Originally published on October 1, 2001
The Toronto Star
By Dana Flavelle
Former Starnet Michael (‘Mike’) Aymong hires ‘tier one’ executives to put distance between software maker and troubled past
Wanted: A reputable Canadian business executive to run a struggling Internet gambling firm faced with multi-million-dollar lawsuits, an RCMP probe, stagnant sales and dwindling cash reserves.
That was the unusual pitch Starnet Communications Inc. made to Michael (‘Mike’) Aymong when the beleaguered gaming software maker went shopping for its fourth chief executive officer in as many years.
“It was the strangest job interview I’ve ever had,” Aymong recalled in a recent interview.
Toronto-born Aymong, 37, had spent most of his career in the telecommunications sector, most recently as executive vice- president of GT Group Telecom Inc.
The son of a food industry executive, he had attended private school and earned his M.B.A. degree from one of Canada’s prominent business schools, the University of Western Ontario.
When Starnet asked Aymong if he wanted the job, he took the bait.
How much harder could it be than tackling Bell Canada on its own turf, Aymong asked himself at the time. His employer, Group Telecom, was one of the few companies that challenged Bell and survived after regulators opened up Canada’s $24.4 billion local telecommunications market to competitors.
Group Telecom had grown to nearly 1,000 employees and annual revenues of $73.2 million by the time Aymong departed, though it had hefty losses that have since widened along with the rest of the telecom sector.
Despite Starnet’s problems, the Internet gaming industry clearly offered better prospects. The global market for online gambling is an estimated $177 billion (U.S.), and the business is hugely profitable.
While other online ventures have burned through billions of dollars and then tanked, Internet gambling software providers like Toronto-based CryptoLogic Inc. run profit margins in the 40 per cent to 50 per cent range.
Starnet, which was recently renamed World Gaming PLC, isn’t currently among them. The company reported last week that it lost $16.8 million, or 52 cents a share, on sales of $20.2 million for the year ended April 30. (All figures are in U.S. dollars.)
Most of the loss was related to one-time charges for restructuring, bad debts and settlement of outstanding legal issues, paving the way for an improved performance in the future, the company’s new chief financial officer Rodney Davis noted.
Meanwhile, Starnet’s shares, which trade on the Nasdaq over-the- counter bulletin board in New York, have fallen to 50 cents apiece from a high of $25 in July, 1999.
Still, with the right management, policies and procedures in place, Aymong figures, World Gaming could catch up and possibly even leapfrog over its competitors.
It would, however, require starting with a clean slate. Again.
Founded in 1995 in Vancouver, Starnet was one of the first companies to exploit the newly commercialized Internet. Its principal business originally was euphemistically called “adult entertainment.”
Its three sites included a gay site and a site featuring one-on- one interaction with women, according to the prospectus the company filed with the U.S. Securities and Exchange Commission in June, 1997, in support of its application for a Nasdaq listing.
When reminded of Starnet’s history in the pornography business, Aymong winces. “Please don’t write that. My mother might read it,” he says.
Starnet also had interests in the online gaming business through a subsidiary called World Gaming.
In financial terms, Starnet was wildly successful. The company enjoyed sales, based mainly on monthly subscriptions, of $1.3 million in the nine months ended Jan., 31, 1997 a 760 per cent increase over the year-earlier period, according to the documents filed with U.S. securities regulators.
By July, 1999, the company had begun developing more aggressively its online gambling business. Sales had grown to $9.8 million and the company reported profits of $2 million. Its share price soared to $25.
What could go wrong?
A month later, the RCMP conducted a raid on the company’s offices and on several homes of executives and directors, based on allegations that Starnet was engaged in illegal gambling and pornographic activities. One employee, who told investigators he was in possession of child pornography, was immediately fired.
The police probe didn’t immediately lead to the laying of any particular charges, but it caused Starnet’s share price to plummet, sparking a class-action lawsuit by U.S. investors. For more than two years, the case distracted the company’s management while the legal issues were sorted out.
In October, 1999, the company named its lawyer, Meldon Ellis, as chief executive officer. During his brief tenure, the company sold off its adult entertainment division, installed a new management team and introduced new software. A year later, Ellis bowed out.
The company’s chairman, Fred Hazell, stepped in as interim chief executive until Aymong came on board April 10 this year.
In retrospect, Aymong says, a lot of Starnet’s problems were typical of a dot-com start-up: inexperienced managers, bad decision- making, compounded by fuzzy laws governing the online gambling business.
In the end, the RCMP laid just one charge under a section of the Canadian Criminal Code that makes it an offence to own or operate a device that permits gambling. In Starnet’s case, that meant the powerful computer servers housed in its Vancouver offices.
World Gaming has since taken the same steps other Canadian Internet gambling firms have done to avoid prosecution: It has moved all its servers to an offshore jurisdiction where online gambling is permitted, namely Antigua.
Like other Canadian firms, the company doesn’t run any gambling sites directly. Rather, it sells “turnkey” gambling solutions everything from the software to the payment systems, plus Web hosting to third parties who operate the sites themselves.
Since joining World Gaming, Aymong has remade the executive team and attracted what he calls “tier one” advisers and suppliers, including IBM Corp., Bay Steet law firm McCarthy Tetrault and public relations firm Goodman Communications Inc.
His new chief financial officer, Rodney Davis, is a KPMG-trained accountant with a background in mergers, acquisitions and corporate financing. Davis was most recently CFO at MGI Corp., a visual media software supplier.
The new chief operating officer, David Pasieka, came from 724 Solutions Inc., where he was COO of Canada’s leading wireless banking service provider.
Since Mike Aymong’s arrival, World Gaming has also settled the U.S. class-action lawsuit, agreeing to pay out a minimum of $1.05 million in shares to disgruntled shareholders.
As well, the company pleaded guilty to a single charge in the RCMP investigation and paid a fine of $100,000, along with the standard victim surcharge of $15,000. The company forfeited $3.9 million in assets frozen since the raid, but it recouped another $3.6 million in frozen assets.
Not a bad start, but the company still has a long way to go.
Companies like CryptoLogic and Boss Media, based in Sweden, have clearly leapfrogged past Starnet while it was preoccupied with its problems.
During last week’s conference call after releasing its financial results. World Gaming’s investors were clearly worried the company wasn’t doing enough to catch up.
But Michael Aymong said he’s confident the company not only can catch up but also surpass its competitors.
John Dutton, the only analyst currently following the company, rates it a “speculative buy” for aggressive investors, in other words, a fairly big gamble.
Dutton is bullish on Aymong, whom he describes as a strong leader who’s very marketing-oriented.
The company’s licensees, Dutton also notes, have remained surprisingly loyal through all of its troubles.