Appears Joe Norton is the owner of Blast Off, and may reach a settlement with Excapsa. At first Excapsa was upset with Blast Off and Joe Norton for not making payments, right around when the cheating started. Then Joe Norton and Blast Off write a letter to Excapsa saying they were sold bunk software, their reputation was ruined, and they had to issue 6 million in refunds so far, they want money back. New Liquidation team comes in and It looks like instead of BO buying it for 130 million, they amended the sale price to 81.4 million
http://www.wsbg.com/liquidation/Unno...October_14.pdf
The following summary below is taken from the Liquidators working with both groups.
http://www.wsbg.com/liquidation/Mana...20,%202008.pdf
BACKGROUND OF EVENTS
The Original Stock Purchase Agreement purported to dispose of all of the Company’s operating assets (specifically all of the shares of Game Theory Holding Limited and all of the shares of Excapsa Software Inc.) to the Buyer (the “Original Sale of Assets”) for aggregate purchase price consideration of USD $130,000,000 (the “Purchase Price”). The Purchase Price was payable by way of USD $5,000,000 in cash, with the balance payable pursuant to the Note. The cash portion of the Purchase Price was received in full. The Note provides for the following cash payments:
• one (1) installment of US $5,000,000 due on or before October 17, 2006 which was made;
• one (1) installment of US $500,000 due on or before November 22, 2006 which was made;
• twelve (12) equal installments each in the amount of US $1 million to be paid on the last date of each calendar month commencing on December 31, 2006 and ending on November 30, 2007;
• fifty-two (52) equal installments each in the amount of US $2 million to be paid commencing on December 31, 2007 and ending April 30, 2012; and
• one (1) payment, due May 31, 2012, in the amount due in order to satisfy the then-outstanding amount of the Note.
CEASING OF PAYMENTS UNDER THE ORIGINAL NOTE AND THE BUYER’S CLAIM
In or about the autumn of 2007, the Buyer advised the Company that it could not generate the cash to meet the increased principal payments under the Note (which, as set forth above, were scheduled to increase from US $1
million to US $2 million per month in December of 2007). The Buyer subsequently ceased to make monthly payments under the Note, save and except for a partial payment in December 2007.
In February 2008, the Buyer informed the Company that players using the Ultimatebet online gaming sites operated by the Buyer had made allegations of unfair play. These allegations centred on concerns that individual players had unfair and improper access to the poker hands of other players. The Buyer issued press releases about these allegations on March 6, 2008, May 29, 2008, July 8, 2008 and July 25, 2008; copies of such press releases can be found on the Liquidator’s website and may be reviewed at
http://www.wsbbg.com/en/liquidation.html.
The Buyer advised the Company that it intended to refund players who had been identified as potentially affected by the unfair play. The Buyer further advised that, as a result of the unfair play, its business had been adversely
affected and specifically had suffered declining revenue. Negotiations between the parties continued and the Buyer requested financial support to help fund the refund of players who had been the victim of unfair play as described above. The Original Liquidator was asked to consider a loan to the Buyer. The loan negotiation contemplated security to be given by way of a pledge of the Company’s shares of certain significant shareholders as collateral security for the repayment of such loan. The Original Liquidator did not agree with the aforementioned loan proposal and advised the Company’s representatives that it was not in a position to authorize such a loan or other
payment to the Buyer.
On August 23, 2008 the Buyer’s legal counsel issued a demand letter (the “Demand Letter”) to the Company in which the Buyer asserts certain claims against the Company including a claim for damages in the amount of $US
81,400,000 (the “Buyer’s Claim”) and demands payment thereof. Specifically, the Buyer alleged that it had suffered significant damages as a result of the unfair play described above and claimed damages from the Company
for direct losses incurred or to be incurred in the form of reimbursements to customers/players who were the victims of the unfair play, as well as for overpayment in the purchase of these shares, out-of-pocket expenses,
opportunity costs and damage to the reputation to the sole beneficial shareholder of the Buyer. The Buyer’s Claim alleges that such cheating was possible as a result of a tool in the internet gambling software code, that the
Company had knowledge of the tool, and of its illegitimate use and failed to disclose such facts to the Buyer and made a number of related misrepresentations to the Buyer during the negotiation and implementation of the Original Stock Purchase Agreement. The inspectors and the directors of the Company vehemently denied these allegations.
The Liquidator, in response to the Demand Letter, promptly convened a series of meetings between the parties to gain more information about and explore a possible resolution of the Buyer's Claim. During these negotiations, the Liquidator worked to substantiate the allegation that unfair play had occurred and the quantum of losses suffered by players as a direct result of the unfair play, to the extent that it could readily do so with the information
available to it at the time. During this time, the Kahnawake Gaming Commission (the "KGC"), the Buyer's licensing body, was conducting its own independent investigation into the same matters with the assistance of
certain third parties engaged by the KGC. As a result of the aforesaid meetings and subsequent meetings and negotiations with various parties and professional advisors, the Amendment to Sale Documents was entered among
the Company, the Buyer and Tokwiro Enterprises ENRG (the Buyer’s sole shareholder).
MATERIAL PROVISIONS OF THE AMENDMENT TO SALE DOCUMENTS
Subject to various conditions (including, but not limited to, approval of the Shareholders and the approval of the Court) the Amendment to Sale Documents contemplates, amongst other matters, the settlement of the Buyer’s Claim and the reinstatement of payments under the Note.
The material terms of the Amendment to Sale Documents are as follows:
• one (1) payment by the Company to the Buyer of the amount of US $14,625,000.00 which is due;
• the Buyer shall cause its wholly-owned subsidiary, Game Theory Ltd., to transfer an undivided ownership interest in certain software to the Company for a purchase price consideration of US $375,000.00;
• the Buyer to cause delivery to the Company, for cancellation, of approximately 6,900,000 previouslyissued common shares of the capital of the Company;
• the Buyer to cause delivery to the Company of no less than 49,300,000 shares in the capital of the Company by way of pledge as collateral security for the payment of the next US $10,250,000.00 of payments under the Note;
• as additional security for the Note, the Buyer will cause the outstanding shares of Game Theory Holdings Limited and Game Theory Ltd. to be pledged to the Company and the Company will also be granted security on the Ultimatebet domain names and the Buyer’s non-US customer database;
• the Buyer’s full and final release of the Buyer’s Claim (which is in a form satisfactory to the Liquidator). The completion of the transaction contemplated by the Amendment to Sale Documents is conditional upon and
subject to the following:
• the receipt of the consent of the shareholders of the Company by written instrument signed by the holders of 66⅔rds of the outstanding shares or by special resolution passed at a meeting;
• delivery of the shares for cancellation and receipt of the collateral described above;
• receipt of satisfactory evidence that the Buyer and its related entities are beneficially owned by Joseph Norton;
• receipt of satisfactory evidence that the Buyer is a viable business entity capable of continuing to carry on
its business in the normal course thereof;
• satisfactory due diligence examination of the Buyer’s Claim;
• approval of the Amendment by the Court.
The application for the Court’s approval of the Amendment to Sale Documents was initially heard on October 14, 2008. The Court approved the Amendment to Sale Documents subject to the Liquidator filing a further report to satisfy the Court that all conditions precedent to the Amendment to Sale Documents have been met. The Liquidator, Buyer and their advisors are actively working on satisfying the conditions precedent. The Court application materials including the First Report of the Liquidator to the Court (the "First Report"), the Judge’s endorsement and the Court Order can be found on the Liquidator’s website and may be reviewed at
http://www.wsbbg.com/en/liquidation.html. A copy of the Amendment to Sale Documents can be found at Appendix H to the First Report.
The Liquidator has received written consents from the holders of 66⅔rds of the outstanding shares of the Company without regard to the shares to be cancelled in connection with the Amendment to Sale Documents. Accordingly,
the approval of the Amendment to Sale Documents by shareholders at the Meeting is not required to fulfill the condition of closing noted above. However, the Meeting will proceed for information purposes and the special
resolution will be tabled.
RATIONALE FOR RECOMMENDING APPROVAL OF AMENDMENT TO SALE DOCUMENTS
The Liquidator is currently holding approximately US $36 million.
In light of the Buyer's Claim, the Liquidator essentially faces two options.
First, the Liquidator could choose to simply defend against the Buyer's Claim and keep the US $36 million. If this action is taken, then the Liquidator is of the view that any further payments under the Note would be very unlikely.
In addition, as mentioned in the First Report, while the Note was to be secured directly and indirectly by the common shares of Excapsa Services Inc. and Game Theory Holdings Ltd., and the intellectual property assets of
Game Theory Limited, the Buyer failed to provide all of the security required by the Original Stock Purchase Agreement and the general security agreement entered into in connection with the sale transaction.
The Liquidator has also been advised that there are currently impediments under Maltese law regarding the perfection of its security in respect of the intellectual property assets. Accordingly, recoveries in connection with enforcing the existing security available will be uncertain. Furthermore, choosing to defend against the Buyer's Claim will mean that no distributions to shareholders can be made (even on an interim basis) until the Buyer's Claim is finally resolved by final court order or settled given the size of the Buyer's Claim relative to the funds on hand with the Liquidator.
This litigation may take years and whether or not the Buyer's Claim would be fully or only partially defeated is uncertain. Accordingly, notwithstanding the merits of any defences that the Company may have, choosing to litigate the Buyer's Claim will result in almost certain lengthy delay and will have an uncertain financial result. Lastly, from the Liquidator's investigations into the matter as confirmed by the independent investigations of the KGC (with the assistance of certain third parties engaged by the KGC) and outlined in a press release of the KGC contained as Appendix K to the First Report, it appears that the unfair play was occurring as early as May 2004. Accordingly, defending the Buyer's Claim may also leave the Company directly exposed to claims from players who suffered losses as a result of the unfair play between May 2004 and the date of the sale transaction, being October 2006.
From the Liquidator's information and investigations, it appears that a substantial portion of the refunds being processed by the Buyer relate to player losses incurred prior to October 2006. Given the foregoing, choosing to simply defend against the claim will likely mean that there will be no distributions to shareholders for some time and that the amount of money available to distribute to shareholders after a final determination of the Buyer's Claim may range from US $36 million less all defence costs (which will not be immaterial) to potentially $0 if the Buyer's Claim is ultimately successful and the Company is exposed to additional success claims from players who suffered losses as a result of the unfair play between May 2004 and October 2006. It will also make any further recovery under the Note or its related and defective security uncertain as the Liquidator would anticipate any such recovery to be vigorously resisted by the Buyer.
Second, the Liquidator could work to re-establish payments under the Note with a view to maximizing the overall, long-term recovery to shareholders by way of implementing the Amendment to Sale Documents. While doing so
would cost US $15 million up front, it will also provide the following benefits: (1) assuming that the Buyer complies with its post closing obligations under the Amendment to Sale Documents, the existing defective security
will be remedied providing the Company with properly enforceable security over the assets sold to the Buyer should their be a subsequent default – importantly, this includes the Company gaining an outright assignment of an
ownership interest in the gaming software itself by way of the copyright assignment that is deliverable as par t of the Amendment to Sale Documents;
(2) the Buyer will cause the delivery up for cancellation of 6.9 million shares which provides an approximate immediate benefit to the remaining shareholders of about US $1.2 million in addition to potential future benefits to the extent that additional recoveries or payments on the Note are obtained;
(3) the Liquidator will have a pledge of 49.3 million shares as security for the next US $10.25 million payable under the Note such that if there is a subsequent default in the near future approximately US$ 10.25 million of
value will be recovered for the remaining shareholders who did not pledge their shares pursuant to the Amendment of Sale Documents;
(4) the lawsuit risk in respect of the Buyer's Claim is eliminated as is any distribution delay as a consequence of the Buyer's Claim;
(5) exposure to pre sale transaction player claims will be substantially
mitigated because the settlement transaction is structured with a view to refunding all players who suffered losses as a result of the unfair play (which includes the time period from May 2004 onward) to the extent that such playerscan be identified; and
(6) anticipated tax savings will be realized. Accordingly, the Liquidator is of the view that the additional or remedied security, the values of the share cancellation and share pledge and anticipate tax savings roughly equate to the US $15 up front payment while litigation risk and delay on the Buyer's Claim is eliminated. Furthermore, payments on the Note are restructured such that a recovery of the US $15 million is anticipated within the next three years given that the Liquidator has satisfied itself as to the ongoing viability of the Buyer given current facts and economic circumstances.
The Liquidator has also examined various books and records of the Buyer, on a confidential basis, to verify that the Buyer has refunded customers/poker players in the aggregate amount of US $6,141,908.65. The Liquidator has
seen internal documents of the Buyer indicating that payments to other accounts of customers/poker players who were the victims of unfair play will aggregate no less than an additional US $9 million. These amounts will be
verified pursuant to the ongoing due diligence work. The Liquidator is seeking confirmation of KGC’s acceptance of the third party analysis of the player losses, and KGC’s approval of the player refund procedure and related
monitoring requirements. As of September 22, 2008, the balance of the Purchase Price remaining due by the Buyer to the Company under the
Original Note is US $108,869,257.00 (exclusive of interest). Accrued and unpaid interest as at September 22, 2008 was US $24,234,795.39. Pursuant to the Amendment to Sale Documents, the Buyer has agree to pay this interest amount at the end of the term of the Note or upon a Default occurring (as that term is defined in the Amendment to Sale Documents).
RECOMMENDATIONS
Accordingly, the Liquidator recommends the approval of the execution and implementation of the Amendment to Sale Documents for the following reasons:
• The Liquidator believes that shareholders will benefit most from the resumption of payments under theNote;
• The Liquidator has received advice that giving effect to the settlement will result in certain tax savings for the Company;
• Though the Liquidator may have a relatively strong defence to the Buyer’s Claim based on the terms of the Stock Purchase Agreement ("as is, where is"), defending the Buyer’s Claim and attempting to enforce payment on the Note could well be a lengthy and costly process with ultimate recoveries being uncertain;
• Subject to the outcome of the ongoing investigative work, the Liquidator is satisfied that the direct losses suffered by the Buyer, including completed and pending player refunds and KGC fines, total at least $15 million. Considering the cancellation of shares, the collateral security and certain potential tax savings resulting from the reduction of the purchase price pursuant to the original sale transaction, the cash payment of US $15,000,000.00 (inclusive of the US $375,000 payable for the interest in the software) appears to be reasonable in the circumstances.
