Gambling News by Gambling Headquarters

One of the big losers in the U.S. crackdown on Internet gambling has been
Burnaby-based ESI Entertainment Systems Inc. ESI doesn't operate any
gambling websites, but it provides support services and products for
gambling operators and bettors through three subsidiaries: Citadel Commerce
Corp., which provides payment processing services to the online gambling
industry. ESI Integrity Inc., which sells real time audit, fraud and
risk-management software to government lotteries and parimutuel
organizations. PlayLine Inc., which markets turnkey gambling systems to
land-based gaming venues such as casinos, pubs and cruise ships.
The company went public last March, selling 3.33 million shares for $3 each,
for gross proceeds of $10 million. The offering was sold on a best efforts
basis by Desjardins Securities, CIBC World Markets, Canaccord Capital, and
GMP Securities.Initially, it looked like a great business to be in. Revenues
for the year ending February 2006 rose 70 per cent to $18.5 million, and net
earnings jumped by 30 per cent to $1.3 million. The company's workforce
would soon peak at 160 employees, nearly all in Burnaby. "These results
truly demonstrate the strength of ESI's business model," trumpeted chairman
and CEO Tony Greening. But there was serious flaw in the model. Nearly 80
per cent of the company's business was generated by Citadel Commerce, which
runs electronic payment processing accounts for more than 625,000 customers,
nearly all of whom live in the United States. These customers, in turn, had
accounts with Internet gambling companies such as Bodog.com, owned by
part-time Vancouver resident Calvin Ayre. These gambling companies paid
Citadel a fee for every financial transaction those customers made with
them, whether it was a credit or a debit. As a result, the majority of ESI's
revenues were being derived from online gambling by U.S. customers. The
problem was that the U.S. Justice Department has always viewed Internet
gambling as an unlawful activity. In July, they drove the point home by
arresting David Carruthers, a senior officer of London-based BetOnSports
PLC, at the Ft. Worth, Tex., airport on racketeering charges.

Still, all seemed well in Burnaby. In September, Deloitte & Touche ranked
ESI the 26th fastest-growing technology company in Canada. The same month,
Citadel acquired at auction 30 baseballs signed by controversial baseball
star Pete Rose with the message, "I'm sorry I bet on baseball." The idea was
to give the balls to customers as an incentive to open accounts.

A few days later, there was a sobering development. The U.S. Congress passed
the Unlawful Internet Gambling Enforcement Act, which specifically
prohibited financial intermediaries like Citadel from processing online
gambling transactions.

Initially, ESI executives took a wait-and-see approach. "At this time, we
are evaluating the negative impact of this new legislation on our
activities," said president Michael Meeks.

On Jan. 15, the company reported good results. Revenues for the nine months
ending Nov. 30 were up 35 per cent to $17.5 million, and gross profit had
soared by 81 per cent to $11 million.

However, it was becoming clear that Citadel's business model would be
seriously squeezed by the Unlawful Internet Gambling Enforcement Act, so the
company wrote down just over $6 million in assets, resulting in a net loss
of $4.5 million. The company also announced it would lay off 22 employees,
saving $1 million in annual staffing costs.

The appropriateness of these moves was confirmed two days later, when the
U.S. Justice Department announced that FBI agents had arrested John Lefebvre
and Stephen Lawrence, co-founders of London-based electronic payment
processor NETeller Inc., for conspiring to promote illegal gambling.

Lefebvre and Lawrence are both Canadian citizens. Lefebvre, in particular,
is a part-time resident of Saltspring Island, which no doubt helped drive
home the point to ESI's officers and directors.

The same day the arrests were announced, ESI announced that, in view of the
arrests, Citadel would no longer offer financial processing to foreign
Internet gambling merchants for U.S. consumers.

"This decision will have a material impact on the financial condition of the
company as a substantial part of its revenues was derived from non-domestic
Internet gaming merchants for USA consumers," the company warned.

Last week, ESI announced it had reduced its workforce by another 35 per cent
to 80 people, and had taken other measures that would save $5 million per
year.

"With these changes completed," said Greening, "we are now able to focus our
cash reserves on our growing market opportunities in Europe and are better
positioned to execute our international payment solution strategy."

All this has had an extremely deleterious effect on ESI's stock price. It
has slumped from its $3 initial offering price to 58 cents on the Toronto
Stock Exchange, proving once again you don't mess with Uncle Sam.