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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ____No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of November 10, 2003 was
8,485,513.
SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets at September 30, 2003 (Unaudited)
and June 30, 2003
Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) for three
months ended September 30, 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 6 Exhibits and Reports on Form 8-K
SIGNATURES
SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2003 2003
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(Unaudited)
ASSETS
Current assets
Cash and cash equivalents, includes restricted cash of
$1,055,396 and $835,951, respectively $ 1,523,976 $ 1,617,629
Accounts receivable, net 26,084 17,816
Inventories 120,392 168,113
Current portion of notes receivable 188,350 248,205
Prepaid expenses and other current assets 98,167 120,142
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Total current assets 1,956,969 2,171,905
Property, plant and equipment, net 128,940 140,301
Investments in affiliates 843,566 843,566
Long-term notes receivable 6,687,191 6,213,686
Goodwill, net 2,947,824 2,947,824 2,947,824
Intangible assets, net 14,000 30,750
Deferred charges and other assets 6,130 6,130
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Total assets $ 12,584,620 $ 12,354,162
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit 355,396 218,851
Current portion of long term debt 20,745 26,237
Accounts payable 532,430 483,264
Other provisions and accruals 387,742 415,399
Deferred revenue 468,719 836,073
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Total current liabilities 1,765,032 1,979,824
Long term debt 32,505 33,884
Obligation related to acquisition 315,405 315,405
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Total liabilities 2,112,942 2,329,113
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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; 7,538,924 and 7,503,924 shares
issued and outstanding, respectively 75,389 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 63,524,222 63,512,472
Accumulated deficit (53,137,999) (53,572,528)
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Total stockholders' equity 10,471,678 10,025,049
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Total liabilities and stockholders' equity $ 12,584,620 $ 12,354,162
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See notes to condensed consolidated financial statements.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
2003 2002
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Revenues $ 886,895 $ 1,021,314
Operating expenses:
Cost of sales 477,535 559,556
Selling, general and administrative 463,996 511,290
Amortization of intangible assets 16,750 16,750
Depreciation 11,514 18,830
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969,795 1,106,426
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Operating loss (82,900) (85,112)
Other income 1,237 99
Foreign currency gains (losses) 344,851 (97,923)
Interest income 178,382 145,614
Interest expense (7,041) (2,399)
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Income (Loss) from continuing operations, before income taxes 434,529 (39,721)
Provision for income taxes -- --
Income (loss) from continuing operations 434,529 (39,721)
Loss from discontinued operations -- (165,916)
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Net income (loss) $ 434,529 $ (205,637)
Income (Loss) per share
Basic
Continuing operations $ .05 --
Discontinued operations -- $ (.02)
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Net income (loss) $ .05 $ (.02)
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Diluted
Continuing operations $ .05 --
Discontinued operations -- $ (.02)
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Net income (loss) $ .05 $ (.02)
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Weighted average common stock outstanding:
Basic 8,482,469 8,940,617
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Diluted 9,293,770 8,940,617
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See notes to condensed consolidated financial statements.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Three Months Ended September 30,
2003 2002
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Cash flow from operating activities:
Net loss from operations $ 434,529 $ (39,721)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 28,104 35,580
Foreign currency gains (losses) (338,894) 49,632
Non-cash interest income on notes receivable (172,905) (127,399)
Changes in operating assets and liabilities (284,417) (419,572)
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Net cash used in continuing operations (333,583) (501,480)
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Net cash used in discontinued operations -- (82,000)
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Net cash used in operating activities (333,583) (583,480)
Cash flows from investing activities:
Acquisition of property plant and equipment -- (582)
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Decrease in long-term notes receivable 98,156 92,836
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Net cash provided by investing activities 98,156 92,254
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Cash flows from financing activities:
Short term borrowings, net 136,545 320,500
Repayment of long term debt (6,871) --
Repurchase of Treasury Stock (9,744)
Issuance of Stock 12,100 --
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Net cash provided by financing activities 141,774 310,756
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Net decrease in cash and cash equivalents (93,653) (180,470)
Cash and cash equivalents, beginning of period 1,617,629 2,540,667
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Cash and cash equivalents, end of period $ 1,523,976 $ 2,360,197
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Supplemental cash flow information:
Cash paid for interest $ 7,041 $ 2,399
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See notes to condensed consolidated financial statements.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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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 September
30, 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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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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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.
Three Months ended September 30,
2003 2002
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Income (loss) continuing operations as reported $ 434,529 $(205,637)
Less: Compensation expense for options
Awards determined by the fair-value-based
Method (2,392) (2,392)
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Proforma net income/(loss) from continuing
Operations $ 432,137 $(208,029)
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Basic:
As reported $0.05 $(0.02)
Pro forma $0.05 (0.02)
Assuming Full dilution :
As reported $0.05 N/A
Pro forma $0.05 N/A
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement requires that the amount recorded as a liability be
capitalized by increasing the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the liability is accreted to the ultimate
amount anticipated to be paid, and is also adjusted for revisions to the timing
or amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for fiscal 2003. The adoption of this
statement did not have a significant impact on the results of operations or
financial position of the Company.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement provides a single comprehensive
accounting model for impairment of long-lived assets and discontinued
operations. SFAS 144 became effective in the first quarter of fiscal 2003. The
adoption of this statement did not have a significant impact on the results of
operations or financial position of the Company.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." Adoption of the standard is generally required in the fiscal
year beginning after May 15, 2002, with certain provisions becoming effective
for financial statements issued on or after May 15, 2002. Under the standard,
transactions currently classified by the Company as extraordinary items will no
longer be treated as such but instead will be reported as other non-operating
income or expenses. The Company adopted SFAS 145 on July 1, 2002 and the
adoption of SFAS 145 did not have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146 will
become effective in the third quarter of fiscal 2003. The Company believes that
the adoption of this statement will not have a significant impact on the results
of operations or financial position of the Company.
In November 2002 the FASB issued FASB Interpretation No., or FIN 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company has adopted the provisions
of this pronouncement to existing loan guarantees. See Note 7.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
SFAS 148 amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
has decided not to adopt the fair value method of accounting for stock-based
employee compensation but has adopted the disclosure provisions affecting those
companies who continue to use the intrinsic value method of accounting for stock
options under APB 25.
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 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.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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3. INTANGIBLE ASSETS
The components of amortizable intangible assets as of September 30, 2003 and
June 30, 2003 are as follows:
Cost as of Accumulated Amortization
September 30, 2003 September 30, June 30,
and June 30, 2003 2003 2003
----------------- ---- ----
Customer Lists $215,000 $201,000 $184,250
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$215,000 $201,000 $184,250
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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 three months of fiscal
2004 was $16,750. Estimated amortization expense for the rest of fiscal 2004 and
for the succeeding four fiscal years after that is as follows:
2004 1,500
2005 2,000
2006 2,000
2007 2,000
2008 2,000
The balance in goodwill is as follows:
Internet
Fantasy
Sports
Games
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Balance at September 30, 2003 and June 30, 2003 $2,947,824
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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4. CASH FLOWS
The changes in operating assets and liabilities consist of the following:
Three Months Ended September 30,
2003 2002
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Increase in accounts receivable $ (8,268) $ (14,682)
Increase (Decrease) in inventories 47,721 (119,933)
Decrease in prepaid expenses and other current assets 21,975 60,038
Increase in accounts payable 49,166 88,562
Decrease in other provisions and accruals (395,011) (433,557)
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$(284,417) $(419,572)
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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 provided marketing
services and Fantasy Sports provides entertainment services .As the company has
changed it's focus, the Company sold Student Sports in June, 2003, and was
reported as discontinued operations in our Annual Report as of June 30, 2003 on
Form 10K. As a result, as of September 30, 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 against cash balances held
in the Company's account. This facility is due on demand and has an interest
rate of 3.25%. The balance outstanding under this line of credit at September
30, 2003, was $305,396.
The Company also has an 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 September 30, 2003.
7. GUARANTEE
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. As a result of the previously mentioned
loan, at September 30, 2003, this guarantee stood at approximately $750,000 and
is secured by like amounts of cash. Under the revised loan agreement (previously
mentioned) we anticipate this guarantee to reduce by approximately $15,000 per
month. This guarantee would only be called in the event of a substantial
deterioration of this subsidiary's business or liquidation. The Company monitors
the activity of this former subsidiary closely and does not foresee any short
term likelihood that this guarantee will be called. However, in the event this
guarantee is called, the Company has recourse to certain assets of this former
subsidiary, which should substantially cover the Company's potential exposure.
The Company is currently negotiating with a number of parties to remove its
guarantee; there is no assurance that the company will be successful in this
regard.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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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 and net assets 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 $426,050 for the quarters
ended September 30, 2003, and 2002 and net losses from operations of $0 and
$165,916, respectively.
Results of Operations
Fantasy Sports has seasonal trends that affect the revenues and results of its
businesses. Fantasy Sports accrues its revenues and recognizes most of its
income during the June and September quarters. Therefore, the results for the
December and March quarters are negatively affected by this seasonality.
Quarter ended September 30, 2003 as compared to quarter ended September 30, 2002
Revenues
Revenues were $887,000 in the first quarter of fiscal 2004 as compared to
$1,021,000 in the same period in the prior year for total decrease of 134,000.
Substantially all of this decrease is due to lower merchandise and apparel
sales. The company is currently in the process of closing the money losing
merchandise and apparel division.
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Cost of Sales
Cost of sales were $478,000, or 53.9% in the first quarter fiscal 2004, as
compared to $560,000 or 54.8%, in the same period of the prior year. The
decrease is primarily a result of reduction of merchandise cost of sales and
decreases in payroll expenses related to the operation of our online games.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 30,
2003 were $464,000 a decrease of approximately $47,000 over the same period in
the prior year. Significant reductions in management payroll and benefits
substantially contributed to the overall decrease and more than offset by a
$57,000 increase in advertising expenses due to timing differences between the
comparable periods.
Amortization and Depreciation
Amortization of intangible assets were unchanged at $16,750 in the first fiscal
quarter of fiscal 2004. Depreciation expense was approximately $11,500 in the
quarter ended September 30, 2003 compared to approximately $18,800 in the
comparative prior period.
Foreign Currency Gains (Losses)
Foreign currency gains or losses are related to the assets remaining from the
sale of discontinued South African operations. The foreign currency gains during
the first quarter of fiscal 2004 were $345,000 as compared to ($98,000) loss in
the first quarter of fiscal 2003. These gains (losses) are a result of the
fluctuations of the South African Rand against the US dollar. During the quarter
ended September 30, 2003, the Rand appreciated approximately 5% against the US
dollar, while it depreciated approximately 2% 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 $178,382 was recorded during the first quarter of fiscal
2004, as compared to interest income of $146,000 during the first quarter of
fiscal 2003. The increase in interest income in fiscal 2004 was primarily the
result of the appreciation of the South African Rand against the US dollar
compared to the prior year, which affects interest earned on Notes Receivable
from the sale of the South African operations, offset by lower invested cash
balances.
Provision for Income Taxes
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to 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 (loss)
The Company recognized net income of $435,000 during the first quarter of fiscal
2004 as compared to a loss of $206,000 during the corresponding period last
year. The improvement in income over the prior year is due to the sale of
Student Sports which generated losses in fiscal 2003, a reduction of cost of
sales at Fantasy Sports (as a percentage of sales), a reduction in general and
administrative expenses at both the operational and corporate levels and foreign
currency gains resulting from the appreciation of the South African Rand against
the US dollar during the first quarter of fiscal year 2004 as opposed to foreign
currency losses in the corresponding period last year.
Financial Condition, Liquidity and Capital Resources
Cash decreased by $94,000 from $1,618,000 at June 30, 2003 to $1,524,000 at
September 30, 2003. The decrease in cash is a result of the payment of operating
expenses of the company in excess of revenues collected. Remaining cash is being
held for working capital purposes and to fund potential investments.
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. As a result of the previously mentioned
loan, at September 30, 2003, this guarantee stood at approximately $750,000 and
is secured by like amounts of cash. Under the revised loan agreement (previously
mentioned) we anticipate this guarantee to reduce by approximately $15,000 per
month. This guarantee would only be called in the event of a substantial
deterioration of this subsidiary's business or liquidation. The Company monitors
the activity of this former subsidiary
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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closely and does not foresee any short-term likelihood that this guarantee will
be called. However, in the event this guarantee is called, the Company has
recourse to certain assets of these former subsidiaries, which should
substantially cover the Company's potential exposure. The Company is currently
negotiating with a number of parties to remove its guarantee; there is no
assurance that the company will be successful in this regard.
Working capital was $192,000 at both September 30, 2003 and June 30, 2003.
Decreases in current assets were offset by decreases in deferred revenue.
At September 30, 2003, the Company had borrowings of $408,646 which consisted of
$305,396 of advances against lines of credit secured by like amounts of cash,
$50,000 of advances against lines of credit secured by inventory, and $53,250 of
equipment and vehicle loans.
The Company continues to reduce its expenses in order to preserve its cash
balances and build profitability. 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.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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Future Commitments
Historically, Fantasy Sports has lost money. However, during the three months
ended September 30, 2003, Fantasy Sports generated a net profit from operations
of $108,546. The Company anticipates that this profitability will be sustained,
however there are no assurances that this will occur. In the event, the Company
may need to continue to support the operations of its subsidiaries.
The Company intends to preserve its cash balances to the best of its ability.
The Company anticipates continued repayments from certain notes receivable.
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 comparable
publicly traded companies in the same industry and applying this ratio to
revenue of the reporting unit.
Intangible Assets
Intangible assets include trademarks, customer lists and other intellectual
property and non-competition agreements. Intangible assets, excluding goodwill,
are stated on the basis of cost and are amortized on a straight-line basis over
a period of three to ten years. Intangible assets with indefinite lives are not
amortized but are evaluated for impairment annually unless circumstances dictate
otherwise. Management periodically reviews intangible assets for impairment
based on an assessment of undiscounted future cash flows, which are compared to
the carrying value of the intangible assets. Should these cash flows not equate
to or exceed the carrying value of the intangible, a discounted cash flow model
is used to determine the extent of any impairment charge required.
Adoption of New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement requires that the amount recorded as a liability be
capitalized by increasing the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the liability is accreted to the ultimate
amount anticipated to be paid, and is also adjusted for revisions to the timing
or amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for fiscal 2003. The adoption of this
statement did not have a significant impact on the results of operations or
financial position of the Company.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement provides a single comprehensive
accounting model for impairment of long-lived assets and discontinued
operations. SFAS 144 became effective in the first quarter of fiscal 2003. The
adoption of this statement did not have a significant impact on the results of
operations or financial position of the Company.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." Adoption of the standard is generally required in the fiscal
year beginning after May 15, 2002, with certain provisions becoming effective
for financial statements issued on or after May 15, 2002. Under the standard,
transactions currently classified by the Company as extraordinary items will
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no longer be treated as such but instead will be reported as other non-operating
income or expenses. The Company adopted SFAS 145 on July 1, 2002 and the
adoption of SFAS 145 did not have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146 will
become effective in the third quarter of fiscal 2003. The Company believes that
the adoption of this statement will not have a significant impact on the results
of operations or financial position of the Company.
In November 2002 the FASB issued FASB Interpretation No., or FIN 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company has adopted the provisions
of this pronouncement to existing loan guarantees. See Note 7.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
SFAS 148 amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
has decided not to adopt the fair value method of accounting for stock-based
employee compensation but has adopted the disclosure provisions affecting those
companies who continue to use the intrinsic value method of accounting for stock
options under APB 25.
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 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 September 30, 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 September 30, 2003 balances
and rates, it is estimated that a 1/2 of 1%
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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increase in interest rates would increase interest expense by approximately
$2,000. There is no assurance that interest rates will increase or decrease over
the next fiscal year.
Foreign currency risk
Certain of the Company's cash balances and the remaining proceeds from the sale
of its South African subsidiaries are denominated in South African Rand. This
exposes the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Due to the prohibitive
cost of hedging these proceeds, the exposure has not been covered as yet. Should
more favorable conditions arise, a suitable Rand hedge may be considered by
management. For every 1% decline in the Rand/US Dollar exchange rate, at
quarter-end exchange rates, the Company loses $1,369 on every R1 million
retained in South Africa. At September 30, 2003, the Company had total assets
denominated in South African Rand of R50.04 million.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during the three months
ended September 30, 2003:
Foreign Currency
Gain/(Loss) for the Three
Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
in Rand US Dollars
Cash 1,146,665 $ 7,999
Notes Receivable, net of reserve 48,816,343 340,556
Other 79,188 (3,704)
----------
$344,851
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports that
the Company is required to file under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including the principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management necessarily
has applied its judgment in assessing the costs and benefits of such controls
and procedures, which, by their nature, can provide only reasonable assurance
regarding management's control objectives. Management believes that there are
reasonable assurances that our controls and procedures will achieve management's
control objectives.
In July 2003, the Company has carried out an evaluation, under the
supervision and with the participation of its management, including Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
required to be included in its Exchange Act reports.
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.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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Changes in Internal Controls Over Financial Reporting
The evaluation referred to above did not identify any changes in the
Company's internal controls over financial reporting that occurred during the
quarter ended September 30, 2003 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
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SILVERSTAR HOLINGS LTD - 10Q Filing Date: 11/14/03
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned duly authorized.
Date: November 14, 2003
SILVERSTAR HOLDINGS, LTD.
/s/ Clive Kabatznik
---------------------------------------------
Clive Kabatznik
Chief Executive Officer, President and Chief
Financial Officer
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