BLUE BELL, Penn. -- Interactive Gaming and Communications Corp.(IGCC) has announced that on November 20 it filed a proxy statement along with its 10q and 10k with the SEC in connection with the sale of two of its gaming subsidiaries, Sports International Ltd. and Global Casinos Ltd., to International Gaming Corp. of Vancouver, B.C. (Gary Newman, President) for
$5 million in cash and notes. The transaction is subject to shareholder's approval December 29, 1997.
According to the SEC proxy filings, as of the September 30 pro forma IGCC's stockholder's equity increased to $6.2 million. Assets are increased to approximately $8 million. The earnings per share increased from a .06 per share loss to a .25 per share gain on 13,701,290 shares outstanding. IGCC intends to apply to NASDAQ Small Cap for listing.
The move to sell the two assets was prompted by recent legal actions by the State of Missouri and an investigation by the US Justice Department. The subsidiaries were wholly owned by IGC, which opened to door for Missouri and the Justice Department to bring legal action against the
parent company, even though jurisdiction is still an issue.
According to a release issued by Interactive Gaming, "Although IGC feels it would win any legal suits, the board of directors concluded that it would be more prudent to divest itself of these companies until a final determination over the legality of internet wagering is made. The board's decision to sell is also consistent with the company's goal to become the leading developer and supplier of internet gaming software in the industry. IGC will now concentrate on developing additions to their already popular internet gaming products line."
More details have been found on how the company was viewing this move. Here are some highlights.
Government Regulation - Effect on Financing
The Company's business is legally constituted and organized in Grenada, West Indies, and a license fee is paid to the Grenadan government to conduct its business in the Gaming and Licensing Division. The Company's business activities emanating from the United States (customers' wagers) may be materially affected by regulations and actions that may now be in place or will be promulgated in the future by the various local, state, and/or federal government regulators. The uncertainty of how the United States and other world governments will look upon gambling on the Internet may deter major financial and/or investment companies from participating in any capital venture with the Company.
In this regard, on February 19, 1997, the Company was served with a warrant to produce all records involving gambling activities emanating from the United States. The Company has co-operated with the United States Attorney's office in Philadelphia in providing such records. In addition, in April of 1997, the Attorney General for the State of Missouri filed a request for an injunction to restrict the Company from offering gambling over the Internet to Missouri residents. The Company denied all claims in the lawsuit including jurisdiction and agreed not to accept applications from Missouri residents. Legal proceedings are currently ongoing concerning the indictments and judgement in this action.
The Company continues to be proactive in the area of Internet gambling and has encouraged various government organizations to utilize its expertise in both Internet and legalized gambling operations to assist their regulatory agencies in creating and maintaining strict guidelines, rules and controls to effectuate the credibility, reporting and possible taxation of enterprises organized and licensed to operate gambling activities.
On February 18, 1997, a search warrant ( the "Warrant") was issued, filed in the United States District Court for the Eastern District of Pennsylvania, authorizing the Federal Bureau of Investigation (FBI) to search the premises of the Company's executive offices and the offices of Intersphere in Blue Bell, Pennsylvania including any and all computer hardware, software, peripheral devices and computer-related documentation on any of such premises. The Warrant lists a variety of items to be obtained based on the assumption that there was a violation of federal laws and that an illegal gambling business was being conducted from its premises in Pennsylvania.
Based on the advice of counsel with significant criminal law, trial and appellate experience and comprehensive understanding of the jurisdictional scope of gaming laws, both domestic and international, management does not believe the gaming operations of its subsidiaries violate either the laws of the United States or the Commonwealth of Pennsylvania, since no gaming or gambling operations are conducted there.
Management's belief is based principally on its understanding, as interpreted by its counsel, that the operations of the Gaming and Licensing Division are legally authorized in Grenada and, as such, are beyond the scope and outside the jurisdiction of the U.S. criminal laws relating to gaming activities.
In May of 1997, the Company filed an amended motion to quash the subpoenas issued from the United States District Court on the grounds that the laws of Grenada pertaining to secrecy and confidentiality could be violated by individual compliance. The Court denied the motion, noting that the subpoenas were directed to the Company and not to individuals. On July 30, 1997, the Company made a good faith effort to comply with the subpoenas and delivered relevant documents. Individuals from the Company under subpoena have been advised that their scheduled appearances have been continued indefinitely.
The Company, through counsel, while co-operating fully with the officials of the United States, intends to move to quash the Warrant and subsequent subpoena in the United States District Court on the grounds that jurisdiction is lacking. Although the Company intends to defend vigorously any action that may ultimately be brought by the United States in connection with the Warrant and subpoena, no assurance can be given that management's beliefs as to the criminality of its subsidiaries' operations, or its basis for such beliefs, are correct and that the Company will prevail.
In April of 1997, the State of Missouri sought an injunction in its courts seeking to restrict the Company from offering the Global Casino through the Internet to Missouri residents. While not admitting personal jurisdiction, the Company through counsel agreed not to offer these services to Missouri residents. The Company posted a notice to this effect within its Internet
web site. Subsequently, an investigator employed by the State of Missouri accessed the Company's web site; apparently determining that the Company had breached its agreement with Missouri.
Accordingly, in May of 1997, the State of Missouri indicted the Company and its President, Michael F. Simone, and filed a judgement in the amount of $66,050 for statutory "gambling" violations in Missouri. The Missouri attorney general is seeking extradition of the Company and its President and has obtained a favorable ruling from the Court of Common Pleas of Montgomery County, Pennsylvania granting extradition. The Company and its President have appealed the ruling to the Superior Court of Pennsylvania, the intermediate appellate court of the state, and that appeal is pending. (Editor's Note: The Superior Court recently overturned that extradition ruling.)
The Company has been advised by competent legal counsel experienced in civil, criminal and constitutional matters, that the Missouri proceedings lack merit because Missouri has no in personum jurisdiction of the Company or of Mr. Simone. Once again, no assurance can be given that this view is judicially correct, nor can assurance be given that the Company will prevail in these proceedings.
Now on the sale, the SEC filing noted...
The Company proposes to sell its Internet Gaming Business to International Gaming by selling 100% of the stock of Sports and Global Casinos (together, the "Internet Gaming Subsidiaries"). The Sale will be pursuant to a Stock Purchase Agreement, dated November 6, 1997 (the "Purchase Agreement"), a copy of which is attached to this Proxy Statement as Annex A.
The purchase price is $5 million. The purchase price will be paid $10,000 in cash and the balance, being $4,990,000, with a three-year promissory note from International Gaming bearing interest at the prime rate (the "Purchase Money Note"), a copy of which is attached to the Purchase Agreement.
Immediately following the sale of the Internet Gaming Subsidiaries, the Company's remaining operations will be those related to the software and web-site advertising operations conducted through Intersphere. In addition, the Company will maintain ownership of Global Gaming, which possesses gaming licenses from Grenada. Global Gaming does not presently conduct any gaming business.
NEGOTIATIONS RELATING TO THE SALE
As a result of the increasing United States governmental scrutiny of the Company's Internet Gaming Business, as described above under "GOVERNMENT REGULATION AND LEGAL PROCEEDINGS," management of the Company decided to explore methods to allow the Company's gaming operations to continue free of legal threats from governmental officials. Initially, the Company believed an additional investment, together with a modification of the Company's business plan might be sufficient. Eventually, it was determined that a proposed sale of the Company's gaming subsidiaries to a third party was a more beneficial method.
In October of 1996, the Company received an unsolicited telephone call from Mr. Gary Newman, a principal of International Gaming Corp. of Vancouver, British Columbia. Mr. Newman indicated that International Gaming was interested in entering the Internet casino business and had been
investigating the field. As part of that investigation, International Gaming had learned of the Wiseguy Sports Wagering System developed by the Company.
Following many months of discussions and negotiations, International Gaming proposed making an investment in the Company's Common Stock. The purpose of such a transaction would have been to provide cash to the Company with which to continue to develop its software business and to promote its gaming business, while at the same time providing to International Gaming an entrance into the Internet Gaming business.
On September 15, 1997, management of both companies signed a form of agreement to accomplish that transaction. That agreement was subject to a number of contingencies, some of which were not satisfied, and the agreement expired by its terms.
In late September of 1997, management met with it outside legal counsel and its outside accountants to discuss the proposed transaction with International Gaming. Management reviewed the benefits and the drawbacks of having International Gaming make a significant investment in the Company's Common Stock. Among other things, management concluded that International Gaming's investment in the Company, by itself, would not end the governmental scrutiny by the United States and state authorities relative to its Internet Gaming Business, and that other steps would be required to achieve that purpose.
At that meeting, management and its advisors discussed various possible transactions that would achieve that objective, and management decided to propose an outright sale of the stock of the Internet Gaming Subsidiaries to International Gaming. Michael Simone telephoned Mr. Newman to propose the sale of the Internet Gaming Subsidiaries to International Gaming. International
expressed a preliminary interest in such a transaction, subject to further negotiations over the price and the terms of such a sale.
Michael Simone and Fred Michini, the Company's Chief Financial Officer, then held a telephone conference call with Mr. Newman of International Gaming at which price and terms were discussed. As a result, the parties agreed in principle on the Sale.
The Company then prepared and delivered to International Gaming form of Stock Purchase Agreement setting forth the principal terms and conditions relating to the Sale. The parties executed the Stock Purchase Agreement.
REASONS FOR THE SALE
The Board of Directors believes that the Sale of the Internet Gaming Subsidiaries is in the best interest of the Company and its shareholders and unanimously recommends that the shareholders of the Company vote FOR approval of the Sale.
Prior to reaching its conclusions, the Board reviewed the proposed Sale with the Company's management and its financial and legal advisors. The following are material factors, among others, considered by the Board in reaching its conclusions:
(i) The Company has come under legal attack from two separate governmental authorities. See "GOVERNMENT REGULATION AND LEGAL PROCEEDINGS," above. The fact that Sports and Global Casinos are engaged in the gaming business over the Internet and the telephone from Grenada and with licenses from that government have not been sufficient to preclude those attacks, since the Company has its holding company offices in the United States. The Company does not
have the financial resources necessary to defend its position for an indefinite period of time, or to set the legal precedents necessary to preclude future legal attacks
from other governmental authorities. Accordingly, the Board believes it is necessary and prudent to sell the Internet
(ii) The Board has evaluated the price offered by International Gaming, in light of the historical and projected earnings of the Internet Gaming Business and the estimated fair value of that business.
(iii) The Board evaluated the financial strength of International Gaming as it pertains to International's ability to pay the deferred purchase price pursuant to the Purchase Money Note. International Gaming intends to add new product lines and to expand the marketing of the business throughout Canada, Hong Kong, Australia, Great Britain and other countries; and accordingly it is expected that International Gaming will repay the Purchase Money Note from income generated by the current customer base of the Internet Gaming Business and from new gaming customers.
Although the Company expects that the Purchase Money Note will be fully paid when due, the Board recognized that there is risk that the Purchase Money Note will not be paid.
(iv) After it exits the Internet Gaming Business, the Company will be engaged principally in its gaming and entertainment software development business. The Board of Directors believes that such business has good future growth potential. The Company intends to use some of the proceeds from the sale to develop new interactive Internet casino games. The Company believes that it can license the gaming software to operating companies for attractive license and royalty fees. See "DESCRIPTION OF THE COMPANY FOLLOWING THE SALE," below.
(vi) The Board believes that the financial cost of defending the Company from legal attacks will decrease the value of the Company. International Gaming has offered what the Board believes is a fair price for the Internet Gaming Business. Awaiting or soliciting other offers, in the opinion of the Board, will have little or no value to the Company and, depending upon the results of the legal proceedings, may actually result in a lower offering price.
(vii) When the Sale is consummated, the Company will have increased its tangible net book value from approximately $1.5 million to approximately $5.8 million, or from approximately $.11 per share to approximately $.42 per share.
In view of the wide variety of factors considered in connection with its evaluation of the proposed Sale, the Board did not find it practical to, and did not, quantify or otherwise attempt to assign relative weights to specific factors considered in reaching its determinations.
INFORMATION REGARDING INTERNATIONAL GAMING
International Gaming Corp. is a privately-held British Columbia, Canada, corporation. The principals and managers and affiliates of International Gaming are not associated or affiliated with the Company, its officers and directors or any of their respective affiliates. The information in this section was provided to the Company by International Gaming Corp.