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, 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
--- ---
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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of common stock outstanding as of February 3, 2006 was
9,091,533
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets at December 31, 2005 (Unaudited)
and June 30, 2005
Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended December 31, 2005 and 2004
Condensed Consolidated Statements of Cash Flows (Unaudited) for six
months ended December 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 and Reports on Form 8-K
SIGNATURES
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
ASSETS 2005 2005
------- ------------ ------------
Current Assets:
Cash and cash equivalents, includes restricted cash of
$973,465 and $67,189 respectively (see note 4) $ 7,626,857 $ 4,870,486
Cash deposits held in escrow 1,184,450 -
Accounts receivable, net 793,588 95,130
Inventory 76,278 534
Current portion of long-term notes receivable 147,350 118,272
Prepaid expenses and other current assets 410,561 182,687
Option Contract 109,253 359,171
------------ ------------
Total current assets 10,348,337 5,626,280
------------ ------------
Property, Plant and Equipment, net 101,674 114,628
Investments in Non-Marketable Securities 843,566 843,566
Long-Term Notes Receivable 3,354,168 3,135,763
Goodwill, net 3,756,415 3,715,153
Intangible Assets, net 1,236,868 1,241,701
Deferred Charges and Other Assets 605,013 23,374
------------ ------------
Total assets $ 20,246,041 $ 14,700,465
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank overdraft $ 65,865 -
Line of credit 973,465 $ 67,189
Current portion of long-term debt 234,173 220,845
Current portion of convertible secured debenture 925,925
Accounts payable 490,536 395,383
Accrued expenses 1,046,773 675,681
Deferred revenue 143,237 629,248
------------ ------------
Total current liabilities 3,879,974 1,988,346
------------ ------------
Long-Term Debt 41,532 150,047
Convertible Secured Debenture 3,353,010 -
Obligation to Issue Common Stock 273,554 273,554
------------ ------------
Total liabilities 7,548,070 2,411,947
------------ ------------
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, 50,000,000 shares authorized; 8,263,324 and
8,233,324 shares issued and outstanding, respectively 82,633 82,333
Common stock, Class B, $0.01 par value; 2,000,000 shares authorized; 835,260
shares issued and outstanding 8,353 8,353
Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized;
2,671,087 shares issued and outstanding 600 600
Additional paid-in capital 65,448,928 64,602,803
Accumulated deficit (52,914,428) (52,411,167)
Accumulated comprehensive income 71,885 5,596
------------ ------------
Total stockholders' equity 12,697,971 12,288,518
------------ ------------
Total liabilities and stockholders' equity $ 20,246,041 $ 14,700,465
============ ============
See notes to condensed consolidated financial statements.
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Revenues $ 1,536,814 $ 505,300
----------- -----------
Operating Expenses:
Cost of sales 815,927 285,030
Selling, general and administrative 815,541 358,642
Amortization of intangibles 35,284 500
Depreciation 9,648 4,283
----------- -----------
1,676,400 648,455
Operating Loss (139,586) (143,155)
Other Income 17,514 741
Foreign Currency Gain (Loss) (15,697) 769,543
Acquisition Costs Incurred (209,342) -
Amortization of Convertible Debt Discounts and Issuance Costs (123,169) -
Interest Expense (89,862) (5,315)
Interest Income 105,179 165,393
----------- -----------
Income (Loss) before Income Taxes (454,963) 787,207
Provision for Income Taxes - -
----------- -----------
Net Income (Loss) $ (454,963) $ 787,207
=========== ===========
Net Income (Loss) Per Share:
Basic $ (0.05) $ 0.09
=========== ===========
Diluted $ (0.05) $ 0.09
=========== ===========
Weighted Average Common Stock Outstanding:
Basic 9,076,518 8,695,513
=========== ===========
Diluted 9,076,518 9,037,886
=========== ===========
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Revenues $ 2,503,251 $ 1,115,635
----------- -----------
Operating Expenses:
Cost of sales 1,255,812 565,850
Selling, general and administrative 1,479,237 645,886
Amortization of intangibles 69,702 1,000
Depreciation 19,083 8,557
----------- -----------
2,823,834 1,221,293
Operating Loss (320,583) (105,658)
Other Income 41,426 165,896
Foreign Currency Gains 17,540 540,330
Acquisition Costs Incurred (209,342) -
Amortization of Convertible Debt Discounts and Issuance Costs (123,169) -
Interest Expense (98,426) (10,875)
Interest Income 189,293 332,797
----------- -----------
Income (Loss) Before Income Taxes (503,261) 912,490
----------- -----------
Provision for Income Taxes - -
----------- -----------
Income (Loss) from Operations (503,261) 912,490
Net Income (Loss) $ (503,261) $ 912,490
=========== ===========
Income (Loss) Per Share:
Basic $ (0.06) $ 0.10
=========== ===========
Diluted $ (0.06) $ 0.10
=========== ===========
Weighted Average Common Stock Outstanding:
Basic 9,072,551 8,695,513
=========== ===========
Diluted 9,072,551 9,019,116
=========== ===========
See notes to consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) from operations $ (503,261) $ 912,490
Depreciation and amortization 211,953 9,557
Stock-based compensation 34,188 -
Warrants issued for services - 19,200
Unrealized foreign currency gains (71,657) (700,077)
Accrued interest income on notes receivable (120,031) (306,540)
Changes in operating assets and liabilities, net (998,245) (468,537)
----------- -----------
Net cash used in operating activities (1,447,053) (533,907)
----------- -----------
Cash Flows from Investing Activities:
Acquisition expenses capitalized (3,322) -
Purchase of fixed assets (1,896) -
Proceeds from repayment of long-term note receivable 48,164 5,356,868
----------- -----------
Net cash provided by investing activities 42,946 5,356,868
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 906,276 119,200
Increase in deposits held in escrow (1,184,450)
Increase in bank overdraft 65,865 -
Net proceeds from convertible debenture 4,373,301 -
Repayment of long term debt (89,303) (11,166)
Issuance of common stock 22,500 -
----------- -----------
Net cash provided by financing activities 4,094,189 108,034
----------- -----------
Effect of exchange rates on cash 66,289 -
Net increase in cash and cash equivalents 2,765,371 4,930,995
Cash and cash equivalents, beginning of period 4,870,486 1,235,310
----------- -----------
Cash and cash equivalents, end of period $ 7,626,857 $ 6,166,305
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 54,445 $ 10,875
=========== ===========
See notes to condensed consolidated financial statements.
5
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 website, and specializes in subscription based
NASCAR, college football and basketball and other fantasy sports games and
Strategy First Inc., a leading developer and worldwide publisher of
entertainment software for the Personal Computer (PC). We are also a minority
shareholder in Magnolia Broadband Wireless, a development stage company which is
developing mobile wireless broadband products.
NOTE 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, 2005 and the results of operations and cash flows for the interim periods of
the fiscal year ending June 30, 2006 ("fiscal 2006") and the fiscal year ended
June 30, 2005 ("fiscal 2005") 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, 2005.
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
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". This standard replaced SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The standard requires companies to
expense the fair value of stock options on the grant date and is effective for
annual periods beginning after June 15, 2005. In accordance with the revised
statement, the Company will recognize the expenses
6
attributable to stock options granted or vested subsequent to July 1, 2005,
during the fiscal year ending June 30, 2006. The Company recognized expense of
$17,094 and $34,188 for the three and six month periods ended December 31, 2005,
respectively, for employee stock options that vest during fiscal 2006.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
encouraged but did not require companies to record stock-based compensation
plans using a fair value based method. The Company chose to account for
stock-based compensation using the intrinsic value based method prescribed in
APB Opinion No. 25, "Accounting for Stock Issued to Employees" for accounting
periods ending before July 1, 2005. Accordingly, compensation cost for stock
options was 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 for the three and six month periods ended December 31,
2004, respectively.
If the Company used the fair value-based method of accounting to measure
compensation expense for options granted at the date they were granted as
prescribed by SFAS No. 123, loss per share from continuing operations for the
three and six month periods ended December 31, 2004 would have changed, as
indicated by the pro forma amounts set forth in the table below.
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2004 2004
----------- -----------
Income from continuing operations as reported $ 787,207 $ 912,490
Less: Compensation expense for options
Awards determined by the fair-value-based
Method (68,437) (68,437)
----------- -----------
Proforma net income from continuing
Operations $ 718,770 $ 844,053
=========== ===========
Basic:
As reported $ 0.09 $ 0.10
Pro forma $ 0.08 $ 0.10
Assuming Full dilution:
As reported $ 0.09 $ 0.10
Pro forma $ 0.08 $ 0.09
In July 2004, warrant to purchase 180,000 shares of our 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-employee in the amounts of $19,200 for the first six months of fiscal year
2005. Effective May 1, 2005 the consultant was appointed to the Board at
Strategy First and the remainder of his options valued at $83,210 vested
immediately. These options were included in compensation expense deducted from
income from continuing operations as prescribed by Accounting Principles Board
Opinion #25.
7
NOTE 3. ACQUISITIONS
On April 21, 2005, the Company acquired Strategy First Inc.
(www.strategyfirst.com), a leading developer and worldwide publisher of
entertainment software for the PC. We acquired the company through the
jurisdiction of the Montreal bankruptcy court. As per the approved plan of
arrangement, the Company paid consideration to creditors of approximately
$609,000 in cash; the Company issued approximately 377,000 shares of Common
Stock and warrants to purchase 200,000 shares of Common Stock; the Company
assumed approximately $400,000 in existing bank debt, as well as contingent
consideration based on the future profitability of Strategy First.
The purchase price was allocated on the basis of the estimated fair values of
the assets acquired and liabilities assumed. The acquisition was accounted for
as a purchase. The intangible assets identified in connection with the
acquisition were recorded (and amortized where applicable) in accordance with
the provisions of SFAS No. 142.
Acquisition cost $1,370,574
==========
Net assets acquired:
Current assets $ 297,244
Fixed assets 82,664
Goodwill 764,089
Intangible assets 1,245,157
----------
Total assets 2,389,154
Current liabilities 624,183
Long-term debt 394,397
----------
Total liabilities 1,018,580
----------
$1,370,574
==========
NOTE 4. CASH, CASH EQUIVALENTS AND ESCROW DEPOSIT
Cash and cash equivalents consist of cash and all highly liquid investments with
original maturities of three months or less. The vast majority our cash balances
are held in liquid accounts at two highly rated financial institutions. While
these deposits are not insured, the quality of such financial institutions is
such that the risks of loss on these funds are minimal. Restricted cash balances
at December 31, 2005 totaled $973,465, which is used as collateral on the
Company's line of credit.
The Company has classified $1,184,450 (one million Euro) as an escrow deposit.
This amount has been deposited with the Commercial Court in Vienna, in order to
secure a claim for fulfillment of an investment agreement. The Company has
subsequently applied for repayment of this deposit. The claim for fulfillment
was structured so as to ensure the maximum likelihood of full repayment of the
deposit should we so request. We therefore anticipate that substantially all of
this deposit will be refunded during the current quarter. However, should the
repayment request be opposed by the defending party, we may require further
legal proceedings to redeem this deposit. In this event, there can be no
assurance as to the final amount, if any, that we will recover from such
deposit. To date there has been no filing to prevent full repayment of this
deposit.
8
NOTE 5. INTANGIBLE ASSETS
The components of amortizable intangible assets as of December 31, 2005 and
June 30, 2005 are as follows:
Balance at December 31, 2005 GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION TOTAL
---------- ---------- ----------
Customer lists $ 215,000 ($ 205,500) $ 9,500
Game titles 1,286,450 (85,786) 1,200,664
Covenant not to compete 34,305 (7,601) 26,704
---------- ---------- ----------
Balance at December 31, 2005 $1,535,755 ($ 298,887) $1,236,868
========== ========== ==========
Balance at June 30, 2005 GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION TOTAL
---------- ---------- ----------
Customer lists $ 215,000 ($ 204,500) $ 10,500
Game titles 1,220,802 (20,347) 1,200,455
Covenant not to compete 32,555 (1,809) 30,746
---------- ---------- ----------
Balance at June 30, 2005 $1,468,357 ($ 226,656) $1,241,701
========== ========== =========
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 three and six month periods
ended December 31, 2005 were $35,284 and $69,702, respectively. Estimated
amortization expense for the rest of fiscal 2006 and for the succeeding four
fiscal years is as follows:
2006 71,041
2007 142,080
2008 140,196
2009 130,645
2010 130,645
Thereafter 622,261
-------
$ 1,236,868
============
9
The balance in goodwill is as follows:
INTERNET FANTASY ENTERTAINMENT
SPORTS GAMES SOFTWARE TOTAL
---------- ---------- ----------
Balance at December 31, 2005 $2,947,824 $ 808,591 $3,756,415
========== ========== ==========
Balance at June 30, 2005 $2,947,824 $ 767,329 $3,715,153
========== ========== ==========
NOTE 6. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
SIX MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Increase in accounts receivable $ (654,680) $ (1,273)
(Increase) decrease in inventories (72,249) 10,565
Increase (decrease) in prepaid expenses and other current assets (221,750) 2,970
Increase (decrease) in accounts payable 88,562 (74,185)
Decrease in other provisions and accruals (138,128) (406,614)
----------- -----------
$ (998,245) $ (468,537)
=========== ===========
NOTE 7. BUSINESS SEGMENTS
As a result of the acquisition of Strategy First on April 21, 2005, the Company
now operates in two segments - entertainment software and internet fantasy
sports games. The operations of the entertainment software specialize in the
publishing of software games for the PC platform. The operations of the Internet
fantasy sports games segment specialize in Internet-based subscriptions for
NASCAR, college football and basketball and other fantasy sports games.
Management has chosen to organize the enterprise around differences in the
products and services it provides.
Information concerning identifiable assets as of December 31, 2005 and June 30,
2005 for the segments in which the Company operated are shown in the following
table. Corporate assets are principally cash and notes receivable.
10
AS OF AS OF
DECEMBER 31, 2005 JUNE 30, 2005
----------- -----------
Identifiable Assets:
Segments:
Entertainment software $ 3,321,875 $ 2,345,845
Internet fantasy sports games 3,247,336 3,195,566
----------- -----------
6,569,211 5,541,411
Corporate 13,676,830 9,159,054
----------- -----------
Consolidated Totals $20,246,041 $14,700,465
=========== ===========
Information concerning the results of operations for three and six months ended
December 31, 2005 and 2004 for the segments in which the company operates are as
follows:
THREE MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Segments:
Entertainment software $ 983,434 $ -
Internet Fantasy Sports games 553,380 505,300
----------- -----------
Consolidated Totals $ 1,536,814 $ 505,300
=========== ===========
Income (loss) from operations:
Segments:
Entertainment software $ (9,259) $ -
Internet Fantasy Sports games 121,508 104,858
----------- -----------
112,249 104,858
Corporate:
Corporate general and administrative expenses (251,835) (248,013)
Other income 17,514 741
Foreign currency gain (loss) (15,697) 769,543
Acquisition costs incurred (209,342) -
Amortization of convertible debt discounts
and issuance costs (123,169)
Interest expense (89,862) (5,315)
Interest income 105,579 165,393
----------- -----------
Consolidated Totals $ (454,963) $ 787,207
=========== ===========
11
SIX MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Segments:
Entertainment software $ 1,354,143 $ -
Internet Fantasy Sports games 1,149,108 1,115,635
----------- -----------
Consolidated Totals $ 2,503,251 $ 1,115,635
=========== ===========
Income (loss) from operations:
Segments:
Entertainment software $ (200,235) $ -
Internet Fantasy Sports games 361,125 354,502
----------- -----------
160,890 354,502
Corporate:
Corporate general and administrative expenses (481,473) (460,160)
Other income 41,426 165,896
Foreign currency gain 17,540 540,330
Acquisition costs incurred (209,342) -
Amortization of convertible debt discounts
and issuance costs (123,169) -
Interest expense (98,426) -
Interest income 189,293 332,797
----------- -----------
Consolidated Totals $ (503,261) $ 912,490
=========== ===========
NOTE 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 that is based on the prime rate minus 1.75%. On December 31, 2005,
this rate was at 5.75%. The balance outstanding under this line of credit at
December 31, 2005, was $973,465.
LONG TERM DEBT
DECEMBER 31, JUNE 30,
2005 2005
--------- ---------
Vehicle and equipment loans $ 9,281 $ 10,633
Term loan 266,424 360,259
--------- ---------
275,705 370,892
Less current portion (234,173) (220,845)
--------- ---------
Long-term debt, net $ 41,532 $ 150,047
========= =========
12
Scheduled debt maturities as of December 31, 2005 are as follows:
1 Year or less: $234,173
1-2 Years 41,532
--------
Total $275,705
========
NOTE 9. CONVERTIBLE SECURED DEBENTURE
On October 31, 2005, the Company consummated a transaction pursuant to a
Securities Purchase Agreement, dated October 21, 2005 (the "Purchase
Agreement"), with DKR SoundShore Oasis Holding Fund Ltd. (the "Purchaser").
Pursuant to the Purchase Agreement, the Company issued to the Purchaser a
$5,000,000 principal amount Variable Rate Secured Convertible Debenture due
October 31, 2008 (the "Debenture") and a warrant to purchase 791,139 shares of
the Company's Common Stock at an exercise price of $1.896 per share (the
"Warrant").
Interest accrues on the principal balance of the note at an annual interest rate
equal to prime plus 1.5%. On December 31, 2005 the interest rate was 8.75%. The
note is convertible into common stock of the Company at an initial conversion
rate of $1.738 per share up to a maximum of 2,876,860 shares. The agreement
allows for an additional 1,100,403 shares to be issued upon the conversion of
the debentures or exercise of the warrants as a result of either conversion
price adjustments or exercise price adjustments. Based upon the closing price
per share of the Company's Common Stock on the date of issuance, there was an
intrinsic value associated with the beneficial conversion feature of $124,443,
which is presented as a discount on the convertible note and amortized over the
term of the note.
The principal amount of the Debenture is to be redeemed at the rate of $185,185
per month, plus accrued and unpaid interest and liquidated damages, commencing
on July 6, 2006 and may be paid, at the Company's option (i) in cash or (ii) in
shares of the Company's Common Stock in an amount not to exceed 10% of the total
dollar trading volume of the Common Stock during the 10 trading days immediately
prior to the applicable monthly redemption date based on a conversion price
equal to 85% of the average of the lowest three volume weighted average price
during the 10 trading days immediately prior to the applicable monthly
redemption date. The Company has the option, at any time, to redeem some or all
of the outstanding Debenture, in cash, in an amount equal to the sum of (i) 115%
of the principal amount of the Debenture outstanding, plus accrued and unpaid
interest and liquidated damages (the "Optional Redemption Amount") (provided,
however, that the Company may pay up to 15% of the principal amount comprising
of a portion of the Optional Redemption Amount in shares of the Company's Common
Stock if certain conditions are satisfied).
The Company's obligations under the Debenture are secured by a lien on all
assets of the Company in favor of the Purchaser pursuant to a Security
Agreement, dated October 31, 2005, among the Company, all of the subsidiaries of
the Company and the Purchaser, and guaranteed by all the subsidiaries of the
Company pursuant to a Subsidiary Guarantee, dated October 31, 2005, made by the
Company's subsidiaries in favor of the Purchaser. In addition, the obligations
of the Company under the Debenture are personally guaranteed by Mr. George
Karfunkel pursuant to a Personal Guarantee, dated October 31, 2005, between Mr.
Karfunkel and the Purchaser. Mr. Karfunkel is compensated in the amount of 5% of
the current principal outstanding per annum.
In connection with the convertible note, the Company issued to the holder of the
note a five-year warrant to purchase up to 791,139 shares of the Company's
common stock at an exercise price of $1.896 per share. The fair value for these
warrants was estimated at the grant date using the Black-Scholes option pricing
model using the following weighted average assumptions: risk-free interest rate
of 4.50%, dividend yields of 0% and a volatility factor of the expected market
price of the Common Stock of
13
114.80%. Based upon the closing price per share of the Company's common stock on
the date of issuance, the Company estimated the fair value of the warrant and
allocated $665,295 of the proceeds from the note to the warrant, which is
presented as a discount on the convertible note, net of amortization to be taken
over the three-year term of the note using the effective interest method.
The balance of the note as of December 31, 2005, net of unamortized discounts is
as follows:
Principal amount of note $ 5,000,000
Discount for beneficial conversion features (113,622)
Discount for fair value of warrants and options (607,443)
-----------
Balance as of December 31, 2005, net of unamortized discounts $ 4,278,935
-----------
Scheduled maturities of the convertible debenture as of December 31, 2005 were
as follows:
1 Year or less: $ 925,925
1-2 Years 4,074,075
----------
Total $5,000,000
==========
Interest expense related to the note amounted to $70,833 during the period of
October 31, 2005 through December 31, 2005.
Amortization of discounts for the beneficial conversion features and warrant
resulted in charges to Amortization of Convertible Debt Discounts and Issuance
Costs totaling $68,673 during the three months ended December 31, 2005 .The
Company also incurred expenses of $626,699 directly related to securing this
note. These expenses are being amortized over the term of the note and $54,496
of these costs were included in Amortization of Convertible Debt Discounts and
Issuance Costs during the quarter ended December 31, 2005.
Estimated amortization expense related to the warrants, beneficial conversion
feature, and costs related to securing this note for the rest of fiscal 2006
through debt maturity is as follows:
2006 369,505
2007 613,561
2008 287,393
2009 22,809
---------
Total 1,293,968
---------
NOTE 10. GUARANTEES
During the first quarter of fiscal 2006, the Company entered into an agreement
with one of Strategy First's game developers to guarantee certain of their
royalty payments. The guarantee is limited to $100,000. The royalties subject to
these guarantees are expected to be earned from games released in the second
quarter of fiscal 2006. As of December 31, 2005, $42,000 has been earned under
these agreements which are payable in February 2006.
The Company anticipates that Strategy First will pay the royalties due to its
developers when earned and does not anticipate having to make any payments under
these guarantees.
14
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. 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 Leisure Planet Holdings, Ltd. In 2000, we disposed
of all 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. In 2005, we acquired 100% of Strategy First Inc. As a
result of these changes and developments, we have reestablished our investment
criteria. Currently, our strategy focuses on the following:
a) Acquiring controlling stakes in 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.
b) Our investments must show an ability to contribute, in the short to medium
term, to earnings per share through operating profit or capital appreciation.
c) 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 earns 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 DECEMBER 31, 2005 AS COMPARED TO QUARTER ENDED DECEMBER 31, 2004
Since the Company has owned Strategy First since April 2005, prior year
comparisons for this operation are not included in the MD&A. During the last
fiscal year, Strategy First operated under bankruptcy protection. Therefore its
prior numbers do not provide an accurate or valid comparison to its current
operations.
REVENUES
Revenues were $1,537,000 in the second quarter of fiscal 2006 as compared to
$505,000 in the same period in the prior year. Fantasy Sports revenues increased
$48,000 to $553,000. Revenues from the College Football Challenge increased
$33,000 due to a substantial increase in the number of subscribers to this game.
Revenues for Strategy First totaled $983,000 during the quarter ended December
31, 2005, which was an increase of $612,000 from the quarter, ended September
30, 2005. The increase in revenue over the previous quarter was primarily the
result of releasing three new game titles in North America.
COST OF SALES
Cost of sales was $816,000 or 53.1% of total revenues in the second quarter of
fiscal 2006, as compared to $285,000, or 56.4%, of total revenues, in the same
period of the prior year. Cost of sales for Fantasy Sports were $342,000, or
61.8 %, of related revenues as compared to 56.4 % of related revenues in the
same period in the prior year. The increase is primarily the result of increases
in merchandise prize fulfillment expenses to winning participants in our Nextel
Cup and College Football Challenges. Cost of
15
sales for Strategy First were $474,000 or 48.2% of related revenues during the
quarter ended December 31, 2005 as compared to $164,000 or $46.4% of related
revenues during the quarter ended September 30, 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of fiscal
2006 were $816,000, an increase of approximately $457,000 over the same period
in the prior year. Selling, general and administrative expenses for Strategy
first totaled $478,000. Selling, general and administrative expenses for Fantasy
sports decreased by $25,000 from $113,000 during the quarter ended December 31,
2004 to $88,000 during the comparable quarter this fiscal year primarily as the
result of reductions in advertising expenses. Corporate overhead expenses
increased $4,000 to $250,000 from $246,000 during the same period in the prior
year.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets increased $35,000 in the second fiscal quarter
of fiscal 2006 from the same period in the previous fiscal year as a result of
the acquisition of Strategy First in April 2005. Depreciation expense was
approximately $10,000 in the second quarter of fiscal 2006, an increase of
approximately $5,000 to the comparative prior period and incurred primarily as
the result of the acquisition of Strategy First in April 2005.
OTHER INCOME
Other income for the second quarter of fiscal 2006 increased $17,000 over the
same period in the prior year and consisted primarily of gains recognized by
short term investments held in the Company's managed fund cash account.
FOREIGN CURRENCY GAINS AND LOSSES
The foreign currency losses during the second quarter of fiscal 2006 were
approximately $16,000, as compared to gains of $770,000 in the second quarter of
fiscal 2005. Foreign currency gains of $44,000 were related to the assets
remaining from the sale of discontinued South African operations. Strategy first
recognized $2,000 in gains and $28,000 in unrealized losses were recognized by
the parent company on the 1 million Euro deposited with the Commercial Court in
Vienna. The functional Currency of Strategy First is the Canadian dollar and
it's products are sold throughout the United States and Europe. Gains (losses)
from the discontinued South African operations are the result of the
fluctuations of the South African Rand against the US dollar. During the three
months ended December 31, 2005 the Rand appreciated approximately 5% against the
US dollar, while it appreciated 12% in the corresponding period last year. In
fiscal 2006, the decrease in the market value of Rand put/US dollar call option
offset these foreign currency gains, which resulted in a smaller net gain for
the period. 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 three 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 payment the Company converted unrealized
gains into cash.
ACQUISITION COSTS INCURRED
During fiscal year 2006 the Company incurred approximately $209,000 of expenses
pursuing the unsuccessful acquisition of a European Company that develops and
publishes entertainment software. These costs consisted primarily of legal and
travel expenses. During the quarter ended December 31, 2005 the Company expensed
these previously capitalized costs when it became apparent that the acquisition
would not occur. At December 31, 2005 the company had $1,185,000 in restricted
cash that is currently being held in escrow as a result of litigation in
connection with this unsuccessful acquisition.
16
AMORTIZATION OF CONVERTIBLE DEBT DISCOUNTS AND ISSUANCE COSTS
On October 31, 2005, the Company issued a $5,000,000 principal amount Variable
Rate Secured Convertible Note and a warrant to purchase additional shares of the
Company's Common Stock. Based upon the closing price per share of the Company's
Common Stock on the date of issuance, and the effective conversion rate, there
was a beneficial conversion feature. Approximately $665,000 of the proceeds were
allocated to the warrants. The Company also incurred expenses of $627,000
directly related to securing this note. Amortization of the warrants issued, the
beneficial conversion feature of the note and the costs associated with securing
this note totaled $123,000 for the quarter ended December 31, 2005.
INTEREST EXPENSE
Interest expense of $90,000 was recorded during the second quarter of fiscal
2006 as compared to $5,000 in the same period of the prior year. Interest
expense increased primarily as a result of interest charges incurred in the
second quarter fiscal 2006 on the convertible debenture security, which totaled
$71,000 during the quarter, ended December 31, 2005.
INTEREST INCOME
Interest income of $105,000 was earned during the second quarter of fiscal 2006
as compared to $165,000 in the same quarter of the prior year. The decrease in
interest income in the second quarter of fiscal 2006 was primarily the result of
the lower principal balances on the 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 US income taxes and one is subject to
Canadian 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.
NET INCOME (LOSS)
The Company recognized a net loss of $454,000 during the second quarter of
fiscal 2006 as compared to net income of $787,000 during the same period in the
prior year for an overall decrease in net income of $1,241,000. The operating
loss for the three months ended December 31, 2005 decreased to $140,000 from
$143,000 in the same period of the prior fiscal year. The reduction in income
over the prior year is primarily the result of a $754,000 decrease in foreign
currency gains in the second fiscal quarter of fiscal 2006 from the same period
in the previous fiscal year. The Company also incurred $209,000 of acquisition
expenses, $123,000 of amortizable convertible debt discounts and issuance costs,
and $71,000 of interest charges as a result of the issuance of the convertible
secured debenture during the second quarter of fiscal 2006. None of these
expenses were incurred during the second fiscal quarter of 2005
SIX MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2004
REVENUES
Revenues were $2,503,000 in the first six months of fiscal 2006 as compared to
$1,116,000 in the same period in the prior year. Fantasy Sports revenues
increased $33,000 to $1,149,000 primarily as a result of increases in revenues
from the College Football Challenge due to a substantial increase in the number
of subscribers to this game. Revenues for Strategy First totaled $1,354,000,000
during the six months ended December 31, 2005. Revenues for the Quarter ended
December 31. 2005 increased $612,000 from the quarter ended September 30, 2005.
The increase in revenue over the previous quarter was primarily the result of
releasing three new game titles in North America and a substantial increase in
the recognition of revenue on guaranteed contracts.
17
COST OF SALES
Cost of sales were $1,256,000 or 50.2% of total revenues in the for the six
months ending December 31, 2005 as compared to $566,000 or 50.7%, of total
revenues, in the same period of the prior year. Cost of sales for Fantasy Sports
were $620,000, or 54.0 %, of related revenues as compared to 50.7 % of related
revenues in the same period in the prior year. The increase is primarily the
result of increases in merchandise prize fulfillment expenses. Cost of sales for
Strategy First was $638,000 or 47.1% of related revenues during the six months
ended December 31, 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first two quarters of
fiscal 2006 were $1,479,000 an increase of approximately $832,000 over the same
period in the prior year. Selling, general and administrative expenses for
Strategy first totaled $836,000. Selling, general and administrative expenses
for Fantasy sports decreased by $26,000 from $190,000 during the six months
ended December 31, 2004 to $164,000 during the comparable quarter this fiscal
year primarily as the result of reductions in advertising expenses. Corporate
overhead expenses increased $21,000 to $477,000 from $456,000 during the same
period in the prior year.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets increased $69,000 in the first two quarters of
fiscal 2006 from the same period in the previous fiscal year as a result of the
acquisition of Strategy First in April 2005. Depreciation expense was
approximately $19,000 for the six months ending December 31, 2005, an increase
of approximately $10,000 from the comparative prior period and incurred
primarily as the result of the acquisition of Strategy First in April 2005.
OTHER INCOME
Other income for the first two quarters of fiscal 2006 decreased $124,000 to
$41,000 as compared to the same period in the prior year. During the six months
ending December 31, 2004 the Company received $164,000 relating to a one-time
recovery from a bankruptcy proceeding.
FOREIGN CURRENCY GAINS AND LOSSES
Foreign currency gains during the first two quarters of fiscal 2006 were
$18,000, as compared to gains of $540,000 in the Comparable period for fiscal
2005. Foreign currency gains of $16,000 were related to the assets remaining
from the sale of discontinued South African operations. Strategy First
recognized $4,000 in losses and $28,000 in losses were recognized by the parent
company.
ACQUISITION COSTS INCURRED
During fiscal year the Company incurred approximately $209,000 of expenses
pursuing the unsuccessful acquisition of a European Company that develops and
publishes entertainment software. These costs consisted primarily of legal and
travel expenses. During the six months ended December 31, 2005 the Company
expensed these previously capitalized costs when it became apparent that the
acquisition would not occur. At December 31, 2005 the company had $1,185,000 in
restricted cash that is currently being held in escrow as a result of litigation
in connection with unsuccessful acquisition.
AMORTIZATION OF CONVERTIBLE DEBT DISCOUNTS AND ISSUANCE COSTS
On October 31, 2005, the Company issued a $5,000,000 principal amount Variable
Rate Secured Convertible that included a warrant to purchase additional shares
of the Company's Common Stock. Based upon the closing price per share of the
Company's common stock on the date of issuance, there were intrinsic values
associated with the beneficial conversion feature of the note and the warrants,
which were issued. The Company also incurred expenses of $627,000 directly
related to securing this note. Amortization of the warrants issued, the
beneficial conversion feature of the note and the costs associated with securing
this note totaled $123,000 for the six months ended December 31, 2005.
18
INTEREST EXPENSE
Interest expense of $98,000 was recorded during the first two quarters of fiscal
2006 as compared to $11,000 in the same period of the prior year. Interest
expense increased primarily as a result of interest charges incurred in the
first six months of fiscal 2006 on the convertible debenture security, which
totaled $71,000 during the six months ended December 31, 2005.
INTEREST INCOME
Interest income of $189,000 was earned during the first two quarters of fiscal
2006 as compared to $333,000 in the same period of the prior year. The decrease
in interest income in the first two quarters of fiscal 2006 was primarily the
result of the lower principal balances on the notes receivable from the sale of
the South African operations.
NET INCOME (LOSS)
The Company recognized a net loss of $503,000 during the first two quarters of
fiscal 2006 as compared to net income of $912,000 during the same period in the
prior year for an overall decrease in net income of $1,415,000. The operating
loss for the six months end December 31, 2005 increased to $321,000 from
$106,000 in the same period of the prior fiscal year. Operating income for
Fantasy Sports improved $6,000 and totaled $361,000. Strategy First incurred
operating losses of $200,000. Other factors that contributed to the decrease in
income over the prior year included a $522,000 decrease in foreign currency
gains, a $122,000 decrease in other income, and a $221,000 decrease in net
interest income. The Company also incurred $209,000 of acquisition expenses,
$123,000 of amortizable convertible debt discounts and issuance costs, and
$71,000 of interest charges as a result of the issuance of the convertible
secured debenture during the six months ending December 31, 2005. None of these
expenses were incurred during the first six months of fiscal 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $2,757,000 from $4,870,000 at June 30, 2005 to $7,627,000 at
December 31, 2005. The increase in cash is primarily the result of net proceeds
received from the issuance of the convertible secured debenture offset by cash
used in operations.
Working capital increased $2,830,000 from $3,638,000 at June 30, 2005, to
$6,468,000 at December 31, 2005. This increase is primarily the result of our
increased cash balances offset by the cash used in operations.
At December 31, 2005, the Company had borrowings of $6,249,000 which consisted
of a $5,000,000 principal obligation due on a convertible secured debenture,
$973,000 of advances against lines of credit secured by like amounts of cash,
term loans of $267,00, and $9,000 of equipment and vehicle loans.
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
R19 million (approximately $3 million).
This note is supported 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.
19
To the extent that 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, 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
Strategy First distributes the majority of its products through third-party
software distributors to mass-merchant and major retailers and directly to
certain Personal Computer ("PC") software retailers, all of which have
traditionally sold consumer entertainment PC software products. Additionally,
Strategy may license its products to distributors in exchange for royalty
payments. The distribution of products is governed by purchase orders,
distribution agreements or direct sale agreements, most of which provide for
product returns and price markdowns. For product shipments to these software
distributors or retailers, Strategy First records a provision for product
returns and price markdowns as a reduction of gross sales at the time the
product passes to these distributors or retailers. Revenue is recognized at the
time product is shipped by distributors.
The provision for anticipated product returns and price markdowns is primarily
based upon Strategy First's analysis of historical product return and price
markdown results. If product sell-through results at retail store locations fall
significantly below anticipated levels the adequacy of this allowance may be
insufficient. Strategy First's reviews the adequacy of its allowance for product
returns and price markdowns and if necessary makes adjustments to this allowance
on a quarterly basis.
In the case of royalty income, Strategy First will recognize revenue when earned
based on sales reports from its distributors. Most agreements require quarterly
reporting of sales with payment due within 45 days of the end of the quarter. In
many cases, Strategy First receives guaranteed royalty income and these revenues
are recorded upon performance of deliverables per the royalty agreements.
Revenues generated by Fantasy Sports are seasonal from mid-February to the end
of November. Fantasy Sports' collects the majority of its revenue from customers
at the beginning and mid-point of a season and defers recognition of income
until the season starts. Once a season begins revenue is recognized prorata
until the season ends.
CASH, CASH EQUIVALENTS AND ESCROW DEPOSIT
Cash and cash equivalents consist of cash and all highly liquid investments with
original maturities of three months or less. The vast majority our cash balances
are held in liquid accounts at two highly rated financial institutions. While
these deposits are not insured, the quality of such financial institutions is
such that the risks of loss on these funds are minimal. Restricted cash balances
at December 31, 2005 totaled $973,465, which is used as collateral on the
Company's line of credit.
The Company has classified $1,184,450 (one million Euro) as an escrow deposit.
This amount has been deposited with the Commercial Court in Vienna, in order to
secure a claim for fulfillment of an investment agreement. The Company has
subsequently applied for repayment of this deposit. The claim for fulfillment
was structured so as to ensure the maximum likelihood of full repayment of the
deposit should we so request. We therefore anticipate that substantially all of
this deposit will be refunded during the current quarter. However, should the
repayment request be opposed by the defending party, we may
20
require further legal proceedings to redeem this deposit. In this event, there
can be no assurance as to the final amount, if any, that we will recover from
such deposit. To date there has been no filing to prevent full repayment of this
deposit.
GOODWILL
Goodwill represents the excess of the purchase price over the fair market value
of net assets acquired. Evaluating goodwill for impairment involves the
determination of the fair market value of our reporting units. Inherent in such
fair market value determinations are certain judgments and estimates, including
the interpretation of current economic indicators and market valuations, and the
Company's strategic plans with regard to its operations. To the extent
additional information arises or the Company's strategies change, it is possible
that our conclusion regarding goodwill impairment could change, which could have
a material effect on the Company's financial position and results of operations.
For those reasons, we believe that the accounting estimate related to goodwill
impairment is a critical accounting estimate.
The Company reviews goodwill annually (or more frequently under certain
conditions) for impairment in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The Company performed its annual impairment test of goodwill
as of June 30, 2005 and determined that goodwill was not impaired. While the
Company believes that no impairment exists, there can be no assurances that
future economic or financial developments might not lead to an impairment of
goodwill.
INTANGIBLE ASSETS
Intangible assets include software game titles, 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 estimated lives 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 December 31, 2005, our cash resources and notes receivable earned interest at
variable rates. The Company also pays interest at variable rates on long term
debt. Accordingly, any change in interest rates will affect the Company's
earnings.
FOREIGN CURRENCY RISK
Strategy First Inc. is incorporated in Canada and sells products throughout the
United States and Europe. Its functional currency is the Canadian Dollar. This
has exposed the Company to market risk with respect to fluctuations in the
relative value of the Euro, British Pound, the Canadian Dollar and the U.S.
Dollar. At December 31, 2005 Strategy First had net assets of $694,000
originating in Canadian Dollars and net assets of $278,000 originating in Euros.
At December 31, 2005 the Company had Cash deposits denominated in Euros with a
U.S. Dollar value of $1,184,450. This has exposed the Company to market risk
with respect to fluctuations in the relative value of the Euro against the US
Dollar.
21
Certain of the Company's cash balances and the remaining notes receivable
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 U.S.
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 December 31, 2005. The
Company will continue to adjust the market value of this option as of the end of
subsequent reporting periods.
At December 31, 2005, we had assets denominated in South African Rand of R 33.8
million.
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 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.
22
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 October 18, 2005.
(2) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 26, 2005.
(3) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 27, 2005.
(4) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 4, 2005.
(5) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 17, 2005.
23
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, 2006
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
-------------------------------------
Clive Kabatznik
Chief Executive Officer,
President and Chief Financial Officer
24