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: January 31, 1999
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 January 31, 1999, the registrant had 23,969,829 shares of Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one);
Yes No X
----- -----
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 Income and Earnings
(Unaudited)
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For three months ended For nine months ended
Jan 31, 1999 Jan 31, 1998 Jan 31, 1999 Jan 31, 1998
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REVENUE
Sales 2,665,559 812,177 5,984,175 2,242,246
Cost of sales 643,971 329,551 1,784,448 980,987
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GROSS MARGIN 2,021,588 482,626 4,199,727 1,261,259
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EXPENSES
Operating expenses 1,116,606 1,036,257 2,985,250 2,111,811
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1,116,606 1,036,257 2,985,250 2,111,811
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Net income (loss) from operations
for the period 904,982 (553,631) 1,214,477 (850,552)
- ---------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Gain (Loss) on termination of capital
lease - - 4,668 2,191
Interest income (expense) (16,561) (15,625) (54,821) (44,621)
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(16,561) (15,625) (50,153) (42,430)
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Net income (loss) before income
taxes 888,421 (569,256) 1,164,324 (892,982)
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Income tax expense (recovery):
- current - - (74,360) -
- deferred - - - 4,452
- ---------------------------------------------------------------------------------------
Income taxes - - (74,360) 4,452
- ---------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD 888,421 (569,256) 1,238,684 (897,434)
Retained earnings (deficit),
beginning of period (807,608) (448,089) (1,157,871) (119,911)
- ---------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END
OF PERIOD 80,813 (1,017,345) 80,813 (1,017,345)
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EARNINGS PER SHARE
- Basic 0.04 (0.03) 0.06 (0.04)
- Diluted 0.04 (0.03) 0.05 (0.04)
WEIGHTED AVERAGE NUMBER OF SHARES
- Basic 22,523,300 21,615,385 22,474,433 20,534,545
- Diluted 24,379,118 21,615,385 23,093,039 20,534,545
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2
STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Balance Sheet
(Unaudited)
- ------------------------------------------------------------------------------
Jan. 31, 1999 April 30, 1998
$ $
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ASSETS
CURRENT
Cash and cash equivalents 860,372 140,462
Restricted cash - 500,000
Accounts receivable 1,816,494 264,163
Prepaid expenses 212,371 262,545
Security deposits 233,428 195,607
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Total current assets 3,122,665 1,362,777
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Capital assets (net) 988,780 1,190,511
Deferred website costs 274,638 255,884
Software development costs 679,855 465,759
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5,065,938 3,274,931
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness - 466,217
Accounts payable & accrued liabilities 730,663 520,031
Income taxes payable - 74,360
Deposits from customers 487,670 190,727
Loan payable 207,031 -
Deferred revenue 319,748 279,848
Current portion of capital lease obligations 148,122 160,654
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TOTAL CURRENT LIABILITIES 1,893,234 1,691,837
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Non-current portion of capital lease
obligations 126,082 258,298
Deferred income taxes 26,904 26,904
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TOTAL LIABILITIES 2,046,220 1,977,039
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SHAREHOLDERS' EQUITY
Capital stock 2,831,499 2,421,000
Retained Earnings (Deficit) 80,813 (1,157,871)
Cumulative translation adjustment 107,406 34,763
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TOTAL SHAREHOLDERS' EQUITY 3,019,718 1,297,892
- ------------------------------------------------------------------------------
5,065,938 3,274,931
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3
STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Statement of Cash Flows
(Unaudited)
- -----------------------------------------------------------------------------
FOR NINE MONTHS ENDED Jan. 31, 1999 Jan. 31, 1998
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period 1,238,684 (897,434)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 513,507 343,203
Amortization of deferred web site costs 304,182 244,133
Amortization of software development costs 120,168 -
Gain on disposal of fixed assets (4,668) (2,191)
Deferred income taxes - 4,452
Foreign exchange 72,643 5,446
Changes in current assets and liabilities
Decrease (Increase) in accounts receivable (1,552,331) (29,762)
Decrease (Increase) in prepaid expenses 50,174 (205,149)
Increase (decrease) in accounts payable
and accrued liabilities 210,632 (7,423)
Increase (decrease) in deposits from
customers 296,943 57,920
Increase (decrease) in deferred revenue 39,900 35,402
Decrease (Increase) in income tax payable (74,360) -
- -----------------------------------------------------------------------------
Total adjustments (23,210) 446,031
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Net cash provided by operating activities 1,215,474 (451,403)
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- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in notes receivable (27,480)
Purchase of capital assets (319,421) (555,557)
Deferred web site costs (322,936) (293,323)
Software development costs (334,264) (163,577)
Restricted cash 500,000 (526,340)
Security deposits (37,821) -
- -----------------------------------------------------------------------------
Net cash (used in) investing activities (514,442) (1,566,277)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank indebtedness (466,217) 389,669
Proceeds from loan 207,031 (200,343)
Repayments to related parties - (132,605)
Principal repayments under capital lease
obligations (132,435) (92,990)
Proceeds from issuance of common stocks 410,499 2,450,000
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 18,878 2,413,731
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- -----------------------------------------------------------------------------
NET INCREASE IN CASH DURING THE PERIOD 719,910 396,051
CASH, BEGINNING OF PERIOD 140,462 27,545
- -----------------------------------------------------------------------------
CASH, END OF PERIOD 860,372 423,596
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 68,317 47,386
Income tax paid - -
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4
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 AND 1998
(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 10KSB.
(B) SOFTWARE REVENUE RECOGNITION
Statement of Position (SOP) 97-2 is effective for transactions entered into
in fiscal years beginning after December 15, 1997. Revenue generated from
software licensing in this reporting period is recognized in accordance
with SOP 97-2.
Item 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
Until the end of fiscal 1998, the Company derived its revenues principally
from its Internet web sites namely Sizzle and Chisel. Through substantial
research and exploration in the past two years, the Company has identified
the opportunity of offering gaming services over the Internet and has
successfully launched its gaming products in March 1998. The Company's
Internet casino, which targets only customers outside North America, is
operated by its subsidiary, World Gaming Services Inc, in Antigua. Softec
System Caribbean Inc., another Antigua subsidiary, licenses its gaming
software to third parties for a set up fee and monthly royalty. Since the
beginning of fiscal 1999, revenues from all components of the gaming
business, which include licensing, casino operations and financial
transactions processing, have undergone a tremendous growth and have become
the major source of revenues. Revenues generated from the gaming business
amounted to $3,368,801 representing 56.3% of the total revenues for the
nine months ended January 31, 1999 and $1,718,336 representing 64.5% of the
total revenues for the three months ended January 31, 1999.
The following tables set forth statements of operations data for the three
months ended January 31, 1999 and 1998, nine months ended January 31, 1999
and 1998 and balance sheet data as at January 31, 1999 and April 30, 1998.
5
A. Statement of Operations Data
- --------------------------------
For the three months ended January 31, 1999 and 1998
For the three months ended
January 31, 1999 January 31, 1998
---------------- ----------------
Net Sales 2,665,559 812,177
Gross Margin 2,021,588 482,626
Operating expenses 1,116,606 1,036,257
Operating Income (Loss) 904,982 (553,631)
Net Income (Loss) 888,421 (569,256)
For the nine months ended January 31, 1999 and 1998
- ---------------------------------------------------
For the nine months ended
January 31, 1999 January 31, 1998
---------------- ----------------
Net Sales 5,984,175 2,242,246
Gross Margin 4,199,727 1,261,259
Operating expenses 2,985,250 2,111,811
Operating Income (Loss) 1,214,477 (850,552)
Net Income (Loss) 1,238,684 (897,434)
B. Balance Sheet Data
- ---------------------
At January 31, 1999 At April 30, 1998
------------------- -----------------
Working Capital (Deficiency) 1,229,431 (329,060)
Total Assets 5,065,938 3,274,931
Long Term Debt 126,082 258,298
Stockholders' Equity (Deficit) 3,019,718 1,297,892
Accumulated Earnings (Deficit) 80,813 (1,157,871)
The Company's revenues increased 167% to $5,984,175 for the nine months
ended January 31, 1999 compared to $2,242,246 for the nine months ended
January 31, 1998. Revenues for the quarter ended January 31, 1999 amounted
to $2,665,559 which represents a growth of 49.6% compared to the previous
quarter and 228.2% compared to the prior year quarter. The growth is
primarily due to additional revenues generated from licensing, gaming
operations and financial transactions processing for licensees. Revenue
from software licensing, which has become a major income source, accounts
for 56.3% and 45.2% of the total revenues for the three months and nine
months ended January 31, 1999 respectively. The Company currently has a
total of 21 licensees and at January 31, 1999, ten licensees were in
operation generating aggregate monthly revenue of around 2 million dollars.
The Company expects all
6
licensees signed before January 31, 1999 to be operational within 2 months,
which will bring in revenues of approximately 1 million dollars from set up
fees.
Along with the growth in sales, gross margin increased to $2,021,588 for
the quarter ended January 31, 1999 from $482,626 for the prior year
quarter. Gross margin increased from 59.4% for the quarter ended January
31, 1998 to 75.8% for the quarter ended January 31, 1999 due to the
relatively higher gross margin of the software licensing business and
efficiencies gained from increased number of licensees.
Operating expenses increased by 7.8% to $1,116,606 (41.9% of sales) for the
three months ended January 31, 1999 from $1,036,257 (127.6% of sales) for
the prior year quarter. The decrease in these expenses from 127.6% to 41.9%
was the result of substantial revenue growth following the completion of
software development and efficiencies gained as the Company handled a
greater level of activity.
Interest expense increased to $54,821 for the nine months ended January 31,
1999 from $44,621 for the nine months ended January 31, 1998, and to
$16,561 for the quarter ended January 31, 1999 from $15,625 for the prior
year quarter. The increase was mainly resulted from interest cost due to
bank borrowing. As the Company chose to terminate the loan facilities with
its bank in January 1999, interest cost is expected to decrease in the next
quarter.
Net income from operations for the three months ended January 31, 1999 was
$904,982 compared to operating profit of $186,726 for the previous quarter
and operating loss of $553,631 for the prior year quarter. The continuous
growth was mainly the result of increase in revenues from software
licensing. The Company expects revenues from licensing continue to grow as
more licensees commence operations and revenues of their casino operations
increase.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At January 31, 1999, the Company had $860,372 in cash and cash equivalents
compared to $140,462 at April 30, 1998. In January 1999, the Company paid
off the outstanding bank loan with the restricted cash equivalent of
$500,000.
Working capital at January 31, 1999 increased significantly to $1,229,431
from a deficit of $329,060 at April 30, 1998. The increase was the result
of increased accounts receivable following the surge in sales.
Net cash (used for) generated from operations for the nine months ended
January 31, 1999 increased to $1,215,474 from ($451,403) for the nine
months ended January 31, 1998. The increase in cashflow from operations was
mainly due to increase in revenues and customers' deposits received by the
Company.
Net cash used for investing activities for the nine months ended January
31, 1999 was $514,442 compared to $1,566,277 for the nine months ended
January 31, 1998. The decrease in cashflow used for investing activities
was resulted from the release of the restricted cash.
7
Net cash provided by financing activities for the nine months ended January
31, 1999 was $18,878 compared to $2,413,731 for the nine months ended
January 31, 1998. The decrease resulted from the voluntary termination of
the bank loans and the share offering for the nine month ended January 31,
1998.
Impact of Inflation
- -------------------
The Company believes that inflation has not had a material effect on its
past business.
Part II - Other Information
---------------------------
Item 5 - Other Information
YEAR 2000 RISKS.
Currently, many computer systems, hardware and software products are coded
to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. The
interactions between various software and hardware platforms often rely
upon the date coding system. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to function
properly after the turn of the century. The Company, its customers, and
suppliers are reliant on computers and related automated systems for daily
business operations. Failure to achieve at least a minimum level of Year
2000 systems compliance by both the company and its suppliers could have a
material adverse effect on the Company.
The Company has begun the process of identifying computer systems that
could be affected by the Year 2000 issue as it relates to the Company's
internal hardware and software, as well as third parties that provide the
Company with goods or services. Three categories or general areas have
been identified for review and analysis:
1. Systems providing customers services. These include hardware and
software systems that are used to provide services to the
Company's customers in the form of Internet connectivity, e-mail
servers, authentication servers, gaming servers, database
servers, etc. Hardware in the form of routers and switches are
also included in this area.
2. Third party vendors providing critical services including
circuits, hardware, long distance Internet connectivity and
related products. These include telco providers, suppliers of
routers, modems, switches, odds feeds, etceteras.
3. Critical internal systems that support the Company's
administrative systems for billing and collecting, general
accounting systems, computer networks, and communication systems.
The Company is in the planning and initial study phase of Year 2000
compliance review and testing. In regards to Item (1) listed above,
systems providing customers services, the Company's critical existing
systems are no more than two and one-half years old and it is anticipated
that many of these systems will not have significant Year 2000 problems.
These
8
systems are in the process of being inventoried and a systems testing
schedule is being developed. Many of the critical systems have been
migrated to new hardware and software platforms to increase reliability and
capacities. All newly acquired hardware systems, operating systems, and
software are required to have vendor certification for Year 2000
compliance.
In regard to Item (2) above - third party products and services - the
Company's significant vendors are large public companies such as Sun
Microsystems, Microsoft, Oracle, Silicon Graphics Cisco, Lucent
Technologies, etceteras. These companies are all under SEC mandates to
report their compliance in all publicly filed documents. The Company will
initiate a compliance review program with these vendors during the first
full quarter of 1999 and will continue to track progress of all critical
vendors for compliance.
Item (3) above, critical internal systems, relates to internal systems for
company administrative and communications requirements. The Company is in
the process of implementing new billing and billing presentment systems
during the first half of 1999. These systems are proprietary to the
company and are required to be Year 2000 compliant. Additionally, the
Company will test these systems for compliance during the implementation
processes. Internal computer networks and communications systems will be
tested in the first full quarter of 1999 for compliance.
The costs to address the Year 2000 compliance issues have not been
determined at this time. Based on growth the Company plans to implement
new hardware platforms and software systems that should be Year 2000
compliant and therefore costs specifically allocated to Year 2000
compliance may not be significant. Systems testing and compliance reviews
with third party services providers will incur manpower and consultant
costs. The nature of the Company's business makes it dependent on computer
hardware, software, and operating systems that are susceptible to Year 2000
issues. Failure to attain at least minimum levels of Year 2000 compliance
would have a material adverse effect on the Company's ability to deliver
services.
The Company has not developed a contingency plan for dealing with Year 2000
risks at this time.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated December 2, 1998, was filed acknowledging the
extension of the expiry date for the warrants issued under the
Regulation "S" private placement that was completed December 2,
1997. The warrants were to expire on December 2, 1998, and now
are set to expire on December 2, 1999.
9
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: March 11, 1999 /s/ CHRISTOPHER H. ZACHARIAS
--------------------------------------
Christopher H. Zacharias
Corporate Counsel, and
Corporate Secretary
Date: March 11, 1999 /s/ JOHN CARLEY
--------------------------------------
John Carley
Chief Financial Officer
10