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, 1998
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, 1998, the registrant had 22,450,000 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.
<PAGE>
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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January 31, April 30,
1998 1997
$ $
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ASSETS
CURRENT
Cash 423,596 27,545
Accounts receivable 160,967 131,205
Notes receivable 27,480 -
Prepaid expenses 233,678 28,529
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TOTAL CURRENT ASSETS 845,721 187,279
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Capital assets (net) 1,149,379 792,247
Deferred website costs 238,242 189,053
Deferred software development costs 163,577 -
Assets pledged 554,960 28,620
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2,951,879 1,197,199
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank Indebtedness 389,669 -
Accounts payable & accrued liabilities 339,494 346,917
Loans payable - 200,343
Deferred revenue 258,406 223,004
Deposit from customers 57,920 -
Current portion of capital lease
obligations 135,487 75,136
Due to related parties - 132,605
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TOTAL CURRENT LIABILITIES 1,180,976 978,005
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Non-current portion of capital lease
obligations 212,139 237,371
Deferred income tax 57,238 52,786
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TOTAL LIABILITIES 1,450,353 1,268,162
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SHAREHOLDERS' EQUITY
Capital stock 22,450 20,000
Authorized:
100,000,000 shares of Class A Voting
Common Stock, par 0.001
50,000,000 shares of Class B nonvoting
common stock, par 0.001
50,000,000 shares of Preferred Stock,
par 0.001
Issued and outstanding
22,450,000 shares of Class A voting
common stock, par $0.001
Additional paid in capital 2,447,550 -
Retained Earnings (Deficit) (1,017,345) (119,911)
Cumulative translation adjustment 48,871 28,948
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,501,526 (70,963)
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2,951,879 1,197,199
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<PAGE>
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF INCOME AND EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
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For three months ended For nine months ended
Jan 31, Jan 31, Jan 31, Jan 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUE
Sales 812,177 538,902 2,242,246 1,331,644
Cost of sales 329,551 237,899 980,987 564,006
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GROSS MARGIN 482,626 301,003 1,261,259 767,638
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EXPENSES
Selling, general and administrative
expenses 420,315 339,119 973,732 711,514
Research and development expenses 615,942 - 1,138,079 0
- -------------------------------------------------------------------------------------
1,036,257 339,119 2,111,811 711,514
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Net income (loss) from operations
for the period (553,631) (38,116) (850,552) 56,124
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OTHER INCOME (EXPENSES)
Gain (Loss) on termination of
capital lease - - 2,191 0
Interest income (expense) (15,625) (2,770) (44,621) (9,305)
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(15,625) (2,770) (42,430) (9,305)
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INCOME TAX EXPENSE:
- current - - 0
- deferred - 16,648 4,452 38,578
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INCOME TAXES 0 16,648 4,452 38,578
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NET INCOME (LOSS) FOR THE PERIOD (569,256) (57,534) (897,434) 8,241
Retained earnings (deficit),
beginning of period (448,089) 39,578 (119,911) (26,197)
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Retained earnings (deficit),
end of period (1,017,345) (17,956) (1,017,345) (17,956)
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PER COMMON SHARE
Net income (loss) for the period (0.03) (0.00) (0.04) 0.00
Dividends
Weighted average number of common
shares outstanding 21,615,385 20,000,000 20,534,545 20,000,000
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</TABLE>
<PAGE>
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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FOR NINE MONTHS ENDED Jan 31, 1998 Jan 31, 1997
$ $
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Cash flows from operating activities
Net income (loss) for the period (897,434) 8,241
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 343,203 132,517
Amortization of deferred website costs 244,133 98,081
Gain on termination of capital lease (2,191) -
Deferred income tax 4,452 38,578
Foreign exchange 5,446 (400)
Changes in non-cash working capital
balances:
Decrease (Increase) in accounts
receivable (29,762) (75,503)
Decrease (Increase) in prepaid expenses (205,149) (8,846)
Increase (decrease) in accounts
payable and accrued liabilities (7,423) 149,838
Increase (decrease) in deferred revenue 35,402 124,555
Increase (decrease) in deposit
from customers 57,920 -
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Total adjustment 446,031 458,820
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (451,403) 467,061
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CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in notes receivable (27,480) -
Purchase of capital assets (555,557) (229,124)
Deferred website costs (293,323) (216,529)
Deferred software development costs (163,577) -
Decrease (increase) in assets pledged (526,340) -
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NET CASH (USED IN) INVESTING ACTIVITIES (1,566,277) (445,653)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in bank indebtedness 389,669 (1,161)
Proceeds from loan - 207,869
Proceeds from issuance of common stocks 2,450,000 -
Repayment of loan (200,343) -
Advance from (repayments to) related
parties (132,605) (58,032)
Principal repayments under capital
lease obligation (92,990) (15,799)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,413,731 132,877
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NET INCREASE IN CASH DURING THE PERIOD 396,051 154,285
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Cash, beginning of period 27,545 -
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Cash, end of period 423,596 154,285
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 47,386 9,305
Income tax paid 0 -
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<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
(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) NOTES RECEIVABLE
During the quarter ended January 31, 1998, the Company obtained notes
totaling CAD40,000 from an unrelated corporation. The notes are fully
secured and interest bearing at 24% per annum. Interest is payable monthly
and the principal is due in May 1998.
(D) BANK INDEBTEDNESS
The Company has arranged an Operating Line of Credit and a Demand
Instalment Loan with its bank for the total of CAD700,000. The facilities
are secured by hypothecated mutual funds for US$500,000 and personal
guarantees of key directors and employees.
<PAGE>
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 January 31, 1998 and 1997 and balance sheet data as at
January 31, 1998 and April 30, 1997.
A. Statement of Operations Data
- ---------------------------------
For the three months ended January 31, 1998 and 1997
- ----------------------------------------------------
For the three months ended
January 31, January 31,
1998 1997
----------- -----------
Net Sales 812,177 538,902
Gross Margin 482,626 301,003
Selling, General & Administrative Exp. 420,315 339,119
Operating Income (Loss) before R&D 62,311 (38,116)
R&D Expenses 615,942 -
Net Income (Loss) (569,256) (57,534)
For the nine months ended January 31, 1998 and 1997
- ---------------------------------------------------
For the nine months ended
January 31, January 31,
1998 1997
----------- -----------
Net Sales 2,242,246 1,331,644
Gross Margin 1,261,259 767,638
Selling, General & Administrative Exp. 973,732 711,514
Operating Income (Loss) before R&D 287,527 56,124
R&D Expenses 1,138,079 -
Net Income (Loss) (897,434) 8,241
<PAGE>
B. Balance Sheet Data
- ---------------------
At Jan 31, At April 30,
1998 1997
---------- -----------
Working Capital (Deficiency) (335,255) (790,726)
Total Assets 2,951,879 1,197,199
Long Term Debt 212,139 237,371
Stockholders' Equity (Deficit) 1,501,526 (70,963)
Accumulated Earnings (Deficit) (1,017,345) (119,911)
The Company's revenues increased 50.7% to $812,177 for the quarter ended
January 31, 1998 compared to $538,902 for the prior year quarter. On a
year-to-date basis, revenues for the nine months ended January 31, 1998
were $2,242,246, 68.4% 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 $482,626 for the three months ended January 31,
1998 from $301,003 for the three months ended January 31, 1997. Gross
margin was increased from 55.9% for the three months ended January 31, 1997
to 59.4% for the three months ended January 31, 1998 due to the
discontinuance of the pay per usage Internet site "Livewomen" in September
1997 and efficiencies gained from an increase in membership. The
lower gross margin on the pay per usage Internet site "Livewomen",
caused a drop in gross margin to 56.2% for the nine months ended January
31, 1998 from 57.7% for the nine months ended January 31, 1997.
Selling, general and administrative expenses increased by 23.9% to $420,315
(51.8% of sales) for the three months ended January 31, 1998 from $339,119
(62.9% of sales) for the prior year quarter.
Research and development expenses for the quarter ended January 31, 1998
amounted to $615,942, compared to $327,588 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. As the gaming project is in its final testing stage, the
Company expects R&D costs to be significantly reduced and the gaming
operations starts generating revenues in the next quarter.
Interest expense increased to $15,625 for the three months ended January
31, 1998 from $2,770 for the prior year quarter. The increase was mainly
resulted from interest cost due to bank borrowing and additional capital
leases obtained.
Net loss from operations for the quarter ended January 31, 1998 was
$569,256 compared to $38,116 for the prior year quarter. The loss for the
quarter ended January 31, 1998 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
<PAGE>
net income from operations of $62,311 for the three months ended January
31, 1998 and $287,527 for the nine months ended January 31, 1998. No income
tax expense was recorded for the three months ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At January 31, 1998, the Company had $423,596 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 nine months ended
January 31, 1998 decreased to ($451,403) from $467,061 for the nine months
ended January 31, 1997. The decrease in cashflow from operations is mainly
due to the increase in prepaid expenses resulted from the 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 nine months ended January
31, 1998 was $1,566,277 compared to $445,653 for the nine months ended
January 31, 1997. The increase was resulted from higher level of investment
in notes receivable, capital assets, assets pledged and deferred software
development costs.
Net cash provided by financing activities for the nine months ended January
31, 1998 was $2,413,731 compared to $132,877 for the nine months ended
January 31, 1997. The increase is resulted from the completion of the
share offering for $2,450,000 and bank borrowing for $389,669.
Impact of Inflation
- -------------------
The Company believes that inflation has not had a material effect on its
past business.
<PAGE>
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
A Form 8-K dated December 2, 1997, was filed acknowledging a Regulation "S"
private placement of shares. This private placement is the "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: March 10, 1998 /s/ CHRISTOPHER H. ZACHARIAS
---------------------------------------
Christopher H. Zacharias
Corporate Counsel, and
Corporate Secretary
Date: March 10, 1998 /s/ JOHN CARLEY
---------------------------------------
John Carley
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 423,596
<SECURITIES> 0
<RECEIVABLES> 188,447
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 845,721
<PP&E> 1,492,583
<DEPRECIATION> 343,204
<TOTAL-ASSETS> 2,951,879
<CURRENT-LIABILITIES> 1,180,976
<BONDS> 0
0
0
<COMMON> 22,450
<OTHER-SE> 2,447,550
<TOTAL-LIABILITY-AND-EQUITY> 2,951,879
<SALES> 2,242,246
<TOTAL-REVENUES> 2,242,246
<CGS> 0
<TOTAL-COSTS> 3,092,798
<OTHER-EXPENSES> 44,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,621
<INCOME-PRETAX> (892,982)
<INCOME-TAX> 4,452
<INCOME-CONTINUING> (897,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897,434)
<EPS-PRIMARY> (0.044)
<EPS-DILUTED> (0.044)
</TABLE>
