FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-29290
STARNET COMMUNICATIONS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2027313
(State of incorporation) (IRS Employer ID No.)
Newgate Street
PO Box 3265
St. John's, Antigua
West Indies
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (268) 480-1651
425 Carrall Street, Mezzanine Level
Vancouver, B.C., Canada V6B 6E3
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of July 31, 1999, the registrant had 29,912,749 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one);
Yes No X
----- -----
The registrant meets the conditions set forth in General Instruction and is
therefore filing this Form with the reduced disclosure format.
<PAGE>
Part I - Financial Information
------------------------------
Item 1 - Financial Statements:
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
AS AT JULY 31, 1999 AND APRIL 30, 1999
(in thousands of US dollars)
July 31 April 30
1999 1999
- ---------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 12,138 5,000
Accounts receivable 4,777 2,671
Prepaid expenses 392 149
Deposits 1,527 1,398
Other current assets 2,241 1,507
- ---------------------------------------------------------------------------
TOTAL CURRENT ASSETS 21,075 10,725
- ---------------------------------------------------------------------------
Capital assets (net) 2,180 1,673
Deferred website costs (net) 245 285
Software development costs (net) 541 610
Deferred income tax asset 147 0
- ---------------------------------------------------------------------------
24,188 13,293
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 1,988 1,371
Income taxes payable 312 268
Deposits from customers 1,670 1,234
Deferred revenue 322 328
Current portion of capital lease obligations 332 357
- ---------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,624 3,558
- ---------------------------------------------------------------------------
Non-current portion of capital lease
obligations 600 461
Deferred income tax liability 0 (146)
- ---------------------------------------------------------------------------
TOTAL LIABILITIES 5,224 3,873
- ---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 17,477 8,584
Retained earnings 1,497 884
Accumulated other comprehensive loss (10) (48)
- ---------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 18,964 9,420
- ---------------------------------------------------------------------------
24,188 13,293
- ---------------------------------------------------------------------------
2
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTH PERIODS ENDING JULY 31
(in thousands of US dollars except per share information)
1999 1998
- ----- ---------------------------------------------------------------------
REVENUE
Sales 3,615 659
Cost of sales 866 216
- ---------------------------------------------------------------------------
GROSS MARGIN 2,749 443
- ---------------------------------------------------------------------------
EXPENSES
Development, selling, general and
administrative 2,336 526
- ---------------------------------------------------------------------------
Income (loss) from operations 413 (83)
- ---------------------------------------------------------------------------
Other income (expenses) 29 (20)
- ---------------------------------------------------------------------------
Net income from continuing operations before
income taxes 442 (103)
- ---------------------------------------------------------------------------
Income tax expense (recovery)
current 0 0
deferred 0 0
- ---------------------------------------------------------------------------
Income taxes 0 0
- ---------------------------------------------------------------------------
Income from continuing operations 442 (103)
Income from discontinued operations of the
on-line interactive media division (less
applicable income taxes of 1999 - $45
and 1998 - nil) 171 206
- ---------------------------------------------------------------------------
NET INCOME FOR THE PERIOD 613 103
Retained earnings (deficit), beginning of period 884 (1,158)
- ---------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD 1,497 (1,055)
- ---------------------------------------------------------------------------
Basic earnings per share from continuing
operations $ 0.02 $ -
Basic earnings per share $ 0.02 $ -
Weighted average number of common shares
outstanding 27,639,450 22,450,000
Diluted earnings per share from continuing
operations $ 0.01 $ -
Diluted earnings per share $ 0.02 $ -
Weighted average number of common shares
outstanding for diluted earnings per
share 33,103,494 22,450,000
3
<PAGE>
STARNET COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDING JULY 31
(in thousands of US dollars)
1999 1998
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 613 103
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 262 167
Amortization of deferred website costs 36 132
Amortization of software development costs 69 40
Changes in current assets and liabilities:
Increase in accounts receivable (2,106) (197)
Increase in prepaid expenses (243) (1)
Increase in other assets (735) 0
Increase in accounts payable
and accrued liabilities 620 90
Increase in income taxes payable 44 0
Increase in deposits from customers 436 309
Decrease in deferred revenue (6) (14)
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,010) 629
- ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (528) (99)
Deferred website costs 0 (169)
Software development costs 0 (82)
Deposits (129) (38)
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (657) (388)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank indebtedness 0 (12)
Proceeds from issuance of shares 8,893 0
Principal repayments under capital
lease obligations (151) (58)
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,742 (70)
- ---------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 63 63
- ---------------------------------------------------------------------------
NET INCREASE IN CASH DURING THE YEAR 7,138 234
Cash, beginning of year 5,000 140
- ---------------------------------------------------------------------------
Cash, end of year 12,138 374
- ---------------------------------------------------------------------------
OTHER NON-CASH TRANSACTIONS
Leased assets acquired 282 0
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 10 25
Income tax paid 0 0
4
<PAGE>
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All figures are in thousands of US dollars)
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 represented a
majority of revenues in the last fiscal year. As revenues from Internet
gaming continue to grow, the Company decided in August 1999 to focus on the
Internet gaming business by divesting itself from the adult entertainment
industry completely. As a result, income from Internet adult entertainment
was classified as income from discontinued operations and comparable
figures were adjusted accordingly.
The following tables set forth selected information from the statements of
operations for the three months ended July 31, 1999 and 1998 and the
balance sheets as at July 31, 1999 and April 30, 1999.
Selected Statement of Operations Information
- --------------------------------------------
For the three months ended
July 31, 1999 July 31, 1998
------------- -------------
Net Sales 3,615 659
Gross Margin 2,749 443
Operating Expenses 2,336 526
Income (loss) from continuing operations 442 (103)
Income from discontinued operations 171 206
Net Income 613 103
Selected Balance Sheet Information
- ----------------------------------
At July 31, 1999 At April 30, 1999
---------------- -----------------
Cash and Cash Equivalents 12,138 5,000
Working Capital 16,451 7,167
Total Assets 24,188 13,293
Long Term Debt 600 461
Retained Earnings 1,497 884
Total Shareholders' Equity 18,964 9,420
The Company's revenues increased 449% to $3,615 for the three months ended
July 31, 1999 compared to $659 for the three months ended July 31, 1998.
The growth is primarily due to the increase in the number of licensees and
licensees' revenues. Including revenues from adult entertainment which was
reclassified, total revenues should have been $4,467 for the quarter ended
July 31, 1999, representing a growth of 18% from $3,788 for the quarter
ended April 30, 1999. The Company expects a substantial growth in
revenues for the next quarter as it enters the upcoming sports seasons.
5
<PAGE>
At July 31, 1999, the Company had completed the software for 35 licensees,
but some of these licensees were not in operation pending confirmation of
their gaming licenses. In June 1999, the Company terminated the licensing
agreement with one of its licensees due to non-payment of the on-going
royalty. At July 31, 1999, the receivable from this terminated licensee
amounted to approximately $250 for which an allowance has been made. Legal
action has already been taken in an attempt to collect the outstanding
balance from this licensee. The Company does not expect the loss in revenues
from this licensee to be significant as more licensees commence operations
and revenues of their casino operations increase.
Along with the growth in sales, gross margin increased to $2,749 for the
quarter ended July 31, 1999 from $443 for the prior year quarter. Gross
margin increased from 67% for the three months ended July 31, 1998 to 76%
for the three months ended July 31, 1999 due to efficiencies gained from an
increased number of licensees.
Operating expenses increased by 344% to $2,336 for the quarter ended
July 31, 1999 from $526 for the prior year quarter. However, as a percentage
of sales, operating expenses decreased from 80% to 65% as a result of
substantial revenue growth and efficiencies gained as the Company handled
a greater level of activity. The Company expects an increase in operating
expenses for the next quarter due to higher legal costs and the expenses
incurred in relocating its headquarters to Antigua.
No tax provision was made for the three months ended July 31, 1999 as the
Company's income is solely generated from companies in jurisdictions where
there is no income tax. However, income generated from the adult
entertainment business is subject to Canadian income tax and an income tax
expense of $45 was included in the income from discontinued operations.
Net income from continuing operations for the quarter ended July 31, 1999
was $442 compared to a loss $103 for the prior year quarter. Net income for
the quarter ended July 31, 1999 was $613 compared to $103 for the prior
year quarter.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 1999, the Company had $12,138 in cash and cash equivalents
compared to $5,000 at April 30, 1998. The increase in cash balance is
mainly a result of the exercise of stock options and warrants in the
quarter ended July 31, 1999. Due to an investigation by Canadian authorities
of the business operations of the Company, two of the Company's bank
accounts with a Canadian bank were frozen on August 25, 1999 pursuant to an
Ex Parte Restraint Order granted by the Honourable Associate Chief
Justice pending the outcme of the investigation. The amount affected
totaled approximately $6.9 million. Despite the fact that the Restraint
Order is slowing down the Company's expansion plan, it does not prevent the
Company from continuing its operations or expansion plan. The Company has
filed an application to revoke or vary the Restraint Order.
Working capital at July 31, 1999 increased significantly to $16,451 from
$7,167 at April 30, 1999. Accounts receivable increased from $2,671 at April
30, 1999 to $4,777 at July 31, 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 July 31, 1999 increased by $129 from $1,398
at April 30, 1999 due to increased deposits for higher processing volume.
Other current assets at July 31, 1999 amounted to $2,241 compared to $1,507
at April 30, 1999. The increase is mainly due to
6
<PAGE>
prepayments made to the Antiguan government for the purchase of additional
casino licenses. The casino licenses are held for sale to prospective
licensees.
Net cash generated from (used for) operations for the three months ended
July 31, 1999 decreased by $2,278 to ($1,010) from $629 for the three
months ended July 31, 1998. The decrease in cash from operations was mainly
due to the increase in accounts receivable, deposits and other assets.
Net cash used for investing activities for the quarter ended July 31, 1999
was $657 compared to $388 for the prior year quarter. The increase in cash
used is mainly due to increase in capital assets to cope with increased
volume.
Net cash provided by financing activities for the three months ended July
31, 1999 was $8,742 compared to a net use of $70 for the three months ended
July 31, 1998. The increase was from the proceeds of the exercise of stock
options and warrants.
Impact of Inflation
- -------------------
The Company believes that inflation has not had a material effect on its
past business.
Part II - Other Information
---------------------------
Item 5 - Other Information
YEAR 2000 RISKS.
Currently, many computer systems, hardware and software products are coded
to accept only two digit entries in the date code field and, consequently,
cannot distinguish 21st century dates from 20th century dates. The
interactions between various software and hardware platforms often rely
upon the date coding system. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to function
properly after the turn of the century. The Company, its customers, and
suppliers are reliant on computers and related automated systems for daily
business operations. Failure to achieve at least a minimum level of Year
2000 systems compliance by both the company and its suppliers 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.
7
<PAGE>
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 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 6 - Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) There are no reports on Form 8-K that were filed for the quarter.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STARNET COMMUNICATIONS INTERNATIONAL INC.
(Registrant)
Date: September 14, 1999 /s/ PAUL GILES
---------------------------------
Paul Giles
President and Secretary/Treasurer
Date: September 14, 1999 /s/ JOHN CARLEY
---------------------------------
John Carley
Chief Financial Officer
9
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 12,138,000
<SECURITIES> 0
<RECEIVABLES> 5,054,000
<ALLOWANCES> 277,000
<INVENTORY> 0
<CURRENT-ASSETS> 21,075,000
<PP&E> 3,851,000
<DEPRECIATION> 1,671,000
<TOTAL-ASSETS> 24,188,000
<CURRENT-LIABILITIES> 4,624,000
<BONDS> 0
0
0
<COMMON> 17,477,000
<OTHER-SE> 1,487,000
<TOTAL-LIABILITY-AND-EQUITY> 24,188,000
<SALES> 3,615,000
<TOTAL-REVENUES> 3,615,000
<CGS> 0
<TOTAL-COSTS> 3,202,000
<OTHER-EXPENSES> (29,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 442,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 442,000
<DISCONTINUED> 171,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613,000
<EPS-BASIC> 0.016
<EPS-DILUTED> 0.013
</TABLE>
