USCF first invited bids for the outsourcing of its books and equipment business in 2001. Hanon Russell of ChessCafe submitted the bid that was considered best, but after discussions between Russell and USCF President John McCrary, the Federation decided to remain selling its own books and equipment.

In 2003, USCF again called for B&E outsourcing bids, and this time the Board considered the bid submitted by Malcolm Pein to be best. VP of Finance Tim Hanke was appointed to negotiate with Pein, but also authorized to contact other vendors. He apparently spoke only to Pein, and presented a contract for Board approval at its January 2004 meeting. I was USCF Office Manager at the time and would be named Executive Director at that meeting.

The Pein proposal offered a 12% base commission, no minimum guarantee, and required USCF to provide six pages of free advertising in each issue of Chess Life. I thought we could do better, and in view of Russell's strong bid two years before, asked Hanke if he had contacted Russell.

He had not, and didn't object to me doing so. Russell expressed strong interest, but it was only a few days before the meeting and he needed more time to prepare a bid. At the meeting, the Board postponed a decision and allowed me three weeks to negotiate with vendors.

I suggested to bidders that a substantial guarantee was justified based on USCF's sales figures (over $2.8 million) for its most recent fiscal year, 2002-2003, and these negotiations resulted in three bids that all appeared far superior for USCF to the original Pein bid. However, none of the bidders offered a personal guarantee of payment and I should have requested this.

Pein improved his offer with a $250,000 guarantee, but Russell offered a $350,000 guarantee, and another bidder even more. Russell offered the highest base commission with 13.5% followed by Pein with 12%, and all accepted paying USCF's cost price for Chess Life advertising.

An important issue for the Board was whether the outsourcer would run a separate non-USCF retail business in competition with USCF. Russell offered to merge his existing retail sales with those of USCF and promised to do 100% USCF retail sales only. The other two major bidders declined to do this, intending to continue their separate non-USCF retail businesses.

The Board unanimously selected ChessCafe, and a contract was signed expiring in 2007, with the vendor having an option to renew for five more years.

However, Tim Hanke, though voting for the contract, said that the $350,000 minimum guarantee was much too high and doubted that ChessCafe would be able to pay it. Unfortunately, Tim proved correct as first year sales were only about $1.32 million, less than half of USCF's reported sales for 2002-2003.

I found Russell easy to work with, and he helped USCF in a number of ways not mandated by contract, for example: 1) Making a $15,000 payment for April 2004 sales a month early on request to help USCF's cash flow, and offering to do the same for May 2004 (but the federation no longer needed this help then), 2) Filling back orders that USCF could not handle and requiring no payment for many months, 3) Sponsoring the USCF Grand Prix, the first corporate sponsorship for this event since 1998, 4) Encouraging suppliers to advertise in Chess Life, 5) Referring a sponsorship lead to USCF, 6) Mailing 40,000 catalogs to schools at ChessCafe's expense, 7) Permitting USCF's "Warehouse Clearance Sale," which under the terms of the contract he could have forbidden.

As USCF Sales under ChessCafe offered much faster service than USCF had done previously, I expected sales to increase, and was shocked when they were less than half of expectations right from the start, with only modest improvement after that. Several hundred thousand dollars of sales were lost because Russell was too busy setting up his mail/web/phone operations to sell at the spring 2004 National Scholastics, but even taking this into consideration, the numbers were poor. Russell expressed the opinion that there must have been a mistake in USCF's records and 2002-2003 sales could not possibly have been over $2.8 million, but he did not push the point and no action was taken to review the accuracy of those figures. It eventually came to light that the $2.8 million number Russell had been given by USCF included shipping and handling charges as well as sales, so the actual sales number for 2002-2003 was about $400,000 less than he was led to believe.

Other factors suggested by Board members as possibly contributing to poor sales included: 1) Unusually aggressive competition from discounters, 2) Customers going elsewhere after hearing that USCF was no longer doing the sales, 3) Inadequate marketing by ChessCafe.

On March 31, 2005 ChessCafe completed its first full outsourcing year, having paid commissions to USCF of $177,000. An additional $173,000 was apparently due to USCF for the first year of the guarantee. When the Executive Board met in May, Russell told them that ChessCafe already had a substantial loss even without the $173,000 payment due, and was not able to continue in business as USCF Sales unless the contract was renegotiated. He also said that he would cease making monthly payments until a new contract was signed, and offered to place such payments in escrow. However, if he had placed money in escrow, he could have subsequently prevented its release by not agreeing to a modified contract.

The withholding of the monthly commissions was intended to produce immediate Board action regarding renegotiation, but this tactic may have been counterproductive. Both the existing Board and the new one installed in August appeared supportive of renegotiating to help our partner stay in business under unexpectedly difficult circumstances, but the cessation of the monthly payments became the prime argument against continuing to do business with ChessCafe. Don Schultz, who was on both the new and old Boards, supported a substantial restructuring of the contract to assist ChessCafe until the monthly payments were halted, at which point he became strongly opposed to continuation of the ChessCafe contract. It should also be noted that ChessCafe was not technically in default of contract provisions because to produce default, USCF needed to give legal notice of default and await a 30 day cure period, and never gave such notice.

Negotiations with ChessCafe then took place for several months without agreement. In July the Board considered a proposal that resulted from talks between Beatriz Marinello and Hanon Russell, which according to an email sent to that Board by Bill Hall on 7/4/05, would have resulted in the following: 1) Minimum annual guarantee reduced to $250,000. 2) ChessCafe pays $73,000 towards first year to bring total paid up to $250,000. 3) ChessCafe retains tournament sales rights. 4) Commission is reduced to 10% on the first $2.5 million and 13% above that figure. 5) ChessCafe exercises their option to renew until 2012. Don Schultz argued that a decision should be left to the new Board, and the Board agreed.

Beatriz Marinello does not agree that the above paragraph accurately reflects the history of renegotiation by the previous Board, and feels that we lack sufficient information to reproduce the exact discussions and proposals that took place.

When the new Board was installed in August at Phoenix, we discussed a new offer from Russell which included a 10% commission, found it unacceptable, and based on our discussion, ED Bill Hall presented the Board with a memo listing suggested terms for a counter offer along with some negotiating instructions. My understanding was that I was to negotiate with Russell according to the terms and instructions of the Hall memo and that if a satisfactory agreement could not be reached within two weeks, Bill Hall would contact other vendors. Don Schultz and Joel Channing disagreed with my understanding of the situation, and felt that Hall was asked to immediately contact other vendors.

The Hall memo included these changes:
1. USCF to excuse half of ChessCafe's $173,000 debt for the first outsourcing year.
2. The commission on the first $2 million in sales to be lowered from 13.5% to 12%. The commission on sales over $2 million to remain at 15%.
3. ChessCafe, which under the existing contract had an option to renew for five more years (4/1/07 to 3/31/12), would be required to exercise that option.
4. The minimum annual guarantee after year one to be reduced from $350,000 to $150,000.
5. ChessCafe to give up all tournament sales rights effective 1/1/06; these rights will return to USCF which will offer them for bidding. (Note: We estimate that by bidding out these rights we will probably earn at least $60,000).

I presented an offer to Russell that was slightly more favorable to USCF than the minimum authorized by the Hall memo, and after he suggested changes and I did the same, we agreed to recommend to the Board an agreement modified in a way the Board had not anticipated. One change not requested by the Board that I asked for and Russell agreed to was to provide a personal guarantee of ChessCafe's annual minimum payment. The Board's reaction to this new proposal appeared negative. Meanwhile, some Board members urged Hall to contact other vendors and he did contact five major B & E retailers, saying that we might be taking bids and inviting them to make offers. Only one of these, Malcolm Pein, expressed interest in bidding to run USCF Sales overall, although several others were interested in tournament sales rights only.

Russell expressed disappointment that the Board seemed unwilling to accept the agreement he and I had discussed and was not making a counter proposal. He asked whether there was any Board offer which, if he accepted it, would resolve the matter. I replied by again presenting the original Board proposal based on the Hall memo, with Russell's personal guarantee added, and Russell agreed to these terms.

I thought the matter was settled, but those opposed to the agreement argued that we were not bound by our offer. A Board conference call was scheduled for September 18 to vote on the proposed agreement.

Arguments made for the agreement included:
A) Market conditions had changed, competition had become far more intense, the $2.8 million 2002-2003 USCF sales number bidders had relied on was not a realistic expectation, and it would be in our interest to help our outsourcing partner succeed.
B) We made an offer and we should stand behind it.
C) If we switched vendors, it was unclear how much we could collect from ChessCafe of the approximately $235,000 they appeared to owe us. Taking legal action against this corporation to collect might result in their bankruptcy. Also, it was too late to change vendors without severely impacting the holiday sales season.
D) When we switched from USCF to ChessCafe in April 2004, sales immediately collapsed even though USCF cooperated with the switch. A second switch from ChessCafe to a new vendor would likely result in ChessCafe retaining some of its customers, hurting USCF sales further.
E) The only other major vendor who seemed interested had a conflict of interest, running several other B & E sales operations which would compete with USCF.
F) Compelling ChessCafe to exercise its option to renew for five years (2007-2012) was favorable for USCF, as otherwise ChessCafe would likely renew if sales were good but try to negotiate a better deal if they were not.

Arguments made against the agreement included:
A) We should no longer deal with Russell because his withholding of payments was unethical. (All Board members agreed that the withholding of payments was improper, but some felt that we should go ahead with the agreement anyway. It was also argued that we knew he was withholding payments when we made our offer.)
B) We were not bound by our offer because Russell's withholding of payments was unethical.
C) We were not bound by our offer because Russell had rejected it. (It was disputed that he had rejected it).
D) Another vendor could promote sales more effectively.
E) We could switch vendors without significantly hurting sales.
F) The deal was unacceptable because Russell had offered a better deal to the previous Board which that Board did not accept.
G) Requiring ChessCafe to renew until 2012 was unfavorable for USCF because we don't want them to renew.

At the September 18 call, the following motion was introduced:
06-017 Bill Goichberg) The contract between USCF and ChessCafe shall be modified as follows:
1. ChessCafe relinquishes the rights to sell at all national tournaments after 12/31/05.
2. USCF accepts $86,500.00 from ChessCafe to settle all obligations between ChessCafe and USCF through March 31, 2005. The $86,500.00 shall be paid as follows: $43,250.00 upon the signing of the revised agreement and $43,250.00 within one year thereafter.
3. ChessCafe immediately pays commission fees to USCF for April, May, June, and July 2005 at 13.5%.
4. From August 1, 2005, the commission rates will be 12.0% on the first $2,000,000.00 and 15.0% on sales above $2,000,000.00.
5. ChessCafe may bid for the sales rights at tournaments run by USCF, or sell its products at tournaments not run by USCF. For tournaments run by USCF, the commission rate to be paid to USCF is to be negotiated. For tournaments not run by USCF, the commission rate to be paid to USCF will be 5%. All sales at tournaments are considered to be part of the overall sales referred to in #4.
6. Guarantee for all years of the contract after the first is reduced to $150,000.00.
7. ChessCafe exercise the option to extend the contract through March 31, 2012.
8. Contract subject to Tennessee Law.
9. ChessCafe will pay the legal fees incurred by the USCF connected with the revision of this agreement, provided that ChessCafe’s obligation shall be limited to $1,000.00 in such fees.
10. Hanon Russell will personally guarantee the $150,000.00 minimum annual payment for the duration of the contract. He will also provide a representation that his personal net worth is between $1.5 million and $2 million, and is willing to show Bill Goichberg or Bill Hall his personal financial statement (but not transmit a copy) on the condition that the USCF representative viewing the statement not reveal details to anyone, and only report to the Board their conclusion regarding his net worth.
11. Upon a Board vote in favor of this motion, ChessCafe shall send checks to Harry Sabine to hold on behalf of the USCF for the April through July 2005 payments and the first half of the $86,500.00 due. Harry Sabine will be authorized to release these funds to USCF upon the signing of the revised contract.
12. The Chesscafe sponsorship of the Grand Prix will for the present time not be extended for 2006. Future talks between USCF and ChessCafe are envisioned with the objective of continuing this sponsorship.

Robert Tanner was absent from this call. The motion failed on a 2-2 tie vote with Goichberg and Shahade in favor, Channing and Schultz opposed, and Marinello abstaining.

Joel Channing then moved a similar motion, but with the agreement expiring in May 2008.
06-018 (Joel Channing) The contract between USCF and ChessCafe shall be modified as follows:
1. ChessCafe relinquishes the rights to sell at all national tournaments after 12/31/05.
2. USCF accepts $86,500.00 from ChessCafe to settle all obligations between ChessCafe and USCF through March 31, 2005. The $86,500.00 shall be paid as follows: $43,250.00 upon the signing of the revised agreement and $43,250.00 within one year thereafter.
3. ChessCafe immediately pays commission fees to USCF for April, May, June, and July 2005 at 13.5%.
4. From August 1, 2005, the commission rates will be 12.0% on the first $2,000,000.00 and 15.0% on sales above $2,000,000.00.
5. ChessCafe may bid for the sales rights at tournaments run by USCF, or sell its products at tournaments not run by USCF. For tournaments run by USCF, the commission rate to be paid to USCF is to be negotiated. For tournaments not run by USCF, the commission rate to be paid to USCF will be 5%. All sales at tournaments are considered to be part of the overall sales referred to in #4.
6. Guarantee for all years of the contract after the first is reduced to $150,000.00.
7. The contract will be modified so the option date is May 31, 2008 and the decision will require the approval of both parties.
8. Contract subject to Tennessee Law.
9. ChessCafe will pay the legal fees incurred by the USCF connected with the revision of this agreement, provided that ChessCafe’s obligation shall be limited to $1,000.00 in such fees.
10. Hanon Russell will personally guarantee the $150,000.00 minimum annual payment for the duration of the contract. He will also provide a representation that his personal net worth is between $1.5 million and $2 million, and is willing to show Bill Goichberg or Bill Hall his personal financial statement (but not transmit a copy) on the condition that the USCF representative viewing the statement not reveal details to anyone, and only report to the Board their conclusion regarding his net worth.
11. Upon a Board vote in favor of this motion, ChessCafe shall send checks to Harry Sabine to hold on behalf of the USCF for the April through July 2005 payments and the first half of the $86,500.00 due. Harry Sabine will be authorized to release these funds to USCF upon the signing of the revised contract.
12. The Chesscafe sponsorship of the Grand Prix will for the present time not be extended for 2006. Future talks between USCF and ChessCafe are envisioned with the objective of continuing this sponsorship.
13. USCF reserves the right to not agree to the revised contract if we find the audit to be unsatisfactory.

This passed 4-1, with Channing, Goichberg, Marinello and Shahade in favor and Schultz opposed. However, Russell found the terms unacceptable, saying that he had agreed to the Board's offer which included 2012 rather than 2008.

Several weeks of further Board discussion followed. Pein submitted a bid but then withdrew, and another conference call was scheduled for Oct 8. I thought the motion that had ended in a tie vote on Sept 18 would now pass easily. However, a few hours before our call, we received an improved proposal from Pein with the same guarantee as ChessCafe but a slightly larger percentage. This proposal, a 3 year agreement, called for USCF to receive the same commission as the ChessCafe agreement with up to $1.167 million in sales, and annually $12,500 more on $1.25 million, $20,000 more on $1.5 million, $27,500 more on $1.75 million, and $35,000 more on $2 million or more.

This new proposal also attempted to address the conflict of interest issue by offering USCF a commission on any increase in sales by Chess4Less, a competing business owned by Pein. This appeared to satisfy some Board members, but I remained concerned about the conflict of interest issue, and believe that it should be a requirement for our outsourcing partner to fold all existing retail B & E business into USCF Sales and to represent USCF only.

At the Oct 8 conference call, the ChessCafe motion was on the agenda and Channing moved to substitute a motion to consider the Pein proposal instead. This failed on a 3-3 tie vote with Channing, Marinello and Schultz in favor and Goichberg, Shahade and Tanner opposed. The ChessCafe motion then was voted on and failed to pass 2-3 with Goichberg and Tanner in favor, Channing, Shahade and Schultz opposed, and Marinello abstaining. After some discussion, Channing broke the deadlock by moving to accept the ChessCafe motion with some changes: 1) USCF would send a CPA to audit ChessCafe's records and the audit would have to be acceptable, 2) In the event of default by ChessCafe, the 30 day default period and cure period would be reduced to 15 days, 3) The contract would be extended to 2009, with automatic further extension to 2012 if all of ChessCafe's payments were timely. This motion passed 5-1 with Schultz opposed.

Hanon Russell, though objecting that the Board having already made an agreement should not ask for new conditions, accepted the changes. Grant Perks was sent to Connecticut to do the ChessCafe audit and reported that everything seemed in order. Grant also pointed out that USCF's sales records included shipping and handling charges as part of gross sales. This seems an odd practice, and one I was unaware of; I inadvertantly had probably caused all the bidders in 2004 to overbid by reporting the numbers to them as being simply sales.

An addendum to the existing contract was then prepared by the attorneys for each side. Channing favored allowing USCF to cancel the extension from 2009 to 2012 on any late payment by ChessCafe with no cure period, and opposed the agreement because a cure period still applied.

The final version was approved by the Board on November 21 by a vote of 4-2 with Schultz and Channing opposed.

Don Schultz and Joel Channing have has submitted the following statements, which I believe well explain the thinking of Board members in opposing, or being reluctant to approve, the ChessCafe agreement.

STATEMENT BY DON SCHULTZ:
I understand and respect the reasons why my fellow Board members decided to go with a revised B and E contract with Chess Cafe. Nevertheless, I must point out why I disagreed with and argued so vehemently against that decision.

Chess Cafe withheld payments to us for approximately a quarter of a million dollars. It was clear to me this was done to intimidate us into agreeing to a revised contract more favorable to them. I believe we acted under duress. I also believe that there was a reasonable alternative on the table submitted by Malcolm Pein. I further am concerned over Chess Cafe's ability to expand our B and E business to its full potential.

Having said that, I hope everything works out well and wish our partner success.

STATEMENT BY JOEL CHANNING:
I have mixed emotions about the outcome of the ChessCafe matter, but I do believe that the Board members acted in good faith throughout the lengthy and sometimes heated debate. Due to the lack of a substantive guarantee, the original agreement was flawed from the start, which, in turn, allowed the subcontractor to create leverage against us by withholding payments. USCF, including this and the previous Board, might not have acted as quickly and decisively as it could have, thus allowing the leverage of the subcontractor to grow. I disagree with much of the rationale contained in the above-presented Board statement, but, overall, it is a correct presentation of the chronology and actions taken to settle the matter.