Briand, It's amazing how they twist the truth :< Here's the ISN for those that may have missed it...Have a good night, and thanks...Gator
>>
INTERNET STOCK NEWS? August 30, 1999
Insight For The Intelligent Internet Investor
As many may be aware, Starnet Communications International, Inc. was
recently raided by the Canadian police due to allegations of solicitation
of adult entertainment and gaming from their Canadian headquarters. Many
company personnel were prevented from entering their offices until the
following Monday as the Canadian police confiscated some computers and
other records.
Although some of Starnet?s web sites were sporadically unavailable as
authorities requested down time for investigation, Starnet stated that, at
no time, was service completely disrupted, as their servers are located
offshore in Antigua. The company was completely restored to normal
operations the following Monday (August 23) as no charges were filed.
Although Starnet has been extremely busy due to this situation, their CEO,
Mark Dohlen, took some time out for an exclusive interview with our senior
editor, Ted Kunzog on Wednesday. Ted?s questions are indicated by ?ISN?
and Mr. Dohlen?s responses by ?SNMM.? Enjoy!
ISN: Mark, we are extremely sorry for the unfortunate events your company
has gone through in recent days. I know many of our subscribers feel the
same way. Is there anything at all you would like to say to Internet Stock
News subscribers?
SNMM: We appreciate their continued support through this unfortunate
situation and we want to give our assurances that we are continuing to
execute our business plan and have every intention and full expectation to
continue on and build the business as we have always planned to.
ISN: What do you expect in terms of charges resulting from your recent
raid?
SNMM: We do not expect any charges to be relayed to the company as a result
of these recent investigations. If, at worst, any charges are laid, they
would be against some of the senior officers and directors of Starnet for
an accused violation of section 202 of the Canadian Criminal code that
relates
to bookmaking (sports betting) activities. Based on information that is
coming through the press, it will take the authorities several months or
longer to complete their investigation, before they can come up with any
charges, if any. We feel that any bookmaking charges that result will
relate to activities long in the past of Starnet.
ISN: In terms of these charges that might be laid, what is the worst-case
scenario we might be looking at?
SNMM: There are a couple of subsections in the criminal code under 202 that
they are looking at. Our feedback has been that typically a first offense
under this section is a $200 fine. There are obviously a few factors that
go into sentencing in our case if we were found guilty: we operated openly,
we were in a gray area at worst, that we were cooperative, but on the other
side we do things in great magnitude here. We expect at worst for it to be
a small fine.
ISN: Starnet was reportedly under investigation for the last 18 months.
Was management aware that this investigation was going on?
SNMM: No sir, we were not aware that this investigation was going on. If
w were, we would have called them up and invited them in.
ISN: Were you aware that a raid was imminent?
SNMM: No.
ISN: What do you think were the motivations behind the raid?
SNMM: I think that there was some uncertainty with the nature of how we
operated our business here. It is unfortunate; we have always had an open
door policy and been very above board about what it is we are doing. I
think that there was some uncertainty that in this case may have caused
suspicion. We have been a high profile company with some success,
unfortunately whether some people hold that against you, I don?t know. I
guess that because of the highly technical and new industry that we are in
here, we?ve established a certain kind of business model and made certain
assumptions, and it was hard either for the authorities to understand or
confirm those assumptions. I think that is what they are going through
right now and I feel very comfortable that they?ll come away and say, ?You
guys are okay.?
ISN: How much would you expect this raid to reduce your company?s quarterly
results in US dollar terms?
SNMM: We are going to see some unbudgeted costs as it relates to the
cleanup and getting our business back in order after this disruption.
Obviously we are going to be incurring additional legal and public
relations fees. Nothing really substantial, but they?ll be something
around two hundred thousand dollars, I?m sure. Unfortunately, we will
probably see a short-term negative impact on new licensee sign-ups because
of some of the current uncertainty. We do feel comfortable with our work
in progress; our
licensee program is far ahead of meeting our sales objectives. We are
going to spend the next month or so focusing back in house and ramping up
our activities here while we let things cool down a bit in the community.
We?ve got to remain very vocal and get our message out. There will be a
minor impact on our results with some expense increases as well as a
short-term negative impact on the sale of new licensees. We don?t expect
any impact on our ongoing licensee revenue, as our licensees are still
there and in
business. It seems that this has received much more attention from the
financial community than the online gaming community as we continue to
operate an excellent system.
ISN: Do you anticipate any changes in Starnet?s operations as a result of
the raid?
SNMM: We already have about 40 people employed in Antigua, and we have
been growing rapidly both in Vancouver and in Antigua. Some of the growth
will be in Antigua as we continue to ramp up operational activities. We do
development in Vancouver and operational activities in Antigua and, as our
business was to grow with the increase in licensees and users, there was a
planned growth in this operational infrastructure. In fact, there really
hasn?t been a movement of things; it will be an expansion of our activities
in Antigua that has been coming on stream for several months now. This is
simply related to the growth in our business. Quite frankly, nothing has
changed around here, or very little.
ISN: There was one report in the media I saw that discussed insider stock
sales prior to the raid.
SNMM: No, I have no knowledge of insider stock trades other than normal
course employee options, and that would be anyone from the customer service
group. So we?re not aware of any insider trading prior to the raid.
ISN: Ignoring your licensees, can any US or Canadian citizen place a wager
on a Starnet gambling site?
SNMM: We from day one have stated that any of Starnet?s wholly owned
subsidiary World Gaming Services will not knowingly accept a wager from any
US or Canadian resident. We have taken reasonable measures to ensure that
we do not. We then have started another company called Softek Systems,
which is our licensing entity. We have a license in Antigua that makes it
legal for us to accept a wager from anywhere in the world. We have set the
restriction on not accepting wagers from the US and Canada on our own
simply because we feel that this is a gray area, and that accepting wagers
from the US and Canada could put us at some exposure.
The biggest part of our business now is licensing our technology to
independent gaming operators and one of the first requirements you must
have to become a licensee is to have a valid gaming license. Since we are
not authorities in any of this we do not put restrictions on what are legal
activities in the jurisdiction in which they are conducted. In other
words, we have a licensee that operates out of Antigua, and we provide him
with a system. Within his license in Antigua he is doing everything
legally that he is required to do, and if he chooses to accept a wager from
the U.S. we do not restrict that. The Antiguan government says that these
guys are legal doing what they?re doing, and that we?re (Starnet) a
supplier to them, like VISA, AT&T, or CompuServe, and that these activities
that are being conducted are not violating any regulations or laws.
We have a legal opinion from a Nevada attorney stating that because of the
way Starnet?s business and licensing model is structured; we are not in
violation of any U.S. laws. We don?t ask for legal opinions from our
licensees because that is a responsibility of the authorities and the
authorities we are concerned about in this case is Antigua and that?s where
we operate from. You can place a bet with some Starnet licensees through
their business from the U.S. but Starnet themselves is not in violation of
any laws by them doing so.
It actually came up in the information used for the search warrant that
said that the police had gone in and played with this one guy, then played
with the next guy, then played with a third guy, and at the end of every
session they said they went in to World Gaming and were denied access.
ISN: Do you expect the investigation to impact your pending NASDAQ
registration, and can you give us an update on that at all?
SNMM: All that we have been told by the authorities here in British
Columbia is that there were authorities from the US involved because of the
technical complexity of the business. Neither the SEC or the NASD has
contacted us, and quite frankly we?ve been too busy with business around
here to call them. We realize that the normal thing for them to do would
be to take a look and see what happens here in the near term and see if we
can get some stability in the market, because our business and our balance
sheet have not changed here from last week to this week. We have seen a
drop in our share price, which obviously is unfortunate, but whether the
NASD will be hesitant to deal with us while there is an ongoing
investigation or not we don?t know. Our business is our business and that
has been the key of our focus at this time. We will be in contact with the
NASD here shortly to give them our side of the story and let them know
what?s going on.
ISN: Could you update us on the sale of Starnet?s adult entertainment
division? When the sale might be expected and how much might be received
for the sale?
SNMM: This is a divesture that had always been in the business plan for us
as it is now a small part of our ongoing revenues and not the key focus of
our attention for over two years now. We decided on the divestiture based
on our desire to make further inroads in our gaming business and to
distance ourselves from the nature of that previous business and because we
make a better return on gaming activities. The raid was not the catalyst in
the announcement of the sale of the adult entertainment division; it was
something we had chosen to do the week prior, irrespective of those events
on Friday. We expect that we could generate proceeds of up to $10 million
on this sale. We?re really trying to get all of our potential purchasers
identified, we have several, quite a few actually, and once we get them all
in place we want to go with what we call almost an auction process so we
can sell to whoever is prepare to pay the highest amount. I?d hope that
we?d get up to $10 million for it, and that would come in the form of some
cash
and some kind of note paid out over a year or two, whatever those terms may
be. It has been an asset that has not appeared on our balance sheet, but
we have enjoyed the revenues from it. In our last quarter I think it was
getting down to about 12 or 14 percent of our revenues, so we?re not going
to see a significant drop in revenues from that, we?re going to more than
mke up for that with our growth of the gaming business, but it will be nice
to see that asset on the balance sheet.
ISN: Mark, thanks so much for your time and candor in speaking with me
today. I wish you all the luck in the world and I know many of our
subscribers feel the same way.
About Internet Stock News:
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published by IP Equity, Inc., an Internet venture consulting firm. IP
Equity, Inc. has been compensated with cash and stock options of Starnet
Communications International, Inc. totaling less than six hundred thousand
dollars at the time of engagement for providing consulting services to the
company. IP Equity has not been compensated, in any manner, for providing
or for distributing this exclusive Internet Stock News? interview. IP
Equity and its consultants, directors, and employees are not believed to
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