Former C.E.O. Takes Activist Position in Crypto

18 December 2008

Javaid Aziz, the former chief executive of CryptoLogic Ltd., has taken a 9.8 percent activist ownership position in CryptoLogic on concern over the company's current strategic direction and deteriorating financial position.

"I am, along with many other shareholders, very concerned about the strategic and financial management of Cryptologic," Mr. Aziz wrote in a Dec. 4 letter to Robert H. Stikeman, the company's chairman.

"The quarter on quarter downward trend in revenue, the upward and unpredictable trend in controllable expenses, ever increasing losses, decreasing free cash in the bank and the cataclysmic fall in the share price since May 2008 of 90% is very perturbing," said the letter, which was included in a filing with the United States Securities and Exchange Commission Tuesday.

The Dublin company -- which recently took the decision to focus on its casino software products, exclusively, and migrate its poker licensees to Gtech Corporation's International Poker Network -- booked a $5.88 million loss on its third-quarter results in November.

In the nine months ending Sept. 30, 2008, CryptoLogic said total revenue fell 5.9 percent to $50.2 million compared to the same period in 2007. Casino income dropped 11.4 percent while poker fell 33 percent versus the previous-year period.

On the Nasdaq, CryptoLogic has lost 86.4 percent in the year to date, 83.4 percent on the Toronto Stock Exchange and 82.4 percent on the London Stock Exchange.

Among a number of Mr. Aziz's recommendations in his correspondence with Mr. Stikeman were to cut staff numbers to between 150 and 200; reduce compensation for senior management by half; de-list from the Toronto Stock Exchange and the London Stock Exchange; cancel the dividend; consider closing the Dublin office in favor of relocating to Cyprus; and the immediate write-off of failed investments.

On the third-quarter earnings call in November, Mr. Hadfield indicated that CryptoLogic's workforce -- estimated then at approximately 300 -- had been reduced by 10 percent.

"I have to be convinced that all the necessary actions are being taken in a timely way and to the desired intensity and that those doing so are not tied to any past legacy or decisions made and that they are prepared to dismantle and downsize the business appropriately and with speed," Mr. Aziz wrote. "There is no time for traditional timelines or protocols!"

With his shareholding, Mr. Aziz is seeking two seats on the CryptoLogic board, one of which he intends for himself -- a request, he added, that was "not for negotiation." In an effort to conserve costs, he has requested that two existing board members, Thomas Byrne and Wai Ming Yap, step down.

No announcement regarding the board shuffle has been released to the S.E.C. or the London Stock Exchange, and CryptoLogic's chief executive, Brian H. Hadfield, could not be reached for comment by press time Thursday.

Todd Eilers, an analyst with Roth Capital Partners in California, said in a research note that Mr. Aziz's activist stake should "provide a sense of urgency in terms of the company's restructuring efforts" and come as a "positive event for shareholders."

More on this story as it develops.

Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.