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: October 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) 685-7619
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 X No
----- -----
As of October 31, 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
------------------------------
Item 1 - Financial Statements:
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Statement of Cash Flows
(Unaudited)
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FOR THE SIX MONTHS ENDED Oct 31/97 Oct 31/96
- ------------------------ $ $
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period (328,178) 65,775
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation 205,058 81,912
Amortization of deferred website costs 157,315 86,221
Gain on termination of capital lease (2,191)
Deferred income tax 4,452 21,930
Foreign exchange (10,299) (7,247)
Changes in non-cash working capital
balances:
Decrease (increase) in accounts
receivable 56,829 (28,873)
Decrease (increase) in prepaid
expenses (203,772) (6,121)
Increase (decrease) in accounts
payable and accrued (48,741) 90,823
Increase (decrease) in deferred
revenue 38,289 114,437
- ---------------------------------------------------------------------------
Total adjustment 196,940 353,082
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NET CASH PROVIDED BY OPERATING ACTIVITIES (131,238) 418,857
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (291,313) (158,899)
Deferred website costs (184,667) (148,884)
Deferred software development costs (93,611)
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NET CASH (USED IN) INVESTING ACTIVITIES (569,591) (307,783)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank indebtedness -- (1,161)
Proceeds from loan 1,862,120
Repayment of loan (200,343)
Advance from (repayment to) related
parties (132,605) (68,763)
Principle repayments under capital
lease obligation (60,328) (7,534)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,468,844 (77,458)
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NET INCREASE IN CASH DURING THE PERIOD 768,015 33,616
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Cash, beginning of period 27,545 --
- ---------------------------------------------------------------------------
CASH, END OF PERIOD 795,560 33,616
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- ---------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED Oct 31/97 Oct 31/96
- ------------------------ $ $
- ---------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 28,996 6,535
Income tax paid 0 --
- ---------------------------------------------------------------------------
STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Balance Sheet
(Unaudited)
ASSETS
CURRENT
- -------
Cash 795,560 27,545
Accounts receivable 74,376 131,205
Prepaid expenses 232,301 28,529
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Total current assets 1,102,237 187,279
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Capital assets (net) 1,002,275 792,247
Deferred website costs 216,406 189,053
Deferred software development costs 93,611 --
Term deposit pledged 28,401 28,620
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2,442,930 1,197,199
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable & accrued liabilities 298,176 346,917
Deferred revenue 261,293 223,004
Current portion of capital lease
obligations 124,357 75,136
Loans payable 1,862,120 200,343
Due to related parties -- 132,605
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TOTAL CURRENT LIABILITIES 2,545,946 978,005
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Non-current portion of capital lease
obligations 249,403 237,371
Deferred income tax 57,238 52,786
- ---------------------------------------------------------------------------
TOTAL LIABILITIES 2,852,587 1,268,162
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SHAREHOLDERS' EQUITY
Capital stock 20,000 20,000
Deficit (448,089) (119,911)
Cumulative translation adjustment 18,432 28,948
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TOTAL SHAREHOLDERS' DEFICIT (409,657) (70,963)
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2,442,930 1,197,199
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STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Statement of Income and Earnings (Unaudited)
- --------------------------------------------------------------------------------------
For three months ended For six months ended
Oct 31/97 Oct 31/96 Oct 31/97 Oct 31/96
- --------------------------------------------------------------------------------------
REVENUE
Sales 720,732 440,014 1,430,069 792,742
Cost of sales 326,057 181,318 651,436 326,107
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GROSS MARGIN 394,675 258,696 778,633 466,635
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EXPENSES
Selling, general and
administrative expenses 281,158 216,796 553,417 372,395
Research and development
expenses 327,588 -- 522,137 0
- --------------------------------------------------------------------------------------
608,746 216,796 1,075,554 372,395
- --------------------------------------------------------------------------------------
Net income (loss) from
operations (214,071) 41,900 (296,921) 94,240
for the period
- --------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Gain (Loss) on termination of -- -- 2,191 0
capital lease
Interest income (expense) (15,616) (3,180) (28,996) (6,535)
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(15,616) (3,180) (26,805) (6,535)
- --------------------------------------------------------------------------------------
INCOME TAX EXPENSE:
- current -- -- 0
- deferred -- 12,413 4,452 21,930
- --------------------------------------------------------------------------------------
INCOME TAXES 0 12,413 4,452 21,930
- --------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD (229,687) 26,307 (328,178) 65,775
Retained earnings (deficit), (218,402) 13,271 (119,911) (26,197)
beginning of period
- --------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), (448,089) 39,578 (448,089) 39,578
END OF PERIOD
- --------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (loss) for the period (0.01) 0.00 (0.02) 0.00
Dividends
Weighted average number of common
shares outstanding 20,000,000 20,000,000 20,000,000 20,000,000
- --------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1997 AND 1996
(A) BASIS OF PRESENTATION
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.
(C) LIVEWOMEN
During September 1997, the Company discontinued its pay per usage Internet
site "Livewomen". Equipment acquired for this project was reused by the
company's other membership sites.
Item 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
The Company currently derives its revenues principally from its Internet
web sites namely Sizzle and Chisel. 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
and six months ended October 31, 1997 and 1996 and balance sheet data as at
October 31, 1997 and April 30, 1997.
A. Statement of Operations Data
- -------------------------------
For the three months ended October 31, 1997 and 1996
- ----------------------------------------------------
For the three months ended
October 31, October 31,
1997 1996
---------- ----------
Net Sales 720,732 440,014
Gross Margin 394,675 258,696
Net Income (Loss) from operations (214,071) 41,900
Net Income (Loss) (229,687) 26,307
For the six months ended October 31, 1997 and 1996
- --------------------------------------------------
For the six months ended
October 31, October 31,
1997 1996
---------- ----------
Net Sales 1,430,069 792,742
Gross Margin 778,633 466,635
Net Income (Loss) from operations (296,921) 94,240
Net Income (Loss) (328,178) 65,775
B. Balance Sheet Data
- ---------------------
At October 31, At April 30,
1997 1997
---------- ----------
Working Capital (Deficiency) (1,443,709) (790,726)
Total Assets 2,442,930 1,197,199
Long Term Debt 249,403 237,371
Stockholders' Equity (Deficit) (409,657) (70,963)
Accumulated Earnings (Deficit) (448,089) (119,911)
The Company's revenues increased 63.8% to $720,732 for the quarter ended
October 31, 1997 compared to $440,014 for the prior year quarter. On a
year-to-date basis, revenues for the six months ended October 31, 1997 were
$1,430,069, 80.4% greater than the comparable period of the prior fiscal
year. 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 $394,675 for the three months ended October 31, 1997
from $258,696 for the three months ended October 31, 1996. Enhancement in
features and content, coupled with the lower gross margin on the pay per
usage Internet site "Livewomen", caused a drop in gross margin to 54.8% for
the three months ended October 31, 1997 from 58.8% for the three months
ended October 31, 1996.
Selling, general and administrative expenses increased by 29.7% to $281,158
(39% of sales) for the three months ended October 31, 1997 from $216,796
(49.3% of sales) for the prior year quarter. The decrease in these expenses
from 49.3% to 39% was the result of efficiencies gained as the Company
handled a greater level of activity.
Research and development expenses for the quarter ended October 31, 1997
amounted to $327,588, compared to $194,549 in the previous quarter. These
expenses are mainly related to the Company's increased effort in exploring
new business opportunities and development of the gaming project in
Antigua. Production costs for the gaming software incurred subsequent to
the establishment of technological feasibility are capitalized as software
development cost.
Interest expense increased to $15,616 for the three months ended October
31, 1997 from $3,180 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 quarter ended October 31, 1997 was
$214,071 compared to the net income from operations of $41,900 for the
prior year quarter. The loss for the quarter ended October 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 $113,517 for the three months
ended October 31, 1997 and $225,216 for the six months ended October 31,
1997. No income tax expense was recorded for the three months ended October
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At October 31, 1997, the Company had $795,560 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 (used for) operations for the six months ended
October 31, 1997 decreased to -$131,238 from $418,857 for the six months
ended October 31, 1996. Net cash generated (used) by changes in working
capital (excluding cash) was $157,395 for the six months ended October 31,
1997 compared to $170,266 for the same period of fiscal 1997. The decrease
in cash flow from operations is mainly due to the increase in prepaid
expenses that resulted from the $175,000 prepayment of the gaming license
in Antigua and net loss due to the increase in R&D expenses.
Net cash used for investing activities for the six months ended October 31,
1997 was $569,591 compared to $307,783 for the six months ended October 31,
1996. 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 six months ended October
31, 1997 was $1,468,844 compared to net cash used by financing activities
for the six months ended October 31, 1996 for $77,458. During the six
months ended October 31, 1997, the Company arranged a bridge financing for
$1,862,120 in anticipation of a pending share offering and subsequent
repayment of the loan from DGD Wealth Management. The share offering was
completed on December 2, 1997, with a Form 8-K dated December 2, 1997
referencing the sale being filed with the SEC.
Impact of Inflation
- -------------------
The Company believes that inflation has not had a material effect on its
past business.
Part II - Other Information
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
(a) No Exhibits are filed with this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1997,
however, a Form 8-K dated December 2, 1997, was filed acknowledging a
Regulation "S" private placement of shares. This private placement is the
"pending share offering" referred to under LIQUIDITY AND CAPITAL RESOURCES
in this 10-QSB report.
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: December 9, 1997 /s/ CHRISTOPHER H. ZACHARIAS
---------------------------------------
Christopher H. Zacharias
Corporate Counsel, and
Corporate Secretary
Date: December 9, 1997 /s/ JOHN CARLEY
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John Carley
Chief Financial Officer