U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
STARNET COMMUNICATIONS INTERNATIONAL INC.
(Name of Small Business Issuer in its Charter)
Delaware E.I.N. 52-2027313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
425 Carrall Street, Mezzanine Level
Vancouver, B.C., CANADA V6B 6E3
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (604) 685-7619
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class Name of each exchange on which
to be so registered each class to be registered
Class A Voting Common Stock OTC Bulletin Board Service
Page No.: 1
Total No. of Pages: 166
Exhibit Index Appears on Page: 26
PART I
ITEM 1. DESCRIPTION OF BUSINESS
I. BUSINESS DEVELOPMENT.
--------------------
A. STARNET COMMUNICATIONS INTERNATIONAL INC.:
-----------------------------------------
Starnet Communications International Inc. (the "Company") was incorporated
in June 1996 in the state of Nevada. In March 1997, the Company merged
with a Delaware corporation for the purpose of re-domiciling to the state
of Delaware. The Company is a high technology investment and finance
company with several wholly owned technology subsidiaries under its
control, or to be formed. As a result, the Company may be characterized as
a holding Company. The intent of the Company is to identify and
commercialize leading edge technologies for established markets. The
Company, including its subsidiaries, employs 50 persons full time. The
majority of these individuals develop and produce adult websites for
display on the computer accessible medium known commonly as the "Internet."
B. STARNET COMMUNICATIONS CANADA INC.:
----------------------------------
Starnet Communications Canada Inc. ("Starnet Canada"), a wholly-owned
subsidiary of Starnet Communications International Inc., was incorporated
in May 1995 and is based in Vancouver, Canada. Starnet Canada manages
advanced on-line interactive media and information systems for the
Internet. Starnet Canada is an Internet publisher utilizing video, audio,
film, animation, graphics, multimedia, hyper-text markup language (HTML),
site management, transaction processing, client support systems, and post
production facilities. Starnet Canada was established for the purpose of
providing adult web sites on the Internet. In June of 1996, Starnet Canada
was certified by the Bank of Montreal, and now conducts secure Visa,
Mastercard and American Express credit card transactions via the Internet.
C. STARNET COMMUNICATIONS INTERNATIONAL INC. CORPORATE HISTORY:
-----------------------------------------------------------
On June 28, 1996, Creative Sports Marketing Inc. ("Creative") filed its
Articles of Incorporation with the Secretary of State of the State of
Nevada. Thereafter, a meeting of the Shareholders of Creative Sports
Marketing Inc. was held and authorized the Board to change the name of
Creative at a future date if in its discretion it deemed such a change
advantageous. The first intended business plan contemplated celebrity golf
promotions. A tournament was scheduled for Phoenix, Arizona, but shortly
after its organization, it and the business plan were dropped.
On July 15, 1996, Creative accepted subscription agreements from twelve
entities to acquire securities of Creative pursuant to a Rule 504 offering
under Regulation D. The Board authorized Creative to proceed with the sale
of its shares pursuant to the subscriptions received for the sale of
10,000,000 common shares at a price of $0.001 per common share. Pacific
Stock Transfer Company was appointed as the transfer agent of the common
shares of Creative.
-2-
This offering was sold through a Vanuatu corporation, Pacific Rim
Investment Inc., as a transaction sales agent. (SEE Exhibit "4.b").
Thereafter, Pacific Rim Investment Inc. established a market clearing house
as a non-quotation bargain market. The Company is aware of approximately
forty-nine transactions that have occurred. These transactions are
summarized in Item 4 -- Transfers Involving Pacific Rim Investment Inc.
Thereafter, Creative's Board of Directors voted to change the name from
Creative Sports Marketing Inc. to Gelato Brats Inc. A Certificate of
Amendment to the Articles of Incorporation of Creative Sports Marketing
Inc. changing the name of the corporation to Gelato Brats Inc. was
submitted to the Nevada Secretary of State's Office. A new business plan
was adopted focusing upon non-fat dairy ice cream and dessert
manufacturing.
On November 1, 1996, a Board of Directors' meeting of Gelato Brats Inc. was
held appointing Donald Byers as a director and authorizing a further name
change as deemed advisable in the discretion of the Board of Directors.
Also at this meeting the resignation as directors and officers of Ziad
Batal and Richard Kipping were accepted. Donald Byers was appointed
President, Secretary and Treasurer of Gelato Brats Inc.
On January 27, 1997, a Board of Directors' meeting of Gelato Brats Inc. was
held. The resignation of Donald Byers as a director and officer of the
Company was accepted. The Shareholders elected to the Board of Directors
the following: Mitchell White; Mark Dohlen; Jason Bolduc; Christopher
Zacharias; and John Carley. Mr. Bolduc was appointed President and Mr.
Zacharias was appointed Secretary and Treasurer.
On January 29, 1997, a Board of Directors' meeting of Gelato Brats Inc. was
held. The Board voted to authorize a change of the name to Starnet
Communications International Inc. (the "Company").
On February 24, 1997, a Certificate of Amendment of the Articles of
Incorporation of Gelato Brats Inc. changing the name of the Company to
Starnet Communications International Inc. was submitted to the Nevada
Secretary of State.
On March 10, 1997, the Board of Directors of Starnet Communications
International Inc. voted to merge Starnet Communications International Inc.
into a wholly owned subsidiary -- Starnet Communications International (DE)
Inc. ("Starnet Delaware"). The Company was authorized to redomesticate
into Delaware with Starnet Delaware as the surviving corporation.
On March 10, 1997, Starnet Communications International Inc., the sole
stockholder of Starnet Delaware acted by vote to consummate the merger
among the Company and Starnet Delaware and to change the name of Starnet
Delaware to Starnet Communications International Inc. All of the
stockholders of Starnet Communications International Inc. voted to
acknowledge and adopt the Plan and Agreement of Merger of Starnet
Communications International Inc. into Starnet Delaware. Thus on March 10,
1997, a Certificate of Merger among Starnet Communications
-3-
International Inc. and Starnet Delaware was executed and the Articles of
Merger were submitted to the Delaware Secretary of State.
On March 25, 1997, Starnet Communications International Inc. entered into
a Share Purchase Agreement with Murray Partners (BVI) Inc. pursuant to
which Starnet Communications International Inc. acquired all 10,101
outstanding shares in Starnet Communications Canada Inc. In exchange Murray
Partners (BVI) Inc. received 10,000,000 Class A Common Voting Shares of
Starnet Communications International Inc.
The Company does not have any plans, proposals, arrangements or
understandings with respect to future acquisitions.
II. BUSINESS OF ISSUER:
------------------
Starnet Communications Canada Inc. ("Starnet Canada"), a wholly-owned
subsidiary of Starnet Communications International Inc., was incorporated
in May 1995 and is based in Vancouver, British Columbia, Canada. Starnet
Canada develops, markets and manages advanced on-line interactive media and
information systems for the Internet. Starnet Canada is an Internet
developer and content provider utilizing proprietary software, video,
audio, film, animation, graphics, multimedia, hyper-text markup language
(HTML), site and network management, transaction processing and database
management systems, client support systems, and post production facilities.
In June of 1996, Starnet Canada was certified by the Bank of Montreal, and
now conducts secure, real time Visa, Mastercard and American Express credit
card transactions via the Internet.
Starnet Canada has emerged as a world leader in providing adult
entertainment services on the Internet. Since the launch in September
1995, membership in Starnet Canada's Club Sizzle at http://www.sizzle.com
("Sizzle") has grown to exceed 10,000 members by January 1997. Revenue
streams are generated by monthly subscription fees from clients who reside
in over 60 different countries. Sizzle is promoted on the Internet via
advertising, search engine registration and news group promotion. Several
hundred competitors compete in finely defined segments similar to Sizzle's
market.
Starnet Canada's AdultLinks Internet search engine site at
http://www.adultlinks.com ("AdultLinks") was launched in July 1996 and is
becoming one of the top Internet adult search engine sites in the world.
Revenues are generated by monthly advertising fees from commercial clients
who market to the on-line adult community. There are approximately 25
competitors in this market.
Chisel Media Internet site at http://www.chisel.com ("Chisel") was launched
in August 1996 and is one of the top Internet gay sites in the world.
Revenue streams are generated by monthly subscription fees from over 2,000
clients residing around the world. Chisel is promoted on the Internet via
advertising, search engine registration and news group promotion. Less
than 100
-4-
competitors compete in segments similar to Chisel's market.
Starnet Canada's Live Women Internet site at http://www.livewomen.com
("Live Women") was launched in February 1997. Live Women allows clients to
interact with a woman on a one to one basis via the Internet. Live Women
was the first to provide these services entirely over the Internet. Live
Women is promoted on the Internet via advertising, search engine
registration and news group promotion. Approximately 10 competitors
compete directly with Live Women.
Starnet Canada has received a retractable letter of intent from CompuServe
Corporation, to supply adult casino style games for use by CompuServe's
clients. CompuServe is an on-line content and Internet service provider
with approximately 4 million subscribers. Starnet Canada is presently
Beta-testing several of these games and they are expected to be on-line in
the fall of 1997. Starnet Canada anticipates entering into a revenue
sharing agreement with CompuServe for all usage of these games. Revenue
will be generated by charging a fee for each minute a client is logged onto
CompuServe and is using the games.
III. INDUSTRY OVERVIEW AND COMPETITION.
---------------------------------
The Internet is the largest and most widely used computer network in the
world and provides access to an incredible volume of information and data.
Management believes that hundreds of billions of private and public dollars
will be invested over the next decade to weave together the global
information systems, including the hardware and software tools necessary to
navigate the Internet.
There are many other providers of adult entertainment currently accessible
through computer networks all competing for the public's entertainment
dollar. Starnet Canada also competes for the public's monthly expenditures
on such entertainment opportunities as cable television, movie theaters,
sporting events and other recreational time endeavors. Starnet Canada
cannot estimate how these competing industries may grow and to what extent
such growth would decrease Starnet Canada's revenue.
IV. RESEARCH AND DEVELOPMENT:
------------------------
A. Electronic Financial Services Caribbean Inc.:
--------------------------------------------
Electronic Financial Services Caribbean Inc. ("EFS"), a wholly-owned
subsidiary of Starnet Communications International Inc., is based in
Antigua, West Indies and was formed in May, 1997. EFS will operate as a
participant in the growing Internet world of commerce with the primary
focus of acting as an international currency converter and a secure
merchant to financial institution Internet transaction gateway. Management
estimates that $2,000,000 (U.S.) will be needed to commence operations.
The Company may seek to obtain this financing through a registered or
exempt securities
-5-
offering or debt financing if favorable terms may be obtained. Provided
sufficient funding is available, management anticipates that EFS will be
fully operational in the fall of 1997.
B. Starnet USA Inc.:
----------------
Starnet USA Inc., a wholly owned subsidiary of Starnet Communications
International Inc., is based in Seattle, Washington and was formed in
November 1995. It will operate as an Internet access provider and network
center for corporate clients. The network will use a sophisticated LAN of
computers, routers, servers and modems to provide service to its client
base. Management estimates that $1,000,000 (U.S.) will be needed to
commence operations. The Company may seek to obtain this financing through
a registered or exempt securities offering or debt financing if favorable
terms may be obtained. Provided sufficient funding is available,
management anticipates that Starnet USA will be fully operational in the
fall of 1998.
C. World Gaming Services Inc.:
--------------------------
World Gaming Services Inc. ("World Gaming"), a wholly owned subsidiary of
Starnet Communications International Inc. is based in Antigua, West Indies,
and was incorporated in July, 1997. World Gaming will launch an Internet
on-line electronic lottery and gaming operation which will be engaged in
the business of accepting, processing, and managing wagers through the
Internet on the outcome of international sporting events, international
lotteries and a variety of casino style games of chance. World Gaming's
focus will be to capitalize on the demand for gaming. Management
estimates that $5,000,000 (U.S.) will be needed. The Company may seek to
obtain this financing through a registered or exempt securities offering
or debt financing if favorable terms may be obtained. Provided sufficient
funding is available, management anticipates that World Gaming will be
fully operational in the fall of 1997.
World Gaming will operate as a full service gaming corporation on the
Internet. World Gaming will operate under the laws and regulations of
Antigua to assure fair opportunities for its Internet clients. World
Gaming will be promoted on the Internet via paid advertising, search engine
registration and news group promotion. As of July 1997 there were several
competitors operating Internet gaming ventures. As of this date, none of
the competitors are providing all the products and services that World
Gaming is proposing to provide. Provided sufficient funding is available,
management anticipates that World Gaming will be fully operational in the
fall of 1997.
-6-
V. REGULATORY BACKGROUND:
---------------------
In order to ensure that Starnet Canada's Sizzle site was operating in
compliance with the Criminal Code of Canada a legal opinion was obtained
pertaining to the sexual content initially displayed on the Sizzle site.
The legal opinion concludes that Starnet Canada's production and
distribution of adult materials is not in violation of the Criminal Code of
Canada. The Company is aware of indecency laws beyond Canada and that the
production and transmission of such materials is subject to varying local
standards. However, the effect of local laws upon such transmissions via
the Internet is unresolved. The latest statement by the United States
Supreme Court in 1997 is favorable to an interpretation that any regulation
of content of transmissions over the Internet must be minimal. Management
intends to continue its policy of requesting and obtaining legal opinions
to assist and guide it through the applicable and developing regulatory
framework.
Due to the uncertain regulatory environment as it relates to Internet
gaming in the U.S. and Canada, management intends to focus on the market
outside of North America until such time as U.S. and Canadian laws,
specifically in regard to Internet gaming, are clarified. The Company will
ensure that no gaming laws both inside and outside the U.S. and Canada are
violated through the use of several checks. Through major credit cards and
Internet service providers, World Gaming will confirm that an applicant is
of legal age, and resides outside of North America.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
I. RESULTS OF OPERATIONS
---------------------
The Company currently derives its revenues principally from subscription
sales of its Internet web sites namely Sizzle and Chisel. As the Internet
continues to become more accessible, the market opportunities for the
Company will continue to expand. Based upon the Company's history and
management's expectations, the Company's operations should grow. But these
growth opportunities will also attract many potential new competitors. In
order to maintain sales growth, the Company has been expanding the content
and improving the services on its Internet web sites, as well as
researching and developing other projects that will utilize its existing
facilities and expertise.
If the Company is able to implement its research and development plans, the
Company will require the infusion of an additional approximately
$8,000,000. The Company may seek to obtain this financing through a
registered or exempt securities offering or debt financing if favorable
terms may be obtained. (See Item I. Section IV RESEARCH AND DEVELOPMENT.)
-7-
The following tables set forth consolidated statements of operations data
for the Company for the year ended April 30, 1997 and 1996 and consolidated
balance sheet data at April 30, 1997 and April 30, 1996. The consolidated
data has been compiled as if the Company had existed and owned Starnet
Canada since the May 19, 1995 incorporation of Starnet Canada.
A. Statement of Operations Data
----------------------------
For the year ended
April 30, 1997 April 30, 1996
-------------- --------------
Net Sales 1,996,535 378,544
Gross Margin 1,089,167 205,789
Net Income (Loss) from operations (39,843) (26,197)
Net Income (Loss) (93,714) (26,197)
B. Balance Sheet Data
------------------
At April 30, 1997 At April 30, 1996
----------------- -----------------
Working Capital (Deficiency) (790,726) (331,088)
Total Assets 1,197,199 457,513
Long Term Debt 237,371 62,786
Accumulated Earnings (Deficit) (119,911) (26,197)
Stockholders' Equity (Deficit) (70,963) (6,211)
-8-
Year ended April 30, 1997 Compared to Year ended April 30, 1996
- ---------------------------------------------------------------
The Company's revenues increased 427% to $1,996,535 for the year ended
April 30, 1997 compared to $378,544 for the year ended April 30, 1996. The
growth is primarily due to increased subscription revenue from the
Company's Internet web sites. Along with the growth in sales, gross margin
increased to $1,089,167 for the year ended April 30, 1997 from $205,789 for
the year ended April 30, 1996. Gross profit margin for the year ended
April 30, 1997 was 54.6% compared to 54.4% in the prior year.
Selling, general and administrative expenses increased by 387% to
$1,129,010 (56.6% of sales) for the year ended April 30, 1997 from $231,986
(61.3% of sales) for the year ended April 30, 1996. The decrease in these
expenses from 61.3% to 56.6% of sales was the result of efficiencies gained
as the Company handled a greater level of activity.
Net loss from operations for the year ended April 30, 1997 was $39,843
compared to the net loss of $26,197 for the year ended April 30, 1996.
Income tax expense for year ended April 30, 1997 was $53,871 (deferred) and
no income tax expense or recovery for the year ended April 30, 1996.
Starnet Canada has been active as a reseller of Internet services to other
smaller Internet based companies. (SEE Item III. Description of Property).
Revenues derived by Starnet Canada's reseller activities are $60,145.00
(U.S) for the period ending April 30, 1997. Expenses of Starnet Canada's
reseller activity are nominal for the period ending April 30, 1997 as the
Company had the capacity in place to handle this service and related
activity.
C. Liquidity and Capital Resources
-------------------------------
Year Ended April 30, 1997
- -------------------------
Starnet Canada has leased 13,100 square feet of office and production space
at 425 Carrall Street, Vancouver, British Columbia, Canada. The first lease
for 6,100 square feet was for 5 years starting May 1, 1995 with the option
to renew for an additional 5 years. The second lease for 7,000 square feet
was for 3 years starting January 1, 1997 with the option to renew for an
additional three year term. Total monthly rent is currently averaging
$9,500 over the terms of the leases.
Starnet Canada initially relied on advances from shareholders and cash
generated from operations to meet its working capital requirements and to
provide funds for investments in property and equipment. As Starnet Canada
established its creditworthiness, it was able to acquire equipment on
capital leases. Outstanding capital lease obligations at April 30, 1997
and April 30, 1996 were $312,507 and $81,193 respectively.
-9-
In January 1997, Starnet Canada obtained loans for $200,343, from
Celestine Fund Management Inc. which are secured by all assets of Starnet
Canada and guaranteed by directors and employees Paul Giles, Richard
Thiessen, Mitchell White and Jason Bolduc. Celestine Fund Management Inc.
is a privately held investment fund with its principal offices at P.O. Box
3140, Road Town, Tortola, Britain Virgin Islands. Celestine Fund
Management, Inc. provides short term financing for small and medium sized
businesses. The loans are interest bearing at 6% per annum. The principal
and interest under the notes were payable on April 6, 1997 and the lender
subsequently agreed to extend the due date to May 31, 1997. The lender has
agreed to extend the due date again to September 30, 1997. Thereafter, on
June 10, 1997, Celestine Fund Management Inc. sold the notes to DGD Wealth
Management. The Company expects to repay the loans by cashflow generated
from operations on its due date. As of June 23, 1997, the Company has
repaid $94,469 of the loans.
The Company expects to meet its short-term cash requirements through cash
generated from operations and its long-term cash requirements through
equity financing.
The cashflow from operations for the year ended April 30, 1997 totaled
$707,760 including net loss of $93,714, depreciation and amortization of
$443,708 and deferred income taxes of $53,871. The net cash generated by
changes in working capital (excluding cash) was $287,461.
For the year ended April 30, 1997, net cash used for investing activities
was $788,719. The additions to property and equipment were $406,454 and
mainly consisted of new computer equipment, automobiles and leasehold
improvements. The Company also invested $354,547 in Internet web site
development.
The Company has expended approximately $105,000.00 to commence its research
and development projects. (SEE: Item 1.; IV Research and Development).
This value includes $10,000.00 U.S. for each corporation on incorporation
related expenses and $75,000.00 U.S. to secure a gaming license from the
nation of Antigua. The license has been approved and is fully paid.
However, the Company has elected to delay issuance until it is prepared to
commence operation of World Gaming Inc.
Net cash provided by financing activities was $108,504 for the year ended
April 30, 1997. The major source of financing was loans from a private
lender. Payments of $56,189 were made to pay down the advances from former
shareholders of Starnet Canada.
-10-
Inception (May 19, 1995) through April 30, 1996
- -----------------------------------------------
The cashflow from operations for the period May 19, 1995 to April 30, 1996
totaled $201,427 including net loss of $26,197 and depreciation and
amortization of $104,352. The net cash generated by changes in working
capital (excluding bank indebtedness) was $122,726.
For the period from May 19, 1995 to April 30, 1996, net cash used for
investing activities was $408,540. The additions to property and equipment
were $336,962 and mainly consisted of new computer equipment and leasehold
improvements. The Company also invested $70,676 in Internet web site
development.
Net cash provided by financing activities was $207,113 for the period from
May 19, 1995 to April 30, 1996. The major source of financing was advances
from former shareholders.
D. Impact of Inflation
-------------------
The Company believes that inflation has not had a material effect on its
past business.
-11-
ITEM 3. DESCRIPTION OF PROPERTY.
Starnet Canada occupies 13,100 square feet of commercial space at 425
Carrall Street, Vancouver, British Columbia. This facility houses all of
Starnet Canada's operations including production, technical, marketing, and
administration. Because of the size of Starnet Canada's presence on the
Internet some smaller Internet based companies have started operations
within the same building utilizing Starnet Canada's Internet connections,
but the revenue and expenses of reselling these Internet services are not
material. (SEE Item II. Management Discussion and Analysis or Plan of
Operation). The result has been the creation of a centralized location for
a significant percentage of Vancouver's Internet industry. Starnet Canada
has been able to act as a reseller of Internet services to many of these
businesses. This has resulted in a monthly net cash flow for the benefit
of Starnet Canada.
The terms of the Carrall Street commercial lease are as follows. Starnet
Canada leases 7,000 square feet through December 31, 1999 (three years)
with an annual rent of U.S. $61,000.00. Starnet Canada has an option to
renew this lease for one additional three year term. Starnet Canada leases
6,100 square feet through April 30, 2000 (five years) with an annual rent
of U.S. $53,000.00. Starnet Canada possesses an option to renew this lease
for an additional five years.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 30, 1997 by (i) each
person who is known to the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) each of the Company's directors
and executive officers, (iii) the Named Executive, and (iv) all current
directors and executive officers as a group.
I. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
-----------------------------------------------
The date of the information presented on this table is April 30, 1997.
Title Of Name And Address of Amount And Percent of
Class Beneficial Owner Nature of Class
Beneficial
Owner
Class A Voting Common Murray Partners (BVI) Inc.(1) 10,000,000 50.0
Todman Building
Main Street, P.O. Box 3140
Road Town, Tortola
British Virgin Islands
___________________
(1) On March 25, 1997 ownership of Starnet Canada was transferred from
Murray Partners (BVI) Inc., a British Virgin Islands company, to Starnet
Communications International Inc., a U.S. company incorporated in the state
of Delaware. This ownership transfer was effected through the issuance of
10,000,000 common shares of Starnet Communications International Inc. to
Murray Partners (BVI) Inc. in exchange for all of the issued common shares
of Starnet Communications Canada Inc. Murray Partners (BVI) Inc. is owned
indirectly by some of the Company's officers and directors: Jason Bolduc;
Mitchell White; Mark Dohlen and John Carley and their families. SEE:
Certain Transactions.
-12-
II. SECURITY OWNERSHIP OF MANAGEMENT.
--------------------------------
The date of the information presented on this table is April 30, 1997.
========================================================================
Title of Name and Address of Amount And Percent of
Class Beneficial Owner (2) Nature of Class
Beneficial
Owner (3)
- ------------------------------------------------------------------------
Class A Voting Mitchell White 300,000 1.5
Common Director/Chairman
" " Richard Thiessen 300,000 1.5
Vice President-Production
" " Jason Bolduc 300,000 1.5
Director/President
" " Paul Giles 300,000 1.5
Vice President
" " Mark Dohlen 100,000 0.5
Director/CEO
" " Jack Carley 25,000 0.125
Director/CFO
" " Christopher Zacharias 10,000 0.05
Director, Secretary,
Treasurer
All Directors & Executive
Officers as a Group 1,335,000 6.675
____________________
(2) This table does not reflect the shares owned indirectly by Management
through Murray Partners (BVI) Inc. (SEE: Certain Transactions).
(3) No member of Management has the right to acquire within sixty days
through options, warrants, rights, conversion, privilege or similar
obligations any securities of the Company.
-13-
III. TRANSFERS INVOLVING PACIFIC RIM INVESTMENT INC.
----------------------------------------------
VENDOR PURCHASER DATE VOLUME
Pacific Rim Investment Inc.
Certificate #2004 Gise Capital March 26, 1997 200,000
Sharp, Flint & Blunt March 26, 1997 200,000
Eastern Pacific March 26, 1997 200,000
Richland Acceptance March 26, 1997 100,000
Allfund Capital Corp. March 26, 1997 100,000
David Parfitt March 26, 1997 50,000
Randal Pow March 26, 1997 50,000
Pacific Rim Investment Inc.
Certificate #2006 Mitchell White April 15, 1997 300,000
Richard Thiessen April 15, 1997 300,000
Jason Bolduc April 15, 1997 300,000
Pacific Rim Investment Inc.
Certificate #2002 Peter McCurdy April 29, 1997 5,000
Hugh Mosaheb April 29, 1997 4,000
Dorothy Mosaheb April 29, 1997 8,000
Talon Ent. Corp. April 29, 1997 20,000
Tony Ricci April 29, 1997 25,000
Chuck Choo April 29, 1997 25,000
Steve Ng April 29, 1997 25,000
Frank DiSalvo April 29, 1997 10,000
Rush & Company April 29, 1997 50,000
Paul Giles April 29, 1997 300,000
Mark Dohlen April 29, 1997 100,000
Jack Carley April 29, 1997 25,000
Edward Garner April 29, 1997 25,000
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Pacific Rim Investment Inc.
Certificate #2002 Rush & Company April 29, 1997 50,000
First Marathon Sec. April 29, 1997 60,000
Christopher Zacharias April 29, 1997 10,000
David Parfitt April 29, 1997 50,000
Randall Pow April 29, 1997 50,000
Frank Reichardt April 29, 1997 8,000
Bob Hoegler April 29, 1997 20,000
Rush & Company April 29, 1997 30,000
Pacific Rim Investment Inc.
Certificate #2003 Richard Stewart May 2, 1997 10,000
Rush & Company May 2, 1997 10,000
Steve Cook May 2, 1997 10,000
Peter McCurdy May 2, 1997 5,000
Nancy Smith May 2, 1997 10,000
Pembroke Consultants May 2, 1997 20,000
Whytecliff Properties May 2, 1997 30,000
Ltd.
George Roumanis May 2, 1997 30,000
George Tsagarii May 2, 1997 15,000
Elissavet Doxa May 2, 1997 100,000
Rush & Company May 2, 1997 10,000
Vince Sanseverino May 2, 1997 10,000
Eric Polson May 2, 1997 10,000
Rush & Company May 2, 1997 50,000
First Marathon
Securities May 2, 1997 25,000
John Tsagarii May 2, 1997 55,000
First Marathon
Securities May 2, 1997 500,000
-15-
VENDOR PURCHASER DATE VOLUME
Share Transfer
Andrew McNeilly May 21, 1997 100,000
Pacific Rim Investment Inc.
Certificate No. 2005
521587 B.C. Ltd. June 12, 1997 5,000
Harry Anthony Bosley June 12, 1997 20,575
Wally Brooks June 12, 1997 25,000
Dave Butler June 12, 1997 10,000
Patrick Chan June 12, 1997 12,500
Carl Cuterres June 12, 1997 3,000
Reginald Davis June 12, 1997 25,000
Rocco Dipolo June 12, 1997 2,000
Michael Evans June 12, 1997 3,125
Rick Finlayson June 12, 1997 2,000
First Marathon
Securities June 12, 1997 590,100
Donald Hall June 12, 1997 3,000
Bob Hoegler June 12, 1997 20,000
Peter Hume June 12, 1997 3,000
Ernest Kurz June 12, 1997 1,000
Thelma Kurz June 12, 1997 1,000
Steve Leahy June 12, 1997 10,000
Henry Lee June 12, 1997 1,000
Sophia Lee June 12, 1997 1,000
Ka-Ming Li June 12, 1997 2,000
Lyle McKnight June 12, 1997 1,000
Hugh Mosaheb June 12, 1997 1,000
Dorothy Mosaheb June 12, 1997 2,000
Susan Patterson June 12, 1997 10,000
Tony Ricci June 12, 1997 30,000
Rock Capital Corp. June 12, 1997 50,000
George Roumanis June 12, 1997 10,000
Rush & Company June 12, 1997 25,000
-16-
Alexandra Shorre June 12, 1997 5,000
George Tsagarii June 12, 1997 5,000
Andreas Tsonis June 12, 1997 4,000
Jman Gok Wong June 12, 1997 15,000
Alexander Wong June 12, 1997 700
Despina Xatzigeorgiou June 12, 1997 10,000
Billy Zacharias June 12, 1997 1,000
IV. CHANGES IN CONTROL.
------------------
There are no arrangements which may result in a change in control of the
issuer.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
I. DIRECTORS AND EXECUTIVE OFFICERS.
--------------------------------
MITCHELL WHITE - (Age 36). Chairman of the Board of Directors. Mr.
White's term of office as a director is one year. He has served as a
director since January 27, 1997.
1987 - April 1995 - Self employed computer consultant, White & Associates.
April 1995 - Present - Starnet Communications Canada Inc.
Mr. White possesses more than fifteen years of experience in sales,
marketing and management in the high technology and entertainment
industries. Previously, Mr. White operated a high technology consulting
firm, White & Associates.
MARK DOHLEN - (Age 36). Chief Executive Officer and Director. Mr.
Dohlen's term of office as a director is one year. He has served as a
director since January 27, 1997.
April 1993 - May 1996 - ISG Consulting Inc. (Consultant)
May 1996 - Present - Starnet Communications Canada Inc.
Mr. Dohlen possesses more than ten years of experience in senior management
positions. Mr. Dohlen holds a Bachelor of Administration in Finance from
the University of Regina in Saskatchewan, and an MBA in Management
Information Systems from Simon Fraser University in British Columbia, and
is currently completing the Bachelor of Law program at the University of
British Columbia. Mr. Dohlen has completed the Certified Management
Consultant and Chartered Secretaries and Administrators professional
designations. Mr. Dohlen holds an FCIS designation.
JOHN CARLEY - (Age 50). Chief Financial Officer and Director. Mr.
Carley's term of office as a director is one year. He has served as a
director since January 27, 1997.
March 1990 - August 1994 - Royal Trust, Western Canada Region
(Regional Managing Partner, Finance and Administration)
-17-
August 1994 - Present - Hong Kong Bank of Canada/Hong Kong Bank & Trust Co.
(Vice President, Trust Operations)
Mr. Carley is presently Vice President, Trust Operations for the Hong Kong
Bank Trust Company. Previously, Mr. Carley has worked as Executive
Director of Examinations and Investigations for the Financial Institution
Commission of the Ministry of Finance and Corporate Affairs, Province of
British Columbia. Mr. Carley holds a Diploma in Business Administration,
a FICB designation, a Canadian Securities designation, and is a Certified
General Accountant.
JASON BOLDUC - (Age 22). April 1995 - Present - President and Director.
Mr. Bolduc's term of office as a director is one year. He has served as a
director since January 27, 1997.
1990 - April 1995 - Wiz Zone Computers Inc. (Managing Partner)
Dec. 1994 - April 1995 - Cyberstore Systems Inc. (Network Administrator)
Mr. Bolduc was most recently Director of Network Operations for Cyberstore
Systems Inc., a Vancouver, Canada based Internet access provider.
Previously, Mr. Bolduc operated a high technology consulting firm.
CHRIS ZACHARIAS - (Age 30). Secretary, Treasurer, Director and Corporate
Counsel. Mr. Zacharias' term of office as a director is one year. He has
served as a director since January 27, 1997.
September 1993 - May 1995 - Simon Fraser University (Computer Lab
Assistant)
May 1995 - May 1996 - Baker Newby (Lawyer)
May 1996 - February 1997 - Brawn Karras & Sanderson (Lawyer)
February 1997 - Present - Starnet Communications Canada Inc.
Mr. Zacharias possesses experience in financial, contractual, intellectual
property, and legal affairs. Mr. Zacharias holds a Bachelor of Law from
the University of Manitoba and an MBA from Simon Fraser University in
British Columbia. Previously, Mr. Zacharias was practicing as a corporate
solicitor with the law firm Brawn Karras & Sanderson. Mr. Zacharias has
completed the Chartered Secretaries and Administrators professional
designation. Mr. Zacharias holds an ACIS designation.
II. FAMILY RELATIONSHIPS.
--------------------
There are no family relationships among directors, executive officers or
persons nominated or chosen by the Company to become officers or executive
officers other than among John Carley and Mitchell White. Mr. White is Mr.
Carley's son-in-law.
III. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
----------------------------------------
The Company is not aware of any material legal proceedings involving any
director, director nominee, promoter or control person including criminal
convictions, pending criminal matters, pending or concluded administrative
or civil proceedings limiting one's participation in the securities or
banking industries, or findings of securities or commodities law
violations. However, a personal bankruptcy proceeding under Canadian law
involving Mark Dohlen concluded in September 1994, with Mr. Dohlen
receiving a judicial discharge.
-18-
ITEM 6. EXECUTIVE COMPENSATION
The following information is dated as of April 30, 1996, the end of Starnet
Canada's last fiscal year.
I. SUMMARY COMPENSATION TABLE
Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
---------------------------- ---------------------- ------------
- ------------------------------------------------------------------------------------------------------
Securities
Other Underlying
Annual Restric- Opposi- All Other
Compen- ted Stock tions/ LTIP Compen-
Name and Year Salary Bonus sation Award(s) SARs Payouts sation
Principal(1) (US$)(2) ($) ($) ($) (#) ($) ($)
Position
- ------------------------------------------------------------------------------------------------------
Mark Dohlen (CEO) '96 22,826 725 -0- -0- -0- -0- -0-
Paul Giles '96 30,587 1,812 -0- -0- -0- -0- -0-
(V.P. Offshore
Operations)
Jason Bolduc '96 30,817 1,812 -0- -0- -0- -0- -0-
(President)
Richard Thiessen '96 25,643 2,536 -0- -0- -0- -0- -0-
(V.P. Production)
David Greenseed '96 18,036 580 -0- -0- -0- -0- -0-
(Chief Programmer)
____________________
(1) The positions described were of Starnet Canada. None of the
individual's depicted were under any employment agreement with Starnet
Canada.
(2) The compensation depicted is in the U.S. dollars. The compensation
was paid in Canadian dollars.
-19-
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The Company has no grants to report in the past fiscal year pursuant to its
Employee Stock Plan. The Employee Stock Plan authorizes the distribution
of up to 1,000,000 shares to be acquired at $.50 per share, but no options
have been granted. The criteria for distributing options is within
management's discretion.
III. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
The Company has no Options, Exercises or Values to report for last fiscal
year pursuant to its Employee Stock Plan. The Employee Stock Plan
authorizes the distribution of up to 1,000,000 shares to be acquired at
$.50 per share, but no options have been granted. The criteria for
distributing options is within management's discretion.
IV. LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
The Company has no plans or awards to report for last fiscal year pursuant
to its Employee Stock Plan. The Employee Stock Plan authorizes the
distribution of up to 1,000,000 shares to be acquired at $.50 per share,
but no options have been granted. The criteria for distributing options is
within management's discretion..
V. COMPENSATION OF DIRECTORS
A. Standard Arrangements.
---------------------
The members of the Company's Board of Directors are reimbursed for actual
expenses incurred in attending Board meetings.
B. Other Arrangements.
------------------
There are no other arrangements for compensation to the Board of Directors'
members.
VI. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT,
AND CHANGE-IN-CONTROL ARRANGEMENTS
There are no written contracts or agreements. Employee salaries are set by
the members of the Board of Directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 25, 1997, Starnet Communications International Inc. entered into
a Share Purchase Agreement with Murray Partners (BVI) Inc. pursuant to
which Starnet Communications International Inc. acquired all 10,101
outstanding shares in Starnet Communications Canada Inc.
-20-
In exchange, Murray Partners (BVI) Inc. received 10,000,000 Class A Common
Voting Shares of Starnet Communications International Inc. This
transaction occurred on March 25, 1997. Murray Partners (BVI) Inc. is
owned by certain trusts established pursuant to the laws of Barbados. The
trusts' beneficial owners include some of the members of management and
certain of their family members.
The Company completed a reorganization in January 1997, pursuant to which
500,000 shares were transferred from Cleveland Corporation to Nesbitt Burns
Inc. as record owner for former management. Pursuant to this transaction
the Company adopted a new business plan and changed its name from Gelato
Brats Inc. to Starnet Communications International Inc. By way of
background, on July 20, 1996 the corporate name was changed from Creative
Sports Marketing Inc. to Gelato Brats Inc. Thereafter the management of
Gelato Brats Inc. endeavored to implement a new business plan for the
Company. Subject to conditions applicable to the business plan, 500,000
common shares were transferred to Nesbitt Burns Inc., a Canadian brokerage
firm, to be held in trust for Gelato Brats management team. Completion of
the business plan was unsuccessful.
The Company completed a reorganization on July 20, 1996, pursuant to which
the Company adopted a new business plan and changed its name from Creative
Sports Marketing Inc. to Gelato Brats Inc.
The Company's bylaws include Section 8.1, INTEREST OF PARTY TRANSACTIONS,
which is a provision regarding Related Party Transactions. The bylaw sets
forth the policy, procedures and controls with respect to entering into
transactions with related parties. These include that each participant to
a Related Party Transaction must identify specifically all interests
directly or indirectly to be derived by the Company entering into the
Related Party Transaction. A majority of the disinterested members of the
board of directors must approve any Related Party Transaction.
For the nine months ended January 31, 1997, Starnet Canada was involved in
the following transactions with the officers, directors and key employees
of the Company:
(a) In November 1996, an advance for $3,269 was received from Richard
Thiessen.
(b) In January 1997, a loan for $37,210 was received from John Carley.
This advance is to be repayable in monthly installments of $3,712
through November 1997.
(c) Monthly repayment of $3,582 was made to John Carley from May 1996 to
January 1997, totalling $25,074.
(d) Repayments totalling $52,303 were made to Paul Giles from June 1996 to
December 1996.
(e) Repayment of $4,298 was made to Ken Lelek in July 1996.
-21-
(f) Repayments totalling $11,463 were made to Richard Thiessen during the
period from June 1996 to January 1997.
(g) Repayments totalling $5,373 were made to Mitch White during the period
between July 1996 and October 1996.
The amounts due to related parties are due to officers and directors of the
Company who have an indirect ownership interest in the Company. These
amounts are non-interest bearing and are unsecured. The amount due to John
Carley of $37,210 is repayable in monthly installments of $3,712 through
November 1997. All other amounts are without specified terms of repayment.
During the year ended April 30, 1996, Starnet Canada was involved in the
following transactions with the shareholders of the Company:
(a) In July 1995, the Company purchased from Jason Bolduc a computer for
$2,938 and programming service for $2,203.
(b) The Company purchased from Paul Giles computers and office equipment
for $11,296 in July 1995, $42,234 in September 1995 and $12,486 in
February 1996.
(c) The Company purchased from Ken Lelek computers and office equipment
for $5,508 in July 1995.
(d) The Company purchased from Richard Thiessen computers, office
equipment and furniture for $28,108 in July 1995 and audio equipment
for $38,083 in September 1995.
(e) The Company purchased from Mitch White computers, office equipment and
furniture for $13,367 in June 1995.
(f) In January 1996, a cash loan for $36,724 was received from John
Carley. The loan is repayable in monthly installments of $3,671
starting in February 1996. At April 30, 1996, repayments totalling
$11,027 were made and the outstanding balance was $25,697.
(g) During the year, the Company received cash advances totalling $20,529
from Paul Giles; $21,667 from Ken Lelek; $1,837 from Richard Thiessen
and $17,172 from Mitch White.
(h) During the year, the Company repaid $1,748 to Jason Bolduc; $36,468 to
Paul Giles; $9,093 to Ken Lelek; $4,770 to Richard Thiessen and $2,192
to Mitch White.
The amounts due to shareholders at April 30, 1996 arose during the initial
year of Starnet Canada's operations when six former individual shareholders
(i.e. Jason Bolduc, Paul Giles, Ken Lelek, Richard Thiessen, John Carley
and Mitch White) advanced funds and sold equipment and furniture to Starnet
Canada on credit terms to finance the development of Starnet Canada's
products and operations.
-22-
The amounts due to shareholders are non-interest bearing and are unsecured.
The amount due to John Carley of $25,697 is repayable in monthly
installments of $3,671 through November 1996. All other amounts are
without specified terms of repayment.
Shareholders have not incurred expenses on behalf of the Company. The
interest expense on the Related Party Advances to date is approximately
$7,280.
ITEM 8. LEGAL PROCEEDINGS
The issuer is not a party to any pending legal proceeding nor is its
property the subject of any pending legal proceeding.
ITEM 9. MARKET FOR REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS
There is no public trading market for the common equity shares of the
registrant. If the registrant successfully obtains a listing, as is
presently intended by management, the common equity shares will be listed
upon the OTC Bulletin Board Service. There are approximately 48 equity
holders of record of the Company's Class A Common Voting stock. The number
of shares eligible for trading will be all of the Class A Voting Common
stock except that which is owned by Murray Partners (BVI) Inc. and the
shares which are owned by management. There have been no cash dividends
declared since inception of any of the companies in the group. There are
no restrictions that would limit the ability to pay dividends on common
equity or that are likely to do so in the future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On March 25, 1997, Starnet Communications International Inc. entered into
a Share Purchase Agreement with Murray Partners (BVI) Inc. pursuant to
which Starnet Communications International Inc. acquired all 10,101
outstanding shares in Starnet Communications Canada Inc. In exchange,
Murray Partners (BVI) Inc. received 10,000,000 Class A Common Voting Shares
of Starnet Communications International Inc. This transaction occurred on
March 25, 1997. This transaction involved a single purchaser. The
purchase price did not exceed $5,000,000 because the assets of Starnet
Communications Canada Inc. were valued at substantially less than
$5,000,000. This was an entirely private transaction pursuant to which all
material information as specified in Rule 502(b)(2) was made available to
the purchaser. Thus the exemption from registration afforded by Rule 4(2)
was available to the issuer.
On June 26, 1996, the Company's predecessor, Creative Sports Marketing Inc.
executed a Form D disclosing that it relied upon Rule 504 in selling
10,000,000 Class A Common Voting Shares in exchange for $10,000 to twelve
individuals and businesses. This offering was sold through Pacific Rim
Investment Inc. as a transaction sales agent which established a market
clearing house as a non-quotation bargain market.
Creative Sports Marketing Inc. was not a reporting company pursuant to the
Securities Exchange
-23-
Act of 1934 nor was it a development stage company with no business plan.
Thus it was eligible to rely upon Rule 504. Moreover, Rule 504 was
available to Creative Sports Marketing Inc. in that the Company sold less
than $1,000,000 worth of securities in the previous 12 month period and the
purchasers were unaffiliated, sophisticated investors. Further, Rule 504
does not require the presentation of specified information prior to the
sale of securities offered in reliance upon this rule.
On August 1, 1996, the Company filed a Form 701 under its predecessor's
name Gelato Brats Inc. Pursuant to Rule 701, the Company established the
Gelato Stock Plan for distributing Class A Voting Common Stock. One
million authorized shares were reserved for distribution pursuant to the
Plan. No shares were distributed to any eligible persons pursuant to the
Plan.
On July 15, 1996, one share of stock was distributed in reliance upon
section 4(2) to Kendall White for $0.001 per share.
ITEM 11. DESCRIPTION OF SECURITIES
The securities to be registered pursuant to this Form 10-SB are all of the
authorized Class A Voting Common stock of Starnet Communications
International Inc. There are no preemptive rights associated with the
securities and no cumulative voting is authorized by the By-laws. The
amount of shares authorized is 200,000,000. Of these, 100,000,000 are
Class A Voting Common, 50,000,000 are Class B Common (non-voting) and
50,000,000 are Class C Preferred. There are no Class B or Class C shares
issued. Preferences for Class B and Class C, if any, will be established
by the Board of Directors upon issuance.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 11 of the Company's By-Laws contains an indemnification provision
indemnifying a controlling person, officer or director for conduct on
behalf of the Company which results in an action suit or proceeding to the
fullest extent permitted under the General Corporation Law of the State of
Delaware. The Company does not believe that Article 11 affects the
liability of any person for actually engaging in wrongful conduct.
However, if a person is acting on the Company's behalf, the Company may be
responsible to indemnify the accused wrongdoer for all associated costs,
fees or damages.
ITEM. 13. FINANCIAL STATEMENTS.
The Financial Statements are contained at Exhibit 1 hereto. they are:
i. Starnet Communications Canada Inc. Consolidated Financial
Statements, April 30, 1996.
ii. Starnet Communications Canada Inc. Consolidated Financial
Statements, January 31, 1997, Unaudited.
-24-
iii. Starnet Communications International Inc. Financial Statements,
January 31, 1997.
iv. Financial Statements for Starnet Communications International, Inc.
(formerly Gelato Brats Inc. and Creative Sports Marketing Inc.)
dated April 30, 1997.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements on accounting and financial disclosures
from the inception of the Company through the date of this Registration
Statement.
ITEM 15. INDEX TO EXHIBITS
Financial Statements
(v) Financial Statements for Starnet Communications
International, Inc. (formerly Gelato Brats Inc.
and Creative Sports Marketing Inc.) dated
April 30, 1997
2. (i) Action of Sole Stockholder of Starnet
Communications International (DE) Inc. by
Written Consent*
(ii) Action of Directors of Starnet Communications
International Inc. by Written Consent*
(iii) Action of Directors of Starnet Communications
International (DE) Inc. by Written Consent*
(iv) Organization Acts of Directors of
Starnet Communications International (DE) Inc.
by Written Consent*
(v) Articles of Merger of Starnet Communications
International Inc. with and into Starnet
Communications International (DE) Inc.*
3. (i) Articles of Incorporation*
(ii) Bylaws*
5. (i) Opinion re: legality*
10. Material Contracts
(i) Bank of Montreal*
(ii) Pacific Rim Investment Inc.*
(iii) Simulcast Agreement*
(iv) CompuServe Agreement*
21. (i) Subsidiaries of the Registrant*
23. (i) Consent of Experts*
27. (i) Financial Data Schedule*
______________________
* previously filed
-25-
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Starnet Communications International Inc.
(Registrant)
Date August 14, 1997
By /s/ Jason Bolduc
_______________________________________________________________________
Jason Bolduc, President
Date August 14, 1997
By /s/ Mitch White
________________________________________________________________________
Mitch White, Chairman of the Board of Directors
Date August 14, 1997
By /s/ Mark Dohlen
________________________________________________________________________
Mark Dohlen, Chief Executive Officer and Director
Date August 14, 1997
By /s/ Jack Carley
__________________________________________________________________________
Jack Carley, Chief Financial Officer and Director
Date August 14, 1997
By Chris Zacharias
________________________________________________________________________
Chris Zacharias, Secretary, Treasurer, Director and Corporate Counsel
-26-
CONSOLIDATED FINANCIAL STATEMENTS
STARNET COMMUNICATIONS
INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
APRIL 30, 1997
27
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND CREATIVE SPORTS MARKETING INC.)
We have audited the accompanying consolidated balance sheet of STARNET
COMMUNICATIONS INTERNATIONAL INC. (FORMERLY GELATO BRATS INC. AND CREATIVE
SPORTS MARKETING INC.) as of April 30, 1997 and 1996 and the related
consolidated statements of loss and deficit and cash flows for the periods
then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Starnet
Communications International Inc. (formerly Gelato Brats Inc. and Creative
Sports Marketing Inc.) at April 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the periods then ended in
conformity with accounting principles generally accepted in the United
States.
Vancouver, Canada, /s/ ERNST & YOUNG
June 23, 1997. Chartered Accountants
28
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
CONSOLIDATED BALANCE SHEET
(IN UNITED STATES DOLLARS)
APRIL 30, APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
ASSETS
CURRENT
Cash 27,545 -
Accounts receivable (ALLOWANCE FOR
BAD DEBTS - $28,985, 1996 - $15,933) 131,205 64,706
Prepaid expenses 28,529 5,144
- ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 187,279 69,850
- ----------------------------------------------------------------------------
Capital assets (net) [NOTE 3] 792,247 351,423
Deferred website costs [NOTE 4] 189,053 35,338
Term deposit pledged [NOTE 8] 28,620 -
- ----------------------------------------------------------------------------
1,197,199 457,513
- ----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Bank indebtedness - 1,161
Accounts payable and accrued liabilities 346,917 103,365
Loans payable [NOTE 6] 200,343 -
Deferred revenue 223,004 89,211
Current portion of capital lease
obligations [NOTE 8] 75,136 18,407
Due to related parties [NOTE 7] 132,605 188,794
- ----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 978,005 400,938
- ----------------------------------------------------------------------------
Non-current portion of capital lease
obligations [NOTE 8] 237,371 62,786
Deferred income tax [NOTE 5] 52,786 -
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 1,268,162 463,724
- ----------------------------------------------------------------------------
SHAREHOLDERS' DEFICIT
Capital stock [NOTE 9] 20,000 20,000
Deficit (119,911) (26,197)
Cumulative translation adjustment 28,948 (14)
- ----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT (70,963) (6,211)
- ----------------------------------------------------------------------------
1,197,199 457,513
- ----------------------------------------------------------------------------
Commitments [NOTE 10]
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
29
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
(IN UNITED STATES DOLLARS)
PERIOD FROM PERIOD FROM
MAY 1, 1996 MAY 19, 1995
TO APRIL 30, TO APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
REVENUE
Sales 1,996,535 378,544
Cost of sales [SCHEDULE 1] 907,368 172,755
- ----------------------------------------------------------------------------
GROSS MARGIN 1,089,167 205,789
- ----------------------------------------------------------------------------
EXPENSES
Wages and benefits 361,212 36,795
Depreciation 242,876 69,014
Bank charges and interest 98,817 9,217
Advertising and promotion 97,666 8,390
Legal and accounting 88,278 30,215
Premises costs - rent 55,584 28,594
Office and miscellaneous 26,583 8,397
Telephone 25,815 14,975
Automotive 20,479 3,892
Business Development 23,028 -
Other 88,672 22,497
- ----------------------------------------------------------------------------
1,129,010 231,986
- ----------------------------------------------------------------------------
Net loss from operations for the period (39,843) (26,197)
- ----------------------------------------------------------------------------
Income tax expense:
- current [NOTE 5] - -
- deferred [NOTE 5] 53,871 -
- ----------------------------------------------------------------------------
Income taxes 53,871 -
- ----------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (93,714) (26,197)
Deficit, beginning of period (26,197) -
- ----------------------------------------------------------------------------
DEFICIT, END OF PERIOD (119,911) (26,197)
- ----------------------------------------------------------------------------
PER COMMON SHARE
Net loss for the period (0.00) (0.00)
Dividends - -
Weighted average number of common
shares outstanding 20,000,000 20,000,000
- ----------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
30
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN UNITED STATES DOLLARS)
PERIOD FROM PERIOD FROM
MAY 1, 1996 MAY 19, 1995
TO APRIL 30, TO APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (93,714) (26,197)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 242,876 69,014
Amortization of deferred website costs 200,832 35,338
Deferred income taxes 53,871 -
Foreign exchange 16,434 546
Changes in current assets and liabilities:
Increase in accounts receivable (66,499) (64,706)
Increase in prepaid expenses (23,385) (5,144)
Increase in accounts payable and
accrued liabilities 243,552 103,365
Increase in deferred revenue 133,793 89,211
- ----------------------------------------------------------------------------
Total adjustment 801,474 227,624
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 707,760 201,427
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (406,454) (336,962)
Deferred website costs (354,547) (70,676)
Term deposit (28,620) -
Advance to related company 902 (902)
- ----------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (788,719) (408,540)
- ----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank indebtedness (1,161) 1,161
Proceeds from loans 200,343 -
Proceeds from issuance of shares - 20,000
Advance from (repayments to) related parties (56,189) 188,794
Principal repayments under capital
lease obligations (34,489) (2,842)
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 108,504 207,113
- ----------------------------------------------------------------------------
NET INCREASE IN CASH DURING THE PERIOD 27,545 -
Cash, beginning of period - -
- ----------------------------------------------------------------------------
CASH, END OF PERIOD 27,545 -
- ----------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 18,495 4,432
Income tax paid - -
- ----------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
31
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
1. NATURE OF BUSINESS
Starnet Communications International Inc. (the "Company") was incorporated
on June 28, 1996 in the State of Nevada as Creative Sports Marketing Inc.
On July 20, 1996, the Company changed its name from Creative Sports
Marketing Inc. to Gelato Brats Inc. and on February 24, 1997 to Starnet
Communications International Inc. On March 10, 1997, Starnet Communications
International Inc. redomiciled into Delaware and combined with Starnet
Communications Canada Inc. (Starnet Canada) which is involved in the
development and management of advanced on-line interactive media and
information systems for the Internet.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
On March 10, 1997, Starnet Communications International Inc. merged with
Starnet Communications Canada Inc. The Company issued 10 million shares of
Class A voting common stock for all of the outstanding stock of Starnet
Canada. This business combination was accounted for in a manner similar to
a pooling of interests. The Company's consolidated financial statements are
presented as if the merger had been in effect on May 19, 1995 (the date of
incorporation of Starnet Canada).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiary, Starnet Communications Canada Inc.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated or amortized using the straight-line
method over the estimated useful life of the assets at the following rates:
Furniture and fixtures 3 years
Computer hardware and equipment 3 years
Computer software 3 years
Automobile 4 years
1
32
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
2. ACCOUNTING POLICIES (CONT'D.)
Leasehold improvements are amortized over the term of the related lease
using the straight-line method.
One-half of the normal depreciation rate is applied in the year of
acquisition or capitalization of the capital assets.
REVENUE RECOGNITION
Revenue from dial-up access is recognized at the time services are
rendered. Billings in advance of services are included in deferred revenue
and recognized at the time services are rendered.
On-line service revenues are recognized over the period services are
provided.
REPORTING CURRENCY
The Company's functional currency is the Canadian dollar as substantially
all of the Company's operations are in Canada. The Company uses the United
States dollar as its reporting currency for consistency with other United
States Securities and Exchange Commission domestic registrants.
DEFERRED WEBSITE COSTS
Costs which relate to the development of the Company's Internet sites are
capitalized when these costs are expected to be recovered through future
revenues. Deferred website costs are amortized one half in the year
incurred, one third in the following year, and one sixth in the second
following year. The website costs balance shown in the balance sheet is
presented net of accumulated amortization.
The recoverability of the website costs is dependent upon the realization
of sufficient future revenues from these products.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of Starnet Canada which are to be settled
in a foreign currency are translated at the prevailing year-end rates of
exchange. Transactions in foreign currencies are translated at the
approximate rate of exchange in effect when the transactions occur.
Translation adjustments are reflected as a separate component of
shareholders' deficit.
2
33
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
2. ACCOUNTING POLICIES (CONT'D.)
LEASES
Leases which transfer substantially all of the benefits and risks of
ownership are recorded as the acquisition of assets and incurrence of
obligations. Under this method of accounting, both assets and obligations,
including interest thereon, are amortized over the life of the lease.
ADVERTISING
The Company expenses the costs of advertising as incurred.
NET EARNINGS AND DIVIDENDS PER COMMON SHARE
The calculations of net earnings and dividends per common share are based
upon the weighted average number of common shares of the Company
outstanding during each period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes to the consolidated
financial statements. Actual results may differ from those estimates.
3
34
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
3. CAPITAL ASSETS
Property and equipment are recorded at cost and comprise:
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
- ----------------------------------------------------------------------------
APRIL 30, 1997
Computer hardware and equipment 607,755 202,718 405,037
Computer hardware under capital
leases 208,826 62,821 146,005
Automobiles under capital leases 152,455 19,057 133,398
Leasehold improvements 81,049 12,976 68,073
Furniture and fixtures 37,257 10,919 26,338
Computer software 16,796 3,400 13,396
- ----------------------------------------------------------------------------
1,104,138 311,891 792,247
- ----------------------------------------------------------------------------
APRIL 30, 1996
Computer hardware and equipment 304,220 50,722 253,498
Computer hardware under capital
leases 84,035 14,011 70,024
Leasehold improvements 16,256 1,626 14,630
Furniture and fixtures 14,124 2,355 11,769
Computer software 1,802 300 1,502
- ----------------------------------------------------------------------------
420,437 69,014 351,423
- ----------------------------------------------------------------------------
Depreciation of assets under capital leases is included in depreciation
expense in the consolidated statements of loss and deficit.
4
35
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
4. DEFERRED WEBSITE COSTS
Website costs are recorded at cost less accumulated amortization and
comprise:
MAY 1, 1996 MAY 19, 1995
TO APRIL 30, TO APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
Net balance, beginning of period 35,338 -
Costs capitalized during the period 354,547 70,676
Current period amortization (200,832) (35,338)
- ----------------------------------------------------------------------------
Net balance, end of period 189,053 35,338
- ----------------------------------------------------------------------------
5. INCOME TAXES
(a) Virtually all of the Company's operations are located in Canada. The
income tax provision differs from the amount that would be computed by
applying the combined federal and provincial income tax rate of 45.62%
to the profit before taxes as follows:
MAY 1, 1996
TO APRIL 30,
1997
$
- ----------------------------------------------------------------------------
Provision based on (loss) before income taxes (18,176)
Increase (decrease) in tax provision resulting from :
Expenses not deductible for income tax purposes 29,242
Benefit of tax loss not currently recognized 27,372
Amortization of permanent differences on capital assets 4,433
Other 11,000
--------------------------------------------------------------------------
53,871
- ----------------------------------------------------------------------------
The above reconciliation is not presented for the comparative period as
there was a net loss for accounting and income tax purposes for that
period.
5
36
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
5. INCOME TAXES (CONT'D.)
(b) Deferred income taxes arise from timing differences in the recognition
of income and expenses for financial reporting and tax purposes. The
sources of timing differences in operations and the related deferred
income tax amounts are as follows:
APRIL 30, APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
Depreciation of capital assets (29,397) (13,490)
Deferred website costs 76,231 7,993
Other 5,952 (522)
- ----------------------------------------------------------------------------
Deferred tax (asset) liability 52,786 (6,019)
Valuation allowance - 6,019
- ----------------------------------------------------------------------------
Net deferred tax liability 52,786 -
- ----------------------------------------------------------------------------
The deferred income tax asset at April 30, 1996 was not recorded due to the
uncertainty of its realization.
6. LOANS PAYABLE
The loans are interest bearing at 6% per annum and are secured by all
assets of the Company and guaranteed by key directors and employees. The
principal and interest under the notes were payable on April 6, 1997 and
the lender subsequently agreed to extend the due date to September 30,
1997. As the loans are required to be repaid within the next two quarters,
the fair value of the debt approximates its carrying value.
Subsequent to year end, the Company has repaid $94,469 of the loans.
6
37
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
7. DUE TO RELATED PARTIES
The amounts due to related parties are due to officers and directors of the
Company who have an indirect ownership interest in the Company ("the
Related Parties"). These amounts are non-interest bearing and are
unsecured. The amount due to one individual of $25,043 (1996 - $25,697) is
repayable in monthly installments of $3,576 through November 1997. All
other amounts are without specified terms of repayment.
During the period ended, the Company was involved in the following
transactions with the Related Parties:
(a) Purchases of fixed assets and other goods and services of nil (1996 -
$156,223).
(b) Advances and loans of $94,540 (1996 - $97,929) were received.
(c) Repayments of $150,729 (1996 - $65,358) were made.
These amounts arose during the initial year of the Company's operations
when six individuals advanced funds and sold capital assets to the Company
on credit terms to finance the development of the Company's products and
operations.
8. CAPITAL LEASE OBLIGATIONS
At April 30, 1997, the Company has entered into capital leases for
equipment and automobiles. The future payments for the 12 months ended
April 30 are:
$
- ----------------------------------------------------------------------------
1998 111,701
1999 111,701
2000 83,919
2001 52,428
2002 31,020
- ----------------------------------------------------------------------------
Total minimum lease payments 390,768
Less amounts representing interest at rates varying
from 6.1% to 17.5% 78,261
- ----------------------------------------------------------------------------
Present value of minimum lease payments 312,507
Current portion of capital lease obligations 75,136
- ----------------------------------------------------------------------------
237,371
- ----------------------------------------------------------------------------
7
38
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
8. CAPITAL LEASE OBLIGATIONS (CONT'D.)
Under the equipment lease the Company entered into in February 1997, the
Company has the option to acquire the equipment for $11,309 at the end of
the lease's 33rd calendar month. As a condition of the lease, the Company
has pledged a term deposit for $28,620. The term deposit will be returned
upon the expiry of the lease.
The Company has the option to acquire four leased automobiles at the end of
the lease terms by paying amounts estimated at commencement of the leases
to be the residual values of the vehicles at the end of the leases. As a
condition of these leases the Company has guaranteed that the residual
value of the four leased vehicles will be $12,981, $13,284, $9,310 and
$16,874 at the end of the lease terms.
Subsequent to April 30, 1997, the Company has entered into capital leases
for computer equipment. These leases require aggregate monthly payments
including interest of $3,096 through November 1999 and $1,783 from December
1999 through May 2000.
9. SHARE CAPITAL
Share capital comprises:
APRIL 30, APRIL 30,
1997 1996
$ $
- ----------------------------------------------------------------------------
AUTHORIZED
200,000,000 Class A voting common shares,
par value $0.001
ISSUED AND OUTSTANDING
20,000,000 Class A voting common shares 20,000 20,000
- ----------------------------------------------------------------------------
20,000 20,000
- ----------------------------------------------------------------------------
8
39
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1997
10. COMMITMENTS
At April 30, 1997, the Company has entered into commitments for leases for
premises. The future payments for the 12 months ended April 30 are:
$
- ----------------------------------------------------------------------------
1998 120,000
1999 123,000
2000 108,000
- ---- -------
381,000
- ----------------------------------------------------------------------------
Subsequent to April 30, 1997, the Company has entered into a commitment for
an operating lease for a vehicle. The lease requires monthly payment of
$869 through May 2000 and the Company guarantees the residual value of the
vehicle for $14,533 in May 2000.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128") regarding the
determination and disclosure of earnings per share. The Company will
initially adopt these new standards for the purpose of preparing its
financial statements for the year ended April 30, 1998. Due to the fact
there are no common stock equivalents for the periods presented herein,
basic earnings (loss) per share under FAS 128 would be equal to the primary
earnings (loss) per share amounts presented in the consolidated statement
of loss.
9
40
STARNET COMMUNICATIONS INTERNATIONAL INC. SCHEDULE 1
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
SCHEDULE OF COST OF SALES
(IN UNITED STATES DOLLARS)
PERIOD FROM PERIOD FROM
MAY 1, 1996 MAY 19, 1995
TO APRIL 30, TO APRIL 30,
1997 1996
$ $
- -----------------------------------------------------------------------------
Line charges 280,797 50,585
Wages and benefits 216,438 45,118
Amortization of deferred website costs 200,832 35,338
Live performers 61,329 7,088
Video content 51,661 10,848
Photo content 47,616 6,569
Other 36,706 10,176
Audio content 11,989 7,033
- ----------------------------------------------------------------------------
Cost of sales 907,368 172,755
- ----------------------------------------------------------------------------
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