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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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
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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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ____No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of February 4,
2003 was 8,769,058.
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets at December 31, 2002 (Unaudited)
and June 30, 2002
Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended December 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
six months ended December 31, 2002 and 2001
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
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$1,229,666 and $925,600, respectively $ 2,049,566 $ 2,650,476
Accounts receivable, net 295,529 267,408
Inventories 232,148 121,630
Current portion of notes receivable 321,005 409,971
Prepaid expenses and other current assets 171,143 150,829
----------- -----------
Total current assets 3,069,391 3,600,314
Property, plant and equipment, net 182,692 216,179
Investments in affiliates 843,566 843,566
Long-term notes receivable 5,146,312 3,859,138
Goodwill 3,383,862 3,383,862
Intangible assets, net 681,625 1,063,375
Deferred charges and other assets 6,130 4,855
----------- -----------
Total assets $13,313,578 $12,971,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 640,527 $ 103,955
Current portion of long term debt 17,102 22,682
Accounts payable 522,938 374,572
Other provisions and accruals 394,777 395,187
Deferred revenue 735,969 1,020,044
----------- -----------
Total current liabilities 2,311,313 1,916,440
Long term debt 26,692 35,776
Obligation related to acquisition of Student Sports 807,000 807,000
----------- -----------
Total liabilities 3,145,005 2,759,216
----------- -----------
Stockholders' equity:
Capital stock:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, class A, $0.01 par value; 50,000,000
shares authorized; 7,839,610 and 8,001,310 shares
issued and outstanding, respectively 78,296 80,013
Common stock, class B, $0.01 par value; 2,000,000
shares authorized; 946,589 shares issued and
outstanding 9,466 9,466
Common stock, FSAH Class B, R0.001 par value;
10,000,000 shares authorized; 2,671,087 shares
issued and outstanding 600 600
Additional paid-in capital 63,740,452 63,763,870
Accumulated deficit (53,660,241) (53,641,876)
----------- -----------
Total stockholders' equity 10,168,573 10,212,073
----------- -----------
Total liabilities and stockholders' equity $13,313,578 $12,971,289
=========== ===========
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31,
2002 2001
---- ----
Revenues $986,758 $1,023,202
Operating expenses:
Cost of sales 627,536 540,071
Selling, general and administrative 951,484 1,174,998
Impairment of intangible assets 322,000 --
Amortization of intangible assets 29,875 29,875
Depreciation 21,984 20,008
---------- -----------
1,952,879 1,764,952
---------- -----------
Operating loss (966,121) (741,750)
Other expense (4,484) (47,672)
Foreign currency gains (losses) 1,008,389 (1,278,598)
Interest income 157,893 141,545
Interest expense (8,405) (2,460)
---------- -----------
Income/(loss) from operations, before income taxes 187,272 (1,928,935)
Provision for income taxes -- --
---------- -----------
Net income/(loss): $187,272 $(1,928,935)
========== ===========
Net income/(loss) per share:
Basic $0.02 $(0.22)
===== ======
Diluted $0.02 $(0.22)
===== ======
Weighted average common stock outstanding:
Basic 8,807,180 8,969,899
========== =========
Diluted 10,531,990 8,969,899
========== =========
See notes to condensed consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended December 31,
2002 2001
---- ----
Revenues $2,434,122 $2,020,226
Operating expenses:
Cost of sales 1,359,301 990,142
Selling, general and administrative 1,858,647 2,011,645
Impairment of intangible assets 322,000 --
Amortization of intangible assets 59,750 46,625
Depreciation 48,325 37,140
---------- ----------
3,648,023 3,085,552
---------- ----------
Operating loss (1,213,901) (1,065,326)
Other expense (4,326) (47,672)
Foreign currency gains (losses) 910,466 (2,000,054)
Interest income 303,572 372,321
Interest expense (14,176) (11,572)
---------- ----------
Net loss from operations, before income taxes (18,365) (2,752,303)
Provision for income taxes -- --
---------- ----------
Net loss $(18,365) $(2,752,303)
========== ==========
Net loss per share:
Basic and diluted $(0.00) $(0.32)
========== ==========
Weighted average common stock outstanding: 8,873,899 8,552,997
========== ==========
See notes to condensed consolidated financial statements.
5
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended December 31,
2002 2001
---- ----
Cash flow from operating activities:
Net loss $(18,365) $(2,752,303)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of intangible assets 322,000 --
Depreciation and amortization 108,075 83,765
Provision for doubtful accounts 1,390 --
Foreign currency (gains) losses (1,111,026) 1,825,969
Loss on disposal of fixed assets 6,502 --
Non-cash interest income on notes receivable (269,733) (242,592)
Changes in operating assets and liabilities (296,462) (1,096,608)
Changes in other assets (1,275) 169,309
Increase in debenture redemption reserve fund -- 4,248
---------- ----------
Net cash used in operating activities (1,258,894) (2,008,212)
Cash flows from investing activities:
Acquisition of property, plant and equipment (25,868) (5,445)
Return of purchase price Fantasy Sports -- 200,000
Investment in affiliates -- (200,000)
Decrease in long-term notes receivable 181,956 231,918
---------- ----------
Net cash provided by investing activities 156,088 226,473
---------- ----------
Cash flows from financing activities:
Short term borrowings, net 536,572 50,000
Repayment of long term debt (9,541) (368,795)
Repurchase of treasury shares (25,135) (52,797)
---------- ----------
Net cash provided by (used in) financing activities 501,896 (371,592)
---------- ----------
Net decrease in cash and cash equivalents (600,910) (2,153,331)
Cash and cash equivalents, beginning of period 2,650,476 5,664,013
---------- ----------
Cash and cash equivalents, end of period $2,049,566 $3,510,682
========== ==========
Supplemental cash flow information:
Cash paid for interest $14,176 $5,848
========== ==========
See notes to condensed consolidated financial statements.
6
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL INFORMATION
Silverstar Holdings, Ltd. (the "Company"), was founded on September 6, 1995. In
fiscal 2001, the purpose of the Company changed from acquiring and operating
South African Companies to investing in companies that fit a predefined
investment strategy.
On November 17, 2000, the Company acquired Fantasy Sports, Inc. ("Fantasy").
Fantasy specializes in Internet-based subscriptions for NASCAR, college football
and basketball and other fantasy sports games and sale of die-cast racing cars.
On September 24, 2001, the Company acquired Student Sports, Inc. ("Student
Sports"), a media company producing publications, television programs and
various marketing initiatives for the high school sports market.
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, 2002 and the results of operations and cash flows for the interim periods of
the fiscal year ending June 30, 2003 ("fiscal 2003") and the fiscal year ended
June 30, 2002 ("fiscal 2002") 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, 2002.
Certain amounts in the fiscal 2002 financial statements have been reclassified
to conform to the fiscal 2003 presentation.
NET INCOME OR LOSS PER SHARE
Basic net income or loss per share is computed by dividing net income or loss
by the weighted average number of common shares outstanding. Diluted net income
or loss per share is computed by dividing net income or loss by the weighted
average number of common shares outstanding and dilutive potential common shares
which includes 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. The diluted share base for the three months ended
December 31, 2001 excludes shares of 1,736,205 and for the six months ended
December 31, 2002 and 2001 excludes shares of 1,726,344 and 1,119,478,
respectively. These shares are excluded due to their anti-dilutive effect as a
result of the Company's net loss from operations for the three and six months
ended December 31, 2001.
7
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement requires that the amount recorded as a liability be
capitalized by increasing the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the liability is accreted to the ultimate
amount anticipated to be paid, and is also adjusted for revisions to the timing
or amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for fiscal 2003. The adoption of this
statement did not have a significant impact on the results of operations or
financial position of the Company.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement provides a single comprehensive
accounting model for impairment of long-lived assets and discontinued
operations. SFAS 144 became effective in the first quarter of fiscal 2003. The
adoption of this statement did not have a significant impact on the results of
operations or financial position of the Company.
3. INTANGIBLE ASSETS
The components of amortizable intangible assets as of December 31, 2002 and June
30, 2002 are as follows:
Cost as of Accumulated Amortization
December 31 December 31, June 30,
and June 30, 2002 2002 2002
----------------- ---- ----
Customer Lists $245,000 $160,125 $122,875
Noncompete agreement 225,000 56,250 33,750
-------- -------- --------
$470,000 $216,375 $156,625
======== ======== ========
The components of intangible assets that have an indefinite life and are not
amortizable at December 31, 2002 and June 30, 2002 are as follows:
Trade Names $163,000 $485,000
Internet domain 65,000 65,000
Video and audiovisual materials 50,000 50,000
Copyright registration 75,000 75,000
Statistics database 75,000 75,000
-------- --------
$428,000 $750,000
======== ========
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually. During the second quarter of fiscal 2003, the Company
prepared a valuation of Student Sports, Inc. (SSI), which valued SSI at
approximately $428,400. The valuation was based on projected calendar 2003 cash
flows for SSI of approximately $125,500 and a capitalization rate of 30%. The
methodology used to value SSI is consistent with the valuation performed by a
third party valuation firm when SSI was acquired. However, due to the current
economic environment, and the fact that SSI did not meet its fiscal 2002
projections, management determined that the
8
capitalization rate should be adjusted for increased risk and therefore used a
capitalization rate of 30%. Management believes that SSI's future cash flows
will be generated primarily by the non-amortized intangible assets. Accordingly,
the carrying value of SSI's non-amortized intangible assets of $750,000 has been
reduced to approximately $428,400, resulting in an impairment loss of
approximately $322,000.
Amortization expense for intangible assets for the first six months of fiscal
2003 was $59,750. Estimated amortization expense for the rest of fiscal 2003 and
for the succeeding four fiscal years after that is as follows:
2003 $59,750
2004 69,750
2005 53,500
2006 47,875
2007 12,250
The balance in goodwill by business segment is as follows:
Internet
Fantasy
Marketing Sports
Services Games Total
-------- ---------- ----------
Balance at December 31, 2002 and June 30, 2002 $436,038 $2,947,824 $3,383,862
======== ========== ==========
During the second quarter, the Company performed the goodwill impairment test
for Student Sports, Inc. (SSI). As discussed above, the Company prepared a
valuation of SSI, which valued SSI at approximately $428,400. This value
exceeded the carrying value of SSI at December 31, 2002 (including goodwill) and
therefore no impairment of goodwill exists at this time.
4. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Six Months Ended December 31,
2002 2001
---- ----
(Increase)/ decrease in accounts receivable $ (29,511) $ 68,924
(Increase)/decrease in inventories (110,518) 161,512
(Increase)/decrease in prepaid expenses and other current assets (20,314) 38,202
Increase/(decrease) in accounts payable 148,366 (415,820)
Decrease in other provisions and accruals (284,485) (949,426)
--------- -----------
$(296,462) $(1,096,608)
========= ===========
During the six months ended December 31, 2001, the Company issued stock valued
at $484,200 and recorded liabilities of $903,045, including the $807,000 to be
settled by issuance of the Company's stock in March 2004, to acquire the assets
of Student Sports. In addition, during the six months ended December 31, 2002
and 2001, the Company retired 171,700 and 55,000 shares of Class A common stock
that it had repurchased for $25,135 and $52,797, respectively.
9
5. BUSINESS SEGMENTS
The Company operates in two segments - marketing services and Internet fantasy
sports games. The operations of the marketing services segment produces
publications, television programs and various marketing initiatives for the high
school sports market. 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 products and services it provides.
Information concerning the results of operations for the three and six months
ended December 31, 2002 and 2001 and information concerning identifiable assets
as of December 31, 2002 and June 30, 2002 for the two segments in which the
Company operates are shown in the following table. Identifiable assets by
segment are those assets that are used in the Company's operations in each
segment. Corporate assets are principally cash and notes receivable. The Company
does not have any operations outside of the United States.
Identifiable Assets: December 31, 2002 June 30, 2002
----------------- -------------
Segments:
Marketing services $1,607,308 $ 1,910,896
Internet fantasy sports games 3,503,512 3,439,032
----------- -----------
5,110,820 5,349,928
Corporate 8,202,758 7,621,361
----------- -----------
Consolidated Totals $13,313,578 $12,971,289
=========== ===========
Three Months Ended December 31,
Revenues 2002 2001
---- ----
Segments:
Marketing services $ 335,232 $ 339,541
Internet fantasy sports games 651,526 683,661
----------- -----------
Consolidated totals $986,758 $1,023,202
=========== ===========
Loss from operations:
Segments:
Marketing services $(432,737)$ (194,773)
Internet fantasy sports games (204,152) (244,564)
----------- -----------
(636,889) (439,337)
Corporate:
Corporate general and administrative expenses (329,232) (302,413)
Other expense (4,484) (47,672)
Foreign currency gains/(losses) 1,008,389 (1,278,598)
Interest income 157,893 141,545
Interest expense (8,405) (2,460)
----------- -----------
Consolidated totals $ 187,272 $(1,928,935)
=========== ===========
10
Six Months Ended December 31,
Revenues: 2002 2001
---- ----
Segments:
Marketing services $ 761,282 $ 339,541
Internet fantasy sports games 1,672,840 1,680,685
----------- -----------
Consolidated totals $2,434,122 $2,020,226
=========== ===========
Loss from operations:
Segments:
Marketing services $(595,405)$ (194,773)
Internet fantasy sports games (85,653) (250,338)
----------- -----------
(681,058) (445,111)
Corporate:
Corporate general and administrative expenses (532,843) (620,215)
Other expense (4,326) (47,672)
Foreign currency gains/(losses) 910,466 (2,000,054)
Interest income 303,572 372,321
Interest expense (14,176) (11,572)
----------- -----------
Consolidated totals $ (18,365) $(2,752,303)
=========== ===========
6. DEBT
LINES OF CREDIT
In June, 2002, Fantasy Sports obtained a secured line of credit facility for
borrowings up to $1.0 million, which is fully secured against cash balances held
in the Company's account. This facility is due on demand and has an interest
rate of 3.75%. The balance outstanding under this line of credit at December 31,
2002, was $440,527.
The Company also had an unsecured line of credit utilized by Fantasy Sports.
This facility is payable on demand and bears interest based on prime plus 1/2%
(5.25% at December 31, 2002). The balance outstanding under this line of credit
totaled $50,000 at December 31, 2002.
In addition, the Company has a $150,000 secured line of credit facility utilized
by Student Sports, which is fully secured against cash balances held in the
Company's account. This facility is due on demand and has an interest rate of
5.25%. The balance outstanding under this line of credit at December 31, 2002
was $150,000.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND AND HISTORY
Silverstar Holdings, Ltd. (the "Company") was incorporated in September 1995.
The Company's intention is to actively pursue acquisitions fitting a predefined
investment strategy:
o Acquiring controlling stakes in small, high quality, sports media and
marketing businesses with strong management teams that are positioned to
use technology and Internet related platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium
term, to earnings per share through operating profit or capital
appreciation.
o We aim to add value to our investments by operating in partnership with
committed, incentivised, entrepreneurial management who show the vision and
ability to grow their businesses into industry or niche leaders.
On September 24, 2001, a newly created subsidiary of the Company, Student
Sports, Inc., acquired all the assets and business and assumed certain
liabilities of Student Sports, a media company, producing publications,
television programs and various marketing initiatives for the high school sports
market.
During fiscal 2001, the Company disposed of its last remaining South African
operating subsidiary. The Company still has significant assets that are
denominated in South African Rand. The assets include cash and notes receivable.
As long as the Company holds the notes and maintains bank accounts denominated
in Rand, the Company will incur income statement charges to the extent that the
Rand devalues relative to the US dollar. At the present time, management has no
intention of disposing of the notes receivable.
RESULTS OF OPERATIONS
Both of the Company's subsidiaries have seasonal trends that affect the revenues
and results of their businesses. Fantasy Sports accrues its revenues and
recognizes most of its income during the June and September quarters. Therefore,
the results for the December and March quarters are negatively affected by this
seasonality. Student Sports, while somewhat less affected by seasonal factors,
generates less revenues in the December quarter than during the rest of the
year.
QUARTER ENDED DECEMBER 31, 2002 AS COMPARED TO QUARTER ENDED DECEMBER 31, 2001
REVENUES
Revenues were $987,000 in the second quarter of fiscal 2003 as compared to
$1,023,000 in the same period in the prior year. Fantasy Sports sales were
slightly lower than the prior year, due to a decrease of approximately $117,000
in revenues from the NASCAR and College Football games, offset by increased
merchandise sales. Student Sports sales were basically unchanged from the prior
year's second quarter.
COST OF SALES
Cost of sales were $628,000 in the second quarter of fiscal 2003 as compared to
$540,000 in the same period of the prior year. The increase is primarily a
result of increases in the cost of prize winnings, offset by reduced payroll and
facility expenses at Fantasy Sports.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended December 31,
2002 were $951,000 a decrease of approximately $224,000 over same period in the
prior year. The decrease was in Fantasy Sport's selling expenses, primarily
advertising costs, and a decline in general and administrative expenses across
all segments due to cost control measures implemented in the second half of
2002. The Company continues to implement cost control measures to reduce
operating losses and achieve profitability.
IMPAIRMENT OF INTANGIBLE ASSETS
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. During the second quarter of fiscal 2003, the Company
prepared a valuation of Student Sports, Inc. (SSI), which valued SSI at
approximately $428,400. The valuation was based on projected calendar 2003 cash
flows for SSI of approximately $125,500 and a capitalization rate of 30%. The
methodology used to value SSI is consistent with the valuation performed by a
third party valuation firm when SSI was acquired. However, due to the current
economic environment, and that SSI did not meet its fiscal 2002 projections,
management determined that the capitalization rate should be adjusted for
increased risk and therefore used a capitalization rate of 30%. Management
believes that SSI's future cash flows will be generated primarily by the
non-amortized intangibles assets. Accordingly, the carrying value of SSI's
non-amortized intangible assets of $750,000 has been reduced to the value
calculated of approximately $428,400, resulting in an impairment loss of
approximately $322,000.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets were unchanged at $30,000 in the second
quarter of fiscal 2002. Depreciation expense was basically unchanged at $22,000
in fiscal 2003 as compared to the prior year.
FOREIGN CURRENCY GAINS (LOSSES)
Foreign currency gains or losses are related to the assets remaining from the
sale of discontinued South African operations. The foreign currency gains during
the second quarter of fiscal 2003 were $1,008,000 as compared to losses of
$1,279,000 in the second quarter of fiscal 2002. These gains and losses are a
result of the fluctuations of the South African Rand against the US dollar.
During the quarter ended December 31, 2002, the Rand appreciated approximately
18% against the US dollar, while it depreciated 33% in the corresponding period
last year. These foreign currency gains and losses are non cash items until
converted into US dollars, when any accumulated gains or losses will be
converted into cash.
INTEREST INCOME
Interest income of $158,000 was recorded during the second quarter of fiscal
2003, as compared to interest income of $142,000 during the second quarter of
fiscal 2002. The increase in interest income in fiscal 2003 was primarily the
result of the appreciation of the South African Rand against the US dollar since
the prior year, which affects interest earned on Notes Receivable from the sale
of the South African operations, offset by lower invested cash balances.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to income taxes. Up to this date, none of
them has had
13
taxable income. They have incurred losses for tax purposes. The deferred tax
asset generated by the tax losses and temporary differences has been fully
reserved.
NET PROFIT (LOSS)
The Company recognized net income of $187,000 during the second quarter of
fiscal 2003 as compared to a loss of $1,929,000 during the same period in the
prior year. The improvement in income over the prior year is primarily a result
of the foreign currency gains as a result of the appreciation of the South
African Rand rate against the US dollar during the second quarter of fiscal year
2003 compared to depreciation in the second quarter of the prior year.
Additionally, Fantasy Sports generated a smaller operating loss due to reduction
of corporate general and administrative expenses. These expenses were also
reduced at the corporate level as compared to a comparable period during the
prior year. These gains were offset by a loss due to impairment of intangible
assets at Student Sports.
SIX MONTHS ENDED DECEMBER 31, 2002 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2001
REVENUES
Revenues were $2,434,000 in the first six months of fiscal 2003 as compared to
$2,020,000 in the same period in the prior year. The increase was primarily the
result of the acquisition of Student Sports, which was acquired at the end of
the first quarter of fiscal 2002. Fantasy Sports sales were basically even with
the prior year, with decreases in revenues from the NASCAR and College Football
games offset by increased merchandise sales and outside promotions.
COST OF SALES
Cost of sales were $1,359,000 in the first six months of fiscal 2003 as compared
to $990,000 in the same period of the prior year. The increase is primarily a
result the acquisition of Student Sports at the end of the first quarter of the
prior year. In addition, Fantasy Sports showed an increase in the cost of prize
winnings as a result of new games added during fiscal 2003 and increased costs
of retail merchandise sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended December
31, 2002 were $1,859,000, a decrease of approximately $153,000 over same period
in the prior year. The decrease was in Fantasy Sport's selling expenses,
primarily advertising costs, and a decline in general and administrative
expenses in general due to cost control measures implemented during the second
half of 2002. The Company continues to implement cost control measures to reduce
operating losses and achieve profitability. The decrease was offset by an
increase due to the acquisition of Student Sports at the end of the first
quarter of the prior year.
IMPAIRMENT OF INTANGIBLE ASSETS
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. During the second quarter of fiscal 2003, the Company
prepared a valuation of Student Sports, Inc. (SSI), which valued SSI at
approximately $428,400. The valuation was based on projected calendar 2003 cash
flows for SSI of approximately $125,500 and a capitalization rate of 30%. The
methodology used to value SSI is consistent with the valuation performed by a
third party valuation firm when SSI was acquired. However, due to the current
economic environment, and that SSI did not meet its fiscal 2002 projections,
management determined that the capitalization rate should be adjusted for
increased risk and therefore used a capitalization rate of 30%.
14
Management believes that SSI's future cash flows will be generated primarily by
the non-amortized intangibles assets. Accordingly, the carrying value of SSI's
non-amortized intangible assets of $750,000 has been reduced to the value
calculated of approximately $428,400, resulting in an impairment loss of
approximately $322,000.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets increased from $47,000 in the first six months
of fiscal 2002 to $60,000 in the same period of the current year. Depreciation
expense increased to $48,000 in fiscal 2003 from $37,000 in the prior year,
primarily as a result of the acquisition of Student Sports during the prior
year.
FOREIGN CURRENCY GAINS (LOSSES)
Foreign currency gains or losses are related to the assets remaining from the
sale of discontinued South African operations. The foreign currency gains during
the first six months of fiscal 2003 were $910,000 as compared to losses of
$2,000,000 in the first six months of fiscal 2002. These gains and losses are a
result of the fluctuations of the South African Rand against the US dollar.
During the six months ended December 31, 2002, the Rand appreciated
approximately 17% against the US dollar, while it depreciated 50% in the
corresponding period last year. These foreign currency gains and losses are non
cash items until converted into US dollars, when any accumulated gains or losses
will be converted into cash.
INTEREST INCOME
Interest income of $304,000 was recorded during the first six months of fiscal
2003, as compared to interest income of $372,000 during the same period in
fiscal 2002. The decrease in interest income in fiscal 2003 was primarily the
result of lower invested cash balances and lower US interest rates. Interest
earned on Notes Receivable from the sale of the South African operations were
basically even with the prior year.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to income taxes. Up to this date, none of
them has had taxable income. They have incurred losses for tax purposes. The
deferred tax asset generated by the tax losses and temporary differences has
been fully reserved.
NET LOSS
The Company recognized net loss of $18,000 during the first six months of fiscal
2003 as compared to a loss of $2,752,000 during the same period in the prior
year. The improvement in income over the prior year is primarily a result of the
foreign currency gains as a result of the appreciation of the South African Rand
rate against the US dollar during the second quarter of fiscal year 2003
compared to depreciation in the second quarter of the prior year. There was also
a decrease in Fantasy Sport's selling expenses, primarily advertising costs, and
a decline in general and administrative expenses in general due to cost control
measures implemented during the second half of 2002. These improvements were
offset by an impairment loss on intangible assets at Student Sports.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $601,000 from $2,650,000 at June 30, 2002 to $2,050,000 at
December 31, 2002. The decrease in cash is a result of the payment of operating
expenses of the company in excess of revenues collected, as well as a loan of
approximately $230,000 made to one of the Company's former South African
subsidiaries. This loan was made to facilitate a restructuring of that company's
capital structure and reduce our overall guarantees for their bank facilities.
15
This note will bear interest at 5% per annum and will be repaid within 48
months. The balance of the remaining cash is being held for working capital
purposes and to fund potential investments.
The Company has guaranteed certain bank facilities of some of its former
industrial subsidiaries in South Africa. As a result of the previously mentioned
loan these guarantees have been reduced to approximately $640,000 from
approximately $1,200,000 during fiscal 2002 and are secured by like amounts of
cash. Under the revised loan agreement (previously mentioned) we anticipate
these guarantees to reduce by approximately $12,000 per month. In the event
these guarantees are called, the Company has recourse to certain assets of these
former subsidiaries, which should substantially cover the Company's potential
exposure.
Working capital decreased $926,000 to $758,000 at December 31, 2002 from
$1,684,000 at June 30, 2002. This decrease is primarily the result of an
increase in short term borrowings under lines of credit, offset by increases in
inventory and accounts receivable balances.
At December 31, 2002, the Company had borrowings of $684,000, which consisted of
$641,000 of advances against lines of credit secured by like amounts of cash and
$44,000 of equipment loans. Approximately $491,000 of these borrowings were
incurred by the Fantasy Sports division.
Due to the seasonality of this division's revenue collection cycle, we
anticipate that these borrowings will be substantially reduced by mid February
2003. The Company continues to reduce its expenses in order to preserve its cash
balances and reduce its losses. As a result, we anticipate further reductions in
the outflow of operating capital during the remainder of fiscal 2003. These
factors, along with the current cash balances will allow the Company to meet its
obligations for the foreseeable future.
The Company intends to continue to work on building its existing portfolio of
subsidiaries in terms of revenues and profitability. It may also acquire further
synergistic businesses and may therefore utilize a portion of its remaining cash
balances and the proceeds of its disposal of Lifestyle to fund this strategy to
the extent that suitable acquisition candidates can be identified. The Company
may be required to incur additional indebtedness or equity financing in
connection with the funding of future acquisitions. There is no assurance that
the Company will be able to secure additional indebtedness or raise additional
equity to finance future acquisitions on terms acceptable to management, if at
all. The Company may also seek to dispose of its operating subsidiaries should
it be unable to find appropriate synergistic acquisitions, or if its
subsidiaries fail to meet operating goals.
FUTURE COMMITMENTS
Through December 31, 2002, Fantasy and Student Sports, the Company's operating
subsidiaries, had incurred net losses from operations. The Company anticipates
that this situation will be rectified through a combination of expense
reductions and increased revenues. However, there are no assurances that these
changes will be successful. In the event that these plans are not successful,
the Company may need to continue to support the operations of its subsidiaries.
The Company intends to bring its operating subsidiaries to profitability and to
preserve its cash balances to the best of its ability. The Company anticipates
continued repayments from certain notes receivable.
16
CRITICAL ACCOUNTING POLICIES
The following is a discussion of the accounting policies that the Company
believes are critical to its operations:
REVENUES
Revenues generated by Fantasy are seasonal from mid-February to the end of
November. Fantasy collects its revenue at the beginning and mid-point of the
season and recognizes this deferred revenue pro rata over the season. Student
Sports recognizes subscription revenue over the life of the subscription. For
event-type revenue, revenue is recognized over the course of the contract in
proportion to the expenses for the period compared to total expenses anticipated
for the specific event. Revenues from television sports shows produced by
Student Sports for television stations are recognized when the show is aired.
Student Sports, while somewhat less affected by seasonal factors, generates less
revenues in the December quarter than during the rest of the year.
GOODWILL
The Company adopted SFAS 142 during fiscal 2002 and no longer amortizes
goodwill. The Company tests goodwill for impairment in the fourth quarter for
Fantasy Sports, Inc. The goodwill impairment test for Student Sports, Inc. and
subsequent acquisitions will be performed on the one year anniversary of the
acquisition and in that period thereafter. The goodwill impairment test for
Student Sports Inc. was performed during the second quarter of fiscal 2003 and
it was determined that no impairment existed. The Company performs the
impairment test in accordance with SFAS 142 "Goodwill and Other Intangible
Assets." SFAS 142 requires that the fair value of the reporting unit be compared
to the carrying value, including goodwill, as the first step in the impairment
test. The Company determined fair value for Fantasy at June 30, 2002, by
developing a ratio of revenue to market capitalization utilizing the Company and
comparable publicly traded companies in the same industry and applying this
ratio to revenue of the reporting unit. The Company determined fair value for
Student Sports, Inc. based on projected cash flows for fiscal 2003, multiplied
by a capitalization rate of 30%.
INTANGIBLE ASSETS
Intangible assets include trademarks, customer lists and other intellectual
property and non-competition agreements. Intangible assets, excluding goodwill,
are stated on the basis of cost and are amortized on a straight-line basis over
a period of three to ten years. Intangible assets with indefinite lives are not
amortized but are evaluated for impairment annually unless circumstances dictate
otherwise. Management periodically reviews intangible assets for impairment
based on an assessment of undiscounted future cash flows, which are compared to
the carrying value of the intangible assets. Should these cash flows not equate
to or exceed the carrying value of the intangible, a discounted cash flow model
is used to determine the extent of any impairment charge required. During the
second quarter of fiscal 2003, the Company evaluated the goodwill and intangible
assets of Student Sports for impairment losses. While the goodwill was not
impaired, it was determined that there was an impairment loss of $322,000 for
intangible assets as discussed in footnote three to the condensed consolidated
financial statements in Item 1 of Part I.
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement requires that the amount recorded as a liability be
capitalized by increasing the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the liability is accreted to the ultimate
amount anticipated to
17
be paid, and is also adjusted for revisions to the timing or amount of estimated
cash flows. The capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for fiscal 2003. The adoption of this statement did not
have a significant impact on the results of operations or financial position of
the Company.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement provides a single comprehensive
accounting model for impairment of long-lived assets and discontinued
operations. SFAS 144 became effective in the first quarter of fiscal 2003. The
adoption of this statement did not have a significant impact on the results of
operations or financial position of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
SFAS 148 amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
has not determined whether it will adopt the fair value method of accounting for
stock-based employee compensation.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes. The company does however recognize market risk from interest
rate and foreign currency exchange exposure.
INTEREST RATE RISK
At December 31, 2002, the Company's cash resources earn interest at variable
rates. Accordingly, the Company's return on these funds is affected by
fluctuations in interest rates. Any decrease in interest rates will have a
negative effect on the Company's earnings. Using the December 31, 2002 balances
and rates, it is estimated that a 1/2 of 1% increase in interest rates would
increase interest expense by approximately $3,200. There is no assurance that
interest rates will increase or decrease over the next fiscal year.
FOREIGN CURRENCY RISK
Certain of the Company's cash balances and the remaining proceeds from the sale
of its South African subsidiaries are denominated in South African Rand. This
exposes the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Due to the prohibitive
cost of hedging these proceeds, the exposure has not been covered as yet. Should
more favorable conditions arise, a suitable Rand hedge may be considered by
management. For every 1% decline in the Rand/US Dollar exchange rate, at
quarter-end exchange rates, the Company loses $1,151 on every R1 million
retained in South Africa. At December 31, 2002, the Company had total assets
denominated in South African Rand of R47.64 million.
18
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during the three months
ended December 31, 2002:
Foreign Currency
Gain/(Loss) for the Six
Months Ended
December 31, 2002 December 31, 2002
----------------- -----------------
in Rand US Dollars
Cash 561,085 $ 10,861
Notes Receivable, net of reserve 46,933,613 908,539
Other (8,934)
--------
$910,466
========
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.
In January 2003, under the supervision and review of our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them in a timely
manner to material information regarding us (including our consolidated
subsidiaries) that is required to be included in our periodic reports to the
SEC.
In addition, there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls since our
January 2003 evaluation. We cannot assure you, however, that our system of
disclosure controls and procedures will always achieve its stated goals under
all future conditions, no matter how remote.
19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 16, 2002 the Company held its annual meeting of stockholders. At the
annual meeting, the Company's stockholders elected five directors to serve until
the next annual meeting and until their respective successors are elected and
qualified. At the annual meeting, the Company's stockholders also approved and
adopted a proposal to ratify the action of the Board of Directors in appointing
Rachlin Cohen & Holtz LLP as the Company's independent public accountants for
the fiscal year ending June 30, 2003. The votes for directors were as follows:
Votes
----------------------------
For Withheld
--------- --------
Michael Levy 9,452,088 28,260
Clive Kabatznik 9,452,088 28,260
Cornelius J. Roodt 9,452,088 28,260
Stanley Castleton 9,452,088 28,260
Joseph Weil 9,452,088 28,260
The votes to approve and adopt a proposal to ratify the action of the Board of
Directors in appointing Rachlin Cohen & Holtz LLP as the Company's independent
public accountants for the fiscal year ending June 30, 2003 were as follows:
For Against Abstain
--------- ------- -------
9,463,548 16,800 0
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 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:
None.
20
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 12, 2003
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
-------------------
Clive Kabatznik
Chief Executive Officer, President and Chief
Financial Officer
21
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 FOR
---------------------------------------------------------------------------
QUARTERLY REPORTS ON FORM 10-Q
------------------------------
I, Clive Kabatznik, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Silverstar Holdings,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003 /s/ Clive Kabatznik
------------------------
Clive Kabatznik
Chief Executive Officer
Chief Financial Officer
22