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, 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 October 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>
Part I - Financial Information
------------------------------
Item 1 - Financial Statements:
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
2
<PAGE>
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STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Statement of Cash Flows
(Unaudited)
- -----------------------------------------------------------------------------
FOR SIX MONTHS ENDED Oct 31, 1998 Oct 31, 1997
$ $
- -----------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) for the period 350,263 (328,178)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 332,486 205,058
Amortization of deferred web site costs 244,711 157,315
Amortization of software development costs 80,112 -
Gain on disposal of fixed assets (4,668) (2,191)
Deferred income taxes - 4,452
Foreign exchange 80,069 (10,299)
Changes in current assets and liabilities
Decrease (Increase) in accounts receivable (468,727) 56,829
Decrease (Increase) in prepaid expenses 76,302 (203,772)
Increase (decrease) in accounts payable
and accrued liabilities 101,161 (48,741)
Increase (decrease) in deposits from
customers 204,212 -
Increase (decrease) in deferred revenue 17,859 38,289
Decrease (Increase) in income tax payable (74,360) -
- -----------------------------------------------------------------------------
Total adjustments 589,158 196,940
- -----------------------------------------------------------------------------
Net cash provided (used in) by operating
activities 939,421 (131,238)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (177,396) (291,313)
Deferred web site costs (299,137) (184,667)
Software development costs (247,587) (93,611)
Security deposits (36,388) -
- -----------------------------------------------------------------------------
Net cash (used in) investing activities (760,507) (569,591)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank indebtedness (7,317) -
Proceeds from loan 72,780 1,661,777
Advance from (repayments to) related parties - (132,605)
Principal repayments under capital lease
obligations (111,710) (60,328)
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (46,247) 1,468,844
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Net increase in cash during the period 132,666 768,015
Cash, beginning of period 140,462 27,545
- -----------------------------------------------------------------------------
Cash, end of period 273,128 795,560
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Supplemental cash flow information
Interest paid 48,834 28,996
Income tax paid - -
- -----------------------------------------------------------------------------
3
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STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Statement of Income and Earnings
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
For three months ended For six months ended
Oct 31, 1998 Oct 31, 1997 Oct 31, 1998 Oct 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Sales 1,781,357 720,732 3,318,616 1,430,069
Cost of sales 565,437 326,057 1,140,477 651,436
- ---------------------------------------------------------------------------------------
GROSS MARGIN 1,215,920 394,675 2,178,139 778,633
- ---------------------------------------------------------------------------------------
EXPENSES
Operating expenses 1,029,194 608,746 1,868,644 1,075,554
- ---------------------------------------------------------------------------------------
1,029,194 608,746 1,868,644 1,075,554
- ---------------------------------------------------------------------------------------
Net income (loss) from operations for
the period 186,726 (214,071) 309,495 (296,921)
- ---------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Gain (Loss) on termination of capital
lease 4,668 - 4,668 2,191
Interest income (expense) (18,007) (15,616) (38,260) (28,996)
- ---------------------------------------------------------------------------------------
Net loss before income taxes (13,339) (15,616) (33,592) (26,805)
- ---------------------------------------------------------------------------------------
Income tax expense:
- current (74,360) - (74,360) 0
- deferred - - 0 4,452
- ---------------------------------------------------------------------------------------
Income taxes (74,360) 0 (74,360) 4,452
- ---------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD 247,747 (229,687) 350,263 (328,178)
RETAINED EARNINGS (DEFICIT),
BEGINNING OF PERIOD (1,055,355) (218,402) (1,157,871) (119,911)
- ---------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END
OF PERIOD (807,608) (448,089) (807,608) (448,089)
- ---------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (loss) for the period 0.01 (0.01) 0.01 (0.02)
Dividends
Weighted average number of common
shares outstanding 22,450,000 20,000,000 22,450,000 20,000,000
- ---------------------------------------------------------------------------------------
</TABLE>
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STARNET COMMUNICATIONS INTERNATIONAL INC.
Consolidated Balance Sheet
(Unaudited)
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Oct 31, 1998 April 30, 1998
$ $
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ASSETS
CURRENT
Cash and cash equivalents 273,128 140,462
Restricted cash 500,000 500,000
Accounts receivable 732,890 264,163
Prepaid expenses 186,243 262,545
Security deposits 231,995 195,607
- -----------------------------------------------------------------------------
Total current assets 1,924,256 1,362,777
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Capital assets (net) 1,040,090 1,190,511
Deferred website costs 310,309 255,884
Software development costs 633,234 465,759
- -----------------------------------------------------------------------------
3,907,889 3,274,931
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness 458,900 466,217
Accounts payable & accrued liabilities 621,192 520,031
Income taxes payable - 74,360
Deposits from customers 394,939 190,727
Loan payable 72,780 -
Deferred revenue 297,707 279,848
Current portion of capital lease obligations 140,572 160,654
- -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,986,090 1,691,837
- -----------------------------------------------------------------------------
Non-current portion of capital lease
obligations 166,670 258,298
Deferred income taxes 26,904 26,904
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 2,179,664 1,977,039
- -----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 2,421,000 2,421,000
Deficit (807,608) (1,157,871)
Cumulative translation adjustment 114,832 34,763
- -----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,728,224 1,297,892
- -----------------------------------------------------------------------------
3,907,889 3,274,931
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5
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 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 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 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., the Company's other Antigua subsidiary, licenses its gaming product
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,
has undergone a tremendous growth. For the three months ended October 31,
1998, revenues generated from the gaming business reached $991,098 and
accounted for 55.6% of the total revenues.
6
<PAGE>
The following tables set forth statements of operations data for the three
months ended October 31, 1998 and 1997, six months ended October 31, 1998
and 1997 and balance sheet data as at October 31, 1998 and April 30, 1998.
A. Statement of Operations Data
- --------------------------------
For the three months ended October 31, 1998 and 1997
- ----------------------------------------------------
For the three months ended
October 31, October 31,
1998 1997
---------- ----------
Net Sales 1,781,357 720,732
Gross Margin 1,215,920 394,675
Operating expenses 1,029,194 608,746
Operating Income (Loss) 186,726 (214,071)
Net Income (Loss) 247,747 (229,687)
For the six months ended October 31, 1998 and 1997
- --------------------------------------------------
For the six months ended
October 31, October 31,
1998 1997
---------- ----------
Net Sales 3,318,616 1,430,069
Gross Margin 2,178,139 778,633
Operating expenses 1,868,644 1,075,554
Operating Income (Loss) 309,495 (296,921)
Net Income (Loss) 350,263 (328,178)
B. Balance Sheet Data
- ---------------------
At October 31, At April 30,
1998 1998
---------- ----------
Working Capital (Deficiency) (61,834) (329,060)
Total Assets 3,907,889 3,274,931
Long Term Debt 166,670 258,298
Stockholders' Equity 1,728,224 1,297,892
Accumulated Earnings (Deficit) (807,608) (1,157,871)
The Company's revenues increased 132% to $3,318,616 for the six months
ended October 31, 1998 compared to $1,430,069 for the six months ended
October 31, 1997. Revenues for the quarter ended October 31, 1998 amounted
to $1,781,357 which represents a growth of 15.9% compared to the previous
quarter and 147.2% compared to
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the prior year quarter. The growth is primarily due to additional revenues
generated from licensing, gaming operations and financial transactions
processing for licensees. Revenues from licensing, which is becoming a
major income source, account for 41% and 36% of the total revenues for the
three months and six months ended October 31, 1998 respectively. At October
31, 1998, nine licensees are in operations and are generating over 1
million dollars a month in total revenues.
Along with the growth in sales, gross margin increased to $1,215,920 for
the quarter ended October 31, 1998 from $394,675 for the prior year
quarter. Gross margin increased from 54.8% for the quarter ended October
31, 1997 to 68.3% for the quarter ended October 31, 1998 due to the
relatively higher gross margin of the gaming operations and efficiencies
gained from increased number of licensees.
Operating expenses increased by 69.1% to $1,029,194 (57.8% of sales) for
the three months ended October 31, 1998 from $608,746 (84.5% of sales) for
the prior year quarter. The decrease in these expenses from 84.5% to 57.8%
was the result of efficiencies gained as the Company handled a greater
level of activity.
Interest expense increased to $38,260 for the six months ended October 31,
1998 from $28,996 for the six months ended October 31, 1997. The increase
was mainly a result of interest costs due to bank borrowing and additional
capital leases obtained.
Net income from operations for the three months ended October 31, 1998 was
$186,726 compared to operating profit of $122,769 for the previous quarter
and operating loss of $214,071 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 from their casino
operations increase.
Provision for income tax for the year ended April 30, 1998 was reversed
following the filing of Starnet Communications Canada Inc. tax return. As
a result, income tax recovery of $74,360 was recorded for the quarter ended
October 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of October 31, 1998, the Company had $273,128 in cash and cash
equivalents compared to $140,462 at April 30, 1998. The Company has pledged
cash equivalents of $500,000 to its bank to secure the banking facilities.
Net cash generated from (used for) operations for the six months ended
October 31, 1998 increased to $939,421 from ($131,238) for the six months
ended October 31, 1997. The increase in cash flow from operations was
mainly due to increase in revenues and customers' deposits received by the
Company.
8
<PAGE>
Net cash used for investing activities for the six months ended October 31,
1998 was $760,507 compared to $569,591 for the six months ended October 31,
1997. The increase was a result of a higher level of investment in software
and web site development.
Net cash provided by (used in) financing activities for the six months
ended October 31, 1998 was ($46,247) compared to $1,468,844 for the six
months ended October 31, 1997. The decrease was a result of the loans
obtained for the six months ended October 31, 1997 and higher principal
repayments under the capital leases.
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.
9
<PAGE>
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 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
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 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
10
<PAGE>
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
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 13, 1998 /s/ CHRISTOPHER H. ZACHARIAS
-------------------------------
Christopher H. Zacharias
Corporate Counsel, and
Corporate Secretary
Date: December 13, 1998 /s/ JOHN CARLEY
-------------------------------
John Carley
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 773,128
<SECURITIES> 0
<RECEIVABLES> 759,556
<ALLOWANCES> 26,666
<INVENTORY> 0
<CURRENT-ASSETS> 1,924,256
<PP&E> 2,142,248
<DEPRECIATION> 1,102,158
<TOTAL-ASSETS> 3,907,889
<CURRENT-LIABILITIES> 1,986,090
<BONDS> 0
0
0
<COMMON> 2,421,000
<OTHER-SE> (692,776)
<TOTAL-LIABILITY-AND-EQUITY> 3,907,889
<SALES> 3,318,616
<TOTAL-REVENUES> 3,318,616
<CGS> 0
<TOTAL-COSTS> 3,009,121
<OTHER-EXPENSES> 33,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,260
<INCOME-PRETAX> 275,903
<INCOME-TAX> (74,360)
<INCOME-CONTINUING> 350,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350,263
<EPS-PRIMARY> 0.016
<EPS-DILUTED> 0.016
</TABLE>
