SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
-------------------------
(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
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(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number, Including Area Code: 809-295-1422
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
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 November 11, 2002
was 8,886,999.
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets at September 30, 2002
(Unaudited) and June 30, 2002
Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ended September 30, 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 6 Exhibits and Reports on Form 8-K
SIGNATURES
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2002 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$1,323,969 and $925,600, respectively $ 2,532,569 $ 2,650,476
Accounts receivable, net 203,279 267,408
Inventories 241,563 121,630
Current portion of notes receivable 474,563 409,971
Prepaid expenses and other current assets 92,517 150,829
------------ ------------
Total current assets 3,544,491 3,600,314
Property, plant and equipment, net 211,156 216,179
Investments in affiliates 843,566 843,566
Long-term notes receivable 3,779,516 3,859,138
Goodwill, net 3,383,862 3,383,862
Intangible assets, net 1,033,500 1,063,375
Deferred charges and other assets 4,855 4,855
------------ ------------
Total assets $ 12,800,946 $ 12,971,289
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 520,500 $ 103,955
Current portion of long term debt 21,450 22,682
Accounts payable 474,949 374,572
Other provisions and accruals 382,846 395,187
Deferred revenue 566,275 1,020,044
------------ ------------
Total current liabilities 1,966,020 1,916,440
Long term debt 31,234 35,776
Obligation related to acquisition of Student Sports 807,000 807,000
------------ ------------
Total liabilities 2,804,254 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; 7,940,410 and 8,001,310 shares
issued and outstanding, respectively 79,404 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 63,754,735 63,763,870
Accumulated deficit (53,847,513) (53,641,876)
------------ ------------
Total stockholders' equity 9,996,692 10,212,073
------------ ------------
Total liabilities and stockholders' equity $ 12,800,946 $ 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 September 30,
2002 2001
---- ----
Revenues $ 1,447,364 $ 997,024
Operating expenses:
Cost of sales 731,765 450,071
Selling, general and administrative 907,163 836,647
Amortization of intangible assets 29,875 16,750
Depreciation 26,341 17,132
----------- -----------
1,695,144 1,320,600
----------- -----------
Operating loss (247,780) (323,576)
Other income 158 --
Foreign currency losses (97,923) (721,456)
Interest income 145,679 230,776
Interest expense (5,771) (9,112)
----------- -----------
Loss from operations, before income taxes (205,637) (823,368)
Provision for income taxes -- --
----------- -----------
Net loss $ (205,637) $ (823,368)
=========== ===========
Loss per share - basic and diluted:
Net loss $(0.02) $(0.10)
====== ======
Weighted average common stock outstanding:
Basic and diluted 8,940,617 8,136,095
========= =========
See notes to condensed consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended September 30,
2002 2001
---- ----
Cash flow from operating activities:
Net loss from operations $ (205,637) $ (823,368)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 56,216 33,957
Foreign currency losses 49,632 596,451
Non-cash interest income on notes receivable (127,399) (138,685)
Changes in operating assets and liabilities (363,225) (654,115)
Changes in other assets -- 1,751
Increase in debenture redemption reserve fund -- 4,248
----------- -----------
Net cash used in operating activities (590,413) (979,761)
Cash flows from investing activities:
Acquisition of property, plant and equipment (21,357) (5,445)
Decrease in long-term notes receivable 92,836 136,579
----------- -----------
Net cash provided by investing activities 71,479 131,134
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 416,545 --
Repayment of long term debt (5,774) (658)
Repurchase of treasury shares (9,744) (52,797)
----------- -----------
Net cash provided by (used in) financing activities 401,027 (53,455)
----------- -----------
Net decrease in cash and cash equivalents (117,907) (902,082)
Cash and cash equivalents, beginning of period 2,650,476 5,664,013
----------- -----------
Cash and cash equivalents, end of period $ 2,532,569 $ 4,761,931
=========== ===========
Supplemental cash flow information:
Cash paid for interest $5,771 $3,750
====== ======
See notes to condensed consolidated financial statements.
5
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 September
30, 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 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. 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 September 30, 2002 and 2001 excludes
shares of 1,727,879 and 502,751, respectively. These shares are excluded due to
their anti-dilutive effect as a result of the Company's net loss from
operations.
6
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 September 30, 2002 and
June 30, 2002 are as follows:
Cost as of Accumulated Amortization
September 30 September 30, June 30,
and June 30, 2002 2002 2002
----------------- ---- ----
Customer Lists $245,000 $141,500 $122,875
Noncompete agreement 225,000 45,000 33,750
-------- -------- --------
$470,000 $186,500 $156,625
======== ======== ========
The components of intangible assets that have an indefinite life and are not
amortizable at September 30, 2002 and June 30, 2002 are as follows:
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 for the first three months of fiscal
2003 was $29,875. Estimated amortization expense for the rest of fiscal 2003 and
for the succeeding fiscal four years after that is as follows:
2003 $89,625
2004 70,750
2005 54,500
2006 49,875
2007 13,250
7
The balance in goodwill by business segment is as follows:
Internet
Fantasy
Marketing Sports
Services Games Total
-------- ----- -----
Balance at September 30, 2002 and June 30, 2002 $436,038 $2,947,824 $3,383,862
======== ========== ==========
4. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Three Months Ended September 30,
2002 2001
---- ----
Decrease in accounts receivable $ 64,129 $ 21,940
Increase in inventories (119,933) (54,227)
Decrease in prepaid expenses and other current assets 58,312 80,667
Increase/(decrease) in accounts payable 100,377 (150,167)
Decrease in other provisions and accruals (466,110) (552,328)
--------- ---------
$(363,225) $(654,115)
========= =========
During the three months ended September 30, 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 three months ended September
30, 2002 and 2001, the Company retired 60,900 and 55,000 shares of Class A
common stock that it had repurchased for $9,744 and $50,797, respectively.
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 months ended
September 30, 2002 and 2001 and information concerning identifiable assets as of
September 30, 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: September 30, 2002 June 30, 2002
------------------ -------------
Segments:
Marketing services $1,896,512 $ 1,910,896
Internet fantasy sports games 3,453,057 3,439,032
----------- -------------
5,349,569 5,349,928
Corporate 7,451,377 7,621,361
----------- ------------
Consolidated Totals $12,800,946 $12,971,289
=========== ===========
8
Three Months Ended September 30,
2002 2001
---- ----
Revenues:
Segments:
Marketing services $ 426,050 $ --
Internet fantasy sports games 1,021,314 997,024
----------- -----------
Consolidated totals $ 1,447,364 $ 997,024
=========== ===========
Loss from operations:
Segments:
Marketing services $ (162,668) $ --
Internet fantasy sports games 118,499 (5,774)
----------- -----------
(44,169) (5,774)
Corporate:
Corporate general and administrative expenses (203,611) (317,802)
Other income 158 --
Foreign currency losses (97,923) (721,456)
Interest income 145,679 230,776
Interest expense (5,771) (9,112)
----------- -----------
Consolidated totals $ (205,637) $ (823,368)
=========== ===========
6. DEBT
LINES OF CREDIT
In June, 2002, Fantasy Sports obtained a new 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 September
30, 2002, was $320,500.
In addition, the Company had two other lines of credit. One is a $50,000
unsecured line of credit and the other is a $150,000 secured line of credit,
which is fully secured against cash balances held in the Company's account.
These facilities are payable on demand and bear interest rates based on prime
plus 1/2% (5.25% at September 30, 2002). The balances outstanding under these
lines of credit totaled $200,000 at September 30, 2002.
9
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
recognized most of its income during the June and September quarters. Therefore,
the results for the December and March quarters will be 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 SEPTEMBER 30, 2002 AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001
REVENUES
Revenues were $1.4 million in the first three months of fiscal 2003 as a result
of revenues earned by Student Sports, which was acquired at the end of the first
quarter of the prior year. Revenues in the prior year were $1.0 million related
to Fantasy Sports. Fantasy Sports sales were slightly higher than the prior
year, due to new revenues of approximately $80,000 from outside merchandise
promotions and new games. This increase was partially offset by a decrease of
approximately $54,000 in revenues from the NASCAR Spring and Fall and College
Football games as a result of lower participation.
COST OF SALES
Cost of sales were $0.73 million in the first three months of fiscal 2003 as a
result of Fantasy's and Student Sports' operations. Cost of sales in the prior
year were $0.45 million and are attributable to Fantasy Sports. The increase is
due to the acquisition of Student Sports at the end of the first quarter of
fiscal 2002. In addition, Fantasy Sports showed an increase in the cost of
10
prize winnings as a result of the new games added during the first quarter of
fiscal 2003 and increased costs of retail merchandise sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended September 30,
2002 were $0.91 million, an increase of approximately $0.07 million over same
period in the prior year. This increase is primarily due to the acquisition of
Student Sports at the end of the first quarter of the prior year, offset by a
decrease in Fantasy Sport's selling expenses, primarily advertising costs of
approximately $0.11 million, and a decline in general and administrative
expenses in general due to cost control measures implemented at the end of
fiscal year 2002. The Company continues to implement cost control measures to
reduce operating losses and achieve profitability.
AMORTIZATION AND DEPRECIATION
Amortization of intangible assets increased from $0.17 million in the first
quarter of fiscal 2002 to $0.29 million in the first quarter of fiscal 2003 as a
result of the acquisition of Student Sports at the end of the first quarter of
the prior year. Depreciation expense increased to $0.26 million in fiscal 2003
from $0.17 million in the same period of the prior year due to the acquisition
of Student Sports.
FOREIGN CURRENCY LOSS
Foreign currency losses are related to the assets remaining from the sale of
discontinued South African operations. The foreign currency losses during the
first quarter of fiscal 2003 were $0.10 million as compared to $0.72 million in
the first quarter of fiscal 2002. These losses are a result of the fluctuations
of the South African Rand against the US dollar. During the quarter ended
September 30, 2002, the Rand depreciated approximately 2% against the US dollar,
while it depreciated 12% in the corresponding period last year. These foreign
currency 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 $0.15 million was recorded during the first quarter of fiscal
2003, as compared to interest income of $0.23 million during the first quarter
of fiscal 2002. The decrease in interest income in fiscal 2003 is the result of
lower invested cash balances and lower US interest rates, as well as the
deterioration 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.
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 a net loss of $0.21 million during the first quarter of
fiscal 2003 as compared to a loss of $0.82 million during the same period in the
prior year. The improvement in income over the prior year is a result of an
increase in the operating income for the Fantasy Sports operations and a
reduction of corporate general and administrative expenses, offset by the losses
at Student Sports (which are not included in the prior year as a result of the
acquisition later in fiscal 2002), as well as a reduction in the foreign
currency losses as a result of a more stable South African Rand rate against the
US dollar.
11
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $0.12 million from $2.65 million at June 30, 2002 to $2.53
million at September 30, 2002. The decrease in cash is a result of the payment
of operating expenses of the company in excess of revenues collected. The
balance of the remaining cash is being held for working capital purposes and to
fund potential investments.
Working capital decreased $0.10 million to $1.58 million at September 30, 2002
from $1.68 million at June 30, 2002. This decrease is primarily the result of an
increase in borrowings under a lines of credit, offset by increases in inventory
balances.
At September 30, 2002, the Company had borrowings of $0.57 million, which
consisted of $0.52 million of advances against lines of credit secured by like
amounts of cash and $0.05 million of equipment loans. Approximately $0.4 million
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. Additionally, the
Company anticipates receiving increased repayments from the notes receivable
issued in connection with the sale of the South African assets. The combination
of these factors, along with the current cash balances will allow the Company to
meet its obligations for the foreseeable future.
The Company has guaranteed certain bank facilities of some of its former
industrial subsidiaries in South Africa. Currently, these guarantees amount to
approximately $0.90 million and are secured by like amounts of cash. The Company
had reduced these guarantees from $1.20 million during fiscal 2002 and will try
to further reduce these guarantees. 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.
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.
FUTURE COMMITMENTS
Through September 30, 2002, Fantasy and Student Sports, the Company's operating
subsidiaries, had incurred net losses. 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 the notes receivable.
12
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. will be performed during the second quarter of fiscal 2003.
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.
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.
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.
13
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.
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 September 30, 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 September 30, 2002 balances
and rates, it is estimated that a 1/2 of 1% increase in interest rates would
increase interest expense by approximately $3,000. 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 $934 on every R1,000,000 retained
in South Africa. At September 30, 2002, the Company had total assets denominated
in South African Rand of R49.55 million.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during the three months
ended September 30, 2002:
Foreign Currency
Gain/(Loss) for the
Three Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
In Rand In US Dollars
Cash 4,656,008 $ (9,403)
Notes Receivable, net of reserve 44,439,214 (89,750)
Other 1,230
-----------
$(97,923)
===========
14
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 October 2002, 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
October 2002 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.
15
PART II - OTHER INFORMATION
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.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: November 13, 2002
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
-------------------
Clive Kabatznik
Chief Executive Officer, President and Chief
Financial Officer
17
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: November 13, 2002 /s/ Clive Kabatznik
-----------------------------------
Clive Kabatznik
Chief Executive Officer
Chief Financial Officer
18