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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING JUNE 30, 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: 000-13627
STARNET FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2168244
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
17311 NORTH DALLAS PARKWAY, SUITE 350
DALLAS, TEXAS 75248
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 972-818-1212
--------------------------------------------------------------------------------
(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 filed such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at June 30, 2000 was 19,308,825.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes X No
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STARNET FINANCIAL, INC. FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
<S> <C>
Consolidated Balance Sheets....................................................................... 1
Consolidated Statements of Operations............................................................. 2
Consolidated Statements of Cash Flows............................................................. 3
Notes to Consolidated Financial Statements........................................................ 4
Item 2-- Management's Discussion and Analysis of Financial Condition and
Plan of Operations....................................................................... 5
PART II -- OTHER INFORMATION
Item 2-- Changes in Securities and Use of Proceeds................................................ 8
Item 6-- Exhibits and Reports on Form 8-K......................................................... 8
Signature......................................................................................... 9
</TABLE>
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STARNET FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND MARCH 31, 1999
<TABLE>
<CAPTION>
June 30, 2000 March 31, 1999
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 294,172
Mortgage loans available for sale, net 21,752,573 25,009,987
Property and equipment, net 829,555 746,559
Real estate owned -- 91,000
Notes and accounts receivable 747,954 351,813
Prepaid expenses -- 123,893
Goodwill and other intangibles 1,360,397 1,393,983
Other assets 62,574 40,852
------------ ------------
Total assets $ 24,753,053 $ 28,052,259
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse and other notes payable $ 21,642,828 $ 24,857,453
Accounts payable and accrued expenses 2,116,324 995,277
Funds held on account for others 109,973 107,799
------------ ------------
Total liabilities 23,869,125 25,960,529
------------ ------------
Stockholders' equity:
Preferred stock, authorized,1,000,000 shares; issued and
outstanding, none
Common stock, authorized 20,000,000 shares; issued and
outstanding,19,308,825 and 19,199,578; par value, $.01 193,088 191,996
Additional paid-in-capital 8,565,049 8,396,822
Stock subscriptions receivable (2,100,000) (2,100,000)
Accumulated deficit (5,774,209) (4,397,088)
------------ ------------
Total shareholders equity 883,928 2,091,730
------------ ------------
$ 24,753,053 $ 28,052,259
============ ============
</TABLE>
See accompanying notes to financial statements.
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STARNET FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Gross revenue $ 2,101,041 $ 397,254
Expenses:
Salaries and benefits 1,612,297 404,955
Depreciation & amortization 112,346 5,282
Investment property expenses -- 3,249
Advertising, Dues and Promotions 81,984 29,057
Office supplies and Utilities 30,629 11,133
Bank service charges 9,131 1,534
Consulting and Contracts and Leases 171,678 37,579
Loan Processing Expenses 124,571 31,041
Insurance 101,022 17,346
Telephone and pagers 59,795 8,245
Postage and delivery 37,582 6,983
Legal and professional 103,912 18,749
Miscellaneous 13,110 9,830
Office Occupancy/Rent 207,677 23,307
Taxes and Licenses 10,234 --
Travel and entertainment 70,957 23,312
------------ ------------
Total operating expenses 2,746,925 631,602
------------ ------------
Loss from operations (645,884) (234,348)
Interest expense 532,480 37,340
Other income (expense) (198,758)
Loss before taxes (1,377,122) (271,688)
Taxes -- 2,259
------------ ------------
Net loss $ (1,377,122) $ (273,947)
============ ============
Basic net loss per common share $ (.07) $ (.03)
============ ============
Weighted average common shares $ 19,253,578 $ 10,800,000
============ ============
</TABLE>
See accompanying notes to financial statements.
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STARNET FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net loss $ (1,377,122) $ (273,947)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 112,346 5,282
Accounts receivable (396,141) (80,129)
Loans held for sale 3,257,414 (4,942,098)
Direct loan costs capitalized -- (208,500)
Other receivable 102,171 (81,290)
Deposits -- (18,973)
Accounts payable 1,121,047 535,573
Notes payable to banks (3,214,625) 4,847,018
Other liabilities 2,174 --
------------ ------------
Net cash used in operating activities (392,735) (217,064)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (104,342) (165,762)
Goodwill 33,586 (43,552)
------------ ------------
Net cash provided by (used in) investing activities (70,756) (209,314)
------------ ------------
Cash flows from financing activities:
Employee / stockholder receivable (83,134)
Common Stock 1,092 108,000
Paid in Capital 168,227 451,821
------------ ------------
Net cash provided by financing activities 169,319 476,687
------------ ------------
Net cash increase (decrease) for period (294,172) 50,309
Cash at beginning of period 294,172 --
------------ ------------
Cash at end of period $ 0 $ 613,152
============ ============
Interest paid $ 532,480 $ 37,340
============ ============
</TABLE>
See accompanying notes to financial statements.
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STARNET FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Regulation S-B. They do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, except as
disclosed herein, there has been no material change in the information disclosed
in the notes to the financial statements for the year ended March 31, 2000
included in the Company's Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission. The interim unaudited financial statements should be
read in conjunction with those financial statements included in the Form 10-KSB.
In the opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the three months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2001.
Description of Business
The predecessor company to StarNet Financial, Inc. was incorporated in February
1999 as LoanNet, Inc. ("LoanNet") to engage in mortgage lending activities. In
May 1999, LoanNet was acquired by Sarkis Capital, Inc. ("Sarkis"), a public
shell company. This transaction has been accounted for as a reverse acquisition
for which LoanNet was the acquirer for accounting purposes. The name of the
resulting entity was changed to StarNet Financial, Inc.
The accompanying financial statements present the financial position of StarNet
Financial, Inc. ("the Company"), its divisions (StarNet Retail, and Occidental)
and its wholly owned subsidiaries (StarNet Mortgage, Inc., StarNet Trakker,
Inc., and Residential Lenders, Inc.). The results of operations and cash flows
include The GM Group, Inc. ("GM"). GM was acquired in April 1999 for cash and a
note payable in a transaction accounted for as a purchase. GM's stock was sold
as of December 31, 1999 in exchange for a note receivable; however certain of
its operations, personnel and relationships were retained. The Company
incorporated StarNet Mortgage, Inc. in June 1999. Residential Lenders, Inc. was
acquired in October 1999 for cash, a note payable, and common stock of the
Company in a transaction accounted for as a purchase.
The Company operates as a wholesale and retail mortgage banking organization
primarily through traditional origination channels and through Internet-based
channels. The Company is licensed to originate, underwrite, fund, purchase
closed loans or sell loans, or exempt from licensing requirements, in 33 states.
The Company sells its loans primarily to numerous investors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which can be
identified by the use of words such as "intend," "anticipate," "believe,"
"estimate," "project," or "expect" or other similar statements. These statements
discuss future expectations, contain projections of results of operations or of
financial condition or state other "forward-looking" information. We do not
undertake to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future. We
believe that our forward-looking statements are within the safe harbor provided
by the Exchange Act.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements, the
notes to our financial statements and the other financial information contained
elsewhere in this document. In addition to the historical information, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this document contain forward-looking information
as described above that involve risks and uncertainties. Our actual results
could differ materially from those anticipated by the forward-looking
information as a result of certain factors.
GENERAL
As a mortgage lender, we generate revenues through the origination and
subsequent sale of funded loans. These revenues are made up of loan processing
fees, net gain on sale, and net interest income. Loan processing fees include
application, documentation, commitment, and processing fees paid by borrowers.
Net gain on sale consists of the difference in price paid by the borrower and
the price paid by the permanent investor, which includes the value of the rights
to service loans. Net interest income consists of the difference between
interest received by us for the time we hold a loan and interest paid by us
under our credit facilities.
Our expenses largely consist of:
- salaries and benefits paid to employees;
- occupancy and equipment costs;
- loan processing expenses such as appraisals and credit reports;
- Internet and other technology-related expenses, including licensing
and participation fees and advertising costs; and
- data processing and communication costs.
A substantial portion of these expenses is variable in nature. Commissions paid
to loan originators are 100% variable, while other salaries and benefits
fluctuate from quarter to quarter based on our assessment of the appropriate
levels of non-loan originator staffing, which correlates to the current level of
loan origination volume and our estimates of future loan origination volume.
Seasonality affects the mortgage industry as loan originations are typically at
their lowest levels during the first and fourth quarters of the calendar year
due to a reduced level of home buying activity during the winter months. Loan
originations generally increase during the warmer months beginning in March and
continuing through October. As a result, we expect higher earnings in our first
and second quarters and lower earnings in the third and fourth quarters of our
fiscal year.
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Interest rate and economic cycles also affect the mortgage industry, as loan
originations typically fall in rising interest rate environments. During these
periods, refinancing originations decrease, as higher interest rates provide
reduced economic incentives for borrowers to refinance their existing mortgages.
Due to stable and decreasing interest rate environments over recent years, our
current performance may not be indicative of results in rising interest rate
environments.
During the first quarter of fiscal year 2001, we accepted applications for new
loans as follows:
<TABLE>
<S> <C>
StarNet - Dallas $ 34,561,800
StarNet - Houston 23,263,700
StarNet - Southeastern 25,915,000
StarNet - Western 247,569,200
-------------
$ 331,309,700
</TABLE>
Only a percentage of loan applications will ultimately close. A higher
percentage of conforming loan applications, such as those originated by StarNet
- Dallas and StarNet-Southwestern, will close compared to the non-conforming
loans originated by StarNet - Houston and StarNet-Western. On the other hand,
non-conforming loan volume is less susceptible to the seasonal and interest rate
cycles described above.
During the first quarter of fiscal year 2001, we closed and funded loans as
follows:
<TABLE>
<S> <C>
StarNet - Dallas $ 16,670,200
StarNet - Houston 15,520,200
StarNet - Southeastern 8,049,600
StarNet - Western 44,851,100
------------
$ 85,091,100
</TABLE>
Our loan "pipeline," which is the volume of loans applications accepted and in
the process of completing underwriting documentation and/or awaiting closing,
was approximately $150,207,500 at June 30, 2000. The pipeline consists of
approximately $90,000,000 of non-conforming "A" quality loans, $30,000,000 in
subprime "B/C" quality loans, $10,000,000 in government-insured loans, and the
balance in various conforming products. The source of the pipeline is broken
down as follows:
<TABLE>
<S> <C>
StarNet - Dallas $ 37,798,500
StarNet - Houston 11,500,000
StarNet-Southeastern 8,772,300
StarNet-Western 92,136,700
------------
$150,207,500
</TABLE>
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RESULTS OF OPERATIONS
Quarter ended June 30, 2000 Compared to Quarter ended June 30, 1999
Total revenues increased 529% to $2,101,000 in 2000 from $397,000 in 1999. This
increase was primarily due to the acquisitions of Residential Lenders,
Occidental Mortgage and Wall Street Mortgage during the third quarter of fiscal
year 2000 and the first quarter of fiscal year 2001.
Total expenses increased 435% to $2,747,000 in 2000 from $632,000 in 1999. This
increase is primarily due to the increase in the number of offices and
employees.
Interest expense increased 1,439% to $532,500 in 2000 from $37,000 in 1999, due
primarily to higher usage of our warehouse facilities.
Depreciation expenses increased in 2000 to $112,000 from $5,000 in 1999,
primarily due to the increase in the number of offices combined with additional
furniture and fixtures.
In 2000, the Company had net losses of $1,377,000 compared to net losses of
$274,000 in 1999. The increase in net losses in 2000 compared to 1999 was the
result of increased overhead due to the acquisitions of Residential Lenders,
Occidental Mortgage and Wall Street Mortgage and duplication of various
positions because of these acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had a negative cash position of $300,000 (included in
accounts payable). During the same period, we experienced negative cash flows
from operations amounting to $392,000. Rising interest rates leading to a
decline in loan production place additional pressures on liquidity.
During the fourth quarter of fiscal year 2000 and the first quarter of fiscal
year 2001, we conducted a private placement of our common stock. As part of this
private placement, we issued 1,486,702 shares of Common Stock, and we raised
approximately $1.4 million. Additional capital will need to be raised for us to
continue our business as contemplated in our business plan beyond fiscal year
2001.
The discussion above addresses working capital requirements. In addition to
working capital, we fund our "Mortgage Loans Held for Sale" through advances
under warehouse lines of credit. Our subsidiary, StarNet Mortgage, currently
uses two lines of credit (implemented by means of loan purchase agreements) with
an aggregate limit of $11,000,000 provided by First State Bank of Moulton and
Lott State Bank. Additionally, StarNet Mortgage maintains two warehouse lines of
credit with DLJ Mortgage Capital, Inc. and IMPAC Warehouse Lending Group with
borrowing limits of $30,000,000 and $25,000,000, respectively.
We have a critical need for additional working capital to execute our business
strategy. We anticipate using the net proceeds of the private placement
discussed above to open additional regional offices, hire additional personnel
and maintain net worth requirements for federal agency approvals and credit
facilitation. In the event that we are unable to obtain additional capital, we
will forego further expansion of our net branch and regional office network,
reduce the number of employees and overhead expenses, curtail our loan
production activities and/or sell loans earlier than is optimal and concentrate
our efforts on our existing operations.
We believe that the lines of credit, funds generated from operations and the net
proceeds of the private placement will be sufficient to finance our current and
anticipated operations through fiscal year 2001. Our long-term capital
requirements beyond this period will depend on numerous factors, including the
following:
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o the rate of market acceptance of our products and services;
o the ability to expand our customer base; and
o the level of expenditures for sales and marketing and other factors.
To the extent that the lines of credit, the net proceeds of the private
placement and our revenues are insufficient to fund the activities in the short
or long term, we would need to raise additional funds by incurring debt or
through public or private offerings of our stock. We are, however, actively
negotiating with other providers of mortgage warehouse lending facilities for
increased limits and more favorable terms.
PART II --OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of June 30, 2000, the Company concluded a private placement offering under
Rule 506 of Regulation D of the Act. In conjunction with that offering, the
Company issued 1,486,702 shares of its common stock, $0.01 par value (the
"Common Stock"), to accredited and non-accredited investors. The offering price
of the Common Stock in the private placement was $1.00 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No
27.1 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 16, 2000 in order to
report a change in the Company's certifying accountants.
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SIGNATURE
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 FINANCIAL, INC.
Date: August 21, 2000 By: /s/ Kenneth F. Urbanus
-------------------------------------------
Kenneth F. Urbanus
(Principal Executive Officer, Principal
Financial Officer and Principal Accounting
Officer)
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
