SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
COMMISSION FILE NUMBER: 0-29290
STARNET COMMUNICATIONS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware E.I.N. 52-2027313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
The CIBC Banking Centre
Old Parham Road
P.O. Box 3265
St. John's, Antigua, West Indies
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (268) 480-1650
Former address, if changed since last report:
Starnet Place
Newgate Street
P.O. Box 1589
St. John's, Antigua, West Indies
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of September 11, 2000, there were 32,193,181 shares of the registrant's
Class A Voting Common Stock outstanding.
Unless noted otherwise, all amounts contained in this report are in United
States dollars.
Some of the information in this report contains forward-looking statements
that involve substantial risks and uncertainties. Any statement in this
report and in the documents incorporated by reference into this report that
is not a statement of an historical fact constitutes a forward-looking
statement. Further, when we use the words "may", "expect", "anticipate",
"plan", "believe", "seek", "estimate" and similar words, we intend to
identify statements and expressions that may be forward-looking statements.
We believe it is important to communicate certain of our expectations to
our investors. Forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions that could
cause Starnet's future results to differ materially from those expressed in
any forward-looking statements. Many factors are beyond our ability to
control or predict. You are accordingly cautioned not to place undue
reliance on such forward-looking statements. We have no obligation or
intent to update publicly any forward-looking statements whether in
response to new information, future events or otherwise. You should be
aware that the occurrence or non-occurrence of any of the events described
in this report could have a material adverse effect on our business,
financial condition and results of operation.
-2-
PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Starnet Communications International Inc.
Consolidated Balance Sheets
As at July 31, 2000 and April 30, 2000
(in thousands of US dollars)
July 31 April 30
2000 2000
- ------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 3,235 5,984
Reserves and deposits with credit card processors 4,072 3,857
Accounts receivable 2,235 2,022
Prepaid expenses and deposits 644 616
Current portion of long-term receivable 38 514
Other current assets 1,042 1,349
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TOTAL CURRENT ASSETS 11,266 14,342
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Restricted cash 7,276 7,234
Capital assets (net) 5,958 4,868
Long-term receivable 1,537 1,539
- ------------------------------------------------------------------------------------------
26,037 27,983
- ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 4,332 5,223
Funds held on deposit 1,890 2,118
Deferred revenue 372 287
Loan payable 500 0
Current portion of capital lease obligations 585 476
- ------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,679 8,104
- ------------------------------------------------------------------------------------------
Non-current portion of capital lease obligations 727 503
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,406 8,607
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 22,205 22,143
Subscription receivable (299) (381)
Retained earnings (deficit) (4,193) (2,371)
Accumulated other comprehensive loss (82) (15)
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 17,631 19,376
- ------------------------------------------------------------------------------------------
26,037 27,983
- ------------------------------------------------------------------------------------------
-3-
Starnet Communications International Inc.
Consolidated Statements of Operations
For the Periods Ending July 31
(in thousands of US dollars except per share information)
(Unaudited)
Three Months Ended
July 31
2000 1999
- ------------------------------------------------------------------------------------------
REVENUE
Sales
Royalties and fees 3,624 2,365
Licensing 405 1,250
- ------------------------------------------------------------------------------------------
Total sales 4,029 3,615
Cost of sales 1,296 866
- ------------------------------------------------------------------------------------------
GROSS PROFIT 2,733 2,749
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EXPENSES
Sales 120 168
Marketing 755 244
Development 846 367
Operations 1,080 359
General and administrative 1,214 643
Provision for bad debts 0 250
Legal 73 37
Depreciation and amortization 553 268
- ------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,641 2,336
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Income (loss) from operations (1,908) 413
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Other income (expenses) 86 29
- ------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,822) 442
- ------------------------------------------------------------------------------------------
Income tax expense (recovery)
current 0 0
deferred 0 0
- ------------------------------------------------------------------------------------------
INCOME TAXES 0 0
- ------------------------------------------------------------------------------------------
Income (loss) from continuing operations (1,822) 442
Income (loss) from discontinued operations of the on-line
interactive media division (less applicable income taxes) 0 171
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD (1,822) 613
Retained earnings (deficit), beginning of period (2,371) 884
- ------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD (4,193) 1,497
- ------------------------------------------------------------------------------------------
Basic earnings (loss) per share from continuing operations $ (0.06) $ 0.02
Basic earnings (loss) per share $ (0.06) $ 0.02
Weighted average number of common shares
outstanding 32,094,150 27,639,450
Diluted earnings per share from continuing operations n/a $ 0.01
Diluted earnings per share n/a $ 0.02
Weighted average number of common shares
outstanding for diluted earnings per share n/a 33,103,494
-4-
Starnet Communications International Inc.
Consolidated Statements of Cash Flows
For the Periods Ending July 31
(in thousands of US dollars)
(Unaudited)
Three Months Ended
July 31
2000 1999
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (1,822) 613
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 553 262
Amortization of deferred website costs 0 36
Amortization of software development costs 0 69
Changes in current assets and liabilities:
Decrease (increase) in reserves and deposits
with credit card processors (215) (55)
Decrease (increase) in accounts receivable (132) (2,106)
Decrease (increase) in prepaid expenses and deposits (28) (171)
Decrease (increase) in other assets 306 (735)
Increase (decrease) in accounts payable
and accrued liabilities (891) 620
Increase in income taxes payable 0 44
Increase (decrease) in funds held on deposit (227) 436
Increase (decrease) in deferred revenue 85 (6)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,371) (993)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (1,181) (528)
Transfer to restricted cash (42) 0
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,223) (528)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments received on long-term receivable 471 0
Proceeds from loan 500 0
Proceeds from issuance of shares 62 8,893
Principal repayments under capital lease obligations (148) (151)
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 885 8,742
- ------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (40) 63
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD (2,749) 7,284
Cash, beginning of period 5,984 5,866
- ------------------------------------------------------------------------------------------
CASH, END OF PERIOD 3,235 13,150
- ------------------------------------------------------------------------------------------
OTHER NON-CASH TRANSACTIONS
Leased assets acquired 487 282
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 17 10
Income tax paid 0 0
-5-
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT JULY 31, 2000
1. Condensed Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at July 31 and
April 30, 2000, and results of operations and cash flows for the
periods ended July 31, 2000 and 1999, have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 2000 audited
consolidated financial statements. The results for operations for
periods ended July 31, 2000 and 1999 are not necessarily indicative of
the operating results for the full years.
2. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the
adjustments which, in the opinion of management, are necessary for a
fair presentation. Such adjustments are of a normal recurring nature.
3. General
Restricted Cash refers to funds in the Company's bank accounts frozen
pursuant to a Restraint Order in Canada, and collateral for leases and
letters of credit.
Other Current Assets consist primarily of gaming licenses from the
government of Antigua held for resale to licensees.
4. Loan Payable
The Company has entered into an agreement to borrow up to $1.5
million, of which it has received $0.5 million at July 31, 2000.
Interest is payable monthly at a rate of 8% per annum. The loan may
be satisfied by converting the loan amount to common stock of the
Company as part of a private placement along with other third-party
investors at the same terms and conditions as those other third-party
investors.
-6-
5. Discontinued Operations
Income (loss) from discontinued operations refers to the on-line
interactive media division which was disposed of in March 2000. The
receivable related to the proceeds of sale is included in long-term
receivable.
6. Contingencies and Commitments
On September 16, 1999, Las Vegas Casino Inc. ("LVC") commenced an
action against the Company, a number of its subsidiaries and various
employees of the Company and its subsidiaries. LVC, a former software
licensee of the Company's subsidiary, Starnet Systems, alleges a $1
billion loss arising from alleged misappropriation of funds, and
breach and wrongful termination of its software license agreement.
Starnet Systems terminated the software license agreement with LVC on
July 22, 1999 as a result of LVC's failure to pay over $200,000 in
fees owed to Starnet Systems. On July 12, 2000, the Supreme Court of
British Columbia granted a stay of the lawsuit as against Starnet
Systems only. Should LVC wish to proceed with its claim against
Starnet Systems, it must do so through the arbitration process
provided for in the software license agreement. LVC has not yet taken
any steps to do so. The Company believes that LVC's allegations are
without merit and intends to defend LVC's lawsuit and to contest
arbitration proceedings vigorously. As this matter is at a
preliminary stage, its financial impact, if any, cannot be determined
at this time, although management is of the opinion that it will not
result in any significant losses to the Company.
On August 20, 1999, the Royal Canadian Mounted Police ("RCMP")
obtained a search warrant and searched the Vancouver, British Columbia
offices of the Company's subsidiary, Starnet Communications Canada
Inc. The basis for the search was the allegation of the RCMP that the
Company and some of its officers, directors and employees were
breaching certain gaming provisions contained in the Criminal Code of
Canada.
On August 25, 1999, the RCMP obtained an ex parte restraint order
pursuant to the provisions of the Criminal Code of Canada. This order
prevents the Company and Starnet Systems International Inc. from
accessing funds located in their Canadian bank accounts. The amount of
money in these accounts is approximately $7,188,000. In September
1999, the Company brought an application to have the restraint order
revoked. This application was unsuccessful.
On February 24, 2000, the RCMP applied to the Supreme Court of British
Columbia to continue the restraint order for a further 12 months. On
the same day, the Company brought an application to have the restraint
order vacated. The application to continue the restraint order was
granted but only for a further six months. The application to vacate
the restraint order was adjourned until such time as all issues
relating to privileged documents had been dealt with.
A further application filed by the RCMP on August 14, 2000 resulted in
the Supreme Court of British Columbia extending the restraining order
for an additional six
-7-
months to allow the RCMP to complete their investigation into the
Company's on-line gaming operations. The Company has appealed this
decision to the British Columbia Court of Appeal. The RCMP
investigation has not been completed and no charges have been laid.
Between October 15, 1999 and December 9, 1999, ten class action claims
were commenced in the United States against the Company and some of
its directors and officers. On March 7, 2000, the United States
District Court for the District of Delaware ordered that these ten
actions be consolidated in a single proceeding. An amended
Consolidated Class Action Complaint was filed on June 7, 2000. The
Plaintiff class alleges generally that material misrepresentations
regarding the nature and inherent risks of the Company's business were
knowingly made to its investors (including the Plaintiff class). The
relief sought includes damages and costs for the Plaintiff class. The
amount of the damages claimed is unspecified. As this issue is at a
preliminary stage, its financial impact, if any, cannot be determined
at this time. It is the Company's intention to defend these lawsuits
vigorously.
In all of the above-noted matters, management has been unable to
determine the likely outcomes. Consequently, no provision for loss has
been made in these financial statements in respect of these matters.
7. Diluted Earnings Per Share
Diluted earnings per share for the three month period ended July 31,
2000 are not disclosed as the amounts would be anti-dilutive.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results Of Operations
- ---------------------
(Financial figures are in thousands)
The Company's Internet casino, which targets only customers outside North
America, is operated by its subsidiary, World Gaming Services Inc. of
Antigua. Starnet Systems International Inc. ("Starnet Systems"), also of
Antigua, licenses its gaming software to third parties for a set- up fee
and monthly royalties. Inphinity Interactive Inc. was incorporated in 1999
to develop gaming software and web pages. In April 2000, the Company sold
the assets of its adult entertainment business to a third party to focus
entirely on the Internet gaming industry. For the three months ended July 31,
2000, revenues from all components of the gaming business, which
include licensing, casino operations and financial transaction processing
generated revenues of $4,029, up 11% from the gaming revenues of $3,615 for
the quarter ended July 31, 1999. Although the annual revenue growth rate is
lower than previous quarters due to a drop in up front licensing revenues,
the underlying business, represented by system wide deposits and revenues
were up 116% and 99% respectively. The core royalty revenue in Quarter 1
increased 53% over the same quarter last year.
The following tables set out selected information from the statements of
operations for the quarters ended July 31, 2000 and 1999 and the balance
sheets as at July 31, 2000 and April 30, 2000:
SELECTED STATEMENT OF OPERATIONS INFORMATION (IN THOUSANDS OF DOLLARS)
For the three months ended
July 31, 2000 July 31, 1999
------------- -------------
Net Sales 4,029 3,615
Gross Profit 2,733 2,749
Operating Expenses 4,641 2,336
Income (Loss) From Continuing Operations (1,822) 442
Net Income (Loss) (1,822) 613
SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS OF DOLLARS)
At July 31, 2000 At April 30, 2000
---------------- ------------------
Working Capital 3,587 6,238
Total Assets 26,037 27,983
Long Term Debt 727 503
Deficit (4,193) (2,371)
Total Shareholders' Equity 17,631 19,376
-9-
In 1999 the Company generated significant revenues from licensing its
software as the number of licensees grew from 15 at April 30, 1999 to 45 at
April 30, 2000. During the same period, royalty revenues also experienced
substantial growth and represented well over 75% of total revenues for the
full year. Furthermore, the top 10 licensees accounted for over 95% of the
royalties, while most of the bad debt provision in 1999 related to
licensees generating very little royalty income. In order to provide better
service to the Company's top licensees and support their continued growth,
the Company has slowed the number of new licensees considerably and
focussed selling efforts on well funded companies who can commit the
resources that the company believes are necessary for a successful
operation. Furthermore, since most of these operators are delaying their
launch until the new Beyond 2000 software is ready in Q2, there was only
one new licensee that began operations during the quarter, bringing the
total number of licensees to 46 by July 31, 2000. As a result of this new
direction and the upcoming launch of the new software, total revenues grew
only 11% to $4,029, as a 53% increase in royalty revenue to $3,624 was
largely offset by a reduction of 68% in licensing revenue.
The underlying business, however, remained very strong as system-wide
deposits increased to $33,075 for the three months ended July 31, 2000, up
116% from $15,303 for the same period last year. System-wide revenues from
all licensees increased 99% to $14,445. Although system-wide deposits and
revenues and Company revenues were down from Quarter 4 due to the slow
summer season, especially for sports betting, Quarter 2 is expected to
increase dramatically as the fall sports seasons begin. Last year, system-
wide deposits and revenues increased over 75% from Quarter 1 to Quarter 2
and a further 50% growth in Quarter 3 which has 3 full months (November to
January) of fall sports. Early Quarter 2 results would indicate a similar
growth pattern for the current year.
Although year on year revenues increased slightly in the first quarter,
gross profit decreased negligibly to $2,733 for the quarter ended July 31,
2000 from $2,749 for the prior year. The gross margin decreased from 76%
for the quarter ended July 31, 1999 to 68% for the quarter ended July 31,
2000 due to the relatively lower gross margin from reselling the Antigua
gaming licenses. As royalty revenue picks up during the remainder of the
year, the gross margins are expected to climb back above 70%.
-10-
The first quarter of 2000 was a turning point for operating expenses
because sales, marketing, development, operations, and G&A expenses
flattened out compared to previous quarters as these costs were only 3%
higher than last quarter. When compared to the same period last year,
however, these expenses increased by 125% to $4,015 for the quarter ended
July 31, 2000 from $1,781 for the same period last year in order to support
the over 100% year on year growth in the underlying business. Quarter on
quarter expense growth going forward is expected to be much less than the
corresponding quarter on quarter revenue growth.
Depreciation and amortization increased from $268 in the first quarter in
1999 to $553 in 2000 as new computer equipment was purchased to handle the
expected increase in network traffic for the rest of the year. The Company
also expanded its facilities in Antigua.
The combination of seasonally low revenues and the higher expenses required
to build capacity and develop new software to meet future growth potential
resulted in a loss from continuing operations for the quarter ended July 31,
2000 of $1,822 compared to an operating income of $442 for the prior
year. As revenues expand over the next few quarters and expenses flatten
out, the Company is anticipating to reach positive cash flow in Quarter 2
and profitability by Quarter 3.
Effective March 31, 2000, the Company sold the business and all of the
assets of its adult entertainment division, therefore there was no income
from discontinued operations during the quarter compared to income of $171
for the same period last year.
There is no tax provision for the quarter as the majority of the Company's
income is generated from Starnet Systems in Antigua, which is not subject
to income tax.
Liquidity and Capital Resources
- -------------------------------
(Financial figures are in thousands)
At July 31, 2000, the Company had $3,235 in cash and cash equivalents
compared to $5,984 at April 30, 2000. The decrease was caused by $2,371
used in operations and the rest partially financed new capital
expenditures. Due to the investigation by Canadian authorities of the
business operations of the Company prior to August 1999, the freeze on two
of the Company's bank accounts with a Canadian bank was extended until
February 2001. The amount affected totaled approximately $7,188, including
interest. The Company also has reserves and deposits held by credit card
processors totaling $4,072, which includes $330 relating to a discontinued
business. A majority of the funds are held as a rolling reserve, which is
released to the Company after six months.
-11-
Working capital at July 31, 2000 decreased to $3,587 from $6,238 at April 30,
2000. Accounts receivable increased from $2,022 at April 30, 2000 to
$2,235 at July 31, 2000. The majority of the receivables are from existing
licensees that were offered an installment payment plan on the initial
licensing fees and from operating licensees that have their own merchant
accounts. Other current assets at July 31, 2000 dropped to $1,042 from
$1,349 at April 30, 2000. The decrease is the net effect of prepayments
made to the Antiguan Government for the purchase of additional casino
licenses less the portion allocated to costs of sales during the year. The
casino licenses are held for sale to prospective licensees who have cleared
the Antigua government due diligence.
Net cash used by operations for the quarter ended July 31, 2000 was $2,371
compared to $993 for the same period last year. The decrease in cash from
operations was mainly due to the investment in software development
expenses that were expensed during the year and the build up of operating
expenses to handle future revenue growth.
Net cash used for investing activities for the quarter ended July 31, 2000
was $1,223 compared to $528 for the same period last year. There was
another $487 of leased assets added. The higher level of investment in
capital assets was necessary to meet the growing processing requirements.
Net cash provided by financing activities for the three months ended July 31,
2000 was $885, down considerably from $8,742 for the same period last
year as the lower stock price reduced the number of options and warrants
that were exercised. Included in the funds raised was a $500 advance on a
loan agreement to borrow $1,500. The loan repayment may be satisfied by
converting the loan amount to common stock of the Company.
Contingencies and Commitments
- -----------------------------
On September 16, 1999, Las Vegas Casino Inc. ("LVC") commenced an action
against the Company, a number of its subsidiaries and various employees of
the Company and its subsidiaries. LVC, a former software licensee of
Starnet Systems, alleges a $1 billion loss arising from alleged
misappropriation of funds, and breach and wrongful termination of its
software license agreement. Starnet Systems terminated the software license
agreement with LVC on July 22, 1999 as a result of LVC's failure to pay
over $200,000 in fees owed to Starnet Systems. On July 12, 2000, the
Supreme Court of British Columbia granted a stay of the lawsuit as against
Starnet Systems only. Should LVC wish to proceed with its claim against
Starnet Systems, it must do so through the arbitration process provided for
in the software license agreement. LVC has not yet taken any steps to do
so. The Company believes that LVC's allegations are without merit and
intends to defend LVC's lawsuit and to contest arbitration proceedings
vigorously. As this matter is at a preliminary stage, its financial
impact, if any, cannot be determined at this time, although management is
of the opinion that it will not result in any significant losses to the
Company.
-12-
On August 20, 1999, the Royal Canadian Mounted Police ("RCMP") obtained a
search warrant and searched the Vancouver, British Columbia offices of
Starnet Communications Canada Inc. The basis for the search was the
allegation of the RCMP that the Company and some of its officers, directors
and employees were breaching certain gaming provisions contained in the
Criminal Code of Canada.
On August 25, 1999, the RCMP obtained an ex parte restraint order pursuant
to the provisions of the Criminal Code of Canada. This order prevents the
Company and Starnet Systems International Inc. from accessing funds located
in their Canadian bank accounts. The amount of money in these accounts is
approximately $7,188,000. In September 1999, the Company brought an
application to have the restraint order revoked. This application was
unsuccessful.
On February 24, 2000, the RCMP applied to the Supreme Court of British
Columbia to continue the restraint order for a further 12 months. On the
same day, the Company brought an application to have the restraint order
vacated. The application to continue the restraint order was granted but
only for a further six months. The application to vacate the restraint
order was adjourned until such time as all issues relating to privileged
documents had been dealt with.
A further application filed by the RCMP on August 14, 2000 resulted in the
Supreme Court of British Columbia extending the restraining order for an
additional six months to allow the RCMP to complete their investigation
into the Company's on-line gaming operations. The Company has appealed this
decision to the British Columbia Court of Appeal.
Despite the fact that the restraint order is slowing down the Company's
expansion plan, it does not prevent the Company from continuing its
operations or expansion plan. The RCMP investigation has not been completed
and no charges have been laid.
Between October 15, 1999 and December 9, 1999, ten class action claims were
commenced in the United States against the Company and some of its
directors and officers. On March 7, 2000, the United States District Court
for the District of Delaware ordered that these ten actions be consolidated
in a single proceeding. An amended Consolidated Class Action Complaint was
filed on June 7, 2000. The Plaintiff class alleges generally that material
misrepresentations regarding the nature and inherent risks of the Company's
business were knowingly made to its investors (including the Plaintiff
class). The relief sought includes damages and costs for the Plaintiff
class. The amount of the damages claimed is unspecified. As this issue is
at a preliminary stage, its financial impact, if any, cannot be determined
at this time. It is the Company's intention to defend these lawsuits
vigorously.
-13-
In all of the above-noted matters, management has been unable to determine
the likely outcomes. Consequently, no provision for loss has been made in
these financial statements in respect of these matters.
PART 2 - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
The following are material existing and pending legal claims against the
Company:
Her Majesty the Queen in Right of Canada
- ----------------------------------------
On August 25, 1999, the RCMP obtained an ex parte restraint order from the
Honourable Associate Chief Justice of the Supreme Court of British Columbia
pursuant to the provisions of the Criminal Code of Canada. This order
prevents the Company and Starnet Systems International Inc. from accessing
funds located in their Canadian bank accounts. The amount of money in
these accounts is approximately $7,188,000. The basis for the claim is the
allegation that the funds in these bank accounts are proceeds of crime,
obtained as a result of the breach of certain gaming provisions contained
in the Criminal Code of Canada, and should therefore be forfeited to the
Crown. In September 1999, the Company brought an application to have the
restraint order revoked. This application was unsuccessful.
On February 24, 2000, the RCMP applied to the Supreme Court of British
Columbia to continue the restraint order for a further 12 months. On the
same day, the Company brought an application to have the restraint order
vacated. The application to continue the restraint order was granted but
only for a further six months. The application to vacate the restraint
order was adjourned until such time as all issues relating to privileged
documents had been dealt with.
A further application filed by the RCMP on August 14, 2000 resulted in the
Supreme Court of British Columbia extending the restraint order for an
additional six months to allow the RCMP to complete their investigation
into the Company's on-line gaming operations. The Company has appealed this
decision to the British Columbia Court of Appeal.
Las Vegas Casino Inc.
- ---------------------
Plaintiff: Las Vegas Casino Inc. ("LVC")
Defendants: The Company, a number of its subsidiaries and various
employees
Court: Supreme Court of British Columbia, Action No. C994793,
Vancouver Registry
Date Filed: September 16, 1999
-14-
The Plaintiff alleges that the Company, a number of its subsidiaries,
including Starnet Systems (formerly Softec Systems Caribbean Inc.), and
various employees of the Company and its subsidiaries, caused a $1 billion
loss arising by reason of alleged misappropriation of funds and breach and
wrongful termination of its software license agreement with Starnet
Systems. The relief sought includes general and exemplary damages,
declarative relief, an accounting, interest and costs.
On July 12, 2000, the Supreme Court of British Columbia granted a stay of
the lawsuit as against Starnet Systems only. Should LVC wish to proceed
with its claim against Starnet Systems, it must do so through the
arbitration process provided for in the software license agreement. LVC
has not yet taken any steps to do so.
The Company believes that LVC's allegations are without merit and intends
to defend LVC's lawsuit and to contest arbitration proceedings vigorously.
As this matter is at a preliminary stage, its financial impact, if any,
cannot be determined at this time, although management is of the opinion
that it will not result in any significant losses to the Company.
U.S. Class Action Claims
- ------------------------
Between October 15, 1999 and December 9, 1999, ten class action claims were
commenced in the United States against the Company and some of its
directors and officers. On March 7, 2000, the United States District Court
for the District of Delaware ordered that these ten actions be consolidated
under the heading IN RE STARNET COMMUNICATIONS INTERNATIONAL INC.
SECURITIES LITIGATION, C.A. No. 99-681 (SLR).
An amended Consolidated Class Action Complaint was filed in the United
States District Court for the District of Delaware on June 7, 2000. The
Plaintiff class consists potentially of all persons who purchased the
Company's Class A Voting Common Stock from March 11, 1999 to August 20,
1999 inclusive, excluding the Defendants. The Plaintiffs allege generally
as follows:
(a) The Company became involved in internet gaming;
(b) The Company represented to its investors (including the Plaintiff
class) that the legality of internet gaming was uncertain;
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(c) The Company represented to its investors (including the Plaintiff
class) that it had taken steps to minimize the risk of exposure to a
criminal or quasi criminal prosecution for being involved in internet
gaming;
(d) The representations made by the Company were false or incomplete;
(e) The false or misleading representations of the Company caused its
share price to rise;
(f) The members of the Plaintiff class purchased the Company's shares;
(g) In August of 1999, the RCMP searched the Company's Vancouver, British
Columbia offices;
(h) The share price of the Company dropped dramatically;
(i) The members of the Plaintiff class lost money as a result of the drop
in the share price;
(j) Certain former officers of the Company (John Carley, Chris Zacharias
and Mark Dohlen - the "Individual Defendants") were involved in or
aware of the false or misleading representations; and
(k) The Individual Defendants were involved with the preparation of or
approved of the false or misleading representations of the Company for
the purpose of inflating the price of the Company's stock, thereby
allowing the Individual Defendants to reap millions of dollars in
profits from the sale of the Company's shares at inflated prices.
The relief sought includes damages and costs for the Plaintiff class. The
amount of the damages claimed is unspecified. As this issue is at a
preliminary stage, its financial impact, if any, cannot be determined at
this time. It is the Company's intention to defend this lawsuit vigorously.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
------------------------------------------------
3.1 Articles of Incorporation - incorporated by reference from
Exhibit 3.3 of Form S-8 dated March 12, 1998
3.2 By-laws - incorporated by reference from Form 10-K filed July 31,
2000
10.1 Bank of Montreal - incorporated by reference from Form 10-SB
dated June 18, 1997
10.2 Pacific Rim Investments Inc. - incorporated by reference from
Form 10-SB dated June 18, 1997
10.3 Simulcast Agreement - incorporated by reference from Form 10-SB
dated June 18, 1997
10.4 CompuServe Agreement - incorporated by reference from Form 10-SB
dated June 18, 1997
10.5 Starnet Communications International Inc. 1997 Stock Option Plan
- incorporated by reference from Form S-8 dated March 12, 1998
10.7 Starnet Communications International Inc. 1999 Stock Option Plan
- incorporated by reference from Form S-8 dated March 10, 1999
10.8 Software License Agreement between Starnet Systems International
Inc. and Global Interactive Ltd. dated February 19, 2000 -
incorporated by reference from Form 10-K filed July 31, 2000
10.9 Commitment Letter between Starnet Systems International Inc. and
Simpson Bay, Ltd. dated June 23, 2000 - incorporated by
reference from Form 10-K filed July 31, 2000
10.10 Employment Agreement between Starnet Communications
International Inc. and Meldon Ellis dated October 1, 1999 -
incorporated by reference from Form 10-K filed July 31, 2000
10.11 Consulting Services Agreement between Starnet Communications
International Inc. and Wolf Bergelt dated April 1, 1999 -
incorporated by reference from Form 10-K filed July 31, 2000
27.1 Financial Data Schedule
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(b) Reports on Form 8-K:
--------------------
The following report on Form 8-K was filed during the quarter covered
by this Report:
June 15, 2000 - sale of the assets and undertakings comprising the
adult entertainment division of Starnet Communications Canada Inc. to
596773 B.C. Ltd.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Starnet Communications International Inc.
(Registrant)
Date: September 13, 2000 By: /s/ Fred Hazell
-------------------------------------
Chairman, President and Chief Executive
Officer
Date: September 13, 2000 By: /s/ Chris Thompson
-------------------------------------
Vice-President, Finance
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