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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended December 31, 2004
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 0-27494
SILVERSTAR HOLDINGS, LTD.
-------------------------
(Exact name of Registrant as Specified in Its Charter)
Bermuda Not Applicable
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Clarendon House, Church Street, Hamilton HM CX, Bermuda
-------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number, Including Area Code: 809-295-1422
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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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes ____No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of February 3, 2005 was
8,703,372
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets at December 31, 2004
(Unaudited) and June 30, 2004
Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended December 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows (Unaudited) for six
months ended December 31, 2004 and 2003
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2004 2004
------------ ------------
(unaudited)
Current Assets:
Cash and cash equivalents, includes restricted cash of
$424,360 and $321,096 respectively (see Note 7) $ 6,166,305 $ 1,235,310
Accounts receivable 2,341 1,068
Inventories 8,814 19,379
Current portion of long-term notes receivable 144,205 138,704
Prepaid expenses and other current assets 33,747 36,717
------------ ------------
Total Current Assets 6,355,412 1,431,178
Property, Plant and Equipment, net 41,537 49,856
Investments in Non-Marketable Securities 843,566 843,566
Long-Term Notes Receivable 3,621,559 7,977,549
Goodwill, net 2,947,824 2,947,824
Intangible Assets, net 11,500 12,500
Deferred Charges and Other Assets 2,985 2,985
------------ ------------
$ 13,824,383 $ 13,265,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 424,360 $ 305,160
Current portion of long-term debt 18,539 24,883
Accounts payable 152,645 226,830
Accrued expenses 298,214 359,022
Deferred revenue
347,458 693,264
Total Current Liabilities 1,241,216 1,609,159
Long-Term Debt 5,811 10,633
Obligation to issue common stock 223,559 223,559
------------ ------------
Total Liabilities 1,470,586 1,843,351
------------ ------------
Commitments, Contingencies and Other Matters - -
Stockholders' Equity:
Capital stock:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
No shares issued and outstanding -
Common stock, Class A, $0.01 par value, 23,000,000 shares authorized; 7,798,924 and
7,798,924 shares issued and outstanding, respectively 77,989 77,989
Common stock, Class B, $0.01 par value; 2,000,000 shares authorized; 896,589 and
896,589 shares issued and outstanding, respectively 8,966 8,966
Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized; 2,671,087
and 2,671,087 shares issued and outstanding, respectively 600 600
Additional paid-in capital 63,923,757 63,904,557
Accumulated deficit (51,657,515) (52,570,005)
------------ ------------
Total Stockholders' Equity 12,353,797 11,422,107
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,824,383 $ 13,265,458
============ ============
See notes to condensed consolidated financial statements.
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31,
---------------------------
2004 2003
----------- -----------
Revenues $ 505,300 $ 588,796
----------- -----------
Operating Expenses:
Cost of sales 285,030 445,231
Selling, general and administrative 358,642 444,937
Amortization of intangibles 500 500
Depreciation 4,283 11,535
----------- -----------
648,455 902,203
Operating Loss (143,155) (313,407)
Other Income 741 42,274
Foreign Currency Gain 769,543 474,055
Interest Income 165,393 152,822
Interest Expense (5,315) (8,664)
----------- -----------
Income from Operations, before Income Taxes 787,207 347,080
Provision for Income Taxes - -
----------- -----------
Net Income $ 787,207 $ 347,080
=========== ===========
Net Income Per Share:
Basic $ 0.09 $ 0.04
=========== ===========
Diluted $ 0.09 $ 0.04
=========== ===========
Weighted Average Common Stock Outstanding:
Basic 8,695,513 8,529,535
=========== ===========
Diluted 9,037,886 8,967,652
=========== ===========
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended December 31,
---------------------------
2004 2003
----------- -----------
Revenues $ 1,115,635 $ 1,475,691
----------- -----------
Operating Expenses:
Cost of sales 565,850 922,766
Selling, general and administrative 645,886 908,933
Amortization of intangibles 1,000 17,250
Depreciation 8,557 23,049
----------- -----------
1,221,293 1,871,998
Operating Loss (105,658) (396,307)
Other Income 165,896 43,511
Foreign Currency Gains 540,330 818,906
Interest Income 322,797 331,204
Interest Expense (10,875) (15,705)
----------- -----------
Income before income taxes 912,490 781,609
Provision for Income Taxes - -
----------- -----------
Income from Continuing Operations 912,490 781,609
Net income $ 912,490 $ 781,609
=========== ===========
Income per share:
Basic $ 0.10 $ 0.09
=========== ===========
Diluted $ 0.10 $ 0.09
=========== ===========
Weighted Average Common Stock Outstanding:
Basic 8,695,513 8,506,002
=========== ===========
Diluted 9,019,116 9,162,128
=========== ===========
See notes to consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended December 31,
---------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net income from operations $ 912,490 $ 781,609
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 9,557 40,299
Warrants issued for services 19,200 -
Increase in allowance for bad debt - 2,500
Foreign currency gains (700,077) (802,642)
Gain on disposal of fixed assets - (278)
Non-cash interest income on notes receivable (306,540) (321,002)
Changes in operating assets and liabilities, net (468,537) (314,759)
Changes in other assets - (1,430)
----------- -----------
Net cash used in operating activities (533,907) (615,703)
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale fixed assets - 600
Decrease in long-term note receivable 5,356,868 158,214
----------- -----------
Net cash provided by investing activities 5,356,868 158,814
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 119,200 229,273
Repayment of long term debt (11,166) (12,575)
Issuance of common stock 302,689
----------- -----------
-----------
Net Cash Provided by Financing Activities 108,034 519,387
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,930,995 62,498
Cash and cash equivalents, beginning of period 1,235,310 1,617,629
----------- -----------
Cash and cash equivalents, end of period $ 6,166,305 $ 1,680,127
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 10,875 $ 15,705
=========== ===========
See notes to condensed consolidated financial statements.
5
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
We are a holding company that seeks to acquire businesses fitting a predefined
investment strategy.
We are the parent company of Fantasy Sports, Inc., which operates the
fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com, and
fantasynhra.com websites and specializes in subscription based NASCAR, college
football and basketball and other fantasy sports games. We are also a
shareholder in Magnolia Broadband Wireless, a startup company that is developing
mobile wireless broadband products.
2. BASIS OF PREPARATION
The unaudited consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which it has a majority voting interest.
Investments in affiliates are accounted for under the equity or cost method of
accounting. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Pursuant to the rules and regulations of the Securities and Exchange Commission
for Form 10-Q, the financial statements, footnote disclosures and other
information normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed. The financial
statements contained in this report are unaudited but, in the opinion of the
Company, reflect all adjustments, consisting of only normal recurring
adjustments necessary to fairly present the financial position as of December
31, 2004 and the results of operations and cash flows for the interim periods of
the fiscal year ending June 30, 2005 ("fiscal 2005") and the fiscal year ended
June 30, 2004 ("fiscal 2004") presented herein. The results of operations for
any interim period are not necessarily indicative of results for the full year.
These financial statements, footnote disclosures and other information should be
read in conjunction with the financial statements and the notes thereto included
in the Company's annual report on Form 10-K for the year ended June 30, 2004.
6
NET INCOME OR LOSS PER SHARE
Basic net income or loss per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding. Diluted net income or
loss per share is computed by dividing net income or loss by the weighted
average number of common shares outstanding and dilutive potential common shares
reflecting the dilutive effect of stock options, warrants, convertible
debentures and shares to be issued in connection with the acquisition of Student
Sports. Dilutive potential common shares, stock options, warrants and
convertible debentures for all periods presented are computed utilizing the
treasury stock method. The dilutive effect of shares to be issued in connection
with the acquisition of Student Sports is computed using the average market
price for the quarter.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), encourages but does not require companies to
record stock-based compensation plans using a fair value based method. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value based method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock.
If the Company used the fair value-based method of accounting to measure
compensation expense for options granted at grant date as prescribed by SFAS No.
123, income (loss) per share from continuing operations would have been reduced
to the proforma amounts indicated below.
Six Months ended December 31,
---------------------------
2004 2003
----------- -----------
Income from continuing operations as reported $ 912,490 $ 781,609
Less: Compensation expense for options
Awards determined by the fair-value -based
Method (68,437) (67,264)
----------- -----------
Proforma net income from continuing
Operations $ 844,053 $ 714,345
=========== ===========
Basic:
As reported $ 0.10 $ 0.09
Pro forma $ 0.10 $ 0.08
Assuming Full dilution :
As reported $ 0.10 $ 0.09
Pro forma $ 0.09 $ 0.08
In July 2004, 180,000 warrants to purchase one share of Class A common stock at
an exercise price of $0.81 per share were granted to a consultant for services
to be rendered. These warrants were valued at $115,210 using a Black-Scholes
pricing model with the following assumptions: expected volatility of 142%; a
risk-free interest rate of 3.19% and an expected life of three years. These
warrants vest ratably over the three-year period of the agreement. An expense
has been recognized for the fair value of these warrants granted to such
non-employees in the amounts of $19,200 for the first six months of fiscal year
2005.
In October 2004, the FASB concluded that Statement 123R, " Share-Based Payment,"
which would require all companies to measure compensation cost for all
share-based payments (including employee stock options) at
7
fair value, would be effective for public companies for interim or annual
periods beginning after June 15, 2005. The proposed standard would require
companies to expense the fair value of all stock options that have future
vesting provisions, are modified, or are newly granted beginning on the grant
date of such options. The Company does not intend to adopt a fair value based
method of accounting for stock based employee compensation until a final
standard is issued by the FASB that requires this accounting.
3. INVESTMENTS
Magnolia Broadband is a development stage company established to develop and
market wireless based chips primarily for the mobile handset market.
The Company initially invested in Magnolia based on the track record of
Magnolia's founder, positive industry feedback together with the results of an
independent study commissioned by the Company to evaluate Magnolia's basic
technological premise and its market applications.
In assessing the fair value of our investment in Magnolia, we monitor its
progress through monthly board meetings and additional formal and informal
communications. Magnolia, since inception, has set technical goals and
timelines, which were invariably met or surpassed. Furthermore, the company
excelled in hiring high level technical staff with advanced degrees and
experience in management of corporations such as Lucent, Qualcom, Bell Labs,
Motorola, and Anadigics. The willingness of highly qualified individuals to
leave established corporations for a start-up opportunity provided validation
for our belief in Magnolia's potential. This promise was further validated by
the significant investments made by leading venture capital funds in April 2002
, July 2003, September 2004, and by Intel Capital in December 2004.
Additionally, Magnolia is making significant progress with potential customers
and distributors, most notably SK Telecom, Sprint PCS and Uniquest.
Based on Magnolia's achievements, some of which are summarized above, the
Company concluded that these positive accomplishments support the variables
considered in developing the valuations for the private placement transactions
which the Company used as a basis for concluding that its investment in Magnolia
was not reflected at a value in excess of fair value on its financial
statements.
4. NOTES RECEIVABLE
In connection with the sale of Lifestyle, which was completed in November 2000,
as well as the earlier sale of two other subsidiaries, the Company received as
partial consideration three notes receivable denominated in South African Rand.
These notes bear interest at rates based on the lower of the South African
Bankers Acceptance rate or 12% (at December 31, 2004 the rate was 7%) and are
subject to foreign currency risk. The largest of these notes is an obligation
from Salwin Investments Pty. Ltd. (Salwin). It has no fixed repayment terms and
if not paid by November 2020, it will be cancelled. After a partial prepayment
of R31.5 million received in December 2004, the note has a remaining face value
of R18 million (approximately $3million).
Salwin's sole asset is a 17.54% share of the total outstanding common stock of
First Lifestyle Holdings. Any dividends or other monies generated from the sale
of these shares are contractually pledged towards repayment of the note.
Furthermore these shares cannot be transferred or otherwise be redeemed until
the earlier of the repayment of the note or November 2020. Salwin has no other
obligations.
8
5. INTANGIBLE ASSETS
The components of amortizable intangible assets as of December 31, 2004 and June
30, 2004 are as follows:
Cost as of Accumulated Amortization
December 31, 2004 December 31, June 30,
and June 30, 2004 2004 2004
----------------- ---- ----
Customer Lists $215,000 $203,500 $202,500
------- -------- --------
$215,000 $203,500 $202,500
======== ======== ========
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually.
Amortization expense for intangible assets for the first six months of fiscal
2005 was $1,000. Estimated amortization expense for the rest of fiscal 2005 and
for the succeeding four fiscal years thereafter is as follows:
2005 1,000
2006 2,000
2007 2,000
2008 2,000
2009 2,000
The balance in goodwill is as follows:
Internet
Fantasy
Sports
Games
----------
Balance at December 31, 2004 and June 30, 2004 $2,947,824
==========
6. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Six Months Ended December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in accounts receivable $ (1,273) $ (20,347)
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in inventories 10,565 136,471
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in prepaid expenses and other current assets 2,970 62,268
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in accounts payable (74,185) 16,535
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in other provisions and accruals (406,614) (509,687)
---------
- ------------------------------------------------------------------------------------------------------------
$(468,537) $(314,759)
========= =========
- ------------------------------------------------------------------------------------------------------------
9
7. BUSINESS SEGMENTS
Through June 2003, the Company had two reportable segments, which included
strategic business units that offered different products and services. These
business units were managed separately as Student Sports which provided
marketing services and Fantasy Sports which provides entertainment services. As
the Company has changed its focus, the Company sold Student Sports in June,
2003, which was reported as discontinued operations in our Annual Report on Form
10K for the year ended June 30, 2003. As a result, from June 30, 2003, the
Company operates in only one segment, consisting of fantasy sports games.
8. DEBT
LINES OF CREDIT
In June 2002, Fantasy Sports obtained a secured line of credit facility for
borrowings up to $1.0 million, which is fully secured by cash balances held in
the Company's account. This facility is due on demand and has a floating
interest rate currently at 4.25%. The balance outstanding under this line of
credit at December 31, 2004, was $424,360.
10
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Background and History
We were founded in September 1995, as a Bermuda corporation to pursue
opportunities in South Africa as an emerging market. At that time, our business
plan was to acquire, own and operate seasoned, closely held companies in South
Africa with annual sales in the range of approximately $5 million to $50
million. In 1999, we shifted our focus to the Internet, technology and
e-commerce sectors, and away from South Africa, by acquiring a majority stake in
Leisureplanet.com, an Internet travel services company. In connection with the
shift in our business plan, we changed our name to Leisureplanet Holdings, Ltd.
In 2000, we disposed of our operations in South Africa, closed Leisureplanet.com
and acquired 100% of Fantasy Sports, Inc. In 2001, we acquired 100% of Student
Sports, Inc, which we sold in 2003. This was the only operating subsidiary in
our marketing services segment. As a result of these changes and developments,
we have reestablished our investment criteria. Currently, our strategy focuses
on:
o Acquiring controlling stakes in small, high quality game related media
and marketing businesses with strong management teams that are
positioned to use technology and Internet related platforms to fuel
above average growth.
o Our investments must show an ability to contribute, in the short to
medium term, to earnings per share through operating profit or capital
appreciation.
o We aim to add value to our investments by operating in partnership
with committed, incentivised, entrepreneurial management who show the
vision and ability to grow their businesses into industry or niche
leaders.
Results of Operations
Fantasy Sports has seasonal trends that affect the revenues and results of its
businesses. Fantasy Sports accrues its revenues and recognizes most of its
income during the quarters ending June 30 and September 30. Therefore, the
results for the quarters ending December 31 and March 31 are negatively affected
by this seasonality.
Quarter ended December 31, 2004 as compared to quarter ended December 31, 2003
REVENUES
Revenues were $505,000 in the second quarter of fiscal 2005, as compared to
$589,000 in the same period in the prior year for a total decrease of $84,000.
Decreases in merchandise and apparel sales accounted for $52,000 of this total
as Fantasy Sports stopped selling merchandise and apparel during the quarter
ending December 31, 2003.
COST OF SALES
Cost of sales were $285,000 in the second quarter of fiscal 2005, as compared to
$445,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prize fulfillment expenses, and the cost of
merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended December 31,
2004 were $359,000 a decrease of approximately $86,000 over the same period in
the prior year. A decrease of $113,000 was the result of continuing
implementation of cost cutting measures primarily to payroll and related costs
at Fantasy Sports offset by a one time increase of $27,000 in administrative and
professional expenses primarily incurred by South African operations.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets was $500 in the second quarter of fiscal 2005
and 2004. Depreciation expense decreased approximately $7,000 in the second
quarter of fiscal 2005, as compared to the prior year.
11
FOREIGN CURRENCY GAINS
Foreign currency gains are related to the assets remaining from the sale of our
discontinued South African operations. The foreign currency gains during the
second quarter of fiscal 2005 were $770,000 as compared to gains of $474,000 in
the second quarter of fiscal 2004. These gains are a result of the fluctuations
of the South African Rand against the US dollar. During the quarter ended
December 31, 2004, the Rand appreciated approximately 12% against the US dollar,
while it appreciated 6% in the corresponding period last year. These foreign
currency gains are non-cash items until converted into US dollars, when any
accumulated gains or losses will be converted into cash. During the quarter
ended December 31, 2004, the Company received approximately R31 million (South
African Rand) as partial payment of notes owed by Salwin Pty, Ltd. As a result
of this prepayment the Company realized a gain on this portion of the South
African Notes receivable. The Company still carries approximately $3.5 million
in notes receivable and cash denominated in South African Rand.
INTEREST INCOME
Interest income of $165,000 was recorded during the second quarter of fiscal
2005, as compared to interest income of $153,000 during the second quarter of
fiscal 2004. The increase in interest income in fiscal 2005 was primarily the
result of a higher comparative rate of appreciation of the South African Rand
against the US dollar. This increase was offset by a lower principal balance on
the notes receivable of the South African operations during fiscal 2005 which
causes interest to be computed on lower balances.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to US income taxes. Up to this date, none
of them has had taxable income. They have incurred losses for tax purposes. The
deferred tax asset generated by the tax losses and temporary differences has
been fully reserved.
NET INCOME
The Company recognized net income of $787,000 during the second quarter of
fiscal 2005, as compared to income of $347,000 during the same period in the
prior year. These gains were primarily due to the increase in foreign currency
gains recognized which was $770,000 in the second quarter of fiscal 2005, as
compared to $474,000 during the same period in the prior fiscal year as well as
improved profitability at Fantasy Sports. This subsidiary earned $100,000 during
the quarter ended December 31, 2004, as compared to losses of $99,000 during the
same period in the prior fiscal year.
12
Six Months Ended December 31, 2004 as Compared to Six Months Ended December 31,
2003
REVENUES
Revenues were $1,116,000 in the first six months of fiscal 2005, as compared to
$1,476,000 in the same period in the prior year. The decrease was primarily the
result of Fantasy Sports decision to stop selling merchandise and apparel during
the quarter ending December 31, 2003.
COST OF SALES
Cost of sales were $566,000 in the first six months of fiscal 2005, as compared
to $923,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prize fulfillment, direct labor costs and the
cost of merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended December
31, 2004 were $646,000, a decrease of approximately $263,000 over same period in
the prior year. The decrease was caused by the continuing implementation of cost
cutting measures primarily to payroll and related costs at the corporate and
operating levels.
AMORTZATION AND DEPRECIATION
Amortization of intangible assets decreased from $17,000 in the first six months
of fiscal 2004, to $1,000 in the same period of the current year as the result
of one of two customer lists becoming fully amortized at September 30, 2003.
Depreciation expense decreased to $9,000 in fiscal 2005, from $23,000 in the
prior year.
OTHER INCOME
Other income for the six months ended December 31, 2004 includes approximately
$164,000 relating to a one-time recovery from a bankruptcy proceeding.
FOREIGN CURRENCY GAINS
Foreign currency gains are related to the assets remaining from the sale of
discontinued South African operations. The foreign currency gains during the
first six months of fiscal 2005 were $540,000 as compared to gains of $819,000
in the first six months of fiscal 2004. These gains are the result of the
fluctuations of the South African Rand against the US dollar. During the six
months ended December 31, 2004, the Rand appreciated approximately 10% against
the US dollar, while it appreciated 11% in the corresponding period last year.
These foreign currency gains are non cash items until converted into US dollars,
when any accumulated gains or losses will be converted into cash. During the six
months ended December 31, 2004, the Company received approximately R31 million
(South African Rand) as partial payment of notes owed by Salwin Pty, Ltd. As a
result of this the Company realized gains on this prepayment amount.
INTEREST INCOME
Interest income of $323,000 was recorded during the first six months of fiscal
2005, as compared to interest income of $331,000 during the same period in
fiscal 2004. The decrease in interest income in fiscal 2005 was primarily the
result of less interest income earned on Notes Receivable from the sale of the
South African operations.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to income taxes. Up to this date, none of
them has had taxable income. They have incurred losses for tax purposes. The
deferred tax asset generated by the tax losses and temporary differences has
been fully reserved.
NET INCOME (LOSS)
The Company recognized net income of $912,000 during the first six months of
fiscal 2005, as compared to income of $782,000 during the same period in the
prior year. These gains were primarily due to improved profitability at Fantasy
Sports. This subsidiary earned $347,000 during the six month period ending
December 31, 2004, as compared to $9,000 during the same period in the prior
fiscal year.
13
Financial Condition, Liquidity and Capital Resources
Cash increased by $4,931,000 from $1,235,000 at June 30, 2004, to $6,166,000 at
December 31, 2004. The increase in cash is a result of the prepayment of
approximately R31 million of the note receivable from Salwin Pty, Ltd., a
$164,000 recovery of bad debt and an increase in the Company's operating income.
Working capital increased $5,292,000 from a deficit of $178,000 at June 30,
2004, to $5,114,000 at December 31, 2004. This increase is primarily the result
of our increased cash balances and the seasonal decrease in deferred revenue.
At December 31, 2004, the Company had borrowings of $449,000 which consisted of
$425,000 of advances against lines of credit secured by like amounts of cash and
$24,000 of equipment and vehicle loans.
In the future, the Company expects to meet its short and long term obligations
in part through cash balances and the collection of amounts due from outstanding
notes receivable. Currently, the Company carries approximately $3.5 million in
notes receivable denominated in South African Rand. The largest of these Notes,
is a Note from Salwin Investments Pty. Ltd. After a partial prepayment of R31.5
million received in December 2004, the Salwin note has a remaining face value of
R18 million (approximately $3 million).
This note is secured by approximately 18% of the shares in First Lifestyle
Holdings, it has no fixed repayment terms and if not paid by November 2020, it
will be cancelled. The Company monitors the financial results of First Lifestyle
Holdings on a quarterly and annual basis. It is the Company's opinion, based on
reviews of audited financial statements, interim management accounts, reviews of
budgets and projections and inquiries of management of First Lifestyle Holdings,
that the 18% shareholding of First Lifestyle Holdings has sufficient value to
justify the carrying value of the Salwin note.
Once note payments are collected in South African Rand, the Company expects to
repatriate those funds to the United States. The Company believes that
repatriation of the full amount is allowable under current South African foreign
currency regulations. Over the last six years, including a substantial
repatriation during the past 90 days, the Company has, from time to time,
repatriated funds from South Africa without restriction. However, there can be
no guarantee that the South African foreign currency regulations will not change
in the future in a manner that might restrict the Company's ability to
repatriate the remaining assets.
Critical Accounting Policies
The following is a discussion of the accounting policies that the Company
believes are critical to its operations:
Revenues
Revenues generated by Fantasy Sports are seasonal from mid-February to the end
of November. Fantasy Sports collects its revenue at the beginning and mid-point
of the season and recognizes this deferred revenue pro rata over the season.
Goodwill
The Company adopted SFAS 142 during fiscal 2002 and no longer amortizes
goodwill. The Company tests goodwill for impairment in the fourth quarter for
Fantasy Sports, Inc. The goodwill impairment test for subsequent acquisitions
will be performed on the one-year anniversary of the acquisition and in that
period thereafter. The Company performs the impairment test in accordance with
SFAS 142 "Goodwill and Other Intangible Assets." SFAS 142 requires that the fair
value of the reporting unit be compared to the carrying value, including
goodwill, as the first step in the impairment test. The Company determines fair
value for Fantasy by developing a ratio of revenue to market capitalization of
utilizing the Company and comparable publicly traded companies in the same
industry and applying this ratio to revenues of the reporting unit.
In determining the value for Fantasy Sports, the Company considered several
valuation methodologies before deciding to utilize the revenue to market
capitalization model. The Company concluded that a market value as a measure of
value would be less speculative and more reliable than estimating future cash
flows for a business that was newly acquired, not currently profitable and in a
state of redesign with respect to its business model.
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The fair value of the business rests with the revenue stream and any potential
buyer would look to that revenue stream to determine value. The Company was not
able to locate any comparable sale/purchase transactions for which information
was publicly available. However, the underlying business, fantasy games accessed
through the internet, is one for which a comparable company that is publicly
traded exists. The Company compared the ratio of revenue to market
capitalization of the two companies and found them to be reasonably comparable.
The Company then selected a ratio that was between the two ratios and used that
ratio as a measure of fair value. That value was significantly above the
carrying value of the reporting unit. The carrying value of Fantasy Sports, Inc.
is quite low, in part due to the recognition over time of operating losses. The
Company determined that the second step of the impairment test was not necessary
due to the results of the first step.
Intangible Assets
Intangible assets include trademarks, customer lists and other intellectual
property and non-competition agreements. Intangible assets, excluding goodwill,
are stated on the basis of cost and are amortized on a straight-line basis over
a period of three to ten years. Intangible assets with indefinite lives are not
amortized but are evaluated for impairment annually unless circumstances dictate
otherwise. Management periodically reviews intangible assets for impairment
based on an assessment of undiscounted future cash flows, which are compared to
the carrying value of the intangible assets. Should these cash flows not equate
to or exceed the carrying value of the intangible, a discounted cash flow model
is used to determine the extent of any impairment charge required.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes. The company does however recognize market risk from interest
rate and foreign currency exchange exposure. Any movements of interest rates as
they relate to outstanding debt would be immaterial to the financial results of
the Company.
Interest rate risk
The Company's cash resources earn interest at variable rates. Accordingly, the
Company's return on these funds is affected by fluctuations in interest rates.
Any decrease in interest rates will have a negative effect on the Company's
earnings. Using the December 31, 2004 balances and rates, it is estimated that a
1/2 of 1% increase in interest rates would increase interest expense by
approximately $2,224. There is no assurance that interest rates will increase or
decrease over the next fiscal year. The Company believes that any movement of
interest rates as they relate to outstanding debt would be immaterial to the
financial results of the Company.
Foreign currency risk
Certain of the Company's cash balances and the remaining proceeds from the sale
of its South African subsidiaries are denominated in South African Rand. This
exposes the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Due to the prohibitive
cost of hedging these proceeds, the exposure has not been covered as yet. Should
more favorable conditions arise, a suitable Rand hedge may be considered by
management. For every 1% fluctuation in the Rand/US Dollar exchange rate, at
quarter-end exchange rates, the Company could realize a gain or suffer a loss of
approximately $1,764 per every 1,000,000 of its assets denominated in South
Africa Rand. Subsequent to the end of the quarter the Company entered into
contracts to convert R 30.57 million to US dollars at a rate of approximately
6.06 to the U.S. Dollar, as a result these funds have been recorded in U.S
Dollars at the contracted conversion rate. The remaining assets denominated in
South African Rand at December 31, 2004 totaled R22.08 million and consist
primarily of notes receivable as detailed below. Since the Company now holds
significantly smaller South African Rand denominated assets, the effect of
currency fluctuations on our future income statements will be proportionately
lower.
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The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during the six months ended
December 31, 2004.
Foreign Currency
Balance Gain for the Six
As of December 31, Months Ended
2004 December 31, 2004
In Rand In US Dollars
----------- -----------
R 701,100 $ 17,157
Cash
Notes Receivable 21,353,391 522,557
Other 25,174 616
----------- -----------
R22,079,665 $ 540,330
=========== ===========
ITEM 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure (1)
that information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and forms, and (2)
that this information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost benefit relationship of possible controls and procedures.
Prior to the filing date of this quarterly report, under the supervision and
review of our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
in alerting them in a timely manner to material information regarding us
(including our consolidated subsidiaries) that is required to be included in our
periodic reports to the SEC.
In addition, there have been no significant changes in our internal controls and
procedures or in other factors that could significantly affect those controls
since our evaluation. We cannot assure you, however, that our system of
disclosure controls and procedures will always achieve its stated goals under
all future conditions, no matter how remote.
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PART II - OTHER INFORMATION
ITEM 6: Exhibits
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 11, 2004.
(2) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on December 21, 2004.
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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 duly authorized.
Date: February 14, 2005
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
------------------------------------------
Clive Kabatznik
Chief Executive Officer, President and Chief Financial Officer
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