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Starnet Communications' Stock Falls as it Reports $4.75 Million in Charges

The earnings report was released Tuesday after the markets closed. Investors reacted negatively today, sending the stock down 32 percent, to close at $4.03 a share.

Meldon Ellis, Starnet's chief executive, said this afternoon that he expected the news to have an impact on the company's stock price. But he said the restructuring that caused some of the charges puts the company in a very good position.

"We believe the short-term pain will result in long-term gain,'' Ellis told RGT Online.

Starnet, based in St. Johns, Antigua, is a major provider of software for Internet casinos. It has restructured and changed its management since its former headquarters in Vancouver, British Columbia, was raided by Canadian authorities in August.

The company said revenue for its third quarter increased 157 percent, to $4.4 million, over the same period of last year. For the nine months, revenue increased 267 percent, to $12.4 million.

Martin Mullally, vice president of strategic planning, said in a statement, "As part of our strategic restructuring program, we have performed an in-depth, comprehensive review of our licensee operations, our internal policies, and our underlying business model."

One of the resulting changes, Mullally said, is that "The company has revised the qualifications necessary to obtain Starnet software and now requires demonstrated Internet marketing experience, as well as sufficient funds to spend on acquiring and retaining customers."

The third-quarter charges are:

--A bad debt provision of $1.4 million, which the company said resulted from 14 licensees that were indirectly affected by the Canadian authorities' investigation into Starnet's operations. Starnet initially recognized this revenue when it entered into contracts with the licensees, but several of them failed to generate sufficient Web site revenues to pay Starnet the royalty and license fees required by their contracts.

--A reduction of $806,000 in royalty revenues due to an overestimate of royalty revenues from a major licensee and an increase of $160,000 in operating expenses due to an understatement of fees payable to the same licensee for periods prior to Nov. 1, 1999. The licensee was not named, but Ellis said it's still an active and important one.

--Legal expenses of $412,000 for the nine months ending Jan. 31, 2000, stemming from corporate restructuring and litigation.

--A provision of $1.5 million to cover the anticipated future legal costs to defend the company against the investigation and various legal actions and to finalize the corporate restructuring.

--An expense of the remaining $473,000 in deferred software development costs. That software is less valuable now due to the planned release of Starnet Systems 2000.

"Although these adjustments impact Starnet's third quarter and nine-month results, it is important to note that our business remains strong," Ellis said. "The adjustments announced today in no way impair our ability to execute our strategic plans going forward. We look forward to continued strong top line revenue growth in fiscal 2001."

Ellis told RGT Online that the investigation of the company by Canadian authorities continues, with no date set for its conclusion. No charges have been filed.

Many changes, including replacing most of Starnet's top management, have been made to facilitate an end to the investigation, Ellis said. At some point, he said, "We hope to be sitting down in discussions with them (the authorities) with a view to resolving the investigation.''

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