SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 2004
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 April 27, 2004 was
8,623,372.
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets at March 31, 2004 (Unaudited)
and June 30, 2003
Condensed Consolidated Statements of Operations (Unaudited) for the
three and nine months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows (Unaudited) for nine
months ended March 31, 2004 and 2003
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 31, 32 and Reports on Form 8-K
SIGNATURES
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$289,957 and $835,951 respectively (see Note 7) $ 1,519,706 $ 1,617,629
Accounts receivable, net 9,788 17,816
Inventories 27,734 168,113
Current portion of notes receivable 156,757 248,205
Prepaid expenses and other current assets 54,801 120,142
------------ ------------
Total current assets 1,768,786 2,171,905
Property, plant and equipment, net 105,203 140,301
Investments in affiliates 843,566 843,566
Long-term notes receivable 7,746,018 6,213,686
Goodwill 2,947,824 2,947,824
Intangible assets, net 13,000 30,750
Deferred charges and other assets 2,985 6,130
------------ ------------
Total assets $ 13,427,382 $ 12,354,162
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 250,602 $ 218,851
Current portion of long term debt 25,569 26,237
Accounts payable 218,854 483,264
Other provisions and accruals 253,049 415,399
Deferred revenue 1,148,349 836,073
------------ ------------
Total current liabilities 1,896,423 1,979,824
Long term debt 17,612 33,884
Obligation Related to Acquisition of Student Sports 315,405 315,405
------------ ------------
Total liabilities 2,229,440 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 (52,702,324) (53,572,528)
------------ ------------
Total stockholders' equity 11,197,942 10,025,049
------------ ------------
Total liabilities and stockholders' equity $ 13,427,382 $ 12,354,162
============ ============
See notes to condensed consolidated financial statements.
2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Revenues $ 357,545 $ 653,023
Operating expenses:
Cost of sales 230,533 452,080
Selling, general and administrative 506,050 602,674
Amortization of intangible assets 500 16,750
Depreciation 8,054 17,339
------------ ------------
745,137 1,088,843
------------ ------------
Operating loss (387,592) (435,820)
Other income (expense) (31,280) 2,064
Foreign currency gains 365,268 411,400
Interest income 146,824 163,142
Interest expense (4,625) (3,257)
------------ ------------
Income from operations, before income taxes 88,595 137,529
Provision for income taxes -- --
------------ ------------
Income from continuing operations 88,595 137,529
Loss from discontinued operations -- (58,723)
------------ ------------
Net Income $ 88,595 $ 78,806
============ ============
Net income/(loss) per share:
Basic:
Continuing Operations $ 0.01 $ 0.02
Discontinued Operations -- (0.01)
------------ ------------
Net income $ 0.01 $ 0.01
============ ============
Diluted:
Continuing Operations $ 0.01 $ 0.02
Discontinued Operations -- (0.01)
------------ ------------
Net income $ 0.01 $ 0.01
============ ============
Weighted average common stock outstanding:
Basic 8,630,513 8,776,199
============ ============
Diluted 9,042,236 10,509,053
============ ============
See notes to condensed consolidated financial statements.
3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Revenues $ 1,833,236 $ 2,325,863
Operating expenses:
Cost of sales 1,153,299 1,516,702
Selling, general and administrative 1,414,983 1,762,904
Amortization of intangible assets 17,750 50,250
Depreciation 31,103 50,773
------------ ------------
2,617,135 3,380,629
------------ ------------
Operating loss (783,899) (1,054,766)
Other income 12,231 2,163
Foreign currency gains 1,184,174 1,321,866
Interest income 478,028 465,811
Interest expense (20,330) (10,083)
------------ ------------
Income from operations, before income taxes 870,204 724,991
Provision for income taxes -- --
------------ ------------
Income from continuing operations 870,204 724,991
Loss from discontinued operations (664,550)
------------ ------------
Net income $ 870,204 $ 60,441
============ ============
Net income per share:
Basic:
Continuing Operations .10 $ 0.08
Discontinued Operations -- (0.07)
------------ ------------
Net income $ .10 $ 0.01
============ ============
Diluted:
Continuing Operations .10 $ 0.07
Discontinued Operations -- (0.06)
------------ ------------
Net income $ 0.10 $ 0.01
============ ============
Weighted average common stock outstanding:
Basic 8,547,506 8,841,332
============ ============
Diluted 9,122,164 10,509,053
============ ============
See notes to condensed consolidated financial statements.
4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended March 31,
----------- -----------
2004 2003
----------- -----------
Cash flow from operating activities:
Net income from operations $ 870,204 $ 724,991
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 48,853 101,023
Foreign currency gains (1,158,884) (1,506,460)
Loss on disposal of fixed assets 3,796 --
Non-cash interest income on notes receivable (463,144) (427,791)
Changes in operating assets and liabilities 99,264 351,957
Changes in other assets 3,145 (1,275)
----------- -----------
Net cash used in continuing operations (596,766) (757,556)
Net cash used in discontinued operations -- (237,762)
----------- -----------
Net cash used in operating activities (596,766) (995,318)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (542) (22,252)
Proceeds from sale of fixed assets 1,220 --
Decrease in long-term notes receivable 180,665 246,047
----------- -----------
Net cash provided by investing activities 181,343 223,795
----------- -----------
Cash flows from financing activities:
Short term borrowings, net 31,751 17,998
Repayment of long - term debt (16,940) --
Repurchase of treasury shares -- (25,135)
Issuance of common stock 302,689 --
----------- -----------
Net cash provided by (used in) financing activities 317,500 (7,137)
----------- -----------
Net decrease in cash and cash equivalents (97,923) (778,660)
Cash and cash equivalents, beginning of period 1,617,629 2,540,667
----------- -----------
Cash and cash equivalents, end of period $ 1,519,706 $ 1,762,007
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 20,330 $ 10,083
=========== ===========
See notes to condensed consolidated financial statements.
5
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 March 31,
2004 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.
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 obligation related to the acquisition of Student Sports is computed
using the average market price for the quarter.
6
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 pro forma amounts indicated below.
Three Months ended March 31, Nine Months ended March 31,
----------------------- ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Income from continuing operations as reported $ 88,595 $ 137,529 $ 870,204 $ 724,991
Less: Compensation expense for options
Awards determined by the fair-value-based
Method 0 (2,392) (67,264) (13,349)
--------- --------- --------- ---------
Pro forma net income from continuing
Operations 88,595 135,137 $ 802,940 $ 711,642
========= ========= ========= =========
Basic:
As reported $0.01 $0.02 $0.10 $0.08
Pro forma $0.01 $0.02 $0.09 $0.08
Assuming Full dilution :
As reported $0.01 $0.01 $0.10 $0.07
Pro forma $0.01 $0.01 $0.09 $0.07
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its
Exposure Draft, "Share-Based Payment," which is a proposed amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." The Exposure Draft
would require all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. FASB expects that a final standard would be effective for public
companies for fiscal years beginning after December 15, 2004. The Company does
not intend to adopt a fair-value based method of accounting for stock-based
employee compensation until a final standard is issued by the FASB that requires
this accounting.
3. INVESTMENT IN AFFILIATES
Magnolia Broadband is a development stage company established to develop and
market wireless based chips primarily for the mobile handset market.
The Company initially invested in Magnolia based on the track record of
Magnolia's founder, positive industry feedback together with the results of an
independent study commissioned by the Company to evaluate Magnolia's basic
technological premise and its market applications.
In assessing the fair value of our investment in Magnolia, we monitor their
progress through monthly board meetings and additional formal and informal
communications. Magnolia, since inception, has set technical goals and
timelines, which were invariably met or surpassed. Furthermore, the company
excelled in hiring high level technical staff with advanced degrees and
experience in management of corporations such as Bell Labs, Motorola, and
Anadigics. The willingness of highly qualified individuals to leave established
corporations for a start-up opportunity provided
7
validation for our belief in Magnolia's potential. This promise was further
validated by the significant investments made by leading venture capital funds
in April 2002 and July 2003, and by positive responses from potential customers,
most notably SK Telecom and Sprint PCS.
Based on Magnolia's achievements, some of which are summarized above, the
Company concluded that these positive accomplishments support the variables
considered in developing the valuations for the private placement transactions
which the Company used as a basis for concluding that its investment in Magnolia
was not reflected at a value in excess of fair value on its financial
statements.
The Company's ongoing monitoring and evaluation described above continues. Over
the next twelve months, among other goals, Magnolia anticipates commercial
production of its first Chipset product, as well as engineered samples of a
second commercial Chipset product. Furthermore, it plans to have successfully
completed pre-production of a first commercial design handset with a handset
manufacturer. Additionally, a further engineering prototype handset is to be
developed with a second handset manufacturer, as well as a commercial
relationship with a handset manufacturer are anticipated over the next twelve
months. The Company will continue to monitor Magnolias' progress and will
evaluate the carrying value of its investment based upon these milestones being
met.
4. INTANGIBLE ASSETS
The components of amortizable intangible assets as of March 31, 2004 and June
30, 2003 are as follows:
Cost as of Accumulated Amortization
March 31, 2004 March 31, June 30,
and June 30, 2003 2004 2003
----------------- ---- ----
Customer Lists $215,000 $202,000 $184,250
------- -------- --------
$215,000 $202,000 $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 nine 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 March 31, 2004 and June 30, 2003 $2,947,824
==========
8
5. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Nine Months Ended March 31,
--------- ---------
2004 2003
--------- ---------
Decrease in accounts receivable $ 8,028 $ 9,856
Decrease in inventories 140,379 680
(Increase) Decrease in prepaid expenses 65,341 (96,295)
and other current assets
Increase (Decrease) in accounts payable (264,410) 58,660
Decrease in other provisions and accruals 149,926 379,056
--------- ---------
$ 99,264 $ 351,957
========= =========
6. 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 fantasy sports games. 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 March 31, 2004, the Company
operates in only one segment, consisting of fantasy sports games.
7. 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 March 31,
2003, was $250,602.
8. GUARANTEE
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. At March 31, 2004, this guarantee stood
at approximately $40,000 and was secured by like amounts of cash. As per
previous disclosure, in January 2004, an unrelated South African third party,
entered into an agreement to acquire the former subsidiary. This agreement
reduced the Company's guarantee to approximately $47,000. As per the agreement,
the remaining $40,000 guarantee will reduce on a monthly basis to zero through
August 2004. The Company does not believe that it will be called upon to meet
any portion of this remaining guarantee.
9. 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 purchaser is an entity controlled by some, but not all of the
stockholders from which the Company originally acquired Student Sports in
September 2001. Those stockholders who
9
participated in the repurchase agreed to surrender the right to receive shares
of Company common stock which they received as contingent consideration in the
Company's acquisition of Student Sports. As a result, an obligation to issue
approximately 914,000 common shares, valued at approximately $492,000 has been
included as a liability relieved in connection with the sale in the calculation
of the loss associated with the disposition. The calculation of loss from
disposition also includes the value of the Company common stock returned, as
well as the cash paid. A summary of the calculation of the loss on disposition
is approximately as follows:
Cash received $ 1,000
Common stock returned 231,000
Liability to issue common stock relieved 492,000
-------
Total consideration 724,000
Net book value transferred (987,000)
-------
Loss on disposition (263,000)
=======
In September 2001 when Student Sports was acquired, a commitment to issue up to
1,500,000 shares of Company common stock, at the lower of $3.00 per share or the
market price of the stock, not to exceed $1,500,000 was entered into. The only
contingency for the issuance of the shares was time. The shares were to be
issued on March 31, 2004. Pursuant to EITF 97-15, the contingent consideration
was recorded at the date of acquisition as a liability of $807,000, the
1,500,000 shares at 80% ($0.538per share) of the average market value for the 20
trading days prior to closing. The remaining liability to issue shares, included
as a liability in the accompanying consolidated balance sheet ($315,404)
represents the obligation to issue common shares to those rights holders who did
not surrender their rights.
Those rights that were not surrendered entitle the holders to received Company
common stock on March 31, 2004. The Company is currently negotiating with the
remaining rights holders in an effort to reduce or eliminate the number of
common shares that the Company must issue in connection with the contingent
consideration in light of the poor performance of Student Sports.
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 Nine Months
Ended Ended
March 31, March 31,
2003 2003
----------- -----------
Revenue $ 316,204 $ 1,077,486
=========== ===========
Operating loss $ (58,723) $ (664,850)
=========== ===========
10
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 specializes in Internet subscription based
NASCAR, college football and other fantasy sports games.
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 $316,000 for
the quarters ended March 31, 2004, and 2003, and $0 and approximately $1,078,000
for the nine month period, respectively. Losses from discontinued operations
were approximately $59,000 for the three months ended March 31, 2004 and
approximately $665,000 for the nine month period in 2003.
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.
11
Quarter ended March 31, 2004 as compared to quarter ended March 31, 2003
REVENUES
Revenues were $358,000 in the third quarter of fiscal 2004 as compared to
$653,000, in the same period in the prior year. Revenues from operations of
online games decreased primarily due to a decline in subscribers, sales of One
Race events during the quarter. Additionally, fewer races were held in 2004
versus the comparable period in 2003 thereby shifting the timing for the
recognition of revenues. Finally, a decrease of approximately $165,000 in sales
of merchandise and apparel was recorded in 2004 versus 2003. Fantasy Sports
stopped selling merchandise and apparel during the quarter ending December 31,
2003, as this was an unprofitable business.
COST OF SALES
Cost of sales were $231,000 in the third quarter of fiscal 2004, as compared to
$452,000 in the same period of the prior year. The decrease is primarily a
result of decreases in the cost of prize winner expenses, due to fewer races and
subscribers, spersonnel and the cost of merchandise and apparel sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended March 31,
2004 were $506,000 a decrease of approximately $97,000 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 third quarter of
fiscal 2004 as the result of one of two customer lists becoming fully amortized
at September 30, 2003. Depreciation expense decreased approximately $9,000 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
third quarter of fiscal 2004 were $ 365,000 as compared to gains of $411,000 in
the third 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 March 31, 2004, the Rand appreciated approximately 5% against the US
dollar, while it appreciated 7% 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 $147,000 was recorded during the third quarter of fiscal
2004, as compared to interest income of $163,000 during the third quarter of
fiscal 2003. The decrease in interest income in fiscal 2004 was primarily the
result of lower interest rates in South Africa, thereby decreasing the interest
income on our notes receivable.
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 $89,000 during the third quarter of fiscal
2004 as compared to income of $79,000 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 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
revenues, foreign currency gains and interest income in fiscal 2004 as compared
to comparable period in the prior year.
12
Nine Months Ended March 31, 2004 as Compared to Nine Months Ended March 31, 2003
REVENUES
Revenues were $1,833,000 in the first nine months of fiscal 2004 as compared to
$2,326,000 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, as well as a decrease in subscribers.
COST OF SALES
Cost of sales were $1,153,000 in the first nine months of fiscal 2004 as
compared to $1,517,000 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 nine months ended March 31,
2004 were $1,415,000, a decrease of approximately $348,000 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 $50,000 in the first nine
months of fiscal 2003 to $18,000 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 $31,000 in fiscal 2004 from $51,000 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 nine months of fiscal 2004 were $1,184,000 as compared to gains of
$1,322,000 in the first nine months of fiscal 2003. These gains are the result
of the fluctuations of the South African Rand against the US dollar. During the
nine months ended March 31, 2004, the Rand appreciated approximately 15% against
the US dollar, while it appreciated 23% 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 $478,000 was recorded during the first nine months of fiscal
2004, as compared to interest income of $466,000 during the same period in
fiscal 2003.
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 $870,000 during the first nine months of
fiscal 2004 as compared to a loss of $60,000 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 of approximately $138,000.
13
Financial Condition, Liquidity and Capital Resources
Cash decreased by $98,000 from $1,618,000 at June 30, 2003 to $1,520,000 at
March 31, 2004. The decrease in cash is a result of the Company's operating
losses, repayment of debt and other payables offset by 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 guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. At March 31, 2004, this guarantee stood
at approximately $40,000 and was secured by like amounts of cash. As per
previous disclosure, in January 2004, an unrelated South African third party,
entered into an agreement to acquire the former subsidiary. This agreement
reduced the Company's guarantee to approximately $47,000. As per the agreement,
the remaining $40,000 guarantee will reduce on a monthly basis to zero through
August 2004. The Company does not believe that it will be called upon to meet
any portion of this remaining guarantee.
Working capital decreased to ($128,000) at March 31, 2004 from $192,000 at June
30, 2003. This decrease is primarily the result of the seasonal increase in
deferred revenue.
At March 31, 2004, the Company had borrowings of $294,000 that consisted of
$251,000 of advances against lines of credit secured by like amounts of cash and
$43,000 of equipment and vehicle loans.
The Company continues to reduce its expenses in order to preserve its cash
balances and reduce its operational 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 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 that
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 March 31, 2004, 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.
14
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 on a pro rata basis 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.
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its
Exposure Draft, "Share-Based Payment," which is a proposed amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." The Exposure Draft
would require all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. FASB expects that a final standard would be effective for public
companies for fiscal years beginning after December 15, 2004. The Company does
not intend to adopt a fair-value based method of accounting for stock-based
employee compensation until a final standard is issued by the FASB that requires
this accounting. Proforma disclosures of quarterly earnings are included in Note
2 of this quarterly statement.
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.
15
Interest rate risk
At March 31, 2004, 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 March 31, 2004 balances and rates, it is
estimated that a 1/2 of 1% increase in interest rates would increase interest
expense by approximately $1,469. 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% fluctuation in the Rand/US Dollar exchange rate, at
quarter-end exchange rates, the Company could realize a gain or suffer a loss of
approximately $77,400 based on the value of its assets retained in South Africa.
At March 31, 2004, the Company had total assets denominated in South African
Rand of R51.58 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 March 31, 2004:
Foreign Currency
Gain/(Loss) for the
Three Months Ended
March 31, 2004 March 31, 2004
-------------- --------
in Rand US Dollars
Cash 1,348,068 $ 9,548
Notes Receivable, net of reserve 50,202,380 355,588
Other 32,794 132
----------
$ 365,268
==========
16
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/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.
As of March 31, 2004, an evaluation was performed, under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer/Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Chief Executive
Officer/Chief Financial Officer, concluded that the company's disclosure
controls and procedures were effective as of March 31, 2004 in ensuring that
information required to be disclosed by the company in the reports it files and
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms. There
were no changes in the company's internal control over financial reporting that
occurred during the company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
31 Certification pursuant to 18 U.S.C. 1350 adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002.
32 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: May 12, 2004
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
--------------------------------------------------------------
Clive Kabatznik
Chief Executive Officer, President and Chief Financial Officer
19