I'd say there were some crappy business decisions. Putting their first video game on the N-Gage which was a joke of a system well before the game was announced. Bragging about the RIFTS movie for years, etc... It seems to me they may have started counting on money they didn't have. Let me over-analyze:
I may not be a fan of Palladium, but I hate to see any hardworking RPG company go under.
I may be wrong, but I seem to remember KS bragging about how his company has held onto the third spot of the big 3 for so long doing it his way and the upcoming movie will just futher vindicate him and give him a pile of money so he could continue to do whatever he wants. This, then, would be irony.
His reasons for the trouble, other than the embezzelment he can't speak of, perplex me a bit though...
...I wouldn't think that any investment would have been lost in liscensing out RIFTS for the Nokia game. Sure, profits could come in well under projections, but as long as he didn't count on the income from that...which no businessman taking a new venture should then there should have been that much of a problem. It also seems to be poor research...most everyone knew the N-Gage was a joke by the time the game was announced. Why go with that system?
...Not getting into the book trade certainly sucks, but since Palladium was never there before it's not like they lost anything.
...Rifts movie stalled? Again, seems to be loss of potential income.
...RIFTS MMOG? Ditto.
It seems that all these "unfortunate events" represent more a loss of growth potential rather than big sinks in capital. I could be wrong, of course. If Ultimate RIFTS sold as good as he claims then one would think Palladium would be coming off of a big upswing in profits.
The question this whole thing raises for me is whether Palladium was actually sustaining itself on it's book sales. It's very possible they were and the embezzlement did them in, but there is also the possibility that profits at Palladium have just been plummetting and KS is embellishing the story to get aid, not willing to admit poor sales.
Again, this is all conjecture, but given the lack of details and KS's comments over the years it certainly does raise a lot of questions....