SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 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:
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
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As of December 1, 2000, there were 32,193,181 shares of the registrant's
Class A Voting Common Stock outstanding.
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.
EXPLANATORY NOTE:
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This Amendment No. 1 to the Registrant's Form 10-Q for the quarter ended
October 31, 2000 is being filed to correct certain information relating
to deposits and revenues of our licensees, or system wide deposits and
revenues, as disclosed in Part I, Item 2 - Management's Discussion and
Financial Analysis.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (All figures in thousands of US dollars)
Results Of Operations
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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, 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 October 31, 2000, revenues
from all components of the gaming business, which include licensing,
casino operations and financial transaction processing generated revenues
of $5,476, up 26% from the gaming revenues of $4,342 for the quarter
ended October 31, 1999 and up 36% from Q1. The year-over-year revenue
growth rate of 26% increased from 11% in Q1 but was lower than expected
due to poor sportsbook profits in October despite record sportsbook
wagers during the month. The underlying business continued healthy growth
as system wide deposits and revenues were up 106% and 91%, respectively.
Although total operating costs increased to $5,259 in Q2 compared to
$4,641 in Q1, most of the increase was attributable to one time general
and administration and legal costs.
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The combined sales, marketing, development and operations costs for Q2
were up only 2% from Q1 despite a 36% rise in revenue over the same period.
The following tables set out selected information from the statements of
operations for the quarters ended October 31, 2000 and 1999 and the
balance sheets as at October 31, 2000 and April 30, 2000:
SELECTED STATEMENT OF OPERATIONS INFORMATION (IN THOUSANDS OF DOLLARS)
FOR THE THREE MONTHS ENDED
October 31, 2000 October 31, 1999
---------------- ----------------
Net Sales 5,476 4,342
Gross Profit 3,872 3,412
Operating Expenses 5,259 3,002
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,291) 408
Net Income (Loss) (1,291) 341
SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS OF DOLLARS)
At October 31, 2000 At April 30, 2000
---------------------------------------
Working Capital 3,331 6,238
Total Assets 27,116 27,983
Long Term Debt 2,406 503
Deficit (5,484) (2,371)
Total Shareholders' Equity 16,137 19,376
As explained in Q1, the Company has reduced the number of new licensees
considerably and focussed selling efforts on established gaming
operators. As a result of this new direction, total sales from licensing
declined 18% to $746 while sales from royalties increased 38% to $4,730.
Year to date revenues increased 19% to $9,505 as a 44% increase in
royalties and fees was partially offset by a 47% drop in Licensing revenue.
The underlying business, however, remained very strong as system-wide
deposits increased to $55,916 for the three months ended October 31,
2000, up 106% from $27,030 for the same period last year and up 65% from
Q1. System wide revenues for Q2 from all licensees increased 92% to
$22,209 compared to the same period last year and jumped 54% from Q1. The
quarter on quarter growth for system wide revenue was less than
anticipated, and less than the growth in deposits, due to low football
profits during the first three weeks of October.
Gross profit increased 13% to $3,872 for the quarter ended October 31,
2000 from $3,412 for the prior year. The gross margin increased as
expected to 71% for the quarter ended October 31, 2000 compared to 68% in
Q1 but decreased from 79% for the same period
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last year due to the relatively lower gross margin from reselling the
Antigua gaming licenses.
Sales, marketing, development and operations costs for Q2 were up only 2%
from Q1 despite a 36% rise in revenue over the same period as follows:
Q2 Q1 Variance
Sales 177 120 47%
Marketing 743 755 (2%)
Development 863 846 2%
Operations 1,087 1,080 1%
--------------------------
Total 2,870 2,801 2%
==========================
These expenses were relatively flat for the second quarter in a row and
in line with expectations. However, the General and administration and
Legal costs were $1,626, up 26% from $1,287 in Q1 due to costs associated
with the start of internal restructuring and the Company's efforts to
reorganize into a new holding company incorporated in England and Wales.
The quarter 2 comparative for Operations expenses are negative $66 due to
a reclassification between Operations and General and administrative
expenses in the six month period for 1999. Depreciation costs rose 38%
to $763 for the quarter due to the addition of a second server site and a
full quarter of depreciation for the Q1 equipment upgrades in Antigua.
The total operating expenses were $5,259, up 75% from $3,002 in the same
period last year and up 13% over Q1, considerably lower than the 36%
quarter on quarter revenue growth. For the six months ended October 31,
2000, operating expenses were $9,900, up 85% from $5,339 in the same
period last year and in line with the year on year increase in the
underlying business.
The combination of lower than expected revenues and the higher G&A and
Legal expenses resulted in a loss from continuing operations of $1,291
for the quarter ended October 31, 2000 compared to an operating income of
$408 for the prior year. The Q2 loss, however, was somewhat lower than
the $1,822 loss in Q1. The year to date loss from continuing operations
was $3,113 compared to operating income of $848 for the prior year.
On April 1, 2000, the Company sold the business and all of the assets of
its interactive media division therefore there was no income from this
discontinued division during the quarter compared to a loss of $67 for
the same period last year. This interactive media division had generated
income of $106 for the six months ended October 31, 1999.
There is no tax provision for the quarter or the year to date as the
majority of the Company's income is generated from Starnet Systems in
Antigua, which is not subject to income tax.
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Liquidity and Capital Resources
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At October 31, 2000, the Company had $3,937 in cash and cash equivalents
down from $5,984 at April 30, 2000 but up from $3,235 at July 31, 2000.
The decrease over the six months to October 31, 2000 was caused by $1,610
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 $7,293
including interest. The Company also has reserves and deposits held by
credit card processors totaling $3,639 which includes $322 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.
Working capital at October 31, 2000 decreased to $3,331 from $6,238 at
April 30, 2000. Accounts receivable increased from $2,022 at April 30,
2000 to $2,889 at October 31, 2000. The majority of the receivables are
from new 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 October 31, 2000 dropped to
$761 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 period. The casino licenses are held for sale to prospective
licensees.
Net cash generated by operations for the quarter ended October 31, 2000
of $761 was down from $2,257 for the same period last year but up
considerably from the $2,371 cash used in Q1.
Net cash used for investing activities for the quarter ended October 31,
2000 was $870 compared to $8,267 for the same period last year. For the
year to date, the amount was $2,093 compared to $8,795 for the same
period last year. Last year's figure included $6,856 of restricted cash
as explained above. There was another $472 of leased assets added during
the quarter bringing the year to date total to $959.
Net cash provided by financing activities for the three months ended
October 31, 2000 and the year to date was $990 and $1,874 , respectively,
down considerably from the same periods last year as the lower stock
price reduced the number of options and warrants exercised.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
STARNET COMMUNICATIONS INTERNATIONAL INC.
(REGISTRANT)
Date: March 21, 2001 By: /s/ Fred Hazell
----------------------------
Fred Hazell
Chairman, President and Chief Executive Officer
Date: March 21, 2001 By: /s/ Chris Thompson
----------------------------
Chris Thompson
Vice-President, Finance
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