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 MARCH 31, 2005
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
-------------------------------------------------------------------------
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 April 26, 2005
was 9,068,069.
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005
(Unaudited) and June 30, 2004
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended March 31, 2005 and 2004
Condensed Consolidated Statements of Cash Flows (Unaudited)
for nine months ended March 31, 2005 and 2004
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
SIGNATURES
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2005 2004
------------ ------------
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$0 and $321,096 respectively (see Note 8) $ 5,677,721 $ 1,235,310
Accounts receivable, net - 1,068
Inventories 640 19,379
Current portion of notes receivable 123,594 138,704
Prepaid expenses and other current assets 60,455 36,717
Option contract (see Note: 4) 269,876 -
------------ ------------
Total current assets 6,132,286 1,431,178
Property, plant and equipment, net 37,029 49,856
Investments in non-marketable securities 843,566 843,566
Acquisition expenses - Strategy First 124,307 -
Long-term notes receivable 3,289,993 7,977,549
Goodwill 2,947,824 2,947,824
Intangible assets, net 11,000 12,500
Deferred charges and other assets 2,985 2,985
------------ ------------
Total assets $ 13,388,990 $ 13,265,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ - $ 305,160
Current portion of long term debt 5,897 24,883
Accounts payable 63,872 226,830
Other provisions and accruals 305,469 359,022
Deferred revenue 1,082,265 693,264
------------ ------------
Total current liabilities 1,457,503 1,609,159
Long term debt 6,179 10,633
Obligation Related to Acquisition of Student Sports 223,559 223,559
------------ ------------
Total liabilities $ 1,687,241 $ 1,843,351
------------ ------------
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; 50,000,000
shares authorized; 7,794,624 and 7,798,924 shares
issued and outstanding, respectively 77,946 77,989
Common stock, class B, $0.01 par value; 2,000,000
shares authorized; 896,589 shares issued and 8,966 8,966
outstanding
Common stock, FSAH Class B, R0.001 par value; 10,000,000 shares
authorized; 2,671,087 shares issued and outstanding 600 600
Additional paid-in capital 63,918,601 63,904,557
Accumulated deficit (52,304,364) (52,570,005)
------------ ------------
Total stockholders' equity 11,701,749 11,422,107
------------ ------------
Total liabilities and stockholders' equity $ 13,388,990 $ 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 March 31,
2005 2004
----------- -----------
Revenues $ 249,851 $ 357,545
----------- -----------
Operating expenses:
Cost of sales 172,900 230,533
Selling, general and administrative 513,113 506,050
Amortization of intangible assets 500 500
Depreciation 4,277 8,054
----------- -----------
690,790 745,137
----------- -----------
Operating loss (440,939) (387,592)
Other expense (5,578) (31,280)
Foreign currency gains (losses) (318,702) 365,268
Interest income 124,699 146,824
Interest expense (6,329) (4,625)
----------- -----------
Income(Loss) from operations, before income taxes (646,849) 88,595
Provision for income taxes -- --
----------- -----------
Net Income(Loss) $ (646,849) $ 88,595
=========== ===========
Net income/(loss) per share:
Basic: $ (.07) $ 0.01
=========== ===========
Diluted: $ (.07) $ 0.01
=========== ===========
Weighted average common stock outstanding:
Basic 8,703,081 8,630,513
=========== ===========
Diluted 8,703,081 9,042,236
=========== ===========
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended March 31,
2005 2004
----------- -----------
Revenues $ 1,365,486 $ 1,833,236
----------- -----------
Operating expenses:
Cost of sales 738,750 1,153,299
Selling, general and administrative 1,158,999 1,414,983
Amortization of intangible assets 1,500 17,750
Depreciation 12,834 31,103
----------- -----------
1,912,083 2,617,135
----------- -----------
Operating loss (546,597) (783,899)
Other income 160,318 12,231
Foreign currency gains 221,628 1,184,174
Interest income 447,496 478,028
Interest expense (17,204) (20,330)
----------- -----------
Income from operations, before income taxes 265,641 870,204
Provision for Income Taxes -- --
----------- -----------
Net income $ 265,641 $ 870,204
=========== ===========
Net income per share:
Basic: $ 0.03 $ 0.10
=========== ===========
Diluted $ 0.03 $ 0.10
=========== ===========
Weighted average common stock outstanding:
Basic 8,698,036 8,547,506
=========== ===========
Diluted 9,046,257 9,122,164
=========== ===========
See notes to condensed consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended March 31,
2005 2004
----------- -----------
Cash flow from operating activities:
Net income from operations $ 265,641 $ 870,204
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 14,334 48,853
Foreign currency gains (396,490) (1,158,884)
Warrants issued for services 28,800 -
Loss on disposal of fixed assets 3,796
Non-cash interest income on notes receivable (372,109) (463,144)
Changes in operating assets and liabilities 168,559 99,264
Changes in other assets - 3,145
----------- -----------
Net cash used in continuing operations (291,265) (596,766)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment - (542)
Proceeds from sale of fixed assets - 1,220
Decrease in long-term notes receivable 5,391,639 180,665
Investment in Strategy First (124,307) -
FNB Option Premium (190,257) -
----------- -----------
Net cash provided by investing activities 5,077,075 181,343
----------- -----------
Cash flows from financing activities:
Short term borrowings,(repayments) net (305,160) 31,751
Repayment of long - term debt (23,439) (16,940)
Repurchase of treasury shares (21,450) --
Issuance of common stock 6,650 302,689
----------- -----------
Net cash provided by (used in) financing activities (343,399) 317,500
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,442,411 (97,923)
Cash and cash equivalents, beginning of period 1,235,310 1,617,629
----------- -----------
Cash and cash equivalents, end of period $ 5,677,721 $ 1,519,706
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 17,204 $ 20,330
=========== ===========
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 which 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 March 31,
2005 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.
Certain amounts in the fiscal 2004 financial statements have been reclassified
to conform to the fiscal 2005 presentation.
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 obligation related to the acquisition of Student Sports is computed
using the average market price for the quarter.
6
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 pro forma amounts indicated below.
Three Months ended March 31, Nine Months ended March 31,
2005 2004 2005 2004
----------- ---------- ----------- -----------
Income (Loss) from continuing operations as reported $ (646,849) $ 88,595 $ 265,641 $ 870,204
Less: Total stock based employee compensation
expense determined by the fair-value based
method (14,113) 0 (82,550) (67,264)
----------- ---------- ----------- -----------
Pro forma net income from continuing
Operations
$ (660,962) 88,595 $ 183,091 802,940
=========== ========== =========== ===========
Basic:
As reported $(0.07) $0.01 $0.03 $0.10
Pro forma (0.08) 0.01 0.02 0.09
Assuming Full dilution :
As reported (0.07) 0.01 0.03 0.10
Pro forma (0.08) 0.01 0.02 0.09
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 $28,800 for the first nine months of fiscal year
2005.
During the nine months ended March 31, 2005 90,000 options to purchase one share
of Class A common stock were awarded to Board Members. 75,000 options at $1.06
per share were awarded in December of 2004 and 15,000 options at $1.10 per share
were awarded in March 2005. The options expire if not exercised within 5 years
of issuance.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board (`PB') Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock option on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to July 1,
2005, will be required to be recognized by the Company.
7
The Exposure Draft would require all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. FASB expects that a final standard would
be effective for public companies for fiscal years beginning after December 15,
2004. 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, Quallcom, 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 March 31, 2005 the rate was 7.5%) and were
subject to foreign currency risk during the quarter ended March 31, 2005.
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
$3 million).
8
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.
On March 9, 2005, the Company acquired a twelve-month Rand put/US dollar call
option, at a strike price of R6.25 to the US dollar. During its term, this
option serves as a hedge against the depreciation of the SA Rand versus the US
dollar. The cost of the option was approximately $200,000 and its price was
marked to market at the close of business on March 31, 2005. The Company will
continue to record the market value of this option as of the end of its
subsequent reporting periods.
- ------------------------------ -------------------------------- --------------------------------- --------------------------------
Option Contract Cost at 03-09-05 Fair Value at 03-31-05 Unrealized Gain
- ------------------------------ -------------------------------- --------------------------------- --------------------------------
South African Rand R 1,200,500 R 1,702,891 R 502,391
- ------------------------------ -------------------------------- --------------------------------- --------------------------------
US Dollars $ 190,257 $269,876 $79,619
- ------------------------------ -------------------------------- --------------------------------- --------------------------------
5. INTANGIBLE ASSETS
The components of amortizable intangible assets as of March 31, 2005 and June
30, 2004 are as follows:
Cost as of Accumulated Amortization
March 31, 2005 March 31, June 30,
and June 30, 2004 2005 2004
----------------- -------- ---------
Customer Lists $ 215,000 $ 204,000 $ 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 nine months of fiscal
2005 was $1,500. Estimated amortization expense for the rest of fiscal 2005 and
for the succeeding four fiscal years after that is as follows:
2005 500
2006 2,000
2007 2,000
2008 2,000
2009 2,000
Thereafter 2,500
9
6. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Nine Months Ended March 31,
2005 2004
--------- ---------
Decrease in accounts receivable $ 1,068 $ 8,028
Decrease in inventories 18,739 140,379
(Increase) Decrease in prepaid expenses (23,738) 65,341
and other current assets
Decrease in accounts payable (162,958) (264,410)
Decrease in other provisions and accruals 335,448 149,926
--------- ---------
$ 168,559 $ 99,264
========= =========
7. BUSINESS SEGMENTS
As of March 31, 2005, the Company, through its wholly owned subsidiary, Fantasy
Sports, Inc., operated in one segment - online, fee-based fantasy sports games.
8. SUBSEQUENT EVENTS
On April 21, 2005, the Company acquired all the outstanding shares of Strategy
First, Inc., a developer and worldwide publisher of entertainment software for
the PC, a Canadian company.
The acquisition was made through a plan of arrangement in the Montreal Superior
Court, under the terms of the approved plan of arrangement; the Company
distributed approximately $600,000 in cash, as well as approximately 365,000
shares of Common Stock and 200,000 three year warrants to acquire Common Stock
at $2.50 per share to Strategy First's creditors.
The plan of arrangement calls for further contingent consideration, based on
Strategy First's future performance of up to a maximum of approximately $160,000
in cash and $500,000 in the Company's Common Stock.
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, fee-based,
electronic game related 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, incentivized, entrepreneurial management who show
the vision and ability to grow their businesses into industry or
niche leaders.
11
Results of Operations
Fantasy Sports has seasonal trends that affect the revenues and results of its
businesses. Fantasy Sports defers its revenues and recognizes most of its income
during the quarters ending June 30 and September 30. Additionally, Fantasy
incurs most of its advertising expenses during the quarter ending March 31.
Therefore, the operating results for the quarters ending December 31 and more
particularly, March 31 are negatively affected by this seasonality.
QUARTER ENDED MARCH 31, 2005 AS COMPARED TO QUARTER ENDED MARCH 31, 2004
REVENUES
Revenues were $250,000 in the third quarter of fiscal 2005 as compared to
$358,000, in the same period in the prior year. Revenues from operations of
online games decreased primarily as a result of fewer races being held in 2005
versus the comparable period in 2004 thereby shifting the timing for the
recognition of revenues.
COST OF SALES
Cost of sales were $173,000 in the third quarter of fiscal 2005, as compared to
$231,000 in the same period of the prior year. The decrease is a result of a
total lower cost of prizes awarded, and fulfillment expenses, primarily due to
fewer races in the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended March 31,
2005 were $513,000 an increase of approximately $7,000 over same period in the
prior year.
AMORTZATION AND DEPRECIATION
Amortization of intangible assets was $500 in the third quarter of fiscal 2005
and 2004. Depreciation expense decreased approximately $4,000 in fiscal 2005 as
compared to the prior year.
FOREIGN CURRENCY GAINS (LOSSES)
Foreign currency gains (losses) are related to the assets remaining from the
sale of our discontinued South African operations. The foreign currency losses
during the third quarter of fiscal 2005 were ($319,000) as compared to gains of
$365,000 in the third quarter of fiscal 2004. These gains (losses) are a result
of the fluctuations of the South African Rand against the US dollar. During the
quarter ended March 31, 2005, the Rand depreciated approximately 11 % against
the US dollar, while it appreciated 5% in the corresponding period last year. In
2005, the increase in the market value of Rand put/US dollar call option
partially offset the foreign currency losses. These foreign currency gains
(losses) are non-cash items until converted into US dollars, when any
accumulated gains or losses will be converted into cash.
INTEREST INCOME
Interest income of $125,000 was recorded during the third quarter of fiscal
2005, as compared to interest income of $147,000 during the third quarter of
fiscal 2004. The decrease in interest income in fiscal 2005 was primarily the
result of the lower principal balances on the notes receivable 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 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 (LOSS)
The Company recognized net losses of $647,000, during the third quarter of
fiscal 2005 as compared to income of $89,000 during the same period in the prior
year for an overall decrease in net income of $736,000. Increases in foreign
currency losses were $684,000 and accounted for the majority of the decrease in
net income from the prior year.
12
NINE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
REVENUES
Revenues were $1,365,000 in the first nine months of fiscal 2005 as compared to
$1,833,000 in the same period in the prior year. The decrease is the result of
Fantasy Sport's decision to stop selling merchandise and apparel during the
quarter ended December 31, 2003, the focus on operating profitable games in
2005, the result of fewer races held in 2005 thereby shifting the timing for the
recognition of revenues, as well as a decrease in the number of subscribers.
COST OF SALES
Cost of sales were $739,000 in the first nine months of fiscal 2005 as compared
to $1,153,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prizes awarded, fulfillment expenses , direct
labor costs and the cost of merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended March 31,
2005 were $1,159,000, a decrease of approximately $256,000 over same period in
the prior year. The decrease was caused by the continuing implementation of cost
cutting measures primarily in payroll and related costs at Fantasy Sports.
AMORTZATION AND DEPRECIATION
Amortization of intangible assets decreased from $18,000 in the first nine
months of fiscal 2004 to $2,000 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 $13,000 in fiscal 2005 from $31,000 in
the prior year.
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 nine months of fiscal 2005 were $222,000 as compared to gains of
$1,184,000 in the first nine months of fiscal 2004. These gains are the result
of the fluctuations of the South African Rand against the US dollar. During the
nine months ended March 31, 2005, the Rand depreciated approximately 1% against
the US dollar, while it appreciated 15% in the corresponding period last year.
In 2005, the increase in the market value of Rand put/US dollar call option
partially offset the foreign currency losses. 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 nine months ended March 31, 2005,
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 when it was converted into US dollars.
INTEREST INCOME
Interest income of $447,000 was recorded during the first nine months of fiscal
2005, as compared to interest income of $478,000 during the same period in
fiscal 2004. The decrease in interest income in fiscal 2005 was primarily the
result of the lower principal balances on the notes receivable 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 $266,000 during the first nine months of
fiscal 2005 as compared to net income of $870,000 during the same period in the
prior year for an overall decrease in net income of $604,000. Operating losses
decreased $237,000 from ($784,000) in 2004 to ($547,000) in 2005, however the
decrease in foreign currency gains of 962,000 for the nine months ended March 31
,2005 as compared to the nine month period ending March 31, 2004 more than
offset the improvements in operations.
13
Financial Condition, Liquidity and Capital Resources
Cash increased by $4,443,000 from $1,235,000 at June 30, 2004, to $5,678,000 at
March 31, 2005. 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.
Working capital increased $4,853,000 from a deficit of $178,000 at June 30,
2004, to $4,675,000 at March 31, 2005. This increase is primarily the result of
our increased cash balances and the payoff of our line of credit.
The Company believes it has sufficient cash balances and outstanding notes
receivable to meet its anticipated short and long-term obligations.
Currently, the Company carries approximately $3.4 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 remaining Salwin note has a 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 the majority of its revenue at the
beginning and mid-point of the season and recognizes this deferred revenue pro
rata over the related season.
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
14
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 is not currently profitable and in a state of redesign
with respect to its business model.
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.
15
Item 3. 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 March 31, 2005 balances and rates, it is estimated that a
1/2 of 1% increase in interest rates would increase interest expense by
approximately $60. 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
has exposed the Company to market risk with respect to fluctuations in the
relative value of the South African Rand against the US Dollar.
On March 9, 2005, the Company acquired a twelve-month Rand put/US dollar call
option, at a strike price of R6.25 to the US dollar. During its term, this
option serves as a partial protection against the depreciation of the SA Rand
versus the US dollar. The cost of the option was approximately $200,000 and its
price was marked to market at the close of business on March 31, 2005. The
Company will continue to adjust the market value of this option as of the end of
subsequent reporting periods.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during the nine months
ended March 31, 2005:
Net Foreign Currency
Gain (Loss) for the Nine
Balance As of Months Ended
March 31, 2005 March 31, 2005
In Rand In US Dollars
------------------ ------------------
Cash R 9,623,381 $ (202,191)
Notes Receivable R 21,539,394 $ 345,720
Other R 1,730,374 $ 78,099
------------------ ------------------
R 32,893,149 $ 221,628
================== ==================
16
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/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/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/Chief Financial Officer
has 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.
17
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K filed on January 24, 2005.
2. Current Report on Form 8-K filed on February 4, 2005.
3. Current Report on Form 8-K filed on February 23, 2005.
4. Current Report on Form 8-K filed on March 2, 2005.
5. Current Report on Form 8-K filed on April 26, 2005.
18
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: May 16, 2005
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
---------------------------------------------
Clive Kabatznik
Chief Executive Officer, President and
Chief Financial Officer
19