UNITED STATES
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 September 30, 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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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 X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of November 15, 2004
was 8,688,372.
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets at September 30, 2004
(Unaudited) and June 30, 2004
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows (Unaudited)
for three months ended September 30, 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
SIGNATURES
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 2004 2004
------------ ------------
Current Assets:
Cash and cash equivalents, includes restricted cash of
$332,193 and $321,096 respectively (see Note 7) $ 1,087,496 $ 1,235,310
Accounts receivable, net 570 1,068
Inventories 12,860 19,379
Current portion of long-term notes receivable 120,642 138,704
Prepaid expenses and other current assets 186,599 36,717
------------ ------------
Total Current Assets 1,408,167 1,431,178
------------ ------------
Property, Plant and Equipment, net 45,509 49,856
Investments in Non-Marketable Securities 843,566 843,566
Long-Term Notes Receivable 7,884,908 7,977,549
Goodwill, net 2,947,824 2,947,824
Intangible Assets, net 12,000 12,500
Deferred Charges and Other Assets 2,985 2,985
------------ ------------
Total Assets $ 13,144,959 $ 13,265,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Lines of credit $ 332,193 $ 305,160
Current portion of long-term debt 20,004 24,883
Accounts payable 212,918 226,830
Accrued expenses 347,550 359,022
Deferred revenue 442,575 693,264
------------ ------------
Total Current Liabilities 1,355,240 1,609,159
Long-Term Debt 9,170 10,633
Obligation to issue common stock 223,559 223,559
------------ ------------
Total Liabilities 1,587,969 1,843,351
------------ ------------
Commitments, Contingencies and Other Matters - -
Stockholders' Equity:
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 63,914,157 63,904,557
Accumulated deficit (52,444,722) (52,570,005)
------------ ------------
Total Stockholders' Equity 11,556,990 11,422,107
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,144,959 $ 13,265,458
============ ============
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
-----------------------------
2004 2003
----------- -----------
Revenues $ 610,335 $ 886,895
Operating expenses:
Cost of sales 280,820 477,535
Selling, general and administrative 287,244 463,996
Amortization of intangible assets 500 16,750
Depreciation 4,274 11,514
----------- -----------
572,838 969,795
----------- -----------
Operating income (loss) 37,497 (82,900)
Other income 165,155 1,237
Foreign currency gains (losses) (229,213) 344,851
Interest income 157,404 178,382
Interest expense (5,560) (7,041)
----------- -----------
Income before income taxes 125,283 434,529
Provision for income taxes -- --
----------- -----------
Net income $ 125,283 $ 434,529
=========== ===========
Income per share
Basic $0.01 $0.05
=========== ===========
Diluted $0.01 $0.05
=========== ===========
Weighted average common stock outstanding:
Basic 8,695,513 8,482,469
=========== ===========
Diluted 8,754,270 9,293,770
=========== ===========
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended September 30,
-----------------------------
2004 2003
----------- -----------
Cash flow from operating activities:
Net income from operations $ 125,283 $ 434,529
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,774 28,104
Warrants issued for services 9,600 -
Foreign currency gains (losses) (82,560) (338,894)
Non-cash interest income on notes receivable 154,803 (172,905)
Changes in operating assets and liabilities (418,938) (284,417)
----------- -----------
Net cash used in operating activities (207,038) (333,583)
Cash flows from investing activities:
Decrease in long-term notes receivable 38,533 98,156
----------- -----------
Net cash provided by investing activities 38,533 98,156
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 27,033 136,545
Repayment of long term debt (6,342) (6,871)
Issuance of Stock - 12,100
----------- -----------
Net cash provided by financing activities 20,691 141,774
----------- -----------
Net decrease in cash and cash equivalents (147,814) (93,653)
Cash and cash equivalents, beginning of period 1,235,310 1,617,629
----------- -----------
Cash and cash equivalents, end of period $ 1,087,496 $ 1,523,976
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 5,560 $ 7,041
=========== ===========
See notes to condensed consolidated financial statements.
4
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 September
30, 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.
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 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
5
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.
Three Months ended September 30,
------------------------
2004 2003
--------- ---------
Income as reported $ 125,283 $ 434,529
Less: Compensation expense for options
Awards determined by the fair-value -based
Method - (2,392)
--------- ---------
Proforma net income $ 125,283 $ 432,137
========= =========
Basic:
As reported $0.01 $0.05
Pro forma $0.01 $0.05
Assuming Full dilution:
As reported $0.01 $0.05
Pro forma $0.01 $0.05
In July 2004, 180,000 warrants to purchase one share of Class A common stock at
$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 $9,600
for the first quarter 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 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. INVESTMENT IN AFFILIATES
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 their
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 and September 2004, and by positive responses from potential
customers, most notably SK Telecom and Sprint PCS.
6
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.
The Company's ongoing monitoring and evaluation described above continues. Over
the next twelve months, among other goals, Magnolia anticipates commercial
production of its first two Chipset products, Furthermore, it plans to have
successfully completed pre-production of commercial design handsets with a
number of handset manufacturers. Commercial relationships with a handset
manufacturers are also anticipated over the next twelve months. The Company will
continue to monitor Magnolias' progress and will evaluate the carrying value of
its investment based upon these milestones being met.
4. INTANGIBLE ASSETS
The components of amortizable intangible assets as of September 30, 2004 and
June30, 2004 are as follows:
Cost as of Accumulated Amortization
September 30, 2004 September 30, June 30,
and June 30, 2004 2004 2004
----------------- -------- ---------
Customer Lists $215,000 $202,500 $ 202,000
-------- -------- --------
$215,000 $202,500 $202,000
======== ======== ========
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 three months of fiscal
2005 was $500. Estimated amortization expense for the rest of fiscal 2005 and
for the succeeding four fiscal years after that is as follows:
2005 2,000
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 September 30, 2004 and June 30, 2004 $2,947,824
==========
7
5. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Three Months Ended September 30,
-------------------------
2004 2003
--------- ---------
(Increase) decrease in accounts receivable $ 498 $ (8,268)
Decrease in inventories 6,519 47,721
Increase (decrease) in prepaid expenses and other current assets (149,882) 21,975
Increase (decrease) in accounts payable (13,912) 49,166
Decrease in other provisions and accruals (262,161) (395,011)
--------- ---------
$(418,938) $(284,417)
========= =========
6. 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 provided marketing
services and Fantasy Sports provides entertainment services. As the company has
changed its focus, the Company sold Student Sports in June, 2003, and reported
it as discontinued operations in our Annual Report as of June 30, 2003 on Form
10K. As a result, as of September 30, 2003, the company operates in only one
segment, consisting of fantasy sports games.
7. 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 against cash balances held
in the Company's account. This facility is due on demand and has an interest
rate of 3.25%. The balance outstanding under this line of credit at September
30, 2004, was $332,193.
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.
8
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 June and September quarters. Therefore, the results for the
December and March quarters are negatively affected by this seasonality.
Quarter ended September 30, 2004 as compared to quarter ended September 30, 2003
Revenues
Revenues were $610,000 in the first quarter of fiscal 2005 as compared to
$887,000 in the same period in the prior year for total decrease of $277,000.
Part of this decrease is the result of the company's decision to close its
unprofitable merchandise and apparel division during the quarter ended December
31, 2003. Sales for this division for the quarter ended September 30, 2003
totaled $125,000. The company also chose for strategic reasons not to offer
three games during the quarter ended September 30, 2004 which were offered
during the quarter ending September 30, 2003. Revenues from these games for the
quarter ended September 30, 2003 totaled $56,000. Due to changes in the Nextel
Cup Schedule the company recognized revenue from twelve Nextel Cup races during
the quarter ended September 30, 2004, while in 2003 revenue was recognized from
thirteen races.
Cost of Sales
Cost of sales were $281,000, or 46.1% in the first quarter fiscal 2005, as
compared to $478,000 or 53.9%, in the same period of the prior year. The
decrease is primarily a result of reduction of merchandise cost of sales and
decreases in payroll expenses related to the operation of our online games.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 30,
2004 were $287,000 a decrease of approximately $177,000 over the same period in
the prior year. Significant reductions in management payroll and benefits
substantially contributed to the overall decrease.
Amortization and Depreciation
Amortization of intangible assets decreased $16,000 in the first fiscal quarter
of fiscal 2005 as a result of one of two customer lists becoming fully amortized
at September 30, 2004. Depreciation expense was approximately $4,000 in the
quarter ended September 30, 2004 a decrease of approximately $7,000 to the
comparative prior period.
Other Income
Other income for the 3 months ended September 30, 2004 includes approximately
$164,000 relating to a one-time recovery from a bankruptcy proceeding.
Foreign Currency Gains and Losses
Foreign currency gains or losses are related to the assets remaining from the
sale of discontinued South African operations. The foreign currency loss during
the first quarter of fiscal 2005 was $229,000 as compared to a $345,000 gain in
the first quarter of fiscal 2004. These gains and losses are a result of the
fluctuations of the South African Rand against the US dollar. During the quarter
ended September 30, 2004, the Rand depreciated approximately 3% against the US
dollar, while it appreciated approximately 5% 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.
Interest Income
Interest income of $157,000 was recorded during the first quarter of fiscal
2005, as compared to interest income of $178,000 during the first quarter of
fiscal 2004. The decrease in interest income in fiscal 2005 was primarily the
result of the depreciation of the South African Rand against the US dollar.
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. Prior to this date,
they have incurred losses for tax purposes. The deferred tax asset generated by
the tax losses and temporary differences has been fully reserved.
9
Net Income (loss)
The Company recognized net income of $125,000 during the first quarter of fiscal
2005 as compared to $435,000 during the corresponding period last year. The
reduction in income over the prior year is primarily the result of fluctuations
in the exchange rate of the South African Rand against the US dollar which
resulted in losses of $229,000 during the first fiscal quarter of 2005 as
compared to gains of $345,000 during the first fiscal quarter of 2004. Operating
income increased $120,000 from a loss of $83,000 for the quarter ended September
30, 2003 to a gain of $37,000 for the quarter ended September 30, 2004. The
improvement in operating income was primarily caused by decreases in cost of
sales and selling, general, and administrative expenses at Fantasy Sports.
Financial Condition, Liquidity and Capital Resources
Cash decreased by $148,000 from $1,235,000 at June 30, 2004 to $1,087,000 at
September 30, 2004. The decrease in cash is a result of the payment of operating
expenses of the company in excess of revenues collected. Remaining cash is being
held for working capital purposes and to fund potential investments.
Working capital increased $231,000 from a deficit of $178,000 at June 30, 2004
to $53,000 at September 30, 2004. This increase is primarily the result of the
seasonal decrease in deferred revenue.
At September 30, 2004, the Company had borrowings of $361,000 which consisted of
$332,000 of advances against lines of credit secured by like amounts of cash and
$29,000 of equipment and vehicle loans.
In the future the Company expects to meet its short and long term obligations in
part through the collection of amounts due from outstanding notes receivable.
Those notes, which are denominated in South African Rand, are to be collected
once certain debt covenants have been satisfied in connection with senior debt
to which repayment has been subordinated. 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, reviews of
the debt covenant compliance calculations, reviews of budgets and inquiries of
management of First Lifestyle Holdings, that First Lifestyle Holdings is
generating sufficient cash flow from operations to meet its senior debt
obligations and be in compliance with the senior debt covenants. The management
of First Lifestyle Holdings estimates that repayments of the amounts due should
begin in Fiscal 2005.
Once the funds 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 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.
In the future the Company intends to add additional operating subsidiaries which
will produce revenues and net profits. The Company may utilize a portion of the
working capital in connection with the acquisition or establishment of those
operations. The Company may also be required to secure additional debt or equity
funding in connection with the funding of those future acquisitions. There is no
assurance that the Company will be able to secure additional indebtedness or
raise additional equity to finance future acquisitions on terms acceptable to
management.
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
10
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 utilizing the Company and comparable publicly traded companies in
the same industry and applying this ratio to revenue 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 which was newly acquired, 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.
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
At September 30, 2004, 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 September 30, 2004 balances
and rates, it is estimated that a 1/2 of 1% increase in interest rates would
increase interest expense by approximately $1,807. 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 $80,500 based on the value of its assets retained in South Africa.
At September 30, 2004, the Company had assets denominated in South African Rand
of 51.96 million.
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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 three months
ended September 30, 2004.
Foreign Currency
Gain/(Loss) for the
Balance Three Months
As of September 30, Ended September 30,
2004 2004
---------- ----------
In Rand In US Dollars
Cash 249,820 $ (1,116)
Notes Receivable 51,683,829 (230,917)
Other 23,507 2,820
---------- ----------
$ (229,213)
==========
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
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.
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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: November 15, 2004
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
-------------------------------
Clive Kabatznik
Chief Executive Officer, President and Chief Financial Officer
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