SILVERSTAR HOLDINGS LTD - 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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.
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(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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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}
SILVERSTAR HOLDINGS LTD - 10-Q
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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 [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Title of Class Shares Outstanding on May 3, 2006
-------------- ---------------------------------
Class A Common Stock 8,327,197
Class B Common Stock 814,786
---------
Total 9,141,983
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2006 (Unaudited)
and June 30, 2005
Condensed Consolidated Statements of Operations (Unaudited) for the
three and nine months ended March 31, 2006 and 2005
Condensed Consolidated Statements of Cash Flows (Unaudited) for nine
months ended March 31, 2006 and 2005
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 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
2006 2005
(Unaudited)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents, includes restricted cash of
$886,306 and $67,189 respectively (see note 2) $ 7,997,285 $ 4,865,291
Accounts receivable, net 893,732 94,378
Inventory 56,369 --
Current portion of long-term notes receivable 157,727
118,272
Prepaid expenses and other current assets 458,299 165,593
Option contract -- 359,171
Short-term assets from discontinued operations 105,041 23,575
------------ ------------
Total current assets 9,668,453 5,626,280
------------ ------------
Property, plant and equipment, net 85,547 103,946
Investments in non-marketable securities 1,143,566 843,566
Long-term notes receivable 3,416,526 3,135,763
Goodwill, net 807,483
767,329
Intangible assets, net 1,389,875 1,231,201
Deferred charges and other assets 521,918 20,389
Long-term assets from discontinued operations 2,963,666 2,971,991
------------ ------------
Total assets $ 19,997,034 $ 14,700,465
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 637,069 $ --
Current portion of long term debt 233,819 220,845
Current portion of convertible secured debenture 1,481,480 --
Accounts payable 345,223 342,874
Accrued expenses 1,007,887 354,131
Short-term liabilities from discontinued operations 1,015,717 1,070,496
Total current liabilities 4,721,195 1,988,346
------------ ------------
Long term debt, net -- 150,047
Convertible secured debenture 2,900,464 --
Obligation to issue common stock 273,554 273,554
------------ ------------
Total liabilities $ 7,895,213 $ 2,411,947
------------ ------------
Stockholders' equity:
Capital stock:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, class A, $0.01 par value; 50,000,000
shares authorized; 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 65,466,022 64,602,803
Accumulated deficit (53,522,540) (52,411,167)
Accumulated comprehensive income 66,753 5,596
------------ ------------
Total stockholders' equity 12,101,821 12,288,518
------------ ------------
Total liabilities and stockholders' equity $ 19,997,034 $ 14,700,465
============ ============
See accompanying notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2006 2005
----------- -----------
Net Revenues $ 1,494,991 $ --
----------- -----------
Operating expenses:
Cost of sales 694,303 --
Selling, general and administrative 744,786 319,065
Amortization of intangible assets 35,350 --
Depreciation 8,295 2,107
----------- -----------
1,482,734 321,172
----------- -----------
Operating income (loss) 12,257 (321,172)
Other income (expense) 37 (5,911)
Foreign currency losses (165,070) (318,702)
Costs incurred with abandoned acquisition (75,436) --
Amortization of convertible debt discounts and
issuance costs (184,753) --
Interest income 135,209 124,632
Interest expense (123,544) (760)
----------- -----------
Loss from continuing operations, before income
taxes (401,300) (521,913)
Provision for income taxes -- --
----------- -----------
Loss from continuing operations (401,300) (521,913)
Loss from discontinued operations, net of income
taxes of $0 and $0, respectively (206,812) (124,936)
----------- -----------
Net loss (608,112) (646,849)
----------- -----------
Net loss per share - basic and diluted
Continuing operations $ (.05) $ (.06)
Discontinued operations (.02) (.01)
----------- -----------
Net loss per share $ (.07) $ (.07)
=========== ===========
Weighted average common stock outstanding:
Basic and diluted 9,098,584 8,703,081
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended March 31,
2006 2005
----------- ------------
Net Revenues $ 2,849,134 $ --
----------- ------------
Operating expenses:
Cost of sales 1,329,899 --
Selling, general and administrative 2,060,112 775,008
Amortization of intangible assets 104,052 --
Depreciation 24,522 6,324
----------- -----------
3,518,585 (781,332)
Operating loss (669,451) (781,332)
Other income 41,375 158,389
Foreign currency gains (losses) (147,530) 221,628
Costs incurred with abandoned acquisition (284,778) --
Amortization of convertible debt discounts and
issuance costs (307,922) --
Interest income 324,502 447,429
Interest expense (218,380) (2,309)
----------- -----------
Income (loss) from continuing operations, before
income taxes (1,262,184) 43,805
Provision for income taxes -- --
----------- -----------
Income (loss) from continuing operations $(1,262,184) $ 43,805
Income from discontinued operations, net
of income taxes of $0 and $0, respectively 150,811 221,836
----------- -----------
Net income (loss) $(1,111,373) $ 265,641
----------- -----------
Net income (loss) per share - basic:
Continuing operations $ (.14) $ --
Discontinued operations .02 .03
----------- -----------
Net income (loss) per share $ (.12) $ .03
=========== ===========
Net income (loss) per share - diluted:
Continuing operations $ (.14) $ --
Discontinued operations .02 .03
----------- -----------
Net income per share $ .12 $ .03
=========== ===========
Weighted average common stock outstanding:
Basic 9,081,229 8,698,036
=========== ===========
Diluted 9,081,229 9,046,257
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended March 31,
2006 2005
----------- -----------
Cash flow from operating activities:
Net income (loss) $(1,111,373) $ 265,641
Net income (loss) discontinued operation 158,111 221,836
Net income (loss) from continuing operations (1,262,184) 43,805
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 436,493 6,324
Stock-based compensation 51,282 --
Unrealized foreign currency gains (12,647) (396,490)
Warrants issued for services -- 28,800
Accrued interest income on notes receivable (183,175) (372,109)
----------- -----------
Operating cash flows provided by continuing operations (970,231) $ (689,670)
Changes in operating assets and liabilities (468,421) (56,547)
Operating cash flows provided by
discontinued operations (159,157) 368,062
----------- -----------
Net cash used in operating activities $(1,597,809) $ (378,155)
----------- -----------
Cash flows from investing activities:
Acquisition expenses capitalized (4,140) (124,307)
Purchase of property, plant and equipment (1,896) --
Purchase of intangible assets (200,000) --
Investment in non-marketable securities (300,000) --
Proceeds from repayment of long-term notes receivable 88,691 5,391,639
FNB option premium -- (190,257)
Net cash (used in) provided by investing activities $ (417,345) $ 5,077,075
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 637,069 --
Financing cash flows provided by
discontinued operations 182,048 (305,160)
Net proceeds from convertible debenture 4,373,301 --
Repayment of long-term debt (128,927) (23,439)
Repurchase of treasury shares -- (21,450)
Issuance of common stock 22,500 6,650
----------- -----------
Net cash provided by (used in) financing activities $ 5,085,991 $ (343,399)
----------- -----------
Effect of exchange rates on cash 61,157 --
Net increase in cash and cash equivalents 3,131,994 4,355,521
Cash and cash equivalents, beginning of period 4,865,291 1,235,310
----------- -----------
Cash and cash equivalents, end of period $ 7,997,285 $ 5,590,831
----------- -----------
Supplemental cash flow information:
Cash paid for interest $ 182,963 $ 2,309
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. FINANCIAL INFORMATION
The Company is a holding company that seeks to acquire businesses fitting a
predefined investment strategy. The Company is the parent company of Strategy
First Inc. ("Strategy First"), a leading developer and worldwide publisher of
entertainment software for the Personal Computer (PC). The Company is 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 March 31,
2006 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 prior acquisitions.
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
obligations related to prior acquisitions is computed using the average market
price for the quarter.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and all highly liquid investments with
original maturities of three months or less. The vast majority of 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 March 31, 2006 totaled $886,306, which is used as collateral on the
Company's line of credit.
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
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Stock-Based Compensation" and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The standard
requires companies to recognize all share-based payments to employees, including
grants of employee stock options, in the financial statements based on their
fair values 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 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 $51,282 for the three and nine month
periods ended March 31, 2006, respectively, for employee stock options that vest
during fiscal 2006. These options were valued using a risk-free interest rate of
3.72%, volatility of 132%, zero dividend yield and an option term of three
years.
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 is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
If the Company used the fair value-based method of accounting to measure
compensation expense for options granted at the date they were granted as
prescribed by SFAS No. 123, loss per share from continuing operations for the
three and nine month periods ended March 31, 2006 would have changed to the pro
forma amounts set forth in the table below.
Three Months Nine Months
ended ended
March 31, March 31,
2005 2005
---------- --------
Income (loss) from continuing operations as $ (521,913) $ 43,805
reported
Less: total stock based employee
compensation expense
determined by the fair-value based method (465,205) (533,642)
-------- --------
Pro forma net loss from continuing
operations $ (987,118) $(489,837)
========== =========
Basic:
As reported $ (.06) $ .01
Pro forma $ (.11) $ (.06)
Assuming full dilution:
As reported $ (.06) --
Proforma $ (.11) $ (.06)
As of March 31, 2006, the Company had 1,305,000 stock options outstanding, of
which 1,105,000 are fully vested. A summary of the activity in the Company's
stock option plans is as follows for the nine months ended March 31, 2006:
Share
Subject Weighted
Options Average
Outstanding Exercise
Outstanding, beginning of year 1,545,000 2.49
Granted -- --
Forfeited (210,000) --
Exercised (30,000) .75
Outstanding March 31, 2006 1,105.000 2.52
Weighted average fair value of options granted
during the year 0.00 0.00
For the three months ended March 31, 2006, the Company did not grant any stock
options.
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The following table summarizes information about vested and exercisable stock
options outstanding at March 31, 2006:
Weighted
Average
Number Remaining
Outstanding Contractual
Exercise Prices March 31, 2006 Life
--------------- -------------- -----------
Less than $1.00 85,000 1.05
$1.00 to $2.19 770,000 3.04
$3.75 To $4.875
250,000 1.3
---------
Total 1,105,000
=========
NOTE 3. ACQUISITIONS
On April 21, 2005, the Company acquired Strategy First, a leading developer and
worldwide publisher of entertainment software for the PC. The Company acquired
Strategy First 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
==========
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NOTE 4. INTANGIBLE ASSETS
The components of amortizable intangible assets as of March 31, 2006 and June
30, 2005 are as follows:
Balance at March 31, 2006 Gross Carrying Accumulated
Amount Amortization Total
-------------- ------------ ----------
Game titles $1,483,848 $(117,775) $1,366,073
Covenant not to compete 34,258 (10,456) 23,802
---------- --------- ----------
Balance at March 31, 2006 $1,518,106 $(128,231) $1,389,875
========== ========= ==========
Balance at June 30, 2005 Gross Carrying Accumulated
Amount Amortization Total
-------------- ------------ ----------
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 $1,253,357 $(22,156) $1,231,201
========== ======== ==========
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 nine month periods
ended March 31, 2006 were $35,350 and $104,052, respectively. Estimated
amortization expense for the rest of fiscal 2006 and for the succeeding four
fiscal years is as follows:
2006 $ 39,951
2007 159,804
2008 157,913
2009 148,385
2010 148,385
Thereafter $ 735,437
$1,389,875
NOTE 5. DISCONTINUED OPERATIONS
On April 7, 2006, the Company sold all the assets and certain liabilities of
Fantasy Sports, Inc. ("Fantasy Sports") to FUN Technologies, LLC for
approximately $4.4 million, including $3.85 million paid in cash at closing. The
gain on disposal of this business segment will be reported during the quarter
ended June 30, 2006.
In accordance with accounting principles generally accepted in the United States
of America, the net income and net assets related to Fantasy Sports have been
included in discontinued operations in the company's consolidated statements of
operations and consolidated balance sheets.
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The following summarizes the operating results of the discontinued operations.
Nine Months Ended March 31,
2006 2005
Revenue $1,447,722 $1,365,486
Net income $150,811 $221,836
Net assets related to discontinued operations of Fantasy Sports totaled
$2,052,990 and $1,925,070 at March 31, 2006 and June 30, 2005. These assets
consist of the following:
March 31, 2006 June 30, 2005
Property plant and equipment, net $ 3,857 $ 10,682
Intangible assets, net 2,956,824 2,958,324
Other assets 2,985 2,985
---------- ----------
Total long term assets
from discontinued operations $2,963,666 $2,971,991
========== ==========
Cash $88,115 $ 5,195
Accounts receivable, net -- 752
Inventory 5,071 534
Prepaid assets and other current assets 11,855 17,094
---------- ----------
Total short term assets
from discontinued operations $105,041 $ 23,575
========== ==========
Lines of credit (249,237) (67,189)
Accounts payable (3,137) (52,509)
Accrued expenses and deferred revenue (763,343) (950,798)
---------- ----------
Total short term liabilities
from discontinued operations (1,015,717) (1,070,496)
---------- ----------
Net assets from discontinued operations $2,052,990 $1,925,070
========== ==========
NOTE 6. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Nine Months Ended March 31,
2006 2005
---- ----
Increase in accounts receivable $(750,513) $ --
Increase in inventories (52,925) --
Increase in prepaid expenses and
other current assets (282,657) 15,526)
Increase in accounts payable 1,817 23,870
(Increase) decrease in other
provisions and accruals 615,857 (64,891)
--------- --------
$(468,421) $(56,547)
========= ========
Cash flows from discontinued operations for the nine months ended March 31, 2006
and 2005 were as follows:
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2006 2005
---- ----
Cash flows from operating activities:
Net income from discontinued operations $150,811 $221,836
Loss on disposal of fixed assets 2,762 --
Depreciation and amortization 5,563 8,010
Decrease in accounts receivable 752 1,068
(Increase) decrease in inventories (4,537) 18,739
(Increase) decrease in prepaid assets 5,239 (8,212)
Increase in accounts payable (49,372) (186,828)
Increase (decrease) in
other provisions and accruals (187,455) 400,339
Change in cash included in net assets
from discontinued operations (82,920) (86,890)
------- -------
Net cash provided by
(used in) operating activities (159,157) 368,062
-------- -------
Cash flows from financing activities:
Short term borrowings (repayments), net 182,048 (305,160)
------- --------
Net cash provided by (used in) financing activities 182,048 (305,160)
------- --------
Net cash flows provided by discontinued operations $ 22,891 $ 62,902
======== ========
NOTE 7. BUSINESS SEGMENTS
As a result of the sale of all the assets and certain liabilities of Fantasy
Sports on April 7, 2006 the Company no longer operates in the internet fantasy
sports games segment and now only operates in one segment--entertainment
software. The operations of the entertainment software segment are focused on
the publishing of software games for the PC platform. The operations of Fantasy
Sports which fully comprised the Company's operations in the internet fantasy
sports games segment have been reported as discontinued operations as of the
quarter ending March 31, 2006.
NOTE 8. DEBT
Line of Credit
In June 2002, The Company 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 liability is due on demand and has a floating
interest rate that is based on the prime rate minus 1.75%. On March 31, 2006,
this rate was at 6.2%. The balance outstanding under this line of credit at
March 31, 2006, was $886,306 of which $249,237 is included in short-term
liabilities from discontinued operations.
Long Term Debt
March 31, 2006 June 30, 2005
Vehicle and equipment loans $ 6,875 $ 10,633
Term loan 226,944 360,259
-------- --------
233,819 370,892
Less current portion (233,819) (220,845)
-------- --------
Long-term debt, net -- $150,047
========= ========
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").
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Interest accrues on the principal balance of the note at an annual interest rate
equal to prime plus 1.5%. On March 31, 2006 the interest rate was 9.25%. 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 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 March 31, 2006, net of unamortized discounts is as
follows:
Principal amount of note $5,000,000
Discount for beneficial conversion features (97,390)
Discount for fair value of warrants and options (520,666)
----------
Balance as of March 31, 2006, net of
unamortized discounts $4,381,944
==========
Scheduled maturities of the convertible debenture as of March 31, 2006 were as
follows:
1 Year or less: $1,481,480
1-2 Years 3,518,520
- - ----------
Total $5,000,000
==========
Interest expense related to the note amounted to $177,083 during the period of
October 31, 2005 through March 31, 2006.
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Amortization of discounts for the beneficial conversion features and warrant
resulted in charges to Amortization of Convertible Debt Discounts and Issuance
Costs totaling $103,009 during the three months ended March 31, 2006. 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 $81,743
of these costs was included in Amortization of Convertible Debt Discounts and
Issuance Costs during the quarter ended March 31, 2006.
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 $ 184,753
2007 613,561
2008 287,393
2009 22,809
---- ------
Total $1,108,516
==========
NOTE 10. GUARANTEE AND OTHER COMMITTMENT
During the first quarter of fiscal 2006, the Company entered into agreements
with two of Strategy First's game developers to guarantee certain of their
royalty payments. The guarantee is limited to $100,000.
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.
On March 29, 2006, Strategy First entered into an agreement to acquire certain
intellectual property rights for $200,000 in cash and the issuance of options to
acquire 100,000 shares of the Company's common stock at an exercise price of
$1.50. The options vest when net sales, as defined in the purchase agreement,
exceed $750,000 and expire on December 31, 2008. The agreement also provides for
commissions of twenty-five percent of net sales in the event they exceed
$500,000 through December 31, 2008
NOTE 11. SUBSEQUENT EVENTS
On April 7, 2006, the Company sold all the assets and certain liabilities of
Fantasy Sports to FUN Technologies, LLC for approximately $4.4 million,
including $3.85 million paid in cash at closing. The Company anticipates
recognizing a profit on the sale during the quarter ended June 30, 2006. These
proceeds will be used for repayment of debt and general corporate purposes.
In early April 2006, First South African Holdings, a wholly owned South African
subsidiary of the Company, received a letter from the South African Revenue
Service ("SARS") challenging certain tax treatment of dividends and operating
loss carry forwards for the years 2002 through 2004. The Company believes that
its South African tax filings are in full compliance with all applicable laws.
The Company intends to vigorously defend its position in this regard.
On May 9, 2006, the Company prepaid $1.4 million face amount of its outstanding
convertible secured debentures, thereby reducing the outstanding balance to $3.6
million.
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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. ("Fantasy Sports"). In April 2006, we sold all the
assets and certain liabilities of Fantasy Sports. In 2001, we acquired 100% of
Student Sports, Inc, which we sold in 2003. In 2005, we acquired 100% of
Strategy First Inc. ("Strategy First"). 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
In April 2006, we sold all the assets and certain liabilities of Fantasy Sports.
See "Subsequent Events" for more information regarding the sale. As a result,
the financial information for Fantasy Sports is classified as discontinued
operations for the three-month and nine- month periods ended March 31, 2005 and
2006. Information in the management discussion and analysis, therefore, relates
solely to the operations of our remaining subsidiary, Strategy First.
Additionally, since there is no comparative prior year data for Strategy First
as we acquired Strategy First through the jurisdiction of a bankruptcy court in
April 2005, in certain cases our recent results are compared to those of the
prior quarter ended December 31, 2005.
Quarter Ended March 31, 2006 As Compared to Quarter Ended March 31, 2005
Revenues
Revenues were $1,495,000 in the third quarter of fiscal 2006. There is no
comparable data for the 2005 period.
Cost of Sales
Cost of sales was $694,403 in the third quarter of fiscal 2006, or 46.4% of
total revenues. There is no comparable data for the 2005 period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended March 31,
2006 were $745,000. Selling, general and administrative expenses for Strategy
First totaled $471,000. Corporate overhead expenses decreased by $54,000 to
$265,000 from $319,000 in the same period last year.
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Selling, general and administrative expenses for the quarter ended March 31,
2006 were $745,000. Selling, general and administrative expenses for Strategy
First totaled $471,000. Corporate overhead expenses decreased by $54,000 to
$265,000 from $319,000 in the same period last year.
Amortization and Depreciation
Amortization of intangible assets was $35,000 for the third quarter of fiscal
2006. Depreciation was $8,300 for the period. For the comparable period in 2005,
depreciation was $2,100.
Foreign Currency Losses
Foreign currency losses are primarily related to the assets remaining from the
sale of our discontinued South African operations. The foreign currency losses
during the third quarter of fiscal 2006 were approximately $165,000 as compared
to a loss of $319,000 in the third quarter of fiscal 2005. Foreign currency
losses of $232,000 were related to the sale of discontinued South African
operations. Strategy First recognized $22,000 in gains and $45,000 in gains were
recognized by us on the 1 million Euros deposited with the Commercial Court in
Vienna which was subsequently returned to us.
The functional currency of Strategy First is the Canadian dollar and its
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
March 31, 2006 the Rand appreciated approximately 1.5% against the US dollar,
while it depreciated 5% in the corresponding period last year. The gain realized
by the appreciation of the South African Rand was offset by the loss in value of
the Rand put/US dollar call option thereby resulting in a net loss for the
period. Foreign currency gains are non-cash items until converted into US
dollars, when any accumulated gains or losses will be converted into cash.
Acquisition Costs Incurred
During the quarter ended March 31, 2006, we incurred approximately $75,500 in
litigation expenses in connection with the unsuccessful acquisition of a
European Software Company. We are seeking damages for breach of contract from
this European software company. There is no assurance that we will be successful
in this litigation.
Amortization of Convertible Debt Discounts and Issuance Costs
On October 31, 2005, we issued a $5,000,000 principal amount Variable Rate
Secured Convertible Note and a warrant to purchase additional shares of our
Common Stock. Based upon the closing price per share of our Common Stock on the
date of issuance, and the effective conversion rate, there was a beneficial
conversion feature. Approximately $665,000 of the proceeds was allocated to the
warrants. We 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
$185,000 for the quarter ended March 31, 2006.
Interest Expense
Interest expense of $128,000 was recorded during the third quarter of fiscal
2006 as compared to $760 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
$106,000 during the quarter ended March 31, 2006.
Interest Income
Interest income of $135,000 was recorded during the third quarter of fiscal
2006, as compared to interest income of $125,000 during the third quarter of
fiscal 2005.
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Provision for Income Taxes
We are registered in Bermuda, where no tax laws are applicable. Two of our
subsidiaries are subject to US income taxes, one subsidiary is subject to
Canadian income taxes and one subsidiary is subject to South African income
taxes. Up to this date, none of them has had taxable income. See "Subsequent
Events." They have incurred losses for tax purposes. The deferred tax asset
generated by the tax losses and temporary differences has been fully reserved.
Net Loss
We recognized a net loss of $608,000 for the three months ended March 31, 2006
as compared to a net loss of $647,000 during the three months ended March 31,
2005. Losses from discontinued operations (Fantasy Sports) were $207,000 for the
quarter ended March 31, 2006 as compared to $125,000 for the comparable period
in the prior fiscal year. We recognized a net loss from continuing operations of
$401,000 during the third quarter of fiscal 2006 as compared to a loss of
$522,000 during the same period in the prior year. Strategy First registered an
operating gain of $288,000. Other factors that contributed to the loss for the
three months ended March 31, 2006 included the foreign currency loss of
$165,000, $185,000 in amortization of convertible debt discounts and issuance
costs, $75,000 in acquisition costs, and $124,000 in interest expense. None of
these expenses were incurred during the first three months of 2005.
Selected Sequential Quarterly Comparisons
Revenues
Revenues were $1,495,000 in the third quarter of fiscal 2006, an increase of
$512,000 from the quarter ended December 31, 2005. The increase in revenue over
the previous quarter was primarily the result of new online distribution
contracts signed during the quarter.
Cost of Sales
Cost of sales was $694,005 in the third quarter of fiscal 2006, or 46.4% of
total revenues. Cost of sales was 48.2% during the quarter ended December 31,
2005. The decrease in the percentage of cost of sales is due to the lower cost
of our online distribution contracts.
Selling General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended March 31,
2006 were $745,000 as compared with $728,000 for the quarter ended December 31,
2005.
Nine Months Ended March 31, 2006 as Compared to Nine Months Ended March 31, 2005
Revenues
Revenues were $2,850,000 in the first nine months of fiscal 2006.
Cost of Sales
Cost of sales was $1,330,000 in the first nine months of fiscal 2006, or 46.7%
of total revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended March 31,
2006 were $2,060,000. Selling, general and administrative expenses for Strategy
First totaled $1,307,000. Corporate overhead expenses decreased to $753,000 from
$775,000 for the previous year.
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Amortization and Depreciation
Amortization of intangible assets was $104,000 for the first three quarters of
fiscal 2006. Depreciation was $24,500 for the same period. For the comparable
period in 2005, depreciation was $6,300.
Foreign Currency Gains (Losses)
Foreign currency gains (losses) are related to the assets remaining from the
sale of our discontinued South African operations. The foreign currency losses
during the first nine months of fiscal 2006 were approximately $148,000 as
compared to a gain of $222,000 in the first nine months of fiscal 2005. Foreign
currency losses of $262,000 were related to the sale of discontinued South
African operations. Strategy First recognized $24,000 in gains and $16,000 in
gains were recognized by us on the 1 million Euros deposited with the Commercial
Court in Vienna which was subsequently returned to us. During the nine months
ended March 31, 2006 the Rand appreciated approximately 6.4% against the US
dollar, while it appreciated 1% in the corresponding period last year. Gains
(losses) from the discontinued South African operations are the result of the
fluctuations of the South African Rand against the US dollar. The gain realized
by the appreciation of the South African Rand was offset by the loss in value of
the Rand put/US dollar call option thereby resulting in a net loss for the
period.
The functional currency of Strategy First is the Canadian dollar and its
products are sold throughout the United States and Europe
Acquisition Costs Incurred
During the first nine months of fiscal 2006, we incurred approximately $285,000
in expenses pursuing the unsuccessful acquisition of and subsequent litigation
against a European software company.
Amortization of Convertible Debt Discounts and Issuance Costs
On October 31, 2005, we issued a $5,000,000 principal amount Variable Rate
Secured Convertible Note and a warrant to purchase additional shares of our
Common Stock. Based upon the closing price per share of our Common Stock on the
date of issuance, and the effective conversion rate, there was a beneficial
conversion feature. Approximately $665,000 of the proceeds was allocated to the
warrants. We 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
$308,000 during the nine months ended March 31, 2006.
Interest Expense
Interest expense of $218,000 was recorded during the first nine months of fiscal
2006 as compared to $2,300 in the same period of the prior year. Interest
expense increased primarily as a result of interest charges on the convertible
debenture security.
Interest Income
Interest income of $324,000 was recorded during the three quarters of fiscal
2006, as compared to interest income of $447,000 during the first three quarters
of fiscal 2005. This decrease is primarily due to lower principal amounts of our
notes receivable.
Provision for Income Taxes
We are registered in Bermuda, where no tax laws are applicable. Two of our
subsidiaries are subject to US income taxes. One subsidiary is subject to
Canadian Income taxes, one is subject to South African income taxes. Up to this
date, none of them has had taxable income. See "Subsequent Events." They have
incurred losses for tax purposes. The deferred tax asset generated by the tax
losses and temporary differences have been fully reserved.
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Net Income (Loss)
We recognized a net loss of $1,111,000 for the first nine months of 2006 as
compared to net income of $266,000 during the first nine months of Fiscal 2005.
Income from discontinued operations (Fantasy Sports) was $151,000 for the nine
months ended March 31, 2006 as compared to $222,000 for the comparable period in
the prior fiscal year. We recognized a net loss from continuing operations of
$1,262,000 for the nine months ending March 31, 2006 as compared to a profit of
$44,000 during the first nine months of fiscal 2005. Strategy First registered
an operating gain of $12,000 during the first nine months of Fiscal 2006. Other
factors that contributed to the loss included the foreign currency loss of
$147,000, $308,000 in amortization of convertible debt discounts and issuance
costs, $285,000 in acquisition costs, and $218,000 in interest expense. None of
these expenses were incurred during the first nine months of 2005.
Financial Condition, Liquidity and Capital Resources
Cash increased by $3,132,000 from $4, 865,000 at June 30, 2005, to $7,997,000 at
March 31, 2006.
Working capital increased $1,307,000 from $3,640,000 at June 30, 2005, to
$4,947,000 at March 31, 2006. This increase is primarily the result of our
increased cash balances and the payoff of our line of credit.
We believe we have sufficient cash balances and outstanding notes receivable to
meet our anticipated short and long-term obligations.
Currently, we carry approximately $3,400,000 in notes receivable denominated in
South African Rand. The largest of these notes, is a note from Salwin
Investments (Pty.) Ltd. After a partial prepayment of R31.5 million received in
December 2004, the remaining Salwin note has a value of R19.7 million including
accrued interest (approximately $3.3 million).
This note is secured by approximately 18% of the shares in First Lifestyle
Holdings (Pty.) Ltd. it has no fixed repayment terms and if not paid by November
2020, it will be cancelled. We monitor the financial results of First Lifestyle
Holdings on a quarterly and annual basis. It is our 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 (Pty.) Ltd. has sufficient
value to justify the carrying value of the Salwin note.
Once note payments are collected in South African Rand, the Company expects to
repatriate those funds to the United States. We believe that repatriation of the
full amount is allowable under current South African foreign currency
regulations. Over the last six years we have, 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 our ability to repatriate the remaining
assets.
Critical Accounting Policies
The following is a discussion of the accounting policies that we believe are
critical to our 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 First 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.
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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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and all highly liquid investments with
original maturities of three months or less. The vast majority of 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 March 31, 2006 totaled $886,000, which is used as collateral on our
line of credit.
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 our
strategic plans with regard to our operations. To the extent additional
information arises or our strategies change, it is possible that our conclusion
regarding goodwill impairment could change, which could have a material effect
on our financial position and results of operations. For those reasons, we
believe that the accounting estimate related to goodwill impairment is a
critical accounting estimate.
We review goodwill annually (or more frequently under certain conditions) for
impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. We performed our annual impairment test of goodwill as of June 30, 2005
and determined that goodwill was not impaired. While we believe 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, 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. Our 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.
Share-Based Payments
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
statement is a revision of SFAS NO. 123, "Accounting for Stock-Based
Compensation," supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and amends SFAS No. 95, "Statement of Cash Flows." The statement
eliminates the alternative to use the intrinsic value method of accounting that
was provided in
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SFAS No. 123, which generally resulted in no compensation expense recorded in
the financial statements related to the issuance of equity awards to employees.
The statement also requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. It establishes fair
value as the measurement objective in accounting for share-based payment
arrangements and generally requires all companies to apply a fair-value-based
measurement method in accounting for share-based payment transactions with
employees. In March 2005, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin 107 which describes the SEC staff's
expectations in determining the assumptions that underlie the fair value
estimates and discusses the interaction of SFAS No. 123R with existing guidance.
The Company has adopted SFAS No. 123R effective January 1, 2006, using the
modified prospective application method in accordance with the statement. This
application requires the Company to record compensation expense for all awards
granted after the adoption date and for the unvested portion of awards that are
outstanding at the date of adoption.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading
purposes. We do however recognize market risk from interest rate and foreign
currency exchange exposure.
Interest Rate Risk
At March 31, 2006, our cash resources and notes receivable earned interest at
variable rates. We also pay interest at variable rates on long term debt.
Accordingly, any change in interest rates will affect our 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 March 31, 2006 Strategy First had net assets of $353,000 originating
in Canadian dollars and net assets of $344,000 originating in Euros.
Certain of our cash balances and the remaining notes receivable from the sale of
our South African subsidiaries are denominated in South African Rand. This has
exposed us to market risk with respect to fluctuations in the relative value of
the South African Rand against the US dollar.
On March 9, 2005, we 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 served as
partial protection against the depreciation of the SA Rand versus the US dollar.
The cost of the option was approximately $200,000 and it was liquidated for
$28,000 in March 2006. Currently we have no foreign currency hedges in place.
At March 31, 2006, we had assets denominated in South African Rand of R32.9
million, (approximately $5.5 million).
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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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on March 30, 2006,
shareholders of the Company elected the following nominees to the Board of
Directors to serve a one-year term. Votes cast were as follows:
Michael Levy
For: 10,307,206
Withheld: 83,071
Clive Kabatznik
For: 10,309,706
Withheld: 80,571
Cornelius J. Roodt
For: 10,307,206
Withheld: 83,071
John T. Grippo
For: 10,312,331
Withheld: 77,946
Douglas Brisotti
For: 10,312,301
Withheld: 77,976
Shareholders approved a proposal to approve the issuance of up to (a) 2,876,870
shares of the Company's Common Stock underlying a $5,000,000 principal amount
Variable Rate Secured Convertible Debenture due October 31, 2008 and (b) 791,139
shares of the Company's Common Stock underlying a warrant dated October 31,
2005. Votes were cast as follows:
For: 5,900,816
Against: 62,007
Abstention: 13,550
Broker Non-Votes 4,413,904
Shareholders ratified the appointment of Rachlin Cohen & Holtz LLP as the
Company's independent public accountants for fiscal 2006. Votes were cast as
follows:
For: 10,328,931
Against: 57,746
Abstention: 3,600
Broker Non-Votes 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
31.1 Certification pursuant to 18 U.S.C. 1350 adopted 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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Reports on Form 8-K
1. Current Report on Form 8-K filed on February 16, 2006.
2. Current Report on Form 8-K filed on April 5, 2006.
3. Current Report on Form 8-K filed on April 12, 2006.
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SILVERSTAR HOLDINGS LTD - 10-Q
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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: May 15, 2006
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
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Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
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