U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended April 30, 1998
___ Transition report under 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.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware E.I.N. 52-2027313
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
425 Carrall Street, Mezzanine Level
Vancouver, British Columbia, Canada V6B 6E3
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604) 685-7619
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which to be so registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Class A Voting Common Stock
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year:
Revenues for the Fiscal Year ended April 30, 1998 were $3,370,325.
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average of the bid and asked prices of such Stock as of a specified date
within the past 60 days: as of July 1, 1998: $13,828,700.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 22,450,000 Class A
Common Shares as of July 27, 1998
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-KSB, WHEN NOT HISTORICAL
MATTERS, ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
PROJECTED RESULTS. SUCH FACTORS INCLUDE, AMONG OTHERS, SPECULATIVE NATURE
OF THE COMPANY'S BUSINESS, AVAILABILITY OF FINANCING, GOVERNMENTAL
REGULATION, CURRENCY FLUCTUATION, QUARTERLY FLUCTUATION IN REVENUES, INCOME
AND OVERHEAD EXPENSE, AND OTHER RISK FACTORS AS DESCRIBED FROM TIME TO TIME
IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. MANY
OF THESE FACTORS ARE BEYOND THE COMPANY'S ABILITY TO CONTROL OR PREDICT.
THE COMPANY DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE ITS FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF RECEIVING NEW INFORMATION, THE
OCCURRENCE OF FUTURE EVENTS, OR OTHERWISE.
ALL MONETARY AMOUNTS ARE IN U.S. DOLLARS UNLESS OTHERWISE INDICATED.
PART 1
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ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT.
STARNET COMMUNICATIONS INTERNATIONAL INC.:
Starnet Communications International Inc. (the "Company") was incorporated
in June 1996 in the state of Nevada. In March 1997, the Company merged
with a Delaware corporation for the purpose of re-domiciling to the state
of Delaware. The Company is a high technology finance company with several
wholly owned technology subsidiaries under its control, or to be formed.
The intent of the Company is to identify and commercialize leading edge
technologies for established markets.
STARNET COMMUNICATIONS INTERNATIONAL INC. CORPORATE HISTORY:
On June 28, 1996, Creative Sports Marketing Inc. ("Creative") filed its
Articles of Incorporation with the Secretary of State of the State of
Nevada. Thereafter, a meeting of the Shareholders of Creative Sports
Marketing Inc. was held and authorized the Board to change the name of
Creative at a future date if in its discretion it deemed such a change
advantageous. The first intended business plan contemplated celebrity golf
promotions. A tournament was scheduled for Phoenix, Arizona, but shortly
after its organization, it and the business plan were dropped.
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On July 15, 1996, Creative accepted subscription agreements from twelve
entities to acquire securities of Creative pursuant to a Rule 504 offering
under Regulation D. The Board authorized Creative to proceed with the sale
of its shares pursuant to the subscriptions received for the sale of
10,000,000 common shares at a price of $0.001 per common share. Pacific
Stock Transfer Company was appointed as the transfer agent of the common
shares of Creative.
This offering was sold through a Vanuatu corporation, Pacific Rim
Investment Inc., as a transaction sales agent. Thereafter, Pacific Rim
Investment Inc. established a market clearing house as a non-quotation
bargain market.
Thereafter, Creative's Board of Directors voted to change the name from
Creative Sports Marketing Inc. to Gelato Brats Inc. A Certificate of
Amendment to the Articles of Incorporation of Creative Sports Marketing
Inc. changing the name of the corporation to Gelato Brats Inc. was
submitted to the Nevada Secretary of State's Office. A new business plan
was adopted focusing upon non-fat dairy ice cream and dessert
manufacturing.
On November 1, 1996, a Board of Directors' meeting of Gelato Brats Inc. was
held appointing Donald Byers as a director and authorizing a further name
change as deemed advisable in the discretion of the Board of Directors.
Also at this meeting the resignation as directors and officers of Ziad
Batal and Richard Kipping were accepted. Donald Byers was appointed
President, Secretary and Treasurer of Gelato Brats Inc.
On January 27, 1997, a Board of Directors' meeting of Gelato Brats Inc. was
held. The resignation of Donald Byers as a director and officer of the
Company was accepted. The Shareholders elected to the Board of Directors
the following: Mitchell White; Mark Dohlen; Jason Bolduc; Christopher
Zacharias; and John Carley. Mr. Bolduc was appointed President and Mr.
Zacharias was appointed Secretary and Treasurer.
On January 29, 1997, a Board of Directors' meeting of Gelato Brats Inc. was
held. The Board voted to authorize a change of the name to Starnet
Communications International Inc. (the "Company").
On February 24, 1997, a Certificate of Amendment of the Articles of
Incorporation of Gelato Brats Inc. changing the name of the Company to
Starnet Communications International Inc. was submitted to the Nevada
Secretary of State.
On March 10, 1997, the Board of Directors of Starnet Communications
International Inc. voted to merge Starnet Communications International Inc.
into a wholly owned subsidiary -- Starnet Communications International (DE)
Inc. ("Starnet Delaware"). The Company was authorized to re-domicile
into Delaware with Starnet Delaware as the surviving corporation.
On March 10, 1997, Starnet Communications International Inc., the sole
stockholder of Starnet Delaware acted by vote to consummate the merger
among the Company and Starnet Delaware and to change the name of Starnet
Delaware to Starnet Communications International Inc. All of the
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stockholders of Starnet Communications International Inc. voted to
acknowledge and adopt the Plan and Agreement of Merger of Starnet
Communications International Inc. into Starnet Delaware. Thus on March 10,
1997, a Certificate of Merger among Starnet Communications International
Inc. and Starnet Delaware was executed and the Articles of Merger were
submitted to the Delaware Secretary of State.
On March 25, 1997, Starnet Communications International Inc. entered into
a Share Purchase Agreement with Murray Partners (BVI) Inc. pursuant to
which Starnet Communications International Inc. acquired all 10,101
outstanding shares in Starnet Communications Canada Inc. In exchange Murray
Partners (BVI) Inc. received 10,000,000 Class A Common Voting Shares of
Starnet Communications International Inc.
On April 8, 1998, Mitchell White submitted his resignation from his
positions of Chairman of the Board and Director for personal reasons. The
Board of Directors elected Director John Carley, the Company's Chief
Financial Officer, as Chairman.
B. BUSINESS OF ISSUER:
STARNET COMMUNICATIONS CANADA INC.
Starnet Communications Canada Inc. ("Starnet Canada"), a wholly-owned
subsidiary of Starnet Communications International Inc., was incorporated
in May 1995 and is based in Vancouver, British Columbia, Canada. Starnet
Canada develops, markets and manages advanced interactive media,
information systems and gaming technologies for the Internet. Starnet
Canada is an Internet developer and content provider utilizing proprietary
software, video, audio, film, animation, graphics, multimedia, hyper-text
markup language (HTML), site and network management, transaction processing
and database management systems, client support systems, and post
production facilities. In June of 1996, Starnet Canada was certified by the
Bank of Montreal to conduct secure, real time Visa, Mastercard and
American Express credit card transactions via the Internet. Starnet Canada
is the software developer for all of the Company's subsidiaries and third
parties. Starnet Canada developed the gaming software used by Softec
Systems Caribbean Inc., and the transaction processing system used by
EFS U.S.A. Inc. and EFS Caribbean Inc.
Starnet Canada has emerged as a world leader in providing adult
entertainment services on the Internet. Starnet Canada's Internet adult
service at HTTP://WWW.SIZZLE.COM is one of the premier adult sites on the
Internet. Revenue streams are generated by monthly subscription fees from
clients who reside in over 60 different countries. Sizzle is promoted on
the Internet via advertising, search engine registration and news group
promotion. Several hundred competitors compete in finely defined segments
similar to Sizzle's market.
Starnet Canada's AdultLinks Internet search engine site at
http://www.adultlinks.com ("AdultLinks") was launched in July 1996 and is
becoming one of the top Internet adult search engine sites in the world.
Revenues are generated by monthly advertising fees from commercial clients
who market to the on-line adult community. There are thousands of
competitors in this market.
Chisel Media Internet site at http://www.chisel.com ("Chisel") was launched
in August 1996 and is one of the top Internet gay sites in the world.
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Revenue streams are generated by monthly subscription fees from clients
residing around the world. Chisel is promoted on the Internet via
advertising, search engine registration and news group promotion. Less
than 100 full-service competitors compete in segments similar to Chisel's
market.
In order to ensure that Starnet Canada's adult sites are operating within
the law, a legal opinion was obtained pertaining to the sexual content
initially displayed on the sites. Management intends to continue its
policy of requesting and obtaining legal opinions to assist and guide it
through the applicable and developing regulatory framework.
While Internet users outside of the U.S. are quickly coming online, the
Internet market outside of the U.S., in terms of online commerce is still
in its infancy. This market, comparable to the U.S. Internet market in
1994, shows great potential for the Company to establish a solid presence
and obtain market share. In North America, the Internet is becoming a true
mass media as the Internet population expands. The mainstreaming of the
Internet has allowed the Company to expand beyond traditional user profiles
to include new groups of users coming online each day. The company is
dedicated to meeting the needs of a growing Internet population by offering
products that satisfy the demands of markets that desire access to
online entertainment and interactivity.
A recent Graphic Visualization and Usability Center ("GVU") survey of the
World Wide Web by Georgia Tech suggests an increase in mainstream populations
logging onto the Internet. This mainstream culture is showing an increased
desire for online entertainment methods. The Internet is now being used more
frequently for games/entertainment (50.4%) and online chatting (29.9%),
rather than for what the internet was traditionally used for, research
(73.6%) and educational (47.9) purposes.
The Internet population is becoming younger and more mainstream as
technological advances and media hype launch pop culture into cyberspace.
The GVU survey shows that there is an increase in users in their
20's as well as a shift in Internet use to mainstream culture in North
America. European and Asian demographics are expected to be a few years
behind North America as they still show a higher percentages of mid 30's
users with technical/computer backgrounds. By being pioneers in on-line
entertainment and commerce and being able to anticipate similar growth
phases that were addressed by the US market 3 - 5 years ago, the Company
believes it will be able to successfully compete in the overseas Internet
market. The Company believies this will give it the opportunity to
capture market share in these countries.
WORLD GAMING SERVICES INC.
World Gaming Services Inc. ("World Gaming"), a wholly owned subsidiary of
the Company incorporated in Antigua, West Indies, is a full-service
Internet gaming operation at http://www.worldgaming.net. World Gaming holds
licenses in its domicile to conduct business as an Internet casino and an
Internet sports wagering service. World Gaming accepts, processes and
manages wagers on games of chance via the Internet. World Gaming offers
electronic casino games such as "Blackjack" and "Roulette", a sportsbook
for wagering on the outcome of real-world sporting events, and an
international lottery ticket brokerage. World Gaming is a licensee of
Softec Systems Caribbean Inc.
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Since May 24, 1997, World Gaming has provided a simulcast horse racing feed
from the Ontario Jockey Club's Woodbine Racecourse in Toronto, Ontario,
Canada. On April 7, 1998, World Gaming entered into a Letter of Intent
outlining a strategic alliance with the Ontario Jockey Club ("OJC"), which
encompasses netcast coverage & on-line wagering on the OJC's horse racing
events, and a Joint Venture to further develop both parties' on-line pari-
mutuel wagering technologies. Under the proposed Simulcast Agreement, horse
racing events from the OJC's facilities will be broadcast on the World
Gaming web site. It is anticipated that World Gaming patrons will have full
access to the system's features, including up-to-the-minute track, program
and handicapping information, and live racing coverage. It is anticipated
that viewers residing outside of North America will be able to place up-to-
the-post bets on the outcome of the OJC races. It is anticipated that in
the interest of advancing its Internet pari-mutuel wagering technology,
Starnet Canada will develop the technology with the OJC under a Joint
Venture Agreement, for future use by either party. Under the terms of the
Joint Venture, it is anticipated that Starnet Canada will provide Internet
commerce & marketing consultation on the OJC's current business
applications, and the OJC will consult World Gaming on the management of
pari-mutuel wagering systems.
On March 17, 1998 World Gaming entered into a Simulcast Agreement with the
Hialeah Park Racecourse of Florida for the purpose of accepting wagers from
international consumers, based on the races taking place at that location.
World Gaming was to operate this pari-mutuel wagering system on a separate
pool basis. However, due to Hialeah's short racing season, World Gaming
was unable to implement the necessary software prior to the end of their
race season. The term of the Simulcast Agreement is one year, and World
Gaming is anticipating re-signing Hialeah for their next racing season.
World Gaming markets its services in eight languages, to consumers residing
worldwide. In order to pursue these consumers, a variety of advertising and
promotion campaigns, including but not limited to advertising and reseller
programs with third-party web site operators, has been implemented.
However, due to the ambiguities of U.S. and Canadian laws specifically
relating to Internet gambling, World Gaming does not knowingly accept
wagers from the U.S. and Canada.
The Company currently observes approximately 140 competitors in the
Internet gaming system operator market. However, several of these
operations may be controlled by single entities.
SOFTEC SYSTEMS CARIBBEAN INC.
Softec Systems Caribbean Inc. ("Softec") is a wholly owned subsidiary of
the Company and is incorporated in Antigua, West Indies. Softec is in the
business of licensing Internet gaming systems, similar to World Gaming,
to independent operators holding Internet gaming licenses (the "Licensee").
Softec purchases its software from Starnet Canada.
Softec charges a one-time fee to customize the licensee's software and set
up the Licensee's network systems, web sites and online financial
transaction processing system. The Licensees market their systems in
similar methods to World Gaming's. Softec then participates in the
Licensee's revenues. The Licensee markets its system at its own
discretion, cost and risk. The Licensee is responsible for obtaining
their own merchant banking facilities, and managing their own accounting
system, and customer service.
The Company is aware of pending legislation in the United States, which
would prohibit Internet gaming within the United States. This legislation
has been pending for more than one year. Should this legislation pass, the
Company does not expect any adverse effect to be felt by Softec. World
Gaming does not accept wagers from persons residing in North America.
It is
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possible that some of Softec's Licensees will be adversely affected
although the Company feels that the likelihood of this is remote. The U.S.
Department of Justice, in a letter to Senator Leahy on May 26, 1998 states:
"We should also note that, to the extent individuals and organizations,
whether here or abroad, violate U.S. law; existing legal mechanisms can be
used to enforce it. Although (sic) we recognize that there may be times
when we cannot obtain foreign assistance, the fact remains that some form
of gambling is legal in virtually every state in the United States. This
diminishes our ability to persuade a foreign country that gambling must be
vigorously combated, absent extenuating circumstances (e.g. organized crime
involvement in the gambling enterprise).
If we request that foreign countries investigate, on our behalf, conduct
that is legal in the foreign state, we must be prepared to receive and act
upon foreign requests for assistance when the conduct complained of is
legal, or even constitutionally protected in the United States. For
example, if we ask a foreign country to investigate an activity (e.g.
gambling) that is legal in the foreign state, that country may, for example,
ask us to investigate constitutionally protected speech originating on
computers based in the United States (e.g. that arguably violates that
nation's "hate speech" laws). Considering all of the challenges facing law
enforcement in the information age, we believe that current efforts should
focus on conduct, which either is, or should be universally condemned."
Softec provides the Company with an opportunity to spread its Internet
gaming research & development and operating costs amongst multiple
operators, while also indirectly participating in a wider share of the
Internet gaming market. As of the end of the reporting period, Softec has
entered into five (5) licensing agreements. These agreements are one year
in term, with an automatic renewal for one additional year unless the
Licensee gives notice of termination.
The Company currently observes approximately ten competitors in the
Internet gaming developer/licensor market. Several of these observed
competitors have not completed the development of their systems as at the
end of the reporting period. (At least one of the competitors that has
completed development of their technology only licenses software, as
opposed to the turn-key package offered by Softec.)
EFS U.S.A. INC. and EFS CARIBBEAN INC.
EFS U.S.A. Inc. ("EFS U.S.A.") is a wholly owned subsidiary of the Company
and is incorporated in the state of Nevada. EFS Caribbean Inc. ("EFS
Caribbean") is a wholly owned subsidiary of the Company and is incorporated
under the laws of Antigua (collectively, the "EFS Group"). The EFS Group
manages the
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Company's Internet based, secure financial transaction processing system.
On-line revenues generated by the Company's subsidiaries and licensees
are processed via the EFS Group's system, which enables consumers to
purchase services with a secure, real-time, online credit card transaction.
The EFS Group charges a percentage fee on all monies processed through its
system. Since the EFS Group operates as the exclusive service provider to
Softec's Licensees, the EFS Group is not subject to a competitive
environment.
The Company's subsidiaries and licensees of Softec are reliant upon merchant
numbers issued to EFS U.S.A. and EFS Caribbean in order to process credit
cards via the Internet. At present, the Company is processing through
six separate banks. The Company is presently in negotiations with several
other banks around the world in its search for merchant numbers in order to
minimize this risk. Should the Company, and all of Softec's licensees lose
their ability to process credit cards, alternative methods of payment are
available, including, wire transfer, mailing of cheques, as well as other
fund delivery systems.
GOVERNMENT REGULATION
Both the adult and the gaming industries are subject to intensive
government regulations that can change at any time. Any such change could
have a material adverse effect on the prospects of the Company.
RESEARCH AND DEVELOPMENT
For the year ended April 30, 1998, 32.1% of the operating expenses are
related to the development of the gaming operations and exploration of
other business opportunities. These costs including Research and
Development, Market Research and Business Development, Product Testing,
Quality Control and Subsidiary Start up Costs (Product Development and
Enhancement Costs") amounted to $962,791 in fiscal 1998. Production costs
for the gaming software incurred subsequent to the establishment of
technological feasibility are capitalized as software development cost,
which is amortized over 3 years. The Company will continue its efforts in
improving the products and exploring other opportunities.
Research and Development expenses reported for fiscal 1997 was
$23,028. Research and Development expenses reported for fiscal 1998 is
$82,141.
ENVIRONMENTAL IMPACT
No significant costs or effects arise with respect to compliance with
environmental laws.
NUMBER OF EMPLOYEES
During the reporting period, the Company had 132 employees, of which 82
were engaged full-time.
ITEM 2. DESCRIPTION OF PROPERTY
Starnet Canada occupies 13,100 square feet of commercial space at 425
Carrall Street, Vancouver, British Columbia. This facility houses all of
Starnet Canada's operations including production, technical, marketing, and
administration for all of the Company's subsidiaries.
The terms of the Carrall Street commercial lease are as follows. Starnet
Canada leases 6,100 square feet through December 31, 1999 (three years)
with an annual rent of $16,771. Starnet Canada has an option to renew this
lease for one additional three year term. Starnet Canada leases 7,000
square feet through December 31, 1999 (three years) with an annual rent of
$44,025 for the first year, and $58,700 for the remaining years. Starnet
Canada possesses an option to renew this lease for an additional three
years.
Softec, World Gaming and EFS Caribbean occupy 2431 square feet of
commercial space at Newgate Street in St. John's, Antigua, West Indies.
This facility houses Softec's Internet hardware and certain administration
including systems administration, technical support and business
development.
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The terms of the Newgate Street commercial lease are as follows. The
lessee leases 2,431 square feet through June 30, 1999 (two years) with an
annual rent of $26,785. The lessee has an option to renew this lease for
one additional two year term.
EFS Caribbean leases residential accommodation for its senior management
residing in Antigua. Two residential apartments have been rented for a
term of one year commencing from the 1st day of October, 1997. The rent
for each apartment is $1,517 per month.
ITEM 3. LEGAL PROCEEDINGS
The Company was not involved in any legal proceedings during the reporting
period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock is reported by the Nasdaq Over-The-Counter
Bulletin Board under the symbol "SNMM".
The following table sets forth the range of high and low bid quotations for
the Company's common stock for each of the periods indicated as reported by
the Nasdaq Over-The-Counter Bulletin Board. Bid quotations reflect inter-
dealer prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions. The Company's common stock
commenced trading on the Nasdaq Over-The-Counter Bulletin Board on
September 18, 1997.
Quarter Ended High Low
October 31, 1997(1) $2.339 $1.50
January 30, 1998 1.828 0.75
April 30, 1998 1.45 0.742
(1) This was not a full quarter as the Company only came to trade on
September 18, 1997.
The source for these stock quotations is Bloomberg.
SECURITY HOLDERS
The approximate number of record holders of shares of the common stock of
the Company outstanding as of April 30, 1998 was 88.
DIVIDENDS
No dividends have been declared or paid on the Company's common stock.
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RECENT SALES OF UNREGISTERED SECURITIES
There have been no recent sales of unregistered securities (other than
Regulation S sales) for the one year period ended April 30, 1998.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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General
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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 loss data for the years ended
April 30, 1998 and 1997 and balance sheet data as at April 30, 1998 and
April 30, 1997.
A. Statement of Loss Data
- - --------------------------
For the years ended April 30
- - ----------------------------
1998 1997
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Net Sales $ 3,370,325 $ 1,996,535
Gross Margin 2,032,524 1,089,167
Operating Expenses 2,999,020 1,110,515
Operating Loss (966,496) (21,348)
Net Loss (1,037,960) (93,714)
B. Balance Sheet Data
- - ----------------------
As at As at
April 30, April 30,
1998 1997
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Working Deficiency $ (329,060) $ (762,106)
Total Assets 3,274,931 1,197,199
Long Term Debt 258,298 237,371
Stockholders' Equity (Deficit) 1,297,892 (70,963)
Accumulated Earnings (Deficit) (1,157,871) (119,911)
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The Company's revenues increased 68.8% to $3,370,325 for the year ended
April 30, 1998 compared to $1,996,535 for the prior year. The growth is
primarily due to increased subscription revenue from the Company's Internet
web sites and additional revenues generated from the licensing and gaming
operations. Along with the growth in sales, gross margin increased to
$2,032,524 for the year ended April 30, 1998 from $1,089,167 for the year
ended April 30, 1997. Gross margin was increased from 54.6% for the year
ended April 30, 1997 to 60.3% for the year ended April 30, 1998 due to the
relatively higher gross margin of the gaming operations and efficiencies
gained from having a larger number of memberships. By expanding its
licensing and gaming operations and increasing the number of membership
websites by using its existing materials, the Company expects a continuous
growth in revenues and gross margin for the next fiscal year.
For the year ended April 30, 1998, 32.1% of the operating expenses is
related to the development of the gaming operations and exploration of
other business opportunities. These costs including Research and
Development, Market Research and Business Development, Product Testing and
Quality Control and Subsidiary Start up Costs. ("Product Development and
Enhancement costs") amounted to $962,791 in fiscal 1998. Production costs
for the gaming software incurred subsequent to the establishment of
technological feasibility are capitalized as software development costs,
which is amortized over 3 years. The Company will continue its efforts in
improving the products and exploring other opportunities.
Expenses excluding Product Development and Enhancement costs increased by
83.4% to $2,036,229 (60.4% of sales) for the year ended April 30, 1998 from
1,110,515 (55.6% of sales) for the prior year. The increase mainly resulted
from wage increases and the increased activities in investor relations and
advertising.
Interest expense increased to $22,986 for the year ended April 30, 1998
from $18,495 for the prior year. The increase mainly resulted from interest
costs due to bank borrowing and additional equipment leases obtained.
During the year ended April 30, 1998, Starnet Canada transferred the
ownership of the gaming software to Softec of Antigua at market value. As
a result, the Company incurred current income tax expenses of $74,362.
Management estimates that the long-term tax savings by having the gaming
software ownership in Antigua will outweigh the current tax expenses
incurred in this fiscal year.
Net operating loss for the year ended April 30, 1998 was $966,496 compared
to $21,348 for the prior year. The loss for the year ended April 30, 1998
was the result of the significant increase in product research and
enhancement expenses during the
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period. Excluding those costs, the net operating loss of the Company would
have been $3,705 for the year ended April 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
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At April 30, 1998, the Company had $140,462 in cash and cash equivalents
compared to $27,545 at April 30, 1997. The Company has pledged cash
equivalents of $500,000 to its bank to secure banking facilities.
Net cash from operations for the year ended April 30, 1998 decreased to
($199,437) from $707,760 for the year ended April 30, 1997. The decrease in
cashflow from operations is mainly due to the increase in prepaid expenses
resulting from the prepayment of the gaming licenses in Antigua and the net
loss due to increase in product research and enhancement costs.
Net cash used for investing activities for the year ended April 30, 1998
was $2,080,043 compared to $788,719 for the year ended April 30, 1997. The
increase resulted from higher levels of investment in security deposits,
restricted cash, capital assets and software development costs.
Net cash provided by financing activities for the year ended April 30, 1998
was $2,392,397 compared to $108,504 for the year ended April 30, 1997. The
increase resulted from the completion of the share offering for $2,401,000
and bank borrowing for $466,217.
The Company expects to meet its future cash requirements through cash
generated from operations. Following the substantial investment in the
product development, it is anticipated that the Company will start
generating increased revenue from the gaming operations in the next fiscal
year. Subsequent to April 30, 1998, the Company has completed the
installations for 4 Internet gaming software licenses.
Impact of Inflation
- - -------------------
The Company believes that inflation has not had a material effect on its
past business.
Year 2000 Issue
- - ---------------
Many existing computer programs, including some programs used by the
Company, use only two digits to identify a year in the date field. These
programs were designed without considering the impact of the upcoming
change in the century. If not corrected, these computer applications and
systems could fail or create erroneous results by, at, or after the year
2000. Based on the preliminary review on the computer programs currently
used by the Company, management does not anticipate that the Company will
incur material operating expenses or be required to incur material costs to
be year 2000 compliant. To the extent the Company's systems are not fully
year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software
Page 12 of 38
<PAGE>
would not have a material effect on the Company's business, financial
condition, results of operations and business prospect. In addition, in the
event that the Company's significant suppliers do not successfully and
timely achieve year 2000 compliance, the Company's business or operations
could be adversely affected.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial
statements appearing on Item 13 of this Report. Such information is
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in, or disagreements with accountants on accounting
and financial disclosure for the two most recent fiscal years.
PART III.
- - ---------
ITEM 9. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are as follows:
Name: John Carley, DBA, CGA, FICB
Age: 51
Position: Chairman of the Board, Chief Financial Officer & Director
Term of Office: Mr. Carley's term of office as a director is one year. He
has served as a director since January 27, 1997 and has
been re-appointed for further term of one year starting
January 27, 1998.
Employment History:
March 1990 - August 1994 - Royal Trust, Western Canada
Region, (Regional Managing Partner, Finance and
Administration)
August 1994 - January 1997 - Hong Kong Bank of Canada/Hong
Kong Bank & Trust Co., (Vise President, Trust Operations)
Mr. Carley was previously Vice President, Trust Operations
for the Hong Kong Bank Trust Company. Previously, Mr.
Carley has worked as Executive Director of Examinations
and Investigations for the Financial Institution
Commission of the Ministry of Finance and Corporate
Affairs, Province of British Columbia. Mr. Carley holds
a Diploma in business Administration, a FICB designation,
a Canadian Securities designation, and is a Certified
General Accountant.
Name: Mark Dohlen, B.Admin., MBA, LLB, FCIS, P.Admin.
Age: 37
Position: Chief Executive Officer & Director
Term of Office: Mr. Dohlen's term of office as a director is one year. He
has served as a director since January 27, 1997 and has
been re-appointed for further term of one year starting
January 27, 1998.
Employment History:
April 1993 - May 1996 - ISG Consulting Inc. (Consultant)
Page 13 of 38
<PAGE>
Mr. Dohlen possesses more than ten years of experience in
senior management positions. Mr. Dohlen holds a Bachelor
of Administration in Finance from the University of Regina
in Saskatchewan, and an MBA in Management Information
Systems from Simon Fraser University in British Columbia
and a Bachelor of Laws from the University of British
Columbia. Mr. Dohlen also holds Chartered Secretaries
and Administrators and Professional Administrator
designations. His is currently completing a Certified
Management Consultant designation.
Name: Jason Bolduc
Age: 23
Position: President & Director
Term of Office: Mr. Bolduc's term of office as a director is one year. He
has served as a director since January 27, 1997 and has
been re-appointed for further term of one year starting
January 27, 1998.
Employment History:
1990 - April 1995 - Wiz Zone Computers Inc. (Managing
Partner)
December 1994 - April 1995 - Cyberstore Systems Inc.
(Network Administrator)
Mr. Bolduc was most recently Director of Network
Operations for Cyberstore Systems Inc., a Vancouver,
Canada based Internet access provider. Previously, Mr.
Bolduc operated a high technology consulting firm.
Name: Paul Giles
Age: 31
Position: Director, Senior Vice President
Employment History:
April 1988 - July 1995 Goldstein Productions Inc.
(President, Director)
Aug 1995 - Present Starnet Communications International
(Senior Vice President, Director)
Mr. Giles brings over 10 years of experience in a variety
of entertainment and computer related fields, and has
served as an employee of Starnet since the Company's
inception. Previously, Mr. Giles was president and
director of a Vancouver, Canada based entertainment
management firm, Goldstein Productions Inc.
Name: Christopher H. Zacharias MBA, LLB, ACIS
Age: 31
Position: Secretary/Treasurer, Corporate Counsel & Director
Term of Office: Mr. Zacharias' term of office as a director is one year.
He has served as a director since January 27, 1997 and has
been re-appointed for further term of one year starting
January 27, 1998.
Employment History:
September 1993 - May 1995 - Simon Fraser University
(Computer Lab Assistant)
May 1995 - May 1996 - Baker Newby (Lawyer)
May 1996 - February 1997 - Brawn Karras & Sanderson
(Lawyer)
Mr. Zacharias brings a wealth of experience in financial,
contractual, intellectual property, and legal affairs. Mr.
Zacharias has been called to the British Columbia Bar.
Previously, Mr. Zacharias was practicing as a corporate
solicitor with the law firm Brawn Karras & Sanderson. Mr.
Zacharias holds a Bachelor of Law from the University of
Manitoba and an MBA from Simon Fraser University in
British Columbia. Mr. Zacharias holds the Chartered
Secretaries and Administrators professional designation.
Page 14 of 38
<PAGE>
Name: Jason King, BA
Age: 26
Position: Chief Operations Officer
Employment History:
Dec. 1990 - May 1991 Harrod's of London, England.
Computer Department (Assistant Manager)
May 1992 - April 1996 Credit Generale (VP Corporate
Development)
May 1996 - Jan 1997 Starnet Communications
International (Production Manager)
Mr. King brings over 10 years of experience in a variety
of computer related fields, and has served as an employee
of Starnet since the May, 1996. Mr. King has held management
positions in a variety of companies in both Canada and the
UK, building an extensive knowledge of computers and the
Internet. Mr. King holds a Bachelor of Arts degree from Simon
Fraser University in British Columbia, Canada.
Name: Benjamin Wong, BBA, CGA, CPA
Age: 31
Position: Vice-President Finance
Employment History:
Nov. 89 - July 93, STD Computer (Vancouver) Inc.
(Financial Controller)
Aug. 93 - Dec. 95, ANO Automation (Vancouver) Ltd.
(Financial Controller)
Jan. 96 - Nov. 96, NamTai Electronic (Accountant)
Mr. Wong brings over 10 years of experience in the
accounting field, having served controlling and internal
auditing positions in both private and public
corporations. Mr. Wong holds a BBA from the Chinese
University of Hong Kong, is a Certified General Accountant
(CGA; Canada) and a Certified Public Accountant (CPA;
U.S.).
FAMILY RELATIONSHIPS.
There are no family relationships among directors, executive officers or
other persons nominated or chosen by the Company to become officers or
executive officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
The Company is not aware of any material legal proceedings involving any
director, director nominee, promoter or control person including criminal
convictions, pending criminal matters, pending or concluded administrative
or civil proceedings limiting one's participation in the securities or
banking industries, or findings of securities or commodities law
violations. However, a personal bankruptcy proceeding under Canadian law
involving Mark Dohlen concluded in September 1994, with Mr. Dohlen
receiving a judicial discharge.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
The following persons were late in filing their Form 3:
Jason Bolduc; John Carley; Mark Dohlen; Richard Gallo; Paul Giles; Murray
Partners (BVI) Inc.; Mitchell White; and Chris Zacharias.
Page 15 of 38
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Options/
Name and Fiscal Salary SARs
Principal Year ended (US$)(1) (#)
Position April 30
- - -------- -------- -------- -------
Mark Dohlen 1998 $56,915 350,000
(CEO)
Mark Dohlen 1997 $26,763 0
(CEO)
There was no CEO appointed in fiscal year ended April 30, 1996, nor were
there executive officers earning greater than $100,000 in that year.
(1) The compensation depicted is in the U.S. dollars. The compensation
was paid in Canadian dollars.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
(a) (b) (c) (d) (e)
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
---- ----------- -------------- ------------ ---------------
Mark Dohlen 350,000 12.7% $0.74 January 1, 2008
CEO
For the above granted options, the options vest as to 50% as of January 1,
1998, and the remaining 50% as of January 1, 1999. The exercise price is
the same as the market price on the date of grant.
As of the end of the reporting period, no options have been exercised by
any of the executive officers of the Company.
COMPENSATION OF DIRECTORS
The members of the Company's Board of Directors are reimbursed for actual
expenses incurred in attending Board meetings. There are no other
arrangements for compensation to the Board of Directors' members.
Page 16 of 38
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Name and Address Amount and
Address of Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
- - -------------- ---------------- ---------------- --------
Class A Voting
Common Murray Partners
(BVI) Inc.(1) 10,000,000 44.5%
Todman Building
Main Street, PO Box 3140
Road Town
Tortola
British Virgin Islands
(1) The shareholders of Murray Partners (BVI) Inc. ("Murray Partners ") are
a collection of discretionary trusts, the beneficiaries of which include
some of the Company's officers and directors: Jason Bolduc; Mark Dohlen;
Paul Giles; John Carley, and their families. The beneficiaries of the
trusts are unable to vote the shares of Murray Partners, nor the shares of
the Company, owned by Murray Partners, nor are they able to direct the sale
of shares of Murray Parthers, nor the shares of the Company, owned by
Murray Partners. The "beneficial owner" of the Company's shares held by
Murray Partners (for U.S. Securities and Exchange Commission reporting
purposes) is the trustee of the discretionary trusts, William Bruce
Flatt.
SECURITY OWNERSHIP OF MANAGEMENT
Name and Address Amount and
Address of Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
- - -------------- ---------------- ---------------- --------
Class A Voting
Common Jason Bolduc 325,000(1) 1.45%
2205 - 1050 Burrard St.
Vancouver, B.C. Record and Beneficial
Class A Voting
Common Paul Giles 325,000(1) 1.45%
PH 401 - 825 West 8th
Vancouver, B.C. Record and Beneficial
Class A Voting
Common Mark Dohlen 275,000(2) 1.22%
509 - 1188 Quebec St.
Vancouver, B.C. Record and Beneficial
Class A Voting
Common Christopher Zacharias 68,750(3) 0.31%
2267 Park Crescent
Coquitlam, B.C. Record and Beneficial
Class A Voting
Common John Carley 100,000(4) 0.44%
5373 Wildwood Cres.
Tsawwassen, B.C. Record and Beneficial
Class A Voting
Common All Directors and
Officers as a group 1,143,332(5) 5.01%
Record and Beneficial
Page 17 of 38
<PAGE>
(1) Includes 25,000 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share.
(2) Includes 175,000 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share.
(3) Includes 58,750 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share.
(4) Includes 75,000 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share.
(5) Includes 7 individuals, and a total of 362,916 options that have vested
as of July 1, 1998, all at an exercise price of $0.74 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nothing reportable
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Consolidated Financial Statements of Starnet
Communications International Inc. (formerly Gelato
Brats Inc., formerly Creative Sports Marketing Inc)
dated April 30, 1998
Statement Re: Computation of per share earnings
of Starnet Communications International Inc. (formerly
Gelato Brats Inc., formerly Creative Sports Marketing
Inc) dated April 30, 1998
3.1 Articles of Incorporation . (incorporated by reference from
exhibit 3.3 of Form S-8 dated March 12, 1998)
3.2 Bylaws (1)
10.1 Bank of Montreal (1)
10.2 Pacific Rim Investment Inc (1)
21.1 Subsidiaries of the Registrant (2)
23.1 Ernst & Young, Consent of Independent Chartered Accountants (2)
27.1 Financial Data Schedule(2)
(1) incorporated by reference from Form 10-SB
(2) filed herewith
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
Page 18 of 38
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
STARNET COMMUNICATIONS INTERNATIONAL INC.
April 30, 1998
Page 19 of 38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
STARNET COMMUNICATIONS INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of STARNET
COMMUNICATIONS INTERNATIONAL INC. as of April 30, 1998 and 1997 and the
related consolidated statements of loss and deficit and cash flows for the
two years ended April 30, 1998 and 1997 and the period from May 19, 1995 to
April 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Starnet
Communications International Inc. at April 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years
ended April 30, 1998 and 1997 and the period from May 19, 1995 to April 30,
1996 in conformity with accounting principles generally accepted in the
United States.
Vancouver, Canada, /s/ ERNST & YOUNG
July 3, 1998. Chartered Accountants
Page 20 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN UNITED STATES DOLLARS)
As at April 30
1998 1997
$ $
- - -----------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 140,462 27,545
Restricted cash [NOTE 7] 500,000 -
Accounts receivable [allowance for bad
debts - $27,953, 1997 - $28,985] 196,040 55,478
Employee receivable [NOTE 11] 68,123 75,727
Prepaid expenses [NOTE 13] 262,545 28,529
Security deposits [NOTE 6] 195,607 28,620
- - -----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,362,777 215,899
- - -----------------------------------------------------------------------------
Capital assets (net) [NOTE 3] 1,190,511 792,247
Deferred website costs [NOTE 4] 255,884 189,053
Software development costs [NOTE 5] 465,759 -
- - -----------------------------------------------------------------------------
3,274,931 1,197,199
- - -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Bank indebtedness [NOTE 7] 466,217 -
Accounts payable and accrued liabilities 520,031 346,917
Income taxes payable [NOTE 8] 74,360 -
Deposits from customers [NOTE 14] 190,727 -
Loans payable [NOTE 9] - 200,343
Deferred revenue 279,848 223,004
Current portion of capital lease
obligations [NOTE 11] 160,654 75,136
Due to related parties [NOTE 10] - 132,605
- - -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,691,837 978,005
- - -----------------------------------------------------------------------------
Non-current portion of capital lease
obligations [NOTE 11] 258,298 237,371
Deferred income tax [NOTE 8] 26,904 52,786
- - -----------------------------------------------------------------------------
TOTAL LIABILITIES 1,977,039 1,268,162
- - -----------------------------------------------------------------------------
Commitments [NOTE 15]
SHAREHOLDERS' DEFICIT
Capital stock [NOTE 12] 2,421,000 20,000
Deficit (1,157,871) (119,911)
Cumulative translation adjustment 34,763 28,948
- - -----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,297,892 (70,963)
- - -----------------------------------------------------------------------------
3,274,931 1,197,199
- - -----------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
Page 21 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
Period from
May 19,
1995
Year ended April 30, to April 30,
1998 1997 1996
$ $ $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Sales 3,370,325 1,996,535 378,544
Cost of sales 1,337,801 907,368 172,755
- - --------------------------------------------------------------------------------------
GROSS MARGIN 2,032,524 1,089,167 205,789
- - --------------------------------------------------------------------------------------
EXPENSES
Wages and benefits 533,475 361,212 36,795
Product testing and quality control 508,768 - -
General and administrative 380,542 224,927 78,355
Advertising 356,024 89,872 8,390
Depreciation 285,430 242,876 69,014
Investor relations 237,568 - -
Subsidiary start up costs 216,088 - -
Market research and business development 155,794 - -
Bank charges and interest 124,534 80,322 9,217
Legal and accounting 118,656 88,278 30,215
Research and development 82,141 23,028 -
- - --------------------------------------------------------------------------------------
2,999,020 1,110,515 231,986
- - --------------------------------------------------------------------------------------
Net loss from operations for the year (966,496) (21,348) (26,197)
- - --------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Interest income (expense) (22,986) (18,495) -
- - --------------------------------------------------------------------------------------
Net loss before income taxes (989,482) (39,843) (26,197)
- - --------------------------------------------------------------------------------------
Income tax expense (recovery):
- current [NOTE 8] 74,360 - -
- deferred [NOTE 8] (25,882) 53,871 -
- - --------------------------------------------------------------------------------------
Income taxes 48,478 53,871 -
- - --------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR (1,037,960) (93,714) (26,197)
Deficit, beginning of year (119,911) (26,197) -
- - --------------------------------------------------------------------------------------
DEFICIT, END OF YEAR (1,157,871) (119,911) (26,197)
- - --------------------------------------------------------------------------------------
PER COMMON SHARE
Net loss for the year (0.05) (0.00)
Dividends - -
Weighted average number of common shares
outstanding 21,002,885 20,000,000
- - --------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
Page 22 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
Period from
May 19,
1995
Year ended April 30, to April 30,
1998 1997 1996
$ $ $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (1,037,960) (93,714) (26,197)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 378,323 242,876 69,014
Amortization of deferred website costs 326,754 200,832 35,338
Amortization of software development costs 26,704 - -
Gain on disposal of fixed assets (1,262) - -
Deferred income taxes (25,882) 53,871 -
Foreign exchange 5,815 16,434 546
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (140,562) 9,228 (64,706)
(Increase) decrease in employee receivable 7,604 (75,727) -
Increase in prepaid expenses (234,016) (23,385) (5,144)
Increase in accounts payable and accrued
liabilities 173,114 243,552 115,949
Increase in income taxes payable 74,360 - -
Increase in deposit from customers 190,727 - -
Increase in deferred revenue 56,844 133,793 89,211
- - --------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (199,437) 707,760 214,011
- - --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (527,008) (406,454) (336,962)
Restricted cash (500,000) - -
Deferred website costs (393,585) (354,547) (70,676)
Software development costs (492,463) - -
Security deposits (166,987) (28,620) -
Advance to related company - 902 (902)
- - --------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,080,043) (788,719) (408,540)
- - --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness 466,217 (1,161) 1,161
Proceeds from loans - 200,343 -
Repayment of loan (200,343) - -
Proceeds from issuance of shares 2,401,000 - 7,416
Repayments to related parties (132,605) (56,189) -
Advance from shareholders - - 188,794
Principal repayments under capital lease
obligations (141,872) (34,489) (2,842)
- - --------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,392,397 108,504 194,529
- - --------------------------------------------------------------------------------------
NET INCREASE IN CASH DURING THE YEAR 112,917 27,545 -
Cash, beginning of year 27,545 - -
- - --------------------------------------------------------------------------------------
CASH, END OF YEAR 140,462 27,545 -
- - --------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 71,761 18,495 4,432
Income tax paid - - -
- - --------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
Page 23 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Starnet Communications International Inc. (the "Company") was incorporated
on June 28, 1996 in the State of Nevada as Creative Sports Marketing Inc.
On July 20, 1996, the Company changed its name from Creative Sports
Marketing Inc. to Gelato Brats Inc. and on February 24, 1997 to Starnet
Communications International Inc. On March 10, 1997, Starnet
Communications International Inc. redomiciled into Delaware and combined
with Starnet Communications Canada Inc. ("Starnet Canada").
The Company issued 10 million shares of Class A voting common stock for all
of the outstanding stock of Starnet Canada. Since the companies were under
common control this transaction was accounted for in a manner similar to a
pooling of interests. The Company's consolidated financial statements are
presented as if the merger had been in effect on May 19, 1995 (the date of
incorporation of Starnet Canada).
Starnet Communications International Inc. operates through five wholly
owned subsidiaries:
Starnet Canada
World Gaming Services Inc. ("World Gaming")
Softec Systems Caribbean Inc. ("Softec")
EFS (Electronic Financial Services) USA Inc. ("EFS USA")
EFS Caribbean Inc. ("EFS Caribbean")
Starnet Canada is based in Vancouver, British Columbia. Starnet Canada
develops, markets and manages advanced online interactive media and
information systems for the Internet.
World Gaming is Starnet's proprietary, full-service Internet gaming
operation. World Gaming holds Internet gaming permits in its domicile of
Antigua.
Through its product line, the World Gaming system accepts, processes and
manages wagers via the Internet on world sporting events, international
lotteries, Internet-simulcast horse racing and interactive casino games.
World Gaming derives its revenues from customers residing outside of the
United States and Canada.
1
Page 24 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (cont'd.)
Softec, also of Antigua, is in the business of licensing customized, turn-key
Internet gaming systems (similar to the World Gaming system) to
independent parties wanting to participate in the online gaming industry.
Softec provides a ready-to-use operation in exchange for participation in
the licensees' revenues.
EFS USA, incorporated in Nevada in December 1997, facilitates Internet
commerce by providing a common currency "e-cash" on the Internet.
Customers purchase e-cash from EFS USA by providing their credit card
information through a secured link on the Internet. Merchants that have
arrangements with EFS USA will accept their customers' payment in e-cash
and do the settlement with EFS USA in real currency such as US dollars. In
return, EFS USA charges its merchants fees equaling a certain percentage of
the transactions.
EFS Caribbean was incorporated in Antigua in October 1997. Its principal
business activity is to serve as the corporate headquarters of the various
Antiguan operations.
Due to the uncertain regulatory environment as it relates to Internet
gaming in the United States and Canada, the Company continues to focus on
the market outside of North America until such time as United States and
Canadian laws, specifically in regard to Internet gaming are clarified.
2. ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all its subsidiaries.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated or amortized using the straight-line
method over the estimated useful life of the assets at the following rates:
Furniture and fixtures 3 years
Computer hardware and equipment 3 years
Computer software 3 years
Automobiles 4 years
2
Page 25 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
2. ACCOUNTING POLICIES (cont'd.)
Leasehold improvements are amortized over the term of the related lease
using the straight-line method.
One-half of the normal depreciation rate is applied in the year of
acquisition or capitalization of the capital assets.
REVENUE RECOGNITION
Revenue from dial-up access is recognized at the time services are
rendered. Billings in advance of services are included in deferred revenue
and recognized at the time services are rendered.
Initial license fees are recognized as revenue upon the completion of the
license sale transactions. Before the revenues are recognized, deposits
from licensees are recorded as liabilities, and direct costs relating to
the franchise sales are deferred.
On-line service revenues, gaming revenues and monthly licensing revenues
are recognized over the period services are provided.
DEFERRED WEBSITE COSTS
Costs which relate to the development of the Company's Internet sites are
capitalized. Deferred website costs are amortized one half in the year
incurred, one third in the following year, and one sixth in the second
following year. The website costs balance shown in the balance sheet is
presented net of accumulated amortization.
The recoverability of the website costs is dependent upon the realization
of sufficient future revenues from these products.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred subsequent to establishing
technological feasibility are capitalized. Capitalized costs are amortized
using the straight-line method over three years. Capitalization ceases and
amortization commences on the date that the software is available for
general release. The software development costs balance in the balance
sheet is reported at the lower of unamortized cost or net realizable value.
3
Page 26 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
2. ACCOUNTING POLICIES (cont'd.)
FOREIGN CURRENCY TRANSLATION
All transactions in currencies other than the United States dollar during
the year are translated at the exchange rates on the transaction dates.
Monetary assets and liabilities denominated in a foreign currency are
translated at the prevailing year-end rates of exchange. Exchange gains or
losses are included in the statements of loss and deficit.
The financial statements of all subsidiaries expressed in currencies other
than the United States dollar are translated. All assets and liabilities
are translated at the exchange rate on the balance sheet date and all
revenues and expenditures are translated at the average rate for the year.
Translation adjustments are reflected as a separate component of
shareholders' equity.
LEASES
Leases which transfer substantially all of the benefits and risks of
ownership are recorded as the acquisition of assets and incurrence of
obligations. Under this method of accounting, both assets and obligations,
including interest thereon, are amortized over the life of the lease.
ADVERTISING
The Company expenses the costs of advertising as incurred.
NET EARNINGS AND DIVIDENDS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
("FAS 128") regarding the determination and disclosure of earnings per
share for the purpose of preparing its financial statements. The
calculations of net earnings and dividends per common share are based upon
the weighted average number of common shares of the Company outstanding
during each period. No dilutive potential common share is included in the
computation of the diluted per-share amount because the inclusion will
result in an antidilutive per-share amount due to the Company's loss from
operations.
The adoption of FAS 128 has no impact on previously reported information.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25 in accounting for stock based awards and consequently has not recognized
compensation expense for these awards made during the year.
4
Page 27 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
2. ACCOUNTING POLICIES (cont'd.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes to the consolidated
financial statements. Actual results may differ from those estimates.
3. CAPITAL ASSETS
Property and equipment are recorded at cost and comprise:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
APRIL 30, 1998
Computer hardware and equipment 975,172 466,539 508,633
Computer hardware under capital leases 517,691 183,907 333,784
Automobiles under capital leases 79,024 19,702 59,322
Leasehold improvements 246,377 63,248 183,129
Furniture and fixtures 88,152 31,821 56,331
Computer software 66,614 17,302 49,312
- - --------------------------------------------------------------------------------------
1,973,030 782,519 1,190,511
- - --------------------------------------------------------------------------------------
APRIL 30, 1997
Computer hardware and equipment 607,755 202,718 405,037
Computer hardware under capital leases 208,826 62,821 146,005
Automobiles under capital leases 152,455 19,057 133,398
Leasehold improvements 81,049 12,976 68,073
Furniture and fixtures 37,257 10,919 26,338
Computer software 16,796 3,400 13,396
- - --------------------------------------------------------------------------------------
1,104,138 311,891 792,247
- - --------------------------------------------------------------------------------------
</TABLE>
5
Page 28 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
4. DEFERRED WEBSITE COSTS
Website costs are recorded at cost less accumulated amortization and
comprise:
1998 1997
$ $
- - -----------------------------------------------------------------------------
Net balance, beginning of period 189,053 35,338
Costs capitalized during the period 393,585 354,547
Current period amortization (326,754) (200,832)
- - -----------------------------------------------------------------------------
Net balance, end of period 255,884 189,053
- - -----------------------------------------------------------------------------
5. SOFTWARE DEVELOPMENT COSTS
Software development costs are recorded at cost less accumulated
amortization and comprise:
1998 1997
$ $
- - -----------------------------------------------------------------------------
Net balance, beginning of period - -
Costs capitalized during the period 492,463 -
Current period amortization (26,704) -
- - -----------------------------------------------------------------------------
Net balance, end of period 465,759 -
- - -----------------------------------------------------------------------------
6. SECURITY DEPOSITS
The Company has obtained merchant accounts with two banks in the United
States for credit card processing. Under the conditions of the merchant
agreement, the Company is required to provide the banks with security
deposits. The deposits will be held until the merchant accounts are
cancelled. The aggregate balance of the security deposits held by these
two banks amounted to $104,762 at April 30, 1998. Under a similar
arrangement with a Canadian bank, a term deposit for $27,952 is held to
collateralize a merchant account in Canada. There are also three deposits
totaling $62,893 for equipment leases [note 11]. The security deposits are
non-interest bearing.
6
Page 29 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
7. BANK INDEBTEDNESS
Starnet Canada has arranged a $100,000 operating line of credit, bearing
interest at 8.5%, and a demand instalment loan, at the Canadian prime rate
(6.5%), with its bank for $388,100, of which $366,217 is currently
outstanding. The facilities are fully collateralized by cash equivalents
of the Company of $500,000 and personal guarantees of key directors and
employees. This restricted cash is invested in a United States dollar
money market fund with the same bank.
8. INCOME TAXES
(a) Prior to 1998, all of the Company's operations were located in Canada.
The income tax provision differs from the amount that would be
computed by applying the combined federal and provincial income tax
rate of 45.62% to the loss before taxes as follows:
1998 1997
$ $
- - -----------------------------------------------------------------------------
Provision based on loss before income
taxes (451,402) (18,176)
Increase (decrease) in tax provision
resulting from:
Expenses not deductible for income
tax purposes 89,300 29,242
Benefit of U.S. tax loss not currently
recognized 129,460 27,372
Amortization of permanent differences
on capital assets 3,375 4,433
Other 8,701 11,000
Effect of difference in rate between
Canada and Antigua 208,025 -
Tax arising on software transfer 70,294 -
Recognition of operating loss
carryforward (9,275) -
- - -----------------------------------------------------------------------------
48,478 53,871
- - -----------------------------------------------------------------------------
7
Page 30 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
8. INCOME TAXES (cont'd.)
(b) Deferred income taxes arise from timing differences in the recognition
of income and expenses for financial reporting and tax purposes. The
sources of timing differences in operations and the related deferred
income tax amounts are as follows:
1998 1997
$ $
- - -----------------------------------------------------------------------------
Property, plant and equipment 89,317 29,397
Net operating loss and credit carryforwards 129,460 27,372
- - -----------------------------------------------------------------------------
218,777 56,769
Valuation allowances (129,460) (27,372)
- - -----------------------------------------------------------------------------
Deferred tax assets 89,317 29,397
- - -----------------------------------------------------------------------------
Deferred website costs 106,136 76,231
Other 10,085 5,952
- - -----------------------------------------------------------------------------
Deferred tax liabilities 116,221 82,183
- - -----------------------------------------------------------------------------
Deferred tax liability, net 26,904 52,786
- - -----------------------------------------------------------------------------
9. LOANS PAYABLE
The loans outstanding at April 30, 1997 were interest bearing at 6% per
annum and were collateralized by all assets of the Company and guaranteed
by key directors and employees. The principal and interest were fully
repaid during the year ended April 30, 1998.
8
Page 31 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
10. DUE TO RELATED PARTIES
The amounts due to related parties are due to officers and directors of the
Company who have an indirect ownership interest in the Company ("the
Related Parties"). These amounts are non-interest bearing and are
unsecured.
During the year ended, the Company was involved in the following
transactions with the Related Parties:
(a) Advances and loans of $18,763 [1997 - $94,540] were received.
(b) Repayments of $151,368 [1997 - $150,729] were made.
These amounts arose during the period ended April 30, 1996 of the Company's
operations when six individuals advanced funds and sold capital assets to
the Company on credit terms to finance the development of the Company's
products and operations.
As at April 30, 1998, the Company had advanced $68,123 [1997 - $75,727] to
some of its employees. The advances are non-interest bearing and there are
no specific repayment terms.
11. CAPITAL LEASE OBLIGATIONS
At April 30, 1998, the Company had entered into capital leases for
equipment and automobiles. The future payments for the 12 months ended
April 30 are:
$
- - -----------------------------------------------------------------------------
1999 223,312
2000 184,990
2001 99,885
2002 6,772
2003 5,759
- - -----------------------------------------------------------------------------
Total minimum lease payments 520,718
Less amounts representing interest at rates varying
from 6% to 11% 101,766
- - -----------------------------------------------------------------------------
Present value of minimum lease payments 418,952
Current portion of capital lease obligations 160,654
- - -----------------------------------------------------------------------------
258,298
- - -----------------------------------------------------------------------------
Three of the equipment leases require the Company to pledge term deposits
for $27,953, $17,470 and $17,470 respectively. The term deposits will be
returned upon the expiry of the lease.
9
Page 32 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
11. CAPITAL LEASE OBLIGATIONS (cont'd.)
During the year ended April 30, 1998, the Company has terminated three of
the automobile leases. The lessor agreed to terminate the automobile
leases without penalty.
The Company has the option to acquire two leased automobiles at the end of
the lease terms by paying amounts estimated at commencement of the leases
to be the residual values of the vehicles at the end of the leases. As a
condition of these leases the Company has guaranteed that the residual
value of the two leased vehicles will be $14,193 and $22,676 at the end of
the lease terms.
12. SHARE CAPITAL
AUTHORIZED
100,000,000 Class A voting common shares, par value $0.001
50,000,000 Class B nonvoting common shares, par value $0.001
50,000,000 preferred shares, par value $0.001
(a) The Company had the following shares and warrants issued and
outstanding:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
# $ # $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding Class A shares,
beginning of year 20,000,000 20,000 - -
Shares issued for cash 2,450,000 2,450,000 20,000,000 20,000
Less: share issue costs - (49,000) - -
- - --------------------------------------------------------------------------------------
Outstanding Class A shares,
end of year 22,450,000 2,421,000 20,000,000 20,000
- - --------------------------------------------------------------------------------------
</TABLE>
On December 2, 1997, the Company completed an offering of 2,450,000
units at $1.00 per unit. Each unit consisted of one Class A voting
common share and a single warrant exercisable within one year from the
date of issue at $2.00. Each warrant exercised at $2.00 entitles the
purchaser to one Class A voting common share and a second warrant (the
"Piggyback Warrant"). Each Piggyback Warrant may be exercised, within
one year of the Piggyback Warrant being issued, at $4.00. The
exercising of the Piggyback Warrant entitles the purchaser to one
share of common stock.
At April 30, 1998, none of the warrants had been exercised.
10
Page 33 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
12. SHARE CAPITAL (cont'd.)
(b) Stock Options
On March 12, 1998, the Board of Directors approved a stock option
plan, which authorized the issuance of 3,000,000 options to employees
of the Company and its subsidiaries at an exercise price of $0.74.
The options expire on January 1, 2008. No compensation expense was
recorded as the options' exercise price was the same as the market
price on the option grant date.
As at April 30, 1998, 2,750,834 options had been issued to directors
(250,000) and employees (2,500,834). The options for directors vest
50% after the first year and 50% after the second year. The options
for employees vest on a straight-line basis over 2 years. At April
30, 1998, 3,000,000 shares were reserved for issuance pursuant to the
exercise of options.
At April 30, 1998, none of the stock options had been exercised. At
April 30, 1998, 104,201 stock options are exercisable.
The Company has adopted the disclosure-only provisions of FAS 123,
Accounting for "STOCK-BASED COMPENSATION". Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost
for the Company's stock option plan been determined based on the fair value
at the grant date for awards in 1998 consistent with the provisions of SFAS
No. 123, the Company's loss and loss per share would have been increased to
the proforma amounts indicated below:
1998 1997
$ $
- - -----------------------------------------------------------------------------
Loss - as reported 1,037,960 21,348
Loss - proforma 1,125,949 -
Loss per share - as reported (0.05) (0.00)
Loss per share - proforma (0.05) -
- - -----------------------------------------------------------------------------
The fair value of option grant is estimated on the date of grant using the
Black-Scholes option-pricing model discounted for lack of liquidity with
the following weighted-average assumptions used for grants in 1998.
Dividend yield 0%
Expected volatility 122%
Risk-free interest rate 5.4%
Expected lives 2 years
11
Page 34 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
12. SHARE CAPITAL (cont'd.)
Options granted during the year have a weighted average fair value at the
grant date of $0.47. The weighted average contractual life remaining is 8
years and 8 months.
13. PREPAID EXPENSES
Included in prepaid expenses at April 30, 1998 is a one year gaming license
for World Gaming with the government of Antigua at a carrying value of
$146,565. The cost of the license was $175,000. It has been accounted for
as a prepaid expense and has been taken into the statement of loss and
deficit starting March 1, 1998, the date the license became effective.
14. DEPOSITS FROM CUSTOMERS
The deposits from customers are comprised of two $50,000 deposits with
Softec for the sale of two license fees. The deposits are non-interest
bearing and fully refundable to the customer until such time as the
software is satisfactorily installed.
The remaining $90,727 represents deposits from customers from the purchase
of electronic chips for the purpose of gambling. These deposits are non-
interest bearing and repayable on demand.
15. COMMITMENTS
At April 30, 1998, the Company has entered into commitments for leases for
premises. The future payments for the 12 months ended April 30 are:
$
- - -----------------------------------------------------------------------------
1999 138,201
2000 113,044
2001 3,228
- - -----------------------------------------------------------------------------
254,473
- - -----------------------------------------------------------------------------
12
Page 35 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
16. BUSINESS SEGMENTS
<TABLE>
<CAPTION>
On-line
Interactive Consolidated
Media Licensing Gaming Balance
$ $ $ $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES 3,112,813 150,000 107,512 3,370,325
- - --------------------------------------------------------------------------------------
Operating income (212,674) (731,161) (15,661) (959,496)
Interest expense (22,986)
(16,876)
- - --------------------------------------------------------------------------------------
(999,358)
- - --------------------------------------------------------------------------------------
</TABLE>
Prior to 1998, the Company operated in a single business line of business,
on-line interactive media. Revenues for 1997 and 1996 were as disclosed in
the statements of loss and deficit.
The only significant country to which on-line interactive media sales are
made is the United States.
IDENTIFIABLE ASSETS
<TABLE>
<CAPTION>
On-line
Interactive Elimi- Consolidated
Media Licensing Gaming nations Balance
$ $ $ $ $
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets 856,296 205,529 300,952 - 1,362,777
Capital assets 1,140,449 - 50,062 - 1,190,511
Deferred website costs 255,884 - - - 255,884
Software development costs - 600,000 - (134,241) 465,759
- - --------------------------------------------------------------------------------------
2,252,629 955,529 351,014 (284,241) 3,274,931
- - --------------------------------------------------------------------------------------
</TABLE>
The on-line interactive media assets are domiciled in Canada. The
licensing and gaming assets are domiciled in Antigua.
13
Page 36 of 38
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN UNITED STATES DOLLARS)
April 30, 1998
17. SUBSEQUENT EVENTS
Subsequent to the year end, the Company has completed the installation of
4 licensing agreements which has resulted in another $350,000 of
installation fees having been received.
18. COMPARATIVE FIGURES
Certain amounts for 1997 and 1996 have been reclassified to conform with
the current year's presentation.
19. YEAR 2000 ISSUE (unaudited)
Like other companies, financial and business organizations and individuals
around the world, the Company could be adversely affected if the computer
systems it uses and those used by the Company's suppliers do not properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 issue".
Management is assessing its computer systems and the systems compliance
issues of the Company's suppliers.
Based on the information available to management, the Company's suppliers
are taking steps that they believe are reasonably designed to address the
Year 2000 issue with respect to the computer systems. At this time,
however, there can be no assurance that these steps will be sufficient, and
the failure of timely completion of all necessary procedures could have a
material adverse effect on the Company's operations. Management will
continue to monitor the status of and its exposure to this issue. For the
year ended April 30, 1998, the Company incurred no Year 2000 related costs
and does not expect to incur significant Year 2000 costs.
14
Page 37 of 38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
(Registrant) Starnet Communications International Inc.
By /s/ MARK DOHLEN
---------------------------------
Mark Dohlen Chief Executive Officer
Date July 31, 1998
____________________________________________________________________
(Registrant) Starnet Communications International Inc.
By /s/ JOHN CARLEY
---------------------------------
John Carley CFO, Principal Accounting Officer
Date July 31, 1998
____________________________________________________________________
In accordance with the Exchange Act, the Registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Starnet Communications International Inc.
By /s/ MARK DOHLEN
---------------------------------
Mark Dohlen CEO, Director
Date July 31, 1998
____________________________________________________________________
(Registrant) Starnet Communications International Inc.
By /s/ JOHN CARLEY
---------------------------------
John Carley CFO, Chairman of the Board
Date July 31, 1998
____________________________________________________________________
Page 38 of 38
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Starnet USA, Inc., a corporation organized under the Washington
Business Corporation Act.
2. Starnet Communications Canada Inc. a corporation organized under the
Company Act of the Province of British Columbia.
3. Softec Systems Caribbean Inc., a corporation organized under the laws
of the Country of Antigua.
4. World Gaming Systems Inc., a corporation organized under the laws of
the Country of Antigua.
5. EFS U.S.A. Inc., a corporation organized under the laws of the state
of Nevada, USA.
6. EFS Caribbean Inc., a corporation organized under the laws of the
Country of Antigua.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Starnet Communications International Inc. on Form S-8 of Starnet
Communications International Inc. of our report dated July 3, 1998, which
appears in this Annual Report on Form 10-KSB, on our audits of the
consolidated financial statements of Starnet Communications International
Inc. as at and for the year ended April 30, 1998 and 1997 and the period
from May 19, 1995 to April 30, 1996.
Vancouver, Canada /s/ ERNST & YOUNG
July 29, 1998 Chartered Accountants
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 140,462
<SECURITIES> 0
<RECEIVABLES> 264,163
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,362,777
<PP&E> 1,973,030
<DEPRECIATION> 782,519
<TOTAL-ASSETS> 3,274,931
<CURRENT-LIABILITIES> 1,691,837
<BONDS> 0
0
0
<COMMON> 2,421,000
<OTHER-SE> (1,123,108)
<TOTAL-LIABILITY-AND-EQUITY> 3,274,931
<SALES> 3,370,325
<TOTAL-REVENUES> 3,370,325
<CGS> 0
<TOTAL-COSTS> 4,336,821
<OTHER-EXPENSES> 22,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,986
<INCOME-PRETAX> (989,482)
<INCOME-TAX> 48,478
<INCOME-CONTINUING> (1,037,960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,037,960)
<EPS-PRIMARY> (0.050)
<EPS-DILUTED> (0.050)
</TABLE>
