SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
- --- For the quarterly period ended March 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
SILVERSTAR HOLDINGS, LTD.
-------------------------
(Exact name of Registrant as Specified in Its Charter)
Bermuda Not Applicable
- --------------------------------------- --------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
CLARENDON HOUSE, CHURCH STREET, HAMILTON HM CX, BERMUDA
-------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number, Including Area Code: 809-295-1422
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes ____No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of May 10, 2002 was
8,947,899.
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets at March 31, 2002 (Unaudited)
and June 30, 2001
Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 2002 and 2001
Condensed Consolidated Statements of Operations (Unaudited) for the
nine months ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended March 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
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2002 2001
---- ----
(Unaudited)
Current assets
Cash and cash equivalents $ 3,499,681 $ 5,664,013
Accounts receivable, net 292,441 --
Inventories 48,310 377,721
Current portion of notes receivable 320,051 411,266
Prepaid expenses and other current assets 132,774 153,148
------------ ------------
Total current assets 4,293,257 6,606,148
Property, plant and equipment, net 230,866 167,464
Investments in affiliates 831,066 631,066
Long-term notes receivable 3,575,438 5,033,080
Intangible assets, net 4,356,401 3,487,799
Deferred charges and other assets 4,855 6,300
------------ ------------
Total assets $ 13,291,883 $ 15,931,857
============ ============
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2002 2001
---- ----
(Unaudited)
Current liabilities
Bank overdraft $ -- $ 92,887
Current portion of long term debt -- 361,836
Accounts payable 251,505 421,316
Other provisions and accruals 232,538 553,742
Deferred revenue 1,523,428 923,366
------------ ------------
Total current liabilities 2,007,471 2,353,147
Long term debt 9,434 --
Obligation related to acquisition of Student Sports 807,000 --
------------ ------------
Total liabilities 2,823,905 2,353,147
------------ ------------
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; 23,000,000
shares authorized; 8,001,310 and 7,178,310 shares
issued and outstanding, respectively 80,013 71,783
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 63,763,870 63,349,937
Accumulated deficit (53,385,971) (49,853,076)
------------ ------------
Total stockholders' equity 10,467,978 13,578,710
------------ ------------
Total liabilities and stockholders' equity $ 13,291,883 $ 15,931,857
============ ============
See notes to condensed consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
---- ----
Revenues $ 985,172 $ 511,900
Operating expenses:
Cost of sales 751,986 404,107
Selling, general and administrative 1,330,854 1,285,615
Amortization of intangible assets 29,875 109,788
Depreciation 23,303 9,901
----------- -----------
2,136,018 1,809,411
----------- -----------
Operating loss (1,150,846) (1,297,511)
Interest in losses of unconsolidated affiliates -- (393,937)
Other income 202 56,633
Foreign currency gains/(losses) 250,597 (98,235)
Interest income 119,887 395,359
Interest expense (432) (132,619)
----------- -----------
Loss from continuing operations, before income taxes (780,592) (1,470,310)
Provision for income taxes -- --
----------- -----------
Loss from continuing operations (780,592) (1,470,310)
Discontinued operations:
Loss on disposition, net of income taxes of $0 -- --
----------- -----------
Loss before extraordinary item (780,592) (1,470,310)
Extraordinary item - gain on extinguishment of debt,
net of taxes of $nil and $nil -- 1,026,896
----------- -----------
Net loss $ (780,592) $ (443,414)
=========== ===========
Loss per share - basic and diluted:
Continuing operations $ (0.09) $ (0.17)
Discontinued operations -- --
Extraordinary item -- 0.12
----------- -----------
Net loss $ (0.09) $ (0.05)
=========== ===========
Weighted average common stock outstanding:
Basic and diluted 8,949,855 8,680,302
=========== ===========
See notes to condensed consolidated financial statements.
5
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended March 31,
2002 2001
---- ----
Revenues $ 3,005,398 $ 511,900
Operating expenses:
Cost of sales 1,742,128 404,107
Selling, general and administrative 3,342,499 2,201,092
Amortization of intangible assets 76,500 253,933
Depreciation 60,443 17,925
----------- -----------
5,221,570 2,877,057
----------- -----------
Operating loss (2,216,172) (2,365,157)
Interest in losses of unconsolidated affiliates -- (1,320,579)
Preference dividend -- (165,109)
Other income (47,470) 56,633
Foreign currency losses (1,749,457) (887,277)
Interest income 492,208 1,271,326
Interest expense (12,004) (536,157)
----------- -----------
Loss from continuing operations, before income taxes (3,532,895) (3,946,320)
Provision for income taxes -- --
----------- -----------
Loss from continuing operations (3,532,895) (3,946,320)
Discontinued operations:
Loss on disposition, net of income taxes of
$0 and $0, respectively -- (2,389,383)
----------- -----------
Loss before extraordinary item (3,532,895) (6,335,703)
Extraordinary item - gain on extinguishment of debt,
net of taxes of $nil and $nil -- 1,026,896
----------- -----------
Net loss $(3,532,895) $(5,308,807)
=========== ===========
Loss per share - basic and diluted:
Continuing operations $(0.41) $ (0.43)
Discontinued operations -- (0.26)
Extraordinary item -- 0.11
------ -------
Net loss $(0.41) $ (0.58)
====== =======
Weighted average common stock outstanding:
Basic and diluted 8,685,283 9,089,841
=========== ===========
See notes to condensed consolidated financial statements.
6
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended March 31,
2002 2001
---- ----
Cash flow from operating activities:
Net loss from continuing operations $ (3,532,895) $ (3,946,320)
Adjustments to reconcile net loss to net cash
used in operating activities:
Dividend charge -- 165,109
Depreciation and amortization 136,943 294,867
Issuance of warrants for consulting fees 34,326
Foreign currency losses on notes receivable 1,586,953
Changes in operating assets and liabilities,
net of discontinued operations (12,095) (699,026)
Changes in other assets 159,208 --
Increase in debenture redemption reserve fund 4,248 262,500
Equity in losses of affiliates -- 1,320,579
------------ ------------
Net cash used in continuing operations (1,657,638) (2,567,965)
Net cash used in discontinued operations -- (1,114,133)
------------ ------------
Net cash used in operating activities (1,657,638) (3,682,098)
------------ ------------
Cash flows from investing activities:
Acquisition of intangibles -- (49,332)
Acquisition of property, plant and equipment (73,711) (1,646,983)
Changes in long term receivables -- 1,188,355
Acquisition of subsidiary (net of cash of $863,337) -- (3,454,569)
Proceeds on disposal of property, plant and equipment -- 74,150
Net proceeds on sale of discontinued operations -- 11,102,549
Proceeds on other assets sold -- 1,042
Return of purchase price Fantasy Sports 200,000 --
Investment in and loans to affiliates (200,000) (250,000)
Repayment of loan by affiliates -- 161,500
------------ ------------
Net cash (used in) provided by investing activities (73,711) 7,126,712
------------ ------------
Cash flows from financing activities:
Short term borrowings, net -- (999,883)
Repayment of long term debt (370,946) (7,020,470)
Repurchase of treasury shares (62,037) (944,300)
Redemption of preference shares -- (8,153,928)
------------ ------------
Net cash used in financing activities (432,983) (17,118,581)
------------ ------------
Effect of exchange rate changes on cash -- (3,981,909)
------------ ------------
Net decrease in cash and cash equivalents (2,164,332) (17,655,876)
Cash and cash equivalents, beginning of period 5,664,013 29,853,067
------------ ------------
Cash and cash equivalents, end of period $ 3,499,681 $ 12,197,191
============ ============
Supplemental cash flow information:
Cash paid for interest $ 6,280 $ 219,230
======= =========
See notes to condensed consolidated financial statements.
7
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 (see Background and History in ITEM 2).
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 (see Note 3).
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,
2002 and the results of operations and cash flows for the interim periods of the
fiscal year ending June 30, 2002 ("fiscal 2002") and the fiscal year ended June
30, 2001 ("fiscal 2001") 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, 2001.
Certain amounts in the fiscal 2001 financial statements have been reclassified
to conform to the fiscal 2002 presentation.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net 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 (see Note 3).
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 and nine months ended March 31,
2002 excludes shares of 1,746,605 and 1,741,018, respectively. These shares are
excluded due to their anti-dilutive effect as a result of the Company's loss
from continuing operations.
8
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. SFAS 144 retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The Company is required and plans to adopt the
provisions of SFAS 144 for the quarter ending September 30, 2003. The Company
has not determined the impact, if any, that SFAS 144 will have on its financial
statements.
In June 2001, the FASB issued SFAS 141, Business Combinations, which requires
all business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. SFAS 141 also sets forth guidelines for applying the
purchase method of accounting in the determination of intangible assets,
including goodwill acquired in a business combination, and expands financial
disclosures concerning business combinations consummated after June 30, 2001.
The application of SFAS 141 did not affect any of our previously reported
amounts included in goodwill or other intangible assets.
Effective July 1, 2001 the Company adopted SFAS 142, Goodwill and Other
Intangible Assets, which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased effective July 1, 2001 (goodwill amortization for the first
nine months of fiscal 2002 otherwise would have been $603,999) and recorded
goodwill attributable to Fantasy Sports, Inc. was tested for impairment by
comparing the fair value to its carrying value. Fair value was determined using
a multiple of revenues methodology. This impairment test is required to be
performed at adoption of SFAS 142 and at least annually thereafter. On an
ongoing basis (absent any impairment indicators), the Company expects to perform
this impairment test during the fourth quarter.
Based on the initial impairment test, it was determined that none of the
goodwill recorded was impaired. Impairment adjustments recognized after
adoption, if any, generally are required to be recognized as operating expenses.
In connection with adopting SFAS 142, the useful lives and the classification of
our identifiable intangible assets was reassessed and it was determined that
they continue to be appropriate. The components of our amortized intangible
assets as of March 31, 2002 follow:
Gross Carrying Accumulated
Amount Amortization
Customer lists $245,000 $104,250
Noncompete agreement 225,000 22,500
-------- --------
$470,000 $126,750
======== ========
9
The components of intangible assets that have an indefinite life and are not
amortizable at March 31, 2002 are as follows:
Gross Carrying
Amounts
Trade names $485,000
Internet domain 65,000
Video and audiovisual materials 50,000
Copyright registration 75,000
Statistics database 75,000
--------
$750,000
========
Amortization expense for intangible assets during the first nine months of 2002
was $76,500. Estimated amortization expense for the remainder of 2002 and the
five succeeding fiscal years follows:
2002 (remainder) $29,875
2003 119,500
2004 70,750
2005 54,500
2006 48,875
Since SFAS No. 142 was adopted July 1, 2001 for fiscal 2002, the following table
shows the Company's fiscal 2001 results, which are presented on a basis
comparable to the 2002 results, adjusted to exclude amortization related to
goodwill and equity method goodwill.
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Loss before extraordinary items -as reported $ (780,592) $ (1,470,310)
Add back: Goodwill amortization - 87,925
Add back: Equity method goodwill amortization - 108,333
Loss before extraordinary items -as adjusted $ (780,592) $ (1,274,052)
=========== =============
Net loss -as reported $ (780,592) $ (443,414)
Add back: Goodwill amortization - 87,925
Add back: Equity method goodwill amortization - 108,333
Net loss -as adjusted $ (780,592) $ (247,156)
========= =========
Loss per share - basic and diluted - extraordinary item:
Loss before extraordinary items -as reported $(0.09) $(0.17)
Add back: Goodwill amortization - 0.01
Add back: Equity method goodwill amortization - 0.02
------- ------
Loss before extraordinary items -as adjusted $ (0.09) $(0.14)
======= ======
Loss per share - basic and diluted
Net loss -as reported $(0.09) $(0.05)
Add back: Goodwill amortization - 0.01
Add back: Equity method goodwill amortization - 0.02
------- ------
Net loss -as adjusted $(0.09) $(0.02)
====== ------
10
Nine Months Nine Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Loss before extraordinary items -as reported $ (3,532,895) $ (6,335,703)
Add back: Goodwill amortization - 117,233
Add back: Equity method goodwill amortization - 324,993
Loss before extraordinary items -as adjusted $ (3,532,895) $ (5,893,477)
============== =============
Net loss -as reported $ (3,532,895) $ (5,308,807)
Add back: Goodwill amortization - 117,233
Add back: Equity method goodwill amortization - 324,993
Net loss -as adjusted $ (3,532,895) $ (4,866,581)
============== =============
Loss per share - basic and diluted - extraordinary item:
Loss before extraordinary items -as reported $(0.41) $(0.69)
Add back: Goodwill amortization - 0.01
Add back: Equity method goodwill amortization - 0.04
------- ------
Loss before extraordinary items -as adjusted $(0.41) $(0.64)
======= =======
Loss per share - basic and diluted
Net loss -as reported $(0.41) $(0.58)
Add back: Goodwill amortization - 0.01
Add back: Equity method goodwill amortization - 0.04
------- ------
Net loss -as adjusted $(0.41) $(0.53)
======= =======
The changes in goodwill balance during fiscal 2002 are as follows:
Internet
Fantasy
Marketing Sports
Services Games Total
Balance at June 30, 2001, net $ -- $ 3,323,049 $ 3,323,049
Additions to goodwill:
Acquisition of Student Sports, Inc. 315,328 -- 315,328
Reductions in goodwill:
Settlement of purchase price issues related
to Fantasy Sports (see Note 3) -- (375,225) (375,225)
----------- ----------- -----------
Balance at March 31, 2002, net $ 315,328 $ 2,947,824 $ 3,263,152
=========== =========== ===========
RECLASSIFICATIONS
Certain amounts in the Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and the Nine Months Ended March 31, 2001 have
been reclassified to conform to the 2002 presentation.
3. ACQUISITION
On September 24, 2001, the Company 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. Under the terms of the agreement, the Company issued
900,000 Company common shares to the owners of Student Sports, and undertook to
provide a further payment, as defined, of between 500,000 and 1,500,000 shares
of Company common stock on March 31, 2004. In addition, the agreement calls for
certain potential earn-outs of 33% of the pre-tax profits of Student Sports for
the years ending December 31, 2002 and 2003, as defined. This earn-out, which
cannot exceed $500,000, is to be
11
paid no later than April 30, 2004. Finally, the seller is to receive 33% of
certain litigation proceeds, as defined, if received by the Company.
The assets and liabilities are to be held in a new wholly-owned subsidiary,
Student Sports, Inc. and will be reported as a new operating segment titled
marketing services (see Note 8). The results of operations of Student Sports
will be included in the consolidated financial statements starting October 1,
2001.
The costs of the acquisition were allocated on the basis of the estimated fair
values of the assets acquired and liabilities assumed. These estimates are
subject to revision as better information becomes available. The acquisition was
accounted for under the provisions of SFAS No. 141 Business Combinations and was
accounted for as a purchase. The intangible assets identified in connection with
the acquisition will be recorded (and amortized where applicable) in accordance
with the provisions of SFAS No. 142 Goodwill and Other Intangible Assets (see
Note 2).
Acquisition cost $1,394,148
==========
Net assets acquired:
Current assets, primarily accounts receivable 255,426
Fixed assets 41,410
Intangible assets 1,320,328
----------
Total assets 1,617,164
----------
Current liabilities 208,720
Long-term debt 14,296
----------
Total liabilities 223,016
----------
$1,394,148
==========
The following unaudited pro forma summary presents consolidated financial
information as if the acquisition of Student Sports had occurred effective July
1, 2001 and 2000, respectively. The pro forma amounts, which include the results
of operations of Student Sports, were compiled using the cash basis of
accounting. The Company believes that these results do not differ materially
from generally accepted accounting principles. The pro forma information does
not necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of operations of the consolidated
entities.
Nine Months Ended March 31,
2002 2001
---- ----
Revenue $ 3,347,007 $ 1,676,713
=========== ===========
Net loss $(3,827,164) $(6,147,040)
=========== ===========
Loss per share - basic and diluted: $(0.35) $(0.58)
====== ======
In October 2001, the Company received $200,000 in cash and approximately
$305,000 reduction in accounts payable related to the acquisition of Fantasy
Sports, Inc. from Action Performance during the second quarter of fiscal 2001.
The cash amount, which had been held in escrow, relates to settlement of a
dispute related to the acquisition of Fantasy regarding certain disclosures made
by Action at the time of acquisition and has been used to reduce the recorded
goodwill. Of the $305,000, $130,000 was used to reduce inventory to fair value
and the remaining $175,000 relating to the purchase price was also recorded as a
reduction to recorded goodwill.
12
4. INVENTORIES Inventories consist of finished goods of $48,310 and $377,721 at
March 31, 2002 and June 30, 2001, respectively. During the second quarter of
fiscal 2002, inventory values were reduced by approximately $130,000 due to a
settlement with the seller of Fantasy (see Note 3). In the third quarter
inventory was reduced by a bulk sale of inventory of approximately $150,000.
5. INVESTMENT IN AFFILIATES A summary of the impact of these investments on the
consolidated financial statements is presented below:
Effective As of
Percentage March 31, June 30,
Ownership 2002 2001
---- ----
Investments in and receivables from
unconsolidated affiliates:
Magnolia Broadband 14% $831,066 $631,066
======== ========
Effective Nine Months Ended
Percentage March 31,
Ownership 2002 2001
---- ----
Share of losses of unconsolidated affiliates:
Other $ -- $ (14,032)
Magnolia Broadband 14% -- (1,306,547)
------- -----------
$ -- $(1,320,579)
======= ===========
On March 21, 2002, Magnolia entered into an agreement whereby it raised $6
million from three institutional investors. The agreement calls for an immediate
infusion of $3 million, with an additional $3 million committed, but contingent
on Magnolia reaching defined technical milestones. As a result of this
agreement, the Company has exchanged its existing shares in Magnolia for new
Series A Preferred shares and has converted its October 2001 loan into these new
Series A Preferred Shares, as well. The Company's ownership percentage has been
reduced to approximately 14% and will further reduce should the second tranche
of financing be realized, as well as any exercise of outstanding Magnolia
employee stock options. On a fully diluted basis, the Company's percentage in
Magnolia will be reduced to approximately 8%. Therefore the Company is no longer
accounting for their investment in Magnolia under the equity method. However,
the investment in Magnolia will continue to be tested for impairment in
accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. While Magnolia is confident that it
can meet the defined technical milestones to obtain the additional funding,
there is no assurance that this will occur. Furthermore, there is no assurance
that the full amount will be sufficient for Magnolia to fund its future
operations until it achieves revenues and profitability.
13
6. DISCONTINUED OPERATIONS
First Lifestyle Holdings Limited ("Lifestyle") was sold on November 6, 2000.
The following summarized the operating results of the Lifestyle discontinued
operation:
Nine Months Ended
March 31, 2001
Revenue $28,819,495
Operating (loss) (1,506,371)
Net loss, net of minority interest of $844,273 (2,389,383)
7. CASH FLOWS
The changes in assets and liabilities consist of the following:
Nine Months Ended March 31,
2002 2001
---- ----
Increase in accounts receivable $(56,745) $ --
Decrease/(increase) in inventories 329,411 (387,812)
Decrease/(increase) in prepaid expenses and other current assets 3,844 (904,921)
Decrease in bank overdraft (92,887) --
(Decrease)/increase in accounts payable (221,159) 264,488
Increase in other provisions and accruals 25,441 329,219
-------- ---------
$(12,095) $(699,026)
======== =========
Net cash provided by discontinued operations in the nine months ended March 31,
2001 consists of the following:
Net loss of discontinued operations $(2,389,383)
Depreciation and amortization 950,388
Minority share of gains 844,273
Equity in losses of affiliates 13,579
Net loss on sale of assets 21,278
Changes in assets and liabilities (848,285)
Movement in deferred income taxes 294,017
-----------
$(1,114,133)
===========
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 (see Note 3). In
addition, the Company retired 55,000 and 22,000 shares of Class A common stock
in the first and third quarters, respectively, for a total of $62,037.
8. BUSINESS SEGMENTS As a result of the acquisition of Student Sports (see Note
3), the Company now 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.
14
Information concerning identifiable assets as of March 31, 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.
As of As of
Identifiable Assets: March 31, 2002 June 30, 2001
Segments:
Marketing services $ 1,849,640 $ --
Internet fantasy sports games 3,855,711 4,756,335
----------- -----------
5,705,351 4,756,335
Corporate 7,586,532 11,175,522
----------- -----------
Consolidated Totals $13,291,883 $15,931,857
=========== ===========
Nine Months Ended March 31,
2002 2001
Revenues:
Segments:
Marketing services $ 689,745 $ --
Internet fantasy sports games 2,315,653 511,900
----------- -----------
Consolidated totals $ 3,005,398 $ 511,900
=========== ===========
Loss from continuing operations:
Segments:
Marketing services $ (462,085) $ --
Internet fantasy sports games (821,329) (1,035,131)
----------- -----------
(1,283,414) (1,035,131)
Corporate:
Corporate general and administrative expenses (932,758) (1,330,026)
Other income (47,470) 56,633
Foreign currency losses (1,749,457) (887,277)
Equity in losses of affiliates -- (1,320,579)
Preference dividend -- (165,109)
Interest income 492,208 1,271,326
Interest expense (12,004) (536,157)
----------- -----------
Consolidated totals $(3,532,895) $(3,946,320)
=========== ===========
15
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 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.
During fiscal 2001, the Company disposed of First Lifestyle Holdings Limited
("Lifestyle"), the holding company of its last remaining South African operating
subsidiaries. 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.
On November 17, 2000, the Company acquired all the assets and certain
liabilities of Fantasy Sports ("Fantasy"). Founded in 1993, Fantasy Sports
operates the fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com
and fantasynhra.com websites and specialized in subscription based NASCAR,
college football and basketball and other fantasy sports games, as well as the
sale of die-cast racing cars.
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.
RESULTS OF OPERATIONS
Both of the Company's subsidiaries have seasonal trends that effect 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 will be negatively effected by
this seasonality. Student Sports, while somewhat less effected by seasonal
factors, generates less revenues in the December quarter than during the rest of
the year.
QUARTER ENDED MARCH 31, 2002 AS COMPARED TO QUARTER ENDED MARCH 31, 2001
REVENUES
Revenues were $0.99 million in the third quarter of fiscal 2002 as a result of
revenues earned by Fantasy and Student Sports, which were acquired during the
second quarter of the prior year and the first quarter of the current year,
respectively. Revenues in the prior year were $0.51 million related to Fantasy
Sports. The increase is due to an increase in Fantasy's revenue, as well as the
acquisition of Student Sports during the first quarter of fiscal 2002.
16
COST OF SALES
Cost of sales were $0.75 million in the third quarter of fiscal 2002 as a result
of Fantasy's and Student Sports' operations. Cost of sales in the prior year
were $0.40 and are attributable to Fantasy. The increase is due to an increase
in Fantasy's revenue, as well as the acquisition of Student Sports during the
first quarter of fiscal 2002 and the bulk sale of Fantasy Sports inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended March 31,
2002 were $1.33 million, an increase of $0.05 million over same period in the
prior year. This increase is due to the acquisition Student Sports during the
first quarter of the current year, offset by a reduction in overall corporate
expenses.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense is not material.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES
Equity in losses of unconsolidated affiliates decreased to zero at March 31,
2002 compared to $0.39 million for the quarter ended March 31, 2001. The
decrease is due to the Company recognizing losses to the extent of their
investment prior to the first quarter. The Company's investment in Magnolia,
effective with the third quarter is being accounted for under the cost method.
Therefore no further income or loss from Magnolia's operations will be
recognized by the Company.
FOREIGN CURRENCY GAINS AND LOSSES
Foreign currency gains and losses are related to the assets remaining from the
disposition of the South African operations. The foreign currency gains during
the third quarter of fiscal 2002 were $0.25 million as compared to a loss of
$0.10 million in the third quarter of fiscal 2001. These gains and losses are a
result of the fluctuations of the South African Rand against the US dollar.
These foreign currency gains and losses are non cash items until converted into
U.S. dollars, when any unrealized gains or losses will be converted into cash.
INTEREST INCOME
Interest income of $0.12 million was recorded during the third quarter of fiscal
2002 as compared to interest income of $0.40 million during the third quarter of
fiscal 2001. During fiscal 2001, the Company earned interest on the proceeds
realized on the sale of Lifestyle. These proceeds were utilized to pay down debt
and invested in interest bearing accounts. The decrease in interest income in
fiscal 2002 is a result of lower invested cash balances and lower U.S. interest
rates, as well as the deterioration of the South African Rand against the dollar
since June 30, 2001, which affects interest earned on Notes Receivable from the
sale of the Lifestyle business.
INTEREST EXPENSE
Interest expense during the three months ended March, 2002 was not material as
compared to $0.13 million in the prior year. The decrease in interest expense is
attributable to the repayment of approximately $12 million of increasing rate
subordinated convertible debentures during the third and fourth quarters of
fiscal 2001.
17
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.
DISCONTINUED OPERATIONS
The Lifestyle business was sold in November 2000 and has not been included in
the Company's results since that time. The income during the first three months
of the prior year was earned before the disposition of the business.
EXTRAORDINARY ITEM-GAIN ON EXTINGUISHMENT OF DEBT
During the third quarter of the prior year, the Company negotiated agreements
with two lenders to retire $5.75 million of debentures at face value plus
accrued interest. As a result, the Company recorded a gain on previously accrued
sinking fund interest of $1.03 million in the quarter ended March 31, 2001.
Since the remaining debentures were paid off in October 2001, no such
transaction occurred during the third quarter of fiscal 2002.
NET LOSS
The company has recognized a loss of $0.78 million during the third quarter of
fiscal 2002 as compared to a loss of $0.44 million during the same period in the
prior year. The prior year loss included $1.03 million gain on extinguishment of
debt. Without this loss, prior year net loss would have been $1.47 million. The
improvement in income from continuing operations is a result of improved results
of operations of Fantasy Sports over the prior year, as well as a reduction in
foreign currency losses.
NINE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
REVENUES
Revenues were $3.01 million in the first nine months of fiscal 2002 as a result
of revenues earned by Fantasy and Student Sports, which were acquired during the
second quarter of the prior year and the first quarter of the current year,
respectively. Revenues in the prior year $0.51 million related to Fantasy
Sports. The increase is due to having a full nine months of Fantasy's revenue,
as well as the acquisition of Student Sports during the first quarter of fiscal
2002.
COST OF SALES
Cost of sales were $1.74 million in the first nine months of fiscal 2002 as a
result of Fantasy's and Student Sports' operations. Cost of sales in the prior
year were $0.40 million related to Fantasy Sports. The increase is due to having
a full nine months of Fantasy's operations, as well as the acquisition of
Student Sports during the first quarter of fiscal 2002 and the bulk sale of
Fantasy Sports inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended March 31,
2002 were $3.34 million, an increase of $1.14 million over same period in the
prior year. This increase is due to having a full nine months of Fantasy as
compared with three months in the prior year and the acquisition of Student
Sports at the end of the first quarter of fiscal 2002.
18
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets decreased from $0.25 million in the first nine
months of fiscal 2001 to $0.08 million in the same period of fiscal 2002 as a
result of the adoption of SFAS 142 Goodwill and Other Intangible Assets, whereby
the Company no longer amortizes amounts attributable to goodwill. Depreciation
expense is not material.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES
Equity in losses of unconsolidated affiliates decreased to zero at March 31,
2002 compared to $1.32 million for the nine months ended March 31, 2001. The
decrease is due to the Company recognizing losses to the extent of their
investment prior to the first quarter. The Company's investment in Magnolia,
effective with the third quarter is being accounted for under the cost method.
Therefore no further income or loss from Magnolia's operations will be
recognized by the Company.
FOREIGN CURRENCY LOSS
Foreign currency losses are related to the assets remaining in the discontinued
South African operations. The foreign currency losses during the first nine
months of fiscal 2002 were $1.75 million as compared to $0.89 million in the
same period in fiscal 2001 as a result of the deterioration of the South African
Rand against the US dollar. These foreign currency losses are non cash items
until converted into U.S. dollars, when any unrealized gains or losses will be
converted to cash.
INTEREST INCOME
Interest income of $0.49 was recorded during the first nine months of fiscal
2002 as compared to interest income of $1.27 million during the first nine
months of fiscal 2001. During fiscal 2001, the Company earned interest on the
proceeds realized on the sale of Lifestyle. These proceeds were utilized to pay
down debt and invested in interest bearing accounts. The decrease in interest
income in fiscal 2002 is a result of lower invested cash balances, as well as
the deterioration of the South African Rand against the dollar, which affects
interest earned on Notes Receivable from the sale of the Lifestyle business.
INTEREST EXPENSE
Interest expense during the nine months ended March, 2002 was not material as
compared to $0.54 million in the prior year. The decrease in interest expense is
attributable to the repayment of approximately $12 million of increasing rate
subordinated convertible debentures during the third and fourth quarters of
fiscal 2001.
PREFERENCE DIVIDEND
The preference dividend related to the mandatory redeemable preference shares of
Lifestyle. These preferred shares were redeemed with the sale of Lifestyle and
there were no additional dividends after the second quarter of fiscal 2001.
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.
19
DISCONTINUED OPERATIONS
The Lifestyle business was sold in November 2000 and has not been included in
the Company's results since that time. The income during the first three months
of the prior year was earned before the disposition of the business.
EXTRAORDINARY ITEM-GAIN ON EXTINGUISHMENT OF DEBT
During the third quarter of the prior year, the Company negotiated agreements
with two lenders to retire $5.75 million of debentures at face value plus
accrued interest. As a result, the Company recorded a gain on previously accrued
sinking fund interest of $1.03 million in the nine months ended March 31, 2001.
Since the remaining debentures were paid off at their maturity in October 2001,
no such transaction occurred during fiscal 2002.
NET LOSS
Primarily, as a result of its non-cash foreign currency losses of $1.75 million,
the company has recognized a loss of $3.53 million during the first nine months
of fiscal 2002 as compared to a loss of $5.31 million during the same period in
the prior year. The prior year loss included $2.39 million loss on the disposal
of discontinued operations, offset by the extraordinary gain on extinguishment
of debt of $1.03 million. Without these unusual items, the net loss would have
been $3.95 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $2.16 million from $5.66 million at June 30, 2001 to $3.50
million at March 31, 2002. The decrease in cash in excess of the operating
losses is a result of the repayment of the Company's long term debt, its
investment in Magnolia Broadband, the reduction of payable by the Company and
its subsidiaries and the payment of accrued liabilities, such as prize money by
Fantasy Sports. The balance of the remaining cash is being held for working
capital purposes and to fund potential investments.
Working capital decreased $1.96 million to $2.29 million from $4.25 million at
June 30, 2001. This decrease in working capital is due to operating losses.
The Company paid off its remaining debentures of $0.37 million when they matured
in October 2001. There is an additional non-cash payment of $0.81 million due in
March 2004 related to the acquisition of Student Sports. In addition, the
Student Sports acquisition agreement calls for certain potential earn-outs of
33% of the pretax profits of Student Sports for the years ending December 31,
2002 and 2003, as defined. This earn-out, which cannot exceed $500,000, is to be
paid no later than April 30, 2004. Along with the earn-out, the seller is
entitled to receive 33% of certain litigation proceeds, as defined, if received
by the Company.
The Company loaned $0.20 million to Magnolia in October 2001. On March 21, 2002,
the Company converted this loan to a new Series A Preferred Shares as part of
Magnolia's $6 million financing agreement.
On September 24, 2001, a newly created subsidiary of the Company 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. Management believes that Student
Sports will be able to provide all of its capital requirements out of its own
operations. The operations of Student Sports have been included starting with
the second quarter of fiscal 2002.
20
The Company has guaranteed certain bank facilities of some of its former
industrial subsidiaries in South Africa. Currently, these guarantees amount to
approximately $800,000 and are secured by like amounts of cash. The Company has
reduced these guarantees from approximately $1.2 million as of June 30, 2001 and
will try to further reduce these guarantees. In the event that these guarantees
are called, the Company has recourse to certain assets of these subsidiaries,
which should substantially cover the Company's potential exposure.
The Company intends 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. SFAS 144 retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The Company is required and plans to adopt the
provisions of SFAS 144 for the quarter ending September 30, 2003. The Company
has not determined the impact, if any, that SFAS 144 will have on its financial
statements.
In June 2001, the FASB issued SFAS 141 Business Combinations, which requires all
business combinations initiated after June 30, 2001 to be accounted for under
the purchase method. The application of SFAS 141 did not affect any previously
reported amounts included in goodwill or other intangible assets.
Effective July 1, 2001, the Company adopted SFAS 142, Goodwill and Other
Intangible Assets, which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased, effective July 1, 2001. The first nine months of fiscal
2002 goodwill amortization otherwise would have been $603,999. Recorded goodwill
attributable to Fantasy Sports, Inc. was tested for impairment by comparing the
fair value to its carrying value. Fair value was determined using a multiple of
revenues methodology. Impairment is required to be tested at least annually. At
the time of adoption of SFAS 142, no impairment adjustments were required.
21
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Certain of the Company's cash balances and Notes receivable from the sale of
Lifestyle 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 the
Notes receivable, 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 March
31, 2002 rates, the Company loses $872 on every R1,000,000 retained in South
Africa. During the nine months ended March 31, 2002, the Rand has depreciated
against the US dollar by approximately 40% from the rate at June 30, 2001. At
March 31, 2002, the Company had assets denominated in Rand of R50.03 million.
During the first quarter the Company hedged approximately $1.4 million of its
liquid South African Rand deposits. The net effect of this hedge was to reduce
the Company's foreign currency loss for the quarter by approximately $140,000.
The Company did not hedge any of its liquid South African Rand deposits during
the second or third quarters.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during fiscal 2002:
As of Foreign Currency Gain/(Loss)
March 31 Three Nine
2002 Months Ended March 31, 2002
In Rand In U.S. Dollars
Cash 5,777,759 $ 29,976 $ (209,587)
Notes Receivable 44,012,778 228,343 (1,596,551)
Other (7,722) 56,681
--------- -----------
Total $ 250,597 $(1,749,457)
========= ===========
SUBSEQUENT EVENT
In April 2002, Student Sports, Inc. acquired all of the assets of Area Code
Baseball, a company that operates elite regional high school baseball tryouts
and a national high school all-star baseball tournament. The assets acquired are
not material to the condensed consolidated balance sheet of the Company.
22
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: May 13, 2002 SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
-------------------
Clive Kabatznik
Chief Executive Officer, President and Chief
Financial Officer
24