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, 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
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As of July 31, 1998, the registrant had 22,450,000 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.
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Part I Financial Information
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Item 1 Financial Statements:
STARNET COMMUNICATIONS INTERNATIONAL INC.
(FORMERLY GELATO BRATS INC. AND
CREATIVE SPORTS MARKETING INC.)
2
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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FOR THREE MONTHS ENDED July 31, 1998 July 31, 1997
$ $
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period 102,516 (98,491)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 167,348 94,344
Amortization of deferred website costs 131,871 105,325
Amortization of software development
costs 40,056 -
Gain on termination of capital lease - (2,191)
Deferred income tax - 4,452
Foreign exchange 63,438 (6,569)
Changes in non-cash working capital
balances:
Decrease (Increase) in accounts
receivable (197,237) 77,086
Decrease (Increase) in prepaid expenses (689) (76,503)
Increase (decrease) in accounts payable
and accrued liabilities 89,606 (31,392)
Increase (decrease) in deferred revenue (14,570) 40,860
Increase (decrease) in deposit from
customers 309,040 -
- -----------------------------------------------------------------------------
Total adjustment 588,863 205,412
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 691,379 106,921
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (98,882) (117,824)
Deferred website costs (168,598) (122,041)
Software development costs (82,391) (27,095)
Security deposits (37,878) -
- -----------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (387,749) (266,960)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in bank indebtedness (12,128) -
Proceeds from loan - 326,200
Repayment of loan - (102,663)
Advance from (repayments to) related parties - (14,832)
Principal repayments under capital
lease obligation (57,824) (28,376)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (69,952) 180,329
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NET INCREASE IN CASH DURING THE PERIOD 233,678 20,290
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Cash, beginning of period 140,462 27,545
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CASH, END OF PERIOD 374,140 47,835
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 25,243 10,934
Income tax paid - -
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3
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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July 31, 1998 April 30, 1998
$ $
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ASSETS
CURRENT
Cash & cash equivalents 374,140 140,462
Restricted cash 500,000 500,000
Accounts receivable 461,400 264,163
Prepaid expenses 263,234 262,545
Security Deposit 233,485 195,607
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TOTAL CURRENT ASSETS 1,832,259 1,362,777
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Capital assets (net) 1,122,045 1,190,511
Deferred website costs 292,611 255,884
Deferred software development costs 508,094 465,759
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3,755,009 3,274,931
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank Indebtedness 454,089 466,217
Accounts payable & accrued liabilities 609,637 520,031
Income taxes payable 74,360 74,360
Deposits from customers 499,767 190,727
Deferred revenue 265,278 279,848
Current portion of captial lease obligations 157,844 160,654
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TOTAL CURRENT LIABILITIES 2,060,975 1,691,837
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Non-current portion of capital lease
obligations 203,284 258,298
Deferred income tax 26,904 26,904
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TOTAL LIABILITIES 2,291,163 1,977,039
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SHAREHOLDERS' EQUITY
Capital stock 2,421,000 2,421,000
Deficit (1,055,355) (1,157,871)
Cumulative translation adjustment 98,201 34,763
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,463,846 1,297,892
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3,755,009 3,274,931
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4
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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, 1998 July 31, 1997
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REVENUE
Sales 1,537,259 709,337
Cost of sales 575,040 325,379
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GROSS MARGIN 962,219 383,958
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EXPENSES
Selling, general and administrative
expenses 839,450 466,808
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839,450 466,808
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Net income (loss) from operations for
the period 122,769 (82,850)
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OTHER INCOME (EXPENSES)
Gain (Loss) on termination of capital lease - 2,191
Interest income (expense) (20,253) (13,380)
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Net income (loss) before income taxes 102,516 (94,039)
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Income tax expense:
- current - -
- deferred - 4,452
- -----------------------------------------------------------------------------
Income taxes - 4,452
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NET INCOME (LOSS) FOR THE PERIOD 102,516 (98,491)
Deficit, beginning of period (1,157,871) (119,911)
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DEFICIT, END OF PERIOD (1,055,355) (218,402)
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PER COMMON SHARE
Net income (loss) for the period 0.00 (0.00)
Dividends - -
Weighted average number of common
shares outstanding 22,450,000 20,000,000
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5
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 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) 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.
6
<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. Through substantial research and
exploration, the Company has identified the opportunity of offering gaming
services over the Internet and has successfully launched its gaming
products in fiscal 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.
The following tables set forth statements of operations data for the three
months ended July 31, 1998 and 1997 and balance sheet data as at July 31,
1998 and April 30, 1998.
A. Statement of Operations Data
- --------------------------------
For the three months ended July 31, 1998 and 1997
- -------------------------------------------------
For three months ended
July 31, 1998 July 31, 1997
------------- -------------
Net Sales 1,537,259 709,337
Gross Margin 962,219 383,958
Selling, General & Administrative Exp. 839,450 466,808
Operating Income (Loss) 122,769 (82,850)
Net Income (Loss) 102,516 (98,491)
B. Balance Sheet Data
- ----------------------
At July 31, At April 30,
1998 1998
----------- ------------
Working Capital (Deficiency) (228,716) (329,060)
Total Assets 3,755,009 3,274,931
Long Term Debt 203,284 258,298
Stockholders' Equity (Deficit) 1,463,846 1,297,892
Accumulated Earnings (Deficit) (1,055,355) (1,157,871)
7
<PAGE>
The Company's revenues increased 116.7% to $1,537,259 for the three months
ended July 31, 1998 compared to $709,337 for the prior year quarter. The
growth is primarily due to additional revenues generated from the licensing
and gaming operations and increased subscription revenue from the Company's
Internet web sites. Revenues from licensing, which is expected to become a
major income source, account for more than 30% of total revenue for the
quarter ended July 30, 1998. Along with the growth in sales, gross margin
increased to $962,219 for the three months ended July 31, 1998 from
$383,958 for the year ended July 31, 1997. Gross margin was increased from
54.1% for the quarter ended July 31, 1997 to 62.6% for the quarter ended
July 31, 1998 due to the relatively higher gross margin of the gaming
operations and efficiencies gained from having a larger number of
membership.
Operating expenses increased by 79.8% to $839,451 (54.6% of sales) for the
three months ended July 31, 1998 from $466,808 (65.8% of sales) for the
prior year quarter. The decease in these expenses from 65.8% to 54.6% was
the result of efficiencies gained as the Company handled a greater level of
activity.
Interest expense increased to $20,253 for the three months ended July 31,
1998 from $13,380 for the prior year quarter. The increase was mainly
resulted from interest cost due to bank borrowing and additional equipment
leases obtained.
Net income from operations for the three months ended July 31, 1998 was
$122,769 compared to net operating loss of $82,850 for the prior year
quarter. The income for the quarter ended July 31, 1998 was the result of
increase in revenues from software licensing and gaming operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 1998, the Company had $374,140 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 from operations for the three months ended July 31, 1998 increased
to $691,379 from $106,921 for the three months ended July 31, 1997. The
increase in cashflow from operations is mainly due to increase in revenues
and customers' deposit received by the Company.
Net cash used for investing activities for the three months ended July 31,
1998 was $387,749 compared to $266,960 for the three months ended July 31,
1997. The increase was resulted from higher level of investment in security
deposit and software development costs.
Net cash provided by (used in) financing activities for the three months
ended July 31, 1998 was ($69,952) compared to $180,329 for the three months
ended July 31, 1997. The increase is resulted from reduction in borrowings
due to improvement in cash position.
8
<PAGE>
Impact of Inflation
- -------------------
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
(a) Exhibit No. Description
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27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1998.
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 14, 1998 /s/ CHRISTOPHER H. ZACHARIAS
-----------------------------------
Christopher H. Zacharias
Corporate Counsel, and
Corporate Secretary
Date: September 14, 1998 /s/ JOHN CARLEY
-----------------------------------
John Carley
Chief Financial Officer
9
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 374,140
<SECURITIES> 0
<RECEIVABLES> 487,856
<ALLOWANCES> 26,456
<INVENTORY> 0
<CURRENT-ASSETS> 1,832,259
<PP&E> 2,071,912
<DEPRECIATION> 949,867
<TOTAL-ASSETS> 3,755,009
<CURRENT-LIABILITIES> 2,060,975
<BONDS> 0
0
0
<COMMON> 2,421,000
<OTHER-SE> (957,154)
<TOTAL-LIABILITY-AND-EQUITY> 3,755,009
<SALES> 1,537,259
<TOTAL-REVENUES> 1,537,259
<CGS> 0
<TOTAL-COSTS> 1,414,490
<OTHER-EXPENSES> 20,253
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,253
<INCOME-PRETAX> 102,516
<INCOME-TAX> 0
<INCOME-CONTINUING> 102,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,516
<EPS-PRIMARY> 0.005
<EPS-DILUTED> 0.005
</TABLE>
