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
SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO ________
COMMISSION FILE NUMBER: ___________
STARNET FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2168244
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
17000 PRESTON ROAD, SUITE 350
DALLAS, TEXAS 75248
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 972-931-8600
--------------------------------------------------------------------------------
(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 [ ]
The number of shares of Common Stock of the Registrant, par value of $.01 per
share, outstanding at September 30, 2000 was $19,199,578.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
_____ Yes __x__ No
<PAGE>
STARNET FINANCIAL, INC. FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
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...................................................4
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.....................................................................8
<PAGE>
STARNET FINANCIAL, INC. AND SUBSIDIARES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 AND MARCH 31, 2000
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------ --------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 82,053 $ 294,172
Mortgage Loans available for sale, net $ 29,428,885 $ 25,009,087
Property and equipment, net $ 758,980 $ 746,559
Real estate owned $ 1,700,000 $ 91,000
Notes and accounts receivable $ 459,550 $ 351,813
Prepaid expenses $ 19,312 $ 123,893
Goodwill ans other intangibles $ 763,711 $ 1,393,983
Other assets $ 99,866 $ 41,752
------------ ------------
$ 33,312,357 $ 28,052,259
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse and other notes payable $ 29,470,700 $ 24,857,453
Accounts payable and accrued expenses $ 2,215,336 $ 995,277
Funds held on account for others $ 182,008 $ 107,799
------------ ------------
Total Liabilities $ 31,868,044 $ 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; par value $.01 $ 193,088 $ 191,996
Additional paid in capital $ 7,869,475 $ 8,396,822
Subscriptions receivable ($ 2,100,000)
Accumulate deficit ($ 6,618,250) ($ 4,397,088)
------------ ------------
Total shareholders' equity $ 1,444,313 $ 2,091,730
------------ ------------
$ 33,312,357 $ 28,052,259
============ ============
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
STARNET FINANCIAL, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
September 30, September 30,
2000 1999
----------- -----------
GROSS REVENUE $ 4,633,553 $ 958,305
EXPENSES:
Commissions $ 295,629
Salaries & Benefits & Taxes $ 2,788,998 $ 1,193,220
Trevel & Entertainment $ 207,022 $ 56,349
Office occupancy/Rent Expense $ 354,358 $ 208,895
Advertising, Dues and Bus. Promotions $ 131,372 $ 45,386
Loan Processing Expenses $ 368,889 $ 117,796
Consulting and Contracts and Leases $ 361,335 $ 120,533
Legal and Professional Services $ 127,164 $ 20,831
Insurance Expense $ 91,638 $ 19,710
Interest Expense $ 1,269,529 $ 57,960
Depreciation and amortization $ 253,367 $ 52,672
Office Supplies and Utilities $ 60,015
Postage, Delivery & Courier $ 82,169
Telephone & Fax $ 124,104
Taxes and Licenses $ 22,113
Bank Charges $ 1,018
Other Expenses $ 91,513 $ 56,205
----------- -----------
$ 6,630,233 $ 1,949,557
----------- -----------
GROSS INCOME/LOSS BEFORE TAXES ($1,996,680) ($ 991,252)
EQUITY IN EARNINGS OF SUBSIDIARES ($ 224,481)
PROVISIONS FOR TAXES
----------- -----------
NET INCOME (LOSS) ($2,221,161) ($ 991,252)
=========== ===========
See accompanying notes to financial statements.
2
<PAGE>
STARNET FINANCIAL, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
September 31, September 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) ($ 2,221,162) ($ 991,252)
Adjustments to reconcile net loss to net
cash used operating activities:
Depreciation and amortization $ 253,367 $ 52,672
Mortgage Loans Issued ($ 4,419,798) ($12,132,684)
Proceeds from Mortgage Loans Sold $ 11,409,780
Decrease (Increase) in accounts Receivable & Similar
Operating Assets ($ 61,270) $ 265,196
Increase (Decrease) in Accounts Payable & Similar
Operating Liabilities $ 1,294,268 $ 286,596
Net Cash from Operating Activities ($ 5,154,595) ($ 1,109,692)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (Increase) in Property & Equipment ($ 1,874,788) ($ 76,186)
Acquisition of Business, net of Cash Accquired $ 630,272 ($ 444,199)
Net Cash from Investing Activities ($ 1,244,516) ($ 520,385)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances under Warehouse Lines of Credit $ 4,613,247 $ 12,132,684
Repayment of Warehouse Lines of Credit ($11,395,633)
Decrease (Increase) in Organizational Cost ($ 211,424)
Proceeds from Stock issuance $ 1,573,744 $ 2,653,728
Net cash from financing activities $ 6,186,991 $ 3,179,355
Net Change in Cash ($ 212,120) $ 1,549,278
Cash Beginning of Period $ 294,172 $ 146,970
Cash End of Period $ 82,052 $ 1,696,248
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STARNET FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 division (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
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.
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.
4
<PAGE>
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 sales 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
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 relates 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.
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.
5
<PAGE>
During the second quarter of fiscal year 2001, we accepted applications for new
loans as follows:
StarNet - Dallas $ 30,855,393
StarNet - Houston 36,060,209
StarNet - Southeastern 4,721,255
StarNet - Western 177,486,052
------------
$249,122,909
Only a percentage of loan applications will ultimately close. A higher
percentage of conforming loan applications, such as those originated by StatNet
- Dallas and StarNet- Southeastern, 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 season and interest rate
cycles described above.
During the second quarter of fiscal year 2001, we closed and funded loans as
follows:
StarNet - Dallas $ 11,945,865
StarNet - Houston 19,272,813
StarNet - Southeastern 6,288,864
StarNet - Western 53,748,241
------------
$ 91,255,783
Our loan "pipeline," which is the volume of loan applications accepted and in
the process of completing underwriting documentation and/or awaiting closing,
was approximately $142,127,335 at September 30, 2000. The pipeline consists of
approximately $85,200,000 of non-conforming "A" quality loans, $42,600,000 in
sub-prime "B/C" quality loans, $14,200,000 in government-insured loans, and the
balance in various conforming products. The source of the pipeline is broken
down as follows:
StarNet - Dallas $ 58,843,194
StarNet - Houston 44,872,469
StarNet - Southeastern 24,613,113
StarNet - Western 284,154,456
------------
$412,483,232
RESULTS OF OPERATIONS
Quarter ended September 30, 2000 compared to September 30, 1999.
Total revenues increased 451% to $2,532,512 in 2000 from $561,051 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.
6
<PAGE>
Total expenses increased 254% to $3,350,828 in 2000 from $1,317,955 in 1999.
This increase is primarily due to the increase in the number of offices and
employees.
Interest expense increased 357% to $737,049 in 2000 from $20,620 in 1999, due
primarily to higher usage of our warehouse facilities.
Depreciation expenses increased in 2000 to $141,021 from $47,390 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 $818,316 compared to net losses of
$717,305 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 September 30, 2000, we had a cash position of $82,053. During the same
period, we experienced negative cash flows from operations amount to $212,120.
Rising interest rates leading to a decline in loan production place additional
pressures on liquidity as, warehouse interest has increased and profit margins
have decreased.
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 and funds generated from operations along
with a determined commitment to down-sizing of branch and division operations
resulting in decreased personnel costs and overhead expenses will be sufficient
to finance our current and anticipated operations for the remainder of the year.
Our long-term capital requirements beyond this period will depend on numerous
factors, including the following:
* the rate of market acceptance of our products and services;
* the ability to maintain credit lines
* the ability to expand our customer base, and
* the reduction of expenditures for sales and marketing and other
factors.
7
<PAGE>
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
During the quarter, a shareholder contributed land appraised at $1.7 million in
exchange for capital stock at a price of $.43 per share.
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 part 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
There were no reports on Form 8-K filed during the quarter.
SUBSEQUENT EVENTS
On October 23, 2000, the Board of Directors voted to accept the resignation of
Kenneth F. Urbanus as President, Chief Executive Officer, Chief Operating
Officer and Director of StarNet Financial, Inc.
On November 28, the Board of Directors voted to accept the resignation of Daniel
L. Jackson as Chairman of the Board and Director of StarNet Financial, Inc.
SIGNATAURE
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.
Dated: December 29, 2000 By: /s/ Edward P. Dayton
--------------------------------------
Edward P. Dayton
Executive Vice President and Corporate
Secretary
8
