SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 2000 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 E.I.N. 52-2027313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
The CIBC Banking Centre
Old Parham Road
P.O. Box 3265
St. John's, Antigua, West Indies
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (268) 480-1650
Former address, 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 December 1, 2000, there were 32,193,181 shares of the registrant's
Class A Voting Common Stock outstanding.
<PAGE>
Some of the information in this report contains forward-looking statements
that involve substantial risks and uncertainties. Any statement in this
report and in the documents incorporated by reference into this report that
is not a statement of an historical fact constitutes a forward-looking
statement. Further, when we use the words "may", "expect", "anticipate",
"plan", "believe", "seek", "estimate" and similar words, we intend to
identify statements and expressions that may be forward-looking statements.
We believe it is important to communicate certain of our expectations to
our investors. Forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions that could
cause Starnet's future results to differ materially from those expressed in
any forward-looking statements. Many factors are beyond our ability to
control or predict. You are accordingly cautioned not to place undue
reliance on such forward-looking statements. We have no obligation or
intent to update publicly any forward-looking statements whether in
response to new information, future events or otherwise. You should be
aware that the occurrence or non-occurrence of any of the events described
in this report could have a material adverse effect on our business,
financial condition and results of operation.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
Starnet Communications International Inc.
Consolidated Balance Sheets
As at October 31, 2000 and April 30, 2000
(in thousands of US dollars)
<TABLE>
<CAPTION>
(Unaudited)
October 31 April 30
2000 2000
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 3,937 5,984
Reserves and deposits with credit card processors 3,639 3,857
Accounts receivable 2,889 2,022
Prepaid expenses and deposits 641 616
Current portion of long-term receivable 37 514
Other current assets 761 1,349
------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 11,904 14,342
------------------------------------------------------------------------------------------
Restricted cash 7,556 7,234
Capital assets (net) 6,122 4,868
Long-term receivable 1,534 1,539
------------------------------------------------------------------------------------------
27,116 27,983
------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 3,594 5,223
Funds held on deposit 4,159 2,118
Deferred revenue 133 287
Current portion of capital lease obligations 687 476
------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,573 8,104
------------------------------------------------------------------------------------------
Non-current portion of capital lease obligations 906 503
Long-term note payable 1,500 0
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,979 8,607
------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 22,335 22,143
Subscription receivable (366) (381)
Retained earnings (deficit) (5,484) (2,371)
Accumulated other comprehensive loss (348) (15)
------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 16,137 19,376
------------------------------------------------------------------------------------------
27,116 27,983
------------------------------------------------------------------------------------------
</TABLE>
2
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Starnet Communications International Inc.
Consolidated Statements of Operations
For the Periods Ending October 31
(in thousands of US dollars except per share information)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
October 31 October 31
2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
SALES
Royalties and fees 4,730 3,430 8,354 5,794
Licensing 746 912 1,151 2,163
--------------------------------------------------------------------------------------
Total sales 5,476 4,342 9,505 7,957
Cost of sales 1,604 930 2,900 1,797
--------------------------------------------------------------------------------------
GROSS PROFIT 3,872 3,412 6,605 6,160
--------------------------------------------------------------------------------------
EXPENSES
Sales 177 127 297 295
Marketing 743 609 1,498 853
Development 863 455 1,709 823
Operations 1,087 (66) 2,168 292
General and administrative 1,409 1,347 2,623 1,991
Provision for bad debts 0 0 0 250
Legal 217 152 290 189
Depreciation and amortization 763 378 1,315 646
--------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,259 3,002 9,900 5,339
--------------------------------------------------------------------------------------
Income (loss) from operations (1,387) 410 (3,295) 821
--------------------------------------------------------------------------------------
Other income (expenses) 96 51 182 80
--------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,291) 461 (3,113) 901
--------------------------------------------------------------------------------------
Income tax expense (recovery)
current 0 53 0 53
deferred 0 0 0 0
--------------------------------------------------------------------------------------
INCOME TAXES 0 53 0 53
--------------------------------------------------------------------------------------
Income (loss) from continuing
operations (1,291) 408 (3,113) 848
Income (loss) from discontinued
operations of the on-line
interactive media division
(less applicable income taxes) 0 (67) 0 106
--------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD (1,291) 341 (3,113) 954
Retained earnings (deficit),
beginning of period (4,193) 1,497 (2,371) 884
--------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT),
END OF PERIOD (5,484) 1,838 (5,484) 1,838
--------------------------------------------------------------------------------------
Basic earnings (loss) per share
from continuing operations $ (0.04) $ 0.01 $ (0.10) $ 0.03
Basic earnings (loss) per share $ (0.04) $ 0.01 $ (0.10) $ 0.03
Weighted average number of
common shares outstanding 32,176,665 30,483,604 32,141,634 29,054,349
Diluted earnings per share from
continuing operations n/a $ 0.01 n/a $ 0.03
Diluted earnings per share n/a $ 0.01 n/a $ 0.03
Weighted average number of
common shares outstanding for
diluted earnings per share n/a 33,259,232 n/a 33,174,185
</TABLE>
3
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Starnet Communications International Inc.
Consolidated Statements of Cash Flows
For the Periods Ending October 31
(in thousands of US dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
October 31 October 31
2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (1,291) 341 (3,113) 954
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 763 384 1,315 646
Amortization of deferred website costs 0 70 0 105
Amortization of software development
costs 0 69 0 138
Changes in current assets and liabilities:
Decrease (increase) in reserves and
deposits with credit card processors 433 (439) 218 (493)
Increase in accounts receivable (720) (1,861) (852) (3,968)
Decrease (increase) in prepaid
expenses and deposits 3 (168) (25) (339)
Decrease (increase) in other assets 282 8 588 (727)
Increase (decrease) in accounts
payable and accrued liabilities (738) 2,266 (1,629) 2,886
Increase in income taxes payable 0 14 0 58
Increase (decrease) in funds held
on deposit 2,268 1,701 2,041 2,137
Decrease in deferred revenue (239) (128) (154) (134)
--------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 761 2,257 (1,611) 1,263
--------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (590) (1,411) (1,771) (1,939)
Transfer to restricted cash (280) (6,856) (322) (6,856)
--------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (870) (8,267) (2,093) (8,795)
--------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments received on long-term receivable 12 0 482 0
Proceeds from loan 1,000 0 1,500 0
Proceeds from issuance of shares 130 3,133 192 12,027
Principal repayments under capital
lease obligations (152) (38) (300) (189)
--------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 990 3,095 1,874 11,838
--------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (179) (142) (217) (79)
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING
THE PERIOD 702 (3,057) (2,047) 4,227
Cash, beginning of period 3,235 13,150 5,984 5,866
--------------------------------------------------------------------------------------
Cash, end of period 3,937 10,093 3,937 10,093
--------------------------------------------------------------------------------------
OTHER NON-CASH TRANSACTIONS
Leased assets acquired 472 282 959 282
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 13 10 30 10
Income tax paid 0 0 0 29
</TABLE>
4
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STARNET COMMUNICATIONS INTERNATIONAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT OCTOBER 31, 2000
(UNAUDITED)
1. Condensed Consolidated Financial Statements
The accompanying consolidated financial statements have been
prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position at
October 31 and April 30, 2000, and results of operations and cash
flows for the periods ended October 31, 2000 and 1999, have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's April 30,
2000 audited consolidated financial statements. The results for
operations for periods ended October 31, 2000 and 1999 are not
necessarily indicative of the operating results for the full years.
2. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the
adjustments which, in the opinion of management, are necessary for a
fair presentation. Such adjustments are of a normal recurring nature.
3. General
Restricted Cash refers to funds in the Company's bank accounts
frozen pursuant to a Restraint Order in Canada, and collateral for
leases and letters of credit.
Other Current Assets consist primarily of gaming licences from the
government of Antigua held for resale to licencees.
4. Loan Payable
The Company has entered into an agreement to borrow up to $1.5
million, all of which it has received at October 31, 2000. Interest
is payable monthly at a rate of 8% per annum. The loan may be
satisfied by converting the loan amount to common stock of the
Company as part of a private placement along with other third-party
investors at the same terms and conditions as those other third-party
investors.
5
<PAGE>
5. Discontinued Operations
Income (loss) from discontinued operations refers to the on-line
interactive media division which was disposed of in April 2000. The
receivable related to the proceeds of sale is included in long-term
receivable.
6. Contingencies and Commitments
An application filed by the Royal Canadian Mounted Police ("RCMP")
on August 14, 2000 resulted in the Supreme Court of British Columbia
extending an ex parte restraint order that prevents the Company and
Starnet Systems International Inc. from accessing approximately $7.3
million for an additional six months. The time is expected to allow
the RCMP to complete their investigation of allegations that the
Company and some of its officers, directors and employees were
breaching certain gaming provisions contained in the Criminal Code
of Canada. The Company has appealed the restraining order extension
to the British Columbia Court of Appeal. The RCMP investigation has
not been completed and no charges have been laid.
Between October 15, 1999 and December 9, 1999, ten class action
claims were commenced in the United States against the Company and
some of its directors and officers. On March 7, 2000, the United
States District Court for the District of Delaware ordered that
these ten actions be consolidated in a single proceeding. An amended
Consolidated Class Action Complaint was filed on June 7, 2000. The
Plaintiff class alleges generally that material misrepresentations
regarding the nature and inherent risks of the Company's business
were knowingly made to its investors (including the Plaintiff
class). The relief sought includes damages and costs for the
Plaintiff class. The amount of the damages claimed is unspecified.
As this issue is at a preliminary stage, its financial impact, if
any, cannot be determined at this time. It is the Company's
intention to defend these lawsuits vigorously. The Company filed a
motion to dismiss on September 14, 2000, which as of the date of
this report has not been responded to by the Plaintiff nor ruled
upon by the District Court.
On September 16, 1999, Las Vegas Casino Inc. ("LVC") commenced an
action against the Company, a number of its subsidiaries and various
employees of the Company and its subsidiaries. LVC, a former
software licensee of the Company's subsidiary, Starnet Systems,
alleges a $1 billion loss arising from alleged misappropriation of
funds, and breach and wrongful termination of its software licence
agreement. Starnet Systems terminated the software licence agreement
with LVC on July 22, 1999 as a result of LVC's failure to pay over
$200,000 in fees owed to Starnet Systems. On July 12, 2000, the
Supreme Court of British Columbia granted a stay of the lawsuit as
against Starnet Systems only. Should LVC wish to proceed with its
claim against Starnet Systems, it must do so through the arbitration
process provided for in the software licence agreement. LVC has not
yet taken any steps to do so. The Company believes that LVC's
6
<PAGE>
allegations are without merit and intends to defend LVC's lawsuit
and to contest arbitration proceedings vigorously. As this matter
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 significant losses to the Company.
In all of the above-noted matters, management has been unable to
determine the likely outcomes. Consequently, no provision for loss
has been made in these financial statements in respect of these matters.
7. Subsequent Event
The Company has submitted an agreement and plan of reorganization
for shareholder approval. If such approval is obtained and the
Company consummates the agreement and plan of reorganization, the
Company will become an indirect wholly-owned subsidiary of World
Gaming Plc, a new holding company incorporated in England and Wales.
8. Diluted Earnings Per Share
Diluted earnings per share for the six and three month periods ended
October 31, 2000 are not disclosed as the amounts would be anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (All figures in thousands of US dollars)
Results Of Operations
---------------------
The Company's Internet casino, which targets only customers outside North
America, is operated by its subsidiary, World Gaming Services Inc. of
Antigua. Starnet Systems, also of Antigua, licenses its gaming software
to third parties for a set up fee and monthly royalties. Inphinity
Interactive Inc. was incorporated in 1999 to develop gaming software and
web pages. In April 2000, the Company sold the assets of its adult
entertainment business to a third party to focus entirely on the Internet
gaming industry. For the three months ended October 31, 2000, revenues
from all components of the gaming business, which include licensing,
casino operations and financial transaction processing generated revenues
of $5,476, up 26% from the gaming revenues of $4,342 for the quarter
ended October 31, 1999 and up 36% from Q1. The year-over-year revenue
growth rate of 26% increased from 11% in Q1 but was lower than expected
due to poor sportsbook profits in October despite record sportsbook
wagers during the month. The underlying business continued healthy growth
as system wide deposits and revenues were up 106% and 91%, respectively.
Although total operating costs increased to $5,259 in Q2 compared to
$4,641 in Q1, most of the increase was attributable to one time general
and administration and legal costs.
7
<PAGE>
The combined sales, marketing, development and operations costs for Q2
were up only 2% from Q1 despite a 36% rise in revenue over the same period.
The following tables set out selected information from the statements of
operations for the quarters ended October 31, 2000 and 1999 and the
balance sheets as at October 31, 2000 and April 30, 2000:
SELECTED STATEMENT OF OPERATIONS INFORMATION (IN THOUSANDS OF DOLLARS)
FOR THE THREE MONTHS ENDED
October 31, 2000 October 31, 1999
---------------- ----------------
Net Sales 5,476 4,342
Gross Profit 3,872 3,412
Operating Expenses 5,259 3,002
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,291) 408
Net Income (Loss) (1,291) 341
SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS OF DOLLARS)
At October 31, 2000 At April 30, 2000
---------------------------------------
Working Capital 3,331 6,238
Total Assets 27,116 27,983
Long Term Debt 2,406 503
Deficit (5,484) (2,371)
Total Shareholders' Equity 16,137 19,376
As explained in Q1, the Company has reduced the number of new licensees
considerably and focussed selling efforts on established gaming
operators. As a result of this new direction, total sales from licensing
declined 18% to $746 while sales from royalties increased 38% to $4,730.
Year to date revenues increased 19% to $9,505 as a 44% increase in
royalties and fees was partially offset by a 47% drop in Licensing revenue.
The underlying business, however, remained very strong as system-wide
deposits increased to $56,372 for the three months ended October 31,
2000, up 109% from $27,030 for the same period last year and up 70% from
Q1. System wide revenues for Q2 from all licensees increased 94% to
$36,506 compared to the same period last year and jumped 53% from Q1. The
quarter on quarter growth for system wide revenue was less than
anticipated, and less than the growth in deposits, due to low football
profits during the first three weeks of October.
Gross profit increased 13% to $3,872 for the quarter ended October 31,
2000 from $3,412 for the prior year. The gross margin increased as
expected to 71% for the quarter ended October 31, 2000 compared to 68% in
Q1 but decreased from 79% for the same period
8
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last year due to the relatively lower gross margin from reselling the
Antigua gaming licenses.
Sales, marketing, development and operations costs for Q2 were up only 2%
from Q1 despite a 36% rise in revenue over the same period as follows:
Q2 Q1 Variance
Sales 177 120 47%
Marketing 743 755 (2%)
Development 863 846 2%
Operations 1,087 1,080 1%
--------------------------
Total 2,870 2,801 2%
==========================
These expenses were relatively flat for the second quarter in a row and
in line with expectations. However, the General and administration and
Legal costs were $1,626, up 26% from $1,287 in Q1 due to costs associated
with the start of internal restructuring and the Company's efforts to
reorganize into a new holding company incorporated in England and Wales.
The quarter 2 comparative for Operations expenses are negative $66 due to
a reclassification between Operations and General and administrative
expenses in the six month period for 1999. Depreciation costs rose 38%
to $763 for the quarter due to the addition of a second server site and a
full quarter of depreciation for the Q1 equipment upgrades in Antigua.
The total operating expenses were $5,259, up 75% from $3,002 in the same
period last year and up 13% over Q1, considerably lower than the 36%
quarter on quarter revenue growth. For the six months ended October 31,
2000, operating expenses were $9,900, up 85% from $5,339 in the same
period last year and in line with the year on year increase in the
underlying business.
The combination of lower than expected revenues and the higher G&A and
Legal expenses resulted in a loss from continuing operations of $1,291
for the quarter ended October 31, 2000 compared to an operating income of
$408 for the prior year. The Q2 loss, however, was somewhat lower than
the $1,822 loss in Q1. The year to date loss from continuing operations
was $3,113 compared to operating income of $848 for the prior year.
On April 1, 2000, the Company sold the business and all of the assets of
its interactive media division therefore there was no income from this
discontinued division during the quarter compared to a loss of $67 for
the same period last year. This interactive media division had generated
income of $106 for the six months ended October 31, 1999.
There is no tax provision for the quarter or the year to date as the
majority of the Company's income is generated from Starnet Systems in
Antigua, which is not subject to income tax.
9
<PAGE>
Liquidity and Capital Resources
-------------------------------
At October 31, 2000, the Company had $3,937 in cash and cash equivalents
down from $5,984 at April 30, 2000 but up from $3,235 at July 31, 2000.
The decrease over the six months to October 31, 2000 was caused by $1,610
used in operations and the rest partially financed new capital
expenditures. Due to the investigation by Canadian authorities of the
business operations of the Company prior to August 1999, the freeze on
two of the Company's bank accounts with a Canadian bank was extended
until February 2001 The amount affected totaled approximately $7,293
including interest. The Company also has reserves and deposits held by
credit card processors totaling $3,639 which includes $322 relating to a
discontinued business. A majority of the funds are held as a rolling
reserve, which is released to the Company after six months.
Working capital at October 31, 2000 decreased to $3,331 from $6,238 at
April 30, 2000. Accounts receivable increased from $2,022 at April 30,
2000 to $2,889 at October 31, 2000. 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. Other current assets at October 31, 2000 dropped to
$761 from $1,349 at April 30, 2000. The decrease is the net effect of
prepayments made to the Antiguan Government for the purchase of
additional casino licenses less the portion allocated to costs of sales
during the period. The casino licenses are held for sale to prospective
licensees.
Net cash generated by operations for the quarter ended October 31, 2000
of $761 was down from $2,257 for the same period last year but up
considerably from the $2,371 cash used in Q1.
Net cash used for investing activities for the quarter ended October 31,
2000 was $870 compared to $8,267 for the same period last year. For the
year to date, the amount was $2,093 compared to $8,795 for the same
period last year. Last year's figure included $6,856 of restricted cash
as explained above. There was another $472 of leased assets added during
the quarter bringing the year to date total to $959.
Net cash provided by financing activities for the three months ended
October 31, 2000 and the year to date was $990 and $1,874 , respectively,
down considerably from the same periods last year as the lower stock
price reduced the number of options and warrants exercised.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The information below updates and discloses material events that occurred
during the quarter ended October 31, 2000 with respect to previously
disclosed existing and pending legal claims against the Company. Please
refer to the Company's Form 10-Q for the quarter ended July 31, 2000 for
a discussion of all existing and pending legal claims against the Company.
Her Majesty the Queen in Right of Canada
----------------------------------------
On August 25, 1999, the RCMP obtained an ex parte restraint order from
the Honourable Associate Chief Justice of the Supreme Court of British
Columbia pursuant to the provisions of the Criminal Code of Canada. This
order prevents the Company and Starnet Systems International Inc. from
accessing funds located in their Canadian bank accounts. The amount of
money in these accounts is approximately $7,188,000. The basis for the
claim is the allegation that the funds in these bank accounts are
proceeds of crime, obtained as a result of the breach of certain gaming
provisions contained in the Criminal Code of Canada, and should therefore
be forfeited to the Crown. In September 1999, the Company brought an
application to have the restraint order revoked. This application was
unsuccessful.
On February 24, 2000, the RCMP applied to the Supreme Court of British
Columbia to continue the restraint order for a further 12 months. On the
same day, the Company brought an application to have the restraint order
vacated. The application to continue the restraint order was granted but
only for a further six months. The application to vacate the restraint
order was adjourned until such time as all issues relating to privileged
documents had been dealt with.
An application filed by the Royal Canadian Mounted Police ("RCMP") on
August 14, 2000 resulted in the Supreme Court of British Columbia
extending an ex parte restraint order that prevents the Company and
Starnet Systems International Inc. from accessing approximately $7.3
million for an additional six months. The time is expected to allow the
RCMP to complete their investigation of allegations that the Company and
some of its officers, directors and employees were breaching certain
gaming provisions contained in the Criminal Code of Canada. The Company
has appealed the restraining order extension to the British Columbia
Court of Appeal. The RCMP investigation has not been completed and no
charges have been laid.
U.S. Class Action Claims
------------------------
Between October 15, 1999 and December 9, 1999, ten class action claims
were commenced in the United States against the Company and some of its
directors and officers. On March 7, 2000, the United States District
Court for the District of Delaware
11
<PAGE>
ordered that these ten actions be consolidated under the heading IN RE
STARNET COMMUNICATIONS INTERNATIONAL INC. SECURITIES LITIGATION, C.A. No.
99-681 (SLR).
An amended Consolidated Class Action Complaint was filed in the United
States District Court for the District of Delaware on June 7, 2000. The
Plaintiff class consists potentially of all persons who purchased the
Company's Class A Voting Common Stock from March 11, 1999 to August 20,
1999 inclusive, excluding the Defendants. The Plaintiffs allege generally
as follows:
(a) The Company became involved in internet gaming;
(b) The Company represented to its investors (including the
Plaintiff class) that the legality of internet gaming was
uncertain;
(c) The Company represented to its investors (including the
Plaintiff class) that it had taken steps to minimize the
risk of exposure to a criminal or quasi criminal
prosecution for being involved in internet gaming;
(d) The representations made by the Company were false or incomplete;
(e) The false or misleading representations of the Company
caused its share price to rise;
(f) The members of the Plaintiff class purchased the Company's
shares;
(g) In August of 1999, the RCMP searched the Company's
Vancouver, British Columbia offices;
(h) The share price of the Company dropped dramatically;
(i) The members of the Plaintiff class lost money as a result
of the drop in the share price;
(j) Certain former officers of the Company (John Carley, Chris
Zacharias and Mark Dohlen - the "Individual Defendants")
were involved in or aware of the false or misleading
representations; and
(k) The Individual Defendants were involved with the
preparation of or approved of the false or misleading
representations of the Company for the purpose of
inflating the price of the Company's stock, thereby
allowing the Individual Defendants to reap millions of
dollars in profits from the sale of the Company's shares
at inflated prices.
12
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The Company filed a Motion to Dismiss on September 14, 2000, which as of
the date of this report has not yet been responded to by the Plaintiff
nor ruled upon by the District Court.
The relief sought includes damages and costs for the Plaintiff class. The
amount of the damages claimed is unspecified. As this issue is at a
preliminary stage, its financial impact, if any, cannot be determined at
this time. It is the Company's intention to defend this lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On September 11, 2000, the Company's Board of Directors appointed the
Company's Chairman, Fred Hazell, to serve as interim President and Chief
Executive Officer following the resignation of Meldon Ellis, who
previously had served in the same positions. On that same date, the
Company's Board of Directors resolved to set Mr. Hazell's compensation at
the same amount formerly paid to Mr. Ellis, which included an annual
salary of $216,000 as well as allowances for certain other expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
------------------------------------------------
10.13 Settlement Agreement, dated September 13, 2000, by and
between the Registrant and Meldon Ellis.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
None.
13
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STARNET COMMUNICATIONS INTERNATIONAL INC.
(REGISTRANT)
Date: December 15, 2000 By: /s/ Fred Hazell
----------------------------
Fred Hazell
Chairman, President and Chief Executive Officer
Date: December 15, 2000 By: /s/ Chris Thompson
----------------------------
Chris Thompson
Vice-President, Finance
14
