FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1997
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 52-2027313
(State of incorporation) (IRS Employer ID No.)
425 Carrall Street, Mezzanine Level
Vancouver, B.C., Canada V6B 6E3
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 485-7619
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 No X
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As of April 30, 1997, the registrant had 20,000,000 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one);
Yes No X
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THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
Part I - Financial Information
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Item 1 - Financial Statements:
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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July 31, 1997 April 30, 1997
$ $
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ASSETS
CURRENT
Cash 47,835 27,545
Accounts receivable 54,119 131,205
Prepaid expenses 105,032 28,529
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Total current assets 206,986 187,279
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Capital assets (net) 870,915 792,247
Deferred website costs 200,763 189,053
Deferred software development costs 27,095 -
Term deposits pledged 29,021 28,620
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1,334,780 1,197 199
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT
Accounts payable and accrued liabilities 315,525 346,917
Deferred revenue 263,864 223,004
Current portion of capital
lease obligations 98,061 75,136
Loans payable 423,880 200,343
Due to related parties 117,773 132,605
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TOTAL CURRENT LIABILITIES 1,219,103 978,005
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Non-current portion of capital
lease obligations 243,785 237,371
Deferred income tax 57,238 52,786
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TOTAL LIABILITIES 1,520,126 1,268,162
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SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock 20,000 20,000
Retained earnings (deficit) (218,402) (119,911)
Cumulative translation adjustment 13,056 28,948
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TOTAL SHAREHOLDERS' DEFICIT (185,346) (70,963)
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1,334,780 1,197,199
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF INCOME AND EARNINGS
(UNAUDITED)
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FOR THREE MONTHS ENDED July 31, 1997 July 31, 1996
$ $
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REVENUE
Sales 709,337 352,728
Cost of sales 325,379 144,789
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GROSS MARGIN 383,958 207,939
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EXPENSES
Selling, general and administrative
expenses 272,259 155,599
Research and development expenses 194,549 -
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466,808 155,599
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Net income (loss) from operations
for the period (82,850) 52,340
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OTHER INCOME (EXPENSES)
Gain (Loss) on termination of
capital lease 2,191 -
Interest income (expense) (13,380) (3,355)
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(11,189) (3,355)
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INCOME TAX EXPENSE:
- current - -
- deferred 4,452 9,517
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INCOME TAXES 4,452 9,517
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NET INCOME (LOSS) FOR THE PERIOD (98,491) 39,468
Retained earnings (deficit), beginning
of period (119,911) (26,197)
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RETAINED EARNINGS (DEFICIT), END
OF PERIOD (218,402) 13,271
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PER COMMON SHARE
Net earnings (loss) for the period (0.00) 0.00
Dividends - -
Weighted average number of common
shares outstanding 20,000,000 20,000,000
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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FOR THREE MONTHS ENDED July 31, 1997 July 31, 1996
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period (98,491) 39,468
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 94,344 36,184
Amortization of deferred website costs 105,325 37,151
Gain on termination of capital lease (2,191) -
Deferred income taxes 4,452 9,517
Foreign exchange (6,569) (450)
Changes in non-cash working
capital balances:
Decrease (Increase) in accounts
receivable 77,086 (26,121)
Decrease (Increase) in prepaid
expenses (76,503) (4,995)
Increase (decrease) in accounts payable
and accrued liabilities (31,392) 27,417
Increase (decrease) in deferred revenue 40,860 38,554
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Total adjustment 205,412 117,257
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NET CASH PROVIDED BY OPERATING ACTIVITIES 106,921 156,725
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (117,824) (41,312)
Deferred website costs (122,041) (57,524)
Deferred software development costs (27,095) -
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NET CASH (USED IN) INVESTING ACTIVITIES (266,960) (98,836)
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CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank indebtedness - (1,161)
Proceeds from loan 326,200 -
Repayment of loan (102,663) -
Advance from (repayments to)
related parties (14,832) (30,552)
Principal repayments under capital
lease obligation (28,376) (4,276)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 180,329 (35,989)
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NET INCREASE IN CASH DURING THE PERIOD 20,290 21,900
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Cash, beginning of period 27,545 -
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CASH, END OF PERIOD 47,835 21,900
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 10,934 3,355
Income tax paid - -
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STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1996
(A) BASIS OF PREPARATION
The consolidated financial statements included herein are unaudited, but in
the opinion of management, reflects all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the
results for the interim period. The interim results of operations and cash
flows are not necessarily indicative of such results and cash flows for the
entire year. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and
notes included in the Company's Form 10-SB.
(B) DEFERRED SOFTWARE DEVELOPMENT COST
Software production costs related to the development of the gaming software
are capitalized in accordance with Statement of Financial Accounting
Standards No. 86 (FAS86), Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed. Amortization will start when the
product is available for release.
Item 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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General
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The Company currently derives its revenues principally from its Internet
web sites namely Sizzle, Chisel and Livewomen. While the Internet
continues to become more accessible, the Company is actively researching
and developing other projects that will utilize its existing facilities and
expertise.
The following tables set forth statements of operations data for the three
months ended July 31, 1997 and 1996 and balance sheet data as at July 31,
1997 and April 30, 1997.
A. Statement of Operations Data
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For the three months ended
July 31, 1997 July 31, 1996
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Net Sales 709,337 352,728
Gross Margin 383,958 207,939
Net Income (Loss) from operations (82,850) 52,340
Net Income (Loss) (98,491) 39,468
B. Balance Sheet Data
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At July 31, 1997 At April 30, 1997
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Working Capital (Deficiency) (1,012,117) (790,726)
Total Assets 1,334,780 1,197,199
Long Term Debt 243,785 237,371
Stockholders' Equity (Deficit) (185,346) (70,963)
Accumulated Earnings (Deficit) (218,402) (119,911)
The Quarter ended July 31, 1997 Compared to the Quarter ended July 31, 1996
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The Company's revenues increased 101% to $709,337 for the three months
ended July 31, 1997 compared to $352,728 for the prior year quarter. 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 $383,958 for the three months ended July 31, 1997 from
$207,939 for the three months ended July 31, 1996. More features and
content were added to the Internet web sites in order to attract new
subscribers, resulting in a drop in gross margin to 54.1% for the three
months ended July 31, 1997 from 59% for the three months ended July 31,
1996.
Selling, general and administrative expenses increased by 75% to $272,259
(38.4% of sales) for the three months ended July 31, 1997 from $155,599
(44.1% of sales) for the prior year quarter. The decrease in these expenses
from 44.1% to 38.4% was the result of efficiencies gained as the Company
handled a greater level of activity.
Research and development expenses for the quarter ended July 31, 1997
amounted to $194,549. These expenses are mainly related to the Company's
increased effort in exploring new business opportunities and development of
the gaming project in Antigua. All software development costs incurred
subsequent to the establishment of technological feasibility are
capitalized as software development cost.
Interest expense increased by 299% to $13,380 for the three months ended
July 31, 1997 from $3,355 for the prior year quarter. The increase mainly
resulted from interest cost on the loans from DGD Wealth Management and
additional capital leases obtained.
Net loss from operations for the three months ended July 31, 1997 was
$82,850 compared to the net income from operations of $52,340 for the prior
year quarter. The loss for the quarter ended July 31 1997 was the result of
the significant increase in R&D costs incurred during the period. If the
Company had not invested in research and development, the Company would
have had net income from operations of $111,699 for the three months ended
July 31, 1997. Income tax expense for the three months ended
July 31, 1997 was $4,452 (deferred) compared to $9,517 (deferred) for the
three months ended July 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
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At July 31, 1997, the Company had $47,835 in cash and cash equivalents
compared to $27,545 at April 31, 1997. The Company expects to meet its
future cash requirements through equity financing and cash generated from
operations.
Net cash generated from operations for the three months ended July 31, 1997
decreased to $106,921 from $156,725 for the prior year quarter. Net cash
generated by changes in working capital (excluding cash) was $10,051 for
the quarter ended July 31, 1997 compared to $34,855 for the prior year
quarter. The decrease in cashflow from operations is mainly due to the
increase in prepaid expenses resulted from the $75,000 prepayment of the
gaming license in Antigua.
Net cash used for investing activities for the three months ended July 31,
1997 was $266,960 compared to $98,836 for the prior year quarter. The
increase was resulted from higher level of investment in capital assets,
deferred website costs and deferred software development costs.
Net cash provided by financing activities for the three months ended July
31, 1997 was $180,329 compared to net cash used by financing activities for
the prior quarter of $35,989. For the quarter ended July 31, 1997, the
Company obtained loans amounting to $326,200 and repaid $102,663 on the
loan from DGD Wealth Management.
Impact of Inflation
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The Company believes that inflation has not had a material effect on its
past business.
Part II - Other Information
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Item 6 - Exhibits and Reports on Form 8-K
Exhibit No. Description
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6 Bylaws
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1997.
SIGNATURES
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 10, 1997 /s/ CHRISTOPHER H. ZACHARIAS
---------------------------------
Christopher H. Zacharias
Corporate Council, and
Corporate Secretary
Date: September 10, 1997 /s/ MITCHELL WHITE
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Mitchell White
Chairman of the Board