ICC-USCF proposal letter of May 8

8 May 2001

George De Feis
Executive Director & CEO
U.C. Chess Federation
Fax: 845-561-2437

Dear George,

Thank you for your fax of Wednesday, 2 May 2001, and the time you
spent with us in Kansas City.

We'd like to both answer your list of questions, and also develop
mutual understandings and deal terms that will enable USCF and ICC to
enter into a mutually beneficial partnership for chess.

We have been working very hard to develop a sound proposal as quickly
as possible. We do not have enough information yet to give a full
formal proposal in this first response.

In the meantime, we need clarification from you and the Executive
Board as to exactly how long we have to complete such a proposal.  We
were given to understand that this process must be completed to the
Executive Board's satisfaction within thirty days of its April 29
decision that such negotiations take place.  We are prepared to follow
up quickly after this letter to exchange more information and views.
We want to prepare a detailed proposal that will be appropriate to
your needs, and also allow time to conduct final negotiations once we
are close to agreement.

To date, ICC has conducted information gathering and analysis to find
the best partnership with USCF.  We have reached a number of
preliminary conclusions as to what would or would not be worthwhile,
which we would like to outline in this letter.

First of all, let us state that we see this as a prospective
relationship between two natural partners:

The USCF, which is the governing body for over-the-board chess in the
US, and the official representative of the US to FIDE, which is
similarly the world-wide governing body for OTB chess.

The ICC, which is the leading service for chess players on the
Internet, which is distinct and separate from all physical and
geographical locations, and is commonly known as "Cyberspace" as a way
of describing a "place" where activities on the Internet are

It is our strong belief that it is in the ICC's best interests to
support OTB chess, to work effectively with national chess federations
to help maximize the footprint of chess in every country and in every
form, and especially to encourage persons interested in chess to share
the thrill of competing and finding their places within the great
tradition of OTB play as epitomized by the greatest recognized players
of all time, such as Paul Morphy, Bobby Fischer and Garry Kasparov.

We have identified the following key goals for mutual cooperation:

A. The application of ICC's expertise to the USCF's technical needs,
specifically in the areas of improving/augmenting the USCF Rating
System, and in enabling Real-Time Membership Signups via the Internet,
complete with prompt issuance of a valid USCF Membership ID # and PIN #.

B. The operation of an Internet Chess Playing site which carries USCF
branding, and is offered as a free membership benefit to USCF members.

C. USCF Members receive a discounted membership rate on ICC, which may
also provide revenues to the USCF if USCF members join ICC. There may
be special privileges for USCF members when playing on or joining ICC.

D. A Promotional/Marketing/Co-Branding Relationship, which will
include such elements as:

* co-sponsored and co-branded events, including USCF OTB events and
   ICC online events,

* mutual promotion of membership in each other's organizations,

* ICC develops programs for USCF sponsorships, advertising, and

* co-promotion of the USCF within the ICC's marketing programs, in
   particular those that will reach audiences beyond those currently
   aware of the USCF,

* activities and services on ICC that encourage US chess players to
   join the USCF, play in USCF OTB events, and purchase books and
   supplies from the USCF, and

* a presence for ICC in Chess Life magazine and other USCF
   publications and materials, at appropriate rates or in exchange for
   appropriate sponsorships, perhaps including special designations
   for ICC as USCF's official partner in key areas.

We note the following with respect to the above four key goals:

1. The USCF's needs in the technical area are urgent, and the ICC has
the know-how and experience to assist the USCF in solving these
problems. ICC management includes individuals with extensive
experience in almost all areas of software design, development and
deployment. ICC also has extensive resources available through our
various business relationships, and through our large community of

The first step is to complete a Needs Assessment. We would like to
initiate the Needs Assessment immediately, at no charge to USCF. We
would like USCF to designate a contact person who is knowledgeable in
these areas and authorize him to give ICC full access to whatever
information is needed to complete a Needs Assessment. We will assign a
Project Manager for this task, at our expense, after which ICC will
develop recommendations to USCF. We will also assist in supervising
the execution of the solution, by such contractor(s) as ICC may
recommend and USCF may choose to engage. We cannot commit to
completing this project at our cost, as we do not understand the scope
and complexity of the problems, but we will commit in advance to
identifying cost effective solutions.

2. We know the USCF currently administers and operates, in conjunction
with Games Parlor, a USCF-branded online playing site known as
USCL. USCF offers play on USCL as a free membership benefit, and has
committed to continue to offer this membership benefit for free to all
USCF members indefinitely.

What we would like to add is that the ICC is already familiar with the
technology of USCL, as the server technology was licensed from FICS,
and the client software is apparently based on ICC's Blitzin to some
extent.  (For the record, ICC would like USCF to note that Games
Parlor's predecessor, KO Interactive, signed an agreement with ICC on
24 September 1999, under which KO Interactive was allowed access to
the Blitzin source code for the sole purpose of developing an 'ICC
Lite' which could be used by the purchasers of School Mates Chess.)

ICC is currently evaluating the financial, operational and overall
business aspects of operating USCL on behalf of and as partner with
USCF, and is developing financial models which we hope to share with
USCF within the next seven days as part of this process. There are
still some issues the ICC needs to discuss with the USCF to ensure
that we accurately evaluate the benefits and risks to both USCF and

One concern which we feel must be addressed is the need to share
information about costs and revenues related to the existing service
that may help us to better analyze the fiscal aspects of operating
USCL in the future. We have identified some scenarios in which the
joint operation of such a service could cost both partners (whether GP
and USCF now, or ICC and USCF in the future) increasing amounts of
money as the service grows, and end up with heavy financial costs to
both parties, despite (or even due to) high levels of user

ICC assures the USCF that the technical process of creating a similar
service using ICC technology and development resources can reliably be
completed during a period of between 30 and 50 days from initiation,
including testing and launch processes. To be able to reliably launch
such a server no later than 1 August, we would need an agreement no
later than 15 June.

We will need to know if there are any restrictions or requirements
that we may not be aware of, that might affect our evaluation or
execution of this project.

We will need to know if there are any exclusivity provisions in your
current arrangements of which we need to be aware.

3. The ICC is a successful business, with many thousands of users
paying for its services. Many USCF members are active and pleased
members of ICC, and we believe that many more USCF members might wish
to play on ICC as well. ICC is open to a wide variety of arrangements,
incentives and special offers or opportunities to allow more USCF
members to play on ICC.

As a membership organization, ICC must carefully consider the
financial ramifications of any such programs. However, we can tune the
offerings to achieve an agreed-upon balance of member benefits and
revenue opportunities for both ICC and USCF.

We believe that we could create a special level of membership within
ICC for USCF members consistent with the above, which would enable
USCF to offer its members a higher level of service than that
available on USCL today, plus the opportunity to upgrade to full ICC
membership, at a preferred rate, or with a bounty to USCF, as the USCF
may prefer.

The advantages of USCF members participating directly within ICC are
many, and include the following:

* The ICC has proven scalability, with the ability to manage many
   thousands of online players simultaneously.  This is not a simple

* The ICC has a carefully selected set of features.  Every major
   chess online feature that we know of was either invented by the
   ICC, or implemented first on the ICC, or perfected for long-term
   use on the ICC.  There are many additional features which we once
   tested, but did not implement after studying our members reactions.
   As a result, the ICC has an excellent blend of features and ease of

* The ICC is profitable and well managed, meaning that the USCF can
   count on the ICC being around for many years to come.
   Profitability is unique to the ICC over all other chess playing

* ICC is a service that thousands of people are paying for. The ICC
   offers its members value, and our members are overwhelmingly voting
   for the ICC with their wallets.

* The ICC has long established anti-cheating technology and policies,
   with the infrastructure in place to process a large volume of
   tournament games and minimize online cheating. Some of the details
   of these are Trade Secrets, and no other service has ever
   approached the effectiveness of the ICC in this area.

* The ICC does not charge Federations and Tournament Directors fees
   for tournaments that the ICC hosts. The ICC considers this a
   Service to its members, and to the community-at-large.

* The ICC has established effective behavioral oversight, and has
   successfully reduced poor user behavior on ICC to a minimum.

* The ICC has 6 years of development behind it, ensuring a system
   which is stable and expandable.

We would be pleased to discuss programs based on a special category of
USCF member as an alternative (but not a supplement) to our running
USCL.  We can even offer programs which add a special Member Benefit
and could be offered even if USCF continued to rely on Games Parlor to
run USCL as it exists today.

We will also discuss running a separate USCL Server, but this is not
our preferred option, because of the heavy costs which will burden
both USCF and ICC.

4. That USCF affords ICC and others with numerous opportunities to
sponsor events or programs, to advertise or co-market, and that there
may be considerable benefit to ICC by taking advantage of some of
these opportunities in the context of a wider relationship.

ICC would like to discuss a range of possibilities, which would
provide for direct cash payments to the USCF and also help us to
achieve ICC's marketing goals. We are particularly interested in
discussing the following opportunities:

* Sponsorship in part of the 2001 Grand Prix, which we note is
   currently sponsored at $15,000 below last year's level.

* Other sponsorships of individual events or programs at the USCF's
   recommendation, which might likewise bring ICC favorable exposure
   in Chess Life magazine, other USCF publications and marketing
   materials, and thereby lead to USCF members being more likely to
   try ICC and perhaps join.

We would also like to discuss co-branding some of our planned
Marketing campaigns, which we plan to initiate later this year and to
expand considerably in following years. As part of our expansion
plans, we intend to invest in extensive advertising and outreach
programs and to draw in players who are not currently involved and/or
previously familiar with chess organizations such as USCF or ICC.


Having discussed the key goals for mutual cooperation, we'd like to
also provide answers to the questions that you asked us in your fax of
2 May 2001, and to explain our own current situation so you may
understand how we can best make successful efforts to work together.

You stated that you have "little performance experience to go on."
This leaves us wondering if you refer to USCF's experiences with ICC,
or with online issues generally.  During the three-year period of 1998
to 2000, USCF and ICC had a modest relationship, under which over
$100,000 was paid to USCF by ICC for a combination of web site
advertising and membership bounties.  Numerous USCF activities took
place on ICC, including the very successful USCF Rated Tournament
series in which over a thousand USCF members took part.

You ask a number of questions about the relationship between ICC and
World Class Games LLC (WCG) which we'd like to answer.

1. Will World Class Games (WCG) be with you in the long run - are we
signing with WCG or ICC, or both? Give me the exact status of your
agreement. Can I have a copy? What gets signed (or agreed to ) in July

ICC has been in business for over six years, with consistent
management, growth and profitability, under the direction of
Dr. Daniel Sleator.  Over the years, ICC has been approached with
numerous business propositions, many of which were specious. (Games
Parlor is one of the many companies that have made such offers.)
During the last year, ICC chose to enter into discussions with Mark
James regarding investment and growth for ICC.  These discussions
resulted in the formation of WCG as an investment vehicle, and the
raising of some millions of dollars.  Mark James and his partners
(Sandy Jackson, Hal Bogner and Dave Wasdahl) each bring valuable
skills to ICC, and will assume management roles upon the closing of
the investment, which is scheduled to be initiated no later than 15
July. The four WCG partners are currently working with ICC during the
transition period, and a portion of the investment monies have already
been paid to ICC.

The investment agreement between ICC and WCG is private, and is not
contingent upon any involvement with USCF.  After the Closing Date
more information will become available, including information
regarding other individuals who are also participating in the
investment.  We believe that ICC will be a stronger company as a
result of the investment by WCG.  Mark James and Sandy Jackson will
join the current management team, and we anticipate a period of higher
growth and additional service improvements over the next year and

Because the investment is in progress at this time, with a closing
process to occur no later than 15 July, we ask you and your staff to
work closely with both Daniel Sleator and Mark James as we proceed
with our discussions, and we will designate appropriate individuals
for particular tasks within these discussions as we proceed.

2. What are the exact statuses of Mark James, Hal Bogner, Sandy
Jackson and Dave Wasdahl? Are they paid personnel of ICC or WCG (or

All four are part of World Class Games.  When the investment process
is complete, World Class games will have full management authority for
all ICC decisions.

3. You note "Management Historically Worked Part-Time" (slide #8).
How/who do you envision working full-time? ICC, WCG, or both?

ICC management has devoted as many hours as we deemed appropriate to
accomplish our goals and run our business.  I, Danny Sleator, have
typically worked part time to manage the business, and I am sure we
could have grown faster with more time spent on my part.  The purpose
of bringing in new management is to add a new level of professionalism
to the company, and allow ICC to grow and expand at an increased pace.
The ICC has become a full time business, requiring full time managers,
and that is what we are bringing in with WCG.

4. How many of ICC members are USCF members? How much income is that?
How would WCG/ICC manage if all of these were converted to free

We do not have sufficient data to answer this question.  Twenty
percent is a rough estimate.

We have no intention of giving away free full memberships on the ICC,
and damaging a valuable business.  We do want to offer USCF members a
place to play, but without all of the membership benefits available to
paying members of ICC.

There is no intention by any party, including Games Parlor, to give
the USCF a subsidy at the cost of their own business.  Games Parlor,
in the pubic part of their presentation to the Board in Kansas City,
also made it clear they were developing an "upsell" business model,
which by necessity, means that at some point, features are going to be
limited for current users, so that an upsell opportunity may be
created.  An on-line chess club is labor intensive to run well.  It
cannot be run at no cost, and revenue must be generated to pay for the
service.  ICC has proven over the last six years that there is a
market for our business, and we plan to continue to serve that market
and to lead it.

There have been free alternatives for playing chess on the internet
since the founding of ICC in 1995.  This includes FICS, USCL, and
several others.  Despite this, we have maintained dominance, steady
growth, and a loyal membership base.  We also know that the transition
from a free site to a pay site is painful, and we do not think the
USCL service will survive such a transition when it inevitably occurs.

5. If USCF is mainly interested in "rated" tournament play, and ICC is
mainly interested in "casual" play, explain how there is a match? Will
"rated" play be organized secondarily, and "casual" play be the
primary focus?

I think there is some confusion here.  Many of our members take play
on ICC VERY seriously.  ICC runs many tournaments each week, both slow
and fast.  And we've had many major events.  The play on ICC is often
just as serious as one sees in over the board events.  We did not
intend to say that ICC is mainly interested in casual play, but rather
that today's "casual players" are players we would like to enlist to
join ICC, and become more serious about playing chess.  Of course ICC
also is comprised of a very large and friendly online community who
engage in a wide variety of other activities besides playing --
including improving their game, and camaraderie of all sorts.

Please note that there are both similarities and differences between
"USCF Over-the-Board" and ICC online play. For instance, USCF
sanctioned events are supervised by certified Tournament Directors,
almost invariably at a single playing site, under strictly controlled
conditions.  ICC rated play is conducted from wherever the member
happens to be connected, and is supervised by our server technology
and our support staff; conditions may vary widely, and are likely to
be far from equal from one player to the next.

We also want to point out that traditional USCF play, all players are
clearly identified.  Ratings are earned under strict supervision, and
each member's reputation in chess can be closely tied to who he or she
is as a person.  ICC members - and likewise almost all chess players
in Cyberspace - are anonymous unless they choose not to be, and some
literally adopt "personas" that have little or nothing to do with who
they are in the "real world."

As a result, we feel there is room for both ICC's "casual tournaments"
and "USCF rated" tournaments, which take place under more strict

6. Assuming that ICC has 26,000 members, and that half of these, say
13,000, are USCF members, how will ICC respond/react to their dues
becoming free from the outset? (That's 13,000 x $37.50 or $500K at

This question is assuming we are changing ICC's business model.  We
have no intention of doing so.  In order for us to sponsor USCF
events, and assist the USCF monetarily, we must be profitable.  No
entity can offer the level of service of ICC without comparable
membership costs. After 6 years, we understand better than anyone what
it costs to provide these services, and they certainly cannot be
offered gratis, or only from advertising revenue.

7. According to the agreement, it will allow "USCF paid members to
play online chess for free" and we (USCF) "would provide
administration and user support." What does that mean? And, will it be
"up and running in less than 60 days"

There are two ways we can address this, depending on how our
conversations develop.  One is a service where USCF members are given
some access to ICC (and USCF rated tournament events), and the other
is a separate chess server, independent of ICC, which will have
limited features and service.  As we've stated before, we prefer the
former.  And further discussions are needed here.

A special "USCF-class membership" on ICC will be very valuable to a
USCF Member even without being entitled to all of the benefits of ICC
membership.  In this scenario ICC would handle all administration
costs.  On the other hand, a separate free server must be staffed and
monitored by USCF, as is the case today.  While we can do it easily,
the USCF must understand the long term costs to the USCF of
administering this service, especially if it were to grow to
substantial usage.

8. Sponsorship of Events - nothing is defined here, except "at a later
date." As we are very interested, please provide exact details.

In the main body above, we mention the Grand Prix as one option for
sponsorship.  There are undoubtedly others. The extent and amount of
ICC sponsorship must depend on the overall package we work out.  The
USCF must keep in mind that it costs money to run a service, and it
requires profits to enable sponsoring.  The USCF cannot expect us to
give up some revenue, and also have money to sponsor the USCF. ICC
wants to do a deal with the USCF which is MUTUALLY beneficial.

9. The agreement says, "irregardless of whether our bid is ultimately
accepted, in exchange for giving us the opportunity to pursue these
discussions, the ICC will offer the USCF assistance in solving the
tournament rating issue." We greatly appreciate this, and look forward
to working with you, as tournament ratings are a critical need at this

We addressed this above, in the main body. We believe we have the
in-house expertise to solve your rating and membership ID problems.
Without a detailed understanding of all the parameters, we do not know
if the solution will be "easy" to implement, or require some
expenditure by the USCF. It is possible we may be able to offer a
complete solution to the USCF at no cost, but unless a Needs
Assessment is performed, we do not know the scope of the
problem. However, we are confident that we can design the most cost
effective solution, regardless.

10. "ICC commits to provide, at no cost, a branded USCF chess site
until November, 2001" - - I thought the proposal was to provide such a
site for free all the time?

We made an offer at the Executive Board meeting to extend a guarantee
to USCF that we would assist the USCF - if - during these negotiations
the current provider of USCL failed, and USCF was thereby 'left in the
lurch.' We would step in and help USCF to carry forward USCL or an
alternate free playing site with USCF branding, for a limited period
of time, at minimum until November, 2001. This is an emergency
solution, not a permanent service.

11. Please provide any shared revenue plans, e.g., what are they, how
much will we each get, how do we ensure that the site is "looked

We discuss several options above, but we will summarize them here

  a) shared membership offerings
  b) eliminate USCF administration costs
  c) share upsell revenue to each other
  d) co-marketing/co-branding efforts

We must reiterate, a USCF class membership service has minimal costs
for us, and is easy to administer.  A stand-alone USCF service must
carry its full weight, which will require USCF staffing, which will
increase substantially if USCL grows.

12. What would be the chain of events for a transfer from an existing
on-line service to an ICC on-line service, e.g., a)we'd have to send
an e-mail message to all users, b) they would have to register for
ICC, c) what if they were already a member of ICC and asked for their
money back, etc.

The exact procedures for a transition under the various kinds of
arrangements discussed above would have to be developed as we got
closer to the transition point. Items (a) and (b) seem quite
reasonable and appropriate, but item (c) is not, as indicated in our
response to questions 4 and 6.

13. Is the WCG arrangement written and signed, or does it depend upon
the USCF agreement?

It is written and signed. It is independent of USCF involvement with
ICC.  The ICC has prospered without the USCF, and will continue to do
so, but we feel that we can assist the USCF in many ways, both
financially and technically.

14. Would ICC be interested in such an agreement in the future?

We believe this question refers to how we'll respond if the USCF
enters into an agreement with Games Parlor, but comes back to us later
if the arrangement fails.  The answer is that we'd much rather work
with you now, but of course would still be interested in making a
relationship work with the USCF.

Now, we have a few questions of our own, which we brought up in our
response, which we summarize below:

1. How much time do we have to give you a formal proposal?

2. Who is the contact person for the Needs Assessment?

3. There are several issues and assumptions on running a server for
USCF which must be discussed before we understand the cost impact. If
the USCF wants a seperate chess server, is it willing to pay all
administration costs? Who will we work with to discuss the financial
impacts of various business models?

4. We will need to know if there are any restrictions or requirements
that we may not be aware of, that might affect our evaluation or
execution of this project. Exclusivity is one example. There may be

Finally, we are indeed interested in reaching an agreement, and we
look forward to discussions along the lines of the above. If there is
anything we have overlooked in preparing this letter, please let us

As we stated at the outset, we would like to follow up on this letter
with an exchange of views and information and begin working closely
with you to home in on the right proposal for both USCF and ICC. We
greatly appreciate your consideration, and look forward to capitalizing
on this sudden opportunity to discuss a partnership with the USCF.


Dr. Daniel Sleator and Mark James

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Questions from USCF to ICC (received by fax 5/2)

Initial "Letter of Understanding" from ICC, 4/29