SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to ______________
Commission file number 0-27494
SILVERSTAR HOLDINGS, LTD.
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(Exact name of Registrant as Specified in Its Charter)
Bermuda Not Applicable
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(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 February 3, 2004 was
8,623,372.
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets at December 31, 2003
(Unaudited) and June 30, 2003
Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended December 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) for six
months ended December 31, 2003 and 2002
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 5 Submission of Matters to a Vote of Security Holders
ITEM 6 Exhibits 32.1, 32.2 and Reports on Form 8-K
SIGNATURES
SILVERSTAR HOLDINGS LTD - 10Q Filing Date 2/17/04
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2003 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$1,149,800 and $835,951 respectively (see Note 7) $ 1,680,127 $ 1,617,629
Accounts receivable, net 35,662 17,816
Inventories 31,642 168,113
Current portion of notes receivable 168,479 248,205
Prepaid expenses and other current assets 57,874 120,142
------------ ------------
Total current assets 1,973,784 2,171,905
Property, plant and equipment, net 117,284 140,301
Investments in affiliates 843,566 843,566
Long-term notes receivable 7,258,488 6,213,686
Goodwill 2,947,824 2,947,824
Intangible assets, net 13,500 30,750
Deferred charges and other assets 7,560 6,130
------------ ------------
Total assets $ 13,162,006 $ 12,354,162
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 448,124 $ 218,851
Current portion of long term debt 24,944 26,237
Accounts payable 499,799 483,264
Other provisions and accruals 316,930 415,399
Deferred revenue 424,855 836,073
------------ ------------
Total current liabilities 1,714,652 1,979,824
Long term debt 22,602 33,884
OBLIGATION RELATED TO ACQUISITION OF STUDENT SPORTS 315,405 315,405
------------ ------------
Total liabilities 2,052,659 2,329,113
------------ ------------
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; 7,683,924 and 7,503,924 shares
issued and outstanding, respectively 76,839 75,039
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 63,813,361 63,512,472
Accumulated deficit (52,790,919) (53,572,528)
------------ ------------
Total stockholders' equity 11,109,347 10,025,049
------------ ------------
Total liabilities and stockholders' equity $ 13,162,006 $ 12,354,162
============ ============
See notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
------------ ------------
Revenues $ 588,796 $ 651,526
Operating expenses:
Cost of sales 445,231 505,066
Selling, general and administrative 444,937 648,940
Amortization of intangible assets 500 16,750
Depreciation 11,535 14,604
------------ ------------
902,203 1,185,360
------------ ------------
Operating loss (313,407) (533,834)
Other income 42,274 --
Foreign currency gains 474,055 1,008,389
Interest income 152,822 157,055
Interest expense (8,664) (4,427)
------------ ------------
Income from operations, before income taxes 347,080 627,183
Provision for income taxes -- --
------------ ------------
Income from continuing operations 347,080 627,183
Loss from discontinued operations -- (439,911)
------------ ------------
Net Income $ 347,080 $ 187,272
============ ============
Net income/(loss) per share:
Basic:
Continuing Operations $ 0.04 $ 0.07
Discontinued Operations -- (0.05)
------------ ------------
Net income $ 0.04 $ 0.02
============ ============
Diluted:
Continuing Operations $ 0.04 $ 0.06
Discontinued Operations -- (0.04)
------------ ------------
Net income $ 0.04 $ 0.02
============ ============
Weighted average common stock outstanding:
Basic 8,529,535 8,807,180
============ ============
Diluted 8,967,652 10,531,990
See notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
----------- -----------
Revenues $ 1,475,691 $ 1,672,840
Operating expenses:
Cost of sales 922,766 1,064,622
Selling, general and administrative 908,933 1,160,230
Amortization of intangible assets 17,250 33,500
Depreciation 23,049 33,434
----------- -----------
1,871,998 2,291,786
----------- -----------
Operating loss (396,307) (618,946)
Other income 43,511 99
Foreign currency gains 818,906 910,466
Interest income 331,204 302,669
Interest expense (15,705) (6,826)
----------- -----------
Net inc. from operations, before income taxes 781,609 587,462
Provision for income taxes -- --
----------- -----------
Income from continuing operations 781,609 587,462
Loss from discontinued operations (605,827)
----------- -----------
Net income (loss) $ 781,609 $ (18,365)
=========== ===========
Net income (loss) per share:
Basic:
Continuing Operations .09 $ 0.07
Discontinued Operations -- (0.07)
----------- -----------
Net income (loss) $ .09 $ (0.00)
=========== ===========
Diluted:
Continuing Operations .09 $ 0.07
Discontinued Operations -- (0.07)
----------- -----------
Net income (loss) $ 0.09 $ (0.00)
=========== ===========
Weighted average common stock outstanding:
Basic 8,506,002 8,873,899
=========== ===========
Diluted 9,162,128 8,873,899
See notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
----------- -----------
Cash flow from operating activities:
Net income from operations $ 781,609 $ 587,462
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 40,299 66,932
Increase in allowance for bad debts 2,500
Foreign currency gains (877,391) (1,111,026)
Gain on disposal of fixed (278) --
Non-cash interest income on notes receivable (148,097) (269,733)
Changes in operating assets and liabilities (314,759) (336,835)
Changes in other assets (1,430) (1,275)
----------- -----------
Net cash used in continuing operations (517,547) (1,064,075)
Net cash used in discontinued operations -- (175,000)
----------- -----------
Net cash used in operating activities (517,547) (1,239,475)
Cash flows from investing activities:
Acquisition of property, plant and equipment -- (4,660)
Proceeds from sale of fixed assets 600 --
Decrease in long-term notes receivable 60,058 181,956
----------- -----------
Net cash provided by investing activities 60,658 177,296
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 229,273 440,527
Repayment of long term debt (12,575) --
Repurchase of treasury shares -- (25,135)
Issuance of common stock 302,689
----------- -----------
Net cash provided by financing activities 519,387 415,392
----------- -----------
Net increase (decrease) in cash and cash equivalents 62,498 (646,787)
Cash and cash equivalents, beginning of period 1,617,629 2,540,667
----------- -----------
Cash and cash equivalents, end of period $ 1,680,127 $ 1,893,880
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 15,705 $ 6,826
=========== ===========
See notes to condensed consolidated financial statements.
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
We are a holding company that seeks to acquire businesses fitting a predefined
investment strategy.
We are the parent company of Fantasy Sports, Inc., which operates the
Fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com, and
fantasynhra.com websites and specializes in subscription based NASCAR, college
football and basketball and other fantasy sports games. We are also a
shareholder in Magnolia Broadband Wireless, a startup company which is
developing mobile wireless broadband products.
2. BASIS OF PREPARATION
The unaudited consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which it has a majority voting interest.
Investments in affiliates are accounted for under the equity or cost method of
accounting. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Pursuant to the rules and regulations of the Securities and Exchange Commission
for Form 10-Q, the financial statements, footnote disclosures and other
information normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed. The financial
statements contained in this report are unaudited but, in the opinion of the
Company, reflect all adjustments, consisting of only normal recurring
adjustments necessary to fairly present the financial position as of December
31, 2003 and the results of operations and cash flows for the interim periods of
the fiscal year ending June 30, 2004 ("fiscal 2004") and the fiscal year ended
June 30, 2003 ("fiscal 2003") 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, 2003.
Certain amounts in the fiscal 2003 financial statements have been reclassified
to conform to the fiscal 2004 presentation.
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NET INCOME OR LOSS PER SHARE
Basic net income or loss per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding. Diluted net income or
loss per share is computed by dividing net income or loss by the weighted
average number of common shares outstanding and dilutive potential common shares
reflecting the dilutive effect of stock options, warrants, convertible
debentures and shares to be issued in connection with the acquisition of Student
Sports. Dilutive potential common shares, stock options, warrants and
convertible debentures for all periods presented are computed utilizing the
treasury stock method. The dilutive effect of shares to be issued in connection
with the acquisition of Student Sports is computed using the average market
price for the quarter.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), encourages but does not require companies to
record stock-based compensation plans using a fair value based method. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value based method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock.
If the Company used the fair value-based method of accounting to measure
compensation expense for options granted at grant date as prescribed by SFAS No.
123, income/ (loss) per share from continuing operations would have been reduced
to the proforma amounts indicated below.
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
----------- -----------
Income from continuing operations as reported $ 781,609 $ 587,462
Less: Compensation expense for options
Awards determined by the fair-value -based
Method (67,264) (10,957)
----------- -----------
Proforma net income from continuing
Operations $ 714,345 $ 576,505
=========== ===========
Basic:
As reported $ 0.09 $ 0.07
Pro forma $ 0.08 $ 0.06
Assuming Full dilution :
As reported $ 0.09 $ 0.07
Pro forma $ 0.08 $ 0.06
During April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The adoption of SFAS 149 did not have any impact on our operating
results or financial position as we do not have any derivative instruments that
are affected by SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 ("SFAS 150"),
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"Accounting for Certain Instruments with Characteristics of
both Liabilities and Equity". SFAS 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not have an impact on our operating results or financial position.
3. INTANGIBLE ASSETS
The components of amortizable intangible assets as of December 31, 2003 and June
30, 2003 are as follows:
ACCUMULATED AMORTIZATION
COST AS OF -------------------------
DECEMBER 31, 2003 DECEMBER 31, JUNE 30,
AND JUNE 30, 2003 2003 2003
-------- -------- --------
Customer Lists $215,000 $201,500 $184,250
-------- -------- --------
$215,000 $201,500 $184,250
======== ======== ========
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually.
Amortization expense for intangible assets for the first six months of fiscal
2004 was $17,250. Estimated amortization expense for the rest of fiscal 2004 and
for the succeeding four fiscal years after that is as follows:
2004 1,000
2005 2,000
2006 2,000
2007 2,000
2008 2,000
The balance in goodwill is as follows:
Internet
Fantasy
Sports
Games
----------
Balance at December 31, 2003 and June 30, 2003 $2,947,824
==========
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4. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
SIX MONTHS ENDED DECEMBER 31,
-------------------------
2003 2002
--------- ---------
INCREASE IN ACCOUNTS RECEIVABLE $ (20,347) $ (29,511)
INCREASE (DECREASE) IN INVENTORIES 136,471 (110,518)
INCREASE (DECREASE) IN PREPAID EXPENSES 62,268 (20,314)
AND OTHER CURRENT ASSETS
INCREASE IN ACCOUNTS PAYABLE 16,535 148,366
DECREASE IN OTHER PROVISIONS AND ACCRUALS (509,687) (284,485)
--------- ---------
$(314,759) $(296,462)
========= =========
5. BUSINESS SEGMENTS
Through June 2003 the Company had two reportable segments, which included
strategic business units that offered different products and services. These
business units were managed separately as Student Sports which provided
marketing services and Fantasy Sports which provides entertainment services. As
the Company has changed it's focus, the Company sold Student Sports in June,
2003, which was reported as discontinued operations in our Annual Report as of
June 30, 2003 on Form 10K. As a result, as of December 31, 2003, the Company
operates in only one segment, consisting of fantasy sports games.
6. DEBT
LINES OF CREDIT
In June 2002, Fantasy Sports obtained a secured line of credit facility for
borrowings up to $1.0 million, which is fully secured by cash balances held in
the Company's account. This facility is due on demand and has a fixed interest
rate of 3.25%. The balance outstanding under this line of credit at December 31,
2003, was $398,124.
The Company also has a secured line of credit utilized by Fantasy Sports for
borrowings up to $50,000, which is fully secured by inventory currently owned or
hereafter acquired. This facility is payable on demand and bears interest based
on prime plus 1/2% . This line was fully drawn at December 31, 2003.
7. GUARANTEE
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. At December 31, 2003, this guarantee
stood at approximately $750,000 and was secured by like amounts of cash. As per
previous disclosure, the Company, along with the sold entity, have been working
to find a replacement guarantor for its guarantee. In this regard, in January
2004, an unrelated South African third party, entered into an agreement to
acquire the former subsidiary. This agreement also called for the assumption of
the Company's guarantee with the exception of $40,000. As per the agreement, the
remaining $40,000 guarantee will reduce on a monthly basis to zero through July
2004. The Company does not believe that it will be called upon to meet any
portion of this remaining $40,000.
The agreement was conditioned upon receipt of bank funding for the replacement
of the Company's guarantee. The Company has received documentation from the bank
that the funding commitment has been approved and therefore this contingency has
been met. However, the funding bank's legal staff have reviewed the acquisition
contract and have requested changes to certain clauses in the contract. Counsel
for the acquiror
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are scheduled to meet with the bank's legal department to redraft the contract.
The Company anticipates that this redrafting will be successfully concluded
within the next few days and that the transaction will close at that time,
thereby formally releasing its guarantee.
In the event that the transaction does not close, the Company will continue to
aggressively seek alternative guarantors for its current guarantee.
8. DISCONTINUED OPERATIONS
STUDENT SPORTS, INC.
On June 10, 2003 the Company sold substantially all the assets and liabilities
as of May 15, 2003 of Student Sports, a media company producing publications,
television programs and various marketing initiatives for the high school sports
market. The consideration for the sale of Student Sports was 325,686 shares of
Silverstar Holdings common stock that were returned to the Company, as well as
the forgiveness of a maximum of 913,745 contingent shares of Silverstar Holdings
that could have been payable to former Student Sports shareholders in April
2004.
Assets and liabilities associated with the discontinued operations of Student
Sports are not presented in the accompanying consolidated condensed financial
statements since the sale of the operations of Students Sports occurred prior to
June 30, 2003.
The following summarizes the operating results of Student Sports, discontinued
operations:
Three Months Six Months
Ended Ended
December 31, December 31,
2002 2002
------------- ---------
Revenue $ 335,232 $ 761,282
============= =========
Operating loss $ (439,911) $(605,827)
============= =========
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND AND HISTORY
Silverstar Holdings Limited was incorporated in September 1995. The Company's
intention is to actively pursue acquisitions fitting a pre defined 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, entrepreneurial management who
show the vision and ability to grow their businesses into
industry or niche leaders.
The Company sold its last remaining South African operations in November 2000.
The Company still has significant assets that are denominated in South African
Rand. The assets include cash and notes receivable. Should the Company hold the
notes until maturity the Company will continue to record income statement gains
or losses to the extent that the Rand's value fluctuates 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 of the assets and certain
liabilities of Fantasy Sports (Fantasy) from GoRacing Interactive Services, Inc.
Founded in 1993, Fantasy Sports operates the fantasycup.com, fantasycup.org,
fantasycup.net, fantasystockcar.com and fantasynhra.com websites and specializes
in subscription based NASCAR, college football 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. On June 10, 2003, the Company disposed of substantially all the assets
and liabilities of Student Sports, which was the only operating subsidiary in
the marketing services segment of the Company.
In accordance with accounting principles generally accepted in the United States
of America the operating results related to Student Sports have been included in
discontinued operations in the company's consolidated statements of operations.
The discontinued operations generated sales of $0 and approximately $335,000 for
the quarters ended December 31, 2003, and 2002, and $0 and approximately
$761,000 for the six months period, respectively. Losses from discontinued
operations were approximately $440,000 for the three months ended December 31,
2002 and approximately $606,000 for the six months period in 2002.
RESULTS OF OPERATIONS
Fantasy Sports has seasonal trends that affect the revenues and results of its
businesses. Fantasy Sports earns its revenues and recognizes most of its income
during the June and September quarters. Therefore, the results for the December
and March quarters are negatively affected by this seasonality.
QUARTER ENDED DECEMBER 31, 2003 AS COMPARED TO QUARTER ENDED DECEMBER 31, 2002
REVENUES
Revenues were $589,000 in the second quarter of fiscal 2004 as compared to
$652,000 in the same period in the prior year. Revenues from operations of
online games increased, but were offset by a decrease of approximately $140,000
in sales of merchandise and apparel. Fantasy Sports stopped selling merchandise
and apparel during the quarter ending December 31, 2003, as this was an
unprofitable business.
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COST OF SALES
Cost of sales were $445,000 in the second quarter of fiscal 2004, as compared to
$505,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prize winner expenses, and the cost of
merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended December 31,
2003 were $445,000 a decrease of approximately $204,000 over same period in the
prior year. The decrease was caused by the continuing implementation of cost
cutting measures primarily to payroll and related costs at the corporate and
operating levels.
AMORTZATION AND DEPRECIATION
Amortization of intangible assets decreased $16,000 in the second quarter of
fiscal 2004 as the result of one of two customer lists becoming fully amortized
at September 30, 2003. Depreciation expense decreased approximately $3,000 in
fiscal 2004 as compared to the prior year.
FOREIGN CURRENCY GAINS
Foreign currency gains are related to the assets remaining from the sale of
discontinued South African operations. The foreign currency gains during the
second quarter of fiscal 2004 were $ 474,000 as compared to gains of $1,008,000
in the second quarter of fiscal 2003. These gains and losses are a result of the
fluctuations of the South African Rand against the US dollar. During the quarter
ended December 31, 2003, the Rand appreciated approximately 6% against the US
dollar, while it appreciated 18% in the corresponding period last year. These
foreign currency gains 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 $153,000 was recorded during the second quarter of fiscal
2004, as compared to interest income of $157,000 during the second quarter of
fiscal 2003. The decrease in interest income in fiscal 2004 was primarily the
result of lower comparative rate of appreciation of the South African Rand
against the US dollar. This decrease is offset by a higher principal balance on
the notes receivable of the South African operations during fiscal 2004 which
causes interest to be computed on higher balances.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to US 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 INCOME
The Company recognized net income of $347,000 during the second quarter of
fiscal 2004 as compared to income of $187,000 during the same period in the
prior year. The improvement in income over the prior year is due to the sale of
Student Sports which generated significant losses in fiscal 2003 and a reduction
of cost of sales at Fantasy Sports and a reduction in general and administrative
expenses at both the operational and corporate levels. These gains were offset
by the decrease in foreign currency gains recognized which was $474,000 in
fiscal 2004 as compared to $1,008,000 during the same period in the prior fiscal
year and Interest income which was $153,000 in fiscal 2004 as compared to
$157,000 during the same period in the prior fiscal year.
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SIX MONTHS ENDED DECEMBER 31, 2003 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2002
REVENUES
Revenues were $1,476,000 in the first six months of fiscal 2004 as compared to
$1,673,000 in the same period in the prior year. The decrease was primarily the
result of Fantasy Sports decision to stop selling merchandise and apparel during
the quarter ending December 31, 2003.
COST OF SALES
Cost of sales were $923,000 in the first six months of fiscal 2004 as compared
to $1,064,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prizes awarded ,fulfillment expenses , direct
labor costs and the cost of merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended December
31, 2003 were $909,000, a decrease of approximately $251,000 over same period in
the prior year. The decrease was caused by the continuing implementation of cost
cutting measures primarily to payroll and related costs at the corporate and
operating levels.
AMORTZATION AND DEPRECIATION
Amortization of intangible assets decreased from $34,000 in the first six months
of fiscal 2003 to $17,000 in the same period of the current year as the result
of one of two customer lists becoming fully amortized at September 30, 2003.
Depreciation expense decreased to $23,000 in fiscal 2004 from $33,000 in the
prior year.
FOREIGN CURRENCY GAINS
Foreign currency gains are related to the assets remaining from the sale of
discontinued South African operations. The foreign currency gains during the
first six months of fiscal 2004 were $819,000 as compared to gains of $910,000
in the first six months of fiscal 2003. These gains are the result of the
fluctuations of the South African Rand against the US dollar. During the six
months ended December 31, 2003, the Rand appreciated approximately 11% against
the US dollar, while it appreciated 17% in the corresponding period last year.
These foreign currency gains 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 $331,000 was recorded during the first six months of fiscal
2004, as compared to interest income of $303,000 during the same period in
fiscal 2003. The increase in interest income in fiscal 2004 was primarily the
result of more interest income 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 INCOME (LOSS)
The Company recognized net income of $782,000 during the first six months of
fiscal 2004 as compared to a loss of $18,000 during the same period in the prior
year. The improvement in income over the prior year is due to the sale of
Student Sports which generated significant losses in fiscal 2003 and a reduction
of cost of sales at Fantasy Sports and a reduction in general and administrative
expenses at the both the operational and corporate levels. These gains were
offset by the decrease in foreign currency gains recognized which was $474,000
in fiscal 2004 as compared to $1,008,000 during the same period in the prior
fiscal year and Interest income which was $153,000 in fiscal 2004 as compared to
$157,000 during the same period in the prior fiscal year.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $62,000 from $1,618,000 at June 30, 2003 to $1,680,000 at
December 31, 2003. The increase in cash is a result of the decrease in the
Company's operating losses, the generation of cash through the issuance of
shares in connection with the exercise of stock options, a partial recoupment of
claims against Leisureplanet Holdings (LTD), (in administration) and the
increased value of our cash being held in South Africa.
The Company has also guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. At December 31, 2003, this guarantee
stood at approximately $750,000 and was secured by like amounts of cash. As per
previous disclosure, the Company, along with the sold entity, have been working
to find a replacement guarantor for its guarantee. In this regard, in January
2004, an unrelated South African third party, entered into an agreement to
acquire the former subsidiary. This agreement also called for the assumption of
the Company's guarantee with the exception of $40,000. As per the agreement, the
remaining $40,000 guarantee will reduce on a monthly basis to zero through July
2004. The Company does not believe that it will be called upon to meet any
portion of this remaining $40,000.
The agreement was conditioned upon receipt of bank funding for the replacement
of the Company's guarantee. The Company has received documentation from the bank
that the funding commitment has been approved and therefore this contingency has
been met. However, the funding bank's legal staff have reviewed the acquisition
contract and have requested changes to certain clauses in the contract. Counsel
for the acquiror are scheduled to meet with the bank's legal department to
redraft the contract. The Company anticipates that this redrafting will be
successfully concluded within the next few days and that the transaction will
close at that time, thereby formally releasing its guarantee.
In the event that the transaction does not close, the Company will continue to
aggressively seek alternative guarantors for its current guarantee.
Working capital increased $67,000 to $259,000 at December 31, 2003 from $192,000
at June 30, 2003. This increase is primarily the result of increased cash due to
the issuance of shares in connection with the exercise of stock options as well
as a decrease in deferred revenue at the end of the calendar year.
At December 31, 2003, the Company had borrowings of $495,670, which consisted of
$398,124 of advances against lines of credit secured by like amounts of cash,
$50,000 of advances against lines of credit secured by inventory, and $47,546 of
equipment and vehicle loans.
Due to the seasonality of this division's revenue collection cycle, we
anticipate that these borrowings will be substantially reduced by mid February
2004. 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 2004. These
factors, along with the current cash balances will allow the Company to meet its
obligations for the foreseeable future.
In the future the Company expects to meet its short and long term obligations in
part through the collection of amounts due from outstanding notes receivable.
Those notes, which are denominated in South African rand, are to be collected
once certain debt covenants have been satisfied in connection with senior debt
to which repayment has been subordinated. The Company monitors the financial
results of First Lifestyle Holdings on a quarterly and annual basis. It is the
Company's opinion, based on reviews of audited financial statements, reviews of
the debt covenant compliance calculations, reviews of budgets and inquiries of
management of First Lifestyle Holdings, that First Lifestyle Holdings is
generating sufficient cash flow from operations to meet its senior debt
obligations and be in compliance with the senior debt covenants.
Once the funds are collected in South African Rand, the Company expects to
repatriate those funds to the United States. The Company believes that
repatriation of the full amount is allowable under current South African foreign
currency regulations. Over the last six years the Company has, from time to
time, repatriated funds from South Africa without
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restriction. However, there can be no guarantee that the South African foreign
currency regulations will not change in the future in a manner that might
restrict the Company's ability to repatriate the remaining assets.
In the future the Company intends to add additional operating subsidiaries which
will produce revenues and net profits. The Company may utilize a portion of the
working capital in connection with the acquisition or establishment of those
operations. The Company may also be required to secure additional debt or equity
funding in connection with the funding of those 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.
FUTURE COMMITMENTS
Through December 31, 2003, Fantasy Sports had not generated significant
operational profits. 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 Fantasy Sport's operations.
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.
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 any subsequent
acquisitions, if any, will be performed on the one year anniversary of the
acquisition and in that period thereafter. 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, 2003, by developing a
ratio of revenue to market capitalization utilizing the Company and a comparable
publicly traded company in the same industry and applying this ratio to revenue
of the reporting unit.
In determining the value for Fantasy Sports, the Company considered several
valuation methodologies before deciding to utilize the revenue to market
capitalization model. The Company concluded that a market value as a measure of
value would be less speculative and more reliable than estimating future cash
flows for a business which was newly acquired, not currently profitable and in a
state of redesign with respect to its business model. The fair value of the
business rests with the revenue stream and any potential buyer would look to
that revenue stream to determine value. The Company was not able to locate any
comparable sale/purchase transactions for which information was publicly
available. However, the underlying business, fantasy games accessed through the
internet, is one for which a comparable company that is publicly traded exists.
The Company compared the ratio of revenue to market capitalization of the two
companies and found them to be reasonably comparable. The Company then selected
a ratio that was between the two ratios and used that ratio as a measure of fair
value. That value was significantly above the carrying value of the reporting
unit. The carrying value of Fantasy Sports, Inc. is quite low, in part due to
the recognition over time of operating losses. The Company determined that the
second step of the impairment test was not necessary due to the results of the
first step.
INTANGIBLE ASSETS
Intangible assets include trademarks, customer lists and other intellectual
property and non-competition agreements. Intangible assets, excluding goodwill,
are stated on the basis of cost and are amortized on a straight-line basis over
a period of three to ten years. Intangible assets with indefinite lives are not
amortized but are evaluated for impairment annually unless circumstances dictate
otherwise. Management periodically reviews intangible assets for impairment
based on an assessment of undiscounted future cash flows, which are compared to
the carrying value of the intangible assets. Should these cash flows not equate
to or exceed the carrying value of the intangible, a discounted cash flow model
is used to determine the extent of any impairment charge required.
During April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS 149"), "Amendment
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SILVERSTAR HOLDINGS LTD - 10Q Filing Date 2/17/04
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of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. SFAS 149 is effective for contracts entering into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149
did not have any impact on our operating results or financial position as we do
not have any derivative instruments that are affected by SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 ("SFAS 150"), "Accounting for Certain Instruments with Characteristics of
both Liabilities and Equity". SFAS 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not have an impact on our operating results or financial position.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes. The company does however recognize market risk from interest
rate and foreign currency exchange exposure.
INTEREST RATE RISK
AT DECEMBER 31, 2003, the Company's cash resources earn interest at variable
rates. Accordingly, the Company's return on these funds is affected by
fluctuations in interest rates. Any decrease in interest rates will have a
negative effect on the Company's earnings. Using the December 31, 2003 balances
and rates, it is estimated that a 1/2 of 1% increase in interest rates would
increase interest expense by approximately $2,500. There is no assurance that
interest rates will increase or decrease over the next fiscal year. The Company
believes that any movement of interest rates as they relate to outstanding debt
would be immaterial to the financial results of the Company.
FOREIGN CURRENCY RISK
Certain of the Company's cash balances and the remaining proceeds from the sale
of its South African subsidiaries are denominated in South African Rand. This
exposes the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Due to the prohibitive
cost of hedging these proceeds, the exposure has not been covered as yet. Should
more favorable conditions arise, a suitable Rand hedge may be considered by
management. For every 1% decline in the Rand/US Dollar exchange rate, at
quarter-end exchange rates, the Company loses $1,501 on every R1 million
retained in South Africa. AT DECEMBER 31, 2003, the Company had total assets
denominated in South African Rand of R50.96 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 December 31, 2003:
FOREIGN CURRENCY
GAIN/(LOSS) FOR THE
THREE MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2003
----------------- -------------------
IN RAND US DOLLARS
Cash 1,447,096 $ 13,733
Notes Receivable, net of reserve 49,402,698 468,840
Other 115,189 (8,518)
----------
$ 474,055
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
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Commission's ("SEC") rules and forms, and (2) that this information is
accumulated and communicated to our management, including our Chief Executive
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 July 2003, under the supervision and review of our Chief Executive Officer,
we conducted an evaluation of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive 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 July
2003 evaluation. We cannot assure you, however, that our system of disclosure
controls and procedures will always achieve its stated goals under all future
conditions, no matter how remote.
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 18, 2003 the Company held its annual meeting of stockholders. At the
annual meeting, the Company's stockholders elected five directors to serve until
the next annual meeting and until their respective successors are elected and
qualified. At the annual meeting, the Company's stockholders also approved and
adopted a proposal to ratify the action of the Board of Directors in appointing
Rachlin Cohen & Holtz LLP as the Company's independent public accountants for
the fiscal year ending June 30, 2004. The votes for directors were as follows:
Votes
--------------------------
For Withheld
--------- --------
Michael Levy 9,672,962 26,287
Clive Kabatznik 9,672,962 26,287
Cornelius J. Roodt 9,672,962 26,287
Stanley Castleton 9,672,962 26,287
Joseph Weil 9,672,962 26,287
The votes to approve and adopt a proposal to ratify the action of the Board of
Directors in appointing Rachlin Cohen & Holtz LLP as the Company's independent
public accountants for the fiscal year ending June 30, 2004 were as follows:
For Against Abstain
--------- ------- -------
9,684,312 6,787 9,050
17
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
SILVERSTAR HOLDINGS LTD - 10Q Filing Date 2/17/04
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32.1 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: February 17, 2004
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
------------------------
Clive Kabatznik
Chief Executive Officer, President and
Chief Financial Officer
19