U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
STARNET COMMUNICATIONS INTERNATIONAL INC.
(Name of Small Business Issuer in its Charter)
Delaware E.I.N. 52-2027313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class to be so registered
Class A Voting Common Stock
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the 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 is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information
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statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
The issuer's revenues for the Fiscal Year ended April 30, 1999 were $9,772,628.
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the issuer as of July 28,
1999 computed by reference to the close price as at July 28, 1999 of
$19.812 of the registrant's Common Stock as quoted on the OTC Bulletin
Board service on such date, was approximately $385,893,163.
As at July 28, 1999, there were 29,912,749 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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PART 1
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Statements contained in the annual report that are not historical facts are
forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
are subject to risks and uncertainties, which could cause actual results to
differ materially from estimated results. Such risks and uncertainties are
detailed in filings with the Securities and Exchange Commission, including
without limitation in Item 1. "BUSINESS" and Item 6 "MANAGEMENT'S
DISCUSSION AND DESCRIPTION OR PLAN OF OPERATION" below.
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 investment and 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.
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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.
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. The Company is aware of approximately forty-nine
transactions that have occurred.
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
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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-domesticate
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
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.
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B. BUSINESS OF ISSUER:
ORGANIZATIONAL STRUCTURE
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STARNET CORPORATE ORGANIZATIONAL CHART
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Starnet Communications International Inc.
/
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/ / / / / /
EFS USA Inc. / EFS Caribbean Inc. / EFS Australia / EFS St. Kitts Inc.
/ / Pty Ltd. /
/ / /
/ / /
Starnet Softec Systems World Gaming
Communications Caribbean Inc. Services Inc.
Canada Inc.
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The key milestones in the development and evolution of the Company are:
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STARNET DEVELOPMENT MILESTONES
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1997 * Starnet Communications International, Inc. formed by the
acquisition of Starnet Communications Canada Inc.
* Starnet files with the Securities and Exchange Commission (SEC)
as U.S. Public Company.
* Launch of World Gaming, a proprietary website licensed in Antigua
to accept, process and manage wagers via the Internet.
* Softec Systems Caribbean Inc. created to license turnkey,
customized, Internet gaming systems to independent operators in
exchange for participation in the licensees' revenues.
* Seven private placements completed with individual investors, for
gross proceeds of $2.45 million.
* Starnet forms partnership with the Ontario Jockey Club ("OJC") on
May 24th.
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1998 * Softec Systems subsidiary signs first Internet gaming licensee.
* Partnerships with the Hialeah Park Race Course, Windsor Raceway,
Flamboro Downs and Capitol Racing at Cal Expo to provide
simulcast Internet coverage via World Gaming.
* World Gaming begins live broadcasts of horseracing from OJC's
Woodbine and Mohawk racetracks on April 17th.
* Introduction of world's first simulcast Internet coverage of dog
racing from Jacksonville Greyhound Racing Circuit, followed by
live broadcasts from Phoenix Greyhound Park.
* Starnet announces contract signing for the Larry Holmes
Sportsbook and Casino.
* Starnet finishes the fiscal year with 4 licensees.
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1999 * Starnet announces listing on the Berlin Stock Exchange OTC Market
* On-line gaming / fund raising agreement signed with International
Charitable Organizations.
* Starnet announces agreement to develop play-for-fun site for
Fuzzy Zoeller with link to play-for-real site.
* Starnet enters lucrative Asian gaming market with launch of
Pachinko (Japanese) and Joyluck (Chinese) sites.
* Worldracetracks, Worldlotteries, Worldbingo projected to be
launched.
* Finishes FISCAL YEAR ENDED April 30, 1999 with 37 licensees, and
six million hits per day.
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OVERVIEW
Starnet is currently one of the leading developers and providers of
Internet gaming systems. Starnet also operates its own (offshore) online
gaming systems. The Company's innovative gaming systems have been designed
to: (i) offer customers a user-friendly interface, superior interactive
experience and a wide selection of gaming options; (ii) provide licensees
with financially attractive returns, easy site maintenance and limited
administration;
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and (iii) protect customers and licensees through its proprietary fully
integrated technology.
The Company invested the profits and technology from its earlier,
entertainment-oriented online interactive business to build a worldwide
Internet gaming business. By growing a gaming licensee network along with
its own site operations, Starnet is rapidly building a market share in this
new Internet commerce industry. The Company offers a fully integrated gaming
software suite, along with fee based use of its certified Electronic Funds
Transfer (EFT) Internet transaction system. Starnet's first license sale
closed in March 1998, and the Company had 37 licensees signed by fiscal year
ended April 30, 1999. During the software development stage, management
planned for a total gaming experience. Starnet has developed dozens of
online gaming venues that offer a full suite of gaming entertainment
including; 22 casino games, operation of live sports book wagering,
twenty-four hour live simulcast and parimutuel betting on any of 15 horse
and dog racing tracks in North America (wagers not currently accepted), and
will soon be launching brokerage of international lottery tickets, an
interactive lottery system and interactive bingo games.
Starnet's gaming software is owned by its wholly-owned Antigua-based
licensing subsidiary, Softec Systems Caribbean Inc. ("Softec"), which
licenses the Company's own gaming venue, World Gaming, and a growing list
of licensees. Softec provides the licensee with an installed fully integrated
gaming system. Softec receives a percentage of the licensee's revenues
in exchange for hosting the site with a fixed minimum payment being due
each month. In addition, the licensee must obtain a gaming license from
the jurisdiction where domiciled or, if necessary, from the Government of
Antigua.
Softec develops the new licensee's site to reflect its intended market
segment. This development can reflect a particular motif (i.e. sports
theme or French Riviera theme) or ethnic market (e.g., Japan, Indonesia, or
Latin America). Starnet gaming systems are now available in eight
languages with additional variations planned for fiscal year ended 2000.
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PRODUCTS AND SERVICES
Through various wholly owned subsidiaries, the Company develops and
provides its software products, electronic funds transfer and online gaming
management services to the independent licensees. To its licensees,
Starnet provides:
* Assistance in procuring of initial Internet gaming license
* Concept development and design of virtual casino "theme" in
multiple languages
* All odds-making rules and calculations
* Complete graphical user interface with sophisticated visual and
sound effects to create a total gaming experience
* Real-time wagering
* Complete, secure electronic funds transfer
* Retention and analysis of all gaming data, including win/loss,
game preferences and monitoring of player activities
* Administration and complete 24 hour, 7 days a week customer
support services
* Continuing customization of website
* Monitoring of all funds flow
* Hosting of server software
* Customization and system integration
* Provision of credit card processing and other banking services
* Discussion, liaison and co-operation with testing agencies,
regulatory boards, governing bodies and governments
* Market consulting
JAVA CASINO GAMES. Starnet's Java games utilize the Java language to
provide easily accessible online games to the Company's licensees'
websites. The cross-platform nature of Java makes it possible to play these
games on all major operating systems, online, with virtually no downloading
required. The games are simplified to optimize loading times. Starnet
currently has four casino style Java Games (Videopoker, Blackjack,
Caribbean Stud poker, and Gold Rush slots) for players to wager on, with
several additional Java games projected to be released throughout FY2000.
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A virtual Java horse racing game is in development that will allow users to
wager on "virtual thoroughbreds" at the "CyberDowns" raceway. Starnet is
also in the process of researching HTML games, due to the technological
limitations of the current version of "WebTV." Given the current size of
this market and its projected future growth, the Company feels that this is
a worthwhile investment.
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DESCRIPTION OF CASINO GAMES OFFERED BY STARNET
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Game House Description
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Take(1)%
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Blackjack: 2.1% Traditional game of 21, where the player tries to
beat the dealer's hand, without exceeding 21.
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Pai Gow: 2.3% Based on the Chinese tile game by the same name, it
is played in a poker format using seven cards to
make one five card hand and a separate two card hand
that can beat both the dealer's hands that have been
set up in the same way.
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Battle Royale: 0.9% Similar to the child's card game "war"; it pits the
player against the dealer in a one-card duel for who
has the higher card. If the player and dealer tie
a "Battle Royale" takes place. If the player wins
this round the payout is substantially more.
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Caribbean 5.5% A poker based stud game, where the player simply has
Poker: to beat the dealer. This game has a "progressive"
side game with a jackpot for better hands.
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Free Ride: 7.8% Another game based on the poker premise. In this
game the player receives his/her first three (of
five) cards and bets additional money if he/she
believes the end result will be a good hand.
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Red-Dog: 6.4% In this game the player bets that the third card
dealt is going to be numerically between the first
two.
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Baccarat: 1.3% In this game the player either bets with the bank or
against it. The player has no direct decisions as
to the outcome of the hand.
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Roulette: 5.4% A wheel oriented game where the player chooses a
potential number or other parameter that could
result from the next spin.
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Craps: 2.2% A dice game where the player bets with or against
the "roller" on the potential outcome of the next
roll.
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Sic Bo: 11.2% Similar to roulette, except played with three dice,
the player bets on the specific outcome of the dice.
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Video Poker: All video poker is similar in function, the player
receives five cards and chooses which to keep in
order to make the best possible hand after receiving
their new cards. The nuances between the games are
minimum winning hands and amount of wild cards.
2.1% "Jacks or Better" - no wild cards, minimum winning
hand is a pair of jacks.
4.2% "Joker's Wild" - one wild card (the joker), minimum
winning hand is two pair.
6.6% "Deuces Wild"- four wild cards (all 2's), minimum-
winning hand is three of a kind.
5.3% "Kings of the Deck" - played with five decks,
minimum winning hand is two pair.
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Slots: 5.2% "Magic Hat" and "Gold Rush" are the same in premise.
The player spins the wheels and hopes to achieve a
winning combination of symbols.
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Pachinko: 21.4% A Japanese arcade game played with steel balls flung
into a vertical container pitted with nails. If the
player gets a ball into a specific area the player
wins more balls. They can then cash in balls for
coins.
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Bingo: 8.2% The traditional "blot out the pattern and win a
prize" game.
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(1) House take is the total bet minus total payout.
<TABLE>
<CAPTION>
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TYPES OF SPORTS WAGERING OFFERED BY STARNET*
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CASINO SPORTSBOOK
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NORTH AMERICAN INTERNATIONAL
SPORTS EUROPEAN SOCCER SPORTS OTHER EVENTS
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<S> <C> <C> <C> <C>
Blackjack NFL Football Austria 1st Division Olympics Academy Awards
Pai-Gow NCAA Football England Premier Horse Racing Box Office
Wagering
Battle Royale CFL Football France 1st Division Indy Lights Grammys
Caribbean Poker Arena Football** German Bundesliga Indy Racing Brit Awards
League
Free Ride MLB Baseball Holland Prem. Division Formula 1 Political
Racing Elections
Red Dog NBA Basketball Italy Series A Track & Field Financial
(Stocks)
Baccarat NCAA Basketball Portugal 1st Division Rugby More in
Development
Roulette Women's Spain 1st Division Boxing
Basketball**
Craps NHL Hockey Sweden 1st Division Tennis
Sic Bo CART Racing Turkey 1st Division Golf
Jacks or Better NASCAR Scottish 1st Division Cricket
Video Poker
Joker's Wild Intl Matches World Cup
Video Poker
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Deuces Wild INTERNATIONAL Brazil League Skiing**
Video Poker -------------
BASKETBALL
----------
King of Decks Euro League Euro Cup Winners Handball**
Video Poker
Magic Hat Slots Greece Israel League Aust. Rules
Football**
Gold Rush Israel Swiss 1st Division Sumo Wrestling**
Victory Italy Belgium 1st Division
Pachinko
Dragon Spirit International Argentine Division
Pachinko Matches
Spain UEFA Cup
Turkey Euro 2000
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TYPES OF BETS ACCEPTED
----------------------
Straight Wagers Futures Propositions Money Lines
Point Spreads Totals European Odds Parlays
Teasers Reverses Halftime Matchups
Combos/Multiples Parimutuels** Pools** Spread Index
Bets**
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</TABLE>
*See description of games.
**In development - due to launch during FY2000
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THE SPORTSBOOK achieves profits based on what is called a vigorish. This
is a percentage (usually between 6 - 8%) that is added to the money line of
the wager. For example, if a player were to bet on a team that was a 6
point favorite, he would have to bet $100 to win $90 based on a 10%
vigorish. Hence, the sportsbook makes a profit by making the net wager
uneven.
The Company's product areas include casino gaming, sportsbook wagering,
parimutuel wagering and international lottery brokerage.
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ESTIMATED % OF GAMING AND LICENSEES' REVENUES BY PRODUCT
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Product Mix Current
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1. Casino Gaming 68%
2. Sportsbook Wagering 32%
3. Horse Racing and other Parimutuel N/A
4. International Lottery Brokerage N/A
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After every play, up-to-date statistics can be produced on a per-customer
basis in order to gauge preferences for various locations.
LICENSEES AND END USERS
Starnet has focused its growth strategy on licensing its software and
services in order to become a leading technology provider to the online
gaming industry.
LICENSEES
The Starnet gaming software is owned by its Antigua licensing subsidiary
Softec Systems Caribbean Inc. ("Softec", www.softecsystems.com). Softec
licenses its filly integrated systems to World Gaming and a growing list of
licensees. A one time license fee provides an installed fully integrated
operation. The licensee's site is generally operational within 90 - 120
days of signing a license agreement. Softec receives a continuing percentage
of the licensee's revenues, in exchange for continuing to host and maintain
the site. The licensee must obtain a gaming license from the jurisdiction
where domiciled or from Antigua. Softec modifies the new licensee's site to
more reflect its intended market segment. This change can reflect a
particular motif or ethnic market (e.g., Japanese, Indonesia, or Latin
America). Management seeks a licensee knowledgeable of the target market in
order to maximize sales potential. Licensees generally establish their
marketing efforts from within their target market.
* The initial term of the licensing agreement is one year, renewable
indefinitely unless the licensee gives written notice of termination
of the agreement at least 45 days prior to the end of any one year
period. Starnet will also provide continuous support both from a
software and hardware perspective, 24 hours, 7 days a week.
* Should any licensee become delinquent in payment to Starnet, the
Company has full legal and technological ability to remotely "shut
down" the website(s).
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A sample list of Starnet's licensed casinos includes:
www.playersonly.com www.silverclover.com www.casinoonair.com
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www.clubriocasino.com www.aztecgaming.com www.classiccasino.com
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www.i-casino.com www.superbet.com www.allsportscasino.com
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www.worldgamescasino.com www.betonsports.com www.acescasino.com
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It is anticipated that the majority of Starnet's future revenue and
earnings growth will come from its ongoing participation in the licensees'
revenue stream. Softec receives a sliding scale from 35%-15% of a
licensee's gross revenue (wagers less payouts). For all customers, it
converts available credit on credit cards to gaming funds through its
offshore EFS division. The Company's primary cost against continuing
license income is software development amortization and direct site
operating costs.
Management emphasizes that the licensees are structured operationally and
financially so that a licensee's prime responsibility is to market their
gaming site to their respective market. Management notes that its monthly
license fees, which it believes are lower than many current competitors,
should make more funds available for marketing, which increases site
utilization and revenues.
EFS
There are four subsidiaries dedicated to EFT: EFS Caribbean Inc. (based
in Antigua); EFS USA Inc., (based in Nevada); EFS Australia Pty Ltd.; and
EFS St. Kitts Inc. The EFS subsidiaries are established in these countries
in order to facilitate local banking relationships for transaction
processing. Online revenues generated by Starnet's subsidiaries and
licensees are processed through the EFS subsidiary appropriate to the country
they are domiciled in. EFS uses Starnet's proprietary processing technology,
STAR-MX, which processes credit card transactions via the Internet with ease
and security.
This technology was the first of its kind to be certified by a Canadian
Chartered Bank, the Bank of Montreal, for E-commerce in 1996. EFS intends
to expand its services to the constantly increasing number of independent
online licensees. EFS intends to establish subsidiaries in several other
key financial center jurisdictions in the future to facilitate the
expansion of its banking relationships.
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SOFTEC SYSTEMS CARIBBEAN INC.
Softec Systems (www.softecsystems.com) based in St. John's, Antigua, is in
the business of licensing customized, fully integrated Internet gaming
systems (similar to the Company's World Gaming virtual gaming system) to
independent parties wanting to seize upon the online gaming opportunity.
Softec provides a complete range of services that the operator needs in
order to launch an online gaming website including customized software, web
site development and management on Starnet's network, custom database
systems to manage customer accounts, 24-hour technical support for the
licensee and its customers, and an EFT gateway to facilitate online wagers
and financial transactions. Softec provides these services in exchange for
monthly fees and participation in the licensees' gaming revenues, providing
Starnet with the opportunity to spread its gaming development and operating
costs among multiple operators and broaden its penetration of the market.
WORLD GAMING SERVICES INC.
World Gaming (www.worldgaming.net), also based in Antigua, is a full-service
on-line gaming operation. Through its product lines, World Gaming
accepts, processes and manages wagers via the Internet and on interactive
sporting events, as well as live broadcasts of horseracing, and
casino-style games of chance. World Gaming allows users outside of North
America to wager with real funds, which can be deposited, converted to
"Virtual Chips" or withdrawn from personal accounts with complete security.
One of the original and most reputable gaming operations on the Internet,
World Gaming has been translated into five European languages and stand
alone Japanese (www.pachinkocasino.com) and Chinese (www.joyluck.com) sites
have been developed to cater exclusively to the emerging Asian market.
Additionally, World Gaming has entered into a variety of long term
strategic partnerships including a contract with former Heavyweight Boxing
Champion Larry Holmes and International Sports Marketing Corporation (ISM)
to develop celebrity themed gaming sites.
Within www.worldgaming.net, Starnet operates www.worldcasino.net and
www.worldsportsbook.net. Worldcasino.net offers interactive casino-style
games
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of chance developed in conjunction with Nevada State Gaming Guidelines.
The virtual casino provides a cross-section of games such as Blackjack,
Roulette and Slot Machines, as well as culture-specific games such as
Japanese Pachinko and Chinese Pai-Gow poker. Worldsportsbook.net offers
access to "real-time" betting lines using information feeds from Las Vegas
and Europe. Betting systems are established for most major worldwide
sporting events, such as World Cup Soccer, auto racing, PGA golf and NFL
Football.
GAMING DIVISIONS UNDER DEVELOPMENT
1) www.worldracetracks.net - provides Internet broadcasting from some of
the world's leading horse racing tracks (World Gaming currently has
Internet simulcast wagering agreements with 15 tracks in North America).
Streaming audio and video technology allows users to wager and watch the
race outcome via their computer. Starnet's first broadcast - the
prestigious Ontario Jockey Club's Woodbine Racecourse - went online May 24,
1997. Starnet intends to provide 24-hour live horse coverage from top-tier
facilities worldwide. Parimutuel wagering is currently authorized in 43
states in the United States, all provinces in Canada, and approximately 100
other countries around the world. Wagering systems are currently
undergoing beta testing and are expected to launch for commercial use
during Fall 1999.
Pari-mutuel wagering is the lowest maintenance form of sports wagering
a company can offer. The bettors wager against themselves and not against
the house, therefore lowering the house exposure to zero. The house makes
its profit by taking a predetermined commission from the total pool,
usually between 10% and 20%. Because the players are wagering against each
other there is no need for the lines (or odds) to be monitored. The lines
are determined by the amount of money wagered on each competitor/team
involved in the wager. The more money wagered on one specific outcome the
lower the odds for that team will be.
2) www.worldlotteries.net - is expected to serve as a broker of major
international lottery tickets from around the globe. The lottery brokerage
is expected to be launched during 1999. The brokerage will offer players
the chance to win large jackpot prizes from countries such as Australia,
the UK, Ireland, Germany, and Spain. According to INTERNATIONAL GAMING &
WAGERING BUSINESS' annual "Worldwide Lottery Sales Report", global lottery
sales exceeded US$120 billion in 1996.
3) INSTANT LOTTERIES - In addition, a variety of interactive lottery games
are under development for FY2000 launch. These entertaining games will
provide players with a chance to instantly win cash prizes. Instant games
are the fastest growing lottery segment, representing 25% of worldwide
lottery sales. The interactive games are also scheduled for launch during
1999.
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4) www.worldbingo.net - will offer online bingo games. Two types of Bingo
games are planned to be offered. "Multi-player" Bingo games will link
players from around the world and provide them with fun, fast-paced games
in a variety of themed, interactive Bingo communities. "Personal play"
Bingo games are also being developed where players will be able to play
"scratch" Bingo games online that offer odds of winning cash prizes. Both
types of Bingo products are scheduled to launch during 1999. Annual
conventional bingo revenues are estimated to exceed $50 billion worldwide.
Starnet is also well underway in its development of a variety of "Scratch
& Win" and "Instant Play" Java lottery products that will compliment the
international lottery brokerage aspect of the Company's WorldLotteries site.
STRATEGIC RELATIONSHIPS
Since developing its Internet gaming software and services, Starnet has
built a number of strong relationships with key strategic partners, such as
content providers (primarily racetracks), International Sports Marketing
Corporation (ISM) and sovereign nations hosting Internet gaming businesses.
Starnet has also developed strategic transaction processing relationships
with numerous financial institutions, including Bank of Montreal, Canadian
Imperial Bank of Commerce (CIBC), Bank of Nevis, Bank of Bermuda,
Cybersource, National Bank of Redwoods and Westpac Banking Corporation of
Australia. Starnet believes that these strong partnerships, and its
ability to partner with quality licensees are significant steps in the
Company's goal to obtain the leading competitive position in the on-line
gaming market and achieve its business objectives.
Celebrity-themed gaming venues have become an important draw for Starnet's
customers. In recent months, sports celebrities such as Larry Holmes,
Bubba Smith, Fuzzy Zoeller, and Stephan Johanssen Racing have become
affiliated with or licensed their name to Starnet-designed websites.
Native American/Aboriginal organizations may also be potential future
licensees of Starnet. Starnet intends to pursue native tribes throughout
Canada and North America and assist them with entry into the Internet
gaming world, as an extension of their current gaming activities.
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GROWTH STRATEGY
The development of telecommunications and the emergence of new technology
have created opportunities to develop new, efficient and secure ways to
deliver information and entertainment to customers. As one of the first
companies to employ these new technologies on the Internet, Starnet intends
to capitalize on its technological lead and expertise to become a world
leader in online gaming systems. Starnet's key strategic objectives are
to: (i) maintain its role as a leading provider of Internet gaming
technologies; (ii) expand geographically to other attractive markets; and
(iii) selectively pursue opportunities in other market segments using its
Internet and marketing technologies.
Starnet intends to implement its business strategy by: (i) maintaining and
enhancing its technological lead; (ii) seeking key strategic alliances and;
(iii) developing Starnet into a global brand name. The following
summarizes Starnet's strategic focus and operating strategy:
RAPIDLY PENETRATE THE INTERNET GAMING MARKETS. Starnet intends to
capitalize on its technological lead and early market entry to capture a
significant share of the Internet Gaming market. The Company believes it
is well positioned to achieve this goal since it possesses the competitive
advantage of being one of the first companies to both operate and license
proprietary turnkey gaming systems, which incorporate the industry's
largest selection of gaming products and services.
PROVIDE HIGH QUALITY, INNOVATIVE AND SUPERIOR PRODUCTS AND SERVICES.
Starnet, in collaboration with its strategic partners, has focused on
designing a gaming experience using state-of-the-art technology.
Additionally, licensees may benefit from other methods of revenue
generation that conventional gaming machines cannot provide, such as the
advertising and data collection potential of the network.
MAINTAIN TECHNOLOGICAL LEAD. Starnet has achieved its technological lead
through the development of its proprietary software and networked
architecture. Furthermore, Starnet has made a strong commitment to
continue research and development activities to enhance its products and
software and to develop new applications for potential markets. Starnet
will continue to use such methods to protect its technology and mitigate
competition from current and future entrants.
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SALES AND MARKETING STRATEGY
Starnet's sales and marketing are conducted through its Vancouver and its
Antigua headquarters. As of April 30, 1999, the sales and marketing team
comprised 16 sales and marketing professionals and field technicians. The
managers hired to date are experienced people, who have many contacts with
operators and in-depth knowledge of the Internet and gaming industries.
Starnet has fully embraced the importance of marketing and maintaining a
customer-driven organization and has aggressively recruited and trained a
full marketing department to assist the Company in achieving its sales goals.
Softec Systems has established a team of marketing management professionals
to work directly with licensees. Each Softec marketing manager works with
a portfolio of 6-9 licensees to consult on design, branding, marketing
plans, strategy, implementation and evaluation. The Softec marketing team
is also very active in developing programs that benefit licensees including
the Softec Marketing website, co-op program, negotiation of discounted ad
rates, market research, development of vertical portals and ongoing web
marketing training.
Licensees also benefit from the international marketing representatives
within the World Gaming Marketing Department. Currently, market experts
for the Chinese, Japanese, Spanish, French, U.K., Australian and South
African markets are in place and a German specialist is expected to be
added. These representatives fill the dual role of managing World Gaming's
cultural specific sites as well as providing market expertise and proven
techniques to the Softec managers to share with their licensees. World
Gaming operates and markets celebrity sites as well, which further enhance
Starnet's profile.
Starnet sets itself apart from its competitors by ensuring the ongoing
success of its licensees by providing this type of added value marketing
support. This strategic direction greatly supports Starnet's goal of
market share leadership and revenue growth.
COMPETITIVE ENVIRONMENT
Starnet estimates that there are currently over 100 gaming operators on the
world wide web, with Starnet's software operating approximately 15% market
share.
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Starnet experiences competition from five market segments:
1) Traditional gaming companies;
2) Internet gaming companies;
3) Electronic gaming companies;
4) Web service providers; and
5) Other entertainment/media companies
There are currently several competitors for the licensing of internet
gaming software: including Microgaming, Atlantic International
Entertainment, Ltd., Chartwell Technology, Inc., Cryptologic, Inc. and
Boss Media AB. None of these competitors currently offer the full suite of
gaming products offered by Softec.
TECHNOLOGY
REDUNDANT HIGH-SPEED NETWORK
The Company's network is connected to the Internet via redundant high-speed
fiber, ensuring multiple backup connections to the Internet. This high
performance network infrastructure ensures reliable and responsive game
play for Starnet's licensees and the end users/players. The system is
composed of high speed Sun Microsystems servers and Cisco networking
equipment. Most of the critical system components, such as the game
servers and web servers, are distributed across multiple machines, which
protect the gaming service from failures due to malfunctioning equipment.
The highly scalable nature of Starnet's system design makes provisioning
for additional capacity simple. The network monitoring staff tracks the
system at all times to maintain constant awareness of the system's
operating parameters. New equipment is installed when necessary to
compensate for increased activity or anticipated peak demands for popular
events.
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The high quality Internet connection at Starnet's network facility in
Antigua is provided by Cable and Wireless plc and contributes to responsive
game play. Each gaming transaction is stored on an Oracle database that is
replicated for redundancy and backed up daily to prevent data loss and the
gaming components communicate using the Secure Sockets Layer (SSL) to
encrypt and protect sensitive data from potential hackers.
In addition to Starnet's digital network serving gaming content, the
Company has developed a state of the art proprietary Electronic Funds
Transfer System ("EFS") that provides a high level of security and
integrity of funds wagered.
STARNET MEASURES FOR SECURITY
Starnet uses the most advanced technologies, such as site identification,
data encryption, and secure servers to provide users with the safest
environments to perform secure transactions, and data transmission, over
the Internet. Any transaction made with Starnet's licensees online is
completely secure and convenient. Starnet's system is protected by the
Secure Sockets Layer (SSL) protocol, which encrypts all information and
confirms the identity of the Company's server, before allowing a
transaction to be completed.
Data encryption hides sensitive information such as the customer's name,
address, and credit card number. Even if someone manages to obtain a
player's personal information from the transaction process, data encryption
will not allow them to either read or use it.
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THE RANDOM NUMBER ALGORITHM employed by starnet is known as the "Mersenne
Twister" algorithm. This algorithm is employed to determine the random
pattern in which numbers are generated for casino games. The algorithm was
originally created at the University of Keio in Japan. Starnet retained
Dr. James Ngai (Ph.D. University of British Columbia), to conduct an
independent study of the algorithm, which resulted in his finding that at
a rate of calling 50 random numbers per second, it will take 10 to the
power of 5994.56 days before the generator will repeat itself.
THE GAMING CLIENT APPLICATION is essentially a casino graphical interface.
Gaming calculations are performed by the game server, while the client
application displays the results and accepts input from the player for
further interaction. Communications between the client and server are
encrypted using the Secure Sockets Layer protocol. The SSL prevents
hackers from monitoring a gaming session should they be able to intercept
communications.
To tamper with the odds and payouts, a hacker would have to modify the game
server or database system. Both of these systems are protected from
external access. The game server can only be accessed using the gaming
client. Learning the client/server protocol will not aid a hacker in
gaining additional winnings from the system, since he/she would still be
limited by the game server's rules and constraints. The machines that the
game server processes run on are only accessible from Starnet's private
network. Users cannot connect to these servers using telnet, rlogin, ssh,
X windows, or any other login method. Therefore, it is not possible for a
hacker to tamper with game server code. The database systems are
completely shut off from the Internet and can only be accessed by a limited
number of applications on a closed network, such as the game servers and
report generators.
All the information provided to the Company is kept strictly confidential,
and is used only to support the player's relationship with Starnet and the
licensee.
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END-USER/PLAYER SCREENING
The Company has developed a secure network both to preserve the absolute
integrity of the millions of financial transactions executed over their
network as well as to screen out potential website customers who may be
residents of the jurisdictions blocked from using the systems. World
Gaming is in the process of implementing additional country and address
screening. By matching the credit card number with the customer's country,
postal code, and address, Starnet is able to successfully block customers
from the jurisdictions blocked from using the systems. Starnet also
outlines on its web pages, and within the software itself, for WorldGaming
that it does not accept wagers from U.S. or Canadian citizens, nor will it
pay out funds to any address within North America.
As an additional security, the Company provides players with a Personal
Identification Number (PIN) which is required before any funds can be
withdrawn.
ADULT WEBSITES
Starnet Communications Canada Inc. ("Starnet Canada"), a wholly-owned
subsidiary of Starnet Communications International Inc., 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, and
now conducts secure, real time Visa, MasterCard and American Express credit
card transactions via the Internet for its adult entertainment business.
Starnet Canada provides adult entertainment services via the Internet.
Since the launch in September 1995, membership in Starnet Canada's Club
Sizzle at http://www.sizzle.com ("Sizzle") has grown substantially.
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 thousand competitors compete in finely defined segments similar to
Sizzle's market.
Chisel Media Internet site at http://www.chisel.com ("Chisel") was launched
in August 1996 and may be one of the top Internet gay sites in the world.
Revenue streams are generated by monthly subscription fees from over 4,000
clients residing around the world. Chisel is promoted on the Internet via
advertising, search engine registration and news group promotion. Several
thousand competitors compete in segments similar to Chisel's market, most
of which do not offer the entire range of services which Chisel provides.
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RESEARCH AND PRODUCT DEVELOPMENT
Starnet is currently developing a parimutuel system to be launched during
1999. The new parimutuel wagering includes real-time wagering for
horseracing, greyhound racing, and, to a smaller degree jai alai. Horse
racing takes place virtually every day of the year in the United States,
Canada and the rest of the world. In the U.S. and Canada customers can
place wagers on races, including out of state/province races, at a location
other than the one where the race is run (Simulcasting). This form of
wagering takes place at off-track betting locations ("OTB"), or through
Starnet on the Internet, by using the same principles and regulations
governing telephone betting. Presently, eight states allow telephone
betting and other states that offer pari-mutuel wagering are expected to
offer telephone wagering in the future. In Canada, telephone wagering has
been legal since 1973, but is currently restricted to specific "Home Market
Areas".
WORLD RACETRACKS' business model intends to move OTB or simulcasting onto
the Internet, allowing customers access to some of the world's horse and
dog racing events. Such events have traditionally been restricted by
satellite "footprints." However, through the Internet the entire global
market will be opened to the individual racetracks.
World Racetracks has created an Internet based wagering interface which
will allow its customers to participate in the live racetrack pools by
paying the track a Simulcasting fee for the use of their product. Since
World Gaming is an owner/operator as well as a licensee, World Racetracks
will run it's own operations in Antigua, making this software and its
complete suite of products (Thoroughbred, Standardbred, Greyhound and Jai
Alai) available to all of Starnet's current and future Licensees. Softec
will also license this software as a stand-alone product to any individual
racetrack interested in offering this type of wagering, with Softec retaining
a percentage of the handle for providing the software and systems.
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NUMBER OF EMPLOYEES
As of April 30, 1999, the Company had 163 employees, of which 157 were
engaged full-time.
GOVERNMENT REGULATION
Regulatory Environment
- ---------------------
The Company and its licensees are subject to applicable laws in the
jurisdictions in which they operate. While some jurisdictions have
introduced regulations to attempt to restrict or prohibit Internet gaming,
other jurisdictions, such as several Caribbean countries and Australia,
have taken the position Internet gaming is legal and/or have adopted or are
in the process of reviewing legislation to regulate Internet gaming in such
jurisdictions. As companies and consumers involved in Internet gaming are
located around the globe, including the end-users of the Company's
licensees, there is uncertainty regarding exactly which government has
jurisdiction or authority to regulate or legislate with respect to various
aspects of the industry. Furthermore, it may be difficult to identify or
differentiate gaming-related transactions from other Internet activities
and link those transmissions to specific users, in turn making enforcement
of legislation aimed at restricting Internet gaming activities difficult.
The uncertainty surrounding the regulation of Internet gaming could have a
material adverse effect on the Company's business, revenues, operating
results and financial condition.
However, legislation designated to restrict or prohibit Internet gaming may
be adopted in the future in the United States or other jurisdictions.
After previous similar proposals failed to pass in 1998, on March 23, 1999,
Senator Jon Kyl of the United States Senate introduced a revised proposal
intended to prohibit and criminalize Internet gambling. There can be no
assurance whether any such bill will become law. As well, existing
legislation, including United States and federal statutes, could be
construed to prohibit or restrict gaming through the use of the Internet
and there is a risk governmental authorities may view the Company's
licensees or the Company as having violated such statutes. There is a risk
that criminal and civil proceedings could be initiated in such
jurisdictions against the Company's licensees or the Company and such
proceedings could involve substantial litigation expense, penalties, fines,
diversion of the attention of key executives, injunctions or other
prohibitions being invoked against the Company's licensees or the Company.
Such proceedings could have a material adverse effect on the Company's
business, revenues, operating results and financial condition.
In addition, as electronic commerce further develops, it may generally be
the subject of government regulation. As well, current laws which pre-date
or are incompatible with Internet electronic commerce may be enforced in a
manner that restricts the electronic commerce market. Any such
developments could have a material adverse effect on the Company's
business, revenues, operating results and financial condition.
Starnet is in the process of minimizing the potential risks in this area by
putting greater marketing efforts into foreign jurisdictions, and by
developing an Internet pari-mutuel system.
Starnet has received a legal opinion from a Nevada State Attorney stating
that Starnet is conducting its business in accordance with U.S. Federal and
State laws.
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RESEARCH AND DEVELOPMENT
Research and Development expenses reported for fiscal 1997 was $23,028.
Research and Development expenses reported for fiscal 1998 was $82,141.
The Company did not identify any material Research and Development expenses
in fiscal 1999.
ITEM 2. DESCRIPTION OF PROPERTY
Starnet Canada occupies 27,500 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 annual cost of the space at the Carrall Street location is
approximately $235,000 USD. The various leases expire between December 31,
1999 and April 30, 2000 and have renewal options of three to five years.
Softec occupies 3,500 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 and customer support, business development, as well as
administrative office space for general management.
The terms of the Newgate Street commercial lease are as follows. The
lessee leases 3,500 square feet through June 30, 2001 (two years) with an
annual rent of $27,000 plus utilities. The lessee has an option to renew
this lease for one additional two year term.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company may be involved in litigation in the ordinary
course of business. In the opinion of Management, there are no actions,
suits, proceedings or governmental investigations pending, or to their
knowledge, threatened against Starnet or any of its subsidiaries which,
either singly, or in the aggregate, will have a material effect on the
Company.
The following lawsuits, while currently pending, are deemed to be
immaterial by the Management team:
* Mr. Warren Eugene, a former licensee, is currently suing Starnet in
the B.C. Supreme Court for the right to be granted stock options in
the Company.
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Mr. Eugene originally agreed to become a licensee, however, after
refusing to purchase a gaming license from Antigua or another
domicile, Starnet terminated the agreement. Mr. Eugene's claim does
not dispute the license termination and Management feels there is no
basis to his claim.
* Home Gambling Network has filed a lawsuit in the Nevada State Court
against Starnet claiming patent infringement. Home Gambling Network's
patent contemplates the use of a live video feed to play real-time
footage of a live person facilitating the play on a casino game. The
player watches the game being dealt and winnings and losses are
directly debited or credited from the payer's bank account. Starnet
has received a legal opinion from its counsel dismissing the validity
of the plaintiff's claim and has filed a motion to dismiss with the
court.
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 during the fourth quarter of the
fiscal year covered by this report.
PART II
- -------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's common stock is reported by the NASD Over-The-Counter
Bulletin Board under the symbol "SNMM" and on the Berlin Over-The-Counter
market under the symbol "SNM".
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 NASD Over-The-Counter Bulletin Board. Bid quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
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<PAGE>
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
July 30, 1998 3/4 1.5
October 31, 1998 7/8 0.45
January 31, 1999 6 1/32 3/8
April 30, 1999 17.01 3 11/16
(1) This was not a full quarter as the Company only came to trade on
September 18, 1997.
SECURITY HOLDERS
The approximate number of record holders of shares of the common stock of
the Company outstanding as of April 30, 1999 was 209.
DIVIDENDS
No dividends have been declared or paid on the Company's common stock.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
- ---------------------
GENERAL
- -------
Until the end of fiscal 1998, the Company derived its revenues principally
from its Internet web sites, namely Sizzle, Chisel and Redlight. Through
substantial research in the past two years, the Company identified the
opportunity of offering gaming services over the Internet and successfully
launched its gaming products in March 1998. The Company's Internet casino,
which targets only customers outside North America, is operated by its
subsidiary, World Gaming Services Inc. of Antigua. Softec Systems Caribbean
Inc., also of Antigua, licenses its gaming software to third parties for a
set up fee and monthly royalty. Since the beginning of fiscal 1999,
revenues from all components of the gaming business, which include
licensing, casino operations and financial transaction processing, have
undergone tremendous growth and generated revenues of $6,254,000,
representing 64% of the total revenues for the year ended April 30, 1999.
The following tables set forth selected information from the statements of
operations for the year ended April 30, 1999 and 1998 and the balance
sheets as at April 30, 1999 and 1998.
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Selected Statement of Operations Information
- --------------------------------------------
FOR THE YEAR ENDED
April 30, 1999 April 30, 1998
-------------- --------------
Net Sales 9,772,628 3,370,325
Gross Margin 7,576,322 2,385,982
Operating Expenses 5,527,814 3,352,478
Income (Loss) From Operations 2,048,508 (966,496)
Income Tax Expense (Current & Deferred) 33,482 48,478
Net Income (Loss) 2,041,764 (1,037,960)
Selected Balance Sheet Information
- ----------------------------------
At April 30, 1999 At April 30, 1998
----------------- -----------------
Working Capital (Deficiency) 7,167,174 (329,060)
Total Assets 13,438,872 3,274,931
Long Term Debt 461,279 258,298
Retained Earnings (Deficit) 883,893 (1,157,871)
Total Shareholders' Equity 9,419,925 1,297,892
The Company's revenues increased 190% to $9,772,628 for the year ended
April 30, 1999 compared to $3,370,325 for the year ended April 30, 1998.
The growth is primarily due to additional revenues generated from
licensing, gaming operations and financial transaction processing for
licensees. Revenue from software licensing, which has become a significant
income source, accounts for 52.8% of the total revenues for the year ended
April 30, 1999. At April 30, 1999, the Company had entered into agreements
with 37 licensees and had fully completed software for 20 licensees. As the
industry matures and the quality of the Company's gaming software is proven
within the industry, the Company expects to be able to attract
approximately four new licensees per month in the next fiscal year. Royalty
revenue from one of the operating licensees represented approximately 17%
of the total sales for the Company in fiscal 1999. However as the
operations of existing licensees continue to grow, and new licensees are
added, the Company expects that concentration of revenue from that licensee
will diminish.
Along with the growth in sales, gross margin increased to $7,576,322 for
the year ended April 30, 1999 from $2,385,982 for the prior year. Gross
margin increased from 70.8% for the year ended April 30, 1998 to 77.5% for
the year ended April 30, 1999 due to the relatively higher gross margin of
the software licensing business and efficiencies gained from an increased
number of licensees.
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Operating expenses increased by 64.9% to $5,527,814 for the year ended
April 30, 1999 from $3,352,478 for the prior year. However, as a percentage
of sales, operating expenses decreased from 99.5% to 56.6% as a result of
substantial revenue growth and efficiencies gained as the Company handled
a greater level of activity.
Income from operations for the year ended April 30, 1999 was $2,048,508
compared to an operating loss of $966,496 for the prior year. The growth
was mainly the result of an increase in revenues from software licensing.
The Company expects licensing revenues to continue to grow as more
licensees commence operations and revenues of their casino operations
increase.
Tax expense for the year ended April 30, 1999 was $33,482, compared to
$48,478 for the prior year. The majority of the Company's income is
generated from Softec in Antigua, which is not subject to income tax.
However, income generated from the Company's Canadian operations relating
to on-line multimedia business and software development is subject to
Canadian income tax.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At April 30, 1999, the Company had $4,999,943 in cash and cash equivalents
compared to $140,462 at April 30, 1998. The increase in cash balance is
mainly a result of the increased operating profit and the exercise of stock
options and warrants in the last quarter of fiscal 1999. In January 1999,
the Company paid off the outstanding bank loan with the restricted cash
equivalent of $500,000.
Working capital at April 30, 1999 increased significantly to $7,167,174
from a deficit of $329,060 at April 30, 1998. Accounts receivable
increased from $133,930 at April 30, 1998 to $2,670,626 at April 30, 1999.
The majority of the receivables are from new licensees that were offered an
installment payment plan on the initial licensing fees and from operating
licensees that have their own merchant accounts. Deposits at April 30, 1999
increased by $1,140,627 from $257,717 at April 30, 1998 due to increased
security deposits required for higher processing volume. Other current
assets at April 30, 1999 amounted to $1,506,844 compared to $200,854 at
April 30, 1998. The increase is mainly due to prepayments made to the
Antiguan government for the purchase of casino licenses. The casino
licenses are held for sale to prospective licensees.
Net cash generated from operations for the year ended April 30, 1999
increased to $1,432,002 from a net use of $143,142 for the year ended April
30, 1998. The increase in cash from operations was mainly due to the
increase in revenues and customers' deposits received by the Company.
Net cash used for investing activities for the year ended April 30, 1999
was $1,967,554 compared to $2,142,153 for the year ended April 30, 1998.
The
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decrease in cash used is mainly due to the release of the restricted cash
during fiscal 1999, but the effect was largely reduced by the increase in
security deposits.
Net cash provided by financing activities for the year ended April 30, 1999
was $5,415,867 compared to $2,392,397 for the year ended April 30, 1998.
The increase was from the proceeds of the exercise of stock options and
warrants, primarily during the last quarter of fiscal 1999.
Impact of Inflation
- -------------------
The Company believes that inflation has not had a material effect on its
past business.
CONTINGENCIES
- -------------
On July 26, 1999, one of the Company's Internet gaming licensees announced
in a press release that it was starting legal action immediately against
the Company and its subsidiaries for $1 billion for abusive breach of
license agreement and other items. The Company has not received any formal
legal notice of a lawsuit from the licensee in question.
The Company believes that the allegations contained in the above mentioned
press release are without merit and intends to vigorously contest any
lawsuit which arises from the announcement. As this issue is at a
preliminary stage, its financial impact, if any, cannot be determined at
this time although management is of the opinion that it will not result in
any material losses to the Company.
The company is the subject of a lawsuit now pending in the United States
District Court for the District of Nevada. The claim is from a competitor
for patent infringement. The amount of the damages claimed is unspecified.
It is the Company's intention to vigorously defend this lawsuit. The
Company believes that the risk of being found liable and the plaintiff
being awarded any substantial damages is low.
No provision has been made in these financial statements in respect of
these matters.
YEAR 2000 RISKS
Currently, many computer systems, hardware and software products are coded
to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. The
interactions between
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various software and hardware platforms often rely upon the date coding
system. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to function properly after the
turn of the century. The Company, its customers, and suppliers are reliant
on computers and related automated systems for daily business operations.
Failure to achieve at least a minimum level of Year 2000 systems compliance
by both the company and its suppliers would have a material adverse effect
on the Company.
The Company has completed the process of identifying computer systems that
could be affected by the Year 2000 issue as it relates to the Company's
internal hardware and software, as well as third parties that provide the
Company with goods or services. Three categories or general areas have
been identified for review and analysis:
1. Systems providing customers services. These include hardware and
software systems that are used to provide services to the Company's
customers in the form of Internet connectivity, e-mail servers,
authentication servers, gaming servers, database servers, etc.
Hardware in the form of routers and switches are also included in this
area.
2. Third party vendors providing critical services including circuits,
hardware, long distance Internet connectivity and related products.
These include telco providers, suppliers of routers, modems, switches,
odds feeds, etc.
3. Critical internal systems that support the Company's administrative
systems for billing and collecting, general accounting systems,
computer networks, and communication systems.
The Company has completed its Year 2000 compliance review and testing. In
regards to Item (1) listed above, systems providing customers services, the
Company's critical existing systems are no more than two and one-half years
old and none of these systems have Year 2000 problems. These systems have
been inventoried and a systems test has been completed. Many of the
critical systems have been migrated to new hardware and software platforms
to increase reliability and capacities. All newly acquired hardware
systems, operating systems, and software are required to have vendor
certification for Year 2000 compliance.
In regard to Item (2) above - third party products and services - the
Company's significant vendors are large public companies such as Sun
Microsystems, Microsoft, Oracle, Silicon Graphics Cisco, Lucent
Technologies, etc. These companies are all under SEC mandates to report
their compliance in all publicly filed documents. The Company has
initiated a compliance review program with these vendors during the first
full quarter of 1999 and will continue to track progress of all critical
vendors for compliance.
Item (3) above, critical internal systems, relates to internal systems for
company administrative and communications requirements. The Company is in
the process
-32-
<PAGE>
of implementing new billing and billing presentment systems. These systems
are proprietary to the company and are required to be Year 2000 compliant.
The company expects these new systems to be implemented late 1999 to early
2000. Additionally, the Company has tested the existing systems for Year
2000 compliance. It has been determined that the existing billing and
billing presentment systems are Year 2000 compliant.
The costs to address the Year 2000 compliance issues have not been
determined at this time. Based on growth the Company plans to implement
new hardware platforms and software systems that should be Year 2000
compliant and therefore costs specifically allocated to Year 2000
compliance may not be significant, and have not been significant to date.
The nature of the Company's business makes it dependent on computer
hardware, software, and operating systems that are susceptible to Year 2000
issues. Failure to attain at least minimum levels of Year 2000 compliance
would have a material adverse effect on the Company's ability to deliver
services.
The Company has not developed a contingency plan for dealing with Year 2000
risks at this time.
ITEM 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, EXECUTIVE 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:
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<PAGE>
John Carley, DBA, CGA, FICB - Chairman, Chief Financial Officer & Director
Mark Dohlen, B.Admin., MBA, LLB, FCIS, P.Admin. - Chief Executive Officer
& Director
Chris Zacharias, MBA, LLB, ACIS - Secretary/Treasurer & Director
Paul Giles - President & Director
Jason Bolduc - Director
Wolf Bergelt CA - Director
Nicholas Jackson - Director
Jason King BA - Chief Operating Officer
JOHN CARLEY, 53, DBA, CGA, FICB: CHAIRMAN OF THE BOARD, CHIEF FINANCIAL
- -----------------------------------------------------------------------
OFFICER AND DIRECTOR
- --------------------
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, 1999.
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., (Vice
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.
MARK DOHLEN, 39, B. ADMIN, MBA, LLB, FCIS, P. ADMIN.: CHIEF EXECUTIVE
- ---------------------------------------------------------------------
OFFICER & DIRECTOR
- ------------------
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, 1999.
Employment History: April 1993 - May 1996 - ISG Consulting Inc.
(Consultant) 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. He
-34-
<PAGE>
is currently completing a Certified Management Consultant designation.
PAUL GILES, 32: PRESIDENT & DIRECTOR
- ---------------------------------------------
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.
CHRISTOPHER ZACHARIAS, 32, MBA, LLB, ACIS: 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, 1999.
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.
OUTSIDE DIRECTORS
- -----------------
WOLF BERGELT, 55, CHARTERED ACCOUNTANT, DIRECTOR
- ------------------------------------------------
Term of Office: Mr. Bergelt's term of office as a director is one year. He
has served as a director since April 1, 1999.
Employment History: 1993-1995 Ainsworth Lumber Co. Ltd. (Vice President and
Treasurer) 1995-1996 CRS Forestal 1997-1998 Corporate Consultant for Lions
Gate Entertainment Corp. and Campbell River Mills Ltd.
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<PAGE>
Mr. Bergelt is a Corporate Financial Consultant who has worked with a
number of publicly traded companies including Lions Gate Entertainment
Cop., Rogers Cantel Inc. and was Chief Financial Officer of First City
Trustco Inc. Mr. Bergelt is a Chartered Accountant by training and
attended the Masters of Business Administration program at Simon Fraser
University, British Columbia, Canada.
NICHOLAS JACKSON, 57, DIRECTOR
- ------------------------------
Term of Office: Mr. Jackson's term of office as a director is one year. He
has served as a director since April 12, 1999.
Employment History: 1994 - present Involved in coal trading in South
Africa and Europe, looking after anthracite mining interests in South
Africa including mining, processing, and marketing.
JASON BOLDUC, 24, 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.
SIGNIFICANT EMPLOYEES
JASON KING, 27, BA: 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.
-36-
<PAGE>
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.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company
believes that, during the fiscal year ended April 30, 1999, all filing
requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with except that Mr. Bolduc has
never filed a Form 4.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation of the Chief
Executive Officer and the other most highly compensated executive officers
(collectively, the "Named Executive Officers") of the Company earning in
excess of $100,000 for the year ended April 30, 1999, as well as the total
compensation paid to each such individual for the Company's three previous
fiscal years:
-37-
<PAGE>
Long Term Compensation
----------------------
- -------------------------------------------------------------------------
Annual Compensation Awards Payouts
- -------------------------------------------------------------------------
Securities
Underlying
Name and Options/ All Other
Principal Year Salary Stock SARs Compensation
Position ($) ($) (US$)(1)
Mark Dohlen 1999 $92,807 300,000 6,961(2)
(CEO)
Mark Dohlen 1998 $56,915 350,000 -0-
(CEO)
Mark Dohlen 1997 $26,763 -0- -0-
(CEO)
(1) The compensation depicted is in U.S. dollars. The compensation was
paid in Canadian dollars.
(2) The compensation consists of a one time payment of $5966 and quarterly
payments of $995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
(a) (b) (c) (d) (e)
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
---- ----------- -------------- ------------ ---------------
Mark Dohlen 300,000 7.5% $1.44 January 1, 2009
For the above granted options, the options vest as to 50% as of January 1,
1999, and the remaining 50% as of January 1, 2000.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of
Securities
Underlying Value of
Unexercised In-the-Money
Options/SARs Options/SARs
At Fy-End(#) at FY-End($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
---- ------------ ----------- ------------- -------------
Mark Dohlen 200,000(1) 608,000(2) 300,000/ 3,112,500/
150,000 1,556,250(3)
(1) Based on 100,000 shares exercised on January 12, 1999 and 100,000 shares
exercised on January 22, 1999.
(2) Based on a strike price of $0.74 for all transactions, and a sell price
of $3.01 on January 12, 1999 and $3.07 on January 22, 1999.
(3) Based on a closing price of $10.375 on April 30, 1999.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
The Company has no long-term incentive plans or awards to report for last
fiscal year other than the Employee Stock Plan already mentioned.
COMPENSATION OF DIRECTORS
A. Standard Arrangements.
The members of the Company's Board of Directors are reimbursed for actual
expenses incurred in attending Board meetings.
B. Other Arrangements.
The "Inside" Directors receive a quarterly payment of $995, and they also
received a one time payment of $5,966.
-39-
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are no written contracts or agreements. Employee salaries are set by
the members of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of April 30, 1999, with respect
to beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than 5% of its
outstanding Common Stock, by each director of the Company, by each Named
Executive Officer and by all officers and directors of the Company as a
group. Unless otherwise noted, each shareholder has sole investment and
voting power over the shares owned.
Name and Address Amount and nature Percent
Title of Class Of Beneficial Owner of Beneficial Owner of Class
Class A Murray Partners
Voting (BVI) Inc.(1) 10,000,000 34.4%(2)
Common Todman Building
Main Street, PO Box 3140
Tortola, Road Town
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 Partners, 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
and Clyde Williams.
(2) Percent of Class as of July 28, 1999
-40-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT (current to July 28, 1999)
<TABLE>
<CAPTION>
Percent
Name and Address Amount and nature Of
Title of Class Of Beneficial Owner of Beneficial Owner Class Class
<S> <C> <C> <C>
Class A Voting Common Jason Bolduc 0 0%
2405 - 1050 Burrard Street
Vancouver, BC Record and Beneficial
Class A Voting Common Paul Giles 425,000 (1) 1.41%
Newgate Street
St. John's, Antigua Record and Beneficial
Class A Voting Common Mark Dohlen 350,000(2) 1.16%
509 - 1188 Quebec St.
Vancouver, B.C. Record and Beneficial
Class A Voting Common Christopher Zacharias 45,000(3) 0.15%
2267 Park Crescent
Coquitlam, B.C. Record and Beneficial
Class A Voting Common John Carley 127,500(4) 0.42%
Newgate Street
St. John's, Antigua Record and Beneficial
Class A Voting Common Wolf Bergelt 41,200(5) 0.14%
Newgate Street
St. John's, Antigua Record and Beneficial
Class A Voting Common Nicholas Jackson 25,000(6) 0.08%
9 chemin de la Brire
Ohain 1380
Brussels, Belgium Record and Beneficial
Class A Voting Common Clare Roberts 25,000(7) 0.08%
St. Clare Estate
St. John's
Antigua
West Indies Record and Beneficial
Class A Voting Common All Directors and
Officers as a group 1,038,700(8) 3.4 %
Record and Beneficial
</TABLE>
-41-
<PAGE>
(1) Includes 125,000 options that have vested as of January 1, 1999, at an
exercise price of $1.44 per share.
(2) Includes 100,000 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share and 150,000 options that have vested as
of January 1, 1999, at an exercise price of $1.44 per share.
(3) Includes 7,500 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share and 27,500 options that have vested as of
September 28, 1999, at an exercise price of $1.44 per share.
(4) Includes 150,000 options that have vested as of July 1, 1998, at an
exercise price of $0.74 per share and 102,500 options that have vested as
of January 1, 1999, at an exercise price of $1.44 per share.
(5) Includes 40,000 options that have vested as of January 1, 1999, at an
exercise price of $1.44 per share.
(6) Includes 25,000 options that have vested as of April 12, 1999 at an
exercise price of $6.74 per share.
(7) Includes 25,000 options that have vested as of July 6, 1999 at an
exercise price of $9.44 per share.
(8) Includes 8 individuals, and a total of 602,500 options of which 107,500
that have vested as of September 28, 1999 at an exercise price of $0.74 per
share; 405,000 that have vested as of January 1, 1999 at an exercise price
of $1.44 per share; 40,000 that have vested as of January 1, 1999 at an
exercise price of $6.74 per share; 25,000 that have vested as of April 12,
1999 at an exercise price of $6.74 per share; 25,000 that have vested as of
May 27, 1999 at an exercise price of $9.44 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nothing reportable.
ITEM 13. INDEX TO EXHIBITS
(a) Financial Statements (included in Part II of this Report):
Report of Independent Accounts
Consolidated Balance Sheet - April 30, 1999
Consolidated Statements of Income (Loss) and Retained Earnings
(Deficit) - April 30, 1999
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<PAGE>
Consolidated Statements of Shareholders' Equity (Deficiency) - April
30, 1999
Consolidated Statements of Cash Flows - April 30, 1999
Notes to Consolidated Financial Statements - April 30, 1999
3.1 Articles of Incorporation(1)
3.2 Bylaws(2)
10.1 Bank of Montreal(2)
10.2 Pacific Rim Investments Inc.(2)
21.1 Subsidiaries of Registrant(3)
23.1 Consent of Independent Chartered Accountants(3)
27.1 Financial Data Schedule(3)
(1) Incorporated by reference from Exhibit 3.3 of Form S-8 dated
March 12, 1998.
(2) Incorporated by reference from Form 10-SB dated June 18, 1997.
(3) 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.
-43-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
STARNET COMMUNICATIONS INTERNATIONAL INC.
April 30, 1999
-44-
<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, 1999 and 1998 and the
related consolidated statements of income (loss) and retained earnings
(deficit), shareholders' equity (deficiency) and cash flows for each of the
two year periods ended April 30, 1999 and 1998. 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years
ended April 30, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States.
Vancouver, Canada, /s/ Ernst & Young LLP
June 30, 1999 (except as to note 13 which is at Chartered Accountants
July 28, 1999)
-45-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in United States dollars)
As at April 30, 1999
1999 1998
$ $
- ------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 4,999,943 140,462
Restricted cash - 500,000
Accounts receivable [NOTE 3] 2,670,626 133,930
Employee receivable - 68,123
Prepaid expenses 149,085 61,691
Deposits [NOTE 4] 1,398,344 257,717
Other current assets [NOTE 5] 1,506,844 200,854
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,724,842 1,362,777
- ------------------------------------------------------------------------------
Capital assets (net) [NOTE 6] 1,672,793 1,190,511
Deferred website costs [NOTE 7] 284,956 255,884
Software development costs [NOTE 8] 610,313 465,759
Deferred income tax asset [NOTE 9] 145,968 -
- ------------------------------------------------------------------------------
13,438,872 3,274,931
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Bank indebtedness - 466,217
Accounts payable and accrued liabilities 1,370,652 520,031
Income taxes payable [NOTE 9] 267,551 74,360
Deposits from customers [NOTE 10] 1,234,066 190,727
Deferred revenue 328,183 279,848
Current portion of capital lease
obligations [NOTE 11] 357,216 160,654
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,557,668 1,691,837
- ------------------------------------------------------------------------------
Non-current portion of capital lease
obligations [NOTE 11] 461,279 258,298
Deferred income tax liability [NOTE 9] - 26,904
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 4,018,947 1,977,039
- ------------------------------------------------------------------------------
Commitments and contingencies [NOTE 13]
SHAREHOLDERS' EQUITY
Capital stock [NOTE 12] 8,583,798 2,421,000
Retained earnings (deficit) 883,893 (1,157,871)
Accumulated other comprehensive income (loss) (47,766) 34,763
- ------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,419,925 1,297,892
- ------------------------------------------------------------------------------
13,438,872 3,274,931
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
-46-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF
INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
(in United States dollars)
Year ended April 30, 1999
1999 1998
$ $
- ------------------------------------------------------------------------------
REVENUE
Sales 9,772,628 3,370,325
Cost of sales 2,196,306 984,343
- ------------------------------------------------------------------------------
GROSS MARGIN 7,576,322 2,385,982
- ------------------------------------------------------------------------------
EXPENSES
Development, selling, general and
administrative 4,197,824 2,589,056
Depreciation and amortization 1,220,820 638,888
Interest and bank charges 109,170 124,534
- ------------------------------------------------------------------------------
5,527,814 3,352,478
- -----------------------------------------------------------------------------
Income (loss) from operations for the year 2,048,508 (966,496)
Other income (expenses) 26,738 (22,986)
- ------------------------------------------------------------------------------
Income (loss) before income taxes 2,075,246 (989,482)
- ------------------------------------------------------------------------------
Income tax expense (recovery) [NOTE 9]:
- current 205,711 74,360
- deferred (172,229) (25,882)
- ------------------------------------------------------------------------------
Income taxes 33,482 48,478
- ------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR 2,041,764 (1,037,960)
Deficit, beginning of year (1,157,871) (119,911)
- ------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF YEAR 883,893 (1,157,871)
- ------------------------------------------------------------------------------
Basic earnings per share $0.09 $(0.05)
Weighted average number of common shares
outstanding 22,951,546 21,002,885
Diluted earnings per share $0.08 -
Weighted average number of common shares
for diluted earnings per share 25,960,005 -
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
-47-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
(in United States dollars)
Year ended April 30, 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other
------------ Earnings Comprenensive
Shares Amount (Deficit) Income
# $ $ $
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, April 30, 1997 [NOTE 12] 20,000,000 20,000 (119,911) 28,948
Common shares issued for cash 2,450,000 2,450,000 - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments - - - 5,815
Net loss for the year - - (1,037,960) -
Less: share issue costs - (49,000) - -
- ---------------------------------------------------------------------------------------
Balance at April 30, 1998 22,450,000 2,421,000 (1,157,871) 34,763
Shares issued for cash pursuant to
exercise of options 1,602,434 1,262,798 - -
Shares issued for cash pursuant to
exercise of warrants 2,450,000 4,900,000 - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments - - - (82,529)
Net income for the year - - 2,041,764 -
- ---------------------------------------------------------------------------------------
Balance at April 30, 1999 26,502,434 8,583,798 883,893 (47,766)
- ---------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
-48-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in United States dollars)
Year ended April 30, 1999
1999 1998
$ $
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 2,041,764 (1,037,960)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 706,129 378,323
Amortization of deferred website costs 393,793 326,754
Amortization of software development costs 189,016 26,704
Gain on disposal of fixed assets - (1,262)
Deferred income taxes - (25,882)
Changes in current assets and liabilities:
(Increase) decrease in accounts
receivable (2,536,696) (78,452)
(Increase) decrease in employee
receivable 68,123 7,604
(Increase) in prepaid expenses (87,394) (33,162)
(Increase) in other current assets (1,305,990) (200,854)
(Increase) in deferred income tax asset (172,229) -
Increase in accounts payable and
accrued liabilities 850,621 173,114
Increase (decrease) in income taxes
payable 193,191 74,360
Increase in deposit from customers 1,043,339 190,727
Increase in deferred revenue 48,335 56,844
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 1,432,002 (143,142)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (570,492) (527,008)
Restricted cash 500,000 (500,000)
Deferred website costs (422,865) (393,585)
Software development costs (333,570) (492,463)
Deposits (1,140,627) (229,097)
- ------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,967,554) (2,142,153)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness (466,217) 466,217
Repayment of loan - (200,343)
Proceeds from issuance of shares 6,162,798 2,401,000
Repayments to related parties - (132,605)
Principal repayments under capital
lease obligations (280,714) (141,872)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,415,867 2,392,397
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash (20,834) 5,815
- ------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS DURING THE YEAR 4,859,481 112,917
Cash and cash equivalents, beginning
of year 140,462 27,545
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 4,999,943 140,462
- ------------------------------------------------------------------------------
OTHER NON-CASH TRANSACTIONS
Leased assets acquired 685,410 275,712
- ------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 93,215 71,761
Income tax paid - -
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
-49-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
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 six wholly owned
subsidiaries:
World Gaming Services Inc. ("World Gaming")
Softec Systems Caribbean Inc. ("Softec")
EFS (Electronic Financial Services) USA Inc. ("EFS USA")
EFS Caribbean Inc. ("EFS Caribbean")
EFS St Kitts Inc. ("EFS St Kitts")
Starnet Communications Canada Inc.
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.
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 an initial fee
plus participation in the licensees' revenues.
-50-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (cont'd.)
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 settle 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 and EFS St. Kitts were incorporated in Antigua and in St.
Kitts respectively and perform the same function as EFS USA.
Starnet Canada is based in Vancouver, British Columbia. Starnet Canada
develops, markets and manages advanced online interactive media and
information systems for the Internet. It also develops software on behalf
of Softec.
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.
REVENUE RECOGNITION
Revenue from dial-up access of on-line interactive media 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 of gaming software 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.
-51-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
2. ACCOUNTING POLICIES (cont'd.)
On-line service revenues, gaming revenues and monthly licensing revenues
are recognized over the period services are provided.
Gaming revenues are presented on a net basis (i.e. net of customer
winnings).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and 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
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.
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.
-52-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
2. ACCOUNTING POLICIES (cont'd.)
DEFERRED SOFTWARE CUSTOMIZATION COSTS
Costs which relate to the customization of software prior to the sale of
the software to licensees are capitalized. These costs are released to the
income statement once the software has been fully installed and revenue
from the sale has been recognized.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, cash and cash equivalents
consist of cash on hand and balances with banks, and investments in money
market instruments.
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 consolidated statements of income (loss) and
retained earnings (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.
-53-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
2. ACCOUNTING POLICIES (cont'd.)
NET EARNINGS 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 per common share are based upon the weighted
average number of common shares of the Company outstanding during each year.
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.
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. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
1999 1998
$ $
- ------------------------------------------------------------------------------
Amounts due from licensees 2,570,683 50,000
Other 127,001 111,883
Less: allowance for bad debts (27,058) (27,953)
- ------------------------------------------------------------------------------
2,670,626 133,930
- ------------------------------------------------------------------------------
-54-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
3. ACCOUNTS RECEIVABLE (cont'd.)
Substantially all of the Company's accounts receivable at April 30, 1999
relate to the licensing business. This concentration of customers may
impact the Company's overall credit risk, either positively or negatively,
in that such entities may be similarly affected by industry-wide changes in
economic or other conditions. Historically to date, the Company has
incurred insignificant credit losses against its receivables.
4. DEPOSITS
Deposits comprise:
1999 1998
$ $
- ------------------------------------------------------------------------------
Equipment lease deposits [NOTE 11] 60,881 62,893
Rolling reserve 282,137 14,186
Deposits held by merchant banks 1,055,326 180,638
- ------------------------------------------------------------------------------
1,398,344 257,717
- ------------------------------------------------------------------------------
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 and are non-interest bearing.
The rolling reserve represents a specified percentage of deposits which are
held as collateral by the merchant banks for a set period of time.
5. OTHER CURRENT ASSETS
Other current assets comprise:
1999 1998
$ $
- ------------------------------------------------------------------------------
Deferred gaming license costs 1,333,333 146,565
Deferred software customization costs 173,511 54,289
- ------------------------------------------------------------------------------
1,506,844 200,854
- ------------------------------------------------------------------------------
-55-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
5. OTHER CURRENT ASSETS (cont'd.)
Deferred gaming license costs relate to amounts paid to the Antiguan
government for the purchase of casino licenses. These licenses are held
for sale to prospective licensees. This balance includes the purchase of
a one year gaming license for World Gaming. This was purchased for
$100,000 and has a carrying value of $83,333 at April 30, 1999 [1998 -
$146,565].
6. CAPITAL ASSETS
Property and equipment are recorded at cost less accumulated depreciation
and comprise:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
$ $ $
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
APRIL 30, 1999
Computer hardware and equipment 1,773,269 798,943 974,326
Computer hardware under capital leases 764,267 383,113 381,154
Automobiles under capital leases 38,062 14,273 23,789
Leasehold improvements 262,140 142,377 119,763
Furniture and fixtures 125,971 64,390 61,581
Computer software 104,143 36,963 67,180
Domain name 45,000 - 45,000
- --------------------------------------------------------------------------------------
3,112,852 1,440,059 1,672,793
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
</TABLE>
-56-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
7. DEFERRED WEBSITE COSTS
Website costs are recorded at cost less accumulated amortization and
comprise:
1999 1998
$ $
- ------------------------------------------------------------------------------
Net balance, beginning of year 255,884 189,053
Costs capitalized during the year 422,865 393,585
Current year amortization (393,793) (326,754)
- ------------------------------------------------------------------------------
Net balance, end of year 284,956 255,884
- ------------------------------------------------------------------------------
8. SOFTWARE DEVELOPMENT COSTS
Software development costs are recorded at cost less accumulated
amortization and comprise:
1999 1998
$ $
- ------------------------------------------------------------------------------
Net balance, beginning of year 465,759 -
Costs capitalized during the year 333,570 492,463
Current year amortization (189,016) (26,704)
- ------------------------------------------------------------------------------
Net balance, end of year 610,313 465,759
- ------------------------------------------------------------------------------
-57-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
9. 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 45.6% to the loss before taxes as follows:
1999 1998
$ $
- ------------------------------------------------------------------------------
Provision based on income (loss) before
income taxes 946,727 (451,402)
Increase (decrease) in tax provision
resulting from:
Expenses not deductible for income
tax purposes 18,145 89,300
Benefit of U.S. tax loss not currently
recognized 407,356 129,460
Lower effective income tax rates of
foreign subsidiaries (1,141,530) 208,025
Tax arising on software transfer - 70,294
Recognition of operating loss
carryforward (122,856) (9,275)
Other (74,360) 12,076
- ------------------------------------------------------------------------------
33,482 48,478
- ------------------------------------------------------------------------------
(b) Deferred income taxes arise from temporary differences in the
recognition of income and expenses for financial reporting and tax
purposes. The sources of temporary differences and the related
deferred income tax amounts are as follows:
1999 1998
$ $
- ------------------------------------------------------------------------------
Property, plant and equipment 195,376 89,317
Net operating loss and credit carryforwards 129,460 129,460
- ------------------------------------------------------------------------------
324,836 218,777
Valuation allowances (129,460) (129,460)
- ------------------------------------------------------------------------------
Deferred tax assets 195,376 89,317
- ------------------------------------------------------------------------------
Deferred website costs 125,510 106,136
Other (76,102) 10,085
- ------------------------------------------------------------------------------
Deferred tax liabilities 49,408 116,221
- ------------------------------------------------------------------------------
Deferred tax asset (liability), net 145,968 (26,904)
- ------------------------------------------------------------------------------
-58-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
10. DEPOSITS FROM CUSTOMERS
Deposits from customers is composed of:
1999 1998
$ $
- ------------------------------------------------------------------------------
License fees 245,000 100,000
Gaming 989,066 90,727
- ------------------------------------------------------------------------------
1,234,066 190,727
- ------------------------------------------------------------------------------
The deposits for license fees are for the sale of software licenses. The
deposits are non-interest bearing.
The deposits for gaming represent deposits from customers for the purchase
of electronic chips for the purpose of gambling. These deposits are
non-interest bearing and repayable on demand.
11. CAPITAL LEASE OBLIGATIONS
At April 30, 1999, the Company had entered into capital leases for
equipment and automobiles. The future payments for the 12 months ended
April 30 are:
$
- ------------------------------------------------------------------------------
2000 417,874
2001 324,320
2002 161,518
2003 5,575
2004 1,393
- ------------------------------------------------------------------------------
Total minimum lease payments 910,680
Less amounts representing interest at rates varying
from 6% to 11% 92,185
- ------------------------------------------------------------------------------
Present value of minimum lease payments 818,495
Current portion of capital lease obligations 357,216
- ------------------------------------------------------------------------------
461,279
- ------------------------------------------------------------------------------
Three of the equipment leases require the Company to pledge term deposits
for $27,059, $16,911 and $16,911 respectively. The term deposits will be
returned upon the expiry of the lease and are non-interest bearing.
The Company has guaranteed the residual value on 2 leased vehicles to be
$14,193 and $22,676 at the end of the lease terms.
-59-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
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>
1999 1998
------------------------ -----------------------
# $ # $
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding Class A shares,
beginning of year 22,450,000 2,421,000 20,000,000 20,000
Shares issued for cash - - 2,450,000 2,450,000
Shares issued pursuant
to exercise of options 1,602,706 1,262,798 - -
Shares issued for cash pursuant
to exercise of warrants 2,450,000 4,900,000 - -
Less: share issue costs - - - (49,000)
- --------------------------------------------------------------------------------------
Outstanding Class A shares,
end of year 26,502,706 8,583,798 22,450,000 2,421,000
- --------------------------------------------------------------------------------------
</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 at $2.00. Each warrant
exercised at $2.00 entitled 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.
During the year ended April 30, 1999, all 2,450,000 warrants at $2.00
had been exercised. At April 30, 1999, none of the 2,450,000
outstanding $4.00 Piggyback Warrants were exercised. The Piggyback
Warrants expire between February 8, 2000 and April 30, 2000.
-60-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
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. On December 31, 1998, the
Board of Directors authorized the issuance of up to 4,000,000
additional options at an exercise price to be determined based on the
trading price of the Company's shares on the grant date.
Options issued to employees generally vest straight-line on a monthly
basis over two years while options issued to directors vest one-half
immediately and one-half after one year. Options expire ten years
after the date granted. As at April 30, 1999, 5,397,294 shares were
reserved for issuance pursuant to the exercise of options.
A summary of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Weighted Weighted
Options Average Exercise Options Average Exercise
# Price # Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at May 1 2,750,834 $0.74 - -
Granted 4,611,750 $1.57 2,750,834 $0.74
Exercised (1,602,706) $0.83 - -
Forfeited (623,083) $0.84 - -
- -----------------------------------------------------------------------------------
Outstanding at April 30 5,136,795 $1.45 2,750,834 $0.74
- -----------------------------------------------------------------------------------
</TABLE>
-61-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
12. SHARE CAPITAL (cont'd.)
At April 30, 1999, options outstanding were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -------------------------
Weighted
Average
Remaining Weighted
Contractual Average Weighted
Range of Options Life Exercise Options Average
Exercise Prices # (Years) Price # Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.74 - $1.43 1,718,409 9.1 $0.76 1,216,034 $0.76
$1.44 - $2.50 3,219,286 9.7 $1.51 777,955 $1.49
$2.51 - $5.99 73,600 9.8 $4.13 4,684 $4.08
$6.00 - $10.83 125,500 9.9 $7.90 30,248 $7.06
- -----------------------------------------------------------------------------------
$0.74 - $10.83 5,136,795 9.5 $1.45 2,028,921 $1.14
- -----------------------------------------------------------------------------------
</TABLE>
(c) Accounting for stock based compensation
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 1999 and 1998
consistent with the provisions of SFAS No. 123, the Company's loss and
loss per share would have been increased to the pro forma amounts
indicated below:
1999 1998
$ $
- ------------------------------------------------------------------------------
Net income (loss) as reported 2,041,764 (1,037,960)
Pro forma net income (loss) under
FAS 123 746,625 (1,125,949)
Net income (loss) per share -
basic, as reported 0.09 (0.05)
Pro forma net income (loss) per share -
basic, under FAS 123 0.03 (0.05)
Net income (loss) per share - diluted,
as reported 0.08 -
Pro forma net income (loss) per share -
diluted, under FAS 123 0.03 -
- ------------------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized to expense over a 2 year period.
-62-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
12. SHARE CAPITAL (cont'd.)
The fair value of option grants 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:
1999 1998
$ $
- ------------------------------------------------------------------------------
Dividend yield 0% 0%
Expected volatility 125% 122%
Risk-free interest rate 4.6% 5.4%
Expected lives 2 years 2 years
- ------------------------------------------------------------------------------
The weighted average fair value per share of stock options granted
during 1999 and 1998 are $1.04 and $0.47 respectively.
13. COMMITMENTS AND CONTINGENCIES
At April 30, 1999, the Company has entered into commitments for leases for
premises and equipment. The future payments for the 12 months ended April
30 are:
$
- ------------------------------------------------------------------------------
2000 129,993
2001 8,550
2002 5,431
2003 5,431
2004 5,431
- ------------------------------------------------------------------------------
154,836
- ------------------------------------------------------------------------------
On July 26, 1999, one of the Company's Internet gaming licensees announced
in a press release that it was starting legal action immediately against
the Company and its subsidiaries for $1billion for abusive breach of
license agreement and other items. The Company has not received any formal
legal notice of a lawsuit from the licensee in question.
The Company believes that the allegations contained in the above mentioned
press release are without merit and intends to vigorously contest any
lawsuit which arises from the announcement. As this issue is at a
preliminary stage, its financial impact, if any, cannot be determined at
this time although management is of the opinion that it will not result in
any material losses to the Company.
-63-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
13. COMMITMENTS AND CONTINGENCIES (cont'd.)
The company is the subject of a lawsuit now pending in the United States
District Court for the District of Nevada. The claim is from a competitor
for patent infringement. The amount of the damages claimed is unspecified.
It is the Company's intention to vigorously defend this lawsuit. The
Company believes that the risk of being found liable and the plaintiff
being awarded any substantial damages is low.
No provision has been made in these financial statements in respect of
these matters.
14. BUSINESS SEGMENTS
The segments described below are the components of the consolidated entity
where separate financial information is available and evaluated by
management in deciding how to allocate resources and in assessing
performance.
<TABLE>
<CAPTION>
ON-LINE
INTERACTIVE WORLD PROCESSING ELIMI- CONSOLIDATED
MEDIA LICENSING GAMING SERVICES NATIONS BALANCE
APRIL 30, 1999 $ $ $ $ $ $
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 3,517,811 5,159,221 395,225 767,604 (67,233) 9,772,628
- ----------------------------------------------------------------------------------------------
Operating income (loss) 198,502 3,759,984 (431,227) (435,274) 3,091,985
Interest expense (109,170)
Corporate costs (907,569)1
Income tax expense (33,482)
- ----------------------------------------------------------------------------------------------
Net income 2,041,764
- ----------------------------------------------------------------------------------------------
</TABLE>
1 This represents expenses incurred by the holding company (Starnet
Communications International Inc.).
-64-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
14. BUSINESS SEGMENTS (cont'd.)
<TABLE>
<CAPTION>
ON-LINE
INTERACTIVE WORLD PROCESSING ELIMI- CONSOLIDATED
MEDIA LICENSING GAMING SERVICES NATIONS BALANCE
APRIL 30, 1998 $ $ $ $ $ $
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 3,112,813 150,000 107,512 - - 3,370,325
- ----------------------------------------------------------------------------------------------
Operating income (219,674) (731,161) (15,661) - - (966,496)
Interest expense (22,986)
Income tax expense (48,478)
- ----------------------------------------------------------------------------------------------
Net loss (1,037,960)
- ----------------------------------------------------------------------------------------------
</TABLE>
The only significant country to which on-line interactive media sales are
made is the United States.
IDENTIFIABLE ASSETS
<TABLE>
<CAPTION>
ON-LINE
INTERACTIVE WORLD PROCESSING ELIMI- CONSOLIDATED
MEDIA LICENSING GAMING SERVICES CCORPORATE NATIONS BALANCE
APRIL 30, 1999 $ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> (C)
Current assets 517,112 2,261,356 83,333 3,104,829 4,758,212 - 10,724,842
Capital assets 1,091,178 81,525 132,796 177,592 189,702 - 1,672,793
Deferred website
costs 284,956 - - - - - 284,956
Software development
costs - 756,344 - - - (146,031) 610,313
Defered income tax
asset - - - - 145,968 - 145,968
- -------------------------------------------------------------------------------------------------
Total assets 1,893,246 3,099,225 216,129 3,282,421 5,093,882 (146,031) 13,438,872
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ON-LINE
INTERACTIVE WORLD PROCESSING ELIMI- CONSOLIDATED
MEDIA LICENSING GAMING SERVICES CCORPORATE NATIONS BALANCE
APRIL 30, 1998 $ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <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
- -------------------------------------------------------------------------------------------------
Total assets 2,252,629 805,529 351,014 - - (134,241) 3,274,931
- -------------------------------------------------------------------------------------------------
</TABLE>
The on-line interactive media and corporate assets are domiciled in Canada.
The licensing and gaming assets are domiciled in Antigua. Processing
services assets are domiciled in the U.S., Antigua and St. Kitts.
15. COMPARATIVE FIGURES
Certain amounts for 1998 have been reclassified to conform with the current
year's presentation.
16. YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
-65-
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in United States dollars)
Year ended April 30, 1999
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect the
Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the Company, including those related to the efforts of customers,
suppliers, or other third parties will be fully resolved.
-66-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 July 28, 1999 By: /s/ Paul Giles
---------------------------------
President and Director
Date July 28, 1999 By: /s/ Mark Dohlen
---------------------------------
Chief Executive Officer and Director
Date July 28, 1999 By: /s/ Chris Zacharias
---------------------------------
Secretary, Treasurer, Director
Date July 28, 1999 By: /s/ Wolf Bergelt
---------------------------------
Director
Date July 28, 1999 By: /s/ Nicholas Jackson
---------------------------------
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Paul Giles President and Director July 28, 1999
- --------------------
/s/ Mark Dohlen Chief Executive Officer July 28, 1999
- -------------------- and Director
/s/ Chris Zacharias Secretary, Treasurer, July 28, 1999
- -------------------- Director
/s/ Wolf Bergelt Director July 28, 1999
- --------------------
/s/ Nicholas Jackson Director July 28, 1999
- --------------------
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Starnet Communications Canada Inc., a corporation organized under the
Company Act of the Province of British Columbia.
2. Softec Systems Caribbean Inc., a corporation organized under the laws
of the Country of Antigua.
3. World Gaming Systems Inc., a corporation organized under the laws of
the Country of Antigua.
4. EFS U.S.A. Inc., a corporation organized under the laws of the State
of Nevada, USA.
5. EFS Caribbean Inc., a corporation organized under the laws of the Country
of Antigua.
6. EFS Australia Pty. Ltd., a corporation organized under the laws of the
Country of Australia.
7. EFS St. Kitts Inc., a corporation organized under the laws of the Country
of St. Kitts.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the inclusion in the Form 10-KSB, of Starnet Communications
International Inc. of our report dated June 30, 1999 (except as to note
13 which is at July 28, 1999) with respect to the financial statements of
Starnet Communications International Inc. as at April 30, 1999 and 1998.
Vancouver, Canada /s/ Ernst & Young LLP
July 28, 1999 Chartered Accountants
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 4,999,943
<SECURITIES> 0
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0
0
<COMMON> 8,583,798
<OTHER-SE> 836,127
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<INCOME-CONTINUING> 2,041,764
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