EXHIBIT 1 Rhode Island Eco~o.mic Development Corporation vs Keith Stokes - Vol. II Page 294 1 the first meeting. And where was that meeting? A. It was also held at the office of Mike Corso. Q. Okay. In Providence, Rhode Island. A. In Providence, correct. Q. And who was present? A. I had asked Rob Stolzman, counsel to the EDC, and also Mike Saul, who was managing director of finance of the EDC, to accompany me. Q. But who else was at the meeting? A. From 38 Studios, to my recollection it was Tom Zaccagnino, Curt Schilling, and Mike Corso. Q. Okay. And approximately how long did this meeting take? A. To my recollection, within the hour. I know I had another meeting soon after that. But my recollection is about an hour, not more than an hour. Q. Okay. Can you tell me what you recollect from beginning to end of what transpired during the meeting? A. The first part of the meeting was just general introductions again. I believe either Tom Zaccagnino or Curt Schilling, or both, gave a general kind of introduction to 38 Studios, who Page 296 1 2 Q. 2 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there were general questions about, an interchange about 38 Studios and their game, their product; that was something we wanted to know more about, and such. And, again, any one of us would have asked questions about the types of jobs that they were creating, because economic development in the public domain largely is job creation. It's very focused on job creation. And, again, with a close to 12% unemployment rate and 60,000-plus people unemployed, we were very focused on, you know, creating jobs in the state. So there were discussions about the fact that most of the jobs from gaming was largely design, engineering, coding, development work, but largely high-skill, high-wage jobs, which we saw as attractive. It might have been myself or it might have been interchangeably myself with Rob and Mike, we talked a little bit about the knowledge district and as a policy the state had an interest in identifying high-skill, high-wage jobs, and we were particularly interested in building this knowledge district area, which Corso's office, which I believe was on Richmond Street, it's right in the center of it, the center of the activity, and across the way was the Brown Page 295 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 they were. I believe they, you know, disclosed it was a gaming company; that they had secured or were in the process of securing with Electronic Arts a financing and distribution agreement for their first game; that they had an interest in a follow-along game which would be a massive multiplayer online, or MMOG, game; and their interest was to combine facilities in Baltimore, I believe Big Huge Games at the time, and their Maynard facility and create a single facility which would complete the RPG, or the first game, and then move directly into the production and design and distribution of the MMOG, and their interest was to consolidate these facilities. So they were looking at Massachusetts locations; Rhode Island could be a potential location. So the first 20 minutes or so was kind of the introduction around, you know, again the company, the game, the gaming market and such, and what their general interests were. From there, to the best of my recollection, I believe interchangeably Rob, Mike and I just talked about Rhode Island, again, the economy, the products and programs that we have in place, you know, that assist companies. I think Min-U-Script® Page 297 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Medical School that was under construction. So that was a large part of the meeting. At some point 38 talked about their needs of capital, capital to, obviously, complete MMOG and, more importantly, hire up the appropriate staff and have the appropriate equipment and facilities and consolidation of facilities. I don't recall ifthere was a specific number at that time. I think -- to the best of my recollection, I know that they were looking at the tens of millions of dollars, but I don't recall the specific number, what their need was at that time. But it was, but it was clearly a larger need; it wasn't a $1 million need and it wasn't a hundred million, it was a larger need. I believe, as we started to discuss the programs, be it the Industrial Recreational Building Authority, again, the limitation there is that that's for fixed asset, traditional industrial types of company investments: land, machinery, equipment, and so on. Our other capital programs which were smaller, small business investment. At the time, again myself, Mike or Rob, could have mentioned that, you know, one of our Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (11) Pages 294 - 297 Rhode Island Eco~o.mic Development Corporation vs Keith Stokes - Vol. II Page 298 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 goals as a policy is to create a soft asset capital program. In fact, I had stated that that was something that we had talked about for several years, and previously I was on the board of the EDC and I had actually presented in 2009 to the Senate Economic Development Committee about the need for creating a capital program that would augment and support our soft asset engineering design companies. And I believe the EDC in 2009, that year, actually, if they had not submitted, I believe that they were talking with the Legislature about creating a program, but I don't think it went, went anywhere, I don't think it got to a budget article or to legislation or into a committee. But I do know that we talked generally that there was an interest in creating a capital program that would meet the needs of companies such as 38 and such, anyone who was obviously producing, you know, software or design services and such. So my general recollection is, is that the meeting ended with that we would, you know, have a team of people kind of sit down with them and talk more specifically about what their needs might be and then kind of come back and assess if this is Page 300 1 A. No, you know, I've got teenagers, so, I mean, the 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 jargon I was generally, you know, knowledgeable to. And I know that they provided further, you know, answers and discussions as such. I certainly didn't know what an MMOG was. I knew what the concept was. I have two sons that were World ofWarcraft aficionados. But at that early stage it was more just a general sense of where the company was and what their goals were to consolidate and grow. Q. All right. I'm trying to re-create the conversation as best I can, -A. Yes. Q. -- so I'm going to try to see ifl can help refresh your recollection. So they did say they were presently working on an RPG; yes? A. To my recollection, they did disclose that they were working on an RPG, you know, a console game, and that they had an agreement to some degree with Electronic Arts. Q. When you say "an agreement to some degree," did they tell you that Electronic Arts was the publisher of the -A. I don't recall exactly. I know that it came up. And, again, I don't recall exactly how detailed we Page 301 Page 299 1 something we think we can assist on. But at the 2 end of that second meeting, again, that we would 3 have to follow up again, you know, for more 4 specific details as far as what exactly they would 5 need and what programs we would have in place or 6 would need to consider putting in place to assist 7 the company or capital need. 8 So that's my general sense of it. The 9 whole meeting lasted based about an hour, as I 10 recall. 11 Q. Okay. Have you finished your answer? 12 A. To my recollection. I might come up with other 13 things, but right now -14 Q. Well, let me see ifl can help. So one of the 15 things they were talking about at the meeting is 16 they're interested in taking the two offices they 17 have, one in Maynard and one in Baltimore, and 18 putting them together in one place? 19 A. That was my recollection. 20 Q. Okay. And another thing they were talking about 21 is they described that they were working on an 22 RPG, as you call it; yes? 23 A. That's correct. 24 Q. Did you know at that time what an RPG was, or is 25 this sort of a baptism by fire for you? Min-U-Script® 1 got at that meeting. You know, was there a 2 publishing agreement in place? Was there a 3 capital investment or infusion around that? I 4 just don't recall at that initial meeting. 5 Q. All right. But they did indicate the existence of 6 Electronic Arts and the relationship. 7 A. To my recollection, yes. 8 Q. Okay. And then they also said that they were 9 working on an MMOG; yes? 10 A. To my recollection, yes, there would be a next 11 phase of the game. 12 Q. Okay. And did they indicate that they had hoped 13 to do a different kind of process for the MMOG 14 than for the RPG, that is, the RPG was related to 15 Electronic Arts but they wanted to do an MMOG 16 independent? Did that come up? 17 A. I don't know ifthat came up in that meeting. I 18 mean, clearly, as I recollect, the understanding 19 was, is that the first phase was the console game, 20 or the RPG, and then that would lead, that 21 success, that success would lead towards an MMOG, 22 which is an online game, a subscriber game. So 23 it's kind of a binary process. But I don't recall 24 any detail as far as how those steps would proceed 25 and how the program would be capitalized and Allied Court Reporters, Inc. (401)946-5500 www .allieClcourtreporters.com (12) Pages 298 - 301 EXHIBIT 2 James Michael Saul Rhode Island Eco~o.mic Development Corporation vs Page47 Page 45 l Q. You indicated -- l 2 MR. WISTOW: Look, you don't want me to be courteous? MR. PETROS: I don't want you to comment on the witness's testimony. It's inappropriate. MR. WISTOW: Oh, okay. Q. Thank you. A. You're welcome. Q. You indicated that Fox was instrumental in getting the Jobs Creation Guaranty Program up from 50 million to 125 million. Do you remember that testimony? MR. GLADSTONE: Objection. Go ahead. A. Yes. Yes, I do. Q. Explain that to me. DEFENSE COUNSEL: Objection. MR. WISTOW: I'll withdraw that. Q. Originally the request by the EDC for the jobs guaranty program was going to be $50 million; is that true? MR. GLADSTONE: Objection. A. Yes. I believe there was -- I believe legislation was introduced at the $50 million level, yes. Q. And then once 38 Studios came on the scene requesting $75 million, that was, to your 2 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 an update of legislation that was introduced the prior year at 25 million which was turned down. Q. Okay. So the year before EDC was looking for a jobs, the equivalent of a jobs guaranty program for 25 million; yes? A. Yes. Q. Turned down? A. Actually, we were -- you know, I would say it this way. You know, I felt we were laughed out of the committee room. Q. Okay. Well, -A. Well, let me tell you why. Q. Please. Forgive me. I thought you were finished. I apologize. A. No. I can't -MR. GLADSTONE: Go ahead. A. I can't do yes and no answers here. Q. Apparently you cannot. MR. GLADSTONE: But that's fine. Go ahead. A. Well, should I ask -MR. GLADSTONE: No, no. Finish your answer. THE DEPONENT: Because I've got to tell the truth. Page 48 Page 46 l 2 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 understanding, the reason for the increase from 50 to the 125; is that fair? MS. CONCANNON: Objection. A. Let me answer it based on what I know. So there was a meeting in Maynard at 38 Studios at which the House Finance chairman, Steven Costantino, attended. He sat next to me at the meeting, as I recall. And at the conclusion of the meeting he turned to me and asked me the question, Ifwe were to increase the 50 million to 125 million, would this -- I'm paraphrasing here -- would this, would this be helpful to get this done? And my answer was, A lot, a lot more due diligence to do here; however, if you choose to increase it to 125 million, -- this part I recall -- there's a whole lot of companies who can use the additional 75 million. So what I'm saying is that as the House Finance chair clearly on that day it was on his mind to increase it from 50 to 125. What happened after that I don't know. And in terms of any of the legislative, the hearings or anything like that, I wasn't involved. My involvement was limited to reviewing a draft of the legislation, which was really just Min-U-Script® l MR. GLADSTONE: Finish your answer. 2 THE DEPONENT: Okay. 3 A. So at that committee meeting, 25 mil was on the 4 table. At the same time the federal government 5 had-6 Q. We're talking about 2009 now. 7 A. Yeah, the year before. 8 Q. Yes. 9 A. Where you had asked me about the 25 -lO Q. Right. Right. No, I'm not arguing. I just want l l to be make it clear for the record. 12 A. No, I want to be clear. Right? 13 Q. Good. Good. 14 A. So we're talking about 2009, we're talking about a 15 25 million, you know, guaranty program, and we're 16 talking about the language in that 25 million 17 which was basically the same language that ended 18 up in the 50 that ended up in the 125. 19 Q. You're talking about a Kushner? 20 A. Yes, it was a Kushner, as I recall. And at that 21 committee meeting -- at that time, if I recall, 22 the federal government had come out with a 23 stimulus program and had allowed the SBA to step 24 up its guaranty. So essentially the conversation, the crux 25 Allied Court Re~orters, Inc. (401)946-5500 www .allie wrote: Absolutely, but I think we should sync-up internally first. What is your availability for a call on our side? -----------From: Jen Maclean [mailto:jmadean@38studios.com] Sent: Thursday, October 07, 2010 5:59 PM To: Aber, Alexander Cc: Bill Thomas; Rick Wester Subject: Fwd: Agreement Hi Alex, Do you have time tomorrow to hop on the phone with Mike and his attorneys to discuss warrant structure (and possibly his comments to the agreement)? Thanks! Jen Begin forwarded message: From: Jen Maclean Date: October 7, 2010 5:50:37 PM EDT To: Michael Corso Cc: Curt Schilling , Tom Zaccagnino Subject: Re: Agreement Michael, I am not comfortable enough with the intricacies of warrant structure, particularly as it relates to a conversion from an LLC to a C Corp, to have this discussion without attorneys. Given that we are talking about 2% of the company, and considering how flexible Alex is in accommodating us, a delay is worth it. We don't want to screw this up. I' PLAINTIFF'S EXHIBIT ~ Ut ~ ~.M ~«... Let's save the warrant discussion for when attorneys are available. Check with your team and I'll check with Alex. Jen On Oct 7, 2010, at 4:49 PM, Michael Corso < mcorso@kingstoncap.com > wrote: Jen: I don't want to involve attorneys in business issues, which will only cause further delays. I think we are getting away from the approach that was previously discussed. I want to schedule a call with you, Tom and Curt as quickly as possible to address this. This is a time sensitive issue so I will send out an email suggesting times. Michael On 10/7/10 2: 12 PM, "Jen Maclean" wrote: We should schedule a call with the attorneys to discuss the warrant Issue. I'll wait to receive your markup, and then let's set up a time with both sets of counsel to review. -----Original Message----From: Michael [mailto:mcorso@kingstoncap.com] Sent: Thursday, October 07, 2010 2: 11 PM To: Jen Maclean Subject: Re: Agreement Jen: I want to finalize the agreement and want to indude the current warrants. There are warrants that are outstanding and there is no dilution issue. I do not want to bring the issue of the C corp conversion into this, which will only complicate things. That is something that should not be incorporated into this agreement. Thanks. Michael On Oct 7, 2010, at 12:06 PM, Jen Maclean wrote: Thanks, Mike. As you may know, we are in the process of converting to a C corp. Because of that, I'd suggest we include the material terms of the warrants in the agreement, but agree to issue them when we convert (or at a drop-dead date as backup). a Jen -----Original Message----From: Michael Corso [mailto:mcorso@kingstoncap.com] Sent: Thursday, October 07, 2010 10:47 AM To: Jen Maclean Subject: Agreement Jen: I am in receipt of the agreement and have reviewed such. It does not accurately reflect the scope of services or the compensation arrangement. My attorneys are currently revising the agreement and will have it to you shortly. As part of the arrangement warrants were included so please '-------- -- - .... ·-· .. forward to me today the latest warrant form used. I know you mentioned it would be by separate agreement, but I am going to incorporate them into the agreement and not delay it any further. I really want this wrapped up. Thanks for everything. Michael United States Treasury Regulations require us to disclose the following: Any tax advice included in this document and its attachments was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. This email message and any attachments are confidential and may be privileged. If you are not the intended recipient, please notify Foley Hoag LLP immediately -- by replying to this message or by sending an email to postmaster@foleyhoag.com -- and destroy all copies of this message and any attachments without reading or disclosing their contents. Thank you. For more information about Foley Hoag LLP, please visit us at www.foleyhoag.com. ' - - - - - - - - - - · · · - · - · . --···. EXHIBIT 7 --------------~·------------------- Richard Wester Rhode Island Eco~o.mic Development Corporation vs Page 67 Page 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Mr. Wester? A. It doesn't ring a bell. I remember the warrants side. MR. WISTOW: Well, maybe this will ring a bell for you. Number 9. EXHIBIT PLAINTIFF'S 299 FOR I.D.: E-mail from Jen MacLean dated October 7, 2010, 5 pages. BY MR. WISTOW: (Continuing) Q. Do you recognize that document? A. I do. I --yeah. MR. CONNOLLY: Do you want to take a minute and read it? THE DEPONENT: Sure. (Deponent reviews document). Okay. It's the same. Q. Does this refresh your recollection that Jen told you that, "For your information, Mike and I agreed to 5% in cash and 2% in warrants"? A. (Deponent reviews document). Okay. Q. Does it refresh your recollection? A. It does, yes. Q. So she did tell you that she had an agreement with Mike for 5 percent in cash and 2 percent in warrants; yes? A. Yes. I'm cc'd on this e-mail. Q. Yes. Now, explain to me -- I think I know what 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. We'll get into all of that, I promise you. A. Okay. Q. But what I'm trying to ask you is, do you now remember, does this refresh your recollection that Jen told you that she had an agreement to give Corso 5 percent in cash and 2 percent in warrants? Does it refresh your recollection? A. Yes. It's, it's an e-mail stating that, so I'd have to say it refreshes my recollection. MR. WISTOW: Okay. Fair enough. Number 10. EXHIBIT PLAINTIFF'S 300 FOR I.D.: E-mail from Rick Wester dated October 7, 2010, 5 pages. BY MR. WISTOW: (Continuing) Q. Now, you wrote an e-mail to the law firm Foley Hoag, Mr. Alexander Aber, and Jen MacLean, with copies to Bill Thomas, on October 7th; correct? A. Correct. Q. And at that point in time you knew about the 5 percent. You refer to it; yes? A. Correct. Q. But you're saying, We should only pay him 5 percent on the project fund deposit, not the whole 75 million; right? A. Correct. At this point we knew the project fund, Page 66 1 "cash" is. "Cash" is dollars; yes? Correct. Q. And what does that mean, "2% in warrants"? Did you have an understanding, when you got this e-mail, what she's referring to? A. I think it could be interpreted different ways, but it would basically be 2 percent of the market value of the company. Q. In addition to the cash. A. Correct. That's what it says, yeah. Q. Do you know what a warrant is? A. It's a right to buy in the future. Q. It's an existing document that gives the holder the right to buy shares of stock at a certain agreed upon price; correct? A. Correct. Q. Okay. Do you remember that you were informed that there was an agreement about giving Corso 2 percent in warrants in addition to 5 percent cash? Do you remember that now? A. I remember working on a warrant. Q. I guess what I'm asking is this -A. But again, I think whatever, you know, got finalized. I don't know where the warrant got finalized, to tell you the t~th. 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® Page 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 yes. Was 51 million. A. 51, yes. Q. So your proposal at that point was pay him 5 percent of 50 million, or 2.5 and change; correct? A. Correct. That's what it says. Q. So it was a little bit up in the air as to whether the commission to be paid to Corso was on the gross or the net; correct? A. I -- yeah. I assume we're still in negotiation here. But, yeah, I'm trying to get it down, yes. Q. There was no doubt it was 5 percent of something. A. That's what it says. Q. So you're agreeing with me there's no doubt; yes? MR. CONNOLLY: Objection. A. Based on this e-mail, yes, I'd say there's no doubt. MR. WISTOW: Number 12-A, please. EXHIBIT PLAINTIFF'S 301 FORl.D.: E-mail from Michael dated October 28, 2010, 2 pages. BY MR. WISTOW: (Continuing) Q. Now, you got an e-mail on October 27th -- strike that. Forgive me. I misstated it. You got an e-mail from Corso on Q. Allied Court Re~orters, Inc. (401)946-5500 www.allieilcourtreporters.com (17) Pages 65 - 68 EXHIBIT 8 Rhode Island Eco~o.mic Development Corporation vs Jennifer Elizabeth MacLean Page 91 Page 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And what would he get 5% of? A. He would get 5% of the net. Q. Of the net, okay. And that's what you were telling -- that's what you were attempting to tell Schilling by this e-mail? A. That's correct. Q. Okay. So, under your proposal, ifthe bond netted $50 million, Corso would get 2.5 million? MR. BERTHIAUME: Objection. A. There wasn't a proposal yet. Q. Okay. A. I was asking for general guidelines as part of a very long process that involved not only Curt as the majority shareholder, but also the finance committee, the overall board of directors and ongoing -Q. Right. I'm not asking you if you had authority on this date, June 13th, to do this. In fact, you expressly say you needed an okay; right? A. That's correct. Q. And you said you needed an okay from whom? A. This -- when I wrote this e-mail. MR. WISTOW: No, please. Can you answer the question? MR. BERTHIAUME: Objection. Let her 1 Q. Okay. And you told him you'd like to do a 5% cash 2 fee at the closing of the bonds; yes? 3 A. Yes. 4 Q. And you had hoped and maybe expected that you'd be 5 able to gross up the bond number; yes? MR. BERTHIAUME: Objection. That's what 6 7 it says. 8 A. Yes. 9 Q. Okay. And then on top of that, you hoped to get 10 an okay from Schilling for two years of warrants 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 at a 0.25% each quarter for a 2% total, priced at the higher of $1 or whatever wouldn't trigger an anti-dilution clause. That's what you asked Schilling for an okay for; yes? Isn't that right? MS. CONCANNON: Objection. MR. BERTHIAUME: You're just reading the e-mail. MR. WISTOW: That's right, and I'd like to get her to say yes or no. Or, you can instruct her -MR. BERTHIAUME: Whether you're reading it correctly? MR. WISTOW: No. When I say, "isn't that what you asked for an okay from Schilling for," this is like we do it in the courtroom, you know. Page 92 Page 90 1 answer. 2 THE WITNESS: I'd like to explain to you 3 what I meant when I wrote the e-mail. 4 MR. WISTOW: Go ahead. 5 A. When I wrote this e-mail, I wanted Curt's okay 6 to move forward with discussions, but I 7 communicated very clearly to Michael Corso 8 throughout these discussions that any deal would 9 need to be reviewed and approved by the board of 10 directors. I did not have the authority at any 11 point to commit something to a deal of this size. 12 MR. WISTOW: I move to strike. 13 Q. I'm talking about this e-mail. I'm not talking 14 about discussions with Corso. I'm asking you a 15 very specific question of what you asked Schilling 16 for in this e-mail, and you said "The biggest 17 thing I need from you is an OK to move forward 18 with Corso's deal"; isn't that so? Isn't that 19 what that says? 20 MS. CONCANNON: Objection. 21 MR. BERTHIAUME: Objection. That's what 22 it says, and she's answered. 23 MR. WISTOW: No, I want an answer to that. 24 Q. Isn't that what that says? 25 A. Yes. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. That's what I wrote. MS. CONCANNON: Objection. MR. BERTHIAUME: Objection. MR. WISTOW: You can strike my little comment if that's what the objection is. MS. CONCANNON: The record is -Q. Did you get a response? A. I don't recall. Q. Maybe this will refresh your recollection. (PLAINTIFF'S EXHIBIT 412 FOR I.D.: E-mail string dated 6/13/10 to Tom Zaccagnino, 5 pgs.) Q. Now this, too, is an e-mail chain, and you'll see that it's the same as Exhibit 411 except now we have a response from Curt Schilling and a response from you to Schilling. Do you see that? Let me orient you. On page 2. A. I was just comparing the e-mails to make sure they were correct. Q. Okay. Go ahead. A. I've read the e-mails. Q. Okay. Am I correct? A. I'm sorry, could you please repeat the question? Q. Okay. Exhibit 412 and Exhibit 411 are the same except 412 contains some follow-up to Exhibit 411, Allied Court Reporters, Inc. (401)946-5500 (23) Pages 89 - 92 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com .Min-U-Script@ Jennifer Elizabeth MacLean Rhode Island Eco~o.mic Development Corporation vs Page 95 Page 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 additional e-mails; correct? MR. BERTHIAUME: Objection. A. 411 contains an e-mail that is not in 412. Q. And which one is that? A. The e-mail that Curt sent to Tom. Q. Okay, fair enough. The e-mail exchange between you and Schilling that appears in 411 also appears in 412? A. Yes. Q. And then on top of that, 412 has a response to your e-mail where you said, "The biggest thing I need from you," referring to go Curt Schilling, "is an OK to move forward." You get a response from Schilling; correct? A. That's correct. Q. Do you remember getting that response? A. I don't recall specifically, no. Q. Do you accept that you got it? A. Yes. Q. Okay. And why do you accept you got it if you don't remember getting it? A. Because this looks like exactly what Curt would say in this kind of circumstance. Q. Well, there were a bunch of e-mails that you wrote, purportedly, that you said "I can't accept 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 e-mails a month, and I can't tell you exactly when certain e-mails were sent, or whether or not I wrote them. Q. Okay. So you got a response from Schilling, and what did he say about your proposal at 5% and the 2% total warrants? MS. CONCANNON: Objection. A. He said, "Ok, I can swallow these numbers as the top end max. So if you go back to them with this, or I do, you need to make sure this is as far as I will go, no higher on either end at all." Q. And did you respond to him? A. I did. Q. What did you say? A. Got it. Q. And do you remember sending that message? A. No, I don't. Q. But you accept you sent it? A. Yes. Q. Now, let's go to June 14, 2010. (PLAINTIFF'S EXHIBIT 413 FOR I.D.: E-mail dated 6114/10 to Mike Corso, 1 pg.) Q. Now, on the 13th of June, in Exhibit 412, you told Curt Schilling that you "Got it" as to his response on the course of the proposal; yes? Page 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 , that I wrote those." I'm trying to understand why you would accept that this is authentic but not e-mails that purportedly came from you. A. I recognize -Q. Do you recognize your own writing style? MS. CONCANNON: Objection. MR. BERTHIAUME: You've got to let her answer a question before you ask the next one. One at a time, Max. MR. WISTOW: She's got to let me finish, though, my question. MR. BERTHIAUME: Well, let's stop at one question, then. MR. WISTOW: Let's stop. Let's stop fighting. Q. Why do you accept that Exhibit 412 is something that you received from Schilling? MR. BERTHIAUME: Objection. A. Because this is the response I would expect from Curt, and because I knew his feelings in general about that compensation from Mike Corso. Q. Right. Now, as to the e-mails that I asked you about that purportedly were from you, didn't you know how you thought? A. I can't tell you. I've sent thousands of Page 96 1 A. That's correct. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. The next day, there's an e-mail exchange between you and Corso, Exhibit 413. Do you have that in front of you? A. I do. Q. Do you recognize that e-mail? A. I do not. Q. Do you accept that you received the e-mail? MR. BERTHIAUME: Objection. A. I don't recognize the e-mail. Q. Do you see the response from you? A. I do. Q. Do you accept you sent that? A. I don't recognize that. Q. Okay. So you don't -- you have no recollection of Exhibit 413; is that true? A. That's correct. Q. Okay. And you are unable to accept that you either received Corso's 1:04 p.m. e-mail or -- is that true? MR. BERTHIAUME: Objection. A. I don't recollect receiving it. Q. Okay. And you are unable to accept that you responded to him at, according to this, 6:08 p.m.; correct? Min-U-Script® Allied Court Rei>_orters, Inc. (401)946-5500 (24) Pages 93 - 96 115 Phenix Avenue, Cranston,RI 02920 www.alliedcourtreporters.com EXHIBIT 9 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and then it stopped because the company didn't want to pursue equity at that point. And so, no, I don't specifically remember discussing it. Q. Okay. That's fair enough. Do you remember somebody acting as a broker on the bond deal? A. Acting as a broker? Q. Yes. A. No. MR. WISTOW: Could we have number 2? EXHIBIT PLAINTIFF'S 294 FOR I.D.: E-mail from Rick Wester dated May 21, 2010, I page. BY MR. WISTOW: (Continuing) Q. Do you recognize that document? A. Yeah. Okay. You know, this is vaguely familiar. Q. I know it's been a long time, it's four years, and I don't expect you to have total recall. But that's an e-mail you sent to Jen MacLean and to Bill Thomas; yes? A. I believe so, yes. I would say yes. Q. And Jen MacLean was the CEO of38 Studios? A. Correct. Q. And Bill Thomas was the president and COO? A. At the time I believe he was the COO. Q. Okay. In any event, they were both high-ranking executives of38. Page 39 1 be? If you remember. If you don't -I don't remember, no. Q. Okay. And did you get an answer to the question, "Do we need to disclose this as a contingency"? If you remember, you remember. If you don't, you don't. A. No. Q. You didn't get an answer? A. I don't remember getting an answer. Q. Are you saying to the best of your recollection you didn't get an answer? A. To the best of my recollection I don't remember getting an answer. Q. Okay. You considered that a significant question; yes? A. At the time, yes. There was an agreement that we were giving comments on. Q. Yes. Okay. And, of course, if he was going to get a success fee on the closing of the bonds, there would be a contingent liability to him; correct? If he was going to get a fee. A. Potentially, yeah. Yeah, if he was going to get a fee. MR. WISTOW: Number 3, please. 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 38 Correct. And you got an e-mail from Jen MacLean, and the Q. e-mail said, -- this is on May 21st -- "Comments or questions? Michael Corso is the RI consultant." Do you see that? A. Yes. Yes. Q. And then you wrote back and you said, "I would stay away from Warrants. It could (probably would) blow up the Wells process. He's acting as a broker." Who's acting as a broker? A. I would assume I'm talking about Corso, since it says the Corso agreement in the subject line. Q. Okay. So you described Corso at that time as a broker; yes? A. Yes. Q. Okay. And you said, "I would give him a success fee payable in cash." Did you say that? A. Yes. Q. And the "success" being what? A. I would imagine representing our interests in Rhode Island. Q. The "success" being the closing. A. Correct. Q. All right. And did you at that time, on May 21st, have any knowledge of what the success fee would Page 40 1 A. 1 2 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 EXHIBIT PLAINTIFF'S 295 FOR I.D.: E-mail from Rick Wester dated May 21, 2010, 2 pages. BY MR. WISTOW: (Continuing) Q. Tell me when you're ready. A. (Deponent reviews document). Okay, I'm ready. Q. All right. Now, this is on May 21st that you're sending this e-mail, and you say -- in fact, you're saying you're putting in your two cents. A. Correct. Q. Which means this is your view of the situation; yes? A. Yes. Q. And you say, "Mike's acting as a broker." We're talking about Mike Corso; correct? A. Correct. Q. That's your view, he was acting as a broker; correct? A. That was my view, yes. Q. Okay. That's fine. MR. CONNOLLY: At the time. A. At the time, yes. Q. At the time. He hasn't been working -MR. WISTOW: I heard Mr. Connolly suggest a little answer to you. I respect and I like Mr. Connolly, but I would ask him not to whisper Allied Court Reporters, Inc. (401)946-5500 www.allieilcourtreporters.com (10) Pages 37 - 40 EXHIBIT 1 Jennifer Elizabeth MacLean Rhode Island Eco":o.mic Development Corporation vs Page 51 Page 49 l accept your characterization. l 2 MR. WISTOW: But she can come back ifl 3 file a Motion to Compel. So you can instruct her 4 not to answer, if you want. 5 MR. BERTHIAUME: I didn't instruct her not 6 to answer. 7 Q. My question is this -8 MR. BERTHIAUME: She doesn't have to 9 accept your characterization. 10 Q. Was he working -- was he working -- was Corso 11 working in May of2010 to attempt to get financing 12 for 38 Studios from the EDC; yes or no? 13 A. Yes. 14 Q. Is the answer yes? 15 A. Yes. 16 Q. Thank you. May 22nd, 802. 17 (PLAINTIFF'S EXHIBIT 408FOR1.D.: E-mail 18 dated 5/22/10 to Michael, 2 pgs.) 19 Q. Did you ever learn if -20 MR. BERTHIAUME: Can you give her a 21 second? 22 MR. WISTOW: No, I'm not going to ask her 23 about that yet. We're just marking it. 24 MR. BERTHIAUME: Well, you put a document 25 in front of her. Can she look at it? 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 52 Page 50 1 MR. WISTOW: I'll tell you what; give me 2 the document back. 3 MR. CONNOLLY: Do you want mine back? 4 MR. WISTOW: I'm sorry? 5 MR. CONNOLLY: Do you want mine back? 6 MR. WISTOW: No, you can have it. You 7 want to give it to me, I'll take it. 8 MR. CONNOLLY: No, no, I'll keep it. 9 Q. Did there ever come a time that you learned that 10 anybody at 38 Studios met with Gordon Fox? 11 A. As I recall -12 Q. The answer to that, I suggest, is yes or no. 13 MR. BERTHIAUME: Let her answer the 14 question, Max. 15 MR. WISTOW: No, I don't want to let her 16 answer the question. This is not some 17 free-wheeling conversation we're having here. 18 It's a deposition in a lawsuit, and I am entitled 19 to ask the question and get a responsive answer. 20 Q. The question was: Did there ever come a time that 21 you learned that anybody at 38 Studios had met 22 with Gordon Fox? That's the question. 23 A. Yes. 24 Q. Okay. And when did you learn that? 25 A. As I recall, sometime in late April, maybe early May, 2010. Okay. And when you learned of it, had you learned that the contact had already taken place, or did you learn of it before it was going to take place? A. As I recall, I was told that Curt and Tom would be meeting with Gordon Fox. Q. Okay. And how long before the meeting had you learned of the fact that it was supposed to take place? A. I don't recall. Q. Days, weeks? A. I don't recall. MR. BERTHIAUME: Objection. Q. It could have been days; it could have been weeks? MR. BERTHIAUME: Objection. A. I don't recall. Q. Could it have been weeks? A. I don't recall. Q. Could it have been months? A. I don't recall. Q. Could it have been years? A. I don't recall when I learned. Q. That's fine. I'm perfectly happy with the answer, believe me. And you can say "I don't recall" to everything I ask you, if you wish. Q. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. BERTHIAUME: She hasn't said "I don't recall" to -MR. WISTOW: I'm just giving her permission to if she wishes. MR. BERTHIAUME: She doesn't need your permission to answer questions, Max. MR. WISTOW: Do you know what a non-dimenticare witness is? MR. BERTHIAUME: Continue. Q. Now, did you ever learn of any connection between Corso and Gordon Fox? A. Yes. Q. And when did you first learn of that connection? A. Sometime in late April, maybe early May of 2010. Q. And what did you learn the connection was? A. As I recall, I learned that they had been in business together, but I did not have any specific details. Q. Did you ask? A. I did not. Q. Who told you this? A. I believe it was Tom Zaccagnino. Q. Okay. And you have a recollection of a conversation with Zaccagnino? Allied Court Rep_orters, Inc. (401)946-5500 (13) Pages 49 - 52 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com M.in-U-Script® Jennifer Elizabeth MacLean Rhode Island Eco~o.mic Development Corporation vs Page 53 Page 55 1 A. l 2 2 A. I don't recall sending the e-mail. 3 Q. Do you recall receiving an e-mail? There's an 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I don't recall a specific conversation, no. But you learned the connection between Fox and Q. Corso from Zaccagnino? A. I believe that's correct. Q. And do you remember what he told you? A. Not some specific words, no. Q. How about generally, what the substance was? A. Generally, I believe he mentioned that Mike Corso and Gordon Fox had done business together or were in business together, and that was how Mike knew the speaker. Q. So, what Zaccagnino was telling you, that all three of them. Zaccagnino, Corso, I misunderstood. A. No, that's not correct. Q. Okay. Fair enough. So, Zaccagnino was telling you that Corso and the speaker had been in the past or were currently in business together; is that what you're saying? MR. BERTHIAUME: Objection. A. As I recall, I don't remember ifhe said they had been or were currently, but I remember -- as I recall, Tom mentioning there was a business relationship between Mike Corso and Gordon Fox. Q. Okay. Exhibit 408, why don't you read it to 4 MR. BERTHIAUME: Objection. e-mail here to you; do you recall receiving it? I do not. Q. All right. The substance of the e-mail to you from Michael Corso is that he's saying that it was his intent that something be contingent on the financial closing so there's no disclosure issue. Do you see that in the first sentence? MR. BERTHIAUME: Objection. Q. Well, I'll read it. "To clear up any confusion, it has always been my intent that this is contingent on the financial closing so there is no disclosure issue." Do you remember, even though you don't remember receiving this, ever having a discussion with Corso about whether or not his financial arrangement had to be disclosed; yes or no? A. I don't recall discussing that with Michael Corso. I do recall discussing it with other 38 Studios -MR. WISTOW: I move to strike. Q. My question is: Do you recall ever discussing with Michael Corso, whether or not his arrangement 5 A. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 54 1 yourself silently. Tell me when you're finished. I'm finished. Q. Did you ever hear Curt Schilling refer to Corso as Gordon Fox's right-hand man? A. I don't recall that, no. Q. Do you deny that? A. I don't recall it. Q. Okay. Do you recognize Exhibit 408, or would it be fair to say you don't recollect this either? MR. BERTHIAUME: Objection. Are you going to stick with the first question? MR. WISTOW: I'll try them both. MR. BERTHIAUME: Which question do you want her to answer? MR. WISTOW: Both. MR. BERTHIAUME: Let's go one at a time. Objection. Q. Can you answer the question, please? MR. BERTHIAUME: Objection. A. I don't remember sending this e-mail. Q. Is this one of the e-mails you reviewed in preparation for the deposition? A. I don't recall reviewing this e-mail. Q. Okay. And you don't accept that you received it, . do you? Page 56 1 had to be disclosed? That's my question. What specific arrangement are you referring to? Q. His financial arrangement where he was going to get some fee as a result of the transaction. MR. BERTHIAUME: Objection. So, you're referring to any, any arrangement at any point in time, not necessarily what -MR. WISTOW: Any arrangement that existed before the closing. A. In my mind, we did not have an arrangement with Michael Corso before the closing. Q. Oh, okay. So you don't have any recollection of any discussion of disclosing any arrangement because, in your mind, there wasn't any; is that fair? MS. CONCANNON: Objection. MR. BERTHIAUME: Objection. Are you talking about before the closing? MR. WISTOW: Before the closing. Q. Isthatfair? A. That's fair. Q. And by "closing," I mean the November 2nd, 2010 closing of the moral obligation bonds; correct? You understood that? 2 A. 2 A. 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (14) Pages 53 - 56 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com Rhode Island Eco~o.mic Development Corporation vs Page 59 Page 57 1 A. 1 2 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Correct. Q. And he goes on to say: "I have structured this as a pure debt raise fee without upfront costs, but with the warrants because we are creating a structure that preserves a significant portion of the equity for 38 and I expect to assist the company long term." Did you have a discussion along those lines, with Corso, before the closing? A. Are you referring, Max, specifically to the structure of the raise to the use of warrants, or to Corso's long term relationship? Q. I'm referring specifically to the sentence here that I just read you. "I have structured this as a pure debt raise fee without upfront costs, but with the warrants because we are creating a structure that preserves a significant portion of the equity for 38 and I expect to assist the company long term." Did you ever have any kind of discussion regarding that arrangement, yes or no, before the closing? MR. BERTHIAUME: Objection. A. I'm sorry. I want to clarify your question because, to me, that sentence hits three different arrangements. There's the structure of the debt. There is the use of warrants, and then there's 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Michael Corso's long term relationship with the company. Q. Okay. Let's do them one at a time. Before the closing, did you have a discussion with Corso, either in writing or orally, about a fee for helping with the financing of the EDC deal; yes or no? A. Yes. Q. You did, okay. Did you have a discussion before the closing with Corso about getting warrants as part of the compensation? A. Yes. Q. And that's before the closing, yes? A. Yes. Q. And did you have a discussion with him that the way he was structuring it would help preserve a significant portion of the equity for 38 Studios; yes or no? MR. BERTHIAUME: Objection. A. I don't recall discussing that specifically. Q. Okay. So, the first two items where you discussed the fee with him, yes? A. Yes. Q. And the second was a discussion about warrants, both of which took place before the closing. What's the earliest that you had that discussion with him? A. I believe it was -- as I recall, it was early June. Q. It was early June. So, you'd be able to say, if that were accurate, that you couldn't possibly have sent these e-mails, or received these e-mails in May; is that fair? MR. BERTHIAUME: Objection. A. No, that's not fair. That's not what I said. Q. What you're saying is, if these discussions took place, you just don't remember them? A. That's correct. Q. And you placed them much later into June; correct? MR. BERTHIAUME: Objection. A. I placed them in early June, so it would be a week or two. Q. And, in any event, when you say "early June," it very well could be before the legislature passed the statute; is that correct? MS. CONCANNON: Objection. A. It's possible. Q. So, as we sum it up, so far these e-mails, you're not saying they didn't take place; you're saying your recollection today is these various Page 60 Page 58 2 Jennifer Elizabeth MacLean 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 conversations took place in early June and, as you recollect, did not take place in May; is that fair? MR. BERTHIAUME: Objection. A. I'm saying that I recollect, with the distance of four years, that the conversations took place in early June. Q. Okay. And these documents obviously don't refresh your recollection that they took place at least in May? They obviously don't refresh your recollection; is that fair? A. That's correct. Q. Okay, good. Now, let's go to June 1st, 814. (PLAINTIFF'S EXHIBIT 409 FOR I.D.: E-mail dated 6/1/10 to Tom Zaccagnino, 1 pg.) Q. Ms. MacLean, do you recognize Exhibit 409? A. I'd like to read it first. Q. Sure. A. I do. Q. You recollect this one? A. I do. Q. And, according to this, it looks like you've been having discussions sometime before June 1st with Corso; is that fair? A. That's correct. Min-U-Script@ Allied Court Reporters, Inc. (401)946-5500 (15) Pages 57 - 60 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 11 Jennifer Elizabeth MacLean Rhode Island Eco~o.mic Development Corporation vs Page 135 Page 133 1 Q. Well, the earliest e-mail is from -- Exhibit 416 1 2 is from Bill Thomas, isn't it? A. Yes. Q. And maybe I'm missing something, but he doesn't use -MR. BERTHIAUME: It's a partial e-mail. Q. In any event, do you know if Bill Thomas used the subject "MC deal"? A. I do not. Q. You do not. So, maybe he used MC deal, and maybe you did? MR. BERTHIAUME: Objection. A. I don't remember writing this e-mail. I can't -Q. All right, fair enough. But, in any event, in any event, even if you wrote it, you can't think of any other MC other than Mike Corso? MR. BERTHIAUME: Object. How many times, Max? MR. WISTOW: Last time, ifl get an answer. MR. BERTHIAUME: She's answered it all four times. MR. WISTOW: But I didn't realize before that it said -- 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 10 19 20 21 22 23 24 25 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 A. Not that I know of, no. Q. Okay. And let's just go with this. "I am great with Monday. Rick and I have concerns this is becoming a disclosable event because of the financial and equity magnitude. If it is not disclosable we can discuss anytime next week." And that e-mail purports to be directed to you. Do you remember having a discussion about a disclosable even in October, early October? A. Yes. Q. Okay. And was that with reference to the Corso deal? A. Yes. Q. And who was that discussion with? A. We had a number of discussions. I remember discussing it with Bill Thomas, Rick Wester and Tom Zaccagnino. Q. Okay. So, Bill Thomas, Zaccagnino and Wester, Rick Wester; yes? A. That's correct. Q. And how many such discussions were there? A. I only recall one. Q. I thought you said there were a number of discussions. I'm sorry; maybe I misheard you. A. You're right. I misspoke. I apologize. Page 136 Page 134 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. BERTHIAUME: It doesn't change the question. MR. WISTOW: Let's not fight. Q. Shall we leave it that you can think of no other MC other than Mike Corso? A. It could have been referring to Martha Crowninshield. Q. To Martha Crowninshield? A. She was a board member of 3 8 Studios. Q. Well, let's go through that. So, we have Martha Crowninshield. Who else comes to mind? A. There were other -- a number of other employees at that point in time. Because I don't recognize the e-mail, I can't tell you definitively who it refers to. Q. All right. And is there a reference in the phone call to Mike? Do you see that? "Asked Mike if we could talk on Monday, haven't heard back from him." Do you see that? A. ldo. Q. Martha Crowninshield, obviously, is not Mike? MR. BERTHIAUME: Objection. Q. Was there a Martha Crowninshield deal at that time that might be a disclosable event that you know of? 1 Q. So there was one. And when was that? Sometime probably in the middle of October. don't remember the exact date. Q. This e-mail, if it's authentic, Exhibit 416 was on a Saturday, and it looks like they were proposing to talk about it the following Monday, which would be the 10th. Could that be when you spoke? A. It could be. Q. All right. And all three of these other people were at this meeting? MR. BERTHIAUME: Objection. A. It may have been a phone call. I don't recall specifics. Q. Okay. But all three of the people were either on the phone or in your presence? A. There may have been different discussions. I remember getting feedback from each of them. I can't remember for sure ifit was in one single discussion, or if we discussed things individually. Q. But you told me before there was only one discussion. Then you corrected yourself, and you said you misspoke when you said there were multiple discussions. So, which is it? A. I don't recall. 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (34) Pages 133 - 136 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 12 Richard Wester Rhode Island Eco~o.mic Development Corporation vs Page 73 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 MR. CONNOLLY: Objection. A. You know, I don't have any recollection of it; so ... MR. WISTOW: Number 13. EXHIBIT PLAINTIFF'S 302FOR1.D.: E-mail from Curt Schilling dated October 28, 2010, 4 pages. BY MR. WISTOW: (Continuing) Q. This is an e-mail from Curt Schilling. Do you recognize -- a copy was sent to you? A. I do. MR. CONNOLLY: Just take a minute to familiarize yourself with it. Q. Do you recognize that document? MR. CONNOLLY: Ifhe can have a minute, Max. MR. WISTOW: Sure. A. (Deponent reviews document). Q. Do you recognize the document? A. I see it's an e-mail sent to me. Q. Do you accept that you received it? A. I do. Q. Okay. Now, Schilling says, "We gave Mike our word." Do you see that? A. Correct, yes. 1 Q. Okay. And typically you would have read it. I imagine so, yes. Q. That would be part of your custom and usage. A. It would. Q. And she's writing to Mike Corso, with a copy to you. Those are the only two recipients; right? A. Yes. Q. And it says, "It's not appropriate for Curt or Tom to be involved in this discussion. I'm sure Rick would be happy to join us." So she's saying that neither Curt Schilling or Tom Zaccagnino needs to be involved in this, me, Jen, and Rick would be happy to straighten this out with you, Mike; yes? Is that a fair reading? A. Could you say that again? Sorry. Or read it back? MR. WISTOW: I'll withdraw the question. Q. "We should also agree," she says, "on what the fees are for. I'm certainly not disputing a payment amount since we've already agreed to the total, but we need to come up with a schedule that works for the company's cash flow." Yes? A. That's what it says, yes. Q. It says "we've already agreed to the total." What was the agreement on the total? 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 76 Page 74 l Q. You would have read that at the time. It's coming 2 from the founder of the company. A. Yes. Q. Did you have any idea what he was talking about? What was his word? What had they told Mike? MR. CONNOLLY: Objection. Q. Do you know? A. I don't know. Q. You have no idea. MR. CONNOLLY: Objection. A. No. Q. Did you ask anybody? A. I don't remember asking anyone. Q. Okay. Now, take a look at the e-mail from Jen MacLean of October 27th at 11:07 which is in Exhibit 302. A. 302? Q. Yes. A. (Deponent complies). Okay, it's the same as that other e-mail I saw before, yes. Q. I'm sorry, I don't understand your answer. A. I -- yes, I'm looking at it. Q. Right. It's part of the e-mail chain that you received. A. Correct. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. You know, I'm not sure. I could assume. MR. CONNOLLY: Objection. Q. What do you assume? THE DEPONENT: That's not good for me to assume. MR. CONNOLLY: No. Youjusttestifyto the best of your recollection. Q. I just want to see if I understand this. A. Well, from right now it looks like we're talking about 5 percent. Q. Of what? A. I'm not sure whether it's 75 or 51, based on what we've been discussing. Q. But it's one or the other. A. Yes. Q. But it's one or the other. A. That's what it alludes to, yes. Q. That's how you understood it. MR. CONNOLLY: Objection. A. Reading it now, that's how I understand it, yes. Q. And you believe you would have understood it that way at the time. MR. CONNOLLY: Objection. Q. Yes? A. Yes. Allied Court ReJ>orters, Inc. (401)946-5500 www.allie158 Stolzman, R I 3.25 250.0 812.50 2024437 09/29/10 0158 Stolzman, R I 6.75 250.0 1,687.50 2024467 09/30/10 0158 Stolzman, R I 2.50 250.0 625.00 2026003 10/01/10 0158 Stolzman, R I 1.00 250.0 250.00 2029062 10(04/10 0158 Stolzman, R I 4.25 250.0 1,062.50 2029070 10/06/10 0158 Stolzman, R I 6.50 250.0 1,625.00 2029078 10/08110 0158 Stolzman, RI 1.50 250.0 375.00 :i::i ttj (J) 0 J--1 -.J Q) ,b. J--1 and ·conditions of loan and trust agreemen~ Corso; review Providence Journal documen of records to determine public records aspe1 38 St.udlos and RIEDC; conference with Tor Mike Saul. Conference with Al Verrecchia regarding sh: Stokes; attention to inco!Jling corresponden1 conference with Mike Corso. Extensive conferences and review of provlsl agreement regarding film tax credits; review conference with Michael C()rso; conference Attention documents; attention to State w placement memorandum; review placemen! correspondence with State disclosure coune parties regarding distribution of agreement: correspondence to bond counsel; correspon Extensive conferences and meetings regard Trust Agreement; conferences and final revl memorandum; extensive conferences with ~ and chairman regarding review by State Pia conformance with S1ate guide plan and proc approval in time for closing of sale of bonds; bond team on status of transaction; correspc proofs; review printer's proofs; review offerir Conference with Kevin Flynn; corresponden incoming correspondence from State disclo~ Conference with Kevin Flynn at Department to State Planning Council approval; incomin Kevin Flynn; review approval recommendati Correspondence to State Representative Cl public criticisms of project and response to f project; preparation for conference call with of client on talking points for investment; rev Review documents and preparation for mee bonds; preparation for conference call with ~ for bond investor conference call; attend anc Investor call; conference with Mike Saul; car Gurghigian; conference with Gordon Fox; cc Attention to Bond Purchase Agreement; revi to -·· .. ·---··.·--···· ··········.:-······-·r.1- 1••··· 10/29/2010 2:23 PM ·. Adler Pollock & Sheehan P.C. Billing Memorandum Thru October 29, 2010 Prebill: 245532 Client 054906 • Rhode Island Economic Development Corp. 2031740 10111/10 0158 Stolzman, R I 1.00 250.0 250.00 2031794 10/12/10 0158 Stolzman, R I 1.00 250.0 250.00 2031801 10/13/10 0158 Stolzman, R I 2.00 250.0 500.00 2031815 10/14/10 0158 Stolzman, R I 0.75 250.0 187.50 2031819 10/15/10 0158 Stolzman, R I 1.25 250.0 312.50 2034262 10/18/10 0158 Stolzman, R I 1.75 250.0 437.50 2034318 10/19/10 0158 Stolzman, R I 2.25 250.0 562.50 2034323 10/20/10 0158 Stofzman, R I 3.25 250.0 812.50 2034404 10/21/10 0158 Stolzman, RI 3.75 250.0 937.50 2034411 10/22/10 0158 Stolzman, R I 4.25 250.0 1,062.50 2036067 10/25/10 0158 Stofzman, RI 2.00 ::t::' tU CJ) 0 f-' -.J O'I .i::.. [\) 250.0 500.00 Review terms and conditions of Bond Purchai memorandum to Bond Counsel. Conference with Mike Saul regarding project 1 status criteria; memorandum to Mike Saul reg for project status; attention to Incoming corres purchase agreement; conference with state di conference with Maureen Gurhegian regardin1 Conference with Providence Business News;' Providence Journal; conference with Michael 1 Keith Stokes; attention to public records requE offices with govem editorial candidates regard with Mike Saul regarding status. · Conference with Wells Fargo and Maureen G1 Keith Stokes: conference with Mike Saul. · Conference with Maureen Gurhegfan; confere conference with Wells Fargo; conference with with Keith Stokes; attention to incoming corre~ Providence Joumal; conference with Steve Cc Conference calls with Wells Fargo and Barcia~ record's request; conference with Michael Sa\J Afonso: conference With Keith Stokes. Extensive review of four Rhode Island Provide inquiries regarding status of transatlons; confe members; conference with Barclays; conferen1 attention to public records request; attention tc transactions; review memorandum. Conference calls with Bond Sale Team; confe1 conference with Paul Choquette; attention to ~ Conference wllh Michael Corso; attention to b1 meeting; attention to sale of bonds; attention ti conferences with Keith Stokes; conferences w Conference with Kathy Gregg at Providence J correspondence from Kathy Gregg; conferenc conference with Tony Afonso regarding bond J conference with underwriter's counsel regardir agreement; conference with Mike Saul; confer at 38.Studfos: memorandum to Board membei Conference with Karl Wadensten; attention to . -·· " ---- ~···· ··-:-· ·-·---:-- .. ·.· --· ... 10/29/2010 2:23 PM •' ·.· .... Adler Pollock & Sheehan P.C. Billing Memorandum Thru Octpber 29, 2010 Prebill: 245532 Client: 054906 - Rhode Island Economic Development Corp. 2036087 10/26/10 0158 Stolzman, R I 3.00 250.0 2036096 10/27/10 0158 Stolzman, RI 4.25 250.0 2036110 10/28/10 ' 0158 Stolzman, R I 4.00 250.0 499.5 0 Totals Providence Journal; extensive attention to P candidate inquiries. 750.00 Conference with public inquiry requests with with Al Verecchia; conference with Keith Ste recommended response for Al Verecchia; cc conference with Mike Saul; draft FAQ amen memorandum for project; review comments agreement. 1,062.50 Attention to placement memorandum; revie~ memorandum; conference with client; revie11 review closing agendas; preparation of opinl comments and delivery of monitoring agreer 1,000.00 Attention to closing documents: conferenc~ regarding miscellaneous closing matters; pn 124,790.0 0 **Please Check the Appropriate Responses Below*** 0 Bill Type: Bill: Regular D Retainer DAii D Fees Only 0 Return to Attorney Instructions: 0 Write-off 0 Cancel (Do Not Invoice) D Disbursements Only D Mail Directly to Client EXHIBIT 24 Rhode Island Eco~o.mic Development Corporation vs Maureen Gurghigian Page 25 l to six; there was a part-time person. Page 27 l Q. 2 Q. And what are you now? 2 3 A. 3 Five. 4 Q. And do all of those people specialize in the 5 6 7 8 9 lo 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 financial advisory practice? A. Yes. Q. Does the five include support staff? A. Could you -- I'll let you finish. Go ahead. Q. Does it include everybody who works in the office? A. Yes. It's a number of employees. Q. What is your title in that office? A. Managing director. Q. What are the titles of the other people who work there now? Well, let me ask that differently. What are the titles of the people that worked there back in 2010? A. In 201 O? Senior vice president, senior vice president, and administrative assistant. Q. So there would have been four people in 2010? A. Three. Q. Plus yourself. A. No. Q. Oh, I see. A. I was a senior vice president, there was another senior vice president, and there was an 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Can you give me an example where they would bill separately. A. If there were an arbitrage rebate calculation, that's a separate service that's billed separately from the financial advisory. There is another practice, continuing disclosure practice that's separate. Q. Have you ever brought in any experts in corporate finance to assist your clients? A. I've consulted with them. There's an engagement, and that was a separate engagement for a client that was seeking to enter into a contract with a private entity, and corporate finance did a project for that client and billed that separately, yes. Q. What kind of a project was that? A. It was a privatization of a municipal utility. Q. Which utility? A. I don't remember ifit was Newport Water or Newport Wastewater, but it was Newport. Q. Was the privatization selling the utility to the private company? A. I don't recall the specifics. Q. Well, -A. I don't believe it was a sale, no. Page 28 Page 26 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 administrative assistant. Q. Okay. Now, from time to time clients of yours might be provided services by First Southwest Company involving areas other than financial advice through other branches of First Southwest; is that fair? A. Yes. Q. In other words, sometimes you have to refer clients to other First Southwest offices to handle issues that those clients need to have dealt with that you do not deal with in your financial advisory practice. A. Well, I wouldn't characterize it that way. From time to -- rather than "refer," I would say from time to time we would bring in an industry specialist to work with a client ifthere was a particular need. Q. And in those cases, obviously, you were providing business for First Southwest Company outside of your financial advisory practice? Let me rephrase that. Does First Southwest bill those clients for such services independently of their bills for financial advisory services? A. It depends on the service. Min-U-Script® l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Who was the private company that acquired the utility? A. I don't believe it was an -MR. PETROS: Objection. THE DEPONENT: Oh. MR. PETROS: You can answer. A. I don't believe there was an acquisition. Q. All right. You said there was a contract between a public entity and a private company. A. Yes. Q. And what was the purpose of the contract? A. It was a design/build/operate. Design/build/ operate, not a sale. Again, I just -- I do recall that corporate finance was brought in by one of my colleagues at the request of the municipal utility; I don't recall all the specifics. Q. What does that mean, there was a design/build/ operate? A. The municipal entity was seeking proposals from private entities to design, build and operate a treatment plant. Q. And what kind of investigation was required from corporate finance for this private company? A. It was a limited engagement. Q. To do what? Allied Court Reporters, Inc. (401)946-5500 www .allie Wednesday, March 24, 2010 7:50 PM Keith Stokes ; ·Saul, Michael ; Hashway, Fred Maureen E. Gurghigian (mgurghigian@fustsw.com); Campellone, Paul · imageOOI.png; 38 Studios Draft Letter March 24, 2010.DOC Hello all. As you know, Rhode Island is in discussions with Curt Schilling's 38 Studios to try to induce them to relocate to and expand quickly In RI. Attached Is a proposed draft of an broad economic development proposal combined with a down and dirty loan term sheet. Mike and I think this format will Interest the company based on our meeting with their CEO and fin a nee director yesterday. Take a look and let us know what you think. Maureen, Is this feasible from a bond market pers pectlve? I did not reference bond insurance or other features that you might advise, but this is a rough draft. Paul, any legal bond global issues we should address at this time? I restricted niyselfto one sports metaphor in which I also made a game pun. While it is not all that clever, it might appeal to fv1 r. Schilling! I This remains highly confidential (of course, since everybody including the press are discussing it). Yours, Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzman@apslaw.com Phone 401 ..274. 7200 Fax 401. 751 .0604 Visit our websile at www.a slaw.com To comply vvith IRS regulations, we advise that any discussion ofFederal tax Issues in this e-mail is not Intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (iQ to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only for the named reciplent(s). It may contain information that is subject to ttl e attorney cllent privilege or the attorney work-product doctrine or that Is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. APS002883 ··::-··.· --::-·· ..... ·.·. ·7·-.·.·-.· ·.--····-·r···.-·::··-·1-- •••. ·· ······ ····· ··-····-.··,.···-· ,,~ ..... ·.·.-···· .... ···.····· ·:-·· ·- . RIEDC Letterhead March_, 2010 :Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 :Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. MacLean: We are pleased to present this out· ···., undertaking actions to provide econo'. will commence locating its businesses ·· ich Rhode Island Vt/ commence s to 38 Studios and 3 8 Studios We understand your capital needs to bring your project Copernicus to MMO completion to be $75,000,000. Based on our understanding to date of your financial projections and current assets, the RIEDC would issue $75M ofrevenue bonds, the proceeds of which would be loaned to you to fulfill your capital needs. We anticipate that these bonds would be purchased by or through a lender or investment vehicle· familiar with your industry, or otherwise through an underwriter sufficiently conversant in your industry to underwrite this issue. As your company is in the unusual position of having pipeline product and contractual commitments for product distribution, but as yet is "pre revenue", we recognize the market for these bonds would be APS002884 '''"'.'.' ·.:--:·. --- ........ ·-·····-··· ·- ··! . . . . . . . . . . . .. ••: • ••:-.-:-••,'" • ' ' ' ''•"•-•'~•'I " ' I ' & " " ' ;. I I , '",' • 0 •' • • ' ' ' " • • • • • • • • •• •,• ','" Mr. Schilling and Ms. MacLean March 2010 Page2 _J limited without credit enhancement. Accordingly, we would submit this bond issue for approval to the Rhode Island General Assembly, wirich currently is in session, for approval by it for the RIEDC to use an available capital reserve mechanism by which the General Assembly may consider on an annual basis funding any silortfall of any loan payments necessary to pay the bondholders, thereby creating for this issu e what is commonly.. led a "moral obligation" guaranty for the bondholder(s). This financing would reflect the following terms and b parameters all of which will be more fully- articulat . the. following general an documentation: -{.,.( Borrower: 38 Studios. Loan Amount: $75,000,000 Purpose: For product development · relocation to and expansion in Rhode' : any including but not limited to intellectual ~·=':ilshing contracts, receivables and work :S~nt (1.5%) ofloan amount annually. ~~~iE~~\~ mounts to be negotiated will be required from key owners (a) The debt would not be assignable or assumable; (b) Recapture or early payment would be made from excess earnings should EBITD exceed a base formula to be agreed upon by the parties; (c) Any recapture received by RIEDC and not necessary to be used to pay bondholders would be used by the RIEDC to pr<>vide seed capital to the video game and digital media industry in Rhode Island in conjun ~tion with a program to be developed jointly between 38 Studios and the RJEDC; APS002885 . ! ·.·-·---, . -····- ·-··-· ···1 . . . ., - ·······.-·· ..··.·····1--· •..•.. ··.·.···· ···············-·· .. ··:· ·; Mr. Schilling and Ms. MacLean March Page 3 _J 2010 (d) 3 8 Studios will locate all of its Massachusetts operations to Rhode Island; (e) 38 Studios will provide 150 full time jobs with an average annual wage of approximately $75,000 Gobs) in Rhode Island by December 31, 2010; (t) 38 Studios will add an additional ISO jobs in Rhode Island by December 31, 2011; (g) 38 Studios will add an additional I SO jobs in Rhode Is . by December 31, 2012; (h) Should 3 8 Studios fail to meet any jobs requiremen 11 pay to the RlEDC an amount equal to $7,500 per year for each job not ·· until such shortfall is cured; and ode Island design and (i) 38 Studios will hire and provide internships,~fe.r· u en greed upon with such educational institutions pursuant to prog1J1ml1lhl.d policies institutions. entation and velopment expert of an analysis pcation to and growth in Rhode ak:ing ind°';lstry contacts and identifying necessary espect to the loan. gency the Rhode Island Industrial Finance Corporation 1i The RIEDC through 1 ,. elopment financing, also with credit enhancement guarantees (RIIFC) will consider through the RIEDC affiliat' · dustrial Recreational Bond Authority (IR.BA) upon its customary terms. fa , Rhode Island Economic Development Incentives The RIEDC will make available to 38 Studios its traditional but aggressive incentives for the company's move to and expansion in Rhode Island including: APS002886 ..... ·-:-::-:-:::.:--.:-.-:...-. --;-:.-..-.~····;.,,..,,_. ,,,- ···.·.-·:··-·············· ·.··-·:·-·. ·.·· Mr. Schilling and Ms. MacLean March_, 2010 Page4 (a) Economic Development Project Status: the purchase of building materials, FFE .and computers, and equipment will be exempt from sales tax; (b) Job Training Grants and Credits will be made available to the company; (c) Jobs Development Act reductions in the corporate tax rate will be made available to the company; and (d) As applicable, all other available tax incentives that ful to the company wiil be available to it (such as R&D tax credits. New Industry Incentives We are particularly interested in assisting 38 of the video gaming and digital media indust and advocate for the implementation of jobs pro provide Rhode Islander's with a cleai;~retum on inv will support other creative and inno .(.{,.,.' ·, dustry d ,..,.. us to accelerate and increase your sue '®1 '>;:;;~h,. We think your company ith%tfur economic develo]Jment for Rhode Island and tnat you r many e 'citing ventures and Keith W. Stokes, Executive Director 529693.1 APS002887 EXHIBIT 26 .:.:--.·--:-.:---···-·.·:·····-····:··-·· ..., ·-·····-.···············-··:-·-···· ······ ... . .. ... . . . ··.-.-·.·. ··-~--.-. ·-·:··.-·· -.·.·:.-~·.·:::·- -:1·· .•. ·-. ·. ·.-:·....... : ..... - - -· ·.·-. -· - Mathieu, Jeanine From: Sent: To: Subject: Attachments: Stolzman, Rob Thursday, March 25, 20101:22 PM Mathieu, Jeanine FW: [FWD: NDA] 38 Studios RIEDC Letter 3_25 Draft.DOC Please print with attachments. Tx. Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, Bth Floor Providence, RI 02903 E·Mall rstolzman@apslaw.com Phone 401.274. 7200 Fax 401.751.0604 Visit our website at www.apslaw.com ADLERPOLLCIX®"SHEEHAN P.C. ....,,......... *.............................t ............................ of To comply with IRS regulations, we advise that any discussion Federal tax issues in this e·mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii} to promote, market or recommend to another party any transaction or matter addressed herein. This a.mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please .i~m~~Jatel~-~~!!!Y. _l_h,~~n~~nd d~J~~t~~~_!!~e~~~9..~-~P.!!l .Y..~!:l!_~~~l!~~r a~..~~.Y~ co~:_Th~"!!<_Y..~:. ___ ......... _ . From: Stolzman, Rob Sent: Thursday, March 25, 2010 1:08 PM To: mcorso@kingstoncap.com Subject: RE: [FWD; NDA] HI Mike. I'll review and in the worse case, we'll finalize and sign it at the meeting. Both Mike and I are authorized on behalf of the RIEDCto sign NDA's. Also, attached is a very rough draft of a terms letter/term sheet. The RIEDC Is stlll reviewing and it also will need to be reviewed by the Governor's office. But, in the meantime, Is a good starting place for the discussion. Rob Robert I. Stolzrnan, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzman@apslaw.com Phone 401.274.7200 Fax 401.751.0604 Visit our website at www.apslaw.com . ADLER POLLCil<®-SHEEHAN P.C. .......... .............. , . ..... . , ..... . To comply with IRS regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or ***"***~········ written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed here.in. · 1 PLAINTIFF'S EXHIBIT APSOl 7468 -- __ ·-·.-·. ··~·-:--:: ·.. ·. ·. ·.-:- ·.·. ·.-. ·.-:·.: ·.··: :·~·'.·....:..-_·· ... :: : .: : :·: ... -. ·:·. ·: -·. ··- ·- ... This e-mail message is confidential and is intended only for the named recipient(s). tt may contain information that is subject to lhe attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message In error, or are not the named recipienl(s), please _imll!~dlate.!>.'. n~~fY. th~ se!!~~-!l..l}-':'t~~~nd..2~~!ro.i'~L£~P-.les. T.ne!!!5..Y.~~:.- .. -···· ·-·· From: mcorso@klngstoncap.com [mallto;mcorso@kingstoncap.com] Sent: Thursday, March 25, 2010 12:46 PM To: Stolzman, Rob Subject: [FWD: NDA] Rob: As discussed, here Is the NDA. Please have all the parties execute for today's meeting. Also, any luck with the term sheet. Please forward directly to me for distribution, Thanks, Michael o. Corso Michael Kingston Capital Group, LLC 155 Chestnut Street Providence, RI 02903 tel 401-454-0800 fax 401-537-9154 cell 401-226-4081 2 APS017469 --- ... __ ,,. ·.·-·.· ..... ·-·:-·:·:·.•·•1·- .• -· .• ·:.-:-·· .... -··· ...... ··-·- .. RIEDC Letterhead March_, 2010 Mr. Curt Schilling, Chainnan 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios ·· 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. Mac Lean: We are pleased to present this ocitli undertaking actions to provide econo will commence locating its businesses s pursuant to which Rhode Island ll commence ment incentives to 38 Studios and 38 Studios d. We very much appreciate the vaiue your c e video gaming and interactive digital media industry, and we thtink that Rh perfect home for you. We also 'ndustry a en. Your assessment of your appreciate yolir company's cultu...re, backgrou industry opportunities, your assembly of talent a: levels of your company, your investments to date, your urces needs and your desire row are aligned perfectly-with Rhode Island's omy and design resources. ile some might call moving 38 Studios to here a home run, since pitching wins ball games, we are more Rhod ore subtle but equally thrilling complete game. The Rhode I development ag · Rhode Island: lopment Corporation (RIEDC), as the State's economic following tools to consider 1n relocating your businesses to We understand your capital needs to bring your project Copernicus to MMO completion to be $75,000,000. Based on our understanding to date of your financial projections, the RIEDC would issue $7 5M of revenue b<> nds, the proceeds of which would provide the necessary financing to complete production on Copernicus and relocate 38 Studios to Rhode Island. We anticipate that these bonds would be purchased by or through a lender or investment vehicle familiar with your industry, or otherwise through an underwriter sufficiently conversant in your industry. As your company is in the unusual position of having pipeline product and contractual. APS017470 •• . . ·: . ·····..· ••• J ·---·--·----.·-···:······-····-··.-···· ••, , •• ,, •••••••• ••••••• •• · · · · · · · - · •••• . •·····-.. . ... .... ····--·---···· .· .... Mr. Schilling and Ms. MacLean March_, 2010 Page2 commitments for product distribution, but as yet is "pre revenue", we recognize the market for these bonds would be limited without credit enhancement. Accordingly, we would submit this bond issue for approval to the Rhode Island General Assembly, which currently is in session, for approval by it for the RIEDC to use an available capital reserve mechanism by which the General Assembly may consider on an annual basis funding any shortfall of any loan payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for the bondholder(s). This .financing would reflect the following tenns and conditions and be subject to the following general parameters all of which will be more fully ·culated in traditional loan documentation: Borrower: 3 8 Studios. Loan Amount: $75,000,000 Purpose: ·For product development and deployment b relocation to and expansion in Rhode Island. rchaser. Term: Negotiable, b recapture as discusse Collateral: collateral assig property, licenses, licensing product. __ . :·:::· years with some accrued interest in early year(s) with early of company including but not limited to intellectual publishing contracts, receivables and work State Guaranty Fee: Initial fee of one : ercent (1/2%) payable at closing at closing ($375,000) and one and one half percent -j;/":5%) ($1,125,000) ofloan amount annually payable on the loan closing anniversary. Guarantees: limited guarantees in amounts to be negotiated will be required from key owners of the company. Specific Conditions and Covenants: (a) The debt would not be assignable or assumable; (b) Recapture or early payment would be made from excess earnings should EBITDA exceed a base formula to be agreed upon by the parties; (c) A percentage of the funds available from (b) above may be used at RIEDC's option to provide seed capital to the video game and digital media industry in Rhode Island in conjunction with a program to be developed jointly between 38 Studios and the RIEDC; APS017471 ::~-::·:.::-~ :'·---······ .... --:···-.~-··.· ·-··.·······.-··••""."'/"''"" -~-···:·.-.--·-····-· ··:····;-···-· . - - -· :/:.· ..... ~.: ... ···-··:·-.-:-:··:··-.···:.--~~·:·:-::::·:-:~·.::...:.-:··:. Mr. Schilling and Ms. MacLean March_, 2010 Page3 (d) 3 8 Studios will locate all of its Massachusetts operations to Rhode Island; (e) 3 8 Studios will provide 150 full time jobs with an average annual wage of approximately $75,000 Gobs) in Rhode Island by December 31, 2010; (t) 38 Studios wiH add an additional 150 jobs in Rhode Isl . by December 31, 2011; (g) 38 Studios will add an additional 150 jobs in Rhode · y December 31, 2012; (h) Should 38 Studios fail to any jobs require all pay to the RIEDC an . :amount. equal to $7,500 per year for each job until such shortfall is cured; · and · (i) 38 Studios will provide audited financial statements that in a certification that the ifying the calculations borrower has met the requirements of (e), (f) and (g) above an required in (b) and (c) above. 0) 38 Studios wiIJ hire and provide internships for students at Rhode educational institutions pur t to programs and policies to be agree institutions. o be negotiated including industry typical (k) Usual debt service and other assurance on the retention of ke meet Conditions Precedent: ·Conditions to closi legal requirements typical of transactions of Iude standard documentation and d: (a) The completion and delivery by a quali I onomic development expert of an analysis ·c development impacts oft mpany's location to and growth in Rhode to be paid for by the com ; cial review and analysis of the company's financial projections; (b ligations with gaming industry partners such as EA; specialized entations obtained by the company; and any other related or co ormation of the company; and reque · y the General Assembly and RIEDC Board of Directors for (c) The prer approvals. those actio The company will assist sources to complete its due C in making industry contacts and identifying necessary igence with respect to the loan. Rhode Island Economic Development Iilcentives The RIEDC will make available to 38 Studios its traditional but aggressive incentives for the company's move to and expansion in Rhode Island including: APS017472 :.-.·.··.-.-· •.•.. ••• '···-:·:·:·:·.···.::::.:_ r :· ".'.'· '.: ~: · : : : . • • •. .• • •..••• •. ... • . • ' .• ••• •• :-·.· ... ··-.-:--- .... ·:.: ... :·::: ~:::·~·: :_·_:_~ .': :·· . ·-:·:<: ·:: .. : :· ·:- -·· ·.-. - Mr. Schilling and Ms. MacLean March_, 2010 Page4 (a) Economic Development Project Status: the purchase of building materials, FFE and computers, and equipment will be exempt from sales tax; (b) Job Training Grants and Credits will be made available to the company; (c) Jobs Development Act reductions in the corporate tax rate will be made available to the company; and (d) As applicable, all other available tax incentives that available to it (such as R&D tax credits). New Industry Incentives We are particularly interested in assisting 38 Studios grow and beco of the video gaming and digital media industry in Rhode Island. Accor and advocate.for the implementation of jobs· producing interactive digital · tax credits that provide Rhode Islander's with a cl etum on investment resulting from the "ts. We also will support other creative and inno · dustry development incentives joint y developed by us to accelerate and increase your su We look forward to the opportunity to di and its product development concepts are strategies. We think 38 Studios will be a str will be particularly welcome here as the foun s with you. We think your company with our economic development . for Rhode Island and that you r many e citing ventures and opportunities. Keith W. Stokes, Executive Director 529694 .1 APSO :J. 74 73 EXHIBIT 27 . .-~-----·-:-.---;-·".""'"t--- .. -~-·::-":" ... ,. ... -··-...: :_ ·.:::' ·. -. -:·. -... ·.· ......... ·:- .. -·1 .., . ·······-- .. ·····~ _·-·-:-·::-:·:::·.···.··.·:-·.-.···.--··~·-··--·.1;:·- ... --.·.··--:-·······-···--····:-··--·_ - . Stolzman, Rob From: Sent~ To: Subject: Attachments:· mcorso@kingstoncap.com Friday, March 26, 2010 11:51 AM Stolzman, Rob RE: image001.png Thanks. On the term sheet, I am assuming that additional Information: you are maklngi all the revisions discussed. Here Is some ~~Curt keeps $15MM in 'I i~) i ·J. Jobs 125 2010 175 2011 1502012 Audited flnanclals beginning with 2010 at 180 days after year end. Also, can we strike (k) and deal with It In loan docs? (a) of special conditions ph~ase revise so that It states 38 Stu dlos wlll establlsh Its principal place of slness In RI. As discussed, It will take some time to move all c:>perations from MA to RI. As long as the principal place of business is set up and we meet job requirements, It should be ok I think. In addition, on the conditions precedent please delete the bonding language. Let me know if you need anything else.· Thanks. Michael D. Corso Kingston Capital Group, LLC 155 Chestnut Street Providence, RI 02903 tel 401-454-0800 fax 401-537-9154 cell 401-226-4081 -------- Original Message -------Subject: From: "Stolzman, Rob" Date: Thu, March 25, 2010 3:45 pm To: HI Mike. As we discussed, attached are a survey and floor pla~s of 498 Kinsley Ave. I'd love to show you and whomever from 38 Studios the building. If I ca~ be helpful with this It would be great to help a company and my In-laws. Thanks, Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzman@apslaw.com Phone 401.274. 7200 Fax 401.751.0604 Visit our Website at www.apslaw.com Pl.AjNJfFF'S APS017454 . . . .. . . -. ··--·· ·::·-. ·. ·::-:---.. -.. ·::- •... : ·.--: ··-: :-:-:t:::....:• .. : :- : •: •.... -....... -·. ·:-. -. ·~ ~ ADLER POLLCCK ®.SHEEHAN P.C. ...............*••••••*-•** ................... ltH ........... To comply with IRS regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties Imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and Is intended only for the named reclpient(s). It may contain information that Is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named reclpient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. 2 APS017455 EXHIBIT 28 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman Page 137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Do you understand today, now that I focus you on it, that a public offering has to be registered with the SEC? A. I have a general understanding that that's true but not a specific knowledge of the registration requirements. Q. Okay. As you sit here as a practicing lawyer, it's your belief that a public offering of bonds has to be registered with the SEC. A. Yes. Q. Subject to, perhaps, by all kinds of exceptions, -A. Right. Yes. Q. -- but as a general coverage. A. General coverage. Q. Okay. And it goes on to say that, "even with the moral obligation enhancement, banks will have to seriously review the financial projections." What financial projections are you referring to? A. The company's. Q. The 38 Studios'. A. Yes. Q. Okay. And then it says, "giving us cover should the moral obligation be approved." What does that mean, "giving us cover"? Page 139 1 A. 2 That's correct. Q. What are your in-laws' names? 3 A. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 My father-in-law is deceased; his name is Marvin Granoff -- was Marvin Granoff. And my mother-in-law is Molly Granoff. Q: Okay. Was your father-in-law deceased at this time? A. No. Q. Okay. But they apparently both -- who owned, who owned 498 Kinsley place? A. A limited liability company called MLG Kinsley Ave., LLC. Q. Okay. And the ownership interest in that LLC was in your in-laws? A. Was in my in-laws and also a trust that the beneficiaries of the trust are my wife, her sister and two brothers. Q. Okay. So if 498 Kinsley Avenue was accepted, that would be of benefit not only to your in-laws but to the trust of which your wife was a beneficiary. A. That's correct. Q. Okay. Now, Corso responded back to you in response, in reply to this document, -MR. WISTOW: This is Exhibit what? MR. SHEEHAN: 32. 3-2. Page 140 Page 138 1 A. 1 Q. 2 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Protection. The -- comfort that the banks would review the financial projections. Q. 38 Studios' financial projections. A. That's correct. Q. For the purpose of helping determine whether or not the debt could be paid on the bond. MR. DOLAN: Objection to the form. Go ahead. Q. Correct? A. Yes. Q. Okay. Did you ever -- strike that. MR. WISTOW: Number 3-A. PLAINTIFF'S EXHIBIT 32FOR1.D.: Series of e-mails dated March 24 and March 25, 2010, 2 pages. BY MR. WISTOW: (Continuing) Q. Now, by March 25th of2010 it was contemplated that if38 Studios borrowed from the EDC, that they would have to move to Rhode Island; is that fair? A. That's correct. Q. Okay. And were you suggesting that they look at a place in Rhode Island that your in-laws owned? A. That's correct. Q. Okay. And you were suggesting that to Corso. MJn-U-Script® 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -- and, among other things, he asked you to strike line item (k). Do you see that? A. Yep. Q. And line item (k) relates to the contracts with key employees; correct? A. Yes, if -- assuming that he's referring to the draft that was attached to Exhibit 30. I'm willing to assume that, but if that's -MR. DOLAN: Don't assume it. Look at it. THE DEPONENT: Yeah. I mean, no. No, no, it does say that in (k). A. The issue is if he's referring to that draft, then that would, that would be the case. Q. Well, is there anything else he could have been referring to? To your knowledge. A. To my knowledge, no. Q. Okay. Fair enough. So he was asking you to strike (k); yes? A. Yes. Q. That was a provision that Saul had said was, quote, "key," unquote; is that fair? MR. DOLAN: Objection to the form. A. Yes. Q. Saul had in fact so categorized it. A. That's correct. Allied Court Reporters, Inc. (401)946-5500 www .allieClcourtreporters.com (35) Pages 137 - 140 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman Page 141 Page 143 1 Q. Okay. Now, when, if at any time, did you get a 1 2 response from Corso about moving into your in-laws' building? A. I don't recall. It was -- they looked at it at some point in time and quickly determined that it was not suitable for their company's needs, so there was -- it never percolated to any real discussion. Q. When was that that they made that determination? A. I don't recall. It was -- I just don't recall. Q. Give me some frame ofreference. I mean, if you literally have no idea whatsoever, I don't want to press you. A. April, May, June, July. Q. Okay. Possibly August? A. No, I don't think it was August. Q. Okay. So -A. Possibly, though. Q. Okay. A. I just don't remember. Q. All right. But if you don't remember, then you don't remember. What I'm trying to find out is what is the range of possibilities, and if you could tell me -- I mean, clearly, it was not November. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PLAINTIFF'S EXHIBIT 33 FOR I.D.: Series of e-mails dated March 26, March 27 and March 28, 2010, 3 pages. BY MR. WISTOW: (Continuing) Q. Tell me when you're ready. A. (Deponent reviews document). I've reviewed this e-mail. Q. Okay. Do you recall receiving it? A. No, I don't recall receiving it. I presume that I did, though. Q. Okay. And, in fact, it's got a Bates stamp from your office, -A. That's correct. Q. -- it was produced by your office. Now that you read it, does it refresh your recollection at all about the events described? A. I'm sorry, I don't understand which events you're talking about. Q. Well, let's talk about Keith telling you, "I spoke with Senate President Paiva Weed and provided update to 38 Studio discussions." Does that refresh any recollection on your part? A. It's stated in the e-mail that he did do so. I don't recall him speaking to me about that conversation separate from this e-mail. Page 144 Page 142 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. No, that's true. Q. There's no question about that. A. That's true. Q. So what I'm trying to ask you is: What's the latest when you found out that they were not going to be interested in 498 Kinsley? A. I think I pretty early on found out they were not very interested. I don't remember when they, when they made it clear that it was not a possibility. Q. Right. But you were good enough a few moments ago to say that it was possibly as late as August. Do you recall that? A. Yes. Q. Okay. Could it have been possibly as late as September? A. Yes, that's possible. Q. Could it be possibly as late as October? A. Yes, that's possible too. I don't recall. Q. But it couldn't have been November, because the deal was closed on November 2nd; correct? A. That's correct. Q. Okay. So it could have been as late as October of 2010. A. That's correct. MR. WISTOW: Let's go to 3-B. Min-U-Script® 1 Q. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Okay. Now, the e-mail asks, purports to ask Saul to provide a time when Curt -- can we agree that refers to Schilling? A. Yes. Q. -- might be available around that time, meaning 7 p.m. the next day, to meet with the Senate President, Paiva Weed. A. Yes. Q. Okay. Do you remember ever hearing one way or the other about Paiva Weed meeting with Curt or anybody at the EDC with regard to the potential loan to 38 Studios? DEFENSE COUNSEL: Objection to form. A. I believe they did meet. Q. Okay. And what's the basis for that belief? A. I don't recall whether I heard about it or I may have even attended the meeting; I don't recall. Q. Okay. By that time, March 28th, it was known that the arrangement potentially to be entered into with 38 Studios involved a $75 million loan. A. Yes. MR. WISTOW: Let's go to 4. PLAINTIFF'S EXHIBIT 34 FOR I.D.: Series of e-mails dated March 26, March 27 and March 28, 2010, with attached term sheet, 15 pages. Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (36) Pages 141 - 144 EXHIBIT 29 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman Page 85 1 2 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 any contracts with Maureen's employer? You know who that was; right? A. Her employer. Q. Yes. Do you know who that was? A. I do not. Q. First Southwest? Have you ever heard of that? A. Oh, I'm sorry. Yes, I certainly do. I meant-yes. No, I did not. Q. You -- I'm sorry? Did not what? A. Let me -- can you repeat the question for me again and let me answer? Q. Sure. You understood Maureen was an employee of a company called First Southwest. A. Yes. Q. And in fact the financial advisor of the state is not Maureen, it would be First Southwest. Am I correct about that? A. Oh, that's a good point. I don't know the answer to that question. Q. Even up to today? A. I have not considered that, and I don't have knowledge of who technically, whether it's -- I know that was her, that is or was her employer. I don't know who technically is the financial advisor; whether it's the firm or her I don't Page 87 1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 A. That's correct. Q. Was there any other possible financial advisor to the EDC in March of 2010 other than Maureen or First Southwest? MR. DOLAN: Objection to the form. Go ahead. Q. In your mind. A. I'm sorry, I don't understand the question. Q. Okay. Are you telling me that in March of2010 you believed the financial advisor for EDC was either Maureen or her employer, First Southwest? A. That's correct. Q. So in your mind there's not any third possibility, it's one of those two; is that fair? A. Yes. Q. Okay. Now, did you ever, from -- at any time, at any time -- let me back up. When did you first become secretary to the EDC? Approximately. A. I believe 1994. Q. Okay. So we're working on in excess of 19 years? A. Yes. Q. All right. Now, in that time did you ever look at -- I'll withdraw that. In addition to being secretary, which is a Page 88 Page 86 1 know. 1 2 Q. Okay. That's one of the things I'm trying to find 3 out here, is what you know. I don't know that. Q. Okay. And we're talking about, first we're talking about the state and the relationship between Maureen and/or First Southwest with the state. So you have no knowledge whether Maureen was the advisor to the state or First Southwest. A. That's correct. Q. You just don't know. A. I don't know. Q. Even as you sit here today. A. That's correct. Q. So you never knew. A. That's correct. Q. Okay. Now, let's talk about the financial advisor for the EDC. Did you have any idea or do you know today whether Maureen is the financial -- bad question. Do you know whether Maureen at March 24th, 2010, was the financial advisor to EDC or whether it was First Southwest? A. I do not know. Q. Okay. And you didn't know it at the time. 2 3 4 A. 4 5 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® 6 7 B 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 corporate officer, of the EDC, was your law firm in any way rendering legal services to the EDC? A. Yes. Q. And can you describe for me in general terms what that relationship was? A. Yes. We provided general corporate maintenance services, such as public records advice, open meetings law advice, general corporate governance advice with respect to advising on the operating statutes that -- statutes that govern the operating of the Economic Development Corporation as well as its bylaws. And from time to time we provided other services: labor and employment, specific transactional, or litigation as matters arose. Q. During the period -- by the way, would Adler Pollock & Sheehan have been counsel to the EDC from 1994, approximately? A. 1991. Q. So it was even before you became -A. Secretary, that's correct. Q. Okay. So during the period 1991 to the present, were there any areas oflegal representation, to your knowledge, that Adler Pollock did not render for the EDC? Allied Court Re110rters, Inc. (401)946-5500 www.allieacourtreporters.com (22) Pages 85 - 88 EXHIBIT 30 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman - Vol. II Page 271 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Not necessarily on the financial documents. It was explained to me and to the board that that was the result. I would not have, I would not have checked that on the financial documents 'cause I wasn't the financial professional hired for that purpose. Q. Right. I'm not suggesting that you check them. I'm saying, if you had learned from some source that there was some insufficient funds to pay the bonds, that would have been significant to you, would it not? MR. DOLAN: Objection to form. Go ahead. Q. As counsel to the EDC. A. Well, we -MR. DOLAN: Hold on. Hold on. Lethim finish his question. THE DEPONENT: I'm sorry. I'm sorry, i thought he was done. MR. DOLAN: Go ahead. THE DEPONENT: Can you read back the question, please. (The reporter read the following: "Question: I'm not suggesting that you check them. I'm saying, if you had learned from some source that there was some insufficient funds Page 273 1 financial projections showed sufficient monies to 2 pay the bonds. You indicated Mike Saul told you 3 that. 4 A. Yes. The meetings leading up to, meetings with 5 Mike Saul leading up to the June 9 meeting of the 6 board; at the June 9 meeting of the board; 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 meetings between the June 9 meeting of the board and the June 14 meeting of the board; and at the July 15 meeting of the board; and then again at the July 26 meeting of the board. There was discussion of the financial projections at all of those meetings, and at all of those meetings it was represented that there were projections that showed the ability for the bonds to be repaid. Q. And let me focus a little bit differently. Was there any discussion of whether or not there was sufficient cash flow to complete Copernicus? If you recall. A. I understand the question. There was discussion about the risk of there being inadequate cash flow to complete Copernicus. That was discussed at the July 15 meeting. Q. Okay. And that was by Mr. Saul? A. Mr. Saul did discuss that. And Governor Carcieri specifically said that that was one of the two Page 274 Page 272 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to pay the bonds, that would have been significant to you, would it not?") MR. DOLAN: And you have my objection? THE REPORTER: Yes. A. Yes, it would have been significant, and it was discussed that there was a risk the bonds would not be repaid. That was a risk. Q. Right. Of course it was a risk. What I'm saying, though, is, there were financial projections which, to your knowledge, indicated the bonds would be able to be paid; correct? A. That's the way it was explained to me, yes. Q. And who explained that to you? A. Mike Saul when he explained it to the board; and it might have also been discussed at the board meeting with, and at other meetings with Wells Fargo and Strategy Analytics. Q. Okay. What I'd like to do, Mr. Stolzman, is not talk about what might have been but the things you actually have a recollection of. You understand. A. Yes. Q. Okay. A. But -- I'm sorry. Q. Okay. Would you please tell me those situations you recall where it was explained to you that the Min-U-Script® l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 risks that we faced, that the EDC faced. One was that adequate resources to complete the game, that game, and second was sales. Q. Now, who was taking the minutes of those meetings? A. I was. Q. Did you indicate anything like that in your minutes? A. I don't recall. Q. You haven't looked at the minutes -A. I -Q. -- personally? A. I did look at the minutes, but I don't recall whether that was specifically mentioned in the minutes. Q. Okay. Does anybody else have the job of recording what's stated at the meetings other than you? MR. DOLAN: Objection to the form. A. Could you repeat the question. Q. I'll withdraw the question. A. No, -Q. You're the secretary -A. Yes. Q. -- of the corporation, -MR. DOLAN: Objection to the form. A. Yes. Allied Court Re1>orters, Inc. (401)946-5500 www.allie Date: Fri, March 26, 2010 1:41 pm To: Cc: "Stokes, Keith" , , "Hashway, Fred" Hi Mike. Thank you for getting comments to me on the draft letter of intent. attach hereto a marked and clean copy of the draft reflecting your comments what we discussed yesterday. RIEDC staff has not yet reviewed these drafts, there may be a tweak or two, but it appears as if the parties are very close. assume you are working on this this weekend with various parties. I am available all weekend if that is helpful to you. My cell no. Is 401 263 7244. I and so I We look forward to seeing you on Monday. Yours, Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzm£!n@apslaw.com Phone 401.274.7200 Fax 401.751.0604 Visit our website at www.apslaw.com ADLER POLLCIX @.SHEEHAN P.C. ······•*************°*'*•**••••••••••*****•****** To comply with IRS regulations, we advise that any discussion of Federal tax issues In this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 8 PLAINTIFF'S EXHIBIT ~ ;."' ! This e-mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. RIEDC Letterhead March _, 20 l 0 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 .. : .:_ ~ ...::... .:;~f~~'::-'·' Re: 38 Studios/Rhode Island .. :;,',. ·.·..~;. Dear Mr. Schilling and Ms. MacLean: ., ;·'.:'::>.,,_ .:~.\. :•,::.,~;,~ . ;,:~~{\Jti'.: ; ' "'. . . We are pleased to present this outliri~·. pftenns pursuant~g/~hich Rhode Island wl, I commence undertaking actions to provide economic deveJopment in2~t).yes to 38 Studios LLC (hereafter "38 Studios" or the "company") and 3S·Stud.ios:W)ll,comm;~;Jocating and expanding its businesses in Rhode Isl::~~·;::>.\\.; ':_ .' ... ">i;:~;:~i;~{;~:>, '<~·~?:'.;_;~~'.: We very much appr~i~te,the viftf.~1your corrip4~~i;~p1fi~~·'iif~'i?yid~o gaming and interactive digital media industcy~,~99 we thinl{)hat Rhode)~~and can be th& perfect home for you. We also appreciate your compariy~$;.cultur~;/6'ackground a~~.industry acumen. Your assessment of your industry or~pw.in~tie,s_, youFa§~~~~iy tal~mt at i:i,k~~vels of your company, your investments to date, yolJ.&'.~µriian res~~ces ne~1lM~'.~nd your ·q~~_i_r.,~, t6.grow are aligned perfectly with Rhode Island';~_Jrnowledge economy and·«~_esign resour~;: ' .·. . . of ~ The Rhod~fs~and EconomiP~velo~·~~nt Corporation ("RIEDC"), as the State's economic development'agency, offers yotd!le following tools to consider in relocating your businesses to Rhode Island: .. ~ :;·, --')i .. . .. .-· ~.: Product Development Financm~.:1.::': cap~:}'.Jr~~-s We understand your to bring your project Copernicus to MMO completion to be $75,000,000. Based on our understanding to date of your financial projections, the RIEDC would issue $75M of revenue bonds, the proceeds of which would provide the necessary financing to complete production on Copernicus and begin relocating 38 Studios to Rhode Island. We anticipate that these bonds would be purchased by or through a lender or lenders familiar with your industry. As your company is in the unusual position of having pipeline Mr. Schilling and Ms. MacLean March _, 20 I 0 Page 2 product and contractual commitments for product publishing and distribution, but as yet is "pre revenue", we recognize the market for these bonds would be limited without credit enhancement. Accordingly, we would submit this bond issue for approval to the Rhode Island General Assembly, which currently is in session, for approval by it for the RIEDC to use an available capital reserve mechanism by which the General Assembly IDC!Y)S~nsider on an annual basis funding any shortfall of any loan payments necessary to pay:W,.'.ef:l)ondholders, thereby creating for this issue what is commonly called a "moral obligatio.n~f~~ranty for the bondholder(s).This financing would reflect the following terms and condit~on~,'an4;~~~, subject to the following general parameters all of which will be more fully art:ic'ulated in~qitional loan documentation: Borrower: 38 Studios. .. :-;;·tf~1;1;~.,. . :.~ •::~ :;~: .''>::'.f.;~:~~. ' . Loan Amount: $75,000,000 :·:····,· Purpose: For all associated busines~ifMP.~nses related to_Qper~tions, product de~el~pment and deployment by 38 Studios in conjunctippwtt'Jlits business:i;{ey~lopment and expansion in Rhode '(;';~;.\ · . ::·,. _. "-t.~}¥\~{~\ Island. Rate: Market for bond11$.~J.~fp{:tl)is type ~~iµ~gotiaJed·wm~.&ondz~~chas~r. ·'< \'. >.. . ·<:Ai'.:s:;t., . . {;.,::·:,:;,. .. :·'~i~1i:~~*' Term: Negotiable, lik~f)!:JO years~ii..th a porti:&#;pfcapitalizecl"foterest in early year(s) with " · early recapture as discussed:belowniw. ...,.,,.:t~S\'·:;:., . :;~:;-:,.,.: ...:·df:i~1ifl~1;t;,{\,, ·,. ~,., CollateraI;·:~J;J~fo'riJ;ti$~Jgnment:b_t all assel'~fAoriipany now owned and hereafter acquired includi~g}bUt not limit'g,. ·:;~,. (e) 38 Studios will provide 125 ~~l)Ldme jobs with aiJWff.erage annual wage of approximately $75,000 ('~obs") in Rhode Isi'lm.(r·i;y::Qepember 3 I ~:::~0.1 O; (t) 38 Studios will add an addition·~~Y.~75~1€niw:;m,Jlhode,Isi~nd. by December 31, 2011; (g) 38 Studios will add.an additional TS.-0 jobiriif: .· de Islari(i.·by December 31, 2012; {h) Should 38 Stusf.~~W.{~{~;f(u:neet any}~g~ req.!:f. ,:,.;. ·•';~ryt~•. _it shfilJ;·pay to the RJED.c an amount equai·tp}$7,500.pei.·:year for e~9.h),~~~not so'addaj until such shortfall is cured; · ·. ;, i ., .. >-:;/;:Y and (i) 38 Studios will pt~}:de 2010 and annuaf(yftµereafter during the term of the loan audited financial statements;:w.~f. m.ctud~··:a:,c;:~,rtificdt1~n that the borrower has met the r.equ_irements. . O~(e), (Q'~R~ (g) aboVe'.'.' cd~ffying the calculations required in (b) and {c) above · ·)~~(::':. ., <: ·. · '-- · ·. , (j) .. 38·-Studio~ will ·._;.<>·. ·*-7~·/:-. ,. ·· :· The company will assist the RIEDC in m~ii~{:i~du.:s.try cont"_'·· ~nd identifying necessary sources to complete its due ,~.!.ligence with:~~~pect'tb"·;t~0loan. · :~:y;~t;~, ~ . : :=:·}:~~~;:·~t... ·-.~:~~{\ . ..~ . . .;~~~~- Rhode Island Economic. Develd'fument Incentt~es :: · ,, . ~~i~~~= ·'\_'.~~f~~2}r/'· The RIEDC will make available t .i-3.8.~~tudios i~~ditional but aggressive incentives for the ' d ~. company s. Jn.ove to an exp~rt;_: ·? ... . :;::):{:~. · · .. ·. ·.· .~:%~~~L~. . •. ·~l'"~ "°\ . '.;:4,d,.e _Islan~t~~..;. We look forward to the opportunity to discuss t and its product development concepts are exci strategies. We think 38 Studios will be a stro will be particularly welcome here for the founda opportunities. Sincerely ours, Governor Donald L. C~rcfoi-i~ Chairman of the Boar4.' · .::;-\:}:;:::···· :.·: Keith W; .Stokes, Executive Director S29694.3 .:.: ·. _.., ....,r . -h::.~;,~;~.. .· lf'.. RIEDC Letterhead March _, 20 I 0 Mr. Curt Schilling, Chainnan 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 .. i ;::!.:l~;r;;. .-~< . ·::' .! \di'' ,,~~~$,;, .,~,, . ~~· '····:~·1·::. Re: 38 Studios/Rhode Island ~i:'~i:!;~" . ··::.··,;,: . ·-~··F~:·\.:.:.:: ., .. ;i\;~;;i~i:\? Dear Mr. Schilling and Ms. MacLean:. '';~l~(q;~'.t·(:-: We are pleased to present this outlin~;o(terms pursuarit;~g'.~W'nich Rhode Island will commence undertaking actions to provide econoriiiC"deve1Qpment inc~hti.yes to 38 Studios LLC (hereafter "38 Studios" or the ·•company'') and 38 Studi6~'-WiJl commeri'd6,;Jocating and expanding its businesses in Rhode Island .· ., · '·>:. · \;:f);, . ,:,;. . ::){f,;,,;f'\"·:. . .:, :::: .' ' :?i~:~::?:~;,:r,: . . , . .)',~0:~} We very much appr~t~~'the va1~~.;iYOUr coml'~y~[lhgs tfri. .)yJdeo gaming and interactive digital media indus · · we thirl~1hat Rhodeff~!thd can be dfe perfect home for you. We also lture,~~,backgrounc('"·'" industry acumen. Your assessment of your appreciate your compan·· industry opp~nitj~s, yo, ,ff~~~fci'f::.~Iynt at ·a vels of your company, your investments to date, you.ri~~inan reS'~µ~9es ne~~~i;#nd your if~S.i~~. ~ '· ·ow are aligned perfectly ~ith Rhode. Island'.~·:~owledge econ_9:ITT.Y and\~~~.ign resoutO'¢~' While some might call movmg 38 Studios to Rfwde lSlatld and growing Jt;Jrere a ll;01~e run, since pitching wins bal I games, we are more inclined t(1"eompare it to the·:--"~re sub.t1ebu~ equally thrilling eomplete game. ·... The Rhode lsland.;E.Cl.onomic D~~~~opment Corporation C.:RIEDC~, as the State's economic development agency,, offers you\lh~ following tools to consider in relocating your businesses to · Rhode Island: Product Development Finaricfog We understand your capital needs to bring your project Copernicus to MMO completion to be $75,000,000. Based on our understanding to date of your financial projections, the RIEDC would issue $75M of revenue bonds, the proceeds of which would provide the necessary financing to complete production on Copernicus and relocate 38 Studios to Rhode Island. We anticipate that these bonds would be purchased by or through a lender or i1westment veh ielelenders familiar with your industry, or othel"Nise through an Uflderwriter suffieiently conversant in your industry. As your company is in the unusual position of having pipeline product and eontraetual Mr. Schilling and Ms. MacLean March _, 20 l 0 Page 2 product and c.ontractual commitments for product publishing and distribution, but as yet is "pre revenue", we recognize the market for these bonds would be limited without credit enhancement. Accordingly, we would submit this bond issue for approval to;~~'·Rhode Island General Assembly, which currently is in session, for approval by idbtlhe RlEDC to use an available capital reserve mechanism by which the General AsselJ:l~i::Yifuay_;consider on an annual basis funding any shortfall of any loan payments necessa,cy,_tO~p·ay the ht>!l~holders, thereby creating for this issue what is commonly called a "moral obligation" guaran~ifqr the bondholder(s). :::::/;~~~=··:·;ff:·· .. ·'~6:~i(. =~.:.~ This financing would reflect the following terri1$:~and conditions and be sfi.'bJ~ct to the following general parameters all of which will be more ful'Jf::i};i.1.iculate~Un traditionat1fd~P.;documentation: .., . Borrower: 38 Studios. ·~ {{~~<. .... Loan Amount: $75,000,000 ''ri+~, .... 1 ':i;F · r;~~~{- ·~· :.:...;~\:. ""'<'.<~\/; ,. . ~;...=:==;::=.;~~~~~=~,:...:::.:~· ..<": > ()". ...atioii's · iness develo ment and .... : Rate: Marke~ ·for.bond issues'C>.f;~~j~pe as negotf~~~ with bond purchaser. ·... ~.-· .... : . .. -~: ·.=.. ~.;'.... ~:;.:~~\:~~.:·;.. ~ ......:::~···~=.-· . ~-~\r~ . Term:·~~g6tia~le, &!:if like!~, ~'.;~~tM~ars witli' a~:Qortion ofsome accrued capitalized interest m early year(~) with early recapwre as''.(t:!~c:ussed below . .::· ~. ~· ~~:~~11:~. ~.: \~~~: ~ .! Collateral: ccill~JQ~al assignme~~,f all assets of company now owned and hereafter acquired including but not{U,mjted to int tual property, licenses, licensing fees, distribution and d work product. We recognize that a portion of your assets publishing contrads','.:reC,eivabl '< . su · ar the ownershi interest of which will be led ed to the are held in a wholl RlEDC. and that such a~~tg?.~f.i'otherwise pledged in connection with an early phase of product development security. :;/ o State Guaranty Fee: Initial fee of one half percent (112%) payable at closing at closing ($375,000) and one and one half percent (1.5%) ($1,125,000) of loan amount annually payable on the loan closing anniversary. Gwtrnntees: limited guurar:tee~; in amounts to be negotiated will be required from key owners of and Dividend Covenants: During the term of"the loan, Mr. Schi1Iing shall main!eed capf~ffocreate an investment fund for the companv's growth and expansion in Rhode Island and to facilitate the development of the video game and digital media industrf~':Rhode ~s!~d in conjun~iion with a program to be developed and operatedjqintly betweer1"1a,~tr,td}9~"and the RIEDG;· .. , ':"::{'.:o<;L'~: . ,. Mr. Schilling and Ms: Macbean March . 2010 ~ . .:·· .. : .·· . . ··.~ ..; ·. ~ . ,?;:~:~ni·:., :.: . :., . ,, :t\.:~:-J. . \. ~~~·~·. . .... .:~f"iA. ... Jtddiff~tra.J, 150 jobs In Rhode Island by December 31, 2012; (h) ShoU:{dJ8 Studios fait~9 med~nyjobs requirements, it shall pay to the RIEDC an amouni:equal to $7,soo::pt(r year fdf.';'eachjob not so added until such shortfall is cured; and · . ":;,,, ·r.: ;·;. (i) 38 Studios will provide 2010 and annually thereafter during the term of the loan audited financial statements thai\itihlude a certification that the borrower has met the requirements of (e)/(f:f~~d (g) above and certifying the calculations required in (b) and · (c) above. U) 38 Studios will hire und p1'0'dde if!terftshipsdevelop internship programs for students at Rhode Island design and educational institutions pursuant to programs and policies to be agreed upon with such institutions. (k) Usual debt sen·ice and other covemmta to ee Aegotiated including industr)· typical as~ammce on the retention of key executiYes. Conditions Precedent: Conditions to closing the loan will include standard documentation and legal requirements typical of transactions of this size and scope and: Mr. Schilling and Ms. Mad.can March • 2010 Page 4 .;;:.i;~:~JJ.' (a) The completion and delivery by a qualified economN:~d.evelopment expert of an analysis of the economic development impacts of the cqfrl,PaliY.~·!1i't9cation to and growth in Rhode Island, such study to be paid for by the compaiiyft. "'+:~", (b) An independent financial review and an .. ,. fthe comp ,.. financial projections; current contracts and obligations with, · · industry partne has EA; specialized · · · · · y other related or requested documents or information oftH filThe prerequisite approvals by the General A:. those actio·ns requiring such· apl#pyals: and ·".ft:", . " t:e-)(d) Placement of the bond'issde::"vith a lender' ~Waenclet·s and documentation reflecting the terms hereof and other stand~"rd te:1iiiS';lmd conditib~s tvpical of a transaction of this size and nature ..,. · · · ·~.:·:;:-::-, · . ·:·:.. : ,l". ~: . :.:: .. The company will assj'~Hhe RIEPC in maki~g;jg~µ~t~ ~ofil'i~t$ . and identifying necessary sources to complete its.due diligence. with respecfifo. the loan. ·· . Rhode Island-Economic . .. . . ... ··:{':~¥~~:.;. . De"velopmeri.t Incentives·!.:'.;:\~, . .. . . . : ": "h··'..~'.:_::. "\;~%:> The ruippc will make av~ilable to 38 Studios" ii$:'1ciitional but aggressive incentives for the company'-f¥10ve to and exp~~ion in ~Rhode Island including: · Mr. SchilliRg and Marel'I __, 2010 ~4s':':Maclean?::.,~ (a) Economic Development Project Status: The RIEDC mav designate the development of the company's offices and job expansion in Rhode lsland as a project of the RTEDC, resulting in reimbursements to the companv for sales tax paid fo connection with the purchase of building materials, FFE and computers, and equipment •Nill be eKempt from sales tax.for use in Rhode Island; (b) Job Training Grants and Credits (of amounts up to $5.000 per year per employee) will be made available to the company; - - - - - - - - - - - - - - - - - - - - - - · - · ... ·- ·- --···-- .. ···-- ······-. · · · · - · · · · · - - - - - - - - - - - - (c) Jobs Development Act reductions in the corporate tax rate (by up to one-quarter of one percent for everv 50 jobs with a floor corporate income tax rate of 3%) will be made available to the company; and (d) As applicable, all other available tax incentives that are useful to the company will be available to it (such as R&D tax credits). New Industry Incentives We are particularly interested in assisting 38 Studios grow and become a magnet for the growth of the video gaming and digital media industry in Rhode Islan. ·r;,,Accordingly, we will support and advocate for the implementation of jobs producing intei: · ., digital media tax credits that provide Rhode Islander's with a clear return on investme. . ng from the credits. We also will support other creative and innovative industry dev~~f . '~'·'~~t~pcentives jointly developed by us to accelerate and increase your successes. ''"". ·~-t'/< -· ·~ •• tti~~~·:i~:ms . . •• ~ . . . . .. , .... ~# yo:>:*-~.'think We look forward to the opportunity to discuss with your company and its product development concepts are excitiiigJmd aligned with our '~~p,9mic development strategies. We think 38 Studios will be a strong cbtp~rate ci . ·. for Rhod~~!~\~,nd and that you will be particularly welcome here as tb.e foundation for·gt~: . citing venture·S::~9 opportunities. ·, ·.. ·.. · ~··f!·~\)~?\·'' ·- . Sincerely ours, ···.· ~: ::=: .. •:' ·. <. "~.':· :_. .. ; . :i~ . :.:.::::~~-: ~ :. . Governor Donald L.iq~tdieri, ·'\·1.~'~L Chairman of the Board·''" \:;~ : ·:". ·;,..;...> . ·.~ .•. !)..:. • .. • ~=~: i- .~ ·/"-'· / .:.~~:.. :. ... ·. '>.. :. . ~:).. ·, . ~.'.I.:.~.).:.:_·~.·.~:.;f('.f' .'?> ·....· . . ';: ·.:<_,.!:.c.::_. .- . . • =; ....... ~: Keith W;;;;S:tqkes, Executive ~if.ector ·" :: ....· ... ~ .... ·.:·. ·-- ··-·---- ,,,_, ,, _____________________ EXHIBIT 32 B. Mr. Stolzman and Adler Pollock did not suffer from a conflict of interest such that they breached a duty owed to their client. 1. Certain Relevant Facts The Plaintiff and/or the experts retained by counsel to the Plaintiff allege that Mr. Stolzman and/or Adler Pollock suffered from a conflict of interest by virtue of (i) Mr. Stolzman's interest in a property at 498 Kinsley Ave., Providence, R.I., and (ii) an interest in appeasing various political factions.24 i. 498 Kinsley Avenue With respect to Mr. Stolzman's alleged interest in a property at 498 Kinsley Avenue, early on in the discussions with 38 Studios, and specifically with Mr. Corso, Mr. Stolzman .discussed the possibility of 38 Studios leasing property located at 498 Kinsley Avenue.25 That property was owned by a limited liability company called MLG Kinsley Ave., LLC. That company was in turn owned by Mr. Stolzman's wife's parents and a trust whose beneficiaries included his wife, her sister and her two brothers.26 I am informed that this discussion with 38 Studios and Mr. Corso took place in the presence of EDC senior management, including Mr. Saul and Mr. Hashway. The only relevant document from that time period that I have reviewed is an email from Mr. Stolzman to Mr. Corso dated March 25, 2010.27 From: "Stolzman, Rob" Date: Thu, March 25, 2010 3:45 pm To: Hi Mike. As we discussed, attached are a survey and floor plans of 498 Kinsley Ave. I'd love to show you and whomever from 38 Studios the building. If I can be helpful with this it would be great to help a company and my in-laws. Thanks, Doty Opinion #63; Green Opinion #18 EDC Expert Disclosures. Stolzman Tr. at 139. 2s Stolzman Tr. at 139. 21 Exhibit 32. 24 25 Report of William B. Lytton Page19 EXHIBIT 33 Mark Lamarre - Vol. I Rhode Island Eco~o.mic Development Corporation vs Page 9 1 Q. Did your -- well, let me strike that. 1 2 When approximately did the merger take place such that your employer became Wells Fargo Securities? A. That's a matter of public record. I can't remember the exact day or month. Q. Just the year would be fine. A. I think it was -- I could be wrong on this, but I think it might have been 2008, 2009 maybe? Q. Now, at the time that this took place did you still have the title of managing director, investment banking and capital markets? A. I may have -- I don't know when my title changed to managing director and vice chairman of investment banking and capital markets. I don't remember. But I had the title managing director and then they added and vice chairman to it sometime, and to be honest with you I don't remember. Q. When you left Wells Fargo in 2011 was that your title? A. Yes. Q. So, obviously, when you started at Wells Fargo, or when the transition took place you kept that title of managing director and vice chairman, investment 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the case? I have not reviewed anything I believe called a deposition. I don't know what a pleading means. Q. Did you review a complaint filed by the plaintiff? A. I reviewed, yes, I believe I reviewed a 97-page document; if that's the complaint, then that's -I did read that, yes. Q. When did you begin preparing for this deposition? A. I believe I was first contacted about the proceedings -- I don't remember specifically; I think it was maybe in the fall oflast year. It may have been before that, but I think it was the fall oflast year. And then I met with K&L Gates a couple of times either in February or in March, so reasonably recently. February or March. I don't remember the exact dates. Q. When did you first learn that a lawsuit had been brought, this particular lawsuit had been brought? A. I don't remember when I originally was informed of that. Q. Well, the lawsuit was filed in November of2012. Did you learn of it by the end of2012? A. The lawsuit? I do not believe I did, but I do not recall specifically when I first heard of the lawsuit. Page 12 Page 10 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 banking and capital markets? A. Again, I do not remember if I had that title prior to the acquisition of Wachovia took place or after; I don't remember. Q. Okay. What documents have you reviewed in preparation for this deposition? A. I've seen some of my e-mails. I believe I saw the equity private placement memorandum that Wells Fargo prepared with 38 Studios. I've seen several documents. Q. I understand. Which documents? MR. HOLT: To the best of your recollection. If you can't recall -A. Yeah, I mean, I don't know ifl can recall them all. I've seen several e-mails. I've seen a financial model. Yep. Several e-mails, yes. Q. Can you think of any other documents that you reviewed in preparation for this deposition? A. I'm guessing I'm not naming them all because I've seen several. Q. Right. Can you think of any others? A. I cannot think of any other specific documents, no, sir. Q. Did you review any of the depositions in the case or any of the pleadings that have been filed in .Min-U-Script@ l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Q. What's the first recollection you have of knowing that there was a lawsuit? A. The first recollection I have is I believe when K -- I think the first recollection is when someone from K&L Gates called me, or someone from Wells Fargo called me, I can't remember who called me, and told me of the proceeding. Q. By "proceeding" what do you mean? A. I think you used that term, and I think I'm referring to it to mean the lawsuit. Q. Okay. With whom did you speak at Wells Fargo concerning the lawsuit? A. I spoke with Brett Holmes. Q. With whom else? A. I don't remember ifthere was anybody else. There may have -- no, I don't remember ifthere was anybody else. I know I spoke with Brett Holmes. Q. What is his position at Wells Fargo? A. I don't know specifically. My belief is that he is a lawyer for Wells Fargo. Q. You believe he's in the legal department? A. I don't know, sir. Q. I know you don't know. I'm asking your belief. You volunteered your belief that he's a lawyer. Do you believe that he's in the legal department? Allied Court Re~orters, Inc. (401)946-5500 www .allieb . Wednesday, March 31, 2010 2:05 PM .Stok~; Kcilh ~ Hashway, Fred ; Saul, Michael RIEDC/38 Studios llllageOOl.png Hello _all. I just got a call fr.om Michael Corso. He told me that his post meeting meetings went well last night and 1:hat Gordon and Steve C want to put the ~moral ob program" in the FY '10 supplemental budget, which currently mlgh "t be heard as early as next week. That coincides with Sharon Reynolds calllng me from the House Fiscal while I was at -vour office and leaving me a message that Steve C said I'll have something for her (while she didn't say what or for the supplemental). I've returned her call. Good news. Michael is trying to get Dan DaPonte and others up to Maynard on Monday or Tuesday. Since Teresa left that.with RIEDC, as Fred suggested earlier, we also .should follow up on that. Fred, you thought you might do that through Teresa's office. Let me know. ·As a soft heads up, Michael said that he thinks there Is some confusion fn that he believes Gordon and Steve see this as a "digital media Industry" program, with $75M of $125M ''committed" to 38 Studios and the rest to be worked out on an Industry based program, the details of which are to be developed by the RIEDC and the. legislative policy folks with industry Input. Per Michael (so, It Is heresay, even If well Intended and accurate), he thinks there might be a problem with either not speclflcally allocating all of the 12SM for digital media, or alternatively, trying to allocate it among other economic development "buckets" in.the Kushner. He merely raised the issue, not strongly, but I wanted to get this heads up to you asap. ' In the meantime, I'll draft a broad open ended l25M Kushner for review and "ornaments" or constraints may be a~ded by the powers that be. • Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 6th Floor ProVidence, RI 02903 E-Mail rstolzrnan@apslaw.com Phone -401.274.7200 Fax 401.751.0604 Visit our website at www.apslaw.com To comply with IRS regulations, we advise that any discussion of Federal tax Issues In this e-mail ls not ·intended or wdtten to be used, and cannot be used, (i) to avoid any penalties Imposed under the Internal Revenue Code or (ii) tc. promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and Is Intended only for the named reclplent(s). It may contain Information that Is subject to the attorney client privilege or the attorney work-product doctrine or that is otheiwise exempt from disclosi.ue under applicable law. If you have received this e-mail message In error, or are not the .named reclpient(s), please Immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. I j !i! PLAJNTIFPS EXHIBIT 3, ~ 11/r/d APSO ()2454 ~.-:-:-·---:- ... ~,.,,\2, EXHIBIT 36 Rhode Island Eco~o.mic Development Corporation vs Keith Stokes - Vol. II Page 346 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 amused by what I feel like being amused by. DEFENSE COUNSEL: Objection. MR. GLADSTONE: Objection. MR. WISTOW: Well, he asked me a question. I gave him the courtesy ofresponding. THE DEPONENT: Thank you. MR. MARTLAND: Are you done with that exhibit, Max? MR. WISTOW: Yes. Q. Exhibit 35. Do you have it? A. Yes, I do. Q. Okay. On March 29th you wrote to Stolzman and asked him to prepare a, quote, "short memo for me with draft term sheet so I can brief Governor" -and that's, of course, Carcieri -- "on Wednesday," and you sign it "Keith"; is that correct? A. That's correct. Q. Okay. And the reference there, obviously, is a short memo to describe what's going on with 38 Studios; yes? A. That's correct. Q. Exhibit 36. Do you have that? A. Yes, I do. Q. Do you recall receiving that? A. I mean, I see it in front of me, so I recollect Page 348 1 A. Yes. 2 Q. And "Steve C" would be Steven Costantino, who was 3 the chairman of the House Finance Committee. That's correct. Q. Okay. And then it goes on to say that, "Michael is trying to get Dan DaPonte and others up to Maynard on Monday or Tuesday." Do you see that? A. Yes, I do. Q. And "Michael" is Corso, is it not? A. I believe so. Q. Typically -A. I believe so. Q. Typically the distinction was "Mike" was Mike Saul but "Michael" is Michael Corso; yes? A. Interchangeably. Q. Right. But from the context it's pretty clear that we're talking about Michael Corso. A. That's correct. Q. Okay. And that's what you understood at the time? A. Correct. Q. And then it says, "Michael is trying to get Dan DaPonte up to Maynard on Monday or Tuesday." Dan DaPonte was the chairman of the Senate Finance Committee; yes? A. That's correct. 4 A. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 349 Page 347 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 receiving it, yes. Q. Well, just because you see it in front of you doesn't mean you recollect receiving it, with all due respect. I mean, you can say, I must have gotten it but I don't remember getting it, or you can say, I do remember getting it. Which is it? A. In all due respect, thinking back over three and a half years of activities, and my response is, is that I do recall receiving it. Q. Okay. Fair enough. And you recall reading it, obviously? A. That's correct. Q. Okay. And Stolzman is saying that, "I just got a call from Michael Corso"; right? Do you see that? A. That's correct. Q. "He told me that his post meeting meetings went well last night and that Gordon and Steve C want to put the moral obligation program in the fiscal year '10 supplemental budget, which currently might be heard as early as next week." Have I read that correctly? A. That's correct. Q. Now, "Gordon" is, obviously, Gordon Fox; yes? A. That's correct. Q. That's what you understood? lVHn-U-Script® 1 Q. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And then it says, "Since Teresa left that with RIEDC, as Fred suggested earlier, we also should follow up on that. Fred, you thought you might do that through Teresa's office. Let me know." Now, here we have -- "Teresa" is, obviously, Teresa Paiva Weed, the President of the Senate? A. That's correct. Q. And did you have an understanding when you read this as to whether or not there was an effort to get Teresa to visit 38 Studios in Maynard, Mass.? A. I don't recall an effort to get Teresa to visit Maynard, Mass. I don't recall that. Q. What do you believe this refers to? It says, "Since Teresa left that with RIEDC, as Fred suggested earlier, we also should follow up on it." What do you believe that meant? A. I believed then, and I believe today, that means that she would leave it up to the EDC to continue the negotiations in developing the transaction. That's an EDC activity, not Senate activity at that time. That's, that's my interpretation. Q. Well, it says, "Michael is trying to get Dan DaPonte and others up to Maynard." Was Teresa leaving that with the RIEDC to set up the meeting with Dan DaPonte? Is that -- Allied Court Reporters, Inc. (401)946-5500 www.allieacourtreporters.com (24) Pages 346 - 349 Keith Stokes - Vol. II Rhode Island Eco~o.mic Development Corporation vs Page 352 Page 350 1 A. That's what I believe. Okay. Fair enough. A. Yes. Q. Fair enough. Okay. Then it says, "As a soft heads up, Michael" -- meaning Corso; yes? A. Yes. Q. -- "said that he thinks there is some confusion in that he believes Gordon and Steve see this as a, quote, 'digital media industry' program with 75 of 125 million, quote, 'committed,' unquote, to 38 Studios and the rest to be worked out on an industry based program, the details of which are to be developed by the RIEDC and the legislative policy folks with industry input." Have I read that correctly? A. That's correct. Q. When you read it, what did you understand that meant? A. My recollection is, is that the initial interest was, you know, setting aside an amount for digital media industry, which would include a company such as 38 Studios. My belief at that time was, is that that was a bit narrow; that the goal was to create a guaranty program for a host of knowledge-based, soft asset companies, which could 2 Q. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evolution of what would become legislation, is that our goal was to create a broader based program within knowledge base and not specifically digital media industry. Q. Okay. But am I correct in saying that's what the, quote, "confusion" was or the issue was, is it going to be broader based than digital media industry to include everything or is it going to be limited to digital -A. That's correct. That's correct. Q. Okay. And Michael was saying he believed that it was specifically allocated, to be allocated for the digital media industry. You didn't necessarily agree with that; is that true? A. Well, that's Michael's statement, his interpretation, what he believes Gordon and Steve had believed. Q. Yes. A. My interpretation is, is that it was broader. Q. Okay. I'm not quarrelling with you. I'm just -A. No, no, I'm just trying to answer, again. Q. In other words, you read this to be that Michael Corso had interpreted to be that it was limited to digital media industry, the 125; you didn't necessarily agree with that. Page 353 Page 351 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 include digital media. We at that time didn't have enough knowledge to know that there would be other companies either in-state or outside the state within the focus of digital media. Q. All right. So the confusion was is the 125 million going to be for the digital media industry generally or is it going to be for any other kind of -A. That's correct. It was a -Q. Let me finish. -- or any other kind of industry; is that the confusion? A. That's -- well, I think it's a policy discussion on how the investment program should be designed and developed. Q. But what I'm focusing on is, Michael said he thinks there was some confusion. I didn't -A. That's Michael's statement, yes. Q. Yes, that's right. And I'm trying to figure out what that, quote, alleged "confusion" related to. And was it that there was an issue that hadn't been resolved whether or not the 125 would be just for digital media industry or would it be for anything that the EDC felt was appropriate for job creation? A. My recollection is at the early stage of the Min-U-Script® 1 A. That's correct. 2 Q. Okay. And that's the so-called, quote, 3 "confusion"; is that fair? A. That's fair. Q. Okay. Good. All right. But, in any event, of that 125, at that point in time it was being proposed that 75 of it go to 38 Studios, and the balance, assuming 38 Studios qualified, and the balance of 50 million would go to either the digital media industry or whomever; -A. That's correct. Q. -- is that fair? A. That's fair. Q. Okay. Thank you. Now, Exhibit 37. Do you recall receiving that document? A. Yes, to the best of my recollection. Q. Okay. Now, at this point in time there was an effort to create some kind of due diligence plan with respect to 38 Studios; is that not true? A. That's correct. Q. Okay. And one of the things that Mr. Saul was talking with Corso -- this is an e-mail from Saul to Corso with copies to you; correct? A. That's correct. Q. And others. And one of the things he's talking 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (25) Pages 350 - 353 EXHIBIT 37 :-:-·.-.-·;··.·- ..... ' ,.. ···:"':····- "7--:------:.·-r-~···-~-----~-··.-~-.-.-.-.·1 From: Sent: To: Cc: Subject: Attach: ·- -·.-····.----------------···-:-···.-, . ·-:···.·.-................... ···-·. ---.·-:-~-.-:--.···-:.------····:·"":",-:-:-1··- Penta, Sharon Monday, April 5, 2010 11:58 AM Alfred Verrecchia ; Cheryl Snead ; Daniel Sullivan ; David Dooley, Ph.D. ; Donna Cupelo ; George Nee ; Governor Donald Carcieri ; Karl Wadensten ; Lynn Singleton ; Paul Choquette ; Shi van Subramaniam ; Stephen Lane ; Timothy Babineau, MD. Cherly Costantino (Paul Choquette); Cynthia Goldsmith (Lynn Singleton) ; Heidi Adler (Daniel Sullivan) ; Karen Rowland (Alfred Verrecchia) ; Linda Kleineberg (Karl Wadensten) ; Maggie North (Timothy Babineau, MD.) ; Michelle Currieri (David Dooley, Ph.D) ; Pam.Vieira (DoDna Cupelo) ; Robin Andreozzi (Shivan Subramaniam) Memo to the EDC Board Stokes Memo to Board re Guaranty Kushner 4_4_10 DOC ms.DOC; Budget Article for RIEDC ·Kushner 4_1_10.doc Good Morning, Attached please find two documents from Keith Stokes: As ruways, if you have any questions or concerns, please feel free to contact Keith directly. Thank you, Sharon Penta Sharon Penta Executive Assistant Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100x103 J 401.273.8270 fax email .~P..Ei!J19.@ti.~ff£:WID I web Y.!'.r.{.W..:f1~f!S:£C?.m This e-mail message may cont21ln confidential lnform21tlon belonging to the sender. If you are not the Intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained In this e-mail message or any attachment Is strictly prohibited. If you are not the Intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system Immediately. ' i~ ~I/ a:r PLAIN FF'S r/t.J ~ APS001277 -·:•- .. ·.-· . -;--::;-----~.-·.--:-·-;------:-:·:-:-:-.-- :: ... ·-- ·-·..· .. --.-.-:---- -- - --······· ·--- -- ., - ·.·....... . MEMORANDUM To: From: Date: Re: RIEDC Board of Directors Keith W. Stokes, Executive Director April 5, 2010 RlEDC/Job Creation Guaranty Program (Legislative Approval) You may recall that one of the economic development tools that we have been advocating, and that has been the topic of many discussions, and reports, is the availability of a complete "capital continuum" of state supported finance programs. Rhode Island has some good programs in this · arena, but what we offer has limitations. For example, through our Small Business Loan Fund, we· have provided a good source, but not enough, of operating capital for small businesses. Through· Slater,,,, we have reduced the· number of sector investments to IT/Digital Media and Life Sciences and· provide some, ·but not enough; seed capital in these sectors. Through our RIIFC and IRBA prog;rams we have provided successful funding for manufacturers and firms reql,liring . expansion of physical plant and equipment.. However, on the continuum, we do not have a good tool·to help solid businesses expand and grow if their capital needs are based on intellectual ·property (e.g. pate.nts or licenses)"or other soft assets or business operations require in excess· of $5,000,000 loa::n ·(the cap on IRB:A. guarantees, resulting from the legislation authorizing this program being approximately 25 years old). This leaves us at a competitive disadvantage, . particularly sin-ce traditional commercial lending dropped approximately 19% nationally in 2009. The General Assembly has been·Jistening to us, and they also are finding many of their . constituents also raising similar concerns .. Accordingly, on April 6, at the rise of the House (approximately- 4:30 to 5:00), the House Finance Committee will hold a hearing on the RIEDC financing programs, including Slater and small business services. In addition to the traditional financing programs, I have been discussing with the General Assembly leadership the need for a larger and more :flexible financing program that will allow the RIEDC to assist growth businesses creating jobs in the "knowledge economy'' and other growth areas. .·. The General A:ssembly has ·asked us to propose a program that would respond to the need for credit enhancement in these growth areas and at these levels. This is wonderful news and would ·immediately respond to some initiatives and opportunities in our pipeline. Accordingly, we have prepared a forrm of joint resolution for the General Assembly to consider that would authorize us to guaranty directly, or through the issuance of bonds, the debt service (not accelerated default debt) of up to $125,000,000 of these types of loans from commercial lenders or bond purchasers. This annual "moral obligation" guaranty has proven successful for us in the past. · I am pleased tt...at the General Assembly has indicated its desire to proactively seek our participation int this program.· I ani attaching a draft of the form of resolution we have submitted to the General Assembly for their consideration. We can discuss this further, of course, but I wantedfo mak~ you aware of this exciting opportunity for us. Please call me if you have any questions. 530790.1 APS001278 .... ·-------~- -- -·.·.··· --.-.---·------··-····---··-· • 1.1• •1 •;,• • • •.:•• • •:•• " l " ' > • I •" I II .•••:-1 ··---- -:---:--.,.-~ ... -- ·-·.·· .. ·.-.----. --.---------------· .. i . . ···,.--··---:·•;:-,:.,...-,_, .......... . ~. . . . . DRAFT 4/1/10 ARTICLE RELATING TO DEBT MANAGEMENT ACT JOINT RESOLUTION(S) SECTION_. . RIEDC JOB CREA110N GUARANTY PROGRAM l WHEREAS, the Rhode Island Economic Development Corporation was created by the .. 2 general assembly·pursuant to chapter· 64 of title 42 of the general laws in on,ler to, among other 3 4 .5 · ·6 7 8 ·9 10 ··things, promote the retention and expansion of businesses and the creation of jobs in Rhode Island; and WHEREAS, one.ofthe·niethods utilized by the Rhode Island Economic Development ·Corporation to help promote and expand businesses in Rhode Island is the use of its quasi public corporation powers to issue bonds and debt and guarantees of debt; and WHEREAS, Rhode Island continues to suffer from continuing high unemployment and other ill effects from the. most recent national rece~sion; and WHEREAS, one of Rhode Island's economic development's strategies of continuing to 11 optimize its knowledge economy assets such, as the sciences, technology, digital media, 12 innovative manufacturing and other technologies, requires adequate access to capital; and 13 , WHEREAS, 14 . . obtain reasonable 15 Rhode Island companies in growth phases are limited in their ability to credit without access to credit enhancement; and ·WHEREAS, the Rhode Island Economic Development Corporation desires to cr~ate a 16 loan guarantee and bond program pursuant to which it will be able to guarantee loan repayments 17 either directly or through the issuance of its bonds in order to induce lending to companies 18 growing their employment in Rhode Island; and APS001279 .. ·:-:· -.~.· -----.-::-•":"···-~---·---·~· .,.,..::-·-. -· r-·.·. ····--.--·-·------ ·--·-···-·-·-· - I· • • 2 authority pursuant to chapter 18 of title 35 of the general laws to guarantee debts or otherwise 3 issue its bonds for this purpose not to exceed $125,000,000 in the aggregate of unpaid principal 4 ·and interest, thereby limiting the contingent long-term cost of such program to the state to such 5 maximum amount; and WHEREAS, the Rhode Island·Economic Development Corporation requests the approval 6 of the general assembly prior to.undertaking such program; now, therefore, be it: 7 RESOLVED, that the Rhode Island Economic Development Corporation (the 8 "corporation") is hereby empowered and authorized pursuant to chapter 18, title 35 of the general 9. · laws, and notwithstanding any provisions of chapter 64, title 42 of the general laws to the 11 contrary, to create the corpqration's Job Creation Guaranty Program (the "program") and 12 guarantee annual debt service or issue bonds up to an aggregate guaranty or bond obligations of 13 the corporation with respect to.th.e program not to exceed $125,000,000 in the aggregate; 14 RESOLVED, that guaranties· or bonds issued by the corporation shall be approved by it.s 15 board of directors, or a committee of the board as so designated by the board, and shall be 16 executed by its executive director or any authorized officer of the corporation as authorized in a 17 resolution approved by the board of directors of the corporation from time to time in a form the 18 corporation may prescribe. The board of directors of the corporation in authorizing any such 19 guaranty or bond obligations shall consider and be guided by the following objectives: 20 II•••,•' - • •.•• WHEREAS, the Rhode Island Economic Development Corporation seeks to have 1 10 ••• . (a) Priority will be given to projects that promptly create permanent, full-time jobs with 21 annual wages in excess of 15 0% of the then current minimum wage earned annually with 22 industry comparable benefits. 23 2 APS001280 •, •,•,••;-.I: . · ··· •• '' '' ''••·.••••••,•- '" ..... 1 •.•·11"'' ··•·~ 1 ··• ,••r.• --~.·r·-;--.~.-~---···---•:.•.-,....,....,-.-•o-~-·:•••.·.-.-··-·~·.-•-•••••••••••••• •' --~, ---- ••I,'"'"'•' I • • .... ,'•"":"•"•''"'' formation to facilitate business development with new and existing companies tbat create or 3 retain jobs. . ·5 6 7 · 8 ·. 9· IO respect to assets related thereto. · ( d) Guarantees or loan obligations from the program's borrower will be -collateralized by any· and all available assets of the borrower and guarantors, where applicable, in<.luding subordinate collateral positions,. cross collateralization with other lenders and co llateralized . guarantees as appropriate. 12 (f) The corporation may utilize such data and retain experts as necessary"" to assess and 13 validate associated guaranty risk, ·and the corporation may charge borrower reascmable fees for 14 the corporation's guaranty and reimbursement of expenses; · 17 RESOLVED, that in order assure any payments due on guarantees or bond obligations issued by the corporation in connection with the program pursuant to this authorization are made, to·assure the continued operation and solvency of the corporation for the carryin..g out of its 18 corporate purposes, and except as otherwise set forth in these authorizing resolu""tions in 19 accordance with the provisions of chapter 64, title 42 of the general laws (i) the <:orporation.shall 20 · create a reserve fund from which shall be charged any and all expenses of the corporation with 21 respect to guarantee or bond obligations of the corporation pursuant to these resc:>lutions resulting 22 from a program borrower's default; and (ii) the corporation shall credit to the re ;Serve fund no -.23 ~•tl'of"",-:'"'" development strategy to expand high-wage jobs in knowledge industry growth cJ.usters or with (e) Insurances, including-hazard and.key person life, may be required w~ere appropriate. 16 "I (c) Priority shall be given to guarantees that align with the State's economic ·11 · 15 • (b) Any guaranty or bond obligations hereby authorized should leverage capital 2 4 --- less than fifty percent (50%) of all program receipts of the corporation includinJg guaranty fees, 3 APS001281 -,- ---:-:-:--.-:-·-·---·-----··--.--- -- ·-:·:···.·-.--·-·--------·-·-·----·· ···-· I 2 · premiums - . ·.: - '· and any other receipts or recoveries from collections received pursuant to the corporation's rights to recover payments as a guarantor; and (iii) to the extent the corporation's 3 . obligations 4 ·amounts in its guaranty reserve fund, the executive director of the corporation shall annually, on 5 or before December 1s\ make and deliver to the governor a certificate stating the minimum ·. 6. · . · T. .8 as a guarantor or' pursuant to its program bond obligations are not satisfied by -amount, if any, required for.the corporationto make payments due on such guarantees. During each January.session of the generalassembly, tP,e governor shall submit to the generahssembly, as part of the governor's budget, the total of such sums, if any, required to pay any and all 9 · . obligations ofthe. corporation under such guarantees .or bond obligations pursuant to the terms of 10 this .authorization. All sums appropriated by the general assembly for that purpose, and paid to 11 the corporation, if any, shall be utilized .by the corporation to make payments due on such 12 guarantees or bond obligations. Any recoveries by the corporation of guaranteed payments are 13 to be returned to the guaranty.reser\!e ~nd and utilized to reduce any obligation of the state 14 pursuant tp any guarantees entered into by the corporation; · · 15. . ·. RESOLVED, On or before January 1 of each year, the corporation shall issue a report on 16 all guarantees issued by the corporation pursuant to this authorization. The report shall include ·17 at a minimum: a list of each guarantee issued; a description of the borrower on behalf of which 18 the guarantee was issued; the.Jender or.lenders that made the loan, and the amount of such loan, 19 to such·borrower; the amount ofprmcipal and interest on each such loan outstanding as of the 20 date of such report; a summary of the collateral securing the repayment of such loan for which 21 · the guarantee was issued; and a summary of the economic impacts made by such borrower as a 22 resultofthe guaranteed loan, including but·not limited to the number, type and wages of jobs 23 · created by such borrower, any impacts on.the industry in which the borrower operates and an 4 APS001282 ·:-'"- ·.-· ...... ·.··.··1 ·-.-.-··-----~-:--.· ··-.··-··· ~-.~~:.•· ...._ ·-·.· .. ·.·.-.7.-·-· --.------·····----·· •' ·.''"•;•.•'I ' • • ..... ·. •:·.•.• •- 1 • • • •· ..... ' .. : ·-···. 1 • , •• • ·-·· ·-,:--··--:---·:~.··•··:-- .. -:-~:·:..-:~::-i •.'., ,·•• , •••• · . • I •• _ -·.· .. ···-.--·-· ··--- • I estimate of income taxes for the state of Rhode Island generated by the employees of such 2 borrower and the borrower itself. 3 ... · .. 530443.2 5 APS001283 EXHIBIT 38 From: Lamarre, Mark[Mark.Lamarre@cf.funb.com] Sent: Sunday, April 4, 2010 06:37:19 PM To: Lamarre, Mark[Mark.Lamarre@cf.funb.com] BCC: mark.lamarre@cf.funb.com Subject: 38 studios 4/4 call report Fri mtg w edc of RI went very well. Are attending the public hearing in Providence re the Ee Devi 125m pkg. It is an opeh hearing. 38 is not sure If they will have to speak. Have asked industry guy from EDA (enter s/w assoc ?) To be there to speak to industry growth if needed. State of RI will hire JOA in NH to do the economic devl study. Tom said State will also rely on WF's due dili re biz plan, end mkVs etc. Citizens and Webster Bank - initital purchasers also ? To dos: One pager to Tom Z by Mon pm summarizing mcl's experience and our Muni bond experience One page will suffice Ask Munis Dept what typical bond issuance calendar is (with details) from start to finish. Send draft calendar to Tom Z by Wed .. Mark C. Lamarre Managing Director and Vice Chairman Wells Fargo Securities, LLC 301 South College Street; 5th floor Charlotte, NC 28202 (704) 715 - 8680 mark.lamarre@wachovia.com Sent from my BlackBerry Wireless Handheld CONFIDENTIAL WFS_0082461 EXHIBIT 39 .. :-- ·· --:--::---:-:--.---.------.--=-···,.-i·.--,~·.-·-:~:-..:·--:----·r•: ·-· --···· ------- From: Sent: To: Subject: Attach: • • 0 0 ••••I•• • - •.-.• • , 1.• < > .... • • I & I••• o• • -•-:• r:--.•~ --.---••-:-• ••-::" ·--.-.--••.:-;-:-;,-•- --.• • ••,•.-.--·-•: :-,•-••• •••-• ---:-•••• Michael Corso Monday, April 5, 2010 6:02 PM Saul, Michael ; Stolzman, Rob Due diligence . 3& Studio 6 YearP!an-In-StateLoan View- DRAFT-04.01[2].pdf; IDC- US Online PC Gaming Forecast2010 2014[2].pdf Gentlemen: As part of Friday's action ilems please find38"s six year plan along with a gaming forecast. Th1111ks. Michael Michael D. Con;o Kingston Capital Group, LLC 155 Chestnut Street Providence, RI 02903 Tel 401-454-0800 . Fax 401-537-9154 Cell 401-226-4081 ~ ~ ... PLAINTIFF'S EXHIBIT ¥7 I 11/.rft3 APS000454 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 224 297 347 396 396 396 396 396 Key Assumptions Massively Multiplayer Online Gaming (MMO) Division Division Average Headcount DMslon Period End Headcount 106 150 MMO #1 • Release date - Fall of 2012 Unit Sales Average Price % to 38 Studios $ 0.0% $ 2,000,000 40.00 30.0% $ 1,000,000 30.00 30.0% $ 1,200,000 20.00 30.0% $ 600,000 12.50 100.0% $ 1,000,000 12.50 100.0% $ 1,200,000 12.50 100.()'>f,, 0.0% Subscription Sales Average Monthly Subscribers Average Monthly Price % to 38 Studios $ $ 0.0% 0.0% 75 80 78 MMO #2 - Release date • Fall of 2016 Role Playing Gaming (RPG) Division Division Average Headcount Division Period End Headcount RPG #1 • Release date - fall 2011 Unit Sales Average Price % to 38 Studios RPG #2 - Release date ·fall 2013 Unit Sales Average Price % to 38 studios ;J::I ltj {/) 0 0 0 .t:o. (J1 (J1 RPG #3 - Release date -fall 2015 Unit Sales Average Price % to 38 Studios 81 $ $ 0.0% $ $ 0.0% $ Confidential 38 Stucfros LLC Consol Plan 38 Studio 6 Year Plan· In-Staie Loan View- DRAFT-04.01.10.xlsx 1,729,000 40.00 30.0% $ 0.0% 1,436,000 40.00 33.0% 78 78 78 78 $ 197,000 40.00 35.0% $ 197,000 40.00 35.0% 2,247,700 40.00 36.0% $ 1,866,800 40.00 38.0% $ 40.00 38.0% $ $ 40.00 38.0% $ 0.0% $ 0.0% 78 78 40.0(') 38.0% $ 40.00 38.0% 38 Studios, UC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected Oecember-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13. FY2013 Projected December-14 FY2014 Income Statement Total Net Revenues - $ Costs and Expenses Development Operations and Support S, G, & A expenses $ $ 20,748,000 65,455,200 $ 195,923,040 $ 218,333,360 4,298,776 41,751,1°95 1,031,250 4,900,814 53,908,945 13,750,000 7,534,132 72,555,774 20,000,000 21,556,700 77,135,368 20,000,000 23,340,064 Total Costs and Expenses 34,930,979 47,683,259 75,193,077 114,112,474 120,475,432 Operating Income (34,930,979) (26,935,259) (9,737,877) 81,810,566 97,857,928 (4,606,406) (7,977,262) (8,005,436) (7, 153,242) (4,305,979) 30,632,203 Interest Income (Expense) Other Income (Expense) Tax (Expense) Net lncome(Loss) (37!162,172l $ {39,5371384} $ ~34,912,521 l $ {17z743,313) $ 74,657,324 $ 56!389,777 Percent of Net Revenues !J::l r-o (/) 0 0 0 ..):::. (J1 ~ $ Total Net Revenues 0% 100% . 100% 100% 100% Cos1s and Expenses Development Operations and Support S, G, & A expenses 0% 0% 0% 201% 5% 24% 82% 21% 12% 37% 10% 11% 35% Total Costs and Expenses 0% 230"/o 115% 58% 55% Operating Income 0% -130% -15% 42"/o 45% Tax/Other Expense 0% 3S°/o 12% 4% 19% Net lncome(Loss) 0% -168% -27% 38% 26% Confidential 38 studios LLC Consol Plan ;,e Studio 6 Year Plan - In-Stale Loan View- DRAFT-04.01.10.xlsK 9°.4. 11% $ 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 Cash Flow Operating activities Net Income Non-Cash Changes In Operating Accounts Accounts receivable Prepaid and Other Assets AJP, Accrued, Debt Interest $ (39,537,384) $ 1,415,417 74,657,324 $ 1,958,693 ss,aas,1n $ 1,992,338 (5,989,800) (50,000) 1,638,569 (32,616,960) (50,000) 5,571,801 (5,602,580) (50,000) 6,327,410 (36,527,829) (42, 190,499) (20, 160,946) 49,520,858 59,056,945 (2, 144,055) (2,840,502) (891,522) (2, 144,055) (2,941,438) 12,477,997 75,000,000 13,131,925 (6,322,128) (10,714,286) (25,000,000) (10,714,286) Investing Activities Fixed Assets Financing Activities Bank Line Capi1al Leases . :Olstributio n Advances .outside Debt In-State Tax Credits Debt to Affiliates Equity (11,579,078) 11,923,663 Change In Cash 49,150,698 4,923,899 54,074,596 $ Cash, Beginning of Period Cash, End of Period (17,743,313) $ 1,983,598 (10,374,000) 339,225 608,520 819,619 774,519 Total Operating Activities (34, 912,521 ) $ 2,14e,2n $ BS Proof Conlidential 38 Studios Ll.C Consol Plan 38 Studio 6 Year Plan - In-State l..aari View- DRAFT - 04.01. 1O.xl$x (1,460,000) 20,000,000 60,000,000 (31,899,075) (8,834,596) 96,662,517 54,074,596 22,175,521 $ 22,175,521 13,340,925 $ 13,340,925 110,003,442 $ 20,401,221 110,003,442 130,404,663 $ 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projecied December-13 FY2013 Projected December-14 FY2014 Balance Sheet Assets Cash Accounts Receivable Prepaid and Other Assets Flxed Assets Intellectual Property Long-term Assets Total Assets $ 54,074,596 $ 639,225 1,941,033 . 22,175,521 10,374,000 300,000 2,633,258 $ 13,340,925 16,363,800 350,000 1,541,182 $ 110,003,442 48,980,760 400,000 1,726,544 $ 130,404,663 54,583,340 450,000 2,675,644 $ $ 4001000 57,054,855 $ 400,000 35,882,779 $ 400,000 31,995,907 $ 400,000 161,510,748 $ 400,000 188,513,646 $ $ 1,335,402 $ 1,943.921 $ 3,582,490 $ 9,154,291 $ 15,481,701 $ Llabilln!S A/P and Accrued Uabllltles Bank Debt Capital Leases Distribution Advances .Long-term Uabllitles . . Outside Debt .· .. Debt to Affiliates Total Liabilities · 18,190,203 281,014 75,000,000 1,528,620 96,335,239 31,322,128 281.014 75,000,000 1,528,620 110,075,684 25,000,000 281,014 75,000,000 68,620 103,932,125 25,000,000 281,014 64,285,714 68,620 98,789,640 281,014 53,571,429 68,620 69,402,763 Equity (39,280,384) (74,192,905) (71,936,218) 62,721,106 119,110,883 Total Liabilities and Equity Proof $ ~ "t1 ((.! 0 0 0 ,J::>, (Jl co Conndanllal 38 Sludlos U.C Consol Plan 38 Studio 6 Vear Plan - In-Stale Loan View - DRAFT - 04.01.10.xlsx 57,054,855 $ 35,882,779 $ 31,995,907 $ 161,51o.746 $ 188,513,646 $ ' ·38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 Metrics 20,748,000 65,455,200 195,923,040 21 B,333,360 (33,515,562) (24, 786,981) (7,754,279) 83,769,259 99,850,266 NIA NIA NIA 42.8% 45.7% EBITDA- Pro Forma (1) EBITDA Pro Forma % of Revenue (33,515,562) (24,786,981) {7,754,279) NIA NIA NIA 91,269,259 46.6% 107,350,266 49.2% Operating Income Revenue EBlTDA EBITDA % of Revenue (34,930,979) (26,935,259) (9,737,8n) Operating Income % of Revenue NIA NIA NIA Operating Income - Pro Forma (1) (34,930,979) (26,935,259) (9,737,Bn) 81,810,566 41.8% 89,310,56!> Operating Income % of Revenue NIA NIA NIA 45.6% 97,857,928 44.8% 105,357,928 48.3% (39,537,384) (34,912,521) (17,743,313) 74,657,324 56,389,777 NIA NIA NIA 38.1% 25.8"/o NIA 180,522 15,043 15,043 64,636 148,546 12,379 12,379 147,588 169,545 14, 129 14,129 397,410 231,465 19,289 18,021 442,867 244,372 20,364 19,097 Net Income Net Income % of Revenue Revenue per Head Total Cost per Head Monthly Cost per Head Monthly Cost per Head - Pro Forma (1) (1)- Pro Forma amounts exclude estimated accruals for a founding employee bonus plan. Confidential 38 Studios UC Consol Plan 38 stud"~ 6 Year Plan- In-Stale loan View- DRAFT-04.01.10.xfsic 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-lo FY2010 Projected December-11 FY20t1 231 335 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 Period End Headcount Development Operations and Support S, G, & A expenses Total 19 394 58.9% 374 100 19 493 25.1% 93% 0% 7% 85% 10% 76% 20% 5"/c, 4% 100% 100% 100% 181 283 20 355 40 17 248 Growth from Prior Period 78.4% 374 100 0.0% 374 100 19 493 0.0% 76% 20% 4% 100% 76% 20% 4% 100% 374 100 19 493 0.0% 76% 20% 4% 100% 19 49~ Percent Period End Headcount Development Operations and Support s, G, & A expenses Total Average Headcount Development Operations and Support S, G, & A expenses Total Growth from Prior Perfod 194 18 321 444 113.8% 65.9% 38.2% 374 100 I 19 49§ 11.2% 93% 0% 7% 100% 88% 6% 80% 16% 4% 100% 76% 20% 4% 100% 13 70 19 Percent Average Headcount Development Operations and Support S, G, & A expenses Total ~ ttj en C) C) 0 ~ O"I 0 Confidential 38 Studios UC Consol Plan 38 Studio 6 Year Plan - In-Stale Loan View· DRAFT - 04.01.1 O.xlsx 6% 100% 38 Studios, LLC Financial Projections~ Preliminary Draft Consolidated Plan • Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 Financing Distribution Advances - Paid-back on release revenue RPG#1 12,477,997 MM0#1 RPG#2 3,131,925 (21,322,128) 10,000,000 15,000,000 Total Period Advances Advances Balance 13,131,925 31,322,128 25!000.000 25,000,00Q 20,000,000 60,000,000 20,000,000 60,000,000 12,477,997 18,190,203 Equity Rnanclng Member 1 Member2 Other Members Series B Members · Financlng/IPO (25,000,000) {6132~128} (25.0001000} 0 10,923,663 1,000,000 Total Equity Financing 111923,663 -Investor Debt/ Debt Financing Note Payable - Crecfrt Llne Director Note RA Note Conversion to Equity Mentor Media (10,747,231) (544,847) Total Investor Debt Financing (11,579,078) (287,000) (1,460,000) (1,460,000) : Outside Debt Financing Debt Financing - 7 year payback starting 20 Debt Payments Tax Credit Sales to Debt to 2012 80,000,000 (5,000,000) (10,714,286) (10,714,286) !101714,286) 64,285,714 (10l14,286) 53,571,429 ::r::i trj rn 0 0 0 ~ O'I 1--1 Total Outside Debt Financing Outside Debt Balance Confidential 38 Studios LLC Consol Plan 38 studio 6 Year Plan - Ill-Stale Loan View- DRAFT-04.01.10.lds~ 75,000,000 75,000,000 75 1000,000 75,000,000 Confidential 38 Slutfros LLC Consol Plan 38 Stutlio 6 Year Plan· Jn-state Loan View· DRAFT ·04.01.10.xlsx 38 Studios, LLC Maynard Financial Projections - Preliminary Draft Revenues Projected Oecember-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 p Dec F Projected December-13 FY2013 MMO Revenue Detail MM0#1 MM0#2 Total Net Revenue MMO #1 • Subsctiption Model Average monthly Subscribers Months Price pr Month % to 38 Studios Subscription Revenue Unit Sales Retail Price % to 38 Studios Dlstribution Revenue $ - $ - $ 46,500,000 $ 159,000,000 $ $ - $ - $ 46,500,000 $ 159,000,000 $ 600,000 3 12.50 100.0% 22,500!000 1.000,000 12 12.50 100.0% 150,000,000 $ $ :;.::ii l'rj UJ 0 o o ~ O"I w Confidential 38 Studios LLC MOO Revenues 38 Studio 6 Year Plan - In-Slate Loan Vlew - DRAFT - 04.01.10.xlsx $ $ O.Oo/o 0.0% $ $ 0.0% 0.0% 2,000,000 40.00 30.0% 24,000,000 $ $ 1,000,000 30.00 30.0% 9,000,000 $ $ 38 Studios, LLC Baltimore Financial Projections - Preliminary Draft Revenues Projected December-11 FY2011 Projectep Decembefr13 FY2013. Projected December-12 FY2012 Projected December-1 FY2014 RPG Revenue Detail RPG#1 $ $ 20,748,000 $ 18,955,200 $ 2,758,000 RPG#2 $ 2,758,0 34,165,040 28,375,3 RPG#3 Total Revenue $ $ RPG#1 Unit Sales Retail Price % to 38 Studios 20,748,000 $ $ $ RPG#2 Growth from RPG #1 Unit Sales Retail Price % to 38 Studios 1,729,000 40.00 30.0% 20,748,000 $ 181955,200 $ $ 30% $ 0.0% $ $ $ 40.00 38.0% $ $ 36,923i040 30% $ $ 1,436,000 40.00 33.0% 18,955,200 ' $ 197,000 40.00 35.0% 2,758,000 $ 31,133,3 $ 197,0 40. 35. 2,758,0 $ 1,866,8 40. 38. 28,375,3 $ 3 30% 2,247,700 40.00 $ 38.0% $ 34,165;040 RPG#3 :J;;I l'rj (/) 0 0 0 ~ O"l ~ Growth from RPG #2 Unit Sales Retail Price % to 38 Studios 30% 30% $ $ $ $ Conlidentlal 38 Studios LLC RPG Revenues 38 Studio 6 Year Plan - In-state Loan View· DRAFT - 04.01.10.xlsx $ 40.00 $ 40.00 $ 38.0% 38.0% 0.0% 3 30% $ 40. 38. $ EXHIBIT 40 From: Sent: To: Cc: Subject: Stokes, Keith Friday, April 2, 2010 6:22 PM Penta, Sharon Stolzman, Rob ; Saul, Michael ; Hashway, Fred · Hearing Sharon, I need to testify at the House Finance at House Rise on Tuesday, April 5th_ This is a very important hearing and I have to arrange my schedule to attend. Fred and Mike will have to handle Senate Finance committee meeting that day and Rob and I will handle House Finance. Keith Keith Stokes Executive Director Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 I 401.273.8270 fax email k$.t9.~.~l?.@r.i.~.Q.i;;,_i;;Qm. I web ww.w.,r.·J.~.Q~ •.i;;g.m This e-mail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. APS001242 : -... -.·.· ·:- ·.· .. . ---.------:-.-~-~···-,;--···-:.- From: Sent: To: Cc: Subject: Attach: -··.-;-.-:-.-.·· ·- -·.· ... ·.-- -· ·- -------·-··· ·---· . ·-· .: .. •• ··.·· - ·-:•-.·.·.·.·.··•.,••: . ···• , .. , .. _.. ---.--7-::-~-r·-:--·--·····~·-:--:-:-;-~··- Penta, Sharon Monday, April 5, 201011:58 AM Alfred Venecchia ; Cheryl Snead ; Daniel Sullivan ; David Dooley, Ph.D. ; Donna Cupelo ; George Nee ; Governor Donald Carcieri ; Karl Wadensten ; Lynn Singleton ; Paul Choquette ; Sbivan Subramaniam ; Stephen Lane ; Timothy Babineau, MD. Cherly Costantino (Paul Choquette) ; Cynthia Goldsmith (Lynn Singleton) ; Heidi Adler (Daniel Sullivan) ; Karen Rowland (Alfred Verrecehia) ; Linda Kleineberg (Karl Wadensten) ; Maggie North (fimothy Babineau, MD.) ; Michelle Currieri (David Dooley, Ph.D) ; Pam.Vieira (Docna Cupelo) ; Robin Andreozzi (Shivan Subramaniam) Memo to the EDC Board Stokes Memo to Board re Guaranty Kushner 4_4_10 DOC ms.DOC; Budget Article for RIEDC - Kushner 4_1_10.doc Good Morning, Attached please find two documents from Keith Stokes: As i.ilways, if you have any questions or concerns, please feel free to contact Keith directly. Thank you, Sharon Penta Sharon Penta Executive Assistant ~~~-i':..Q~;~ fa,~:~f:d ~<:~x.1t....: :~k: t:·:-e·.o:~.<1-:;;r:::n~~=:;:;~· ~~~~~~t:cr. .rr: . Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100x103 J 401.273.8270 fax email .§P..~!l.t.~~r.i.edc.:.f.9-..!!! I web Y!'.r.{.~tl~9.S:E Friday,April 2, 2010 6:19 PM Saul, Michael ; Stolzman, Rob ; Hashway, Fred RE: 38 Hearing is on for Tuesday. This is what we wanted, a fully engaged General Assembly Leadership towards EDC, now we have to deliver. Please feel free to call me anytime this weekend on cell. Keith riedc logo Keith Stokes Executive Director Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 I 401.273.8270 fax email kstokes@riedc.com [ web www.riedc.com This e-mail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. ·····Original Message·-··· From: Saul, Michael Sent: Friday, April 02, 2010 6: ID PM To: Stolzman, Rob; Stokes, Keith; Saul, Michael; Hashway, Fred Subject: RE: 38 The company needs to know the Kushner has passed within two weeks. A Tuesday hearing on the program will require some preparation. Company is leaning toward bond vs loan. They are talking with Wells Fargo's municipal group. They will need $3.5-5.0 mm bridge loan with a bond closing in 6-8 weeks. Sent from my Windows Mobile(r) phone. ·····Original Message---·· From: Stolzman, Rob Sent: Friday, April 02, 2010 5:42 PM To: kstokes@riedc.com ; msaul@riedc.com ; fhashway@riedc.com Subject: Re: 38 Hi all. We are not ready to announce 38 Studios. We can do a hearing on the program and not 38 Studios per se. Ifwe talked about the need for a growth capital guarantee program then they can approve that generally and we can later approve the company as planned. While that wouls fuel speculation, it would help the company to have the Kushner in hand. Mike can fill you in on the company's needs, but they need to know if we can perform right away, then 60 to 90 days to close. Rob To comply with IRS regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. From: Stokes, Keith To: Saul, Michael ; Stolzman, Rob; Hashway, Fred APS001522 Sent: Fri Apr 02 17:36:18 2010 Subject: 38 I have been speaking with Steve Constantino regarding our project and he has been directed by Speaker to post for hearing next Tuesday the budget article for EDC. I told Steve we are nowhere ready for a public hearing and I am arranging for meeting with Gov and several EDC board members that will not happen until next Thursday. Also, 1 will be briefing Senator Daponte tomorrow. I will speak with Gordon and Mike Corso tonight with a request that we may not go the supplemental budget route, but instead drop legislation or place in FY2011 budget. The question is, will a month+ delay loose the interest 38? I am very concerned that a hearing Tuesday is premature. Your thoughts? Keith Keith Stokes Executive Director Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite IOI, Providence, RI 02908 401.278.9!00 I 401.273.8270 fax email kstokes@riedc.com I web www.riedc.com This e-qiail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. APS001523 EXHIBIT 44 Robert I. Stolzman Rhode Island Economic Development Corporation vs Page 219 Page 217 l 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 A. It was not disclosed by the EDC to the Legislature. Q. But do you have any information that anybody else disclosed it to the Legislature as a whole? A. I don't know what discussions the leadership had with their rank and file. Q. I'm talking about your knowledge. Do you have any knowledge -A. No. Q. Okay. Now, let's talk about the second -MR. WISTOW: Maybe we should say something to Jeff. BY MR. WISTOW: (Continuing) Q. Do you have any knowledge as to whether or not there was any disclosure to the second house of the Legislature? A. No, I don't have any knowledge of that. Q. Before the second vote. A. Before the vote. I do not have knowledge of that. MR. WISTOW: All right. 17-D. PLAINTIFF'S EXHIBIT 46 FOR l.D.: E-mail from Sharon Penta dated April 5, 2010, with attachments, 7 pages. 24 25 l 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 BY MR. WISTOW: (Continuing) 25 the disclosure; -DEFENSE COUNSEL: Objection to the form. Q. -- is that true? A. Yes. Q. Okay. And who else was privy to that decision? Who else knew that it was -DEFENSE COUNSEL: Objection. A. I don't recall, besides Keith and I, who knew that. Q. Did Saul know? DEFENSE COUNSEL: Objection. A. I don't know. Q. Did you tell Saul? A. I don't recall. Q. Okay. How about Fox? Did Fox know ahead of time that it was not going to be mentioned? A. I believe the legislative leadership did know. But I did not participate in that discussion, to my memory. Q. Okay. How about the Governor? DEFENSE COUNSEL: The Governor -MR. DOLAN: Is there a question? Wait a second. Wait. Is there a question? Q. Do you know whether or not the Governor knew that there was going to be testimony before the Page 220 Page 218 l Q. Let me back up just a bit. Was any consideration l 2 given to inform the Legislature, other than the leadership, that the EDC was contemplating giving 75 million to one applicant without identifying who that was and giving an explanation that it was too sensitive a subject? MR. DOLAN: Objection. Q. Was any consideration given to that? MR. DOLAN: Objection to the form. A. I don't recall any consideration being given to that that I was involved with. Q. Okay. Who was it that agreed not to disclose the possible 75 million to one applicant to the Legislature generally? DEFENSE COUNSEL: Objection. Q. You indicated there was an agreement not to do that. MS. CONCANNON: Objection to form. A. Keith and I participated in that presentation and did not make that disclosure. Q. Right. I understand that. But was that -- that was a plan you had made beforehand; is that not so? DEFENSE COUNSEL: Objection. Q. You knew going in that you were going to not make 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 Min-U-Script® 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Legislature, House Finance, and there would be no revelation or discussion about the possibility of 75 million going to one applicant? Do you know? A. I don't recall who -- I just don't at this time recall who was involved with that discussion besides, besides Keith and I. MR. WISTOW: Now, 17-D. MR. SHEEHAN: 46. He has the exhibit already. MR. WISTOW: Okay. THE DEPONENT: Yes. Q. Let me back up and ask you this question: Fox, Costantino, DaPonte and Paiva Weed knew about the potential for the 75 million going specifically to 38 Studios before the legislative hearing that you attended and testified at; correct? A. Yes. Q. Were you at all concerned that by going up there and not mentioning it, that perhaps one of those leaders would be upset with you for not disclosing it? Did you give any consideration to that at all? A. No. Q. It didn't even cross your mind. A. No. Allied Court ReJ>orters, Inc. (401)946-5500 www.allieClcourtreporters.com (55) Pages 217 - 220 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman Page 221 1 Q. 1 2 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 o 21 22 23 24 25 Or was it that you expected they knew that you were not going to do this, that is, reveal the 75 million? A. I did not believe that it was their expectation that I would disclose that. Q. Okay. You believed it was not their expectation. A. That's correct. Q. Okay. And how did you come to that belief? A. I don't recall exactly beyond my discussions with Keith. Q. All right. But that was your belief at the time. A. Yes. Q. Okay. Fair enough. Number 46. Now, do you recall your drafting the memo that's attached for Keith Stokes? A. No, I don't recall drafting it, but I do recognize it. Q. And do you expect you drafted it? A. I do. Q. How did that work? There were -- apparently Stokes relied on you to do a lot of memo-writing for him? Or -A. Sometimes. Ifwe were working on transactions or specific policy matters that I was working with on -- working with him on, he would ask me to Page 223 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Q. And it goes on to talk about the, what ultimately comes to be the job guaranty program of $125 million; right? A. Yes. Q. Okay. Now, would you from time to time -- well, let me rephrase it. Would the staff of the EDC from time to time make disclosures to the board which was expected to be held in confidence? A. Yes. Q. And any sensitive things would be discussed, for example, in executive session. A. Yes. Q. And you would expect that having been informed, that the board members having been informed of the confidentiality of a matter, would respect that; yes? A. Yes. Q. Okay. Now, would it be fair to say that here we are on April 5th telling the board about a $125 million job guaranty program and not one single reference to the potential for 75 million going to one applicant, namely 38 Studios? A. I'm sorry, I don't understand the question. Q. Are you telling the board about the prospects ofa Page 224 Page 222 1 draft letters, memos, or summaries. Okay. In any event, 46 is one of those that appears to be written by Stokes but in fact was drafted by you; is that so? A. Yes. Q. Okay. Now, this is a memo to the EDC board. A. That's correct. Q. Now, -MR. WISTOW: What's that? Q. Mr. Sheehan points out to me that on the bottom left of the memorandum there's some numbers. Are you familiar with Adler Pollock's coding so you could say in fact that it came from your firm? A. I can tell you that that is consistent with our coding system. Q. All right. So it's consistent with your coding system, and your best belief is you wrote this. A. Yes. Q. All right. In this memo you tell the board that the General Assembly -- I'm looking at the third paragraph. "The General Assembly has asked us to propose a program that would respond to the need for credit enhancement in these growth areas and at these levels." Do you see that? A. Yes. 1 $125 million job guaranty program? Yes. Q. Okay. And is there any reference in this memo whatever to 75 million of that 125 potentially going to one applicant? A. No. Q. Okay. And could that have been disclosed to the board and done so under confidentiality? DEFENSE COUNSEL: Objection. A. I don't see why not. Q. Okay. Why wasn't it disclosed? A. I don't recall. MR. WISTOW: Number 18. PLAINTIFF'S EXHIBIT 47 FOR l.D.: E-mail from Michael Corso dated April 5, 2010, with attachments, 53 pages. MR. WISTOW: Could we take a five-minute break? MR. DOLAN: Absolutely. (A recess was called at 3:46 p.m. The deposition reconvened at 3:48 p.m.) BY MR. WISTOW: (Continuing) Q. Do you recognize Exhibit 47? A. I do. Q. And could you identify for the record what that 2 Q. 2 A. 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Allied Court Re~orters, Inc. (401)946-5500 www.allieClcourtreporters.com (56) Pages 221 - 224 EXHIBIT 45 - .. -----··-----·i ~ i Antonio Afonso Stolzman, Rob (RSloJzman@apslaw.com) Thursday, May 20, 2010 10:51 AM Stolzman, Rob; Daniel Waugh; Stokes, Keith; Saul, Michael; Hashway, Fred; Esten, Sean; Antonio Afonso; mgurghiglan@lirstsw.com Stokes, Keith RE: RIEOC/38 Studios From: Sent: To: Cc: Subject: Hello all. After much scuffling last evening, the House Finance Chair introduced a bill (8158-link attached below) for the Kushner on the Jobs Guaranty Program. They ;Jjlreed with our need to assure that the $125,000,000 cap applles to "principal" only, and kept some of Dan's clarification language In that regard. Notwithstanding my arguments that the statutory changes suggested by Dan were better drafting (adding section 18.l to the RIEOC statute and carving out the program from the Kushner Act), the Chairman does not want to do It that way and wants to use the resolution format. rve only scanned the attached, so let's all review it and see If there are any fatal flaws. If not, the Chairman will try to have the House pass It on Tuesday. For the RIEDC folks, you wlll note that the procurement leglslatlon also is attached to this blll. Rob http:Uwww.rllin.state.rl.us/BlllText/8111Textl0/HouseText10/H8158.pdf Robert I. Stotzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8111 Floor ProvldenC:e, RI 02903 E-Mail (§tolDDan@apslaw.com Phone 401.274. 7200 Fax 401.751.0604 Visit our website at www.apslaw.com ADLER POLLOCK_ ........... ®SHEEHAN P.C. ••ti••••.......................... ... To comply with IRS regulations, we advise that any discussion or Federal tax issues in this e-mail is not intended or written to be used. end cannot be used, {i) lo avoid any penalties imposed under the Internal Revenue Code·or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidenUal and is intended only ror the named recipient(s). It may contain information thal is subject to ltle attorney client privilege or the attorney work·product doclrine or Iha! is otherwise exempt from disclosure under applicable law. If you have received this e·mail message in error. or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and deslroy all copies. Thank you. From1 Stolzman, Rab Sent: Friday, May 14, 201() 12:14 PM To: Daniel Waugh; Stokes, Keith; Saul, Mlchael; Hashway, Fred; Esten, Sean; Antonio Afonso; mgurghlglan@lflrstsw.com Cc: Stokes, Keith Subject: RE: RIEDC/38 Studios Hello all. I am attaching a proposed bill, rather than a joint resolution, per Dan Waugh's comments, that would act as the Kushner for the RIEDCJob Creation Guaranty Program, the first transaction of which would be the 38 Studios matter. I've incorporated Dan's suggestions, including that it be a bill rather than a joint resolution in order to avoid any due authoriiation question later. Please review this in Its entirety and if we are ready to go, Keith will se11d it up to the legislature. Thanks, Rob 38MAR 000962 ~· ·- - - - · --·---~·~----- EXHIBIT 46 38325a2c-4d5a-44ab-92d1-d42d3e1 c5199 RE: $125M Jobs Creation Guaranty Fund From: Maureen Gurghigian To: "Degnan, Peg" Bee: degnan, peg, pdegnan@riedc.com Date: Tue, 08 Jun 2010 11:59:22-0500 Thanks Peg, will do. -----Original Message---- Frorn: Degnan, Peg frr1ailto:pdeqnanaMedG.Gorn] Sent: Tuesday, June 08, 2010 12:58 PM To: Maureen Gurghigian Subject: FW: $125M Jobs Creation Guaranty Fund Maureen, all set- please call Mike at 278-9100. Thanks .... Peg -----Original Message--From: Maureen Gurghi gian [ff!giHQ;M.9.Yf§~n •.G.Yrn!:1.!g!;;in@f1,Gs.fi?.~Y. •.C.Qt:O] Sent: Tuesday, June 08, 2010 12:56 PM To: Degnan, Peg Subject: RE: $125M Jobs Creation Guaranty Fund That works. Please let me know if you need me to set up a call in number or if it is just the two of us whether you will call me or I should call your office. Thanks, -----Original Message---From: Degnan, Peg (fXlgittQ;pi;!~gn9_0.@11~.~-C.•.C.Qll] Sent: Tuesday, June 08, 2010 12:52 PM To: Maureen Gurghigian Subject: FW: $125M Jobs Creation Guaranty Fund Maureen, I assume this is a conference call. Mike can do 1:00 PM tomorrow June 9th. Let me know if that works. Thanks, Peg -----Original Message---From: Saul, Michael Sent: Tuesday, June 08, 2010 12:22 PM To: Maureen E. Gurghigian (mgurghigian@tirstsw.com) Cc: Degnan, Peg Subject: FW: $125M Jobs Creation Guaranty Fund CONFIDENTIAL FSC-000012373 38325a2c-4d5a-44ab-92d 1-d42d3e1 c5199 Maureen, Can we schedule a time to discuss this and 14th meeting on 38 Studios? I will have Peg schedule a time. Mike ----Original Message--From: Michael Corso [rnailtowcorso@kingstoocap com] Sent: Tuesday, June 08, 2010 12:09 PM To: Saul, Michael; Stolzman, Rob; Hashway, Fred Cc: Thomas J Zaccagnino Subject: Re: $125M Jobs Creation Guaranty Fund Michael: Tom and I are working on the grossed up figure. Can you send me a schedule of your estimated fees? Thanks. Michael On 6/4/10 4:00 PM, "Saul, Michael" wrote: > Thanks ... Mike > > -----Original Message-> From: Stolzman, Rob [mailto:RStolzmao@apslaw.com] >Sent: Friday, June 04, 2010 3:53 PM >To: mcorso@kingstoncap.com; Stokes, Keith; Saul, Michael; Hashway, >Fred >Subject: $125M Jobs Creation Guaranty Fund > > Hi all. Senate Finance just held a hearing on both House and Senate > bills. I testified in favor and there was no opposition. The committee > continued the hearing until Tuesday for the purpose of reconciling the > two bills (I'm told by Peter that they are amending Senate bill to >conform to House version). Then, they'll move to floor on Tuesday in > concurrence with House bill which then will go to Gov. > >Rob > >Rob > >To comply with IRS regulations, we advise that any discussion of > Federal tax issues in this e-mail is not intended or written to be > used, and cannot be used, (i) to avoid any penalties imposed under the >Internal Revenue Code or (ii) to promote, market or recommend to > another party any transaction or matter addressed herein. CONFIDENTIAL FSC-000012374 38325a2c-4d5a-44ab-92d1-d42d3e1 c5199 > > This e-mail message is confidential and is intended only for the named > recipient(s). It may contain information that is subject to the > attorney client privilege or the attorney work-product doctrine or >that is otherwise exempt from disclosure under applicable law. If you > have received this e-mail message in error, or are not the named > recipient(s), please immediately notify the sender and delete this >message from your computer and destroy all copies. Thank you. Neither First Southwest Company nor any of its affiliates (collectively, "First Southwest") is responsible for any recommendation, solicitation, offer or agreement or any information about any transactions, customer account or account activity in this communication. Confidential or time-sensitive security-related communications should not be transmitted to First Southwest via the Internet as there can be no assurance of actual or timely delivery, receipt and/or confidentiality. Neither can there be any assurance that messages transmitted by electronic mail will not be corrupted, lost, deleted or modified. First Southwest reseNes the right to refrain from processing or executing electronic mail until verification of the information is obtained in another format acceptable to First Southwest. CONFIDENTIAL FSC-000012375 EXHIBIT 47 H. 2010--S 2923 SUBSTITUTE A AN ACT RELATING TO AUTHORlZINOTIIB ECONOMIC DEVELOPMENT CORPORATION TO CREATB TIIB JOB CREATION GUARANTY PROORAM LC02672/SUB A Presenled by & -!! < {} "' :S "filjl1 '\ ' ~ ;;i; ~ idb i1j :g. ·I8 ~ ~ s ~!~ m~a w; j:".Z z~ -\; d C'I 17.> Cl :z: :::> -, 11 ~i ~·~ ~ N er,,· Cl ::z: => -, APS018053 EXHIBIT 48 From: Michael Corso To: Tom laccagn!no FW: RIEDC/38 Studios Wednesday, April 07, 2010 11:27:08 AM Subject: Date: Attachments: jroage png 38 Studjos RrEDC Letter 4 7 Qean Draft:. DOC 38 Studjos RIEDC Letter 4 7 MarJ Date: Wed, 7 Apr 2010 11 :04:41 -0400 To: Michael Corso Cc: •stokes, Keith" , , "Hashway, Fred" < fhashway@riedc.com> Conversation: RIEDC/38 Studios Subject: RIEDC/38 Studios Hi all. I am attaching a "tweaked" letter of Intent between 38 Studios and the RIEDC, marked and clean, to reflect what Fred and I discussed with Michael, Tom and Curt last night. Basically, we've narrowed the facility from either a guarantee or bond to the bond option, clarified that the company will continue to develop product and perhaps even grow In Maynard before relocating to RI, adjusted the time frames to 12, 24 and 36 months for job creation (reflecting that if the bonds close in June, the company would have had only six months to select, refit and relocate into a facility, which may not be feasible} and providing a mechanism by which the parties can adjust the time frames should site location and development present mutually beneficial opportunities to the state and the company. Take a look at the attached and let me know if you have any additional comments. Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzman@apslaw.com Phone 401.274. 7200 Fax 401.751.0604 Visit our website at www.apslaw.com ADLER POILCD<@SHEEHAN P.C. *********************************************** To comply with IRS regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or written to be used, and cannot be used, (i} to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privllege or the attorney work-product doctrine or that Is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please ~mll!PLAJ~Nl!!!IF!!F~'S-.. EXHIBIT 3,9 immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. ------ End of Forwarded Message -·-····· ·-··-·--- ·--------------------------------- RIEDC Letterhead April_, 2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island ,;.·:: .. . . . ! ... : ::l::gp=~~~::::'.~tierms p~~it!~ ilie Rhode;:;~· &anomic Development Corporation ("RIEDC")\v)licpro:v,ide credit!~~cement to 38 Studios LLC (hereafter "38 Studios" or the "compan*b artcf:S8$tudios wtll~!bQmmence locating and expanding its businesses in,lti.iode Island>>.·. ·'->.>,:, "'.!!l1>:•:,,_ appr~ci4~;i~;;:~'~1~wour c~~p~y~b~r:;:~~:-~~(yj~~~ We very much gaming and interactive digital media industrh\Ein4 we th~1th.at Rhod·~:{.sfaiid can be llit; perfect home for you. We also appreciate your compru:i)f;r~'.P.ulture.i;;W..ckground· and industry acumen. Your assessment of your industry opppl!!Jµriti~s, yout~~s,eµi,~t§;:~f,tajent at filt;ievels of your company, your investments to date, yo~!l#Wa'ft=&~~~es iiii~;'.~d yo0r'4~$ire to,:grow are aligned perfectly with Rhode Island~~owledge ecb~QffiY andi:~~s..ign resour~e~= ~::;1~~~;ti~;. ··~! ::: :~· ;:·~~j. .~;:~~~~~\/':. The RIEmt~~~~irthe State's ec~rip_mic de'.\i,¢.lQpment agency, offers you the following tools to consider in rdti~ing your bu·· ,sses to.;:Rhode Island: .·"''/>:.. 'q~;;1~ Product Develo mertt'financi c~~ftt~::,_. We understand your to bring your project Copernicus to MMO completion to be $75,000,000. Based on oultitiderstanding to date of your financial projections, the RIEDC would issue $75M ofrevenue bonds, the proceeds of which would provide the necessary financing to complete production on Copernicus and begin relocating 38 Studios to Rhode Island. We anticipate that bonds would be purchased by or through a lender or lenders familiar with your industry. As your company is in the unusual position of having pipeline ----------------------------- ..... . Mr. Schilling and Ms. MacLean April_, 2010 Page2 product and contractual commitments for product publishing and distribution, but as yet is ''pre revenue", we recognize the market for these bonds would be limited without credit enhancement Accordingly, we would utilize our statutory authority to issue bonds with a capital reserve mechanism by which the General Assembly must consider on an annual basis funding any shortfall of any loan payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for theJ1qpdholder(s). The moral obligation mechanism is reflected in the RIEDC's enabling ~~g,~liition and the resolutions of the legislature authorizing the RIEDC to enter into these typ((S:~~:~bligations. That legislation and the related authorizing resolutions require the Govemqr-:tj), ~~t_to the legislature by December 1 of every year a budget request for the legislature !<>:a.Ppropriat'e:!tio.~he following fiscal year's budget any shortfall on debt service that otherwiscfts~not adequatei:~f~erved by the RIEDC. The guarantee or the bond documents would r,~.f:i:t;hhhe following teriri~'8:.µd conditions and be subject to the following general parameters aif~f:\v.hich will be more fuilyJmiculated in ., ' ' ., .:" ~: ..·:.;., traditional loan documentation: . 8 :::~:.: =~0,000 i{~~;~~~t,~i :r,,, . :· ·: =·:.\;':~· '.'..'>c ·-~ . .{!.::. .. assocj~t~j~µsil)_ess ex;~~~~~,r~la;i.~·:fu'.:Q~~~~~i1~froduct m Pwpose: For all development and deployment by 3 8 stµtµ.~~;f cori.J~ction wlt~'.:if:s, t':~ent bh~l~s.s development, then relocation <;;:.;_:;'.:.:'.' · · :",:.:· to and expansion in ~M\ ~sland~ ~;~i;l!~; . Rate: Mar~~~,f.QJ::~~qpd iss~~~'9f;,~i~;.¥,:negotl~fed with bond purchaser. . <·:1;'.~~~i;;~:r.: ,;;::~i~~~Y,~~~~~~~::!~-··. ·-=:-..:=:~~:~.~~~\:(:~. . _: ... ::. Term:J()iyears with ii'P9)'.tj9n of'tapi.~alized iiiter~t in early year(s) with early recapture as ciiscussect'~m.~~:.· : ·;:·:= ~ ::··=~.-... :· . ,"\i;i\'i\:,,. ··\;i;~:kti;Yi:,,. ·. . Collateral: ool(~l assignmeriti'i;>f all ass1ets of company now owned and hereafter acquired including but ndt§{~.WJted to intell~tual property, licenses, licensing fees, distribution and publishing contrad~)(~ivable~~nd work product. We recognize that a portion of the company's assets are.·h~l'q:i.n Cl-~W'ii6lly owned subsidiary, the ownership interest of which will be pledged to the RIEDC, 'al@i~tjl¥'such assets are otherwise currently pledged in connection with the publishing agreement w'iili Electronic Arts and currently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for this credit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee of one half percent (112%) payable at closing at closing ($375,000) and one and one half percent (1.5%) ($1,125,000) ofloan amount annually payable on the loan closing anniversary. Mr. Schilling and Ms. MacLean April _, 2010 Page 3 Equity and Dividend Covenants: During the term of the loan, Mr. Schilling shall maintain no less than an amount equal to $15,000,000 of equity in the company, and equity or earnings distributions to members shall be limited to a coverage ratio formula to be agreed upon by the RIEDC and the company prior to closing. Specific Conditions and Covenants: ..,:_::ii.::,~::;;~'.'.:·;:::·· (a) The debt would not be assignable or assumabl~,w~f}).oufl~der consent; (b) Recapture or early payment would be made.,f?;,~;itii;~xcesif~ngs should EBITDA exceed a base formula to be agreed upon by the p~~ prior to cl6'S:~g;.._ (c) A percentage of the funds available fre>.aj{&}"above shall be usefiJ>.y 38 Studios to establish an investment fund to providls~e,d capital and other investment vehicles to facilitate the development of the video g~ri(~:~d digjt~lmedia indiist&:,41 Rhode Island in conjunction with a progra~:.t.o be develop&d,'~9,~~jy:~between 38 StUdrq~:and the RIEDC, the RIEDC being entitl¢d tp having a dt$,~grtee on the investmenf committee of such fund; "'.::·<-·,:·:i.:F·: ·:, · ..:.·Y: (d) 38 Studios will immediately co~e~ce(~I~mning and'4~v.elopment in order to locate its corporate headquart;er.i and its pruicipal pf~e..land wi~. ~elye"(12ftlio1:1~s of the closing of the ·..,,.' issuance of th6.~~ds (the·1~¢losing"); '\ii "· (f) 38 Studios ·~~fl,11 add(i:jo:n,al 175 job~)P,. Rhode Island within twenty-four (24) montb.s:.o,f tqe closing;',>,,•'>:.<\·.::,;::\'..·"·'·· <:~th; (g) ~.~;~:St\ldios;,~UJ::Wd art·;~~d.i#onai t50j~h,~. iii\~hode Island within thirty-six (36) months ''\"~;·i:'.>. . ··'"' i~i'.?.i\'.ir• · .;'~(:.the closing·;·,:'~;'.'.¥.![~,, (hfS~i;>~Jd 38 Studios(,~_.to m~~:aµy jobs requirements, it shall pay to the RIEDC an am. ind~~L~Q~~~~~- and identifyi~~;necessary The company will assist the RIEDC .Pl,making sources to complete its due diligenc¢~~~tlp;espect to th~>iib.~:, o~:t~~;:;~~~--~~is~~~;if;¢Quld ';:" Of course, the RIEDC also would to 38 Studios to facilitate your smooth transition to R.hpde Island. -~~}pore.·ctimpl~~.e lis~~~f.services provided by the RIEDC is available at.tlr~:·ruEI)G's websit~:~~-rl.~i#¢'.9m.. · :'/>::; New Industry Jae~'. . . '";;;I~, ·+~:;:·}/? '•P,;;~~;W pa£!j,~l,y.,intere~"t¢di,~:~~g~~ Studi~~=~grow We are and become a magnet for the growth of the vi .·:. ;::~:; . ';;,:.~~~~:..' , '·::~$~'1;:::;1~· \ Purpose: f;~f;,~l,k~~~P.ciated~lj~~~%ip:~~s rel~~,.to operations, product development and deplo~ ·, :(~yis'g'!$~p.s in conj4.nctiori\'ili1tl(it~. cl.tiitent business development, then relocation :.=~;;~o~i;::~n::~ wifu bondp=ha=. Tenn: NegotiabWtlilcely 10 ye ···. ith a portion of capitalized interest in early year(s) with early recapture as d~sed bel''irliellectual property, licenses, licensing fees, distribution and publishing contracts, receivables and work product. We recognize that a portion of the company's assets are held in a wholly owned subsidiary, the ownership interest of which will be pledged to the RIEDC, and that such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts and currently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for this credit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee ofone half percent (1/2%) payable at closing at closing ($375,000) and one and one half percent (1.5%) ($1,125,000) ofloan amount annually payable on the loan closing anniversary. Equity and Dividend Covenants: During the term of the loan, Mr. Schilling shall maintain no less than an amount equal to $15,000,000 of equity in the company, and equity or earnings Mr. Schilling and Ms. Maclean April _, 2010 Page3 . .;/-: .·;::;:.~};;:~r~~i .,':,:;·~::;:~{):::::;;::::.:;. coy~~~e ·~~~o fo~iliiiit.Q,.be agreed upon by the distributions to members shall be limited to a RIEDC and the company prior to closing. ,: <;:<. .;: '." ·· ..:.•.. '' '<)" " • •I~:•!: •\:;,:::.·. Specific Conditions and Covenants: ....:·. ...::!: :i·. ': !. ·:. ... ··• . -~·:.~;'\;> assigli~.~;'.6~y~~~able ~~~~~pender (a) The debt would not be consent; .· . (b) Recapture or early payment wouJ~~~elt1*4~Jrom exce~~i~~gs should EBITDA exceed a base formula to be: ~greed upon·qyJhe pfili#e~~pfior to'ril(.l~g; (c) A percentage of.Jhe,,f'aj,i:.; ·...::·; '.:;, .·~~· .. ,.::·;>'' .. :t:;_ :'" ~ ~·::::. ~:· ~ >i~ :t.i'.Y!~f:1)q:1~ ;, ; ,; *"':.'.~ 4;to :)" . ... , ":i"·;'-. .• -~:: ... =--~, ,: : (a}'i~e completiori;;~9,;,deli:Ve&;QY a quaf~jeconomic development expert of an analysis ·o~;~~ economic de~~)J;;ipmefitji,µpacts of the company's location to and growth in Rhode ls~tt·,~uch study to'·~~'paid fo:f.:,~y:Jhe company; (b) An indep~deet frnand~:fei:view ·atl:tl analysisacceptable industry validation of the company~~Jwancial proJ~tions; the review of the company"s projections by a qualified investment bank.; reviewCbf cUITent contracts and obligations with gaming industry partners such 11"·"'' arid\'ahy other related or requested documents or information e.f..from the company; ~' ·,. ·'~}~;'.~ 1 F (e-}--'I'-he-pFerequ-isit~ls-by-the-Geneml-A-ssemely-and-RI-E9G-Beard-ef-Directors-.fe.r those actions requiring such appmvals; and Placement of the bond issue with a lender or lenders and documentation reflecting the terms hereof and other standard terms and conditions typical of a transaction of this size and nature. (:c< ., :'::;/!<, · .-<:t/' ··'.'~:~:'.;~!;;~~: below. ::';> . :~:;:\ <'" . . ;::.:t. Sincerely ours, ,,;;"°<~::~:i:!r'~~::;:·:;:.~:t.~;':: ·Goveni9 'onald L. Ca1!6ieri, " Chai~~;:oanl \;1'.t;, .r./ ~!:',;.,s~~2;\~;~{'::!*'I Agreed and accepted as of the date first above written: ~------------------·-- - ------·------ ···-. - - - - .. -·--·- ·------ - 38 Studios LLC By: _ _ _ _ _ _ _ _ _ _ __ Its: 529694.8 .- ~ ·..f-'h:;:> :. :, ···: .... •· .·.,·.:;Y· . ;·.:·: ··.. ·· . :'' .:. ·::.:. :.,,< . .. ··., . ~ .:... ·:,:t;: ~: $jJ~./,·.· ,'.~.- = ,·:.' · : '. <~'fii: - ·;:~;:~~:~:: .... ... : :1 :: : :. \?... :=·::·:'.. '' ''· ·-~=.:.:;~:;\._. . .T ~·· ,.' .. .. ~:;:: ~;-: .:·/~/;:i!:\i:;i!,;'.,•· . ·:.· :.:~·.: .·.~;.~.~};!r,;y•:,, ~;~i: "J~ '.fi;~i.·.,}.-~.:.·~.·1., .. !:-:::.~:"-: . .., . . :: ·::: .. ::-:: :·-.. . " . -: ;'_: ·: .'~: /.'.> ·:.'·=-:;~· ~~~ . _.,~; ··::i ;::~:!.:¥\. . '.;:',:;;; ~ ·.:: .. .. .• ... ..·.·.·:..• ~.i~~,~ ~--~ ~- . '\i~::;· <:;~:'.·i: .' :_;~ -·_;.,' ·. ': .·,' ·. ,. ·,.' t~:\ .:i:;·..:·,t~...?: ··.. ~:, :.. ." '. '.~ ; ;1:~.~ .: 1,:"·.i.!;: · ,; ..... ·::;i.·~·· ['..:'c ~~~;_ ~.· ,:· .· ,=~~=.· ~=.>: ..:···.:,.:,,, "-i:... ··=<::::;;;,,, ··'i:f:i:.{:. .,, . :-~ ~ ·.: EXHIBIT 49 From: Lamarre. Mark To: Subject: Ipm Zaccaqnjno RE: Wells/38 Conf call # Date: Thursday, April OB, 2010 12:53:31 PM Ok thanks Mark C. Lamarre Managing Director and Vice Chairman Investment Banking &. Capital Markets Wells Fargo Securities, LLC 301 South College Street; 5th floor Charlotte, NC 28202 (704) 715-8680 mark.lamarre@wachovia.com -----Original Message----From: Tz [mailto:tz@38studjos.com] Sent: Thursday, April 08, 2010 12:51 PM To: Lamarre, Mark Subject: Re: Wells/38 Conf call # Fyi - Jen and Curt will be on the phone with me. Best, TZ Sent from my iPhone On Apr 8, 2010, at 12:19 PM, "Lamarre, Mark" wrote: > 1-866-856-5147 > Code: # 704 715 8680 > > Lamarre will enter Leader Code > > > > > > > > > > > > Mark C. Lamarre Managing Director and Vice Chairman Investment Banking&. c.apital Markets Wells Fargo Securities, LLC 301 South College Street; 5th floor Charlotte, NC 28202 (704) 715-8680 mark.lamarre@wachovia.com i ij PLAINTIFF'S EXHIBIT z _JlLif1/!!Lf!!!::. 1 ..... ···-···------------ ------------------- EXHIBIT 50 From: Lamair&, Madc(Mart.lamane@d.funb.ccM] Thursday, Apli II, 2010 12:57:53 PM Kecrra. Abhishek[AbhlsheU(ed"ra@(unb.c:omJ; U, Jennrl,Jemy.U@funb.com] Senc: To; ace: allhilhelc.kedla@funb.com; jeMy.li@lunb.com Subject: fW: Wellsl38 Con! c:al II Mark c. Lamarra Managing Director and Vb: Chairman Investment Banking & Capltsl Markets Wells Fargo Secutlties, LLC 301 Soulh College Street 5lh floor Ctiadotle, NC 28202 (704) 715-8680 mark.lamarre@wac;f1ovia.com ~lnal Message-- From: Tz (malllo;f/;@38slucr10S.oomJ Sent: Thursday, April 08, 2010 12:55 PM Lamarre, Mall< SUbfec;t; Re: Wells/38 Conf call# To: Michael SINA, RfEDC Deputy Director and Fred Hashway, RIEDC Oireclor of Glvemmenl Alfalrs, Policy & lnnovallon w11 be on lhe can as well as Mike Cor&o a 38 c:onsuHanL All parf/es are under CAs. Best, TZ Sent from my IPhone On Apr 8, 2010, al t2:t9 PM, "Lamarre, Mark" wrote: > 1-866-856-5147 > Code: # 704 715 8680 > > Lamaira will enler Leader Code > > > Mark c. Lama/Te > Managing Dfreclor and Vice Chafrman > Investment Banking & Capnal Markels > Wens Fargo Securilles, LLC > 301 Soulh College Street 51h floor > Charlolte, NC 28202 > (704) 715-6660 > marlc.ramarre@wachovla.com > > iJ PLAINTIFPS ~ - 197 ! EXHIBIT ~ 'f/f/1f WFS_0066087 EXHIBIT 51 .. ... -·-. ·-····· ··-··-··· -···-······-·-··· ····-. ··-·---·-·. . ........... ...• :: :: .. _.....!....·. e89Be387 -a855-4f43-Bb90-0Bbcc28 nsas FW: Due diligence From: "sau1, MlchaelR To: Maureen Gurghigian Bee: •maureen gurghigian", Maureen Gurghigian . Dale: Thu, OB Apr 201 O 16:26:54 -0500 Attachments: 38 Studio 6 Year Plan - In-Stale Loan View - DRAFT - 04.01[2}.pdf (60.54 kB): IDC - us Onlfne PC Gaming Forecast 201O2014[2].pdf (422.2 kB) Maureen .•. FYI -Original Messa~ From: Michael Corso (ma11rowcorso@l 8% Confidenllal 38 Stvdfoa u.c ' Consol Pla11 ~ \;\~a;ie iYARFP';p 'n 'iln&a 1Rft:; CONFIDENTIAL >q,.,,, gt:UFhT' 04:01o'Q M';M 683871 38 Studios, LLC Maynard Financial Projections - PreJiminary Draft Revenues " Projected December·11 FY2011 Projected December-10 FY2010 Projected Projected December·12 December-13 FY2013 FV2012 Projected December·1· FY2014 MMO Revenue Detail MM0#1 $ • $ - $ 46,500,000 $ 159,000,000 $ 187,200,1 $ - $ - $ 46.500.000 $ 159,000,000 $ 187,200, 600,000 3 12.50 100.0% 22,500.000 1,000,000 12 12.50 100.0% 150,000,000 MM0#2 Total Net Revenue MMO #1 • Subsctlption Model Average monthly Subscribers Months Price pr Month · % to38 Studios Subscription Revenue $ Unit Sales Retall Price % to 38 Studios Distribution Revenue $ $ 0.0% $ 0.0% $ 0.0% .. · " Confidential 38 Studios LLC MOO Revenues 38 Stl!dio 6 Year Plan - In-State Loan View - CRAFT • 04.01.1 O.xlsx -CONFIDENTIAL· ·,.-.. $ 0.0% 2,000,000 40.00 30.0% 241000,000 $ 1,200, $ 1,000,000 $ 30.00 30.0".4 91000,000 1~ 10( 180,000, 1,200, $ 2( 3( 7,200, 683871 38 Studios, LLC Baltimore Financial Projections - Preliminary Draft Revenues Projected December-14 FY2014 Projected December-13 FY201;3 Projected December-12 FY2012 Projected December-11 FY2011 RPG Revenue Detail $ RPG#1 -j $ 20,748,000 18,955,200 $ 2,758,000 $ 2,758,000 $ 28,375,360 34,165,040 RPG#2 RPG#3 i Total Revenue $ $ RPG#1 Unit Sales Retail Price % to 38 Studios 20,748,000 $ $ $ RPG#2 Growth from RPG #1 Unit Sales Retail Price % to 38 Studios 1 $ $ $ $ 0.0%. $ RPG#3 Growth from RPG #2 Unit Sales Retail Price % to 38 Studios ... p· cd1~#idrmTTAlu..,c. 18,955,200 30% $ Coi11identlal 36 studios LLC RPG"Revenues 1,12s.ooo 40.00 30.0"/o 20,748,000 $ $ O.OOk $ $ h· C(\~1$ !:t,.,., V~"' • 9A7\Ff • 5MH. te...Ja>. $ '· 30o/o $ 1,866,800 40.00 38.0% 28,375,360 40.00 38.0o/o $ 30% $ 30°/o 2,247,700 40.00 38.0% 34.165,040 30% $ 31,133,360 $ $ $ $ 197,000 40.00 35.0% 2,758,000 197,000 40.00 35.0"k 2.1se.ooo 1,436,000 40.00 33.0"k 18,955,200 $ 30% 36,923,040 $ $ $ 30% $ 40.00 38.0% 30% $ 40.00 ~8 . 0% $ 40.00 38.0o/o $ s EXHIBIT 52 Rhode Island Eco~o.mic Development Corporation vs Maureen Gurghigian Page 89 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 91 l A. Yes. BY MR. SHEEHAN: (Continuing) Q. What's been marked as Exhibit 9 are two 2 Q. Did you have any discussion with anyone at the EDC extensions, and I just ask you to look them over and tell me whether your signature appears on both ofthem. A. Yes. Q. And what these extensions do is extend the terms of the June 2002 contract into the time periods covered by the extensions; right? A. Yes. Q. Now, is the June 2002 contract still in effect between First Southwest and the State of Rhode Island? A. Yes. Q. Are you aware of any written amendments to that June 2002 contract? A. Yes. Amendments? Q. Yes. A. Or extensions? Q. I meant amendments, not extensions. A. No. Q. As far as you know, the only change to the June 2002 contract has been that the term has been changed through various extensions; right? A. Yes. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 prior to sending the engagement letter that's Exhibit 7 concerning how First Southwest Company's fees would be calculated or paid? A. Yes. Q. With whom did you have such discussion? A. The deputy director. Q. Would that be Mike Saul? A. Yes. Q. And when do you believe you first had such discussion? A. I don't recall the exact time, but it would have been in the summer. Q. The summerof2010? A. Yes. Q. Can you say whether it had been early in the summer, the middle of the summer or the end of the summer? A. I don't recall the date. Q. Was the gist of the conversation that your services would be compensated under the agreement that First Southwest had with the state? A. The gist of the conversation was that the fee range would be in the hundred and twenty thousand Page 92 Page 90 l Q. Okay. Now, you did not provide the EDC with the 2 engagement letter that's been marked as Exhibit 7 until at the earliest October 5 of2010; correct? A. Yes. Q. You, however, had started working as a financial advisor to the EDC in connection with the 38 Studios matter many months earlier; correct? A. Several? Many? Q. You had been working in that capacity since March. A. Yes. Q. Okay. And you had been working fairly continuously for a number of months on that project. A. Not since March. Q. Okay. But you had been working very continuously on it in June, July, August and September; correct? A. Yes. Q. And at that time you were not expecting that First Southwest Company was donating your services to the EDC; correct? A. I'm sure -- yes. Q. You expected that the services you provided would be compensated under the existing contract between First Southwest and the state; right? 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 Min-U-Script® l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l7 18 19 2o 21 22 23 24 25 dollar range, and there were discussion of services as well. Q. I'm now just focusing, ifl may, on the issue of the amount of the fee and how it would be paid. And it's your recollection that the only discussions before you sent the engagement letter was that you estimated that the fee would be in the area of$120,000 to Mr. Saul? A. Yes. Q. And did he object to that when you talked to him about it? A. No. Q. And did you have any discussion with him prior to sending the engagement letter as to whether or not the fees would be payable regardless of whether the bonds went through? A. It was our understanding that the fee would be paid from proceeds at closing. So, no, we did not have a discussion other than, other than the early discussion I referenced to you. Q. And it was your understanding that First Southwest's right to the fee would be contingent on the bonds actually going through; right? A. Yes. Q. And that's indeed what's provided in the state -- Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (23) Pages 89 - 92 EXHIBIT 53 Rhode Island Eco~o.mic Development Corporation vs James Michael Saul- Vol. II Page 265 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 November, on November 2nd, 2010? MR. EDWARDS: Objection. A. I assumed there was. Q. Okay. Let me just clarify that. You knew that First Southwest had some relationship with the State of Rhode Island as a financial advisor? A. Yes. Q. Okay. I mean, there was never any doubt in your mind about that, was there? A. No. In fact, First Southwest had acted as fiscal advisor on two other bond issues while I was at the EDC. So when the bond issue for 38 Studios came up, I just assumed, based on First Southwest's relationship with the state, that they would act, continue to act as fiscal advisor on this issue. Q. Okay. And what were the other transactions that you were familiar with where First Southwest had acted as fiscal advisor? A. I recall there was a bond associated with the historic tax credits and there was a follow-on bond issue to the GARVEE bonds, G-A-R-V-E-E. Q. And how about in connection with the Rhode Island Airport Corporation? If you know. A. I don't recall any. But, but the Airport Page 267 1 MR. SHEEHAN: Yes. I'm going to show you Exhibit 7 and ask you if you recognize that document. A. What was the question? I'm sorry. Q. Do you recognize that document? A. Yes. Q. What is it? A. It is the engagement letter between First Southwest and the Rhode Island Economic Development Corporation in connection with the 38 Studios transaction. Q. "The 38 Studios transaction" meaning the $75 million bond. A. Yes. Q. And who signed the document on behalf of the EDC? A. I did. Q. Okay. Now, that document was signed when? A. On or about October 29th, based on this e-mail. Q. Okay. And when you say "based on this e-mail," you're referring to -- may I have it, please? A. Yes. (Document tendered). Q. It's an e-mail from you to Maureen attaching the engagement letter that we've been talking about; right? MR. DOLAN: Objection. 2 Q. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 268 Page 266 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Corporation was a subsidiary of the EDC, so, yes, any, any bond issues that the Airport Corporation would have issued I assume, I would have assumed that First Southwest would have acted as fiscal advisor. Q. What I'm trying to focus on is, did you believe that there was some kind of contractual arrangement between First Southwest and the State of Rhode Island -- the State of Rhode Island, not the EDC. A. Yes. Q. -- before the bond closing of November 2nd, 2010? A. Yes. Q. Okay. And did you ever attempt to find out the specific terms of that contract between the State of Rhode Island and First Southwest? A. No. Q. Did you believe that anybody else affiliated with the EDC had looked into that relationship? A. No. Q. Okay. You've never seen Exhibit 8 until-A. Today. Q. -- today. A. Correct. MR. WISTOW: Is this Exhibit 7? Min-U-Script® 1 A. Yes. 2 Q. Okay. And when --who is Peg Degnan? 3 A. She is an administrative person at the EDC. Working under you? A. No. She worked for Bill Parsons, as I recall. Q. All right. And the reason I mention Peg Degnan is the Exhibit 7 is an e-mail actually from Peg Degnan to Maureen Gurghigian with a copy to you, and it's dated November 2nd; yes? Do you see that? A. Yes. But I think your question was when did I sign it, and I think I signed it on the 29th when I asked Peg to scan the letter, which I signed, and send it to Maureen. And so I believe I signed it on the 29th. Q. OfOctober. A. Correct. Q. So that would be four or five days before the closing? A. Yes. May I have that back for one second? Q. Sure. Of course. Of course. (Document tendered to the deponent) A. But as I reviewed the letter, there was nothing inconsistent with the scope of the responsibilities of First Southwest. 4 Q. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (7) Pages 265 - 268 EXHIBIT 54 Rhode Island Eco~o.mic Development Corporation vs Maureen Gurghigian Page 177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 believe that anyone on the board of directors did not also believe that 38 Studios' financial projections were reviewed by Strategy Analytics, Wells Fargo and the EDC?") A. I don't know -- could you rephrase that? I don't know what they believed. Q. Sure. You were present at meetings of the board; right? A. I was present at some of them, yes. Q. Yeah. At meetings of the board. A. Yes. Q. Did anything you saw at that meeting make you think that the members of the board had a belief as to who, if anyone, had done the analysis of 38 Studios' financial projections? MR. PETROS: Objection. DEFENSE COUNSEL: Objection. Q. Did anything they say or did anything they do give you reason to believe who they thought did the financial projections? Let me back up a bit. You're at a meeting of the board. The question I'm asking you is: Did anyone at that meeting of the board in the board itself take a position as to who had done the analysis of 38 Studios' financial projections? Page 179 1 comes to mind. And you're giving me everything you recall of that conversation. A. That's my recollection, full recollection of that conversation at this time, yes. Q. Who looked at the company. That's the question; right? A. Again, I'm paraphrasing, because I was -Q. All right. Anything else other than that? DEFENSE COUNSEL: Objection to the form of that question. MR. SHEEHAN: Okay. DEFENSE COUNSEL: That's like, Tell me everything you know. Q. When you offered to have First Southwest corporate finance people look at the financial projections, were you intending that that would be something that they would bill for as a separate item? DEFENSE COUNSEL: Objection to form. A. When I asked ifthat was something they wanted us to do, it was to clarify our role, and if we did bring corporate finance people, it would have had to be done by corporate finance, yes, that's -- if they were to render an opinion, that would have been a separate fee. 2 Q. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 180 Page 178 1 A. There were board meetings that I didn't attend and 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 there were executive sessions that I didn't attend, so they could have had discussions I would not be aware of. MR. SHEEHAN: Could you ask your client, really, -MR. PETROS: Do you want to read back the question, please. (The reporter read the following: "Question: You're at a meeting of the board. The question I'm asking you is: Did anyone at that meeting of the board in the board itself take a position as to who had done the analysis of 38 Studios' financial projection?") MR. PETROS: At the June 14 meeting, Steve? Q. At any meeting that you're aware of. A. I recall one member of the board, I believe it was President Dooley of the University of Rhode Island, asking about who looked at the company, and the response, my recollection of the response from Mr. Saul was Strategy Analytics. Q. Okay. A. That's one recollection. I mean, there could have been others, but that's one recollection that Min-U-Sc rip t® 1 Q. 2 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Did Mr. Saul ever say to you that you should not yourself review 38 Studios' financial projections? DEFENSE COUNSEL: Objection. A. I asked him if they wanted us to do that, and he said no. Q. You asked whether they wanted the corporate finance people to do that; right? DEFENSE COUNSEL: Objection. A. I asked whether they wanted First Southwest to do it. I would have brought in our corporate finance people, yes. PLAINTIFF'S EXHIBIT 21 FOR I.D.: Letter from Maureen E. Gurghigian dated October 1, 2012, with enclosure, 26 pages. BY MR. SHEEHAN: (Continuing) Q. Just to be clear, you did not say to Mr. Saul, Would you like the corporate finance people at First Southwest to analyze these financial projections. DEFENSE COUNSEL: Objection. A. Again, recollection of exact words? I asked him ifhe wanted First Southwest to do it; I would have had to bring in corporate finance. I don't know exactly what words were used. My best recollection of the conversation is, Do you want Allied Court Re~orters, Inc. (401)946-5500 www.allieClcourtreporters.com (45) Pages 177 -180 EXHIBIT 55 James Michael Saul- Vol. II Rhode Island Eco":o.mic Development Corporation vs Page 289 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 creditworthiness, we're talking about the underlying creditworthiness of 3 8 Studios. A. Correct. Q. Okay. So there are -- this bond, the $75 million bond that closed on November 2nd, had two aspects to it. One was the creditworthiness of38 Studios and the second was the creditworthiness of the moral obligation; is that fair? A. Yes. Q. So that the people buying the bonds were looking at two different -- two things: One, will 38 Studios be able to make the payments, and, two, if not, what about the State of Rhode Island honoring the moral obligation; correct? MR. DOLAN: Form. MR. EDWARDS: Objection. A. Yes. Q. Okay. So in order to get these bonds to market, to sell them, one had to tell the investor, the projected investors about both these aspects: the ability of 38 Studios to make the payments, and then, if not, the likelihood of the State of Rhode Island honoring the moral obligation; is that true? DEFENSE COUNSEL: Objection. Page 291 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Paragraph 4, second sentence, -- I read you the first one already -- "At one point I asked Mike Saul, the Deputy Director of the EDC, whether the EDC was seeking a recommendation from First Southwest on whether or not to go forward with the bond issuance and loan to 38 Studios and was told that no such recommendation was requested." Did you ever tell First Southwest or Maureen Gurghigian that no such recommendation was requested? A. No. Q. Then it says, "I also offered to have my colleagues in corporate finance at First Southwest review the transaction for EDC and that offer was declined." Were you ever offered to have Maureen Gurghigian's colleagues at First Southwest review the transaction and said no? A. I recall her asking; I do not recall my refusing it. I recollect at the time I mentioned that we were talking with Wells Fargo and Strategic Analytics and did not want to be duplicative with the use of outside experts, and I also recall Maureen telling me that she was not certain whether her corporate finance people had any institutional or sector experience. So, again, Page 292 Page 290 1 A. I'm not an expert in what the disclosures should 2 have been by Wells Fargo and Barclays to the 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bondholders in terms of the underlying credit and/or the moral obligation. However, what I would say is that the process that led to the board approving the transaction, which placed the moral obligation on it, that all of the experts, including First Southwest, looked at the underlying credit and had the financial projections and all other information that was produced. Q. All right. But what -- I want to back up just a little bit. And if you have no knowledge about this, this is okay; just tell me. But was it your understanding that bond purchasers were looking at two different scenarios for getting payments on the bonds: one was whether or not 38 Studios could make the payments promised and, if not, what, if anything, would the State of Rhode Island do regarding the moral obligation? Was that your understanding? MR. EDWARDS: Objection. A. Yes, that's my understanding. Q. Okay. All right. So let's go forward. And I'm reading you the affidavit of Maureen Gurghigian. Min-U-Sc rip t® 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we -- I didn't refuse her offer; I think we just simply proceeded to continue with Wells and SA, who had more, who I concluded at the time had more sector experience. Q. All right. So let me see ifl understand this. You were saying to Maureen that the review of the transaction, to use the terms in her affidavit, was going to be done by SA, Perimeter Partners and Wells Fargo? MR. DOLAN: Objection, form. MR. GLADSTONE: Objection. A. Ask that question again, please. Q. I'll withdraw it. I'll start over again. She says, "I also offered to have my colleagues in corporate finance ... review the transaction and that offer was declined." Do you see that? A. Yes. Q. Okay. Now, -A. And my answer was I did not refuse that offer. Q. All right. Fair enough. Now, there was -- did you understand that there were different responsibilities between Maureen's job as the financial advisor versus going to her colleagues back at First Southwest to review the transaction? MR. DOLAN: Form. Allied Court Re~orters, Inc. (401)946-5500 www.allieCJ.courtreporters.com (13) Pages 289 - 292 EXHIBIT 56 • - • -'• I •,. •; ~ .:; ~; • - .:. :.·.·-·. • :': : ~: ···.·.·········:········.·.:·;·. .·: • • • • • • .,, :. FINANCIAL ADVISORY AGREEMENT . . . . This Ftnnnolal A~visory Agreement (the "Agreement") i~ made and entered into by and between the State of Rhode Island and P~ovldence Plantations ("Issuer") and First Southwest Company («FSC'') effective as of the date executed by tho Issuer as set forth on the· signature pago hereof, wrrNESSETH: ~REAS, the Issuer will have under consideration from time to time the authorization and issuance . of indebtedness in amounts and forms whiQh cannot prepently be determined and, in connection witb the · a~thor~a.ti9n, sale, Issuance and dfl!ivery of such indebtedness, Issuer d~sires to retahi an Independent · financial advisor; and ·WHEREAS, the _Issuer ~esites to obtain the profossional services ofFSC to advise the Issuer regarding ~he issuance and sale of certain ovidences of indebtedness or debt obligations that may be authorized and issued or otherwise created or assumed by the Issuer (hereinaftflr referred to collectively as the "Debt Instruments~')-from time to time during thfl period In which this Agreement shall be effective; and WHEREAS, FSC is willing to provide its profession11.l 11ervices and its facllities asflna.nclil.l advisor in . . connection with all programs offlnancing as may be considered and authorized by Issuer during the perioclin which this Agreement shall be effective: of NOW, THEREFORE, t11e Issuer and FSC, in consideration th~ mutual covenants and agreements herein contained and other good and valuable consideration, do hereby agree as follows: S.EC'l'lON I DESCRIPTION OF SERVICES Upon the request of an authorized representative of the Issuer, FSC agrees to perfonn the financial advisory services stated in the fol~owlng provisions of this Section I; _and for having rendered such s6rvices, the Issuer agrees to pay to'FSC the ~ompensatlon as provided in Section V hereof.. A. Financial Planning. At the directi.on of Issuer, FSC shall: l. Survey and Analysis. Conduct a survey of the financial resources of the Issuer to detennine the extent of its capacity to authorize, issue and service any Debt Instruments contemplated. I . !' ~ PLA!NTIFPS EXHIBIT R ii! to ~yf1., CONFIDENTIAL FSC-000025201 I .' ''. 'l ., I · Tb is sutvey will include an ·analysis of any existing debt structure as co~pared with the existing and projected sources of revenues whloh may be pledged to secure payment of debt service an~, ~here appr~priate, wm inol~de a study of the trend of the assessed v;uuatlon,·taxing power and pres_e~t and fu~re taxing requlr~htents of. the Issuer•. In the event rever:m~s of existing or projected facilities operated by the Issuer aro t~ be pledged to· repayment of the Debt hstruments then under consideration, the survey "."ill take into account ~y outstanding i'ndebtedness payable fro~ the revenues thereof, additional revenues to be available from any proposed"rate in~reases end additional revenues, as proje.cted by consultingengineers employed by the Issuer, res"Ulting from improvements to be financed by the pebt Instrum.~nts under consideration. Future Financings. Consider and analyze future fmencing needs es projected·by the Issuer's .staff and consulting englneers or other experts, if any, employed by the Issuer. 2. Recommendations for Debt Instruments. On the basis of the infonnation developed by the survey described above,. and Qther information and experlence available, submit to the Issuer recommendations regarding the Deb~ ,Instruments under consideration, including such elements as the date of issue, interest payment dates, schedule of prlnolpal maturities, options of prior payment, secur~t)' provisions, and such other provisions as may be appropriate in order to make . the issue attra~tlve to investors while achieving the objectives of the Issuer. All recommendations will be consistent·With the goal of des~gning "ttie Debt Instruments to be sold on terms which are advantageous to the Issuer, including the Jowost interest cost consistent with all other considerations\ 3. 4. Market Information, Advise the Issu·er of our interpretation of current bond 1narket conditions; other related forthcoming bond issues and general information, with economic data, which might normally be expected to influence interest rates or bidding conditlons so that the date of sale of the Debt Instruments may be set at a favorii.ble time. Elections. In the event it is necessary to hold an ~lection to authorizo the De~t Instruments ~en under oonsideration1 FSC will assist in coordinating the assembly of such data as may be required for the preparation ofnecessary petitions, orders, resolutions, ordinances, D?tloes and / certificates in connection with the election, including assistance in the transmission of s~oh data to a firm of mu~1iclpal bond attorneys ("Bond Counsel">' re~ined by the lssuer. S. 2 CONFIDENTIAL FSC-000025202 .. -·' ··-·::·:.··.:::-·••·····-· .... . ' . .... .... ····---·-· .. ·: ... ··.·: .... '- - . ' ..... B. Debt Management and Financial Implementation. At the. d!reotion ofissuer, FSC shall: 1. Method of Sale. Evaluate tbe particular finenoing being contempla:ed, giving consideration to the complexity, market acceptance, rating, size and structure in order to make a recommendation as to an appropriate method of sale, -and: a. [f the Debt Instruments are to be sold by an advertised competitive sale, FSC will: (I). Supervise tho sale of the Debt Instruments, reserving the right, alone or Jn oonjunction with others, to submit a bid for any Debt Instruments issued under this Agreement which the Issuer advertises for competitive bids; however, in keeping with the provisions of Rule G·Z3 of the Municipal Securities Rulemaklng Board, FSCwill request and obtain written co~sent to bid pi:lor to submitting a bid; in any instance · wherein FSC elects to bid, for any installment of such Debt Instruments; - . (2) ·Disseminate Information to prospective bidders,· organize such ·1nfonnational meetings as be necessary, and facilitate prospective bidders' efforts in making time Ir submission of proper bids; may (3) Assist the staff of the Issuer in coordinating the receipt of bids, fle safekeeping of goo Friday, April 9, 2010 8:27 AM Michael Stolzrnan, Rob ; Hushway, Fred ; Stokes, Keith RE: Update Michael, Meeting.with Wells wen! fine. We will need fo get them on RJ's approved tmderwriter list. I spoke with Maureen Gurghigian at First Southwest about this. Maureen does not see a problem. Wells will present at the board meeting & we will firm up their presentation over the nei.."t couple of weeks. Wells understands they will need to convince the· EDC board that 38 Studios' business model & projections are what will sell the bond vs. the credit enhancement. EDC board will need a high confidence moral obligation will never be called. ,We will need to firm up the term sheet ASAP for Wells (i.e. excess cash flow recapture, etc.). One issue that will remain a challenge is the amount of the bond moral obligation as a % of the total program. The amount is around $85.0 million as a result of the gross up for the deferred P&I period, plus a reserve plus fees. At today's meeting we need to discuss remaining due diligence requirements and board presentation. Realistically, getting to the 4/26 board meeting will be a pull so we need to discuss consequences and options for that as well. See you in a little while. Mike ·····Original Message-··· From: Michael [m~i!to:mcgrso@kingstoncap.com] Sent: Thursday, April 08, 2010 9:50 PM To: Saul, Michael Subj8':t: Update Michael: If you have a moment please call to let me know how thi11gs went. Also, we are all set for after the Governor's meeting to meet. 226-4081. Michael APS00.1994 EXHIBIT 58 Rhode Island Eco~o.mic Development Corporation vs Mark Lamarre - Vol. I Page 149 Page 151 1 Q. 1 A. 2 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Okay. And certainly by this date you understood that Wells Fargo through you would be making a presentation to the RIEDC board; correct? A. Yes. At the request of38 Studios, yes. Q. Well, right now I'm not asking who asked you, so if! could just ask you to limit your answer to the question. Did you understand by this time, April 9th, 2010, that Wells Fargo through you was being asked to make a presentation to the EDC board? A. Yes. Q. And you understood that the presentation would include the structure of the bond and -MR. HOLT: Objection. Facts not in evidence. MR. SHEEHAN: Will you let me finish my question? Really. And when I say "you understand," it's a question, Mr. Holt. You're being a pest. Okay? MR. HOLT: No, I'm just doing my job. MR. SHEEHAN: No, you're not. You're not listening to the question. MR. HOLT: Why don't you do your job and ask the right questions, and I'll do my job. Q. When I say, Mr. Lamarre, "you understand," that's 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 That's how I read it, but, you know, ... MR. SHEEHAN: All right. Could I have Exhibit 86? I'm just going to grab a water. MR. VALENTE: Take a break? MR. SHEEHAN: I don't need to. I'm just grabbing a water. MR. HOLT: Off the record. (Discussion off the record) BY MR. SHEEHAN: (Continuing) Q. Mr. Lamarre, this is an exhibit marked previously as Exhibit 86. A. Exhibit 86. Q. And it's an e-mail from Mike Saul to various people, not you, on April 12th, 2010. Do you see that? A. I do see that it's an e-mail from Mike Saul, April 12th, yep. Yes, sir. Q. And he states, "Gentlemen, here are the, quote, 'to do's,' close quote, from my notes"; correct? A. Yes. Q. And then he uses a hyphen to list eight or ten different items; right? A. Yeah. Q. And the first hyphen is to "Prepare Draconian forecast evidencing 38's ability to service debt Page 152 Page 150 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the question. So let me ask it again. You understood that the presentation would involve something about structure of the bonds and something about the due diligence/market opportunity; right? MR. HOLT: Objection. A. To be honest, I don't believe that's the case, because I was referring to the schedule. (Reading): The rush is, blah, blah, blah, by which they want to know the structure, your expertise here, and due diligence market opportunity, my side. So I was, I was really thinking it was that part to the right. Not that it matters, but that's what I read into this. And, again, it's four years old, but that's what I read into it. Q. What do you mean, "that part to the right"? A. Due diligence to the right of the words "structure (your expertise here)." So "due dili/market opportunity (my side)." Q. Oh, I understand. So you're saying that the presentation to the board would be the due diligence/market opportunity, and by then you'd also want to know the schedule on the bond placement? Min-U-Script® 1 2 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 even ifMMOG does not launch successfully. (Rick and Jen)." Have I read that correctly? A. Yes. Q. And then if we go down the fourth is, quote, "Meet with Wells Fargo to understand and assemble their presentation to EDC board on market (RPG/MMORPG), 38 business model and projections as an industry underwriter," and then there's paren, "Tom, Mike, Rob, Rick,'' close paren. Have I read that correctly? A. Yes. Q. Now, I'm going to ask you to assume that Rob here is Rob Stolzman and Mike is Mike Saul and Tom is Tom Zaccagnino and Rick is Rick Wester. Okay? A. Sounds rational. Q. Now, did you understand at any time that the RIEDC or anyone acting on behalf of -- let me back up a bit. You knew that Rob Stolzman was the lawyer for the EDC; right? A. To be honest, I don't remember what role he had. I remember the name. Q. Okay. I'm going to tell you he was the general counsel for the EDC. A. Thank you. Allied Court Re~orters, Inc. (401)946-5500 www.allieacourtreporters.com (38) Pages 149 - 152 Rhode Island Eco~o.mic Development Corporation vs Mark Lamarre - Vol. I Page 153 Page 155 l Q. Do you believe you would have understood that at l 2 the time and you simply since then don't recall it? A. Yeah, I think that's reasonable. Q. All right. Now, did you ever understand that Wells Fargo was going to meet with Rob Stolzman and/or Mike Saul to understand and assemble their presentation to the EDC board? A. I don't -- I didn't -- I don't think I received this e-mail, and I don't think I ever did meet with those guys. Q. Okay. But my question was, did you ever understand that Wells Fargo was going to meet with these individuals to assemble their presentation to the EDC board? A. I'd have to -MR. HOLT: Objection. A. I'd have to say no, because I never, I never have seen this -- I don't think I was copied on this e-mail, and I never did meet with Mike and Rob. I met with Tom and Rick many times. Q. Well, did you ever speak on the phone with Rob Stolzman? A. Let's see. I think there were two phone calls that I participated on with the RIEDC: one was 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 segmentation I talked about earlier? You know, how their -- what their position is in the industry? I believe I did talk about their position in the industry, I would have guessed. Q. And did you undertake to also talk about their projections? A. I don't know. I don't believe I did. Q. Now, when you say you don't recall those slides, what slides are you referring to? A. There was a slide deck that we did, and its been four years, but I remember we did a slide deck that had a few slides, it was like a horizontal PowerPoint presentation, that when we went to the EDC board meeting -- I can't remember whether that was in Providence or that was at Maynard Mass., I can't remember where it was -- we presented, the company presented a bunch of stuff and we presented some stuff on the industry. But I don't have a copy of those, so I don't know what was in them. Q. And that would be the best evidence of whether you presented to the EDC board concerning 38 Studios' projections; right? A. If there's documentation to that, then, sure, yep. Q. Now, if we go further down in this document that's Page 156 Page 154 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l 7 18 19 20 21 22 23 24 25 the one we talked about, I believe it was April 8th, and another time was I believe when we were marketing the bonds. I could be mistaken on that, but I think there were some RIEDC people on that phone call. And then I presented to the RIEDC board; I don't know if Rob or Mike were in that room. I don't know. Q. And those are the only times you can recall where you participated, even in a phone call, with either Mr. Stolzman or Mr. Saul? A. Those are the ones I can recall, yes, sir. Q. And those are the only ones you can recall. A. Those are the only ones I can recall. Q. Now, did Wells Fargo ever undertake to make a presentation to the EDC board on the market, 38 business model and projections? A. On the market, yes. I remember creating some slides that we got from publicly-available information. The terms "38 business model and projections," boy, that's pretty broad. I don't know what was in the rest of those slides. I don't have a copy of them. "38 business model" I will say probably includes --you know, that's a pretty broad term. Business model, you know, how they're going into the industry, how -- that Min-U-Script® 1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 l7 18 19 2o 21 22 23 24 25 been marked as Exhibit 86, there is this -- like, three or four lines from the bottom it starts, "Economic Development Consultant." Do you see that? A. Yes. Q. It states, quote, "Economic Development Consultant to document sector potential of investment in a catalytic studio and Wells Fargo to substantiate/opine on 38 Studios business model and projections," close quote. Have I read that correctly? A. You have, yes, sir. Q. Now, do you understand what an economic development consultant is? A. I learned from this process -- and ifl paraphrase incorrectly, please correct me. I believe, as I learned through this process, was when a government is thinking of making a strategic investment or loan in a company they want to know what the broader impact of it is, so like taxes, housing prices going up, you know, because employees with good-paying jobs come into the region. And that's my belief of what an economic development consultant is. Q. Would it be your understanding that an economic Allied Court Re}Jorters, Inc. (401)946-5500 www .allieacourtreporters.com (39) Pages 153 - 156 ------------ Rhode Island Eco~o.mic Development Corporation vs Mark Lamarre - Vol. I Page 159 Page 157 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 development consultant would be asked to assume that a particular project was going to be successful and then determine what impact it would have on the economy? A. I, I don't know what charter would be given to them, but that sounds rational to me. Because, obviously, you can't have an impact on the economy unless you move the company there; right? Q. Right. A. So I would assume they would have been given that as -- what do you call it, a precedent? -- to their analysis or something. Q. And you can't predict what impact it would have on the company unless you can assume it's going to be successful; right? MR. HOLT: Objection. Q. Well, how do you predict the impact it would have on the economy ifit was -A. Jobs. Yeah, job creation. Yeah. Q. Right. And to have jobs the company has to be in business; right? MR. HOLT: Objection. A. In business? The Bankruptcy Court would dispute you on that one. But I understand where you're going. The company has to be operating, yes, sir. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you've already testified would be a cash flow statement. A. Yep. Q. And a cash flow statement would typically include those funds that are available to the company in cash in any given year; right? A. Yes. Q. And that would -A. If you did a year-end. If you did a year-end, yeah. Q. Or whatever period was -A. Right. Usually, you know, there's other things, what we call interim financial statements. But I got your point, yes. Q. And that cash would include any funds made available as loan proceeds during that period of time. A. As long as they hadn't already been used, correct. Q. Okay. A. Yep. MR. SHEEHAN: Could I have exhibit 20, our 20? EXHIBIT PLAINTIFF'S 203 FOR I.D.: E-mail from Mark Lamarre dated April 15, 2010, with attachment, 3 pages. Page 160 Page 158 1 Q. 1 2 2 Q. What's been marked as Exhibit 203 is an e-mail 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Okay. Now, there's the reference, "Wells Fargo to substantiate/opine on 38 Studios business model and projections." Have I read that part of the sentence correctly? A. You've read that correctly. Q. Did Wells Fargo ever undertake to substantiate/opine on 38 Studios business model and projections? A. Not to the EDC. I did my own due diligence on behalf of Wells Fargo in contemplating whether to take 38 Studios on as a client. Q. And did you do that due diligence with respect to 38 Studios including if38 Studios went forward with the bond offering from the EDC? A. Sure. Financing, they needed financing. The company needed financing. So, sure, they had to have sources for financing, yes. Q. Well, you, in doing your due diligence, would first have to look at a set of financial projections for the company; correct? A. Yes. And that -- yes, and they came from Rick Wester. Q. And one part-A. Yeah. Sorry. Q. Right. And one part of financial projections M.i.n-U-Script® 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. SHEEHAN: (Continuing) from you to Tom Zaccagnino and Rick Wester with an attachment; correct? A. Yes, sir. For the record, I can't read the stuff that's in the gray on the third page, but we can get there when we get there, if you get there. But, yes. Q. Yes, I see your point. A. You see what I'm saying? Like, the photocopying kind of grays it out. Q. We'll see what we can do, if we get there. A. Yeah, we can figure it out. Q. Let's start with the e-mail. First I'd like to draw your attention to the third paragraph that starts "Conceptually." A. Yes, sir. Q. You say, "Conceptually, I have endeavored to," and then you have two entries; right? And the second is, quote, "Align our interests with yours; meaning strive to close financing at the most expeditious pace and at the lowest cost." Have I read that part correctly? A. Yes, you have. Q. All right. And what does that mean, "close Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (40) Pages 157 - 160 EXHIBIT 59 . Rhode Island Economic Corporation vs . Development . Mark Lamarre - Vol. I Page 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 referring to. Jenny Li; Abhishek Kedia. I think there's one more person I'm missing. Aaron Topp. Q. And that was the team that worked on the presentation. A. I believe that was the team that worked on the presentation. Yeah, the investment banking team. Q. Did you work at all with -A. Oh, maybe -Q. -- Pete Cannava or -A. Yeah. Q. I'm just trying to finish my question. A. Sorry. Q. Sure. Do you recall whether anyone from the municipal bond side of Wells Fargo was involved in working on the presentation? MR. HOLT: Objection. What presentation? Q. The presentation that was made to the EDC board of directors by Wells Fargo? MR. HOLT: At what point in time? MR. SHEEHAN: That's as good as it gets. A. I don't specifically recall about working on the presentation, sir, but I do remember that Pete Cannava attended, physically attended the presentation with the RIEDC. But I don't remember, you know, kind of putting the Page 95 1 because your client was 38 Studios. I -- did I? I don't know if! said that. I was -- well, Wells Fargo, I was talking about the investment banking department where I worked, sir, yes. Q. So you would not expect that the investment banking side of Wells Fargo would work with the RIEDC because 38 Studios was your client; right? A. That is correct, sir. Q. And "work with the EDC" includes working with the RIEDC on your presentation to the RIEDC board; you would not expect that either, would you? MR. HOLT: For the investment banking group. A. I would not expect the investment banking group -I don't think we worked with the RIEDC on the presentation we were making to the RIEDC, no. Q. Now, do you recall that you worked with 38 Studios on the presentation that was going to be made by Wells Fargo to the RIEDC board? A. Yes. I believe we sent drafts back and forth, et cetera. Normal prep process for a presentation, you know. Q. And was it normal prep process for Wells Fargo to work with its client on the presentation it would 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 96 Page 94 1 presentation together, I don't know. 2 Q. Is it fair to say that as best as you can recall 3 no one from municipal finance was involved in 4 putting that presentation together, though you 5 can't be sure? 6 A. As best I can recall, the answer to your question 7 is yes, because, if! remember the content of the 8 presentation, it was about industry trends, and 9 that's kind of where I worked, is on the industry 10 investment banking side. So it's, again, you 11 know, four years ago. But it doesn't seem 12 rational to me that they would have been involved, 13 but I can't, I can't tell you specifically, sir. 14 Q. Okay. And one of the reasons why you would not 15 expect anyone from Wells Fargo who was involved in 16 preparing that presentation to the EDC board to 17 work with the RIEDC on the presentation was 18 because Wells Fargo's client was 38 Studios, not 19 the RIEDC. I believe you said that. 20 A. My client was 38 Studios. I don't know, I don't 21 know the legalities of the conduit financing 22 vehicle, sir. I don't. So I can't definitively 23 state for you the second part of your question. 24 Q. Well, I thought earlier you said that you would 25 not expect Wells Fargo to work with the RIEDC M.in-U-Script® 1 be making to a board meeting such as was made in 2 this case? 3 A. Yes. 4 Q. And that's because Wells Fargo wants to work 5 closely with its client on an important matter 6 such as that; right? 7 A. Correct. We had been hired to advise and serve 8 them. 9 Q. Now, the next sentence on 156 states, quote, 10 "Wells understands they will need to convince the 11 EDC board that 38 Studios' business model and 12 projections are what will sell the bond versus the 13 credit enhancement." Have I read that correctly? 14 A. You've read it correctly. MR. HOLT: I'm going to note one objection 15 16 here: that the witness is not copied on this 17 e-mail nor was it sent to him. THE DEPONENT: Yeah, I was going to say. 18 19 Q. Now, Mr. Lamarre, do you deny that in the 20 telephone conference with Mr. Saul, Mr. Hashway, 21 Mr. Schilling, Mr. Wester, Mr. Zaccagnino, and 22 Ms. MacLean, on April 8th, 2010, you agreed that 23 Wells Fargo needed to convince the EDC board that 24 38 Studios' business model and projections are 25 what will sell the bond versus the credit Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (24) Pages 93 - 96 Mark Lamarre - Vol. I Rhode Island Eco°:o.mic Development Corporation vs Page 99 Page 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 enhancement? MR. HOLT: Objection. Q. Or do you not recall one way or the other? A. I don't specifically recall, but I would, I would deny that because I don't believe that statement to be true. Q. Now, do you know of any reason why on April 9th, 2010, Mr. Saul would make this statement, "Wells understands they will need to convince the RIEDC board that 38 Studios' business model and projections are what will sell the bond versus the credit enhancement," if in fact that was not his belief as to what Wells's understanding was? MR. HOLT: Objection to the form of the question. Also calls for speculation and something outside the personal knowledge of this witness. Q. I asked, do you know of any reason? THE DEPONENT: Should I answer? MR. HOLT: You can answer. A. I'm sorry, I'd have to have the question read back to try to do a good job here. Q. Sure. The sentence we're focusing on purports to be a representation of Wells's understanding. A. Yes, I got that. 1 Q. Right. Now, you understood that investors looking 2 at the bonds would be making the determination whether or not they thought it was a good investment; right? A. Yes, that's what investors would have to do. Q. Right. Now, -A. Decide to purchase the bonds, yeah, or not. Q. Yeah. And the reference in that sentence that I read you, "38 Studios' business model and projections are what will sell the bond," -- do you see that? A. I do. Q. --you understand that to be suggesting that from the point of view of investors they would be looking at 38 Studios' business model and projections to determine whether or not they wanted to buy the bond; right? MR. HOLT: Objection. That's what this document, which the witness did not receive a copy, says. A. Yeah, again, I wasn't on this thing. But that's what Mike Saul is saying, and I disagree with what he's saying. Q. Okay. But that's your understanding of what he's saying; right? 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 Page 100 Page 98 l Q. Okay. Do you have any reason to -- let me 1 A. 2 rephrase that. Do you know of any reason why Mr. Saul would not accurately state what he believed was Wells's understanding in this e-mail? MR. HOLT: Objection. Calls for speculation. A. I don't know what was in his mind or what have you, sir. Q. Right. Now, do you agree that at least by April 8th, 2010, you were aware that one of the possibilities was that the RIEDC would issue bonds and loan the proceeds to 38 Studios? MR. HOLT: Objection. A. My -- I didn't know specifically, sir, about the, you know, what do you call it, the financial structure, but I'd say conceptually, yes. Q. Now, you understood that ifthat indeed happened, that there would have to be investors found to buy the bonds. A. Yes, sir, there would have to be ultimate purchasers, funders of the bonds. Q. And for the project to go forward the bonds would have to be sold. A. Yes, sir. Sold to investors. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The second part of that sentence he's saying, (Reading): Projections are what will sell the bond versus the credit enhancement. That is what Mike Saul is saying. And, again, I disagree with that statement, or e-mail, whatever you call it. Q. Now, "versus the credit enhancement," you understand that to be referring to the fact that these bonds would be guaranteed in some form by either the State of Rhode Island or the RIEDC and that would be the credit enhancement. MR. HOLT: Objection. I think we do know that, and even this document states, that this is not a guarantee, and indeed the bond PPM states that it is a nonrecourse instrument as far as the State of Rhode Island or the EDC is concerned. MR. SHEEHAN: Please, no speaking objections, Mr. Holt. MR. HOLT: I just want to make sure -MR. SHEEHAN: Do you know Kelvey v. Coughlin, Mr. Holt, the seminal case in Rhode Island that speaking objections of the type you just offered are improper? I'd like you to just confirm whether you know that, because -MR. HOLT: I'd like to confirm with you Allied Court Re~orters, Inc. (401)946-5500 www .allieilcourtreporters.com (25) Pages 97 - 100 EXHIBIT 60 Mark Lamarre - Vol. II Rhode Island Eco~o.mic Development Corporation vs Page 511 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 like. Can we go on? Can I have exhibit 49, please. Actually, before I do that, could I have 48? EXHIBIT PLAINTIFF'S 227 FOR I.D.: E-mail from Peter Cannava dated July 21, 2010, 2 pages. BY MR. SHEEHAN: (Continuing) Q. Mr. Lamarre, Exhibit 227 is an e-mail from Mr. Cannava to a number of entities. And I'd ask you just to read the first paragraph of the e-mail, and when you're done I have a question. MR. PETROS: Exhibit 227, Steve? MR. SHEEHAN: It is, yes. MR. PETROS: Thank you. A. (Deponent complies). I've finished reading that first paragraph. Q. Thank you. What does the phrase "Since first payment is from the company" mean to you? A. Literally that's why I read it three times. I don't know what that means. (Reading): Since first payment. Q. Do you understand it means that the first obligor to pay on the bonds would be 38 Studios? A. Actually, I thought it related to timing of a payment of interest or principal. Since first payment is from the company, right, they're making 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and I believe that. Now, can you place a percentage in terms of 90 percent on the credit enhancement, 10 percent on 38 Studios' financial plan and projections, or 60-40, or 55-45, 95-5? Can you split them up in that way? MR. HOLT: Objection. A. I'll give it a try. On the credit enhancement and then the, secondarily, the company business plan? I'd probably say 75-25 for the credit enhancement. So the business plan -- 25 percent's important, but it's not larger than the credit enhancement. Q. Now, you understand that as matters now stand the Rhode Island Legislature is considering whether or not to honor the moral obligation and there's some debate about that. A. I was told that. Q. And you know at the time this bond transaction went through that moral obligation meant that the Legislature was not legally required to appropriate the money. A. I learned that from the public finance team during the process. Q. And that, therefore, there would be a political risk that the Legislature might choose not to fund Q. Page 514 Page 512 1 principal and interest payments. 1 2 Q. Okay. With that understanding in mind, why do you 2 3 think investors would want to have some disclosure from the company? A. I didn't write the e-mail; I don't know what -- I don't know what that means, sir. Q. All right. Now, -A. I don't even think I received this e-mail. Did I? Q. No, you didn't. A. So I don't -- yeah. Q. Earlier in your deposition, yesterday in fact, we talked about the issue of whether the credit enhancement would be the primary consideration for investors and what role, if any, 38 Studios' business plan and projections would play for investors on the bond transaction. Do you recall that was discussed? A. I do that -- I do recall that. Excuse me. Q. And what you testified was that in your opinion investors would look primarily at the credit enhancement and only secondarily at 38 Studios' business plan and projections in determining whether or not to buy the bonds; right? MR. HOLT: Objection. A. To buy the bonds, I believe I testified to that, 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 1B 19 2o 21 22 23 24 25 Min-U-Script® 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the bond. You knew that. That goes along with the moral obligation. A. I don't know if it's political. But there's a risk, absolutely, yeah. Q. Now, obviously, you don't get to that risk ifthe obligor, in this case 38 Studios, makes all of the necessary payments due under the loan because the Legislature won't be called upon; right? MR. HOLT: Objection. MS. CONCANNON: Objection. A. I believe that's -- I think that's how the bond was structured. MR. SHEEHAN: Could I have 45? EXHIBIT PLAINTIFF'S 228 FOR I.D.: E-mail from Mark Lamarre dated June 30, 2010, 2 pages. BY MR. SHEEHAN: (Continuing) Q. Exhibit 228 is an e-mail from you to Aaron Topp; correct? A. To Aaron Topp and others. Yes. Q. And it includes an e-mail from Aaron Topp to you. Do you see that? A. Yes. Q. And in that e-mail from Aaron Topp to you he talks about a meeting of the 3 8 Studios board to discuss equity financing; correct? Allied Court Reporters, Inc. (401)946-5500 www.allie wrote: > Michael, > > Meeting with Wells went fine. We will need to get them on RI's approved > underwriter list. I spoke with Maureen Gurghigian at First Southwest > about this. Maureen does not see a problem. > .>Wells will present at the board meeting & we will firm up their > presentation over the next couple of weeks. Wells understands they will > need to convince the EDC board that 38 Studios' business model & > projectiOns are what will sell the bond vs. the credit enhancement. EDC > board will need a high confidence moral obligation will never be called. > > We will need to firm up the term sheet ASAP for Wells (i.e. excess cash >flow recapture, etc.). > > One issue that will remain a challenge is the amount of the bond moral > obligation as a % of the total program. The amount is around $85.0 > million as a result of the gross up for the deferred P&I period, plus a > reserve plus fees. > > At today's meeting we need to discuss remaining due diligence > requirements and board presentation. Realistically, getting to the 4/26 > board meeting will be a pull so we need to discuss consequences and > options for that as well. ) > See you in a little while, > > Mike > > -----Original Message----- > From: Michael [mailto:mcorso@kingstoncap.com] 2 APS017275 ~·Sent: Thursday, April 08, £010 9;50 PM > To: Saul. Michael > Subject: Update > > Michael: > > If you have a moment please call to let me know how things went. > Also, we are all set for after the Governor's meeting to meet. > 226-4081. > > Michael 3 APS017276 EXHIBIT 65 From: ~nt: Saul, Michael Friday, April 9, 2010 8:27 AM To: Michael Cc: Slolzman, Rob ; H11Shwny, Fred ; Slokes, Keith RE: Update Subject: Michael, Meeting with Wells went fine. We will need to gel them on Rl'• approved underwriter list. I spoke with Maureen Gurghigian at First Southwest about this. Maureen does not see a problem. Wells will present at tl\e board meeting & we will firm up their presentation over the nei.1 couple of weeks. Wells understands they will riced to convince the EDC board that 38 Studios' business model & projections are what will sell the bond vs. tbe credit enhancement. EDC board will need a high confidence moral obligation will never be called. We will need to fllltl up the term sheet ASAP for Wells (i.e. excess cash flow recapture, etc.). One issue that will remain a challenge is the amount of the bond moral obligation as a% oflhe total program. The amount is around S85.0 million as a result of the gross up for the deferred P&I period, plus a reserve plus fees. At today's meeting we need to discuss remaining due diligence requirements and board presentation. Realistically, getting to the 4/26 board meeting will be a pull so we need to· discuss consequences and options for that as well. See you in a little while. Mike -----Original Message----From: Michael [roai!to:mcotl'g@!Qngstoncap.com) Sent: Thursday, April 08, 2010 9:50 PM To: Saul, Michael Subject: Update Michael: If you have a moment please call to let me know how things went. Also, we are all set for after the Governor's meeting to meet. 226-4081. Michael ·'9~. PLAINTIFF'S ' . EXHIBIT ·~ -~ . ·. l.£"(g 'ft! :;,f~/1y &\ APS001994 EXHIBIT 66 - - - - - " · - .. .. ----·······-···········-· - .. __ ... _. ,,_ , Stolzman, Rob From: Sent: To: Cc: Subject: Thomas J Zaccagnino [tz@38studlos.com] Tuesday, April 20, 2010 4:06 PM Saul, Michael; Stolzman, Rob; Fred S. Hashway, Jr Mlchael Touching Base Importance: High Gents -1 know that the timeline has been slightly disrupted however there are a few things that I wanted to touch base on ... l. Review of the EA deal -Rob when would you like to come to Maynard to review the docs? We are preparing a brief but it will take some time to complete. 2. Economic Impact Assessment-this is perhaps the single most important item for the EDC presentation. I know that you have been reaching out to various groups ... would you please let me know what the results have been? I reached out to Jason Della Rocca at Perimeter Partners to see his availability and abillty to help with driving the industry specific content. Jason is considered one of the top In his field and has been involved In many EIA for various States/Countries. The lead time is long and I am concerned that we don't have a dear path to accomplish this step prior to the meeting. 3. Mike's due diligence list -we have completed the tasks on our slde ... what else is needed? Is there a consolidated dlllgence check list of required items from your side? 4. Meeting Agenda - I have a.draft agenda to start the dialog and will forward under separate cover. 5. Term Sheet- I believe the outstanding Items center around the formulas for the excess cash flow ... when can we get together to walk through our proposal? 6. EOC Special Meeting Date - I know Keith has meetings today to discuss ... please note that Wells cannot do the 3rd and 17th doesn't work. I believe we are targeting the 10th but the soon we can nail this down the · better... we have a lot of schedules to manage. 7. Wells due diligence -Wells has been working Intensely on their due diligence for several weeks ....they have made great progress. However, we will need time to marry their work with the EIA. 8. Wells as an approved Bond underwriter/issuer,,.. has this been completed yet...we are moving full steam wlth them and really need this to be taken care of. , 9. Wells as the lead underwriter/Issuer- per our concall with Wells I want to confirm that Wells will be the lead underwriter and seller and that they will not be sharing the role with anyone else ... please confirm. That's It for now... please let me know your thoughts ... I am around tomorrow in and out of meetings. Please use the cell ... 617 645 8563. Best, TZ APS017266 EXHIBIT 67 ,-----------------------------------------~'--------------·-- ........ _.. . .. From: Rick W11st11~rw11ster@38studlos.com] Sent: Monday, Aprll 12, 2010 05:39:17 PM To: Lamarre, Marll(mark.lamarre@wellsfargo.com] CC: Tom Zaccagnlno(tz@38studios.comt. Bill Thomas[bthomas@38studlos.com I sec: mark.lamarre@cf.funb.com Subject: Financial Malerlal Attachment&: 38 Studios Financial materials.zip Mark, Here are the models- $75m Instate/self publishing model and $25m Private Placement model. 1 also included the budget flle for tile studios and the PPM draft. Password for the excel files - "Pro1". Rick Rick Wester ChiefFinanclal Officer 38 Studlos, LLC 978.310.5198 T 978.310.5152 F This communication Is for the sole use of the Intended reclplent(sJ and may contain confidential and privileged Information. Any unauthorized review, use, disclosure or distribution of this information Is prohibited. If you are not the Intended recipient, please contact the sender by reply email and destroy all copies of the message, This communication Is for Informational purposes only, Is not an offer, sollcitatlon, recommendation or commitment for any transaction or to buy or sell any security or other flnanclal product, and Is not Intended as investment advice or as a i::onflrmatlon of any transaction. Any market price, indicative value, estimate, view, opinion, data or other Information herein Is not warranted as to completeness or accuracy, Is subject to change without notice, and Wells Fargo Securities accepts no liablllty for Its use or to update or keep It current. Any views or opinions are those of the indlvlduai sender, not necessarily or Wells Fargo Securities or Its affiliates. Wells Fargo Sei::uritles Js the trade name for the copltal markets and Investment banking services of Wells Fargo & Company and Its subsidiaries, Including Wachovia Bank, National Association, and Wells Fargo Securities, LLC, member flNRA and S!PC. Wells Fargo Securities and or one or more of its affiliates may provide advice or may from time to time acquire, hold or sell a position In any securities that may be mentioned herein. PLAINTIFF'S EXHrsrr CONFIDENTIAL (p7J. WFS_0133131 ·. FILE NAME 2010 RPG Studio Budget - For Six Year Plan,xlsx .•. In PPM - 03.17.10 - to Wells Fargo 04.12.10.xlsx •.• -DRAFT - 04.01.10 - To Wells Fargo 04.12.10.xlsx 38 Studios PPM - DRAFT - 03.18.10.docx 2010 MMO Studio Budget - For 6 Year Plan.xlsx CONFIDENTIAL OATE_:>!ODIFIED 04/12/2010 17:27 04/12/2010 17:29 04/12/2010 17:28 03/18/2010 17:11 04/12/2010 17:26 FILE SIZE 0 0 0 0 0 WFS_0133132 This document produced natively} CONFIDENTIAL 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 DE Key Assumptions Massively Multiplayer Online Gaming (MMO) Division Division Average Headcount Division Period End Headcount MMO #1 - Release date - Fall of 2012 Unit Sales Average Price % to 38 Studios Subscription Sales Average Monthly Subscribers Average Monthly Price % to 38 Studios 106 150 $ $ 347 396 224 297 $ 2,000,000 40.00 30.0% $ 1,000,000 30.00 30.0% $ 1,200,000 20.00 30.0% $ $ $ 1,000,000 12.50 100.0% $ 1,200,000 12.50 100.0% $ 0.0% 0.0% 0.0% 0.0% 600,000 12.50 100.0% 75 81 80 78 78 78 $ $ 396 396 396 396 MMO #2-Release date-Fall of 2016 Role Playing Gaming (RPG) Division Division Average Headcount Division Period End Headcount RPG #1 - Release date - fall 2011 Unit Sales Average Price % to 38 Studios RPG #2 - Release date - fall 2013 Unit Sales Average Price % to 38 Studios RPG #3 - Release date - fall 2015 Unit Sales Average Price % to 38 Studios Confidential 38 Studios Ll.C Consol Plan WFS_0133135.xlSJC $ $ 0.0% $ 1,729,000 40.00 30.0% $ 0.0% 0.0% 0.0% 1,436,000 40.00 33.0% 78 78 $ 197,000 40.00 35.0% $ 197,000 40.00 35.0% $ 2,247,700 40.00 38.0% $ 1,866,800 40.00 38.0% $ $ 40.00 38.0% $ $ 40.00 38.0% $ 0.0% $ $ $ 78 78 40.00 38.0o/o $ 40.00 38.0o/o $ 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-11 FY2011 Projected December-10 FY2010 Projected December-13 FY2013 Projected December-12 FY2012 Projected December-14 FY2014 DE Income Statement Total Net Revenues $ Costs and Expenses Development Operations and Support S, G, & A expenses $ Operating Income Interest Income (Expense) Other income (Expense) Tax (Expense) 20,748,000 $ 65,455,200 $ 195,923,040 $ 218,333,360 4,298,776 41,751,195 1,031,250 4,900,814 53,908,945 13,750,000 7,534,132 72,555,774 20,000,000 21,556,700 77,135,368 20,000,000 23,340,064 34,930,979 47,683,259 75,193,077 114,112,474 120,475,432 (34,930,979) (26,935,259) (9,737,877) 81,810,566 97,857,928 (4,606,406) (7,977,262) (8,005,436) (7' 153,242) (4,305,979) 30,632,203 Total Costs and Expenses Net lncome(Loss) - {37,162,172) $ p9,537,384} $ {34,912,521} $ {17,743,313} $ 74,657,324 $ 56,389,777 Percent of Net Revenues Total Net Revenues 0% 100% 100% 100% 100% Costs and Expenses Development Operations and Support S, G, & A expenses 0% 0% 0% 201% 5% 24% 82% 21% 12% 37% 10% 11% 35% 9% 11% Total Costs and Expenses 0% 230% 115% 58% 55% Operating Income 0% -130% -15% 42% 45% Tax/Other Expense 0% 38% 12% 4% 19% Net lncome(Loss) 0% -168% -27% 38% 26% Confidential 38 Studios LLC Consol Plan WFS_0133135.xlsx $ $ 38 Studios, LLC Financial Projections- Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 DE Cash Flow Operating activities Net Income Non-Cash Changes in Operating Accounts Accounts receivable Prepaid and Other Assets NP, Accrued, Debt Interest $ Investing Activities Fixed Assets Financing Activities Bank Line Capital Leases Distribution Advances Outside Debt In-State Tax Credits Debt to Affiliates Equity Confidl!fltial 38 Studios LLC Consol Plan WFS_0133135.xlsx 74,657,324 $ 1,958,693 56,389,777 $ 1,992,338 (32,616,960) (50,000) 5,571,801 (5,602,580) (50,000) 6,327,410 (36,527,829) (42.190,499) (20, 160,946) 49,520,858 59,056,945 (2, 144,055) (2,840,502) (891,522) (2, 144,055) (2,941,438) 12,477,997 75,000,000 13,131,925 (6,322,128) (10,714,286) (25,000,000) (10,714,286) 49,150,698 $ (17,743,313) $ 1,983,598. (5,989,800) (50,000) 1,638,569 (11,579,078) 11,923,663 Change In Cash BS Proof (34,912,521) $ 2,148,277 (10,374,000) 339,225 608,520 819,619 774,519 Total Operating Activities Cash, Beginning of Period Cash, End of Period (39,537,384) $ 1,415,417 4,923,899 54,074,596 $ (31,899,075) 54,074,596 22,175,521 $ (1,460,000) 20,000,000 60,000,000 (8,834,596) 96,662,517 22,175,521 13,340,925 $ 13,340,925 110,003,442 $ 20,401,221 110,003,442 130,404,663 $ - 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-12 FY2012 Projected December-11 FY2011 Projected December-10 FY2010 Projected December-13 FY2013 Projected December-14 FY2014 De Balance Sheet Assets Cash Accounts Receivable Prepaid and Other Assets Fixed Assets Intellectual Property Long-term Assets Total Assets Liabilities AJP and Accrued Liabilities Bank Debt Capital Leases Distribution Advances Long-term Liabilities Outside Debt Debt to Affiliates Total Liabilities $ Confidential 38 Studios U.C Consol Plan WFS_0133135.xlsx $ 639,225 1,941,033 22,175,521 10,374,000 300,000 2,633,258 $ 13,340,925 16,363,800 350,000 1,541,182 $ 110,003,442 48,980,760 400,000 1,726,544 $ 130,404,663 54,583,340 450,000 2,675,644 $ $ 400,000 57,054,855 $ 400,000 35,882,779 $ 400,000 31,995,907 $ 400,000 161,510,746 $ 400,000 188,513,646 $ $ 1,335,402 $ 1,943,921 $ 3,582,490 $ 9,154,291 $ 15,481,701 $ Equity Total Liabilities and Equity Proof 54,074,596 $ 18,190,203 281,014 75,000,000 1,528,620 96,335,239 31,322,128 281,014 75,000,000 1,528,620 110,075,684 25,000,000 281,014 75,000,000 68,620 103,932, 125 25,000,000 281,014 64,285,714 68,620 98,789,640 281,014 53,571,429 68,620 69,402,763 (39,280,384) (74,192,905) (71,936,218) 62,721,106 119, 110,883 57,054,855 $ 35,882,779 $ 31,995,907 $ 161,510,746 $ 188,513,646 $ = - 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Metrics Revenue 20,748,000 65,455,200 Projected December-14 FY2014 195,923,040 218,333,360 EBITDA EBITDA % of Revenue EBITDA- Pro Forma (1) EBITDA Pro Forma % of Revenue (33,515,562) NIA (33,515,562) NIA (24,786,981) NIA (24,786,981) NIA (7,754,279) NIA (7,754,279) NIA 83,769,259 42.8% 91,269,259 46.6% 99,850,266 45.7% 107,350,266 49.2% Operating Income Operating Income % of Revenue Operating Income - Pro Forma (1) Operating Income % of Revenue (34,930,979) NIA (34,930,979) NIA (26,935,259) NIA (26,935,259) NIA (9,737,877) NIA (9,737,877) NIA 81,810,566 41.8% 89,310,566 45.6% 97,857,928 44.8% 105,357,928 48.3% Net Income Net Income % of Revenue (39,537,384) NIA (34,912,521) NIA (17,743,313) NIA 74,657,324 38.1% 56,389,777 25.B"A. NIA 180,522 15,043 15,043 64,636 148,546 12,379 12,379 147.588 169,545 14,129 14,129 397,410 231,465 19,289 18,021 442,867 244,372 20,364 19,097 Revenue per Head Total Cost per Head Monthly Cost per Head Monthly Cost per Head -Pro Forma (1) (1) - Pro Forma amounts exclude estimated accruals for a founding employee bonus plan. Ccnfideooal 38 Stucfios LLC Consol Plan WFS_0133135.xlsx De 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 231 335 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 DE Period End Headcount Development Operations and Support S, G, & A expenses Total Growth from Prior Period 19 394 58.9% 374 100 19 493 25.1% 374 100 19 493 0.0% 374 100 19 493 0.0% 85% 10% 5% 100% 76% 20% 4% 100% 76% 20% 4% 100% 76% 20% 4% 100% 13 194 113.8% 283 20 18 321 65.9% 355 70 19 444 38.2% 374 100 19 493 11.2% 374 100 19 493 0.0% 93% 0% 7% 100% 88% 6% 6% 100% 80% 16% 4% 100% 76% 20% 4% 100% 76% 20% 4% 100% 40 17 248 78.4% = Percent Period End Headcount Development Operations and Support S, G, & A expenses 93% 0% 7% 100% Total Average Headcount Development Operations and Support S, G, & A expenses Total Growth from Prior Period 181 Percent Average Headcount Development Operations and Support S, G, & A expenses Total Confidential 38 Studios LLC Consol Plan WFS_0133135.xfsx -- 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP Projected December-10 FY2010 Projected December-11 FY2011 Projected December-12 FY2012 Projected December-13 FY2013 Projected December-14 FY2014 De Financing Distribution Advances - Paid-back on release revenue RPG#1 12,477,997 MM0#1 RPG#2 3,131,925 (21,322,128) 10,000,000 15,000,000 Total Period Advances Advances Balance 13,131,925 31,322,128 (6,322, 128) 25,000,000 25,000,000 20,000,000 60,000,000 20.000,000 60,000,000 Equity Financing Member 1 Member2 Other Members Series B Members Financing/I PO Total Equity Financing 12,477,997 18,190,203 (25,000,000) (25,000,000} 0 10,923,663 1,000,000 11,923,663 Investor Debt/ Debt Financing Note Payable - Credit Line Director Note RA Note Conversion to Equity Mentor Media (10,747,231) (544,847) Total Investor Debt Financing {11,579,076) = (287,000) (1,460,000) {1,460,000) Outside Debt Financing Debt Financing - 7 year payback starting 20 Debt Payments Tax Credit Sales to Debt to 2012 Total Outside Debt Financing Outside Debt Balance Confidential 38 Studios LLC Consol Plan WFS_0133135.xlsx 80,000,000 (5,000,000) 75,000,000 75,000,000 75,000,000 75,000,000 (10,714,266) (10,714,286) (10,714,286} 64,265,714 {10,714,266) 53,571,429 - 38 Studios, LLC Financial Projections - Preliminary Draft Consolidated Plan - Non GAAP In-State Tax Credit Analysis Total Costs Less Real Estate Related - @28sq. ft. gros less discount of: 0% Credit Cost Base Credit% 0% Total Credit% Projected December-12 FY2012 Projected December-13 FY2013 Projected December-10 FY2010 Projected December-11 FY2011 13,072,829 560,000 35,988,580 1,408,400 62,997,614 2,324,000 99,013,586 2,324,000 104,615,077 2,324,000 12,512,829 34,580,180 60,673,614 96,689,586 102,291,077 {2.502,566) {6,916,036) {12, 134,723i {19,337,917) {20,458,215) Tax Credit Balance De 1 -- -- Interest Expense on Debt Distribution Advances and Debt Balance Interest@ -> 8% Confidential 38 Studios LLC Consol Plan WFS_013313S.xlsx F Projected December-14 FY2014 93,190,203 106,322,128 100,000,000 89,285,715 53,571,429 4,182,479 7,974,336 8,000,000 7,142,857 4,285,714 = = Rhode Island Eco~o.mic Development Corporation vs Mark Lamarre - Vol. I Page 125 1 know that that was the case. 2 Q. All right. Did you, when you performed that 1 A. Would not want to? No, I can't think of one. 2 Q. Do you agree that in the normal course you would 4 A. financial review, do so independently? I did it on my own analysis with my team, yes, 4 5 Sir. 5 3 3 6 Q. Right. And did you attempt in your -- 6 7 A. 7 8 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 On behalf of Wells Fargo, my employer. Q. And did you attempt in your task both to review and analyze the company's financial projections? MR. HOLT: Objection. A. Yes, I did. Q. Did Wells Fargo ever provide the EDC with a copy of the equity private placement memorandum that was prepared in connection with 38 Studios' proposed equity offering? A. Yes. Q. Were you personally involved in providing that document to the EDC? A. No. I believe Pete was, Pete Cannava did, if my recollection serves, but I can't cite the date. Pete Cannava in our municipal finance group. Q. Is it your understanding that that document was provided to the EDC by Wells Fargo prior to the EDC hearing -MR. SHEEHAN: Mr. Holt, I hear you 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 want to see the term sheet in order to know the transaction that was going to give rise to the bond? MR. HOLT: Objection. When you say "term sheet," do you have one particular one in mind, or are you referring to one specifically? MR. SHEEHAN: No, I don't. MR. HOLT: Well, then, define "term sheet." MR. SHEEHAN: I'm not going to, Mr. Holt. A. So the terms of the deal between call it the RIEDC and 38 Studios? Sure, I was interested, and I kept myself familiarized. However, the limitation is that I'm not an expert in the documentation of municipal bond financings. But, I'll be honest, I think I have reasonable knowledge on the equity side and mergers and acquisitions. And, again, that's what why I had to rely on, trust two partners, Pete and Craig, to expertize that part of the transaction. Q. Did you understand that Mr. Cannava and Mr. Hrinkevich would be experts with respect to the term sheet that would be issued by the RIEDC Page 128 Page 126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 whispering. THE DEPONENT: No, he's talking to himself, not to me. MR. HOLT: I'm talking to myself. THE DEPONENT: Ifhe is, I can't hear him. MR. SHEEHAN: Yeah, I can hear him from here. THE DEPONENT: Oh, you're better than I. Jewish gunfire. MR. SHEEHAN: All right. Were you in the service? THE DEPONENT: No. MR. HOLT: He just feels like it after today. BY MR. SHEEHAN: (Continuing) Q. Did you understand that the equity private placement memo was provided to the RIEDC before you made your presentation to the EDC board? A. I don't know the answer to that, sir. Q. So you don't know one way or the other? A. I don't know what the timing was. MR. SHEEHAN: Could I have exhibit 9? Q. Mr. Lamarre, was there any reason why you would not want to see any term sheet that was proposed between the RIEDC and 3 8 Studios? .MJn-U-Script@ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and 38 Studios concerning the terms of the RIEDC's loan to 38 Studios? A. I believe this was in their area of expertise, selling municipal-type bonds, meaning ones where there was, like, credit enhancement or credit of a government or agency, yes. Q. Would it have been your understanding that Mr. Hrinkevich or Mr. Cannava would in the normal course review the term sheet between the RIEDC and 38 Studios? A. It would be my belief. They were, you know, working for 38 Studios, negotiating and structuring and working with the RIEDC. I would assume they would have had to have reviewed it many times, meaning iterations of a draft, I assume. Q. If you look at Exhibit -- the exhibit that's in front of you -- I beg your pardon. The number? A. Was it 199, sir? Q. I think so. Yes. A. The one from Michael Corso? Q. Yes. A. And there's an attachment, right, that's marked, stamped "Draft" in big letters? Yeah. Q. Yes. Allied Court Reporters, Inc. (401)946-5500 www.allieIMIUnlcatlons and·enterta1nment tedmolo!llea. With worldwide headquartel$ In Newton, MA and principal offiOl!S In England, Fr.Ince and Gennany, Strategy Analytics foalses on market opportunities and cflallenges In the areas of AutomotlVe Eledmnlal,Dlgltal Consumer, Telematlcs, Wireless Strategies and Enabling Technologies. For more infurmetion, see www.strategyanalyt.aim Strategy Anatvtlcs Inc. 199 WeUs Avenue Sutte 108, Newton, MA 02459, USA Strategy Analytics Ltd. Bank House 171 Mldstmmer Boulevard, Milton Keynes, MK9 1EB United Klngdom I Reg. No. 3247598 Strategy Analytics GmbH, Landsbergef str 394, D-81241 Muenchen, Germany I HRB MLlnc:hen 115 553 strategy Analytics, 19 Rue Pierre Lescot, 75001 Palls, France I Reg. No. 393 657 655 00048 From: C.ole, Tlm [maBto:tcole@rledc.com] Sent: Wednesday, Aprll 14, 2010 9:53 AM To: Barry Giibert SUbject: PN: Introductions Barry, Should we anticipate a response from Strategy Analytics? Thanks, Tim STRATEGY ANALYTICS CONFIDENTIAL 00000585 , RIEOC Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email tcole@riedc.comIwebwww.rledc.com This e·mall message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the lnfol'matlon contained In this e-mail message or any attachment is strictly prohibited. If you are not the Intended recipient please notify the Rhode !stand Economic Development Corporation at 401.278.9100, and purge this e·mall from your computer system Immediately. From: Cole, ilm Sent: Monday, Aprll 12, 2010 11:08 AM To: 'Bany Giibert' SUbject: RE: Introductions Barry, Thank you for taking the time to respond to our Inquiry regarding an economic impact analysis of investing In a video game cluster for Rhode Island. We are vetting several firms in order to recommend a short list for our client. The client firm will be undertaking the independent economic Impact analysis that is required by the Rhode Island Economic Development Corporation. The impact analysis will be used to infonn our board of the scope of this opportunity as part of the EDC's due diligence process. Please provide an abbreviated response to the questions below that outlines your firm's capabilities and anticipated analytical approach. Note that the timeframe for completion Is short term - a matter of a few weeks. Please gauge your responses according to a short timeframe. Your Immediate response ls appreciated. Recap of Ooponun1tv: The EDC Is preparing for the passage of a bill allocating $125 million to a fund that can be used to assist businesses expanding in or relocating to Rhode Island. There is a current opportunity for Rhode Island to gain a significant presence In the video game Industry. The EDC Is considering an investment of $75 million from the fund In the form of a bond, which would leverage an estimated 450 video game industry jobs within four years. Further details on project specifics will be provided to the selected firm. The EDC views this as an opportunity to jumpstart a video game cluster In Rhode Island, and seeks an analysis of the economic potential for dolng so. The EDC hopes to leverage existing assets In the state, Including the Rhode Island School of Design, Hasbro, and local military presence (Naval Undersea Warfare Center, etc.) as well as our proximity to the Boston market in building out this potential cluster. Ultimately the EDC Is interested In !earning of how this opportunity compares to other possible investments In knowledge based clusters In the state (life sciences and Information technology). Questions; What Is your firm's experience In performing economic Impact analysis or return on investment analysis for state governments? (Please reference similar assignments) · What experience and resources does your firm heve related to analysis of the video game industry? How would your firm gauge the 5 and 1Oyear economic potential of the opportunity described above? How would your firm compare the opportunity In the video game Industry to other possible Investment In knowledge Industry clusters? Would your firm be ready and willing to present findings to the EDC Board of Directors? Whet Is a ball park price based on your responses provided above? Best regards, STRATEGY ANALYTICS CONFIDENTIAL -------------------------······ ··-·-----······. 00000586 Tim RIEOC Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email tcole@dedc.com I web www.dedc.com This e-mail message may contain confidential information belonging to the sender. If you are not the Intended recipient, the disclosure, dissemination, distribution, copying, or use of the Information contained In this e-mail message or any attachment Is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e•mall from your computer system immedlately. From: Barry Gilbert [mailto:BGllbert@strategyanalytio;.mm] Sent: Friday, April 09, 2010 3:53 PM To: Cole, llm Cc: Michael McMurray Subject: Introductions HiTim, Just as brief follow-up to my phone message I wanted to provide you with my contact details. I'd be happy to speak with you to find out your interests in the gaming space and provide you with some of our background in the industry. Please feel free to contact me either by email or my direct phone line below. Have a great weekend. Regards, Barry STRATEGY ANALYTICS CONFIDENTIAL ~------------------------------------- 00000587 --·-- ---··-·-----··-·--···· . STRATEGY ANALYTICS fNSIGHTS FOR.SUCCESS April 21, 2010 Rhode Island Economic Development Corporation (RIEDC) 315 Iron Horse Way, Suite 101 Providence, RI 02908 Attn: Tim Cole, Senior Strategy and Research Manager On behalf of Strategy Analytics (SA) I am pleased to provide the following proposal to address the specific requirements of the RIEDC to assess the economic viability of underwriting investments in the gaming industry. The project will investigate the economic and business case issues associated with investments in the video gaming industry to provide for economic expansion and job growth in the state of Rhode Island. We feel SA ls well positioned to address the needs of the RIEDC as it explores its options for investment In different clusters. Background and Objectives The RIEDC wishes to undertake a study to determine the feasibility of investment in the video game Industry and explore options for stimulating the Rhode Island economy. Our proposal is based on email correspondence and a subsequent phone conversation with members of the RIEDC on April 20th, including Michael Saul, Fred Hashway, and Tim Cole. Based on our discussions and understanding of the RIEDC requirements we view the core objectives of the study as follows: • Provide an objective assessment of the overall opportunity for RI to leverage key educational, industry, and government assets to attract a video gaming industry cluster, • Provide Insight to the critical success factors necessary for attracting, retaining, and growing a video gaming cluster in Rhode Island, • Provide insight to the gaming industry structure, • Provide due diligence support on a possible investment in 38 Studios as an initial anchor studio in RI, and, • Provide results and present key findings to the RIEDC board by Mid-May. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Page 1 CONFIDENTIAL Confidential 00000588 STRATEGYANALYT!CS INSIGHTS FOR SUCCESS Strategy Analytics' Approach To accomplish these objectives Strategy Analytics recommends that the following project elements be executed concurrently in an effort to meet the rigorous timelines required, including: 1. Perform a review of Rhode Island's assets that are vital for attracting a gaming cluster and to provide a defensible foundation on which to build a business case for investment. This initiative would Involve a review of the core educational assets, such as URI, RISO, and Brown, key industrial assets that serve as a support mechanism for gaming, such as Hasbro, and evaluate government resources (both State and Federal) that provide various levels of support for the market sector. As part of this component SA would develop a comparison with other markets, such as Baltimore, which successfully launched MicroProse and Big Huge Games (BHG), and was able to grow these efforts supported by local educational programs and talent pools and examine the conditions that were necessary for success. This phase will require interviews with educational institutions, leading game developers, and other relevant parties that serve as catalysts for the gaming markets. 2. Provide an overview of the industry structure of the gaming industry and examine elements that are considered critical success factors in both short and long-term horizons. 3. Conduct a due dillgence exercise on 38 Studios, including where they at in the completion stage of their MMOG Initiative, an understanding of their capital requirements and uses, and a multi·year proforma exercise on capital 1 requirements. Deliverable SA envisions the deliverable to include a written high level summary report of approximately 20·25 pages produced in Microsoft Word or in an Adobe PDF format along with a 2 hour on-site PowerPoint presentation to the RIEDC board. Timeframe Given a kick-off data of April 26th Strategy Analytics can complete the above referenced assignment and deliver results on Friday, May 14th, 2010. While this 3 week period is 1 In order to complete a due dlllgence exercise SA will require access to materials that are considered proprietary and confidential. SA will execute an NDA to facilitate this process. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Confidential Page 2 . 00000589 CONFIDENTIAL ~----------------------·-----··· ··-------··· ··-··. STRATEGYANALYT1CS INSIGHTS FOR SUCCESS aggressive SA believes it can draw on the necessary resources to complete the assignment within that timeframe. Strategy Analytics Experience and Credentials Strategy Analytics believes it possesses the requisite set of capabilities to provide the RIEDC with a solid basis on which to make an Informed and defensible decision, including: Experience In working with business planners to provide creative visions for the future and defensible business planning assumptions that identify market potential, relative competitive positions, and critical success factors for achieving potential, and evaluate risk versus opportunities in emerging wireless businesses. SA has provided global leaders across multiple industry segments with the insights to develop successful new products and services in highly competitive, rapidly evolving markets for nearly thirty years. Expertise In exploring commercial, industrial, and consumer markets worldwide for information on adoption rates, willingness to pay, applications drivers, and barriers to adoption and use for wireless products and services. SA applies a portfolio of market research methodologies to gather qualitative and quantitative information and Insights to meet the specific requirements of each project. Knowledge Objectivity Of user decision behaviour, support requirements, applications needs, and adoption criteria. SA hos combined information from its knowledge bases developed through the SA syndicated programs in Gaming and Entertainment, with Insights gained in working with leading gaming participants to meet the business planning needs of our clients. In assessing the critical success factors, relative strengths and weaknesses, market opportunities, and business risks inherent in emerging businesses facing strategic stakes in global competition. SA focuses on providing objective information and forecasts under alternative scenarios to create defensible information to support planners launching new wireless services and products. Project Team The project will be led by Barry Gilbert, Vice President of Strategy Analytics Gaming Strategies and Opportunities service along with Harvey Cohen, President of Strategy Analytics. These principals will draw on internal resources to assist in completing the different phases of the project under their direction. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Page 3 CONFIDENTIAL Confidential 00000590 STRATEGY A NALYTtCS INSIGHTS FOR SUCCESS Harvey Cohen is the Founder and President of Strategy Analytics. He is a leading visionary and strategist in marketing and technology subjects who has worked as a trusted advisor and counselor to successful multi-national companies in the US, Europe and the Far East during the past 20 years. Mr. Cohen's primary focus is the analysis of key strategic and tactical marketing and technology issues affecting the successful growth of businesses in highly competitive environments, He has extensive experience in assessing requirements and issues critical to the commercial development of advanced information technology services and products. Working with service providers, hardware manufacturers, and software developers, he provides business planning support, analysis and forecasts of emerging markets ranging from portable communicators to advanced semiconductors and software products for electronic commerce. His work has included studies of emerging technologies in the consumer electronics, financial services, healthcare, retail, utilities, and manufacturing sectors. Prior to forming Strategy Analytics in 1996, Mr. Cohen was President of Technology Applications Group and President of BIS Mackintosh, firms specializing in marketing information and analysis for technology businesses. He also spent nine years at Data Resources, Inc., where he consulted with Fortune 500 firms In support of market and strategic planning activities. Mr. Cohen holds an SM in Management from the Sloan School at MIT, an MS In Materials Science from Ohio State University and an SB in Materials Science from MIT. Barry Gilbert was among the original founding members of Strategy Analytics. He left the firm as part of an acquisition of a SA subsidiary by Bowne (NYSE:BNE) in New York and rejoined the firm to lead the development of new programs. While away, Barry served as COO of Current Analysis, Inc., a competitive intelligence firm based in Washington DC. Previously, Barry held executive level positions with Giga Information Group (now part of Forrester Research) where he was Vice President of Quantitative Research and a member of the executive management team. Barry's participation in technology research, publishing, and· consulting spans over 25 years. He has served In leadership roles at IDC, Market Information Center, Computer lntelligence/lnfoCorp and Bowne. Barry holds a BA from the Johns Hopkins University and an MBA from the Clark University's Graduate School of Management. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Page 4 CONFIDENTIAL .. -··-·-·----·---- -·-----·- Confidential 00000591 ------------------------ .. STRATEGY ANALYTICS INSIGHTS FOR SUCCESS Investment Required The investment required to complete the work outlined In this proposal will be $62,500.00, with 50% billed upon project approval and the final 50% upon completion. Terms are Net 30. This proposal is subject to the Terms and Conditions on the next page. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Page 5 CONFIDENTIAL Confidential 00000592 - -- · · · - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - .. STRATEGY ANALYTICS INSIGHTS FOR.SUCCESS Terms and Conditions Validity of Quotation This proposal Is valid for 30 days from the date of submission though Client recognizes that the project delivery dates are contingent on a project kick-off of April 26th. Timely Delivery SA will take all reasonable steps to ensure that the timescales called for by the proposed study are met in accordance with the agreed schedule, but no liability can be accepted for the consequences of delays, howsoever caused. Dependent Methodology We believe that the methodology proposed in this document represents the optimal approach to meeting RIEDC's requirements. Should the client wish to proceed only with part of this project, SA reserves the right to re-submit a revised proposal reflecting the requested changes. Such changes may affect the schedule, the resource requirements, professional fees, travel, and/or SA's ability to deliver all ofthe requirements requested by the client. Project Changes SA recognizes that the RIEDC may desire to make modifications to the proposed work either prior to or during the course of the proposed project. In the event the Client requests changes to the project once the project is initiated, SA reserves the right to re-submit a revised proposal reflecting the requested changes. Changes may affect the schedule, the resource requirements, professional fees, travel, or all of these. Disclaimer of Warranties: Limitation of Uability Although reasonable efforts will be made by SA to ensure the completeness and accuracy of the information contained in written and oral reports in connection with the proposed study, no llablllty can be accepted by SA for the results of any actions taken by the Olent in connection with such information, opinions or advice. SA will take all reasonable steps to ensure that the timescales called for by the proposed study are met Jn accordance with the agreed schedule, but no liability can be accepted for the consequences of delays, howsoever caused. Except as expressly specified herein, SA makes no warranties of any kind, express or implied, statutory or otherwise, including without limitation, any implied warranties of accuracy, completeness or adequacy of such services or of their merchantability or fitness for a particular purpose. SA and Its suppliers' total liability with respect to the services provided hereunder, under all theories of liability and regardless of the form of action, shall be limited to a sum equal to one half of the professional fees paid by the client for the consulting services giving rise to the claim. In no event shall SA be liable for special, indirect, incidental or consequential damages, even if it has been advised of the possibility of such damages. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC STRATEGY ANALYTICS Page 6 CONFIDENTIAL Confidential 00000593 EXHIBIT 75 ............. , .. --··· - ··.;·· From: Sent: To: Cc: SUbjett: Attach: -·"';"" ... ·: ... : ·.:: ::.:._ .. Saul, Michael ThUISday,April22,201010:12.AM tz@38studios.com Michael Corso rso@kingstoncap.com>; Stolzman, Rob ; Hashway, Fred ; Cole, Tim FW: Proposal R1EDC Proposal 4-21-10.pdf, AIT215090.htm; imageOOl.gif; ATT215091.htm Tom, 1will give you a call to discuss our thoughts on Economic Consultant. Mike From: Cole, Tim Sent: Wednesday, April 21, 2010 7:33 PM To: Saul, Michael; Hashway, Fred Subject: Fwd: Proposal Sent from my iPhone Begin forwarded message: From: ''Barry Gilbert" To: "Cole, Tim" Cc: "Harvey Cohen11 , "Michael McMuiTay" · Subject: Proposal Hi Tim, Thanks again for setting up yesterday's meeting with your colleagues at the RIEDC. After reviewing the calendar it quickly became evident that this effort needs to commence immediately if we are to meet the timefrarn.es. As such I put together the attached proposal for your review. For the sake of time I have kept the proposal quite brief though I believe we addressed the requirements articulated on the call. However, ifl have missed something please let me know. We are available to discuss/clarify any of the contents or to answer other questions you might have. Best Regards, Barry • PLAINTIFF'S iii ii! EXHIBIT 10 APS001040 ....... --·. . . . . ....... :· ·:: From: Cole, Tim [mailto:tcole@riedc.com] Sent: Tuesday, April 20, 2010 10:12 AM To: Barry Gilbert Subject: RE: Introductions Does 11 :00 tomorrow morning work for you? Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 xl93 I 401.273.8270 fax email tcole@riedc.com Iweb www.riedc.com This e-mail message may contain confidential infonnation belonging to the sender. If you are not ·. the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278,9100, and purge this e-mail from your computer system immediately. From: Bany Gilbert [mailto:BGilbert@strategyanalytics.com] Sent Tuesday, April 20, 2010 9:39 AM To: Cole, Tim Subject: RE: Introductions Tim, Would this afternoon at 2:00 or 2:30 work, otherwise tomorrow pretty open in morning? Thanks, Barry APS001041 .._:··:~· From: Cole, Tim [mailto:tcole@riedc.com] Sent: Tuesday, April 20, 2010 9:15 AM To: Barry Gilbert Subject: RE: Introductions Barry, We'd like to set up a ~onference call. Do you have availability today or tomorrow? Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite I 0 I, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email tcole@riedc.com I web www.riedc.com This e-mail message may contain confidential infonnation belonging to the sender. If you are not the intended recipient, the disclosure; dissemination, distribution, c~"'lQf'me'Ofthe information contained in this e..:mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify-the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. From: Barry Gilbert [mailto:BGilbert@strategyanalytics.com] Sent: Friday, April 16, 2010 2:48 PM To: Cole, Tim Subject: RB: Introductions Tim, The results from all of our engagements are proprietary to the client, however, generally, we were investigating several similar issues to what you identified as requirements. They were looking to APS001042 ~ ... identify opportunities and requirements for attracting high tech investments and what options might be. best suited to pursue. Hope this helps (albeit a little). Thanks. Barty From: Cole, Tim [mailto:tcole@riedc.com] Sent: Friday, April 16, 2010 11:19 AM To: Barry Gilbert Subject: RE: Introductions Barty, Thank you for your response. I will be meeting with senior staff today to discuss our options . . Based on this meeting we:will target two to three firms for further discussions. I will suggest that Strategy Analytics is well positioned.based on the knowledge of the video game industry as well as knowledge of comparative knowledge economy industries. I will also highlight that your finn conducted the project for Scottish Enterprise. However, I don't have much more to add on that point. Could you provide a copy of that report, or at least a synopsis of what it covered? Thanks, Tim Tim CoJe Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 xl93 I 401.273.8270 fax email tcole@riedc.com Iweb www riedc com This e-mail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. APS001043 ·······-·· ·.·····-.-·· ..... - From: Barry Gilbert [mailto:BGilbert@strategyanalytics.com] Sent: Wednesday, April 14, 2010 12:45 PM To: Cole, Tim Subject: RE: Introductions Tim, Here ·is a response to the questions you presented - please let me know if you would like to discuss these via phone or if you have any questions. Thanks, Barry STRATEGYANALYTICS Barry Gilbert Vice President, Gaming Strategies & Opportunities Tel: +1 617-614-0701 Strategy Analytics, Inc., a global research and consulting finn, provides timely insights and strategic business solutions to companies operating at the convergence of information, communications and entertainment technologies. With worldwide headquarters in Newton, MA and principal offices in England, France and Gennany, Strategy Analytics focuses on market opportunities and challenges in the areas of Automotive Electronics,Digital Consumer, Telematics, Wireless Strategies and Enabling Technologies. For more information, see www.strategyanalytics.com Strategy Analytics Inc. 199 Wells Avenue Suite 108, Newton, MA 02459, USA Strategy Analytics Ltd. Bank House 171 Midsuinmer Boulevard, Milton Keynes, Jv.1K9 lEB United Kingdom IReg. No. 3247598 Strategy Analytics GmbH, Landsberger Str·394, D-81241 Muenchen, Germany I HRB Miinchen 115 553 Strategy Analytics, 19 Rue Pierre Lescot, 75001 Paris, France I Reg. No. 393 657 655 00048 APS001044 ... ··-.-.·· .. '. . . .. . ... . . . . . ----···········- From: Cole, Tim [mailto:tcole@riedc.com] Sent: Wednesday, April 14, 2010 9:53 AM To: Barry Gilbert Subject FW: Introductions Barry, Should we anticipate a response from Strategy Analytics? Thanks, Tim Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email tcole@riedc.com Iweb www.riedc.com This e-mail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. From: Cole, Tim Sent: Monday, April 12, 2010 ll:08AM APS001045 To: 'Barry Gilbert' Subject: RE: Introductions Barry, · Thank you for taking the time to respond to our inquiry regarding an economic impact analysis ofinvesting in a video game Cluster for Rhode Island. We are vetting several firms in order to recommend a shortlist for our client. The client firm will be undertaking the independent economic impact analy.sis that is.required by the Rhode Island Economic Development :Corporation. The impact analysis Will be used to inform our board of the scope of this opportunity as part of the EDC's due diligence process. Please provide an abbreviated response to the questions below that outlines your finn's capabilities and anticipated analytical approach. Note that the timeframe for completion is short term - a matter of a few weeks. Please gauge your responses according to .a: short timeframe. Your immediate response is appreciated. Recap of Opportunity: The EDC is.preparing for the passage of a bill allocating $125 million to a fund that can be used to · assist businesses expanding in or r.elocating to·Rhode Island. There is a current opportunity for Rhode Island to gain· a significant presence in the video game industry. The EDC is considering an investment of $75 million from the fund in the fonn of a bond, which would leverage an estimated 450 video.game industry jobs within four years. Further details on project specifics will be provided to.the selected firm. The EDC views this as an opportunity to jumpstart a video game cluster in Rhode Island, and seeks an analysis of the economic potential for doing so. The EDC hopes.to leverage existing assets in the state, including the Rhode Island School of Design, Hasbro, and local military presence (Naval Undersea Warfare Center, etc.) as well as our proximity to the Boston market in building out this potential cluster. Ultimately the EDC is interested in learning of how this opportunity compares to other possible investments in knowledge based clusters in the state (life sciences and information technology). Questions: What is your finn's experience in perfonning economic impact analysis or return on investment analysis for state governments? (Please reference similar assignments) What experience and resources does your firm have related to analysis of the video game industry? How would your firm gauge the 5 and 10 year economic potential of the opportunity described above? How would your firm compare the opportunity in the video game industty to other possible investment in knowledge industry clusters? APS001046 Would your finn be ready and willing to present findings to the EDC Board of Directors? What is a ball park price based on your responses provided above? Best regards, Tim Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 xl93 I 401.273.8270 fax email tcole@riedc com I web www riedc com This e-mail message may contain confidential information belonging to the sender. If you are not the intended recipient, the disclosure, dissemination, distribution, copying, or use of the information contained in this e-mail message or any attachment is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system immediately. From: Barry Gilbert [mailto:BGilbert@strategyanalytics.com] Sent: Friday, April 09, 2010 3:53 PM To: Cole, Tim Cc: Michael McMurray Subject: Introductions APS001047 . ........... .. . .. ···-··- ... '·. . . .. . ...... ,__ - ....... . Hi Tim, Just as brief follow-up to my phone message I wanted to provide you with my contact details. I'd be happy to speak with you to find out your interests in the gaming space and provide you with some of our background in the industry. Please feel free to contact me either by email or my direct phone line below. Have a great weekend. Regards, Bany APS001048 iN:SfCHTS. f'ORSUCCE.$$ April 21, 2010 Rhode Island Economic Development Corporation (RIEDC) 315 Iron Horse Way, Suite 101 Providence, RI 02908 Attn: Tim Cole, Senior Strategy and Research Manager ·On behalf of Strategy Analytics (SA) I am pleased to provide the following proposal to address the specific requirements ofthe RIEDC to assess the economic viability of underwriting investments in the gaming industry. The project will investigate the economic and business case issues associated with investments in the video gaming Industry to·provide for economic expansion and job growth in the state of Rhode Island. We feel SA is well positioned to address.the needs of the RIEDC as it explores its options for investment in different clusters. Background and Objectives The RIEDC wishes to undertake a study.to determine the feasibility of Investment in the video game industry and explore options for stimulating the Rhode Island economy. Our proposal is based on email correspondence and a subsequent phone conversation with members of the RIEDC on April 20th, including Michael Saul, Fred Hashway, and Tim Cole. Based on our discussions and understanding of the RIEDC requirements we view the core objectives of the study as follows: • Provide an objective assessment ofthe overall opportunity for RI to leverage key educational, industry, and government assets to attract a video gaming industry cluster, • Provide insight to the critical success factors necessary for attracting, retaining, and growing a video gaming cluster in Rhode Island, • Provide insight to the gaming industry structure, • Provide due diligence support on a possible investment in 38 Studios as an Initial anchor studio in RI, and, • Provide results and present key findings to the RIEDC board by Mid-May. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC Page 1 Confidential APS001049 . .... . . . . ' ·-· -··· -- Strategy Analytics' Approach To accomplish these objectives Strategy Analytics recommends that the following project elements be executed concurrently in an effort to meet the rigorous timelines · required, including: 1. Perform-a review of Rhode Island's assets that are vital for attracting a gaming cluster and to provide a defensible foundation on which to build a business case for investment. This initiative would involve a review of the core educational assets, such as URI, RISD, and Brown, key industrial assets that serve as a support mechanism for gaming, such as Hasbro, and evaluate government resources {both Sta.te and Federal) that provide various levels of support for the market sector. As part of this component SA would develop a comparison with other markets, such as-Baltimore, which successfully launched MicroProse and Big Huge Games . (~HG); and was able to grow these efforts supported by local educational programs and talent pools and examine the conditions that were necessary for success. This phase will require interviews with educational institutions, leading .game developers, and other relevant parties that serve as catalysts for the gaming markets. 2. Provide an overview of the industry structure of the gaming industry and examine elements thatare considered critical success factors in both short and long-term horizons. 3. Conduct a due diligence exercise on 38 Studios, including where they at in the completion stage of their MMOG initiative, an understanding of their capital requirements and uses, and a multi-year proforma exercise on capital 1 requirements. Dellverable SA envisions the deliverable to include a written high level summary report of approximately 20-25 pages produced in Microsoft Word or in an Adobe PDF format along with a 2 hour on-site PowerPoint presentation to the RIEDC board. Tlmeframe Given a kick-off data of April 26th Strategy Analytics can complete the above referenced assignment and deliver results on Friday, May 14th, 2010. While this 3 week period Is 1 In order to complete a due diligence exercise SA will require access to materials that are considered proprietary and confidential. SA will execute an NOA to facilitate th ls process. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC Page 2 Confidential APS001050 ··········· ··-·.····· . . ...... -.-.·· ... fNS!GHTS. fORSU.CCEiS aggressive SA believes it can·draw on the necessary resources to complete the assignment within that timeframe. Strategy Analytics Experience and Credentials -Strategy Analytics believes it possesses the requisite set of capabilities to provide the RIEDC with a solid basis on which to make an informed and defensible decision, including: : . ... , In working with business planners to provide creative visions for ·. . ' ·.thefuture and defensible business planning assumptions that : identify market potential, relative competitive positions, and critical success factors for achieving potential, and evaluate risk Experience -versus-.opportunities in emerging wireless businesses. SA has .. . . · provided'globa/ leaders across multiple Industry segments with .. ··the insights to develop successful new products and services in . . .. .... · highly i:ompetltlve, rapidly evolving markets for nearly thirty years. .. • ~ 'Expe~i~e ·In exp'loring commercial, industrial, and consumer markets · worldwide for information on adoption rates, willingness to pay, applications drivers, and barriers to adoption and use for wireless products and services. SA applies a portfolio of market research . methodologies to gather qualitative and quantitative information · and insights to meet the specific requirements· of each project. Knowl~dge Of user decision behaviour, support requirements, applications ··needs; and adoption criteria. SA has combined information from ... its·knowfedge bases developed through the SA syndicated programs in Gaming and Entertainment with insights gained in working wfth leading gaming participants to meet the business planning needs of our di en ts. Objectlvlfy In assessing the critical success factors, relative strengths and weaknesses,·market opportunities, and business risks inherent in emerging businesses facing strategic stakes In global competition. ·SA focuses on providing objective Information and forecasts under alternative scenarios to create defensibf e Information to support planners launching new wireless servfces and products. .. .... Project Team The project will be led by Barry Gilbert, Vice President of Strategy Analytics Gaming Strategies and Opportunities.service along with Harvey Cohen, President of Strategy Analytics. These principals will draw on internal resources to assist in completing the different phases of the project under their direction. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC Page 3 Confidential APS001051 Harvey Cohen is the Founder and President of Strategy Analytics. He is a leading visionary and strategist in marketing and technology subjects who has worked as a trusted advisor and counselo·rto successful multi-national companies in the US, Europe and the Far East during the past 20 years. Mr. Cohen's primary focus is the analysis of key strategic and tactica I marketing and technology issues affect,ing the successful growth of businesses in highly competitive environments, He has extensive experience in assessing requirements and issues critical to the commercial development of advanced information technology services and products. Working with service providers, hardware manufacturers, and · software developers, he provides business planning support, analysis and forecasts ·of emerging markets ranging from portable communicators to advanced semiconductors and software products for electronic commerce. His work has included studies of emerging technologies in the consumer electronics, financial ·services; healthcare, retail, utilities, and manufacturing sectors. Prior to forming Strategy Analytics in 1996, Mr. Cohen was President of Technology Applications Group and President of BIS Mackintosh, firms specializing in marketing information and analysis. for technology businesses. He also spent nine years at Data Resources, Inc., where he consulted with Fortune 500 firi:ns in support of market and strategic planning activities. Mr. Cohen holds an SM in Management from the Sloan School at MIT, an MS in Materials Science from :Ohio State University and an SB In Materials Science from MIT. Barry Gilbert was among the orlglnal founding members of Strategy Analytics. He left the firm as part of an acquisition of a SA subsidiary by Bowne (NYSE:BNE) in New York and rejoined the firm to lead the development of new programs. While away, Barry served as COO of'Current Analysis, Inc., a competitive Intelligence firm based in Washington DC. Previously, Barry held executive level positions with Giga Information Group (now part of Forrester Research) where he was Vice President of Quantitative Research and a member of the executive management team. Barry's participation in technology research, publishing, and consulting spans over 25 years. He has served In leadership roles at IDC, Market Information Center, Computer lntelligence/lnfoCorp and Bowne. Barry holds a BA from.the Johns Hopkins University and an MBA from the Clark University's Graduate School of Management. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC ·Page 4 Confidential APS001052 ·--·· ....... .. ... . ........ '· n ATery J~. N ;~ ~ "'{T'V"'~: S.T· 11'\.rt. f e;;;,y it " • .? ii-~ ,, *"'"" .~ 1N5~CNTS FOP.SUCCESS Investment Required The investment required to complete the work outlined In this proposal will be $62,500.00, with 50% billed upon~project approval and the final 50% upon completion. Terms are Net 30. This proposal is subject to the Terms and Conditions on the next page. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC Page 5 Confidential APS001053 lNSICHTS FORSUCCE.SS Terms and Conditions Validity of Quotation This proposal is valid for 30 days from the date of submission though Client recognizes that the project delivery dates are contingent on a project kick-off of April 26th. Timely Delivery SA will take.all reasonable steps to ensure thatthe timescales called for by the proposed study are met lri accO"rdance with the agreed schedule, but no liability can be accepted for the consequences of delays, howsoever caused. Dependent Methodology We believe that the methodology·proposed in this document represents the optimal approach to meeting RIEDC's requirements. Should the client wish to proceed only with part of this project, SA reserves the right to re-submit a revised proposal reflecting the requested changes. Such·changes may affect the schedule, the resource requirements, professional fees, travel, and/or SA's ability to deliver all of the requirements requested by the client. Project Changes . SA recognizes that the RIEDC may desire to make modifications to the proposed work either prior: to or during the course of the proposed project. In the event the Client requests changes to the project once the project is initiated, SA reserves the right to re-submit a revised proposal reflecting the requested changes. Changes may affect the schedule, the resource requirements, professional fees, travel, or all of these. Disclaimer of Warranties: Limitation of Uablllty Although reasonable efforts wlll be made by SA to ensure the completeness and accuracy of the information contained in written and oral reports in connection with the proposed study, no liability can be accepted by SA for the results of any actions taken by the Cllent In connection with such Information, opinions or advice. SA will take all reasonable steps to ensure that the timescales called for by the proposed· study are met In accordance with the agreed schedule, but no liablllty can be accepted for the consequences of delays, howsoever caused. Except as expressly specified herein, SA makes no warranties of any kind, express or implied, statutory or otherwise, including without limitation, any Implied warranties of accuracy, com·pleteness or adequacy of such services or of their merchantabllity or fitness for a particular purpose. SA and its supplfers' total liabillty with respect to the services provided hereunder, under all theories of liability and regardless of the form of action, shall be limited to a sum equal to one half of the professional fees paid by the client for the consulting services giving rise to the claim. In no event shall SA be liable for special, indirect, incidental or consequential damages, even if it has been advised of the possibility of such damages. Strategy Analytics, Inc. Prepared Exclusively for the RI EDC Page6 Confidential APS001054 EXHIBIT 76 From: Saul, Michael Sent: To: Thursday, Aprll 22, 2010 12: 11 PM Subject: Stolzman, Rob ; Hashway, Fred ; Cole, llm ; tz@38studlos.com; Michael Corso 4/30 visit to maynard Gentleman, Tom and I talked today and propose a meeting in Maynard next Friday (9:30-1:00) to: - Review EA contract - Review "draconian" forecast EDC also made the suggestion to use Strategy Analytics (SA) as lead economic consultant with Perimeter Partners (PP) collaborating on game industry aspect. We provided a copy of SA and PP proposals to Tom. We also discussed with Tom how Wells' due dmgence fits Into· the complete due dingence (I.e. industry, economic, financial, management team, staffing, etc.). We want to minimize disruption to 38 Studios and eliminate duplication between Wells, SA and PP's scope of work. We agreed an initial meeting with Wells and EDC team made sense to get an understanding of the breadth of Wells' due dmgence. We would then move to button up scope of SA and PP work assignments. We also discussed arranging a visit to 38 Studios in the near future for Al Verrecchia, Steve Lane and possibly a Hasbro gaming executive. We asked Tom to include 1-3 38 Studio directors for that visit. Mike J. Michael Saul Deputy Director RI. Economic Development Corporation 315 Iron Horse Way, Suite 101 Providence, R.I. 401-278-9100 401-273-8270 (fax) msaul@riedc corn www riedc com APS000385 EXHIBIT 77 Rhode Island Eco~o.mic Development Corporation vs Jame·s Michael Saul- Vol. II Page 297 1 A. Yes. 1 2 Q. And there are three paragraphs that are numbered 3 at the top of page 2? Do you see that? A. Yes. Q. All right. I want to focus you on paragraph 3. It says -- and, by the way, -- well, let's go up to the very top of the page. "To accomplish these objectives Strategy Analytics recommends that the following project elements be executed concurrently in an effort to meet the rigorous timelines required, including." Do you see that? A. Yes. Q. Have I read that -- okay. Then I'm jumping down to paragraph 3. "Conduct a due diligence exercise on 38 Studios, including where they at" -- do you agree that's supposed to be "where they are at"? A. Yes. Q. -- "in the completion stage of their MMOG initiative, an understanding of their capital requirements and uses, and a multi-year pro forma exercise on capital requirements." And then there's a footnote that says, "In order to complete a due diligence exercise SA will require access to materials that are considered proprietary and confidential. SA will execute a 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 299 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 points in paragraph 3. Paragraph 3 includes not only the completion stage of the MMOG but also an understanding of their capital requirements and uses; yes? And a multi-year pro forma exercise on capital requirements. You see? It's more than just the MMOG, when they complete the MMOG. Do you agree with that? A. Yes, that's what it says. Q. Okay. Now, is it your recollection that you dropped all of paragraph 3 vis-a-vis SA, Strategy Analytics? If you remember. A. I don't remember. Q. Okay. You know you dropped some ofit. A. I know we dropped some of it, yes. Q. Maybe all of it, maybe not. A. Maybe all of it, maybe --yes. Q. Okay. So let's go to Exhibit 92. And do you recognize that document? And take a moment; I know you haven't -- it's not been shown to you during this deposition. Have you seen that recently, by the way? A. This document? Q. Yes. A. No. Q. So within the last several years you haven't seen Page 300 Page 298 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 nondisclosure agreement to facilitate this process." Have I read that correctly? A. Yes. Q. Okay. Now, do you remember whether Strategy Analytics ever was told to conduct a due diligence exercise pursuant to paragraph 3 that I just read to you? If you remember. A. My recollection is we may have dropped this as a requirement of SA because Wells Fargo in fact had, had done it or was doing it in connection with an equity private placement and in fact presented to the board, Wells Fargo presented to the board where 38 Studios was both on the RPG Mercury as well as the MMOG Copernicus. So I think what we did, if I recall, was we dropped this as a requirement of SA because we felt Wells Fargo was able to provide that information. Q. Okay. So let's go back to paragraph 3. Which your present recollection is you dropped paragraph 3 as something that Strategy Analytics would do; is that your present recollection? A. As it relates to the completion stage, yes. That's what I'm focusing on in paragraph 3, is the completion, with the completion stage of the MMOG. Q. Okay. What I'd like to do is go through all the Min-U-Sc rip t® 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it before? A. This -Q. I guess what I'm asking you, in preparation for this deposition have you seen that document? A. May I just have a minute to look through it? Q. Sure. Of course. Take your time. A. (Deponent reviews document). I've finished looking at it. Q. Okay. Do you remember sending it? A. I don't remember sending it. Q. Does it refresh your recollection in any way that you were able to accomplish a reduction in the fees that 38 Studios would have to expend? A. Yes. I think we did -- again, I think we did reduce the scope of Strategic Analytics such that it resulted in a reduction of fees. Q. Okay. And -A. And, and -Q. I'm sorry. Go ahead. A. And not to be duplicative with what Wells was going to do. Q. Okay. So is it fair to say it was your view there was no point in having two different experts opine on the same subject matter? Is that fair? A. No, I think that's not entirely fair. I think we Allied Court Reporters, Inc. (401)946-5500 www.allie Friday,April 23,2010 10:07 AM Cole, Tim ; Hashway, Fred ; Stolzman, Rob Stokes, Keith RE: Draft due dilligence checklist Copenicus.Due Dilligence Checklist.xls.ms.xls Tim, th ls captures where we are. Thanks for doing. Please keep this current. I have made some updates/edits. Note I changed the name of the file. Fred and Rob please add your input. Tim, then clean up and resend. Include Keith on any updates so he is informed. Thanks. 1 •,.,1,.. '••V-.•.•1.•••.U,•.11. ....1... "Vl°''•"•"''""'-'"""•"•.... "•"• ... '·-.1•.••,•.Ul••11,•1••,1,-.-.•\"\"0ll\'.•,•,•\.._....... , ............ .,, .. ,,,,,,,_..\O'\\ ..'.'.'''\\\''Vo"._.,,,,,,..,~,,,U,IO•,\'-'.O.•l."o',','\' .. ·.o.-.-.•1\'\'\",' .................._._.,,.,,•••••,.,•.o.•o,1"""''\".','"''°'""'"\ 0-,'"'"•"'·..''''"''' 0'\• ..... ••-.••<.0•U•"o•••Oo•._...-..,,._ • ...,._,,.._~_,IHO From: Cole, Tim Sent: Tuesday, April 20, 2010 1:24 PM To: Saul, Michael; Hashway, Fred; 'Stolzman, Rob' Subject: Draft due dilligence checklist Mike, Fred, and Rob, I have attached a draft checklist forthe due diligence process and presentation for the video game cluster opportunity. Please let me know if you. would like to see additional categories or action steps included. Also, I will need to sit down to clarify the timeframes in the near future. Tim Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development COrporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email g:ol~rled££Q_,rJ! I web ~.~~.J"ledc_&9_Q! This e-mail message may contain confidential Information belong Ing to the sender. If you are not the Intended recipient, the disclosure, dissemination, distribution, copying, or use of the Information contained in this a-mall message or 21ny att21chment Is strictly prohibited. If you are not the intended recipient please notify the Rhode Island Economic Development corporation et 401.278.9100, and purge this a-mall from your computer system Immediately. I ij ~ PLAINTIFF'S EXHIBIT 91 APS001554 6 Prepare "draconian" forecast evidencing 38's abfllly to service debt even If MMORPO does not launch successfuU . Draconian Forecast Review EA contract with Big Huge games. Need to assure ourselves of EA's Investment, commitment to pubfish, return of EA investment & re11onue sharing EA I Big huge Games Contract arrangement With 38. We need to confirm EA's projectlons for the RPG. 7 38 to engage an Economic Consultant to prepare an EIA satisfactory to EDC. Scope as outlined In draft email from EDC Research Dept. add update th<1t we will coordinate Wells, Strategy Analytlc:s and Perimeter. Next steps_ Tom Z. to review SA proposal. Tom Z. to set up a meeting Economic Impact Analysis 8 Meet with Wells Fargo to understand and assemble their presentation to EDC board on Markets for RPG and MMORPG, 38 business model Wells Fargo Presentation 9 10 RIEOC Te11T1 Sheet Schedule meeting with John Maeda, Keith Stokes and Curt Schllllng to iron out RISD/38 collaboration./ consider outreach to URI and Brown Universty Collaboration 11 Determine whether any local institutions (RISO endowment, RI Foundation, Hasbro, Brown endowment, State Pension fund, etc:.) Local Bond Purchasers 12 13 14 State Keith roved Ust Keith. DOA Meeting Engage Duffey & Shanley to develop a communications strategy related to the review of the 38 project by the board and potential Develop Communications Strategy 15 Secure support of Sector and Chamber leadership, and request Secure Support Prepare "panel" format board presentation to Include SA, Perimeter, Wells, 38 Studios, Mike & Keith Board Presentation 18 Keith, I Steve Keith Stokes to present brief opening remarks on strategy for building a game Industry sector in RI leveraging off the recently passed Job Video Game Cluster Strategy Opportunity Guaranty Pl"Ollram, RISO, B.-own, URI, Knowledge K Video Game Cluster Impacts Economic Development Consultant and industry consultant (SA and Perimeter) to document sector potential of investment In a catalytic studio and Wells Fargo to substantiate/opine on 38 Studios business Mike. Statements of Support RI sector and chamber leadership to support investment (L. Whtte, J. 19 20 21 TBD 11 12 13 14 15 Du?'ey Shanley 18 19 20 21 A 22 23 24 25 26 27 c B Statement frcm 36 Board member Communications Strategy Hasbro due dlOaence Al Verrecchia. S. Lane and Mark Belcher visit to 38 Studios One of the industrv "bin 3" Deliver communications strategy assuming acceptance of 38 studios orni wrote: Hi guys· Here is the update from the Wells Fargo side. l. We believe our due diligence Is largely complete. We will need to visit BHG in MD before either project goes to market, and we will continue to learn and ask questions along the way. 2. We are turning Draft #2 of the RIEDC presentation materials. We will have a draft to you for your review and edlt/s later this week; likely Thursday. Next steps from my perspective: 1. Finish Engagement Letter; I am working on that. 2. Wells to begin work on refining the Equity Private Placement memorandum; believe we should start on that next week. On your end -- any update/son Rhode Island from a Legislature or EDC angle? Thanks and regards • Mark C. Lamarre Managing Director and Vice Chairman WFS_0059563 Wells Fargo Securities, LLC 301 South College Street; 5th floor Charlotte, NC 28202 (704) 715 - 8680 mark.lamarre@wachovia.com Sent from my BlackBerryWireless Handheld Best, Tl WFS_0059564 EXHIBIT 80 .From: Sent: To: Cc: Subject: Attach: Saul, Michael Wednesday, Aptil 28, 2010 3:31 PM tz@38studios.com; 'Stolzman, Rob' Hashway, Fred ; Cole, Tim FW: Revised RIEDC P~·oposal RIEDCProposal 4-21~10 Revised.pdf Tom, Please take a look. l berteve it addresses overlapping scope issues and gets 38 a significantly fee reduction. I am having Rob draft a side-letter batween 38 and EDC regarding 36'5 obligation to reimburse EDC fOr this report irrespective of whether we close on the RI credit enhanced financing. Mike From: Bany Gttbert [mailto:BGilbert@strategyanalytlcs.com] Sent: Wednesday, Aprll 28, 2010 9:58 AM To: Cole, Tim; Saul, Mlc:hael Cc: Harvey Cohen Subject; Revised RIEDC Proposal Tim, Mike, Attached please find a revised proposal based on the latest input from Jason and Mlke's VM this morning. I belleve we have addressed the issues and requirements and I arn available to discuss the proposal and any issues it raises at your convenience. On behalf of Strategy Analytics and Perl meter Partners we look forward to working with you and your colleagues at the RIEDC. Thank you. ~ ! ~ PLAINTIFF'S EXHIBIT f).....; ~ /~'('. ' Air'- BRNonPrivlleged016441 . --~-: --.-·. :.·. . . ..-·.:..:.--: ... - Regards, Barry STRATEGYANALYTICS Barry Gilbert Vice President ·strategy l\lla!ytlcs, Inc., e global r~rch·and consulting nrm,·proVldes timely Insights and rtrateglc business solutions to companies opetetlng at the ·oonvergence of. Information, ccmmunlcatlons and l!llterlalnmert b!chnolcgles. With wetldwlde headquanerv In Newbm, MA ll!1d prindpal offices In Englllnd, Fraroce ~nd Germany, Strlltemi Analytics focuses on market opportunities and challollgeir In the a~as cf Aub:lmlltlve Electronk$,Dlgltal C:Onsumer, Telematlcs-, Wlreli:ss Stral'egles i!nd enabling Technolog~. For more Warmatlcm, see~~ Strategy AnalytlC$ lflt, 199 Weirs Avenue Slllte 1oe, Newton, MA 02459, USA . S!nkgy Arlalyljcs Lt.d. Bank liouse 17t Mldstlmmet Bculev11rd, MBton Keynes, MK9 1S3 United IQngdom I Reg. No, ~24'1598 stmegy Ailatytlts GmbH, l.andsberger Str 394, 0·61241 Muend1en, Germany ( tiP.B MOnchen 115 SS:l Strab!gy An11fyttcs, 19 Rue Pierre Lescot, 75001 Parts, Franlll I Reg. No. 393 6S7 555- 00048 ......_. ·...• -:·,.: ·~· ... , ...: BRNonPrlvlleged016442 STRATEGYANALYTICS JNSICiHT$ FOR. SUCCESS April 28, 2010 . Rhode Island Economic Development Corporation (RIEDC} 315 Iron Horse Way, Suite 101 Providence, RI 02908 Attn:,:Tlm Cole, senior Strategy and Research Manager Re: Proposal Revisions Concerning Development of a Gaming Ouster in Rhode Island Resulting from subsequent conversations with managernent ofthe RIEDC Strategy Analytics .(SA) is pleased to provide this revised proposal to address the issues surrounding the development of a gaming cluster in Rhode Island. The project will · investigate the economic and business case lssues associated with lnve.stments in the video gaming Industry· to provide for economic expansion and job growth in Rhode Island. SA is. well positioned to address the needs of the RIEDC as it explores its options for investment In different clusters. To provide further Insight Strategy Analytics is pleased to team up Perimeter Partners' principal Jason Della Rocca In order to address some of the project requirements. Jason will be working directly with SA as a contractor, so his . fees have been incorporated into this proposal. Background and Objectives The RIEbC wishes to undertake a study to determine the feasibility of investment In the video game Industry and explore options for stimulating the Rhode Island economy. Our proposal is based on email correspondence and subsequent phone conversations with members of the RIEDc·.on April 20th, 23rd, and 27th Including Michael Saul, Fred Hashway, and Tim Cole. Based on these discussions and understanding of the RIEDC requirements core objectives of the study as follows: we view the •· Provide an objective assessment of the overall opportunity for RI to leverage key · educational, industry, and government assets to attract a video gaming Industry cluster, • Provide Insight to the critical success factors necessary for attracting, retainfng, and growing a video game duster in Rhode Island, Strategy Analytics, lnc. Prepared Exclusively for the RIEDC Page 1 Confldentfal BRNonPrJvileged016443 STRATEGYANALYTICS INSIGHTS FOR.SUCCESS • Provide insight to the gaming Industry structure, • Provide economic impact due diligence on a possible investment in 38 Studios as an Initial anchor studio in RI, and, • Provide results and present key findings to the RIEDC board. Strategy Analytics' Approach To accomplish these objectives Strategy Analytlcs recommends that the following project elements be conducted· ln an. effort to meet the rigorous timellnes required, including: · 1.. · Perform a review of Rhode Island's assets that are vital for attracting a gaming duster and to provide a· defensible foundation on which to build a business case for Investment. This initiative would Involve a review of the core educational assets, such as URI, RISO, and· Brown, key industrra Iassets that s·erve as·a support· .mechanism for gaming, such as Hasbro, and evaluate government resources (both State an·d Federal) that provide various levels of support for the market sector. 2, Provide an overview of the Industry structure of the gaming Industry and examine elements that are considered critical success factors in both short and long-term horizons for attracting, stimulating and retaining a gaming-centric cluster ln the state. 3. Provide snapshots of three markets in terms of the development of a gaming community and infrastructure, critical success factors, and a realistic view of the challenges and opportunities presented by the gaming industry segment. As part of this effort an examination of the investment, timeframe, and outcomes will be addressed and used as a benchmark. 4. Conduct an economic Impact due diligence exercise to identify the collateral benefits that may be accrued by an investment in a core anchor gaming participant, such as 38 Studios, including an assessment of the potential employment opportunitres in the state of RI, the potential for attracting other gamlng e~tltles, and provide references to other key gaming markets who have succeeded with simllar approaches. Deliverable SA envisions the deliverable to Include a written high level summary report of approximately 20·25 pages produced In Microsoft Word or fn an Adobe PDF format along with a 2 hour on-site PowerPoint :presentation to the RIEDC board with a Question and Answer (Q&A) component. Given the tlmellnes necessary to complete the project Strategy Analytics, Inc. Prepared Exclusively for the RIEDC Page 2 Confidential BRNonPr!vlleged016444 STRATEGYANALYTICS INSIGHTS ~oa. SUCCESS SA envisions M interim meeting at the RIEDC offices to address interim findings and coordlnate any mid-course realignment of efforts. Timeframe Given a kick-off date of May 3rd'Strategy Analytics can complete the above referenced asslgnment and deliver results on· or after Friday, May 21n, 2010. However, SA, working in conjunction wlth Perimeter Partners, wm provide an interim meeting (date to be determined)- to· provide .'Updates and coordination with other interested parties Involved with thfs Initiative. While this 3 week period Is aggressive SA believes it can draw on the necessary .resources to complete· the asslgnme·nt along with Input from Perimeter Partners within that timeframe:·· · SA will make· every reasonable effort to accommodat(! the RIEDC timellnes and·provlde flexibility in addressing project requirements. The· following time-llne· chart Is provided as a proxy only and examines an estimate of days, or fractions of days for each project component. Strategy Analytics, Inc. Prepared Exclusively for the RIEDC · Page 3 Confidential BRNonPrMleged016445 . . ............ . . . . . ... . .... ·---- ......... . ~ STRATEGY ANALYTICS INSIGHTS .FOJtSUCCESS Strategy Analytics Experience and Credentials Strategy Analytics believes it possesses the requisite set of capabilities to provide the RIEDC with a solid basis on which to make an informed and defensible decision, including: Experlence Expertise · In working With business planners to prnvlde creative visions for the future· and defensible business planning assumptions that identify market potential, retatlve competitive positions, and critical success factors for achieving potential, and evaluate risk ·versus opportunities in emerging wireless businesses. SA has provided.global leaders across multiple industry segments with ~he Insights to develop successful new products and services In highly competitive, rapidly evolving markets for nearly thirty years. In exploring commerclal, industrial, and consumer markets worldwidf! for information on adoption rates, wlllin gness to pay, appllcations·drlvers, and barriers to adoption and use for wireless products· and services. SA applies a portfolio af market research methodologies to gather qualitative and quantitative information and insights to meet the spea1ic requirements of each project. i Thursday, April 29, 2010 9:08 PM Saul, Michael ; Fred S. Hashw-ay, Jr RIEDC/38 Studios Hi Mike and Fred. Earlier today we met with Mark Blecher, Sr. VP Digital Media and Gaming, and James Jones, VP Creative Production, Digital Media and Gaming, at Hasbro. Our conversation with them was wide ranging, and I took away the following questions from our discussion: 1. \Mia! software distribution method will 38 use for the MMOG Q.e., will they need to sell another "box" with the MMOG, and who will distribute that and at what cost?)? 2. \Miat percentage of their target marget will need switch from another MMOG to theirs? Is their "absorbtlon" projection reallstlc If It requires swlthchlng brand loyalty? How many will pick up a second or more MMOG? 3. How realistic Is their time to release projection? Industry known for delayed releases. 4. Have we made a reallstlc assessment orthe quality of their roll-out Like a restaurant, the first reviews and "experiences" are critical. 5. Wlat Is the residual asset and venture value if the MMOG falls? 6. \M'lat are their technology llcense resrlc!lons, terms, etc.? Collateral value? 7. Have we adequately assessed their technology support for their release and service? 8. Wiat ls the RPG price point? Gross margin? Net Margin after EA share? How many "boxes" of RPG need to be sold to pay loan? 9. Wlat Is EA share, other deducts? 1O. What is talent base now, pool for future and talent pipeline? 11. Any Industry models on business (e.g., Turbine?)? In addition to fhese questions, I note the following: A. RPG Is a "grmre" or a consol11 or pe based "disc" game. Other genres eKist, such as RTS (real time strategy). Big Huge successful in RTS. Will they be good at RPG? (compared to switching from wesem to drama). B. Is WOW pc only? I thought that Is what they said. Copernicus will be pc, and console ready per Jenn. Advantage? C. They estimated cost of quality MMOG to be 40 M plus marlletlng? Those were my "take aways." Please ad more if you have em. See you In the morning. Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail r§.tQgm.!ln@.~.l!§]§.'N,.t;:.Qffi. Phone 401.274.7200 FaK 401.751.0604 Visit our webstte at ~-B.Pi!!~~..-~.k. . .-'~-----------·-·----------·-·····--··--···--·-··-·-·---·--·-···· ··---· .... -----~W\\~------·· ---- ~ · - · · - - · - · - · - - - .. - H - t - - - ·--··--··-·· --·----------·-··-------- - - ------·--··--·······ttt-------··---·-- - - - - - - - - - -. ----------·-··· ~~:-~ ~-1;-1~~~~ -=~-~~;~~~-,!~~~=-~--~---- ------·-------- ·- '~ r ~--·-_-:_______________ .... -··· _·_·-.~-=~- ·-.·-~~-- ., ···-··-·-.·--·----·-------·-·------·----- --·-·---------· '" ·-·---·-·--·--· -- --·------·-----:::__~~'[~~' ~' ~,.,.~ __! _ _ _ _ ..... -·---····- -···-·· ..... ·-··--·-----·-·· ---· -·-·· . ~fP..~ -~"°~· ~ ?) ---= -=- ~-~- ~ ~= -~=~·.:~-.~-=-~ - ~=:-~ -~-=-=~·-· - ·:~ - -·-.·-.~- ~-~-·. ·-.~ :.~- ~5~ '=- 3P~-------------·-·· --·-· · ·- ~=- _:-=:- =-===~:=:=--= ---==--~.'-"I--....--f~-- -===---:- ------- · -··--·-·--·-·--·. - ..... ·--.. ·--···- -..··--·----·-·-· ····· .. .... .. .... ~ ~-1--~- ·--· ... bl,D,~-t-··~--~ t~- ~ -~~cJ.~. . .. .. . .. ·-·-· ··-··- ~-~~~ ..... .. . .. 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RlEDC Letterhead April ~2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. Maclean: s pursuant to which the Rhode Isl Economic We are pleased to present this outli 'de credit enhancement to 38 Studios LLC Development Corporation ("RIEDC' ios will commence locating and (hereafter "38 Studios" or the "compan an expanding its businesses in Rhode Jslan ... ' . ·deo gaming and interactive We very much appreciate the value your co d can be perfect home for you. We also digital media industry, and we think that Rho . appreciate your company's culture, background industry acumen. Your assessment of your industry op · · s, your assembly of talent at · vels of your company, your investments to es needs and your desire t''. w are aligned perfectly with Rhode date, yo IslandJ ·; and design resources. mic development agency, offers you the following tools to ses to Rhode Island: ·:~(-;i .. l~::'~ .... We understand your capi · · s to bring your project Copernicus to MMO completion to be $75,000,000. Based on out derstanding to date of your financial projections, the RIEDC would either guarantee the repayment annual debt service of up to $75M of the company's borrowing or issue $75M of revenue bonds, the proceeds of either of which would provide the necessary financing to complete production on Copernicus and begin relocating 38 Studios to Rhode Island. We anticipate that these guaranteed loans would be made by, or bonds would be purchased by or through, a lender or lenders familiar with your industry. As your company is in the unusual position of having pipeline APS017247 ... _ -··-·-·---·-· ---------------- ·. Mr. Schilling and Ms. MacLean April_, 2010 Page2 product and contractual commitments for product publishing and distribution, but as yet is "pre revenue", we recognize the market for these bonds or loans would be limited without credit enhancement. Accordingly, we would immediately request the Rhode Island General Assembly, which currently is in session, to authorize the RIEDC to guarantee the annual debt service of the loans or, in the case of the bonds, to use an available capital reserve mechanism by which the General Assembly may consider on an annual basis funding any shortfall of any loan payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for the bondh er(s). The guarantee or the bond documents would reflect the following terms an tions and be subject to the following general parameters all of which will be more~ iculated in traditional loan documentation: " Borrower: 38 Studios. Loan Amount: $75,000,000 Purpose: For all associated business expenses related to ope . deployment by 38 Studios · conjunction with its business dev Island. ~. e as negotiated with bond purchaser. Rate: Market for bon Tenn: Negotiable, likely early recapture as discussed , product development and ent and expansion in Rhode ion of capitalized interest in early year(s) with ~ Collateral: collateral assignment o sets of company now owned and hereafter acquired including but not limited to intellectua erty, licenses. licensing fees, distribution and publishing contracts, receivables and wo· roduct. We recognize that a portion of the company's assets are held in a wholly owned subsidiary, the ownership interest of which will be pledged to the RIEDC, and that such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts and currently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for this credit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee of one half percent (112%) payable at closing at closing ($375,000) and one and one half percent (I .5o/G) ($1,125,000) of loan amount annually payable on the loan closing anniversary. Equity and Dividend Covenants: During the tenn of the loan, Mr. Schilling shall maintain no less than an amount equal to $15,000,000 of equity in the company, and equity or earnings APS017248 I Mr. Schilling and Ms. MacLean April_, 2010 Page 3 distributions to members shall be limited to a coverage ratio fonnula to be agreed upon by the RIEDC and the company prior to closing. Specific Conditions and Covenants: (a) The debt would not be assignable or assumable r consent; (b) Recapture or early payment would be made from excess e _ s should EBITDA exceed a base fonnula to be agreed upon by the parties prior to closiii' (c) A percentage of the funds available from (b) above shall be establish an investment fund to provide seed capital and other inves facilitate the development of e video game and digital media indust · ode Island in conjunction with a progra· developed jointly between 38 Studio and the RIEDC, the RIEDC being ent ii,.g a designee on the investment committee of such fund; •. (d) 38 Studios will locate its corporat Rhode Island; (e) 38 Studios will provide 125 full time· annual wage of approximately $75,000 ("jobs") in Rhode Island by (f) 38 Studios will add an additional 175 jo (g) 38 ~ · ill add an additional 150 jobs' odelsland by December 31, 2012; (h) § · · s fail to meet any jobs reqll ments, it shall pay to the RIEDC an / 00 per year for each job not so added until such shortfall is cured; requirem . (c) above. . G) 38 Studios wil · . el educational instifu institutions. .( ernship programs for students at Rhode Island design and ursuant to programs and policies to be agreed upon with such Conditions Precedent: Conditions to closing the loan will include standard documentation and legal requirements typical of transactions of this size and scope and: APS017249 '. Mr. Schilling and Ms. Maclean April _, 201 O Page4 (a) The completion and delivery by a qualified economic deve ent expert of an analysis and growth in Rhode of the economic development impacts of the company's locat Island, such study to be paid for by the company; projections; (b) An independent financial review and analysis of the company's fin ; and any current contracts and obligati s with gaming industry partners such other related or requested d , or information of the company; (c) The prerequisite approvals by Assembly and RIEDC Board of Directors for those actions requiring such ap al , (d) Placement of the bond issue with nder ers and documentation reflecting the terms hereof and other standard te d C9.) ical of a transaction of this size and nature. try contacts and identifying necessary The company will assist the RIEDC in making r sources to _c. its due diligence with respec{ e loan. We are particularly in' . _e4 -· sisting 38 Studios grow and become a magnet for the growth of the video gaming and~f edia industry in Rhode Island. Accordingly, we will support and advocate for the imple - ntation of jobs producing interactive digital media tax credits that provide Rhode Islander's with a clear return on investment resulting from the credits. We also will support other creative and innovative industry development incentives jointly developed by us to accelerate and increase your successes. We think your company and its product development concepts are exciting and aligned with our economic development strategies. We think 38 Studios will be a strong corporate citizen for Rhode Island and that you will be particularly welcome here for the foundation for your many exciting ventures and opportunities. APS017250 Mr. Schilling and Ms. Maclean April___, 2010 Page5 Should you agree and desire us to commence the process of obtaining the approvals for the issuance of the bonds and the economic development incentives, please indicate so by signing below. Sincerely ours, Governor Donald L. Carcieri, Chainnan of the Board Keith W. Stokes, Executive Director Agreed and accepteq.~ 38 Studios LLC S29694.7 APS017251 RIEDC Letterhead April___, 2010 Mr. Curt Schilling, Chainnan 38 Studios · 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. MacLean: We are pleased to present this outli Development Corporation ("RIEDC' (hereafter "3 8 Studios" or the "compan expanding its businesses in Rhode Jslan . s pursuant to which the Rhode Jslan Economic ·de credit enhancement to 38 Studios LLC dios will commence locating and ·deo gaming and interactive We very much appreciate the value your co digital media industry, and we think that Rho perfect home for you. We also appreciate your company's culture, background industry acumen. Your assessment of your industry op o · · s, your assembly of talent at vels of your company, your investments to date, yo. es needs and your desire t . ow are aligned perfectly with Rhode Island( wledge ec· , and design resources. ses to Rhode Island: We understand your capi'~ s to bring your project Copernicus ·to MMO completion to be $75,000,000. Based on our' derstanding to date of your financial projections, the RIEDC would either guarantee the repayment annual debt service of up to $75M of the company's borrowing or issue $75M of revenue bonds, the proceeds of either of which would provide the necessary financing to complete production on Copernicus and begin relocating 38 Studios to Rhode Island. We anticipate that these guaranteed loans would be made by, or bonds would be purchased by or through, a lender or lenders familiar with your industry. As your company is in the unusual position of having pipeline APS017252 Mr. Schilling and Ms. Maclean April_, 2010 Page2 product and contractual commitments for product publishing and distribution, but as yet is "pre revenue'', we recognize the market for these bonds or loans would be limited without credit enhancement. Accordingly, we would immediately request the Rhode Island General Assembly,.which currently is in session. to authorize the RIEDC to guarantee the annual debt service of the loans or, in the case of the bonds, to use an available capital reserve mechanism by which the General Assembly may consider on an annual basis funding any shortfall of any loan payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for the bondh er(s). The guarantee or the bond documents would reflect the following terms an · "tions and be subject to the foUowing general parameters all of which will be more t1,. •culated in traditional loan documentation: Borrower: 38 Studios. Loan Amount: $75,000,000 Purpose: For all associated business expenses related to ope s, product development and deployment by 38 Studios · conjunction with its business deve _ ent and expansion in Rhode Island. ., Rate: Market for bon Term: Negotiable, likely t early recapture as discussed I) as negotiated with bond purchaser. ion of capitalized interest in early year(s) with Collateral: collateral assignment o sets of company now owned and hereafter acquired including but not limited to intellectu erty, licenses, licensing fees, distribution and publishing contracts, receivables and wot roduct. We recognize that a portion of the company's assets are held in a wholly owned subsidiary, the ownership interest of which will be pledged to the RIEDC, and that such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts and currently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for this credit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateraJizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee of one half percent (1/2%) payable at closing at closing ($375,000) and one and one half percent (l .5%) ($1,125,000) ofloan amount annually payable on the loan closing anniversary. Equity and Dividend Covenants: During the tenn of the loan, Mr. SchiJling shall maintain no less than an amount equal to $15,000,000 of equity in the company, and equity or earnings _______________________________________ APS017253 . ·--·- ,._ ....... _.. ' Mr. Schilling and Ms. MacLean April 20 I 0 Page 3 _...J distributions to members shall be limited to a coverage ratio formula to be agreed upon by the RIEDC and the company prior to closing. Specific Conditions and Covenants: (a) The debt would not be assignable or assumable thout . r consent; should EBITDA exceed a base fonnula to be agreed upon by the parties prior to closin A percentage of the funds available from (b) above shall be use establish an investment fund to provide seed capital and other inves facilitate the development of e video game and digital media indus....,,.~~"'ode Island in conjunction with a progr ·' developed jointly between 38 Studio and the RIEDC, the RIEDC being ent ii;ig a designee on the investment committee of such fund; 38 Studios will locate its corporat Rhode Island; . 38 Studios will provide 125 full time' annual wage of approximately $75,000 ("jobs") in Rhode Island by 38 Studios will add an additional 175 jo 38 S . ·, ·11 add an additional 150 jobs " · · .. . · s fail to meet any jobs req ments, it shall pay to the RIEDC an t equal t .. : 00 per year for each job not so added until such shortfall is cured; (b) Recapture or early payment would be made from excess e (c) (d) (e) (f) (g) (h) Conditions Precedent: Conditions to closing the loan will include standard documentation and legal requirements typical of transactions of this size and scope and: APS017254 Mr. Schilling and Ms. MacLean April~ 2010 Page4 (a) The completion and delivery by a qualified economic deve ent expert of an analysis of the economic development impacts of the company's locat1 , and growth in Rhode Island, such study to be paid for by the company; . (b) An independent financial review and analysis of the company's fin$ .,., projections; current contracts and obligati s with gaming industry partners such aif ~ ; and any other related or requested d · or infonnation of the company; ·· (c) The prerequisite approvals by Assembly and RIEDC Board of Directors for those actions requiring such ap rs and documentation reflecting the (d) Placement of the bond issue with" . pica~ of a transaction of this size terms hereof and other standard te and nature. ., The company will assist the RIEDC in making i sources to ~ its due diligence with respect' contacts and identifying necessary e loan. ould offer any other assistance it could to 38 Studios to facilitate e Island. A more complete listing of services provided by the 's website: www.riedc.com. Of co ..:"':t~· • We are particularly intt.. e sisting 38 Studios grow and become a magnet for the growth of the video gaming and" edia industry in Rhode Island. Accordingly, we will support and advocate for the implein ntation of jobs producing interactive digital media tax credits that provide Rhode Islander's with a clear return on investment resulting from the credits. We also will support other creative and innovative industry development incentives jointly developed by us to accelerate and increase your successes. We think your company and its product development concepts are exciting and aligned with our economic development strategies. We think 38 Studios will be a strong corporate citizen for Rhode Island and that you will be particularly welcome here for the foundation for your many exciting ventures and opportunities. APS017255 ·. Mr. Schilling and Ms. MacLean April _, 2010 Page 5 Should you agree and desire us to commence the process of obtaining the approvals for the issuance of the bonds and the economic development incentives, please indicate so by signing below. Sincerely ours, Governor Donald L. Carcieri, Chairman of the Board Keith W. Stokes, Executive Director Agreed and accepte 38 Studios LLC 529694.7 APS017256 EXHIBIT 83 Mark Blecher Rhode Island Eco~o.mic Development Corporation vs Page 55 Page 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you that I believe that these are the handwritten notes of Mr. Stolzman. A. Okay. Q. Who, based on the e-mail that we saw on Plaintiffs Exhibit 94, claims that he was at this meeting with you on April 29th. A. Okay. Q. So I want to go through some of these notes to see if they refresh any of your recollection of the meeting as best we can read them. So if you look on the top right-hand comer, it says 4/29/10? A. Correct. Q. So they appear to be notes from something that occurred on that date? A. Yes. Q. Which is the same date that Mike Saul said that he met with you? A. Yes. Q. And the same date that Mr. Stolzman said they met with you? A. That's what they say. Q. Going down to the bottom left-hand comer of the first page, it appears to say "Todd McFarland"? A. Yes. Q. Below that it says "Salvatore"? 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Studios, an arrow, what is distribution plan for software for MMOG?" A. Yes. Q. Do you recall talking at all about the distribution plan? A. I don't recall anything I talked about in that meeting aside from where I said that, you know, I don't know ifl would make -- ifl would have invested my own money. And I'm not trying to be, whatever, challenging, I just know what the meeting was about. All of the things on this document, it's possible I discussed, but seeing them on paper doesn't remind me that I specifically did. Q. Absolutely, and you can only testify as to what you remember. A. Correct. Q. So please do that and nothing more. Let's go to the third page ofit. A. Okay. Q. Down near the bottom it says, "Jim Jones: Branding is getting harder B/C of time limit." Did I read that correctly? A. I'm not sure the first word is branding. Maybe it is, but it says certainly is getting harder Page 54 Page 56 1 A. 1 2 Q. 2 Q. What do you think that first word is? 3 3 A. It looks like it says brand. I will deduce "ing," although it looks like it says brandly and broadly. Q. Do you know what Mr. Jones might have meant? A. I have no idea at all, which is why I'm surprised that it says branding. I don't know how branding would have anything to do with a time limit. Q. So you don't see branding ofa game and the time to release a game or develop a game as being connected? A. No, not at all. Q. Do certain brands have a lifecycle to them? A. They do, but that lifecycle is only clear in hindsight, not in foresight. Q. What do you mean by that? MR. SHEEHAN: Bass Ale, who would have known? A. Well, I know today that the brand MCI had a lifecycle because it doesn't exist anymore, but I couldn't have told you while it did exist how long it was going to be around for. Q. With respect to game development, is it important 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Yes. Did you know who either of those individuals were at the time? A. I had heard the name of Todd McFarland. If you had asked me specifically who he was, I probably would have said he has something to do with Fangamer Consumers, but I didn't know him beyond that. Since that time I think he develops structural Fanboy product that gets sold to consumers. Q. Did you have any knowledge at the time whether he was involved with 38 Studios? A. Yeah, I know that 38 Studios had him and Salvatore somehow associated with the company. I didn't know who Salvatore was at the time. I think now he writes books for Dungeon and Dragons, but I could be wrong. Q. So at the time you knew that they had some involvement with the company, but you didn't know what that involvement was? A. Right. Q. Or much about who they were? A. Correct. I still don't know much about who they are. Q. And above that you'll see it says, "For 38 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 because of time limit. Min-U-Script® Allied Court Rel!_orters, Inc. (401)946-5500 (14) Pages 53 - 56 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com Mark Blecher Rhode Island Eco~o.mic Development Corporation vs Page 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 recollection, do you believe that Mr. Verrecchia was at this meeting at Hasbro? A. Well, the e-mails would make me think he was not. Q. What do you remember independent of the e-mails? A. I thought he was, but I could definitely be mistaken. The e-mails make me now doubt my assumption that he was there. Q. If Mr. Verrecchia was not at this meeting, do you think you might have followed up with him after the meeting? MR. SHEEHAN: Objection to the form. Q. Go ahead and answer. A. I likely would have said, I met with the people that you asked me to. Q. Would you have talked to him about what took place at the meeting? A. No. Q. You wouldn't have given him a verbal report or anything like that? A. Definitely not a verbal report. Knowing the way Al is and the way I communicate with him, I would have sent him an e-mail and said, I met with them, let me know if you need any more help. And he would have sent me an e-mail saying thank you 1 correct? Yes. Q. If you would just read aloud the first two sentences there's after "AL" A. "Recent post from an online gaming newsletter to which I subscribe. Thought you'd be interested." Q. Do you recall why you sent this to Mr. Verrecchia? A. Sure. He had asked me to meet with people, so I was doing a courtesy thing, which was sending him a piece of news I saw. Q. You said you subscribe to a gaming newsletter? A. It doesn't say I subscribe to one. That there is an online newsletter, so I don't know that I pay for it. Q. I believe it says -A. "Recent post from an online gaming newsletter to which I subscribe." So I guess I do subscribe. Q. At the time did you subscribe to multiple gaming newsletters or biogs or things of that sort? A. Probably one gaming newsletter and a couple of tech industry newsletters. Q. And you subscribe to those because of your position at Hasbro? A. Yeah. 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 72 Page 70 1 2 3 4 5 6 7 8 9 10 11 12 for doing it, and that would have been the end of it. Q. So he, based on your experience with Mr. Verrecchia, would have not asked for details of the meeting? A. No. Q. And he would not have wanted you to give him details of that meeting? A. He wouldn't have inquired about the details. Q. I'm going to show you another document. We will mark this as D-176. Take a look at that. (DEFENDANT'S EXHIBIT D-176 MARKED FOR IDENTIFICATION) 1 Q. And you thought he would be interested because he 4 had previously asked you to meet with some individuals from what you now know is the EDC? A. Correct. Q. And this post discusses the EDC possibly loaning $75 million to 38 Studios? A. Yes. Q. At the time that you sent this e-mail, were you then aware that Mr. Verrecchia was on the EDC board? A. I have to surmise I was. Q. And based on the text of the post, we'll call it, you can see that the EDC was considering a $75 million loan to 38 Studios? A. Yes. Q. Did you know whether or not the EDC board would be voting to approve such a loan in the near future? A. No. Q. Had you talked with Mr. Verrecchia in the weeks before or after this e-mail about 38 Studios? A. I don't recall any conversation. Q. So other than the conversation you do recall about Mr. Verrecchia asking you to meet with some 5 6 7 8 9 10 11 12 13 14 14 15 16 17 18 19 2o 21 22 23 24 25 Correct. 3 13 A. Okay. Q. Do you recognize this e-mail? A. I don't remember sending it, but I recognize or I realize that I must have because my name is on it. Q. Okay. So you believe, even though you don't remember seeing this e-mail, you believe that you likely sent it? A. I'm sure I sent it. Q. And for the record, this is an e-mail dated Wednesday, July 14, 2010? A. Yes. Q. And it is to Al Verrecchia and CCing James Jones; Q. And it says, "Thought you'd be interested"? 2 A. 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (18) Pages 69 - 72 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com Mark Blecher Rhode Island Eco~o.mic Development Corporation vs Page 73 1 individuals from the EDC at Hasbro -I do recall him asking me to do it, sure. Q. -- you don't recall any other conversations about 38 Studios in 2010 with Mr. Verrecchia? A. No. Q. Do you know if Mr. Verrecchia responded to this e-mail? A. I don't. I would imagine if he did, he said thanks and that was it. Q. So you don't recall him giving you his thoughts on the loan? A. I'm certain he would not do that. Q. Why are you certain he would not do that? A. Because as the chairman of the company, he would never share his thoughts on things extemporaneously unless specifically asked, and knowing Al as a person, he would never violate some sort of state council to an individual employee at Hasbro. Q. So based on that, you don't believe he would discuss the merits of this transaction with you or any other Hasbro employee? A. Absolutely not. Q. And in that initial conversation, Mr. Verrecchia didn't express any opinions about the -- 1 after 20 l O? Sure. To the best of my recollection either Jen asked me to have lunch or Al might have said that he had met Jen and she wanted to have lunch, I don't recall, and we had lunch, and she showed me the studio and showed me a little of the game they were working on, and I believe it was the game which was then released as a PC standalone game. I don't recall the name of it. And we talked about whether there would be an opportunity for licensing, and then we didn't meet again for some period of time and nothing came of that. There was a subsequent meeting where Curt had reached out I believe to Al and said, Hey, we would like to talk about licensing, and Al said, Okay, can you take this meeting. Al was in the meeting as a courtesy and never was a part of any subsequent conversations and didn't inquire about any subsequent conversations. Q. Do you recall approximately when that meeting took place? A. I don't. Q. Wasitin2011? A. I don't remember. It would have been in '11 or '12 sometime. 2 A. 2 A. 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 76 Page 74 Definitely not. And you said a couple of times now, and this is the last time I will hit this point, is that you said you wouldn't invest your own money in an MMO-A. Correct. Q. -- because it's high risk? A. I probably said I don't think I would invest my own money in this. Q. Thank you. Did you offer an opinion to the folks there about whether or not it was a good idea for the EDC to do so? A. That would be the extent of my opinion. Q. Are you at all familiar with completion bonds for video games? A. No. Q. Have you ever had any dealings with any sort of completion bonds for video games? A. I have never heard of a completion bond. Q. So after 2010 did you have any involvement or communications with 38 Studios? A. Yes. Q. You said you met with Miss MacLean once? A. No, I met with her more than once. Q. Tell me about your involvement with 38 Studios 1 A. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. 1 Q. Before the company filed for bankruptcy? 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Definitely before. Before there was any knowledge or I had any knowledge of any challenges with the company's financials. Q. Any other interactions with 38 Studios? A. Yeah, I had lunch with Jen again. I think it was more social than anything else, and then once the company was in financial troubles, somebody reached out to me, I don't recall ifit was Jen or Curt, it probably was Curt I think, and asked if we would be interested in -- I don't recall ifit was buying, investing, somehow providing financial contribution in exchange for value. And that would have been six to eight weeks before the company went bankrupt or went under. I don't know if they went bankrupt or insolvent. Q. I will represent that they filed for bankruptcy on June 7, 2012. A. Okay. Q. So would you say that that meeting took place probably in the April or May timeframe of2012? A. Sure. It would have been about that time based upon what you've just told me. I don't recall it being at that time. Q. Sure. Did anything come of that meeting? Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (19) Pages 73 - 76 115 Phenix Avenue, Cranston,ID 02920 www.alliedcourtreporters.com Rhode Island Eco~o.mic Development Corporation vs Mark Blecher Page 77 1 A. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Yes. So we recognized that they had a or believed they had an interesting technology platform, and so I sent a couple of folks in to do due diligence and evaluate that platform. And after I think two meetings I asked my team to stop reviewing it because we were not going to pursue any acquisition or investment in it. Q. Why did you reach that conclusion? A. Because Hasbro's general counsel told me that we shouldn't be looking into this. Q. Okay. Any other interactions that you can recall with personnel from 38 Studios? A. Curt called me a couple of times after the -probably before we pulled out, maybe after, saying, Are you sure there isn't some way we can find for Hasbro to be connected? And I said, We cannot do this. Q. Anything else? A. No. Q. After 2010 did you have any discussions about 38 Studios with Mr. Verrecchia? A. No, not that I recall. Well, aside from the time when he said, Let's go and meet with them because they want to talk about licensing. Q. Yes. So there were a couple of meetings with Jen 1 A. Okay. 2 Q. I think you were asked by counsel is it true that 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 you would not have given Mr. Verrecchia a report of your meeting with the EDC. Do you recall that question being asked? A. I do recall the question. Q. And your answer was no, meaning you would not have given him a report? A. I would not have given him a report. Q. And you were asked whether Mr. Verrecchia would not have asked you for a verbal report, and you answered no, meaning he would not have asked you for a verbal report? A. He would definitely not have asked me for a verbal report. MR. SHEEHAN: I don't have anything further. Thank you. MR. VALENTE: I don't have anything further either. Thank you. (PROCEEDINGS CONCLUDED AT 11:35 A.M.) 21 22 23 24 25 Page 80 Page 78 1 and/or Curt about licensing Hasbro brands? Yes. Q. And then there was another set of discussions and due diligence on Hasbro potentially acquiring one of38 Studios' platforms? A. Correct. Q. And those are all of the interactions you can recall with 38 Studios after 2010? A. There were a couple of employees that we interviewed, but that's it. Q. Anything else? A. Nothing else. MR. TUGAN: All right. I don't have any further questions for you, Mr. Blecher. MR. SHEEHAN: I just have probably one, maybe two. THE WITNESS: Okay. EXAMINATION BY MR. SHEEHAN Q. And it just has to do with the issue of phrasing. Some questions were asked of you in the negative, like you would not have done the following, and your answer was no when I think what you meant was, that's true, I would not have done the following, so I just want to ask you one or two of those questions just to be sure. 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 C E RT I F I CAT E 1 2 I, Jane M. Poore, a Notary Public/RPR, do 3 hereby certify that I am expressly approved as a 4 person qualified and authorized to take 5 depositions pursuant to the Rules of Civil 6 Procedure of the Superior Court, especially, but 7 without restriction thereto, under Rule 28 of said 8 Rules; that the witness was first sworn by me; 9 10 11 that the transcript contains a true record of proceedings. Reading and signing of the transcript was not 12 requested by the deponent or any parties involved 13 upon completion of the deposition. 14 15 IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of August, 2014. 16 17 18 19 20 21 (_,Q,._,,...,~~ "-'d~-o--?~ @ JANE M. POORE, NOTARY PUBLIC, RPR My commission expires 9/11/17 22 23 24 25 DATE: August 14, 2014 IN RE: RIEDC vs. Wells Fargo, et al. WITNESS NAME: Mark Blacher Mi.n-U-Script® Allied Court Reporters, Inc. (401)946-5500 (20) Pages 77 - 80 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 84 ..:·::: ·. -- : ·.·.· ... ::. . :: . - .... -·-·-'-'.'."::l--.!'.-·••... ·.-...... ···--···-----···.···.--- ... -·-- .. ···-- __ ,, 710d98fe-12ec-4d3c-91fd-2c532ba 75bdd FW: updated draft From: "Saul, Michael" cmsaul@riedc.com> To: Maureen Gurghigian cmgurghigian@firstsw.com>, Antonio Afonso caafonso@mosesafonso.com> Cc: "Cole, Tim" ctcole@riedc.com> Bee: "maureen gurghigian", "antonio afonso", cola, tim, Maureen Gurghigian Date: Wed, 09 Jun 201 O 12:21 :38 -0500 Attachments: Final Draft Executive Session - 38 Studios.ppt (989.18 kB) ~~~~§§1§!~~!~~,~~·~!!!J~~~~!~~~~~~~~~,~~~,~~~~· Tony & Maureen, This is the deck being presented on 38 Stud.ios in Executive Session today. There may be one or two final tweaks ... but 99% there. You are both scheduled to participate in a conference call tomorrow at 1O:OO. We will provide a call in number soon. Mike From: Cole, Tim Sent: Wednesday, June 09, 2010 12:42 PM To: Saul, Michael; Blazek, Michael Subject: updated draft Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation ~:!r)r.xJs.~ ~~§~m;-J i~:~~~*X.--i~~!~ ~)~~\·~~·~<:pi:!:~:~-sj ;C:;~~:~):H~~i=it~~r~ 315 Iron Horse Way, Suite l..01, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email !.~ol~@.rl~.d;:,.,::;.Qrx;. I web xYJ~lfLrlf,;.\JJ:•.1.:s:.un tuE:iongHl\1 tG the :s~t:(h;~r. rr yot: ~~n~ n:)t t.;1:~~ tr:tc::rH.i==:d :Jr tm~~ o!' t.l"iE: info:·rr:~tforr <.onl~!n~d :n t.h!~. Q:-!TI{3H n-:~~ma:;~: er i!ny ~ttiF:.i1:-neni: !~~ ~t~·!c:tly :::r::'!~~;btt.:~d. !t~ jt{ttJ ~1r~! r:o:: ti·p~ :nt~:r: 10% fees + income tax + fund for investment = $ Minimum equity covenant * Collateral includes lien on all company IP $ No tax credits until loan is repaid * Job Shortfall Penalty fee of ·-~ $7 ,500 per job ... over 300% of income tax benefit per job .. R . CONFIDENTIAL ~ Pre-revenue company .~w Top tier management team to complete both Mercury and-CopernicL -~ Publishing and Distribution Agreement (PDA) between EA & 38 Stud Mercury -,~ $11.1 M invested by EA to date out of commitment of $19. 7M for pro< '"'" EA recently committed to additional investment of $2M for marketing ·-" EA reviews 500+ proposals per year and selects less than 10°/o "~" EA assumes 4 to 5 million unit sales of Copernicus, 38 Studios cons estimates 3 million unit sales 1 - All milestones met to date on PDA, reviewed by EA & First City Natic ·n .~ cb9JFIDENTIAL ~ Product not yet branded ~~ Original IP makes up majority of top games historically """ EA contributing to Mercury marketing efforts --- Pre-release of Mercury as chapter in Copernicus """ 38 Studios will brand Copernicus using downloadable content packs keys'' with Mercury customers i --- Buzz around people - McFarlane and Salvatore are followed like rocl A-- Toy line by McFarlane Toys """ Comic Books drawn by Todd McFarlane -- Prequel book to the Copernicus story written by R.A. Salvatore cb~FIDENTIAL .·R $ Changing industry dynamics due to technology """ Flexibility to adopt new technologies in pre-production phases of future rel - Example: Option to incorporate motion sensing technology via downloc: content ---· Ability to adjust from subscription to "Freemium" pricing model using "free "chapter based billing" ~ Product Revenue Shortfall/Repayment --- Company's "worst case" (> 70% reduction in EBITDA) financial projectiom repayment ~- Loan repayment break-even is 25% reduction in company's "worst case"~ --- Expertise to create new single player games to supplement earnings as nt ~ Upside ,,,.,,. Tax revenues, repayment of principal + interest & fees - Utilize moderate financial ROI to seed an industry focused investment fun 1 ..· . . ·R···- CONFIDENTIAL Assumptions Mercury release 09/2011, sell 1. 7 million units 2011, 1.4 million units Copernicus release 09/2012, 2.0 million box sales 2012, 600k subsc 2012, 1.0 million subscriptions 2013, 1.2 million subscriptions 2014 4 ~ New Role Playing Game every 2 Years, each 30% more successful ~ New Online Game every 4 years ~ Debt Service: 1O year term, 3 year interest only, 7 year level principc: @ @ i' -~ CONFIDENTIAL In OOO's 2010 2011 2012 2013 Revenues · $0 i $20, 748 ~(........................................................................................... $65,455 1 $90,923.. ................................................................................................................................................................................... .9P.~.r.~!!~.9...~.P-~.'-!~.!..__. . . . __ --·-··---_!~~ 9~1...L . .~ . .-~~!._!§_~~J_____. __~..I.~t~--~-~J . ._. ____ ~~--1.~QQ9. ..~~!_~. r~.~t~. -"'""""'"""'.·""'""'"·""·· """·""·""·"· ,.., _,. ,,"'"y.(!~.~l-~;~?2J. ."""~'"'j!~~:~g_1.~J~""···~--..,.,. .(§?"'!Z~.Z:1~),L""'"'~"""'~?.. ~. !..~£Q. -~-~-~!P~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (~.~~!..~~1)L ...............(~?§. . §.~-~2L. . . . . . . . J$..~-~.!~?.11... . . . . . . . . ~?..~.\.~?~. ' l ' •,•.v.·.•.-.•.-.v.-.-.·.•.•.•.....•.o...._•.•.·.o..-.,y,.•.•.\.•.•.-..·.•........•.•.•.-.............-..•••-.-...,•..,,••._..,_,,.._._•.._._...,.._....,._.A.,.,...._.......,,... ....,..,••.,v..,,.,._.,,,_,,._,_...._•••• .'.•.•.-.0..'."l.V.._,_._,...._._.,•••,v.'.•J'•._,,_t_.,._,,..._,_.,.,.,•,y,v.·.v.·•._v.••...-............._..._,,...,•.v.·.····'-"""-'""t._._,...,._._.,._._._._...._._..._....,\.•,·..,._•,._._......_y_._-,...•,c.-.·,Y..•,·""''y,l•.-........_.....,,,,·,._._....._._..._._._.,........_._...,._.......,.,...._._._._.,,......_._ 0 Debt Service Debt Service Coverage $4,606 ~ -7.58] $7,977 1 -3.38~ l -f22l $8,005 $17,868 ·.-......, ......, ........., ,..............-r.-.v.·.-.·.,........................,,,.......,,.....,,..,....,....,......,.,.. .....,,....~............................................,..•.,...._...............,,......,,..._..,._.....,.........~.... .....,.......,._....,,:......._..,,......,._.,...,....,........,_..._.y,, .....,-............w.v.'"'"............."'4.......,.,,....,...........,,..........,......,...,....,.........,.,,....._........-..............,~......-.-......-..,.........,,..•._.,,,_.,._..,...........-.............-.....-.·.·.-.v.-. 1.6, Changes in Assumptions from "Most Likely" • Copernicus _subscriptions drop from 600k at outset (2012) to annually 2013 & forward n -~' d)NFIDENTIAL In OOO's 2010 2011 2012 2013 Revenues $0 1 $20,748 l $65,455 l . . . . . . . . . . . .$83,039 ..................................................................-...-................"'.-........-.................................-....,,-.· ...-.-.-.-.-..............................................-............................................~......................................................-v.-.-................................................,.........................,,...........................................·.·.-.....-.....-.....-.-......-l. . . . -.-. . . . . . . . . . . . . . . .-. .•.-. . . . . . ·.·.-. .-.. .·. . -. . . ."" ! _Qf!~_r!!!_!!_~L~R!.!!~! ~~·-·-··""··~~~1~-~~-~-l. . .---.·-···~~~Zi.?.~~J..,__ .....~.¥L~t-'!.~~-L----------~.!~2.!_ QQ.Q""L._ -.~!,!.~.r~.!!t. . . -.·--~·.w-"•-.-.w.-<.-.- .-.·~·-····--·.-.-lf.~g(-~~.?.1L. -..--·.w.-..,...(~~:h.§1~2-L.-.w·.·.--·.----{~.-1Z' (:1§1!.-.._w~·.-ww·~J,1.~.~Z1. .J. . -.. , -~~-~!-~~-. ,J~~~:!~?..~2.ZL. """"""•'i~Z§!.~~?2.L"'.~--·-···--~§.g_~z~~)L.-......-.. . . ~~?~.Q-~-~J... •.•,.... ····w'""""'"'"'-'"""""'"'"'" _______, __ ......-.·-·--···"'""•'"-'"·•W·'""'""·"'""•""•"''·-'W.••·------ ·'-'"""'""""•"""""""•"·"''•"""'""''.1""""'"""'"'·'"·""·-··"·""''""'"''"""·L.......... Debt Service $4,606 l ................................................................................................................ t .. Debt Service Covert -7.58i $7,977 l -3.381 ,""""''''"'"-W-'-"""~·-····---J,.• $8,005 1 -1.22i w ... w.w.w.•-·--·-'"""'•"""·WoW•W·W·"'L""."" $17,868 l ..····· .. 1.23! ······-····································i··············································~·-································ ··-~········ Changes in Assumptions from Company "Worst CasE •New Role Playing Game every two years; Game 2 (2013) initial sa Mercury initial sales, second year sales increase by 20% over Mercur sales levels •Follow on Games must perform equal to or better than Gan ·u_ ~ C~FIDENTIAL ~ Wells Fargo "''"' Reviewed Private Placement Memorandum for Equity Offering ·-- Discussed with Wells' Capital Market team their due diligence process conclusions ~ a Strategy Analytics & Perimeter Partners -- Identified potential economic and employment benefits of project - Confirmed that RI has the necessary components for cluster developme -- Confirmed that 38 Studios opportunity would accelerate cluster develop1 .~ Provided insight to the critical success factors necessary for 38 Studios Development ~ RIEDC --~ Completed normal credit due diligence ~w Independent conversations with industry players (e.g. Providence others) """ Research on industry Equit~ D ~ cb~FIDENTIAL ~ Strategy Analytics (SA) & Perimeter Partners (PP) final repo1 ~ Finalize Total RI Return of 10+ 0/o based on the sum of (1) gu plus (2) direct state income tax benefit of new jobs plus (3) p recapture to establish an equity fund. ~ Negotiate term sheet ~ Board approval ~ Confirm with EA all company representations CbNFIDFfl'.JAL ., . , . .. . ... EXHIBIT 85 3d70b4f2-60d0-4536-850d-fe606227280b RE: RIEDC/38 Studios From: Maureen Gurghigian To: "Stolzman, Rob" Cc: "Saul, Michael" Bee: stolzman, rob, saul, michael, rstolzman@apslaw.com, msaul@riedc.com Date: Wed, 05 May 2010 13:37:39 -0500 Since WeHs Fargo acquired A.G. Edwards (and A.G. Edwards responded to both RFQ's} I believe they can be considered to be on the State's and EDC's list of approved underwriters. We should discuss syndicate make.. up and mode of sale when you both have time. Thanks, J\rfa.ureen Gmghigian Managing Direti:or l:TirstSou1hwes1 direct 401.334.4267 fa'\'. 401.333.3807 .!~,. !3-!.~~~~~-~'~J~Q!J~:~~~!?.--~~!~~~--~~~2~)~~~~.s~~,~~.,~--g~~.~?'""'""""""'''"""'"'"'"''"""'"""""""""'"'""'·'"'·"''"''""·"'·"'""""""'·"'""""'""°""'"'""""""""'"""'"·'"""""'" From: Stolzman, Rob [mailto:RStolzman@apslaw.com] Sent: Wednesday, May 05, 2010 2:31 PM To: Maureen Gurghigian Cc: Saul, Michael Subject: RIEDC/38 Studios Hi Maureen. Mike Saul indicated he may have spoken with you regarding Wells Fargo and the above deal. If the legislature approves the Kushner for the job creation guarantee program, the RIEDC is considering issuing revenue bonds for 38 Studios' expansion in RI. Wells Fargo is an industry lender and their municipal desk is interested in buying the bonds. Does Wells need to be on a state approved list of underwriters for such a placement? Also, are you aware of whether this type of sale would require a minority underwriter to participate? Your thoughts are appreciated. Thanks, Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 029003 E-Mail rsto!zrnan@apslaw.com Phone 401.274.7200 Fax 401.751.0604 Visit our website at Y.f.INYL.9.P.,S.l!a.Y.V.,@.m ·'1 ,µ r~J1 l 17""K IM ~L1E"E"·t.1 l!;·N'·.· t){·'""'>j j''\~·D' . ./1.~·......:l' .[~~:·.· l.~L"-.X. ..~ .... ~,, ..;;.I l . . . . [l...t.·i.~. i:.o- .,.,.-1" .E· *********************************************** To comply with IRS regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure CONFIDENTIAL FSC-000022183 3d70b4f2-60d0-4536-850d-fe606227280b under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message fiom your computer and destroy all copies. Thank you. CONFIDENTIAL FSC-000022184 EXHIBIT 86 Rhode Island Eco~o.mic Development Corporation vs Michael J. Dominguez - CONFIDENTIAL Page 17 1 Q. Would you agree with Mr. Saul's description of you 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 being a resident industry expert? A. I would not. Q. Why would you disagree with it? A. I have never held myself out as an industry expert. I'm an investor in the industry, familiar with the industry. I serve on the board of Zenimax, but I've always been clear in the context of conversations with Mr. Saul that I don't hold myself out as an industry expert. Q. Do you have, as you sit here today, an independent memory of any conversations that you had with any of the people you believe to be involved with the EDC? MR. AMSEL: With respect to 38 Studios? MR. SARLI: Yes. A. An independent -- are you asking for the occasions on which I spoke to the EDC or whether I can recall the conversations? Can you be more specific. Q. Yeah. As you sit here today, do you know from your memory of any conversations that you can say I remember this conversation with a certain person from my memory? 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 20 Page 18 1 A. Yes. 1 2 Q. Was there a population of people that you recall 2 3 having conversations with at EDC? Yes. Q. Who do you recall having conversations with at EDC? A. I had the call that's referenced in this e-mail exhibit, and Michael Saul was on that call. There were other representatives of the EDC on that call, but I don't recall who. Q. Did you know at the time? A. Yes. Q. I'm going to suggest to you the name of Timothy Cole, does that ring a bell? A. I don't recall. Q. Anyone else that you recall having conversations with at EDC aside from Mr. Saul? A. In 2012 I was asked by the Governor's office to come to an EDC meeting to speak to the board of the EDC, as well as the Governor who was in attendance, about the video gaming industry. Q. And the Governor you're referencing is Governor Chafee? A. Correct. Q. With respect to your conversation or conversations 3 4 A. 4 5 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 with Mr. Saul, did you have one conversation with him or more than one? A. I only recall one. Q. And according to these e-mails that you've brought, that occurred at some time in May of 2010; correct? A. Correct. Q. Exhibit D-218 seems to tell us that you were advised that the call was going to be on May 12th at 1:30 P.M.? A. That's correct. Q. Any reason to doubt the call occurred on that day at that time? A. No, but I can't specifically recall that it happened on that date at that time. Q. As best you know it was scheduled? A. Correct. Q. And you have no reason to doubt that it did occur at that time? A. Correct. Q. Do you remember the conversation? A. I can't recall specific questions, but I can recall the conversation. Q. First of all, who was on the call? A. Again, Michael Saul was on the call. There 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 were other representatives of the EDC who he mentioned, but I can't recall their names. Q. Before calling him, had you done anything at all to prepare for the call? A. Michael called me, just to be specific. MR. SARLI: I'm sorry. A. And, no, I did not prepare for the call. Q. So basically your participation in this call would have been you drawing upon whatever knowledge that you had accumulated from being in the industry up until that point in time? A. An investor in the industry, correct. Q. And someone that sat on the board of Zenimax? A. Correct. Q. Would you include that being in the industry more than by way of strict investment, or is that the same thing to you? A. I guess just the term "in the industry" is a little vague. I have never been an operator in the industry, meaning actually being an employee ofa video gaming company, but, yes, I have been an investor in the industry and sat on the board of Zenimax. Q. Now, tell me everything that you remember about your conversation with Mr. Saul. Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (5) Pages 17 - 20 115 Phenix Avenue, Cranston,ID 02920 www.alliedcourtreporters.com Rhode Island Eco~o.mic Development Corporation vs Michael J. Dominguez - CONFIDENTIAL Page 21 1 A. I can recall them asking me about my background 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 in the industry, again at the time. I can recall telling Mr. Saul and the other participants in the call that I was happy to answer their questions generally about the industry, that I wasn't holding myself out as an industry expert. Again, as an investor in the industry. And that I had no specific knowledge of38 Studios, so I wasn't participating in the call to give them advice on what to do as it relates to 38 Studios, but that I was happy to answer questions about the industry. Q. By the way, before coming here today were you provided with any information concerning what other people have testified to in this case? A. No. Q. Have you been shown any documents at all concerning this case before coming here today? A. No. Q. Have any portions of any documents been read to you? A. No. Q. You've just told me what I would characterize as basically you introducing yourself to Mr. Saul in this conversation; correct? A. Correct. arrangement? They told me that 38 Studios had a distribution arrangement with Electronic Arts, and Electronic Arts would be marketing and distributing the console title that was going to be released, which is not an atypical arrangement in the video gaming space. EA has a division called EA Partners that distributes third-party games. Q. As part of this conversation, did you understand whether or not EA's partnership or relationship, whatever you want to call it, with 38 Studios was in connection with an MMOG, or was it in connection with an RPG? A. No, it would be in connection with a console title, not with an MMO. Q. What did you understand was the project 38 Studios was attempting to get financing for, if you did? A. Yeah, my understanding was that there were two games in development at the time, one was a console title. If! recall correctly, the name of it was Kingdoms of Amalur. And a second game was in development and that was the MMO. Q. Do you remember the name of that? A. I don't. Q. If! suggest to you the term Copernicus, does that 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Can you tell me anything more about the conversation other than that? A. I can't recall the specific questions they asked. Again, just based on my recollection, questions about the gaming industry; about some specific topics that related to 38 Studios; the fact that 38 Studios at the time, again according to Mr. Saul, had an arrangement with Electronic Arts; and whether I thought that that was a differentiating factor in terms of their capabilities. Q. When you say "their capabilities" who's the their? A. 38 Studios. And I can recall them describing to me the nature of the debt structure that they were contemplating putting in place, and they asked me a variety of questions about whether that structure would be something that would be interesting to Providence Equity. Q. Do you remember anything else? A. Not that I can recall. Q. You mentioned to me that one of the topics you recall was 38 Studios' arrangement with EA; correct? A. Correct. Q. Do you remember what they told you about that Page 24 1 refresh your memory? Yes. Q. Does that refresh your memory that was the name of the game? A. The MMO, as far as I recall, yes. Q. You told me that Mr. Saul was specifically asking you a question about the relationship between E&A and 3 8 Studios and whether or not that factored in in some way. Can you explain that to me a little more completely? A. He was asking about whether the relationship with EA was a differentiating factor in the potential success of Kingdoms of Amalur. Q. Did you offer any response to that inquiry? A. I did. Q. What did you tell him? A. I told him based on my own industry knowledge that EA has a variety of different third-party distribution relationships, and so that in and of itself wasn't unique, and based on what we had seen in the industry, it was not necessarily a determinant of success. Q. Did you get the sense Mr. Saul was asking you whether or not that relationship would be a determinant of success in some manner? 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 .M.in-U-Script® Allied Court Reporters, Inc. (401)946-5500 (6) Pages 21 - 24 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 87 Rhode Island Eco~o.mic Development Corporation vs Timothy Cole Page 169 Page 171 the phone call in order to prepare for the call? l 2 A. You know, I don't think we did. I think it was 2 l 3 kind of sudden for me. 3 4 Q. Were there a list of questions written out that 4 5 Mr. Saul had for the call? A. Perhaps. I don't recall. There could have been. Q. What did you understand Providence Equity to do? A. Private equity. Q. What's private equity? THE WITNESS: What is private equity? MR. EDWARDS: Yes. A. Private equity is funds of private capital to be invested. I mean, I might not be an expert here. Q. No, no. I'll ask it differently. You said you understood them to do private equity? A. Right. Q. So what I was asking you is what's your understanding of that word, that phrase that you used? A. Large capital investments in private companies. Q. Do you know what a venture capital investment is? A. I have some familiarity. Q. What's your understanding of that? 5 6 7 8 9 lO ll l2 l3 l4 l5 l6 l7 l8 l9 2o 21 22 23 24 25 6 7 a 9 lO ll 12 l3 l4 l5 l6 l7 l8 19 2o 2l 22 23 24 25 Q. So to your understanding there was a phone call prior to the closing -A. Yes. Q. -- with Mr. Dominguez, you, and Mr. Saul, and then after the closing much later Mr. Dominguez actually came to EDC for a meeting? A. Yeah, although I don't think they released his name. Q. Do you remember, can you tell me what was discussed on the phone call with Mr. Dominguez, you, and Mr. Saul? A. So Providence Equity had previously made investments in the video game industry. Mr. Dominguez had suggested that these are bigger deals than -- it takes more money to get these deals complete than perhaps we anticipated. I think he threw out a number like $200 million ifl recall. Q. Okay. What else did Mr. Dominguez say? A. You know, he warned us away from it. Q. He warned you away from doing the deal? A. Yeah. Q. Tell me what you remember him saying? A. I believe he made a comment like this isn't the right space for, you know, quasi government Page 172 Page 170 l 2 3 4 5 6 7 a 9 10 ll 12 13 l4 l5 16 l7 18 19 2O 21 22 23 24 25 A. Venture capital is again large capital investment in private businesses usually at an earlier stage than -- you know, you're going for the upside and the growth of the company as opposed to private equity that's looking for the income stream that's already been established. For the most part that's my understanding. Q. Was Sean Esten on the call with Mr. Dominguez? A. I don't remember. Q. Was it only one phone call? A. I believe so. The only one that I was on. Q. Did you ever attend an in-person meeting with Mr. Dominguez about 38 Studios? A. No, I was not in that meeting. Q. Was there an in-person meeting? A. I think there might have been. I remember -this was later, much later in the process, I remember somebody saying, Oh, Michael Dominguez is here. And I was like, Oh, wait, you know, but otherwise I wasn't in it, so that's really the answer. MR. EDWARDS: Okay. A. This was late in the game. This was after closing. This was, you know, as things were falling apart. I think Chafee was Governor. l agencies to be in. 2 Q. Do you remember anything else he said? 3 A. You know, those are the things that I remember. 4 Q. Did he say anything -- when he said this is not 5 6 7 a 9 10 l l 12 13 l4 l5 l6 l7 l8 19 2o 21 22 23 24 25 the right space for quasi government agencies to be in, did he elaborate? A. Type of investment. By space I mean the right type of investment. Q. That's what I was going to ask you, what did you mean by space. Type of investment, meaning what? An investment in a video game company or something else? A. I think he probably did mean industry but certainly size was part of that. Q. Tell me what you mean by size? A. The amount of money that it takes to, you know, successfully launch a company like that, especially with the MMORPG. I guess it's a pretty expensive type of video game. Q. The MMOG? A. Yes. Q. And he specifically said that the MMOG was an expensive type of game to get to launch? A. Yeah, I believe so. Q. Did Mr. Saul say anything on the call? Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (43) Pages 169 - 172 115 Phenix Avenue, Cranston,-ru 02920 www.alliedcourtreporters.com EXHIBIT 88 Rhode Island Eco~o.mic Development Corporation vs Michael J. Dominguez - CONFIDENTIAL Page 53 1 A. Yes. 1 2 Q. Was that what Governor Chafee had explained to you 3 was his reason for having you come there? A. He asked me to appear in order to provide information on the industry. He told me that they were deliberating as to whether to provide additional financial support for the company. And, again, I was very clear with him and at the outset of the conversation with the EDC in stating that I was not there to tell them what to do. Q. Do you remember what you said during the meeting? A. I don't recall the specific questions that were asked and what I said. Q. Let me ask you this, was the meeting a meeting where you came in and sort of made a presentation, or was it more a meeting where you came and said this is who I am or you were introduced and people asked you questions or a combination? A. I didn't make a presentation. It was a meeting where I came in, was introduced, and the members of the EDC were able to ask questions. Q. Do you recall who introduced you? A. I don't recall. Q. Did you do anything by way of preparation before you came to this meeting? 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 and it takes a great deal of time and capital to develop MMO games. Do you think that's something you would have said? A. It would be consistent. Q. Do you have any memory of saying that? A. No, but it's not inconsistent with what I would have said. Q. It says that you stressed the importance of having an expert to counsel the corporation as to the technical and market intricacies in bringing a product such as Copernicus to release. Do you remember saying that? A. I don't recall specifically, but it's not inconsistent with what I said. Q. In other words, ifthe minutes say you said that, you wouldn't dispute it? A. Correct. Q. Do you remember offering to help EDC identify that type of expert? A. What I recall is offering to come up with some ideas which they could use. Q. When you say you offered to come up with ideas, what does that mean? A. On individuals or consulting firms who could lend expertise. Page 56 Page 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. No. Q. So essentially this was not unlike the telephone call that you had with Michael Saul and others; you were using basically your knowledge and experience in the industry to respond to things they were asking you? A. Correct. Q. And you made it clear to them it was from that vantage point you were addressing them? A. Correct. I also made it clear to them that we were an investor in Zenimax, who could be considered a competitor in the industry, and so I did not want anyone to be unaware of that fact as I answered the questions. Q. In other words, you didn't want them taking your comments without the knowledge that you were a potential competitor and you could be potentially adverse to 38 Studios? A. Correct. Q. So you wanted to put them on notice of that so that they could consider your comments within an appropriate context? A. In that context, correct. Q. According to the minutes, it says that you explained to EDC that the industry is complicated 1 Q. In other words, resources they could tum to? Correct. Q. You weren't offering to develop any sorts of plans or anything like that for them? A. No. Q. It's reported you said at the meeting it often takes upwards of a hundred million to bring an MMO to market, and while there can be substantial profits if successful, there's very little value to a company or a game if the game is not successful. Is that something that you would have said at the time? A. Yes. Q. As a matter of fact, that was something that you in some fashion communicated to Mr. Saul; true? A. In 2010. Q. It was no different; correct? A. Correct. Q. Did it strike you during this meeting that you were being asked a lot of the questions that you had already given information to Mr. Saul about? A. I can't really recall. Q. It said here that you observed that debt is not typically a component of the capital structure to finance such games because there is no real 2 A. 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (14) Pages 53 - 56 115 Phenix Avenue, Cranston,~ 02920 www.alliedcourtreporters.com Rhode Island Eco~o.mic Michael J. Dominguez- CONFIDENTIAL Development Corporation vs Page 57 1 Q. Do you think it would have been unusual for you to 2 A. 2 3 3 point out such locations as California, where they have the University of Southern California, as potential competitors? A. Yes. Q. How about MIT? A. Yes. Q. Did you also tell them that an independent company like 38 Studios would have difficulty in properly marketing and distributing the product? A. No. Q. I'm sorry? A. No. Q. So ifthe minutes say, "Mr. Dominguez stated that independent companies like 38 Studios often also have difficulty in properly marketing and distributing the product, while further noting that chasm between successful companies and those that are not successful," is that something you would not have said? A. I don't think that quote is complete. I think what I would have said is that 38 Studios not having the capability to market and distribute its own games can present challenges. Q. And what were you contrasting 38 Studios to at 1 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 collateral? Correct. Q. Is that something you would have said to them? A. Let me just clarify that. I would have said that debt is an atypical structure to finance a game because if it is not successful, then there's no collateral. Q. Not unlike what you told Mr. Saul? A. In 2010, correct. Q. It goes on to say that you stated the fact that the company already has substantial debt to the corporation that would be ahead of a potential investor would likely present a challenge, and that few investors would be willing to sit behind the $75 million debt. Do you believe that would have been something you would have said in response to a question? A. Yes. Q. These are essentially things that you would have said in response to questions; correct? A. Correct. Q. Because you told me you didn't come with any sort ofpresentation? A. Correct. Q. Do you know whether as of that time you had 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 60 Page 58 1 already been aware of the UBS inquiry? Yes, because that was in 2011. Because if you're saying at that time, meaning the time of the EDC meeting? MR. SARLI: Yes, 2012. A. Then yes. Q. Were you asked any questions that you remember about the concept of38 Studios being a so-called anchor? A. No. Q. Do you remember any questions about the state's numerous educational institutions being a positive to perhaps entice investors? A. I can remember one member of the EDC talking about their perspective around supporting 38 Studios in the hopes that it would spur more gaming companies to come to the State of Rhode Island. Q. When you say support 38 Studios, you mean at that time? A. Both in the original investment, that one of the benefits that they saw in supporting 3 8 Studios at the outset of the investment was to spur more gaming development companies to come to the state is what she said. 1 that point? Larger publishers who have their own publishing and marketing capabilities -- distribution and marketing capabilities. Q. Was this challenge both financial and in terms of being successful in terms of marketing or both? A. Well, again 38 Studios had a relationship with Electronic Arts. That was the way that they were solving the fact that they didn't have their own distribution and marketing capabilities. And my point to the EDC at the time was you're relying on a third party to market and distribute your games, and the largest players in the industry do that themselves. Q. Do you remember whether or not you were asked any questions about bankruptcy? A. I can't recall. Q. There's again a paraphrase attributed to you that says, "Mr. Dominguez stated that while a bankruptcy would cleanse the company's debt, a bankruptcy would likely cause the company to lose its best talents, such as lead designers and architects, and that ifthe key development talent is lost, than the business is lost." Did you tell them that? 2 A. 2 A. 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (15) Pages 57 - 60 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 89 i ,.. • Wells Fargo Securities, LLC South C.Ollege Street 301 Charlotte, NC 28288-8905 .·,; May 20, 2010 WELLS FARGO SECURITIES, LLC STRICTLY CONFIDENTIAL 38 Studios, LLC 5 Clock Tower Place Suite i40 :M:aynard,~ 01754 Attention: Mr. Rick Wester Chief :Financial Officer Ladies and Ge~tl'e~"C;~; This Jetter (the"Agreement") constitutes the agreement between 38 Studios, LLC (the "Company") and Wells Fargo Securities, LLC ("Wells Fargo Securities") that Wells Fargo Securities wilJ serve as the placement agent for the Company in connection with the proposed offer and private placement (the "Transaction") by the Company of preferred stock, common stock or other equity or equity-linked interests of the Company or any subsidiary thereof(the "Securities"). The terms of this Agreement are as follows: A. Services. At the Company's request, Wells Fargo Securities shall provide the follo'\\ing specific services (the "Services"): l. To the extent we deem appropriate and feasible, familiarize ourselves with the business, properties, and operations of the Company; 2. Assist the Company in the preparation of a confidential private placement memorandum, including any exhibits or amendments thereto, which memorandum shaU be reviewed for accuracy and completeness, and approved in writing, by the Company; .,....~!1!1!11!!!!'!!!~-- f l ~ (!]. z . .,.,_ w Together we'll go far _______________________________ _______ ,, 38 Studios, LLC April 29, 2010 Page2 3. Assist in identifying and screening prospective investors and preparing alist of such investors which shall be reviewed with and approved by the Company; 4. Solicit offers from "accredited investors" as defined in Rule 501 promulgated pursuant to the Securities Act of 1933, as amended (the "Actn), to purchase Securities; 5. Assist in structuring the terms of the Securities and negotiating such terms with potential investors; and 6. Assist in making presentations regarding any propos~ Transaction to the Board of Directors of the Company. Wells Fargo Securities is hereby authorized, as placement agent of the Company, to solicit offers to purchase the Securities from "accredited investors" as defined in Rule 501 promulgated pursuant to the Act. Notwithstanding anything set forth herein to the contrary, Wells Fargo Securities shall be obligated only to perform the Services on a "best efforts" basis and makes no commitment, express or implied, to purchase or place the Securities. B. Fees and Expenses, In connection with the Services described above, the Company shall pay to Wells Fargo Securities the following compensation: 1. 2. Transaction Related Fees (a) Market Entrance Fee. A nonrefundable cash fee of Sso,ooo (the ~Market Entrance Fee"), earned on the date of first dis~ribution t.o a potential investor of the confidentiai private placement memorandum or similar offering materials for the Transaction. (b) Transaction Fee. Anonrefundable cash fee·payable at, and as a condition to, closihg of a Transaction (the "Transaction Eeen) equal to 5.0%.of the aggregate gross proceeds raised from the sale of such Securities. There shall be no Transaction Fee payable to Wells Fargo Securities·on any proceeds raised from any current member of the Company's Board of Directors. Altemative Financing Fees (a) Consulting fee. A nonrefundable cash fee of $25,000 (the "RIEDC Consulting Fee"), earned on the day after the first meeting among the Rhode ISiand Economic Development Council, or any ofits affiliates (collectively, "RIEDC"), Wells Fargo Securities and the Company relating to an Alternative Financing (as defined below). (b) Structuring Fee. A nonrefundable cash fee of $75;000 (the "Alternative Financing Options Structuring.Fee"), earned upon the decision by the Company, at its sole discretion, to actively pursue an Alternative Financing. ( c) Alternative Financing Option Closing Fee. Anonrefundable cash fee of $300,000 (the Alternative Financing Option Closing Fee"), payable upon the closing by the Company of an Alternative Financing Transaction. N 38 Studios, LLC April 29, 2010 Page3 (d) Additional Engagement. In addition to the fees payabJe hereunder, the Company shall use it best efforts, should it decide to pursue an Alternative Financing Transaction, to engage Wells Fargo Securities as sole-, lead-, and book-running agent or undetwriter, if so requested by Wells Fargo Securities. Any additional role to be served by Wells Fargo Securities would be governed by a separate engagementletter and/or underwriting agreement satisf11ctory to Wells Fargo Securities; when and if entered into. "Alternative Financing Transaction" for the purposes of this s.ection, means any financing transaction other than a Transaction, including, .but not limited to the issuance of municipal bonds on behalf of the Company, c0115ummated prior to September 30, 2010, pursuant to which the Company receives proceeds in excess of $2 million. 3. Expenses. In addition to any fees payable to Wells Fargo Securities hereunder and regardless of whether aTransaction is consummated, the Company hereby agrees, from time to time upon request and upon expiration or termination of this Agreement. to promptly reimburse Wells Fargo Securities for all reasonable travel and other out-ofpocket expenses incurred in connection with Wells Fargo Securities' engagement hereunder including the fees and expenses of Wells Fargo Securities' counsel; which expenses (including the fees and expenses of Wells Fargo Securities' counsel) shall not exceed $so,ooo without the prior consent of the Company (which consent shall n9tbe unreasonably withheld) and provided that such limitation shall in no way affect or limit the obligations of the Company with respect to indemnification as set forth on Annex A ------·--·----·--- attach"ednerefo.----·-··--4. Future Transactions. If, prior to October 31, 2010 1 the Company or any of its subsidiaries disposes of or acquires any assets or businesses or.enters into any combination transactions for which it will utilize an advisor, Wells Fargo Securities shall have the right to act as the Company's exclusive financial advisor for all such dispositions or acquisitions or combination transactions. Any decision by Wells fargo Securities or its affiliates to act as fina~Cial advisor in connection with any such di~position or acquisition, would be contained in separate agreements, which agreements would be on market standard terms and contain, among o_ther things, provisions for customary fees for transactions of similar size and nature and fadeniriification of Wells Fargo Securities. C. _Coordination. In order to facilitate the coordination of the parties' efforts with respect to a Transaction, during the period of Wells Fargo Securities' engagement hereunder, neither the Company nor its management or any other representative of the Company will initiate or solicit any discussions looking toward or contemplating any Transaction except through, or in coordination with; Wells Fargo Securities. Each of the Company and Wells Fargo Securities will inform and consuJtwith the other\~sion in any other respect, and the remainder of the Agreement shall remain in full force and effect. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Please note that Wells Fargo Securities is an affiliate of Wells Fargo & Company, which through its subsidiaries and affiliates provides full-service securities trading and brokerage services and other investment banking and financial advisory services. In the ordinary course of its trading and brokerage activities, one of Wells Fargo Securities' affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or for the account of customers, in the securities or options or other derivatives relating to the securities of the Company and other entities that may be involved in a Transaction. Wells Fargo Securitiesrf!cognizes its r~ponsibility for compliance with federal Jaws in connection with such activity. .Nothing containe.d herein shall limit or predude Wells Fargo Securities or any of its affiliates (i) from carrying on any business with, from pi::oviding banking or other financial services to, or from participating in any capadty, including as an equity investor, in any party ._, --whatsoever,•including witlrcrut11mituion, any competit9r, suppher or customer of the Company, or any other party that may have interests different than or adverse to the Company or (ii) from canying on its business as currently conducted or as such business may be conducted in the.futUre. The foregoing shall not limit or change the obligations of confidentiality and nondisclosure contained herein. Wells Fargo Securities is an investment bank and does not provide tax, accounting or legal advice. USA Patriot Act Noq~. Important information about entering into a business N. relationship with Wells Fargo Securities. To help fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person or corporation who opens an account or enters into a business relationship. Provided, however, that for a period of 24 months following t~e expiration. or termination of th.is Agreement, Wells Fargo Securities shalJ not represent any person or entity that attemptS to acquire all or substantially all of the.Company. [Remainder of page intentionally left blank] • 38 Studios, LLC April 29, 2010 Page8 In acknowledgment that the foregoing correctly sets forth the understanding reached by Wells Fargo Securities and the Company, please sign in the space provided below, whereupon this letter sha]] constitute a binding Agreement as of the date indicated above. Vei:y truly yours, WELLS FARGO SECURITIES, LLC By~~ Name: Title: Accepted and agreed: 38 Studios, LLC By:~-~~·=-----­ Name: Rick Wester Title: ChiefFinanciaJ Officer Attachment (t, M~9~rl-~~-j?J-~-vw;; vt·~w--·~----·- ~if ----------~w~t-~ ~ nr)°J ~ j --------· ·--- ~~ 'b llBIHX:I - y Ctv,wiprl(Y . o-- -----·-- ·-- -- - ! '-~wwBf 11>1-1 ~y /-~ . . r- ~,.. s·rrJ Sd::lllNl\f"ld ------..- ...f (IU, ~(/ ~------- 'll({/£1/J.fl;! --·--· ... .J, "-A ... - 'I... ~ ____ ,. ~· -;;;~~,-J--~ ~-t~r:'l~ ._ -- oµ ---·-- -- ,. __ < ~Nj n.o~ .¥& --------·-· _...._ __ ,.,_ ..., _ ... Y\ M.S(~ hfrf!H li~1' - . i1 ~ ._,. h;;l\J ~-(55~ ~ • WI ~-·-. ij:jij.-li~ -:.,) ,.. ~ ~ !t lp;ft) ffe" JJ£ ~ ~/ 'b ~ ~ - ~ ffe? ~ soi:A ~~ ( 1- .... ~_PM ,, ~nwy. .__ . - ·~ t; 4 .~ 1.M??W'i? 1Nlt<' ~/fl~--------- f. ~rtt,,-~- ~. - • 19 . j-YW~/ rnp1 1~·1. w ~~ ~ - - ~...J.. ~ ----~-- ... ;.) ~ ~2 ----...·--·-·~--· ..... ··----~-- . _... ___ __ ------- - _______ P:s~ - .. --~--·- AJ :e S111 ~'IN? -· 'S 0 !Ptt>5 ...... ·-- ~$ ·------- -(t'ilz?JJ .. ::··: .·. ." :·~·-·-·:-.--.·.·.··:··.-- St/ 70111' ........... ··-·-··· .•;:. -- ~ ~ --- - j;-;{Jji)" ·--- 1---·---. . ·.· .. : ........ : . .. -.:-___ _ ----'---+"-·---~·-- --·---~~~~~~--------~u--­ ~~ ~7W ~~··(r:?'--~----­ --~ rwJ ~p n:"'~~ ~ -P ' (Y'fil'? ~~ Saturday, June S, 2010 9:08 AM Cole, Tim Stolznum, Rob ; Hashway, Fred ; Esten, Sean , RE: Your Message... 38 risks.doc; Final Draft Executive Session - 38 Studios.ppt; 38 infonnation request list.doc Tim, Immediately following Monday's meeting with 38 the Executive Summary deck needs to be brought ''current•. We need final by Tuesday meeting with Keith. All addressees should pay close attention at Monday's meeting as we can compare and organize notes for Tim on the return trip to Providence. Let's plan to ride together. I have a firm departure of 1:15. Rob, I know you are able to attend. If you want to call in let me know (completely up to you). The "risk" discussion of the meeting will run from 10-12:00 followed by Wells joining 38, EDC and SA for discussion of 6/9 and 6/14 presentations to EDC board. Rob, is there any way you can review the EA summary and provide feedback before Monday? I will finish my review as well. If anyone has additional risks they would like discussed or additional information (see attached) please send me an email this weekend. · Mike From: Cole, Tim Sent: Wednesday, June 02, 2010 12:29 PM To: Saul, Michael Subject: FW: Your Message .•. Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation 315 Iron Horse Way, Suite 101, Providence, RI 02908 401.278.9100 x193 I 401.273.8270 fax email tgil~.@r.L~s;t~,mm I web ww_w_..rlg_~£.&Q.1Jl This e-mail message may contain confidential information belonging to the sender. If you are not the Intended recipient, the disclosure, dissemination, distribution, copying, or use of the Information contelned In this e-mail message ·or any attachment ls strictly prohibited, If you are not the Intended recipient please notify the Rhode Island Economic Development Corporation at 401.278.9100, and purge this e-mail from your computer system Immediately. From: Cole, Tim Sent: Tuesday, June 01, 2010 3:35 PM To: 'Barry Gilbert' Subject: RE: Your Message ... Barry, Here Is the PP. I've asked Sean to forward his financial risk memo. Tim Cole Senior Strategy and Research Manager Rhode Island Economic Development Corporation APS002192 .. ____ :'>l1~<;,t>1~~.f\LJ(T@=c:s fMSlGHTS FOR SUCCESS devices are seeing a significant uptake in game use and the games available for these devices are becoming increasingly sophisticated. Independent of the device used for game play, there are various levels of games, such as hard core gaming (often associated with consoles), and casual gaming (typically accessed via a PC, netbook, or mobile device such as a Smartphone). The console game industry is dominated by the major platforms noted in item 1 above, and these manufacturers largely dictate the rules for development on their platforms, all of which are proprietary. Each company sets its own policies with respect to royalties on their device. Console class gaming is considered to be associated with hard-core gamers who spend considerable time, effort, and resources to "game" on a specific platform. These platforms each have "live" internet enabled components which command subscription fees to the platform maker (Microsoft, Sony, Nintendo) that allow the gamer to interact with others engaged in the game on a global basis. This social aspect of gaming has become a key driver in adoption of multi-player game offerings. More recently, the consoles themselves have been focused on taking on the role of a media hub in the home entertainment world and support such external capabilities as video streaming from places like Netflix and internet access of social networks such as Face book. Currently, the major consoles are nearing the end of their lifecycles and both Microsoft and Sony have announced "mid-life" kickers to their existing platforms to extend their useful lives. These mid-life kickers include motion sensing technologies that eliminate the need for a more classic game controller, using instead camera sensing motion devices which allow gamers to mimic the activities they wish to execute. These are addon devices that are expected to reach the market before the holiday season 2010. Unlike most other technology products, game consoles attempt to have a longer useful life in order to recoup R&D costs that go into their design and development. Consequently, useful life expectations are in the 5-7 year range. Some analysts have argued that the console devices themselves are analogous to the razor and blade business model, where offering a low cost console will drive adoption and consequently the sale of more games. Next generation console devices are not expected until 2012, at the earliest. Prepared Exclusively for the RIEDC Page 5 of40 APS000675 STRATEGYA\ f<_l\iLJ(T'~C'.'.S fNS!GHTS FOR SUCCESS The overall size of the fixed console market is depicted in the graphic below. Games Consoles: Cumulative Sales to 2009 by Region 30 25 20 [)] PS3 Millions Units 15 ElXBox360 10 illlWii 5 N America/US EM EA/Europe Japan/Row Source: Strategy Analytics' Connected Home Devices service, Feb 201 o More evident from the graph above Microsoft's Xbox and Sony's PlayStation Ill (PS3) are significantly smaller in overall volume than Nintendo's Wii. The Wii is found to offer a broader set of gaming experiences and Nintendo has been successful in finding niche markets, such as senior centers, which has helped to expand its base. The console hardware market is a significant portion ofthe overall game market, however, with lifecycles being extended, average prices per unit dropping, and alternative means of gaming becoming available the market is experiencing some challenges as exhibited by the table below. Global Console Market Fixed & Portable Devices 2009-2014 GtlOSAt4l0.NSO.tle~•MARKS:ttn•tfttt••t•f••=t•tfff' ftt2009ttt ttt2lUti'tf•· ttt20'Utt••·· t'•••'•'•20:1•2•tt ttt2a1=amr ftt20t4'tt •t••'CAGRtt• Fixed Consoles (units shiooed- millions) Fixed Consoles($ value shiooed-billions) Price Per Unit($) 45.1 13.4 297.1 35.1 9.9 282.1 36.7 9.4 256.1 39.1 8.7 222.5 40.5 7.8 192.6 43.5 7.2 165.5 -0.7% -11.7% -11.0% Portable Consoles (units shiooed-millions) Portable Consoles $value shiooed-billions) Price Per Unit($) 42.4 4.9 115.6 36.5 3.3 90.4 27.8 3 107.9 27.8 2.7 97.1 26.1 2.8 107.3 27.5 3 109.1 -8.3% -9.3% -1.1% 18.3 13.2 12.4 10.2 11.4 10.6 Source: Strategy Analytics, 2010 -11.0% Total Console Values !Fixed/Portable\ $ Billions Prepared Exclusively for the RIEDC Page 6 of40 APS000676 iMS!GHTS FOR SUCCESS It is on both the PS3 and Xbox 360 that 38 Studios through Big Huge Games in Baltimore will release their single player role playing game (RPG) code named Project Mercury in September 2011 which EA has signed on to distribute. The PC gaming market consists of many of the same games found on consoles-albeit the user experience can vary dramatically as a function of the device on which the game is played. Additionally, thousands of games are available across a broad set of genres, sophistication levels, maturity ratings, and prices. Games are available for purchase in retail stores, such as Best Buy, GameStop, and Target (as examples) as well as via on line retailers such as Amazon, Buy.com, etc. In addition, a newer trend among game publishers is to bypass these retail stores and have direct digital game downloads. Some publishers offer digital downloads working in conjunction with retail box sales, and some in lieu of box sales. Bypassing a retail box sale, either in store or on line, can save significant money for the developer, given the large distributors often command 40% or more of the retail sale. Regardless of how the gamer takes possession of a game, a royalty back to the platform maker is still required. Combined (royalties and distribution partners) can command two-thirds or more of the total sales. SA estimates that total global sales of game software of $46.5 billion in 2009, broken down into physical game software of $33.4 billion and on line game software and services of $13.1 billion. In total the market was relatively flat from 2008, however, online grew while physical game software shrank as noted below. Global Physical & Online Game Revenues 2008-2013 Physical & Online Game Revenues 111 Online Game Software & Service Revenues 75,000 50,000 25,000 ... i:;:i O~====~==.;c:.==='i'=="'i'==~···:·· 2009E 2010E 2011E 2012E 2013E 2008 Alysical Game Software Revenues Strategy Analytics further breaks out the on line components above into electronic sellthrough, on line subscriptions, on line game advertising, and virtual goods, as shown in the graphic below. Prepared Exclusively for the RIEDC Page 7 of40 APS000677 Online Game Revenues by Component Million 25,000 a Virtual Goods 20,000 15,000 10,000 5,000 lil Online Game Advertising c Online Subscription Services 0-f"""=>i~,,,,,,,,~~~""""~¥==>:~""""=?" 2008 2009E 2010E 2011E 2012E 2013E c Electronic Sell Through The segment of interest within the PC Gaming sector that we are focused is the Massively Multiplayer Online Game (MMOG) space, sometimes referred to as the Massively Multiplayer Online Role Playing Game (MMORPG) market. The definition of Massively Multiplayervaries, and could account for as few as a couple hundred players concurrently but we are referring to an environment that supports up to hundreds of thousands of simultaneous users off dozens to hundreds of servers. Online subscription services, which incorporate MMOGs as well as subscriptions to the major console platforms such as Xbox Live, Sony PS3 live network services, etc. Overall, SA estimates that online services will grow on a global basis at a compounded annual growth rate (CAGR) of 13.9% over the next four years. B:ad~ground on MMOG Sp:ar.e The market for MMOGs is a large, global industry that emerged from the mid 1990's and has expanded as a function of availability of bandwidth, broad penetration of PCs in households, and the development of highly immersive game offerings across a broad portfolio of gamer interests, referred to as game genres. The market for MMORPGs varies dramatically based on: • • Level of game - from more casual on line games to highly sophisticated AAA games such as Copernicus being developed by 38 Studios. Game Mode- MMORPGs are typically found in two varieties o o Browser based - where the full execution is server-based and the player requires only an internet connection and a PC - there is no software downloads or retail box purchases, though sometimes requires some small applets for proper execution Software based on PC, either digitally downloaded or purchased through retail or online. In this environment much of the processing handled via Prepared Exclusively for the RIEDC Page Bof40 APS000678 • • • the PC and storage of game settings, completed exercises and scoring is often retained locally. Game Genre - including Sci-Fi, Fantasy, Racing, Shooter, Real Life, Sports, Historical, Super Hero, etc. Fantasy is the space we are focused on with Copernicus. The Fantasy portion of the MMORPG space is the largest, commanding over half of the total gamer base. Target age group Monetization Models o o o Subscriptions purchased for single play, monthly, 3 month, semi-annual, and annual subscription as well as lifetime subscription are some examples of subscription offerings. Typically, subscriptions for higherend MMORPG range from a low of $5-7/month for a browser-based game such as Runescape from Jagex, to $15/month for Blizzard's World of Warcraft (WoW) though discounts are offered for extended game period play. Freemium Model - this model basically is a newer mode whereby game monetization is facilitated primarily through digital item sales and advertising where the game itself is free to play. Hybrid Models-where players can begin a game without a financial commitment and may aspire to subscribe to a premium subscription which offers an increased level of challenges and game play. SA estimates that the overall global size of the premium MMORPG market is slightly over $2 billion as of yea rend 2009. The premium sector is defined to include subscription-based payment models. Two leading players dominate the market with almost 88% of the revenues, including Blizzard and NCsoft. 2009 Global MMORPG Share Total Market $2.05 Billion l?I Blizzard 12.1% 1111 Ncsoft a Other 26.8% Prepared Exclusively for the RIEDC Page 9 of40 APS000679 INSIGHTS FOR SUCCESS The "other" category, representing 12.1%, or approximately $248 million is comprised of several other notable participants, including Turbine (now part of Warner Bros.), Mythic (EA), Funcom, CCP, and Sony Online Entertainment (SOE) in addition to many much smaller companies. Blizzard Entertainment, now part of Activision Blizzard (NASDAQ: ATV!) is the creator of World of Warcraft (WoW), initially introduced in 2004. In many ways it is an anomaly as it has grown approximately 4X larger than any other MMORPG in the AAA fantasy game space It now has approximately 11.5 million active subscribers globally with over half this base in Asia and the remainder between the US and Europe. It should be noted that WoW appears to have reached a plateau based on its subscriber numbers. In December 2008 Blizzard indicated they had achieved an 11.5 million subscriber base while in their Ql 2010 financials they indicated that their base was a stable 11.5 million. Typically, a spike in subscribers will be observed with the release of a new extension to the game. Blizzard is expected to release its third major expansion, Cataclysm, by the end of Q3 2010. The graph below shows the MMORPG (which is exclusively from Blizzard) relative to ATVl's other major revenue centers while below the Blizzard revenues (mostly WoW) are shown. Activision Blizzard Breakdown of Net Revenue (US$ millions) $2,500 ;···1 ..................................................................................... $2,000 $1,500 $1,000 $500 / -+-- MMORPG (mass multiplayer online role playing) ····•·····Console ....,,,,, .... Handheld $····i~···· Prepared Exclusively for the RIEDC PC & Other Page 10 of40 APS000680 iNSlGHTS FORS!.JCCES:S Blizzard's Contribution to the Activision Blizzard Combined Entity Net Revenue - Distribution ($millions) 2,007 2,008 2,009 408 410 423 3,987 5,032 4,775 The space that 38 Studios is focusing with its Copernicus initiative is clearly classified in the high end, AAA class MMOG space in the Fantasy Genre - these are games that require significant initial investment, long development cycles (often 3-5 years+), and a vast array of talents ranging from technical to creative, strong management, etc. This is the same space occupied by Blizzard's WoW. 38 Studios aspires to replicate the success demonstrated by Blizzard's WoW. WoW, launched in 2004 on an initial estimated development budget of approximately $100M, appears to have reached a plateau in subscribers. No other MMOG has come close to WoW in subscriber base and it should be noted that the Asian market accounts for over half of its total base. Approximately 98% of Blizzard's revenues cited above are attributable to WoW. MMOG Active Subscriptions World ot Warcraft Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-00 Jul-00 1-+-World ofWarcraft (North America) ·-+-World ofWarcraft (Europe) Oct-06 Jan-07 f<;Jr-07 Jul-07 Oct-07 Jan-08 Apr-08 ,,_ Worid ofWarcraft (Asia) -·<>··-World ofWarcraft ('/Vorldwide) I Source: MMOGchart.com Prepared Exclusively for the RIEDC Page llof40 APS000681 fM5KsHTS FORSlKCE.$5 The next largest MMOG, Ncsoft's Lineage, Lineage II and Aion combined are somewhat over half the size of Wow. Lineage and Lineage 11, released in 1998 and 2003 respectively, have a combined subscriber base at peak of less than half of WoW's total subscriber population. Ncsoft's Aion release has had significant success since becoming available in November 2008. To date, it has garnered some 2.7 million subscribers, however, it should be noted, again, that much of the activity is Asian-based. NCsoft's financials are compelling, and they demonstrate that profitability can be attained with critical mass, though this often can take several years to achieve. As noted in the table below, NCsoft stumbled between 2007 and 2008, prior to releasing Aion, which helped it propel its revenues in 2009. Ncsoft's Consolidated Financials 2007-2009 (Based on Currency Conversions from KRW to USD) Net Revenue Cost of Goods Sold Gross Profit Total Operating Expense Net Income (after minority ii Total Assets Total Liabilities Total Stockholders Equity 2009 549 135 414 212 160 737 177 560 2008 275 83 192 152 20 417 80 337 2007 352 77 275 222 48 583 103 480 NCsoft's 3 Year Financial Trend $600 ~Net Revenue $500 -lii-- Cost $400 of Goods Sold ···/,:····Gross Profit $300 $200 ....,,~,.... Total Operating Expense $100 -JK- Net Income (after minority interest) $- 2007 Prepared Exclusively for the RIEDC 2008 2009 Page 12 of40 APS000682 Typically risk factors can be classified around those which are in ones control and those that are not (systematic risks), such as market conditions, timing of other events such as movies that influence a given title or genre, etc. Strategy Analytics believes that 38 Studios has done an excellent job in addressing some of the critical success factors within their control, including but not limited to: • • • Attracting key talent, including creative, techni~al, and management. Clearly 38 Studios is being designed to support a world-class offering in the space it serves, Implementing a disciplined development approach using SCRUM which provides tight controls and integration of various development efforts in a timely manner, and, Formalizing a recruitment process to fill critical positions as they occur and ensure that the necessary talent base is resident when needed in the process. Other risk factors include the following: • Few offerings have achieved greater than 300.000 subscribers, which is considered near breakeven for Copernicus. The short list includes what is considered the "gold standard" with Blizzard's World of Warcraft (WoW). Others who have achieved respectable figures include: o NCsoft (Korean based company) with its Lineage (Launched Sept. 1998 and gamers of 3MM+ at peak) & Lineage II (Launched October 2003 with 2MM gamers at peak (approximately 3MM and 2MM respectively for Lineage). Aion Online, NCsoft's latest big release, has an accumulated gamer base of 2.7 million since its launch in November 2008. o Funcom's Age of Conan: Hyborian Adventures - while achieving a high of 700K in subscribers repeated problems now place it below lOOK o Mythic's Warhammer- released in July 2008, achieved SOOK subscribers and 1.2 million copies sold but quickly lost ground and reported about 300K subscribers after Mythic cut back servers due to huge losses at EA. o Sony Entertainment's Everquest & Everquest II, (SSOK and 350K subscribers respectively) o CCP's (Iceland) Eve Online - 330K - this is a Sci-fi focused genre though clearly has fantasy elements. Prepared Exclusively for the RIEDC Page 13 of40 APS000683 n45!CHTS FOR SUCCESS o Turbine's Lord of the Rings (200K), and Dungeons & Dragons: latest version "Eberron" hit 1MM o Mythic (EA studio) Dark Age of Camelot. 300K o Sony Online Entertainment (SOE) - SOE acquired Sigil Online and got Vanguard: Saga of Heroes- initially sold about 250K copies post launch in early 2007 but quickly gave up most of coverage. The above list provides a snapshot of some of the more successful MMOGs in the market out of the many dozens who have attempted. Strategy Analytics believes that while 38 Studios is doing "all the right stuff" the ultimate market conditions will be the true test- as is the case in any hit driven business. MMOG Active Subscriptions 200,000+ 10,000,000 9,500,000 9,000,000 8,500,000 8,000,000 7,500,000 .~ .E. 7,000,000 6,500,000 ·5 6,000,000 .::: 5,500,000 .. "'ij" 5,000,000 a- 4,000,000 I- 3,500,000 ~ 4,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: MMOGChart.com • Shifting monetization model - the more established games, such as Blizzard's World of Warcraft (WoW), use a two-part subscription model involving either a software download or retail box purchase (retail $60.00) which includes a trial on line subscription of 30 days, followed by the requirement to purchase a subscription in various time increments, ranging in price from $12-15 monthly. Prepared Exclusively for the RIEDC Page 14of40 APS000684 lMSK'iHTS FORSUCCE.SS However, Strategy Analytics is observing a shift to a "freemium" model, or hybrid premium/freemium model, where players can play for free and are attracted by the opportunity to purchase digital goods. A recent example of this is Turbine's 1 Dungeons & Dragons Online: Eberron Unlimited (D&D Online) which reported over a million new players since launch in September 2009. Interestingly, D&D Online first launched with a traditional subscription model, but was struggling and forced Turbine to convert to a freemium model. The switch saw a 500% increase in revenue for the game 2 • In addition, Lord of the Rings Online will transition to a free-to-play game in Q3 2010 despite being developed and published under the subscription model. This is a key example of a massive brand with strong appeal migrating to the freemium model. Warner Brothers now owns the Lord of the Rings franchise as a result of the Turbine acquisition and is expected to continue a large investment in this franchise. Other anticipated releases using this model include THQ's Company of Heroes Online and LucasArts and Sony Online Entertainment's Star Wars Clone Wars Adventures Online. Strategy Analytics believes that this model is gaining traction among gamers. Given that 38 Studio's release of Copernicus is over two years from launch they may have to consider a variation of this model in their business planning as it will impact their subscription estimates. In other gaming spaces, especially casual gaming, the freemium model is proving quite successful, the latest example being Zynga which offers its causal games via Facebook and other social media networks and has garnered over 200MM gamers. Zynga monetizes its games with the sale of digital items. Zynga estimates that 90% of its revenues come from 2% of players who purchase digital goods. With an estimated $150 million in 2009 revenue Zynga recently 3 received a valuation of over $4.5 billion • Strategy Analytics estimates that digital goods will grow from approximately $460 million in the US in 2009 to nearly $1.S billion by 2013, or a 44%+ CAGR. • Timing of Release-Other major MMORPGs released between now and 2012 Over the next two years several major MMOGs will be released including: 1 Turbine, based in Westwood, MA was recently acquired (April 2010) by Warner Bros for a reported $160MM and had a cumulative venture capital base of $94MM since its inception in 1994. 2 Turbine press release dated February 26, 2010. 3 See Wall Street Journal, May 4, 2010 under Digits. Prepared Exclusively for the RIEDC Page 15 of40 APS000685 STRATEGY/!\, f""~ltL\tT'i!('.'.S INSIGHTS FOR SUCCESS o o o o o Final Fantasy XIV- Square Enix is in development of its next generation effort as a follow-on to Final Fantasy XI which is about 5 years old. World of Warcraft: Cataclysm is a major release from Blizzard and expected out later this year (Q4 2010). Star Wars: Old Republic- this is Bioware's first MMORPG and has a significant investment behind it. It is a Sci-Fi genre which hasn't historically had significant take rates but speculation on this one may prove different. Guild Wars 2 - backed by NCsoft which has had much success with its previous MMORPGs Guild Wars 2 is being primed with a book covering the Art of Guild Wars 2. Trion Worlds will be launching Rift: Planes of Te Iara as a fantasy MMORPG using new server technology. Trion is also developing two other MM Os over the next two years, including End of Nations and a joint effort with Syfy with a Syfy Action MMO. The number of entrants is helpful in that it validates a demand and interest in the space that 38 Studios plans to participate. It also is important to note that many of the efforts cited above are second, third generation games which already have a significant following while 38 Studios will be entering the market with its initial release without the benefit of much history aside from the RPG console game (Project Mercury) that will be released a year earlier. Other expected releases in the space include Funcom's Secret World, APB: All Points Bulletin, Need for Speed, and DC Universe Online, however, these genres are not focused on the Fantasy theme and will not compete directly with Copernicus. • Development Cycle Observations SA reviewed the life cycles of many of the MMORPGs and examined their trajectories in terms of percentage of subscriber base attained over what periods oftime. While we recognize "typical" isn't necessarily associated with the expectations of Copernicus, it none-the-less provides some insight on historical performance that can serve as a baseline for discussion. Prepared Exclusively for the RIEDC Page 16 of40 APS000686 STRATEGY/\ if\~s~\L.>t"C~ c: S tMS!CHTS FORS!..JCCESS Subscribers (OOO's) 1 2 5 4 3 7 6 8 Years from Launch The above graphic depicts life cycles of MMOGs based on the size of the subscriber base attained over different periods of time. We examined five groups based on their maximum attained subscriber base and looked at the length oftime it required to reach their maximums. The data is fairly consistent across all sizes of subscriber bases in that it typically is four years+/- from launch to achieve maximum subscriber penetration - after which either a second major release is offered, such as was the case with Lineage and Lineage II, or the brand will experience a decline. The graph below shows the decline after year 4 and the subsequent release of a version II of an existing brand. 100~------------------. 90..Jl---------------..,.-------i SO..J1----------1~-------tf!:11------...ri 70-11---------t-----'i:l-il8Sl--------l;:1. %ofMaximum Subscriber Levels so..Jl----------1!llll---=----tf!:11-~--1 30-11----------ml---i~--t In addition to this cluster, there are two other cluster types, Type B & C. In the Type B cluster, shown below, an existing company relocation or expansion will usually precipitate other growth. Montreal is an example of a Type B cluster. Again, growth typically happens over an extended period (10+ years) and is often supported by Government incentive programs. Type B clusters have between 1500-5000 headcount. Type B Cluster • Prerequisites - Government incentives --: Local talent possibilities Spin-offs and Growth Employment Organic Growt Type B- Company Relocatlon _____.© ~ 1500 - 5000 employees 10+ yrs. New York, Washington, Austin Time····-···-···-··--···-··-···-··-···-·····--·······-·-> The third cluster, Type C, is illustrated below. This cluster type typically experiences slower growth and has a combination of incubation initiatives, entrepreneurs, local talent, and government incentives, but doesn't employ an "anchor" tenant and looks Prepared Exclusively for the RIEDC Page 24of40 APS000694 towards more organic growth. Type C Clusters typically have between 500-1500 total headcount. Type C Cluster • Prerequisites - Government incentives - Local talent possibilities • 500-1500 headcount • Maryland, Illinois, Massachusetts, Florida Employment Gaming Company Incubator, Seed Development Funds Injection, Entrepreneur attraction. Commercial Expansion State/Educational Institutional sponsored student development Time------------------------> Video game history is rooted in American and Japanese culture, and both nations remain #1 and #2 (respectively) in terms of economic activity in games. The United Kingdom was ranked #3 for many years, but has been recently surpassed by Canada. Canada's recent success is attributed to its aggressive economic development activities and clustering effect in major cities like Montreal and Vancouver. The UK views Canada's approach as so aggressive that it has attempted to make a case of international anti-competition practices to the World Trade Organization. Global national clusters of note include: • United States: #1 in both production and sales. See below for details. • Japan: #2 nation for games. Strong gaming culture. Heavy console orientation and play via mobile phones. Prepared Exclusively for the RIEDC Page 25 of40 APS000695 tNS!CHTS fORSUCCf-$$. • Canada: Recently ranked #3 for game production. See below for details. • United Kingdom: Long-time leader with strong technical innovation. Exit of major publishers and relatively high cost base has hurt its sustainability. • South Korea: Driven by online/MMO games, has risen from a piracy riddled market to a multi-billion dollar sector via business model innovations. Heavy government support and investment. • China: Similar to Korea, market is largely on line based. High degree of government intervention. • France: Still a leader in artistic/design innovation, but has lost some momentum in recent years due to publisher shrinkage and lack of business acumen. One of the only European Union countries to provide tax incentives (based on a "cultura I" exception). • Nordic countries: Collectively, the region punches above its weight in term of outputs/successes, partially aided by a highly organized regional support organization. • Australia: Heavy government support has allowed relatively small development community to compete on a global scale, primarily driven by work-for-hire exports. There is, of course, game industry activity across the entire globe - just in varying degrees of size and economic viability. For example, in South America, both Brazil and Argentina support an indigenous development sector, mainly focused on mobile and online games. Many eastern European countries are making progress with work-for-hire services and development of casual/browser based games. India has pushed outsourcing, especially for testing and localization services. Also, other regions of South East Asia are driving forward with online games, following the model set by South Korea and China. Prepared Exclusively for the RIEDC Page 26 of40 APS000696 The United States and Canada combine to make a powerhouse of game production and consumption. It is estimated that 45,000 workers are employed in the game industry in the USA, with an additional 15,000 workers in Canada. While there is game development occurring from coast to coast, the notable regional/city based clusters are as follows (listed in rough order of size/importance): • Bay Area/Silicon Valley: Along with LA, houses approximately half of the nation's game development workforce. Highly diverse range of market segments and value chain representation. Especially strong with emerging social game segment due to proximity to key web2.0 companies. No government support. • Los Angeles: High concentration of workers in the Santa Monica region. Prominence of game publishers and art/audio outsourcing due to proximity to Hollywood. No government support. • Seattle: Home to Microsoft and Nintendo, along with many independent studios. Recent growth and success in the casual/web game space (e.g., PopCap, Real). Dedicated game school, DigiPen, with strong reputation. No government support. • Montreal: See below. • Vancouver: Home to EA's 2000 person strong studio, and dozens of other large and small studios. Region has mostly grown organically via "acorn" model, with most studios having been seeded by EA's presence. Cluster has been coordinated by an industry association, but only recently has a provincial tax incentive been approved. • Austin: See below. • Boston: See below. • North Caroline Research Triangle: Emerging from the region's historical roots in R&D and simulation, the region has excelled in game engine/graphics tools and technologies - in addition to housing several successful studios and pioneers in the serious games space. No government support, though industry trade group is Prepared Exclusively for the RIEDC Page 27 of40 APS000697 currently lobbying for an NC state tax break. • Toronto: With higher cost of living/business, it has taken longer for the game industry to take hold in Canada's largest city. The indie scene and art games have found a particular niche, with large scale development coming with the introduction of Ubisoft's newest studio (via a CND$264M investment from the provincial government). • Orlando: Leveraging the presence of theme parks and related entertainment companies, a game sector has emerged in Orlando and surrounding regions. Home to dedicated game/entrainment media school Full Sail. The state of Florida recently approved a 20% tax credit. • New York City: Despite high cost of living, NYC is home to many casual and mobile developers, as well as large publishers with a need to be close to financial markets. The city leverages strong school base and the arts/new media community. No government support. Several other cities are enjoying spurts of growth such as Atlanta (government incentives), Pittsburg (reputation of CMU's Entertainment Technology Center), Dallas (specialization in shooters) and the Hunt Valley region (historical roots in strategy games). Of note, the states of Michigan and Louisiana of have made extremely limited progress at growing the game industry within their borders, despite having well publicized (and generous) tax breaks. Examining employment here is a look at the top eight states that have emerged with a sizable presence in the video game industry. In total, the US has approximately 45,000 jobs in the video game industry, with nearly half (47%) found in California 4 • There is a significant drop-off after California, with Washington commanding about 9%, Texas approximately 6%. Collectively, these three states are responsible for approximately 62% of the total video game employment in the US as noted in the graph below. 4 Game Developer Census, December 2009. Seehttp://www.gamedevresearch.com Prepared Exclusively for the RIEDC Page 28 of40 APS000698 Washington Texas i:tWWldfWMfo 38 ttmmmm o 2600 New York Massachusetts Illinois Florida Maryland 0 5000 10000 15000 20000 25000 Source: Game Developer Research, SA estimates, industry sources Closer to Rhode Island, Massachusetts has an estimated 1200 video game jobs found at such companies as Harmonix, Turbine, Microsoft, etc. Much of the video game development activity required fairly long, 10+ year evolutions to reach these figures. Gaming salaries vary by region with the western US having the highest overall average salaries across all game job functions as depicted in the table below. 5 . . . ._ California Washington New York Florida Texas 5 80.6 74.0 64.2 60.4 60.3 31 41 20 38 43 107.4 93.7 77.5 70.4 70.2 Source: Game Developer Magazine, Salary Survey, April 2010 Prepared Exclusively for the RIEDC Page 29 of40 APS000699 A trend SA is observing with employment in video gaming is the rise in the small entities that are emerging, those with typically five or less employees. These small players are emerging as a function of three key industry changes, including: 1. Many of the large video game developers have experienced difficult economic times resulting in significant layoffs. Note EA, for example, which shed approximately 1500 jobs in the past six months. These displaced employees now seek other opportunities in their field of expertise. 2. The rapid rise in both mobile and social gaming - in these segments requirements for development are significantly less than larger video game efforts. Consequently, games can be developed in these segments with very limited (<$SOK) development expense along with a few developers. 3. Emerging new monetization methods - these allow small games to be sold via channels such as social networking, mobile app stores (e.g.: Apple) and direct eliminating the need for a multi-tier developer/publisher model relationship which incurs a large percentage of revenue. The graph below illustrates SA's projection of growth in five year increments of the overall gaming industry. While larger game developers will still dominate, there will be a significant growth in the smaller (<5 employee) entities. Projection of Entertainment Software Employment by Size of Entity 60000 - . - - - - - - - - - - - - - - - - - - rn Employment< 5 employees 1995 2000 Prepared Exclusively for the RIEDC 2005 2010 2015 2020 Page 30of40 APS000700 It is useful to investigate existing game industry clusters as a means to understand how different strategies and combinations of resources have affected a given city's business. Ofthe various North American clusters listed above, Montreal, Austin and Boston have been selected as they each represent a rather different approach. Montreal has recently gained a reputation for being a world-class game development cluster. With a history rooted in technical innovation across many sectors (e.g., aerospace, simulation, graphics tech), and French influenced artistic flair, Montreal had many natural resources to help seed a vibrant game ecosystem. In the early-to-mid 90s, Montreal was home to a handful of small game development studios and a dedicated animation school. Today, Montreal is home to over 4000 game workers, dozens of studios and game technology companies, along with several schools offering dedicated game degrees, and game research labs. Montreal is also home to Ubisoft's largest production facility, with nearly 2000 game workers under one roof. Path to Growth In the mid 90s Ubisoft was looking to expand from its home base in France and gain a foothold in the North American market. With commonality of language, they started discussions with the Quebec government, and were offered a tax incentive of 37.5% credit on labor costs. Over the years, Ubisoft steadily grew the studio to its present 2000 person head count, and has produced multi-million selling game series such as Prince of Persia, Assassin's Creed and Splinter Cell. Other local companies took advantage of the same tax breaks, along with other provincial/federal media funding schemes and staff training support programs to grow alongside Ubisoft. After several block-buster hits, Montreal's Ubisoft studio attracted the attention of Electronic Arts, who were motivated to open a nearby studio to gain access to the "magical" talent in the region. As more successes came, other studios followed and kicked the clustering effect into high gear. Aside from the presence of the incentives themselves, various governmental agencies and an industry trade body are aggressive in promoting and supporting the Montreal cluster. Prepared Exclusively for the RIEDC Page 31of40 APS000701 Montreal Headcount (including Quebec) Game Employees In Montreal (Including Quebec) 7000 6000-1iill.l.l~~µ;;+;;;~+.§g;;+;;;~+.§+.4.l~%i.lf.if:mW:ifill±l±':i 5000~~~~~~'iB'B'B~Bl'Bl'i~~~~~ 4000+;;:;il~~_,,~"""""~_,,~"""""~~~~ 1000 0 2000 2005 2007 2008 Source: Quebec Game Industry Positioning Study, Nov 2008, Alliance Numerlque Summary of Montreal • Strong roots in technology and the arts • Fledgling game industry • Introduction of tax breaks and related incentives • Arrival of major anchor tenant • Consistent production of hits attracted publisher attention for expansion • Ongoing aggressive cluster building efforts As luck would have it, one of the game industry's forefathers toiled from his parents' basement in Austin during the early 80s. Legendary game developer (and cosmonaut) Richard Garriott, grew up in Austin and started programming games in the late 70s, later founding Origin Systems. Electronic Arts (EA) bought Origin in 1992, which accelerated the growth of the game development community in Austin. With a handful of strong technical universities and research programs in the area, and spin-off studios from Origin over the years, Austin has emerged as a leading game cluster in the United States. With Origin pioneering much of the early work in MM Os, Austin has developed a recognized regional specialization in creating online games. The largest network of game developer conferences hosts their annual event focused on online games, GDC Online, in Austin. Path to Growth Origin had great success in the PC game market in the late 80s and early 90s, and eventually made groundbreaking products for the new "CD-Rom" format. Smash hits Prepared Exclusively for the RIEDC Page 32 of40 APS000702 tNS!CHTS FORSUCCf-.:%5 included the Ultima series of role-playing games, and the Wing Commander franchise. After the take-over by EA, several splinter groups started new studios as a means to break away from EA's "corporate" approach to making games. Nearly all studios in Austin have their roots based in Origin. In short, Origin/EA served as the "acorn tree" that seeded the local community. Garriott led the development effort of the first modern MMD, Ultimate Online, in the late 90s and hence started the region's specialization in the nascent on line game space. More recently, the city's chamber of commerce, the Texas state government and the state's film/media trade association have been backing the game industry. There is a "'5% tax break on game productions in the state, along with other efforts to promote the sector and conduct inward investment. Austin is also home to the Digital Media Council, which is focused on fostering the educational and talent needs of the region via industry-academia collaboration. Austin Headcount Austin-based Game Employees 201 O Summary of Austin • Home of game industry legend • Establishment of central company, later purchased • Ongoing formation of splinter start-ups from the central company • Natural evolution towards regional specialization in MMO games • Late arrival of cluster support efforts to further grow region, including tax breaks Prepared Exclusively for the RIEDC Page 33 of40 APS000703 The Boston region has a rich history of technology innovation and has been at the forefront of each major technology platform in the information technology industry. Much of this has been centered on MIT and the big tech companies along Route 128. The local expertise in technology, robotics, simulation and artificial intelligence, along with the relative ease of access to capital has provided rich soil for the game industry to prosper. The largest Boston studio, Harmon ix (with over 400 staff) was born out of the MIT Media Lab and went on to produce the Guitar Hero and Rock Band series, both of which have become $!Billion+ franchises. Of note, Governor Patrick declared September gth, 2009, as Video Game Day in Massachusetts to commemorate the release of Harmonix' The Beatles: Rock Band. Path to Growth As hinted above, the development of the game cluster in Boston has largely been the result of the incubation effect between academia and the flow of capital. Many of the early game studios in the region, like the legendary Looking Glass Studios spawned from MIT graduates, setting standards for game innovation and pushing the boundary of a nascent art form. Over the years, the region has prospered and grown organically, boasting over $2 Billion worth of revenues. Over a dozen schools in the region now offer game specific programs and degrees, with MIT housing two game related programs/labs (i.e., Comparative Media Studios group and the Gambit GameLab in collaboration with Singapore). Cluster development efforts mainly started via grass roots by Boston Postmortem, a monthly gathering of local game workers. Postmortem later became sanctioned as the official Boston chapter of the International Game Developers Association (IGDA). Postmortem enabled the community to share knowledge and opportunities, and was the group that fought to get the attention of the government and loca I economic development agencies. Only recently has there been such an interest by government, but now they fully support the game sector (as evidenced by the Governor's declaration above). Though, there is no evidence of tax incentives forthcoming, despite a concerted push to get one. Prepared Exclusively for the RIEDC Page 34of40 APS000704 Boston Headcount Boston Area Game Employees - 201 O 1400 1200+.e~~~~~ms~~mmmm~ffi5mm~i.!.iffi~ittf~'lliti'ltiti:t:tt~~ aoo------- 1000 -IA*-----~ 6001111 400 200 0 2010 Boston Summary • Strong academic roots in technology innovation • Early incubation effect spawning new companies • Pioneering advances in game technology and design • Grassroots driven cluster dynamics at play • Rapid growth of academic offerings • Late arrival of government interest, though with limited assistance A Game Cluster in Rhode Island SA believes that Rhode Island has the potential to be a hybrid Type B/Type C clustermeaning that both an anchor tenant, government incentives, along with the prerequisite for talent is available. Without further investment, incubation, and other support programs beyond an initial anchor tenant the likelihood of success is significantly diminished. Prepared Exclusively for the RIEDC Page 35 of40 APS000705 STRATEGY/\ !Htf\![JrTi!(:;:s INSIGHTS FOR.SUCCESS While there are clear risks associated with an investment in a gaming entity there are also tangible benefits that can be accrued. In an effort to assess a macro economic impact associated with the development of a gaming cluster in Rhode Island (RI) Strategy Analytics incorporated the Regional Input-Output Modeling System (RIMS II) developed by the U.S. Department of Commerce's Bureau of Economic Analysis (BEA). The RIMS approach dates back to the 1970s and has been updated with regional economic data and is used by both the public and private sectors. State and local governments use multipliers to help estimate a regional economic impact of various 6 policies and projects, such as firms or industry locating or relocating to a given state. Multipliers are built by industry sector and geography by the BEA. Using this method helps to provide guidance on what the likely range of impact would be under different scenarios, such as developing an incentive plan to attract video game companies to locate in a given market or investment in an existing entity provided that a direct jobs estimate can be made. Strategy Analytics further used research that was produced by Stephen Siwek, an economist, who authored a report entitled Video Games in the 21st Century and was 7 published by the Entertainment Software Association (ESA). In this research multipliers were obtained for the software publishing industry for a II states that had software publishing activities which were then "applied to the direct game industry employee counts on a state by state basis". This included some 31 states. Since Massachusetts was one of the regions covered, and the broader economic region covered by the BEA includes Rhode Island, a multiplier effect would be applicable for this market. The research provided by Siwek indicated a composite multiplier for all regions where the games industry had employees. That multiplier was calculated to be 3.4312. To interpret the multiplier calculation, for every 100 jobs that come into a market for the gaming software development market, there would be a total of 343 created, broken down into 100 direct jobs and 243 indirect jobs. Strategy Analytics used this multiplier and applied it to the employment projections contained in 38 Studio's proforma estimates. This process yields the impact of 38 Studios employment on the regional economy in terms of the number of indirect jobs created if 38 Studios' peak projections are realized. 6 7 For more information on RIMS II please refer to http://www.bea.gov/bea/regional/rims/ To obtain a copy of this report please refer to http://www.theesa.com/facts/econdata.asp Prepared Exclusively for the RIEDC Page 36 of40 APS000706 lNSlCHTS fORSUCCE.$$ Estimated Gross Employment Impact of Gaming Cluster in RI With 38 Studios as an Anchor Tenant ---Anchor Gaming Tenant (38 Studios) Total Employees (Actual) 458 1113 1571 Average Salary (000) $ 72.5 54.5 59.7 Total Value (millions$) 33.2 60.7 93.9 The above calculations are based on the following assumptions: • The above table does not include an estimate for additional gaming tenants in Rhode Island and is based exclusively on 38 Studios relocating and expanding their employment base there. • Of the 458 jobs, 396 are from the steady-state projections of 38 Studios Copernicus effort, and the additional 62 represent 80% of the 78 jobs that are in Baltimore working on Project Mercury and that are expected to relocate to Rhode Island, leaving a small team remaining in Baltimore 8 • The average salaries of $72,500 and $54,500 are estimates, the latter is based on a 25% +/-reduction from the average game salary. It also reflects the median household income level for RI as of 2008. 9 • Based on an average 7% state income tax for the salary ranges noted in the above table, RI would expect to see gross incremental income tax revenues of $6.8 million on an annual basis 10 • • The Indirect Employment estimates as a function of the multiplier effect are assumed to be located in Rhode Island. • While these are annual values, no cost of living or wage increase factors have been applied to the above data. • Corporate income tax revenues have not been factored into the analysis. 8 Based on May 13 111 2010 meeting notes from on-site meeting at 38 Studios. Please see http://guickfacts.census.gov/qfd/states/44000.html 10 Based on RI Income tax based on income between $32,551-78,850 at 7%. 9 Prepared Exclusively for the RIEDC Page 37 of40 APS000707 U'iS!GHTS FORStKCE.$$ In addition to the job creation impact of relocating 38 Studios to Rhode Island SA estimates that an incremental number of additional businesses/jobs will be either spawned or located in Rhode Island once 38 Studios is fully established in the State and products are being launched. Based on other cluster expansions SA estimates that an additional 200 jobs with a multiplier impact that represents total employment of approximately 686 11 could be developed over time once 38 Studios is firmly entrenched. These incremental jobs would provide an additional $14.5 million in direct wages plus an additional $26.5 million for indirect wages, or approximately $41 million additional over the data presented exclusively from 38 Studios in the previous table. Among the various critical success factors for developing a video game cluster in Rhode Island is the need for a supply of talent. Rhode Island is fortunate to have a significantly rich academic environment that supports curriculum that is essential for the gaming industry. Specifically, Rhode Island has the following educational institutions with several that offer curriculums that support of the video gaming industry. While two institutions stand out in terms of having a significant benefit for a gaming cluster, others, as designated with a ./offer courses in computer science, animation, and related topics that are important for a game developer. i ·i!i.i:l:·: i!i!i.i: :!:i.:i :i·: ,:1:1:1: : .:1: ·: 1:1: :.: : : : : :,: : :J.il: l ~l~i·i:Ji : i:li ·i',:i·i:i:J·i: : : .i ·: i:i: :il:i.: .: li .i l:=: :1.1H·:n1: : .Jl:J.i J: : : .:=1: : :1:1: :1: : : 1t~'i: :·: :i i'i:i:i: .: 1: :1:·: : 1:i:i:i: : 1:::1:::::::::1:1:::::::1~~IHi:11:.:il:i:i:JJ!Ui.llll~~iiii Brown University Providence Bryant University Smi1hfield 3807 Community College of Rhode Island Warwick 17612 New England Institute of Technology Warwick 2655 Providence College Providence 5180 Rhode Island College Providence 9085 Rhode Island School of Design Providence 2350 Bristol 4609 Roger Williams Uniwrsity °'..,°' °' 8332 Salve Regina University Newport 2691 University of Rhode Isl and Kings1on 15609 U.S. Naval War College Newport ? .., .., .., .., ..,.., .., .., ..,.., .., .., NA Rhode Island is drawing from at least three key institutions in support of a video game cluster in the state. A blending of creative talent and computer animation and software 11 Based on 200 jobs plus indirect jobs of approximately 486 using the same multiplier of 3.4312. Prepared Exclusively for the RIEDC Page 38of40 APS000708 fNSlGHTS FOR SUCCESS design talent are essential for the support of a gaming cluster in any region. Rhode Island is fortunate to have at least three important institutions within its border that offers these skill sets, including RISD, Brown, and URI. In addition, other institutions offer a variety of supporting game curriculum, including at the community college level with the Community College of Rhode Island (CCRI) which offers some game development courses. CCRI indicated there could be interest in further course offerings in this space if additional job demand was evident in RI according to one of that institution's professors in computer science. Rhode Island School of Design Of critical importance is the creative talent from Rhode Island School of Design (RISD). RISD graduates some 660 students each year and retains about 17% in the state after graduation. Alum from RISD are almost equally split between Massachusetts and Rhode Island, each numbering in the vicinity of 3000. The top three majors, out of 21 different options, include Illustration, Industrial Design, and Graphic Design. RISD students have the requisite skill sets for the creative aspects of game development and currently have interns with 38 Studios. Brown University Brown University ranks among the Ivy League institutions in the U.S. - giving it a broad draw of students and talents. Among the diverse academic areas at Brown the Computer Science course of study consists of an extensive array of course work that includes Machine Decision and Game Theory, User Interfaces and Virtual Realty, Computer Graphics, Robotics, and Innovating Game Development. One of Brown's Computer Science professors, Chad Jenkins, not only teaches a course on game development, he also co-authored a book "Creating Games: Mechanics, Content, and Technology" published in October 2008 which is targeted as a college level text for teaching courses in game development. In addition to a rich set of course-ware in gaming and related curriculum, Brown is one of five institutions that received funding from the National Science Foundation (NSF) to support the Graphics and Visualization Center. Other NSF sponsored institutions that are part of the Graphics and Visualization Center include Caltech, Cornell, UNC, and Utah. Each of these institutions is involved in a multisite collaboration effort. One of the projects involves the use of 3D graphics which is used in video gaming and other developments for space exploration and scientific research. Prepared Exclusively for the RIEDC Page 39 of40 APS000709 STRATEGYA:: NA~.iL\t'T'~C:S iNS!CHTS FORSUCCE.$5 University of Rhode Island Next to CCRI the University of Rhode Island (URI) has the largest student population in the state with over 15,600 enrolled students. URI offers an extensive base of computer science course work with a track on Interactive and Collaborative Gaming which includes course work on artificial intelligence, interactive game level development, and user interface design. In addition URI offers course work on digital art and design. This gaming track is under the direction of Dr. Jean Yves-Herve. While a cluster in RI clearly has advantages as outlined above and referenced via other clusters there ancillary risk factors that must be considered. Each risk has varying degrees of probability but none-the-less exist. They include: The game industry as whole flat lines and little or no growth is exhibited (but unlikely) 38 Studios takes longer for "halo" effect to kick-in -the basis for growth is a function of 38 Studios meeting their stated business objectives RI relies on 38 deal as its "solution" to the game cluster challenge (i.e., does not adopt an aggressive holistic strategy as outlined in this report) Neighboring clusters grow/succeed more rapidly than expected, and extract local talent faster than RI cluster can evolve and absorb them. Additionally, it should be noted that most "anchor" tenants are established, revenue generating companies with some history of product etc. In the case of 38 Studios it is a pre-revenue concern, meaning that it won't necessarily have the pull-through impact of others with a more established base at the inception. Prepared Exclusively for the RIEDC Page40of40 APS000710. EXHIBIT 107 Rhode Island Economic Development Corporation vs Jason Della Rocca - Vol. II Page 198 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. WISTOW: Why is it I like you so much? MR. KARP: I don't know. It's a deep mystery. Q. Let's go to page 94 of your deposition. You have read this; right? A. Yes. Q. When did you read it? A. When it was delivered. Q. When was that? A. I do not recall. Q. Approximately? A. A few weeks ago. Q. Now, let's go to page 94 and line 19 -- 21. Well, let's put it in context. Maybe line 14 would be a good place to start. "Does that refresh your recollection, sir, as to whether or not you understood at the time that this was being drafted that the report was intended for the eyes of the RIEDC Board of Directors?" Do you see that? A. Yes. Q. And you answered: "Yeah. I mean, I suppose at that time I assumed the report was going to the board members." Do you see that? A. Yes, sir. Q. That's the report, the 40-page report we're 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 testified to; yes or no? MR. VALENTE: Objection. MR. KARP: Objection. Q. Isn't that what you testified to? MR. KARP: He said they tend not to. A. They tend not to. Q. They tend not to. A. And you before stated they do not. Q. Okay. Let me rephrase it. Did you believe that boards of directors tend not to read 40 or 50-page reports? A. Correct. Q. And you testified to that under oath; yes? MR. KARP: Asked and answered. A. Yes. Q. And that's why you prepared an executive summary; isn't that so? A. Correct. Q. And you also knew that there would be some kind of deck presentation, a slide presentation, PowerPoint presentation to the board? A. Yes, sir. Q. So you knew there would be a 40-page report; yes? A. Yes. Q. Which you knew that boards tend not to read; yes? Page 199 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 talking about; right? A. Yes. Q. And then the question was: "And why was it that you suggested that?" And the reference was to having a "bulleted executive summary." Do you see that up in line 8? A. Yeah. Q. So the question is, really, why was it that you suggested it in executive summary? Do you understand that? A. Yes, sir. Q. And your answer was, "Well, I mean, having worked with board members extensively, you realize that they tend not to read 40 page or 50-page reports. So, you're always best to do succinct executive summaries at the start." Do you see that testimony? A. Yes. Q. Did you believe that when you testified to that? A. Yes, sir. Q. You were under oath at the time? A. Yes, sir. Q. So, based on your extensive experience, it was your belief that board members would not tend to read 40 or 50-page reports. Isn't that what you Page 201 1 2 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. VALENTE: Objection. A. Correct. Q. You knew for that reason you would prepare an executive summary; yes? A. Correct. Q. And you knew also that there would be a slide projection presented to the board; yes? A. Yes. Q. And, in fact, it was your belief that they would read -- that they would maybe read only the first few pages of the report; correct? MR. VALENTE: Objection. Q. Isn't that so? A. It's my experience that -- again, I as stated there, that boards tend not to read very lengthy reports, and so it was important to provide an executive summary. Q. Well, wasn't your operating assumption that they would maybe read only the first few pages? MR. VALENTE: Objection. Q. Isn't that so? A. I do not recall. Q. Don't you recall what you testified to? A. I don't remember that particular -Q. Well, let me read it to you, page 95. Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (5) Pages 198 - 201 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com .. Rhode Island Economic Development Corporation vs Jason Della Rocca - Vol. II Page 202 1 1 A. Okay. 2 Q. Line 11: "So your operating assumption was that 3 maybe they'd only read the first few pages?" And 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2 3 4 what was your answer? A. "Correct." Q. Did you believe that? A. Sure. Q. That was your honest opinion? A. Yes. Q. You testified under oath? A. Yes. Q. Do you have the 40-page report? MR. KARP: You mean, today, right here? MR. WISTOW: Yeah. Do you have that? Anybody? MR. WRAY: It's been marked as Exhibit 100. Q. Do you recognize this? MR. KARP: Take a moment to look at it, please. MR. WISTOW: Take as much time as you want. A. This appears to be the final report produced by Strategy Analytics and Perimeter Partners. Q. Well, do you recall testifying from that the other 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 203 1 day when Mr. Dolan was asking you questions? Yes, it was presented several times. Q. That's the document that you testified from, is it not? MR.WRAY: Can we go off the record for a second? (DISCUSSION WAS HELD OFF THE RECORD) MR. WISTOW: Mr. Wray, who is co-counsel with Mr. Dolan, who was asking you the questions, has indicated that the exhibit that I've just handed you has no substantive difference from the exhibit and the document from which Mr. Dolan asked you questions about the report. Do you understand that? THE WITNESS: Yes, sir. Q. Okay. So, let's assume that's the report. Is there any reason to believe that's not the report? A. There's no reason to believe that it isn't. Q. Take a minute. There's no rush. A. No, I gave it a review. Q. You accept that's the report, don't you? A. Yes. Q. Now, what I'd like you to do is show me where first in the executive summary you've indicated to the board of directors of the EDC that economic Page 205 1 2 A. 2 3 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 theory alone says that this loan is a bad move. Can you do that? MR. VALENTE: Objection. Q. I'm quoting specifically, Mr. Della Rocca, from your e-mail to Timothy Loew of May 26, 2012. Do you want to see if I've quoted it correctly? A. I understand. Q. You understand I've quoted it correctly; yes? A. Yes, sir. Q. I want you to tell me where you told the EDC that economic theory alone says this loan is a bad move. MR. KARP: You want him to show you where in this report? MR. WISTOW: No. First, I want him to show me in the executive summary that "it's a bad move." A. All right. So, the report, the mandate -Q. No, no, I want you to show me where. I don't want you to ramble on indefinitely. I want you to show me where in that executive summary it says that economic theory alone says it is a bad move to make this loan. MR. VALENTE: Objection. MR. KARP: I object to the argumentative 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 nature of that question. MR. WISTOW: Forgive me. It's just my nature. MR. KARP: You're not forgiven. A. So the very first bullet I would say demonstrates that. Q. Read it out loud. A. "The development of a game cluster as a long-term initiative requiring a coordinated and sustained effort among academia industry in government without which there is a high degree of failure." Q. And that says, "Economic theory alone says it is a bad move." That's how you believe that you've informed the board that "Economic theory alone says this loan is a bad move"? Is that true; yes orno? MR. KARP: Objection to the form of the question. Q. Please answer. MR. VALENTE: Objection. A. I mean, this is where I would say that it was a very, you know, high degree of failure. It means it's a risky -Q. Continue. Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (6) Pages 202 - 205 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 108 Rhode Island Economic Development Corporation vs Barry Gilbert Page 51 Page 49 1 1 2 2 a duty of competency in this engagement? A. Yes. 3 Q. Tell me who it was at EDC that you principally 4 interacted with in connection with the engagement. 5 A. Principally, Tim Cole working via Mike Saul. 6 Those were the two primary. 7 Q. When you say "working via Mike Saul," what do you 8 mean? 9 A. Tim Cole worked under Mike's direction. So lo Tim was the person that we most often corresponded 11 with. 12 Q. Did you acquire an understanding of the relative 13 roles of Mr. Saul and Mr. Cole? 14 A. I did. 15 Q. And what was that? 16 A. Mr. Saul was the deputy chiefofthe EDC, and 17 Mr. Cole was an analyst working at the EDC. 18 Q. Did you understand, sir, that your duties, the 19 duties we spoke about, honesty, accuracy and 2 o competency, were also duties that you owed to the 21 EDC board of directors? 22 A. We don't differentiate between the board of 2 3 directors and the EDC. It is the client. 24 Q. Understood. Okay. Before you indicated that -2 5 in the June 2nd meeting, you were asked whether 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 directors. To us, we're engaged by the EDC, and we provided our results to the EDC as such. Q. Okay. Did you believe it to be part of your engagement to articulate to the EDC board whether or not you would do the deal or not? MR. WISTOW: Objection. A. Could you state that again, please? Q. Sure, my apologies. Did you or anyone else at Strategy Analytics believe that as part of your engagement, you were to tell the board whether or not you would do the deal? By "the deal," I mean 38 Studios. MR. WISTOW: Objection. A. No. Q. Why did you hold that belief? A. Because we were making no recommendation to do the deal or not do the deal and, therefore, it was a moot point to tell the board not to do it or to do it. We were, as I mentioned earlier, providing sufficient background on the industry and on the game cluster so that the EDC, collectively, with the board ultimately making a decision, could make an informed condition. MR. WISTOW: Move to strike. Q. In terms of the deliverables you mentioned, could Page 50 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 you would do the deal, and you and Mr. Della Rocca-MR. WISTOW: You're talking about the telephone call? MR. DOLAN: Right. The teleconference. The June 2nd teleconference. Q. You were asked whether you would do the deal, and you said, "No." Did you ever articulate that to the EDC board of directors? A. No. Q. Why not? A. First, we had no exposure to the board of directors during the nature of our engagement. We weren't asked to present to them except on the final deliverable, number one; and number two, our belief is that we were working through senior management of the EDC, including deputy chief, and in tow was their legal counsel. If they have any concerns of anything that we're doing, our belief was that there is a fiduciary responsibility on their behalf to communicate to their board on anything that we may relate during the course of our discussions. So we don't distinguish between talking to the deputy chief, their legal counsel, or the board of Page 52 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 you identify what those were again for me? Your deliverables to EDC? A. The deliverables to the EDC -MR. WISTOW: Objection. The document speaks for itself. MR. DOLAN: Would you let him answer, first? MR. WISTOW: I'm entitled to object. A. There were a combination of deliverables. There was correspondence that we had. There was a PowerPoint presentation at the board meeting that we delivered. There was a formal report that we delivered. There was a risk assessment document that we delivered, which was largely incorporated into the final report as a result of the June 2nd meeting. I think that represents the whole nature of our deliverables. Q. Okay. And we'll look at those, some of those, in a short while, but let me just ask you a few questions about them. Do you believe that those deliverables were accurate? MR. WISTOW: Objection. A. I do. Q. Do you believe that the deliverables were complete? Min-U-Script® Allied Court Repo_rters, Inc. (401)946-5500 (13) Pages 49 - 52 115 Phenix Avenue, Cranston, RI 02920 www.alliedcourtreporters.com EXHIBIT 109 .. ·. ::;:._···'-·.....: . -· RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION MEETING OF DIRECTORS PUBLIC SESSION JUNE 14, 2010 The Board of Directors of the Rhode Island Economic Development Corporation (the "Corporation") met on Monday, June 14, 2010, in Public Session, at 4:00 p.m., at the offices of the Rhode Island Economic Development Corporation, located at 315 Iron Horse Way, Suite 101, Providence, Rhode Island, pursuant to notice of the meeting to all Directors, and public notice of the meeting, a copy of which is attached hereto, as required by the By-Laws of the Corporation and applicable Rhode Island law. The following Directors were present and participated throughout the meeting as indicated: Governor Donald L. Carcieri, Mr. Alfred Verrecchia, Mr. Karl Wadensten, Mr. Shivan Subramaniam, Ms. Cheryl Snead, Mr. Dan Sullivan, Dr. Timothy Babineau 1 Ms. Donna Cupelo and Mr. Stephen Lane. Directors absent: Mr. Lynn Singleton, Mr. Paul Choquette, Dr. David Dooley and Mr. George Nee. Also present were: Executive Director Keith Stokes and Attorney Robert f. Stolzman. Governor Carcieri presided over the meeting and Attorney Robert I. Stolzman acted as Secretary. · 1. CALL TO ORDER Governor Carcieri called the meeting to order at 4:00 p.m. 2. APPROVAL OF THE MINUTES OF THE MEETING HELD ON MAY 24. 2010 Upon motion duly made by Mr. Verrecchia and seconded by Dr. Babineau 1 the following vote was adopted: VOTED: To approve the public session minutes of the meeting held on May 24, 2010. Voting in favor of the foregoing were: Mr. Verrecchia, Mr. Wadensten, Mr. Subramaniam, Ms. Snead, Mr. Sullivan, Dr. Babineau, Ms. Cupelo and Mr. Lane . Voting against the foregoing were: None. • PLAINTIFF'S i EXHIBIT /:ill ~ ------- 3. ~--------- EXECUTIVE DIRECTOR'S REPORT In his report, Executive Director Stokes referred to the EDC's Immediate Priorities Implementation Plan that was approved at the April 25, 2010 Board meeting (See Exhibit A). He noted the very specific Policy and Vision statement and the Action Plan. Mr. Stokes reported that the EDC has been very active and has already greatly enhanced access to credit, a capital guaranty program and created a soft asset guaranty program of up to $125 million. The programs are now in place to be put into use. Mr. Stokes stated that work continues on a Regulatory Reform package and development of a 21st Century Workforce Program. With respect to renewable energy, Mr. Stokes n.oted that the EDC has an opportunity to build a green economy, reclaim the manufacturing industry and focus on growth oriented renewable energy, specifically, wind. He noted that nearly every piece that the EDC asked for in the recently ended legislative session has been received, which is a compliment to the Board's vision. Governor Carcieri concurred that this last legislative session was one of the most prod·uctive session in his 8 year tenure. He commended the restructure of the EDC and noted that the House leadership has been very supportive of economic development matters. Governor Carcieri also highlighted the tax reform that has just taken place, including a significant tax cut which will primarily help those earning $75,000 to $175,000. Mr. Stokes agreed that the reform of personal income tax structure is a plus for the State. --- -- ..... ---4. CONSIDERA-TIE>N··OF-NEWB\:JSINESS OR-tNDUSTRY TO BE tOCAT-ED-tN-·· RHODE ISLAND Mr. Stokes announced that a new economic development opportunity· has presented itself to Rhode Island, and introduced Mr. J. Michael Saul, who would act as moderator of three presentations at the meeting. Mr. Saul introduced Mr. Harvey Cohen and Mr. Barry Gilbert, President and Vice · President, respectively, of Strategy Analytics (SA). Mr. Gilbert explained that SA, together with Perimeter Partners, performed an evaluation of the development of a video game cluster in Rhode Island, particularly featuring 38 Studios, LLC, and put together a report for the Board's review {See Exhibit B). Using a power point presentation {See Exhibit C), Mr. Cohen described a video game cluster and pointed out where current video game clusters presently exist in North America. He noted that video-game development jobs pay higher than average salaries and that Rhode Island is well suited to support a video game cluster. Academically, Rhode .Island's secondary education institutions, primarily RISD, Brown and URI, have excellent programs to 2 =-- .·· . -.-·: .. ··: •• - .!.....-.- • • . -·-· •• • . • ....... ! educate future video game developers and designers. Presently, 80% of RISO graduates leave Rhode Island and over 50% of Brown graduates have a interest in the video gaming industry. In addition, Rhode Island already has a game industry presence with companies such as Hasbro and Gtech. Mr. Cohen stated that a video game cluster in Rhode Island could help to retain these talented graduates in Rhode Island. Mr. Cohen also pointed out the risks associated with the game industry in general, as well as those associated with 38 Studios itself. He noted that video gaming is a constantly evolving industry and that gamers are always looking for new genres and new challenges. Upon inquiry of Ms. Snead, Mr. Cohen described different facets of a cluster as including production (design and development with a strong distribution partner) and distribution. Mr. Wadensten asked about Mfreemium" games, which Mr. Cohen described as free play offers which ate enhanced by the purchase of digital goods. He identified "Zinger'' as a freemium gamer, and noted that freemium games are free to play but the purchase of accessories allow the user to better enjoy game playing. Upon inquiry of Dr. Babineau, Mr. Cohen explained that individual employees often spin out of larger studios and start their own companies. In addition, if a studio has a blockbuster hit, everyone starts to look at the region where the studio Is located. In response to a question of Mr. Sullivan. Mr. Cohen acknowledged that his research included meeting with local university officials, but that the schools are hesitant to commit to focusing on this area until a video game business comes to Rhode Island and is successful. ---···-Mr. Verrecchia cxpfained that-compaflies like 38--stuc;Hos-·provide·tl=le-er-eaf.n'ti'w.1v·e----content for video games but then rely on a big distribution partner, such as Electronic Arts (EA), to get the game out. The distribution partner generally takes about 2/3 of the profit from the sales of the games. He noted that the focus today is more on digital downloads as opposed to games in the form of DVD's. Mr. Verrecchia also explained that EA has mass market appeal and provides exposure for the games. The next presenter was Mr. Mark Lamarre of Wells Fargo. A copy of his presentation can be found at Exhibit D. Mr. Lamarre explained that, for over 20 years, Wells. Fargo hes provided financial assistance to the interactive entertainment market. He also pointed out that the type of video gaming being discussed is not at all related to gambling. Mr. Lamarre described the market for gaming consoles as being flat, while the gaming software is the growth part of the market. He stated that the U.S. and western Europe are the target markets for a company like 38 Studios, with EA being the top software publisher. Mr. Lamarre explained that the largest part of video gaming 3 revenue is derived from entrepreneurial companies such as 38 Studios. Upon inquiry of Governor Carc;eri, Mr. Lamarre stated that individual titles are the biggest source of revenue. In response to a question of Mr. Subramaniam, Mr. Lamarre explained that EA in the past developed most of its own games, but that it now prefers to outsource its research and development and is always looking for innovative companies. Mr. Verrecchia asked Mr. Lamarre to speak about franchise building aspects of video gaming. Mr. Lamarre explained that the biggest hits come from having multiple products from the same line, such as added versions, sequels and licensing of characters. He described triple-x games as being complex and hard to play: Mr. Verrecchia stated that many video games are introduced but not all are successful. Mr. Lamarre spoke about trends and drivers, as well as inhibitors to the industry, and noted that video game use has grown five-fold since 2003. Upon inquiry of Ms. Snead, Mr. Lamarre explained that video games are both entertaining and educational, but primarily entertaining. He stated that "edutainment" is a small part of the market. Mr. Lamarre described online PC gaming, which allows players to play and/or compete with others online, as a growing segment of the market. Mr. Lamarre described 38 Studios as having a complete and experienced board of directors and management team, with an ability to hire and re1ain the right people. Mr: Wadenste11 noted that EA is a titan in the industry, wftieft-is-rmHyplca~·and · · ·---·-asked how many people work for EA. Ms. Jen Maclean, CEO of 38 Studios, responded that about 3,000 people, spread out all over the world, currently work for EA Mr. Wadensten noted that businesses in this industry do not have a need for a large physical plant. In response to a question by Governor Carcieri, Mr. Lamarre reported that Montreal has over 6,000 jobs in the video game industry, represented by about 20 companies. He reported that this thriving cluster grew differently than clusters in" the United States. The impetus was Ubisoft, a French company which located In Montreal for language reasons. Mr. Verrecchia noted that Montreal also has significant tax incentives for businesses, which is a reason so many people choose to work there. Mr. Verrecchia commented that MMOG's (Massively Multiplayer Online Games) have been heavily influenced by Aslan companies, and asked if 38 Studios is intended to be a global launch. Ms. Mclean responded that the 38 Studios plans to launch its 4 ..... -··-· ·::·.-.-":'"' .... ·. -.·:······.:· .. · ·- -·· ..... ···-·.:::.•.. ! products in the U.S. and western Europe. She noted that it presenty is impossible to enter China's market without a Chinese partner. Ms. McClean then introduced Curt Schilling, founder and Chairman of 38 Studios, LLC, to provide some background to the Board. Mr. Schilling expressed his gratitude to the EDC for its interest in this project over the last six months. He stated that he has been into gaming for over 30 years, and used it as a way of keeping in touch with his sons when he was traveling as a major league baseball player. He noted that he found video gaming to be an educational tool with his sons. Mr. Schilling stated that the most important attributes of 38 Studios are 1) People, 2) Accountability and 3) Philanthropy. He considers his Board of Directors to include people with leadership skills and accountability. 38 Studios is a product of Mr. Schilling's 20 year visron. He stated that he needed people and talent to execute this vision and that he wants to be the best in the business. He noted that most of his board members were present at the meeting, some having flown in from Europe. Mr. Schilling read letters of support from Mr. Todd McFarlane, Executive Art Director of 38 Studios, LLC, who was unable to attend the meeting, and from a representative of EA. Ms. Mclean then introduced Mr. R.A. Salvatore, Executive Creator of Worlds for 38 Studios, and a New York Times bestselling author. Mr. Salvatore explained that he thought he had retired 20 years ago, but he wrote a book, for which his publisher wanted sequels and now has 50 books pubflshed. He is also a gamer and was satisfied to be home writing books, when he was approached by Mr. Schilling about creating a storyline for 38 Studios. He noted that he considers this company to be something special. _ _ _ _ ____,,Ms;-Mclean-thett-introdueed--the--management-team;-att-of-whom-have--extoostve-- - · . ·experience in design and development of video games, and the board members who were present at the meeting. She explained that the company's product has Its own ecosystem, and that one story is not enough. She stated that there are 10,000 years of backstory to the game. Ms. McLean used a Power Point presentation (See Exhibit E) to provide more information on 38 Studios, LLC to the Board. She explained the first product "Mercury" as a role-playing game that will form the background for "Cop·emicus". Mercury is a console game with downloadable add-ons, while Copernicus will be a downloadable game available through subscription. The release date has not yet been announced. Ms~ McLean reported that 1/3 of the artists involved in 38 Studios are RISO students and/or alumni. Because 38 Studios is an independent closely held company, it can be flexible. The company has a Philanthropy Manager who oversees the company's philanthropic activities. 5 ·.··. ·.··.·.··· 5. --·· .. . . .. : .... . . VOTE TO MEET IN EXECUTIVE SESSION By open call prior to adjournment to Executive Session, upon motion duly made by Mr. Verrechia and seconded by Dr. Babineau, the following vote was adopted: VOTED: That the Board adjourn to Executive Session to consider and possibly take action on such matters as permitted by subsections (6) (location of prospective business and/or industry in Rhode Island) and (7) (investment of public funds where premature disclosure would be adverse to the public interest), of Rhode Island General Laws, §42-46-5 (a), the Open Meetings Act. Voting in favor of the foregoing were: Mr. Verrecchia, Mr. Wadensten, Mr. Subramaniam, Ms. Snead, Mr. Sullivan, Dr. Babineau, Ms. Cupelo and Mr. Lane. Voting against the foregoing were: None. 6. RECONVENE OPEN SESSION The public session was reconvened at 6:20 p.m. Attorney Stolzman reported that the Board discussed matters regarding a new business or industry to be located in Rhode Island, investment of public funds and confidential information regarding 38 Studios, LLC, and that no action was taken by the Board in executive session. Mr. Stolzman then reviewed the proposed authorizing resolutlon. including the amendments discussed by the Board in Executive Session. He noted that this resolution is a preliminary approval only, and that the matter wilt come back before the ---b""'o"""att'r'c:Hor final approval. Upon motion duly made by Mr. Verrecchia and seconded by Dr. Babineau, the following vote was adopted: · VOTED: See text of Vote at Exhibit F. Voting in favor of the foregoing were: Mr. Verrecchia, Mr. Wadensten, Mr. Subramaniam, Ms. Snead, Mr. Sullivan, Dr. Babineau, Ms. Cupelo and Mr. Lane. Voting against the foregoing were: None. 6 ...... . .. ... ___ .. There being no further business in Public Session, the meeting was adjourned at 6:25 p.m., upon motion made by Ms. Cupelo and second d by Dr. Bab'neau . .SJ86.S.S_l.doc · - - - - - - - ·-·--···-·--·· - - - - - - - - 7 ... ..._____ : :· -.:.:.::::: .:: .. :· .... ·-·-·· -· . RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION PUBLIC NOTICE OF MEETING . A meeting of the Rhode Island Economic Development Corporation Board of Directors will be held at the offices of the Rhode Island Economic Development Corporation, 315 Iron Horse Way, Suite 101, Providence, Rhode Island, on MONDAY, JUNE 14, 2010, beginning at 4:00 p.m .• for the following purposes: PUBLIC SESSION 1. To approve the Public Session Minutes of the meeting held on May 24, 2010. 2. .To consider, as may be appropriate, matters covered in the Executive Director's Report. 3. For consideration of new business and/or industry to be located in Rhode Island. EXECUTIVE SESSION 4. If necessary, to consider and act upon such matters as may be considered at a meeting closed to the public pursuant to the Open Meeting Law, specifically matters permitted to be so considered under subsections (1) (personnel matters), (2) {sessions pertaining to collective bargaining or litigation, or work sessions pertaining to collective bargain!!!g or l!tiga~i.Qn) 1 (5) (acquisition lease of property for puhllc purposes or disposition of publicly held property), (6) (location of prospective businesses in Rhode Island), or (7) (investment of public funds) of Rhode Island General Laws, Section 42-46-S(a) (the Open Meeting Law). o"r real This notice shall be posted no later than 4:00 p.m. on THURSDAY, June 10, 2010, at the Office of the Rhode Island Economic Development Corporation, at the State House and by electronic filing with the Secretary of State's office. Robert I. Stolzman Secretary The location is accessible to the handicapped. Those requesting interpreter services for the hearing impaired must notify the Rhode Island Economic Development Corporation at 278-9100 forty-eight {48) hours in advance of the meeting. Dated: June 10, 2010 537582_1.dcc :_ .. ·..:.·· --.· ..·:.· .. .:.::.·.. .:___ . .: RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION IMMEDIATE PRIORITIES IMPLEMENTATION PLAN APRIL 26, 2010 I. Policy and Vision. Rhode Island's economic development policies should be designed so Rhode Island leads New England in creating and retaining jobs and wealth (new capital invested in Rhode Island) and increasing wages in Rhode Island. The policies should (a) result from data and analysis, (b) result from a strategic plan that capitalizes on Rhode Island's strengths and assets, and (c) be implemented pr-0fessionally by the RIEDC in collaboration with its economic development partners. Additionally, immediate action is required to alleviate the plight ofthe approximately 75,000 unemployed Rhode Islanders. II. Characteristics Desired for RIEDC and Rhode Island's Economic Development Environment. A. Leadership. Through innovation and leveraging Rhode Island's strength's, the RIEDC should be a "first stop,. not "last resort" place for businesses to go for collaboration and assistance, and Rhode Island's p~licies should be held as "best practices" in the field. B. Competitive Tax Structure. The overall tax burden and cost of living or doing business in Rhode Island needs to be addressed. The RIEDC should (1) be a credible source of infonnation and policy analysis for this eomplex issue, and (2) be an advoeat-e-and-1eader-fer-smart-strat-egie--·--policies in this regard. C. Innovation. Rhode Island should leverage its size and history of innovation and industrial transformation to "out-innovate the innovators" and adopt innovative business and governmental practices including ''lead" principles and collaborative policy development. The RIEDC should facilitate this policy development through its research, advocacy, 8.dministrative and regulatory functions. · D. Leverage All Assets. In addition to the good and traditional leveraging of assets (Rhode Island's location, transportation infrastructure, labor force), Rhode Island should also increase its leveraging of"soft'' assets such a.sits entrepreneurial foundation in "knowledge" industries ranging from advanced and lean manufacturing to life sciences, digital media, design, - 1- ·-··:::··--··:-··:········:···· and financial services. The RIEDC should be an advocate and facilitator of programs and policies that promote these assets. III. RIEDC Action Plan. A. Develop staff and program assessment. budget and plan to align with priorities. (60 days) 1. Identify other mid-term and long range organizational and management issues. (60 clays) 2. Create Board committees, assign staff and reach out to economic development partners to serve on committees. (90 days) B. Create Economic Research and Policy Development Capacity. 1. Create the RIEDC division of policy and research led by economist and/or economic development professional with proven experience (fulcrum for ''think tank" for Rhode Island's economic development policies). (current, ongoing and 90 days for director) 2. Analyze and recommend best practices, innovative policies and public economic development investments (using accepted analytical models that measure the public's retum on investment-ROI-, e.g., jobs, wealth generated, strategic within target industry). (120 days and ongoing) C. Advocate for Stable, Competitive Tax Structure. 1. Identify and advocate for tax and state budget policies that increase jobs, wages and new investment in RI. (current and ongoing) 2. Collaborate/Educate economic development partners. (current and ongoing) 3. Analyze costs/benefits of tax policies after implementation. (180 days) D. Improve Access to Capital. L Recapitalize Small Business Loan Fund; Increase IR.BA guarantee capacity; work with SBA and banking community on additional guarantee products. (current and ongoing) 2. Create products to assist existing businesses (e.g., amend existing loan and grant programs). (current and ongoing) 3. Create products for new and expanding businesses and industries (e.g., new loan and grant programs for renewable energy and green sector). (current and ongoing) -2- ___ ... .. _. ;-·· ___ -·· :·: .... ·. .. : ..·: ____ . .. - .... E. Invest in Growth of Businesses. 1. Catalyze new business development through programs that assist start up and mature business growth. (current and ongoing). 2. Lean pril;tciples. (60 days) 3. Public Education/Workforce Development programs. (current and ongoing) 4. Leverage RI Strengths and Assets (e.g., health sciences, defense indostries, financial services and other knowledge economy assets). (current and ongoing) 5. Green/Renewable Energy. (current and ongoing) 6. Business Attraction Partnerships. (120 days) 7. Support for existing small businesses. (current and ongoing) F. Regulatory Reform. 1. Increase RIBDC role in facilitating business growth within regulatory framework (e.g., create Office of Regulatory Reform atRIBDC). (120 days) 2. Increase capacity and responsiveness with existing RIEDC Reg Flex program. (120 days) 3. Develop plan to increase efficiencies of regulatory programs with state agencies and cities end towns. (120 days) 4. Build commerciatrmdustrial site selection capacity. (current and ongoing) G. Develop a comprehensive and sustainable communications plan to assure Rhode Island and its targeted market understand Rhode Island's economic development strategy and advantages. 1. Create commttnieations capacity-atRffif)fr.-(60-days) 2. Develop sustainable communications strategy. (120 days) 3. Begin economic development partner outreach and foundation for plan. (current and ongoing) S28Sl7_(i.d« -3- EXHIBIT 110 Barry Gilbert Rhode Island Economic Development Corporation vs Page 23 Page 21 1 A. I believe the statements that were being 2 referred to in the board presentation relative to 3 the report that we had delivered prior to the 1 A. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Correct. There was a written report that Strategy Analytics prepared and provided to the EDC that you understood was going to the EDC board of directors; right? A. Yes. Q. In addition to that, you attended a meeting of the EDC board of directors and made a PowerPoint presentation and an oral presentation to the EDC board of directors in connection with the 38 Studios transaction? A. Correct. Q. And that meeting, do you recall when that was? A. June 14th. Q. Okay. June 14th of2010? A. 2010. Q. And what were the -- did Mr. -- was Mr. Wistow specific in identifying the negative statements that were allegedly made at the June 2014 meeting that were not disclosed to the EDC board? MR. WISTOW: Objection. Q. Was he specific about that? MR. KARP: I'm going to object to the form of the question. Q. Do you understand my question, sir? Q. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 board meeting. The report that was delivered, I believe, on the Thursday prior to the delivery of the board presentation on the following Monday, which was the 14th, I believe. Q. Yeah. A. So there were inconsistencies between the report and that presentation. Q. Okay. And did you acquire -MR. WISTOW: Excuse me. Move to strike. Q. Did you acquire an understanding of what Mr. Wistow was saying was inconsistent between those two pieces of information? MR. WISTOW: Objection. A. Yes. Q. And what was the inconsistency that was alleged as you understood it? MR. WISTOW: Objection. A. That there were certain risk factors that we had outlined in the report that we did not deliver in the PowerPoint presentation at the board meeting. Q. And was he specific about what those were? Page 22 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. I'm not sure I do. Q. So, I think you said in response to my prior question that at the June 2nd meeting, Mr. Wistow had said to you that you had made certain statements that suggested you were negative on the deal. Do you remember that testimony? MR. KARP: I'm confused. MR. WISTOW: Objection. MR. KARP: You're talking about an August 7, 2012 meeting, and a June 2, 2010 conference call. So I'm confused about -MR. DOLAN: I'll try to be more clear. Thank you, Mr. Karp. Q. What I'm focused on right now, Mr. Gilbert, is the meeting on August 7th, 2012 with Mr. Wistow. A. Okay. Q. And you said in response to my prior question, I think you said that Mr. Wistow suggested at that meeting that you had made statements at the June 2nd meeting that suggested you were negative on the deal and hadn't reported that to the EDC board of directors? MR. WISTOW: Objection. A. Allow me to clarify. Q. Yeah. Sure, please. Page 24 1 A. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I don't recollect the specifics of which ones he was mentioning and, in particular, I disagreed with that. Q. Okay. And I know you can't remember the specifics, but do you have a general -MR. WISTOW: I have to move to strike. MR. DOLAN: Would you let me -- okay. MR. WISTOW: You have to let me make my objections for my motions. MR. DOLAN: That's fine. MR. WISTOW: Okay. Q. Do you have a general generalized understanding of what those alleged inconsistencies were? MR. WISTOW: Objection. A. I do. Q. And what's your understanding of that, sir? A. We had outlined a series of risk factors in that report that we believe was delivered to the board of directors, and in the PowerPoint presentation we delivered on the 14th, we essentially distilled that down to comply with the timing requirements of the presentation but made reference back to the report and, so, not every risk factor that labeled within the report was included within the PowerPoint presentation. Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (6) Pages 21 - 24 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com Rhode Island Eco~o.mic Development Corporation vs Barry Gilbert Page 173 1 unusual." And did either of you form any opinions that you articulated to each other about why that was? MR. WISTOW: Objection. A. We formed no opinions as to why we were unsure as to whether the board had reviewed the material that was apparently presented to them at their request. We didn't know because we would have expected much more rigorous questioning to take place, reading the document, the report that was delivered. Q. The written report? A. The written report, than what occurred after the presentation. Q. Were you astonished? MR. WISTOW: Objection. A. I can't say I was astonished. I was surprised. Q. Let's talk about that June 14th meeting of the board of directors; right? A. Yes. Q. Okay. It was at the Rhode Island Economic Development Corporation building? A. Yes. Q. And where specifically was it held; do you Page 175 l 2 Q. 2 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 high-level risk review and mitigation factors to some of those risks. Q. And were you the one who delivered the presentation? A. I delivered it, yes. Q. Did Mr. Cohen, Harvey Cohen, speak? A. No, he did not. Q. Okay. Do you recall when in the meeting your presentation was delivered? Was it at the beginning, the middle or the end? Do you have any memory of that? A. I believe my presentation was in the middle. Q. Okay. And were there other presenters sandwiched around you? A. Yes. Q. Who were they? A. 38 Studios presented, and I think Curt Schilling presented briefly or made some comments. Jenn Maclean presented the presentation, and there were some letters on behalf of 38 produced by -it may have been Salvatore or one of the key creative people talking about their involvement and enthusiasm for this. Q. Any other presenters that you recall? A. Yes. Page 176 Page 174 l remember? Was it in a conference room? It was in a large conference room. Q. And what time of day was the meeting; do you remember? A. Late afternoon, early evening. Late 4:00, or -- I don't remember the exact time. Q. And your presentation consisted of a PowerPoint; is that right? A. That's correct. Q. And that was presented in a public discussion; correct? A. Yes, it was. Q. When you were -- and how long did your presentation last? A. I believe it was within the guidelines I was given of the 15 to 20 minutes max. Q. And, so, tell me what the presentation consisted of MR. WISTOW: Objection. A. The presentation consisted of a series of slides. Approximately, eleven or twelve slides where I walked through the engagement that we did on behalf of the EDC. I outlined very quickly what work we had done and what our observations were, and the last two pages involved some l Q. Who else? Following my presentation was Wells Fargo. Q. Okay. And do you recall who it was at Wells Fargo that made a presentation? A. I don't have his name. He was the senior executive on this project. Q. Do you remember what the presentation consisted of by Wells? Was there a PowerPoint or some other deliverable? A. I believe there was a PowerPoint delivered. Q. Did the other presenters -MR. WISTOW: Would this be a bad time to take a break? MR. DOLAN: Sure, ifyou want. Letme just finish with this line. MR. WISTOW: Sure. Take your time. Q. Did the other presenters fair as well as you did in terms of questions? A. I don't recollect a lot of questioning from the board. Q. In any of the presentation? A. There were a few ad hoc questions but not much interaction at all. It was mostly present as opposed to an interactive kind of engagement. Q. Did that surprise you, that the board didn't ask 2 A. 2 A. 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® Allied Court Rep_orters, Inc. (401)946-5500 (44) Pages 173 -176 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 111 Ba,rry Gilb~rt From: Sent: To: Barry ~ilbert Monday, June.14, 2010 9;21 PM 'Saul, Michael'; 'Cole, Tim'; 'mark.laniarre@wathovia.com' Cc: 'Chambers, Melissa' RE: Public!fessiori slide decks RIEDC BOD :PRESENTATION DRAFT -.6-14-2010.ppt Subject: ·Attachments: Melissa, att"'ched please fin'd. a;c;op'y'Ofthe·slides. Thanks .. Barry From: Saul, Michael [mailto:msaul@riedc.com] Sent: Monday, June 14, 2010 6:48 PM To: COie, Tim; Bar,.Y Gilbert; rriark.lamarre@wachoyia.com Cc; Chambers,. Melissa Subject: P\.lblic se~$Jon slide deeks· Mark.and· Barry, Could you· send by,email copies ofyour presentations today to Melissa Chambers: copied on this,email?. Thanks ... great job! Mike J. Michael Saul Deputy: Director R.I. Economk Development Corporation 315 Iron Horse Way, Suite 101 Providence, R.I. 401-278-9100 401-273-8270 (fax) msaul@riedc.com v.rv. w.riedc.com 1 EXHIBIT .. ?Hmzh Evaluating a Vdeo Game Cluster in Rhode lslan? ?1 Prepared by: STRATEGY ANYTE C's In association with: Perimeter drfners June 14, 2010 I In 1 . STRAT;EGY ANALYTICS - Boston hea'aq:uartered global provider oftechn0logy.-basecd res·earch co·nsulttng· servtces. - Pra~tic;e ate:~ in du.ttivlty - ·Gre·ater innovation - 'Stimulatioh of new husines:s • A cluster exists Where:: - Thete is :a.critical rrfass .of sector.;.sp'eciflt resources & CoJnpetendes - The critical mass provides ·a key position ih ·econo-rnica·e;tivit~l is a sustain able: competitive ,adv-a ritage versus other locations. • Ta.rg.eted -econ.omic,.d.eveJoprn,ent a~ctT\tity for garne cl:us .in the:. mid~90''s th countries., such as Canada ai1.d ·Atlstra - In t~e past few years aggressive tlljst~r development efforts have be - There national, stat~, . . an:d city l'.)ased .economic d:ev.elopm.ent agencies. Emp Gym-ant Average Regional 53 Sou mes: [Employme?ntibata salampata?ig Gain? Dewelqp?ermga?ng hm? - RIE . B?ar? Pres?nt??uon; :June?1452010 S,everal reasons:1 in·cltJding.:· • Job creation/stimulation • Hlg.h gro·wth industry: • 1 Leverage Rl s :c.ore aca·de·mic assets ·• HetaTn .knowle'a;ge workers ·and creati\te talent in RI ·• H'ig·her over.all a.vera;g:e hi·cornes • R:I ha:s :inherent critica:I resoure.es -. :a,ca·demic; industry, to oth·et m.·arkets to h~;ver.ag.e for a ·,vid.eI> ··game cluster • Acad·e.nlic renowrted tal'eht pciol used by game ·devel.~op·ers - RISD- criti.tal, highly - Brown--" Ivy League institqtian· with ~op Computer Science cfrid ·• ·c;:ente.rfo·rvisualiz:atiotl &.(i;raphi'Cs under NSF grant - URI - ExceJIEtnt states.school With high calJbet temputer sd:ence st.ud - Oth~.rs,_ in.clucHr:ig CCRI, Proviqence Co_ll~g.el _& U.$ . .Naval • Existi;n_.g Game Industry Presence - Hasbro - G~tec::h • Proxirrrity to other markets - Bnston - New.York Wa.r College • Tota'I value is afunction of both direct and ihdirect wages only. • Modeled using US Bureauof.Ecs is focused an area :of-the.game market that we forecast to have Sl.ls digitgrowth.-ov~rthenext five plus-Years . . ' New garne:-enttants are furthervalldatibn ofgam·et demand in th·e spac·e • :Cluster develo.'J:lment • ~ RI b~nefitsftdrn observing other duster·strengths/weakness; - While ·MA.and NY'~ave· larger .game th..isters, RI can offer an attra·ctiwe packagE eicJcJitionf:)lgame stuc:H0sto ~he n~gion given its strongaca.demic g11d pro,..:busin - As With othe-r..:dust.ers,. an arn::hor tenant wifl likely spawn new garne reJatf3d b.1 38Studios Critic~l'su~cess fat~qrs i'nclu_cje strong man~gement, first rate techntc~·i ·~nd ·c::n ahd a strong, distribution partner- 3'8 Studios has:all 6fthese in plat¢' - 38 Studios.'has flexibility to address market cha_nges competitron l~iven its .develop·ment stage. in ar~~s of nionetiz:ati:c>"n r · RIEDC Boaid Ptesentatlc1n; ,J_u_ne-14, 2610 EXHIBIT 112 Barry Steven Gilbert - Vol. II Rhode Island Economic Development Corporation vs Page 253 l 1 Q. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Yes, but I'd like to get a yes or no answer to my question, ifl possibly could. A. Okay. Q. Did you believe it more likely than not that they would not achieve their projections? MR. VALENTE: Objection. Q. It's as simple as that. MR. VALENTE: Objection. Q. Let me withdraw it and I'll try something else. A. Okay. Q. Can we agree that it's not impossible to spin a roulette wheel and get the same number ten times in a row. It's not impossible; right? A. No. Q. Maybe close to impossible, but it's not impossible; yes? A. Correct. Q. And it's very, very, very unlikely you'd get that result; isn't it? A. Correct. Q. Now, ifl said to you I'm going to predict where that roulette ball was going to fall in any one situation, you would say more likely than not I'm going to be wrong; right? A. Correct. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 report would conclude that they would not likely -- 38 would not likely fulfill their projections? Did you intend to convey that to the board members? A. I didn't convey that to the board members. Q. Did you intend? A. I did not intend to say that. Q. Okay. So you didn't intend to tell the board that it was more likely than not that 38 Studios would not fulfill its projections; correct? That's what you just said. A. It was not my intention to tell them that the projections that we saw were unlikely to be met, that is correct. Q. And not having intended that, you didn't do it; is that fair? A. I didn't do that. Q. Now, if Mr. Stolzman's notes are correct, somebody did say that in the telephone call that the "Projections for 38 not likely to be fulfilled," and you have no recollection one way or the other of anybody saying that or not saying it; correct? MR. VALENTE: Objection. A. I don't recall who may have said that. I don't believe it was myself. Page 256 Page 254 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Not impossible that I'll do it, but more than likely I'm going to be wrong; right? A. Correct. Q. More than likely -- did you believe that it was more likely than not, just as simple as that, more likely than not, that they wouldn't reach their projections? MR. VALENTE: Objection. A. I can't give you a "yes" answer to that. Q. Well, you don't have to. You can give me a "no" answer to it. A. My belief at the time -- do you want me to elaborate on this? Q. No. A. You want a yes or no? Q. Yes, I do. A. I can't give you a yes. Q. Can you give me a no? MR. VALENTE: Objection. A. My point of view was that they were aggressive figures. Whether they were likely or more likely to not achieve them, I can't give you a statement to that effect, that I felt that way at that time. Q. Well, let me ask you this, did you believe that somebody on the board of directors reading your 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. But you acknowledge somebody other than Cohen or Jason? A. Could have said that, I just don't recollect that statement. Q. We spoke over each other. A. I'm sorry. Q. It may very well be that Della Rocca made that statement. You can't say he did not; is that fair? A. That's fair. Q. The same as to Mr. Cohen; is that fair? A. That's fair. MR. VALENTE: Max, can we take a quick break? MR. WISTOW: Sure. (A SHORT RECESS Wf;..S TAKEN AT 3:08 P.M.) (TESTIMONY RESUMED AT 3:13 P.M.) Q. Now, do you remember what the purpose of the June 2nd call was? A. The June 2nd call revolved around some concerns that we had expressed in the process, and some of the risk factors resulted in a risk factors document I prepared looking at the market. And I believe part of it was we were unfamiliar with what was being done outside of Strategy Allied Court Reporters, Inc. (401)946-5500 (17) Pages 253 - 256 115 Phenix Avenue, Cranston,-ru 02920 www.alliedcourtreporters.com .Min-U-Script® EXHIBIT 113 Robert I. Stolzman - Vol. II Rhode Island Eco~o.mic Development Corporation vs Page 397 Page 395 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and Barry were more sanguine about the Rhode Island opportunity to develop a cluster, and Jason was more skeptical. And I think he said something, as you can see where it says, (Reading): Internal debate amongst us as consultants. And his reason was he thought it was too risky to utilize a cluster strategy because the company has to be successful for the cluster to work. And then he went on, and my notes continue here, because he started to self-mitigate, if you will. He had -- he knew Jen MacLean; he was confident that -- he had confidence in Jen MacLean's capabilities, and, and then he went on, and as my notes elaborate on that discussion. Q. So this is how he's backing off you say? A. Well, the first part is, yes. And then he further goes on about his concerns. Q. And then he goes on and he says again, or you wrote again, "Knowledge yes, but not an 'anchor."' A. Yep. Q. "Maybe a piece, but not the anchor." A. That's correct. Q. Flat out says that. A. That's right. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 he's the one who said this, but investment in anchor tenant is a tactic, not always necessary, try to avoid the need for anchor tenant. That clearly in my mind -- they're my notes, and I'm telling you what my impression was. He backed off. And he was not saying that the state could, was foolhardy in making this investment. Q. The question I want to ask you is whether or not -- we're not talking about whether or not an anchor tenant can be a good strategy but whether or not he believed 3 8 Studios was an anchor tenant. Is there anything in your notes that indicates he thought 38 Studios was an anchor tenant? A. No, I don't recall him discussing that specifically with respect to 38 Studios. Q. So the only thing we've got in your notes on Exhibit -- what is it, 98? -- 96 and 99 is Jason saying video gaming not an anchor tenant, and on Exhibit 99, "Knowledge yes," number 3, "Knowledge yes, but not an 'anchor' - maybe a piece, but not the anchor"; correct? A. No, again, I don't agree with that, because we were talking about 38 Studios. The whole purpose of the meeting was 38 Studios. And he said Page 398 Page 396 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Did he back off from that? A. Yes, he did. Q. Okay. So you've got it in two places. A. I do have it in two places. And then on the second page of my notes, so we're very clear, my memory of that meeting is, is he backed off. He thought that there was an opportunity. He -- he was not an advocate for cluster developments; you know, he'd go out and do anchor tenant-based clusters. And I don't mean to mischaracterize his general view, but he did believe there was an opportunity here certainly by the end of that meeting. Q. The note you made in both places -A. Yep. Q. -- on June 2nd flat out says that 38 is not an anchor; correct? A. Yes. Q. Okay. You never write down anything that he changed his mind. A. Well, I do. I disagree with your characterization. Q. Read me the words, read me the words that tell you he backed off. A. Jason, I write, (Reading): Jason, meaning that Min-U-Script® 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 investment in an anchor tenant is a tactic. This wasn't an abstract discussion, this was a discussion about 38 Studios. My memory of this meeting is very clear that he believed that, while he generally didn't like anchor tenant strategy, given what he had heard about Rhode Island and what he knew about Jen MacLean and this company so far, that it was a tactic worth pursuing. Q. Not to belabor this, but there could be a tactic worth pursuing, but you need to get the right anchor tenant, don't you? A. Yes, that's correct. I would agree with that. Q. And he said, "not an 'anchor' tenant," did he not? "Knowledge yes, but not a, quote, 'anchor,' unquote. Maybe a piece, but not the anchor." Isn't that what you wrote? A. That's what I wrote. THE DEPONENT: This is your copy. (Document tendered). A. I'd also add, ifl may, -- I don't know if you're still on Exhibit 100, but before you move on from that. Q. Go ahead. A. It describes the very chart you pointed me to, which Perimeter Partners signed off on, does Allied Court Re~orters, Inc. (401)946-5500 www.allie~:hht:ide. Con$i;k.' ur~il BUJe.s .(.iu·milli'0n$J .. : II PlayStatlon •Xbox 50.0 l'JWll EGame Cube 43.4 40.0 30.0 20.0 10.0 o.o 2004 2005 2006 2007 2008 2009E 2010E Note: "PlajStation" includes PlaySta:tion. PlaySt.ati.Oll2. and PSJ; "Xbax" iru:ludl'.B Xbox and Xbox 360 So~v~:: Wi;ill l'J~V>...eiotball :. • Amount Amount Brand - Actlvrsian l!lectronlc Arts Rank 1 17% $1,733 %* "%oftotalcompanyU.S.sell-t:httrugh.attrlblltable to mp ten brands 89%" {$mil) 261 Pokemon Zelda 119 5 6 Animal Crossing 7 Nintendogs Wll Music Brain Age Kirby 8 9 10 Total Top 10 Brands Rank $761 407 WllPtay 3 4 %* Brand Mario Brottiers Wil Flt 1 2 3 4 s 67 54 44 4l 39 6 7 8 9 10 26 $1,820 94% Total %* B~i.~ w~~~~·~.rcl"· 38 Studios: Rhode Island Economic Development cOUn.cil ·7 Wells l .. :.-:·::!_ __.:::::-·-·.-·· . •' ~ Indusfry Xrends and Drivers ·· • 'ft·e.nd_., and ... • 0 M : fH~i:\:e1•s.. 0 ' • : - - · • " · - • Broadband penetration to the home, enabling digital distribution and online gamin • More powerful PCs and laptops at lower prices. • Better graphic processors, more disc space, etc. • Improvement in quality of games, often with social elements (VoIP, text chat, etc.). • Longer console lifecycles. • Growth in adoption of smart phones and other bandheld devices that support gamil • Changing demographics: The web-literacy rate among the target audience has been constantly. -------------------------~--------------~~~-----~----------~~---~~-~ • Macroeconomic weakness and uncertainty, which impacts customer spending, adve investment. • Piracy: illegal file downloading I disks. • Free content available on the Internet, which lowers demand for premium titles. • Platform incompatibility: Some hardware cannot play select software. • High bar to produce sophistieated titles; costly and time-consuming to develop. 38 Studios: Rhode Island Economic Development Council 8 Wells I . ·:. .. -::==-:.....-::.:.:.:.::.::::.:.·.·.·· . :: ·: -;.-_·:. :. ·::.·-·:·:.- --····-·-··:-··-- ···:·:··~-- '• U.S. Interactive Entertainment'Versus Other Entertainment Sectors The U.S. Interactive Entertallnrient Sector-Grew Substantially Smee 2003~ While Other Ente Sectors are Approximately Flat to Slightly Down : .. =·-::::.- ·-. . -. .. n~S. Entert.ainruen(S~cfr~rs ..,., .... ($ in Biiiions} •· r - - - --: - -· .· · ,:: ·.··.· . -·1 $20: I 11s:--- ~--~~~~~~--------~--t ·Mf):+--- ----4 GI 2083 • 2004 Ml 2005 0 2{)06 Ii] 2007 Bl 2003 :-1---- $14 $_1~·;J,+- - - r .. '$'U;a I I ·$a.:: $6: ·,,,,;1 ·lii (2fH Dc-mo ' ~ ~ ''· . . · • 55% of the interactive entertainment market is comprised of male.s aged under 45. • Women now represent 40% of game players and 48% of game buyers. • Within the younger demographics (ages 8to·18), time spent consuming video and computer games has increased dramatically over the~! l,O ~- ~ :_; .: • Video games use has increased from 26 minutes a day to I hour 13 minutes in a typical day; - ·.... ell' . . .:. ~:v• . . 6% Males older than 45 ·a%. Females under 18 19% Males un_der 18 . Video games present 11% of media time allocation. .:29~ ~llt--Wi~ M~;·dii.1 .. Chh:mm> 1999 2004 1V Content 3:47 3:51 4:2.9 Music/Audio CornButer1 1:48 · . :27 1:44 1:02 . 2:31 1:29 . 2d% Fema1es ol er tti Time·Allo.cat"inn . . .J\mongJ~- l. .. ~ 2009 Movies Print 6% 4% ~idtaoi ~~aUifr1~;\!. ~':i":,-;:7-:;·o;_~C';"~~•lilfili,iJ"~''"'"'"~j;';;.'.•.'.·~·..;:.-~jo'.'·· i)?fij~Q'~~~~~{i~.?i?:~~~·.<::4,;:~:;,~\~3.1 Print :43 :43 :38 .. :25 ;18 Movies 11% Computer. 14% si>ent t 191Ki of lirn11 ls playing a>mp~ games I Notl$: Total ml!dilll exposure the sum of time spent with all media. Multita•king proportion Is Ifie proportion of media time that is spent using more than one medium concurrentfy, Total media uve Is the actual number.; out of the day that are spent US1f1Q rs media, taking rnultttasklng Into account. -··. · · T"'/ i•J'.>n'r:ent on · other platforms 17% . Source: mISWoriil, Januaiy 2010; Kaiser Family Foundation, January 2010 38 Studios: Rhode Isl.and Economic Development Council : ~. . ... 10 Wells F . .:.: .: ::.:.::::··--· . Interactive Entertainment Software Market by Genre Growth in the Family I Children's Segment has Been_ Driven by Music Themed Games Such as Guitar Hero 2006 20.07 201 9% 22% 2! 0 ~"A~1:1~nr~~efrfr±~~:~-'f~~;1~~~\~'':· · "'~:"'·.;;~~: ·-27~%'·\f.-..::.130%..:~fa~i:. .~~(~?'/g ~~~2~~:-~1*-d1 Family/Children Sports/Ext~me . . Sports 2001 9% .2002 8% 2DD3 9% 2004 9% 2005 8% 21% 17% . 17% 17% 17% 17% 16% 1E ~st·filt~f~~~·~·:~·~G1;1-~~i~~t::~~fi~:·;2io/.~~~t/i~ ~~::~~::~~~47~i:~*J~%·;!t{~~~:~~fiS~;~~~ri·~~~;foftt.~%t*~. :!~ :sfro6t~~~~~~s-:~:~\iai?J:~~7·~§.iW;.:~fH:to/.~~-~~-:~1is~•-::::*~511;~~~i[~~~~:.)l;~~Jt1 Racing 10% 13% . 9% 7% 100/n 9% 6% I Fighting 50/o 5% 6% So/a 4% 4% 4% 5 othe·r Simulations 1% 2% 2% 2% 3% · 2% 2% 1% 2% 1% 2% 1%. 1% 1% 1 0 fllmlly /Chlldl"fl ri 25% Sounle: Wall Street Rfaearcll 38 Studios: Rhode Island Economic De,:elopment Council 11 Wells . ·.· ... ·-··:. ·.: :.~':'."." :·. Online·-pc Gaming in the United States . . r . ' . (Jn Miilions) .S. Onl.ine PO Garning Sul>st11·iheu< .P.uh.:1fas:ed lJigi_l.~tl G~ n1c..ho,;:~1J•~· . ·. -· . . iaOnllne PC Gamers • SubscrlpHons aDlglta 250 200 li 150 50 D 2005A ~QJj~" -~~tA. . 200BA j{togl'\ : 2010E ·20116 ·:: 0 ,. TI('('' .- - . R cv~nu l..:f·~ ._, . . _, -·· ... . ..... ' >·. ..... 4.0% ] 2010E 3.0% ' 2.5% i 0.0% 4.0% NA NA 2010E 2011E I 2012E 2.0% 1.0% D.0% 2012E NA 600,000 NII 24,BOO,DOD 31,500,000 ~ ~ 2011E .. 2012E NA NA $2,585 31% $3,218 24% % Growth US.'it-'!MO Subs 17,700,000 %~~ Source: Management estimates and 2013E 2D14E 3.1% 3.2% roe, March 2010 1 ( 3.0% 2.5% 1.9% 2.0% 1.0% 2011E 38·Studlos Monthly MMD Subs I (~ In Miiiions) 38 stlJClios MMO Net Revenue I ~ I ·_%Growth 2010E - '! U.S. MMO Net Revenue % Gro,wtti 1.2% L..-.-~-i~ 2010E 2011E 2012E $1,968 $40 Source: Management estimates and IDC, Mnrch 2010 2013E 2014E Source: Oomp;my mimagement and Wall Street rrsearcb 38 Studios: Rhode Island Economic Development Council 15 Wells: . -·.-·:·-- - .::.:..:. :.:.··.·· ....... . . ---------···· . . _.::-·.·.·.-..-..~·:..~- . ·::: ---.··.· .·.··· . ···.--.-.-: .. . . :·· . . . • • •• t , •• Plac.eholder - to ·be:created with 'data sent· Pipeline/ Forward MMO Calendar . ••• -·~ ••--;-•-_..•w•• ....- . •:...-=• 38 Studios: Rhode Island Economic Development C..ouncil . • . 16 . . ---:---•, ~ ---:-.'"::~ .....-..--.·--~ •- _ . .. _ - • ...- - ._. •- -··~ • • WellsJ .........:._. ··.-·.· ·, ....... ···---····· ~---.'....--------· ................-.-:·. - ···-···. ' 38 Studios Planning Process ·······-:··"! ---········ -------· ... : ....... -· --- --.. - ·-·······--·--··-·:-·-·.·.:.:.:· . ~ I 2010 Hiring Strategy I . ..... . . . Pll'.i.l"i{· con.fh·1n •-~/.~~ 1/_Jn,co.r1l'or.ak h~.adctuant uuil~l1cl· mltl • l • • ,. ' • --- ---··- ··-· ..... __ ·--··-- .-... -.---.---· -·--- ·-----_. _. ... ..... --·~ ..... I• • ~-~ ., Hiring Budget • Recruiting plans are evaluated yearly, quarterly, and monthly. • Hiring budget includes plans to hire_ approximately [65] employees at Maynard by the end of 2010. • Expected to hire 30% at the senior level (with technical skills), 20-30% at mid-level, and 30-40% at entt: graduates or 0-2 years of experien,ce). • Senior level employees mostly recruited through employee referrals (more than 60%). • ·• 2010 strategy includes att~nding more events and conferences to establish -bigger presence in the m Entry level employees recmited through internship programs at colleges. Select Statistics • 90% offer acceptance rate due to good screening process. '·lt 14% employee turnover with approximately l resignation every other month since Maynard opened. Compensation Headcount plann • 95% of employees are currently salaly-based. . U_i:_a . ~ko::n it l .i f;T i;,) " i .. 12/31/2010 Current ProJected Maynard, MA 86 150 Baltimore, MD 79 81 Corporate 12 177 12 Total 243 Source: Company management 38 Studios: Rhode Island Economic De-velopment Council 18 Wells· ····· .' . ·:.::·:·::::::·.·: ' Recrutting Process 38 Studios Employs a Structured Recruiting Process to Meet Hiring Needs . J-f·c.a~lc_ount R~(:n1j H!i.1 ~·~rts~~wch . l!rQ'ce~~ : .. .: . · ~\:p.p~·o1!a]. T1i.t)c~~ss · .. L Headcount prep permanent vs. temporary hires 2. Headcount planning review 3. If approved. budget is updated 4 Notification sent to initiate the search 5. Job posting creation •, ... ·1.· ..... ' .- . Or&sitcJntm•vi.c'v .·-·_ · . ' . ·s·¢t:.::up: - · .· . . -~. 1. Recruiter initiates sourcing 1. Onsite Inte.tview Request 2. Recruiter screens incoming resumes and updates Applicant Tracking system 2. Approve travel for remote •I 1. ma terl candidates 3. Application reviews 3. Recroiter confirms onsite date 4, Initial test/phone screens 4. Travel arrangements are made scheduled 5, Iuitial test/phone screens results submitted to hlrlng manager 6. Remote tests 2. Tei: Pre 3- Ha: sen 5. Interviewer list created 4- Rec pret 6. Confirmed details sentto Candidate 5. IfoJ 7. Onsite interview conducted 7. Phone interviews Hll Rec boa: 8. Offer process initiated Source: Campaay~t 38 Studios: Rhode Island Economic Development Council 19 Wells I ·:. ;; ··.·.-.-.-- ".' . . .. . .. ··:·:: .. --·.:.---· . ... - - ··:-.-.-.---" Planning Process and Tim.eline - Mercury, Role Playing Game ("RPG") Pl~;_i..:;c --:::--:::";'':. :. - Phfrntln,g. Proeess . _ · . • The Mercury project is currently in Release 4: Diagonal Slice. where RPG elements of gameplay are more fully developed. - ~ · Concept Completion Review Prototype Kickoff • Uses waterfall schedules to scope the entire game. Promtype Completion Review • Content is built in 3 stages: basic :implementation =>working great/ almost shippable=> polishing ~re-Production details I finalizing. Klckoff Pre-Production 9 Production Kickoff- PS3 Feature Parity 9· Currently slightly understaffed in concept art and animation as the team selectively seeks to hire top PS3 Performance 10 Vertical Slice 10 talent. Colagonal Slice 10· • jPre-Alpha Time is compensated by contractors. 10· Platform Performance 10· ALPHA: Code Complete 10- Incented by a $1 million financial incentive from a key partner for shipping on time and achieving a 85% rating BETA: Content Complete 11· RJ'st Party Submission 11· (by Metacritic). RTM 11· Ship 11-i Street 11-: • Looking ta bring in 1-2 concept artists to further assist with animation. !l: : -. Timeline - Concept Kickoff • Utilizes Scrum for all content generators: • ...- · t:nn ·• 2-3 key partner producers spend one week at the studio every four weeks. • Games Audit, an independent party hired by the bonding bank, also tracks development progress. 38 Studios: Rhode Island Economic Development Council 20 Wells F - . ··-·-:-=--···-·-=·.·.-----.-.--.. · •- .•• ·-. :,.r •• -·--.-:.-·:·. ·:.·:·: ••. ·::·. ·.-.-- •• ~- - .- .-1 . Planning Process and Timeline - Copernicus, MMC ·: • The scope ofthe game is now well understood and the content development pipelines are being refined in preparation fur additional team growth and full game production. • Utilizes Scrum as the prinlazy development and operational framework: ., Manage a Product Backlog with evolving, prioritized goals. . · ·.•: Progress is measured daily. • Monthly company-wide review of sprint deliverables. Each Sprint is one calendar month long. • One release is typically composed of three Sprints. 38 Studios: Rhode !Sland Economic Development Council Concept Kickoff 6- Concept Completion Review 8- Prototype Kickoff e- Prototype Completion Review 8- Vertical Sllce Kickoff 8- Vertical Sllce Completion Review B-1 Pre-Production Kickoff 8-1 Production Requirements Review 9-! Production Kickoff 10- lcore Gameplay Demonstrable • Each month, these goals are broken down into sprint deliverables. • ., The Copernicus project is in late pre-production and starting the ramp towards feature and content production. ,ii ..' . ... T.hnelin(·- 21 10- Clnematlcs Pipeline Demonstrable 10-~ World Is Whlteboxed 10~1 Gameplay System Complete 11- Scclal Syst.ems Demonstrable 11-: Feature Complete 11-~ ALPHA: Code and Content Complete 11-1 Friends and Family 12-: BETA: Closed Review 12-J Anal/ Uve 12-~ Wells F .... -· .. ·. :.-.-.--;1· -· -----------·H-·•••• ' . Disclaimer This docwnent and anyothl::r matmals acc:ompanying this docmnent (collectively, the "Materlalll") are provlded for general infur.matlonal puiposes.. By accepting 9.111 thereof ai:lmowledges 8lld agrees ta the matters set forth below in this notice. Wells Pargo Secur.ities:makec; no representation.IJl'~ (express or Implied) regardiug the adequacy, accmaqorcompleteru:ss of anyinfunnationin the Materii Materials is pre1iminazy and isuotintended to be comp]~ mid such infonnafion is qualified in lts entirety. Any opinions or estimab:s oontainedin the Material& rei; Wells Fargo Securities at this time, and are subject to change witholJl:notice. Interested. parties are advised to comact Wells Fargo Sec:urlties formoreinfinmation. T!ie Materials &re not an offer to sell, or a soliclbd:iG11 of an offer to buy, the sccruri:ties or inst:rmnents named or described.herein. The Matelials are DOt: inte.uded to ptcvide, and mu.st not be nilled on for. ru:conntiDg, legal. regulatory, tax. busincm, financial or related adviee or~ rei:onm :providing any Materials Jsactingas fidw:i.ary or ad.vfsor with respect to the Materials. You must OOl18ll1l with your owna.dvlsm:s as tD the]egal, regularory, tax, busine and other aspects of the Mah!riaJs. Wells Fargo Sa:uritic:s js the uade name for certain capitll markets and investment:~ seniices of Well& Plllp) It Company ancl its subsidlarles. including We!Js l memberPINRA end SIPc, miWella Fmgo Bank,Naticm&l.Assoc:iation. NotWithstandmg anything to the conlnu:y comaineclin tlie Mab:rials, allpecions may disclose to any and all :persons, without limitations of any kind, the U.S. fedetal, or tax strudmeof any transaction, any met that may be relevant to UDderstimding the U.S. federal, state or Joc:al lax treatment ortax.atructme of 311¥transaction, and (lnclwling opinionsorothertm:analyses) relating to such U.S. federal, state or local taxtreatmeJll:ortaxstructure, athertban the name ofthe parties or any other per infotmatimi that would permit identification of the parties or &Ucli otherpenJolJIJ, end any prlcinltenns or oocpubli.c business or financial iofonnation that is unrelat Cl1' kJCal taxtxeatment or tautructute oftbetmosadion tn tl:le tmq>ayer and is not relevant to andemtandblg the U.S. federal, state or local tax treatment ortax: strw:tu taxpayer. IRS Cin:ular 230 Disclosure: . Tu ensure CODlplillnce w.ith requirelrumts imposed by the we iof'o[m you that imytu advice contained in the Matuials is a.at intended. written to be used, and~ pmpose of (i) avoiding tu penalties or (rl) pmmatlng, marketing ot reoommencliDg to another party an,ytmnsaction Of matter addressed herein. @2o10 Wells Fargo. or ms, 38 Studios: Rhode Island Economic De'\o-:e]opment Coilncll 22 Wells 1: ill .n. . EXHIBIT 119 Rhode Island Eco~o.mic Development Corporation vs Donald Carcieri - Vol. III Page 354 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 my perspective, you know, the governor serves as the chairman ex-officio on the board, 1 of 12 at the time. What information the board had, and I had to make that decision with information that was presented to the full board. Q. But my question to you is -MR. WISTOW: Why don't you let him finish, Mr. Holt. MR. WISTOW: Mr. Holt -Q. Were you finished? A. Go ahead. Q. My question to you is, do you have any present recollection of having asked anyone at EDC for the financial projections, a complete set of financial projections other than what was shown in presentations at EDC board meetings? A. No, I said no. Q. No. Okay. Thank you. After, at the conclusion of the June 14, 2010 board meeting, what did you expect would be done next by the EDC staff? A. Again, I don't recall the substance of each of the separate meetings. It was a process that we had undertaken. The public -- with the 14th, I forgot which ones were confidential, they were non-public sessions. Was that the non-public l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 357 Page 355 1 session? 2 Q. There was a non-public session as part of the June 3 14th -- 1 2 3 4 A. There were two, actually. 4 5 Q. There was the June 14, 2010, it was a non-public 5 6 7 8 9 10 11 12 13 14 15 16 l7 18 19 2o 21 22 23 24 25 portion then, there was a non-public portion July 15, there was a non-public portion July 26? A. There were special meetings, all right, that were devoted to 38 Studios, a special meeting as I recall, of the board, devoted to 38 Studios and that alone, no other business. And they were much longer than the normal meetings. So, I think that, answer to your question, I don't remember exactly what transpired at which meeting. Q. Well, you know that after -- at the June 14, 2010 meeting that presentations were made by Strategy Analytics, Wells Fargo and others, correct? A. If you say so. As I said, I don't remember exactly when, which meeting, so I'll take what you're saying as fact. Q. After that meeting at which the presentations were made, what did you expect the EDC staff to do next in connection with the 38 Studios deal? A. Well, there was a process. I think at one point, I don't remember which meeting, there was an inducement resolution that was -- that came before the board that basically gave EDC the authority to pursue negotiations. As the process proceeded, and there were different presentations, my general recollection being most all those positive about the transaction, understanding the risks, but the mitigating factors in that, and questions that the board had, that the process would, you know, unfold, further negotiations in terms of what the actual transaction would look like. Q. Further due diligence, for example? A. Yes. There was a process. Q. Who was responsible for doing the further due diligence after June 14, 2010? A. Well, when you say responsible, I mean, the executive director, EDC staff, you know, was responsible, in my judgment. They enlisted outside expertise, as Wells Fargo, Strategy Analytics and others, all right, to assist the presentation, assist providing data to the board. Q. Let me ask you this: You say that the EDC staff enlisted Wells Fargo. Do you have any specific evidence that the EDC had hired Wells Fargo to work on behalf of the EDC prior to July 26, 2010, 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 specific evidence of that? A. No, I don't have any specific -- I don't recall, okay, who did what to whom. All I recall is that I had the strong impression that Wells Fargo had been hired by EDC as an independent advisor to review the industry and review 3 8 Studios, and the reasonableness of their projections, and the same with Strategy Analytics. I mean, why else would they be coming before the board? I'm not interested in hearing from somebody who had a vested interest. The idea was to have independent advisors. And so my presumption was that they had been hired by EDC. Q. What's the specific factual basis to support that presumption? A. I just said I don't know, Tom. Okay. Q. You have no factual basis that you can recollect as you sit here today and testify that -- to support your presumption that someone Wells Fargo had been hired by the EDC prior to July 26? A. I do not have a factual basis for that. I don't have a piece of paper. I don't recall a piece of paper. All I'm saying is as a board member and EDC represented that they were going to seek outside independent counsel, if you will, in .Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (4) Pages 354 - 357 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com Donald Carcieri - Vol. III Rhode Island Eco~o.mic Development Corporation vs Page 358 1 2 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 the sense of analyzing this industry and analyzing 38 Studios, the reasonableness of their business plan and their projections. That's why Wells Fargo was there. Why else would Wells Fargo be there making a lengthy presentation? Q. I want to know specifically what specific facts support your presumption that EDC had actually hired Wells Fargo as opposed to Wells Fargo working on behalfof38 Studios? A. Well -Q. Specific facts. A. First of all, it would make no sense to have Wells Fargo working on behalfof38 Studios making a presentation to the board when it's supposed to be an independent objective analysis. So that was the presumption that the board had asked EDC for outside independent appraisal, not just the EDC staff, because they didn't have expertise in this particular area. And so I presumed that those firms had been engaged to do that. Q. But I want to know specifically the basis for your presumption that Wells Fargo had been hired by EDC as an independent objective advisor, specific factual basis for that presumption? A. I just said I don't have one, I don't have a Page 360 1 Q. It says, "For approval for financing for 38 2 Studios, LLC"? Yes. Q. And the next paragraph goes down, it says, "Mr. Stokes explained that the EDC has been deliberating this matter, performing its due diligence for the last several months." Do you see that? A. Yes. Q. Let's go down to the next paragraph, these notes say that, "After several months of engaged due diligence by staff as well as by the board, final terms and conditions are to be presented at this meeting. Mr. Stokes introduced Deputy Director J. Michael Saul to make a presentation to the board." Do you see that? A. Yes. Q. And he did make a presentation that day, did he not? A. Yes. Q. And then the next paragraph down begins with, "Mr. Saul stated that this process," he's referring to . the due diligence process, right? A. Yes. Q. That's been going on for the last five months, 3 A. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 361 Page 359 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 factual basis. I'm just giving you my impression and my sense, because it would make no sense to have Wells Fargo there presenting, you know, and selling on behalfof38 Studios to the board. We don't need somebody selling us. We wanted independent analysis. Q. Well, did Wells Fargo, anyone at Wells Fargo ever say at that June 14 meeting, I'm Mark Lamarre from Wells Fargo, I have been hired by EDC to do an independent analysis? A. I don't recall that. I don't recall that. Q. Take a look at Exhibit 85. I put before you Exhibit 85, which is the meeting minutes for the meeting of the directors of the EDC public session dated July 26, 2010. Do you have that? A. Yes, I do. Q. Now, let's go to -- let's go to Page 6 of the meeting minutes of the July 26, 2010 meeting at which the EDC approved proceeding with the 38 Studios transaction. Do you have that in front of you, Governor? A. Yes, I do. Q. Let's take a look at Item 6. Do you see that on Page 6? A. Yes. 1 right? Yes. Q. Okay. Then the next paragraph down, can you read that aloud, please? A. It says, "The EDC hired two reputable consultant companies, Strategy Analytics and Perimeter Partners, to evaluate the video game industry as well as 3 8 Studios and provide detailed information to the board." Q. Okay. Does that paragraph mention Wells Fargo anywhere? A. No. Q. In fact, it only represents -- it only indicates that two consultants had been hired by EDC, Strategy Analytics and Perimeter Partners, right? A. No, it doesn't say only two. It says these two had been hired. Q. But there's no reference to Wells Fargo? A. It does not. It didn't. Q. Now, let's -- now after the -- withdraw that question. Now as we were discussing earlier, the next board meeting was on July 15, 2010, right? A. I believe so -- you say the next, this is July 26. Q. I understand. I'm not on this -- let's just leave 2 A. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 .M.in-U-Script@ Allied Court Reporters, Inc. (401)946-5500 (5) Pages 358 - 361 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 120 Rhode Island Eco~o.mic Development Corporation vs Donna Cupelo Page 133 l 2 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 l7 18 19 2o 21 22 23 24 25 opportunity, not recommend the opportunity, or just remain neutral? A. I felt they recommended the opportunity ifthe state would understand its risks and work towards mitigation on those risks. Q. Okay. And are you basing that on words you heard, or your feeling from listening to the presentation? MR. WISTOW: Objection. A. Based upon some of the key things in their report and their presentation. Q. My question was, did you hear them get up and say, "I recommend you should do this," or did you get a feeling that they were for it? A. I heard what they said in their presentation, and they pretty much followed that which was very straightforward as to "This is an opportunity for Rhode Island. There are risks. You need to mitigate those risks in order for it to be successful." Q. The next presentation was done by a man named Mark Lamarre at Wells Fargo, and in the minutes it's on page 3, the second to last paragraph, the beginning of the second to last paragraph. A. Uh-huh. Page 135 1 38 Studios opportunity. I guess my question is little different. Did you understand that he had a relationship with 38 Studios, the EDC, or both? MR. WISTOW: Objection. Q. If you know? A. I don't know, but my understanding was that EDC invited him in to provide his expertise to us to review this opportunity. Q. So, taking a step back. In general, what do you recall about Mr. Lamarre's presentation? A. I remember he gave a lot of facts and figures, as you can see from his presentation about the industry, entertainment industry video, and that he also felt that the 38 Studios numbers --which made me understand that he had some access to 38 Studios financials -- that they were in line with other members of the industry. Q. And so what you're looking at is the PowerPoint, which is Exhibit D to the minutes, which are Exhibit 243? A. Correct. MR. WISTOW: And, also, 121. MR. CONNOLLY: Fair enough. Q. So, there's two parts to this PowerPoint. The 2 Q. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 136 Page 134 l 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. In it, it states that the next presenter was Mr. Mark Lamarre of Wells Fargo who explained that for over 20 years he has provided financial assistance to the interactive -MR. WISTOW: Excuse me, it says "Wells Fargo." Q. Yes. Mr. Lamarre explained that for over 20 years, Wells Fargo has provided financial assist ance to the interactive entertainment market, and he also pointed out that the type of gaming being discussed is not all related to gambling. Do you see that? A. Yes, I do. Q. Did you have an understanding that Mr. Lamarre worked for the part of Wells Fargo that prepared the private placement -- the Equity Private Placement memorandum for 38 Studios? MR. WISTOW: Objection. A. I don't think I knew at that time which division he was in. Q. Okay. Did you have an understanding that he was there on behalf of 3 8 Studios or on behalf of someone else? A. I believe that he was called in by the EDC to provide expert information about the industry and l 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 first part is the "Interactive Entertainment Industry Overview," and the second part is "38 Studios Planning Process." Do you see those? It's page 2 of the PowerPoint. A. Yes, I do. Q. And so, the "Interactive Entertainment Industry Overview," which is the first several pages, that's his overview of the market? A. Yes. Q. Without going through, reading all the facts and figures, because there are many of them, in general, what do you recall Mr. Lamarre explaining to the board about the interactive video gaming market in 201 O? MR. WISTOW: If she wants to refer to anything in particular. MR. CONNOLLY: You can refer to anything you want. I'm just trying to get your big picture overview as opposed to having you read bits and pieces. If you recall, and if you say "I don't recall," that's fine, too. A. Well, what I recall is what I said previously. That he referred us to the fact that the industry had a lot of different players of various sizes to it, and that there were risks associated with this Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (34) Pages 133 - 136 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 121 David Dooley, Ph.D. - Vol. II Rhode Island Eco~o.mic Development Corporation vs Page 435 1 separate exhibit number. 1 2 Q. Dr. Dooley, so the discussion actually anticipates 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2O 21 22 23 24 25 Page437 2 my next question. This is actually -- Exhibit 632 was produced from your files; is that correct? A. That's correct. Q. And you have a distinct recollection or independent recollection of actually looking at this document at the time? A. I do. Q. Now, did you -- what was your understanding as to the role that Wells Fargo was playing in connection with this transaction; did you have an understanding? A. Yes. They were providing an independent analysis of the overall market for gaming, and they were providing analysis of38 Studios and their possible success in that market. Q. And was -- there was an independent analysis of the video game business; is that correct? A. The market for the video game business. Q. The second part of your answer was that -- was that also an independent analysis they were performing of38 Studios? A. That was how I read it, yes. MR. WISTOW: By the way, can I make a 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 THE WITNESS: In color? MR. BLESSINGTON: In color? THE WITNESS: You're right, it is a lot easier to read. Q. I'm sorry, before we got sidetracked by Mr. Wistow, so you also had an understanding that Wells Fargo was performing some sort of independent analysis of38 Studios; is that correct? A. I did. Q. And that was based on your review of the slide presentations? A. Yes. Q. Did anybody tell you that? A. I don't recall anybody specifically saying that. Q. Did you consider Wells Fargo to be an advisor to the EDC; did you have an understanding? A. I considered Wells Fargo to be a consultant. My understanding is Wells Fargo was a consultant that the EDC brought in. Q. They had been retained or hired by EDC? A. Yes. Q. And that was based on what? A. The fact that they were on the agenda for the Page 438 Page 436 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 suggestion, ifl may, what I've got here is the, really good clean copy of the exhibit, where you can actually read the material. If you'd like to -- I'd like to show him that. MR. EDWARDS: You're saying because the page isn't legible? MR. WISTOW: No, it's a little more difficult to read. This is a copy of a copy. In other words, this is not from his files, this is a copy ofa copy. MR. BLESSINGTON: What are you referring to, Max? MR. WISTOW: You can see it's the same material. MR. BLESSINGTON: Is it marked? MR. WISTOW: Yes. It's easier to read. MR. BLESSINGTON: I don't have a problem with that. MR. WISTOW: It's the one you contend was not shown, but it's the one he got. MR. BLESSINGTON: Exactly. We're going to get to that. THE WITNESS: This is what I got? MR. WISTOW: This is what you got. 1 2 3 meeting and made a presentation to the board. Q. But 38 Studios also made a presentation to the board, did they not? 4 A. Yes, they did. 5 Q. And they weren't obviously retained or hired 6 by-7 A. No. They weren't an independent third party, a 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 either. Q. Now, to the point, did you at the time that -- let me ask you this, when you -- when do you recall actually reviewing the presentation, shortly after the June 14th meeting? A. Well, not shortly after the June 14th meeting because I think I was in India. It took a little while to get back. So, it would have been some time probably in the following week. Q. But you did ultimately get a copy of the presentation? A. Yes. Q. Was that in the ordinary course, that if you missed a board meeting, somebody would forward to you minutes and whatever presentation was presented? A. Yes. Q. I take it you would have reviewed it carefully? Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (45) Pages 435 - 438 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 122 Rhode Island Eco~o.mic Development Corporation vs Daniel Sullivan Page 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 come in. You asked about analysts. Give us a projection. That these were realistic numbers. Q. You had someone come in, someone came in and told the board-A. It may not have been when we first saw this, it might have been -- at some point somebody came in, Wells Fargo, and gave us analysis that the numbers and plus the EDC team had given us projections of what they overall thought, but this I believe was Studio 38's projections. Q. Your testimony is that the EDC itselfreviewed 38 Studios' financial projections? A. Well, the EDC, yeah, they were there. They may have only got that on June 9, too. I have no idea. Q. But is your testimony that the EDC conducted an independent analysis regarding whether 38 Studios' financial projections were accurate? A. No. MR. WISTOW: When we use the EDC, really what you mean by that is the EDC staff as opposed to the board. Why don't we define our terms. A. I mean, any work by the EDC was by the staff, not the board. But it was presented to the board Page 55 1 projections, my question was more general, at any 2 time. 3 MR. WISTOW: By these financial 4 projections, you mean Page 13 of Exhibit 15? 5 MR. BATCHELOR: I mean the financial 6 projections that are reflected in this June 9 7 presentation. MR. WISTOW: We've only referred to 8 9 Page 13. 10 MR. BATCHELOR: Correct. THE WITNESS: So what was your 11 12 question? 13 Q. At any time did the staff of the EDC represent to 14 the EDC board that they had reviewed 38 Studios' 15 financial projections and found them to be 16 reasonable? 17 A. Yes. That's why they presented them to us. 18 I believe they thought that these projections 19 should come to the board. So my assumption, this 20 is just my assumption, that, yes, they thought 21 that this was a fair analysis. 22 Q. But do you have any recollection of them actually 23 saying that to the board? When I say saying that, 24 I mean saying that they reviewed 38 Studios' 25 financial projections and found them to be Page 54 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 by, I believe, Studio 38. Q. Did the staff of the EDC ever represent to the EDC board that they themselves had reviewed 38 Studios' financial projections and said that they thought they were reasonable? A. I do not recall. Obviously, they presented them to them, so they were -- they presented it to us, so I assumed they -Q. My question -MR. WISTOW: You did it again. He said, "I assumed they." He was mid-sentence. Now what happens is I've seen this before with you, what happens is the witnesses forget where they were, and we got to go back. Let's go back, let's try to start with the seed for which this monstrous growth developed, let's go. Please go back. (LAST QUESTION AND ANSWER READ) A. They thought it was a worthwhile discussion to present to the board. MR. MARTLAND: Motion to strike everything after, "I don't recall." Q. Are you finished with your answer? A. Yes. Q. I wasn't only referring to these financial Page 56 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reasonable? A. I don't recall exactly that, but the assumption was they presented it for us to consider the bond, the loan guarantee. Q. You testified earlier you believed that the EDC staff had asked a third party to review the financial projections? A. At some point we had presentations by a couple different companies come in to give an objective opinion on the loan guarantee. Q. Who were those companies? A. Wells Fargo was one, and I forgot the same name, Studio -Q. Strategy Analytics? A. I think Strategy Analytics, that's it, yes. Q. Anyone else come to mind? A. There could have been others. There were a few presentations, you know, so ... Q. When you reviewed this slide that says company's most-likely projections, do you recall having any opinion on whether the assumptions here were overly optimistic? A. I do not recall having an opinion, positive or negative. MR. VALENTE: Could I have that Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 · (14) Pages 53 - 56 115 Phenix Avenue, Cranston,-ru 02920 www.alliedcourtreporters.com EXHIBIT 123 Cheryl Snead - Vol. II Rhode Island Eco~o.mic Development Corporation vs Page 203 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 materially change your testimony then -THE WITNESS: No. MR. CONNOLLY: -- then I would probably come back and ask you more questions or attempt to come back and ask more questions. If it's a typo or a name is spelled wrong or something -THE WITNESS: It's a clarification. MR. CONNOLLY: Then you can just do the reading and signing, and you have 30 days from when you get the transcript, and I'm sure Mr. Sheehan -THE WITNESS: Two things glaringly stood out when I read through it. One was right at the beginning when you asked me about boards, and I am on the board and have been on the board of Amica Insurance and am embarrassed I neglected to list that, so that's important to me. So I want to make sure it's in there for the record. And then the other was as I read through, I saw, and I can't remember what page, but we started to talk about, or I used the phrase gap, and I want to make sure that it's clear that gap meant net proceeds. To me personally, as I define net proceeds, it's an understanding of just like a Page 205 1 Q. Are you paying them? 2 A. Q. A. Q. A. 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 206 Page 204 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 loan, you get a certain amount of money, less specific costs that have been identified ahead of time; whereas, I don't want it to be interpreted that gap was you didn't know there was going to be net of the proceeds. So, it was known versus not known. So I just want to make sure that that's clear, because as I read my testimony, even I realized there could be an interpretation by you that I didn't mean that or I did mean that. Q. I'm going to ask a few preliminary questions and then I'm going to touch upon this. Did you have any conversations with anyone about your testimony from day one after your testimony? MR. SHEEHAN: Other than your lawyer. A. Other than my lawyer, no. And I only brought this up to my lawyer this morning. MR. SHEEHAN: You don't need to volunteer that. There's an attorney/client privilege between us. Q. Is there a retainer letter, is Wistow Barylick representing you by retainer, is a retainer letter reflecting attorney/client relationship between Steve Sheehan, Max Wistow and yourself? A. As a member of the EDC board of directors, I have asked them to represent me in this case. No, I'm not. Is anyone paying them? I don't know. But it's not me personally. Is the representation confirmed in writing? Yes. Q. Other than the one conversation when you brought this up to Mr. Sheehan, have there been any other conversations with anyone, including lawyers, about the change in your testimony? A. No. And then two more points that I would like to add. MR. CONNOLLY: Okay. Why don't we do those. A. The third is, as I read through, and I've only read through it this week, you know, I know there's a lot, I don't remember including the Wells Fargo presentation, but I do want to make sure it's documented that my assumption was that Wells Fargo was there endorsing 38 Studios, and I know who Wells Fargo is from their commercials and their being out there in the business world as a large financial institution, and I saw that both as a board member and as an individual listening to their presentation that they were supporting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and endorsing and vouchering (sic) 38 Studios in their presentation to the EDC board, and then my final comment is there were very minimal typos -great job -- but I did note those, and I gave those to Mr. Sheehan this morning. Q. Okay. With respect to Wells Fargo, and we have Wells Fargo's counsel here, so maybe they may ask some questions, but you did testify that you had understood that Wells Fargo was there on behalf of 38 Studios? A. Correct. Q. And you did testify that you were aware that there was a financial relationship between Wells Fargo and 38 Studios? A. Yes. Q. And that Wells Fargo was at that time engaged in trying to help 38 Studios raise money in the private equity market? MR. SHEEHAN: That mischaracterizes her testimony. She said she didn't know at that time whether it was engaged in that. A. But there was a relationship. Q. There was a relationship? A. And if they didn't feel positive about that relationship, they would not have been there Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (2) Pages 203 - 206 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 124 Rhode Island Eco~o.mic Development Corporation vs Shivan Subramaniam Page 21 1 A. I cannot recall if it was a specific recommendation other than a general inclination 3 they were supportive of the transaction. 4 Q. What I want to get at is that as you sit here 5 today, what facts do you possess that led you to 6 conclude that First Southwest was generally 7 favorably inclined to the transaction? 8 MR. WHELAN: Objection. 9 A. First, it was four years ago, and I do not -1 o I would remember today if they said anything that 11 was negative. So, clearly, all of the 12 presentations that they made were, in general, 13 positive about the transaction. 14 Q. So, when you are giving answers pertaining to the 15. recommendations of the professionals, you're doing 16 so and saying it was positive because you can't 17 remember anything negative? 10 MR. WHELAN: Objection. 19 A. That's right. 20 Q. That's the sole basis for your response? 21 MR. WHELAN: Objection. 22 A. That's right. 23 Q. What about Wells Fargo? What do you recall Wells 24 Fargo's role being in connection with the 25 transaction? 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Wells Fargo? A. I don't recall that. Q. You don't remember seeing any written documents that suggested that the RIEDC had retained Wells Fargo? A. I don't recall seeing any documents. Q. Do you recall becoming aware at the time that you considered the transaction, sir, that Wells Fargo had at some point in time been working on behalf of38 Studios to raise capital? MR. WHELAN: Objection. Q. Do you remember that? A. I sort ofrecall something to that effect. Q. You have some memory of learning that Wells Fargo had been retained specifically by 38 Studios? A. I don't recall that the way you phrase it, but I thought they had done some work for 38 Studios. Q. And the work that they had done -- or Wells Fargo had done for 38 Studios had something to do with raising capital; right? A. As I recall, not precisely, but I recall that. Q. And that was a separate exercise from the proposed transaction that was being presented to the RIEDC board; correct? A. That's correct. Page 24 Page 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. They were also on the financial side, and they were also making comments about the nature of the industry itself. And that was -- again, as the role of a consultant, they were laying out what I recall -- what was the history of the industry. What was the experience of the industry, and where 38 Studios fit in in that whole transaction. Q. Okay. At the time that you were sitting on the board, who did you understand that Wells Fargo had been retained by? A. I fully thought they were representing the EDC. Q. Okay. And what did you base that belief on at the time, sir? A. Nothing other than, you know, the very nature of the fact that they were there as part of the presentation. Q. Okay. Is that the sole basis for your conclusion that Wells Fargo was acting on behalf ofRIEDC at the time the board considered the 38 Studios transaction? MR. WHELAN: Objection. A. That's right. Q. You don't recall anybody making any statements to you to the effect that the RIEDC had retained 1 Q. Let me go back to First Southwest to see if we 2 can't get, if you have it, a more precise recollection of their role. Did you understand that First Southwest was engaged as a financial advisor in connection with the issuance of the bonds that RIEDC was going to undertake? A. I don't recall precisely that, other than they were advising the EDC, but I don't recall ifl can be very specific about whether they were retained to just do, just the bonds. Q. Understand. Can you, if you can, tell me the difference between the advice that First Southwest was providing versus Wells Fargo? You told me that they were both acting in the capacity on the financial side. A. Right. Q. I'm just wondering if you can distinguish for me the work that you understood First Southwest was doing versus the work that you understood Wells Fargo was doing? MR. WHELAN: Objection. A. I don't recall a precise discussion. The difference, other than my perception, was that First Southwest was more internal to the EDC -the EDC's perspective -- and Wells Fargo was more 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 M.in-U-Script® Allied Court Reporters, Inc. (401)946-5500 (6) Pages 21 - 24 115 Phenix Avenue, Cranston,-iu 02920 www.alliedcourtreporters.com EXHIBIT 125 Rhode Island Eco~o.mic Development Corporation vs Alfred J. Verrecchia Page 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you and the 38 Studios' management team without talking to you first? MR. WISTOW: Objection. A. I have no idea. Q. Do you think they might have done that without talking to you? A. I don't know. Q. Do you think that either Keith Stokes or Mike Saul would have invited the CEO from Hasbro, Brian Goldner, to a meeting with 38 Studios' management without talking to you about that first? MR. WISTOW: Objection. A. Again, I don't know. He certainly could have. I don't know that he did or didn't, or what he would or wouldn't do. Q. Do you think most likely Mr. Verrecchia would have talked to you about that and gotten Mr. Goldner's name from you before inviting him to a meeting? A. They didn't need me to get Brian Goldner's name. He was the CEO of Hasbro, so he was well known in the community. Common courtesy would have been to contact me, but I don't recall them ever asking me about such a meeting. Q. Can you tum to the second page of this document. I want to just ask you about a statement down 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 here. If you look about two paragraphs down you will see the following statement, "Wells understands they will need to convince the EDC board that 38 Studios' business model and projections are what will sell the bond versus the credit enhancement. EDC board will need a high confidence moral obligation will never be called" (sic). I just want to ask you about those two statements. What was Wells Fargo's role in this transaction? A. There were three professional advisor firms, Wells Fargo, First Southwest and Strategy Analytics were engaged by the EDC to provide professional advice to the EDC. I don't know specifically what the EDC asked each of them to do. I did not read any of the contracts or anything like that. Q. But you did participate in board meetings where each of those parties made presentations to the board, right? A. Yes. Q. And at least in part, in those presentations they described what they had done, right? A. Yes. Q. Okay. We'll get to that later. I appreciate your response. Did you think it was important to convince the board that the 38 Studios' business model and projections would sell the bonds? A. I think it was important for the board to ensure that the business model and projections were sound. To sell the bonds in the context of what you're saying here, you know, I mean, I'm not quite sure how to answer that question in regards to sell the bonds. MR. WISTOW: The complete phrase was versus the credit enhancement, ifthat helps. THE WITNESS: Okay, yes. Q. Did you believe when you were approving this transaction that the 38 Studios' business plan would sell the bonds as opposed to the credit enhancement? THE WITNESS: Would you repeat that? Q. Sure. You eventually voted to approve the loan to 38 Studios, right? A. Yes. Q. When you cast that vote, did you believe at that time that the 38 Studios' business plan and projections would sell the bonds as opposed to the credit enhancement? A. When I voted for the bonds, I believed that Page 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 the business model and financial projections were sufficient to complete the development of the game and get it to market. So that was an important consideration in selling the bonds. Q. My question was, did you believe that investors would buy those bonds because of the 38 Studios' business model and projections, or because of the credit enhancement? A. If you're asking do I think the bonds could have been sold without the credit enhancement? I don't know. I never made the distinction in my mind as to which of those two elements were the most important. I looked at the complete package. Q. Did any of the professional advisors inform you that the bonds could not be sold without the credit enhancement? A. I don't recall. Q. Did you agree that, "The EDC board would need a high confidence moral obligation will never be called." Do you agree with that statement? A. I can't comment on the statement. I mean, it was not a -- I don't recall having a discussion at the board, you know, in those terms. I recall having a discussion that we had a sound financial plan, and that would get the game Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (9) Pages 33 - 36 115 Phenix Avenue, Cranston,"RI 02920 www.alliedcourtreporters.com EXHIBIT 126 Rhode Island Eco~o.mic Development Corporation vs ])onna Capelo Page 133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 opportunity, not recommend the opportunity, or just remain neutral? A. I felt they recommended the opportunity ifthe state would understand its risks and work towards mitigation on those risks. Q. Okay. And are you basing that on words you heard, or your feeling from listening to the presentation? MR. WISTOW: Objection. A. Based upon some of the key things in their report and their presentation. Q. My question was, did you hear them get up and say, "I recommend you should do this," or did you get a feeling that they were for it? A. I heard what they said in their presentation, and they pretty much followed that which was very straightforward as to "This is an opportunity for Rhode Island. There are risks. You need to mitigate those risks in order for it to be successful." Q. The next presentation was done by a man named Mark Lamarre at Wells Fargo, and in the minutes it's on page 3, the second to last paragraph, the beginning of the second to last paragraph. A. Uh-huh. 1 38 Studios opportunity. 2 Q. I guess my question is little different. Did you 3 understand that he had a relationship with 38 Studios, the EDC, or both? MR. WISTOW: Objection. Q. If you know? A. I don't know, but my understanding was that EDC invited him in to provide his expertise to us to review this opportunity. Q. So, taking a step back. In general, what do you recall about Mr. Lamarre's presentation? A. I remember he gave a lot of facts and figures, as you can see from his presentation about the industry, entertainment industry video, and that he also felt that the 38 Studios numbers -- which made me understand that he had some access to 38 Studios financials -- that they were in line with other members of the industry. Q. And so what you're looking at is the PowerPoint, which is Exhibit D to the minutes, which are Exhibit 243? A. Correct. MR. WISTOW: And, also, 121. MR. CONNOLLY: Fair enough. Q. So, there's two parts to this PowerPoint. The 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 136 Page 134 1 Q. In it, it states that the next presenter was Mr. 2 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Mark Lamarre of Wells Fargo who explained that for over 20 years he has provided financial assistance to the interactive -MR. WISTOW: Excuse me, it says "Wells Fargo." Q. Yes. Mr. Lamarre explained that for over 20 years, Wells Fargo has provided financial assist ance to the interactive entertainment market, and he also pointed out that the type of gaming being discussed is not all related to gambling. Do you see that? A. Yes, I do. Q. Did you have an understanding that Mr. Lamarre worked for the part of Wells Fargo that prepared the private placement -- the Equity Private Placement memorandum for 38 Studios? MR. WISTOW: Objection. A. I don't think I knew at that time which division he was in. Q. Okay. Did you have an understanding that he was there on behalf of 3 8 Studios or on behalf of someone else? A. I believe that he was called in by the EDC to provide expert information about the industry and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 first part is the "Interactive Entertainment Industry Overview," and the second part is "38 Studios Planning Process." Do you see those? It's page 2 of the PowerPoint. A. Yes, I do. Q. And so, the "Interactive Entertainment Industry Overview," which is the first several pages, that's his overview of the market? A. Yes. Q. Without going through, reading all the facts and figures, because there are many of them, in general, what do you recall Mr. Lamarre explaining to the board about the interactive video gaming market in 2010? MR. WISTOW: If she wants to refer to anything in particular. MR. CONNOLLY: You can refer to anything you want. I'm just trying to get your big picture overview as opposed to having you read bits and pieces. If you recall, and if you say "I don't recall," that's fine, too. A. Well, what I recall is what I said previously. That he referred us to the fact that the industry had a lot of different players of various sizes to it, and that there were risks associated with this Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (34) Pages 133 -136 115 Phenix Avenue, Cranston,-iu 02920 www.alliedcourtreporters.com EXHIBIT 127 Rhode Island Eco~o.mic Development Corporation vs Cheryl Snead - Vol. II Page 407 1 Q. -- of that. I'm going to show you what's been 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 previously marked as Exhibit 235. This has been previously marked. I'll represent to you an individual affiliated with Wells Fargo sent this to M. Chambers at RIEDC.com on June 14, 2010 at 7:32 P.M. in the evening. Do you see that? A. Yes. Q. Do you recognize the e-mail address mchambers@riedc.com? A. Melissa, yes. Q. What was Melissa's position? A. I thought she was corporate communications or communications. Q. Now, if you could flip to the next page. This is the same format as the presentation we just looked at; is that correct? A. It looks like it, yes. Q. Ifl could just ask you to flip through the slide show, I'm just going to ask if you recognize this PowerPoint presentation? MR. SHEEHAN: As compared to the other ones? MR. VALENTE: As anything. A. I don't remember any of the specific slides relating to Wells Fargo. Page 409 1 Q. And also what else, "Past track record of success; 2 Experienced production managers and staff; disciplined development process"? A. Yes. "Electronic Arts validation." Q. As a member of the board, considering this presentation assuming that Mr. Valente's representation is accurate, what would you conclude regarding these statements by Wells Fargo on the issue of38 Studios development schedule for Copernicus? A. Well, they're validating the success. They're endorsing success of the project. MR. SHEEHAN: I don't have anything more. FURTHEREXAMINATIONBYMR. VALENTE(CONT.) Q. We won't go back and forth. I have one more. But again, you don't recall what was given, one way or another, correct? A. Correct. Q. And do you recall what the schedule was that was presented at the meeting? A. I just remember that the product was going to be completed early fall so that it could be out for the holidays, 2012. Q. Who made that representation? 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 410 Page408 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. So if I were to represent to you this was the PowerPoint presentation that was given at the June 14, 2010 board meeting, and I'd ask you to look through each of the pages, would that refresh your recollection as to what presentation was given? A. Probably not. Q. In flipping through that, can you find any opinion expressed by Wells Fargo as to the timing of the release of the game? A. Not in this document. Q. But again, you have no recollection one way or another looking at both of the slide shows which one was given? A. Correct. MR. PETROS: I don't have any questions. FURTHER EXAMINATION BY MR. SHEEHAN Q. Just one. The exhibit that Mr. Valente was referring to, Exhibit 235, has a page which someone has referred to as the money page? MR. CONNOLLY: Objection. Q. I'll rephrase it. It has a page number 13 and states -A. Second bullet, third bullet down, "On track with schedule." 1 A. I can't remember ifit was 38 Studios 2 themselves or a different party. MR. VALENTE: That's all I have. 3 4 MR. PETROS: Thank you. (DEPOSITION CLOSED AT 2:48 P.M.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Min-U-Script® . Allied Court Reporters, Inc. (401)946-5500 (53) Pages 407 - 410 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 128 David Dooley, Ph.D. Rhode Island Eco~o.mic Development Corporation vs Page 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 that most anchor tenants are established revenue-generating companies with some history of product," et cetera? A. I see that. Q. Then it distinguishes 38 Studios; is that right? A. Yes. Q. It says, "In the case of38 Studios, it is a prerevenue concern," meaning that it won't necessarily have the pull-through impact ofothers with a more established base at the inception, correct? A. Yes. Q. In other words, in building this reputational pull to bring in other video gaming and technology games to the state, 38 Studios, because it was prerevenue, might not have the same pull of a more established branded company? A. That's a possibility. Q. And that's an additional risk? A. Yes, it would be. Q. Dr. Dooley, the next meeting of the board of directors was on June 14th, 2010; is that right? A. It was middle of June, I believe, yes. Q. Which is just about five days after the June 9th meeting we've been discussing? Page 127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 contribution. Here I just want to go quickly through the attachments to the June 14th board minutes labeled as exhibits. These are materials that you received and reviewed in June of2010? A. I would have, yes. Q. And the first Exhibit A, which is DDl-36 is a Rhode Island Economic Development Corporation Immediate Priorities Implementation Plan dated April 26, 2010? A. I see that. Q. And then the labeled Exhibit Bat DDl-39 is the Strategy Analytics report previously marked as 505 that we've just been discussing? A. Yes. Q. The next exhibit at Exhibit C, DD 1-79 is a Strategy Analytics and Perimeter Partners slide dee. entitled Evaluating a Video Game Cluster in Rhode Island? A. I see that, yes. Q. And then the final document attached and produced to us by your office is Exhibit D which is a 38 Studios Rhode Island Economic Development Council RIEDC Discussions materials, a draft dated June 9, 2010 prepared by Wells Fargo securities with the Q. Page 128 Page 126 1 A. Yes. 1 2 Q. And you also were unable to attend the June 14th 2 meeting? Twas. Q. Consistent with the practice that you've described, you received a copy of the minutes and materials from the June 14th meeting and reviewed them contemporaneously in June of2010? A. Yes. (DEFENDANTS' EXHIBIT 632 MARKED FOR IDENTIFICATION) Q. So, Dr. Dooley, I've just handed you Exhibit 632 which is a copy of the public session minutes from June 14, 2010, the executive session minutes from June 14th, 2010 and accompanying materials -actually, I'll strike that. I've handed you 632 which is a copy of the public session minutes from June 14, 2010 and accompanying presentations and materials as produced to us by your office. So, if you look down at the Bates number, it begins with DDl-28 and it extends through DDl-109? A. I see that. Q. And the DD reflects that it was produced to us by you and from your files. A. I'm glad I was able to make some 3 3 4 A. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bates number 1-90 as the first number -A. Yes. Q. -- Is that right? A. Yes. Q. And you received and reviewed each of these materials in June of2010? A. Yes. I would have. Q. So if you turn to the Bates number 1-89, this is a slide in the Strategy Analytics dee.? A. Yes. Q. And here there is an identification ofrisks and mitigating factors? A. I see that. Q. This, like the Strategy Analytics report, which we've just reviewed in some detail, identifies various risks associated with the game industry generally, cluster development success and 38 Studios specifically, correct? A. I see that, yes. Q. And under 38 Studios specifically, the three risks are it's a prerevenue company, no established brand recognition and timing still one to two years before product release? A. I see that, yes. Q. So if you turn to Exhibit D, which is the Wells Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (32) Pages 125 - 128 115 Phenix Avenue, Cranston,ID 02920 www.alliedcourtreporters.com EXHIBIT 129 Rhode Island Eco~o.mic Development Corporation vs Robert I. Stolzman, Esq., 30(b)(6) Page 293 1 A. It appears to be my notes from -- yes, from 1 2 the meeting with Barry Gilbert, Donna Cupelo, 3 Karl Wadensten, Tim Babineau in all 4 likelihood, so that likely would have been 5 the June -- the June meeting whether -6 Q. June 14th? 7 A. June 14 meeting -- yes, this says July, 8 June 14. 9 Q. Now, did your duties to the board include 10 being secretary to the EDC? 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 A. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 295 Yes. Q. In that capacity, you were obliged to take the minutes and prepare them and submit them to the board for approval? A. That's correct. Q. And you were obliged to do that accurately as you could? A. Yes. There's a standard of care with respect to minutes of public meetings and a transcription need not be taken. Courts have held consistently in that regard. It just needs to adequately reflect the subject matter and discussion of the matters and materials that were discussed by the board. Q. Okay. It's really fact specific and you have 540"; do you see that? A. Yes. Q. For three areas. Number one locating -what's that? A. New business, locating new bus. Q. Number two, address public funds? A. That's correct. Q. Number three, discuss confidential info; right? A. That's correct. Q. All right. Now, part of Exhibit 243 is the Wells Fargo presentation. Just tum to that. Would it have been your practice to, when you marked this as an exhibit, to make certain in fact this is what was shown to the board? A. It would have been practice to attempt to -the notion to be certain, sometimes presentations were made to the board and we would have to -- and they'd be made on slides and we'd have to find a copy later. So, generally, the answer is yes, but sometimes getting witnesses to cooperate, as you know, can be a challenge. Q. Okay. In this case, if you tum to the public session minutes, there's a reference Page 294 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to hear the discussion to make a judgment whether or not if something needs to be in the minutes? A. That's correct. Q. Now, you had the duty also to accurately append to the minutes as exhibits those presentations that are reflected in the minutes as having been shown to the board? A. That's correct. Q. And are you aware that the minutes for the June 14th meeting have as exhibits the slide presentations of Strategy Analytics, Wells Fargo and 38 Studios? A. Yes, I believe from my prior deposition you reviewed those with me. Q. Let me just put them in front of you. I'm all set. I'm sorry. It's Exhibit 243. A. This isn't marked as an exhibit. I'm sorry, I didn't see that note, okay. Q. Could you just tum to Exhibit 552. It's in front of you as the meeting from your scribe -A. Carol. Q. Okay. And what she says on page 665, at the bottom, she says "to executive session on Page 296 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to Mark Lamarre's presentation on page three. It says, "A copy of his presentation can be found at Exhibit D"; do you see that? A. Yes. Q. Do you have any reason to believe that what's attached as Exhibit D was not in fact shown to the EDC board? A. No. I believe it was. Q. Now, if you tum in that exhibit to the page of the Wells Fargo report number 14, I'm just going to tell you I've seen some references to this slide and the next one being confidential and not for the public presentation. This is my question. If the EDC board wanted to consider information concerning a company that was confidential, was it the practice of the board to look at that in executive session? THE WITNESS: Please reread the question. (The reporter read the following: "Question: Now, if you tum in that exhibit to the page of the Wells Fargo report number 14, I'm just going to tell you I've Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (74) Pages 293 - 296 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 130 From: Kedia, Abhishek(Abhish"lc.Kadia@flmb.comJ Sent To: CC: Monday, June 14, 2010 07:32:07 PM mchambars@rledc.com Topp, Aaron[aaron.topp1@cf.funb.comJ: Li, Jenny{Jenny.Ll@funb.oom) BCC: Subject: jenny.i@funb.com Attachments: 36 Studios_Rll:DC Discussion Materials_'IPUBLIC.pdl 38 Studios: RI EDC Discussion Materials Mellssa, Please find attached the public version of the RIEDC materials. Please let us know If you need anything else. Regards, Abltishek Kedia Technology, Media & Tclc.,om Investment Banking Wells Fargo Securities 301 S. College St, Charlot:e, '.'iC 2~202 Office: 704-715-5340 Cell: 717-422-2192 Fax: 704-'.183-7037 Email: abhi~hck.kediara.1.wellsf!!rgo.com WFS_0126989 38 Studios: Rhode Island Economic Development Corporation ("RIEDC") Discussion Materials June 14, 2010 Together we Public Session - Private and Confidential CONFIDENTIAL ·-··--····-····--------------- Interactive Entertainment Industry Overview CONFIDENTIAL Interactive Entertainment Market Opportunity Growth in the Interactive Entertainment Market will be Primarily Driven by Software Sales • Worldwide revenue representing retail value of shipments of video game consoles, dedicated handheld gaming devi packaged software for consoles and handhelds reached a record high of $71.7 billion in 2008, up 15% from 2001s 1 of $62.4 billion. • • The worldwide market is expected to reach $124.1 billion in 2013, a projected compounded annual growth rat 1 While hardware revenue is projected to decline and then rise again in 2012 and 2013 due to the console cycle, the r1 of software shipments is expected to increase at a compounded annual growth rate of 14.3% in the projected years, $201.8 billion in 2013 . . · · ·. :. · .:: .. · ·' · ·... · · · : Worldwide interactive Ent~rt~inn;~nt Revcm~e by Comp01~cnt ". "·:· ·: . .' · · · · ·: ($ in Billions) \!!!Hardware •Software $150.0 $124.1 $100.0 $50.0 $0.0 2006A 2007A 2008A 2009E 2010E 2011E 2012E 2013E Source: JDC, May 2009 38 Studios: Rhode Island Economic Development C.orporation CONFIDENTIAL Wells Fargo Market Opportunity by Geography North America and Western Europe Each Currently Represent 40% of Total Market Share • Revenue in North America is expected to grow at a compounded annual growth rate of 7.1%, growing from $32.8 b 2009 to $43.2 billion in 2013. · . · ·· · · : : · \Vor1dwidc Intc~·activc Entcrtaimncnt·Re.v.enuc by.Geography ·: ". ., .·_':- . ·. · ($ in Billions) $124.1 $125.0 $100.0 $75.0 $50.0 $25.0 $0.0 2006A 2007A 200BA !II North America 2010E 2009E •Western Europe 2011E ~Japan 2013E 2012E !!! Rest of World Source: JDC, May 2009 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 3 Wells Fargo North America Market Opportunity Within North America, Hardware Revenue is Projected to Decline Slightly While the Retail Value of Software Shipments is Expected to Increase at a Compounded Annual Growth Rate of 9.9% in the Projected Years, Reaching $35·5 Billion in 2013 :. :· .· · '." .. ·. .· · · . North A.n1c~i~n'Infcractivc'Entcrtilimncnt Revenue by Componc~1t ($ In Billions) li'!Hardware .. •Software Hardware '09E-'13E CAGR: (2.5%) Software '09E-'13E CAGR: 9.9% $50.0 ··· $43.2 $40.0 $30.0 $20.0 $10.0 $0.0 2005A 2007A 2008A 2009E 2010E 2011E 2012E 2013E Somcc: IDC, May 2009 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 'tation• includes PlayStation, .l'iayStation2 and l'S3; "Xbox"' includesXboxandJ\.'box 36o Source: Wall Street research 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 5 Wells Fargo Top U.S. Interactive Software Publii;;hers and Key Titles While the Industry Leaders Command a Large Portion of the Entertainment Software Industry, the Industry is Fragmented and Numerous Small, Privately-Held Players Exist ;wo8 ::r'~fp U.S. Intcractfre.:Eiitcrtaimhcnt Soft'l~·arc ~uhlishcrs 1 Electronic Arts 20% Sony 3% Activision Blizzard 17% Microsoft 4% 5% Nintendo of America 17% Take-Two Interactive •Based on U.S. RetaJ1 Sales 6% Amount Rank 1 2 3 4 5 6 7 8 9 10 Brand Rack Band Madden Football The Sims Need for Speed NCAA Football Tiger Woods FIFA NBA Uve Left 4 Dead Battlefield (~mil} $662 312 143 106 94 89 79 71 67 57 Rank 1 2 3 4 5 6 7 8 9 10 Brand Guitar Hera Call of Outy Warcraft Spider-Man Cabela's Kung Fu Panda James Bond Transformers Crash Ba ndicoot Tony Hawk Total Top 10 Brands Total Top 10 Brands $1,680 O/o* %* 71% •%oftotal company U.S. sell-through attributable to top ten brands Source: Wall Sire.et """earch """~~~~-~~ Amount 1i mil) $992 446 104 42 32 32 25 23 20 17 $1,733 89% .. 1oo-.~ ,_._·-:ill~ 38 Studios: Rhode Island Economic Development C.orporation CONFIDENTIAL Take· Nintendo Activision Electronic Arts Rank 1 2 3 4 5 6 7 8 9 10 Total %* Brand Mario Brothers Wil Flt Wli Play Pokemon Zelda Animal Crossing Nlntendogs Wil Music Brain Age Kirby Top 10 Brands .......-.~--'l'>'I- v .. Amount (iii mill $761 407 261 119 .67 • 54 44 42 39 26 $1,820 94% Rank 1 2 3 4 5 6 7 8 9 10 Total %* Brand Grand Tl NBA 2K Carnival MLB 2K Midnight Civllizati Bully Elder Sci NHL 2K Top Spin Top 10 E ~~~~~-~~..-~-- Wells Fargo Industry Trends and Drivers :,':.. : ....... ·. ,'.- .._-, .'.. · ..... '.·~ ... " .·:.:':frcndsa~d·brivcrs: ''.' .' · .· · .: ··. ·: · · :· ·, .. • Broadband penetration to the home, enabling digital distribution and online gaming. • More powerful PCs and laptops at lower prices. • Better graphic processors, more disc space, etc. • Improvement in quality of games, often with social elements (VoIP, text chat, etc..). • Longer console lifecycles. • Growth in adoption of smart phones and other handheld devices that support gaming applic • Changing demographics: The web-literacy rate among the target audience has been growin~ constantly. • Macroeconomic weakness and uncertainty, which impacts consumer spending, advertisemE and investment. • Piracy: Illegal file downloading / disks. • Free content available on the Internet, which lowers demand for premium titles. • Platform incompatibility: Some hardware cannot play select software. • High bar to produce sophisticated titles; costly and time-consuming to develop. 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 7 Wells Fargo U.S. Interactive Entertainment Versus Other Entertainment Sectors The U.S. Interactive Entertainment Sector Has Grown Substantially Since 2003, While Other Enter! ' Sectors are Approximately Flat to Slightly Down . . . · . · . · . . ·.. ,··,. ·.".u:s. Entertaiitn1e~1t Sector~:=:: ·. · · : ·· · . · · ($ In Billions) $20 $18 r-------1 I I I I I D 2003 I I 1!!11 I $16· 1 ....._ _ _ _ _ _ _ __ 1...----1 02006 • 2004 • 2005 ?00.7 mi,2008 $14 S12 :-1---...-$10 58 $6 S4 S2 $- Video : Mo-.ies (box _______ Games .: office) MO'OOs {renbts} Mo'lies {purchases) Books"' Music " Includes trade, book club, paperback, and other .sales. Source: Wall Street research :~8 CONFIDENTIAL Studios: Rhode Island Economic Development Corporation !'3 Wells Fargo Interactive Entertainment Market Demographics .Although Interactive Entertainment Consumption is Well Distributed, Time Spent by 8- to 18-year-old Growing Dramatically · Interactive Entc~tainiucnt M~\rkct Segme . · · · . ·.· • 55% of the interactive entertainment market is comprised of males aged under 45. • Women now represent 40% of game players and 48% of game buyers. • Within the younger demographics (ages 8 to 18), time spent consuming video and computer games has increased dramatically over the past 10 years. ·.Demographics (2009) 6% Males older than 45 · · .2% Females older than 45 8% Females under 18 36 Males 1 19% Males under 18 • Video games use has increased from 26 minutes a day to 1hour13 minutes in a typical day. • Video games present 11% of media time allocation. 29% Females 18 to 45 . ·. . Media Use Over Time (8- to 18-ycar-~>l~~'l'J>~!?l4.f™~'"''""3QC:if'f<:41l:1w~~'~;-"'~''®.3i;'Zill'''i>'.;g,·'t;WJ<'>":a,,Y.4\'!':1:§.;';i~:l:':~filt'~\W'~WJ'.·~t'IJ:;~->fiF\1''•~''lf:i'"'~~f. :~;:t.®~!.:~-6'k!;~.f'?:f:];.~~\4.4.$~t"~~'?~~~~'~!~~.ih.~.&«~f:.~~·§""7!.~}f.:~~.-?~'1Bt?..c~-..~~~~~=~.ir~~~j£:1t~~~~i Sports/Extrerre S arts 21% 17% 17% 17% 17% 17% Racing Fighting 10% 13% 5% 2% 9% 6% 7% 10% 4% 9% 4% 2% 2% 5% 1% Other ·: · . · · 2008 3% 5% 2% 16% 6% 4% 1% U.S. Ii1teractive. Entertainment.Software 1\farkct bv . ..... Genre 7% 5% . · ·_. · ' . other 1% FamUy/ChUdren 25% Source: Wall Street research 38 Studios: Rhode Island Economic Development C.Orporation CONFIDENTIAL 1G Wells Fargo Online PC Gaming in the United States ·· . . ·.: . ' U.S. Online PC Gaming.Subscribers and Purchased Digital Game Downlo_ad~· ·· . (In Millions} •Subscriptions 11.iOnllne PC Gamers ll1Dlgltal Game DOI 250 200 150 100 50 0 2005A · ·. ; 2006A : 2007A 2008A 2009A : 2010E 2011E 2012E 2C U.S. Online PC.Gaming Revenue ·· ~Advertising/sponsorship and mlcrotransacUon (items, etc.) •Premium full game and add-on download ii! Premium MMO and casual subscription ($ In Miiiions} $10,000 $8 $7,365 $8,000 $6,000 $4,000 $2,000 so 2005A 2006A 2007A 2008A 2009A 2010E 201LE 2012E 2C Source: IDC, Marclt 2010 38 Studios: Rhode Island Economic Development C'.orporation t Wells Fargo 1 CONFIDENTIAL .. -·- ·-··-··---- ----- -·- - - - - - - - - - - Rise of J\iIMOs in the United States Strong Growth in Massively Multiplayer Online Games is Expected to Continue U.S. Premimn MlvIO aud Casual Su~scriptions · ' · (in Millions) 50 40 30 20 10 2005A 2006A 2007A 200BA 2009A ,2010E 2011E Z012E 2013 .. . . . .U.S. Premium MMO and Casual Suhscrip~ion Rev ($ ln Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 2005A 2006A 2007A 2008A 2009A:I 2010E 2011E 2012E 201: Source: IDC, March 2010 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 1"' Wells Fargo Wells Fargo Analytical Framework • Large, growing addressable markets • Substantial progress on game development • Past track record of success • Experienced production managers and staff • On track with schedule • Disciplined development process • Electronic Arts validation · • Opportunity for Intellectual Property-based product line extensions • Complete, experienced executive management team • Ability to hire and retain talented, creative professionals • Corporate culture • Pay, benefits and working environment 38 Studios: Rhode Island Economic Development C.orporation CONFIDENTIAL ~---·-···-· ....... ·-·. --·. 13 Wells Fargo Disclaimer This document andai1y other materials 1tCCOlll(laJlying this document (collectively, the "Materia1"") are pmvided for general informationnl pu'1"'"ffi. 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All Rights 38 Studios: Rhode Island Economic Development Corporation CONFIDENTIAL 14 Wells Fargo CONFIDENTIAL EXHIBIT 131 . ., From: L~ Sent: To: Friday, June 11, 2010 01:48:02 PM Jenny[Jenny.Li@fvnb.com] jmadean@38utudios.com: rwestor@38studios.com; tz@38studios.mm CC: BCC: Subject: Lemarre, Mark!Mari<.lamarre@cf.funb.com); Topp, Aaron{aarcn.topp1@d.lunb.com); Kedia, AbhlshaklAbhlshek.Kedla@lunb.com) Attachments: 311 Studlos_RHEDC Discussion Materials_vf'UBUC.pclr: 38 Studios_RHEOC OiscussiOn Materials_vEXEC.pdf abhishek.kedia@lunb.com; mark.lamarre@cf.lunb.com RIEOC presentations Jen, Rick, Tom, Attached are !he private and public slide decks we plan on bringing to Providence. We will print 30 copies of the Execu~ve Session book (will not print the public session books), and we will also bring both books electronically on a thumb drive. We will begin printing as soon as we receive sign off. Thanks, JennyJ. Li Technology, Media &Telecom Investment Banking Wells Fargo Securities Office: (704)715-6270 Mobile: (704) 999 - 9782 Fax: (704) 383-7037 je.nny.li@wellsfargo.com WFS_0081835 38 Studios: Rhode Island Economic Development Council ("RIEDC") Discussion Materials June14,2010 Together"' Public Session - Private and Confidential CONFIDENTIAL - · . --·-----·----·· ---·------------------ Interactive Entertainment Industry Overview CONFIDENTIAL Interactive Entertainment Market Opportunity Growth in the Interactive Entertainment Market will be Primarily Driven by Software Sales • Worldwide revenue representing retail value of shipments of videogame consoles, dedicated handheld gaming de packaged software for consoles and handhelds reached a record high of $71.7 billion in 2008, up 15% from 2007': of $62.4 billion. • • The worldwide market is expected to reach $124.1 billion in 2013, a projected compounded annual growth r• While hardware revenue is projected to decline and then rise again in 2012 and 2013 due to the console cycle, the of software shipments is expected to increase at a compounded annual growth rate of i4.3% in the projected year $101.8 billion in 2013. ·. . _· · · .. · 'Vorldwidc Intc~~ctivc Entcrtainnicnt Revenue_ by Component··. ($ in Billions) Ill Hardware . . •Software $150.0 $124.1 $100.0 $50.0 $0.0 2006A 2007A 2008A 2009E 2010E 2011E 2012E 2013E Source: me, May 2.009 38 Studios: Rhode Island Economic Development Com1cil CONFIDENTIAL Wells Farg' Market Opportunity by Geography North America and Western Europe Each Currently Represent 40% of Total Market Share • Revenue in North America is expected to grow at a compounded annual growth rate of 7.1%, growing from $32.8 · 2009 to $43.2 billion in 2013. · . . . . \¥or1dwide Interactive.Entertainment Revenue by Geography . . ... . .· ($ In Biiiions) $124.1 $125.0 $100.0 $75.0 $62.4 $50.0 $25.0 $0.0 2006A 2007A 2008A mNorth America 2009E 2010E •Western Europe 2012E 2011E ill Japan !I! Rest or World Source: IDC, May 2009 --II ) 5 - ~-""-.&ell<- ••~'-·'-·-·---·.a---··--------·-~-._,_.,..___~ 38 Studios: Rhode Island Economic Development C.Ouncil CONFIDENTIAL 3 2013E ___.,.._,____ Wells Farge North America Market Opportunity Within North America, Hardware Revenue is Projected to Decline Slightly While the Retail Value o Software Shipments is Expected to Increase at a Compounded Annual Growth Rate of 9.9% in the Projected Years, Reaching $g5.5 Billion in 2013 .. · . . .· · · North'A:rncric:a Interactive Entt.~rtainmcnt Revenue hy Con~poncnt ($ in Billions) !iii Hardware •Software Hardware '09E-'13E CAGR: (2.5%) Software '09E-'13E CAGR: 9.9% $50.0 . · $43.2 $40.0 $30.0 $20.0 $10.0 $0.0 2006A 2007A 2008A 2009E Source: me. May 2009 --- ...,, ~· "'"" .... ...,._---..m..- . . _ ,_ _ _ _ _ _,__,_ _ _ _ _,_U -----·-~·-~ 38 Studios: Rhode Island Economic Development C-0m1cil CONFIDENTIAL 2010E 2011E _ _..... _ _ _ 2012E 2013E .... - .._...,,,,,,,_~~- ·- Wells Farg. Composition of Console Installed Base in the U.S. and Worldvvide ·· . ·· U.S. Console Unit Sales (in millions) · · !!I PlayStation •Xbox lllWii · ·· · . . . A Game Cube 25.0 20.9 20.0 15.0 10.0 5.0 0.0 2004 · ·. · 2005 · . ·. 2006 2007 2008 2009E \Vorldwiclc Console Unit Sales (in millions) . ·. ii PlayStatlon . .· lillGame Cube •Xbox 50.0 2C 2010E 43.4 40.0 30.0 20.0 10.0 0.0 2005 2004 2006 2007 2010E 2009E 2008 Note: "PlayStation" includes PlayStation, PlayStation2 and PS3; "Xbox" includes Xbox andXhox 36o Source:WallS~,!~..,.,,_.,.,, ..... :00: ...... " . . --~~-~---------·-~----~··~- ~ 38 Studios: Rhode Island Economic Development C.onncil CONFIDENTIAL .... .... Wells Farg' Top U.S. Interactive Software Publishers and Key Titles While the Industry Leaders Command a Large Portion of the Entertainment Software Industry, thj Industry is Fragmented and Numerous Small, Privately-Held Players Exist · · 2008 Top·u.s. Intcr~ictive Erii:crtainment Software Puhlisltcrs ~ . Electronic Arts 20% Sony 3% Activision Blizzard 17% Microsoft 4% Ninten 22% 25% i'Mlr~'l~i/i~.$~~,Jj'~~i~.x..~~;{~~ii.~*·~~~~~,¥~~~.t1!>.~~fgm~~.,t-"f.~~·~$i>~~ ~~~.·~~..e~~~~5Jl:?·-;..~<... ~f.~~~~....,):)'(~~ .P.;~;~.lit.t:,Of.#..Y.'.;7P.?;t:.;~~r..:.t~ .• ~:<~·.)~~-f'~ ....~~'1(!; ~=.Jl.4~1.ft; · .· 17% 17% 1~% 17% 16% 16%. 13% 9% 7% 4% 4% 5% 2% 3% 2% 2% 10% 4% 2% 6% 6% 7% 5% 9% 5% 1% 1% 1% 2% 1% 1% 0% .sports/Extrerre Sports 21% 17% Racing Fighting Other SilT'Ulcitions 10% S% 1% 2% 2% · · -. · · 2008 1% U.S. Intcrai.-tivc Entertainment Software l\farlcct by Genre · Other 1% Famlly/ChUdren 25% Source: Wall Street research _ _ _ ,._ :i..-.· ..... - - n n · · 1... tt{!ffl ...........-C::t"~:I__..,.~-,- 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL ..... _.,ll,. I _.,__.._,...,.__,,_. _E_.._ Wells Far~ Online PC Gaming in the United States ·· . . · ·. · . U.S. Online PC Gaming.Snhscrihcrs and . · .· Purchased Digital Game_ Down lo.ads (in Mllllons) lllOnline PC Gamers •Subscriptions #i Digital Game 250 200 150 100 so 0 200SA : .. · 2006A · ($ In Mllllons) 2D07A 2008A 2009A 2010E 2011E 2012E U.S. OnHnc PC Gami~gRcvcnnc ; · Ill Advertising/sponsorship and mlcrotransactlon (Items, et1 •Premium full game and add-on download JI Premium MMO and casual subscription $10,000 $7,365 $8,000 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E Source: lDC, Man:h 2010 38 Studios: Rhode Island Economic Development C.ouncil CONFIDENTIAL t1 Wells Farg Rise of lvIMOs in the United States Strong Growth in Massively Multiplayer Online Games is Expected to Continue . ". · U.S~ Premitm1 MMO and Casual Subscriptio (Jn Mllllons) SD 40 30 20 10 2005A 2006A 20D7A 2DOBA 2009A, 2010E 2011E . .· 2012E 20 U.S. Premium Ml\'JO and Casual Subscription Re ($ Jn Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 2005A 2006A 2007A 2008A 2009A: 2010E 2011E 2012E 21 Sourc:e: lDC, March 2010 38 Studios: Rhode Island Economic Development C.ouncil CONFIDENTIAL l2 Wells Farg i ' I I Wells Fargo Analytical Framework • Large, growing addressable markets • Substantial progress on game development • Past track record of success • Experienced production managers and staff • On track with schedule • Disciplined development process • Electronic Arts validation • Opportunity for Intellectual Property-based product line extensions • ·Complete, experienced executive management team • Ability to hire and retain talented, creative professionals • Corporate culture • Pay, benefits and working environment 38 Studios: Rhode Island Economic Development C.onncil CONFIDENTIAL 13 Wells Farge Disclaimer This document and .any nther materials aa:ompanying this document (collectively. the "Material•') are pn.-ided !or general infom14lional purposes. 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All Rig _,.___,,..·---·-·------•-n~•-·-•~11'"---·-----·----------·-~~~;ff!I> 38 Studios: Rhode Island Economic Development C-0m1cil CONFIDENTIAL .t4 - ~·.,.,, a- WellsFarg CONFIDENTIAL r? 38 Studios: Rhode Island Economic Development Council ("RIEDC") Discussion Materials • June 14, 2010 Together" Executive Session - Private and Confidential CONFIDENTIAL ·----------------- Table of Contents I. Interactive Entertainment Industry Overview IL 38 Studios Hiring Process ~-----~···~ 1 -....,_,n..-.a;:,_ __, _ , _ ,-~~~---.-d-o-C· - · · - - · - - · - · - - - -.... ~ 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL l d C IO:o~~CV!ss .. ' .. ,_.,$11 • Wells Farg Interactive Entertainment Industry Overview CONFIDENTIAL Interactive Entertainment Market Opportunity Growth in the Interactive Entertainment Market will be Primarily Driven by Software Sales • Worldwide revenue representing retail value of shipments ofvideogame consoles, dedicated handheld gaming dE packaged software for consoles and handhelds reached a record high of $71. 7 billion in 2008, up 15% from 2ooi of $62.4 billion. • The worldwide market is expected to reach $124.1 billion in 2013, a projected compounded annual growth r • While hardware revenue is projected to decline and then rise again in 2012 and 2013 due to the console cycle, thE of software shipments is expected to increase at a compounded annual growth rate of 14.3% in the projected year $101.8 billion in 2013. ·. · · -. · · . · "\VorJdwidc.lntcracth•c ~ntcrtainntcnt R~vcnuc by.Con1ponc~t ($ In Billions) II Hardware : · ., \ ·, ·. •Software $150.0 $124.l $100.0 $50.0 $0.0 2006A. 2007A 2008A 2009E 2010E 2011E 2012E 2013E Source: IDC, May 2009 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL Wells Farg· Market Opportunity by Geography North America and Western Europe Each Currently Represent 40% of Total Market Share • Revenue in North America is expected to grow at a compounded annual growth rate of 7.1%, growing from $32.I 2009 to $43·2 billion in 2013. · . . · · '"''orld\\'ide Interactivc:Entcrtainmcnt Rcvcm~c by Geography .· : : , .. ($ In Billions) $124.1 $125.0 $100.0 $75.0 $50.0 $25.0 $0.0 2006A 2007A 2008A 1!I North America -----·-0-·-··-p·-'lr.___, ---------r.o.-o.-. I . . . 2009E 2010E •western Europe z Rest of World Ill Japan Source: lDC, May 2009 -~ 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL · - - · - · - -_ _ .. d 2013E 2012E 2011E • I _,...,,,.;.... -"'° °""" ...., 7" WellsFarg North America Market Opportunity Within North America, Hardware Revenue is Projected to Decline Slightly While the Retail Value ( Software Shipments is Expected to Increase at a Compounded Annual Growth Rate of 9.9% in the Projected Years, Reaching $35-5 Billion in 2013 · . North America Inter.active Entertainment Rcvt~ni1c by Component ($ in Billions) SHardware •Software Hardware '09E-'13E CAGR: (2.5%) Software '09E-'13E CAGR: 9.9% $50.0 . $43.2 $40.0 $30.0 $20.0 $10.0 $0:0 2006A ·---- 2007A Source: IDC, May 2009 ---~.-~ . . ,. . 2008A 2010E . 2011E 2012E 2013E ...:_~~~- -~~--~·----·---0-----·--· 38 Studios: RhoO . . . .....,,..... . . . . . . . . Trends and Ddvcrs _i.;.~~- . · . · • Broadband penetration to the home, enabling digital distribution and online gaming. • More powerful PCs and laptops at lower prices. • Better graphic processors, more disc space, etc. • Improvement in quality of games, often with social elements (VoIP, text chat, etc.). • Longer console lifecycles. • Growth in adoption of smart phones and other handheld devices that support gaming appl • Changing demographics: The web-literacy rate among the target audience has been growir constantly. • Macroeconomic weakness and uncertainty, which impacts consumer spending, advertisen and investment. • Piracy: Illegal file downloading / disks. • Free content available on the Internet, which lowers demand for premium titles. • Platform incompatibility: Some hardware cannot play select software. • High bar to produce sophisticated titles; costly and time-consuming to develop. _,_..,_ '------------~-----·---··-~-~-~ 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL Ml,.., ... PF '1----~·-G_M ____,.________ Wells Farg~ U.S. Interactive Entertainment Versus Other Entertainment Sectors The U.S. Interactive Entertainment Sector Has Grown Substantially Since 2003, While Other Ente Sectors are Approximately Flat to Slightly Down . . .· . '. . · - U.s; Entertainment Sectors . ' . .. . ($ In Bllllons) r-------1 I $20 $18 S16 ..,.__ _ $14 $12 :..+--~ $10 S8: $6: $4: $2 $- I I I I I I I Video : MJsing more than one medium mncurrently. Tatal media use Is the attual number,; out of the day that are spent using media, taking multitasking into account. TV content on other platforms 17% Source: IBISWorld, Januacy 2 .... (In Miiiions) 1110nllne PC Gamers: • Subscriptlons ll!Dlgltal Game I 250 200 150 100 50 a 2005A · · 2006A ·. 2007A 2008A 2009A : 2010E 2011E 2012E · U.S. Online PC Gaming Revenue· '. ra Advertising/sponsorship and mlcrotransact!On (Items, • Premium full game and add-on download II! Premium MMD and casual subScrlptiOn ($ In Miiiions) etc $10,000 $7,365 $8,000 $6,000 $4,000 $2,000 $0 2006A . .. -----·-·•-'C'"--.ao~~~-=:-~ ~~ S~l:I!: IDC. March 2010 . '"1------\:~ ·~- 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL 2007A .... 2008A 2009A , 2010E 201 lE 2012E 1 .. . ~~·-·---~---·-··-·-~~----- . --. Wells Farg Rise of.MMOs in the United States Strong Growth in Massively Multiplayer Online Games is Expected to Continue U.S. Prcmimn MMO and Casual Subscl'ipti (In Miiiions) so 40 30 20 10 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 21 .'. · U.S. Premium MMO and Casual Suhscription .R {$ In Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 2005A 2006A 200?A 2008A 2009A l201oe 2011E 2012E 2 Souta': me, Man:h 2010 ' ·----·--11.:t"·-·. -·· .. . -- -""------··~ --·-·~·-·-·-··--·---··-:ii-~-·-· 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL ~ . .- WellsFarg 38 Studios Relative Revenue Size • Run-Rate Revenue Projections for 38 Studios in 2014 - • 38 Studios Only Needs to Capture a Small Share of the Overall Software Market to Reach its Projected Revenue ($in Miiiions) Activision Blizzard Bectnmle Arts Take-Two · . 2010E are in Line with Peers 2011E 2012E 2013E 2014E $4,858 4,047 1,234 994 $5,354 4,106 $5,628 4,194 $6,875 4,290 1,063 "'" n/• n/B 11/a Activision BJiU1Jrd 7% Beclronic Arts 8% t0% 1% 5% .Z% 25% nta n/a n/8 10% 7% 11/IJ n/B THQ $4,540 3,731 2015 986 901 tl/IJ ~ Take-Two 22'11. 2% % WMdwidC Solbyarc Mitrl;ct Shan: ActivlsiorJ Bllzz~rd 6,4% 6,lo/o 6.0% 5.5% Electrornc Atts 5.l% 4.6% 4.1% Take-Two 5.2% 1.4% l.5% n/8 n/a 7HQ l.3% 1.2% J.2% n/a $6,606 $4,653 North America Marl..th $20,326 % Growth $5,966 $7,616 (30%) 28% .28% $16,779 $18,942 (17%) J.3% Source: Company management and Wall Street research 38 Studios: Rhode Island Economic Development C-01mcil CONFIDENTIAL Wells Far~ 38 Studios M.MO Relative Size Comparison Run-Rate Revenue and Subscriber Growth Projections for 38 Studios are in Line with Target MMO · . : .. · . 38 Studios MMO and U.S. MMO Subscribers. Comparison . ·. · ..' 4.0% 2011E 2012E 2( 1,000,1 NA 600,000 NA 24,800,000 40% 31,500,000 27% 40,700,1 2! 2010E 3.0% 2.5% 2.5% 38 Stud los Monthly MMO Subs % Growth U.S. MMO Subs 2.0% 17,700,000 % Growth 15; Source: Management estimates and JDC, March ZOIO 1.0% 0.0% NA NA 2010E 2011E ... ·. 2012E :... ··. · 2013E 2014E ::~S.Stuclios MMO and U.S. 1\·Il\.10 Revenue Comparison 4.0% U; In Millions) 2.8% 3.0% 3.0% 2010E 38 Studios MMD Net Revenue % Growth Target Market MMO Net Revenue' $3,086 % Growth 2.0% ...·-. . 201lE 2012E ·· 21 $47 $ NA NA 24 $3,904 $4,854 $5, 28% 22% 1 1 Includes U.S. and Western Europe Source: Management estimates and !DC, March 2010 1.0% 0.0% NA NA 2010E 2011E 2012E 2013E 2014E Source: Company management and Wall Street research 38 Studios: Rhode Island Economic Development C.ouncil CONFIDENTIAL Wells Farg' Wells f'argo Analytical Framework • Large, growing addressable markets • Substantial progress on game development • Past track record of success • Experienced production managers and staff • On track with schedule • Disciplined development process • Electronic Arts validation • Opportunity for Intellectual Property-based product line extensions • Complete, experienced executive management team • Ability to hire and retain talented, creative professionals • Corporate culture • Pay, benefits and working environment 38 Studios: Rhode Island Economic Development C.ouncil CONFIDENTIAL 1f, Wells Far{: CONFIDENTIAL 38 Studios Hiring Process 2010 Hiring Strategy Hiring Budget • Recruiting plans are evaluated yearly, quarterly, and monthly, • Hiring budget includes plans to hire approximately 57 emplby~es at Maynard by the end of 2010. • Expected to hire 30% at the senior level (with technical skills), 20-30% at mid-level, and 30-40% at entry level ( graduates or 0-2 years of experience). • Senior level employees mostly recruited through employee referrals (more than 60%). • • 2010 strategy includes attending more events and conferences to establish bigger presence in the industry. Entry level employees recruited through internship programs at colleges. Select Statistics • 90% offer acceptance rate due to good screening process. • 14% employee turnover with approximately one . 2010.Ncw Hires resignation every other month since Maynard opened. Compensation • by Dis~ip1hit~ - .M Headcount planning 95% of employees are currently salary-based . . · · . Headcou;1t(FTE) : ' ;· .. 12/31/2010 Current Projected Maynard, MA 93 150 Baltimore, MD BO 81 Corporate 12 12 Total 185 243 i... ····-· ·~ -· ···-·-··· ........... -~ ...... ········- ........... ········- Source: Company management 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL Wells Farg, Recruiting Process 38 Studios Employs a Structured Recruiting Process to Meet Hiring Needs . . .lkadcount . Approval Process 1. 2. Recruitment Search ·'_ · P1·occss · Headcount prep permanent vs. temporary hires 4. Notification sent to initiate the search s. . . . . . 1. Recruiter initiates sourcing 1. Onsite Interview Request 2. Recruiter screens incoming resumes and updates Applicant Tracking system 2. Approve travel for remote candidates Headcount planning review 3. If approved, budget is updated .. : Onsitc lntcniew . Set-Up . .. 3. Application reviews 3. Recruiter confinns onsite date 4. Initial test/phone screens scheduled 4. Travel arrangements are made s. 5. Job posting creation Initial test/phone screens results submitted to hiring 6. Confirmed details sent to Candidate manager 6. Interviewer list created Remote tests 7. 7. Phone interviews Onsite interview conducted ....: • I 1. HRManag1 manager pr terms 2. Terms are.! President/( 3. If approved sends term 4. Recruiter ii presents of: 5. If offer is a1 Recruiter ii boarding pi 8. Offer process initiated Souroe: Company management --~-~---- - PT ... W'I W. • ~------~"""" _ _ _ _,_~-....~------ 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL 19 Wells Farg, Planning Process and Timeline - Mercmy, Role Playing Game ("RPG") · • • : . Planning Process· .. · ·· · · :" The Mercury project is currently in Release 4: Diagonal Slice, where RPG elements of gameplay are more fully developed. Prototype Kiekoff • Prorotype Completion Review Content is built in 3 stages: basic implementation => working great / almost shippable => polishing details / finalizing. Pre-Production Kickoff Pre-Production Currently slightly understaffed in concept art and animation as the team selectively seeks to hire top talent. • Time is compensated by contractors. • Looking to bring in 2-2 concept artists to further assist with animation. 2-3 key partner producers spend one week at the studio every four weeks. Jul-10 Production Klckoff - PS3 Fearure Parity Oct-10 PS3 Performance Jan-10 Vertical Slice Apr-10 Diagonal Slice May-10 jPre-Alpha Incented by a $1 million financial incentive from a key partner for shipping on time and achieving a 85% rating (by Metacritic). • : '. :. · Concept Completion Review • Uses waterfall schedules to scope the entire game. • " Timelinc Concept Kickoff Utilizes Scrum for all content generators: • . . Aug-10 Platform Performance Oct-10 ALPHA: Code Complete Dec-10 BETA: Content Complete Feb-11 First Party Submission Jun-11 RTM Jul-11 Shlp Aug-11 Street Sep-11 • Games Audit, an independent party hired by the bonding bank, also tracks development progress. ;38 Studios: Rhode Island Economic Development Council CONFIDENTIAL 2G WellsFarg Planning Process and Timeline - Copernicus, MMO Development.Brief • • • . . ·. · ·. .. · · The Copernicus project is in late pre-production and starting the ramp towards feature and content production. The scope of the game is now well understood and the content development pipelines are being refined in preparation for additional team growth and full game production. Utilizes Scrum as the primary development and operational framework: • • • Manage a Product Backlog with evolving, prioritized goals. · Timc'.~Jinc· ' ·. ,. Concept Kickoff Nov-06 Concept Completion Review Feb-08 Prototype Kickoff Feb·08 Prototype Completion Review Oct-OB Vertical Slice Kickoff Oct-08 Vertical Slice Complet\on Review Dec· OS Pre- Preduction Kickoff Dec-OB Production Requirements Review Sep-09 Production Kickoff Mar-10 lcore Gameplay Demonstrable Jun-10 Each month, these goals are broken down into sprint deliverables. Cinematlcs Pipeline Demonstrable Sep·lO World Is Whiteboxed Oec·10 Progress is measured daily. Gameplay System Complete Mar-11 Social systems Demonstrable Jun·ll Monthly company-wide review of sprint deliverables. • Each Sprint is one calendar month long. • One release is typically composed of three Sprints. Feature Complete Sep-11 ALPHA; Code and Content Complete Dec·ll Friends and Fa mlly Jan-12 BETA: Closed Revlew Apr-12 Final 38 Studios: Rhode Island Economic Development Council CONFIDENTIAL : . · . .:..:. I Live Sep-12 Wells Farg1 ··-·--··-··--·--------------------------------- Disclaimer This document and any other materials accompanying Ibis document (collecliwly, the "Materials") are provided for general infor1nalional purposes. By aa:epting any Material thcreofaclumwledges and agrees to the matters set forth below in this noti<:<>. Wells Fargo Securities malne, Matt Sent Wednesday, April 14, 2010 10:11:11 AM To: Lamarra, Mark; Kedia, Abhishek; Li, Jonny CC: Subject: Hrinkevich, Craig; Cannava, Peter Anticipated Cost of Issuance and Underwriter Fees for 38 Studios/RIEDC Bond Issuance Attachments: 38 Studios RIEDC Bond Issuance Prc>posed Expenses.pdf Mark, I atlached the 38 StudlosfRIEDC transaction estimated expense sheet that you requested yesterday. Please note that !he RIEDC/Guaranly fee is listed as TBD because we cannot confirm of the methodology at which RIEDC will handle the fees on this transaction. However, RtEDC has typically had a flat appflcation fee, commitment fee of 1% and an administrative fee of% of 1 % present valued upfront for taxable deals. Feel free to call anyone of us Is you have any questions. Matt Matt Marrone, Analyst 1 Northeast Group Publlc Finance Wells Fargo securities 375 Park Ave, 6th Floor, 10127-060 • New York, New York 10152 T; 212/214-6538 I F; 212/214-8922 1 C: 914/325-7851 matt. marron e[!l!wachovla. com This communication Is for the sole use or the 111tended reclplent(s) and may contain confldentlal and privileged Information. Any unauthorized review, use, disclosure or distribution of this Information Is prohibited. If you are not the Intended recipient, please co11tact the sender by reply email and destroy all copies of the message. This communication Is for Informational purposes 011fy, Is not an Offer, sollcltatlon, recommendation or commitment for any transaction or to buy or sell a11y security or other nnanclal product, and Is not Intended as lnvestmen t advice or as a confirmation of any transaction. Any market price, Indicative value, estimate, view, opinion, data or other Information herein Is not warranted as to completeness or accuracy, Is subject to change without notice, and Wells Fargo Securities accepts no Hablllty for Its use or to update or keep It current. Any views or opinions are those of the Individual sender, not necessarily of Wells Fargo Securities or Its afflllates. Wells Fargo Securities Is the trade name for the capital markets and Investment banking services of Wells Fargo & Company and Its subsidiaries, lncludlng Wachovia Bank, National Association, and Wells Fargo Securities, UC, member F!NRA and SIPC. Wells Fargo Securities and or one or more of Its atnllates may provide advice or may from time to time acquire, hold or sell a position In any securities that may be mentioned herein. CONFIDENTIAL WFS_0024105 Anticipated Cost of Issuance and Underwriter Fees for 38 Studios/RIEDC Bond Issuance • Bond Counsel $ 75,000-100,000 • Underwriter's Takedown $ 400,000 $ • Rating Agency $ 70,000 • Underwriter's Counsel $ 75,080 $ • Printer Fees $ 5,000 • Management/ Structuring Fee $ 200,000 • Trustee and Trustee's Counsel $ 10,000 • Miscellaneous Expenses (Travel, etc.) $ 10,000 • RIEDC/Guaranty Totals $ 160,000-185,000 $ a $685,000 or $8.56 2Amounts listed are apprDXlmatlons, does not Include RIEDC/Guaranty Fee expenses ~The Rhode Island Eamomic Development Corporation has an Application Fee of $1, 000, Commitment Fee of 1 % and an Administrative Fee of 1-2 of 1 % present valued upfront ~Based on ratings of Aa3/AA-/AA- CONFIDENTIAL $ TBD3 'Based on par amount of $80 million WELLS FARGO SECURITQl1S 0 State of Rhode [:;la:id Economic Development Corporation EXHIBIT 135 STATE OF RHODE ISLAND PROVIDENCE, SC. SUPERIOR COURT ) RHODE ISLAND ECONOMIC DEVELOPMENT ) CORPORATION, ) ) Plaintiff, ) ) V. ) ) WELLS FARGO SECURITIES, LLC et al., ) ) Defendants. ) ~~~~~~~~~~~~~~---') C.A. No. PB-12-5616 PLAINTIFF'S EXPERT DISCLOSURE Plaintiff Rhode Island Economic Development Corporation ("EDC") hereby makes this disclosure in accordance with the Case Management Order ("CMO"). Plaintiff intends to present expert testimony from Robert W. Doty, Esq.; Jeffrey S. Green, Esq.; and Donald P. Wisehart, ASA, CPAJABV, MST, CVA, CFF. A. ROBERT W. DOTY, ESQ. Robert W. Doty, Esq., is expected to provide expert testimony. His qualifications are set forth in the curriculum vitae attached hereto as Exhibit 1. The subject matter of his opinions will be the deviations from the applicable standard of care by Defendants Robert I. Stolzman and Adler, Pollock & Sheehan PC (hereinafter collectively "Stolzman"); the deviations from the customs, practices and standards of care prevailing in the municipal securities market in 2010 by Wells Fargo Securities, LLC ("Wells Fargo"); First Southwest Company (First Southwest"); and Barclays Capital, Inc. ("Barclays"); customs, practices, and standards of care prevailing in the municipal securities market in 2010 generally, and conditions in the municipal securities market in 2010, as set forth below. The bases for Mr. Doty's opinions are his education, specialized training, skill, personal experience, knowledge of common and prevailing roles and responsibilities of parties involved in the municipal securities market in and before 2010, review of the applicable Rhode Island law and rules discussed herein, and materials reviewed including the depositions listed in Exhibit 2 and exhibits thereto and related materials upon which his preliminary understanding of the facts is based. 1 Mr. 1 Plaintiff makes this disclosure in accordance with the CMO and without prejudice to Plaintiffs right to present different expert opinions based upon evidence adduced at trial and to rebut testimony disclosed by Defendants pursuant to the CMO or to which their experts are permitted to testify at trial. Mr. Doty may amend or 1 Doty may also consider or rely upon the market literature and other publications or documents listed in Exhibit 3 hereto. Plaintiff has prepared the following summary of the opinions to which Mr. Doty is expected to testify, based on evidence the Plaintiff expects will be offered at trial. Of course, the evidence offered at trial by Plaintiff and by Defendants undoubtedly will be inconsistent and conflicting. In many instances, Plaintiff expects to offer expert opinions based upon the version of the facts Plaintiff contends is accurate, and expert opinions that assume, arguendo, another and possibly contrary version of the facts, since in many cases Plaintiff contends that Defendants acted wrongfully regardless of whether the facts are as Plaintiff intends to prove or are as Defendants contend. Accordingly, many of the expert opinions disclosed herein are offered based upon alternative assumptions. WELLS FARGO OPINION# 1: Insofar as, when Wells Fargo presented to the EDC Board on June 14, 2010, Wells Fargo was acting as a dealer on behalf of 38 Studios in connection with the placement of the 38 Studios LLC ("38 Studios") loan to the EDC or otherwise, Wells Fargo violated customs, practices, and standards of care prevailing in the municipal securities market in 2010 (hereinafter "the Standard of Care") applicable to dealers under the following assumptions: insofar as Wells Fargo failed to expressly disclose to the board of directors of the EDC ("EDC Board") during the presentation and at any time thereafter both that (a) in making the presentation, Wells Fargo was acting as a dealer on behalf of 38 Studios, and (b) Wells Fargo's relationship with 38 Studios created conflicts of interest with the EDC, (i) in and of itself due to the divergent interests of 38 Studios and the EDC in the loan transaction, and (ii) because on June 14, 2010 Wells Fargo was also retained, or was seeking to be retained, to assist and advise the EDC in connection with the EDC's issuance, offering and sale of bonds in 2010 (the "EDC Bonds"); and insofar as Wells Fargo failed to disclose to the EDC Board and the EDC during the presentation and at any time thereafter that Wells Fargo had an agreement with 38 Studios for 38 Studios to pay Wells Fargo approximately $450,000 in connection with the EDC's issuance, structuring and sale of the EDC Bonds, much if not all of which was contingent upon the EDC Bonds being issued and sold. supplement his opinions based upon further review and analysis of additional evidence, documentation or information. Mr. Doty does not Intend to provide opinions on matters of law that are reserved to the Court or to decide questions of fact that are reserved to the jury. 2 OPINION # 2: According to the customs, practices, and standards of care prevailing in the municipal securities market in 2010, when a dealer, such as Wells Fargo, other than solely in a role as an underwriter in a firm commitment underwriting, rendered advice to or on behalf of an issuer of municipal securities, such as EDC, in anticipation of compensation, concerning whether to issue municipal securities or with respect to the structure, timing, terms and other similar matters concerning that issuance, the dealer was understood by market participants to be acting in a capacity in which the issuer and its officials would have been expected and entitled to place trust and confidence in the dealer. OPINION # 3: Insofar as Wells Fargo was acting in such a capacity of trust and confidence when Wells Fargo presented to the EDC Board on June 14, 2010, Wells Fargo violated the Standard of Care applicable to parties serving in such a capacity under the following assumptions: insofar as Wells Fargo failed to expressly disclose to the EDC Board during the presentation and at any time thereafter both that (a) in making the presentation, Wells Fargo was acting as a dealer on behalf of 38 Studios, and (b) Wells Fargo's relationship with 38 Studios created conflicts of interest with the EDC, (i) in and of itself due to the divergent interests of 38 Studios and the EDC in the loan transaction, and (ii) because on June 14, 2010 Wells Fargo was also retained, or was seeking to be retained, to assist and advise the EDC in connection with the EDC's issuance, offering and sale of the EDC Bonds; insofar as Wells Fargo failed to disclose to the EDC Board and the EDC during the presentation and at any time thereafter that Wells Fargo had an agreement with 38 Studios for 38 Studios to pay Wells Fargo approximately $450,000 in connection with the EDC's issuance, structuring and sale of the EDC Bonds, much if not all of which was contingent upon the EDC Bonds being issued and sold; insofar as Wells Fargo knew or should have known that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions, but Wells Fargo failed to disclose that information to the EDC Board; insofar as Wells Fargo failed to disclose to the EDC Board that Wells Fargo's fee in connection with the EDC's bond transaction was contingent on the sale of the bonds, and failed to disclose to the EDC Board that such an arrangement gave Wells Fargo a potential conflict of interest with the interests of the EDC; insofar as Wells Fargo knew or should have known that 38 Studios' statement to the EDC that the "net proceeds" from the EDC loan, together with other revenues set forth in 38 Studios' financial projections, would provide "the necessary financing to relocate 38 Studios to Rhode Island, 3 complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," was not based upon reasonable assumptions and was not accurate, but Wells Fargo failed to disclose that information to the EDC Board; insofar as important risk information applicable to 38 Studios that Wells Fargo had disclosed in the equity private placement memorandum ("EPPM") in connection with Wells Fargo's failed effort to raise equity capital for 38 Studios was information that also was important in the issuance of the EDC Bonds, and Wells Fargo should have disclosed to the EDC Board and in the private placement memorandum for the offering and sale of the EDC bonds (the "BPPM"), but Wells Fargo failed to disclose that information to the EDC Board, including but not limited to 38 Studios' full financial projections; and the likelihood that 38 Studios would "need additional funds in 12 to 14 months, but there [was] no assurance that funds in the amount needed by and on terms satisfactory to [38 Studios would] be available at that time" or that 38 Studios would "require capital in order to complete the development and marketing of the two games in development" and that "there [could] be no assurance that additional capital from any source [would] be available when needed or on terms acceptable to" 38 Studios; insofar as Wells Fargo's efforts to raise equity for 38 Studios failed to attract capital after extensive marketing over several weeks, and Wells Fargo knew or should have known that, even with the proceeds from the EDC Bonds, 38 Studios would also be required to raise additional equity in order to complete Copernicus, but Wells Fargo failed to disclose that information to the EDC Board; -- insofar as Wells Fargo knew or should have known that 38 Studios had provided the EDC with financial projections bearing the legend "38 Studio 6 Year Plan - In-State Loan View- DRAFT - 04.01.10 xlsx" (the "Bond Transaction Projections"), which 38 Studios certified on November 2, 2010 at the closing of the EDC Bond offering and sale, and Wells Fargo knew or should have known that the Bond Transaction Projections assumed that 38 Studios would receive $75 million net proceeds in 2010, when, in fact, Wells Fargo knew or should have known that 38 Studios would receive net proceeds in a much lesser aggregate amount and in increments over a longer period, but Wells Fargo failed to disclose to the EDC Board the impacts of such discrepancies upon 38 Studios' cashflow projections contained in the Bond Transaction Projections; 4 that Wells Fargo knew or should have known that 38 Studios had not provided the EDC with financial projections based upon the actual net proceeds of the EDC's loan or addressing 38 Studios' need for additional capital to complete Copernicus as a result of 38 Studios not receiving $75 million net proceeds, and, therefore, that 38 Studios never presented to the EDC a workable business plan with cashflow projections based upon reasonable assumptions, but Wells Fargo failed to disclose that information to the EDC Board; that Wells Fargo knew or should have known that 38 Studios' Bond Transaction Projections, if adjusted to reflect the actual net proceeds 38 Studios expected to receive from the $75 million loan, would have shown 38 Studios running out of money prior to the completion of Copernicus, and that there was not a reasonable assurance that 38 Studios would be able to obtain additional equity capital or other funding for the completion of Copernicus, but Wells Fargo failed to disclose that information to the EDC Board; that Wells Fargo knew or should have known that 38 Studios' Bond Transaction Projections contained the assumption that $20,748,000, representing 38 Studios' share in 2011 of the proceeds from the sale of 38 Studios' first RPG, Mercury, would be paid to 38 Studios, when Wells Fargo knew or should have known that all of those sales proceeds up to the amount of Electronic Arts' investment relating to Mercury would be paid first to reimburse Electronic Arts for the full amount of Electronic Arts' investment, but Wells Fargo failed to disclose that information to the EDC Board; and that Wells Fargo knew or should have known that 38 Studios' Bond Transaction Projections omitted numerous significant known and reasonably anticipated expenses and deductions from the gross proceeds of the EDC's $75 million loan to 38 Studios, including but not limited to closing expenses paid from the EDC Bond proceeds, funding of the debt service reserve fund ("DSRF") to be held by the Trustee for the EDC Bonds in the name of the EDC, the cost of relocating 38 Studios' assets and employees to Rhode Island, the cost of the build-out of 38 Studios' facilities in Rhode Island, initial and annual guaranty fees payable to the EDC, and approximately $450,000 in fees to be paid by 38 Studios to Wells Fargo under an undisclosed engagement letter dated May 20, 2010 between Wells Fargo and 38 Studios, and that, for a period of time, 38 Studios likely would pay rent at both of its Rhode Island and Massachusetts locations, but Wells Fargo failed to disclose that information to the EDC Board; and 5 that Wells Fargo knew or should have known that 38 Studios' Bond Transaction Projections assumed that 38 Studios would need to raise $20 million from a sale of equity upon the completion of Copernicus, and that there was not reasonable assurance that 38 Studios would be able to obtain that additional capital, but Wells Fargo failed to disclose that information to the EDC Board. OPINION# 4: Insofar as, when it presented to the EDC Board on June 14, 2010, Wells Fargo had the disclosure and other fair dealing roles and responsibilities of a placement agent for the EDC, either because on June 14, 201 OWells Fargo had been retained, or was seeking to be retained, as placement agent to assist and advise the EDC in connection with the EDC's issuance, offering and sale of the EDC Bonds and the structuring of the EDC Bonds, or for any other reason, Wells Fargo violated the Standard of Care applicable to placement agents insofar as Wells Fargo knew or should have known the information described in Opinion # 3 and failed to disclose that information to the EDC Board. OPINION# 5: Insofar as, when it presented to the EDC Board on June 14, 2010, Wells Fargo had the disclosure and other fair dealing roles and responsibilities of a municipal securities dealer working with the EDC, either because on June 14, 2010 Wells Fargo had been retained, or was seeking to be retained, to assist and advise the EDC in connection with the EDC's issuance, offering and sale of the EDC Bonds, and the structuring of the EDC Bonds, or because Wells Fargo had undertaken to advise the EDC for any other reason, Wells Fargo violated the Standard of Care applicable to a dealer if Wells Fargo knew or should have known the information described in Opinion# 3 and failed to disclose that information to the EDC Board. OPINION# 6: Insofar as Wells Fargo presented to the EDC Board on June 14, 2010, positive or favorable information or opinions concerning 38 Studios and the proposed EDC bond issuance, Wells Fargo violated the Standard of Care regardless of whether Wells Fargo acted as a dealer, advisor, placement agent , or underwriter in a firm commitment underwriting, by failing to disclose important negative information concerning 38 Studios that Wells Fargo knew or should have known, including the information concerning 38 Studios described in Opinion # 3. OPINION # 7: According to customs, practices, and standards of care prevailing in the municipal securities market in 2010, given Wells Fargo's contemplated role in connection with the issuance, offering, and sale of the EDC Bonds and Wells Fargo's role as a placement agent for the sale of equity by 38 Studios, and regardless of whether it is proven that the EDC Board knew or should have known that Wells Fargo was acting either as a dealer on behalf of 38 Studios in connection with the placement of the 38 Studios loan with the EDC, a placement agent for the EDC, or an underwriter of the offering and sale of the EDC Bonds pursuant to a firm commitment underwriting, reasonable members of a municipal securities issuer's governing body, such as members of the EDC Board, would have assumed when Wells Fargo presented to the EDC Board on June 14, 2010, that Wells Fargo had conducted reasonable due 6 diligence concerning 38 Studios and had disclosed to the EDC Board all important information that Wells Fargo knew or should have known as a result of such due diligence, unless expressly informed otherwise by Wells Fargo, because market participants would have known that, pursuant to the Standard of Care, entities in such roles were expected to conduct reasonable due diligence, and market participants would have known that entities in such roles were required by the Standard of Care to deal fairly with an issuer of municipal securities and to refrain from deceptive, dishonest, or unfair practices. OPINION# 8: Wells Fargo violated the Standard of Care when Wells Fargo presented to the EDC Board on June 14, 2010, insofar as Wells Fargo knew or should have known the information concerning 38 Studios and Wells Fargo's relationship with 38 Studios described in Opinion # 3, but Wells Fargo failed to disclose that information to the EDC Board, regardless of whether it is proven that the EDC Board knew or should have known that Wells Fargo was acting either as a dealer on behalf of 38 Studios in connection with the placement of the 38 Studios loan with the EDC, as a placement agent for the EDC, or as an underwriter of the offering and sale of the EDC Bonds pursuant to a firm commitment underwriting, because market participants would have known that, pursuant to the Standard of Care, entities in such roles were expected to conduct reasonable due diligence, and market participants would have known that entities in such roles were required by the Standard of Care to deal fairly with an issuer of municipal securities and to refrain from deceptive, dishonest, or unfair practices. OPINION # 9: Insofar as Wells Fargo acted as the EDC's placement agent at any time up to and including the closing of the sale of the EDC Bonds on November 2, 2010, and Wells Fargo knew or should have known the information concerning 38 Studios and Wells Fargo's relationship with 38 Studios described in Opinion# 3, but failed to disclose that information to the EDC Board at any time, and did not confirm explicitly and specifically that the EDC Board already was aware of that information, then Wells Fargo violated the Standard of Care applicable to placement agents because that was information that a placement agent reasonably would have expected the EDC Board to need or want in connection with the EDC Board's decision whether and under what conditions to authorize and permit the issuance, offering and sale of the EDC Bonds. OPINION# 10: In accordance with the Standard of Care, Wells Fargo's market disclosure roles and responsibilities to the EDC and the EDC Board would have been heightened insofar as Wells Fargo knew or should have known that the EDC's loan to 38 Studios and the EDC bond issuance, offering and sale were complex and highly risky transactions, the EDC lacked expertise in the video gaming industry and lacked familiarity with 38 Studios, and the EDC Board was a volunteer board with limited experience as board members, limited municipal securities expertise and limited time, and Wells Fargo held itself out as an expert concerning the video-gaming industry, as having great familiarity with 38 Studios' business plan, and as an expert in municipal securities. 7 OPINION # 11: According to customs, practices, and standards of care prevailing in the municipal securities market in 2010, a municipal securities issuer's placement agent and other financial professionals would have been expected to recommend strongly that the issuer obtain a financial feasibility study prepared by a qualified independent third party prior to agreeing to issue, offer and sell bonds in a complex and highly risky conduit bond offering dependent upon the success of a pre-revenue conduit obliger, such as 38 Studios, insofar as the issuer may have had potential liability to investors, a bond insurer or the State of Rhode Island insofar as the State of Rhode Island honored its moral obligation or the issuer may have been subject to remedial action or otherwise may have suffered significant harm. OPINION# 12: Insofar as Wells Fargo acted as the EDC's placement agent at any time up to and including the closing of the sale of the EDC Bonds on November 2, 2010, Wells Fargo violated the Standard of Care insofar as Wells Fargo failed strongly to recommend to the EDC Board that the EDC retain a qualified independent third party to conduct a financial feasibility study prior to the authorization, sale or closing of the EDC Bonds concerning at least whether 38 Studios' budget and timeline to complete Copernicus were based on reasonable assumptions regarding 38 Studios' operations, revenues and expenditures until that completion, assuming, arguendo, that the condition imposed by the EDC Board in the term sheet between the EDC and 38 Studios dated July 26, 2010 ("the Term Sheet") as incorporated in the resolution adopted by the EDC Board on July 26, 201 O authorizing issuance of the EDC Bonds subject to specified terms and conditions ("the Authorizing Resolution") concerning the development and implementation of a third-party monitoring, reporting and response process did not itself constitute such a requirement. OPINION# 13: Insofar as Wells Fargo acted as the EDC's placement agent at any time up to and including the closing of the sale of the EDC Bonds on November 2, 2010, Wells Fargo violated the Standard of Care insofar as Wells Fargo at any time was uncertain or unaware, but failed to seek clarification from the EDC Board, whether the EDC Board had required a financial feasibility study concerning at least whether 38 Studios' budget and timeline to complete Copernicus were based on reasonable assumptions regarding 38 Studios' operations, revenues and expenditures until that completion. OPINION# 14: Wells Fargo violated the Standard of Care by completing the offering and sale of the EDC Bonds, including taking actions which were a necessary precondition thereto such as issuing the Private Placement Agent's Certificate, certifying that "[a]ll conditions precedent to the consummation of the private placement of the .... 201 O Bonds ... have been accomplished and completed and are in full force and effect," insofar as Wells Fargo knew or should have known: 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions, and, therefore, there was not a reasonable factual basis for the EDC Board's statutorily required finding "[t]hat adequate provision has been made or will be made 8 for the payment of the cost of the construction, rehabilitation, operation and maintenance and upkeep of the Project" (hereinafter the "Finding of Adequate Provision") in the Authorizing Resolution; as a result of 38 Studios' failure to present such a workable business plan, 38 Studios could not reasonably have been anticipated to repay the loan to the EDC or the EDC Bonds, and that, therefore, the EDC and the State of Rhode Island's moral obligation would be called upon to make the payments; the bond documents for the issuance, offering and sale of the EDC Bonds did not "reflect the development and implementation of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus to assure [that 38 Studios'] development or project Copernicus remained on time and on budget. .. ," which was a key condition to the EDC Board's authorization for the issuance, offering and sale of the EDC Bonds; the information concerning 38 Studios and Wells Fargo's relationship with 38 Studios described in Opinion # 3; and ·- additional expenses reasonably anticipated by 38 Studios, including the $3.75 million brokers or finder's fee set forth in the projections that 38 Studios delivered to Wells Fargo (but not the EDC) on June 25, 2010 (the "June 25th Projections"), and the $2 million letter of credit that 38 Studios was required to fund with bond proceeds as security for its lease in Rhode Island OPINION # 15: Wells Fargo violated the Standard of Care insofar as Wells Fargo knew or should have known that the BPPM contained misstatements of important information and omitted important information, including but not limited to the following: the BPPM incorrectly stated that the EDC had entered into a monitoring agreement with IBM; the BPPM failed to disclose that no feasibility study had been conducted by a qualified independent third party regarding 38 Studios and Project Copernicus; the BPPM failed to disclose that the monitoring agreement was between only 38 Studios and IBM, which failed to satisfy the essential term required by the EDC Board that the bond documents would reflect the implementation of a third party monitoring and reporting process as a key condition to the issuance, offering and sale of the EDC Bonds; the BPPM failed to include 38 Studios' Bond Transaction Projections, and other information that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; and 9 the BPPM failed to disclose important information Wells Fargo knew or should have known concerning 38 Studios and Wells Fargo's relationship with 38 Studios described in Opinion # 14. OPINION # 16: In accordance with the Standard of Care, participants in the municipal securities market would have expected placement agents, such as Wells Fargo, to conduct reasonable due diligence to investigate, and to disclose, important risks in a complex offering of municipal securities for a pre-revenue conduit obliger, such as the EDC Bonds, in which an offering document bearing prominently the name of the placement agent, such as the BPPM, was prepared with the placement agent's active participation and was provided by the placement agent to investors in the offering and sale of the municipal securities, in order to assist the issuer, such as the EDC, in understanding transactional risks, in structuring the transaction to mitigate those risks, and in disclosing those risks appropriately in the offering documentation, such as the BPPM, in connection with the offering and sale of the securities. OPINION # 17: In accordance with the Standard of Care, participants in the municipal securities market would have expected a placement agent, such as Wells Fargo, in a complex offering of municipal securities for a pre-revenue conduit obliger, such as the EDC Bonds, in which an offering document bearing prominently the name of the placement agent, such as the BPPM, was prepared with the placement agent's active participation and was provided by the placement agent to investors in the offering and sale of the municipal securities, to conduct reasonable due diligence, and in the process, to inform the issuer, such as the EDC, concerning the business plan and financial projections and other important information regarding a pre-revenue conduit obliger, such as 38 Studios, if the issuer may have had a potential liability in connection with the issuance, offering and sale of the bonds, may have been subject to remedial action or otherwise may have suffered significant harm. OPINION# 18: In accordance with the Standard of Care, a placement agent, such as Wells Fargo, in an offering of municipal securities, such as the EDC Bonds, in which an offering document bearing prominently the name of the placement agent, such as the BPPM, was prepared with the placement agent's active participation and was provided by the placement agent to investors in the offering and sale of the municipal securities, would have been permitted to seek the assistance of counsel in performing the placement agent's market roles and responsibilities to conduct reasonable due diligence and make disclosure of important information that the placement agent knew or should have known, provided that the placement agent had reasonable assurance that the counsel was qualified by sufficient training and experience, but a placement agent was not permitted by the Standard of Care to delegate to that counsel the placement agent's market roles and responsibilities to form a reasonable basis for belief in key representations contained in the disclosure document and to disclose in the disclosure document important information that the placement agent knew or should have known. OPINION# 19: Wells Fargo violated the Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, 10 practices and standards of care, insofar as Wells Fargo did not promptly reject the suggestion that, if the EDC Bonds were payable over a ten-year period, but were amortized over twenty years, with a substantial balloon payment in the tenth year, the DSRF could be determined on the basis of the maximum annual debt service over years 1-9. OPINION# 20: Wells Fargo violated the Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as Wells Fargo did not promptly provide the EDC Board with a reasonably accurate estimate of the required amount of the DSRF, based upon the ten-year term of the EDC Bonds and reasonably anticipated interest rates, as were ultimately reflected in preliminary bond cashflows Wells Fargo circulated on August 12, 2010, that assumed the bonds would be paid and amortized over ten years, at an interest rate of 300 basis points over the prevailing rate of interest for U. S. Treasury bonds with a term of ten years, which calculation could and should have been performed by Wells Fargo and First Southwest at the outset and certainly prior to the EDC Board's approval of the Authorizing Resolution. OPINION# 21: Wells Fargo violated the Standard of Care insofar as Wells Fargo failed to inform the EDC and as necessary the EDC Board that the amount of 38 Studios' net proceeds from the $75 million loan had not been estimated with reasonable accuracy at the time of the EDC Board's authorization of the issuance of the EDC Bonds, including a reasonable estimate of the amount of the DSRF, particularly since that authorization was based upon the representation in the Term Sheet that 38 Studios' "net proceeds" from the $75 million loan would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," and upon the EDC Board's Finding of Adequate Provision in the Authorizing Resolution. OPINION# 22 Wells Fargo failed to conduct due diligence and violated the Standard of Care insofar as Wells Fargo knew or should have known of the misstatements and omissions of important information in the BPPM described in Opinion # 15, but Wells Fargo failed to disclose that information to the EDC or as necessary the EDC Board, notwithstanding that it was contrary to the interests of the EDC to issue, offer or sell the EDC Bonds pursuant to a private placement memorandum provided to investors that contained such misstatements and omissions. OPINION# 23: It is probable, and more likely than not, that if Wells Fargo had disclosed, or urged the EDC to disclose, accurately and completely in the BPPM the information concerning 38 Studios described in Opinion # 15, there would not have been a sufficient market for the sale of the EDC Bonds within the interest parameters authorized by the EDC Board, and the EDC Bonds therefore would not have been sold. OPINION# 24: Wells Fargo violated the Standard of Care insofar as Wells Fargo knew or should have known that it was not in the best interests of the EDC to offer and sell the EDC Bonds pursuant to a BPPM that contained the misstatements and omissions 11 described in Opinion # 15, and Wells Fargo failed to disclose that information to the EDC or as necessary the EDC Board and in the BPPM. OPINION# 25: Wells Fargo violated the Standard of Care in connection with the Form D that Wells Fargo's counsel prepared and filed with the U. S. Securities Exchange Commission relating to the private placement of the EDC Bonds through the failure to disclose all sales commissions and finder's fees, insofar as Wells Fargo knew or should have known that additional sales commissions and finder's fees were being paid in connection with the issuance, offering and sale of the EDC Bonds, including the fees paid to Wells Fargo under the agreement between Wells Fargo and 38 Studios dated May 20, 2010, and the $3.75 million broker's/finder's fee or commission identified in the June 25th Projections, regardless of whether: the EDC as the municipal entity issuing the EDC Bonds was properly identified in the Form D filing as the primary issuer; or, in the alternative, 38 Studios should have been identified in the Form D filing as the primary issuer because it was the primary obliger in the offering, and was receiving the proceeds of the sale. OPINION# 26: Wells Fargo violated the Standard of Care insofar as Wells Fargo failed to ensure that the BPPM contained accurate and complete disclosure of important information regarding 38 Studios and 38 Studios' business plan and financial projections described in Opinion # 15, regardless of whether 38 Studios' obligation to repay the loan from the EDC was a security separate from the EDC's obligation to repay the bond. OPINION # 27: Wells Fargo violated the Standard of Care insofar as Wells Fargo failed to ensure that the BPPM contained accurate and complete disclosure of important information regarding 38 Studios and 38 Studios' business plan and financial projections, including the information described in Opinion # 15, since 38 Studios was a key obliger in the transaction and was obligated to pay amounts sufficient for the payment of the interest and principal due on the EDC Bonds, regardless of the security enhancements offered by the State of Rhode Island's moral obligation and bond insurance. BARCLAYS OPINION # 28: Barclays as the EDC's placement agent violated customs, practices, and standards of care prevailing in the municipal securities market in 201 O (the "Standard of Care") insofar as Barclays failed to obtain reasonable assurance from Wells Fargo that Wells Fargo had investigated and disclosed accurately and completely in the BPPM all important information known or that should have been known to Wells Fargo in connection with the offering and sale of the EDC Bonds, under the following assumptions: Barclays knew or should have known that Wells Fargo was familiar with 38 Studios' business plan and financial projections through its involvement 12 with 38 Studios prior to Barclays 1 involvement in the transaction, including through Wells Fargo's attempt to assist 38 Studios to raise equity and Wells Fargo's work on the EDC bond transaction for many months, but Barclays failed to make appropriate inquiry of Wells Fargo regarding Wells Fargo's knowledge of important information resulting therefrom and Wells Fargo's disclosure of that important information in the BPPM; Barclays failed to make appropriate inquiry of, and to obtain appropriate assurances from, Wells Fargo regarding Wells Fargo's due diligence activities conducted in the EDC bond offering and sale; Barclays failed to receive 38 Studios' business plan and financial projections in connection with the EDC bond offering and sale; Barclays failed to receive a workable 38 Studios business plan with cashflow projections based upon reasonable assumptions in connection with the EDC bond offering and sale; Barclays failed to receive an analysis of 38 Studios' business plan and financial projections in connection with the EDC bond offering and sale; the BPPM on its face failed to even summarize information regarding 38 Studios' cashflow and other financial projections, and to provide the assumptions upon which the projections were based and information regarding 38 Studios' and Wells Fargo's belief in the reasonableness of those assumptions; Barclays failed to receive a feasibility study prepared by a qualified independent third party concerning 38 Studios and Copernicus; and/or Barclays knew or should have known that the BPPM incorrectly stated that the EDC had entered into a third party monitoring agreement with IBM. OPINION# 29: Insofar as Barclays failed to receive reasonable assurance from Wells Fargo that Wells Fargo had investigated appropriately in accordance with prevailing municipal securities market customs, practices and standards of care and disclosed accurately and completely in the BPPM all important information known or that should have been known to Wells Fargo in connection with the offering and sale of the EDC Bonds, Barclays violated the Standard of Care by participating in the offering and sale of the EDC Bonds while failing itself to investigate appropriately in accordance with prevailing municipal securities market customs, practices and standards of care and disclose accurately and completely in the BPPM all important information known or that should have been known to Barclays concerning 38 Studios, including the information described in Opinion # 15. OPINION # 30: Barclays violated the Standard of Care insofar as it failed to disclose in the BPPM important information, such as risk factors applicable to 38 Studios, which are set forth in the EPPM, including but not limited to 38 Studios' "need [for] additional 13 funds in 12 to 14 months, [without] assurance that funds in the amount needed by and on terms satisfactory to [38 Studios would] be available at that time" or that 38 Studios would "require capital in order to complete the development and marketing of the two games in development" and that "there [could] be no assurance that additional capital from any source [would] be available when needed or on terms acceptable to" 38 Studios. OPINION# 31: Barclays violated the Standard of Care insofar as Barclays failed to insist that 38 Studios comply with a request by Barclays for 38 Studios' financial projections, including at least the Bond Transaction Projections that were expressly referred to in the Term Sheet as incorporated by reference in the Authorizing Resolution. OPINION# 32: Barclays violated the Standard of Care by failing to correct the inaccurate information in the BPPM that the EDC had entered into a third party monitoring agreement with IBM, insofar as Barclays was aware or should have been aware of the inaccurate information, either through its receipt of the agreements between 38 Studios and IBM and between the EDC and 38 Studios concerning third party monitoring or otherwise. OPINION# 33: According to customs, practices, and standards of care prevailing in the municipal securities market in 2010, dealers such as Barclays and Wells Fargo who acted together in syndicates in connection with the offering and sale of municipal securities, and shared their fees and expenses regardless of the success or extent of their individual efforts, understood that their liabilities were joint and several unless specifically agreed otherwise. FIRST SOUTHWEST OPINION # 34: First Southwest violated customs, practices, and standards of care prevailing in the municipal securities market in 2010 applicable to municipal financial advisers (hereinafter the "Financial Advisers' Standard of Care") insofar as First Southwest failed to enter into a written contract defining the scope of First Southwest's services and First Southwest's fees as the EDC's financial adviser either prior to or contemporaneously with First Southwest's agreement to provide such services, and failed to define the scope of First Southwest's services over an eight-month period until the EDC Bond offering was scheduled to close. OPINION# 35: First Southwest violated the Financial Advisers' Standard of Care insofar as First Southwest failed to review the Bond Transaction Projections at even a superficial level sufficient to recognize at least that the Projections were based upon the assumption that 38 Studios would receive $75 million in net proceeds from the EDC's loan in 2010 and the consequences for 38 Studios' cashflow from the reduced loan net proceeds that 38 Studios actually received, even if it is assumed, arguendo, that Defendant Saul orally declined First Southwest's offer to have First Southwest's corporate finance specialists analyze 38 Studios' business plan and financial projections. 14 OPINION# 36: First Southwest violated the Financial Advisers' Standard of Care insofar as Defendant Saul orally had declined First Southwest's offer for First Southwest's corporate finance specialists to analyze 38 Studios' business plan and financial projections and First Southwest failed to disclose that to the EDC Board or that First Southwest had not been provided with an analysis of 38 Studios' business plan and financial projections prepared by any other qualified party. OPINION # 37: First Southwest violated the Financial Advisers' Standard of Care by failing to strongly recommend to the EDC Board that the EDC retain an independent and qualified third party to conduct a financial feasibility study at least concerning 38 Studios' timeline and budget to complete Copernicus, based on reasonable assumptions regarding 38 Studios' operations, revenues and expenditures until that completion, assuming, arguendo, that the condition imposed by the EDC Board in the Term Sheet as incorporated in the Authorizing Resolution concerning the development and implementation of a third party monitoring, reporting and response process did not itself constitute such a requirement. OPINION# 38: First Southwest violated the Financial Advisers' Standard of Care insofar as First Southwest knew or should have known the following information and failed to disclose that information to the EDC Board: 38 Studios had repeatedly asserted that the reduction in its net proceeds below $75 million required 38 Studios to obtain additional capital to make up the difference needed to relocate to Rhode Island and complete Copernicus, but First Southwest had not received reasonable assurance that 38 Studios would be successful in obtaining such additional capital; -- there was not a reasonable factual basis for the EDC Board's Finding of Adequate Provision in the Authorizing Resolution, since 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; the EDC had not retained an independent and qualified third party to conduct and deliver prior to the closing of the sale of the EDC Bonds a financial feasibility study at least concerning 38 Studios' timeline and budget to complete Copernicus, based on reasonable assumptions regarding 38 Studios' operations, revenues and expenditures until that completion, assuming, arguendo, that the condition imposed by the EDC Board in the Term Sheet as incorporated in the Authorizing Resolution concerning the development and implementation of a third party monitoring, reporting and response process did not itself constitute such a requirement 15 First Southwest was violating the Financial Adviser's Standard of Care by acting .as the EDC's financial adviser until November 1, 201 Owithout a written contract; First Southwest was violating its own customary practices by acting without a written contract; First Southwest had advised state officials concerning risks of the EDC's loan to 38 studios and the issuance of the EDC Bonds, without disclosing First Southwest's concerns to the EDC Board; First Southwest's fee was contingent upon the sale of the bonds, and such an arrangement gave First Southwest a potential conflict of interest with the interests of the EDC; First Southwest contended that it was not responsible to know whether 38 Studios had presented a workable business plan with cashflow projections based upon reasonable assumptions; First Southwest knew or should have known that 38 Studios' Bond Transaction Projections incorrectly assumed that 38 Studios would receive net proceeds of $75 million from the sale of the EDC Bonds; First Southwest knew or should have known that 38 Studios had not provided the EDC with revised financial projections reflecting 38 Studios' actual net proceeds from the sale of the EDC Bonds; First Southwest contended that it was not responsible to review the Bond Transaction Projections even superficially; and First Southwest contended that it had not reviewed the Bond Transaction Projections and had no knowledge or information of what was contained therein. OPINION# 39: First Southwest violated the Financial Advisers' Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as First Southwest did not promptly reject the suggestion that, if the EDC Bonds were payable over ten years, but were amortized over twenty years, with a substantial balloon payment in the tenth year, the DSRF could be determined on the basis of the maximum annual debt service over years 1-9, and especially did not do so after Moody's Investor Services on July 23, 2010 questioned the legality and appropriateness of calculating the amount of the DSRF based upon the maximum annual debt service over years 1-9 of the bonds. OPINION # 40: First Southwest violated the Financial Advisers' Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as First Southwest did not provide the EDC Board with a reasonably accurate estimate of the required 16 amount of the DSRF, based upon the ten-year term of the EDC Bonds and reasonably anticipated interest rates, as Wells Fargo ultimately did in the preliminary bond cashflows Wells Fargo circulated on August 12, 2010, that assumed the bonds would be paid and amortized over ten years, at an interest rate of 300 basis points over the prevailing rate of interest for U. S. Treasury bonds with a term of ten years, which calculation could and should have been performed by Wells Fargo and First Southwest at the outset and certainly prior to the EDC Board's approval of the Authorizing Resolution. OPINION # 41: First Southwest violated the Financial Advisers' Standard of Care insofar as First Southwest failed to inform the EDC and as necessary the EDC Board that the expected amount of 38 Studios' net proceeds from the $75 million loan should have been estimated with reasonable accuracy prior to or at the time of the EDC Board's authorization of the issuance, offering and sale of the EDC Bonds, including a reasonable estimate of the amount of the DSRF, particularly since that authorization was based upon the representation in the Term Sheet that 38 Studios' "net proceeds" from the $75 million loan would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island" and upon the Finding of Adequate Provision in the Authorizing Resolution. OPINION # 42: First Southwest violated the Financial Advisers' Standard of Care insofar as First Southwest misrepresented the calculation of its fee and failed to remit the portion of the fee that would not have been due if the fee had been calculated on the basis First Southwest represented. OPINION # 43: First Southwest violated the Financial Advisers' Standard of Care insofar as First Southwest did not object to the EDC either (a) when the BPPM was first revised to state that the EDC had entered into a contract with I BM for third party monitoring, or (b) when the BPPM containing that statement was released to the public, insofar as: that statement was not true, and the monitoring agreement was between only 38 Studios and IBM, which failed to satisfy the essential term required by the EDC Board that the bond documents reflect the implementation of a third party monitoring and reporting process as a key condition to the issuance, offering and sale of the EDC Bonds. OPINION # 44: First Southwest violated the Financial Advisers' Standard of Care by not objecting to the EDC staff and, as necessary, to the EDC Board insofar as First Southwest knew or should have known that action was being taken to close the issuance, offering and sale of the EDC Bonds without the bond documents reflecting the "development and implementation of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus to assure that the company's development of project Copernicus remained on time and on 17 budget pursuant to costs, terms and conditions ... ," which First Southwest knew or should have known was a key condition of the EDC Board's authorization of the issuance, offering and sale of the EDC Bonds. OPINION # 45: First Southwest violated the Financial Advisers' Standard of Care by failing to object to statements in the investor presentation that described the use of the EDC bond sale proceeds as including completion of Copernicus insofar as First Southwest knew or should have known that 38 Studios had not presented a workable business plan to complete Copernicus, with cashflow projections based upon reasonable assumptions. ROBERT I. STOLZMAN AND ADLER, POLLOCK & SHEEHAN, PC Although Adler Pollock & Sheehan PC was general counsel to the EDC, Stolzman was the employee assigned by Adler Pollock & Sheehan PC who functioned on a day-to-day basis as the EDC's general counsel. Accordingly, unless otherwise stated, the following opinions to which Mr. Doty is expected to testify are applicable to both entities, to which collective reference is made herein as "Stolzman." OPINION # 46: Stolzman violated the standard of care applicable to attorneys holding themselves out as competent to act as general counsel for and to otherwise represent quasi-governmental and governmental agencies, such as the EDC, and to advise the governing bodies thereof, in connection with their issuance of municipal securities (hereinafter "the Public Agency Attorney's Standard of Care"), insofar as Stolzman did not advise the EDC Board against making the Finding of Adequate Provision in the Authorizing Resolution, because an attorney complying with the Public Agency Attorney's Standard of Care (even an attorney who was new to the transaction or retained merely to advise the EDC Board in connection with the Finding of Adequate Provision) would have realized that it was that attorney's obligation to be satisfied, before the EDC Board made that finding, that the EDC Board had a reasonable factual basis therefor; but such an attorney also would have realized that an attorney was unable to fulfill that obligation insofar as that attorney had not conducted or been provided with an analysis of 38 Studios' business plan and financial projections that provided reasonable assurance that 38 Studios would have sufficient funds to relocate to Rhode Island and complete Copernicus. OPINION # 47: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman either knew or should have known, but failed to inform the EDC Board, that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions, because: Stolzman had received and discussed the Bond Transaction Projections; 18 Stolzman participated in discussions and received documents that assigned to Wells Fargo the task of preparing a meaningful analysis to validate 38 Studios' business plan and financial projections, but Stolzman had not received any such analysis other than Wells Fargo's presentation to the EDC Board on June 14, 2010, which was insufficient and misleading; Stolzman was not aware that any feasibility study had been prepared by a qualified independent third party concerning 38 Studios and Copernicus, and, in fact, none was; and Stolzman participated in discussions and negotiations with 38 Studios' representatives who informed Stolzman that 38 Studios needed to net $75 million from the EDC to complete Copernicus and for 38 Studios' business plan to have a reasonable prospect for success and Stolzman participated in discussions and received preliminary and final bond cashflows and other documents disclosing that 38 Studios' actual net proceeds would be of a much lesser amount than $75 million. OPINION # 48: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman believed and understood, based upon Stolzman's interpretation of the Authorizing Resolution, that there would have been a reasonable factual basis for the Finding of Adequate Provision even if the EDC Board had known that 38 Studios lacked sufficient capital to relocate to Rhode Island and complete Copernicus and was likely to go out of business in 2012, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work, provided the EDC Board had reason to believe that 38 Studios at least had sufficient capital to relocate to Rhode Island and perform some work on the development of Copernicus before 38 Studios went out of business, for at least the following reasons: an attorney complying with the Public Agency Attorney's Standard of Care would understand that the Finding of Adequate Provision must be based upon the Authorizing Resolution considered in its entirety, including the Term Sheet, which was incorporated by reference in the Authorizing Resolution and thereby made a part thereof, and which expressly represented that, '·'based on our understanding of your financial projections," the "net proceeds" of the EDC loan together with other sources of funds identified in 38 Studios' financial projections would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," and, therefore, such an attorney would conclude that such an understanding and belief, as set forth above, would be incorrect; an attorney complying with the Public Agency Attorney's Standard of Care would understand that Stolzman's belief would be inconsistent with the statutory requirement for the Finding of Adequate Provision, as set forth in 19 R.I. Gen. Laws § 42-64-10, and would be contrary to the evident purpose of the statute to foster business development rather than foster business failures, and, therefore, such an attorney would conclude that such an understanding and belief would be incorrect; an attorney complying with the Public Agency Attorney's Standard of Care would understand that Stolzman's belief would be contrary to a stated objective of the Job Creation Guaranty Act, which was to create "permanent, full-time jobs ... ;" -- an attorney complying with the Public Agency Attorney's Standard of Care would understand that the Rhode Island Supreme Court had held that the reason why the EDC's authority to issue bonds on its own initiative was a permissible delegation of legislative power was in part because the statutory requirement for the Finding of Adequate Provision, as set forth in R.I. Gen. Laws§ 42-64-10, operated as a significant constraint upon the EDC's discretion, but that Stolzman's interpretation of the statutory requirement deprived it of that effect, and, therefore, such an attorney would conclude that such an understanding and belief would be incorrect; '"- an attorney in Stolzman's position complying with the Public Agency Attorney's Standard of Care would know that a reasonable factual basis for the Finding of Adequate Provision was lacking even if the Finding of Adequate Provision could be made without regard to the Term Sheet, for at least the following reasons: the definition set forth in the Authorizing Resolution of "the Project" included the terms "establishment" and "development," each of which denoted both stability and duration, and, therefore, were inconsistent with an understanding that 38 Studios lacked sufficient capital to complete Copernicus and would go out of business in two years or less, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work; and the Finding of Adequate Provision also referred to adequate provision for the payment of the cost of the "... operation and maintenance and upkeep of the Project," which would be contradicted by an understanding that 38 Studios lacked sufficient capital to complete Copernicus and would go out of business in two years or less, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work. an attorney in Stolzman's position complying with the Public Agency Attorney's Standard of Care would know that such an understanding would be contrary both to the common understanding of the language of the Authorizing Resolution and to the understanding of the EDC Board members, who instead believed and assumed that "the Project" they were 20 authorizing was the relocation of 38 Studios to Rho.de Island and the completion of Copernicus, and, therefore, such an attorney would conclude that such an understanding would be incorrect. OPINION# 49: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's Finding of Adequate Provision, insofar as Defendant Stolzman never explained to the EDC Board his "understanding" of the Finding of Adequate Provision as described in Opinion # 48. OPINION # 50: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's Finding of Adequate Provision, insofar as Stolzman failed to disclose to the EDC Board that there was not a reasonable factual basis for that finding and that, as a result: the EDC Board was not empowered to approve issuance of the EDC Bonds given the requirement in R.I. Gen. Laws§ 42-64-10; and if the EDC Board, contrary to Stolzman's advice, insisted on making the Finding of Adequate Provision, Stolzman would have been required at the very least to withdraw as general counsel to the EDC. OPINION # 51: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman knew or should have known that Stolzman, or Defendants Saul or Stokes, or any other officer, employee or other person associated with or advising the EDC was engaged in action, intended to act or refused to act in a matter related to the EDC in a manner that was contrary to their responsibilities to the EDC, or a violation of law, that reasonably might be imputed or attributed to the EDC, and that may have resulted in a significant injury to the organization, and failed to refer the matter to higher authority in the organization, including, if necessary, to EDC Board, as required by Rule 1.13 of the Rhode Island Rules of Professional Conduct, including but not limited to the following circumstances: insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were not providing important information to the EDC Board and thereby were acting in a manner that was contrary to those parties' market roles and responsibilities in relationships in which municipal securities issuers and members of their governing bodies typically placed trust and confidence in those parties; insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were misstating or not providing important information to the EDC Board in connection with the Board's authorization of the issuance, offering and sale of the EDC Bonds under the Finding of Adequate Provision with the 21 result that the EDC Board lacked a sufficient factual basis for the Finding, and, therefore, there were significant risks that the EDC may not have had authority to approve the issuance, offering and sale of the EDC Bonds, and that the EDC Bonds may have been issued in violation of law; insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, had failed to comply with the EDC Board's requirement for an independent third-party monitoring, reporting and response process which was a key condition to the EDC Board's authorization of the issuance, offer and sale of the EDC Bonds, and, therefore, there was a significant risk that the EDC Bonds may be issued in violation of the Board's authorization and of law; and insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were taking, or failing to take, actions in connection with the issuance, offering and sale of the EDC Bonds that presented a significant risk that the EDC Bonds may be offered and sold in a manner that would constitute misrepresentations of or failure to disclose important information to investors, and thereby may have exposed the EDC to a risk of potential liability or other remedial action or significant harm. OPINION # 52: Stolzman violated the Public Agency Attorney's Standard of Care in drafting the Term Sheet, which refers to "our understanding to date of your financial projections," expressly identifies the Bond Transaction Projections, and states that "the net proceeds of which [the EDC loan of $75 million] would provide the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," insofar as: Stolzman knew or should have known that the foregoing statement was incorrect, or, at the very least, misleading, Stolzman knew or should have known that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; Stolzman knew or should have known from the Bond Transaction Projections and Stolzman's active participation in the transaction and in discussions of the Bond Transaction Projections both that 38 Studios' business plan was premised on 38 Studios receiving $75 million net proceeds in 2010 and that 38 Studios would in fact receive net proceeds in a much lesser amount and incrementally over a longer period; Stolzman knew or should have known that representatives of 38 Studios contended that 38 Studios needed to receive $75 million net and that any 22 reduction therefrom would necessitate efforts to obtain additional funding to complete Copernicus, and that Stolzman had not been presented with reasonable grounds to expect that 38 Studios would be successful in raising such additional funding; Stolzman knew or should have known that 38 Studios' Bond Transaction Projections had not been recalculated based on 38 Studios' actual net proceeds, and, therefore, failed to present a workable business plan with cashflow projections based upon reasonable assumptions; in light of all of the information Stolzman knew or should have known concerning 38 Studios' business plan, Stolzman was not entitled to rely upon either Defendant Saul's presentations to the EDC Board or Saul's oral assurances concerning 38 Studios' business plan; and Stolzman knew or should have known that Stolzman's purported belief and understanding that the above-quoted phrase in the Term Sheet-"complete production of Copernicus" -- meant merely to "commence production of Copernicus" was contrary to the plain and ordinary meaning of those words, which were likely to be understood by the EDC Board to mean "complete," not merely "commence." OPINION # 53: Stolzman violated the Public Agency Attorney's Standard of Care in drafting the Term Sheet because the Term Sheet expressly required that the documentation and implementation of the $75 million loan be based on the Bond Transaction Projections, insofar as Stolzman had not reviewed the Bond Transaction Projections even superficially, had not been provided with an analysis of the Bond Transaction Projections, and had no understanding of them. OPINION # 54: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman lacked the skill, knowledge and experience necessary to understand the cashflow projections set forth in the Bond Transaction Projections at even a superficial level sufficient to recognize at least that the Bond Transaction Projections were based upon the assumption that 38 Studios would receive $75 million in net proceeds from the EDC's loan in 2010, and the effect on 38 Studios' cashflow of the reduced loan net proceeds that 38 Studios actually received, insofar as: Stolzman received the Bond Transaction Projections and other financial projections of 38 Studios, discussed the Bond Transaction Projections with the EDC's and 38 Studios' representatives, and billed for such services; Stolzman knew or should have known that the Bond Transaction Projections did not reduce 38 Studios' net proceeds by the amount of the DSRF, since the Bond Transaction Projections had been prepared several 23 months before the amount of the DSRF was accurately estimated, and the Projections were not thereafter revised; the incorrect assumption that 38 Studios would receive net proceeds of $75 million in 2010 is apparent even with a superficial reading of the Bond Transaction Projections; · the consequences for 38 Studios' cashflow of 38 Studios not receiving net proceeds of $75 million in 2010 are apparent eve with a superficial reading in the Bond Transaction Projections; that competency is required in order to have represented the EDC appropriately in connection with the authorization, drafting and implementation of the complex and risky transaction with 38 Studios which included the EDC bond issuance, offering and sale and the loan to 38 Studios, in order to understand whether the EDC Board had a reasonable factual basis for the Finding of Adequate Provision; that competency is expected of an attorney who acted as general counsel to the EDC for twenty (20) years in connection with complex financial transactions; and Stolzman held himself out as an attorney who "knows real estate, land use, government affairs and municipal law inside and out" and as having advised the Finance and Corporations legislative committees within the Rhode Island General Assembly. OPINION # 55: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman failed to review and understand the Bond Transaction Projections at even the superficial level described in Opinion # 54, and, in that connection, failed to inform the EDC Board that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions. OPINION # 56: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.2 of the Rhode Island Rules of Professional Conduct insofar as Stolzman failed to review and understand the Bond Transaction Projections at even the superficial level described in Opinion # 54, but never excluded or otherwise limited the scope of Stolzman's representation to exclude review and understanding of 38 Studios' financial projections and failed to secure the EDC's agreement to that limitation after advising the EDC regarding the importance of analysis of the Bond Transaction Projections by a qualified independent third party. OPINION# 57: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 2.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman accepted Defendant Saul's assurances regarding 38 Studios' business plan and financial projections, in the absence of an analysis of the Bond Transaction Projections by a qualified independent third party, rather than exercising Stolzman's independent 24 professional judgment and advising the EDC Board to obtain such an independent third party analysis. OPINION# 58: Stolzman violated the Public Agency Attorney's Standard of Care in advising the EDC Board regarding the Term Sheet, insofar as Stolzman knew or should have known the following information, but failed to disclose it to the EDC Board: that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; that while 38 Studios' business plan and financial projections assumed that 38 Studios would receive $75 million net proceeds in 2010, in fact 38 Studios would receive net proceeds in a much lesser amount and over a longer period in increments; that representatives of 38 Studios contended that 38 Studios needed to receive $75 million net to complete Copernicus and that any reduction therefrom would require additional funding to complete Copernicus without having presented reasonable grounds to determine that 38 Studios would be successful in raising such additional funding; that 38 Studios' business plan and financial projections had not been recalculated based upon the actual net proceeds or 38 Studios' need for additional capital, and, therefore, 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; that neither Stolzman nor the EDC Board should rely on Defendant Saul's presentations to the EDC Board because those presentations contained misrepresentations and omitted important information and were misleading; that neither Stolzman nor the EDC Board should rely on Saul's oral assurances concerning 38 Studios' business plan and financial projections, because Stolzman had not reviewed or understood 38 Studios' business plan and financial projections even superficially, and Saul's assurances were inconsistent with the information Stolzman received that at least should have led Stolzman to suspect that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; that Stolzman's purported belief and understanding was that the phrase in the Term Sheet-"complete production of Copernicus"-meant merely to "commence production of Copernicus"; that Stolzman disavowed a responsibility to determine whether 38 Studios had presented a workable business plan with cashflow projections based 25 upon reasonable assumptions, but, rather, was relying upon assurances from Defendant Saul to that effect; and that, notwithstanding that the Term Sheet purported to set forth the EDC's and 38 Studios' "understanding" of 38 Studios' financial projections, and expressly referenced the Bond Transaction Projections, Stolzmari had not reviewed the Bond Transaction Projections; did not understand the Bond Transaction Projections even superficially; did not know whether the projections referred to were the Bond Transaction Projections or other financial projections he had not seen, -- had not seen any analysis demonstrating that the net proceeds would be sufficient for the purposes stated in the Term Sheet, believed that the "understanding" referred to in the Term Sheet was Defendant Saul's understanding based on oral communications with 38 Studios, the contents of which Stolzman was ignorant, and did not know what Defendant Saul's understanding purported to be in a reasonable level of detail. OPINION # 59: Stolzman violated the Public Agency Attorney's Standard of Care in connection with advising the EDC Board in connection with Defendant Saul's statements and presentation to the EDC Board on June 9, 2010, insofar as Stolzman heard the presentation, and: Stolzman knew or should have known that Saul's reference to 38 Studios' "Year 1 revenues projected at $20.0 million +"from Project Mercury was misleading because 38 Studios would not receive revenues from Project Mercury until Electronic Arts was reimbursed for its investment in Project Mercury; Stolzman had not reviewed 38 Studios' contract with Electronic Arts and did not know of any qualified party who had done so on behalf of EDC; Stolzman knew or should have known that Defendant Saul's reference to "Collateral includes lien on all company IP" was misleading as to Project Mercury since 38 Studios had already pledged its intellectual property on Project Mercury to Electronic Arts; Stolzman knew or should have known that Defendant Saul's reference to "Collateral includes lien on all company IP" was misleading as to Copernicus since the value of the intellectual property concerning Copernicus had not been analyzed; 26 Stolzman knew or should have known that Defendant Saul's reference to "EA assumes 4 to 5 million unit sales of Copernicus, 38 Studios conservatively estimates 3 million unit sales" was misleading because those estimates pertained to unit sales of Mercury, not Copernicus, and no such estimates reasonably could be made for Copernicus because Copernicus was in the earliest stages of development and Stolzman had no reasonable basis to believe that EA had conducted any review of Copernicus or its potential sales; Stolzman knew or should have known that Defendant Saul's statements concerning "Company's 'Most Likely' Projections," "Company's 'Worst Case' Projections," and "RIEDC Break Even Projection" were misleading if not simply incorrect, insofar as they improperly included revenues from Mercury in 2011 that 38 Studios did not reasonably expect to receive for the reason described above; they included projected revenues from Copernicus, but 38 Studio was not receiving the $75 million net it needed to complete Copernicus; and the projections did not deduct for many known or reasonably anticipated expenses or reductions from the gross loan proceeds, including but not limited to the DSRF, closing expenses, relocation expenses, the EDC's guaranty fees, or 38 Studios' lease and related expenses in Rhode Island, which if taken into account would have shown 38 Studios running out of money prior to completion of Copernicus and prior to earning any of the revenues attributed to Copernicus; Stolzman knew or should have known that Defendant Saul's statement that 38 Studios had "expertise to create new single player games to supplement earnings as needed" probably did not have a reasonable basis for support and was at least highly speculative; Stolzman knew or should have known that Defendant Saul's statement that the RIEDC had "completed normal due diligence" was incorrect and misleading, because: Stolzman had represented the EDC for twenty (20) years and was fully familiar with the EDC's customs and practices, which involved a credit memorandum for EDC loans, which Stolzman had not seen and did not have reason to believe had been prepared for the 38 Studios loan transaction; Sean Esten was the credit underwriter initially assigned to analyze the transaction and Mr. Esten stated in an email copied to Stolzman 27 that Mr. Esten did not support the transaction, but the EDC Board had not been so informed; and until Mr. Esten's email, the plan was, and Defendant Saul's draft presentation to the EDC Board expressly stated, that the EDC's internal credit memorandum would be completed and distributed to the EDC Board members by June 4, 2010, but after Sean Esten made that statement, the presentation was revised to incorrectly state that the RIEDC had "completed normal due diligence;" Stolzman knew or should have known that Defendant Saul's reference to "Independent conversations with industry players (e.g. Providence Equity, Hasbro, and others)" was misleading insofar as Hasbro's representative had expressed negative views to both Saul and Stolzman that were against the EDC making the loan to 38 Studios, but those negative views were not disclosed to the EDC Board; and Stolzman, upon learning of Saul's misleading representation to the EDC Board concerning Hasbro, should have inquired, but failed to do so, regarding information learned by Saul from Saul's conversation with Providence Equity representatives, which was also negative. OPINION # 60: Stolzman violated the Public Agency Attorney's Standard of Care in light of Rhode Island General Laws § 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as Stolzman did not promptly reject the suggestion that, if the EDC Bonds were payable over ten years but amortized over twenty years, with a substantial balloon payment in the tenth year, the DSRF could be determined on the basis of the maximum annual debt service over years 1-9. OPINION # 61: Stolzman violated the Public Agency Attorney's Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as Stolzman did not require provision to the EDC Board of a reasonably accurate estimate of the required amount of the DSRF based upon the ten-year term of the EDC Bonds and reasonably anticipated interest rates, as Wells Fargo ultimately did in the preliminary bond cashflows Wells Fargo circulated on August 12, 2010, that assumed the bonds would be paid and amortized over ten years, at an interest rate of 300 basis points over the prevailing rate of interest for U.S. Treasury bonds with a term of ten years, which calculation Stolzman could and should have required that Wells Fargo and First Southwest perform at the outset and certainly prior to the EDC Board's approval of the Authorizing Resolution. OPINION# 62: Stolzman violated the Public Agency Attorney's Standard of Care by failing to inform the EDC and as necessary the EDC Board that the expected amount of 38 Studios' net proceeds from the $75 million loan should have been estimated with reasonable accuracy prior to the EDC Board's authorization of the issuance, offering 28 and sale of the EDC Bonds, including a reasonable estimate of the amount of the DSRF, particularly since that authorization was based upon the representation in the Term Sheet that 38 Studios' "net proceeds" from the $75 million loan would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," and upon the Finding of Adequate Provision in the Authorizing Resolution. OPINION# 63: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to disclose to the EDC Board that, from an early stage in negotiations with 38 Studios on behalf of the EDC until several months after the EDC Board authorized the issuance, offering and sale of the EDC Bonds, Stolzman was soliciting 38 Studios for his own personal financial benefit and the financial benefit of his wife, and that such solicitation created a conflict of interest and gave Stolzman a personal motivation to accommodate 38 Studios' interests in those negotiations to the detriment of the EDC. OPINION # 64: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman knew or should have known the following, but failed to disclose it to the EDC Board: that 38 Studios had been issued a going concern letter, which made it clear that 38 Studios' continued existence was dependent on the EDC loan or raising funds from some other source, which was important information the EDC Board needed in order to accurately understand 38 Studios' financial and negotiating position; that notwithstanding Defendant Saul's assurances to the EDC Board that the "next steps" included "confirm with EA all company representations," that step was not carried out; that Strategy Analytics had offered to review and analyze 38 Studios' business plan and financial projections, but that Defendant Saul without objection from Stolzman declined that offer ostensibly in order to avoid overlap with Wells Fargo's review and analysis of 38 Studios' business plan and financial projections, but Wells Fargo had a conflict of interest with 38 Studios and therefore could not be relied upon to provide an independent analysis; that Wells Fargo had been expected to provide a review and analysis of 38 Studios' business plan and financial projections in connection with the EDC Bonds, but Wells Fargo had failed to do so other than through its presentation to the EDC Board on June 14, 2010 that was both incomplete and misleading; that Wells Fargo had a significant conflict of interest, since its role in advising the EDC Board and acting as the EDC's placement agent were roles in which governing bodies of municipal issuers such as the EDC 29 Board customarily would place trust and confidence, leading them to expect that Wells Fargo would disclose all important information the EDC Board would want to have concerning 38 Studios, but Wells Fargo's prior relationship with 38 Studios may have led to a contradictory role for Wells Fargo resulting in a conflict of interest, and notwithstanding that, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants such as the EDC Board would be expected to assume that Wells Fargo had no such conflict in the absence of such disclosure; that Strategy Analytics and Perimeter Partners had been solicited for their frank assessment of the project and had responded orally with many negative assessments, including an overall recommendation against the project, and that Strategy Analytics and Perimeter Partners thereafter provided their written report and presentation that was limited to what they were contractually required to address and did not include important negative assessments, including their overall recommendation against the project; and that Strategy Analytics and Perimeter Partners had previously told Stolzman that it was their opinion that 38 Studios was not an anchor tenant and that if they were the EDC they would not go forward with the project, although Strategy Analytics and Perimeter Partners later informed the EDC Board in Stolzman's presence that 38 Studios was an anchor tenant and that they would proceed with the project were they in the position of the EDC Board; OPINION# 65: Stolzman violated the Public Agency Attorney's Standard of Care by allowing Defendant Stokes to sign the BPPM, insofar as Stolzman knew or should have known that the BPPM contained misrepresentations of important information and omitted disclosure of important risks in connection with the EDC's issuance, offering and sale of the EDC Bonds, which may have exposed the EDC to potential liability, other remedial action or significant harm, including but not limited to the following: the BPPM incorrectly stated that EDC had entered into a monitoring agreement with IBM; the BPPM failed to disclose that only 38 Studios had entered into the monitoring agreement with IBM, which failed to satisfy the essential term required by the EDC Board that the bond documents reflect the implementation of a third party monitoring and reporting process as a key condition to the issuance, offering and sale of the EDC Bonds; the BPPM failed to include 38 Studios' financial projections, and information that 38 Studios lacked a workable business plan with cashflow projections based upon reasonable assumptions; 30 the BPPM failed to disclose that no feasibility study had been performed by a qualified independent third party; the BPPM failed to disclose that 38 Studios' financial projections, adjusted to reflect the actual net proceeds 38 Studios expected to receive from the $75 million, showed 38 Studios running out of money prior to the completion of Copernicus, and that there was not reasonable assurance that 38 Studios would be able to obtain additional capital; -- the BPPM failed to disclose that 38 Studios' Bond Transaction Projections contained the assumption that $20,748,000 would be paid to 38 Studios in 2011, representing 38 Studios' share of the proceeds from the sale of 38 Studios' first RPG, Mercury, when all of those sales proceeds up to the amount of Electronic Arts' investment relating to Mercury would be paid first to reimburse Electronic Arts for the full amount of Electronic Arts' investment; the BPPM failed to disclose that 38 Studios' Bond Transaction Projections omitted numerous significant expenses and deductions from the gross loan proceeds, including but not limited to the DSRF, the closing expenses, the cost of relocating 38 Studios' assets and employees to Rhode Island, the cost of the build-out of 38 Studios' studio in Rhode Island, initial and annual guaranty fees payable to the EDC, and approximately $2 million required to obtain a letter of credit as security for 38 Studios' lease in Rhode Island, and that, for a period of time, 38 Studios would pay rent at both of its Rhode Island and Massachusetts locations; and the BPPM failed to disclose that 38 Studios' Bond Transaction Projections assumed that 38 Studios would need to raise $20 million from an equity sale upon the completion of Copernicus, but that Stolzman had not received reasonable assurance that 38 Studios would be able to obtain that additional capital or complete Copernicus. OPINION# 66: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's requirement for protection against the completion risk involved in the loan to 38 Studios, specifically the risk that 38 Studios' timetable and budget to relocate to Rhode Island and complete Copernicus might be unreasonable or otherwise not feasible (hereinafter "the Completion Risk"), insofar as: Stolzman participated with Defendant Stokes in promising the EDC Board that they would negotiate protections against the Completion Risk that reasonably replicated the benefits and protections against that risk that a completion bond would have provided, but failed to do so; Stolzman failed to comply with the EDC Board's express oral requirement _ for a pre-closing evaluation of the Completion Risk; 31 ..... even assuming arguendo that the EDC Board had not expressly so required, Stolzman knew or should have known the EDC Board's requirement that the Completion Risk be evaluated prior to the closing was implicit, and failed to require such an evaluation; even assuming arguendo that the EDC Board had not implicitly or explicitly so required, Stolzman failed to recommend to the EDC Board that the EDC require that the Completion Risk be evaluated prior to the closing, and to explain to the EDC Board why that was essential to protect the EDC; notwithstanding Stolzman's active participation in the EDC bond issuance, offering and sale on behalf of the EDC, Stolzman failed to require compliance with the condition in the Term Sheet requiring that the bond documents reflect implementation of monitoring and reporting regarding the Completion Risk, in accordance with the Board's direction and express condition, i.e., that the bond documents reflect "the development and implementation of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus to assure that the company's development of project Copernicus remained on time and on budget pursuant to costs, terms and conditions ... " satisfactory to the EDC, since "implementation" by definition required that a report regarding information obtained in monitoring the Completion Risk be included in the bond documents, which meant that the report was required by the EDC Board to be made prior to the closing; Stolzman allowed 38 Studios to solicit candidates to serve as the third party who was to evaluate the Completion Risk and perform subsequent monitoring, when Stolzman should have insisted that the EDC have that role so that the third party would be truly independent and not have potential allegiance or contractual obligations to 38 Studios; Stolzman allowed 38 Studios to choose IBM over IFG or other potential third parties without obtaining a full explanation of the differences in the various proposals and without inquiring whether IBM had a prior, existing or anticipated future relationship with 38 Studios, or whether IBM employees involved in the analysis had any actual or potential conflicts of interest; Stolzman allowed 38 Studios rather than the EDC to enter into the contract with IBM, when Stolzman knew or should have known that IBM had refused to enter into a contract with or to have direct obligations to the EDC, and that under the prevailing arrangement there was a significant potential that 38 Studios would be able to influence or otherwise affect significantly the quality and timing of IBM's evaluation of the Completion Risk; 32 Stolzman knew or should have known, but failed to object, that 38 Studios and IBM agreed that the Completion Risk was to have been evaluated only after the closing of the sale of the EDC Bonds; Stolzman failed to recommend strongly to the EDC Board and omitted in the negotiation and drafting of the Loan & Trust Agreement and the Project Monitoring Agreement any provision entitling the EDC to withhold payments or take other significant action in the event that IBM reported that Copernicus would not be completed on time and within budget, or in the event IBM failed to provide on a timely basis or at all the reports contemplated by the EDC Board, contrary to the EDC Board's express requirement for a satisfactory "response" process; Stolzman failed to recommend strongly to the EDC Board and omitted in the negotiation and drafting of the Loan & Trust Agreement any rights or remedies for the EDC in the event that 38 Studios experienced a material adverse change to its business plans or prospects, and failed to provide a definition in the Loan & Trust Agreement of what would constitute such a material adverse change; Stolzman failed to recommend strongly to the EDC Board and omitted in the negotiation and drafting of the Loan & Trust Agreement and the Project Monitoring Agreement provisions linking the EDC's obligation to authorize payments to 38 Studios from the EDC bond sale proceeds to meaningful milestones in the development of Copernicus or any other product; Stolzman allowed the sale of the EDC Bonds to close in violation of the EDC Board's authorization that was conditioned upon the bond documents reflecting the implementation of the third party monitoring and reporting process, since "implementation" by definition required that the results of monitoring the Completion Risk be reported in the bond documents; and assuming, arguendo, that Stolzman did not understand that the EDC Board required that the EDC receive a report regarding the Completion Risk prior to the closing, during the period following the closing on November 2, 2010 and prior to Stolzman's dismissal as the EDC's general counsel at the end of January, 2011, Stolzman failed to obtain a report regarding the Completion Risk, notwithstanding that Stolzman knew or should have known that IBM needed only five (5) weeks to complete IBM's initial monitoring and report and that, pursuant to IBM's contract with 38 Studios, IBM was required to begin the initial monitoring process as of the closing of the sale of the EDC Bonds on November 2, 2010. OPINION# 67: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman issued and delivered a formal opinion dated the closing date to the 33 EDC and others that "[t]he RIEDC has full power and authority to adopt the [Authorizing Resolution] and perform its obligations thereunder and such Resolution [has] been duly adopted ... and the Resolution [is] in full force and effect ... ," "[t]he RIEDC has all requisite legal right, power and authority to authorize, execute and deliver the Bond Documents [which was defined to include the Bonds] and to execute issue and deliver the Bonds and perform its obligations with respect thereto," "[e]ach of the Bond Documents [which was defined to include the Bonds] have been duly authorized, executed and delivered by the RIEDC, and ... constitutes a valid, binding and enforceable agreement on the part of the RIEDC ... ," and "[t]o the best of our knowledge, the adoption of the Resolution and the execution and delivery of the Bonds and the Bond Documents, and the performance by the RIEDC of the Bond Documents ... will not in any material respect conflict with or constitute on the part of the RIEDC a material violation of any existing law ... to which the RIEDC is subject that would in any manner materially limit the authority of the RIEDC to enter into and perform its obligations pursuant to the Bonds and the Bond Documents, and no such action will result in any violation of ... [Chapter 64 of Title 42 of the General Laws of the State of Rhode Island, as amended] ... " and insofar as Stolzman further opined that information presented in the BPPM under the heading "The Rhode Island Economic Development Corporation"2 "has been prepared based upon information supplied by the RIEDC and to the best of our knowledge such information is accurate in all material respects and does not contain any. untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading," when Stolzman knew or should have known both that the sale of the EDC Bonds would not take place absent Stolzman's issuance and delivery of that formal opinion, and that the EDC lacked the requisite legal right, power and authority to authorize, execute and deliver the bond documents and to execute issue and deliver the EDC Bonds, because: there was not a reasonable factual basis for the Finding of Adequate Provision; the condition precedent imposed by the EDC Board, when it adopted the Authorizing Resolution, to the issuance, offering and sale of the EDC Bonds was not satisfied, in that the bond documents did not reflect "the development and implementation of a third party monitoring, reporting and 2 The BPPM included the following statement under that heading: The 2010 Bonds are being issued in full compliance with [the Rhode Island Economic Development Corporation Act, Title 42, Chapter 64 of the Rhode Island General Laws, as amended) and [Chapters 026/029 of the Rhode Island Public Laws of 2010]. Pursuant to a resolution issued by the [EDC]'s board of Directors on July 26, 2010, the [EDC) is authorized to enter into the [Loan & Trust] Agreement to issue the 2010 Bonds and to secure the 2010 Bonds by, among other things, Loan Payments by [38 Studios] to the [EDC], amounts on deposit in the Capital Reserve Fund and by certain appropriations which may be made by the State General Assembly. 34 response process regarding the development schedule and budget for project Copernicus to assure that the company's development of project Copernicus remained on time and on budget. .. "; and Stolzman knew or should have known that the BPPM contained the misrepresentations and omissions described in Opinion # 65. OPINION# 68: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.16 of the Rhode Island Rules of Professional Conduct in connection with the EDC Board's requirement for evaluation of the Completion Risk insofar as Stolzman failed to make arrangements for successor counsel to understand the role of IBM or to monitor IBM's performance thereof, such as by providing successor counsel with a transition memorandum or other appropriate instructions. OPINION # 69: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's requirement for a monitoring, reporting and response process regarding the Completion Risk insofar as he knew or should have known the information referred to in Opinion# 66, but failed to disclose that information to the EDC Board. OPINION# 70: Stolzman violated the Public Agency Attorney's Standard of Care insofar as he participated with Defendant Stokes in the manipulation of the agenda for the EDC Board meetings for August 2010 and thereafter to prevent the EDC Board from reconsidering the Board's approval of the EDC's loan to 38 Studios and the EDC bond issue, and by failing to inform the EDC Board that Stolzman believed that Stokes' statement to the EDC Board that the EDC had a legal duty to close the transaction was incorrect and that the EDC had the right to decline to issue the bonds at that time and up to the execution of the closing documents. OPINION # 71: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 2. 1 of the Rhode Island Rules of Professional Responsibility insofar as Stolzman knew or should have known, but failed to disclose to the EDC Board, that Stolzman's support, and the support of Saul and Stokes for the $75 million loan to 38 Studios, was due at least in part to their desire to please the leadership of the Rhode Island General Assembly, which was strongly in favor of the loan to 38 Studios, and that as a result Stolzman was not exercising his independent professional judgment solely on behalf of the EDC. OPINION# 72: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of Wells Fargo's roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that Wells Fargo owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have expected Wells Fargo to advise the EDC and the EDC 35 Board solely in the EDC's best interests concerning 38 Studios' business plan and financial projections. OPINION# 73: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of First Southwest's roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that First Southwest owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have expected First Southwest to advise the EDC and the EDC Board solely in the EDC's best interests concerning 38 Studios' business ·plan and financial projections as they related to 38 Studios' ability to repay the EDC Bonds and the structure, timing and terms of the EDC Bonds. OPINION# 74: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of Barclays' roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that Barclays owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 201 O,market participants would have expected Barclays to obtain reasonable assurance that Wells Fargo had investigated and disclosed to the EDC and the EDC Board all important information concerning 38 Studios' business plan and financial projections, or that, absent such reasonable assurance, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have expected Barclays to advise the EDC and the EDC Board solely in the EDC's best interests concerning 38 Studios' business plan and financial projections. B. JEFFREY S. GREEN, ESQ. Jeffrey S. Green, Esq. is expected to provide expert testimony. His qualifications are set forth in the curriculum vitae attached hereto as Exhibit 4. The subject matter of his opinions will be the deviations by Defendants Robert I. Stolzman and Adler Pollock & Sheehan, PC (collectively "Stolzman") from the applicable standard of care as set forth below. The bases for Mr. Green's opinions are his education, training, review of applicable Rhode Island law as referred to herein, and experience. His reliance materials include the depositions listed in Exhibit 5 upon which his preliminary understanding of the facts is based. He may refer to Disclosure Roles of Counsel in State and Local Government Securities Offerings and such other materials as he deems appropriate. 36 Plaintiff has prepared the following summary of the opinions to which Plaintiff expects Mr. Green to testify, 3 based on evidence the Plaintiff expects will be offered at trial. Of course, the evidence offered at trial by Plaintiff and by Defendants undoubtedly will be inconsistent and conflicting. In many instances, Plaintiff expects to offer expert opinions based upon the version of the facts Plaintiff contends is accurate, and expert opinions that assume, arguendo, another and possibly contrary version of the facts, since in many cases Plaintiff contends that Defendants acted wrongfully regardless of whether the facts are as Plaintiff intends to prove or are as Defendants contend. Accordingly, many of the expert opinions disclosed herein are offered based upon alternative assumptions. Although Adler Pollock & Sheehan PC was general counsel to the EDC, Stolzman was the employee assigned by Adler Pollock & Sheehan PC who functioned on a day-to-day basis as the EDC's general counsel. Accordingly, unless otherwise stated, the following opinions to which Mr. Green is expected to testify are applicable to both entities, which are referred to collectively as "Stolzman." OPINION# 1: Stolzman violated the standard of care applicable to attorneys holding themselves out as competent to act as general counsel for and to otherwise represent quasi-governmental and governmental agencies, such as the EDC, and to advise the governing bodies thereof, in connection with their issuance of municipal securities (hereinafter "the Public Agency Attorney's Standard of Care"), insofar as Stolzman did not advise the EDC Board against making the Finding of Adequate Provision in the Authorizing Resolution, because an attorney complying with the Public Agency Attorney's Standard of Care (even an attorney who was new to the transaction or retained merely to advise the EDC Board in connection with the Finding of Adequate Provision) would have realized that it was that attorney's obligation to be satisfied, before the EDC Board made that finding, that the EDC Board had a reasonable factual basis therefor; but such an attorney also would have realized that an attorney was unable to fulfill that obligation insofar as that attorney had not conducted or been provided with an analysis of 38 Studios' business plan and financial 3 Plaintiff makes this disclosure in accordance with the CMO and without prejudice to Plaintiff's right to present different expert opinions based upon evidence adduced at trial and to rebut testimony disclosed by Defendants pursuant to the CMO or to which their experts are permitted to testify at trial. Mr. Green may amend or supplement his opinions based upon further review and analysis of additional evidence, documentation or information. Mr. Green does not intend to provide opinions on matters of law that are reserved to the Court or to decide questions of fact that are reserved to the jury. 37 projections that provided reasonable assurance that 38 Studios would · have sufficient funds to relocate to Rhode Island and complete Copernicus. OPINION# 2: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman either knew or should have known, but failed to inform the EDC Board, that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions, because: Stolzman had received and discussed the Bond Transaction Projections; Stolzman participated in discussions and received documents that assigned to Wells Fargo the task of preparing a meaningful analysis to validate 38 Studios' business plan and financial projections, but Stolzman had not received any such analysis other than Wells Fargo's presentation to the EDC Board on June 14, 2010, which was insufficient and misleading; Stolzman was not aware that any feasibility study had been prepared by a qualified independent third party concerning 38 Studios and Copernicus, and, in fact, none was; and Stolzman participated in discussions and negotiations with 38 Studios' representatives who informed Stolzman that 38 Studios needed to net $75 million from the EDC to complete Copernicus and for 38 Studios' business plan to have a reasonable prospect for success and Stolzman participated in discussions and received preliminary and final bond cashflows and other documents disclosing that 38 Studios' actual net proceeds would be of a much lesser amount than $75 million. OPINION # 3: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman believed and understood, based upon Stolzman's interpretation of the Authorizing Resolution, that there would have been a reasonable factual basis for the Finding of Adequate Provision even if the EDC Board had known that 38 Studios lacked sufficient capital to relocate to Rhode Island and complete Copernicus and was likely to go out of business in 2012, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work, provided the EDC Board had reason to believe that 38 Studios at least had sufficient capital to relocate to Rhode Island and perform some work on the development of Copernicus before 38 Studios went out of business, for at least the following reasons: an attorney complying with the Public Agency Attorney's Standard of Care would understand that the Finding of Adequate Provision must be based upon the Authorizing Resolution considered in its entirety, including the Term Sheet, which was incorporated by reference in the Authorizing Resolution and thereby made a part thereof, and which expressly represented that, "based on our understanding of your financial 38 projections," the "net proceeds" of the EDC loan together with other sources of funds identified in 38 Studios' financial projections would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," and, therefore, such an attorney would conclude that such an understanding and belief, as set forth above, would be incorrect; an attorney complying with the Public Agency Attorney's Standard of Care would understand that Stolzman's belief would be inconsistent with the statutory requirement for the Finding of Adequate Provision, as set forth in R. I. Gen. Laws § 42-64-10, and would be contrary to the evident purpose of the statute to foster business development rather than foster business failures, and, therefore, such an attorney would conclude that such an understanding and belief would be incorrect; an attorney complying with the Public Agency Attorney's Standard of Care would understand that Stolzman's belief would be contrary to a stated objective of the Job Creation Guaranty Act, which was to create "permanent, full-time jobs ... ;" an attorney complying with the Public Agency Attorney's Standard of Care would understand that the Rhode Island Supreme Court had held that the reason why the EDC's authority to issue bonds on its own initiative was a permissible delegation of legislative power was in part because the statutory requirement for the Finding of Adequate Provision, as set forth in R.I. Gen. Laws§ 42-64-10, operated as a significant constraint upon the EDC's discretion, but that Stolzman's interpretation of the statutory requirement deprived it of that effect, and, therefore, such an attorney would conclude that such an understanding and belief would be incorrect; an attorney in Stolzman's position complying with the Public Agency Attorney's Standard of Care would know that a reasonable factual basis for the Finding of Adequate Provision was lacking even if the Finding of Adequate Provision could be made without regard to the Term Sheet, for at least the following reasons: the definition set forth in the Authorizing Resolution of "the Project" included the terms "establishment" and "development," each of which denoted both stability and duration, and, therefore, were inconsistent with an understanding that 38 Studios lacked sufficient capital to complete Copernicus and would go out of business in two years or less, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work; and the Finding of Adequate Provision also referred to adequate provision for the payment of the cost of the " ... operation and 39 maintenance and upkeep of the Project," which would be contradicted by an understanding that 38 Studios lacked sufficient capital to complete Copernicus and would go out of business in two years or less, with the EDC Bonds largely unpaid and 38 Studios' employees put out of work. an attorney in Stolzman's position complying with the Public Agency Attorney's Standard of Care would know that such an understanding would be contrary both to the common understanding of the language of the Authorizing Resolution and to the understanding of the EDC Board members, who instead believed and assumed that "the Project" they were authorizing was the relocation of 38 Studios to Rhode Island and the completion of Copernicus, and, therefore, such an attorney would conclude that such an understanding would be incorrect. OPINION# 4: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's Finding of Adequate Provision, insofar as Defendant Stolzman never explained to the EDC Board his "understanding" of the Finding of Adequate Provision as described in Opinion # 3. OPINION# 5: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's Finding of Adequate Provision, insofar as Stolzman failed to disclose to the EDC Board that there was not a reasonable factual basis for that finding and that, as a result: the EDC Board was not empowered to approve issuance of the EDC Bonds given the requirement in R.I. Gen. Laws§ 42-64-10; and if the EDC Board, contrary to Stolzman's advice, insisted on making the Finding of Adequate Provision, Stolzman would have been required at the very least to withdraw as general counsel to the EDC. OPINION# 6: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman knew or should have known that Stolzman, or Defendants Saul or Stokes, or any other officer, employee or other person associated with or advising the EDC was engaged in action, intended to act or refused to act in a matter related to the EDC in a manner that was contrary to their responsibilities to the EDC, or a violation of law, that reasonably might be imputed or attributed to the EDC, and that may have resulted in a significant injury to the organization, and failed to refer the matter to higher authority in the organization, including, if necessary, to EDC Board, as required by Rule 1.13 of the Rhode Island Rules of Professional Conduct, including but not limited to the following circumstances: insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were not providing important information to the EDC Board contrary to those 40 parties' market roles and responsibilities in relationships in which municipal securities issuers and members of their governing bodies typically placed trust and confidence in those parties; insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were misstating or not providing important information to the EDC Board in connection with the Board's authorization of the issuance, offering and sale of the EDC Bonds under the Finding of Adequate Provision with the result that the EDC Board lacked a sufficient factual basis for the Finding, and, therefore, there were significant risks that the EDC may not have had authority to approve the issuance, offering and sale of the EDC Bonds, and that the EDC Bonds may have been issued in violation of law; . insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, had failed to comply with the EDC Board's requirement for an independent third-party monitoring, reporting and response process which was a key condition to the EDC Board's authorization of the issuance, offer and sale of the EDC Bonds, and, therefore, there was a significant risk that the EDC Bonds may be issued in violation of the Board's authorization and of law; and insofar as Stolzman knew or should have known that parties associated with or advising the EDC, including but not limited to Stolzman, and Defendants Saul, Stokes, First Southwest, or Wells Fargo, were taking, or failing to take, actions in connection with the issuance, offering and sale of the EDC Bonds that presented a significant risk that the EDC Bonds may be offered and sold in a manner that would constitute misrepresentations of or failure to disclose important information to investors, and thereby may have exposed the EDC to a risk of potential liability or other remedial action or significant harm. OPINION # 7: Stolzman violated the Public Agency Attorney's Standard of Care in drafting the Term Sheet, which refers to "our understanding to date of your financial projections," expressly identifies the Bond Transaction Projections, and states that "the net proceeds of which [the EDC loan of $75 million] would provide the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," insofar as: Stolzman knew or should have known that the foregoing statement was incorrect, or, at the very least, misleading, Stolzman knew or should have known that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; 41 Stolzman knew or should have known from the Bond Transaction Projections and Stolzman's active participation in the transaction and in discussions of the Bond Transaction Projections both that 38 Studios' business plan was premised on 38 Studios receiving $75 million net proceeds in 2010 and that 38 Studios would in fact receive net proceeds in a much lesser amount and incrementally over a longer period; Stolzman knew or should have known that representatives of 38 Studios contended that 38 Studios needed to receive $75 million net and that any reduction therefrom would necessitate efforts to obtain additional funding to complete Copernicus, and that Stolzman had not been presented with reasonable grounds to expect that 38 Studios would be successful in raising such additional funding; Stolzman knew or should have known that 38 Studios' Bond Transaction Projections had not been recalculated based on 38 Studios' actual net proceeds, and, therefore, failed to present a workable business plan with cashflow projections based upon reasonable assumptions; in light of all of the information Stolzman knew or should have known concerning 38 Studios' business plan, Stolzman was not entitled to rely upon either Defendant Saul's presentations to the EDC Board or Saul's oral assurances concerning 38 Studios' business plan; and Stolzman knew or should have known that Stolzman's purported belief and understanding that the above-quoted phrase in the Term Sheet -"complete production of Copernicus" -- meant merely to "commence production of Copernicus" was contrary to the plain and ordinary meaning of those words, which were likely to be understood by the EDC Board to mean "complete," not merely "commence." OPINION # 8: Stolzman violated the Public Agency Attorney's Standard of Care in drafting the Term Sheet because the Term Sheet expressly required that the documentation and implementation of the $75 million loan be based on the Bond Transaction Projections, insofar as Stolzman had not reviewed the Bond Transaction Projections even superficially, had not been.provided with an analysis of the Bond Transaction Projections, and had no understanding of them. OPINION# 9: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman lacked the skill, knowledge and experience necessary to understand the cashflow projections set forth in the Bond Transaction Projections at even a superficial level sufficient to recognize at least that the Bond Transaction Projections were based upon the assumption that 38 Studios would receive $75 million in net proceeds from the EDC's loan in 2010, and the effect on 38 Studios' cashflow of the reduced loan net proceeds that 38 Studios actually received, insofar as: 42 Stolzman received the Bond Transaction Projections and other financial projections of 38 Studios, discussed the Bond Transaction Projections with the EDC's and 38 Studios' representatives, and billed for such services; Stolzman knew or should have known that the Bond Transaction Projections did not reduce 38 Studios' net proceeds by the amount of the DSRF, since the Bond Transaction Projections had been prepared several months before the amount of the DSRF was accurately estimated, and the Projections were not thereafter revised; the incorrect assumption that 38 Studios would receive net proceeds of $75 million in 2010 is apparent even with a superficial reading of in the Bond Transaction Projections; -- the consequences for 38 Studios' cashflow of 38 Studios not receiving net proceeds of $75 million in 201 O are apparent even with a superficial reading of the Bond Transaction Projections; that competency is required in order to have represented the EDC appropriately in connection with the authorization, drafting, and implementation of the complex and risky transaction with 38 Studios which included the EDC bond issuance, offering and sale and the loan to 38 Studios, including in order to understand whether the EDC Board had a reasonable factual basis for the Finding of Adequate Provision; that competency is expected of an attorney who acted as general counsel to the EDC for twenty (20) years in connection with complex financial transactions; and Stolzman held himself out as an attorney who "knows real estate, land use, government affairs and municipal law inside and out" and as having advised the Finance and Corporations legislative committees within the Rhode Island General Assembly. OPINION # 10: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman failed to review and understand the Bond Transaction Projections at even the superficial level described in Opinion # 9, and, in that connection, failed to inform the EDC Board that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions. OPINION # 11: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.2 of the Rhode Island Rules of Professional Conduct insofar as Stolzman failed to review and understand the Bond Transaction Projections at even the superficial level described in Opinion# 9, but never excluded or otherwise limited the scope of Stolzman's representation to exclude review and understanding of 38 Studios' financial projections and failed to secure the EDC's agreement to that limitation after advising the 43 EDC regarding the importance of analysis of the Bond Transaction Projections by a qualified independent third party. OPINION# 12: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 2.1 of the Rhode Island Rules of Professional Conduct insofar as Stolzman accepted Defendant Saul's assurances regarding 38 Studios' business plan and financial projections, in the absence of an analysis of the Bond Transaction Projections by a qualified independent third party, rather than exercising Stolzman's independent professional judgment and advising the EDC Board to obtain such an independent third party analysis. OPINION# 13: Stolzman violated the Public Agency Attorney's Standard of Care in advising the EDC Board regarding the Term Sheet, insofar as Stolzman knew or should have known the following information, but failed to disclose it to the EDC Board: that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; that while 38 Studios' business plan and financial projections assumed that 38 Studios would receive $75 million net proceeds in 2010, in fact 38 Studios would receive net proceeds in a much lesser amount and over a longer period in increments; that representatives of 38 Studios contended that 38 Studios needed to receive $75 million net to complete Copernicus and that ar1y reduction therefrom would require additional funding to complete Copernicus without having presented reasonable grounds to determine that 38 Studios would be successful in raising such additional funding; that 38 Studios' business plan and financial projections had not been recalculated based upon the actual net proceeds or 38 Studios' need for additional capital, and, therefore, 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; that neither Stolzman nor the EDC Board should rely on Defendant Saul's presentations to the EDC Board because those presentations contained misrepresentations and omitted important information and were misleading; that neither Stolzman nor the EDC Board should rely on Saul's oral assurances concerning 38 Studios' business plan and financial projections, because Stolzman had not reviewed or understood 38 Studios' business plan and financial projections even superficially, and Saul's assurances were inconsistent with the information Stolzman received that at least should have led Stolzman to suspect that 38 Studios had not presented a workable business plan with cashflow projections based upon reasonable assumptions; 44 that Stolzman's purported belief and understanding was that the phrase in the Term Sheet-"complete production of Copernicus"-meant merely to "commence production of Copernicus"; that Stolzman disavowed a responsibility to determine whether 38 Studios had presented a workable business plan with cashflow projections based upon reasonable assumptions, but, rather, was relying upon assurances from Defendant Saul to that effect; and that, notwithstanding that the Term Sheet purported to set forth the EDC's and 38 Studios' "understanding" of 38 Studios' financial projections, and expressly referenced the Bond Transaction Projections, Stolzman had not reviewed the Bond Transaction Projections; did not understand the Bond Transaction Projections even superficially; did not know whether the projections referred to were the Bond Transaction Projections or other financial projections he had not seen, had not seen any analysis demonstrating that the net proceeds would be sufficient for the purposes stated in the Term Sheet, believed that the "understanding" referred to in the Term Sheet was Defendant Saul's understanding based on oral communications with 38 Studios, the contents of which Stolzman was ignorant, and did not know what Defendant Saul's understanding purported to be in a reasonable level of detail. OPINION# 14: Stolzman violated the Public Agency Attorney's Standard of Care in connection with advising the EDC Board in connection with Defendant Saul's statements and presentation to the EDC Board on June 9, 2010, insofar as Stolzman heard the presentation, and: Stolzman knew or should have known that Saul's reference to 38 Studios' "Year 1 revenues projected at $20.0 million +"from Project Mercury was misleading because 38 Studios would not receive revenues from Project Mercury until Electronic Arts was reimbursed for its investment in Project Mercury; Stolzman had not reviewed 38 Studios' contract with Electronic Arts and did not know of any qualified party who had done so on behalf of EDC; Stolzman knew or should have known that Defendant Saul's reference to "Collateral includes lien on all company IP" was misleading as to Project 45 Mercury since 38 Studios had already pledged its intellectual property on Project Mercury to Electronic Arts; Stolzman knew or should have known that Defendant Saul's reference to "Collateral includes lien on all company IP" was misleading as to Copernicus since the value of the intellectual property concerning Copernicus had not been analyzed; ·-- Stolzman knew or should have known that Defendant Saul's reference to "EA assumes 4 to 5 million unit sales of Copernicus, 38 Studios conservatively estimates 3 million unit sales" was misleading because those estimates pertained to unit sales of Mercury, not Copernicus, and no such estimates reasonably could be made for Copernicus because Copernicus was in the earliest stages of development and Stolzman had no reasonable basis to believe that EA had conducted any review of Copernicus or is potential sales; Stolzman knew or should have known that Defendant Saul's statements concerning "Company's 'Most Likely' Projections," "Company's 'Worst Case' Projections," and "RIEDC Break Even Projection" were misleading if not simply incorrect, insofar as they improperly included revenues from Mercury in 2011 that 38 Studios did not reasonably expected to receive for the reason described above; they included projected revenues from Copernicus, but 38 Studio was not receiving the $75 million net it needed to complete Copernicus; and the projections did not deduct for many known or reasonably anticipated expenses or reductions from the gross loan proceeds, including but not limited to the DSRF, closing expenses, relocation expenses, the EDC's guaranty fees, or 38 Studios' lease and related expenses in Rhode Island, which if taken into account would have shown 38 Studios running out of money prior to completion of Copernicus and prior to earning any of the revenues attributed to Copernicus; Stolzman knew or should have known that Defendant Saul's statement that 38 Studios had "expertise to create new single player games to supplement earnings as needed" probably did not have a reasonable basis for support and was at least highly speculative; Stolzman knew or should have known that Defendant Saul's statement that the RIEDC had "completed normal due diligence" was incorrect and misleading, because: 46 Stolzman had represented the EDC for twenty (20) years and was fully familiar with the EDC's customs and practices, which involved a credit memorandum for EDC loans, which Stolzman had not seen and did not have reason to believe had been prepared for the 38 Studios loan transaction; Sean Esten was the credit underwriter initially assigned to analyze the transaction and Mr. Esten stated in an email copied to Stolzman that Mr. Esten did not support the transaction, but the EDC Board had not been so informed; and until Mr. Esten's email, the plan was, and Defendant Saul's draft presentation to the EDC Board expressly stated, that the EDC's internal credit memorandum would be completed and distributed to the EDC Board members by June 4, 2010, but after Sean Esten made that statement, the presentation was revised to incorrectly state that the RIEDC had "completed normal due diligence;" Stolzman knew or should have known that Defendant Saul's reference to "Independent conversations with industry players (e.g. Providence Equity, Hasbro, and others)" was misleading insofar as Hasbro's representative had expressed negative views to both Saul and Stolzman that were against the EDC making the loan to 38 Studios, but those negative views were not disclosed to the EDC Board; and Stolzman, upon learning of Saul's misleading representation to the EDC Board concerning Hasbro, should have inquired, but failed to do so, regarding .information learned by Saul from Saul's conversation with Providence Equity representatives, which was also negative. OPINION# 15: Stolzman violated the Public Agency Attorney's Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as Stolzman did not promptly reject the suggestion that, if the EDC Bonds were payable over ten years but amortized over twenty years, with a substantial balloon payment in the tenth year, the DSRF could be determined on the basis of the maximum annual debt service over years 1-9. OPINION # 16: Stolzman violated the Public Agency Attorney's Standard of Care in light of Rhode Island General Laws§ 42-64-18, and given prevailing municipal securities market customs, practices and standards of care, insofar as Stolzman did not require provision to the EDC Board of a reasonably accurate estimate of the required amount of the DSRF based upon the ten-year term of the EDC Bonds and reasonably anticipated interest rates, as Wells Fargo ultimately did in the preliminary bond cashflows Wells Fargo circulated on August 12, 2010, that assumed the bonds would be paid and amortized over ten years, at an interest rate of 300 basis points over the prevailing rate of interest for U. S. Treasury bonds with a term of ten years, which 47 calculation Stolzman could and should have required that Wells Fargo and First Southwest perform at the outset and certainly prior to the EDC Board's approval of the Authorizing Resolution. OPINION# 17: Stolzman violated the Public Agency Attorney's Standard of Care by failing to inform the EDC and as necessary the EDC Board that the expected amount of 38 Studios' net proceeds from the $75 million loan should have been estimated with reasonable accuracy prior to the EDC Board's authorization of the issuance, offering and sale of the EDC Bonds, including a reasonable estimate of the amount of the DSRF, particularly since that authorization was based upon the representation in the Term Sheet that 38 Studios' "net proceeds" from the $75 million loan would provide 38 Studios with "the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island," and upon the Finding of Adequate Provision in the Authorizing Resolution. OPINION # 18: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to disclose to the EDC Board that, from an early stage in negotiations with 38 Studios on behalf of the EDC until several months after the EDC Board authorized the issuance, offering and sale of the EDC Bonds, Stolzman was soliciting 38 Studios for his own personal financial benefit and the financial benefit of his wife, and that such solicitation created a conflict of interest and gave Stolzman a personal motivation to accommodate 38 Studios' interests in those negotiations to the detriment of the EDC. OPINION # 19: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman knew or should have known the following, but failed to disclose it to the EDC Board: that 38 Studios had been issued a going concern letter, which made it clear that 38 Studios' continued existence was dependent on the EDC loan or raising funds from some other source, which was important information the EDC Board needed in order to accurately understand 38 Studios' financial and negotiating position; that notwithstanding Defendant Saul's assurances to the EDC Board that the "next steps" included "confirm with EA all company representations," that step was not carried out; that Strategy Analytics had offered to review and analyze 38 Studios' business plan and financial projections, but that Defendant Saul without objection from Stolzman declined that offer ostensibly in order to avoid overlap with Wells Fargo's review and analysis of 38 Studios' business plan and financial projections, but Wells Fargo had a conflict of interest with 38 Studios and therefore could not be relied upon to provide an independent analysis; 48 that Wells Fargo had been expected to provide a review and analysis of 38 Studios' business plan and financial projections in connection with the EDC Bonds, but Wells Fargo had failed to do so other than through its presentation to the EDC Board on June 14, 2010 that was both incomplete and misleading; that Wells Fargo had a significant conflict of interest, since its role in advising the EDC Board and acting as the EDC's placement agent were roles in which governing bodies of municipal issuers such as the EDC Board customarily would place trust and confidence, leading them to expect that Wells Fargo would disclose all important information the EDC Board would want to have concerning 38 Studios, but Wells Fargo's prior relationship with 38 Studios may have led to a contradictory role for Wells Fargo resulting in a conflict of interest, and notwithstanding that, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants such as the EDC Board would be expected to assume that Wells Fargo had no such conflict in the absence of such disclosure; that Strategy Analytics and Perimeter Partners had been solicited for their frank assessment of the project and had responded orally with many negative assessments, including an overall recommendation against the project, and that Strategy Analytics and Perimeter Partners thereafter provided their written report and presentation that was limited to what they were contractually required to address and did not include important negative assessments, including their overall recommendation against the project; and that Strategy Analytics and Perimeter Partners had previously told Stolzman that it was their opinion that 38 Studios was not an anchor tenant and that if they were the EDC they would not go forward with the project, although Strategy Analytics and Perimeter Partners later informed the EDC Board in Stolzman's presence that 38 Studios was an anchor tenant and that they would proceed with the project were they in the position of the EDC Board. OPINION# 20: Stolzman violated the Public Agency Attorney's Standard of Care by allowing Defendant Stokes to sign the BPPM, insofar as Stolzman knew or should have known that the BPPM contained misrepresentations of important information and omitted disclosure of important risks in connection with the EDC's issuance, offering and sale of the EDC Bonds, which may have exposed the EDC to potential liability, other remedial action or significant harm, including but not limited to the following: the BPPM incorrectly stated that EDC had entered into a monitoring agreement with IBM; 49 the BPPM failed to disclose that only 38 Studios had entered into the monitoring agreement with IBM, which failed to satisfy the essential term required by the EDC Board that the bond documents reflect the implementation of a third party monitoring and reporting process as a key condition to the issuance, offering and sale of the EDC Bonds; the BPPM failed to include 38 Studios' financial projections, and information that 38 Studios lacked a workable business plan with cashflow projections based upon reasonable assumptions; the BPPM failed to disclose that no feasibility study had been performed by a qualified independent third party; the BPPM failed to disclose that 38 Studios' financial projections, adjusted to reflect the actual net proceeds 38 Studios expected to receive from the $75 million, showed 38 Studios running out of money prior to the completion of Copernicus, and that there was not reasonable assurance that 38 Studios would be able to obtain additional capital; the BPPM failed to disclose that 38 Studios' Bond Transaction Projections contained the assumption that $20,748,000 would be paid to 38 Studios in 2011, representing 38 Studios' share of the proceeds from the sale of 38 Studios' first RPG, Mercury, when all of those sales proceeds up to the amount of Electronic Arts' investment relating to Mercury would be paid first to reimburse Electronic Arts for the full amount of Electronic Arts' investment; the BPPM failed to disclose that 38 Studios' Bond Transaction Projections omitted numerous significant expenses and deductions from the gross loan proceeds, including but not limited to the DSRF, the closing expenses, the cost of relocating 38 Studios' assets and employees to Rhode Island, the cost of the build-out of 38 Studios' studio in Rhode Island, initial and annual guaranty fees payable to the EDC, and approximately $2 million required to obtain a letter of credit as security for 38 Studios' lease in Rhode Island, and that, for a period of time, 38 Studios would pay rent at both of its Rhode Island and Massachusetts locations; and the BPPM failed to disclose that 38 Studios' Bond Transaction Projections assumed that 38 Studios would need to raise $20 million from an equity sale upon the completion of Copernicus, but that Stolzman had not received reasonable assurance that 38 Studios would be able to obtain that additional capital or complete Copernicus. OPINION# 21: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's requirement for protection against the completion risk involved in the loan to 38 Studios, specifically the risk that 38 Studios' timetable and so budget to relocate to Rhode Island and complete Copernicus might be unreasonable or otherwise not feasible (hereinafter "the Completion Risk"), insofar as: Stolzman participated with Defendant Stokes in promising the EDC Board that they would negotiate protections against the Completion Risk that reasonably replicated the benefits and protections against that risk that a completion bond would have provided, but failed to do so; Stolzman failed to comply with the EDC Board's express oral requirement for a pre-closing evaluation of the Completion Risk; even assuming arguendo that the EDC Board had not expressly so required, Stolzman knew or should have known the EDC Board's requirement that the Completion Risk be evaluated prior to the closing was implicit, and failed to require such an evaluation; even assuming arguendo that the EDC Board had not implicitly or explicitly so required, Stolzman failed to recommend to the EDC Board that the EDC require that the Completion Risk be evaluated prior to the closing, and to explain to the EDC Board why that was essential to protect the EDC; notwithstanding Stolzman's active participation in the EDC bond issuance, offering and sale on behalf of the EDC, Stolzman failed to require compliance with the condition in the Term Sheet requiring that the bond documents reflect implementation of monitoring and reporting regarding the Completion Risk, in accordance with the Board's direction and express condition, i.e., that the bond documents reflect "the development and implementation of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus to assure that the company's development of project Copernicus remained on time and on budget pursuant to costs, terms and conditions ... " satisfactory to the EDC, since "implementation" by definition required that a report regarding information obtained in monitoring the Completion Risk be included in the bond documents, which meant that the report was required by the EDC Board to be made prior to the closing; Stolzman allowed 38 Studios to solicit candidates to serve as the third party who was to evaluate the Completion Risk and perform subsequent monitoring, when Stolzman should have insisted that the EDC have that role so that the third party would be truly independent and not have potential allegiance or contractual obligations to 38 Studios; Stolzman allowed 38 Studios to choose IBM over IFG or other potential third parties without obtaining a full explanation of the differences in the various proposals and without inquiring whether IBM had a prior, existing or anticipated future relationship with 38 Studios, or whether IBM 51 employees involved in the analysis had any actual or potential conflicts of interest; Stolzman allowed 38 Studios rather than the EDC to enter into the contract with IBM, when Stolzman knew or should have known that IBM had refused to enter into a contract with or to have direct obligations to the EDC, and that under the prevailing arrangement there was a significant potential that 38 Studios would be able to influence or otherwise affect significantly the quality and timing of IBM's evaluation of the Completion Risk; Stolzman knew or should have known, but failed to object, that 38 Studios and IBM agreed that the Completion Risk was to have been evaluated only after the closing of the sale of the EDC Bonds; -- Stolzman omitted in the negotiation and drafting of the Loan & Trust Agreement and the Project Monitoring Agreement any provision entitling the EDC to withhold payments or take other significant action in the event that IBM reported that Copernicus would not be completed on time and within budget, or in the event IBM failed to provide on a timely basis or at all the reports contemplated by the EDC Board, contrary to the EDC Board's express requirement for a satisfactory "response" process; -- Stolzman omitted in the negotiation and drafting of the Loan & Trust Agreement any rights or remedies for the EDC in the event that 38 Studios experienced a material adverse change to its business plans or prospects, and failed to provide a definition in the Loan & Trust Agreement of what would constitute such a material adverse change; Stolzman omitted in the negotiation and drafting of the Loan & Trust Agreement and the Project Monitoring Agreement provisions linking the EDC's obligation to authorize payments to 38 Studios from the EDC bond sale proceeds to meaningful milestones in the development of Copernicus or any other product; Stolzman allowed the sale of the EDC Bonds to close in violation of the EDC Board's authorization that was conditioned upon the bond documents reflecting the implementation of the third party monitoring and reporting process, since "implementation" by definition required that the results of monitoring the Completion Risk be reported in the bond documents; and assuming, arguendo, that Stolzman did not understand that the EDC Board required that the EDC receive a report regarding the Completion Risk prior to the closing, during the period following the closing on November 2, 2010 and prior to Stolzman's dismissal as the EDC's general counsel at the end of January, 2011, Stolzman failed to obtain a report 52 regarding the Completion Risk, notwithstanding that Stolzman knew or should have known that IBM needed only five (5) weeks to complete IBM's initial monitoring and report and that, pursuant to IBM's contract with 38 Studios, IBM was required to begin the initial monitoring process as of the closing of the sale of the EDC Bonds on November 2, 2010. OPINION# 22: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman issued and delivered a formal opinion dated the closing date to the EDC and others that "[t]he RIEDC has full power and authority to adopt the [Authorizing Resolution} and perform its obligations thereunder and such Resolution [has] been duly adopted ... and the Resolution [is} in full force and effect ... ," "[t]he RIEDC has all requisite legal right, power and authority to authorize, execute and deliver the Bond Documents [which was defined to include the Bonds] and to execute issue and deliver the Bonds and perform its obligations with respect thereto.'' "[e]ach of the Bond Documents [which was defined to include the Bonds] have been duly authorized, executed and delivered by the RIEDC, and ... constitutes a valid, binding and enforceable agreement on the part of the RIEDC ... ,"and "[t]o the best of our knowledge, the adoption of the Resolution and the execution and delivery of the Bonds and the Bond Documents, and the performance by the RIEDC of the Bond Documents ... will not in any material respect conflict with or constitute on the part of the RIEDC a material violation of any existing law ... to which the RIEDC is subject that would in any manner materially limit the authority of the RIEDC to enter into and perform its obligations pursuant to the Bonds and the Bond Documents, and no such action will result in any violation of ... [Chapter 64 of Title 42 of the General Laws of the State of Rhode Island, as amended] ... "and insofar as Stolzman further opined that information presented in the BPPM under the heading "The Rhode Island Economic Development Corporation"4 "has been prepared based upon information supplied by the RIEDC and to the best of our knowledge such information is accurate in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.'' when Stolzman knew or should have known both that the sale of the EDC Bonds would not take place absent Stolzman's issuance and delivery of that formal opinion, and that the EDC lacked the requisite legal right, power and authority to authorize, execute and deliver the bond documents and to execute issue and deliver the EDC Bonds, because: 4 The BPPM included the following statement under that heading: The 2010 Bonds are being issued in full compliance with [the Rhode Island Economic Development Corporation Act, ntle 42, Chapter 64 of the Rhode Island General Laws, as amended] and [Chapters 026/029 of the Rhode Island Public Laws of 2010]. Pursuant to a resolution issued by the [EDC]'s board of Directors on July 26, 2010, the [EDC] is authorized to enter Into the [Loan & Trust] Agreement to issue the 2010 Bonds and to secure the 2010 Bonds by, among other things, Loan Payments by [38 Studios] to the [EDC], amounts on deposit in the Capital Reserve Fund and by certain appropriations which may be made by the State General Assembly. 53 there was not a reasonable factual basis for the Finding of Adequate Provision; the condition precedent imposed by the EDC Board, when it adopted the Authorizing Resolution, to the issuance, offering and sale of the EDC Bonds was not satisfied, in that the bond documents did not reflect "the development and implementation of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus to assure that the company's development of project Copernicus remained on time and on budget..."; and Stolzman knew or should have known that the BPPM contained the misrepresentations and omissions described in Opinion # 21. OPINION # 23: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 1.16 of the Rhode Island Rules of Professional Conduct in connection with the EDC Board's requirement for evaluation of the Completion Risk insofar as Stolzman failed to make arrangements for successor counsel to understand the role of IBM or to monitor IBM's performance thereof, such as by providing successor counsel with a transition memorandum or other appropriate instructions. OPINION # 24: Stolzman violated the Public Agency Attorney's Standard of Care in connection with the EDC Board's requirement for a monitoring, reporting and response process regarding the Completion Risk insofar as he knew or should have known the information referred to in Opinion # 23, but failed to disclose that information to the EDC Board. OPINION # 25: Stolzman violated the Public Agency Attorney's Standard of Care insofar as he participated with Defendant Stokes in the manipulation of the agenda for the EDC Board meetings for August 2010 and thereafter to prevent the EDC Board from reconsidering the Board's approval of the EDC's loan to 38 Studios and the EDC bond issue, and by failing to inform the EDC Board that Stolzman believed that Stokes' statement to the EDC Board that the EDC had a legal duty to close the transaction was incorrect and that the EDC had the right to decline to issue the bonds at that time and up to the execution of the closing documents. OPINION# 26: Stolzman violated the Public Agency Attorney's Standard of Care and Rule 2.1 of the Rhode Island Rules of Professional Responsibility insofar as Stolzman knew or should have known, but failed to disclose to the EDC Board, that Stolzman's support, and the support of Saul and Stokes for the $75 million loan to 38 Studios, was due at least in part to their desire to please the leadership of the Rhode Island General Assembly, which was strongly in favor of the loan to 38 Studios, and that as a result Stolzman was not exercising his independent professional judgment solely on behalf of the EDC. 54 OPINION # 27: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of Wells Fargo's roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that Wells Fargo owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have expected Wells Fargo to advise the EDC and the EDC Board solely in the EDC's best interests concerning 38 Studios' business plan and financial projections. OPINION# 28: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of First Southwest's roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that First Southwest owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 201 O, market participants would have expected First Southwest to advise the EDC and the EDC Board solely in the EDC's best interests concerning 38 Studios' business plan and financial projections as they related to 38 Studios' ability to repay the EDC Bonds and the structure, timing and terms of the EDC Bonds. OPINION# 29: Stolzman violated the Public Agency Attorney's Standard of Care insofar as Stolzman failed to clarify to the EDC Board the nature of Barclays' roles and responsibilities to the EDC, including whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have believed that Barclays owed the duties of loyalty, care and disclosure of information that the EDC and the EDC Board would expect and want to have in a relationship of trust and confidence, and whether, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010,market participants would have expected Barclays to obtain reasonable assurance that Wells Fargo had investigated and disclosed to the EDC and the EDC Board all important information concerning 38 Studios' business plan and financial projections, or that, absent such reasonable assurance, according to customs, practices, and standards of care prevailing in the municipal securities market in 2010, market participants would have expected Barclays to advise the EDC and the EDC Board solely in the EDC's best interests concerning 38 Studios' business plan and financial projections. C. DONALD P. WISEHART, ASA, CPA/ABV, MST, CVA, CFF Donald P. Wisehart, ASA, CPA/ABV, MST, CVA, CFF, is expected to provide expert testimony. His qualifications are set forth in the curriculum vitae attached hereto 55 as Exhibit 6. The subject matter of his opinions will be the explanation of certain provisions in 38 Studios' financial projections, the adequacy of 38 Studios' business plan and financial projections as provided to the Rhode Island Economic Development Corporation ("EDC") and Defendants Wells Fargo Securities, LLC ("Wells Fargo"), First Southwest Company ("First Southwest"), and Robert I. Stolzman ("Stolzman), and Wells Fargo's, First Southwest's, and Stolzman's deviations from the standard of care applicable to any person or entity that it obligated to be, or holds himself or itself out as, capable of understanding business financial projections at even a basic level. The bases for Mr. Wisehart's opinions are his education, training, and experience. His reliance materials include the documents and depositions listed in Exhibit 7 upon which his preliminary understanding of the relevant facts is based. Plaintiff has prepared the following summary of the opinions to which Plaintiff expects Mr. Wisehart5 to testify. The evidence offered at trial by Plaintiff and by Defendants undoubtedly will be inconsistent and conflicting. In many instances, Plaintiff expects to offer expert opinions based upon the version of the facts Plaintiff contends is accurate, and expert opinions that assume, arguendo, another and possibly contrary version of the facts, since in many cases Plaintiff contends that Defendants acted wrongfully regardless of whether the facts are as Plaintiff intends to prove or are as Defendants contend. Accordingly, many of the expert opinions disclosed herein are offered based upon alternative assumptions. OPINION # 1: Mr. Wisehart is expected to explain to the finder of fact how to read 38 Studios' financial projections, with particular emphasis on the cashflow projections. OPINION# 2: Mr. Wisehart is expected to testify that the Bond Transaction Projections did not at any time present a workable business plan with cashflow projections based upon reasonable assumptions, and were materially flawed, as of April 15, 2010 in part because not all of the anticipated material expenses of 38 Studios' business plan could be estimated at that early stage, and later because by then all those material expenses could be reasonably estimated or had been incurred but were not included in the Bond Transaction Projections, which if included would have materially changed 38 Studios' projected cashflows, resulting in 38 Studios running out of cash in 2011 based on the adjustments referred to in Opinions ## 3 and 4. Mr. Wisehart is also expected if . necessary to testify to the effect on the 2011 and 2012 projected cashflows in the Bond Transaction Projections if various combinations of some but not all of the adjustments referred to in Opinions ## 3 and 4 are made. 5 Plaintiff makes this disclosure in accordance with the CMO and without prejudice to Plaintiff's right to present different expert opinions based upon evidence adduced at trial and to rebut testimony disclosed by Defendants pursuant to the CMO or to which their experts are permitted to testify at trial. Mr. Wisehart may amend or supplement his opinions based upon further review and analysis of additional evidence, documentation or information. 56 OPINION # 3: Mr. Wisehart is expected to testify that tabulating the effect of adjustments described in Opinion # 4 on the Bond Transaction Projections has the following results: a. As of April 15, 2010, the effect of the total adjustments described in Opinion# 4 to the Bond Transaction Projections estimate of cash on hand at the end of 2011 of $22, 175,521 is to reduce that amount by $18,824,645 6 or $32,686,244, 7 to a new total at the end of 2011 of either $3,350,876 or a negative $10,510,723; b. As of June 23, 2010, the effect of the total adjustments described in Opinion # 4 to the Bond Transaction Projections estimate of cash on hand at the end of 2011 of $22, 175,521 is to reduce that amount by either $26,077, 1458 or $32,996,976, 9 to a new total at the end of 2011 of negative $3,901,623 or negative $10,821,455; c. As of July 26, 2010, the effect of the total adjustments described in Opinion # 4 to the Bond Transaction Projections estimate of cash on hand at the end of 2011 of $22, 175,521 is to reduce that amount by either $28,777, 145 10 or $35,617,058, 11 to a new total at the end of 2011 of negative $6,601,624 or negative $13,441,537; d. As of August 12, 2010, the effect of the total adjustments described in Opinion# 4 to the Bond Transaction Projections estimate of cash on hand at the end of 2011 of $22, 175,521 is to reduce that amount by $35,279,273, 12 to a new total at the end of 2011 of negative $13, 103,752; and 6 Debt Service Reserve Fund {DSRF) $0, Guarantee fees (GF) $929,794.52, Build-out (BO) $2,392,100, Mercury (M) $10,374,000, Finder's fee (FF) $3,750,000, Closing expenses (CE) $1,378,750, Employee relocation (ER) $0, letter of credit (LC) $0, Secret commission {SC) $0. 7 Assuming DSRF is $13,861,600 on the assumption that the parties knew or should have known that the debt service reserve would have to be maximum annual debt service over a ten-year term of the bonds amortized over ten years, and that was calculated using the method and assumptions the parties employed on August 12, 2010, based on the rate for 10-year treasury bonds on 4/15/10 of 3.88%. 8 DSRF $6,607,500, GF $929,794.52, BO $2,392,100, M $10,374,000, FF $3,750,000, CE $1,573,750, ER $0, LC $0, SC $450,000. 9 Assuming DRSF of $13,527,332 (10-year treasury on 6/23/10 of 3.18%) rather than $6,607,500. 10 DSRF $6,607,500, GF $929,794.52, BO $2,393,100, M $10,374,000, FF $3,750,000, CE $1,573,750, ER $2,700,000, LC $0, SC $450,000 11 12 Assuming DSRF of $13,447,414 (10-year treasury on 7/26/10 of 3.02%) rather than $6,607,500. DSRF $13,304,628 (as per 8/12/10 bond cashflows), GF $929,794.52, BO $2,392,100, M $10,374,000, FF $3,750,000, CE $1,378,750, ER $2,700,000, LC $0, SC $450,000 57 e. As of November 2, 2010, the effect of the total adjustments described in Opinion # 4 to the Bond Transaction Projections estimate of cash on hand at the end of 2011 of $22, 175,521 is to reduce that amount by $37, 192,808, 13 to a new total at the end of 2011 of negative $15,017,287. OPINION# 4: Mr. Wisehart is expected to testify to the effect on the Bond Transaction Projections of the accounting adjustments necessary and required by the standard of care applicable to such projections to properly reflect 38 Studios' expected receipts and expenses in connection with the loan from the EDC, determined at various times insofar as the understanding of 38 Studios and others at those times is proven. For example, he is expected to testify as follows: A. the adjustments to the Bond Transaction Projections to reflect the reduction in 38 Studios' net proceeds from the EDC loan due to the DSRF, as it was or should have been reasonably understood or estimated to be on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010 are as follows: 1. April 15, 2010: insofar as on April 15, 2010, the parties did not know or have reason to know there would be a DSRF the assumption is that the DSRF would be zero. Insofar as the parties knew or should have known by April 15, 2010 that the DSRF would be maximum annual debt service based upon a ten-year term for the EDC Bonds, amortized over ten years, the DSRF is $13,861,600 using the method and assumptions the parties employed on August 12, 2010, based on the rate for 10-year treasury bonds on 4/15/10 of 3.88%; 2. June 23, 2010: insofar as the parties knew or should have known by June 23, 201 O that the DSRF would be as set forth in the preliminary bond cashflows circulated that day, the adjustment would be $6,607,500. However, insofar as the parties knew or should have known that the DSRF would be maximum annual debt service based upon a ten-year term for the EDC Bonds, amortized over ten years, the DSRF is $13,527,332 (10-yeartreasury bonds at 3.18% on 6/23/10) using the method and assumptions the parties employed on August 12, 2010; 3. July 26, 201 O: insofar as the parties knew or should have known by July 26, 2010 that the DSRF would be as set forth in the preliminary bond cashflows circulated on June 23, ' 13 - DSRF (actual) $12,749,913, GF $929,795, BO $2,392,100, M $10,374,000, FF $3,750,000, CE $1,847,000, ER $2,700,000, LC $2,000,000, SC $450,000 58 2010, the adjustment would be $6,607,500. However, insofar as the parties knew or should have known that the DSRF would be maximum annual debt service based upon a tenyear term for the EDC Bonds, amortized over ten years, the DSRF is $13,447,414 (10-year treasury bonds at 3.02% on 7/26/10) using the method and assumptions the parties employed on August 12, 2010; 4. August 12, 2010: insofar as the parties knew or should have known on August 12, 2010 that the DSRF would be based upon the preliminary bond cashflows released by Wells Fargo on that date, the adjustment for the DSRF would be $13,304,628; and 5. November 2, 201 O: the actual DSRF of $12, 749,913; B. the adjustments to the Bond Transaction Projections to reflect the reduction in 38 Studios' net proceeds from the EDC loan due to the EDC guaranty fees, as they were or should have been reasonably understood or estimated to be on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010 are $375,000 due at closing, and $554, 795 on May 1, 2011, for a total reduction to the cash on hand at the end of 2011 of $929,795. C, insofar as the parties knew or should have known at all the stated dates that 38 Studios would receive no cash from the sales of Project Mercury until Electronic Arts was reimbursed its advances, the adjustment to the Bond Transaction Projections to reflect the reduction in 38 Studios' net proceeds by deleting the assumption that 38 Studios would receive cash in 2011 from sales of its game Mercury would be to reduce the estimate of cash on hand at the end of 2011 by $10,374,000; D; insofar as the parties knew or should have known that 38 Studios anticipated the expense of a finder's/broker's fee or commission as shown in the projections 38 Studios provided to Wells Fargo on June 25, 2010 ("June 25 Projections"), the cash on hand at the end of 2011 shown in the Bond Transaction Projections must be reduced by $3,750,000 for July 26, 2010, August 12, 2010, and November 2, 2010; E. insofar as the parties knew or should have known the 38 Studios would incur closing expenses in connection with the sale of the EDC Bonds, the adjustment for estimated closing expenses on the cash on hand at the end of 2011 would be as follows: 1. April 15, 2010: the lowest estimate for closing fees on any of the dates selected is $1,378,750, so that amount is selected as a 59 conservative basis to estimate those closing expenses as of April 15, 2010; 2. June 23, 2010 and July 26, 2010: the June 23, 2010 preliminary bond cashflows estimate bond closing expenses of $1,573,750, so that amount is used for these dates; 3. August 12, 2010: The August 12, 2010 preliminary bond cashflows estimates these expenses at $1,378,750, so that amount is used for this date; and 4. November 2, 2010: the bond proceeds were reduced $1,847,000 at closing to pay closing expenses, placement agent fees, and for bond insurance, so that amount is used for this date. F. insofar as the parties knew or should have known the 38 Studios would incur expenses in building-out its studio space in Rhode Island, the amount of $2,392, 100 is used to conservatively estimate those expenses on all of the selected dates, based upon a final build-out expenses of $6, 150,000 (half of the final contract sum of $13 million listed in Deposition Exhibit 401 ), crediting 38 Studios $1, 150,00 for the Maynard projected "2d floor buildout" obviated by the move, and $2,607,900 for the tenant improvement 'allowance under the lease for Empire Street, for April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010. G. insofar as the parties knew or should have known the 38 Studios would incur expenses for the cost of relocating 38 Studios' employees to Rhode Island in 2011 on the dates listed below, the adjustment for this expense is as follows: H. 1. April 15, 2010, June 23, 2010: $0, insofar as it was not reasonable to expect the parties to on these dates to estimate the expenses 38 Studios would incur for the cost of relocating 38 Studios' employees to Rhode Island in 2011; 2. July 26, 2010, August 12, 2010, November 2, 2010: insofar as 38 Studios at this time estimated this expense as a range of $2,700,000 to $3,800,000, utilizing the low end of the range in order to be conservative, the adjustment is $2,700,000; insofar as the parties knew or should have known on the dates indicated below that 38 Studios would incur the expense of establishing a letter of credit to secure its lease of its studio space in Rhode Island, the adjustment would be as follows: 60 I. 1. April 1, 2010, June 23, 2010, July 26, 2010, August 12, 2010: insofar as this expense was not reasonably anticipated at these times, no adjustment is indicated; 2. November 2, 201 O: the adjustment is $2,000,000, the amount 38 Studios actually paid to establish the letter of credit; insofar as the parties knew or should have known on the dates indicated below that 38 Studios would incur the expense of paying Wells Fargo its secret commission in connection with the EDC Bonds, the adjustment would be as follows: 1. April 15, 2010: insofar as this contractual obligation was incurred on May 20, 2010, and, therefore, this expense was not anticipated on April 15, 2010, no adjustment is indicated; 2. June 23, 2010, July 26, 2010, August 12, 2010, November 2, 2010: the adjustment would be $450,000. OPINION# 5: Mr. Wisehart is expected to testify that the calculation contained in Exhibit 1 of the First Amended Complaint as revised in Exhibit 8 hereto accurately presents the effect on 38 Studios' cashflow of the adjustments to the Bond Transaction Projections set forth in that exhibit. OPINION # 6: Mr. Wisehart is expected to testify based upon his review of 38 Studios' books that 38 Studios managed to stay in business until it filed its Petition for Bankruptcy on June 7, 2012 through a combination of obtaining additional capital not anticipated in the Bond Transaction Projections and by not paying its employees and debts. OPINION# 7: Mr. Wisehart is expected to testify that it would be a deviation from the standard of care for any person or entity obligated to be, or holding themselves out as, capable of understanding business financial projections at even a basic level ("the Minimal Standard of Care"), who received the Bond Transaction Projections in connection therewith, and who knew or should have known the amount of the net proceeds 38 Studios would be expected to receive as of April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010, as referred to in Opinions## 3 & 4, to fail to conclude that the Bond Transaction Projections do not present a workable business plan with cashflow projections based upon reasonable assumptions, and to fail to conclude that the Bond Transaction Projections were materially flawed and, properly adjusted, showed 38 Studios running out of cash in 2011. OPINION# 8: Mr. Wisehart is expected to testify that only a basic knowledge of how to read financial projections, equivalent to what would be expected, for example, from a college sophomore who had passed Accounting 1 & 2, is necessary to realize that the adjustments referred to in Opinions## 3 & 4 are necessary, and, as a consequence thereof, to reach the conclusion that the Bond Transaction Projections do not present a workable business plan with cashflow projections based upon reasonable assumptions, 61 and that the Bond Transaction Projections were materially flawed and, properly adjusted, showed 38 Studios running out of cash in 2011 or 2012. OPINION# 9: Mr. Wisehart is expected to explain to the jury the role of cashflow in the viability of any business, and how even a superficial reading of the Bond Transaction Projections, combined with the knowledge that 38 Studios anticipated borrowing $75 million from the EDC in 2010, would reveal that the cashflow projections were based upon the assumption that 38 Studios would receive $75 million net in 2010 from the EDC, and that any decrease in 38 Studios' actual or anticipated net proceeds from $75 million would be to reduce 38 Studios' cash on hand by that amount thereafter, and to the extent that the decrease exceeded the projected amount of cash on hand at any time, the Bond Transaction Projections demonstrate that 38 Studios would run out of money, if all of the other projections contained therein were unchanged. OPINION# 10: Mr. Wisehart is expected to testify that Wells Fargo deviated from the Minimal Standard of Care insofar as Wells Fargo was obligated to be, or held itself out as, capable of understanding 38 Studios' business projections at even a basic level, received the Bond Transaction Projections in connection therewith, and knew or should have known the amount of the net proceeds 38 Studios expected to receive on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010, as referred to in Opinions #If. 3 & 4, but failed to conclude that the Bond Transaction Projections did not present a workable business plan with cashflow projections based upon reasonable assumptions, and did not conclude that the Bond Transaction Projections were materially flawed, and, properly adjusted, showed 38 Studios running out of cash in 2011 or 2012. OPINION # 11: Mr. Wisehart is expected to testify that Wells Fargo deviated from the Minimal Standard of Care insofar as Wells Fargo also reviewed the June 25th Financial Projections, in addition to the Bond Transaction Projections, and failed to conclude that the Bond Transaction Projections did not present a workable business plan with cashflow projections based upon reasonable assumptions, but, rather, were materially flawed, and, properly adjusted, showed 38 Studios running out of cash in 2011 or 2012. OPINION# 12: Mr. Wisehart is expected to testify that First Southwest deviated from the Minimal Standard of Care insofar as First Southwest was obligated to be, or held itself out as, capable of understanding 38 Studios' financial projections at even a basic level, received the Bond Transaction Projections in connection therewith, and knew or should have known the amount of the net proceeds 38 Studios expected to receive on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010, as referred to in Opinions #If. 3 &4, but failed to conclude that the Bond Transaction Projections did not present a workable business plan with cashflow projections based upon reasonable assumptions, and did not conclude that the Bond Transaction Projections were materially flawed, and, properly adjusted, showed 38 Studios running out of cash in 2011 or 2012. OPINION# 13: Mr. Wisehart is expected to testify that Stolzman deviated from the Minimal Standard of Care insofar as Stolzman was obligated to be, or held himself out 62 as, capable of understanding 38 Studios' financial projections at even a basic level, received the Bond Transaction in connection therewith, and knew or should have known the amount of the net proceeds 38 Studios expected to receive on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010, as referred to in Opinions ## 3 & 4, but failed to conclude that the Bond Transaction Projections did not present a workable business plan with cashflow projections based upon reasonable assumptions, and did not conclude that the Bond Transaction Projections were materially flawed, and, properly adjusted, showed 38 Studios running out of cash in 2011 or 2012. OPINION# 14: Mr. Wisehart is expected to testify that if 38 Studios' capital needs to complete Copernicus were approximately $75 million, as stated in the term sheet between 38 Studios and the EDC dated July 26, 2010 ("the Term Sheet"), then the net proceeds 38 Studios expected on April 1, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010 to receive from the EDC loan, as referred to in Opinions ## 3 & 4, together with whatever other revenues or funds that 38 studios expected to receive as set forth in the Bond Transaction Projections did not and could not be represented to "provide the necessary financing to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company's growth and expansion in Rhode Island" as represented in the Term Sheet. OPINION # 15: Mr. Wisehart is expected to testify that it would be a deviation from the Minimal Standard of Care for Wells Fargo, First Southwest, or Stolzman not to reach the conclusions described in Opinion# 14 insofar as they were obligated to be, or held themselves out as, capable of understanding 38 Studios' financial projections at even a basic level, received the Bond Transaction Projections in connection therewith, and knew or should have known the amount of the net proceeds 38 Studios expected to receive on April 15, 2010, June 23, 2010, July 26, 2010, August 12, 2010, and November 2, 2010, as referred to in Opinions## 3 & 4. Plaintiff, Rhode Island Economic Develop,·.··. ,·..' 'Corporation By Its:· 'qt,. y,. ~ . ~(,.' Jstow, Esq. (#0330) Stephen P. Sheehan, Esq. (#4030) Benjamin Ledsham, Esq. (#7956) WISTOW, BARYLICK, SHEEHAN & LOVELEY,PC 61 Weybosset Street Providence, RI 02903 401-831-2700 401-272-9752 (fax) Dated: October 10, 2014 63 CERTIFICATION I hereby certify that an exact copy of the within document was mailed and served by electronic means on this 10th day of October, 2014 to the following individuals: James E. Brandt, Esq. Craig Batchelor, Esq. Latham & Watkins LLP 885 Third Avenue New York, NY 10022 james.brandt@lw.com craig.batchelor@lw.com Thomas F. Holt, Jr., Esq. Christopher J. Valente, Esq. John Blessington, Esq. Timothy J. Grimes, Esq. K&L Gates LLP State Street Financial Center One Lincoln Street Boston, MA 02111-2950 thomas.holt@klgates.com christopher.valente@klgates.com john.blessington@klgates.com timothy.grimes@klgates.com Michael F. Connolly, Esq. Joseph P. Curtin, Esq. Allison W. Phinney, Esq. Emily B. Kanstroom, Esq._ Mintz Levin Cohn Ferris Glovsky and Popea PC One Financial Center Boston, MA 02111 .mfconnolly@mintz.com jpcurtfn@mintz.com awphinney@mintz.com ebkanstroom@mintz.com Brooks R. Magratten, Esq. Pierce Atwood LLP 72 Pine Street, 5th Floor Providence, RI 02903 bmagratten@pierceatwood.com David P. Martland, Esq. Silva, Thomas, Martland &Offenberg, Ltd. 1100 Aquidneck Avenue Middletown, RI 02842 dmartland@silvalawgroup.com William M. Dolan, Ill, Esq. William K. Wray, Jr., Esq. Donoghue Barrett and Singal 155 South Main St., Suite 102 Providence, RI 02903 wdolan@dbslawfirm.com wwray@dbslawfirm.com Carl E. Metzger, Esq. Sarah Heaton Concannon, Esq. Josh L. Launer, Esq. Thomas E. Duncombe, Esq. Goodwin Procter LLP Exchange Place 53 State Street Boston, MA 02109 cmetzger@goodwinprocter.com sconcannon@goodwinprocter.com jlauner@goodwinprocter.com tduncombe@goodwinprocter.com Michael P. Duffy, Esq. Frederick E. Connelly, Jr., Esq. Peabody & Arnold LLP Federal Reserve Plaza 600 Atlantic Avenue Boston, Ma 02210-2261 mduffy@peabodyarnold.com fconnelly@peabodyarnold.com 64 Robert M. Duffy, Esq. Duffy & Sweeney, Ltd. 1800 Financial Plaza Providence, RI 02903 rduffy@dutrvsweeney.com Gerald J. Petros, Esq. Mitchell R. Edwards, Esq. Hinckley Allen Snyder, LLP 50 Kennedy Plaza, Suite 1500 Providence, RI 02903 gpetros@haslaw.com medwards@haslaw.com. Bruce W. Gladstone, Esq. Cameron & Mittleman LLP 301 Promenade Street Providence, RI 02908 bgladstone@cm-law.com Brian E. Robison, Esq. Russell H. Falconer, Esq. Gibson, Dunn & Crutcher LLP 2100 McKinney Avenue, Suite 110 Dallas, TX 75201-6912 brobison@gibsbnduhn.com. rfalconer@albsondunn.com Michael G. Sarli, Esq. Gidley, Sarli &Marusak LLP One Turks Head Place, #900 Providence, RI 02903 mgs@gsm-law.com Jeffrey C. Schreck, Esq. 99 Wayland Avenue, Suite 200 Providence, RI 02906 jschreck@msn.com Jonathan Bell, Esq. Mark A. Berthiaume, Esq. Timothy E. Maguire, Esq. Greenberg Traurig One International Place Boston, MA 02110 belli@gtlaw.com berthiaumem@gtlaw.com maguiret@gtlaw.com 65 Errata. to RIEDC Expert DJsclosJire there was hot a reasonable factual basis for. the Finding of Adequate Provision; the condition precedent imposed by the EDC Board, when It adqpted the Authorizing Resoiution,Jo th.e issuance, offering and sa_le of tlie E;DQ Bonds was r\6f$atisfied, in tharthe bond documents dit:I not reflect "the development and ifl'lplerne11t~tion of a third party monitoring, reporting and response process regarding the development schedule and budget for project Copernicus fo assure 0lli~t the company's development of.project Cope~nicu$ remairiet:I on tim&,~ng on budget, .. ''.; ~rid Stolzman knew or should hc:we known t.ha.t th.eB.PPMcontai.ned!the miSrepi"esentatio'ns and omissions desc_ribed ih Opinioti # 2Q.._"···----·-······--'~--····J'-·o_e_1e_tect-'-_:_1_ _ _ _ _ _ _ ___, Errata to RIEDC Expert Disc;I.o~nire· 2'0f0, the adjustment would be $6,607,500. However, insofar as the parties knew or should hCIVe known that the DSRF would be maximum annual debt service based upon a tenyear term for the EDC .aonds, amortized over ten ye_ars, the. DSRF is $13,447,414 (10-yeartreasi.uy bqrids at 3:020/o on 7/26/1 O) Usi11g_ th.a-method and assumptions the parties employed onAugust 12, 2010; 4. August12, 20to: i~sofar·as·the parties knew or should have .known on Augusf:12-, 201cnhatthe DSRF would be based ,upon the prellmihary b.on.d cC1shfl6ws released byWells · Fargo on that dC1te, the adjustment for' the DSRF would be $13,304,628; and · 5. November2, 2010: the.actual DSRF of$12, 749;913; B; the adjustmentsto the Bond Transaction Projections to reflect-the reduction in 38 Studios' riet proceeds from the EDC loan due to the EDC guaranty fees, as they were or should have been reasonably understood or estimated to be on April 15, 201 o, June 23, 2010, July 26, 201'0, August 12, 2010, and November2, 2010 are $375,000 due !'It clpsing, and $554,795 on MCIY 1, -2011,,for a total reduction to the cash oi') harid atthe end of 2011 of $929,195. C. insofar as the parties knew or should have known at all the stated dates that 38 Studioswould receive no cash from the sales of Project Mercury until ElectronlcArts:was reimbursed its advances,:the adjustnientto the Bond Transaqtiph ;Projectio:hs Jo reflect tli_e ~e.ducti_oli iri -~8 SWgios' net proceeds by deleting the ass,umption that 38 Stu~ios Wquld'r:eceJye cash In '.2011 from sales ofits game Mercury would be to reduce the estimate of cash on hand at.the end of.2011 by $10;374;000; D. _insofar as the parties knew or should have known that38 Studios anticipated the expense of afinders/brokerisfee or commisslo.n as shown in the pr6jecticms 38 Studios provided to Wells Fargo on June 25, 2010 ("June 25 Projections"), the cash on hand a(the end qf 2011 ·shown in the Bond Transaction Projections must be reduced by $3,750,000 for April 15, 2010, June 23,2010, July 26, 2010, August 12, 2010, and Noy13niber 2, 2010; E. insofar as the parties knew or should have known the 38 Studios would incur closing expenses in conn.action with the sale of the EDC Bonds, the adjustment for estimated Closing expenses on the cash on hand at the end of 2011 would be as follows: EXHIBIT 136 Rhode Island Eco~o.mic Development Corporation vs Donald P. Wisehart Page 93 1 2 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SHEEHAN: It's the same time period. Q. All right. Does Footnote 7 indicate that you did make an adjustment for the debt service reserve fund? A. Yes. Q. Okay. Now, can you tell me why as of April 15 you made an adjustment for the build-out but not an adjustment for the employee relocation expenses? A. There was evidence that indicated that the employee relocation expenses weren't really available or known what the amounts were until later date. Q. Okay. Were the build-out expenses known as of April 15? A. Not the amounts, no. I think there certainly was an indication they had moved to Rhode Island. There would be some build-out, but they didn't know that for fact. Q. Then why-- they also knew there was going to be an employee relocation expense, right? A. Right. But they didn't understand the magnitude of that, so we just kept it zero. Q. Why did you include an estimate for the build-out if they didn't know what that was going to be? Page 95 1 Q. Was that because it's an expense you thought would 2 occur in 2011? Yes, sir. Q. All right. Did you follow that same approach with the other expenses? A. Yes. Q. You adjusted as of the year they were going to be incurred? A. Yes, sir. Q. Okay. So the LC expense would have been in 2011, letter of credit expense? A. Yes. Q. And the employee relocation expense would have been in 2011? MR. SHEEHAN: As of201 l. MR. PETROS: As of201 l A. Yes. MR. PETROS: I'm not sure what the difference is, but I'll accept it. MR. SHEEHAN: I'll explain it to you if you want to know. MR. PETROS: No, that's okay. Q. Now-A. Correction. Did you refer to a letter of credit. 3 A. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 94 Page 96 1 A. 1 2 2 A. 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Oh, I'm sorry, the build-out was based on a small portion of what the build-out was, a conservative estimate. Q. All right. As we go down these footnotes on Page 57 you indicate when you made adjustments for these various factors, right? A. Yes. Q. Okay. Now, the relocation expense, was that an expense that was likely to be incurred in 2011? A. Yes. Q. Okay. So if you're doing -- so did you adjust -let me back up. The financial projections that you started with, the April financial projections as prepared by 38 Studios, before you adjusted them, did they show -- did they project the status of the company at year-end as of December 31, 2010, and then '11, '12, '13, '14, '15? A. It showed projected status of cash balances and balance sheet, yes. Q. As of the end of the year? A. Yes. Q. So when you adjusted for the relocation expense, did you adjust as of end of 20 I 0 or the end of 2011? A. At the end of201 l. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. PETROS: Yes, I did. That was deducted in 2010. Q. How come? A. Because it came knowable before the 11-2 date, so it was to be -- they had to take it out in 2010. Q. You understood that the letter of credit expense was going to be incurred in 2010? A. Yes. They had to get a letter of credit, yes, 2010. Q. They had to actually get the letter in 2010, they were going to incur that expense before year-end? A. That was my understanding, so I put it in 2010. Q. Okay. What was that letter of credit for? A. It was for the lease. Q. Okay. Do you know when they signed the lease? A. I have the lease here, but I don't know if it's signed. Q. Fair enough. Okay. Let me ask you some questions about, focusing just on Exhibit 57. Do you still have that in front of you, that's the financial projections. It looks like this (indicating), it's one of the exhibits we gave you. Mr. Wisehart, if you were given only these Allied Court Reporters, Inc. (401)946-5500 (24) Pages 93 - 96 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com .M.in-U-Script® Rhode Island Eco~o.mic Development Corporation vs Donald P. Wisehart Page 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 financial projections to review and nothing else -- are you with me? A. Yes. Q. If you were only given Exhibit 57 and nothing else, which, if any, of the necessary adjustments that you've made in your opinion would you have identified from just review of the financial projections, if any? A. Review of the -Q. If all we did is give you Exhibit 57 -A. Yup. Q. -- and ask you with your experience and knowledge to review Exhibit 57 and tell us if you see any mistakes, would you have identified any mistakes? A. No. Q. Okay. So, in order to identify the adjustments that you've made, there would be a need to know other information and look at other information? A. Yes, sir. Q. So all of the adjustments that you've made relied on information outside of the April 1 financial projections? A. Yes. Q. Okay. Mr. Wisehart, if we tum back to your Opinion number 1 in the disclosure, it's on Page Page 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 100 Page 98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 56. It says, "Mr. Wisehart is expected to explain to the finders of fact how to read 3 8 Studios' financial projections with particular emphasis on the cash flow projections." Do you see that? A. Yes. Q. All right. Tell me what you will tell the jury about how to read 3 8 Studios' financial projections? A. I would concentrate only on the cash flow projection. MR. PETROS: Okay. A. And I would explain to them these items, how they were shown, and the importance of those items and how the cash balance is critical, is a critical, critical number, because in order for the company to survive, it has to be positive. Q. All right. So go ahead and, you know, assume you're at trial, I'm the jury, tell me what you would tell the jury about Opinion Number 1? MR. SHEEHAN: I'm going to object. Depends on the questions we ask him. You know, if you think this is going to bind us to the questions we ask him at trial, I object. MR.PETROS: Youcananswermy question now . THE WITNESS: I can answer your question? MR. PETROS: Yes. A. I have not given a lot oftime or energy in developing what I would say to the jury. So my reply to you would only be in a very 30,000 feet approach. Q. Okay. Well, Mr. Wisehart, we're here to ask you about your opinions and you told us one of the opinions you intend to offer is to explain to the finder of fact how to read the 38 Studios financial projections with, as you said, particular emphasis on the cash flow projections. So I'm just asking you what you're going to say? A. I would explain how the cash flows looked before the adjustments, and then simply show the adjustments and show how cash is affected by those adjustments. Q. Would you -- are you going to tell them anything about how to read the financial projections? MR. SHEEHAN: Objection. A. I'm going to tell them how they should read the cash flow projections. Q. All right. So tell me that. A. That the cash flow projections begins with an 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 opening cash balance, then any inflows of cash during that year are added, then any outflows of cash are then deducted, and that balance is whatever it is, the balance. I would tell them that the cash balance must be sufficient in order to be able to continue operating the company, pay employees, to pay bills, pay rent and that type of thing. Q. Okay. You tell them it has to stay positive, right? A. Yes, sir, I would. Q. Okay. Anything else that would be part of your Opinion Number 1? MR. SHEEHAN: Objection. A. I don't think so. Q. Okay. And would you talk about any other parts of the financial projections with respect to just Opinion Number 1 now, I know you talk about other parts of the financial projections in your other opinions, but your opinion 1 is going to focus just on the cash flow projections? MR. SHEEHAN: Objection. A. Yes. Q. Now I think you've told us, Mr. Wisehart, that you have a lot of experience preparing financial .Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (25) Pages 97 - 100 115 Phenix Avenue, Cranston, ID 02920 www.alliedcourtreporters.com EXHIBIT 137 Aaron R. Topp, 30(b)(6) Rhode Island Eco~o.mic Development Corporation vs Page 121 Page 123 l A. No. l Q. 2 Q. Okay. If you just look at 4(f) and that has 2 3 to do with the cost ofrelocating 38 Studios' chattel which is another word for personal property; do you see that? A. Yes. Q. And we've already covered that that Wells Fargo does not -- had no knowledge then and no knowledge now whether that's included in the April 1st financial projections; right? A. Yes. Q. And has no knowledge then and has no knowledge now whether that's included in the June 25th financial projections? MR. BLESSINGTON: I am just going to object again to the extent you keep asking him his understanding today. You may answer. MR. SHEEHAN: I don't have a problem with you having a standing objection to that. A. That's correct. We did not know. Q. And don't know that today? A. Correct. Q. Now, (g) has to do with relocation of officers, directors and employees to Rhode Island, and the answers would be the same as 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 4 5 6 7 8 9 lO ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 All right. And (i) is this issue of a fee or a commission and, obviously, Wells Fargo was aware that certain placement fees were paid; correct? MR. BLESSINGTON: Objection. A. Define placement fee. Q. Let me rephrase that. Putting aside for the moment any fees Wells Fargo received or Barclays received and just dealing with any fees someone else received for the moment -THE DEPONENT: I'm sorry. MR. BLESSINGTON: Let him finish. THE DEPONENT: I'm sorry. Go ahead. Q. -- does Wells Fargo have any knowledge or information as to whether the April 1st financial projections include any projected costs to be paid to any person as a fee, commission, payment or the like in connection with the bond transaction? A. No. Q. Okay. And that's true today as well? A. Yes. Q. And that's also true then and true today with respect to the June 25th projections; right? MR. BLESSINGTON: Objection. Page 124 Page 122 l with respect to the chattel; right? Yes. Q. Okay. Both now and then and both the April 1st and the June 25th projections, Wells Fargo has no information? A. Correct. Q. And (h), the answer would be the same except now we're talking about rent and facilities? A. I mean, they were paying rent in Massachusetts. We were assuming they'd be paying rent in Rhode Island. Q. Let me rephrase that. Did Wells Fargo have any information as to what provision, if any, was made in the April l st financial projections for the company's rent obligations in Massachusetts and the company's projected rent obligations in Rhode Island? A. No. Q. Was that also true with respect to the June 25th financial projections? A. Yes. Q. And it was true then and true now, no knowledge? A. No knowledge. l 2 A. 2 3 3 4 5 6 7 8 9 lO ll 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 4 5 6 7 8 9 lO ll 12 13 14 15 16 l7 18 19 20 21 22 23 24 25 A. Yes. MR. SHEEHAN: I will rephrase it. I just don't want to waste time. MR. BLESSINGTON: That's fine. I'll withdraw the objection. MR. SHEEHAN: I appreciate your indulgence there with respect to that. Q. (J) has to do with the letter of credit, line of credit, bridge loan or other financing; do you see that? A. Yes. Q. Now, I'm not sure if it was at your deposition or Mr. Lamarre's, there was some discussion of the fact that there's a line entry in the April 1 financial projections that 38 Studios was going to take in $80 million. I'll see ifl can find that. If you go to the second to last page of Exhibit 672, that's one place. A. Okay. Q. We have debt financing of80 million and a debt payment of 5 million resulting in total outside debt financing in 2010 of75 million; right? A. Right. IVHn-U-Script® Allied Court Reporters, Inc. (401)946-5500 (31) Pages 121-124 115 Phenix Avenue, Cranston,~ 02920 www.alliedcourtreporters.com EXHIBIT 138 from: Lamarre, Mark[Mark.Lamarre@cf.funb.comJ Friday, May7, 2010 05:01:42 PM Thakur, Shaktl[shakti.lhakur1@d.funb.com] Sent: To: Subject: Fw: 38 Studios PPM draft Attachments: EPP Memo_DRAFT_D5.07.t0.pdt FYI only. Obv highly confidential. Mark C. Lamarre Managing Director and Vice Chairman Wells Fargo Securities, LLC 301 South College Street; 51h floor Charlotte, NC 28202 (704) 715 - 8680 rnark.lamarre@wellsfargo.com Sent from From: my BlackBerry Wireless Handheld Lamarre, Mark To: 'tz@36studlos.com' i 'rwester@38studlos.com' Cc: Kedia, Abhishek; Li, Jenny Sent: Fri May 07 16:56:36 2010 Subjed:: 38 Studios PPM draft Hi Tom and Ri~ Pis find attached a first draft of lhe EPP PPM document. As you will see, we have: - put lhe document lnlo the standard Wells format - added in an "implied consent" Confidentiality Agreement al the front, which we 1hink is cirilcal to protecting 38 - reorganized the PPM a bit, lo be more •marketing" oriented. The Risi< Factors are now al the back, but in front of the Subscription and other materials; this Is what we would racommend. - added in an Industry section. Though still a work In process, we feel that this Is crucial to communicating the "big addressable market element" of the story - added in the Board bios, as this Is Important, in our view. - reduced the # of Exhibits The "to do" items for next week are, In my view: - rationalize/reduce a bit the way we present the share-counts. We have 4 tables, and while I lllderstand why, we don't want to lose anybody over their mis-perception of a complicated capital structure ·edit and Improve the industry section - filll In any more detail/s you feel Important in describing the games under development For example should we disclose In the PPM more informaUon about the genres/plot for the games ? And show screen shots ? Or Is that too confidential ? - input and discuss the Financial Projections. Obviously, this Is crucial to gaining interest from investors, and in buttressing the valuation proffer. Whal am I missing ? We look forward to the Drafting call on Monday afternoon. The lhree items to complete next week are: - WF engagement letter -PPM - Investor List for the EPP (can you guys pis send me your past-calls by mid-week at the latest?) The following week, May 17th: - I will enter lhe market on Monday May t7 I I CONFIDENTIAL WFS_0059457 - we will begin drafting the roadshC>W presentation Net net, we are on track and on schedule. With a good push next week, we can get lnlo the ma!Ketplace as planned. Have a nice weekend and regards - Mark C. Lamarre Managing Director and Vice Chairman Wells Fargo Securities, LLC 301 South College Street; 5th floor Charlotte, NC 28202 (704) 715. 8680 mark.lamarre@wellsfargo.com Sent from my BlackBerry Wireless Handheld From: Li, Jenny To: Lamarre, Marie Sent: Fri May 07 16:33:33 2010 ---··---·------------·--·---- Subject: 38 Studios CONFIDENTIAL WFS_ 0059458 THIS PRNATE PLACEMENT MEMORANDUM IS Nar TO BE SHOWN OR GIVEN TO ANY PERSON afHER THAN THE PERSON WHOSE NAME APPEARS BELOW AND IS NOT TO BE COPIED OR afHERWISE REPRODUCED IN ANY MANNER WHATSOEVER. FAILURE TO COMPLY WITH THIS DIRECTIVE CAN RESULT IN A VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED. PRNATE PLACEMENT MEMOR{\NDUM of 38 STUDIOS, LLC [MayXX,2010] -CONFIDENTIAL- This numbered copy is for the exclnsive use of the person named below, does not constitute an offer to any other person and must be returned to 38 Studios, LLC immediately upon request. Name (Shown in Red) Copy No. If the above name and number do not appear in red, there is a presumption that this Memorandum has been improperly reproduced and circulated, in which case 38 Studios, LLC disclaims any responsibility for its contents and use. II Together we'll go far -- ···~·~· -"-(':' .. · .,-~ .... ~":. -#•- ·- . - • • . . . .: •• 1 CONFIDENTIAL WFS_0059459 DRAFT - 05.07.10 PRIVATE PLACEMENT MEMORANDUM Dated: [May XX, 2010] 38 STIJDTOS. Ll.C (a Delaware Limited Llability Company) Offering of up to 55,555,556 Class B Units ("Class B Units") Offering Price: $045 per Unit (the "Offering Price") 38 Studios, LLC (the "Companyu or "38 Studios•) plans to convert its ownership structure to a C Corporation in July of 2010. LLC issued units will convert to convertible preferred stock with the same rights and preferences as currently held and will be convertible to common stock on a one-to-one basis. A draft C Corporation Charter is attached as [Exhibit El. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK (See "Risk Factors" in Section X) THIS MEMORANDUM CONTAINS CONFIDEl\'TJAL INFORMATION This Private Placement Memorandum (this "Memorandum") relates to an offer by 38 Studios, LLC, a Delaware limited liability company, to sell an aggregate of up to 55,555,556 Class B Units at a purchase price of $0.45 per Unit. The offering (the "Offering") will terminate at [5:00 p.m. Eastern Time on June 30, 2010] (the "Termination Date0 ) unless extended by the Company. The Company reserves the right in its sole discretion to accept or reject any subscription, allocate or restrict the number of Class B Units that can be acquired by any subscriber, offer the Class B Units to investors on different economic tenns, increase the total round value and withdraw or cancel this Offering at any time. Thi.q Memorandum sets forth the material terms of the Offering and certain other information about the Company. Each prospective investor should examine this Memorandum, the Investor Questionnaire, the Subscription Agreement, the Company's LCC Operating Agreement, and the Company's C Corporation Draft Charter in order to evaluate the Offering and assure himself or herself that the Offering and the Company's business plan is satisfactory. Confidential 2 CONFIDENTIAL WFS_ 0059460 DRAFT - 00.02.10 Wells Fargo Securities, LLC ("Wells Fargo Securities'1 has been retained by the 38 Studios as the placement agent for the planned financing. Wells Fargo Securities is hereinafter referred to as the "Agentm. This document contains proprietary nonpublic information regarding the Company and is furnished exclusively on a confidential basis. By accepting this document, recipients agree that all of the information contained herein is of a confidential nature, that they will treat it in a confidential manner, that they will not, directly or indirectly, disclose or permit their agents, representatives, employees, officers, directors or affiliates to disclose any of such information, and that they will use the information contained in this document and any related information only to evaluate 38 Studios and for no other purpose. The Company and Agent reserve the right to require the return of this document at any time. The selected information contained herein has been prepared by 38 Studios management for the purpose of providing interested parties with general information to assist them in their preliminary evaluation of the operations of 38 Studios. While the information in this document is believed to be accurate and complete in all material respects, nothing contained herein is or shaJl be relied upon as a promise or representation as to the future performance of 38 Studios and no representation or warranty, expressed or implied, is or will be made, and no responsibility or liability is or will be accepted, by the Company, or its Agent or by any of their respective affiliates, officers, directors, employees, agents or representatives as to or in relation to the accuracy or completeness of this document or any other written or oral information made available to any interested party or its advisers and any liability therefore is hereby expressly disclaimed. Any estimates or projections contained herein have been prepared by, and are based on, information currently available Lo 38 Studios and involve significant subjective judgments and analyses and, accordingly, no representation or assurance is made as to their attainability. The information in this document has been prepared by the Company and reflects prevailing conditions and the views of 38 Studios management as of such date prepared, all of which are subject to change, completion, or amendment without notice. The delivery of this document at any time does not imply that the information contained in this document is correct as of any time subsequent to the date hereof. The Agent and 38 Studios assume no obligation, and expressly disclaim any such obligation, to update this document. This document is for discussion purposes only and does not under any circumstances constitute an offer to sell or a solicitation of offers to buy securities of 38 Studios. If and when authorized by 38 Studios, prospective investors will be allowed to conduct a comprehensive due diligence review of the Company's operations and financial condition, including discussions with senior management of 38 Studios. Prospective investors will be required to rely only upon such review in making an investment decision regarding 38 Studios. There is no obligation created by this document on the part of 38 Studios or any recipient until a definitive agreement, if any, is executed by all parties. AU inquiries and requests for additional information concerning lhe Company or regarding any potential transaction should be directed solely to the individuals listed below. r····-····· -·-·-"' - .. " ... -.......................... -.....--.-..........- ................. -................-·-· · .....--·· ··--""" ....... ' !. ..... ' ... "·-· .. " . ' ..... " ... "I l I (704) 715-8680 l i. mark.lamarre@wellsfargo.com ~ r·---·----..··----·----··---··---···-------1---------·----·-·-... -..----·----·-..·----·--·-· )1 Mark La.mane Managing Director and Vice Chairman 1' I i AbhishekKedla ; Associate (704) 715-5340 abhisbek.kedia@wellsfargo.com j ! I 'I JennyU l l Analyst (704) 715-6270 jenny.li@wellsfargo.com I · I [._ .. _._ .........._.. ,_,..,,,....... _,_. ·-·---· ·----..- ..·--·-· ...................... l .___ ---- --·· _,, ____ ,, __,__ . ----·. _ ............................................. .! Confidential 3 CONFIDENTIAL WFS_0059461 DRAF.T - 05.07.10 FORWARD LOOKING STATEMENTS This Memorandum contains forward-looking statements that are based on the Company's current expectations, assumptions, estimates and projections about it and its industry. When used, the words "may," "will," "should," "expect," "plan," "anticipate," "believe," "feel," "confident," "estimate," "intend," ''predict; "potential" or "continue" or the negative of such terms or other variations on these words or comparable terminology are intended to identify forward looking statements. These statements describe the Company's beliefs concerning the future based on currently available information and are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks descnbed herein that may cause the Company's actual business results, levels of activity, performance or achievements to be materia1ly different from any future result, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks d~ribed herein, important factors to consider and evaluate in such forward-looking statements include: (i) changes in the external competitive market factors which might impact the Company's results of operations; (ii) unanticipated working capital or other cash requirements including those created by the failure of the Company to adequately anticipate the costs associated with its business model and other critical acthities; (iii) changes in the Company's business strategy or an inability to execute its strategy due to unanticipated changes in the entertainment and interactive media businesses; and (iv) the failure of the Company to complete any or all of the transactions described herein on the terms currently contemplated. In light of these risks and uncertainties, many of which are descnbed in greater detail elsewhere in this Memorandum, there can be no assurance that the forward-looking statements contained herein will in fact transpire. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. The C.Ompany's actual results could differ materially from those contained in the fmward-looking statements due to a number of risks and uncert_ainties. Important factors that could cause the C.Ompany's actual results to differ materially from its expectations expressed in the forward-looking statements are set forth under the heading "Risk Factors" in Section X. Each prospective investor should read the cautionary statements as being applicable to all related forward-looking statements wherever they appear. The C.Ompany assumes no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Confidential 4 CONFIDENTIAL WFS_0059462 DRAFT - o:;.02.10 INVESTOR NOTICES THIS INVESTMENT Th"VOLVES A HIGH DEGREE OF RISK (SEE "RISK FACOORSw IN SECTION X). THE CLASS B UNITS ARE NOT READILY TRANSFERABLE AND SHOULD BE PURCHASED FOR WNG-TERM INVESTMENT ONLY. 44******** THE CLASS B UNITS HAVE NOT BEEN REGISTERED 't\TI'H THE SECURITIES AND EXCHANGE COMMISSION AND ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION. THE CLASS B Ul\TrS MAY ONLY BE PURCHASED BY ACCREDITED INVESTORS. THE CLASS B UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR ANY IITATE SECURITIES COMMISSION, NOR HAS ANY SUCH COMMISSION PASSED UPON THE ACCURAC,'Y OR ADEQUACY OF THIS PRIVATE PLACEMENT MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS MEMORANDUM CONTAINS CONFIDENTIAL INFORMATION AND IS SUBMITTED IN CONNECTION WITH THE PRIVATE PIACEMENT OF THE CLASS B UNITS DESCRIBED HEREIN AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER PURPOSE. ANY DISTRIBlITION OF THIS MEMORANDUM, IN WHOLE OR IN PART, OR THE DIVULGENCE OF ITS CONTENTS, IS UNAUTHORIZED. . .......... .. THIS MEMORANDUM CO?l.'TAINS INFORMATION WHICH HAS BEEN OBTAINED FROM SOURCES DEEMED RELIABLE BY THE COMPANY. SUCH INFORMATION NECESSARILY INCORPORATES SIGNIFICANT EVALUATIVE AND FACTUAL ASSUMPTIONS. UNLESS OTHERWISE INDICATED, SUCH INFORMATION HAS NOT BEEN INDEPENDE?\'TLYVERIFIED. THIS MEMORANDUM CONSTITUTES AN OFFER ONLY TO THE PERSON TO WHOM IT IS DELIVERED. DELIVERY OF THIS MEMORANDUM TO ANY OTHER PERSON IS UNAUTHORIZED AND ANY REPRODUCTION OF THIS MEMORANDUM, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY, IS PROHIBITED. *********• THE OFFEREE, BY ACCEPTING DELIVERY OF THIS MEMORANDUM, AGREES TO RETURN THIS MEMORANDUM AND ALL ENCLOSED DOCUMENTS TO THE COMPANY IF THE OFFEREE DOES NOT AGREE TO PURCHASE ANY OF THE CLASS B UNITS OFFERED HEREBY. NO OFFERING LITERATURE (OTHER THAN THIS MF..MORANDUM) OR ADVERTISING IN ANY FORM SHALL BE EMPLOYED IN THE OFFERING OF THE CLASS B UNITS. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM OR THE EXHIBITS THERETO, AND, IF MADE, SUCH REPRESENTATION MUST NOT BE RELIED UPON. PROSPECTIVE Il\"VESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS LEGAL, BUSINESS OR TAX ADVICE. EACH INVESTOR SHOULD Confidential 5 CONFIDENTIAL WFS_0059463 DRAFT • 02.oz.10 CONSULT HIS OR HER PERSONAL COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX, ECONOMIC AND RELATED MATIERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABIUTI' FOR HIM OR HER. ................. THE COMPANY SHALL MAKE AVAILABLE TO EACH INVESTOR OR HIS OR HER AGENT, DURING THIS OFFERING AND PRIOR TO THE SALE OF ANY CLASS B UNITS, THE OPPORTUNTIY TO ASK QUESTIONS OF AND OBTAIN ADDfnONAL INFORMATION FROM ANY PERSON AUTHORIZED TO ACT ON BEHALF OF THE COMPANY CONCERNING THE TERMS AND CONDmONS OF THIS OFFERlNG OR ANY OTHER RELEVANT MAITERS (INCLUDING BUT NOT LIMITED TO ADDmONAL INFORMATION NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED IN THIS MEMORANDUM) TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE. THIS MEMORANDUM DOES NOT CONrnTUTE AN OFFER OR SOLICITATION IN Al\'Y STATE OR OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT PERMITTED BY LAW. ****"'••••• THE COMPANY RESERVES THE RIGHT TO WITHDRAW THIS OFFERING AT ANYTIME • ............... Confidential 6 CONFIDENTIAL WFS_0059464 DRAFI' - 05.07.10 Table of Contents SECTION I. EXECUTIVE SUMMARY II. TERMS OF OFFERING AND Pl.AN OF DISTRIBUTION III. DESCRIPfION OF SECURITIES IV. CAPITALIZATION AND INDEBTEDNESS V. USE OF PROCEEDS VI. INDUSTRY OVERVIEW PAGE NO. VII. NATURE OF THE COMPANY'S BUSINESS VIII. KEY PERSONNEL AND BOARD OF DIRECTORS IX. FINANCIAL STATEMENTS AND PROJECTIONS X. RISK FACTORS XI. HOW TO SUBSCRIBE FOR CLASS B UNITS IN THE OFFERING XII. EXHIBITS A. Exhibit A- Corporate Vision Presentation B. [Exhibit B - Current Equity Ownership] C. Exhibit C - Unaudited Draft Financial Statements D. Exhibit D - LLC Operating Agreement E. Exhibit E - C Corporation Draft Charter Confidential 7 CONFIDENTIAL WFS_ 0059465 DRAFf - 05.07.10 I. EXEClITIVE SUMMARY The following summazy is qualified in its entirety by the more detailed information appearing elsewhere in this Memorandum. A. The Company 38 Studios, LLC is a development-stage company founded in August of 2006 to exploit the anticipated market growth of video gaming. The company has developed a "Visionazy Team" to provide creative direction for an original intellectual property and an interactive entertainment product portfolio. The VJSionary Team was conceived and implemented by the Company's founder, Curt Schilling, and includes New York Times-bestselling fantasy author R.A. Salvatore, awardwinning comic book artist Todd McFarlane, and video game pioneer game designer Ken Rolston. All are well known for their individual successes, and well known in the market the Company is pursuing. The Company currently operates two game production divisions called studios. Both studios are staffed with top, industry-recognized, experienced talent with proven records of successful, profitable, and on-time delivery of video game products. The multi-player online gaming studio is located in Maynard, Massachusetts. This studio currently employs 71 full-time staff and is focused on the development of the Company's first Massively Multiplayer Online Game ("MMO"). Code named Copernicus; the release date for the MMO product is set for the second half of 2012. The Company is in discussions with top Publishers regarding a publishing and distribution agreement for the MMO Copernicus. The second gaming studio, known in the industzy as "Big Huge Games" ("BHG"), is located in Timonium (Baltimore), Maryland, and is working on a single-player multi-platform game. In May of 2009, the Company acquired BHG from THQ, Inc. The Baltimore studio currently employs 73 and is focused on its first Role Playing Game ("RPG"). Code named Mercury, the release date is set for fall of2011. The Company has signed a publishing and distribution agreement with Electronic Arts, Inc. ("EA") fur the RPG Mercury under which EA has agreed, among other things, to fund the development costs of the RPG through its general commercial release in fall of 2011. The Company believes that the publishing relationship with FA, which involved significant due diligence, mitigates product success risks substantially through EA's commitment to funding, development support, retail disbibution, and marketing of the Mercury title. The Company currently employs an additional n "corporate" employees in its executive, HR and recruiting, accounting, and administration areas. Total Company FI'E headcount is currently [177]. While the Company is committed to maintaining focus on the release of its first two products; longterm, the Company expects to generate additional revenue streams from expansion of these original products, from ancillary products based on the original products, such as toys, books, comic books, 'IV shows, movies, and from the creation of new themes of RPG and MMO intellectual propertie.~. The Company operates pursuant to its Second Amended and Restated Limited Liability Company Agreement dated November 16, 2009 (the "Operating Agreement"). Its COlpOrate headquarters is located at 5 Clock Tower Place, Suite 140, Maynard, Massachuaetts 01754. CONFIDENTIAL • Confidential 8 WFS_0059466 -------------- - ------- ---------------- r - - - - - - - - - - - - - - - - - - - - - ' - - - - - - - - - - · · · · · · · - · - - ···- DRAFT - 05.02.10 B. The Offering This Offering is for an aggregate of up 55,555,556 Class B Units at a purchase price of $0.45 per Unit. The Company reserves the right to increase or decrease the number of Class B Unit.s issued and sold in the Offering as well as issue and sell Class B Units to subscribers at per unit prices which may be greater than or less than the Offering Price. [Any such price discrimination would be designed to reflect the relative risks attendant with subscribing for Class B Units at different moments in time, such as, for example, the difference in risk before and after the Company consummates a material transaction.] The purchase and sale of the Class B Units is expected to take place at one or more closings. The offering will tenninate al [5:00 p.m. Eastern Time on June 30, 2010] unless extended or closed earlier by the Company in its sole discretion. The Company will amend and restate the Operating Agreement on or before the initial closing of the Offering to reflect the terms of the Offering including the rights, preferences and privileges associated with the Class B Units (the "Amended and Restated Operating Agreement"). In July of 2010, the Company plans to convert its ownership structure to a C Corporation. The LLC issued units will convert to convertible preferred stock with the same rights and preferences as currently held and will be convertible to common stock on a one-to-one basis. Existing investors in the Company and certain members of the Company's Board of Directors have indicated interest in purchasing [$6.5 million] of the Class B Units offered hereby. C. Use of Proceeds The net proceeds of the offering shall be primarily applied to ongoing intellectual property and game development and launch costs including personnel compensation, marketing costs, general administrative costs and other expenses. In addition, a portion of the proceeds of the Offering will be used to satisfy its obligations under the Thomas Note (as defined below in Section IV.B.). D. Risk Factors This offering involves a HIGH DEGREE OF RISK. The Company is an early-stage company and requires years of development and launch activities before realizing any revenue from its products. Assuming successful completion of this Offering, under the Company's current financial projections, the Company expects to need additional funds in [12 to 14 months] and there is no assurance that funds in the amount needed by and on terms satisfactory to the Company will be l!.vailable at that time. The amount of additional funds which the Company will require after the ai>enditure of the proceeds of this offering may be substantial. The Company is highly dependent upon its visionary team and key employees. An investment in the Company cannot be readily liquidated. For a more complete description of the risks associated with the Offering, see "Risk Factors" in Section X. E. Additional Information Additional information about the Company's business strategy can be found in Section Vil, Nature of the Company's Business and in the Corporate Vision Presentation attached hereto as Exhibit A. Prospective investors are also invited to request additional information from and pose questions to the Company through the Agent, and the Company's senior management will endeavor to provide such information and answer such questions. ., PROSPECTIVE INVESTORS SHOULD READ THIS ENTIRE MEMORANDUM FOR A COMPLETE UNDERSTANDING OF THIS OFFERING AND SHOULD NOT RELY UPON THE FOREGOING SUMMARY. Confidential 9 CONFIDENTIAL WFS_0059467 DRAFf - o:;.oz.10 II. TERMS OF OFFERING AND PLAN OF DISTRIBUTION Issuer: 38 Studios, LLC Amount ofFinancing: An aggregate of up to $25 million, representing an approximately 32.5% post-money ownership position, on a fully diluted basis, including Units reserved for an employee and consultant incentive option pool and increased amounts to be reserved post conversion to a C Corporation for an Employee Incentive Stock Plan. Giving effect to the recent Company Class B Unit purchase and sales with proceeds of $6 million, the total issued Class B Units will represent an approximate 40.3% on a fully-diluted basis. Existing investors in the Company and certain members of the C-Ompany's Board of Directors have indicated interest in purchasing [$6.5 million) of the Class B Units offered hereby. Number of Cl.ass B Units included in the Offering: Up to a total of 55,555,556 Class B Units are being offered to qualified investors. Price: $0.45 per Unit. This price represents a fully-diluted pre-money valuation of $45 million (not including the recent Class B Unit proceeds of $6 million) and a fullydiluted post money valuation of $76 million (including the recent Class B Unit proceeds of $6 million) based on the anticipated capitalization of the Company as of the first closing of the Offering, which is subject to change at any time, including after the issuance and sale of all of the Class B Units offered in the Offering). 'The Company reserves the right to issue and sell Class B Units to investors at a per unit price greater than or le.ss than the $0.45 Offering Price stated above. The Offering Price is not related to the Company's asset value, net worth or any other established criterion of value. Factors considered in establishing the price include the following: management's estimate of the business potential and prospects of the Company's products in development, the present status of the Company's marketing efforts, and consideration of the above factors in relation to valuations of comparable companies and the current condition of the industry and the economy as a whole. See ~Capitalization" below for the pre and post-money LLC and the C corporation pro fonna capitalization table.~. Closings: The purchase and sale of the Class B Units shall take place at one or more closings. Type qfSccurity: Membership Interesls in the Company classified as C'lass B Units. Confidential 10 CONFIDENTIAL WFS_0059468 DRAFT· 05.oz.10 Plan ofDist1'ibution: The Offering period will terminate at 5:00 p.m. Eastern Time on the Termination Date, unless extended by the Company. The Company may consummate the Offering and the purchase and sale of the Class 8 Units at more than one closing (each, a "Closing") prior to the Termination Date. The Company reserves the absolute right to extend or withdraw this Offering at any time, as well as increase or decrease the number of Class B Units offered hereby. In the event that the Company elects to withdraw or cancel this Offering, all subscription payments received and held by the Company for a pending Closing will be promptly returned to the respective investor, without interest. The Company reserves the right in its sole discretion to (i) accept or reject any subscription, (ii) allocate or restrict the number of Class B Units that can be acquired by any subscriber, and (iii) determine the maximum number of Class B Units to be sold in total within the limit set forth herein. In the event the Company holds more than one Closing, it may in its sole discretion accept a part of a subscriber subscription at each Closing. In the event that all or a portion of the subscriber's subscription is not accepted, the subscription payment not accepted will be promptly returned, without interest. The Company may use one or more brokers in connection with this Offering. There may be a sales commission or other remuneration paid lo such brokers in connection with the sale of the Units offered hereby in a commercially reasonable amount. Suitobility Stondards: The Class B Units will only be offered and sold to "accredited investors" as defined in Rule 501 of Regulation D under the Securities Act of i933 1 as amended (the "Securities Act"). Accredited investors include: A. certain institutional investors; B. the executive officers and directors of the Company; C. natural persons whose individual net worth, or whose joint net worth with their spouse at the time of purchase exceeds $1,000,000; D. natural persons who have had individual (not joint) income in excess of $200,000 in each of the last two years and who reasonably expect to have individual (not joint) income in excess of $200,000 in lhe current year; E. natural persons who have had joint income with their spouse in excess of 5300,000 in each of the last two years and who reasonably expect to have joint income with U1eir spouse in excess of $300,000 in the current year; and F. entities in which all of the equity owners are accredited investors described in clauses (i) though (iv) above. Confidential 11 CONFIDENTIAL WFS_0059469 ···-·---- - - - - - - ----. -----·· DRAI<"T - 00.02.10 m. DESCRIPTION OF SECURmES As the Company is a Delaware limited liability company (an "LLC"), its inve.~ors whose subscriptions are accepted by the Company become "Members". Rather than receive stock, investors in an LLC receive "Membership Interests". The Company operates under a Second Amended and Restated Operating Agreement which reflects the rights, preferences and privileges associated with the Class B Units. The operating agreement will be amended to increase the authorized amount of Class B Units. In July of 2010 1 the Company plans to convert its ownership structure to a C Corporation. The LLC issued units will convert to convertible preferred stock with the same rights and preferences as currently held and will be convertible lo common slack on a one-to-one basis. Except as noted below, each Member has the same voting rights under the Second Amended and Restated Operating Agreement: each Member shall be entitled to one vote for each Class A Unit, Class A1 Unit or Class B Unit held by such Member. Except as expressly noted below under "Protective Provisions", Members holding Class B Units will vote together with holders of Class A Units and Class A• Units as a single class and will not be entitled to separate class voting. As of the date of this Memorandum, the Company has i~sued Class A Units to eight Members, and ha.c; not issued any Class B Units or Class A1 Units. Investors subscribing to the Offering whose subscriptions are accepted by the Company shall become Members of the· Company with the rights and privileges described in the Amended and Restated Operating Agreement. The Company is offering up to 55.555,556 Class B Units. The sale price of the Class B Units has been determined by the Company and does not nece.5sarily bear any relationship to the Company's book value, assets, past operating results, financial condition, generally accepted accounting principles or any other established criteria of value. The Company has not declared or paid any dividends or made any distributions with respect to its Units since its inception and intends, for the foreseeable future, to retain earnings, if any, to finance the development and expansion of its business. (See "Risk Factors" in Section X). Liquidation and Distributions: Cash lo be distributed lo holders of Units ("Members"), upon a liquidation or winding up of the Company or as otherwise determined by the Board of Directors, shall (after satisfying the Company's debts and obligations) be distributed to Members as follows: (i) first, one hundred percent (100%) to Members holding Class B Units, to the extent of and in proportion to the cash contributed by such Members to the Company in exchange for such Class B Units, (ii) second, one hundred percent (100%) lo Members holding Class A• Units, to the extent of and in proportion to the cash contributed to the Company by such Members in exchange for such Class A1 Units, (iii) third, one hundred percent (100%) to Members holding Class A Units, to the extent of and in proportion to the cash contributed to the Company by such Members in exchange for such Class A Units, and (iv) thereafter, in proportion to the respective number of Units held by each Member. Confidential 12 CONFIDENTIAL WFS_0059470 . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ..-------·--··---··-- DRAFT - 05.oz.10 Alloeations of Profit and Loss: Profits and losses shall be allocated to Members in such amounts and proportions as are necessary for their respective adjusted capita] account balances to equal their respective "Target Capital Account Balances" as of the close of such fiscal year. As used herein, "Target Capital Account Balance" shall mean the amount a Member would then be entitled to receive if the Company were to seD its non-cash assets at book value, satisfy its debts and obligations in accordance with their terms, and then liquidate and distribute cash to Members in accordance with the distribution provisions described above. Voting Rights: Each Unit shall have one (1) vote. Except as expressly noted below under "Protective Provisions", Members holding Class B Units will vote together with holders of Class A Units and holders of Class A1 Units as a single class. Board ofDirectors: The size ofthe Company's Board of Directors (BOD) shall initially be set at seven (7) members, each of whom shall be elected by a vote of the Members holding a majority of the Units issued, outstanding and entitled to vote thereon (voting togetller as a single class). The current directors include: Curt Schilling, Jennifer Macl.ean, Bill Thomas, Jim Halpin, Douglas Macrae, Kevin Roche, Sundar Subramaniam, and Thomas Zaccagnino. The Members may amend the size and composition of the Board of Directors from time to time in accordance with the terms of the Amended and Restated Operating Agreement. Protective Provisions: Consent of the holders of at least a majority of Units (voting together as a single class) shall be required to sell all or substantially all of the assets of the Company or merge with, or consolidate into, another entity. For so long as at least 1,000,000 Class A Units remain outstanding, consent of the holders of at least a majority of the Class A Units (voting as a separate class) shall be required for any action that (i) alters or changes the rights, preferences or privileges of the Class A Units; (ii) increases or decreases the authorized number of Class A Units; (iii) creates (by reclassification or otherwise) any new class or series of Units having rights, preferences or privileges senior to or on a parity with the Class A Units; (iv) results in the redemption or repurchase of any Class A Units (other than pursuant to equity incentive agreements witll service providers giving the Company the right to repurchase Units upon the termination of services); (v) results in any merger, corporate reorganization or other transaction that results in a change in control of the Company, or any transaction in which all or substantially all of the assets of the Company are sold, unless the cash and/or equity consideration in the transaction is greater than $150 million; (vi) increases the authorized size of the Company's Board of Directors to more than nine (9); or (vii) results in the reclassification of units junior to the Class A Units into units having rights and preferences or privileges senior to or on a parity with the Class A Units. Confidential 13 CONFIDENTIAL WFS_0059471 DRAFT - 05.oz.10 11lformation Rights: So long as an investor continues to hold at least 250,000 Units, the Company shall deliver to such investor audited annual and unaudited quarterly financial statements. These provisions shall terminate upon the earlier of a change of control of the Company and the Company's initial · public offering. Inspection Rights: The Company shall keep such books and records, in addition to any documents and information required to be furnished to a Member under Delaware law, at the principal office of the Company for examination and copying by any Member or Director, al such Member's or Director's reasonable .reque.st and expense, during ordinary business hours. These provisions shall terminate upon the earlier of a change of control of the Company and the Company's initial public offering. Pre-Emptive Rights: Each Unit holder shall have the right in the event the Company proposes to offer equity securities to any person (other than securities reserved under equity incentive plans, securities issued pursuant to acquisition tran~actions, securities issued to financial institution.~ or lessors in connection with commercial credit arrangements, equipmenl financings or similar transactions, securities issued in strategic transactions, securities issued in a qualified initial public offering, and other customary exceptions) to purchase their pro rata portion of such equity securities. These provisions shall terminate upon the earlier of a change of control of the Company and the Company's initial public offering. RighJ: ofFirst Refusal: The Company first, and the Members, on a pro-rata basis, second, shall have a right of first refusal on any proposed sales of Units by any Member to a third party. These provisions shall terminate upon the earlier of a change of control of the Company or the Company's initial public offering. • Confidential 14 CONFIDENTIAL WFS_0059472 DRAFT - 05.oz.10 IV. CAPITALIZATION AND INDEBTEDNESS A. Current Capitalization A~ of the date of this Memorandum, the Company has designated, authorized and issued three classes of membership interest. Class A Units, Class A• Units, and Class B Units and resetved a total of i20 million units; 65 million, 30 million, and 25 million, respectively, for issuance under each class. The Company expects that, on or before the initial Closing, the Company will amend and restate the Operating Agreement to designate and authorize the issuance of up to 70,000,000 Class B Units. Under the terms of the Operating Agreement, the Company may borrow funds with the approval by the Board of Directors and admit new members with the approval of holders of a majority of the three classes of unils voling as a single class. A summary of the Company's current capitalization is as follows: Authorized Issued Issued Options Issued Warrants Unissued Units Class A Units ClassA1 Units Class B Unit.s Total 6510001000 30,0001000 251000,000 120,000 1000 12.3l!i1330 25,2~,663 8,625,652 81a932z2!i5 8 1 8~ 1 000 8,8z~hooo 2,822 1fi81 2,822,581 ~edunder Class A Option Plan Total Fully Diluted Percent Issued Percent Fully- 812,666 812,666 57-796 25. 22a.663 31.796 63.4% 27.496 J29 1B22z12zz 8,6951652 94.4411892 10.6% 9.2% 100% 100% diluted The detailed capitalization of the Company as of the date of this Memorandum is set forth in [~ m. [INSERT SHAREHOLDER TABLE HERE] Confidential 15 CONFIDENTIAL WFS_0059473 --·--·· -- · · - - - - - - DRAFf - 05.07.10 B. Short-Term Unsecured Debt On July 13, 2009, the Company made a promissory note for cash received in favor of Mr. William Thomas, a Director and employee of the Company, in the original principal amount of $287,000 (the "Thomas Note"). The indebtedness represented by the Thomas Note is unsecured and the maturity of such indebtedness has been extended until July 12, 2010. A portion of the proceeds from the Offering will be used to pay off the Thomas Note. C. Convertible Debt There is currently no amount outstanding under this Joan. The Chairman of the Company, Mr. Curt Schilling, made certain loans of approximately $24.1 million to the Company al various times during its operating history. This loan was unsecured, accrued interest at an annual rate equal to the prime rate plus 4%, and would have matured on December 31, 2014. The principal and accrued interest under the Schilling Loan was convertible into Class A1 Units at a $1.00 per Unit at the election of Mr. Schilling. In December of 2009, Mr. Schilling converted $15 million of the outstanding balance Class A• Units. On March 1, 2010, MR Schilling converted the remaining balance of approximately $11 million. Mr. Shilling owns 10096 of Class A1 Units of the Company. D. Post-Money and Pro Forma C Cm:poration Capitalization The Class B Units are being priced on a pre-money valuation of $45 million. Total pre-money equity contributions received by the Company total approximately S32.5 million. This amount includes the total cash amounts received from the conversion of the convertible debt descnbed above and [ex]cludes the recent $6 million of Class B Units equity proceeds. The price per share of the Class B Units of $0.45 is being computed on a fully-diluted basis less the Cl~ B Units currently issued and plus full-dilution for the existing stock option plan and an additional 15 million shares of Common Stock being reserved for issuance under a new Common Stock Incentive Plan that the company will implement simultaneous with its conversion to a C corporation. Computation of the pre-money pricing is as follows: Class A Units Fully Diluted from Above New Common Stock Incentive Plan Total Pro Forma Fully Diluted Pre-money Valuation Price per Unit 59,822,577 59,822,577 Class A' Units CCorp. Common Incentive Plan 25,923,663 25,923,663 Total 85,746,240 15,000,000 15,000,000 15,000,000 100,746,240 $45,000,000 $0 5 Confidential 16 CONFIDENTIAL WFS_0059474 DRAFI' - 02.oz.10 The recent Class B Units were sold by the Company for proceeds of $6 million at $0.69 per unit and will be re-priced to the current valuation pricing of $0.45. In addition, the Company's current valuation will effectively trigger a weighted average anti-dilution in Class A warrants issued by the Company. However, the price per share is above the Class B Units and deemed non-dilutive. [The Company is also considering a reverse stock split upon closing with a goal of avoiding a reverse stock split in the future.] [Wells advice - omit this sentence/concept.] Additionally, the Company is researching the effect of re-issuing the current outstanding stock options, attached lo the Class A Units, under the new Common Stock Incentive Plan. If so, the new plan would be increased by lhe amount of outstanding and available lo issue wider the existing plan and the existing plan would be terminated. Fully diluted amounts presented above would not change as a result of this action. Proforma post-money, post conversion to C Corporation, fully-diluted equity ownership is estimated as follows: Class A Units (Series A Convertible Class A' Units (Series B Convertible Preferredl Class BUnit5 (Series C Convertible Preferred) 62,0001000 26,0001000 701000,000 Pre-money Issued Issued Options Issued Warrants Unissned Units reserved Under Class A Option Plan Anti-dilution Protection: Warrants (nondilutive) Class B Units Issued Class B Units to be issued in this Offering New Common Stock Incentive Plan 47,313,330 25,923,663 8,695,652 Total Fully Diluted Percent Fullydiluted 61,241,375 25,923,663 35.8% 15.1% Preferred~ Authorized • Common Stock 25,000,000 Total 183,000,000 81,932,645 818711000 218222581 8 18z1.ooo 21822,581 812,666 812,666 1,418,798 1,418,798 4,637,681 4,637,681 55,555,s56 55,555,556 15,000,000 15,000,000 68,888,889 15,000,000 171,053.927 40-3% 8.8% 100% Confidential 17 CONFIDENTIAL WFS_0059475 . - - - - - - - - · - - - - - - - ··-··-···--····- .. ····- DRAFr - 05.oz.10 Proforma Post-money, post conversion lo C Corporation, issued equity ownership (excluding New Common Stock Incentive Plan) is estimated as follows: Class A Units (Series A Convertible Preferred) Class A.' Units (Series B Convertible 62,000,000 26,000zOOO 70,0001000 Pre-money Issued Anti-dilution Protection: Class B Units Issued Class B Units to be issued in this Offering 47.313.330 25,923,663 8,695,652 81,932,645 4,637,681 4,637,681 55,555,556 55,555,556 Total Fully Diluted 47,313.330 25,923,663 68,888,889 142,125,882 33.3% 18.2% 48.5% Authorized Percent Issued Preferred~ Class B Units (Series C Convertible Preferred) Common Stock 25,0001000 Total 183,000 1000 0_0% Confidential 10096 18 CONFIDENTIAL WFS_0059476 DRAFf - og.oz.10 V. USE OF PROCEEDS The net proceeds to the Company from the Offering after deducting expenses incurred in connection with the Offering (including Agent commissions and fees and legal, accounting and other related expenses), will be used for general working capital purposes including game development and production costs. Proceeds from the Offering may also be used for (i) payment of salaries and wages, (ii) marketing, advertising and promotion costs, (iii) insurance, (iv) rent and other general administrative expenses of the Company, and (v) paying off the Thomas Note. A summary of current financial projections is attached hereto as [Exhibit DJ. The amounts set forth in the cash flow summary represent the Company's current estimates and the actual expenses incurred by the Company may vary significantly depending on numerous factors. The Company's Board of Directors may revise the Company's operating budget and reallocate the net proceeds from the Offering from time to time in its sole discretion. Any such revision and/or reallocation will be in furtherance of the Company's goal to develop the games and achieve profitable operations. Until used for the purposes described herein, the Company will hwest such net proceeds in short-term interest-bearing investment-grade securities. Confidential 19 CONFIDENTIAL WFS_0059477 ~-------·-· ·-····· ····- . ··--·-· ..... ·-··- -·--·--· -- --------------------------------- DRAFI' ~ 05.07.10 VI. INDUSTRY OVERVIEW The interactive entertainment software industry is the economic sector involved with the development, marketing and sale of video and computer games. The first modern video game platform was introduced by Nintendo in 1985, and over the last 25 years, the worldwide video game industry has grown into a $70 billion industry. Worldwide revenue representing retail value of shipments of videogame consoles, dedicated handheld gaming devices, and packaged software for consoles and handhelds reached a record high of $11.7 billion in 2008, up 15% from 2007's record high of $62.4 billion. The worldwide market is expected to reach $124.1 billion in 2013, a projected compounded annual growth rate ("CAGR") of u.0%. While hardware revenue is projected to decline and then rise again in 2012 and 2013 due to the console release cycle, the retail value of software shipments is expected to increase at a CAGR of 14.3% in the projected years, reaching $101.8 billion in 2013. (' In BHllonsl $150.0 •Software '09E-'13E 1 '6GBa. i I ,100.0 11.0'1<. $124.1 i ! 0.1% $0.0 20116/\ 2007A '°""" 2009E 2011E 2010E 2013E 2012E Within North America, hardware revenue is projected to decline slightly while the retail value of software shipments is expected to increase at a CAGR of 9.9% in the projected years, reaching $35·5 billion in 2013. The demographics of the interactive entertainment industry audience have broadened rapidly over the past few years, with video games becoming an increasingly popular form of mainstream entertainment According to the Entertainment Software Association, more than two-thirds of all American households play PC or video games, and the average game player is 35 years old and has been actively playing for 12 years. The teenagers who took up gaming 25 years ago have not grown out of the ~fad", while today's youth adopt next-generation consoles with even greater fervor than their parents did. In 2008 alone, there were 20 million home consoles sold in the United States, with the Wii dominating market share in new console sales . 0 .: · _ . · .' ·· · . U.S.C'onsole Un.itS11ks(inm!lliuns) :· i•010 60% of the population, forecasted to play some kind of online PC game by 2014, Core business models include premium monthly subscriptions mainly associated with virtual worlds and Massively Multiplayer Online Games ("MMOGs"), paid digital downloads, and advertising and micro-transactions (i.e., sub-$5 virtual item purchases). Digital game downloads (i.e., purchased full game and add-on downloads) are expected grow the fastest, reaching 237 million downloads in 2014, a 36.9% compounded annual growth rate from the 49 million in 2009. U.S. online PC gaming revenue is expected to reach $9-5 billion in 2014, a CAGR of 22.6% from 2009. """i""' Strong growth in MM OGs is expected to continue as online gaming becomes more common. The number of paid monthly subscriptions (including MMOGs and casual gaming subscriptions) has historically grown at a CAGR of 27% and is projected to grow rapidly al a CAGR of 29%, from about 18 million in 2010 to nearly 49 million by 2014. Revenue from MMOG and casual subscriptions is projected to double, increasing from $2.0 billion in 2010 to $4.2 billion in 2014. Confidential 21 CONFIDENTIAL WFS_0059479 DRAFf - 05.oz.10 · ·. lJ.!>:J•rcniimn .l\lMQG and CM11~l Subscrip\~>n · · ~: · RC'\'cnt\c.· ·. • .. (lnMPllorisJ 40 30 The video game industry is relatively concentrated, with firms like Electronic Arts, Activision Blizzard and Nintendo holding high market share. However, lhe development of software is the most fragmented segment of the industry. While the large firms all have extensive development operations, there are many small, boutique designers in the U.S. Certain of these groups are responsible for some of the biggestselling games of the recent years. With constant changes in console technology and a rapidly growing market, the development of new games is in constant demand. · !Wo8 Top U.S . .EnL~·rtainmcnl Software Publishers' Sony 3% Acttvrsmn Shard 17% Microsoft 4% Take-Two lnteractlve •BoIG SCHEDULED COMPLETION DATE • STATUS Confidential 26 CONFIDENTIAL WFS_0059484 DRAFT - 02.oz.10 F. Futyre MarketB The long-term goal of 38 Studios to create original, extensible IP using mass-market games as the launch platform. This platform approach will allow the Company to leverage existing IP and content into other revenue streams. While the Company is committed to maintaining focus on the release of its first two products; longterm, the Company expects to generate additional revenue streams from expansion of these original products, from ancillary products based on the original products, such as toys, books, comic books, 1V shows, movies, and from the creation of new themes of RPG and MMO intellectual properties. The Company is also planning to develop ways to integrate mini-games playable on handheld devices that allow players to stay connected to their characters, participating in social or eoonomic aspects of the games while away from their PC or console. The Company is planning significant pre-and post-launch activities - including the licensing of ancillary products such as: A toy line from McFarlane Toys Comic books drawn by Todd McFarlane A prequel book to the story of Copernicus written by R. A. Salvatore These activities will allow 38 Studios to brand its proprietary intellectual property rights and give the Copernicus IP more exposure and a competitive advantage. Other pre-release activities may include weekly shows where Todd McFarlane reveals and discusses concept art and R. A Salvatore talks indepth about the lore and history of the Company's iconic characters. 1'he Company hopes that such activities will provide a stage to allow 38 Studios' story to develop, over time, the popularity of massmarket fantasy/science fiction properties such as Star Wars, Lord of the Rings, and Halo. G. Commitments and Contingencies (i) Marketing of Acquired Intellectual Property. $soo,ooo if any sequels to intellectual property acquired in the BHG acquisition are marketed by the Company. As part of the BHG acquisition, the Company has agreed to pay THQ, Inc. (ii) Founding Employee Bonus Plan. The Company is in the process of formalizing its Founding Employee Bonus Plan .. Under this plan, thirty of the Company's original employees have been promised a combined bonus of $1 million dollars to be paid under certain terms and conditions. One-half is payable upon the Company achieving a market capitalization of $500 million. The balance is to be paid upon the Company achieving a market capitalization of $1 billion. Participating employees must be an employee in good standing in order to participate in the plan. H. Litigation The Company is not currently involved in any litigation or administrative proceeding believed to be material lo lhe development of the Company's business objectives or the Offering. Confidential 27 CONFIDENTIAL WFS_0059485 DRAFf - 02.oz.10 I. Facilities In September 2006, the Company leased approximately 30,000 square feet of office and studio space al 5 Clock Tower Place in Maynard, Massachusells for a period of 6.5 years. [The approximate annual rent for the Maynard facility is $XX.] The Company also leases an additional i4,ooo square feet of office and studio space in Timonium, Maryland at 1954 Greenspring Drive, Suite 520. [The approximate annual rent for the Timonium facility is $XX.] Confidential 28 CONFIDENTIAL WFS_0059486 ..--------------------------------------------- ------ .. DRAFT - 05.oz.10 VIII. KEY PERSONNEL AND BOARD OF DIRECTORS The Company's key personnel include: A. ,Jennifer Macl.eap - Chjef Exgcytjye Officer Jen joined 38 Studios Crom Comcast, where she served as vice president and general manager games, responsible for management of all games products, strategy, and business development for the U.S.'s largest cable company. Her extensive and varied experience in online content and interactive entertainment began in 2992 at MicroProse Software. She joined AOL in 1996, where she held numerous positions in the AOL brand programming division, including programming director for the Games Channel. Jen earned a B.A. in international relations from Johns Hopkins University and an M.B.A. with a concentration in international business from the Columbia Business School. Jen was named one of the "Game Industry's 100 Most Influential Women" by Next Generation, one of the "Top 20 Women in Games" by Gamasutra magazine, is the former Chair Emeritus of the Board of Directors of the International Game Developers Association, and is a frequently requested speaker at interactive entertainment industl)' events. B. Bill Thomas - Chief Ooorating Officer Bill brings 33 years of executive and operational experience to 38 Studios. He has set up, developed, and funded operations in the Middle East, Asia, and the United States. As chairman and CEO of Fortune 500 subsidiaries, Bill has built and executed strategic-development plans for globalization of financial service organizations, as well as funding medical and environmental services start-up companies_ He has served as consultant for such conglomerates as Westinghouse, Lockheed, Boeing, Raytheon, Hyunda~ LG Group, Samsung, Daewoo, HSBC, Bechtel, and Texas Instruments; negotiated joint ventures for entertainers like John Denver, Michael Jackson, Tony Bennett, Phil Collins, and the Everly Brothers; and provided leadership for market development, licensing, and trademark for the Malaysian-based American Polo Club USA's penetration of the US market. Bill's extensive experience with working across cultures as well as at all levels of government and commercial organizations provide him with knowledge of and access to a multitude of financial and operational resources. C. Rick Wester - Chief Financial Officer Rick has more than eighteen years of senior-level financial experience in startup and high growth entities, primarily in software and IT services. In addition, prior to his industry experience, Rick spent five years working as a Certified Public Accountant. He continues to maintain his <..."PA license. Prior experience includes budgeting and planning, fundraising, technical accounting, IPO planning and registration, and public company reporting. Prior to joining the Company, Rick was the Managing Director, Corporate Controller for Exa Corporation, a world-wide provider of fluid dynamics software for the automotive industry. Prior, at C-bri.dge Internet Solutions, Inc., Rick was the CFO while it grew from 63 employees with a $5 million revenue run-rate to 700-plus employees with a $100 million annual revenue run-rate. At C-bridge, Rick also oversaw a successful S74 million IPO. Prior to C-bridge, Rick was a public-company Controller at Computer Telephone Corp and he bas spent time in Controller and VP of Finance positions with other young, high-growth entities. As CFO at 38 Studios, Rick oversees all of the Company's internal and external financial affairs, including current and long-tenn financial planning. D. Denise Kaigler - Chief Marketing Officer Denise is responsible for all of the company's marketing activities, including internal and external communications, public relations, product strategy, market research, and branding and positioning for the company as a whole and for all products, [including an original fantasy IP]. She works closely with the development teams. Prior to joining the Company, Denise served as Vice President of Confidential 29 CONFIDENTIAL WFS_0059487 DRAFT - 05.oz.10 Corporate Affairs for Nintendo of America. In that role, she directed Nintendo's corporate communications, government relations, internal communications, public relations, and entertainment and trend marketing. In addition, Denise has more than sixteen years of experience in the athletic and casual footwear and apparel industry, where she held numerous marketing communications positions at Reebok, Rocli>ort and the Adidas Group. E. Gavian Wbishaw - Studio General Manager. M;zynard Studio Gavian Whishaw has been working in software development for over 10 years. He got his start managing web and IT infrastructure projects in the newspaper industiy and in 2001 joined Electronic Arts as a development director. For Electronic Art.'>, hL'i shipped titles include NHL 2002, NCAA March Madness 2003, NBA Live 2003, NCAA March Madness 2004, NBA Live 2004 and NHL 2005, all multi-platform (Xbox, PS2 and PC). Taking this education in how to ship high quality, record selling products in short development cycles, he joined Crytek in 2004 with the title of development director. Crytek, based in Germany, is an industry leader in cutting edge gaming technoloro· and Gavian helped ship the critically acclaimed PC title Crysis while building new teams and working on new intellectual property. A strong proponent of people-centered management philosophies and systems that create world class entertainment products, Gavian joined 38 Studios as executive producer and currently covers studio general management functions as well. F. Tim Train - Studio Genera] Manager, Baltimore Studio With eighteen years of leadership and team experience on numerous landmark PC titles, Tim brings a broad range of administrative skills and product knowledge to the company. He has worked in eveiy genre of computer games, and has the proven abili1y to organize and motivate a team, while keeping within project budgets and scheduling commitments. Tim's career in computer games began at MicroProse in 1991 as a team member on the original Sid Meier's Civilization. During his time at MicroProse he worked in virtually every genre of computer games in various capacities, including contributions to Masters of Orion, Command HQ, Darklands, Sid Meier's Colonization, and dozens of other titles. In 1994, Tim started the Multimedia Group at MicroProse, and designed or implemented a wide variety of multimedia content for games such as Fi4 Fleet Defender, Civilization II, and Magic: The Gathering. In i996, Tim joined Sid Meier and Brian Reynolds at Firaxis Games where he authored the multimedia content for Sid Meier's Gettysburg. Next, he was producer and co-designer for 1999's critical and commercial hit, Sid Meier's Alpha Centauri. In his final project for Firaxis, Tim designed and produced the Alien Crossfire expansion pack for Alpha Centauri. In 2000, Tim joined Brian Reynolds, David Inscore, and Jason Coleman as a founding partner in Big Huge Garnes. Tim served as executive producer on BHG's first hit, 2003's Rise of Nations, and also designed the Conquer the World single-player campaign game. On Rise of l..egends, Tim continued in his role as executive producer and a member of the core design team. Tim holds a Bachelor's in International Studies with a minor in Psychology from Johns Hopkins University. G. Jon Laff - ChiefTechnology Officer. Maynard Studio With more than a dozen years as an engineer in the video game industiy, CTO Jon Laff has a proven track record in software d~ign and technology leadership. Prior to joining 38 Studios, Jon was a senior systems engineer and lead engineer at Electronic Arts' Montreal development house. He played a key role in growing the new studio and in developing its first AAA IP title, Army of Two. At EA Los Angeles, Jon was the lead engineer on Medal of Honor: European Assault and the Xbox lead engineer on Medal of Honor: Rising Sun. Prior to Electronic Arts, Jon served as a lead and senior software engineer al VR-1/Jaleco Entertainment in Colorado, where he worked on MMO products Lost Continents and VR-1 Crossroads, as well as other online titles including Ultracorps and Fighter Ace III. Jon's extensive experience in the game industry spans a broad array of disciplines including: online and networking, artificial intelligence, animation, audio, game authoring tool~. optimization, game play systems, graphics, physics, relational databases and game senier architectures. Jon holds • Confidential 30 CONFIDENTIAL WFS_0059488 .------------------------------------------~------------ .... - DRAFf - 02.oz.10 two degrees from the University of Colorado at Boulder: a B.S. in computer science and a B.A. in mathematics. H. .Jason Coleman - ChiefTechnolo!lY Officer. Baltimore Studio With 15 years of industry experience, Jason thrives on the ever-changing Jandscape of game development and on working with some of the cooJest, most creative people on the planet. Having completed his Masters in Physics at the University of North Carolina, Chapel Hill, Jason's extraordinary career in gaming began when he took a summer leave from his PhD studies to work in the quality assurance department at MicroProse. Within the first week, he fell in love with the industry and requested a year off from his PhD studies, but he never returned. In 1996, Jason left MicroProse to become Firaxis' first employee. With the "many hats" prerequisite of working for a start-up, Jason set up the network, managed the hardware, and coded the core engine for both Sid Meier and Brian Reynolds. This enabled the development of Sid Meier's Gettysburg! and Sid Meier's Alpha Centauri. In 2000, Jason left Firaxis to help found Big Huge Games with the goal of making AAA games that are both critical successes and commercial blockbusters. He was the lead programmer on Rise of Nations (2003), Rise of Legends (2006) 1 and Catan! for XBI..A (2007). As CTO, Jason sets the tone for the programming team at Big Huge Games. Still a coder at heart, he enjoys probJem-solving cha1lenges as Big Huge deve1ops games for various platforms, including PC, Xbox 360, Playstation 3 and Nintendo Wii. Jason holds a B.A. in Physics from Johns Hopkins University and a Masters in Physics from UNC-Chapel Hill. The Company's Board of Directors include: A. Curt Scbillini: Background in Section VII.C.iii B. Martha Crowninshje!d [Need data] C. Jim Halpin Jim Halpin is the President and owner of River Bend Inc., a private investment company. Prior to starting his own firm in 2000, Mr. Halpin served as President and CEO of Comp USA for seven years. During his tenure at CompUSA, he was named one of the "top 25 managers in the world" by Business Week in 1998. Mr. Halpin also served as President of HomeBase and BJ's Wholesale Club. Mr. Halpin was also a director of MaIYel Entertainment and Life Time Fitness. He was Chairman of the Compensation Committees at both Marvel and Life Time Fitness. Jn addition, he was a member of the Strategic Planning Committee at Marvel and the Finance Committee at Life Time Fitness. Mr. Halpin formerly served on the boards of Access and Posse, nonprofit organizations offering educational assistance to urban youth. Mr. Halpin has guest lectured at Harvard Business School, Massachusetts Institute of Technology, Babson, Columbia, and Wharton. D. Douglas Macrae [Need data] E. Kevin J. Roche Kevin has 26 years of leadership experience in investment banking, private equity and leveraged finance. From :m01 lo 2006, Kevin was Head of Investment Banking at Wachovia Corporation with responsibility for ten Corporate Finance industry coverage groups, Mergers and Acquisitions, Financial Sponsors Group, and Principal Investing. He held leadership responsibility for over $2.0 Confidential 31 CONFIDENTIAL WFS_0059489 DRA.Ff - 05.oz.10 billion of revenue, a $40 billion loan portfolio and a $2.0 billion principal investing portfolio. He quadrupled market share of investment banking fee based revenue over a five year period. Prior lo being Head of Investment Banking, Kevin was Co-Head of Leveraged Finance at Wachovia Corporation from 2000 to 2001 with responsibliity for the Loan Syndications, High Yield Origination, Sales and Trading, Leveraged Capital and Leveraged Finance Underwriting groups. From 1988 to 1999, Kevin was a Managing Partner at Wachovia Capital Partners with a leadership role in founding the private equity inve.sting business and in the successful growth and development of a $2 billion principal investing portfolio. Kevin was Vice President at Kidder, Peabody & Co. Incorporated from 1980 to 1982 and 1984 to i988. Kevin holds a B.A. in Economics, magna cum laude, from Duke University and a M.B.A. from Harvard. F. Sundar Subramaniam Sundar Subramaniam is the Chairman of Knome and Cell Exchange. He has founded eight successful IT companies, five of which completed lPOs. Mr. Subramaniam also served as Chairman of I-Cube, Cbridge, Open Environment Corporation, Wordstreet Corporation, Integrated Computing Engines, and as Managing Director of Cambridge Samsung Partners, a Venture Capital firm. Mr. Subramniam completed his Bachelor of Science in Economics and Computer Science from Brandeis University and an MS from the Harvard-MIT Division of Health Sciences and Technology (HST). G. Thomas Zaccagnino [Need data] Confidential 32 CONFIDENTIAL WFS_ 0059490 . ·----···· - - - - - - DRAJ:t""T - 05.07.10 IX. FINANCIAL STATEMENTS AND PROJECTIONS Attached hereto as rExhibit Fl are the unaudited draft financial statements of the Company for the years ended December 31, 2007, 2008, and 2009. The Company is currently in the client acceptance process with PriceWaterhoUS4lCoopers LLP. Fieldwork on a year ended December 31, 2009 and inception-to- Tuesday, August 24, 2010 11:17 AM Knychalski. Robert S.:; Jackvony, Bernard A. Hrinkevich, Craig ; Marrone, Matt Subject: FW: 38 Studios PPM- Risk Factors Attach: 38 Studios EPP Memorandum_FINAL_S.23.10.pdf Peter M. Cannava Vice President Public Finance Investment Banking Wells Fargo Securities 375 Park Avenue I New York, NY 10152 I Mallcode: J0127·060 Tel: 212.214.6528 I Fax: 212.214.8922 I Cell: 631.431.7356 peter.cannava@wachovla.com From: Topp, Aaron Sent: Tuesday, August 24, 2010 10:10 AM To: Cannava, Peter; Hrlnkevlch, Craig Cc:lamarre, Mark; Nelson, Erik (TMT Group) SUbjec:b 38 Stud1o$·1>.PM - Risk Factors Pete/Craig, Please find the 38 Studios PPM attached to this e~fl. A$ discussed, the r1$k factors: w~re drafted wtth the. help of tl)~company and.couns~I. Note as you're reviewing the document th~t:'ft WiitS drafted"befor.e, the RIEDC path was official~ You'll notice a higher equity raise and different fina_nclal projectl~ns, whl.ch assume .a thln:I party .distribution model for· the MMO rather than the:-self-dlstributlon as desctlbed In the ~IEOC process. Also ·be aware onhe follow Ing: • The Mercury c:;odename· ·for the RPG has ~ publicly· stated' as Kingdoms of Amalur; Re:ckonlng • Under Risk Facto.r G., It may be worth mentioning that the company is pursuing a·self-dlstributlon model ft.)t;the MMO _ . • Risk Factor H. mentions raising additional capital through publishing and distribution agreements. I would check With the .company about whether we want to keep this language since the company Is pursuing self-distribution for the MMO. The current EA agreement Is providing development capital for the RPG. I'm happy to answer any follow~up questions that you may have. Aaron R. Topp Vice President Technology, Media & Telecom Investment Banking Wells Fargo Securities Office: 704. 715.4377 Cell: 703.819.9431 Fax: 704.383. 7037 THIS PRIVATE PLACEMENT MEMORANDUM JS NOT TO BE SHOWN OR GIVEN TO ANY PERSON OTHER THAN THE PERSON WHOSE NAME APPEARS BELOW AND IS NOT TO BE COPIED OR OTHERWISE REPRODUCED IN ANY MANNER WHATSOEVER. FAILURE TO COMPLY WITH THIS DIRECTIVE CAN RESULT lN A VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED. PRIVATE PLACEMENT MEMORANDUM of 38 STUDIOS, LLC May23, 2010 -CONFIDENTIAL~ This numbered copy is for ibe exclusive use of the perSQn named below; does no1. CQUStitute an ofter to any.o~tler person and 11).Ust be returned to 3& Studios, llC immediately upon request Copy No. Name If the above name and number do not appear., there is a presumption that this.Memorandum has l>een impr;OperJy reproduced and l:irculated, in which case 38 Studioii, LLC disclaims any respoaSibility for its contents an.d use. • PRTV ATE .PLACEMENT MEMORANDUM Dated: May 23,.2010 38 SIUDJQS. LLC (a Delaware Limited Liability Company) Offering of up to 55,555,556 Cius B Units ("Class B Units") Offering Price: $OAS per Unit (the ''Offmng Price; THI~ OFFERING INYOLVBS A HIGH DEGREE OF RISK (See "Risk Fa~ors" in Section X) THIS MEMORANDUM CONTAINS .CONFIDENTIAL INFORMATION This Private Placement Memorandum (this "Memorandum..) relates 10 an offer by 38 Studios, LLC, a Delaware limited liability company (the "Company" or "38 Studios"), to sell an aggre~te of up to 55,555,556 Class B Units at a purchase.price of$0.45 per Unit. The ot'fering (the "Offering") will tenninate at 5:00 p.m. Eastern Time on July 31, 2010 (the ''Tcrmimitlon Datej unless. extended by the Company. The Company reserves. tbe rigbt in its sole discretion to aooept or rejeOtential" or "continue" or the negative of such terms or other variations on these words <>r compuable terminology are intended to identtry forwan:l l<>oking statements, and the· flnancia I projections included heteiil also constitute rorward-tooldng statements. Thes.e statements describe the Company's beliet"s c6ncem.ing the ruture -based cin currently ,available infonnation and are only prediction5 ·and involve k.ilowtt and unknown risks, uncertainties and :other factors, including the rilb described herein, that may cause the Company'.s actual business results, levels of activify, perfunnance or achievements to be materially-different frotn any future result; levels of activity, performance or achievements exprts$ed or implied by such forward-looking statements. In addition to the risks described herein, important factors to consider and evaluate in such forward·lex>king statements include: (i) unanticipated delays ·in game devel0pment or higher than anticipated development cost$; (ii) changes in ~l competitive market f.llctOrs, technology or consumer preferences that could adversely afl'eQt the Company~s product dev.:~lopment, competitive position or ability to generate revenue from hs planned games; (iii) dependence on key personneJ; (iv) any inability to raise additional funding when required, and the risk of unanticipated working capital or other cash requirements including those created by any fitilW'e of the Company to meet performance milestones under its third-party development and publishing agreement(s) or to otherwise accurately anticipate the costs associated with its business model and other critical· activities; (v) changes in the Company's business strategy or an in~ility to execute its strategy due to unanticipated changes in the entertainment and interactive media businesses; and (vi) the failure the Company to complete any or all or the transactions described herein on the terms currently contemplated, In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this Memorandum, there can be no assurance that the forward·looki11g statements contained herein.will in fact transpire. or Although the Company believes that the expectations renect'ed in the fOrw&rd-looking sta~ts are reasonable, it results, levels .of activity, performance or achievements. The Company's actual results could differ materially ftom those contained in the forward-looking statements due to a number of risks and uncertain~s. Important factors that could cause the Company's; actual results to differ materially from its expectations expressed in the forward-looking statements are set forth.under the heading "Risk Facton" in Section X. Bach prospective investor should read the cautionary statements as being applicable to all related forward-looking statements wherever they appellT. The Company assum~ no obligation to publicly update or revise these [Qrward-lOQk:ing statements for any reason, or to update the reasons actuaJ results could differ materially from those anticipated in these rorward-look.ing_statements, even if new info~ation becomes available in the future. ~nnot guaJantee future - I I . - INVESTOR NOTICES ~S INVESTMENT INVOLVES A HlOH DEGREJi OF RISK {SEE "RISK FACTORS" lN SECTION X). TJ:I£ CLASS B UNITS ARE NOT R£1\DILY TRANSFERABLE AND SHOULD BE PURCHASED FOR LONG·TERM INVESTMENT ONLY, ............. 1llE CLASS B UNJn; HAVE NOT BEEN R:EOIS1'EllED WITH TJIB SECURIT,n!S AND EXCHANGE COMMisSI,ON AND Afm QFFERED PURSUANT TO AN EXHMPTIO:N FROM ·REOJSTllATJON. THE CLASS B UNITS MAY ONLY· BE PUB.CHASED BY ACCREDITED INVESTORS. ............... TIIE CLJ\SS B UNITS HAVE NOT BEEN APPROVED OR DfSAPPR.OVED BY THE SECUR.lTIES AND EXCHANGE .COMMISSION NOR ANY STATE SECURITIES COMMJSSION, NOR HAS ANY SUCH COMMISSION PASSED UPON TIIE ACCUJtACY OR ADEQUACY Of' THIS PRlVATE PLACEMENT MEMORANDUM. ANY REPREsENTATION TO THE CONnARY lS A CR1M1NAL OFFENSE. •••••••••• THIS MEMORANOuM CONTAINS CONFIDENTIAL INFORMATION AND IS SUBMITTED JN CONNECTION WRll TIIB PRIVATE PLACEMENT OP THE CLASS B UNITS DESCRIBED HEREIN AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER. PURPOSE. ANY DISTRIBUTION OF JHJS MEMORANDUM, IN WHOLE OR IN PART, OR TUE DNULQENCE OF ITS COJllTENTS, IS UNAUTHORIZED. ········~· nns MEMORAlIDOM .CONTAINS INFORMATION THAT HAS BEEN OBTAINED FROM SOURCES·DEEMBD .RELIABLE BY rim COMPANY."SUCH INFO~TION NECESSARll.Y INCORPORATES SlGNIFICANTEVAWAilvE AND FACTUAL ASSUMPTIONS•. ·UNLESS OTHER.WISE INDICATED. SUCH INFORMATIONlJAS NOT BEEN lNDEPENDENTLYVERlFJi!D• ........... •••••••••• THE RECIPIENT OJ' THIS MEMORANDUM, BY ACCEFTh'iO DELIVERY HEREOF, AOREES TO.RETURN nns MBMORANQUM AND ALL ENCLOSED DOCUMENTS TO THE COMPANY IF nrE RECIPIENT DOES NOT AGREE TO PURtflASE ANY OF THE CLASS 8 UNITS OFFERED HcllEBY. . ......... . 'NO.OFFERING LITERATURE (OTHER THAN THIS MEMORANDUM) OR ADVERTISING IN ANY FORM SHAll BE EMPLOYED. IN THE OFFERING OF niE CLASS B UNITS. NO PERSON HAS BEBN AUTHORIZED TO MAKE ANY REPRESENTATION OTHER THAN TIIOSE CONTAINED IN THIS MEMORANDUM OR THE EXHIBITS HERETO, AND, 1F MADE. SUCH REPRESENTATION MUST NOT BE REIJED UPON .. PROSPECTlVE INVESTORS ARE NOT TO C0NSTRUB TI1E CONI'ENTS OF lHlS MEMORANDUM AS I.BOAL. BUSINESS OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OR HER PERSONAL COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO ~GAL. TAX, ECONOMIC AND RELATED MATIERS CONCERNING nIE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR.HIM OR HER. ·••!t••···· THE COMPANY SHALL MAKE AVAILABLE TO EACH INVESTOR OR Hts OR HER AGBNT.DURlNO nus OFFERING AND PRIOR TO tHE SALE OF AJ"'lY CLASS B UNITS. 'THE OPPORTUN11Y TO ASl(. QUESTIONS OF AND OBTAIN ADDITIONAL INFORMATION FROM ANY PERSON AUTHORIZED TO ACT ON BEHALF OF nm COMPANY CONCERNING Tl!RMS AND CONDITIONS Of THIS OFFEJUNG OR AA"Y OTHER RELEVANT MATTERS (INCLUDING BUT NOT LIMII'ED TO ADDITIONAL INFORMATlON NEC~SARY TO VER.1FY THE ACCURACY.OF TIIE JMFORMATION CONTAINED IN THIS MEMORANDUM) TO THE EXTENT THE COMPANY POSSESSES SUCH INf'OR.MATION OR CAN ACQUUlE IT WrrHOUT UNREASONABLE EFFORT OR nm EXPENSE. •••••••••• mrs MEMORANDUM DOES NOT CONST.ITU"IE AN OFFER OR SOUCITATION IN ANY STAIB OR OTHER rulUSDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT PERMITTED BY LAW. ······•••t! nm COMPANY RESERVES nm RIGHT TO WITHDRAWTifl!.OFF~G AT ANY TIME• •••••••••• - COQffdentia.1 s fSI i:l\ Table of Contents SECTION PAGE NO. J. EXECUTIVE SUMMARY 1 Il. TERMS OF OFFERIN.0 AND PLAN OF DISTRlBUTION 10 m. DESCRIPTION OF SECURITlES 12 IV. CAPITALIZATION AND INDEBTEDNESS IS V. USE OF PROCEEDS 19 VI. lNDUSTRY OVERVIEW 20 VII. NATuRE OF THE COMPANY'S BUSINESS 23 VIIl. KEY PERSONNEL AND BOARD OF DIRECTORS 3ff JX. FINANCIAL STATEMENTS AND· PROJECTIONS 34 X. RISK FACTORS 43 XI. HOW TO SUBSCRIBE FOR CLASS B UNITS IN THE OFFERING 48 XU. EXHIBIT 59 Bxlubit A - LLC Opemting Agreement - Confidential 6 The l¢llowing summary Is qualified Jn its entirety by lhe more detailed inlonnation appearing e/sewnere. in tJrls. Memorand.ilm. I. EXECUTIVE SUMMARY A. Thi; Compan)i 38 Studios is a development-stage company founded to ·exploit the anticipated market growth of intemctive entertainment software. The Company bas been driven by ·a "Visionary Team" that provides creative direction for an original intellectual property ("[P'j and interactive enteJtainment product portfolio. The Visionary Team was conceived and implemented by the Company's founder, former M.ajor League Baseball pitcher ~ avid gamer Curt Schilling. and includes New York Times bestselling fantasy author R.A. Salvatore, award-winni..g comic book m1i$t·and creative talent Todd McFarlane, and video game pioneer game designer Ken Rolston. All are well known for their individual successes and respected in the mark.et the Company is pursuing. The Company currently operates two video game productfon divisions called studios. Both studios are staffed With top, industry-recognized. experienced talent with proven records of successful; profitable, and on-time delivery of video game products. One of the Company's studios, known µi the industry as ..Big Huge Games" ("BHG''), is located in TimQ1lium (Baltimore), Maryland, and is working-on a single-player multi-platfonn game. In May of2009, the Company acquired BHG assets from THQ, Inc. The Baltimore studio currently employs 79 full-time staff and is focused .on its first Role Playing Game (''RPG"). Code named Mercury, the release date of the RPG is scheduled for tbe fall o'r 2011. BHO bas a track. record of releasing successful video games, including the 2003 PC Game of the Year, Rise-ofNations. · The Company .has signed a publishing and djstribution agreement with Electronic: Amj Ilic. ("EA'') for Ille RPG Mercury under which EA has agreed, among other tbi.12gs, to fund budgeted development costs of the RPG through.its general commercial release, subject to the Company's achievement of specified milestones. The Comtiany believes that the publishing relationship with EA, which involved significant due diligence, mitigates product success risks substantially through EA 's ·commitment to funding, development support. retail distribution, and marketing of the Mercurytitle. The Company's other game production studio is located in Maynard, Massachusetts. This studio currently employs 86 full-time staff and is dedicated to the development of the Company's first Massively Multiplayer Online game (..MMO"). Code named Copernicus, the release date for the MMO product is scheduled fur the second half of2012. Consistent witb the Company's funding strategy, the Company is in discussions with top publishers regarding a publishing and distributiOn agreement for the MMO Copemlcus, under which the Company anticipates that il would receive signiflcant advance-funding for development of the game. Consistent with the aforementioned BA deal for Mercury, such publishing and distribution relatioiiship's typically do not include equity ownership interests. Toge~er, these studios are developing en original ~n~y stocy that takes place in a vast world over tho~ of years. While the Company is committed to maintaining focus on the ·release of its fll'St two products, long-term, the Company expects to generate additional reveniie streams from expansion of these original products, fi'om ancillary products based on the original products, such as toys, books, comic boob, TV shows, movies, and from the creation ofnew themes ofRPG and.MMO .intellectual properties. The Company bas inten1ionally .structured ifs· production proces~es to be modul~, which the Cc>mpafty believes will facilitate ~he easy development of future JP and content based· op the same themes and characters. Tolal Company full~time employee ("FTE") headcount is currently 177. ... ·' . . . . SF..CUR!TIES ·-:)"''··~-'~ ConfidenOal 7 The Company bas been privately fonded to date by approximately $39 million in equity and equity-linbd securities, including $6.5 million of Class B Units sold in recent months, and approximately $3 million in shorMenn and long-tenn debt financing. The Company Opel(ate& pursuant 10 ilS Second All)ended and Restated Limited Liability _ComP8.JlY Agreemen1 dated November 1"6. 2009 (the "Operating Agreement"'). The Company's headquarters is Joc:ated at S Clock Tower Place, Suite 140, Maynard, Massachusetts 01754. B. The Offering This Offering is for an aggregate of up to SS,SSS,556 Class B. Units at o purchase· pri in all material respectS. and would be convertible into common stock on a one-to-one basis. The Company may offer to ·certain holders of its existing Units the opportunity tO participate in this Oft"ering. An existing investor in the Company has indicated interest in purchasing $5.0 million ·or the Class B Units offered hereby. The minimum subscription by any potential investor will be $250,000 unless otherwise approved by the Company. C. Use ofProoeed§ The net proceeds oftbe t>tfering shall beprilD!lrily applied to ongoing IP, video game development Jnd launch costs including persbiittcl compensation, marketing costs, general administrative co"sts and other expettses. In addition. .a· portion of the· proceeds of the· Offering will be used «> ~tisfy the Company's short•.term dtbt ob6garions. D. Risk Factors this offering involves a HIGH DEGREE OF RISK. The Company is a development.stage company and requires years of development and launch activities. before realizing any revenue from its products. Assuming successful completion of the Offering, under the Company's current financial projections, the Company expects that it wiU need additional funds in 12 to 14 months, but there is no assurance that funds in the amount needed by and on 1enns satisfactory 10 the Company will be available at that time. The Company currently plans ~ pursue publishing and distribution arrange_ments with industry known third party entities for its MMO and RPO products undtr which development costs would be financed through the launch oftbe - Confidential 8 ~ ~ product. The Company anOcipatcs that additional funding will ool be required until the launch of the MMO prOduct if such publishihg arrangements are ·successfully completed. The amount ot additional ftmds that the Company will require after the expenditure.of lbe proceeds of this offerillg may be s~b~tantiel. An investment in the Company involves other risks. including that the Company is highly dependent upon its "Visionary Team" and key employees. An investment in the Company cannot be readily liquidated, and investors should be aware that they may be required to bear the financial risks of this investment for an indefinite period of time. For a more complete description of the risks associated with an investment in the Offering. see ..Risk Factors,. in SectionX. · E. Additional Information Additional ·mfonnation about the Company's blisiness stra1egy can be found in SeCtiol1 VD, Nature of the· Company's Business. Prospective investors are alse invited to request additional infonnation from and pose questions to the Company tbrOugh the Agent, and the Company's senior management will endeavotto provide such information and answer such questions. · PROSPECTIVE INVESTORS SHOULD READ THIS ENTIRE MEMORANDUM FOR A COMPLETE UNDERSTANDING .OP THE OFFERING AND SHOULD NO'f.Rf:LY UPON THE FOREGO/NC SUMMARY. ·''°I ,h",!'{~, ;:_ ., . ~-~Q!J!t!:l'JES ·i~ :::,.~.··t..:- Confidential 9 U. TBRMS OF OFFERING AND PLAN OF DISTRIBUTION lssaer: 38 Studios, LLC (a Delli.ware Limited Liability Company) Amowttof An aggregate of up to $25 million, tepresenting an approximately 32.-5%. post.money ownership position, on a fully diluted basis, including Units reserved for an employee and consultant incentive option pQOI and increased amounts to be reserved for a new Common Option Plan. Financing: Giving effect to the recent sales ofS6.5 million of Class B Units. the total issu·ed Class B Units will represent approximately 41 % ownership on dully·diluted baSis. The Company intends to offer its existing Members the opportunity to participate in this Offerins. An existing investor in the Company has indicated·interest in purchasing $5.0 million of the Class B Units offered hereby, althou~ no definitive agreement has been executed. -Type ofSecurity: Membership interests in the Company classified as. Class B Units. Number of Class B Units Included In the Offering: Up to a total of 55,555,556 Class B Units are being offered to qualified investors. Prlu: $0.45 per Unit. This. price represents .a fully*Clilutcd pre·money valuation of approximately $45 .million (not including the recent Class ·B Unit proceeds. of $6.S million) and· a fully..cJiluted post-money valuation of$77.3 million (including the recent Class B Unit proceeds of$6.S mUlion) based on the anticipated capitalization of the Company as of the closing of the. Offering, which is subject to change at any time, including after the issuance and sale of all of the Class B Units offered in the Offering. The COmpany reserves the right to issue and sell Class B Units to investors at aper Unit price greater"than or less than the $0.45 Offering Price.stated above. The Offeritig Price is not related to the COmpany's asset value, net worth or any .other· e5tablisbed criterion of value. FactOl'S considered in establishing the price include the following! management's estimate of the business potential and prospects of the Company's products in development, the present status of the Company's marketing effol'fs, and consideratfon or the above factors in relati"on to valuations of comparable companies and the cummt condition of the "industry-and the economy as a whole. See "Capitalization and Indebtedness" in Section N for the pre· and post~money capitalization tables. Closings: The purchase and side of the Class B Units shall take place at one or more closings. Plan of Distribution: The Offering period will terminate at 5:00 p.m. Eastern Time on the Termination Date, unless extended by the Company. The Company may consummate the Offering and the purchase and sale of the Class B Units at mote:than one closittg (each, a ..Closing·; prior to the Termination Date. The Company reseryeS: the absolute right to extend or withdraw this Offering at any tifl\C, as well as increase or decreas.e the number of Class B Units offered hereby. Jn the event that the Company elects to withdraw or cancel this Offering. all subscription payments .received - Confidential 10 ti , . . , and held by the Company for a pending Closing will be promptly returned to the respective investor, without interest. The Company reserves. the right in its sole discretion lo (i) actept or reject any subscription. (ii) allocate or restrict the number of Class B Units that can be aeq11ired by any subscriber. and (iii) determine the maximum number of Class B Units to be sold in total within the limit set forth herein. In the evenl the Company holds more than one Closing. ii may in its sole disc.re1ion accept a part of a subscriber subscription at each Closing. In the event that an or a portion of the subscriber's S'1bscription is not accepted, the subscription payment not accepted will be promptly returned, without interest. The minimum substription by any potential investor will be $250,000 unless· otberwise approved by the Company. The Company may use one or more brokers in connection wilb thi5 Offering. T~ may be a sales commission· or other remuneration paid to such brokers .in connection withJbe Sale of the Units offered hC!llby in a commercially reasonable amount. SuJtabU/ty Standards:· The Class B Units will only be. offered and sold to "accredited investois" as dermed in Rule 501 of Regulation D under the Securities Act of 1933. as am.ended (the "Securities Act''). Accredited investors include: · A. certain institutional investors; B. the eitecutive officers.and directors of the Company; C. natural persons ~..indMdual net worth, i;>1' wb9se joint. net. worth with -their spouse at the time of purchase exceeds 'S l ,000,000:. D. natural p,ersons ·who have had individ~ (not joint) income iii excess of .~7.0.0,odo in each of the last tW9 years and who ~~nably expect to ~ve individual (not joint) income excess of$l00,000 in the c~ year; m E. P. natural persons who have bad joint inQOme with their spouse in ex.~ss of $3"00,000 in 1:1acb of the last two years and w® reasonably expect to have joint income with their spouse in excess of$30b~ooo in the current year; and entities in which all of the equity owners are aecredited investors described in clauses A though E above. A more complete description of qualifications of aceredited investors is· set forth. Prospective Investor Questionnaire: in Section XI. - C0.nfide'ntlal ~- the 11 BJ ,m III. D.ESCRIPT10N OF SECURITIES As the Company is a Delaware limited liability company, its investors whose subscriptions are accepted by the Company become ..Members." Rather than receive.stock. investors in an LLC receive "Membership Int~" in the form ofUnits. The Company operates under the Operating Agreement, which reflects the rights, pn:ferenees: and ·privileges associated with. t~ Class. B Units. The Operating Agreement will be anwnded to increase the autbori7.ed number. o.£ Class- B Units to accommodate the Offering. The Comp.any is considering converting from· an LLC to a·.subchapter C Delaware corporation in· the near future. possibly as soon as the closing of this offering. If the conversion occurs~ the Company anticipates that each c.las.s of LLC Units would convert to a separate class or ·series of convertible preferred stock with substantially tbe same rights ·and prefmn~ as the corresponding class ofLLC Vails, in all material respects, and would be convertible into common stock on. a.one-to-one basis. Except as noted below, each Member bas the same votjpg rights under the Operating Agreement: ·eacb Member shall be eJJtitled to one vote for each Class A Unit, Class A1 Unit or Class B Unit held by such Member. Me•rs holding Class B Units will vote together with holders of ¢lass A Units and Class A1 Units as a single class and will not be entitled 10 separate class voting. ln\'estors subscribing to the Offering whose subscriptions are accepted by the Company shall become Members or the Company with the rights and privileges described in the Operating Agreement, as amended. The Company is offering up to SS,SSS,556 Class B Units. The sale price of the Class B Units has been determined by the Company and does not necessarily bear any relationship to the Company's book value, assets. past llpCDlting results, financial condition, generally accepted accounting principles or any other established criteria ofvalue; The Company has not declared or paid any dividends or made any distributions with respect to its Unjts since its inception and intends, for ihe foreseeable future, to retain eaminp, if any, to finance the dev~lppment aod expansion of its business. (See 0 Risk Factors".in Section X). Uquldatlon and DisJrlbutlons: Cash to be distributed to Members. upon a liquidation or wiliding '1P of the Company or as otherwise detenrtined by the Board of Directors (such as in a dividend or otbcw distribution to Membets), ~ball (after satisfying the COlilpJily'~ debts and obligations) be distributed as folli>ws: - (i) first. one hunOJ'tion. to the cash contribufed.·by such Members to the Compim.y:.in exchange for sueb CJass B Units; (ii) second, one hundred pen::ent (100%) to Members holding ·Cfass A 1 Units, to the extent of and in proportion to the cash con1;ributed to 1 the Company by such Members in exchange for juch Class A :Units; (iii) third, one hundred percent (lOOOAi} to Members holding Class A Units, to the extent of and in proportion to the cash contribured to the Company by such Members in exchange for s11cb Class A Units~ and (iv) thereafter, in proportion to the respective number of Units held by each Member. Confidential 12 ---------·----··-···-·--··--·-- AllocatJons of Prollt and Loss: Profits and losses shall be allocated to Members in such amounts and proportions as are necessary for their respective adjusted capital act:ount balances 10 'equal their respective "Target ·Capital Account Balances" as of the close oh~ll fiscal year. As used herein, "Target Capital A~unt Balance" shall mean the amount a Member would tberi be entitled to receive if the Company were to sell its noiicash assets at book value, satiSfy its debts md obligatioos in acctirdance with their terms, and then liquidate and distribute cash to Members in .aocordance with the distribution provisions described above. Voting Rights: Each Unit shall represent one (1) vote. Members holding Class B Units will vote together with holders of Class A Units end holders of Class A 1 Units as a single class. The size of the Compa1ly's Board Qf Directors i~ currell.tly set at 1line · (9) members, each of whom shall be elected ~Y a vote of the Memb~ holding a majority of the Units issued, ~utstanding and entitled to vote there.on (voting together as a single class). The current. directors consist of: Curt Scbillin& Jennifer Mac~n. Bill Thomas. Martha Crowninshield. Jim Ha,lpin. Douglas Macrae, Kevin Roche, Sundar Subramaniam, and Thomas Zaccagnino. The Members may amend the size and composition of the Board of Directors from time to time in accordance with the terms of the Operating Agreement. Protective Provisions: Consent of the holders of at least a majority of Units (voting together as a single class) shall be required to seU all or substantially all of the assets of the Company or merge with, or consolidate inlO, another entity. For so Long as at"ieast I,90(>,000 Class A Ullits remain outstanding..CQnsent oftbe: holders of at loa$t a majority of the Class A Units (voting. as a ~-~lass) shall be ie-quired for any action that.: (i) alters or i:banges the rights, preferences or privileges of the Class A Units; (it') increases or decreases the .authorized number of Class A Units; (iii). creates (by reclassification or otherwise) any new class or series of Units having rights, preferences or privileges senior to or on a parity with the Class A Units; (iv) results in the redentption or repurchase of.atiy Class A Units (other than pursuant to equity incentive 'pements with service providers giving the Company the right to repurchase Units upon the termination of services); (v} results in any merger, corporate reorganiz.ation or other transaction that results in a change of control of the Company, or any transaction in which all or &Ubstantially all of the assets of the Company are sold, unless the cash and/or equity collSideration in the transaction is greater than 5150 Dllllion; (vi) increases the authorized size of the Company's Board of DirectoIS to more than nine (9); or (vii) results in the reclassification of Units junior to the Class A Units into Units having rights and preferences or privileges senior to or on a parity with the Class A Units. Information Rights: II . ···-·---- .. -· -·· So long as an inve$tor continue!; to hold at leut.250,000. Unics, the Company shall deliver to such investor audited annual and unaudited quarterly financial ·statements. These provisions shall terminate· upon the earlier of a change of control of the Company and the Company's initml public atT~tig. · Confidential 13 ··-·----------------------------------------- ~ ~ Inspection Rights: The Company shall keep such books and -records, in addition to any documents and information required to be furnished to a Member under Delaware law, at the principal office of the Company for examination and copying by any Member or Director, at such Member's or Direct:Or's reasonable request and expense, during ordinary business hours. These provi;iions shall terminate upon the earlier of a change of control of the Company and the Company's initial public offering. Pre-Emptive Rights: Each Member shall have the right in the event the Company proposes· kr offer equity securities to any person (other than securities ~rved under equity incentive plans, securities issued pursuant to ·acquisition n-ansactiQJU!, securities issued to financial institutions or lessors in conncctio.n with commercial credit lllTllngements, equipment financiqp -0r similar transactions, securities issued in strategic transactions, securities iss~ in a qualified initial public oftering, and other customary exceptions) to pure~ lheir pro rata portion of such equhy securities. These provisions shall tenninate upon the eerlier of a ch!lllge of control of the Co~y and the C.ompany's-initial pUblic offering. Rlght ofFinl Refusal: The Company first, and the Members second (on a pro-nita bas's), shall have. a right of first .refusal on any proposed sales of Units by any Membt:r· to a· third party. These provisions shall terminati;i upon the earlier oh c~ge of-control of the Company or the Company's initial public offering. The sale·ofthe Class B Units is subject to 1he provisions of, and each of the investors purchasmg-.tbe ClllSs -B Units will be required to execute, a subscription agreement and other related agreements, and the terms of lhe Class B. Units will be set forth in the amended Operating Agreement. Any purcb&se of Class B Units should be made only after a complete and thorough review of the provisions of such agreements. If any of the tenns, conditions or·other provisions of.such agreements .are inconsistent with or -conb'tlry to the foregoing summary or other descriptions hi ·this memorartdum, the tenns, conditions and other provisions ofsuth agreements will control. - CoufldeqtlaJ 14- t!l ~ IV. CAPITALIZATION ~D INDEBTEDNESS A. Current Equit,v Capjta}jzation As of the date ~f this Memorandum, the Company has designai~ and authorized for issuance three classes of membership interest: Class A Units, Class A1 Units, and Class B·Units. the Company expects that, on .or before the initial Closing, the Company will amend the Operating Agreement to increase the number of authorized Class B Units to accommodate the Offering and to-create a new class of Common Units. Under the terms of the Operating Agr@ment, the Company may borrow fuods with the approval by the Board of Directors and admit new Members with the approval of holders of a majority o(tbe three classes of Units voting as a single class. A summary of the Compaoy~s current equiiy capitalization is~ follows: class A Units Class A' units Class B Units Total Authorized 65,000,000 30,000,000 25~000,000 120,00Q,OOO Issued 47,393,996 25,923,663 9,420,290 82,73.7,949· issued Options 9,351,333 9,351,333 lssued Warrants Unlssued Units reserved under Class A Option Plan Total Fully Diiuted 2,822,581 2,822,581 254.6§7 59,822,577 25.;923,653 9,420,290 2541667 95,1661530 Percent 15sl.1ed 57.3% 31.3% ll'..4% l00.0% Percent Fulty-DIMed 62:9% 27.2% 9.9% lOtJ.0% The weighted average exercise price for the Issued Options (tlib]e abOve) is $0.47 per Unit, and the· weighted ·average e.x:ercise price fotthe Issued W~nts is $·1.24 per Unit. · Current owners oftbe company•s Issued Units include: Curt ShilAng, Founder & Chairman Do~las MacrH, Director Class A Units Class .Ai Units 41,250,000 25,923,663 c:;:h1ss B Units 5,499,996 Total % 67,173,6$3 11~2% S,499,996 6.60/o The Tepper Family Trust 4,347,826 4,347;826 s:loto Covell! Crisp 2,898,551" 2,898,551 3.5% Jim Halpin, Director 1,449,275 1,449;275 U3% 724,638 724.~38 0.9% 0.8% Kevin Roche, Director Others - nine Members Total Issued Percent Issued 644,ooo 644,000 47,3931996 25,923,663 57.3% 31.~% 9,4io,200 U.4% 8.2,737,949 100.0% 100.0%- No.le: This capitalization table· does not reflect the. p:rOiloSed ttansfer of a minimal !lumber of Units (less 1ban one percent of the outstanding Units) from an existing Member to another existing Member, which is CUJteotly being discussed by those Members. · - Confldenllal ~··, .·~ I . ! B. Short-Tenn Unsecured Debt On July 13, 2009, the Company made a promissory note for cash received in filvor of Mr. William Thomas, a Director and employee of the Company. in the original principal amount ofS287,000 (the "Thomas Note"). The Thomas Note accrues interest at a rate of 10% per annum. The.indebtedness represented by the Thomas Note is unsecured and the maturity of such indebtedness has been extended until July 12, 2010. A portion of the proceeds from the Offering will be used to pay off the Thomas Note. C. Convertible Debt The Chainnan of the Company, Mr. Curt Schilling, made certaUi loans of approximately $24.1 million to the Company at various tiq1es during its operating. bist<;)ry. The pn.lcipal and ac~ed interest under such loans was convertible Into Class A1 Units at a Sl.00 per Uuit. at the election of'Mr. Schilling. In December 9,f ~{){)9, Mr. $¢hilling converted '$15 miJlion of the outstan~ing balance into Class . A1 Units. On March J, 201 O. Mr. Schilling converted the remaining balance of approximately St l million. Mr. Schilling owns- 1000.k o.f Class A 1 Unit!I of the Company: 25,923,663 A1 Units. There is currently no amount outstanding under these loans. On May Js. 2008, the Company made a promissory note for JP purchased from a ·Company ·c;:ontrol~ and owned by Mr. Douglas Macrae. a Director ofthe·'Company, fu the orisinal principal anl(lunt of$480,000 (the "Mentor Media Nole,.). The Menlor Media Note accrues interest at o rate of S% per annum (com~nded monthly), is unsecured. and matured on November 15, 2009. Maturity of the Mentor Media Note triggered a conversion feature under which the holder may convert the outstanding indebtedness into Class A Units, at the option of the holder, at the average price of $1.70 and the then most .recent price·paid by a third party for Class A Units. The Company expects to repay the debt with a portion of the proceeds &Om the Offering subject to the Note holder's right lo convert. D. LonK·tenn Unsecum! pebt On January 14, 2010, the Company made .a promissory note, es.~mpensation for services r~dc;red, in filvor of R.A. Salvatore, a member of the Company's Visionary· Team, in the original ptiucipal amount of SJ .46 million (the "Salvatore Note"). The Salvatore Note bears interest at a11 annual rate of 2.45% from Jan~· I, 2010 through October I, 2010, and 100/o per annum 1hcreafter. The maturity date of1be $~lwtore Note is October.!, 2012. E. Secured Debt On April 30, 2010, the Company entered into a sale-leasebacktransa~on w~b a commercial leasing co:mpany in the amount of $800,000 (the ..Equipment Lease"). The Equipment Lease is payable monthly. in 18 ~ual installments. It matures on September 30, 2011, end bears interest at a rate of15% per annum. The terms o[lbe Equipment Lease include a security une.rest in all the unencumbered and unpledged assets of the Company. This security interest will be released upon consummation ofdte Offering. As an integml part of the Company's co-publishing arrangement with EA, the· O>mpany eo~"into a series· of loan. security and pledge agreements (collectively, the "RPG. Funding Agreements"') with -EA... a commercial lender, and a commercial .guanmtor. The specific funding mechanism under the RPG Funding Agreements is structured as a secured credit facility whereby tbe.:t.~er agrees to make-~in specified loans to the Company (up to a maximum aggregate principal amount of approximately $30,000;000) in accordance with..a .schedule or pre<;!etennined milestones, if oml when such milestone.s .ar~ completed by the Company to EA's satisfaction, The Company is ultimately .responsible for the indebtedness, as well as any development costs in excess of its budgeted expenses for the RPG. The Company and its subsidiaries granted security interests to the lender and the guarantor in various of their respective assets, including technology and IP associated with the RPG. CotJatcral for the RPO Funding Agreements also includes a pledge oftbe membership interests in the wholly-owned subsidiary of38 Studios which owns the rights to the RPG as well as the right to payments under lhe RPG publishing agreement with EA. in~lated - Confidentbl 16 ----------------------------------- I F. ' ' Anticjpated Bridge Loan The Company is in lhe process of pursuing up to $4.0 miliion of~ridge financing in the form of a one·year term loan (the "Bridge Loan") to fulfill its financing needs through the anticipated closing of the Offering; It is cum:ntly contemplated that the Bridge Loan will be personally secured by founder Curt Schilling, without compensation to Mr. Schilling. and will be a secured obligation of the Company. It is anticipated 1hat the Bridge Loan will be repaid with a portion of the proceeds from the Offering. 0. Post-Money and Pro Fonna Capitalization 1'be Class B Units .ere being priced.~ a pre-money· valuation of approximately·$45 mlili.on .(prior 10. and witbol,lt giving effeetto, the recent sale of$6.5 million o.f Class B Units), Total equity contributions Teeeived by the Company total approximately $39 million. this amount includes the total cash amounts raised from the issuance of convertible debt described above and includes the $6.S ~n of proceeds from the recent sale of Class B Units. The price per·Unit of the Class 8 Units ofS0.45 is ~cing computed on a fully-diluted basis, exctuding,th~Class B Units recently issued but 'including the issued and unissued Units under the Class A Unit option plan, and 311 additional JS million Common Units being ~served for issuance under a=proposed new Common Option Plan . .Computation of1he pre-money pricing is as follows: c:ommon Class A Units Fully Diiuted (from page 15) Proposed New Common Equity Incentive Piao Total Pro FQrma Fully Diluted Class Al Units 59,822,sn 25,923,663 59,822,577 25;923,663 Pre-Money Valuation oet1on .Pla·n Tot.al 85,746,240 1s10001000 t5,QQQ,Q2Q 1s1000,ooo 100,746.,240 Ae,erox 1 !!51000,0QQ Pr1ce p~r Unit $0.45 The recent Class B Units were sold by the Company for proceeds ofS6.5 million at S0.69 per Unit and will be re-priced to the current valuatic;m pricing of $0.45. Accordingly, per the table below. owners of the 9,4.20,290 outstanding Class B Units will be issued an additional 4,637,681 Class B Units in the aggregate. The Company has issued 2;822.581 Class A WQ1T81lts whose exercise prices are subject to a weighted-average anti-dilution adjustment in the event that equity securities (subject IO certain exceptions) are issued·ar granted at less than the wemmts' ex.ercis,e price. Issuance of Class B Units at the Company's current valuation will effectively trigger a weighted average anti-dilution adjustment in the Class A warrants. However, the weighted ·average price per Clas1; A. Unit is above the price per Class B Unit and therefore is currei;itly deem.~ nondilutive. The warranth()Jders are also entitled to 20 days' prior notice of any issuance of equify securities. by the Company, and piggyback registration rights {includi~g .in any ll'O by the Company) subject to specified exceptions~ In addition, the holders may require· the Company to repurchase their ~rr1111ts for cash in the event of any sale, mei:ger or liquidation of the Company. These·warrants expire in July·of2016. Additionally. tbe Company is .researcbing the effect of re~issuing the current outstanding Class. A Unit ·options under a woposed new Common Option Plan. If so, the new plan would be increased by the. maximum number ofc;:lass A Units available for issuance under the existing plan and the existing plan would be terminated. Any options to be issued under the planned new Common Option Plan will have exercise· prices equal to at least the fair mark.et value of the Common Units at the time of gtllnt.. - Confidential 17 ~ I .· ! Pro fonna post-money. fully-diluted equity ownership is as follows: Authorized Pre~money Issued Class A Units Class A 1 Units 65,000,000 30,1)00,000 10,000,000 47,393,996 25,923,663 9,420,290 Class B Units Comm:on Units 2s,ooo,ooo Total 190,000,000 [ssued Optklns 9,351,~33 Issued Warranis Unlssued Units reserved under Class A Option Plan Anti-Dilution Pri>~on: Warrants (non•.dftutlve)' Class B Units Issued to eidstlng B holders Class B Units to be issued In ·~is Offering New common Option Plan 2,822,581 82;737,9'49 9,351,333 2,822,581 254 667 254667 ~dlB,z:28 1·14181798 Total Fully Dllut;ed Percent Fully-Diluted -- 4,637,i681 4,637,~8"1 ss1sss 1SS6 ss 1 sss 1 ~S6 6~,6131527 15,000,000 1~ 1 900 1000 171,778,565 40.5% 8./0i& 100."0o/o 1s,0001000 61,241,375 25,923,663 35,7% 15.1% Confidential 18 I . V. l USE OF PROCEEDS The net proceeds to the Company f'rom the Offering after deducting expenses incurred in connection with the Offering (including Agent commissions and fees and legaJ, accounting and other related expenses), will be used for general working capital pUlJJOses including IP. video game development and p~uction costs. Proceeds fi'om the Offering may also be used for (i) paym\'nt of salaries and wages, (ii) _marketing, advertising and promotion costs, (iii) insurance, (iv) rent and other general administrative exp~es of the Company, and (vlrepayment oftbe sbort- term debt and the Bridge Loan. Amount Use $317,115 Repev.ment of the Thomas Note S3S,915 Repayment of-the Mentor Media Note Repayment of the Bridge L.o~n ~.000,000 1,750,000 Offering-Related Fees and ElC9ensu Gener.al Working Caplt.al P.~rposes Total: ·18,396,970 $25,000,000 Note: Debt balances are estimated es of'luly 31, 2010 A sutillnal)' of current financial projections is contained herein in Section IX. The amounts set forth in lhe projected cash flow summary represent the Company's current estimates and assume that S2S million. is: rais-ed in Ibis Offering (before Agent's commissions and offering expenses), as well as varioils·other assutnpti0ns, Which me subject to risks and uncertainties. The actual revenue received and expenses in~untd by lhe Company may vmy significantly depending on numerous factors, including those Set forth under ...Risk ..Factors" in Section X. The Company's Board of DirectoIS may revise the Company's operating budget and reallocate the net proceeds from the Offering from time to time in its sole discretion. Any such revision and/or realloca.tion will be in· furtherance of the Company's goals including, among other things, to develop the vidoo games audilchieve profitabte.opemtions. Until used for the purposes described herein, the Company Will invest such net proeeeds iil ·short-term inteRSt· bearin~ investment-grade securities. Under the Company's current fiilanciill projections, the Company expects that the net proceeds from.the. Offering. assuming that it is fully subscribed, will be sufficient to fund its operations for 12 to 14 months. The Company is in discussions with top publishers regarding a publisliing and distribution agreement for. the MMO Copemlcus, under which the Company anticipates that it wou.ld receive significant advance-funding for development of the MMO game. Consistent with the Company's existing EA deal for Mercury, such publishing and diStribution agreements typically do not include equity ownership interests. - Confidential 19 VI. INDUSTRY OVERVIEW The interactive entertainment software industry is the economic sector involved with the development. marketing and sale of video and computer games. The first modem video game.platform was introduced by Nintendo in 1985, and over the last 25 years, th~ worldwide video game industry bas grown into a S70 billion industry. Worldwide revenue ·representing· retail value of shipments of v.ideogamc consoles, dedi.cmed bandheld gaming devices. and packaged software for consoles and baodbelds reached a recoro high of.$7'1. 7 billion in 2008, up 15% from 2007's record high of .S62.4 billion. The worldwide market is ·expected to reach $124.l billion in 2013, a projected compounded annual growth rate ("CAGR") Of ll.OOAi. While hardware revenue is projected to decline and then rise again in 2012 and 2013 due to the console ~tease eyelet the retail value of software shipments is expected to increase lit a CAOR of 14.3% in the projected yeaJ'S. reaming SlOI ;s billion in 2013. \\'oriIll: "PltySC.tton• Jncllld• l'laySloUonZ •nd PS3; ")(l)ox' tnchlles Xllox•nd )(!xix JGO; "011w" lndtlla 1f1.-c1o Gome Cube 1nd Nect11tn1r1aen cOM' Take·Two rnterectl'il• -·sates •l!lised·111 u.s. SoU'clt: wtll- Amearch 6 Nlnbinlilo··ot Alllerll:a 17~ 'li Soun:e: JDC {Marcb-2010), Walt Stree1.Research1111d mJSWadJl'(Januaey 2010} - ConfldenU.1 22 I VIJ. . . ~ NATURE OF THE COMPANY'S BUSINESS A. The Company ·'° 38 Studios is a dev!'l1opment-stage company founded in August of20_1)6 exploit the anticipated market.growth 9f single- and multi,.pla.yer· online video gaming through tlle creation of .origilull IP and an interactive -~tertainmenJ product portfolio. The Company currently Qperates two game production divisio!lll called stwfias. Both studios are staffed with top, industry-known, experienced talent with pfQven records of successful, profitable, and on-time· delivery of video game products. The first gaming· studio, known in the industry as "Big Huge Games," is IOC.&ted in Timoniwn (Baltimore), Maryland and is working on a single-player, multi-platfonn game. In May of 2009, the Company acquir-cd BHG assels from THQ, Inc. The B.altimore studio currently employs 79 full-time stafl"and is focused on its firsl Role Playing Oaine ("RPO"). Code named Mercury, the release date ·is scheduled for fall of 2011. The multi-player online gaming' studio is located in Maynard, Massachusetts. This studio c1.ttrently employs 86 full-time staff 11nd is focused on the development of the Compauy•s first Massively MultiplayaOnline. Game (..MMO''). CQ(le named Copernicus, the release dale for the product is $Cheduled for the second hair·of 2012. In addition. the Company currently employs an additional 12 "Corporate" employees in its executive, HR and recruiting, accounting, and marketing areas. Total Company FTE headcount is. cummtly 117. The Company is not.a.party to or bound by any collective bargaining agreements, and consi~ers its relationship with its employ~ tO be excellent. Employee bq:akdown by function as CoUows: function Engineering Platform Art Design Audio Pti>dud:ion QA IT Ad min Corpora~e Totaf Number of eme1oyee1 36 8 SS 33 s 11 6 9 2 12 177 The Company has signed a publishing a~ distnbution agreement with EA for the RPO Mercury under which EA has agreed, among other things, to fund budgeted development costs of the RPO through its general commercial release in tali of201 I, subject to the Company's achievement of specified milestones. Although the Company has granted the right to publish the R:PO to EA, ownership oftbe RPO remains with the Company. Under the publishing armngement with EA; the Company wiU be entitled to a royalty based on proceeds from EA's sale of the RPG, and EA will be entitled to .a royalty based on proceeds from the Company's sale of products ancillary to the RPG. In addition, the Company granted certain rights to EA to publish sequels to the RPG (if any). HA bas certain rights to terminate its funding obligations under the RPO Funding_ A$feelnents, including in th& event that the RPG is not completed by January 25, 2012. However, the Conipeny bas satisfied each of the applicable funding milestones to date, and the RPG FundiJ18 Agreements proVide for cure periods in the-e"Vent that the Company falls behind in its development schedwe or any of the funding milestOnes are not initially satisfied to EA 's satisfaction. Furthermore, the Company is entitled to a termination fee in the event that EA temrillates its funding obligations without cause. - ·- .. Confidentm.I 23 ·--------------------------------------------------- The Company is also in discussions with top publishers regarding a publishing and distributi1;m ngreement for the MMO Copernicus. B. Company Vision (i) Creating an Enlertoinment Powerhouse 311 · Studios will create the next .generation of interactive entertainment IP· that aims to redefine ..1he boundaries of conventional video gaming and media. Together the studios are leveraging a related. storyline of IP created by the Company's ••visionary Team." This Visionary Team was created· and implemented by the Company's founder, Curt Schilling, and includes fantasy author R.A. Salviltore, comic book artist Todd Mcfarlane, and video game pioneer and designer Ken Rolston. AU ·are .well known for their individual succ-ess, and respected in the market'tbe: Company is putsliing, Between the twO studios, the executive and development teams boast a.combined total of more than 100 years of game develOpment experience at top-tier companies mcluding EA. Sony Onlilie · Entertainment, and Comcast, and ·the developmmt teams of both studios have shipped products such as MMOs, RPGs and other genres of games that have generated over·Sl l biUion in sales to date. · 38 Studios is dependent on the proceeds of the Offering.~ continue the development ·of Ctlpemlcus and the CopernlcuslP. (See "Use ofProceeds" and '"Development Schedule.") (ii) The Mercu,YRole-Playing Game At the Baltimore stiJdfo, the Company is using its original Copernicus JP to develop and· .release a roleplaying game for the PlayStation 3. Xbox 360. and PC platfonns. Code named Mercury. this will be'. a single-player, open-world, "fan1asy fictionn RPO designed by Ken Rolston. Merr:ury· eombines prov.en gameplay elements from the RPO genre with the setting and story of the original IP developed by the Visionary Team. The Company bas signed a publishing and distribution agreement with ·EA for the RPG Merdiiy Under which EA b8s egreed. among other.things. to fund the budgeted development costs of the RP01b:rough its general commercial release in fall of 201 I. The Company believes that the publishing relationship with EA, which involved significant due diligence, mitigates pr(xluct success risks substantially through EA's commitment to funding. development ·support. retai 1distribution, and markoting of the Merouzytitle. (iii) The Copemlcus Massively Mulliplayer Online Game The Maynard studio is cmrcntly developing. ii. MMO, code-named Copernicus, that aims to mle6ne multiplayer online gaming as it exists today. Copernicus tells the story of a unique, rith universe· under siege; the player begins his or her heroiojoumey with thousands of other players.and must dec:iide be1ween saving the world or destroying it. Copernicus Will include the heroes, storylines, and a disthtctive visual styJe that characterizes the Company's first IP ("Copernicus IP"). Copernicus is based on the visioriaiy team's original IP including cbaraoters and storyline. In Copernicus. 38 Studios combines proven game design expertise, communications technology, and a multi.product strategy. The first edition of Copernicus is e~pected to be completed and released in the second half of 2012. The initial target market size for Copernicus consists of the 2012 estimated :$3.2 billion revenue.projection end Sl.6 billi(>n revenue projection fur MMOs hi North .America and Western Europe, respeetively. With the primary platform as the PC and personal computers becoming fixtures in more and more homes arouod the world, .38 Studios is.developing a title that takes· advantage of hardware advances while staying.within mas8-market system specifications that will maximize the potential user base. - Confidential 24 I . . . ' The Company is in discussions with top publishers regarding a publishing and disbibution agreement for the MMO Copemicus. under which the Company anticipates that it would receive significant advancefunding .for development. Consistent with the aforementioned EA deal for Mercury, such strategic partnemhips typically do not include equity ownership interests. The Company's plans call for it to reach such ail agreement with a top publisher by the first quarter of201 l. C. JS.Studios' Visionaries (i) Curt Schilling - Founder. Chairman ·and Executive Yisionarv Curt bas eight ye~ of interactive ~tertainment software indu,stry e~tjene.e., and bas participated in MMO development through his long partnership with Sony Online EntertaimI,lcnt Prior to bis r~t from Major League Ba~au,. Curt's leadership was seen on and off the field, and be continues to be II' player spokesmen and advocate for the baseball profession. His preparation skills and ability to focus were cx.tmordinary even amongst professional athletes; these have since canied over into bis busin~s activities. He excels in the most intense and pressure-packed environments. (ii) Todd Mcfarlane - Artjstic Vjsjonazy Todd is the creative force behind Spawn, ono of the world's most popular coniic ,f1ancbises. and be has sold over I SO million comic books. Todd is also known. from bis. days penciling Splder-M8tl at Marvel/Epic· Comics and for running Mcfarlane Toys. a multimiUion-dollar enterprise that bas set the gold standard in the action figure industry. Sought-after by fans and collectors throughout the world, McParlane Toys are known for their unparalleled detail, likenesses, and poses. Todd's COJDP~Y bolds official licenses for acJion figµres rQr a number ofV.S. football. baseball, and basketball players and has partnered with major names in· music (KISS, Elvis Presley, Motley <:;rue, Bon Jovi}. television (Lost, 24. The Simpsons,. HannaBarbera), and feature films (Alien vs. Predator, Tim, 8tµ1.Qn '.s Coipse Bride, WBJ/ace & Gromlt: The Curse ofthe Were-rabbit, and Shrek).. (iii) R. A. Sa!yatore - Creator of'1'he WOild" R. A. 's books regularly appear oil the New York.Time$ bes,·seller lists and have sold more than lS ·•on copies in the U.S. alone. Some of R. A. 's ~riginal works have debuted at #l 011 the Wall Stree~ Joum~ best-seller list. Hi.s books have been trans~ int9:·numerous foreign langWJges, ·including Oennan, .itaiian, Finnish. Greek, Hungarian, Turkish, Croatian, B.ulgarian, Yiddish, Spanish, Russian, Polish, Czech, and French. One of R. A. 's most famous. or infamous, stories revolves around his assassination of one .of science fiction'~ most &mo.us and iconic characters in Vector Prime ($t.irr Wan: The New Jedi Order. Book 1). (iv) Ken Rolston - Senior Designer Ken got his. start in games throl,lgh the traditional pen and paper prodµct, from Dungeons and Dragons ( D&D) to AdvanauJ D&D, as well as Warhammer aod Runequest. He was the 1985 winner of the H. O. Wells Award for Best Role-Playing Game, Paranola. Ken was the lead designer oi Elder Scrolls 111: Morrowiild, as well as Elder Scrolls IV: Oblivion. Elder Scrolls llfwon EditQr's Choi~, PC RPO Game of the Year, and RPG Vault's Game oftbe Year as well as Gamespy's Game of the Year. GamePro Editor's Choice, .aod PC Osmer U.S. Editor's Choice. Elder Scrolls IV is recognized as the most· commerciallysuccessful single player RPO ever -created. The series has combined to sell well over S million copies. Elder Scrolls lV won eight different Game of the Year .awards and received multiple SIS stars and review scores. that 1lV~raged 94%. - Confidential 25 D. Sales and Marketing Strategy The Company anticipates that its two main revenue streams. will consi"~t of retail sale.s ~d subscription fees:. 38 Studios expects to derive retail ·sates for the PC, PS3 and Xbox 360 versions of Mercury, and subscription fees for the PC.-based online version oftbe MMO Copernicus. 38 Studios. expects to establish and maintain strategic partnerships that will allow c9mm.unicaii0~ indllStry in ways that keep players "in the .game" at all limes, wherever they are. .~ecbnology 10 blend customers in online and ofltine worlds ~ game publishers, entertainment companies, cable and telecommunii:a"ons providers, hardware manufacturers, and other companies related to the computer gaming industry, in!)luding advertising, affiliation and affinity marketin_g, and informational and entertainment segments. The Company aims to leverage media relationships with networks and companies· such as .Rei:bolc. Wilson, ESPN, MSNBC, CNN, FO~ and Sports Dtustrated to build ~wareness in global mark.et& and audiences outside traditional gaming demographics. 38 Studios expects to establish marketing partnerships with Pu.blisher relationships play a key role :in ·marketing v.ideo games. For Mercury,, El\·.wHI drivo the marketing and sales campaigns, utilizing their relationships within .the. media and retail industries.. EA is obligated to .expend marketing dollars in an ·amount customary for game releases of this nature. 38 Studios aims to arranse- fQr significant marketing dollars and energy to be expended by any exclusive distributor, or publisher, for the MMO. as in the Mercury partnership with EA. E. Development Scht.dµJe The timeline for game production involves high-level de:v.elopment phases and major milestoneS through 2()11. The phases represent an optimized approach based on rigoro~ software engineering and development methodologies applied to the game development process. 38 Studios' e;xecutive team and developers previously employed th.is approach 10 deliver numerous shipped titles at a variety of publishers. including EA, Bliz1.ard, and Sony Online Entertainment. Below is a brief summary of the major milestones and their current status: - Cotlftdentlal 26 ·--·-··-·------------------- SCHEDULED COMPLETION l>ATE . STATUS SCHEDULED COMPLETION DATE - STATUS Coo.ftdeo~I 27 I . . F. ' ~ Future Markets The long-term goal of 38 Studios is to create original, extensible IP using mass-market games lls the lliwich platform. This platform approach will allow the Company to leverage existing IP and content'into other revenue· streams. While the Company is committed to maintaining focus. on the release of its first two products, long-term, the Company cxpecls to generate additional revenue streams from expallSion of these original products. from ancillary products based on the original prooucts, such as toys, books, comic b()(lks, TV shows, movies, and from the creation of new themes of RPO and MMO intellectual properties. The Company is also plann~g. to develop ways to integrate mini-games pla_yable on handheld devices that allow players to stay connected to their characters, participating in· social or economic ~ts of the games while away from their PC or console. The Company is planning significant pre-- and post-launch activitie-a. - including the licensing Qf ancillary products such as: • A toy linidrom McFa;rlane Toys • Comic books drawn by Todd McFarlane • A prequel book to thestoryof Copern/cuswritteil by R. A. Salvatore These· activities will allow 38 Studios to brand its pl'Qptjetary IP rights and give· the Copernicus IP more exposure and a competitive advantage. Other pre-release activities could inl!lude weekly programs or wehci!sts where Todd McFailMe reveals and discusses concept art, and R. A. Salvatore 1alics in-depth about the tote.and history of the Company's iconic characters. The Company hopes 'that such activities will provide a s • 10 allow 38 Studios' story to develop, over lime, the popularity of mass-market fantasy/science fiction properties such as Star Wars, lord ofthe Ring." and Halo. ·G. Commfiments ·end Continaenci~ (i) Acquired Intellectual Property The O>~llny has a contingent liability ofSS00,000 in connection wilh the BHG asset acquisldon, which may·becomc payable to THQ in 2011, and has accrued·such eKpense in its financial statements. (ii) Founding Employee Bonus Plan The Company is in the process of establishing its Founding Employee Bon~ Plan. Under this plan., up to, thirty ~fthe Company's original employees will be eligible to receive a bonus·ofS:t million ~eb; subject to appli~ble withholding and other taxes~ to' be paid ..under certain terms and oonditioos. SubjeQt to the terms emf.conditions of such plan, one-half of such bonus -will..bc payable upon ~ Company atbieving a market cap~taliz!ltion of $500 million, and the' ba~ce will be payable upon the Company acbieving a market capitalization of $1 billion. For purposes of ~bis plan, ..market capi~lization" shall be as dctennined in good faith by the Co~y's Board of Directors and:Qtberwise in accordance with the tennsand conditions of such plan. Eligible employees must be active employees and in good standing when 1he terms and conditions of such plan are satisfied in order to participate in the plan and be entitled to receive a bonus thereunder. The payment ofthese·bonuses has been factored into the Company's financial projections,. as presented in Section IX. - Confidential 28 ts1 LS (iii) R. A. Salvatore Royalty The Company has agreed to pay R.A. Salvatore, one of the members of the Company's "Visionary Team," a royalty based on "net receipts" (after deduction of.all inception-tcrdate video game development and IPrelated expenses) from Copernicus-related products. inoluding the Company's Mercwy RPG and the Copernicus MMO, up to a maximum of $5 miJlfon. These royalty costs are included in the Company's financial projections presented in Section IX. However, the Company believes the amount of such potential royalties, when earned and payable, if ever, will be immaterial relative to the revenues generated by sates ofthe Company'sproductS1tt such time. H. Litigation The Company is n0.t. currently involved in any litigation or adm~strative pi:oi;:eeding believed to be material to the development of the Company's business objectives or the Offering. I. Fncmlies In September 2006, lhe Company leased approximately 30,000 square feet of offiee a:nd studjo space !lt S Cloc-k Tower Place in Maynard, Massachusetts for a period of 6.5 years. f't.. subsequent all).eJldrt'lent increased the square footage to 50,000 by February 2011. Anni,ialized rent payments for the Maylllll'.d fa~ility increase from approximately $536,000 in 2010 to approximately $675,000 in 2014. Thi~ lease ~xpires in May 2014. The Company also l~es an additional 19,000 square feet· of office and studio space mTimonium, Maryland at 1954 Greenspring Drive, Suite 520, under a lease expiring in March 2014. Annualized rent payments for the Timonium fucility is approximately $541,000 in 2Ql0 and decrease t.o approxima•ly $53"0,000 in 2013. Confidential 29 vm. KEY PERSONNEL AND BOARD OF DIRECTORS The Company's key personnel include: A Jennifer MaeLean - Chief Executive Officer Jen joined 38 Studios from Comcast.. where she served as vice president and gene~~ manager - games. resp~nsible for rnanageme.nt of all games products, strategy, and business deve.~pment fo.r the u~s.~s largest cable company. Her extensive and varied experience in ~line content and in,teraclive entertainment began in 1992 at MicroProse Software. She joined AOL in 1996, where she held numerous positions in the AOL brand programming division, mcluding progranlll$g director for the Oanies Channel. Jen earned a B.A. in international relations from Johns Hopkins University and an M.B.A. with a concentration in international business from the ·columbio Business School Jen was uamed one of the "Game .Industry's l 00 Most Iufluential Women" by Next Generation, one of the '!'fop 20 Women in Games" by Gamasutra magazine, is the fonner Chair Emeritus of the Board of Directors of the International Game Developers Association, -and ts'a frequently requested speak.er at interactive entertainment indusby eveuts. B. BUI Thomas - ChjeCO,Cmtin& Officer Bill brings 33 years of executive and operational experience to 38 SWdios. He bas set up, ~veloped, and funded operations in the MiddJe Eas~ Asia, and the United States. As chairman and CEO of· Fortune 500 subsidiaries_ aill has built .and e)Cecuted strategic-development· plans for glo~lizatiOD of financial .service organizations, as weU .as funding medical and environmen1al services start~up co~nies. He has served as consultant fur such conglomerates as Westinghouse, Lockheed, Boeing, RJiytheon, Hyundai, LG Group, Samsung, Daewoo, HSBC, Bechtel, and Texas Instruments; nego1iated joint ventures for entertainers like John Denver, Michael Jackson, Tony Bennett, Phil Collins. and the Everly Brothers; and provided leadership for market development, licensing, and trademark for the Malaysian-based American Polo Club USA 's penetration ofthe U.S. market. Bill's ext~nsive experience working across cultures as well as at all levels of govemmeot and commercial organizations provide him with knowledge of and access to a multitude of financial and operational .resources. C. Rick. Wester - Chief Financial Officer Rick has more than eighteen years of $ellior-level financial experie.nce in ~up and high growth entitit:11, primarily in software a,nd IT services. In addition, prior to ~is industry e~erience, Rick spent five years working as a Certified Public Accountant. He continues to maintain his CPA license. Prior experience includC!I budgeting and planning, fundraising, technical acco\tnting. IPO planning and registration, and public company reporting. Prior to joining the Company. Rick was the Managing Director. Cotporatei Controller for Ex.a Corporati~ a world-wide provider of fluid dynamics software for the automotive industry. Before that. Rick was the CFO at C-bridge lntemet Solutions, Inc., while it ~w from 63 employees with a SS million revenue nm-rate·to 700-:plus employees with a $100 million ann~I revenue run-rate. At C-bddge, Rick also oversaw a successful $74 million JPO. Prior to C-bridge0 Rick was a· public company Controller at Computer Telephone Corp, and he bas spent time in Controller ~d VP of Finance positions with other high-growth'-entities. AB CFO at 38 Studios. Rick oversi=es all of the Company's mtemal and external financial affairs, including cmrent and long-term financial planning. D. Denise Kaigler - ChiefMar.ke@g Officer Denise is responsible for all of the company's marketing activiti~ including internal and external communications, public relations, product strategy, market research, and branding and positioning .for the company as a whole and for all products. In this capacity, she works closely with the development. teams. Prior to joining the Company, Denise served as Vice President of Corporate Affairs for Nintendo of America. In that role, she directed Nintendo •s corporate communications. government .,-elations, internal communications•. public relations, and entertainment and trend markeling. In addition, Denise has more than sixteen years of experience - Coofldeatial 30 in the athletic and casual footwear and apparel industry, where she held numerous marketing communications positions at Reebok, Rockport and the Adidas Group. E. Gavian Whishaw - Studio General Manager. MftYDard Stusjjo Gavian bas been working in software development for over ·1 O years. He- got bis start managing web -and IT infrastructure projects in the newspaper·industry ~din 2001 joined EA as a development director. For EA, he shipped multi-platform titles including NHL 2002, NCM March Madness 2003, NBA Live 2Q03, NCAA March Madness 2004; NBA live 2004 and NHL 2()()5. Taking 1his ed1JCSrion in how to ship high quality, recoRf selling products in short development cycles, he joined Crytek in 2004 with the title of development director. Crytek, based in Germany, is an industry leader in cutting edge gaming technology, and Gavian helped ship the oritically acclaimed PC title Crysls while building. new teams and working on new IP. A strong proponent 9f people-centered management philosophies and systems that create world class entertainment products, Gavian joined 38 Studios as executive producer and currently covers studio general.management functions as well. F. Tim Train- Studjo General Mannm. Baltimore Studio With eighteen years or leadership and team e~perience on numero~ landmark PC title11, Tim brings a broad range of administrative skilli; and product knowledge to the Conipany. He bas worked in· every genre of computer games, and has the proven ability to organize and motivate a team.: while keeping within pro.ject .budgets and scheduling oommitments. Tim's career in computer games began at MicroProse in .1991 as a team member on the original Sid Meier's Civilization. During his time at MicroProse he worked in-.vil-tually every genre of computer games in various capacities, including contributions to Masters of Orlon, Co.mmand HQ, Dark/and$, Sid Meier's Colonization, and dozens of other titles. In l.994, Tim started the Multimedia Group at MicroProse, and designed or implemented a wide variety of multimedia content for games such as FJ4 Fleet Defender, Civ/llzaUon II, nnd MasJc: The Gathering. 1n 1996, Tim joined Sid Meier and Brian Reynolds at Firaxis Games where he authored the multimedia content for Sid Meier's Gettysburg. Next, he was producer and co-designer for I 999's critical and commercial hit, Sid Meier's Alpha Centaur/. Jn bis final project for Firaxis, Tim designed and produced the Allen Crossfire expansion pack for Alpha Ceritaurf. In 2000, Tim corounded Big Huge Games with Brian Reynolds, David ·Inscore, and Jason Coleman. Tim served as ox.ecutive producer on BHG's .fkst hit. 2003's Rise of Nailons,. and 11lso designed the Conquer the World single-player campaign game. On Rise oflegends, Tim continued in-his role as executive producer and ·a member of the cote design team. Tim bolds a B.A. in International Studies with a minor in Psychology from Johns Hopkins University. 0. JonUIT-.CfiiefTeclinologyOfficer. M@vnard Studio With more than a dozen years as an ·engineer in the video .game industry, Joli. has a ptoven 1rack recot~ in software design and technology leadership. Prior to joining 38" Studios, Jon was a senior systems engmeer and lead engineer at EA's Montreal developnient house. He played a key role in growing the. new studio and in developing its first AAA IP title, Army of Tiw>. At EA Los Angeles, Jon was the lead engineer on Medal of Honor: European Assault and the Xbox. lead engineer on Medal of Honor: RfSlng Sun. Prior to EA, Jon served as a lead and senior software engineer at VR-1/Jaleco Entertainment in Colorado, where he worked on MMO products lost Continents and VR-1 Crossroads, as well as other online titles including Ultracorps and Fighter Ace JU. Jon's eldensive experience in the game industry spans a broad·amy of disciplines including: online and networking, artificial intelligence, -animation, audio, game authoring tools, optimization, game play systems, graphiC.s, physics, relational databases and game server architectures. Jon holds two degrees from the University of Colorado at Boulder: a B.S. in computer science and a B.A. in mathematics. H. Jason Coleman - Chief Technology Officer. Ballimore StudiO With l S· years of industry experience, Jason thrives On the ever-Changing. landscape of game development and on wilrling with some ·or the coolest, most creative people on the phniet. Having completed his Masters in Physics at the University of North· Carolina, Chapel Hill, Jason's ~ordtnllry career in gaming began When be took a: summer leave from his PhD sludies to work in the quality assurance department at MictoProse. Within - ConftdentiJI 31 I . .' ·the firsl week. be fell in love wi1b the industry and requested a year off from bis PhD studies, but he never returned. In 1996, Jason left MicroProse to become Fimxis' first employee. With the "many batsw prerequ~ile of working for a start-up, Jason set up the network. managed the hardware, and coded the core engine for both Sid Meier and Brian Reynolds. This enabled die development of Sid Meier's Gettysburg! and Sid Meier's Alpha Centaurl Jn 2000, Jason left Firaxis to help found Big Huge Games with the goal of making AAA games that are both critical successes and commercial blockbusten;. He was the lend programmer on Rise of Nations (2003), Rise of legends (2006), and Catani for XBLA (2007), As CTO, Jason sets the tone for the programming team. Still a coder at heart, he enjoys problem-solving challenges while developing games for various platfonns. Joson holds a B.A. in Physics from Johns Hopkins University and a Masters in Physics from UNC-Cbapel Hill Jn addition to Curt Schllling. Jenriifer Macuan and Bill ThOmas, the Company'sB~ of Directors includes: A. Martha Crowninshield Martha is a general partner emerita of Boston Ventures, an internationally recognized pri~ate·equity finn witb more than $2.5 billion in raised capital spanning seven limited partnership funds. Since 1985, she bas been principally involved in investing in the entenainment and leisure markets. Her track record of sue<:ess includes such recognized names as Motown Record Company, Six Flags Entertainment Corp0rt1tion, Billboard Publications, Inc., and USA Cinemas (now Loews). She is a member of the Board of Fellows at Harvard Medical School and Founding Co-Chair of the Harvard NeuroDiscovery Center council. Her .financial support and business advice are credited at Harvard Medical School as critical fo.r the launch of the International MS Genetics Consortium where she serves on its Board of Directors. Martha al~o has brought her business and leadership skills to her considerable efforts as a philanthropist. She was a driving force with· the United Way in encouraging Jarge individual donors to support targ~ i.Ditiatives fur progmms including economic literacy and entrepreneurship for girls. As an overseer of the Boston Symphony Orchestra and the Huntington Theater Company in Boston, her work focused on introducing the arts into the broader community with a special focus on education and participation for children. She is also. involved in national and international ·initiatives.. to improve access to capital - both intellectual and financial - for women and people of color. A fonner member of1he Executive Committee of the Simmons College Corporation and the Ex.ecutiw Committee of C200, ·she has received many local and national awards of recognition for her business and philanthropic leadership. Martha m:eived her M.B.A. from Simmons College Graduate School of Business and cllll'CDtly serves as Chair oflndaba Music. B. Jim Halpin Jim is the President and owner of River Bend Inc., a private investment company. Prior to staitilig bis own firm in 2000, Mr. Halpin .served as President and CEO of CompUSA for seven years. During bis tenure· at CompUSA. he: was named one of the "top 25 managers in the world" by Business Weck in 1998. Jim also served as President of HomeBase and BJ's Wholesale Club. Jim was also a director of Marvel Entertainment and Life Time Fitness. He was Chairman of the Compensation -COmminees ·at both Marvel and Life Time Fitness. In addition, he was a member of the Strategic Planning Committee at Marvel and the Finance Committee at Life Time Fitness. fonnerly served on the boards of Access and Posse, nonprofit organiz.ations offering educational assistance to urban youth. Jim bas guest Jectured.,at Harvard.Business School, Massachusetts Institute of Technology, Babson College, Columbia University, and the Wharton School. Jim is Cbainruin:Ofthe Company•s·compensation Committe.e. run C. DWglas Masoo; Doug began hls career in videogames in 1981 when he founded General Computer in ·Cambridge. Massa¢busctts. Within a few years the company grew to over a hundred employeea designing arcade and home games for Atari and Bally I Midway. Between original games and arcade conversion.to. home systems, General Computer was responsible for versions of- Ms. Pac-Man, Centipede. .Calaxians, Calaga, Asteroids, Joust, - Confidential 32 IB1 '~1 Robolron, Pole Position, Ju11g/e Hunt, Xeviaus, Berserk, Desert FalcOIJ, Dig Dug, Ballb/azer, Jr. Pac-Man. Kangaroo, Moa11 Patrol, Food Fight, P/1ae11Jx, Qua11lum, Rubik's Cube, Rea/sports Tennis, Tracie & Field, and Vanguard. In 1993, he founded a new company, VideoGltide, to design interactive program giiides. In 1996, VideoGuidc was merged into Gemstar; in 2000 Gemstar acqllired TV Guide. Doug became President of TV Guide Consumer Electronics with offices in Boston. Los Angeles, London, Luxemburg, Hong Kong, and Tokyo. After retiring in 2005, Mr. Macrae became an avid World of Warcraft player, spending many hours of quality time with his sons. Desiring to get back into the video game world, Doug co-created the Azerotb AdvfSOr, a personalized newsletter for players of Blizzard's World of Warcratl game. D. Kerin J. Roghe Kevin. bas .26 y~ of experience in. investment banking, private equity and levempd finan~. From 200 I to 2006, Kevin was Head of Investment Banking. at Wachovia Corporation with responsibility for ten Cotpo.rate finance industry coverage groups, Mergers and Acquisitions, Financial' Sponsors Group, and Principal Iilvesting. He held leadership responsibility for over S2.0 billion of revenue, a S40 billion loan porrfolio and a. S2.0 billion principal investing portfolio. During bis five year tenure, Wachovia quadrupled its madel share of investment banking fee-based revenue. Prior to being Head of Investment Banking, Kevin was Co-Head of Leveraged Finance at Wachovia Corpomtion from 2000 to 2001 with responsibility for 'the Loan Syndications; High Yield Origination, Sales and Trading; Leveraged Capital; and Leveraged Finance Underwriting ·groups. From 1988 to J 999, Kevin was a Managing Partner at Wachovia Capital Partners with a leadership role in founding this private equity investing business and in the successful growth and development of a $2 billion principal investing portfolio. Kevin was previously a Vice President at Kiddet, Peabody & Co. Incotporated. where be worked from J.980 to 1982 and 1984 to 1.988. Kevin bolds a B.A in Ewnomics, magna cum .Jaude. from Duke University and an M.B.A. from Harvard Busin~ School Kevin is Chairman of the Company's Audit Committee. E. suudar SubnurumiaQ> Sundar is. Cbakman of IBCC whose holdiQSs include CambridSe te;cfuiology Entcrprlses (CTE:NS). Knome. (where.be is Chairman). MTPV, Cambridge Energy Resources and DNSstuff (where he serves as Di.rector). He is CEO of Sialix and General Partner at Higher Moment Capital. He previously served as Chairman of I-Cllbe, C·bridge, Open Environment Corporation. and OneWave - all of which completed lPOs, WorldStreet COrporation. Integrated Computing Engines, and as Managing Partner of Cambridge Samsung Partners, a Venture Capital firm. Sundar graduated from Brandeis Ulliv«Bity with a major in Computer Science. arid Economics, has an M.B.A. from MIT end an M.S. ftom HST (Harvard-MIT Health Science and Technology). F. Thomas Zaccagniitg Tom is currently Co-Managing Director at Wellesley Advisors CotpOJBtlon,. an institutional private equ.ity real estate investment company. He is also a director at 1921 Realty Incorporated. a Real Estate Investment Trust and at Indaba Music, an international digitlil media company. Pnor to holding these positions, Tom was a bigbtecb entrepreneur. He has transacted business in over 25 countries on S continents, and bas extensive experience in private equity, M&A, and private and publfo offerings. Tom is also an active early-stage investor and is.a member of the Urban Land Institute and the Boston Real Estate Finance Association. He also serves u Challman .of the Yale Alumni Real Estate Association of New England and is a member of the Yale AllUD!li Schools Coimniuee. Tom earned a B.A. from Yale College. Tom is Chairman of the Company's Finance Committee~ · - Confideati.t 33 IX. FINANCIAL STATEMENTS AND PROJECTIONS Below are selected draft unaudited :financial statements of the Company. The Company is currently in the proce$S of an audit for the fiscal year ended December 31, 2009 and for the cumulative period from inception ·(August 28, 2006) through December 31, 2009 with PriceWaterhouseC.oopers LLP. PricewaterbouseCoopers LLP does not express any opinion on the Company's financial information included in this Memorandum. Below is the unaudited Consolidated Balance Sheet: All of As Of March 31, 2010 December 31, 2009 ASSETS Current Assets Cash Prepaid Expenses Other Current Assets Total Current Assets Propetty ·and Equipment, net Intangible ASsets,- !'let" Other Assets TOTAL ASSETS $3,767,163 1,703,250 57,273 S,527,686 $4,908,334 1,977,250 83,357 2,0201970 2,000,892 696,336 340;215 769,336 2941789 ffcS85,208 $10,033,958 $562,025 1,793,451 307,523 526,759 3,189,763 $265,600 1,667;415 300,446 520,541 2,754,002 233,646 9,327,100 1,468,367 300,114· S,993,428 1,460,000 6,968;~2· UABIUTIES ANO MEMBERS DEFICIT c ur'"'nt .lJa!>llltles ACC:QUnts Payable Accrued E>perty Other Income Interest expens:e, net Net loss 11• Tbfff Months CotdldentW 35 I . . The projected financial information con1ained herein represents.· projections of future events, which may not occur. The projections are highly subjective and should not be relied upon as being indicative of future results. Investors are cautioned not to place undue reliance on the projections, which are· based on a number of assumptions and estimates that, although presented with numerical specificity. are inherently uncenain and are subject to a wide variety of significant business, economic, technological and competitive risks and uncertainties, many of which are beyond the control ofthe Company. Among other things, the-projections assume that the Company: (i) releases the Merr:ury and Copernicus games on schedule and on budget, (ii) raises $25 million in the Offering (before expenses and commissions) and S20 million in additional equity financing in 2012, (iii) secures all of the funding potentially available under the RPG Funding Agreements, and (iv) secures additional publishing agreements for the planned MMO and subsequent RPGs providing for substantial up-front funding support as shoW1l in the projections. Potential investors should carefully consider the reasonableness of the assumptions inherent in the Company's projections and the sensitivities of the projections to a change in those assumptions. No assurance can be given that the Company will be able to develop its games and raise external funding as anticipated, lhat it will be able to achieve all of the milestones necessary for it to receive alt of the forecast benefits under the RPG Funding Agreements, that it can secure additional publishing agreements providing the advance funding anticipated by the projections. that the Company's games will achieve market acceptance, that i!S costs will not be higher than those projected, that the Company's business s1mtegies will otherwise be effective, or that the anticipated benefits from its strategies will be realized in the periods projected ..As a result of these factors and the other risks atfecting the Company, including those set forth under "Risk Factors" in Section X, actual results may differ materially from those contained in the projections. The projections have been prepared by management ofthe Company and have not been compiled or created by the Agent or any independentpublic accountant. Inclusion of the projeetions in this. Offering Memorandum should not be regarded as a representation by any pe~on that the results contained in· the projections will be achieved. The Company does not intend to update or oth«wise revise the projections included herein to reflect circumstances existing since their preparation or to reflect the occurrence of unailticipated events. - Confidential 36 Below are the Consolidated Financial Projections: Key Assumptjons Projected Projected Projeeted Plojected Decerrblr· 10 Oecentler• 11 Del:~12 Dacantler•13 FY2012 FY2013 FY2010 ry2011 ~ ~jected Ollcenilar•14 MOl4 O.:errber" 15 mo1s Rola Pmylng G•mlng (RPG) DMslon Dvlslcrl Average Headco161t Cllvlilon Petlol:I End Hlladccxrit ·80 78 78 78 78 78 78 78 78 78 .1,7~9,0DO 1,436;090 S40.0() 197,000 197,DOC $40.00 540.00 75 81 RPG #1•....__.·fal20U unt Seles AV41r.age ReOllzed Price at Ratlill '!!> to·38 StUllos 540.DO 30.0'1b 33.0% RPG.ii. ~At•. fal :ZOUI lk'lt Salas Avensga Reallmd Prlca at Retail $40.00 38.0'MI ·'Mi to 38 Studios 197,POO $40.00 35.0'!4> ~~1.100· $40.00 38.0~ 35.0% 35,()%- 256,100 1,866,SQO .40.00 140.00· 38.0.'!b 38.~ RPG#3-RelAMAte-t.120l5 2,m,010 Unit SBllS Averagi1 l!Mlimd Price Ill: Retail 'Ill to 38 Studios S40.00 38.0% 38.Ci'l!o 540.00 38.0'I& ·296 $40.00 140:00· 38.0'!b Massively Mutlplayer Onllne Gaming (MMO) Dlvlsbn CiYsion Averaoe tudcoi,mt. Diltision Period End t-mdco..-it HMO n - d-• · ABleaM Fal Of 2012 UllitSal.. Ave,.ge Realized Price at Retell 'lb to 38 Studios SUNcrilttiDn ~ Average Monthl\l'SUbscnbenl AYlll!Qe Montliy Pllc:'i 'lb to 38 Stl.ldos 106 2114· 277 296 150 "257 296 29.6 $40.00 30:0% 1,000,0l!O 530.DD .30.K· i.200,000· $20.00 •600,000 $12.!0 70.Cl'lll 1,DDO,OOD· $12.SO 70.0'Mi 1,200;000 2,000,000 ·29f1 29.'5 296 1,200;11oi» s20.oo 3Q,Q'I(, 30.~ SJ2.SO 1,200,000· Jl-1,50 70.D'I& 70.0'MI MMO #2·· ....._dste - fal of 2016 - Confidential 37 I Income Statement Projic:tecl Elllcientllr•lS FV.2(113 Projected Oecll!riler·l4 fY2011 $58, 705,200 $150,923,040 $164.333,360 $184,265,2'2 41,961,108 SJ,369,248 7,49?,SOO 66,494,6;i7 21,317,817 69,859;391 23,056,D41 73,-150,.751 4,900,814 35,140,891 46,861,921 60,806,7.49 87,BU;474 92,915,432 ·911,.uis,140 (35,140,891) (26,113,921·) (2,161,549} 63,110;566 71,417,928 87,"9;532 (1,114,537) (2,247,432) (2,sOs,436) (1,260,385} fS35,355 .428) !S28,:361.JS3) !$4,666.9851 w,127,787 !16838. 598 .ffi,643:705 91'!& 13'9b 14'111 ""' 4~ ·1~ "°' ~ 57'11. ~ 1~ 43'1!> 48'!&. l!!! I?'& 12!!1 mi ~- B!! Projected Projected Ceaen'ber·lO Oactll'ltler-U Projected Cloc:en-ber-12 Dllcent>el"• 13 FY2010 FY2011 FV2012 $20, 748,000 30,842,116 4,298,776 1btal Nat Awe.- Projected CtlSta Md~ OilveJoflrnUnt· S, G, ~A-ltJIPllr5eS 'lbtal Cosb •nd !xpeOpmrating Income Jrterul: lncoma (~) Othrh:Oll'D (~) Tllll(~J Nettnmme (1-11) ,3,~394J (20,265) !28,55'9, 06Sl FV2015 23;334,'983 (40,JJ24) l~09Si91)3! Percent of Net Revenues c - •ncl bpenMS ~ S, G, a A elCpllll585 Total Coda and lxpenHa Op;intfng lnc:ome Tait/f;ttier'~ Ni!t.fna!cne ~> - 202% 24'141 226'1b 104'141 (1l6'1b) (4%) 11'11. 11P'l"l ~% 'B'Mil Confldential 13'1ro . ?; ,.'1 ' . ' Cash Flow Statement OpeNtlng actlwns. NetJ~ Non-C!ash Omnges In Operating Account$ llceou'ts i..:l!livatta Pn!patd and Other Al,54itS· NP, Accrwd, Debt. lntei"est Tot.I~ Actlvltfa Projected Oecerrber· 10 F'\'2010 Projectlld Projaetld Projected Projec"tl!ld Oac:ent!er-11 0acena,.12 FY2012 Dec:efttler.· 13 Cllcll.i:it--14 P.nl)lcted Oac:ont.r· 15 FY2Dl3 FY~14 FY2015 (S36,25S,428) ('28,361,353) $58,127,787 $42,838,598 11992,338 1,837,330 FY2011 ($4,666, 985) 2,570,:190 2,457,606 839,126 128,415 (1.D,374,000) 816,270 608,520 c•.:m.mi (50,000) (33,450,SSB) (34,7'40,3?3) (5;~1,66f) (2.144,0SS) (2,840,502) (1!91,522) 1,799-;900 (319,900l 47,850,702 {920,000) 570,018 1,898,579 (23,054,460) (50,000) 4,414,227 (3,352,.580) $52,643, 'lOS Z,"066,881 (.4,082,!!78} .cso,ooo) (SO,j)OO) 4;2&0,567 l,.ao2,673 45~708,924. 50.980.JAO- (2,144,055) (2,941,438) (-1,115,149) (500,000} (-25,000,000} (25,000,0oDl ·~336.134 llivestlnll ActlVlllH FlxodAMets Pmndng ActJvltr.. BankUne Qipt11I Lea&eS Clstr1butlon AdvzlncllS Dett to Affiliates E'quty Clwnge Jn caati· Olsh, Beginning Of PjKted Decfintler-13 FY2013 C.CenDlr· 14 FV2014 U:'!,6'12,19.9 14,676,300 350,000 1;541,:182 $87,364,27& 37,730,760 400,000 1,726,544 $105,131, 764 41;0llJ,340 450,000· 2,675,644 $154,996,895 46;0&6,318- .coo,220 t203,687i1l5 $13,237;435 105,131,~64 95 $154,9961 Balance Sheet ~010 FV2011 PRij.c:ted PrOjKted DecGnmr-15 FY2015 Asset. Cl~ Ar;courts Receiwbla Pmpald and Other Assets Fbced As5et5 lrtelect1111l .l!mperty 1;116,170 2,519,618 4n,33& .$19,304, 947 10,374,000 300,000 J,001,.930 185,336 - . - soo,ooo: . 1,7-23,912 400,000 $13, 928.244 400;00o 400,ooo of00..2!!,q *33.566,212 $30,639,681 $127,621.582 400,000 $1:49. 740j.748 .2,061,430 . $2,669,949 . SJ,239;967 J7,654,195 $11,934, 7152 1,799,900 .500,000 18,411,425 220,114 1150714E 24,060,306 1,420,000 &6,3.22,127 140;114 i1 1431 72,05!1;628 53,800,081 32;554,195 ti,934,762 "13,237,435 Eqult)' [ 10, 132,062) (38,493,416) (23,160,400) 94,967,387 13.7,805,985 190,449,690 Total u.blltles •ml l!qully £13.92812jjj pl,566,212 1.10,6391681 sea !;149.740. 747 129,i~Zilj!S Lol'lg-tenn Assets· . ToealAueW. ....A/P..,... an:I Accrued Liat:llities B!inkDebt. C!lpltal~ r:Jsfnbl.(ton Advanca [)iflimid Rent Cllbt to affliltu Total U.billtles L__ $9,415,020 soz - 50~000,000 25,000,000 60,114 . 11211s211 ConftdeiJ~ 39 ti Ms::tti!<:! i!wl Heas,!£Qu!U Projected Decanmr-10 FV2010 ftev8nue EBITDll Efil'T!:M 'lit of Revenui: Pl'ojl!Cted Decerrber-11 FY2011 P.rcijacted Proj!lcled ~12 ProJeeCed Decantiar.-13 FY2013. Dscent>er-14 Clac~15· EXZ2H FV2015 $20, 748,000 $58, 705,2.00 5150,1123,040 $164,333,360 $164,265,272 PY~ll' 1'/A 296,057 0.5% 296,057 0.5'111 65,009,l.45 4,3.1% 72,5,09,145 48.0%. 73,410,266 44.1% 80,910,266 49.2% (26,U3,921) (2, 161,549) 63,110,5:66 41.B'llo 70,610,566 .f6.8'16 71,417,928 Q.5'16 78,917,928 48,0'lli 87,,n9,532 47.6'lli 58;1.2~;787 42,838,598' si;64,3; 70~ (33,303,562) (23,S4J, 73t) NIA N/A (33,303,562) (23,543,731) N/A Op91'11tlng lncan. (35,140,891) Orlerattig rricome 'I& of Rl!yenua Opel'llllng lncorre • Pro Formi (1) Openitng lricome 'II> of Rl!ve11ue (35,140,891) (26,113.,921) (2,161.~) NIA NIA NIA Nat 1.1\Coma (36,255,428) (28,361;353) ( 4,666, 965) NIA !'VA t+'A NIA 68,930 155;687 12,974 12,974 157,176 162,963 13,580 384,028 223,441 13,5stt 17,030 Pro FonTB ( tl EetrLM PrO FOnna 'lll Of Re11enue earn:~- Net lilcOlfle 91..of Revenue Revenue per Head Total Ca;t per ltMd Monthly Cost per tt.i!d Monthly Cost per HMd - Pro Fome tl) NIA 181,607 lS,134 15,134 'llloi!cted "i'A AVA JS.~ 18.620 89,846,413· 48.816 97,346,41~ 52.8'6 95,279,532 Sl.?'16 za.1111 418,151 236,426 19,10218,Ul .?&"' 468,~ 245,511 20,459 18,869 (1)- Pro Fonre.am>Ll!tS BlCl:ludlll mj:linrl:lld llCC!Uill& loni founding llrrPOVM boma plan (11811page28). P•~ End.Headcount O.Wbcilnint ,_, 5 1 G,. & A GllplllHS ~ ft'om WlarPerkXI· ttercent Ptl~ Encl·H•Bdc:ount C!D:velopl'i!nt S, G, &. A.exper15eS Tot.I 2'~ 17 ii!! 335 12 354 78,'.f% 42.1% ~3% 95'!11 Z!! DI 37~ 1! 393 ·ll.O'll> 374 &9 37.4. &2 374· ~2 0.0% 393· 0.0% 0.0'!6 95'!11 5% 95~ 95'M> 95% ·UU1 m~ 1~ JOO% 181 283 355 ·lD! &D Ill 393 ~ ... ~ 393 5!1!! lD &m 374 374 374 12 12 Average llaadciount ~ S, G, &. A eXjlllnses Total Grllwtll from W/01' Period IU 32~ l1J.8'1. .ss.6% 93'1> 94'111 32~ 12 !23 37;; il!i 5.2% o,0% 0.0% 95% 95'111 §~ ~ 95... §!! !5!2! !11.S!lll> u.1 PercentAveraa• Headcount "8Y~lopmgnt 5, ~. T-1 II &'A elCpBllSelS ~ 100'!& et ·~00211 1m !2D ~ Confidential ~.'!lo 40 Financing Pro~ted O.Cerrber-10 FYlOLD Dlstrftlutfan Adva- • hldo-Ac:k.an relen• reft!lllM! RPG #1- EA $12;477,997. MMC>·lfl RPG#2 Tat•I Period Adv•Adya- llalancw l!qulty FIMnclllg Montier 1 • C!Jt Schlling Sadls 8 Mentler& S121477 1997 m,47 11425. Pro~ted ~-11 FY2D11 52, eso, 702· 35,000,00D 10,000,000 ~7,850,702 !66,322.h? wou (•21,322,12$) {10,000,DOO) ~tecl ~r-13 ~13 Projected Oacertw-14 FY2014 PR>jectcd 09c:fllriler-1S FV2D1:5 (25,000,000) (25,000,000) 15,00D,ODO U:16,322,12s2 1so,0001000 ,sis,000,0001. 20;000,ociO 60,000,DOO !iii1000j000 !&lijOOOjOOO 12s1000 1000 'i2s,00010001. '!!!2 io !!01 10,923,663 . M,SCl0,000 FlnancingflPO T*l lclully FINlnclnt PrQjicted Oe~airbar-12 $37,423,663 lnVtltllDr Da._/ Detlt AMncfng Nate Paya~· Oadit U!1B t:lm!lctor Note (Tti:iirl!lli ~e) RA 5alvatoiw Nl>te Con~mJn to Ei1ultv Mentor Media Total lllVilsblr/Debt FfnancJng (317,115) (l,S07;437) {10. 747,231) (535,915) ~!11,600.261! tHi!l7i4371 Cllpn.!Le~""'9rt Flnanc~ Equjpn9rt l.inll of Cl'9dit 'nltal Cllpltal U - s - 399,900 1;400,bOO (:J9!1;9QO) 20,000 (920,000) (500,000) £1,'7ll9,900 !!379,9001 ,1920,0001 '5soo 1oooi 41 fl . RPG Reyenue Detail Projeet~ Projected Proj&cted Projected Cie(etrber-11 Deeerrber-12 Projected OeeQITblr-13 Pn>jected Ceceniler-10 FY2010 Oac:entler-14 OBceni>er-15 E:t;2011 Etm~ E.'£201.3 9H: En.l!l~ $20,748,00Q .$18,955,lOO RS'G#l Rl'GS2 $2,758,000 34,165,040 ,2,758,000 28,375,360 ~3 ~;758;000 J;892,720 44,414,552 Total Revenue $20,748.000 $18,9551200 $3§.923,040 pt.133.360 !51;065.272 1.436,000 .$40.00 197,(l!>O 197.000 197,000 $40.00 lll'G •1 ~Sllfi AlllinlQe ~ Pr1';;9 1,729.000 "$40.00 3!!,0'lb et P.!ltllll ·<11> to 38 Studio& 122.1481000 nil$ i1s,9ss,200 $40.00 ~.!!!!! H1U!12!1 $40.00 ~·!!!!! 1211ss,ooo JS.~ 13.;s;;--000 P,P!3 •2 GOwth rrom RPG •1 Unit Sales Avenige llszillZlild Priti lit '-all 'Ml fo 38. StUdios Rp(;··3 Gowth from RPG #2 ~ 30% 30'lb 30'!b $40.00 38.:0Clb 30'111 "30'MI 3D'lb ~ ,2.~47,700 $40.00 38.0% e,.I6s 1&io .30lfo Av111rage Realized Price at Retail $40.00 38.0'lb $40.00 3&.D'lb ~.100 J'.40-00 38,0'lb !381375~· !O'MI 5116$ 'l'o to 38 Stuello$ 30'111 30Clb 1,e46,800 $40.00 38.0'lb $40.0o "38.~ s s2ii120 1 30% 2,922,010 $40.00" 38~ m.~c.--:- MMQ Revenue Detail Projected l'rojllc:t~ Projected P!Ojllcti!d Plo~lld P.rQjili::ted Dec.....,..10 Dec:errtier- t1 FY20U OBceniler- 12 Cllli:~14 ~-15 ffi012 Oiceiitiir-13 "l'Y2ll13 F'f:l.!!'1:4. N21its $39, 7SO;Ooo $114,000,0DO $133,200,000 $133,200,000 f39, 750,000 !114,0001000 f133,201UIOO: !133.ZD0,000 600,000 3 $12.50 1,000,000· 12 $12.50 1,200,000 1,200-,QOO 12 $12.SO !105jD001000 !12610001000· 1,000,0\IO t,200,llDO $20,00 FY2010 ""'o 11 MM0f2 Tatal Net Revenue MHO f1 • Sull9cffptlon Model Avemge nvchlv 5ub&crtb81s Months Prtc• pur Month 'lb to 38 Stl.ldlM S!AlKriptlOn Revenue LWt Sali!IS AvtraQt Pea!izlld Price at Ratall 'll>to36St~ DstribUtlon Revenue - 70.~ !1S1 750~000 2,000;000 $40.~ !!-!!~ !2410001000 :z2,0'lb $30.QO ~.!!:!!! s91000 1000 u .fl:i!.50 ?!11m!l :!!121!1 1112gg.ooo 70.ll'lb 11261000i000 1,200;000 ·~;00 i!g.~ p,2!!2j000 Confidential 42 . I . ' X. RISK FACTORS PURCHASE OF THE CLASS B UNITS IS A .~GH·RISK JNVBSTMENT The securities offered hereby are SPECULATIVE and involve a HIOH DEQREE OF RISK. The Cla.ss B Units shou.id be purchased only by persons who. ~-afford to lose their entire investment. Prospective inves~ors, prior to making an inv~ent decision, should carerully consider, along with other matters Tefefl'ed 10 herein. the folloW-jng risk factors: A. Development Stage Business The Company is currentty· focused on completing the development of.two games, code-named Mercury and Copernicus, but tbese,gamcs are not scheduled for release for a considerable period of rime. Although BJJG, the -as~ts of which the Company acquired in May 2009, WS!! fuwuled in 2000, the Company is still in· the development sUJge and bas no revenue. An. investment in the Ci,nnpany must be considered in light of the problems, expenses, difficulties, CQmplications, and delays. frequendy encountered in connection with a developing business. and the competitive industry and envir~t in which 38 Studios operates. ·B. Product Deyelapment Risks Video game development s~µles are long, and release dates are subject to change due to various ~ including changes in consumer preferences or competitive factors, \lllanticipated technological or development problems, market forces and other variables that may be' outside the reasonable conttol of the Company. The RPG, Mercury, is cWTently scheduled for release in the fall of 2011, and the MMO, Copernlcu:;, is scheciuled for launch in die second half of 2012; however, there is no assuraocc that either product will be released on these currently scheduled release dates (or, indeed, ever rele11SC4). In addition, the creative p~ess inhercn• in video .game development makes ·the length of the development cycle difficult to ·predict, especially in connection with products involving new technologies and development tools, such as in the case of Copernicus. lfthe Company's product releases m:e deh1yed, the Company will nol achieve anticipated revenues on schedule, if ever. A delay in introducing the products could also require the Company to spend more development resources to .complete them, which would increase the Company's costs aµd lower its margins, could require the Company to raise additional capital, and could affect the development schedule for future products. Moreover, an uncured delay in the satisfaction of development milestones under the RPG Funding Agreemenls wilh EA could result in a tennination of such agreements by EA. thereby terminating the primary funding soun:e for the development oftbe RPG. .c. Rapid Technology Changes Technology cbanges_r~pjdly fo the interactive entertainment industry. The Co~pany mUS:t conriit!.llllly anticipate and adapt its games to emerging technologies. The Company is designing. its games for multiple platfurms including penonal oompulci:s, Xbox 360, P1ayStation· 3, and muhiple handsets, which is more complex and costly than designing games for a single plaffonn. In addition, a decision to. design games for a panicular technology platform. whether existing or emerging. commits resources to that technology. If that technology is not as successful as anticipated, lbe games' success wiU be adversely affected. The Company's success thus depends, in part. on its ability to identify the most promising platforms and successfully develop its games to work on those platfonns as they change over time. D. Coqetition The interactive entertai11Jl1.Cnt industry is highly compelitive. It. is characterized by t~~ continuous introduction of new titles a~d the development of new technologies. The Company's success will ~epend ~ its ab.Jlity to execute competitjve strategies. The competitors in the market vary in size from very small companies with limited resources to very large companies witb considerable financial, marketing, and product. development resources. Two principal factors of competition in the video game industry include the ability to select and - Confldentlal 43 I .· develop popular game titles and the ability to adapt products for use with new technologies. Suc~ful competition in the video game market is also based on price, product quality, product enhancements, brand recognition, access 1o retail shelf space, marketing support, and access to distribution channels. Tb~:MMO market is .currently dominated by Bli228rd Entertainment (now an affiliate of Activision Blizzard) and its blockbuster MMO, ·World of Warcralt. Blizzard bas more than half oftbe active worldw;de sub$Crlbcrs of MMOs. However, other MMOs with smaller market share - such as EverQuesl I, EverQuesl Il, Dungeons and Dragons Online and Ulllma Online - bave been commercially successfu1 even though they trail Blizzard's World of Warcrah in paid usage. The market for MMOs and other video games may be limited and the Company may need to displace customers loyal to existing MMOs and other games in order to be successful. The Company competes with numerous companies licensed by the platform manufacturers to develop or publish software products for use with their respective systems. These competitors include Activision BHzzard. Atari. Capcom. EA, Konami. Namco, Sega. Square Eni;w;, Take-Two Interactive SoOware, THQ and Ubisoft Entertainment, among others. The Company expects to &cc additional competition from the entry of new companies into the video game and interactive media markets, including entry by well-financed, diversified entertainment companies. Competitors with greater resources are able td spend more time and money on concepl and· f~us testmg, game development, product testing and marketing. Some of the Company's competitors have better access to distribution networks and ·Other markets thali the Company. There is ·aisO· intense competition for shelf space among video game developers and publishers, many of whom have greater brand name recognition, significantly more titles and greater leverage with retailers and distributors than ·the Company. The barriers to entry in the PC market ·are lower because there are no royalties to be paid to the hardware manufacturers. Large diversified entertainment, cable and telecommunications companies, in addition to software companies, are· increasing their focus on the· interactive entertainment iloftware market, which will likely ·result in · consolidation and greater competition. Competitors also inc ludc providers of alternative fonns of entertainment, such as providers of non-interactive. entertainment ineluding movies, television and music, and sporting goods providers. Even after the launch of the Company's games in developme11t, if the relative popularity of video games were to declliie, the Company's revenues (which are currently none), results of operations and financial condition like!>'. would decline. If the Company is unable to compete ·successfutly, loss of sales, market share) opportunities to license marketable 1P and access to next-generation platform technology would result. The Company could also experience difficulty hiring and retaining qualified devefopers·and other employees..Any of these consequences would significantly harm the Company's business; results of.operations and fmancial condition. E.~ The Company anticipates 1hat when it launches the Copernicus and Mercury games, it will do so in the U;$. and Europe. This may be difficult to manage and could be more expensive than launching the game$ io fewer or more targeted markets. If the Company is unable to launch its games in the manner it currently contemplates, its anticipated revenues may not materialize ·and it may incur unexpected costs. Failure to launch the Company's products more broadly will necessarily reduce the potential customer base for its products. The subsequent launch of the Copernicus and Mercury games in additional markets is speculative. F. Intellectual Properiy Protection The games and tbe various componems tbmof that arc subject to iiitetlectual property rights owned or lieensed ·by the CompBJ:ly are susceptible to infringement, particularly tbrough unauthorized copying of the games and piracy.. Although the Company believes that MMOs are less susceptible ti) piracy tban other game: formats because the key intellectlial property is stored on the developer or publisher's central servers (requiring authentfoation for player access) and is not distributed to users in a medium that is easily reproduced such as a DVD, piracy may stilt occur. Infringement of the Company's intellectual property rights would adversely aft"eet - Cobftdential 44 revenues through lost sales or licensing fees, particularly where consumers obtain pirated copies. Moreover, the Company's rep.utation and goodwill could be damaged to the extent that consumers are wrongly led by inmngers to believe that low-quality infiinging material originated from the Company. Preventing and curbing infringement through enforcement of the Company's intellectual property rights may be difficult, costly and time consuming. Enforcement of the Company's intellectual property rights may not be cost-effective, especially where the infringement takes place in foreign countries where the laws are less favorable to rights holders or are not sufficiently developed to afford the level of protection the Company desires. G. General Business Risks 38 Studiq.s 4$ a developDJent stage coq>any with no revenue t~ date. T~ere can be no assunuu:e that the games under development will be· released on. scbe9ule (or. indeed, ever released) or that, if released, .~~y Will meet with mmet. acceptance. Nor ~ there any !ISSurance that .any products ofthe Company will produce stgni~ revenues or ~gs for the Comp$11y. Among the risks associ,tcd with the Company~s products arc achievement of product cost and development objectives. Even if the Company successfully .intrqduces its Copernicus and Mel'Cflry games on schedule, it will need to devote continl,led resoun:es to product development. The Company is heavily dependent on its relationship wilb EA as it relates to tbe development a11,d marlr.eting of the RPG. EA has certain rights to terminate its funding obligations under the RPG Funding Agreements. While the Company is entitled to a termination fee in the event that EA tenninatcs its funding obligations without cause, such fee would not be sufficient to complete the development oftbe RPG, and the Company would need to raise addition.al funds or identify, and negotiate a new publishing arrangement with. an altem.ativc publisher. Such a process could be time consuming and a distraction for management, thereby triggering further delays and disruptions in the development of the Company's products. Moreover, there can be no assuntnce that the Company would be able to secure an alternative publishing arrangement on ·terms satisfactory to the Company. An uncured default by the Company under the RPG Funding Agreements ooutd result in a termination of the credit facility underlying the EA publishing 81T8ngement, as well as the co-publishing agreement itself. and a forfeiture of the Company's assets used 85 ·eollateral far such arrangement, including the m~ership interests in the Company's subsidiary lhat owns the rights to the RPG. It is difficult to predict consumer preferences and acceptance o( video .games, particularly in the case ofMMOs,. which are a newer form of game. Furthennore, if interest in the genre represented by the Company's planned games declines, the·Company's business and financial results ·will suffer. Jn addition, the Company's business model is based, in part, ·on ·anticipated subscription fees. Consumer. subgcriptions for MMO games are 9ften cancelable after a Umited period of time, and it new business models emer~e that offer online subscriptions for free or at a substantial discount to currently anticipated subscription fees, the Company's ability to achieve its desired financial results would be impaired. The operation of an MMO game, such as Copernicus. poses additional risks such as the possibility ·of service interruption due to server problems, legal proceedings stemming from the posting of offensive content by subscribers, and security b~bes. H. Need for Additional Funds- ·The Company· will require additional capital in order to coroplete the development and marketing of the two gam4'S in de,velopment. The Company plans to raise llddlti0.nal capital lhrough publishing and distribution agreements, atid possibly further equity and/or debt offerings. Future. equity offerings will likely result in 1he dilution of ownership of the Company to investors purchasing Class B Uni1S under ·the terms of the Offering. Debt rmancing, if raised in the future, will rank senior to the Class B Units and any equity securities into which ·ihe Class a· Units may be convened in the future, and may contain substantial restrictive covenants, which could impair the Company's ability to change its business strategy or operate its business as currently conlemplaled. -- -------------------------------·---- - Confidential 45 191 ~~ There can be no assUlllDce that additional capital from eny source will be available when needed or on tenru; acceptable to the Company. The availability of additional financing may be dependent on the relative success .and progress of the Company and may be offered on more favorable tenns than offered herein. In order to oblllin additional fmancing, the Company may be required to dilute the equity investment of its then current members, including those investors purchasing Class B Units in the Offering. I. Doing Business Internationally The Company plans to sell its products and otherwise do business outside of the Unltcd States in the future. Intemation1,1l development, sales and operations are subject to a number of risks including; (i) problems obtaining or enforcing· intellectual property rights; (ii) the time and costs associated with translating and localizing the game {i)r foreign markets; (iii) foreign currency fluctuations; (iv) unexpected changes in regulatory requirements, including import and export control regulations, and the right ·of governmental entities in many. foreign countries to censor the content of interactive games or pf9hibit certain types of content; and (v) difficulties and costs of staffing and managing foreign operations or licensing to fqreign entities. Any of these risks could adversely affect costs, results of operations and the financial condition of the Company. J. No Aemwne Minimum; Class B Units are Sold on "Best Btl'orts" Basis The Class B Units are being offered by the Company on a ''.best efforts'' basis and no minim~m amomri of proceeds ·is required to be raised before the Company may use the proceeds of the Offering. The minimum subscription by any potential investor wiJI be $250,000 ·unless otherwise approved by the Company. No assurance is given that any specific portion of Class B. Units offered hereby will be sold. The description of the ''Use of Proceeds" ·set forth herein shows the proposed use of the net proceeds assuming the sale of all of the Class B Units offered hereby. To the extent that less than all of the Class B Units offered hereby are sold, the Company will need to adjust its planned use of proceeds to conipensate for the reduction in :receipt of funds. The allocation and prioritization of uses of proceeds will be lindertaken by the Coinpany•s Board of D~tors and senior management based on their opinion, from time to time, as to the filcely proceeds from this Otrerlng and the then-ex.istU.g needs of the Company. ll Dependence on Key Persopncl The success of the :company•s 'business will be significantly dependent UJ>()n the ·skiUs and continued commitment o°fthe Company's Visionaries and ofthe.Key Personnel noted in Section vm. The loss of any one· <>f them could diminish the success of the Company's games and their ability to attract ll1l audience and following. Certain of the Visionaries are independeni contractors and not full-time employees. Any change in the Key Personnel could also extend the development timeframe and I hereby require additional resources. The Company's ability to grow and succeed is dependent upon its ability to attract and retain sk.illod game developers, artists, software engineers, and experienced management and marketing persomiel. An inability to do so would materially and adversely affect the Company's business. L. Absence of Liqyidity There is got now, nor is there likely to be for the foreseeable future, any public market ~or the sale.·oftbe C~s B Units. Accordingly, you should not expect'to be able to liquidate y9ur invcstm.eni in the.Company, even in an emergency. Further, an investor may be unable to sell his or her Class- B U~t,s for a price approaching hi~ or her original investment. Further, the co-sale and rights o{first refusal in the Operating Agreement may discourage any proposed pennitted sale or transfer of your Class B Units. M. Detemllnatjon of Offering Price The Offedng Price forthe Class B Units was established by the Company a~d'bearsno relationship to the assets or book value of the Company. No assur11Dce is given that the Company's Class B Units could be sold for the - Conftdendal 46 ml ·"'~ Offering Price or for any amount Faciors considered in establishing the price include the following: managemen1's estimate of the business potential and prospects of the Company's products in development, the anticipated economic benefits resulting from the RPG publishing agreement with EA, the present status of the Company's marketing efforts, and consideration of the above factors in relation to valuations of comparable companies and the current condition of the industry and the economy as a whole. The Company reserves the right to alter the Offering Price for any reason. N. Minority lnterest As a holder oftbe ma~rily ofUnHs of the Company, Curt Schilling contro~tbe.iight to fix t~ size and tl:)e COtnpQsitlon ~f the Board of Directors and therefore, indirectly, Mr. Schllling controls the Company. As· a holder of tho majority of Units· of the Company, Mr. Schilling has the right lO approve any action which requires Mcmbel' approval, including amendments.~ the Operating. Agreement. In addition, Mr. Schilli~g. has the right to blo~ ~rtain decisions and actions by 1he Company even if they are supported by .a ~jority, with limited voting rights, of the· other Members. Purchasers of the. Class B Units offered hereby will be minority Memb~rs of the Company and will not have any control over the management of the Company. 0. Risks Inhmnt in the Yi®any power and authority to own and operate its propenies and assets and to cnrry on its business as presently conducted. 2. On or prior to the Company's ac.ceptance of the subscription hereunder, all limited liability company action on the part of the Company necessary for the authorization. execution and delivery of this Agreement and the performance of the Company's obligations hereunder will be taken and, thereafter. this Agreement will constitute a valid and binding obligation of the Company. enforceable in.accordance with its tenns. The execution and delivery of this Agreement and the performance of the Company's obUgations hereurider Will not conflict with or result in a default under any instrument or agreement 10 which the Company is a party· ot by which any of its assets are bound. C. .Representations and Wilmmties of the Subscriber, To induce the Company to accept this subscription. the Subscriber hereby represents, wanants and agrees as follows: 1. The undersigned acknowledges that alt docl°1ments. records and books pertaining to this investment have been made available for· inspection by the Subscriber, its attorney and/or its accountant.· The Subsctiber and/or its ad'visor(s) have had a reasonable opportunity to ask questions of and receive answers &om the Company and its ·officers and directors concerning the terms and conditions of this subscription application and lhe investment. and to ob1ain additional information, to the extent possessed or :obtainable without unreasonable effort or eitpense. All such questions have been answered to the full satisfaction of the undersigned. No Written or verbal representations or wammties have been made to the. UI1dersigned-by the Company or Bny of its omcers, directors. agents, employees or affiliates, and in entering into this transaction the undersigned is not- relying upon any information tither.than the results of the undersigned's own independent investigation. 2. The Subscriber is experienced in evaluating:early-stage companies such as the. Company, is able to' fend for itself in the traosactlons contemplated by this Agreement and bas such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment. The Subscnber understands it is free (and encouraged by the Company) to seek independent ndvice from its professional advisors relating to the ·suitability of an investment in the Company in view of its overall financial and tax needs and with ~pect to the legal and tax implications of such an in vestment. 3. The Subseriber (a) bas adequate means ofptoviding for its current needs and p<>sSible personal contingencies. (b) bas no need for liquidity in this investment, (c}is able to bear the substantial ecooomic risks of"an - Confidential 49 I . . 'I . investment in the Company for on indefinite period, (d) at the present time, can afford a complete loss of such investment, and (e) does not have an overall commitment to investments that are not readily marketable that is disproportionate to the undersigned's net worth, and the undersigned's investment in the Company wiU not cause such overall commitment to become ex.ce.ssi¥e. 4. The undersigned is an "accredited investor," as ~eh tenri is defmed in R,ule SOI promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as·amen~(tbe ••securities Act"). and. if an entity. the undetsigned represents that it was not formed for the purpo5e of investing ·in tho Company. S. The undersigned acknowledges and understands that: (i) the Units are a speculative investment ~d involve a substantial degree ofri~ (ii) the Company is in .a development stage, does not have a significant finanoi!ll or operafulg history, and has only nominal capital; (iii) the Units constitute and will constitute "restricted securities" within the meaning of Rule 144 promulgated under the Securities Act and. have not been and Will not be registered !Jn4er the SecUriti~. Act Rule 144 (other than subsection 144(11) thereof). which permits the resale, subject to various terms·an.d ~onditions, of small amo11nts of "restricted securities" after they have been held for one year, does not apply to the Company because the Company is not required to file~ and does not file, current reports under the. Securities Exchange Act:of 1934, as amended (the "Exchange AcJ"}. and there is not publicly available infonnation concerning the Company sub~folly equivalent to that which would be available if the Company were required to file such reports. (iv) the Company does not intend to become a reporting company under the Eiu:bauge Act and the Company bas no obligation to the undersigned to do so; there are substantlal restrictions ·'QO the transferability of the Units; the Units are not, and the und~rsigned has no right to require the Units to be, l'e$istered under the Secl!Pti~. Ac.t; there will be no public market for the Units; the Units cannot be resold unless they are registered under the Securities Act OJ' unless an exemption from registration is available; and, accordingly. it may not be possible for the· undersigned to liquidate the undersigned investment in the Company; and (-V-) any federal income tax benefit which may be .available to 1he undersigned may be lost th.rough adoption of new laws or regulations, amendments to existing laws or regutations or changes in the interpretations of eitisting laws.and regulations. 6. The undersigned understands that the Units have not been registered under the S~urities ~ in reliance on the exemption theretnlder for transactions not involving any public offering, that the Units have not been registered or qualified under any state blue sky or securities Jaw, that this offering has not been approved or disapproved by the Securities and Exchange Commission or by any other federal or state agency. 7. The undersigned understands that the Units m~t be held indefinitely unl.ess the sale or other thereof is subsequently registered under the Act or an exemption from such registration is available. The undersigned further. understands thattbe Company is under no obligation:to register the Units in the Company on its behalf or·to assist the undersigned in complying with any exemption from regislnltion. ~fer 8. The undersi8Ded is subscribing to pure• the Units for tho undersigned's own account; for investment purposes only, and not for, with a view to, or in connection with the resale or other distribution thereof; in whole or in part. 9. The undcltigned understands that legends will be placed on·any certificates re~entingthc Uum with respect to the aboyc reS1rlctions on resale or other disposition thereof @d 1hat stop transfer instructions have ~nor will be placed wftb re.spei;:t.thereto so as to restrict the assignment, resale or other disposition thereof: - ConftdenO.I 50 10. The undersigned agrees in connection with the Company•s initial public offering of the Company's securities, upon request of the Company ar the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase ot; or otherwise dispose of any oftbe Units without the prior written consent oftbe Company or such underwriters, as the· case may be, for such period of time (not to exceed one hundred eighty (180) days, plus such additional number of days (not .to exceed 35) as may reasonably be requested to enable the underwriter(s) of such offering to comply·with Rule 2711 (f) of the Financial Industry Regulatory Authority or any amendment or successor thereto) fi'om the effective date of such registration as may be requested by the Company or underwriters, as the case may be, and to execute and deliver to the Company and such underwriters, as the case may ·be, any agreement reflecting the foregoing agreement as may be requested by the underwriters or lhe Company, as the case may be, al the time of the public offering. 11. undersi~ed The address set forth below is the true residenee and domicile of the undersigtied, and the bas no pre&ent intention of becoming a resident or domiciliary of any other state or jurisdiction. 12. All information which the ·subscriber bas provided to the Company jn this Agreement or otherwise concerning itself. its investor status~ financilll pi>sition and knowledge and experience In finariCial, tax and business matters is true and. correct and complete as or the date set rortb at the end of this Agreement., arid if there should be any adverse change in such information prior to acceptance of' the undersigned',s subscription, the undersigned will immediately provide the Company with such infonnation. D. Miscellaneous. L This Agree~ent consti1utes the entire !lweement between the parties with respect to the subject matter hereof and may be amended only by a writing executed by each of the parties. The undersigned bas taken no action in connection herewith that could subject the Company to any· valid claim for any commission, tee or other .compensation to a finder or broker, and the execution and perfonnance hereof violates no Older, judgment, injunction, agreement ot document to which h'e is a party or by which he is bound. 2. This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the Stale of Delaware, without regard to its conflicts of laws provisions. · 3. Within ·five days after receipt of a written request from the Com~y,. the undersigned agrees to provide such information and to execute and deliver such documents as teasonably may be necessary to co1111ly with any and all laws. rules and regulations to which the Company is subject. 4. Any notice or other communication given h6l'CU1ldet $ba11 be deemed sufficient if i.n writing Jllld sent by certified mail, return re<:eipt requested, addressed to (i) 38 Studios, LLC, S Clock Tower Place, Suite i40. Maynard, Massac~U$Ctfs 01754, c/o: Rick Wester, with a copy to: Foley Hoag LLP, Seaport West, lSS Seaport "Soulevard, Bos.ton, Massachuse~ 02210, Attn: Alexander J.. Aber, Esq., and (ii) to the Subscriber.at its address indicated on signature page to this Agreement. Notices sheU be deemed to have been given on the date of mailing. .except notices of change of address, which shall be deemed to have been given when received. 5. This. Agreement is not transferable or assignable without the Company's prior writteD consent. The undersigned .agrees that the .transfer or assignment of the Units shall be made only in accordance with the conditions and restrictions conlBined herein and in all applicable laws and regulations. This Agreement shall be binding upon and inure to ·the benefit of the parties hereto and to their respective heirs, legal representatives. successors and.assigns. 6. This Agi-eement may be executed in counterparts. Upon the execution and delivery of this Agreement by the undersigned, this Agreement sha.11 become-on irrevocable binding obligation ~fthe ~dersigned with respect IO the purchase of the investment as herein provided, except as may otherwise be provided herein. subject, however, to the tight hereby reserved to the Company to enter into the same agreements with other investors and to add and/or to delete other persons·ns investors. - Co•fideiltlal sl I . . . . -- 7. It is understood that the supscription and this Agreement are not binding on the Company until the Company accepts it, which acceptance is at the sole discretion of the Company, by executing this Subscription Agreement where indicated. The Company may ati:ept this subscription in whole or in part. Iftbe Company accepts this subscription only in par!, the Company shall cause to be returned to the undersigned any funds wired or delivered by the undersigned to the Company but not accepted on behalf of the Company. This Subscription Agre.ement shall be null and void if the Company does not accept it. If such acceptance is not limely secured, the Company shall cause to be re1umed to the undersigned any funds wired or delivered by the undersigned lo the Company, and the Company and the undersigned shall have no further obligation to .each other hereunder• ... ... - Cotif.ldentiil ·52 IN WITNESS WHEREOF, the undersigned bas executed this Subscription Agreement on the date set forth below. For Execution 'f!Y Natural Person(s) Signature ot'Prospective Investor Pri.ntName Social Security NUmbcr Executed at _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ City State on this_ day of_ _ _ _ _ _ __., 2010. For EJeCUtiop by Comorate,.Partnenhip or Trnst Pwpecttye Ipvestor Name of Corporation, Partnership or Trusl (Please Print) Signature ofpCl"$0n making the investment decisio¥1 on behalf oftbe entity Name:-.__ _ _ _ _ _ __ Title:--------- Taxpayer ID Number Bxec:utedm _ _ _ _~--------------~--City State on this_ day of _ _ _ _ _ _ _, 2010. Nuinber·of Units Subscribed f o r : - - - - - - Ag1Vegate Purchase Price for Subscribed Unlts: ' '"'-"':-:-"Jl;~ ~~.t~}·..- .. . _ ;s~'.ssible, sign and date this Questionnaire, and ·deliver it to the Company. Please contact the Agent's representatives if you have any questions with respect.to this Questionnaire. Y <>u:r..answcrs will be kept strictly confidential, ~xcept to 'the extent disclosure inay be required under any fecleml. or smte .laws. However, each person who agrees to invest in the Company agrees· that the Comp.any may present this QueStionnaire or a copy hereof to its attorneys or such other parties as it, in its sole discretion, deems appropriate 10 assure itself that the proposed offer and sale of the Class B Units of the Company will not result in a violatian oftbe registration provisions of the Securities Act or a violation of the securities· or "blue sky'' Jaws of any state, Please print or type: I. General Infor:mation Legal Name of Potential I n v e s t o r : - - - - - - - - - - - - - - - - - - - - - - - - - - - Business Address: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Business T e l e p h o n e = - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - If applicable: Spouse.·~ N a m e : - - - - - - - - - - - - - aomcAddress: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ .Date ofBirtb: - - - - - - - - - - Dollar Amoum of Class B Units To Be Purchased: ·2. Hotnc Telephone::_·- - - - - - - - - $------------------- Qualification as Accre4ited Inyes(Or (a) Are you a natural person whose current individual net worth or joint net worth with your spouse eXC'eeds SJ ,000,000? Yes _ _ __ No _ _ __ - Confiden..I SS (b) Are you a natural person who bad an individual income in excess of$200,000 in each of the two most recent years or joint income with your spouse in each of those years in cx.c.ess ofS300,000 and do you reasonably expect to achieve the same income levels in the present year? -y~--- N(> _ __ (c). Are you a director or executive officer of the Conqnmy? Yes _ _ __ No. _ _ __ (d) Are you or, ifapplieable, th~ entity on whose behalf you arc completing this Questionnaire: (i) a bank as defined in Sec1ion 3(a)(2) oflhe Securities Act or a savings and loan 88$0Ciation or other institution as defined in Section 3(a)(5)(A) of the Securities Act, whether acting in its individual or ftdu~ary capacity? Yes _ _ __ No _ _ __ (ii) a broker or dealer rejpstered pursuailt to Section 15 of the United SU.tes Securitks EiWbaoge Act Qf]934? Yes _ _ __ No _ _ __ an insu,rance company· as detin~ in Section··2(13)ofthe Securities Act? Yes _ _ __ No _ _ __ (iii) (iv) an inve$tmentcompany registered under the United States Investment Company Act of 1940·or a business development company as defined in Section 2(aX48) of such Act? Yes _ _ __ No _ _ __ (v) a small business investment conwany licensed by the United States Small Business Administration under Section 301(c) or (d) of the United States Small Business Investment Act of19581 Yes _ _ __ No _ _ __ (vi) a plan established and maintained by a stale., its political subdivisions, or .any agency -or in5trumentali1y of a state or ils political subdivisions for the benefit of its employees which bas total assctil in excess oUS,000,0007 Yes _ _ __ No _ _ __ (vii) an employee benetil plan within the meaning of the United States Employee Retirement Income Security Act of 1974, as amended ("ERISA"'), for which all investment decisions ere made by a plan fldu.ciary, as defmed in Section 3(21) of such Act. which is either a bank, savings and loan association, iosuralHle company, or regis1ered investment adviser? Yes (viii") $5,000,000? Yes - NQ _ _ __ an employee benefit plan within the m:eaning of ERISA which has total as~s in exc.esi; of No _ _ __ Confldeqtial 56 (ix) a self-direcled employee benefit plan within the meaning of ERISA, with investment decisions made s.olely by persons that are accredited investors as-set forth in this Question 2'! Yes ---- No _ _ __ (x) a private business deve}in!ct6rs ·and the MembeTS wish to ~ out fully th~ii respective rights. ·ob6~tions and duties witli respect to the LLC and its business, management and operations. NOW, THEREFORE, in consideution of the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency <>f which are hereby acknowledged, the parties hereto hereby agree, and the Prior Operating Agreement is hereby amended and restated, as foUows: ARTICLE/ Dellnftlo.l'IS The following capitalized tenns used in this Agreement shall have the iespeCtive meanings 8scn'bed to them below. NAc:t" means·tbe Delaware Limited Liability Company Act. 6 ~section 18-101, ct seq .• ;as amended from time to time and any successor thereto. Acfjusted Capital Account Balance • means, with respect to any Member as of the cltlse: ·ofany fiscal year or other accounting period; the balance in such Member's Capital Aceount adjusted by adding to such balance such Member's share of any "minimum gain" or ''partner nonrecourse debt minimum gain." within tbe meaning of the Treasury Regulations under Section 704(b) of the Code, of the LLC as of the close of such year or other period. N - Confhlentfal 60 "Adlliate" shall mean, with respect to any specified Person, (i) any Person that directly or indirectly controls, is controlled by, or is under common control with such specified Person; (ii) any Person that directly or indirectly controls 10 percent or more of the outstanding equity securities of the specified entity or of which the specified Person is directly .or indirectly the owner of 10 percent or more of any class ·of equity securities; or (iii) any Person that is an officer of, director of. manager of. pnrtner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, director, partner, manager or trustee, or with respect to which the specified Person serves in a similar capacity. "Agreement" means this Second Amended and Restated Limited Liability Company Agreement as it may be amended, supplemented or restated from time to time. "Board of Directors" Qr Bosrd •means the Board of Directors described in Ar.tide VI of this ~ement. 0 "Capital Account~ mall have the meaning set forth in Section J,2. ·capital Conlrlbutian • means, ·with respect to any Member~ the ~'ggrepte amount of money and vabie ~f property contributed to. the capita1 of the LLC by suc.h Member. Unless otherwise provided h~in, in Che case .of a Member who acquU,,S. a membership interest in .tbe LLC by assignment directly from ·aootber Member in accordance with this Agreement, such Member shall .be deemed to have made the Capital Contribution made by the assignor of such interest (or made by such assignor's predecessor in intereSt). "Certli1cate • means the Certificate of Formation creating the LLC, as it amended in accordance with the Act. may, from time to time, be "Change of Control·. shall mean a transaction or series of related transactions, whether by asset sale, sale of Units, merger, consolidation ·or otherwise, that results In. (i} the sale of all or substantially an of the assets of the LLC, or (ii) the holders of Units immediately prior to such transaction or series of related transactions no longer beneficially holding more than fifty percent (50%) of the voting power of the LLC or, in the case ofa merger or consolidation, the surviving· entity in such transaction or series ofrelated transactions. "Class A Unit• means any Unit issued by the LLC as, and designated in the Unit Register. as,. ·a Class A Unil "Class A' Unit" means any Unit issued by the LLC as, and designatetHti the Unit Register ,as, a Class A' Unit. "'Class B Private Placement• has the meaning aiven to it in tbe..recftals to this ~t. "Class B Unit" means any Unit issued by the LLC as, and designated in the Unit Register as, a CJass B Unit. "Code • means the Internal Revenue Code of l 986, as amended from time to time. "Covered Person " means any officer of the LLC, any Director of the LLC, or any of such Director's Affiliates. "Depreciation• means, for each fiscal year o.f' the LLC or other period, an amount equal to the depreciation, depletion, amortization ot other cost recovery deduction allowable under the Code with respect to· aft asset for such fi~ year or other perioo; provided, however, thnifthe Gross Asset Value of an asset differs ftom its adjusted basis for federal income tax plirposes at the beginning of such fiscal year or other period. Depreciation shall be an amount that belll'S lhe same ratio to such beginning Gross Asset Value as the fede:ral income tax depreciation. amortization or other cost recovery deduction with respect to such asset for such fiscal year or other period bears to such beginning adjusted tax basis; and provided further tliat iflhe federal income tax depreciation, amortization or - Confidential ... ··-- ·-·. 61 ·------------- ~ L!)1 other cost recovery deduction for such fiscal year or other period is zero, Depreciation shall be detennined with reference to such beginning Gross Asset Value using any reasonable method selected by lhe Board of Directors. «Direct.or" refers lo any Pe.rson initially designa~ed as a Director on Schedule A hereto and any Person· who· becomes an additional, substitute or replacement Director as pennitted by this Agreement. in each such Person's capacity as (and for the period during which such Person serves as) a Director of the LLC. "Esumated Tax Period• means, in mpect of any Member, a period with respect to which such Member ~yment of estimated federal income 18Xes based in whole or in pan on an allo'cation of income from must make a tbeLLC. "Gross Asset Value" shall mean. with respect to any liSset, such asset's adjusted basis fur United States federal i11come tax purpos~. except as follows: (a) the Gross Asset Value of all LLC assets Shall b& adjusted to equal theirrespeclive-gross tM. acquisition of an additional interest in the LLC by any new or existing Member in exchange for more than a • minimis Capital Contribution or for services; (ii) the distribution by the LLC to a Member of more than a ~ minimis amount of LLC assets as consideration for an interest in the LLC; and (iii) the liquidation of the LLC within tbe ~ning -of Treasury Regulation Section l.704-l(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (i) and (ii} tair market values, es detennined by the Board of Din:ctorti, as of 'the· following times: (i) of this sentence shall be made only if the Board of Directors reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the LLC; (b) the Gross Asset Value of any LLC asset (other than cash) distributed in kind to any Member shall be adjusted to equal the gross fhir market value of such asseron the date of distribution. as determined by the distributee Member and the Board of Directors;· end (c) the Gross Asset Value ofLLC assets shallothetWise be adjusted as .required forpW'pOSeS of maintaining, capital accounts under relevant Treasury Regulations. · If the: Gross ASSet Value of an asset bas been detennincd or _adjtist~d·pursuant to paragraph (a) above; slich Gro8s Asset Value shall thereafter be ujusted by the Depreciation :taken into account with re&pect to such asset for purposes of comp(lting Profits or Losses. •1nlt/a/ Public Offering" shall mean the initial eqtiify inte:M.sts offered or sold by the LLC for its owa account in a public ·offering pursuant to eii.. e:fl'ective registration statement under the Securities Act of 1933, as amended. "liquidator'' means the Board of Directors, or any Person or Persons appointed by the BOSJd ofDirectorS, to liquidate the assets of the LLC, apply and distribute the proceeds thereof and cause the cancellarioil of the Certificate. ~llC" means the limited liability company fonned.putsuan1 to the Certificate and this Agreement., as the Certificate or thiS: A!µ'eement may from time to tirne be constituted, amended or restated. •Member ~ refel'S to any. Person initially designated us a Member on Schedule A hereto end any Person wbo becomes an additional or substitute Member as per.mitred by this Agreement. in such Person's capacity·as.(end for the period di.iring which such Person serves as} a Member oftbe Ll.C. "Metnber Approval" means, with re8pect to any action, the affmnatiV.e. vote :Ofthe Membenl :at ai meeting to take or approve sueh action.or a written collSent of the Members approving or taking sucbaction, in each case, in aecordai:ice with the terms here<>f. - · ·Contldentlal 62 "Membership lnterP.st means a Member's entire interest in the LLC, including a Member's Capitul Account and the allocation of Profit or Loss to which such Member· is entitled. H "New Securil/es means any equity interests in the LLC whether now authorized or not, any rights, options or warrants to purchase equity interests in the LLC. and any indebtedness of the LLC for borrowed money which is directly or indirectly convertible into equity interests in the LLC; provided. that the term "New Securities" does .not include: H (a) the issuance of (i) the Schiliing Convertible Promissory Note and any Class A' Unit& upon the conversion thereof, and (ii) Class B Uni1S in the Class B Private Plai:ement; (b) any Units issued or awarded .(~r .any· option or other right lO purc;h&Se Units granted) in connection with .the performance of services for the LLC by the Person: to ·whom such Units arc issued (.}1' awarded (or to whom such option or other right is granted) with the approval of the Board of Directors (including. Mthout limitation, options granted and Units issued or awarded IJillk:r·the Option Plan). (c) eny Units or other equity interests, option5, wamlllt11 or convertible securities issued by reason of a dividend, spJit, split-up, subdivisloli or :any distribution or issuance of Units in connection with a reorganization, recapitalization, reclassification, consolidation or merger, (d) any equity interests, options. warrants· or convertible securities issued by the LLC in; ex:change, directly or indirectly, for as5ets o~ or equity interests in, any other entity, (e) any equity interests, options, warrants or convertible securities issul!id in connection with the entry by the LLC into any joint development arrangement or strategic partnership with any other entity; and any equity interests issued upon the exercise or conversion of any such options, warrants or convertible securities, {f) any equity interests, options, wammts or convertible securities issued bi connection mtli any debt or equipment financing ofthe LLC by,.or credit 11JT11ogement of the LLC with; any commercial lc&sor. bank or other commercial lender, including, without limitation, the warrants to purchase Class A Units issued on July 28.. 2009, to 38 Bridge Partners, LLC, a Rhode Island limited liability ~ompany, end Acquisition Trust, LLC, a Massachusetts limited liability company, respectively. (g) any equity interests offered or sold by the LLC for its own account itl a public. offering pursuant to an effective registration statement under the Securities Act of 1933, as amended. end (h) any equity interests in· the LLC into which any of the foregoing Units or othet equity interestSt options, wammtsor convertible securities provided in clauses (a) through (0 are converted or ex.changed. "Optlon Plan· means the 38 Studios, LLC 2008 LLC Unit Option Plan, as amended from rime to time· "Person • means any individuai corporation, association, partnership (general· or trust, estate, limited liability company. or other legal entily or organization. limi~~ joint ven~ . •President a means the person occ.upYbtg· the office of President (as provided in Section "6;4) at Bliy time, or frQm time to time. "Prior Oiieratlf18 Agr.~ment" has the ·meaning given to it in the recitals to this Agreetnent. "Profit Qr.:Lo.ss" sbeil mean. es to any transaction or fiscal ·period, the taxable income or loss of the LLC for United States federal income tH pwposes, and each item of income; gain, loss or deduction entering into the computation thereof, with the following adjustments: 11• Conlideatlll 63 ---·----------------------- (a) Any tax-exempt income or gain of the LLC that is not otherwise taken into account in computing Profits or Losses shall increase the amount of such taxable income or decrease the amount of such Joss; (b) Any expenditures of the LLC described in Code Section 705(a){2)(B) (or treated as such) and not otherwise taken into account in computing Profits or Losses shall decrease the amount of such taxable income or increase the amount of such loss; and . (c) In the event the Gross Asse1 Value ofany LLC asSet is adjusted,.(i) the amount of such adjustinent (includ1ng an adjustment resulting ftOm a distribution of such asset but excluding an fl(ljusbnent resulting .from a contribution of such asset) shall~ taken.into account in the same manner as gain or 1osS from"tbc dispositio'1 of $UCb asset for purpo$e$ of computing Profits .or Losses, (ii) gain or loss resulting ·.ftom any disposition of such asset with respect to which gain or foss is recognized for United States federal income tax purposes shall be computed by reference to the· Gross Asset Value of such asset, and (iii) in lieu of the cost recovery or similar deductions taken intO ~count with respect lo any asset with a Gross Asset Value which differs from its adjusted basis under the Code, such deductions shall be an amount equal tb the Depreciation with respect to such asset. "Schlf/Jng Converrtble Promissory Note "has the meaning given to it in die recitals to this Agreement. "Secretary" means the person occupying the office of Secre~ry (as provided in Section 6.4) at any time, or from time to time. "Securities Act" means the Securities act of 1933, as amended. "Target Capital Account Balance• means, for BllY Member as of"tbc close of any fiscal year or other accounting period, the amount which such Member would then be entitled .to te.c:eive :if the LLC were to sell its non'cash assets at book value as then determined in accordance with the Treasut)' Regulations under Section 70.4(b) of the Code, satisfy its debts and pbligatious in acoordance with their tenns (but limited, in the case of any nonrec:oursc liability of the LLC, to the assets securing such ·lillbility), and then liquidate in accordance with Section 5.2. "Terminated Director" shall have the meaning set fonh in Se"ctlon 6.2(a). "Transfer D' and any grammatical variation thereof, means any sllle, exchange, issuance, ·redemption, assignment, distribution, encumbrance, hypothecation. gift, pledge, i:ethe.meiit, Ie$ignation, trans(er or oiber withdrawal, disposition or alienation in any way (including, without limitation, the grant of atty security interest), wbetber voluntarily, involuntarily or by operation of law, .as to the Member's interest in·tbe LLC. Transfer shall specifically, without limitation of &he above, include assignments and distributions resulting from death. incompetency, bankruptcy, liquidation and dissolution. "Treasurer· means the person occupying the office of Treasurer (as provided in Section 6.4) .at any time, or from time to time. "Treasury Regulations• means the United States income tax regulations, including temporary regulations. promulgated under the Code~ as such regulations may be amended from time to time (including corresponding provisions of succeeding-regulations). ~Unit• means a sbllre of a Class A' Units or Class B Units. M~i:nbU''S Membership Interest. including Units designated a5 Class A Units, ~Unit Register • means a list of Members and their respective ho1dings of Unit& ·of each class, together With Capital Contributions relating to such Units, maintained with the books and records of the LLC in the mamier described in Section 7.1. - ·Confideatill ·64 ---------------·--- "Unreturned Capital Contr1but1011 ·means, with respect to any Member, the excess of such Member's Capital Contribution over all distributions made lo such Member in respect of such Member's Units pursuant to this Agreement. ARTICLEH Genera/. 2.1 Continuation of the Limited LJabUity C()mpany. The Members hereby agree (i) to .continue .the LLC as a limited liability company under and pursuant to .the Delaware Act and in accordance with the terms of this Agreement and (ii) that the ri!ihts. duties and liabilities of the Members shliU be as provided in tbe. Delaware Act, ·eieept as otberwiSC' provided beJ'Cin. · 22 Name of the LimJted liab1/11y Company. The -name of the LLC is 38 Studios, LLC. The name of the LLC may be changed at any time or from time to time with Member Approval 2.3 Omce of the Limited L/Bbllity Company; Regisl.ered Agent. The LLC's registered agent and office in Delaware shall be The Corpomtion Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, or such other registered agent and/or office as the Board of Directors may designate. The LLC's principal place ofbusin~s shall be 5 Clock Tower Place, Suite 140, Maynard, Massachusetts 01754, or such ·other place or plac:es within the United Sates as 1he ~oard of Directors may designate. The Board of Directors may appoinl agents for service of process in aU jurisdictionS in which the LLC shall conduct business. 2.4 OrganiZatJon. The Board of Directors shall cause to be.filed such certificates and documents as may be necessary or appropriate to comply with lhe Act and any othet applicable requirements for the.operation of Jl limited liability company in accordance with the laws of Deiaware and any other jurisdictions in whiCh the LLC shall condlict .business. and shall continue to do so "for so lo'lig as the LLC C9nducts business therem. Each of the Directors is hereby designated as an authorited person. within the· meaning of the Act; to .file any and all such certi6cates and documents (including, without limitation, the Certificate and any amendments and restatements thereof), and the Board of Directors shal I have the power to designate other .authori~ persons from time to time. 2.5 Purposes. The purpose of the LLC is to develop, market and sell video games, and to engage in any activities directly or indirectly related or incidenlal thereto, and in any other lawful business, purpose or activity for which a limited liability company may be organized under the Act. 2.6 Powers. (a) The LLC shall have the power and autbOrity to take any and all actions n~ssary or convenient to, or for the furtherance of, the purposes set forth in Section 2.5, including, .b.ut l'lot limited to, the power: (i) to conduct its business, cany on its operations and have and exercis.e;tbe powers granted to a limited liability company by the Act; (ii) to hi~ ·and fire employees, comultants and other Pers01ls; (iii) to acquire (by purthase, lease, contribution of property or·otherwise}, own, hold, license. ·operate, maintain, finance. impnive, lease, sell, convey, mortgage, transfer. dcmoliSb or disp0se of an_y real or personal praperty·tbat may be necessary or convenient to the accomplishment of the purposes ofthe LLC; (iv) to negotiate. enter"into, perform. amend, extend, waive. terminate·. or take any other action with respect to contracts of any kind, including, without limitation. contract& with any· Member, any Affiliate thereof. or any employee or agent of the LLC in connection with, or necessary or convenient to, the accomplishment of the purposes oftbe LLC, and any lease, contract or security agreement in respect ofaoy assets of theLLC; Confldeiltial 65 I '' ' (v) to lend money for its proper purpose, to invest and reinvest its funds, and to lf.lke and hold reaJ and personal property for the payment of funds so loaned or invested: (vi) to borrow money and issue evidences of indebtedness, and:to secure die same by a·mortgage, pledge or other lien on the assets of the LLC; (vii) to sue ·and Jle ·sued, complain and defend, and participate in administrative or other proceedings in its name, and to ply, collect, compromise, Utigate, arbitrate :or otherwise adJust or.settle aily and all other claims or demaods: of or agllinst the LLC. and to hotd proc- against tbe payment of contingent .liabilities; ·(viii) to elect and designate Directors of the LLC and to appoint employees and aprts oflhe LLC (who may be designated as officers of the LLC), and to define their duties and fix their compensation:· (ix) to indemnify any Person to the extent permitted by t~ Act; (x) to make, ex.ec.ute, acknowledge and file any and .oil documents and instruments necessary, convenient or incidental to the accomplishment of the purposes of the LLC; and (x.i) to cease its activities and cancel the Certificate. (b) Subject to the other provisions of this Agreerilent. the LLC .may sell all Ot substlintililly all of its assets, or merge with or consolidate into another limited liability company or other bu$ioess entity (as defm"Cd in Section 18·209(a) ofthe Act) organized under the laws ofany jurisdiction, only with Member Approval. 2. 7 Members. (a) A Person other lhan lhe Members of the LLC identified on Schedule A ·hereto may be admitted to the LtC as a substitute or additional Member only (i) pursuant to and in acconlance with Arllde IX or (ii) with Member Approval; provided. however. that the Board of Members may, in its sole and absolute discretion and without the approval the Members, (x) admit as au additional Member (if not already a Member) and· issue Class B Units to any Person acquiring Class B Units putilulmt to and in accordance with the terms of the .Class B Private Placement and (y) admit as an additional Member (if not already a Member) and issue Class A' Units to any Person pursuant to and in accordance with the.terms oflhe Schilling Convertible Promissory Note. The admission· of any Person as a Member shall not cause dissolution of the LLC. of (b) The name and business address of each of the Members shalJ be set forth in the Unit Register. (c) Any Person· acquiring one or more Units from the LLC or from a Member in accotdance with this Agreement shall, unless such acquiring Person is a Member· as of immei:Iiately prior to such acquisition.. be deemed to have been admitted as a substitute or an additional Member· to the LLC, with no further a<:tion by the Board of Directors or any of the Members being necessary therefor, upon consummation of such acquisition of Units and the execution by such acquiring Person of a counterpart of this Agreement or another instrument. which bus been accepted by the LLC, pursuant to which such additional Member agrees to be bound by the terms of this A~ement. (d) No Member shall have the right or power to resign, withdraw otretire from the LLC as a Member prior to ·the dissolueion and liquidation of the LLC (except upon a Transfer of record ownership of oll of such Member's Units in compliance with, and subject to. the provisions of-Article /XJ. 2.8 Dt!5/gnation of Dlreelors. The Persons identified on Schedule A hereto as ..Directors" are currently serving as the directors and managers of the LLC. Directors shall be elected by the Members in - ·Conficleatltl 66 accordance with the provisions of Section 6.2(a). Any Director may withdniw or be removed as a manager of lhe LLC, and other Persons may be added or substituted as Directors, only in the manner specified in Section 6.2(a). 2.9 liab//ity of Members and Covered Persons. Except as otherwise provided in the Act, the de.bts. obligations and liabilities of the LLC, whether arising in contract, tort or otherwise, shall be solely the debts. obligations and liabilities of the LLC, and no MelI\ber or Covered Person shall be obligated personally for any such debt, obligation or liability of the LLC solely by reason of being or acting as a Member or Covered Person. Without limiting the foregoing, (i) no Member lit its capacity as such shall have any liability to restore any negative balance in such Member's Capital AccOUDt; and (ii) the failure of the LLC to observe any formalities or requirements relating to exercise of the LLC•s powers OT management of its business or affairs under this Agreement or the Act shall not be grounds for imposing personal liability on any Member, Director or other Covered Person for Uabilities of the l,,LC. 2.10 No Partnership. The LLC is not intended to be u general pattncrs~ip. limited pa!1nership or joint venture, and no Member or Director shall be deemed. to be a partner or joint venturer of any other Member or P~tor, for any purpose .other 'han foreign and domestic federal, state, provincial and local income tu purposes, and this Agreement shall not be construed to suggest 9tbe,rwise. 2.11 .Tftle :to Property. All property owned by the LLC, whether real ()t personal. umgif)te ()r intangible, sha:ll be deemed to be owned by the LLC as an entity. and no Member or Director, individually, shall have any owner5bip of such property. The LLC may hold any. of its assetS in its own name or in tbe name· of its nominee. which nominee may be one or more trusts. 2.12 Investment Representations. Bach Member, by eic.ecution of this Agreement or an amendment hereto reflecting such Member's admission to the LLC or another instJ:umeot pursuant to which such Member agrees to be bound by the tenns of1his Agreement, represents and wmrants to the LLC as follows: (a) Such Member is acquiring such· Member's interest in the LLC for its own· sccotint (or investment only, and not for, with a view to, or in connection witb,.any distribution or resale thereof. (b) Such Member understands that (i) the inte'J'Cst in the LLC such Member is acquiring has not been registered under the Securities Act or applicable state securities laws and cannot be resold unless subsequently registered under the Securities Act and such laws. or unless ·an exemption from such registJation is available; (ii) such registration under the Securities Act and slicb laws is 1.m.likely at any time in the future and neither the LLC nor the Member or Directors are obliguted to ftle a registration slatement under the Securities Act or such laws; and (iii) the assignment, sale, transfer. exchange or other disposition of such Member's interest in the LLC is restricted in.accordance with the tenns of this Agreement. (c) If the Member is an entity, (i) such Membe.t is duly organized. validly e~isting and in good standing under the laws or such Membcr~s jurisdiction of organization; (ii) such Member has full orpni~tional power to execute and deliver this Agreement and to perfonn such Member's o~ligatic>.ns hereunder; (iii) such Member's execution, delivery and perfonnance of this Agreement have been authorized 'by au requisite action on behalf of the entity; and (iv) such Member has duly executed and delivered this Agreement. 2.13 Tiftmtnation of Prior LLC Agreement. The Prior Operating Agreement shall ~ ameuded and restated in its entirety, and shall be temrinated atid of no further force or effect as of the etrectivettess of this Agreement, provided that the rights and obligations of any Person under such agreement accruing prior to the effectiveness hereof shall ~ontinue to be governed by such agreement with rl!spect to all events and time period prior to the effectiveness hereof. Co11fldenUal '67 ARTICLEm Capital Slrocture 3. J Units Generally. (a) All Membership Interests in·the LLC shall be denaminated in Units. The LLC shall have three classes of Units, which shall be designated as Class A Units, Class A' Units and Class B Units. Subjea to-the other provisi()ns of this Agreement (including tboS:e governing. the ~embers' iespective rights tC> tec~ve alled in Treasury Regulatio·n Section l.704-l(b)(2)(ii)(d)(4). (5) or (6), items of Profit (including gross income and gain) shall be specially allocated to such Member in an amount end manner sufficient to eliminate, to the extent required by·the Treasury RegLtlations. any deficit in such Member's Capital Account as quickly as possible. (c) The Board of Directors may make such special allocations. and apply SectJon 4.1 with such modifications, as it reasonably and in good faith detennines to be appropriate to comply with the rules set forth in the Treasury Regulations undei Section 704(b) of the Code governing (i) allocations of "noorecourse deductions,'' "partner noilJ'teourse deductions" and other items lacking "economic effect," (ii) "minimum gain chargebacks" and "partner non.recourse debt.minimum gain chargel>JlekS," (iii) aUocatioos in con~ction with exercises of options and eotivemons of equity or debt interests or iil$truments, .an4 (iv) aUocations with respect to forfeitures of ..substantiaJly non vested interests" in the LLC traruifeaed or issued in connettion With the perfonnance of services. (d) The allocations described in Secdons 4.2(a), 4.2(a} and 4.2(c) are intettded to eomply with certain requirements of Treasury Regulations, and may n01· be consistent with the manner in whk:h the Members intend to divide Company distributions. Accordingly, the Board of Directors is hereby authorized to divide other alJocations of Profits, Losses and other items among the Members so that the net amount of all allocations under Section.<; 4.2(a), 4.2(a) and 4.2(c) to each. such Member is zero. 4.3 Tax Consequences. The Members are aware of the income tax. co'nse.quences of the allocations made by this Artl.cle IV and hereby agree to be bound by the provisions· of this Arilcle IV in reporting their portion of the LLC's income and loss for income taK purposes. 4.4 Tncome Taxf!S. In the event the Gross Asset Value of any asset. of the LLC differs from ·such asset's adjusted basis upon the contribution of such ass.et ta ·the LLC (for tax purposes) or a:S a reswt of an adjustment in· such asset's Gross Asset Value hereunder, ·subsequent allocations of·income, gain, lei.s's and deductibn with respect to such asset for United States federal income tax purposes shall take account of any· variation· between the adjusted basis of such asset for such plll])oses and its Gross Asset Value in the .same manner as· uoder Code Section 704(c) annneetion with the business of the LLC; and to pay $81arieii, expense reimbursements, employee beneitts, lringe benefits. bonuses and any other fonn of compensation or employee benefit to such persons and entities, at such times and in such amounts a~ may be determined by the Board of Directors in its sole discretion, to provide executive; administrative and support services in eonnettion with the business of the LLC; (e) to bite or employ such agents, employees:, managers, ~couniants, attorneys, consultants and other persons necessary o:r appropriate to carry 011t the business and .operations of the LLC, and to pay fees, expenses, salaries, wages and other compensatron to such persons; (f} to pay, extend. renew; modify, adjust, submit to arbitration, prosecute, defend or coi:npromise, on s11ch tenns as it may determine and on such evidonce as it may deem sufficient, any obli?.tio·n., suit;. liability, cause of action or claim. including, without limitation, obligations, suits, liabilities, causes of action or cl~ relating to tax.es. either in favor of or against the LLC; (g) except as expressly otherwi!le provided in this. Agteement, to determine the appropriate accounting mclbod or mctbOds to be used by the LLC; (h) tQ cause the LLC to make or revoke any appliOllble elections ieferred to iD the Code: (i) to establish .and maintain reserves for such purposes and in such amounts· as it deems ·appropriate from time to time; (j) to pay an organizational .expenses and general and· admmistrative expeme5 of the LLC; (k) to deal with, or otherwise engage in business with, or provide services to and receive compens11tion therefor ftotil. any Person who has provided or may in the future provide any services to, lend money 10, sell property to, or purchase property from the LLC, including, without limitation, any Member or Director; (l) to engag~ in any kind of activity; and to perfonn and carry out contracts of any kind necessary to, in connection with or incidental to the accomplishment of the purposes oftbe LLC; ·- Confidential 72 . ti . . ' (m) to pay any and all fees and to make any and all expenditures that the Board or Directors, in its sole discretion, deems necessary or appropriate in connection with the organization of the LLC, the management of .the affairs of the LLC, and the carrying o.ut of its obligations and responsibilities under this· Agreement, including, without limitalion, fe£ls, reimbursements and expenditures payable to any Member or Diret;tor; (:n) to exercise all powers and authority grunted by the Act to managers, except as otherwise provided in this Agreement; (o) to cause the LLC and its properties and assets to be mamtai,Dcd and ~Q.d in such a manner as the Board of Directors may determine, subject, however, to obligations imposed by applicab~ laws or by any mortgage or security interest encumbering the LLC and such properties and assets from. tiine to time, and by any lease, rental agreement or other agreement pertaining thereto; (p) to cause to be· obtained and continued in force all policies of itaumnce required by any mortgage, lease or·other agreement J:Clating w the LLC's business or any pam thereof, or detennined by the' Board of Directors to be in the best interests of the LLC; and (q) to cailse 10 be paid any aod .all taxel!, charges and as~sments that may be levied, assessed or imposed on any of the assets oftbe LLC unle$S the same are C()tltested by tbe'LLC. 6.2 Board.al Directors. (a} Number, Election and Qualfflcetion. The number of Directors whO: shall constitute the whOJe Board of Directors shall be determined at any time and from time .to time by Member Approval. Except·as otherwise provided in this Agreement, the Ditectors shall be elected at any time and from time to time by Member Approval.· Ditcctors need not be Members of the LLC. The number of members oftbe Board ofDirectoni is hemby initially .fix.ed at seven (7), and the persons identified· as· ..Dircctol'S" on Schedule A. hereto are currently serving as lhe Directors. Each Person elected to seive as a Director of the LLC, as a condition to becoming a Director hereunder, shall execute and deliver this Agreement or a counterpart hereof o:r lnother instrument pursuant to which such Director agrees to be bound by the tenns hereof, -and such additional agreements, instruments, certificates. and documents, including, without limitation, an amendment to the Certificate, as the Board of Directors may deem necessary, appropriate or convenient to reflect the foregoing matters. and the election of such Person as a Direc:tVal. (c) Vacancles. Unless and until filled by the Members· in accordance with tbe provfsibns of Section 6.2(a), any vacancy in the Board of Directors, however occuning, including a vacancy resulting from ·an enlargement of the Board, may be filled by vote of a majority of ttie Directors then in office, although less. than a· quorum, or by a sole remaining Director. A Director designated to fill a V&cancy, and a Director chosen to fill a· position resulting from an incrcas·c·in .the number of DirectQrs, shall hold office ·until such Director's suc®ssor is duly elected and qualified, unless a different term. is specified in lhe.resolution electing or appointing such Directw, or until such Director's earlier death, resignation or removal. (d) Re$fgnatlon. Any DirectOr tnay ·~ign by deliverlng such Director's written resignation to the LLC at i1s principal office or to the· President or Secretary. .Such TC$ignation shall be etr~ve· upon receipt unless it is specified to be effective at some other time· or upon the occurrence of some other event. (e) Regular Meetings. Regular meetings of the Board of Directors may be held Without notice at such time and place, either within or without the State of Delaware, as shall be determined from ril!l~ to time by the Board of Directors; provided that any Director who is absent when such a determination is made shall be given notice of the detenninatiQn.. (t) Speclal Meetings. Special meQtings of the Board (If Dircct0rs tn!lY be· held at any time and place, within or without the State of Delaware, designated in a call by the. Piesident, two or more Directors, or by one Director in the event that there is only a single Director in office.. (g). Notice of Special Meetings. Notice of any special meeting tices given in accordance with subpart (jii)"of the preceding sentence shall be effeetive three (3) days after being sent. Any Director may waive notice· of any meeting at any time prior to or a~ sL1cb special meeting ·by delivering such waiver in writing to ~e S~retary or the President, and a Director will be deemed to have waived notice of a meeti~g. if such D~tor attends. the meeting Without protesting prior thereto or at its commencement the lack of notice to him. A notice or ~iver of notice ofa·meeting of the Board of Directors need not specify the purpose oftbe meeting. (h) Meetings by Telephone Conference Calls. Direqtors, or any menibers of any committee designated by the Directol'S, may participate in a meeting of the Board of Directors or such committee by means of c011ference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. and participation by such means shall -constitute ·presence in person at such meeting. (i) Quorum. A majority of the total n.umber of Oirecto~ then in onk:e .siial,I toostitute a quorum at all meetiDSl! of the Board of Directors. In the event thar one or more oftbe Directors .shall be disqualified to vote at any meeting. then the required q.uorum shaJl be reduced by one for each such Director so disqualified. In tbe. li~ce ofa quorum at any such m~eting, a majority of the Dire.Gtors present may adjourn the meeting .from.time to time without flll'Jher notice, other than announcement at the meeting. untiJ a quorum shall be present. Conflde-.tlal 74 i • J (j} Action at Meeting. At any meeting of the Board of Directors at which a quorum is the vote of a majority of those present shall be necessary to take. any action unless a different vote is specified b.y law; the Ccnificate or this Agreement. p~ent, (k) Aatiop by Consenl. Any action required or permitted to be uiken at any·meeting. oftbe Board of Directors or of any committee of the Board of Dbwtors may be taken wit~ut a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with lhe minutes of proceedings of the Board or committee. (I) RemoVll/. Any one or more or all ofibe Direciors may be removed, with or without cause, by Member Approval; provided, however, that, .until such time as Douglas Macrae shall bav,: cecei~ed distributions in an amotmrequal to $2,000,000, he may not be removed as a Director without cause. (m) Committees. The Board of Directors may, ·by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one 1)1' more of the ·Directors of the 1.LC. The Board may designate <,>ne or more Director.i as alternate members of any committee, who may replace any absent or disqualified me•r al any meeting of the committee. Any suc.h committee, to the extent provided in the resolution of the Board Qf Direct~ and subject to the provisions of the Act, shall have and may exerciile aU ~e. powers and authority of the Board of DirectC)rs in the management of the business and affairs of the LLC. Each s~ch committee shall keep minutes and µJake such reports as the Board of Directors may from time to time request E!L~Pt as the Board of Directors may otherwise determine, any committee may make rules for the conduct of the commitlee's business, but, unless otherwise provided by tbe Board of Directors or in such rules. its business shall be conducted as .nearly as possible in the same manner as is provided in this Agreement .for the Board of Directors. (n) Compensation of Dltectors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the B.;.ard of Dire~ors may from time t9 time detennine. No such payment shall preclude any Director from serving the LLC, or any other PtrSon that direct()' or indirectly controls, is controlled by, or is under common control with the LLC, in any o~r capacity and receiving compensation for such service. ~3 Mem~. (a) Place of Meetings. AU meetings of Members shall be held ilt such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the Presidmt ot, ifoot so desien&ted• at the-re~stered office oftbe LLC. (b) Annual Meeting. There shall be held an annual meeting ofMembers for the election of Direetors and for the ·transaction of such other busjness as may properly be brought before the meeting.. S!lcb ·annual meeting shaU be held .on a date to be fixed by the Board of Directors or the·.Presidcnt (which date shall not be a legal holiday in the place where the meeting is to be held) at the time end place to be fixed by the Boarcl.C)f Directors or the President, and stated in the notice .oflhe meeting. Ifno annual meeting is held in .accordance With ~.foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that spceial meeting shall have the same effect as if ii bad been taken at the annual meeting. and, in such case, all re.fei:ences jn this Agreement to the annual meeting of the Members shall be deemed to refer to such special meeting. (c) Special Meetings. Special meetings of Members may be called at any time by the Prc-sident or by ·the Board of Directors. Business transacted at.any special meeting ~fMemben shall be li'1lited .to matters relating to tbe purpose or purposes stated in th~ notice of meeting. Notice ofMeetings. Ex-cept as Qtherwise provided by law, Written noticc,of: each meeting, (d) whtther annual or ~i;;ecial. ofMeml>ers, shall be givet> noc:less tbatt 'ten (10) nor more tbP. sixty (60) days before the date of the meeting to each Member entitled to vote at SL!-ch meeting. The notices of all meetings shall state the place, chJte. and hour of the meeting. The. notice of a spec~ meeting shall state, in addition, the purpose or purpolies for which the meeting is caUed. Jr mailed, notice is deemed given when: deposited··in·the United Slates U'l8i1, postage prepaid, directed to the Member at such Member's address as it appear,; on the records of the LLC. Any Member - Confidential 75 ~ m may waive notice of any annual or special meeting before· or after any such meeting by delivering such waiver in writing 1o the Secretary or the Prc$ident. (c) Quorom. Except. as otherwise provided by law, .the Certificate or this Agreement, Members holding a majority of the Units issued, outstanding and entitled to v<1te shall constitute a quorum for the transaction of business at any meeting of Members. (t) Ar/}ournments. Any meeting of Membei:s may be adjourned to any other time and to any other place al which a meeting of Members may be held under this Agreement by the Members present Or' represented at the meeting and entitled to vote, although less lban a quorum; or, if no Member is pres.ent, by any officer entitled to·preside at or to act as Secretary of such meeting. It shall not. be necessary to nority any Member of any adjournment of less than 30 days if the time and place Qf the adjoul'iled meeting are .announced at the meeriDS at which adjournment is taken unless, after the adjournment. a new .record date Is ·fixed for the ·adjourned meeting. At the adjourned meeting, the LLC may transact any business that might have been transacted at the original meeting. (g) Voting and Proxies. EKCept as otherwise provided in this Agreement. each Member holding of record issued and outstanding Unitil shall be entitled to vote at any meeting of Members. Except as otherwise provided in this Agreement. each Member shall be entitled to one vote for each Unit held by such Member on the applicable r~ord date for such vote· Qr consent, with no cumulativc·voting. A Member may vo~ or express such consent or dissent in person or may authorize another person or persons to vote or act for su~b Member by wtj.tten proxy eitccuted by the Member or such Member's authorized agent and delivered to any offic~ of the LLC~ No such proxy shall be voted or acted on after three (3) years &om the date of its execution, unless the prpx.y expressly provides for a longer period. (b) Action al Meeting. When a qll9rum is presen~ at any me~ng, the Members holding a majority of the Units issued, outstanding and entitled to vote shall decide any matter ·to be voted on by the Members at such meeting. except when a different vote is required by express provision of law, the Certificate or this Agreement. (i) AcUon· Without Meeting. Any action required or pennitted to be taken: .at any anoual ·W' special m~ing of Members of the LLC may be taken without a meeting, without prior nQticc and without ·a vote, if a cQnsent·in writing;. s~ttibg fo~ the action so taten, ls signed by ~e Members having not ~~than the·~um aggregate number of Units that would be ~to authorize or take such actiOn at Ii meeting at whi1=h all Members Jo vote 9n such action were present and voted. Prompt notice of the taking of an ~ction withoµt a meeting by Jess than unanimous written consent of the Members shall be given :to those Members who have not consented in writing; provide~. however, that the failure to give such. nolicc shall not affect the effectiveness of any action -SQ 1aken. (j) Record Dale. The Board or Oire(:tors may tix in advance a date as a record date for the determination of the Members entitled to notice of or to vote at any meeting of Members or to ~xpress consent (or ·dissent) ·to LLC action in writing witbQut a meeting. or entitled to receive payment of any distribution or allotment of any rights in respect of any change, convemon or exchange or-interests,. or for the purpose of any other lawful action. Such record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than ten (J 0) day~ after the date of adoption of a record date for a written,consent without a meeting, nor more tba11 sixty (60) days priirectois:, t~ person presiding at the meeting shail designate a temporary secretary t<> k~ep a record of the meeting. (k) Salaries. Officers of the LLC shall be entitled to such salaries. compensation or reimbursement, if any, as may be fix-ed or allowed from time to time by the Board of Directors. 6.5 Interpretation of Rights and Dulles of Members. To the fullest extent permitted by the Act and other applicable law, and to the extent not inconsistent with the $peeitic provisions of this Agreement ot the Certificate., it is the intention of the parties that the Members shall have no power or authority wbatso.evcr with respect to the management of the business and affairs of the LLC and no Member shall have any right, power or authority to transact any business in the name of the LLC, to act for or on behalf of the LLC. or·in its 1'.lame, or to bind the LLC. 6.6 Member Approval Requirements. Notwithstanding the. provisions of Section 6.1 or any other provision of this Agreement to the contrary: (a) Wilbollt Member Approval, the Board of Directors shall not cause the Ll;C to{and the LLC shall not) sell all or .subStantially all of the assets of the LLC or merge with, or cons01idate into, another Delaware limited liability company or other business entity (as defined in Section l 8·209(a) of the Act): and (b) for so long a~ et least 1.000.000 Class A Ullits· remain outstatKlbig. coiisent of the holders of et least a majority of the Cius A Units (voting as a separate class) shall be required for any action 1hat (i). ..alters or changes the rights. preferences or privileges of the Class A Units; (ii) increases·or aecreases the a.utbQ~ number of Class A Units; (iii) creates (by reclassification or otherwise) any new class or series of Units having rights, preferences or privileges senior to or on a parity with the Class A Units; (iv) results in the redemption or repurchase of any Class A Unils (other than pursuant to ~quity incentive agreements with service providers giving the Company the right to repurchase Unirs upon the 1ennination of services); (v) results ·in any merger, corporate reorganization or other transaction that results in a Change of Control, or any transaction in which all or substantially all of the assets of the LLC are sold, unless the cash and/or equity consideration in the trau~ction is ~tcr than· SJ5(1 million; (vi) increases the authorized size of the Board of Directors to more than -nine (9); or (vii) results in the reclassification of units junior to the Class A Units into u.µts having rights and preferences or privileges .senior to ·or on a parity with lhe Class A Units. 6.7 Binding the LLC. Except as the B.oard of Directors may generally or in any particular case or cases otherwise authorize, and subject to the other provisions of this Agreemellt and the Certificate, all deeds, lease.s, contracts, bonds, notes, ~hecks, drafts or other obligations made, accepted or.cndotsed by the LLC shall be signed by the President or the Treasurei:. 11• Confidential 78" I . } 6.8 Contracts with Members, Directors and Affiliates. The LLC may transact business and enter into contracts and other amttgements with any Director, officer, Member or Affiliate of a Director, officer or Member or with any corporation, partnccsbip, orgaoizatiOQ or other concern iu which any one or more of its Directors, offi~ or Members are directors. officers, stockholders, partners, members, trustees, or otherwitie interested; and, in the absence or fraud, no such c.ontract or transac.tion shall be invalidated or in any way affected by ahe fact that such Directors, officers or Members have or may have interests which are or migbfbe adverse to.the interest of the LLC, even though the vote or aclion of such Directors, officers or Membel"S having such adverse interest may have been necessary to obligare the LLC under suc.b conttact, transaction or ·arrangement. In the absence of any express agreement to the contrary and in the absence of fraud, no Director, officer or Member having such adverse interest shall pe liable to the LLC, any Member or any creditor of the LLC or to any other Person for loss incurred by it under or by reason of such contract or transaction, nor shall any such Director, officer or Member be accountable for any gains or profits .realized thereon. 6;9 lndemnibcatlon and ~ulpatJon. (a) No Covered Person shall have any liability to tlie LLC or to any Member for any Joss suffered by the LLC that arises out of any. action or inaction of such 'Covered ·person if such Covered Person, in good faith, determined that such course ofcon<1uc1 was in, or not opposed to, the best interests.of the l.LC and such course of conduct did not constitute gross negligence or wiilfUI misconduct of such Covered PersQn. (b) To the maKimum extent pennitted by applicable ~w and subject to the other provisions of this Section, the LLC sbaU indemnify each Covered Person liom and against all clai~. tosses, expenses, liabilities, actions or damages (including, without limitation, any action by any Member or assignee thereof against a Covered Pe.rson) due to, arising from, or incurred by reason of any action, inaction or decision performed, taken, not ~or made by such Covered Person in connection with any Qftbe activities and operations of the J,,l,;C, provided such -action. inaction or deQisioJl 1s. within .the scope oftbe autltority of such Covered Person as provided he.rein, such Covered Person acted in good· taith and in a ·manner such Covered Person reasonably believed to be in, or not opposed to, the best interests of the LLC, and, with respect to any criminal proceeding. bad no reasonable cause tvered Person did 11ot act in g9od .fhltb and in a manner which such Covered Person misonably believed to be in, ·ornot opposed to, the best interest of1he LLC, or that such C.Overed Person bad reasonable-cause to believe that .such Covered Person.'s conduct was unlawful (unless there bas been a final .adjudication in the proceeding that such Covered Person did not act in good faith and in a manner which such Covered Person reasonably believed to be in, or no1 opposed to, the best interests of the LLC. or that such Covered Person did have reasonable cause to believe that such Covered Person's conduct was unlawful). Any Covered Person may consult with counse] selected by such Covered Person and any opinion of such counsel (which may be counsel for any Covered Person or any Affiliate) shall be full and complet1,: iiu.thorization E111d prolection in respect of any action taken or suff~d or omitted by such Covered Person bereunder·in good faith and in accordance with the opinion of such counsel Any indemnification under this Section shall include reasonable attorneys' fees incurred by sucb Covered Person -in connection with the defense of any proceeding based on any such action, inaction or decision, and sluill include, to the extent pennltted by law. all such liabilities under United States federal and state securities laws-. The reasonable expeus.es incurred by a Covered Person in connection with the defense of any such_ proceeding shall be paid or reimbursed by the LLC as incurred. upon receipt of an undertaking by such Covered Person to repay such expenses if it shall ultimately be detennioed that such Covered Person is not entitled to be indemnified hereunder. Indemnification hereunder shall only be made to the extenl that such Covered Person is not otherwise reimbursed from insurance or ·other means. Indemnification hereunder sbil:U only be paid from the assets of the LLC, and no Member shall have any persona] liability on account thereof. (c) NoiwitbStandi1'"g1he proVisibns .or Section 6.!J(b);:a Covered Person sball llOt be entitled to be indemnified or held barinl.ess frcim and against any claim, Joss, exi)ense, liability, action or·dltmngc to the extent such claim. loss., expense..· liability, action or damage is due to, or arises from, or is inctirred by reason of, such Covered Person's gross negligence or willful misconduct. -----------------,-------------------·. Confidential 79 ~ L4I ' (d) The provisions or this Section shall be in addition to and not in limitation of any other rights of indemnilication and reimbursement or limitations of liability to which a Covered Person may be entitled. The provisions of this Section shall apply whether or nol at the time of reimbursement the eovered Person entitled to reimbursement is then a Covered Person. Notwithstanding any repeal of this Section or other amendment hereof. its provisions shall be binding upon the LLC (subject only to the exceptions above set forth) as to any claim, loss. expense, liability, action or damage due to, arising from or incumd by reason of matters which occur during or are referable to the period prior to any such repeal or amendment of this Section. 8.10 Tncent!ve Eljlllty Com~tion. Without limiting ~ generality of the other provisiolis of this Article VJ, in o~dcr to adVllnce the interests of the Members by enhancing the LLC1 s ·ability to attrad, main ~nd motivate Persons who make {or ai;e expe.Cled 10 make) important contrit'.)utions to tho LLC by providing such PeJSOns with equity ownership opportunities a~ p.erfonnance-~sed incen~ves and thereby better aligning the interests of·sucb Persons with· those of the Members. the ·B~ ot Djrectors sball have the right, power and authority, with no need f()r an,y further vote, consent, approval or ot~r action of aJ1y Member, to establish one or more ·equity compensation plans for the LLC providing for the issuance of Class A Units (or options or other rights to· acquire the same) 1o such Persons, on such terms and conditions, and in such amountii (subject lP Seclion 3.1 (a}), as the· Board of Directors may detennine to be necessary or advisable. 6.11 Other Ac:cJvities. No Director (or Affiliate thereof), as long as he ·or she. is ·a Director, officer, employee or consultant of the LLC (and for a period of lwelve months thereafter) may, whether as a slQckholder, member, partner, director, manager, officer, employee, consultant or adviser, independently or with others, engage in any business or profession of any nature or description that is competitive with the LLC. other than the passive ownership of 5% or less of the equity interests of a competitor of the LLC. Notwilbslanding the foregoing, Douglas Macrae may maintain his current equity interest in General Computer. Subject. to the foregoing, neither the LLC nor any other Director or Member shall, under the terms oftbis Agreement or by·virtue of the eximence oftbe LLC or the relationship created among the Members, have any rights in or to the independent ventures or opportunities.of& Member or Director or any Affiliate thereof, or the income or profits thereof'. Nothing in this Section 6.11, however, shall limit or abrogate any agreement to which any such Member, Director or Atliliate·may be bound apart from this Agreement. ARTICLE WI Fiscal Matters '1.J Books tll1d Records. At all times during it$ exi8tence and thereafter until its. complete liquidation. or winding up, the LL<:: shall maintain boob.of accoµnt and ~ords at i~. registered off1Ce. The LLC shall keep if$ books and records as determined by the Board or Directors. The Board of Directors sbaU keep or cause the Treasurer or another officer·to keep such books and ~rds, in addition to any documents and .informati~ required lo be furnished to a Member under .the Act, at the principal office of the LLC for examination ~ copying by any Member or Director, or such Member's or Director's duly authorized representative, at such Member;s or Director's reasonable .request, and at such Member's or Director's ex~nse during ordinary business hours. A current list of the full name and last known address of each officer, Member and Director, a copy of this Agreement and any amendmen1s thereto, the Certificate, including all certifi~es of amendment thereto, and eitec:uted copies of all powers or attorney, if any, pursuant to wh.ieh this Agreement, any amendment, the Certificate or any cemncate of amendment bas been executed, shall be mainta'ine~ at lbe principal office of the LLC. The LLC shall bllve no obligation to deliver or mail a copy of the Certificate or any amendment thereto to the Member. To the extent permitted by the Act and applicable law, the Members' rights to copy and examine the LLC's books,reeords, other documents arid information pursuant to this Section 7.1 shall terminate upon the earlier to occur of a Change of Control and an Initial Public Offering. dissoluti~n 7.2· Bank Accawirs. The Board of Directors.or the President or the Treasurer shall boiespoilsible for causing one or more accounts to be mainlained in one or more banks, which accounts shall be used "for.the payment of the expenditures incurred by the Board of Directors and the officers in connection with the business of the LLC. and in which shall be deposited any and all cash reoe:ipts of' the- LLC. All deposits and funds not needed for the operations of the LLC may be invested in short-term investments, including securities issued or folly guaranteed by United States government agencies, certificates of deposit of banks, bank repurchase agreements covering the 11• Confidential 80 securities of the United Stales government, commercial paper rated A or better by Moody's Investors Services, Jnc., money market funds, interest·bearing time deposits in banks and thrift institutions, and such other investments as the· Board of DirectoJS may approve. Withdrawals from any LLC bank or similar account shall be made and other activity conducted on such sjgnature or signatures as shall be approved by the Board of Directors. 7.3 Fiscal Year. The fiscal year of the LLC for tax and for financial accountingpurposes.sballend on December 31 ofeach year, or such other date as may be determined from time to time by the Board of.Directors. 7.4 Tax Matteis Partner. If required by the Code, the Board ofDirectors.shall designate a Melllber to serve as the ''tax mattetS plHtner" of the LLC. If any is designated, the tax matters partner is authorized to -and shall ~onn all duties of a tax matters partner under-the Code and shall serve as tax. matters partner until such tu tn1tttel"$ perttier·~ resignation ·or until the designation of such tax matters partner's successor, whichever occurs sooner; provided. howeyer. that the tall. matters partner shall (i) within ten ( 10) busin~ days after the receipt of any notice from the Internal. R,e\lenue Service in any administrative proceeding at the LLC level rebiting to the detenninatio11 of any LLC item of income. gain, loss, expense, deduction or credit, mail a copy of such·notic~ to· each Mem~r. (u') take such action as may be necessary to cause each Member to become a ..notice partner" within lhe meaning. of Section 6231 (a)(8) of the Code, and (iii) inform each Member of all significant matters that may come to bis or her attention in his or her capacily as tax matters partner by giving written notice thereof witJiin ten (I 0) business days after becoming aware thereof and, within 1h~t time, shall forward to ~h other Member copies of all signiikant written communications he or she may receive in such capacity. All reasonable expenses incuncd by 1he tax matters partner in the perfonnance of the tax matters partner's responsibilities, including, without limi~~ion. reasonable attorneys' fees, shall be deemed expenses of the LLC and paid for by the LLC as an o~rating expense. The tax matters partner shall be deemed to be a Covered Person and shall be entitled to indemnification .for any acts or omissions in the performance of such tax mattelS partner's duties as the tax matters partner as and to tbe--extent provi<$ed in Section 6.9. Information Rights. So long ·as a Memb~ continues to hold ·at least 250,0QO issued and Units, the ¢.ompJDy ·shall deliver to such Member audited annual end uuaudiled quarterly fmancial statements; This Section 1.5 shall terminate upon the earJier to occur of a Change of Control and an Initial Public Offering. 1,,5 outstanc;l~g ARTICLE V111 Con/Idt:Qtlalily ii. I Conhdentlallty. (a) Unless otherWise detennined by the Board of Directors, each Member shall, Biid shall cause its officers, directors, stockholders, employees, independent contractors, managers. members, trustees and general and limited partners to, hold in strict confidence, and shall not use except to the 0"1mt contemplated otherwise in this Agreement, any infonnation it receives regarding the LLC, its business or the busines11 of any Member (or its Affiliates), whether such infonnalion is received from the LLC, any other Member or its Affiliates. or another person; provided, however, that such restrictions shall not apply to: m fufonniltiou that is Of becomes f;lVailable.· to the public generally wifhoUt breach of this Section IJ. I or is in.dependently developed or otherwise qbtaiiie~ by the'disclosing Me!']l~er without breach of any fiduciary, confidentiality or other legal duty; (ii) disclosures which are. in the opinfun of the disclosing Menibet after"COUSUltation with counsel and (to ·the extent not prohibited by law) the Board of Dire!=f(>rs, required ~ b.e made by applicable laws and regulaticiDll. o.- pursuant to an .order, subpoena or legal process; and (iii) disc;losures to officen, dim:to_ls; employees or in~dent contractors of such Member (or its !Jfiliates) lUld to a auditors, counsel and other pr0.-fessi0J1al advisors to such Persons or to the Lie (provided, howev.er, that such Persons have a need to know and have been infonned of the confidential and proprietary nature of the inf~rmation and have agreed in writing (or are subject to professional 1:9des of conduct - Confldenthil 81 mandating confidentiality), and, in any event, the Member disclosing such information shall be liable for any failure by such Persons to abide by the provisions of Ibis Sect/0118. I. (b) The rights ~ obligations of a Member pursuant to this Section 8.1 shall continue following lhe time it ceases to be a Member and shall survive· any dissolution and liquidation of the LLC and/or lermination of this Agreement. (c) Each Member acknowledges that disclosunt orinfonnation in- violation of the _provisions of this Seer/on B;J would cau~ ilTep~ble- b$ml t~ the LLC and··tJie. Membets for which monetary damages are inadequate, difficult to. calculate, or both. Acc~rdingly, each Member ~grces that its obligations wider 1hi~ "Section 8.1. may be enforced by specific performance and that ~bes or·p~eetive breathes of this Section 8.1 may be enjoined. ARTICLE IX Transfers ofInterest8;-Adm/JsJon ofAddllional Members 9. 1 General Provisions Regarding Transfers of Membership Interests. (a) General Prohib/Uon on Transfers. Except as otherwise. provided .tbr b;erofu., uo Member may Transfer all ·or any part of such Member's Membership Interest witb0ut the prior written consent of the Board of Directors. A permitted assignee of a Member's Membership Interest shall be admitted as a. substitute Member. entitled to ex.ercise the right& and powers ofa Member, only with the prior written consent of the Board o'f:Directors. (b) Deemed Acceptance. Any Person who· acquires an Uifei:'est in the LLC by permitted Ttansfet, whether or not such Person has accePted and assumed in writina the terms and provisions of this Agreement or been admitted into the LLC as a Member, shall be de.emed, by ac.C'eplance of the acquisitiCJil of such interest, to have agreed to be subject to and bound by all of lhe obligations of this Agreement with respect lo such interest and shall be subj~t to the provisions of this Agreement with respect to any subsequent Transfer of such interest, (c) Any Tmnsfer in contravention of any of the provisions of'this Agreement shall be· null and void and ineffective to transfer any interest in the LLC, and.shall not bind, or be recognized by, or on the bt>ob ot: the LLC, and any transferee or assignee in such transaction shall not be or be treated as or deemed to be a Member for any plirpose. 9.2 Conditions Precedent to Transfers. In the event that a Member wishes to Transfer all or auy portion of his Membership Interest to any Person. prior to the effectiveness of any such Transfer. (i) such Member must comply with the right of first refti.sal requirements set forth in Sectidn 9.4 hereof, and (ii) and the Person acquiring the Membership Interest must satisfy the requirements for admission as a Metnb« ·set forth in this Agreement, including, without limitation, the.provisions of Section 9.4(g). 9.3 Perm/lied Transfer.s. Notwithstanding anything herein to the contrary, any Member may Transfer ell or any portion of such Member's Membership Interest (i) with the approval of the Board of Directors; or (ii) in Cotniection with or as a-result of the death,dissolutiou, divorce. liquidation, merger onermination of such Member. 9.4 Right of FirSt Re/iJsal. (a) General. Subject only to Section 9.3, the ·LLC and the Members shall have a right of first refusal if any other Member desires to Transfer all or any of its Units now owned or hereafter acquired. Except as provided in Sett/on 9.3, notwithstanding anything IO the conlrary contained herein, no Transfer of any Member's Units shall be allowed unless such Member has received a bona tide offer for the acquisition of such Member's Units, and such Member complies with the procedures set forth in this Article IX. -- - - - - - - - - - - - - - - - - - - - - - - - - - · - - ·--- - Confldeatlal ----·- ----·- -- .. -..... ,,,_,_ 82 tll l~~ (b) Notice. Before transferring any Units, a Member must first provide to the LLC and the Board of Directors at least sixty (60) days' ·prior written notice of ilJI intention to make a disposition of its Units (the ·D1spos1t/on Notice j. The Member proposing to Transfer its Units·.sbalt be known as the "Disposing Membern and the other Members shall be known as the -Non-Disposing MembersM for purposes of this Agreement. Jn the Qisposition Notice, the Disposing Member shall specify the price at-which the Units are proposed to be transf~ the number of its Units to be transferred, the identity of the proposed purchaser or transferee, and the material terms and conditions of the proposed transaction. (¢) Option to LLC. The LLC may elect, Within tJiirty (30) days after receiving ·the Disposition Notice, to purchase all (but not less than all) -()f the Units proposed to be transferred by the Disposing Member at the proposed price as contained in the Disposition Notice. (d) OpliM to Members. If all of the Units covefe4 by the Disposition Notiee are not purchased by the LLC pursuant to Sectlon 9.4.(c), the unsold Units may be purchased by the Non-Disposing Members at the same price available to the LLC. Each Nan-Disposing Member shall h_ave the option to purchase (i) up to that portion of the unsold Units of the Non-Disposing Member· equal to the number of tbe unsold .Units multiplied by a fraction, the numerator of which shall be the number of Units held by such Non-Disposing Member and the denominator or which shall be the aggregate number of issued and outstanding Units, and (ii) such additional porriQns of any unsold Units as to which Non-Disposing Members have not fully exercised their purchase rights, deter.mined in the same manner as among the Non-Disposing Members electing to purchase such.additional portions or by ~greement ofsucb Non-Disposing Members. (e) Tim1J18. If' the LLC elects to .p_urcbase less than all or the Units offered ·\jy the Di11posJng LLC shall so notify each No~·Disp>sing Member within thirty (30) days after .~elvmg ihe Disposition Notice (the "LLC Notice j. The LLC Notice shall state that the LLC did not ·exercise its option to purchase with respect to all of the Units offered pursuant to the Disposition Notice and shull contain appropriate information concerning the Nou-DisposingMembers' option to purchase all or a part ofthe unsold Units offered by the Disposing Member. Each Non-Disposing Member must give written notice to the LLC, the Disposing Member and each of the other Non-Disposing Members of the exercise of ilS option to acquU;e a portion of the Disposing Member's offered Units as pennitted by Section 9.4(d) within fourteen (l4) days after receiving the LLC Notice (provided that the Non-Disposing Members shall have an additional period of five (S) days after the expiration of such fourteen (14) day period to resol\le the portions in which they will purchase any unsold Units as to which one or more of them have not fuUy exercised their pro rats purchase rights). Memt>e~. the (f) Condition ro Electing Option. The ·option~ set fonh in Section 9.4(c) and "Section 9.4(d) shall be subject .to the condition that in no event shall less than one hundred percent (100%)-of the Units proposed to be disposed of by the Disposing Member be purchased in the iiggregate by the LLC and/or the Non-Disposing Members. (g) Transfer to Third Party. Subject only to:Section 9.3, in the event that: (i).~er-the LL9 nor 1he Non-Disposing Members shall have exen:jsed their respective optjons to purchase .all of the Unit!! ~vered by the Disposition Noth;e as provided in the f'oregoing subsections of this Section 9. 4 within ~e fony-five (45) ~ys of the LLC's receipt of the Dispos.ition Notice, and (ii) Non-Disposing Members holding a majority of the. Uni~ held by the Non-Disposing Members have consented in writing. to the Ti:ansftr of the Disposing Member's Units pursuant to the ~ of the Disposition Notice, then the Disposfo.g Member may Transfer its Utii:Q to such tbirdparty set forth .in the Disposition Notice, provided that any Transfer must be made on the identical terms and conditions and to such third-party specified in the Disposition Notice and must be consummated within the ninety (90) days oftbe LLC's receipt of the Disposition Notice. (b) Initial Public Offering. This Section 9. 4 shall terminate upon the earlier to occur of a Change of C0ntrol and an 9.5 Noncomplying Transfers Vold. Any purported.Tra11S:f~·of:any Membership Interest in the LLC that does not comp.ly with the requirements of this Agreement shall be void ab initio as against the LLC and tbe other Members and shall be disregllJ'ded by the LLC for all purposes of allocations and distributions· he~undcr. The - ·Confidential 83 LLC shall be entitled lo treat the record owner of any interest in the LLC as the absolute owner thereof for all purposes and shall incur no liability to any purported transferee or any other person for distributions of money or other property in good faith made to the record owner of such interest, unless and until all conditions of any Trausfer are satisfied in accordance herewith as detennined by the Board of Directors in its reasonable discretion. A/lT!CLEX .CaoRJpbts 10.1 Separation frbm Service. In the event that any Member, who obtained all (or any portion) of such Member's Meinbership Interest in connection with such M~mber's performance of services to tJie LLC, separates fiorn service to the LLC (regardless of whether by voluntary termination, involUJitaty termiuation, death, ·disability, retirement, or for any other reason), the LLC shall have the right, but not the obllgation. to repurchase the Units owned by such Member (or any director or indirect permitted transferee of such Member·pursuant to Section 9,3) at the fair market value for such Units as of the date of separation or, in the case of any Units which have not vested as provided in a separate agr~ent between such Member and the LLC pursuant to which such Units were issued, at the lesser of(i) the amouJtt_pajd for such Units by such Member in cash or property ·or (ii) the fair mar~ value for such Units as of the date o'fseparation. The Members agree that the Unit~.issucd to Douglas Macrae hereullder shall be deem,ed not to have been issued to him in connection with bis performance of services to the LLC for putp0ses of this Section 10.l. 10.2 Fair Market ValueDetermlnatkm. The fair market value of the Units shaU.be determined in.sood faith by the Board of Directors. In the event that a Member disagrees with the fair market value of the Units determined by the Boord of Directors, the Member shall have the right to an appraisal of such Units in accordance with the provisions of Section 10.3. 10;3 Appraisal Rights. Jn the event that a separating Member wishes to exercise the appraisal rights granted by Sectton 10. 2 above, the LLC and the Member sbaU eac~ identify an .b)dependent.appraiser, atld such two in4ependent appraisers shall agree on a third independent appraiser, whose valuation of the Units shall be binding on both lhe Member and the LLC. The Member and the LLC shall share equally in the costs incurred in conncciion with the appraJsal of the UnilS. The Member $pecifically authorizes the LLC to reduce the price paid to the M.emb~r for the Units by the Member•s share of the aggregate apprais.al costs. ARTICLE XI Divfllution and LlquldatiOJ'l 1I.I Events CauslngDlsso/utJon. The LLC shall be dissolved and its affairs wound up upon tbe·eerli~ · to occur of the foUowing events: (a) Member Approval of the eleetion to dissolve the. i.LC. which eleeti011 writing executed by the Members so approving such election; .(b) shall be made in in the event that the LLC bas ()nly ·one member, the ·otclll'l'ence of any ~el!-t under the Ul.af terminates the continued membetship ofthc·Meimber in the LLC unless, within ninety (90) days after the occ~nce of such an event, the legal representat.We or successor of the M.ember agrees in writing to continue th~ Act LLC 1111d to the admission of such legal representative or successor or its nominee or desisnee effective as oftbe occurrence of such-event; or (c) as a Member, the entry of a decree of judicial dissolution under Section 18-802 of the AeJ. I J.2 Procedures on Dissolution. Dissolution of the LLC shall be effective on. Che day on which the event giving rise to the dissolution occurs, but the LLC sha.11 not tenninate until the assets of the LLC have been applied or distributed as provided here.in and the Certificate bas been canceled in t~ manner required by- the Act. Not.withstanding the dissplution of the .LLC. prior to the tennination of the LLC, the bU$iness of the LLC shall continue to be goveril.ed by this Agreement. Promptly after dissolution, the Liquldatbr shall liquidate the assets ()f - CoidldeiltiU 84 the LLC and apply and distribute the proceeds thereof as provided in Section 11.3 below. As soon as practicable after such liquidation and distribution, the Liquidator shall cause the cancellation oftbe Certificate. 1J.3 ltquidetton Following Dissolution. (a) Following the disSC>lutiOn of the LLC in accordance with this Agreement, no further business shall be done in the LLC except for the completion of any transadions in ptocess and the. 1aking of such action as is ncces8al}' for the·perfonnance and discharge of the LLC~s obligations, tbe windin:g-up and liquidatiQn of its affairs and the distribution of its assets. After payment of all liabilities of the LLC owing to credit0rs ofthe LLC, the Liquidator shall set up such reserves as it deems reasonably necessary for any contingent or unforeseen UabjJities or obligations of the LLC. Such reserves shall be paid over by the Liquidator1o a bank, to be held in escrow for.the purpose of paying any such contingent or unforeseen liabilities or obligations as they -become fixed or determined. The.Liquidator shall have the power to pay any such liabilities or obligations of the LLC from the reserves placed in escrow for that purpose. and, at the expiration of such period as the Liquidator deems advisable. the remainder of such reserves, if any. shall be distributed to the Members in the manner set forth in paragraph (b) below. (b) After paying such liabilit~s and providing for such reser.ves, the. Liq!lidator .shilll cause the rcmaini113 net assets of the LLC (and the remainder, if ~y. of the reserves established fa accordance witb Section 1 l.3(a)) to h;e distributed to. th!! Members in accordance with Section S.2. In. the evennhat any.part of such net assets consists of notes or accounts receivable or other noncash :assets, the Liquidator may take whatever steps it deems appropriate to CQnvert· such assets into cash or into any other form which would &cilita~ the distribution thereof. Jfany asset.s of the LLC are to be distributed in kind,·such assets shall be distributed Qn the basis of their &ir market value net of any liabilities. 1J.4 Claims offhe Members. The Members shall look. solely to the LLC's assets for theretum of their Capital Contributions, and if the assets of the LLC remaining after payment of or due provision for "l debts, liabilities and obligations of the LLC are insufficient to return such Capital Contributions, the Members shall have no recourse agaiost tbe·LI.:G or any .l;>i:r:e~r. ARTICL.E XII Generi,ll ProV/sians 12.1 NQtlce5. Except for notices Of meetings ofDirectors, which shall be given in the manner ptQ\'.ided elsewhere in this A.greement, all notices under 1his Agreement shall be··effective (a) on the fourth busin:~s day after being sent by registered or certified mail. return receipt requested, postage prepaid; (b) on the first business day after being sent by express mail, or commercial overnight delivery service, providing a receipt for delivery; (c) on th~ date of hand delivery or delivery by receipt confirmed telecopier; or (d) on the date actually received, if sent by any other method. To be effective, all such notices shall be addressed, if to tbe LLC, at its registered office under the Act, and if to a Member or a Director, at the last address of record on.the LLC•s, books. 12.2 Word Meanings. Words such es "herein," "hereinafter," "hereof;'' and "hereunder" refer to this a wbole·imd not mercly to a subdiv~on in which such words appear unless expressly stated otherwise in any given instance, The singular shall include the plural and the ~culine' gender shall incll~e the feminine and neuter, and vice VefSll, unless the C911text otherwise requires. Where· tlie cooteXt permits, lhe ·use of the term· ~or" sba1l be equivalent to the use of the tenn "and/or". Agreemen~ as 12.3 BJnding.Provtstons. Subject to the restrictions on Transfers set forth here.in, lbe:coveaants and agreements contained herein· ~hall be binding upon. and inure to the benefit of; the parties hereto, all PCJS011S who hereafter become Directors in accordance with this Agreement. ~ their respective heirs, legal representatives, -successors and permitted assigns. 12.4 Applicable Law. This Agreement shall be governed ~y. and -constnied and enf9rced ·bi a~e with, the )lws of the State of Delaw~ ini:luding the Act, notwitbs~nding- any rules regarding choice ·(>flaw to th~ contrary. - Confldeatlal 85 12.S Counterpa11.-;. This Agreement may be executed in several coun1erparts and as so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all of the parties have not signed the same counterpart. 12. 6 ~parabJ/ity of Provlslo1JS. Each provision of this Agreement shall be considered separable.. To the extent that any prpVision of this Agreement is prohibited or inetfcctiye under the Act, this AgrcCJDent shall be considered am.ended to the smallest degree possible in order to make· the Agreement effective under the Ac;t (and. if the Act is subsequently amended or interpreted in such 1DBnner as to make. effective any provision of this Agreement that was formerly rendered invalid, such provision shall automatically be considered to be valid from the effective date of sue~ amendment or interpretation). 12. 7 Section Titles. Section titles are fot. descriptive purposes only :and shall not c;ontrol or alter the meaning of this Agreement as set forth in the text. 12.8 Amendments. Except as otherwise specifically provided ·in this Agr~ment, any provision of this a writing executed by the Mem~rs so Agreement may be ~ended only with Member Approval and only approving such amendment; provided, hoY.rever, that (i) no such amendment shall increase the liability of or incnase the obligations of the Board of DUcctors without the prior approval of the Board of Dii'ectors, (ii) an amendment that would increase the amount of any Member's required contribution to the l,LC or subject any Member to liability for the debts or obligations of the LLC shall not .be effective without the written cons~nt of such Membt:r, (iii) a provision of this Agreement requiring the J!.pproval of Members holding more than a majority of the Units (or of the Units of a particular class) then issued, outstanding and entitled to vote may JlOt be amended without the approval of such greaiter quantum of the Members (or of the Members h9lding Units of such c~s), and (iv) ·an amendment that would materially and adversely modify the rights or obligations of any Member holding Units of a given class ~hall not be effective without the approval of such Member unless the rights or obligations of all of the Members holding Units of such class are modified in the-same.fashion. Notwithslanding the other provision_s ofthis Agreement, the Board of Directors shall cause to be amended, and the President and each Director is· hereby authorized to amend, Sd1edule A at any time and froll) time to time, to accurately refl~t the infonnation contained therein and to reflect any changes to the infonnation contajned therein effected in accordance with the tertn$ of this Agreement. Notwithstanding the other provisions of this Agreement, the Presiden1 or any Director may amend any provision ofthis Agreement to correct any printing, stenographic or clerical CirOJ'S or omissions. in 12.9 Walver.s. No waiver of the provisions hereof or ~e Prior Operating Agreement shall be valid unless in writing and then only ~o the extent therein set forth. Any right or remedy of ~e Members hereunder or under the Prior Operating Agreement may be waived, prospectively or retroactively, with and only with Memb~r Approval. Except as specifically herein provided, no failure or delay by any pany in exercising any right or remedy hereunder shall ·operate as a w~iver thereof. and a waiver or a particular right or remedy on one occasion shall not be deemed a wai\ler of any other right or remedy or-a waiver on any subsequent occasion. J2,JO Third-Patty Beneficiaries. The provisioqs 9f this Ageeme.nt, including, wi~ut iimita(i~n, Article 10, are not intended to befur'tbe benefit otany creditor(otherthan a Mem.beror a Dir~tor who is• creditor) or other Person (other than-a Member or a Director in SL.Leh Member's or Director's capacity as such} to who.many debts,_liabilities or obligations are owed by (or who olherwi&e bas any claim against) the LLC or the Menil!ers or any of the Directors. Moreover, notwithstanding anything contained in this Agreement, including, without limitation, Article Ill, no such creditor or other Person shall obtain any rights under this Agreement or shall, by reason of this Agreemenl, make any claim in respect of any debt, liability or obligation (or otherwise) against the LLC or any Member or any Director. 12.11 Legal Counsel. The LLC has engag~ Foley Hoag LLP (..Foley'1 as legal counsel to the LLC. Moreover, Foley has previously represented or concurrently represents the intercs1s of the LLC -and parties related thereto in connection with matters other than the preparation of this Agreement and may reimsent sucb Persons in the future, Each Member hereby approves Foley's representation of the LLC in the preparation of this Agreement and acknowledges that (a) actual or potential conflicts of interest may exist among the Members in connection with the preparation ofthis Agreement, (b) whether or not Foley bas in the past represented or is curreotfy represeliting such Member with respect to other matters, Foley has not represented the interests of any Member in· the preparation Confidential 86 ~ ~' and negotiation of this Agreement, and (c) Foley does not represent any Member in its capacity as a Member in lhe absence of a clear and explicit written agreement to such effect between such Member and Foley (and then, ,only to such extent as set forth in the such agreement) .and, in the absence of any such agreement, Foley shall owe no duties directly to such Member. In addition, each Member hereby acknowledges that (i) .I!. futuro conflict or dispute between or among Members or between or among any Member or Members and the LLC is possible and (ii) under the Massachusetts Rules of Professional Conduct or similar rules in any other jurisdiction or other laws and ethical rules governing the ·conduct or attorneys (collectively, the "Rules of Professional Conduct"), Foley may be precluded from representing the LLC or any Member in connection with any such· conflict or dispute. The foregoing notwithstanding, in the event any dispute or controversy arises between any Member and the LLC, then each Member agrees that Foley may· represent the LLC in any such dispute or controversy to the ex.tent penniued by the Rules of Professional Conduct, and each Member hereby consents to such representation. 12.12 Powerof Auorney. (a) Each Member irrevocably constitutes and appoinJs each Director and the Liquidator the true and lawful attorney-in-fact of such Member (in such Member's capacity as a Member), to execute, acknowledge, swear to and file any of the following: (i) the Certificate attd all other certificates •nd other instruments deemed advisable by the Directors to carry out the provisions of this Agreement.and applicable law or to pennit the J;..LC.to become or t.o continue as a limited liability company; (ii) this Agreement and all instrurpents that any Director or the Liquidator deems appropriate to reflect a:change or amendment to or modification oftbis Agreement made in accordance with this Agreement; (iii) aU eonv~ces and other instruments or pa.,ers deemed advisable by any Director or ·tilt! Liquidator to effect.the dissolution and termination of the LLC; (iv) all fictitious ~r assumed name certificates required or pennitted Jo be filed on behalf of the LLC; (v) all other certificates, instruments or papers that may be required or permitted by law to be fiied on behalf of the LLC and any amendment or modification of any certificate or other instrument referred to in this Ser.tton.12,JZ(a); and (vi) any agreement, document, certificate or other iitsttument that any Member is required to exetufe and deliver hereunder or pursuant to appilicable. law that such Member bas.failed to execute and deliver within ten (10) days after written request by the Board of Directors. (b) .The foregoing power·of attorney is (i) coupled with an interest; (ii} irrevocable and·durable, (iii) shall not be terminated or otMi'Wi5e affected by any act or deed of any Member (or by any other Person) or by operation of law, whet bet by the legal incapacity o! a Member or by the occurrence of any other .event or events, and (iv) shall survive the transfer by a Member of the whole or any part of such Member's Membership Interest, except that, where the tmnsteree of the whole of such Member's Membership Interest is. to be admitted as a Member,. the power of atto~y of the transferor shall s.urvive such trlillSfer for the sole purpose of enabling the applicable attorney-in-fact to execute, swear to, acknowledge and tile any instrument necessary or appropriate to effect such Jldmission. (c) Each Member agrees to execute, upon live (S) business days· prior written: notice fr0m any Director or the Liquidator, as applicable, a confirmatory or special power of onomey containihg the substantive provisions of this Section 12.12, which shall be iii form satisfactory to the Pen10ns or Person providing such notice. 12.J3 Entire Agreement. This. Agreement embodies· the entire •greement and undemanding &in01lg the parties hereto with respect lo the subject matter bereOf and supmedes all prior agreements and understandings between or among them relating to such subject matter. ·The Members and Directors hereby a~e that the .Memben Confidential 87 I .· J and each Director shall be entitled to rely on the provisions of this Agreement, and no Member or Director shall be liable to the LLC or any Member .or any Director for any action or refusal to act taken in good faith reliance on the tenns of this Agreement. [THE REST OF nns PAGE INTENTIONALLY LEFT BLANK] Confidential gg EXHIBIT 140 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 181 l 2 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 everyone down there and -- I don't -- again, I think.... You know, I can't remember; so... But I'm going to say that the board approved something that was more in the 2.7 range. Q. By the way, by the way, let's say it was 2.7. A. Yeah. Q. Did the financial projections you gave to EDC have $2.7 million in for relocation expenses? A. They did, yeah, close to it. Q. They did. We're going to spend some time going over that. Do you want to say that under oath right now, -MR. CONNOLLY: Objection. Q. -- that you had close to $2. 7 million in the EDC financial projections of April 1st, 2010? Do you want to say that under oath? MR. CONNOLLY: Objection. A. You know, I recall that we had about 800, 900 a year going in from 2010 to 2011. We also were running significantly under budget at the end of the year. So let's wait till we get through it and then I'll give you a clearer answer. Q. No, no, no, no. You gave me an answer, and I'm asking, do you really want to say that under oath, or are you unsure -- Page 183 l Q. No, I'm talking about the employees who -- 2 A. The turnover? 3 Q. Turnover. You used that term yourself in these 4 financials. I'll show you in a little bit. 5 A. Okay. 6 Q. So are you familiar with that concept where 7 employees leave and you have to replace them? Yes. Q. Do you ever call those chums? A. I usually call it turnover. Q. Okay, turnover. Have you heard people refer to it as chum? A. I can't say I have in my world. Q. Do you know that some of the financial projections that you've prepared refer to it as chums? A. It could. Q. Okay. Now, from the time that 38 Studios came into existence it was hiring new people. A. Correct. Q. Without regard to relocating the studios itself, they were asking people to come from other places to work in Maynard, for example. A. Correct. Q. And those you would pay relocation expenses for people for that; right? 8 A. 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 184 Page 182 l MR. CONNOLLY: Objection, Max. l A. We would, yes. Yes. And so there were new hires and then there were replacements for people who left, and that started as early as 2006 and continued on before the move from Maynard to Providence; right? A. Sorry, say that again. Q. These relocation expenses for new hires, where 38 Studios was expanding its work force, and hires to replace people who left, started as early as 2006 and would continue up until the time that the move from Maynard to Providence took place. A. Sounds right, yes. Q. Okay. And there was a budget item, line item for that each year of $500,000, $600,000, $700,000. A. You know, it -Q. Don't you remember that? I'll show it to you in a little bit. A. Yeah, let's -- it sounds about right. We can take a look at it. Q. We'll look at it. But it sounds like something that's correct; isn't that so? A. It sounds right, yes. Q. So what you have, then, is you have two kinds of relocations. We have new hire and replacement relocations adding to the work force in Maynard. 2 Q. -- of what you told the EDC? If you want to say 2 Q. 3 you're unsure, that's fine. A. I don't think I told the EDC anything. Q. Okay. Did you send, in April of2010, a financial projection setting forth the expenses you anticipated having? A. I did, yes. Q. Okay. Did you include relocation expenses in that? A. I did, yes. Q. And do you believe it was -- how much? A. I haven't looked at it in a while, but I believe it was somewhere, you know, 800,000, 900,000 a year. Q. Okay. Let me see if we can -- I know you're trying to save time. Let me suggest something to you. There were relocation expenses starting as early as 2006 for new hires; yes? A. Correct. Q. Okay. So you always were -- I think you called it churning. Am I right? Are you familiar with the term "chum"? A. Chum is, I think, folks that start playing the game. 3 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Min-U-Script® 4 5 6 7 8 9 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Allied Court Re~orters, Inc. (401)946-5500 www.allieacourtreporters.com (46) Pages 181 - 184 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 185 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And then we have something entirely different, which is we're going to take everybody from Maynard and move them to Rhode Island. That's completely different; right? A. It's -- yeah. I mean, you know, we were doing both, actually; so ... Q. Right. Two different things. A. I mean, it was a projection. You know, you throw in relocation costs and there you go. Q. There you go. Hey, good. We have two different things. We have relocating new hires. Guys in Pittsburgh you say, Come to work for us, and you have relocation expenses for them; right? Yes? A. Correct. Q. Okay. And you have guys who quit and you have to replace them with a replacement hire. And ifthe guy's in Silicon Valley and you want him, you pay his relocation costs; yes? A. Correct, yes. Q. And we've said that that was the case from the beginning of38 Studios up until the time of the move. There were these regular relocation costs every year; yes? A. Yes. Sounds about right, yes. Q. And it had nothing to do with moving the studio 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 commute to Maynard might now be in a completely different situation if they had to work in Providence or somewhere else; correct? A. Correct. Q. And there was a relocation budget set up for that, wasn't there, for the separate -- for the move from Maynard to Providence and the people who now were going to change their residence because now they're going to work in Rhode Island? That's a separate relocation budget. A. There was a plan set up. Q. There was a plan set up. And your estimate apparently was $2. 7 million at the high end, at least as of August 30, and Bill Thomas had a projection of2.7 -- excuse me, 2.7 to 3.7 million, and he said he believed we're pushing the high end of3.7; yes? A. That's what he's saying, yes. Q. And that's the relocation budget for the move from Maynard to somewhere in Rhode Island. A. Yes. Q. Okay. Now, the previous -MR. WISTOW: 41, please. Q. I want to make sure that there's no ambiguity about this, and I want you to be comfortable with Page 188 Page 186 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 from Maynard to Rhode Island; correct? A. I don't know if we budgeted separately. You know, it was all kind of mixed in. Q. Yes. But listen to me. Okay? You had every single year a budget item for relocation costs way before you anticipated moving to Rhode Island; correct? A. Correct. We were on a high ramp, so you'd have a bunch of people, you know. Q. "High ramp" is you were ramping up, hiring people rapidly. A. Correct. Q. So I hate to go back, but I'd like to get this book-ended, ifl can, so it's in one place. So even if you never moved from Maynard to Rhode Island, you would always have relocation expenses because of the new hires who were ramping up and the new hires replacing people who had left. You'd always have that. A. We would always have that, yes. Q. Right. But, now, once you commit to move from Maynard to Rhode Island, you're moving the entire studio itself; yes? A. Yes. Q. And people who previously were in a convenient Min-U-Script® 1 2 3 4 5 6 7 8 9 1o 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 what you're saying about the numbers. There's no reason we have to speculate. A. Okay. EXHIBIT PLAINTIFF'S 314 FOR I.D.: E-mail from Rick Wester dated April 13, 2010, with attachment, 11 pages. BY MR. WISTOW: (Continuing) Q. Now, go to the fifth page, please. I think it's the one -- well, it's the fifth. These don't appear to be numbered. MR. WISTOW: Okay. Thank you. Q. My colleague is exactly right. We should establish exactly what this is. And what is this, Mr. Wester? A. It says the "2010 MMO Studio Budget- For 6 Year Plan." Q. Right. But this is a document that you prepared to send to Wells Fargo, isn't it? MR. VALENTE: Objection. A. Correct. Q. And you sent it to Wells Fargo on April 13th, 2010? A. That's what it says. I have no reason to doubt it. Q. Okay. Now, would you go to the fifth page, Allied Court Reporters, Inc. (401)946-5500 www.allieilcourtreporters.com (47) Pages 185 - 188 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 189 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 please. MR. VALENTE: Of the exhibit, Max? Or -MR. WISTOW: Yes, the sixth page of the exhibit. MR. SHEEHAN: Sixth page of the exhibit or fifth page? MR. WISTOW: I'm sorry, fifth page -MR. SHEEHAN: Of the attachment? MR. WISTOW: Forgive me. Fifth page of the attachment, sixth page of the exhibit. I'm sorry. Forgive me. MR. VALENTE: Thank you. Q. Now, take a look at line 121, "Relocation Expenses." A. Uh-huh. Q. And you'll see that for each new hire you were anticipating spending $6200 in relocation expenses. Do you see that? A. Yes. Q. And that was composed of three items: the actual moving expenses, travel expenses, and then other miscellaneous expenses. So each new employee was $6200; yes? A. Yes. Q. And you had a --you were talking about a ramp up. Page 191 1 · under this type of a format. 2 Q. Yes. 3 A. And, yeah, I took this and, you know, kind of 4 reviewed it. 5 Q. You ran with it. 6 A. Exactly. 7 Q. All right. I guess what you're saying is you 8 wouldn't have picked the term "churn," you inherited the term "churn"; right? A. Yes. Q. But you continued to use the document. You had to understand it; right? A. Yes. Q. And you understood what "churn" meant was that you anticipated losing six-tenths of 1 percent of the headcount each month; is that true? A. I'm not sure how it actually was modeled, whether it was just throwing in additional costs or if it was based on headcount. I'd really have to look at the formulas. Q. You really don't know how this works? A. I haven't looked at it, you know, in quite a while; so ... Q. Well, let me suggest to you that if you look at the word "Employee Turnover" to the left at 125, 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 192 Page 190 If you go to line 4 at the very top, employee full-time equivalent headcount, do you see that? 3 A. Line 4? 4 Q. Yes. Line 4 at the very top. 5 A. Oh, I do, yes. Okay. 6 Q. Do you see that? So, for example, you anticipated 7 in January of 2010 to have 72 employees and in 8 February of2010 75 employees. Do you see it? 9 A. I do. 10 Q. So that means you would have three new employees 11 between the 72 and the 75; right? 12 A. Uh-huh. 13 Q. And you anticipated relocation expenses of$6200 14. per person; right? 15 A. Yes. 16 Q. And in addition, if you go down to the churn on 17 121. Doyouseethechurn? 121? 18 A. Yes. 19 Q. And so is that a term that you're familiar with, 2 o since you prepared this document? 21 A. Well, I actually inherited this document and 22 reviewed it. But I can see the churn percent. 23 Q. When you say you inherited the document, you mean 24 you inherited the format. 2 5 A. When I got there, the company had, was working 1 1 2 2 Min-U-Script® 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that may provide a clue to you as to what the six-tenths of 1 percent means. A. Okay. Q. Does it? A. That's what it says. Q. Well, I mean, you were responsible for this document, weren't you? MR. CONNOLLY: Objection. A. Yes, I was responsible for this, yes. Q. Did you think you understood it? A. At the time, yes. Q. You don't understand it now? A. I'm not sure. I mean, I can see the .6 percent, and I can see 6200, and I'm, you know, trying to see how it equates over. But I do see a line. Q. And you see it says "Employee Turnover"? A. So it's taking the headcount times .6 times the 6200? Q. Do you know? A. Is that what you're saying? Q. Well, do you know? A. I'd have to look at the spreadsheets of -- to see. Q. All right. In any event, what we're talking about here is the ramp up; correct? A. Correct. Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (48) Pages 189 - 192 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 193 1 Q. On line 4. In other words, you were anticipating 1 2 the number of employees, new employees to come in, 3 et cetera, et cetera; right? As part of the ramp 4 up. 5 A. Correct. 6 Q. For example, in February of2010 you're showing 7 that the relocation costs would be about $21,000, 8 something like that; yes? 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 195 A. Yes. Q. Okay. And then if you go to the next page, you can get annualized relocation expenses. Do you see that? A. I do. Q. Now, in 2010 nobody's moving from Maynard to Rhode Island. That doesn't happen till 2011; right? A. Correct. Q. Okay. So in -A. It was anticipated to happen in 2010 under this plan. Q. Okay. And in 2010 there was a grand total of $594,000 in relocation expenses. A. Yes. Q. And then in 2011 there was a grand total of $756,000 in relocation expenses; correct? A. Correct. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 10 19 20 21 22 23 24 25 Studios -- to, excuse me, to EDC in April or did you send the printout? If you know. A. I believe I sent both. Q. But you're not sure. A. No, I do remember seeing an e-mail, I believe to Rob Stolzman, where I was sending the model, the live model. Q. Was that in June or in April? A. No, it would have been I think April. Q. So you're going to sit here and tell me that you recollect, and it's your testimony, that you sent the Excel spreadsheet to Stolzman in April; that's what your testimony is. Or are you not sure? A. I sent it to him; I don't remember the specific date. Q. When do you believe you sent it to him? A. I believe I sent it probably late April, early May. Q. And do you recall seeing an e-mail to that effect? MR. CONNOLLY: Objection. Q. Do you? You went through the e-mails, you said. A. You know, I vaguely remember seeing an e-mail, because of, you know, saying, Hey, this is confidential information forwarded along. Q. Exhibit 292 was in Excel form; correct? Page 196 Page 194 1 Q. And that's attributable to the ramp up; correct? 2 A. Yes. Generally, yes. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. WISTOW: Yes. Okay. I want to go to 39, please. MS. SOUZA: 39 is 292. MR. WISTOW: It's not 39? MS. SOUZA: Yes, it's 292. MR. WISTOW: I'm sorry? Oh, it's already been marked? MS. SOUZA: Yes. MR. WISTOW: What is it, Exhibit what? MS. SOUZA: 292. MR. WISTOW: 292? MS. SOUZA: Yes. MR. WISTOW: Thank you. Q. So 292 is the in-state loan view that was ultimately sent in early April to 38 Studios; correct? A. Correct. Q. I mean, to EDC; correct? A. To EDC, correct. Q. That's right. And now you're sending the same document to Jen MacLean in June; correct? A. Yes. Q. Now, did you send the Excel version to 38 Min-U-Script® 1 A. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Correct. That's what the attachment says, yes. MR. WISTOW: Can we get number 40, please. EXHIBIT PLAINTIFF'S 315 FOR I.D.: Excel spreadsheet of Preliminary Draft of Financial Projections for 38 Studios, LLC, dated 04.01.10, 55 pages. MR. CONNOLLY: Number 315, Max? MR. WISTOW: Yes. BY MR. WISTOW: (Continuing) Q. And do you recognize what this is? A. It says the "In-State Loan View - Draft 04.01.10" plan. So, yes, I do recognize it. Q. So this would be the Excel spreadsheet for the April 1st, 2010, in-state document, financial projections; correct? A. Yes. Q. Okay. Now, could you go to page 36. Do you see that? A. I'm on page 36, yes. Q. And you'll see that that has relocation expenses that's set out on a monthly basis. Do you see? A. I do see it, yes. Q. And do you see that the number of employees at the top at the line number 4 is exactly the same number of employees as in the MMO budget, which Allied Court Reporters, Inc. (401)946-5500 www.allieClcourtreporters.com (49) Pages 193 -196 Richard Wester Rhode Island Eco~o.mic Development Corporation vs Page 199 Page 197 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is -MR. WISTOW: What's number 41? MR. SHEEHAN: 314. Q. -- 314? Can you compare those? Do you see that top line? A. It looks like the same, yes. Q. It looks like the same or it is the same? You're an accountant, so I expect some, you know, particulars when it comes to numbers. It's exactly the same, isn't it? A. It's --you know, I'm just comparing it due to different sizes. It's, yes, it's the same. Q. All right. Now, go down to line 57, "Relocation Expenses," and compare those to the MMO budget. And you'll see those numbers are the same, are they not? A. Yes. Q. All right. Now go to page 38, and you see the item, line item 57? A. Yes. Q. And you see the annualized costs for 2010, '11 and '12? 594 and change? 756 and change? A. I do. Q. And could you compare that to Exhibit 314 and tell me if those numbers are not exactly the same. 1 A. Not at this point, no. 2 Q. You know that the company had cash flow problems 3 early? 4 A. Yes. 5 Q. And you must have been paying close attention to 6 all of the money going out. I was, yes. Q. Yet you have no recollection of what the costs were for the relocation expenses. None. A. At this point, no, I don't. Q. Okay. Who was closer to being right, you or Thomas? A. I don't know, to tell you the truth. MR. CONNOLLY: Is this a good time for a break? MR. WISTOW: All right. Okay. (Discussion off the record. A recess was called at 3:06 p.m. The deposition reconvened at 3:16 p.m.) BY MR. WISTOW: (Continuing) Q. One of the things that's certain is once 38 Studios moved to Rhode Island there was going to be a relatively increased ramp up to meet the headcount milestones. A. Yes. 7 A. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 200 Page 198 1 2 3 4 5 6 7 B 9 1o 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. CONNOLLY: What page in 314? THE DEPONENT: It's the next page, I believe. A. Yes, they're the same. Q. Okay. Now, are you aware of any projections that you sent to the EDC showing relocation costs at anywhere between $2.7 and $3.7 million, or anything of that magnitude? A. No, not -- I don't believe that much. Q. I'm just asking you, did you ever send anything else to the EDC about relocation costs, other than possibly the April !st, 2010, financial projections? That's all I'm asking. A. I don't remember sending anything else, no. Q. As you sit here today you can't identify anything else. A. I can't, no. Q. Okay. And the numbers from Exhibit 314 ultimately get incorporated into the April 1st, 2010, financial projections; correct? A. Correct. Q. Okay. Do you know how much the move actually cost, the relocation expenses? A. I don't, no. Q. Do you have any recollection whatever? Min-U-Script® 1 2 Q. And you would be hiring new people to meet the headcount requirements; yes? 3 A. Yes. 4 Q. And those people would, of course, have relocation 5 expenses; right? 6 A. Yes. 7 Q. This is even after you moved to Rhode Island. B A. Correct. And, similarly, after you moved to Rhode Island people are going to be quitting and they have to be replaced with other people who you have relocation expenses for; right? A. Yes. Q. So we have even after the move you're going to continue to have relocation expenses without regard to the move itself. A. Yes. Q. Okay. And the relocation expenses after the move to Rhode Island for new hires and replacement people is going to be somewhat higher than it had been before the move because now you have the headcount milestones; correct? A. I don't know ifl'd say it would be higher. I mean, we were on a certain plan to hire people to finish the project, so, yeah, it would be related 9 Q. 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Allied Court Re~orters, Inc. (401)946-5500 www.allieilcourtreporters.com (50) Pages 197 - 200 Rhode Island Eco~o.mic Development Corporation vs Richard Wester Page 201 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 to the staffing of the project. Q. Right. But the staffing of the project required the hiring ofa certain number of people working in Rhode Island, and there were penalties associated with if you didn't do it, and also you wouldn't get your milestone payments; right? A. Correct. Q. Okay. So, in any event, as a minimum you would continue to have at least the amount ofrelocation expenses once you moved to Rhode Island for new hires as you did before you moved to Rhode Island. A. I'd say that's accurate, yes. Q. Okay. So again I want to segregate two types of relocation expenses. The relocation expenses, whether you move or you don't move, for new hires and for replacing people who leave; that's one kind of relocation expense. The other kind of relocation expense is moving from Maynard to Rhode Island, and you're not bringing in new employees or replacing people who left, you're taking your existing employees and you're going to pay for their expenses of moving; right? A. Those are, yeah, two different types. Q. Right. Now, was EDC ever given an estimate for that second type of relocation expense, the cost Page 203 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of38 Studios. The equity private placement memo did not have 38 Studios -- did have 38 Studios' financial projections. You've said that. A. I believe so, yes. I'm pretty sure. Q. The only reason I'm going over this again is because I thought maybe there was some confusion about whose financials we're talking about. The bond private placement memo did not have 3 8 Studios' financial projections. A. Correct. Q. Okay. Do you know why that was? A. Yes. Q. What was the reason? A. I was told we were the project and, you know, financials weren't included somewhere along the line. Q. You were told you were the project? A. My understanding is the structure was an economic development program that had a project, and, you know, I don't know, we weren't required to put financials in or -- I couldn't really tell you. That's the extent I could tell you. Q. Okay. It's a little bit confusing to me, what you're saying. A. Okay. Page 204 Page 202 l 2 3 4 5 6 7 8 9 lo 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of actually moving existing employees? Which the last numbers we looked at, Thomas was estimating 2.7 to 3.7 at the high end, and you were estimating more like 2.7 as the high end. Was EDC ever given those numbers, to your knowledge? A. I don't know one way or another, to my knowledge. Q. Okay. You didn't give them; is that fair? If somebody else did, I don't expect you to know it, but you didn't do it. A. Yeah, I don't remember one way or another giving them anything. Q. Now, the equity private placement memo had financial projections in it; correct? A. Correct. Q. And the bond private placement memo didn't. A. Correct. Q. Did-A. Our financials you're talking about; right? It had Rhode Island financials in it; right? MR. WISTOW: Off the record. (Discussion off the record) BY MR. WISTOW: (Continuing) Q. When I say "you," I mean -- strike that. Let me start over. We're talking about financial projections Min-U-Script® l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Q. Did somebody affirmatively tell you we're not going to put financial projections in the bond private placement memo, or are you just trying to guess why it's not in there? A. I don't remember anybody specifically telling us that we needed to put projections in there. I don't remember anybody specifically saying no. I mean, there was a process we went through, and we were the project, and, you know, that was it. Q. All right. But let me back up just a little bit here. Okay? And bear with me. I know you're trying to answer the question. What I'm trying to find out is, do you know why there were no finartcial projections in the bond private placement memo or are you kind of speculating? Which is it? A. I can't say that I know. I don't consider myself an expert in that area. Q. Okay. 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JD 31 ··--·--------------·--··-·---. ------·-----·---·------·---.------------·--·----···-- ________________ -·-----··------··--·-··---------,---- , ---------:-- ...--···----------------------·----------------------·--·-------·-··-·-·------··---,---- ----··------ ·-------------------- - - - -. ·--··--------·---·-----------------·---------·----····--- ---·--·----·-------- _____ ____ -·----·-------,, IM AGE ::~·!::MASTER ." \ FINMICIA!. l'RINTINC': _________________________ , Ao MlxedSources The Working Group's Choice<> RIEDCTOFIRSTA ~ESi.11~"="' www.lmageMaster.com FSC :::'11~~.1""' EXHIBIT 143 caa0f51·2-3249-436c-a066-503550e767bb FW: Attached Image From: "Stolzman, Rob" To: Antonio Afonso , "Saul, Michael" , Maureen Gurghigian , "Hashway, Fred" , "Cole, Tim" Bee: "antonio afonso", saul, michael, "maureen gurghigian", hashway, fred, Maureen Gurghigian Date: Thu, 17 Jun 2010 17:45:33 -0500 Attachments: riedc_38 Stuios KEY-TERM_001.pdf (133.48 kB); ·36 Studios RIEDC Letter 4_7 Clean Draft.DOC (40.45 kB) ... .~---~~~~,~~ ... --..~l~~~~~~~~~ ~~"ll!i§[§j~ Hi all. Attached is the pdf of the Key Terms sheet circulated and the last draft of the terms letter we were working on months ago with 38 Studios. I make one observation that mitigates their complaining about the $75M not being net. All along they represented thaHhey needed $75M to oomplete the MMO. rhat is ir~ the letter. Rob Robert I. Slolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence. RI 02903 E-Mail rstolmian@apslaw,com Phone 401.274.7200 Fax 401.751.0604 Visit our website at v.rww,apslaw.com Af)LER t"OLLCCK @.SHEEHJ\N RC. To comply with IRS regulations, we advise that any discussion of Federal tax issues in this eMmail Is not intended or written to be used, and cannot be used, (i) to -avoid an~(penalties imposed under the Internal Revenue Code or (iQ to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended· only· for the named reciplent(s). It may contain information that is subject tq the attl"irney client privilege ort~1e attorney work~product doctrine or that is ,,therwise exempt from disclosure . under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you . .....,.,..,....... v ....... ......'.,.......,.,.....,.,,.,.,.,,....,..,....,...,,.,....,.,.,....,,._,,...,.,,...., .... u...,'-'..,'-'·"'_..,..,....., ...,..,,.,.,.,.,....,.,.,.....,.,....,.,.,y,o,•,.....,,,._,._._.,...,,.,.,...., .... .,..._....., .....,...,,......,,.,,,...,...,......,.,,.,.,u-..,.,.... ...,,.,.,.,u,•.u.o.•......,.,,, ,,.,.....,.,.,.,.,.,.,,.,.,.,.,,,.,.,.,.,,.,._,,_.,,.....,.,.,.,...,.,.,...,.,.,.,.,....,.,,.,..,.......,,.,.,.,.~,.,...,.,.,._.,.,......,.,.,,,,..,.,.....,,,.,...,...,...,.,.,•,"',. ,.,.,..._.,.~ From: 8549_IR3035@apslaw.com [mailto:8549_IR3035@apslaw.com] Sent: Thursday, June 17, 2010 6:36 PM To: Stolzman, Rob Subject: Attached Image CONFIDENTIAL FSC-000000004 I • Amount: $75.0 million credit enhanced bond issue . ., Term: Likely 20 year issue with 10 year call; 2 years interest only. • Fees: % of 1 % fee ·upfront ($375,000)~ ·1.So/o annual fee on outstand ·amount (year one& two $1, 125,000; a1minishing thereafter based or outstandmg). 0 ·... · Deferred fee options: Sufficient to get a mid-teen "aJl-in" ROI. Optior commence in 2013;·1-year option !!>10,000 000; 3-year option $4.6 r aggregate $13.8. million; 5 year: option $3Jj5 million - aggregate $1 • Job Sho.rtf.all Pehalfy: $7,500 per job for: each job beJov.; annual threi • CoUateral: Lien on all IP. • Risk mitigation: Either escrow last $10.0 million and advance agains (i.e·. publishing agreement bn MMOG) or $10.0 million cash or cash collateral. . · • No tax credits until loan is repaid. • Debt not assignable without RIEDC permission 0 Maturity call if company leaves RI • Reporting: audited·F/S; quarterly. mgt. prepared FIS; annual certifrca company s outside CPA's on joos : · · · . Rll 10 f--:---------······. . -~--- Ah Eo e1ac3e5c-437e-494a-tx:Be-570b7b7a5abb RIEDC Letterhead April _, 2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. Jen MacLean, CEO 38 Studios · 5 Clock Tower Place, Suite 140 Maynard; MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. MacLean: . ·deo gaming and interactive d can be · -e perfect home for you. We also "ndustry acumen. Your assessment of your vels of your company, your investments to . . . . w are aligned perfectly with Rhode . pment agency, offers you the following tools to bde Island: to bring your project Copernicus to MMO completion to be $75,000,000. Based on our nderstanding to date of your financial projections, the RIEDC would issue $75M of revenue bonds, the proceeds of which would provide the necessary · financing to complete production on Copernicus and begin relocating 38 Studios to Rhode ·- Island. We anticipate that bonds would be purchased by or through a lender or lenders familiar · with your industry. As your company is in the unusual position of having pipeline CONFIDENTIAL FSC-000000006 ... . ....-.-.·:_.,_. _._.: .- .-.-.-.-:.:::;.: ..·..... :·: ·.-.-.-.·:. :-.-.-.- .. ..... ·.--·.-.-::.·:;·:: -~: .. - ·. :::::.-.-.-.- . -~.---.----. .. . e1 ac3e5c437e-494a-bc8e-570b7b7a5abb Mr. Schilling and Ms. MacLean 20 IO April Page2 ___J · product and contractual commitments for product publishing and distribution, but as yet is "'pre revenue", we recognize the market for these bonds would be limited without credit enhancement. Accordingly, we would utilize our statutory authority to issue bonds with a capital reserve mechanism by which the General A.Ssembly must consider on an annual basis funding any shortfall of any loan payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for the .ndholder(s). The moral · obligation mechanism is reflected in the RIEDC's enabling ·on and the resolutions of the igations. That legislation and . legislatui:e authorizing the RJEDC to enter into these typ the related ·authorizing resolutions require the Govern . . · · . , ,. to the legislature by December . 1 of every year a budget request for the legislature opriaf'~:"I' e following fiscal year's budget' any shortfall on debt service ·that otherwi . •ot adequate · erved by the RIEDC. · · The guarantee or the bond documents would he following te "d conditions and be ·su~j ect to the foll owing general parameters al· ·ch will be more ·culated in traditional loan documentation:· :i a Borrower: 38. Studios. Loan Amount: $75,000,000 -.roduct development and development, then relocation Purpose: For all assoc· deployment by 38 S. to and expansion in ' with bond purchaser. Tenn: discusse;: ;'..~}.,ow. {~~:fa·&.. '\~~~~):$· ~~~~ih~t . Collateral: co= all a~~~ of company now owned and hereafter acquired including but no al property, licenses, licensing fees, distribution and publishing contra . d work product. We recognize that a portion of the lly owned subsidiary, the ownership interest of which will be company's assets are such assets are otherwise currently pledged in connection with pledged to the RJEDC, =· Electronic Arts and currently are unavailable as collateral for this the publishing agreement credit facility, but such assets will be pledged as collateral for this credit facility upon completion ·and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee of one half percent (l/2%) payable at closing at closing ($375,000) and one and one half percent (1.5%) ($1,125,000) of loan amount annually payable on the loan closing anniversary. CONFIDENTIAL FSC-000000007 . . .. .. . . . .. ., --··.-· . . ·.·:··.·:·:: : __-······ . e1ac3e5c-437e-494a-bc8e-570b7b7a5abb Mr. Schilling and Ms. MacLean April -J 2010 Page3 · EquitjT·and Dividend Covenants: During the term of the loan, :M:r. Schilling shall maintain no . less than an amount equal to $15,000,000 of equity in the company, and equity or earnings distributions to members shall be limited to a coverage ratio formula to be agreed upon by the RlEDC and the company prior to closing. Specific Conditions and Covenants: ode Island within twenty-four (24) ode Island within thirty-six (36) months y jobs requirements, it shall pay to the RIEDC an each job not so added until such shortfall is cured quire'' timing mechanisms set forth in sections (e), (f) and ize that site selection and development options for the djustments to those requirements may be beneficial to both and, and the parties agree to adjust such dates as the parties hereto may agree'' . ·mutual benefit of the company and Rhode Island); and (i) 38 Studios will pro''· e 2010 and annually thereafter during the term of the loan audited financial statements that include a certification that the borrower has met the· requirements of (e), (f) and (g) above and certifying the calculations required in (b) and (c) above. G) 38 Studios will develop internship programs for students at Rhode Island design and educational institutions pursuant to p'rograms and policies to be agreed upon with such institutions. CONFIDENTIAL FSC-000000008 . . ;:•.::: ·::J..... • .::.·.·: .•.... :· .. : . . e1ac3e5c-437e-494a-bc8e-570b7b7a5abb Mr. Schilling and Ms. MacLean April_, 2010 Page4 Conditions Precedent: ·conditions to closing the loan will include standard documentation and legal requirements typical of transactions of this size and scope and: (a) The completion and delivery by a qualified economic development expert of an analysis of the economic development impacts of the company's location to and growth in Rhode . Island, s1.1:ch study to be paid for by the company; al projections; the review of (b) An acceptable industry validation. of the company's ; review of current contracts the company's projections by a qualified investm · and any other related or and oblig~tions with gaming industry partners -requested documents or information from t (c) Placement of the·bond issue with a lend~ · terms hereof and other standard terms . and nature. Id to 38 Studios to facilitate services provided by the ·~ey~~) We think your com ·: ..and it duct development concepts are exciting and aligned with our economic developmert .. ·· . ·We think 38 Studios will be a stt;ong corporate citizen for Rhode Island and that yo ~particularly welcome here for the foundation for your many exciting ventures and oppo nities. CONFIDENTIAL FSC-000000009 .: ·-··-·- Mr. Schilling and Ms. MacLean April _, 2010 Pages Should you agree and desire us to commence the process of obtaining the approvals for the issuance of the bonds and the economic development incentives, please indicate so by signing below. Sincerely ours, Governor Donald L. Carcieri, Chairman ofthe.B.oard Keith W. Stokes, Executive Director By: 529694.9 CONFIDENTIAL FSC-000000010 EXHIBIT 144 . ···--·--·------·········------- - ....:.·.·· ......-..... _.,._._.._ -····--· ··-··-· ·-. -·.-· .. ····----·. . ..... -·-·· -·- 86fdadc7-8091-4dB5-9ff7-27Ba3fdb40b4 RIEDC/38 Studios From: "Stolzman, Rob" To: "Saul, Michael'' , "Hashway, Fred" , "Cole, Tim" , Antonio Afonso , Maureen Gurghigian Cc: "Campellone, Paul" Bee: saul, michael, hashway, fred, cole, tim, "antonio afonso", campellone, paul, "Maureen\ Gurghigian" Date: Mon, 21 Jun 2010 13:05:07 -0500 Attachments: 38 Studios RIEDC Letter 6_21 Clean Draft.DOC (38.91 kB); 38 Studios RIEDC Letter 6_21 Marked Draft.DOC (41.98 kB) ~'~~~'-~!.!.l!~~mim~~1!!1~1!!1m~~~1~i~'~'~~~~~!§§!§!:!§!.~'~~~ Hello all. I am attaching the "term letter'' that we were working off of in April. I quickly modified it to more closely reflect.the terms we have been discussing with 38 Studios recently; So, attached is a "redline" version reflecting changes since April and a "clean" copy with those changes accepted. This·is a rough form of document and we should tighten it up before circulating (for example, I've indicated in [brackets] where some questions may be posed or answered, and we should flesh out some of the lease requirements): I circulate this now even though the draft attached is rough in order to keep the ball moving for tomorrow's meeting. Yours, Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rsto!zman@apslaw.com Phone 401.274.7200 Fax 401.751.0604 Visit our website at www.apslaw.com ADLER P()LLCCK®SFIEEI~IAN P.C. To comply with IRS ·regulations, we advise that any discussion of Federal tax issues in this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (iO to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only tor the named reciplent(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. CONFIDENTIAL FSC-000016687 d4c0bcc3-492b-4186-a1Bc-69c84d6d4cb0 June 21 Draft RIEDC Letterhead June_, 2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 · Ms. Jen MacLean, CEO 38 Studios S Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr.· Schilling and Ms. MacL · ngs to the video gaming and interactive ·. can be the perfect home for you. We also . ,. , ustry acumen. Your assessment of your ftalen .I levels of your company, your investments to ur desire to grow are aligned perfectly with Rhode ·· c development agency, offers you the following tools to es to Rhode Island: We understand your capital needs to bring your project Copernicus to :MMOG completion to be approximately $75,000,000. Based on our understanding to date of your financial projections, the:RIEDC would issue $75M of revenue bonds, the proceeds of which would provide the necessary financing to complete production on Copernicus and begin relocating 38 Studios to Rhode Island. We anticipate that bonds would be purchased by or through a lender or lenders familiar with your industry or otherwise as agreed upon between the company and the RIEDC. As your company is in the unusual position of having pipeline CONFIDENTIAL FSC-000016688 .... ·:.··....... ···.··:.:: ·-::;.-;. -:: ...... ------ d4c0bcc3-492b-4186-a1Bc-69c84d6d4cb0 Mr. Schilling and Ms. MacLean June __, 201 O Page2 . product and contractual commitments for product publishing and distribution, but as yet is "pre revenue", we recognize the market for these bonds would be limited without credit enhancement. Accordingly, we would utilize our statutory authority to issue bonds with a capital reserve mechanism by which the General Assembly must consider on an annual basis funding any ereby creating for this issue shortfall of any loan payments necessary to pay the bondholde dholder(s). The moral what is commonly called a "m.oral obligation" guaranty for tion and the resolutions of the obligation mechanism is reflected inthe RIEDC's enabli ations. That legislation and legislature authorizing the RJEDC to enter into these the related authorizing.resolutionsreqtJire the Gove the legislature by December , I of every year a budget request for the legislatu _following fiscal year's ed by the RIEDC. budgetany shortfall on debt-service that othe ,· The guarantee or· the bond documents would · onditions and be .. subject to the following general parameters all lated in traditional loan documentation: · o . Borrower: 38 Studios. ..~~- .. Purpose:· For"all as~ deploymentby38 S ·· to and expansion in Rhcl :. ·Rate: 0 . ;:s~~l1s, product development an~ ent busme'Ss development, then relocation ..,,,. with bond purchaser. . . re as discussed below. Collateral: coll a . ' . assignme · all assets of company now owned and hereafter acquired ual property, licenses, licensing fees, distribution and including but not h~f ,~to int · publishing contracts, · d work product. We recognize that a portion of the oily owned subsidiary, the ownership interest of which will be company's assets are he · . , .pledged to the RIEDC, an·. · · at such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts and currently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for this credit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. State Guaranty Fee: Initial fee of one half percent (1/2%) payable at closing at closing ($375,000) and one and one half percent (1.5%) ($1,125,000) ofloan amount annually payable on the loan closing anniversary. CONFIDENTIAL FSC-000016689 ····: __ ,·;·.":· .. ·.···-;-·-·-·········----:.L .. •····· ··-· .. ••• •••• 1 d4cObcc3-492b-4186-a18c-69cB4d6d4cbO Mr. Schilling and Ms. MacLean June_, 2010 Page3 Equity and Dividend Covenants:. During the term of the loan, the compnay shall maintain no less than an amount equal to $ of equity in the company, and equity or eamingsdistributions to members shall be limited to a coverage ratio formula to be agreed upon by the RIEDC and the company prior to closing. Proceeds-Distribution Schedule: The proceeds'Ofthe sale o.. · company upon the following schedule and upon the achi~ · precedent: ·· nds will be distributed to the of the following conditions [add disbursement sequence here] Specific Conditions and Covenants: lender consent; any shall pay to the RIEDC a ' ula applied to the company's 'ng and development in order to locate its fbusiness in Rhode Island; · n average anniial wage of approximately l~e (12) months of the closing of the 0 ("job' ce of the bo . .: OS will. add mon · · the closing; (t) .38 Stuci1 ·u add an ional 150 jobs in Rhode Island within thirty-six (36) months of the clos1 (g) Should 38 S ' . ,. . 'eet anyjobs requirements, it shall pay to the RIEDC an amount equal to . er year for each job not so .added until S-uch shortfall is cured (notwithstanding th b requirement timing mechanisms set forth in sections (e), (f) and (g) above, the parties recognize that site selection and development options for the company may be such that adjustments to those requirements may be beneficial to both the company and Rhode Island, and the parties agree to adjust such dates as the parties hereto may agree for the mutual benefit of the company and Rhode Island); and (h) 38 Studios will provide 2010 and annually thereafter during the term of the loan audited financial statements that include a certification that the borrower has met the requirements of (e), (f) arid (g) above and certifying the calculations required in (b) and · (c) above. CONFIDENTIAL FSC-000016690 .. . ... .. ::.·. L. .:·. ·--:.~---·· ·•. ·-·-·· .·-·--· -·--·· .... --------1 .... ........ ··:···· .................... : d4c0bcc3-492b-41B6-a18c-69cB4d6d4cbO Mr. Schilling and Ms. MacLean June_,2010 Page4 (i) 38 Sttidios will develop internship programs for students at Rhode Island design and educational institutions pursuant to programs and policies to be agreed upon with such institutions. ·Conditions Precedent: Conditions to closing the loan will in. legal requirements typical of transactions of this size an~. standard documentation and d: .· (a) The execution and delivery of a leas such lease terms being.private and premises, the tenn of the lease, the . . (b) Final authorizing resolutions adopte (c) Placement[?] of bonds?? (d) Letter of intent fee? ($ ' i~#? Of course, the RIB ,, your smooth transiti' RIEDC is available at ld to 38 Studios to facilitate · of services provided by the . Shoul Governor Donald L. Chainnan of the Board Keith W. Stokes, Executive Director CONFIDENTIAL FSC-000016691 ... . . ...... -·-- ····----·····--···--·---·- ..... . d4c0bcc3-492b-4186-a18c-69c84d6d4cb0 . Mr. Schilling and Ms. MacLean June__, 2010 Page 5 Agreed and accepted as of the date first above written: 38 Sfudios LLC Its: 529694,11 CONFIDENTIAL FSC-000016692 e8d57031-f5b3-4f8f-aed6-342b8498a102 RIEDC Letterhead 1\p:;ki-,int!!!._, 2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Ms. JenMacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 Re: 38 Studios/Rhode Island Dear Mr. Schilling and Ms. MacL the Rhode Islaild Economic i.to 38 Studios LLC . ~nee.locating and gs to the vide0 gaming a'nd interactive can be tqe perfect ho.me for you. We also ustzy_ acumen. Your ass!)ssment of your ftale leveis of your: company; your investments to ,. ur desire to grow are aligned.perfectly with Rhode ·c d'1.JJ.i;;J:1fai:;":i.'.~ll" recapture as discu~sed below. .1 and all assets of co.y n~w o~d hereafter acq{rired . .: ectual prop~ity. licenses, licensmg .fee6, distriliiition and publishing contracts, receiV' es and work product. We recognize tb3t a portion of the company's assets are held in a wholly owned subsidiary, the owners~ interest of which will be pledged to tile RIEDC, and that such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts and· cw:rently are unavailable as collateral for this credit facility, but such assets will be pledged as collateral for ciedit facility upon completion and publication of the company's console phase of the project when such assets are no longer collateralizing the aforesaid publishing agreement. . this CONFIDENTIAL FSC-000016694 . ··--·-·· .. ····:·:-----· ······-··.·-··· e8d57031-f5b3-4fBf-aed6-342bB498e 102 State Guaranty:Fee: Initial fee ofone half percent (l/2%) payable atclosin:g at closing ($375,000) and one and one half percent (l.5%) ($1, 125,000) ofloan annually payable · · on the loan closing anniversary. amount Mr. Schilling and Ms. MacLean /,~n:i!-,!l!.!!!2._, 2010 Page3 Equity and Dividend Covenants: maintain no l_ess than an amount eqmd to $~·\•11;~i.:,~:i{1~t ____ equity or earnings · distributions to members shall be limited to a coverage RIEDC and the company prior to closing. · · ·· !~to be a~cd upon by the . ~~;;~f:;p~~§jJ.~1-J!~1JJ~i5~iL~!;l~&~J1ii~:;..::1]l~~-1'-i~~!~!~ . ~;lt:~~!.~~u1.x~Ju~1!J1.:;:JitllitJ:d.:n&~i;lt,;sJ)~lg~;1\1{!: ~W;~~mlihf~~~-!IY ilf,+!lli-H~H&-i;<-.·:fo.3i~~<,,i11~~·*i;iiJR-.~i-~-..'>~14.\.;1:;°'*;;)4i;~ -~:~MJ;~~~~~*'~~q~-~~~~y.~;~f$i-lH;3~B~~'"h~:~~>i; .tl~i}Y~11.tli~t._:;..Q~!Ui~lt"(:~J1!Jl~..P.it~:·..~QJ;i}g.J~~1JJ.!:.H. dtiutt.fai;.11.u.t.h.~J~1UQ5.~'iJ.~Jr..fQJ:.t1'.JJ.\!~.1~~h~~i..tg.1J1g:.~~t=?D.l~n.tur.:~ . .l:~,l~Q!.iil'.>,, ttl1£1;;·-N>W~.;...~~~;~ soi:~~IGM· .~!~=ffi~~l~M-gA~·~~aOO·i~f-:~:~>!·°'~l.a-~~4-t~f • -·lftt-i:~'*l~>ilil)';it.HJ i~rl)..~~~1~?-m:t!~~~i~~~t~e HH~,~~h'Hi4·!!tTu'l(!~k.•·im·!!)"{»'<>\?i..,,_i4:;·!iilli¥.li>'ii~H!'Mi!i5--str:e The company will assist the RlEDC"in making industry contacts and identifying necessary sources to complete its due diligence with respect to the loan. CONFID~NTIAL FSC-000016696 ·-···:---:-t __ e8d57031-f5b3-418f-aed6-342b8496e 102 Of course, the RIEDC also would offer any other assistance it could to 38 ·Stlldios to facilitate your smooth transition to Rhode Island. A more complete listing of services .provided by the RJEDC is available at the RIEDC's website: www.riedc.com. :\~{O·i~~~·~m::ti~~~!t:t~is·-i~~~~~~~t-~J ~lH~);;')~~h~g-]~-SH~H;~-g~~t~'t'··Un>ii-b~~~~:l~·a··:ttm~1ttiHH~t-~h:$·~~;~1'~~:t* t~~-{:~:P·~~id-t~l'·t~~iB.~:i~~!Hi·di~i~x~J·~~!tsi~~:·i~:d~*-!-~:~~·i~~·~j~>ti~·E~l~:*~···~\~~~H~li§~~;~~'::~S~i·:.~-~~i··UUf~10l!i ~~H~~..;~i£~...e~;:-n~~~-i~~:.~h~">·~~~~~~~~H~~tHnt.io~H~:~~~fi·~}i~~~h~~h~!f·i~n;sr:~un~~~~~;1:~~~ut-H~~i,'*·t;i*-e;:~:-E~~tE.~~}~~ i*Cl'«i;*.-~il~·l!il1~1ill~~~-!o'-wi~il·1M;l~il~·l'.'!l•*!l'•·Oi~-il~w;m~ . j:1<~HHll~)<.:,i;:;"'l\l!il&:···W~>~:!:'l'~ wlH-~:~1~>1t.o{··m:h;:i'-til><-.:tH~·f;·;it.~H<:!~''ilti''~"·.i;i~~~mi~>··~le1; .li:vm:·~!~}ll'.1'~1~..,,.-i;li~Ii!!i~f.y· it:3·4fri~~:~~i~'¥Hte-~t:li~·it);Pi~~$¢·~:irui~·&·'t!ti:)~'!:i.'S:i: l:V~·~f~i!~~*·Yl!>l:Sl!·Emi1lf~~E:):·~m~-~~,·~i~d;~:-t-1!~Ni~~p·1-:H. ~~:~~H~l~:·i#~w;~lUftU~~lHif~s~s..,gi~~~.... ~v~).·d~B~:-~ Rl~i~~~;:;Hr:!t~eH; nee ., cess of obtaining the approvals for the please i°'dicate so by signing ~h~il~)ffi.~""<}!IB,ws, Keith W. Stokes, Executive Director CONFIDENTIAL FSC-000016697 eBd57031-f5b3-4fBf-aed6-342b8498e 102 Agreed and accepted as of the date first above written; 38 Studios LLC :ey=·------------'-·Its: CONFIDENTIAL FSC-000016698 EXHIBIT 145 From: Sent: To: CC: BCC: Subject: Attachments: Lamarre, Malf<[Mark.lamarre@cf.funb.eoll\I Monday, June21,201006:21:19 PM rwll$1er@3&itudlos.c:om; )medean@38studios.com; k@38$ludioa.com Kedia. AbhlsheklAbhlohek.Ked"ia@funb,comJ; Topp, Aaron{aaron.IOPP 1@d.funb.oomt U. Jenn)l{Jenny.Ll@funb.com] 11bhishek.kedla@funb.com; jemy.i@fllnb.com Hypothetical Valuation Analyses 38 Studios Valuation Anelyaie_6.21.10.¢f Jen, Rick and Tom Per our conversation and email earlier today - attached please find 3 valualion scenarios for 38 Studios. The firs~ on page 2, uses 38's financial projections. We assume lhal the Company sells 25 mllllon dollars of Series 6 Units at 45 cenfs per share. Essentially - It's the EquHy Private Placement deal In the PPM document; including !he Dislribulion Partner #a for the MMO. We use a range of CO&t of Capllal (J'IACC) from S0.50 percent, es In our opinion, lhe 25 n111ion EPP deal Is being viewed as "Venture capilal." Further, we made a simplifying essumpeon regarding taxes (in eQ scenarios) - lhat NOLs WOldd not be available in future years. We did lhls as we have no abYHy lo predlc! timing, and ramiflcaUons, or possible conversion to a C Corp. 1rom an UC. And In all scenarios we assume that the •meuenlne" financing lhat Rick Is projecllng for 2012 I& done as deb!, not eqully (though! the amounts vary). On page 3 - we use the company's proJecOons for the Self·Publishlng scenario, and assume that lh& 75 million RIEDC debt deal closes, and that no/zero new Equity Is sold. In lhls scenario we have lowered Ill& Company's WACC lo a range of 15.35 percent due lo the low cost (compared to private eqully) of the RIEDC bond money. The Implied Price per Share Is significantly higher than the prior scenario on page 2 due lo: (1) the lower snare count (we Included 1he 16 mllUon stock opUons but NOT the dllutlon/ratctiel shaies, as no new eqully was sold~ and (2) lhe lowerWACC range used. on page 4 - we analyze a "hybrid" scenario - where the Company sens 1DmRllon of new Equity now at 69 cenls per share, AND does tfle RJEDC bonds. Due to tie 10 mDlion dollars of naw EQufty, the mezzanine financing In 2012 ts reduced from 20 million lo 10 mtftlon {lo by to keep evecylhlng apples-tc> apples). For the shara-oount figures here, we use 1he lls from the soenallo on page 3 and add In the new Equity sold al 69 cents per ohare. The obvious but Important conclusion ls that completlng the RJEOC low-ooal financing adds material value to rurrent shareholders, as fl reduces or enmlnates further equltylownershlp dilutfon and slgnlficantly reduoes the Company's WACC. And the difference, In mathema!lcal vak.le-per-share that resulls from doing a near·term 10 million Eqully raise (at 69 cents per share) ~us not doing one at all, ls approxlmalely 10 percent We have discussed with you the benefits of "llafety" In raising prlvale equity near-term versus not doing so. We have not, however, probabllized the do-ablllty of raising priVa!e equity at 69 cents per share. In our analyses, we ha11e made numerous assumpUons and educated •guessHmates• - and aooordingly our analyses should not be relied upon as a formal valuation exercise. We hope Iha! lhls Is helpful lo you In your thinking. Regards - Mark C. Lamarre Managing Director and Vloo Chairman Wells FS190 Securities, LLC 301 South College Street: 5th floor Charlotte, NC 28202 (704) 715. 8680 malk.lamarre@wellsfargo.com PLAINTIFF'S EXHIBIT Sent from my BlackBelT)' Wireless Handheld CONFIDENTIAL wi:s_ooag1pQ. -----·. ·----:--·--·.. From: Kedia, Abtishek ·-~---------- .... ---·,.--------"·-··-·----· To: Lamarre, Mark Sent: Mon Jun 21 16:32:13 2010 Subject: CONFIDENTIAL ...WFS.=...0062151 38 Studios Valuation Analysis m • m rt N nasv n aES1 June 21, 2010 Togetherwe1l-gofa CONFIDENTIAL 38 Studios DCF Scenario 1: Based on Partnership Deal Projections - $25 Million of Equity lssu1 Net Revenue $0 Adjusted EBITOA Less: Oepreciation and Amortization EBIT ~: Illustrative Cash Taxes @30.0% Tax-effected ESIT Plus: Depreciation and Amortization Less: Capital Expenditures Less: Ch11nge In Working Capital 2015E EBITOA at 7.0x 1 Add: PV of cash flows Add: Current cash $151 $164 $184 0 65 73 90 1 (17) 2 (26) 2 (2) 2 71 (17) 1 1 (26) 2 3 (2) 2 1 2 63 19 44 2 2 5 2 88 26 61 2 3 s 5 21 50 2 3 5 5 108 (9) 4 Less: Debt (20) Total Equity Value $83 1 40% welgtlted average cost of capltal Nole: Aasumea f2S ndllion ofJleW equity issued IJ: $0-45 per share Noll:: Debt lDcladea $2o 1llilllo11of11ew "mezzanine" debl iasuecl in 2012 No>le: .Analyais euludeaimpact of my NOLs generated 'llllb1 piofitability Source: 38Studl""' ~eat model&Dd wells l'argo estSmates Project Green Monster 2010 CONFIDENTIAL $59 (24) $90 629 Firm value at exit Dlscoun12<1 terminal v11lue $21 (17) 0.39 0.48 0.19 0.26 Based on fnllycliluted shale count oh71o8 millioo 0.57 0.32 Wells Fargo Secu1 38 Studios DCF Scenario 2: Based on Self-Publishing Projections - No New Equity Issued Net Revenue $0 Adjusted EBITDA Less: Depreciation and Amo'rtization ESIT Less: IUustratlve Cash Taxes @I 30.0% Tax-effected Plus: Depreciation and Amortization Less: Capital Expenditures Less: Change In Working Cai>ltal esrr 2015E! cBITOA at 7.0x $238 100 116 2 2 (10) 82 2 98 114 25 29 34 69 80 2 3 1 5 5 1 2 (27) (34) (34) 1 1 (27) 2 3 3 2 1 57 2 2 s s s (10) 2 2 814 1 252 s 4 Less: Debt Total Equity Value ~166 (2:'il 25% weighted average cost of capital Note: Debt includes *75 mlllion of RI Bond. -1 $20 m!Dtosa of new"l!leZZlllline" debt !Gsued In 201;l Note:J\Jlal)'Sisexdudes impact of asay NOl.:l generated Ullb1 profitabllit;y Source: 38 Sl1ld!os ~model and Wells Farge eatilllaw Project Green Monster 2010 CONFIDENTIAL $218 84 (8) Add: current cash 1 $196 $65 (25) $116 Firm value at exit Oiscounl2d terminal value Add: PV of cash flows $21 (34) llasecl on fillly dilated share count of llll.2 mllliOA 3 Wells Fargo Secu: 38 Studios DCF Scenario 3: Based on Self-Publishing Projections - $1omm of New Equity Issue Net Revenue Adjusted ESITDA Less: Depreciation ancl AmortiZatlon EBIT Less: Illustrative Cash Taxes@ 30.0% Tax-effected EBIT Plus: Depreciation and Amortization Less:CapitalExpenditlJres t.ess: Change In Working Capital 201SE EBITOA at 7.0x Firm value at elntalned ln the Materialnepresent thejudginem o Wells PargoSecuritl.. at this time, IJUI are subjecttoch1111~withtmt DOlir.e. Intaested partiea In! adv!sed racoIJtactWeUs PmgoSeouities for more lnformaiion. lbe Matt:iabue not an offer lo sell,orasolicllll!io11of anoffer10 ~.the secmities orinstrumen18 named.orclesc:nl>edherelo. The llbterial& are DOt lnleDded to provide, and inust DOt be relied 011 for, aocounting, legal, "'!;ulato:y, tax, basiness, iinancllll or rell1edadvlce or lnvestroent te00mmeDd.atioos. No pe:sot p?ll\llding filly Mattria1a is ICling as liduc:iazy or advlaorwilh respect to the lllaWiall. YOll nmstCOllSlllt ioith )'CN!'OWll adviaotua lO thelegal. regulab)ry. tax, buoiness, financial, investme andotberMpOCUa!theMaterial& WellsFargoSecurhiesiscbetradell8meforcertnincapitalmuketsandimutmembaiilsoction, any fact that mey be relevant to u11~ tbe U.S. fe&ml, sterecr loc8l bllC trealmento;-tax etnu:ture of enytraDSactioo, and al\ ll)&terials of aey ki (indudlng opinion&ocothtt tutanal,.es) rdaling to -21 U.S. fedcial, lllam or local tllX tieatmelll or tu. muaure, O!herthan the 1111D1e of the partleaw any other person named herein, or lnform:rtiOll that would perDlit ldentificatlon of the parties or such othBpersona, and my pricing te= or llO!lpllbliC business or financial infozmarjon tlw is umel.ated to the U.S. fedl!r.:l, or local 111Xtreatmell!: ortmr.stnlctureoftbe transaf:tio11 to the ~andis1lo0tl'Clevent to ~dlngtbe U.S. !edenil, stmeor local m treatmellt or lax strw:tnre oftbe 'll'aDB8Ction 1 mpayer. IRS Circular 230 Dia:1osure: To emute compli.ance with requirc:mmts imposed. by the ms, we in!onnyou that any taxadvicecoruained in the Materials is not !ntel>dedor'Wtitten to be used.and c:amiot be used, forth< parposeof(l)avoidlngtllXpena!tiesor(u1prolllOtin!.~gor~IDlll2llcllngtoanotherpaztyaaytrusadi011-c_~~~-Y-O_<_-_~_~_R_-_1..___10_0_~ _ _ _,_3-l~~h~ A ~ R,1 li)'Lfol· ~]V· .iLIJJ___ ~~l~~~,~~·l~'~~-i~,ft~t.~~__,_f"S=--=c_--~~~~~u~1_.._J~r~y--_~~r._~_~_ j ·_ I . I&. ~ - 5 L/ -~ 2 ~ ~_,..-....~~-'--------'1<1~f53 -11o o"° i ./ I --·---·--..--.--rj 4 --------- ·-~·----- --~~=-DC_;_~-Fl~S~~~~;;;-_--j EXHIBIT 147 Rhode Island Eco~o.mic Development Corporation vs Michael G. Bartolotta, 30(b)(6) Page 49 l 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 existed prior to the e-mail and attachment that's been marked as Exhibit 7 that set forth the financial advisory relationship between the EDC and First Southwest in any way or in any part? MR. PETROS: Objection. You can answer. A. Not that we know of. Q. All right. Is it fair to say that it was contrary to First Southwest's policy for Maureen Gurghigian and Bill Fazioli to act as the EDC's financial advisor without having a written financial advisory agreement that either preexisted their acting or was entered into upon their acting or was entered into promptly after they started to act as financial advisor? A. That was outside our customary role, our procedures and policies. Q. Right. And it violated your procedures and policies, right? A. Yes. Q. Now, do you have an understanding -- Let me ask you this: Why did Maureen Gurghigian do that? A. I have no idea. Q. Do you have the same answer for Bill Fazioli? A. Yes. We have no idea. Q. Now, you have spoken to Maureen Gurghigian on a l there. I understand. And I did try to -- That's fair enough. The last page of this contract has this thing called Appendix A. It's on the very last page of the document. There, you have it. Is this layout something that has appeared in other First Southwest contracts that you're aware of? A. Yes, but not all. Q. Is there any standard form contract that First Southwest has that it may choose to use in connection with a financial advisory relationship? A. There is no standard form. It's tailored to the needs and desires of the client. Q. Is there a template or a pro forma that -A. There is a template. Q. Does the template have in it this Appendix A? MR. ROBISON: Object to form. A. I do not recall. Q. Is it -- Let me rephrase that. From time to time, prior to this transaction, has First Southwest provided services to issuers that could be described as referred to on Exhibit -- I'm sorry -- Appendix A as these related services, such as swap advisory services? A. Where are you pointing? 2 Q. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 Page 52 Page 50 l number of occasions, correct? Correct. Q. And part of your preparation for testifying today was to speak to her? A. That's correct. Q. And you have never asked her why she did that? A. We asked her, and she has no good explanation. Q. Okay. Sometimes people simply neglect to do or follow an ordinary practice, and I guess the explanation is that they neglected to do it. Is it your understanding that she simply neglected to do it? MR. ROBISON: Objection. A. That would be our understanding. MR. SHEEHAN: I think you may have two there, and I'd like to pull it apart because I need one of them. But I'm about to give it back to you. THE DEPONENT: You can keep it. Q. Referring to Exhibit 8, did you personally have any role in any way in First Southwest's entering into this initial agreement? A. Myselfpersonally? Q. Right. A. No. I'm just getting confused what my role is l Q. (Indicating) Yes. We provide other services, related services, but not limited to swap advisories. On a case-by-case basis. Q. I just didn't hear the end of it. A. On a case-by-case basis. Q. I guess I should say the bit before that. A. We provide -MR. SHEEHAN: Let me just ask to have the answer read back. (The reporter read the following: "Yes. We provide other services, related services, but not limited to swap advisories. On a case-by-case basis.") Q. Now, can you give me another example of other related services? A. Arbitrage rebate, continuing disclosure would be two of them. Q. Can you think of any others, and I really would ask you to rack your brain. A. Asset management, investment of bond proceeds. We talk about swap advisory, but we also do mark to market analysis. Q. Mark to market? A. Analysis of marketable securities. 2 A. 2 A. 3 3 4 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 6 7 8 9 lo ll 12 13 14 15 16 17 18 19 2o 21 22 23 24 2s Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (13) Pages 49 - 52 115 Phenix Avenue, Cranston,ID 02920 www.alliedcourtreporters.com EXHIBIT 148 ••• :·.···.-·· • .. • • • • • ••••• •• • •• • /. ·:... • ·•· ::.::.._. -~--- ---·-·-·. ~."::° ·.::_ ·-···:-·.:.·---~:•• .t,.•• 1 __.1::.~:-.:.:.:.·-·---·.· .• ··--· -· •.•••.•. ';,. ·' .. ·---"-'if------·----~-------· CONFIDENTIAL - FSC-000023239 i I 0~& To: Maureen Gurghigian , Bill Fazloli Cc: "Hrlnkevich, Craig" , "Marrone, Matt'' Bee: "maureen gurghiglan", "bill fazioli", hrlnkevich, cralg, marrone, matt, Maureen Gurghigian , Bill Fazioli Date: Wed, 23 .Jun 2010 15:11:25 -0500 Attachments: Preliminary Bond Cashflows_23-Jun-2010.pdf (26.79 kB) Maureen & Bill, It was nice seeing both of you yesterday. I wanted to forward to you a preliminary draft set of numbers for a · $75,000,000 taxable bond financing for 38 Studios assuming a 10-year final maturity based upon a 20-year amortization schedule. As you will notice, the final 'principal amortization in 2010 is approximately $53.2 million so around $22 million is amortized through years 3 through 9 (1/0 in the first 3 years). I assumed the DSRF requirement would be MADS from years 1 through 9, which is approximately $6.GMM. I would like to firm up costs of issuance if possible. I hate to make assumptions about peoples fees and don't want to circulate numbers to RIEDC or the broader team until I ran these by you so I have included placeholders. I look forward to touching base to discuss the numbers. Thanks, Peter M. Cannava Vice President Public Finance Investment Banking Wells Fargo Securities 375 Park Avenue I New York, NY 10152 I Mailcode: 10127-060 Tel: 212.214.6528 I Fax: 212.214.8922 I Cell: 631.431.7356 ... peter .cannava@wachovia.com This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/mpg CONFIDENTIAL Ill i PLAINTIFPS EXHIBIT JI/ ~l(/j ,a FSC-000009513 :1 . '4 I . . Lin.? CONFIDENTIAL FSGODDODQSH .• -.·.·.--:···;":::7f.·.-~-./...:..:;.;.·~----· -.·--.:-~~·.::.-::~:·:-;---.-:::.--:::·1. --·· ·····:··· . . · : ••·:..!I .. . ::.:.·:•-!:'/-"-::.~:: .. • :.:. · ·.· · ·······I •·.::-:-.-.·,-·.-.--:,.·:i.::.·;.·· ·;;.···~-:··,·.··:·I... . . ·:.: ·.-.· ..--.-: :.· ····:·{ -;::-::-:·-:-·· :-::,: _·_·,:.:.;:.·.:.-·.·;.,;. · 59dea93d-c094-4cd9-89ae-911 Obccfc6ca Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities -· PMC Page 1 SOURCES AND USES OF FUNDS Rhode Island Economic Development Corporation 3BStudlos Job Creation Guaranty Program Taxable Bonds, Series 2010A Sources: Bond Proceeds: Par Amount 75,000,000.00 75,000,000.00 Uses: Project Fund Deposits: Project Fund Other Fund Deposits: Debt Service Reserve Fund Delivery Date Expenses: Cost of Issuance Underwriter's Discount 66,818,750.00 6,607,500.00 no,000.00 803,750.00 1,573,750.00 75,000,000.00 Notes: Structured with 3-year 1/0; 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due to State's Moral Obngatlon for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009515 .. . :: :.·_:.:.:. :..:. :.: ·~· -. . ::.-.:~-.-..:::.-.-"' ·-·;-...:..::-..:......:..:...·_.:_.. __ . \•··.;--·-·.·.·. -:.:·~ . -::.:..:.,: .. ... ~~.:.·~------~·-~· .· ---------·:..·-·-·-·~:=-~.::.,;...~ ·~:::. -.:.·.. ·--.--:..:._._._...._-:..·.:::_-.:.-::..--·;:.-;.-.1_. __ ...... :."':. 59dea93d-c0944cd9-89ae-911 Obccfc6ca Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities -- PMC Page2 BOND SlJMMARY STATISTICS Rhode Island Economic Development Corporation 38Studlos Job Creation Guaranty Program Taxable Bonds, Serles 201 OA Dated Date Delivery Dale Last Maturity 08/1912010 08/1912010 0611512020 ArbHrage Yield True Interest Cost (TIC) Net Interest Cost (NIC) All-In TIC Average Coupon 5.251120% 5.408613% 5.372909% 5.561534% 5.250000% Average Life (years) Duration qi Issue (years) 8.719 7.016 Par Amount Bond Proceeds Total Interest Net Interest Total Debt Service Maximum Annual Debt Service Average Annual Debt Service 75,000,000.00 75,000,000.00 34,331,937.50 35, 135,687.50 109,331,937.50 56,061,412.50 11,131,079.61 Underwriter's Fees (per $1000) Average Takedown Management Fee Other Fee 6.250000 3.333333 1.133333 Total Underwriter's Discount 10.716667 Bid Price 98.928333 Bond Component Par Value Price Average Coupon Average Life PVof1 bp change Bond Component 75,000,000.00 100.000 5.250% 8.719 57,000.00 8.719 57,000.00 75,000,000.00 TIC All-In TIC Arbitrage Yield Par Value + Accrued Interest + Premium (Discount) - UndelWriter's Discount - Cost of.Issuance Expense • Other Amounts 75,000,000.00 75,000,000.00 75,000,000.00 ·003, 750 00 ·80:-J,?50.00 ·710,0GO.OO Target Value 74,196,250.00 73,426,250.00 75,000,000.00 08/19/2010 5.408613% 08119/2010 5.561534% 08119/2010 5.251120% Targel Dale Yield Notes: Structured wilh 3-year 110; 10-year maturi1y on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due 10 Slate's Moral Obligation for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009516 Jun 23, 201 o 4:09 pm Prepared by Wells Fargo Securities -- PMC Page3 BOND PRICING Rhode Island Economic Development Corporation 38 Studios Job Creation Guaranty Program Taxable Bonds, Serles 201 OA Bond Component Maturity Date Amount Rate Yield Price 2,670,000 2,805,000 2,945,000 3,090,000 3,245,000 3,405,000 3,575,000 53,265,000 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 Bond Component: 06/15/2011 06/15/2012 06/15/2013 06/15/2014 06/15/2015 06/15/2016 06/15/2017 06/15/2018 06/15/2019 06/15/2020 75,000,000 Dated Date Delivery Date First Coupon 08/1912010 08/19/2010 02/01/2011 Par Amount Original Issue Discount 75,000,000.00 Production Underwriter's Discount 75,000,000.00 ·803, 750.00 100.000000% ·1.();11667% Purchase Price Accrued Interest 74,196,250.00 98.928333% Net Proceeds 7,4, 196,250.00 Notes: Structured with 3-year VO; 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA· due to State's Moral Obligation for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009517 .. -.-.:-~:.-··.:----··: ....... ·:.-.- :::::·:·.-.-~· ·.;~J.-:-_·.:.;.· ::.:-...-:..=.::.!~:.~ .. ·.~::;:,::::-.--:..:.::=::_-_-...':.J....;...._.:.;; ~- ~ •· .... -- •. - 4 4 -~ ... - - . . . .:..:..:.~ . . . . . . . . . . ' · • • • • 59dea93d-c094-4cd9-B9ae-911 Obccfc6ca Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities -- PMC Page4 BOND DEBT SERVICE Rhode Island Economic Development Corporation 38Studlos Job Creation Guaranty Program Taxable Bonds, Serles 201 OA Period Ending 12/15/2010 06/15/2011 12/15/2011 06/15/2012 12/15/2012 06/15/2013 12/15/2013 06/15/2014 12/15/2014 06/15/2015 12/1512015 06/15/2016 12/15/2016 06/15/2017 12/15/2017 06/15/2018 12/15/2018 06/15/2019 12115/2019 06/15/2020 Prlnclpal Coupon 2,670,000 5.250% 2,805,000 5.250% 2,945,000 5.250% 3,090,000 5.250% 3,245,000 5.250% 3,405,000 5.250% 3,575,000 5.250% 53,265,000 5.250% 75,000,000 Annual Debt Service Interest Debt Service 1,268,750.00 1,968,750.00 1,968,750.00 1,968,750.00 1,968,750.00 1,968,750.00 1,898,662.50 1,898,662.50 1,825,031.25 1,825,031.25 1,747,725.00 1,747,725.00 1,666,612.50 1,666,612.50 1,581 ,431.25 1,581,431.25 1,492,050.00 1,492,050.00 1,398,206.25 1,398,206.25 1,268,750.00 1,968,750.00 1,968,750.00 1,968,750.00 1,968,750.00 4,638,750.00 1,898,662.50 4,703,662.50 1,825,031.25 4, 770,031.25 1, 747,725.00 4,837,725.00 1,666,612.50 4,911,612.50 1,581,431.25 4,986.431.25 1,492,050.00 5,067,050.00 1,398,206.25 54,663,206.25 56,061,412.50 34,331,937.50 109,331,937.50 109,331,937.50 3,237,500.00 3,937,500.00 6,607,500.00 6,602,325.00 6,595,062.50 6,585,450.00 6,578,225.00 6,567,862.50 6,559, 100. 00 Notes: Structured with 3-year VO: 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due to State's Moral ObllgaUon for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009518 ..... ~-- .. !.·-:.....·-···· ·-· ~···· .. ..-..:.::::..-:;J--·:-·:-······:-····,· .... ···~·.::1- -- :: ·-· ~-:-:..-· .·.· . -::--:------------- . ·. ··- Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities·· PMC Page5 BOND DEBT SERVICE Rhode Island Economic Development Corporation 38Studios Job Creation Guaranty Program Taxable Bonds, Series 201 OA Period Ending 06/15/2011 06/15/2012 06/15/2013 06/15/2014 06/15/2015 06/1512016 06/15/2017 06/15/2018 06/15/2019 06/15/2020 Principal 2,670,000 2,805,000 2,945,000 3,090,000 3,245,000 3,405,000 3,575,000 53,265,000 75,000,000 Coupon Interest Debt Service 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 5.250% 3,237,500.00 3,937,500.00 3,937,500.00 3,797,325.00 3,650,062.50 3,495,450.00 3,333,225.00 3, 162,862.50 2,984, 100.00 2,796,412.50 3,237,500.00 3,937,500.00 6,607,500.00 6,602,325.00 6,595,062.50 6,585,450.00 6,578,225.00 6,567,862.50 6,559, 100.00 56,061,412.50. 34,331,937.50 109,331,937.50 Notes: Structured with 3-year. l/O; 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due to State's Moral Obllgatlon for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009519 ··~ -:.:.-.-.--.-.-r·.:.::.·.-·.·.·.-:·:·.t.·..:•:.-.-.·:-·:·:·.. ·-· -.~·_._· ..:..:·.:_.·. :~·:·:.--=::::.-::.:.: :··:·.-.:·-:·-:.·:--~·-1 ..... -.· ..~ .... ·- · · ·· · · · · •:,• •: .. .. ::.-.·-.-c.· • ·.-.-.··, ....-.·.-.,.-.-. .-. , "''---=,-.;;:;:=:zo~.'.i'"'""·!o;:·,~,, •. ,,._,·.:·_· · · · ··:-···-:·: -.- ·· .··.-·····--.--.----~.-.-.':·.:·. 59dea93d-c094-4cd9-89ae-911 Obccfc6ca Jun 23, 201 O 4:09 p~ Prepared by Wells Fargo Securities -- PMC Page6 PROJECT FUND Rhode Island Economic Development Corporation 38Studios Job Creation Guaranty Program Taxable Bonds, Series 201 OA Project Fund Date OB/19/2010 Interest Deposit @ 5.2511199% 66,818,750 66,818,750 Arbitrage Yield: 0 Principal Scheduled Draws 66,818,750 66,818,750 66,818,750 66,818,750 Balance 5.2511199% Notes: Structured with 3-year VO; 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due to State's Moral Obligation for DSRF Replenishment. · DSRF Funded at MADS from dellvery date through 6/15/2019 CONFIDENTIAL FSC-000009520 1 1 ,-·:.-.-.·:.·; • ·.·.,; . -· • • •.• •,•,·.-~· "! :" ::··:.· -.---:;,:-··.-··.·; "··--.:. :..:...-•.-_·........ ·.·. ··--- .•.. ·.· .·.· •. • • '..·.L--.:.::~-. • • ~' '~-:::.·:..... -~·. L"o": ..;::_-.t..::· ..:.,·..:...·;-_•_·- ··.:;,,;..:.,-..·.:.·.·_:.-.:.··:·,;.-.•.-.-,-;-,----•·•.-I , • • • • • " " - '-·-~:.=.=.=:=:..:.;.;.,:_•;.•.· " "" ···:::.. .. ..:;.:,:: • .; ... ·• ---:.:..:~:.;. 1 I ! 59dea93d-c094-4cd9-89ae-911 Obccfc6ca Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities - PMC Page7 NET DEBT SERVICE Rhode Island Economic Development Corporation 38Studlos Job Creation Guaranty Program Taxable Bonds, Serles 201 OA Period Ending 06115/2011 06/15/2012 06/15/2013 06/15/2014 06/15/2015 06/15/2016 06/15/2017 06115/2018 . 06/15/2019 06/15/2020 Total Debt Service Debt Service Reserve Fund Net Debt Service 3,237,500.00 3,937,500.00 6,607,500.00 6,602,325.00 6,595,062.50 6,585,450.00 6,578,225.00 6,567,862.50 6,559, 100.00 56,061,412.50 176,567.09 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 6,822,243.76 3,060,932.91 3, 722, 756.24 6,392,756.24 6,387,581.24 6,380,318.74 6,370,706.24 6,363,481 .24 6,353, 116.74 6,344,356.24 49,239.168.74 109,331,937.50 8,716,760.93 100,615, 176.57 Notes: Structured with 3-year VO; 10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I M- due to State's Moral Obligation for DSRF Replenishment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009521 .. .• ..:. .. -.·;.....:.: .. •:_·_. ·:··.·-::.-~-=-~-~=·.~::.·~-· . ..••• '· i •• :~ ·- .... , , , ;:.:. . . . . . . . . . . __ ,..,_ .. .,, ...... ~L-.........=:.:.:==::~-.::::::.::.:.:.::::.:..::.:-~=.:..r.-...:.......:.;..::.:...::;,;.:...:.:.:::.:. .::.:::.:.::.:::::.:::...:._•·-·: -···. . . ,.. . •. , ....... ,, •. , •. --·' ..... j •••• 59dea93d-c094-4cd9-89ae-911 Obccfc6ca Page a Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securilies -- PMC DEBT SERVICE RESERVE FUND Rhode Island Economic Development Corporation 38Studfos Job Creation Guaranty Program Taxable Bonds, Series 2010A Debt Service Reserve Fund Date 06/15/2011 06/15/2012 06/15/2013 06/15/2014 06/15/2015 06/15/2016 06/15/2017 06/15/2018 06/15/2019 06/15/2020 Deposlt 6,607,500 6,607,500 Interest @3.25% Principal Debt Service Balance -'176,557.09 6,607,500 6,607,500 6,607,500 6,607,500 6,607,500 6,607,500 6,607,500 6,607,500 6,607,500 176,567.09 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 214,743.76 6,607,500 -6,822,2,1~1. 76 2, 109,260.93 6,607,500 -e.716,7eo.9a Yield To Receipt Date: Arbitrage Yield: Value of Negatlve Arbitrage: "·~~14}4S.76 .;?,·!4;743.'7(~ ··2'i4,7t~?.7G -214,74~{ i'6 -:214.,743.76 ·214.743.. i'6 ·21ct.,743. 76 ··.214,743.76 3.2503561% 5.2511199% 1,004,315.87 Notes: Structured wlth 3-year 1/0; 10-year maturity on a 20-year amortization schedule; make-whole calf redemptlon. Assumes Rating of A+ I AA- due to State's Moral Obligation for DSRF Replenlshment. DSRF Funded at MADS from delivery date through 6/15/2019. CONFIDENTIAL FSC-000009522 •.•.:•°:•_.•T<••J:::1,1.a- ••• _._,,, •• , .. , __ ,:!.~:::.:.=:::.:.:.:.:.:.•:.:.!.:.:.:::.~:.=.:.:::.:.::,_•_•-••_;.:_..•.=.:.:...:.:::.:.:.:.::.:.;::::.::.:.::~:,••,•,,_ •-••• .. -••- .. ~ ........ , .. :J~L...--r•1<1J:.•:J••1• •• ••1•"'•••~··•• ••t....:......:...-.:.:! 59dea93d-c094-4cd9-89ae-911 Obcr;Jc6ca Jun 23, 201 O 4:09 pm Prepared by Wells Fargo Securilies -- PMC Pages UNDERWRITER'S DISCOUNT Rhode Island Economic Development Corporation 38Studios Job Creation Guaranty Program Taxable Bonds, Series 2010A Underwriter's Discount $/1000 Amount Average Takedown Management Fee Expenses Underwriter's Counsel 6.25000 3.33333 0.13333 1.00000 468,750.00 250,000.00 10,000.00 75,000.00 10.71667 803,750.00 Notes: Structured with 3-year lfO; ·10-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA· due to State's Moral Obligation for DSRF Replenlshment. DSRF Funded at MADS from delivery date through 6/15/2019 CONFIDENTIAL FSC-000009523 .... _:..:..:~ .....----"'·'"''·-~:·1- .. ·---.-::.--:-=--.---·--,· 59dea93d-c094-4cc19-89ae-911 Obccfc6ca Jun 23, 2010 4:09 pm Prepared by Wells Fargo Securities -- PMC Page 10 COST OF ISSUANCE Rhode Island Economic Development Corporation 38 Studios Job Creation Guaranty Program Taxable Bonds, Serles 201 DA Cost of Issuance Bond Counsel Flnanclal Advisor Trustee Trustee's Counsel Rating Agency Fees Printer Fees RIEDC Issuer Fees Company's Counsel State's Disclosure Counsel $/1000 Amount 1.66667 1.00000 0.20000 0.13333 1.00000 0.06667 5.00000 1.00000 0.20000 125,000.00 75,000.00 15,000.00 10,000.00 75,000.00 5,000.00 375,000.00 75,000.00 15,000.00 . 10.26667 770,000.00 N~~ . Structured with 3-year 1/0; 1a-year maturity on a 20-year amortization schedule; make-whole call redemption. Assumes Rating of A+ I AA- due to State's Moral Obligation for DSRF Replenlshment. DSRF Funded at MADS from dellvery date through 6/15/2019 CONFIDENTIAL FSC-000009524 EXHIBIT 158 Rhode Island Eco~o.mic Development Corporation vs Peter Cannava Page 81 1 MR. BLESSINGTON: Objection. If you could show me the final cash flows, I can confirm whether or not it was in fact that amount. Q. All right. We'll get to that. And then we have the reference, "Tom Z. not grossing up closing costs and DSRF," and then there's a paren, "($15-16 million comes out of the par amount)," close paren. Did you follow along with that? A. Yes, I follow along with that. Q. Now, we're going to go on with what's left on this page in a minute, but I'd like you to turn to the next page to see if we can try to understand that $15 to $16 million number. In the parenthetical is "Closing costs in the $3 million range" and then "DSRF maximum principal and interest 1.1 million a month on 10 year deal." Did you follow along with that? A. Yeah. Q. So what that's saying is if you had a straight 10-year deal payable over 10 years and amortized over 10, then the debt service reserve fund in that context would be based on a maximum principal and interest of 1.1 million a month, or $13 .2 million a year; right? MR. BLESSINGTON: Objection. Page 83 1 2 A. 2 3 4 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2o 21 22 23 24 25 know, walking through what the iterations were and what were the requirements that we were going to have to structure in the bond in order to make them salable and how that would impact net proceeds, yes. Q. Do you recall any discussions with Tom Zaccagnino when he expressed concern that the net proceeds were being too heavily reduced by various costs including the debt service reserve fund? A. No. I think it, you know, -- repeat the question, actually, please. MR. SHEEHAN: I'm going to have it read back. I'll rephrase it if you need me to. (The reporter read the following: "Question: Do you recall any discussions with Tom Zaccagnino when he expressed concern that the net proceeds were being too heavily reduced by various costs including the debt service reserve fund?") A. And can you -MR. BLESSINGTON: Objection. A. And can you just elaborate on "discussions," please. Q. Sure. Did you ever hear him say that? A. Yes. Page 84 Page 82 1 A. 1 Q. 2 Q. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 That's what the notes say. Okay. And if you add the 3 million to the 13.2 million, you get 16.2 million. Just that's the math; right? MR. BLESSINGTON: Objection. A. Yes, that's the math. Q. Now, if we turn back to the prior page, we see the reference of "$15 to 16 million comes out of the par amount." Do you recall any discussions with Tom Zaccagnino when he discussed the impact of the debt service reserve on the proceeds 38 Studios would receive? A. Well, I think everybody in the working group was working through this as far as, you know, what was going to be the final structure and what was going to be the impact on the money that needed to be netted out of the 75 million to get to a net proceeds deposit into the project fund. Q. What I recall asking you, though, is do you have a specific recollection of Tom Zaccagnino's contribution to that discussion. MR. BLESSINGTON: Objection. A. Yeah, I remember Tom Zaccagnino, and Maureen, and Mike Saul, and myself, and Craig Hrinkevich, and a whole host of folks in the working group, you 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And did you hear him say that on more than one occasion? A. I think on various working group calls it was mentioned that, you know, all of these different things were obviously impacting net proceeds of the deal. Q. Yes. What I'm saying, though, is, was 38 Studios expressing unhappiness with the fact that its net proceeds were being reduced? MR. DOLAN: Form. MR. BLESSINGTON: Objection. A. I can't necessarily tell you whether it was unhappiness or something else. Q. Okay. You understand-A. It was mentioned. Q. Sure. Was 38 Studios ever complaining that its net proceeds were being reduced beyond what it would like? MR. BLESSINGTON: Objection. MR. DOLAN: Form. A. I can't say whether they were complaining. Q. Was 38 Studios or anyone associated with 38 Studios ever saying that they were concerned that the net proceeds were being reduced beyond what 3 8 Studios would like? Min-U-Script® Allied Court Reporters, Inc. (401)946-5500 (21) Pages 81 - 84 · 115 Phenix Avenue, Cranston,~ 02920 www.alliedcourtreporters.com EXHIBIT 159 ~ . From: To: Stolzman Rob Saul. Mjc!Jael; Hashwav. fred; Cole Tim; Maureen Gurgbjgian; CC: Stokes. Keith Bee: .5illi[; ~; ~ fu:l!; ~ tlmi mayceen gurahigjan; ~; ~ ~; Maureen Gurahlgian RIEDC/38 Studios Thursday, June 24, 2010 8:06:15 AM Rlf PC 38 5tudjos Term Letter 6 24 Marked. poc lmageOOl.png Subject: Date: Attachments: ~;Antonio Afonso Hi all. I am attaching a revised term letter for the above that reflects some further discussions with 38 Studios. I have added the disbursement formula that works for the company's cash flow needs but retains nearly 2/3 of the loan from being disbursed until the company actually relocates to RI. The Dividend and Defeasance Fee formulas and the Deferred Fee language needs to be inserted once Mike and Rick agree to that. Additionally, my language on those matters is rather awkward, so I apologize in advance for that and seek your advise on clarifying those provisions (and any others) with more elegant language. Please review and get comments to us today if possible, Mike would like to deliver a draft of this to 38 later today or first thing tomorrow. Thanks to all for your efforts on this matter. Rob Robert I. Stolzman, Esq. ADLER POLLOCK & SHEEHAN P.C. One Citizens Plaza, 8th Floor Providence, RI 02903 E-Mail rstolzmao@apslaw com Phone 401.274. 7200 Fax 401. 751.0604 Visit our website at www.apslaw.com ADLER POLLCCK @.SHEEHAN P.C. *"'*t•iti• Ails**** lfl II 6 AA AA1': . .H1',.,..,.,. . . . . . . . Ji AA A Aili AAA To comply with IRS regulations, we advise that any discussion of Federal tax issues In this e-mail is not intended or written to be used, and cannot be used, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. This e-mail message is confidential and is intended only for the named recipient(s). It may contain information that is subject to the attorney client privilege or the attorney work-product doctrine or that is otherwise exempt from disclosure under applicable law. If you have received this e-mail message in error, or are not the named recipient(s), please immediately notify the sender and delete this message from your computer and destroy all copies. Thank you. .. June ·2-~-M.Draft RIEDC Letterhead June__, 2010 Mr. Curt Schilling, Chairman 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 .· ·: ... Ms. Jen MacLean, CEO 38 Studios 5 Clock Tower Place, Suite 140 Maynard, MA 01754 : .. ;, Re: 38 Studios/Rhode Island ·' :: .. :. Dear Mr. Schilling and Ms. MacLeifu//. •.... We are pleased to present this outline ~f.·t~s and cpnditio~~:~~ed on our ongoing discussions pursuant to which the Rhod~,.l,sland Econom.ic DeveloP11J~nt CCitp">ration ("RIEDC") will issue bonds and provide credit' etihliiie~ent on tae-btmcb w.b~"is::;i,1ed~behalf of 3 8 Studios LLC (hereafter "38 Studi9~"ij)r 'th~"'tompany") to.8s~is~ :~s"stti'i:ifoS'::rt:.location to and expansion of its business in Rhode Isi<4:id... .,.,, .,,.,. .~; ~:: . ., : ..:.. . . ~f·. :•. We appreciat~.~he value yCiii~)~5lm'P.iJ'nY'.;o~gs in helping Rhode Island expand its video gwning and inter;aQilve digital m,edia ii!D.li;~try. We have ,beeO' ~mpressed with your company's manage{rieiit team an'd tfieindus'tfji.P,artners and viSionaries currently working with 38 Studios on its games,~ developmenL"W~ view'~8;8tudios as aligning perfectly with other key Rhode Island knowledge:economy assets ·fli~~~~ill hdj_;.'.IJs accelerate high wage job growth. ·.· We ··:;; ·.. understan~"your:capital n~J;,o bring. project Copernicus to completion to be approximately $75,000,000. BasecI:ti,n our und~anding to date of your financial projections, subject to the ~ns and conditions ·~;ei;fu , .. ··n and re uired Jc al rocedures the RIEDC is willing to €ensi6et'-i'Ssuiflg-iss!J..~$1 "·: venue bonds_p_ursuant to its newly created Job;i,,,r[~tl!Jn Guarantv Program, the ~eds of which would provide the necessary financing to relocate 38 Studios to Rhode Island, and-complete production of Copernicus, and capit~li;r.c thS! company's growth and expansion in Rhode lslund. We anticipate that bonds would be underwritten by a securities firm selected by the RIEDC-Htat is familiar with ri!ikH llm;ociated with ti'lis t;y13e of'.tra:nt1acti:on and ym1r industry. As your company is in the position of having pipeline product and contractual commitments for product publishing and distribution, but as yet is "pre revenue'', we recognize the market for these bonds would be limited without credit enhancement Accordingly, we would utilize our statutory .... ·;i· .· authority to issue bonds with a capital reserve mechanism by which the General Assembly must consider on an annual basis funding any shortfall of any debt service payments necessary to pay the bondholders, thereby creating for this issue what is commonly called a "moral obligation" guaranty for the bondholder(s) . The moral obligation mechanism is reflected in the RIEDC's enabling legislation and the resolutions of the legislature authorizing the RIEDC to enter into these types of obligations. That legislation and the related authorizing resolutions require the Governor to submit to the legislature by December I of every year a budget request for the legislature to appropriate in the following fiscal year's budget any shortfall on debt service that otherwise is not adequately reserved by the RIEDC. The guarantee-andioF-tlle-bond documents would reflect the .following terms and conditions and be subject to the following general parameters and all of wt\iefr'are ~ded to be a efltfl-mitmeHt-:'\ny-eO'lmnitmt.>nt-i;.;-subject to J!f.\..\l...£Qfil!iti..lin~~~1.1....R Final Authorizing Resolution approved by the RIEDC board that inclu~_es'al! final" agreed upon terms and conditions. In addition all bond documentation rqµ,St'~ satisfactor)'j9 )UEDC in its sole discretion prior to any bond closing: :q, 20 I0: ffe~ O.OOO;OOO\i:',, .': ;b)'!i.Upon the rcfocation ofilic compa11f•s:headquartcrs and current nrojcct Copernicus ·'\:;_;studios to Rho"~!!!!d.ifd, _CLt·\~~atted: ~~t: First line: 0.5" •··; · :;.: i. .-.Formatt-;d:i.;de"itt:'first line: 0.5" -..-,.-. ~. 2 _J • : ~: - ~atted: ~_!!dent: Flrst-n;,-;;o:~-- Amortization: Not to exceed 20 years. I. Collateral: first security interest and collateral assignment ofali assets of company now owned and hereatter acquired including but not limited to intellectual property, licenses, licensing fees, distribution and publishing contracts, receivables and work product. We recognize that a portion of the company's assets are held in a wholly owned subsidiary, the ownership interest of which will be pledged to the RIEDC, and that such assets are otherwise currently pledged in connection with the publishing agreement with Electronic Arts (EA) and currently are unavailable as collateral for this bond financing, bµi such. assets will be pledged as subordinate collateral for this bond financing and upon compl¥~n of the EA publishing agreement RIEDC will step into a first secured position OQ.t!je$e assets. ·I :' . ;. ~·,!:~:.::> ,~ + - - ·•· . {~etted: ;,,_~}~-1'.!~!i.!!~L.!'.5" =::::~ · {~i~~.::_~~:~~~~~-~~~=~=::~] State Guaranty Fee: Initial fee of one half pei:F'ent' ( 1/2o/il);'payable at closing at closing ($3 75 ,000) and one and one half percent ( 1.5%) ($l,JZ5,000) of bdn4.:amount annually payable on the bond closing anniversary. /: '·_·_-,.'· " ": '. .. . --) :·, . !add fonnula here) ··:; ·•:: ., . ,,~~:~:.. ''. " Equity ttHd D~~-~!Jd-Cov~ajmts: .:.::::· ... ;/;~;j~~>'<.''/:/,, "'/ - ·· Duririg·!lte term of the loan, the company shall maintain fle-le~·iff:t&S ·. .:·: otjninj.Jl1J:.lJil equity in the company'rlttlEi e<:'lt1i1y ol' ea1;li~4i.!.iff'ihliiie~.fe..,ffl;em~e...-.~ihttl-~ed to a eo·1erage-fatio-fe~ agr-eeti-u~)i'tli~G'-alf~ompan~.ei~ostftfF: of an amount no less than [add minimym equity calcula,tfan language here] :.; ,:; . ·. •:.:· ·: .. :·. ·:.. . -~"!'!~_:_Ind_·en_t:!!IS! line:_!>~~·---~ ~ fMiJ.1-dividend formula herfil b>e~~bood-efos-iflg-anffiv.er~R-2013 .. · tke ernnpaey .·:::· ':.";:··· may eleet pFiaF ta elesiflg an~ a)$ IO,OOQ,OOQ aae time fee. ·~}-$4,600;000-aflmlally-payable-evel'-tflree--ye!ll'&; e)$J,550,QOO flflfll:ltlll)" payable ih er ti, e ye1ns. 3 ·... : ··: . : ... ~ . ., ' P-feeeeas-Gi5W-ibiffieR-Sehedule;-+he"'J}t"{leeeds-ot:the-sule-efihe-bend&-wiH-Be-di-stt~but00-·r&~he eompruiy l!Jlefr-the-fullowing sehed1:1le and ·11pell the achlevernent of the fellowing conditions j*eeed~ [ada disb1:1rsernent set11:1enee here] Specific Conditions and Covenants: (a) The debt would not be assignable or assumable withoutJender consent; (b) 3 8 Studios will provide t 25 full time jobs with an av~g~:annual wage of approximately $75,000 ("jobs") in Rhode Island within twelve (12)::~~hths of the bond closing (the "closing"); · .-... ( c) 38 Studios will add an additional 175 jobs in-RhOde Islan~:;w.ithin twenty-four (24) months of the closing; ..... ( d) 3 8 Studios will add an additional 150 jQbil.,in Rhode Island within thirty-six (36) months of the closing; · , :. . ·' .. (e) Should 38 Studios fail to meet any jobs requirement$, ir..shall pay .the RIEDC an amount equal to $7,500 per ye.a,r for each job.:riot s.o ·adti&i until such shonfall is cured. and .:': :·· · ..::.:::'> (t) 38 Studios will provide 2010-. ~a~~l):!µ!lly there~ft~~ (juring the term of the bond audited financial statements that include· a certtfltation that borrower has met the requirements of (b), (c) and ( d) above and eertify.ing th~ -~culations required in the Equity and Dividend $e¢.tlon above. · . ·: ., '-_· :. . " 0 :;~·; (g) 38 Studios will de~elop·fo~~i:nship progr!lni.s stiiden~ _;at Rhode Island design and educational institutions pu~jjimt to pro~·ms and policies to be agreed upon with such institutions. ·. ·~ . .;:;~. . . ·· · · ,<: . , to the for ConditiQ~iP~~~t: ·condiiic,h~;i~'·~;~~lhg ~e.l~a~_-.will include standard documentation and legal ~iternents . =~;ti>·. typleai ofboiid#1msactioris·of:!his size and scope and: . ·:. '.::;;·;:j:'· ~~;~~cution and:~~~ye~·--~~:iiease for the company's corporate office and studio operations in Rhode'_· d with_1,_1._~n1tof no less than 10 years, such lease terms being priva~ and · , ·b!ic record except for the location of the premises, the tenn of the lease-Sita; •' 0.-y-~. the identity of the landlord, annual.Q_\!~_r;: rn!l!.. paymentS,:Jt~ ewal options~--~!!\:_h le