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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
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OR
[.] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________________
Commission file number 0-27494
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SILVERSTAR HOLDINGS, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda N/A
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(State or other jurisdiction of (I.R.S. 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 (441) 295-1422
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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("Common Stock")
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
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such common equity, as of a specified date within 60
days prior to the date of filing. (See definition of affiliate in Rule 405, 17
CFR 230.405).
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of September 27, 2001, was $5,053,957.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of September 27, 2001, there were 7,219,939 shares of the Registrant's Common
Stock outstanding and 926,025 shares of the Registrant's Class B Common Stock
outstanding.
-2-
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
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 the largest
shareholder in Magnolia Broadband Wireless, a startup company which is
developing wireless broadband products.
HISTORY
We were founded in September 1995 to pursue opportunities in South
Africa as an emerging market. At that time, our business plan was to acquire,
own and operate seasoned, closely held companies in South Africa with annual
sales in the range of approximately $5 million to $50 million. In 1999, we
shifted our focus to the Internet, technology and e-commerce sectors, and away
from South Africa, by acquiring a majority stake in Leisureplanet.com, an
Internet travel services company. In connection with the shift in our business
plan, we changed our name to Leisureplanet Holdings, Ltd. In 2000, we disposed
of our operations in South Africa, closed Leisureplanet.com and acquired 100% of
Fantasy Sports, Inc. As a result of these changes, and developments we have
reestablished our investment criteria. Our strategy focuses on:
o Acquiring controlling stakes in small, high quality, businesses with strong
management teams that are positioned to use technology and Internet related
platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium
term, to earnings per share through operating profit or capital
appreciation.
o We aim to add value to our investments by operating in partnership with
committed, incentivised, entrepreneurial management who show the vision and
ability to grow their businesses into industry or niche leaders.
In connection with the most recent shift in our business strategy away from the
travel industry, we changed our name to Silverstar Holdings, Ltd., and we
changed our trading symbol on the Nasdaq National Market to SSTR.
DESCRIPTION OF OUR SUBSIDIARIES AND INVESTMENTS
FANTASY SPORTS, INC.
Fantasy Sports Enterprises Inc. owns and operates one of America's
oldest and largest subscription based Nascar fantasy sports game. In addition,
the company has developed, and offers, subscription based college football and
basketball fantasy games. The company intends to develop further participatory
fantasy sports related games and aims to become the leading provider of such
subscription based games in the United States. All the company's games offer
weekly and seasonal cash and merchandise prizes.
Currently, over 30,000 subscribers participate in the company's Spring,
Fall and One Race Nascar challenges, as well as the fantasy college football and
basketball challenges. Our Nascar games currently generate over 90% of our
subscriber revenues. Participants pay between $99.95 to $169.95 to play in our
seasonal games, and a $25 fee to participate in our One Race and Tournament
challenges. We offer two grand prizes of $25,000 each for our Nascar challenges
and a $20,000 prize for the college football challenge winner. The winners of
our One Race and Tournament challenges receive $10,000. In addition, weekly
prizes and bonus points are widely distributed. In 2000, over 93% of our
participants were prize winners.
-3-
Fantasy sports participation is rapidly becoming a significant
component of sports related leisure time activity. The Nascar niche is
particularly appealing as growing public interest in the sport, as evidenced by
increased attendance and TV ratings for all Nascar events, particularly the
Winston Cup Series races, have made this one of America's most popular sports.
This trend has been strengthened in 2001 with the first national television
network broadcast of the Winston Cup Series. The death of Dale Earnhardt has
generated further public interest in the sport and does not seem to have had a
negative impact on the sport's popularity. Fantasy Sports has been operating
their Nascar challenges since 1993 and are the dominant company in this market.
Our spokesperson, Ned Jarrett, a well-known Nascar personality, lends
credibility and wide public acceptance to our games. Mr. Jarrett appears in our
numerous television commercials as well as on the cover of our rulebook and his
reputation personifies the quality and integrity of our games. In addition, our
websites offer up to the minute racing tips from Mark Garrow, the well-known
broadcaster, which adds to the fun and excitement of playing the game.
Contestants can visit the site and trade drivers up to the very last minute
prior to a race, thereby offering the highest degree of interactive online
participation. Our state-of-the-art in-house call center offers live, high
quality customer service to our participants.
Since 1997, Fantasy Sports has operated a full season college football
challenge game, which accounts for approximately 8% of our revenues at present.
During 2001, we developed and deployed a tournament challenge college basketball
game that generated over 1,000 paying customers during its first period of
operation. We have developed an online retail store, along with a traditional
retail outlet that specializes in the sale of Nascar related die-cast cars and
other merchandise. This retail operation commenced busienss in May, 2001. In
July, 2001 we entered into an agreement with TWI Interactive, Inc. (TWII), the
online arm of International Management Group(IMG), the world's largest sports
marketing firm. The three-year agreement was designed to aid us in our goal to
establish Fantasy Sports, Inc. as the premiere, independent, subscription based
fantasy sports games provider worldwide. Under the agreement, TWII and
affiliates of IMG provide exclusive representation and services across a broad
spectrum of its sports marketing activities. The agreement also provides for
TWII to receive a 4-year warrant to acquire up to 5% of the currently
outstanding shares of Fantasy Sports, Inc.
We are currently developing a number of new fantasy sports games to
broaden our line of products and provide a wider appeal to the general sports
market. We are also seeking corporate sponsorships for our games in order to
diversify the revenue streams so that we are not solely reliant on subscription
fees for our games, however we have not yet entered into any such agreements.
MAGNOLIA BROADBAND WIRELESS
On April 14, 2000, we entered into a Securities Purchase Agreement with
Magnolia Broadband, Inc. Magnolia is a start up company that is developing
wireless broadband solutions for the mobile telecommunications industry. Mobile
telecommunications has been and continues to be one of the fastest growing and
most dynamic segments of the telecommunications industry. According to a recent
Cahner's Instat Group report, semiconductor revenue for wireless handsets will
reach more than $50B by 2004, driven by an expected sales volume of over 1.2
billion handsets that year.
Magnolia is developing technology to become one of the first companies
to integrate smart antenna technologies into RF chip sets utilized in mobile
phones. The Company's innovative chip sets are aimed at helping handset
manufacturers satisfy both of their key constituencies - consumers and network
operators. Magnolia's technology aims to: double power efficiency, i.e. battery
life; decrease radiation at least twenty times (reducing health risks); and,
significantly reduce dropped calls. We believe the technology will be attractive
to network operators because if effective it will enable them to serve twice as
many subscribers with the same infrastructure and offer better, more consistent
reception to users, many of whom choose a carrier based on this critical
criterion.
-4-
We invested $2,500,000 in Magnolia and received shares of preferred
stock in Magnolia. We also received board representation rights and registration
rights. The shares of Magnolia preferred stock we own are convertible into
common stock of Magnolia, and we are entitled to voting rights on an
as-converted basis, and certain preferred dividend, liquidation and
anti-dilution rights. We initially own approximately 48% of Magnolia. Certain of
the shares of the founders of Magnolia are subject to repurchase by Magnolia if
the founders' employment with Magnolia terminates before October 15, 2002.
Magnolia has reserved additional shares for issuance to founders, employees,
consultants, directors and other investors. Assuming full issuance of such
shares, our ownership interesting Magnolia will be reduced to 33%.
In March 2001, we contributed $250,000 of a $750,000 of a bridge loan
financing to Magnolia. On September 17, 2001, Magnolia received a commitment
from Silverstar Holdings, Selway Partners and CIP to invest a further $750,000
as part of a recapitalization. This investment round is intended to close on or
before September 30, 2001. We will provide $200,000 of this amount and upon
closing and the conversion of the March Bridge Loan we will own approximately
28% of Magnolia and 22% on a fully diluted basis. This round of financing will
enable Magnolia to operate until April 2002. During this time, Magnolia will
complete prototypes and endeavor to enter into customer relationships that will
increase the company's value prior to a further round of financing.
EMPLOYEES
Silverstar Holdings has only 2 full time salaried employees. Fantasy
Sports, Inc. currently employs 12 full time salaried employees, and
approximately 35 hourly employees. We intend to add employees as necessary to
meet management and other requirements from time to time.
Our success will depend on our ability to attract and retain highly
qualified employees. We provide performance based and equity based compensation
programs to reward and motivate significant contributors among our employees.
Competition for qualified personnel in the industry is intense. There can be no
assurance that our current and planned staffing will be adequate to support our
future operations or that management will be able to hire, train, retain,
motivate, and manage required personnel. Although none of our employees is
represented by a labor union, there can be no assurance that our employees will
not join or form a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal executive offices are located at Clarendon House, Church
Street, Hamilton, HM CX, Bermuda, which space is made available to us pursuant
to a corporate services agreement entered into with a corporate services company
in Bermuda.
Fantasy Sports, Inc. has its principal executive offices at 2009
Industrial Highway, York, Pennsylvania, 17402. These offices also contain our
call center and warehouse space and cover approximately 5,000 square feet. The
lease is held on a month-to-month basis, and costs us approximately $40,000 per
year. In addition, Fantasy Sports rents 2,400 square feet of warehouse space in
York, Pennsylvania under a lease that expires on December 31, 2001, and costs us
approximately $18,225 per year.
Our United States management subsidiary, First South Africa Management
Corp., a Delaware corporation incorporated in 1995, has its principal executive
offices at 6100 Glades Road, Suite 305, Boca Raton, Florida 33434. The lease
expires in February 2003 and costs us approximately $28,000 per year.
ITEM 3. LEGAL PROCEEDINGS
Neither we nor any of our subsidiaries is subject to any material legal
proceedings.
-5-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 13, 2000 the Company held its annual meeting of
stockholders. At the annual meeting, the Company's stockholders elected five
directors to serve until the next annual meeting and until their respective
successors are elected and qualified. At the annual meeting, the Company's
stockholders also approved and adopted a proposal to change the Company's name
from Leisureplanet Holdings, Ltd. to Silverstar Holdings, Ltd. The votes for
directors were as follows:
The votes with respect to the increase in our authorized shares were as follows:
Votes
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For Withheld
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Michael Levy 10,530,951 31,411
Clive Kabatznik 10,530,951 31,411
Cornelius J. Roodt 10,530,951 31,411
Chris Matty 10,530,951 31,411
David BenDaniel 10,530,951 31,411
The votes to approve and adopt the change of the Company's name to Silverstar
Holdings, Ltd. were as follows:
For Against Abstain
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10,532,272 25,440 4,650
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed for quotation on the National Market on the
Nasdaq System under the symbol SSTR. The following table sets forth, for the
periods indicated the high and low closing sales prices for our common stock, as
reported by Nasdaq.
High Low
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Common Stock
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Fiscal 2000
1st Quarter........................................ $7.938 $3.625
2nd Quarter........................................ $16.50 $3.563
3rd Quarter........................................ $14.25 $8.063
4th Quarter........................................ $9.063 $2.438
Fiscal 2001
1st Quarter........................................ $3.44 $0.94
2nd Quarter........................................ $1.17 $0.56
3rd Quarter........................................ $1.25 $0.63
4th Quarter........................................ $1.11 $0.63
Fiscal 2002
1st Quarter (through September 27, 2001)........... $1.00 $0.38
-6-
As of September 27, 2001, there were approximately 35 holders of our
common stock, exclusive of holders whose shares were held by brokerage firms,
depositaries and other institutional firms in "street name" for their customers.
We have never declared or paid any cash dividends on our common stock
or our Class B common stock. We do not intend to declare or pay any dividends on
our common stock or our Class B common stock in the foreseeable future. We
currently intend to retain future earnings, if any, to finance the expansion of
our business.
ITEM 6.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA THE COMPANY
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YEARS ENDED JUNE 30,
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1997 (1) 1998 1999 2000 2001
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Revenues $41,885,993 $ - $ - $ - $1,301,432
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Total operating expenses (38,559,968) 2,000,920 2,504,838 2,581,406 4,362,413
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Operating (loss)/income 3,325,945 (2,000,920) (2,504,838) (2,581,406) (3,060,981)
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Interest (expense)/income 26,016 (1,223,654) (2,403,997) (1,363,360) 976,107
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(Loss)/income from continuing operations
before income taxes 7,149,970 (615,740) (6,208,976) (4,232,603) (5,010,726)
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Net (loss)/income from continuing operations 5,832,932 (615,740) (6,210,195) (4,233,222) (5,010,726)
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(Loss)/gain from discontinued operations 850,243 3,387,631 (4,916,267) (34,429,264) (2,389,383)
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Net (loss)/income 6,683,165 2,771,891 (11,126,462) (38,662,486) [ (5,257,160)]
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(Loss)/income per share - from continuing
operations $1.13 ($0.10) ($0.95) ($0.54) ($0.95)
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BALANCE SHEET DATA THE COMPANY
JUNE 30,
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1997 1998 1999 2000 2001
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Total assets $64,197,149 $89,561,459 $102,615,018 $94,266,439 $15,931,857
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Long term liabilities 13,341,758 29,507,926 33,598,244 15,473,769 -
----------------------------------------------- -------------- --------------- -------------- -------------- --------------
Net working capital (2) 25,357,584 25,491,685 28,276,771 31,414,757 4,253,001
----------------------------------------------- -------------- --------------- -------------- -------------- --------------
Stockholders' equity 23,220,014 16,097,666 2,090,966 5,595,870 13,578,710
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(1) Due to the unavailability of financial data on discontinued operations
for 1997 fiscal year, the discontinuation of First Lifestyle Holdings and
Leisureplanet have not been taken into account in these figures.
(2) Net working capital is the net of current assets and current
liabilities.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BACKGROUND AND HISTORY
Silverstar Holdings, Ltd., formerly Leisureplanet 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, businesses with strong
management teams that are positioned to use technology and Internet related
platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium
term, to earnings per share through operating profit or capital
appreciation.
o We aim to add value to our investments by operating in partnership with
committed, incentivised, entrepreneurial management who show the vision and
ability to grow their businesses into industry or niche leaders.
The Company has disposed of First Lifestyle Holdings Limited ("Lifestyle"), the
holding company of its last remaining South African operating subsidiaries. On
June 21, 2000 the Company received an offer from Lifestyle management to buy
Lifestyle from the Company. The Company accepted the offer on September 26, 2000
at a general meeting of Lifestyle shareholders. Regulatory approval was obtained
from the South African monopolies commission on October 12, 2000. Proceeds from
the sale were received on November 6, 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 incur income statement charges to the extent that the Rand
devalues relative to the US Dollar. At the present time, management has no
intention of disposing of the notes receivable.
The Company was unable to obtain additional financing to fund the activities of
Leisureplanet.com ("LPI"), the Internet travel related business. On August 2,
2000 LPI was placed under voluntary administration in the United Kingdom. Full
provision was made for the Company's investment in LPI in the accounts for the
year ended June 30, 2000.
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.
Company's management has ceased funding Hotelsupply Goup, Inc. As a result it
ceased operations in April 2001. No recovery is expected.
-8-
RESULTS OF OPERATIONS
The results of operations only analyze the corporate activity of the group, as
its former operations, namely Lifestyle and LPI are no longer included as
continuing operations. Discussion of the results of these operations is given
under the heading, DISCONTINUED OPERATIONS, below.
FISCAL 2001 COMPARED TO FISCAL 2000
REVENUES
Revenues were zero in 2000 due to the discontinuation of all then
existing businesses. The Company acquired Fantasy in November 2000. All
of the revenues in 2001 relate to Fantasy.
COST OF SALES
Cost of sales was zero in 2000 due to the discontinuation of all then
existing businesses. The Company acquired Fantasy in November 2000. All
cost of sales in 2001 relate to Fantasy. The margin as a percentage of
revenues is 33.2%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended June 30,
2001 increased by $1.21 million to $3.06 million as compared to $1.84
million for the fiscal year ended June 30, 2000. This increase is
primarily due to the acquisition of Fantasy.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles decreased from $0.73 million in fiscal 2000
to $0.37 million in fiscal 2001. This decrease is primarily due to
elimination of non-competition agreements in 2000, which were written
off, with the sale of Lifestyle. The amortization expense in 2001 was
primarily related to goodwill and customer lists from the purchase of
Fantasy.
DEPRECIATION
Depreciation charge relates to minor office equipment, furniture and
computer equipment. This increase is primarily due to the acquisition of
Fantasy.
FOREIGN CURRENCY LOSS
Foreign currency loss of $1.04 million represents the loss realized on
the net assets of First South Africa Holdings (Pty) Ltd (FSAH), that
remain denominated in South African Rand, primarily cash, certain
inter-company balances and notes receivable offset by realized currency
hedging profits. Since the divestiture of Lifestyle, the Company began
recognizing translation gains or losses on the exposure of net assets and
liabilities denominated in South African Rand, within the results of
operations. The prior year's foreign currency loss of $80 thousand
represents the loss realized on the repayment and the translation of the
current account between FSAH and the Company.
INTEREST IN LOSSES OF AFFILIATES
The Company owns a 48% stake in Magnolia Broadband and a 51% stake in
HotelSupplyGroup.com. Both of these companies are start-up ventures,
which have only incurred expenses to date. The charge of $1.92 million
represents the Company's equity accounted share of the operating losses
for the period and a reserve of $0.25 million of a loan made to Magnolia
Broadband. During 2000, the Company's management ceased funding
Hotelsupply Goup, Inc. As a result it discontinued operations in April
2001. The remaining investment of $5,000 was written off. No recovery is
expected.
OTHER INCOME
Other income primarily represents the release of obligations from a
previously sold subsidiary.
-9-
FISCAL 2001 COMPARED TO FISCAL 2000 (CONTINUED)
PREFERENCE DIVIDEND
The preference dividend on the mandatory redeemable preference shares
declared during the current fiscal year was $.17 million. During prior
years, the preference dividend on the mandatory redeemable preference
shares has been accrued on a time proportion basis as the agreement to
pay preference dividends provides for two options, the first being that
the dividend payable must be based on the ordinary dividend declared by
Lifestyle, or the second option must increase by a minimum of 25% percent
over the prior year. The first option is payable three days after receipt
of the Lifestyle dividend, the second option is payable on February 19,
of each calendar year. Since no Lifestyle preference dividend was
declared during the prior fiscal year, the dividend of $0.17 million
represents the time proportion of the dividend payable as of February 19,
2001 through the date of the sale of Lifestyle. The mandatory redeemable
preference shares were redeemed with the sale of Lifestyle.
INTEREST INCOME (EXPENSE)
Interest income has increased by $2.34 million from net interest expense
of $1.36 million to net interest income of $0.98 million. The decrease in
interest expense is due to the early retirement of convertible debt at a
discount. The balance of the movement was made on interest earned on cash
balances; the Company had significant cash resources throughout the year
as compared to the previous fiscal year due to the sale of Lifestyle.
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable.
Two of the Company's subsidiaries are subject to income taxes. Up to this
date, neither has had taxable income. Both have incurred losses for tax
purposes. The deferred tax asset generated by the tax losses and
temporary differences have been fully reserved for.
DISCONTINUED OPERATIONS
The loss from discontinued operations decreased from $34.43 million in
2000 to $2.39 million in 2001. The primary reason for the decrease is the
completion of the sale of the Lifestyle business in November 2000 and the
inclusion of the LPI business segment, which was put under voluntary
administration in 2000. As a result, no additional losses from
discontinued operations were recorded after the sale of Lifestyle or the
voluntary administration of LPI. Additional losses related to any
remaining South African assets after the sale are included in continuing
operations. Translation losses on the net assets denominated in South
African Rand were recognized in discontinued operations up through the
sale date of Lifestyle.
EXTRAORDINARY ITEM
The Company negotiated agreements with three lenders to retire $11.70
million of debentures at face plus accrued interest. As a result, the
Company recorded a gain on previously accreted sinking fund interest of
$2.14 million in the 2001. No such transaction occurred in 2000.
NET LOSS
As a result of the above the Company has achieved a loss of $5.26 million
as compared to a loss of $38.66 million in the prior year.
FISCAL 2000 COMPARED TO FISCAL 1999
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended June 30,
2000 decreased by $0.25 million to $1.84 million as compared to $2.09
million for the fiscal year ended June 30, 1999. This decrease is
primarily due to a reduction in corporate support needed for the
Lifestyle business due to the shift in focus to acquisition of
businesses.
-10-
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED)
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased from $0.42 million in fiscal 1999
to $0.73 million in fiscal 2000. This increase is primarily due to a
change in estimate of the useful life of non-competition agreements.
DEPRECIATION
Depreciation charge relates to minor office equipment, furniture and
computer equipment. Due to the nature of the head office function, these
charges are immaterial.
FOREIGN CURRENCY LOSS
Foreign currency loss of $0.08 million represents the loss realized on
the repayment and the translation of the current account between FSAH and
the Company.
GAIN ON SALE OF SUBSIDIARY STOCK
In the prior year 13,946,500 shares held by FSAH in Lifestyle were sold
at an average price of R2.48 per share realizing a consolidated gain on
disposal of $0.62 million. In addition, a loss on dilution on a group
restructure of $1.42 million was realized. During 2000, 900,000 shares in
First Lifestyle Holdings Limited were sold at R3.00 per share, realizing
a gain of $0.1 million.
INTEREST IN LOSSES OF AFFILIATES
The Company acquired a 48% stake in Magnolia Broadband, a 51% stake in
HotelSupplyGroup.com and a 50% stake in Hall Lifestyle Products. All of
these companies are start-up ventures, which have only incurred expenses
to date. The charge of $0.16 million represents the equity accounted
share of operating losses for the period.
PREFERENCE DIVIDEND DECLARED
During fiscal 2000, the preference dividend on the mandatory redeemable
preference shares has been accrued on a time proportion basis as the
agreement to pay preference dividends provides for two options, the first
being that the dividend payable must be based on the ordinary dividend
declared by Lifestyle, or the second option must increase by a minimum of
25% percent over the prior year. The first option is payable three days
after receipt of the Lifestyle dividend, the second option is payable on
February 19, of each calendar year. Since no Lifestyle dividend was
declared during the current fiscal year the dividend of $0.15 million
represents the time proportion of the dividend payable on February 19,
2001.
INTEREST INCOME (EXPENSE)
Interest expense has decreased by $1.04 million from an interest
expense of $2.40 million to $1.36 million. The conversion of 3,000 of
the increasing rate debentures and the remaining 9% debentures gave
rise to an interest saving of $0.23 million in the current year. The
balance of the movement was made on interest earned on cash balances;
the Company had significant cash resources throughout the year as
compared to the previous fiscal year.
-11-
FISCAL 2000 COMPARED TO FISCAL 1999 (CONTINUED)
PROVISION FOR INCOME TAXES
The Company is registered in Bermuda, where no tax laws are applicable.
One of the Company's subsidiaries is subject to income taxes. Up to this
date, this subsidiary has not had taxable income. The subsidiary has
incurred losses for tax purposes. The deferred tax asset generated by the
tax loss has been fully reserved for.
DISCONTINUED OPERATIONS
During the 2000 fiscal year a loss of $11.93 million arose on
discontinued operations as compared to $3.94 million in fiscal 1999,
representing an increase of $7.99 million over the prior year. The prior
fiscal year included the industrial and packaging business segments,
which incurred losses of $1.46 million and were disposed of during 1999.
The loss realized on the LPI business segment increased by $8.95 million
from $6.17 million in 1999 to $15.12 million in 2000. The increase in the
loss was primarily due to an aggressive attempt to increase the awareness
of the product offered by signing up expensive portal agreements and
advertising arrangements. Due to the lack of investor appetite for loss
making Internet enterprises, LPI could no longer fund its operations and
was placed under voluntary administration on August 2, 2000. Full
provision has been made for the Company's investment in LPI. The
Lifestyle business sector contributed a profit of $3.19 million as
compared to $3.69 million during the previous fiscal year, a decrease of
$0.50 million over the fiscal year. This is primarily because the growth
experienced in this division in South African Rand was 3.9% , which is
below the currency depreciation of the South African Rand against the US
Dollar of 13%. The growth in the business sector was below expectations
due to the lack of consumer demand in South Africa and the inability to
increase selling prices to recover increased costs passed by Lifestyle
suppliers due to competitive pressures experienced in a weak consumer
market.
The loss on disposition of $22.50 million in fiscal 2000 increased by
$21.53 million from $0.97 million in fiscal 1999. The increase is
primarily due to the estimated loss on liquidation of the LPI business
segment and the expected loss arising on the disposition of the Lifestyle
business segment after the inclusion of the currency translation
adjustment reserve and the impairment of an intangible asset related to a
restraint of trade agreement.
NET LOSS
As a result of the above the Company has achieved a loss of $38.66
million as compared to a loss of $11.13 million in the prior year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $24.19 million from $29.85 million to $5.66 million.
Included in the $29.85 million is $4.64 million which was restricted and
was used to repay LPI creditors. The decrease is primarily due to the
cash from the Lifestyle business sector, which was included in the
consolidated cash balance in 2000, but was sold in November, 2000.
Substantially all the net cash received from the Lifestyle sale has been
used to retire the increasing rate debentures $11.70 million face amount
and to fund the acquisition of Fantasy. The balance of the remaining cash
is being held to fund potential investments.
Working capital decreased by $27.16 million from $31.42 million at June
30, 2000 to $4.25 million at June 30, 2001. This is primarily due to the
sale of the Lifestyle businesses.
-12-
At June 30, 2000 the Company had borrowings of $18.48 million which has
decreased to $0.36 million. The decrease is due to the sale of the
Lifestyle businesses and the early retirement of $11.70 million face
amount of convertible debentures.
FUTURE COMMITMENTS
The Company will pay off its remaining debentures of $0.30 million face
amount of debentures after they mature in October, 2001. Excess remaining
cash will be utilized to fund potential acquisitions. There are no other
contingent payments remaining.
Subsequent to year-end, the Company agreed to loan Magnolia Broadband
$0.20 million in the form of convertible notes. The notes will bear
interest at 10% per annum and mature in sixty days. The Company's
investment is contingent on other investors loaning $0.55 million.
Magnolia Broadband will continue to work on securing permanent financing.
Magnolia has received commitments from the other investors for the $0.55
million. Upon closing this round of financing, the Company's ownership
percentage will be reduced to 20% on a fully diluted basis. Magnolia's
management believes that this financing will provide sufficient funding
to operate through April 2002.
As of June 30, 2001, Fantasy, the Company's only operating subsidiary,
had incurred a loss. The Company anticipates that this situation will be
rectified through a combination of improved controls over marketing
expenditures and increased revenues through product expansion. 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
support the operations of Fantasy.
On September 24, 2001, a newly created subsidiary of the Company acquired
all the assets and business and assumed certain liabilities of Student
Sports, a media company, producing publications, television programs and
various marketing initiatives for the high school sports market.
Management believes that Student Sports will be able to provide all of
its capital requirements out of its own operations.
The Company intends to continue to pursue acquisitions and anticipates
utilizing a substantial portion of its remaining cash balances and the
proceeds of its disposal of Lifestyle to fund this strategy to the extent
that suitable acquisition candidates can be identified. The Company may
be required to incur additional indebtedness or equity financing in
connection with the funding of future acquisitions. There is no assurance
that the Company will be able to incur additional indebtedness or raise
additional equity to finance future acquisitions on terms acceptable to
management, if at all.
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 June 30, 2001 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. The debt of the continuing operations is
primarily at fixed interest rates. Any decrease in interest rates will
have a negative effect on the Company's earnings. 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 Lifestyle are denominated in South African Rand. This exposes
the Company to market risk with respect to fluctuations in the relative
value of the South African Rand against the US Dollar. Due to the
prohibitive cost of hedging 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 year-end exchange rates, the Company
loses $1,238 on every R1,000,000 retained in South Africa.. Subsequent to
year-end the Rand has depreciated against the US Dollar by approximately
10%. At June 30, 2001, the Company had assets denominated in Rand of R
57.75 million.
-13-
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity and Comprehensive Income F-5 - F-6
Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Silverstar Holdings, Ltd.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Silverstar
Holdings Limited and Subsidiaries (the Company) as of June 30, 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion.
In our opinion, the accompanying consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Silverstar Holdings, Ltd. and its subsidiaries at June 30, 2001,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
September 7, 2001, except for Note 25,
as to which the date is September 24, 2001
F-1
SILVERSTAR HOLDINGS, LTD.
REPORT OF THE INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Silverstar Holdings, Ltd.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, of comprehensive
income and of cash flows, present fairly, in all material aspects, the financial
position of Silverstar Holdings, Ltd. and its subsidiaries at June 30, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
managment, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, the Company
restated its consolidated financial statements for the years ended June 30,
2000, 1999 and 1998.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
West Londaon
October 13, 2000
Except for Note 2(m)(ii)
as to which the date is February 20, 2001
F-2
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
2001 2000
---- ----
ASSETS
------
Current Assets:
Cash and cash equivalents $5,664,013 $ 29,853,067
Accounts receivable, net - 10,608,197
Inventories 377,721 9,386,857
Current portion of long-term notes receivable 411,266 -
Prepaid expenses and other current assets 153,148 3,631,348
Deferred income taxes - 898,280
------------ ------------
Total current assets 6,606,148 54,377,749
Property, Plant and Equipment, Net 167,464 18,215,196
Investments in Affiliates 631,066 1,283,935
Long-Term Notes Receivable 5,033,080 -
Intangible Assets, Net 3,487,799 20,130,119
Deferred Charges and Other Assets 6,300 259,440
------------ ------------
Total assets $ 15,931,857 $ 94,266,439
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank overdraft $ 92,887 $ 896,860
Current portion of long-term debt 361,836 2,105,153
Accounts payable 421,316 13,046,686
Accrued expenses 553,742 5,754,638
Deferred revenue 923,366 -
Dividends payable - 179,840
Income taxes payable - 676,003
Other taxes payable - 303,812
------------ ------------
Total current liabilities 2,353,147 22,962,992
Long-Term Debt - 15,473,769
Deferred Income Taxes - 4,402,038
------------ ------------
Total liabilities 2,353,147 42,838,799
------------ ------------
Minority Interest - 37,059,840
------------ ------------
FSAH Mandatory Redeemable Preferred Stock - 8,771,930
------------ ------------
Commitments, Contingencies and Subsequent Events - -
Stockholders' Equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, Class A, $0.01 par value; 23,000,000 shares authorized;
7,178,310 and 8,368,767 shares issued and outstanding, respectively 71,783 83,687
Common stock, Class B, $0.01 par value; 2,000,000 shares authorized;
946,589 and 946,589 shares issued and outstanding, respectively 9,466 9,466
Common stock, FSAH Class B, R0.001 par value; 10,000,000 shares authorized;
2,671,087 and 2,671,087 shares issued and outstanding, respectively 600 600
Additional paid-in capital 63,349,937 64,307,442
Accumulated deficit (49,853,076) (44,595,916)
Accumulated other comprehensive loss - (14,209,409)
------------ ------------
Total stockholders' equity 13,578,710 5,595,870
------------ ------------
Total liabilities and stockholders' equity $ 15,931,857 $ 94,266,439
============ ============
See notes to consolidated financial statements.
F-3
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Revenues $1,301,432 $ - $ -
---------- ---------- ----------
Operating Expenses:
Cost of sales 869,185 - -
Selling, general and administrative 3,055,955 1,844,197 2,090,086
Amortization of intangibles 369,318 640,441 410,466
Depreciation 67,955 6,490 4,286
---------- ---------- ----------
4,362,413 2,491,128 2,504,838
---------- ---------- ----------
Operating Loss (3,060,981) (2,491,128) (2,504,838)
Gain (Loss) on Sale of Subsidiary Stock - 103,505 (804,150)
Interest in Losses of Unconsolidated Affiliates (1,919,026) (251,163) -
Other Income 200,757 - -
Preference Dividend (165,109) (149,755) (495,991)
Foreign Currency Loss (1,042,474) (80,702) -
Interest Income (Expense), Net of Interest Income of
$1,548,882, $668,109 and $297,834, respectively 976,107 (1,363,360) (2,403,997)
---------- ---------- ----------
Loss from Continuing Operations Before Income Taxes (5,010,726) (4,232,603) (6,208,976)
Provision for Income Taxes - (619) (1,219)
---------- ---------- ----------
Loss From Continuing Operations (5,010,726) (4,233,222) (6,210,195)
Discontinued Operations:
Loss from operations, net of income taxes of
$0, $2,543,255 and $2,893,380, respectively - (11,931,286) (3,941,319)
Loss on disposition, net of income taxes of $0, $0 and $0,
respectively (2,389,383) (22,497,978) (974,948)
---------- ---------- ----------
Loss before Extraordinary Item (7,400,109) (38,662,486) (11,126,462)
Extraordinary Item - Gain on Extinguishment of Debt,
Net of Income Taxes of $0 2,142,949 - -
---------- ---------- ----------
Net Loss $(5,257,160) $(38,662,486) $(11,126,462)
=========== ============ ============
Loss Per Share - Basic and Diluted:
Continuing operations $ (0.57) $ (0.54) $ (0.95)
Discontinued operations (0.27) (4.39) (0.75)
---------- ---------- ----------
Loss before extraordinary item (0.84) (4.93) (1.70)
Extraordinary item 0.24 - -
---------- ---------- ----------
Net loss $ (0.60) $ (4.93) $ (1.70)
=========== ============ ============
Weighted Average Common Stock Outstanding:
Basic and diluted 8,849,663 7,836,387 6,548,491
=========== ============ ============
See notes to consolidated financial statements.
F-4
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Silverstar Silverstar
Holdings, Ltd. Holdings, Ltd. First SA Holdings
Class A Class B Class B
Common Stock Common Stock Common Stock
------------ ------------ ------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, June 30, 1998 5,649,209 $ 56,492 1,822,500 $ 18,225 2,307,782 $ 537
Year Ended June 30, 1999:
Issuance of stock to FSAC escrow agent 243,400 2,434 - - - -
Issuance of stock on additional purchase
price payments - - - - 242,684 43
Options exercised 20,000 200 - - - -
Conversion of 9% debentures
to common stock 320,700 3,207 - - - -
Redemption and cancellation of stock
from FSAC escrow agent (1,726,078) (17,260) - - - -
Conversion of Class B common stock
to Class A common stock 875,911 8,759 (875,911) (8,759) - -
Net loss - - - - - -
Translation adjustment - - - - - -
Total comprehensive loss - - - - - -
---------- ------- -------- ------ ---------- ----
Balance, June 30, 1999 5,383,142 53,832 946,589 9,466 2,550,466 580
---------- ------- -------- ------ ---------- ----
Retained Accumulated
Additional Earnings Other
Paid-in (Accumulated Comprehensive
Capital Deficit) Income (Loss) Total
------- -------- ------------- -----
Balance, June 30, 1998 $ 28,288,404 $ 5,193,032 $(17,377,313) $ 16,179,377
Year Ended June 30, 1999:
Issuance of stock to FSAC escrow agent (2,434) - - -
Issuance of stock on additional purchase
price payments 1,033,572 - - 1,033,615
Options exercised 106,800 - - 107,000
Conversion of 9% debentures
to common stock 1,732,895 - - 1,736,102
Redemption and cancellation of stock
from FSAC escrow agent (8,837,331) - - (8,854,591)
Conversion of Class B common stock
to Class A common stock - - - -
Net loss - (11,126,462) -
Translation adjustment - - 3,015,925
Total comprehensive loss - - - (8,110,537)
----------- ----------- ------------ ----------
Balance, June 30, 1999 22,321,906 (5,933,430) (14,361,388) 2,090,966
----------- ----------- ------------ ----------
See notes to consolidated financial statements.
F-5
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Continued)
Silverstar Silverstar
Holdings, Ltd. Holdings, Ltd. First SA Holdings
Class A Class B Class B
Common Stock Common Stock Common Stock
------------ ------------ ------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, June 30, 1999 5,383,142 $ 53,832 946,589 $ 9,466 2,550,466 $ 580
Year Ended June 30, 2000:
Issuance of stock to FSAC escrow agent 120,621 1,206 - - - -
Issuance of stock on additional purchase price payments - - - - 120,621 20
Issuance of shares 1,379,310 13,793 - - - -
Warrants exercised 247,311 2,473 - - - -
Options exercised 180,000 1,800 - - - -
Conversion of 9% debentures to common stock 742,503 7,425 - - - -
Increasing rate debentures converted to common stock 315,789 3,158 - - - -
Issuance of warrants - - - - - -
Equity gain on group restructure - - - - - -
Net loss - - - - - -
Provision for loss on subsidiary - - - - - -
Translation adjustment - - - - - -
Total comprehensive loss - - - - - -
---------- --------- ------- -------- ---------- ------
Balance, June 30, 2000 8,368,676 83,687 946,589 9,466 2,671,087 600
Year Ended June 30, 2001:
Disposal of FSAH -translation loss - - - - - -
Stock issued to employee 10,000 100 - - - -
Issuance of warrants for services - - - - - -
Purchase and retirement of treasury stock (1,200,366) (12,004) - - - -
Net loss - - - - - -
---------- --------- ------- -------- ---------- ------
Balance, June 30, 2001 7,178,310 $ 71,783 946,589 $ 9,466 2,671,087 $ 600
========== ========= ======== ======== ========== ======
Retained Accumulated
Additional Earnings Other
Paid-in (Accumulated Comprehensive
Capital Deficit) Income (Loss) Total
------- -------- ------------- -----
Balance, June 30, 1999 $ 22,321,906 $(5,933,430) $(14,361,388) $2,090,966
Year Ended June 30, 2000:
Issuance of stock to FSAC escrow agent (1,206) - - -
Issuance of stock on additional purchase price payments 567,687 - - 567,707
Issuance of shares 18,361,207 - - 18,375,000
Warrants exercised 1,356,434 - - 1,358,907
Options exercised 872,296 - - 874,096
Conversion of 9% debentures to common stock 4,083,465 - - 4,090,890
Increasing rate debentures converted to common stock 3,312,657 - - 3,315,815
Issuance of warrants 3,446,633 - - 3,446,633
Equity gain on group restructure 9,986,363 - - 9,986,363
Net loss - (38,662,486) -
Provision for loss on subsidiary - - 6,268,756
Translation adjustment - - (6,116,777)
Total comprehensive loss - - - (38,510,507)
------------- ------------- ----------- -------------
Balance, June 30, 2000 64,307,442 (44,595,916) (14,209,409) 5,595,870
Year Ended June 30, 2001:
Disposal of FSAH -translation loss - - 14,209,409 14,209,409
Stock issued to employee 7,400 - - 7,500
Issuance of warrants for services 34,326 - - 34,326
Purchase and retirement of treasury stock (999,231) - - (1,011,235)
Net loss - (5,257,160) - (5,257,160)
------------- ------------- ----------- -------------
Balance, June 30, 2001 $ 63,349,937 $ (49,853,076) $ - $ 13,578,710
============= ============== =========== =============
See notes to consolidated financial statements.
F-6
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Cash Flows from Operating Activities:
Net loss from continuing operations $(5,010,726) $(4,233,222) $(6,210,195)
Dividend charge 165,109 149,755 495,991
Depreciation and amortization 437,273 737,209 414,752
Non-cash compensation charge - - 268,802
Deferred income taxes - 748,359 1,104,397
Net loss (gain) on sale of assets - (34,419) 665,842
Net gain on sale of and dilution in subsidiaries - (103,505) 804,150
Issuance of stock and warrants for services 41,826 - -
Changes in operating assets and liabilities, net (943,728) 3,838,445 541,506
Increase in other assets 32,351 - -
Creation of debenture redemption reserve fund 266,748 1,012,500 843,750
Provision for affiliate losses - 35,763 -
Equity in losses of affiliates 1,919,026 160,885 -
---------- ---------- ----------
Net cash provided by (used in) continuing operations (3,092,121) 2,311,770 (1,071,005)
Net cash provided by (used in) discontinued operations (1,090,173) (15,032,079) 1,042,217
---------- ---------- ----------
Net cash used in operating activities (4,182,294) (12,720,309) (28,788)
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds on disposal of investment in subsidiaries - 421,400 5,712,671
Proceeds on disposal of discontinued operations 11,102,549 - 91,718
Additional shares acquired in subsidiaries - - (51,402)
Acquisition of intangibles (49,332) (25,232) (74,832)
Acquisition of property, plant and equipment (1,662,725) (5,862,741) (5,968,074)
Proceeds on disposal of property, plant and equipment 74,150 147,237 740,482
Additional purchase price payments - (586,589) (2,523,311)
Other assets acquired - (1,512) (171,322)
Investment in affiliates - (2,805,423) -
Decrease in long-term receivable 1,188,355 - -
Settlement of share price warranties - - (5,073,339)
Loan to affiliate (250,000) - -
Repayment of loan by affiliates 161,500 - -
Acquisition of subsidiaries (net of cash of $863,337,
$0 and $430,556) (3,454,569) - (2,438,375)
Other 1,042 - -
---------- ---------- ----------
Net cash provided by (used in) investing activities 7,110,970 (8,712,860) (9,755,784)
---------- ---------- ----------
See notes to consolidated financial statements.
F-7
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Cash Flows from Financing Activities:
Short term borrowings, net $ (999,883) $ 301,767 $ 836,250
Proceeds from long-term debt - 234,542 1,317,219
Repayment of long-term debt (1,246,822) (6,227,693) (200,486)
Redemption of debentures (11,700,000) - (2,630,132)
Redemption of preferred shares (8,153,928) - -
Treasury stock transactions (1,011,232) - -
Proceeds on issuance of FSAH mandatory
redeemable preferred stock - - 9,891,197
Share issue expenses in subsidiary company - - (59,489)
Dividends paid - (1,342,996) (284,219)
Proceeds on minority shares issued in Lifestyle - 16,887 -
Proceeds of subsidiary stock issue - 18,997,589 -
Proceeds on issuance of common stock - 20,543,100 107,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (23,111,865) 32,523,196 8,977,340
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash (4,005,865) (2,050,261) 3,671,542
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,189,054) 9,039,766 2,864,310
Cash and Cash Equivalents, Beginning 29,853,067 20,813,301 17,948,991
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 5,664,013 $ 29,853,067 $ 20,813,301
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 373,574 $1,363,360 $1,298,438
============ ============ ============
Cash paid during the period for income taxes $ - $2,218,165 $2,170,203
============ ============ ============
See notes to consolidated financial statements.
F-8
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
NOTE 1. ORGANIZATION AND PRINCIPAL ACTIVITIES OF THE GROUP
Silverstar Holdings, Ltd. (formerly Leisureplanet Holdings Ltd.) (the
"Company"), was founded on September 6, 1995. The purpose of the
Company has changed from acquiring and operating South African
Companies to investing in companies that fit a predefined investment
strategy.
On November 17, 2000, the Company acquired Fantasy Sports, Inc.
("Fantasy"). Fantasy specializes in Internet-based subscriptions for
NASCAR, college football and basketball and other fantasy sports games
(see Note 3).
Additional investments have been made in other companies, which are in
line with the Company's new focus (see Notes 7 and 25).
DISCONTINUED OPERATIONS
The original investment made in Leisureplanet.com ("LPI"), the Internet
travel related services company, has been unsuccessful due to a lack of
further investor funding into the loss making entity. Therefore, on
August 2, 2000, LPI was placed under voluntary administration in the
United Kingdom and subsequently liquidated (see Note 15).
In addition to LPI, First Lifestyle Holdings Limited ("Lifestyle"), the
products segment, was also discontinued in line with the shift in
strategy of the holding company. This segment was involved in the
manufacture, sale and distribution of lifestyle enhancing products,
which included both consumable food products and semi-durable outdoor
and indoor products (see Note 15).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and
incorporate the following significant accounting policies:
CONSOLIDATION
The 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
method of accounting. All significant inter-company accounts and
transactions have been eliminated in the consolidated financial
statements.
The entities included in these consolidated financial statements are as
follows:
Silverstar Holdings, Ltd. (Parent Company)
Silverstar Holdings, Inc.
First South African Management Corp.
First South African Holdings, Ltd. (FSAH)
Fantasy Sports, Inc.
F-9
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates which could be
subject to change in the near term include amortization and valuation
of intangible assets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and all highly liquid
investments with original maturities of three months or less.
CONCENTRATIONS OF CREDIT AND MARKET RISKS
Financial instruments that potentially subject the Company to
concentrations of credit and market risk are comprised of cash and cash
equivalents and notes receivable.
CASH
The Company currently maintains substantially all cash and cash
equivalents with financial institutions in South Africa denominated in
South African Rand. Changes in the value of the Rand compared to the
U.S. dollar can have an unfavorable impact on the value of the cash and
cash equivalents. In addition, these financial instruments are not
subject to credit insurance.
NOTES RECEIVABLE
The Company's notes receivable are to be settled in South African Rand
by South African companies. The Company's ability to collect on these
notes may be affected by economic conditions in South Africa and the
value of the South African Rand, as compared to the U.S. dollar.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and convertible debentures approximate fair value due
to the short-term nature of these instruments. The carrying value of
long-term notes receivable approximates fair values since interest
rates are keyed to the South African prime lending rate.
INVENTORIES
Inventories are valued at the lower of cost or market with cost
determined on the first-in, first-out method.
F-10
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives
of the assets. Land was not depreciated. Buildings were depreciated
over 20 years. Plant and equipment and motor vehicles are depreciated
over 3 to 10 years. Leasehold improvements are amortized over the terms
of the related leases.
SOFTWARE DEVELOPED FOR INTERNAL USE
As a result of the acquisition of Fantasy in November 2000, the Company
has adopted the provisions of AICPA Statement of Position (SOP) 98-1
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED AND OBTAINED
FOR INTERNAL USE". SOP 98-1 requires the capitalization of all internal
and external costs incurred to develop internal use software during the
application development stage. Fantasy operates its fantasy league
through the use of software the company develops. In 2001, Fantasy
developed software to run the college basketball fantasy league;
however, such costs were not significant.
INTANGIBLE ASSETS
Intangible assets include goodwill, customer lists, patents and
trademarks, recipes and other intellectual property and non-competition
agreements. Intangible assets are stated on the basis of cost and are
amortized on a straight-line basis over a period of three to twenty
five years. 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. 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. Goodwill and customer lists
are amortized over a period of 3 to 25 years. The patents, trademarks,
recipes and other intellectual property were amortized over a period of
25 years, and non-competition agreements were amortized over a 3-year
period, up to the time of their disposal (see Note 15).
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States Dollar; the
functional currency of First South African Holdings, Ltd. (FSAH) is the
South African Rand. Accordingly, the following rates of exchange have
been used for translation purposes:
Assets and liabilities are translated into United States Dollars using
exchange rates at the balance sheet date. Common stock and additional
paid-in capital are translated into United States Dollars using
historical rates at date of issuance. Revenue, if any, and expenses are
translated into United States Dollars using the weighted average
exchange rates for each year. The resultant translation adjustments are
reported in the statement of operations since FSAH has sold all its
operating subsidiaries.
F-11
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs incurred
for the year ended June 30, 2001 was $591,894. Advertising costs
incurred for the years ended June 30, 2000 and 1999 are included in
discontinued operations.
INCOME TAXES
The Company accounts for its income taxes using SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES", which requires the recognition of
deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
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.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted net loss
per share is computed by dividing net loss by the weighted average
number of common shares outstanding and dilutive potential common
shares which includes the dilutive effect of stock options, warrants
and convertible debentures. Dilutive potential common shares for all
periods presented are computed utilizing the treasury stock method. The
diluted share base for the years ended June 30, 2001, 2000 and 1999
excludes shares of 261,092, 2,997,230, and 2,565,817, respectively,
related to stock options, warrants and convertible debentures. These
shares are excluded due to their anti-dilutive effect as a result of
the Company's loss from continuing operations during 2001, 2000 and
1999.
F-12
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS
Certain items in the prior year financial statements have been
reclassified to conform to the current period presentation.
RECENTLY ISSUED 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 will
be effective for the Company's financial statements beginning July 1,
2002, with earlier application encouraged. 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 July 2001, the FASB issued SFAS No. 141, "BUSINESS COMBINATIONS",
and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" which replace
Accounting Principles Board Opinion Nos. 16, "BUSINESS COMBINATIONS"
and 17, "INTANGIBLE ASSETS", respectively. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and that the use of the
pooling-of-interests method be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only method. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of
SFAS No. 142, which the Company will be required to adopt on July 1,
2002. After June 30, 2002, goodwill can only be written down upon
impairment discovered during annual tests for fair value, or discovered
during tests taken when certain triggering events occur. The Company is
in the process of determining the impact of these pronouncements on its
consolidated financial position and results of operations.
In June 1998, the FASB issued SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows derivatives gains
and losses to offset related results on the hedged item in the income
statement and requires that the company must formally document,
designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. The adoption of this statement has not had a
significant impact on the results of operations or financial position
of the Company.
F-13
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
Staff Accounting Bulletin "SAB" No. 101, issued by the U.S. Securities
and Exchange Commission, provides the staff's views in applying
generally accepted accounting principles to selected revenue
recognition issues. SAB 101 is effective no later than the fourth
quarter of fiscal years beginning after December 15, 1999. The Company
believes that it is in compliance with the guidelines set forth in SAB
101.
NOTE 3. ACQUISITIONS
The results of operations of the following acquisition are included in
the consolidated financial statements from the date of acquisition. The
costs of the acquisition were allocated on the basis of the estimated
fair value of the assets acquired and liabilities assumed as required
under purchase accounting.
Percentage Purchase
SUBSIDIARY/BUSINESS Date Acquired Acquired Consideration
------------------- ------------- -------- -------------
Fantasy Sports, Inc. November 15, 2000 100% $4,330,990
=========
ACQUISITION COSTS:
Cash consideration $4,330,990
---------
Net Assets Acquired:
Cash and cash equivalents 863,276
Current assets 25,985
Property, plant and equipment 193,472
Intangibles 3,782,814
---------
Total assets 4,865,547
Current Liabilities 534,557
----------
$4,330,990
In connection with the acquisition of Fantasy Sports, Inc., the Company
recorded intangibles consisting of goodwill and customer lists. These
intangibles are being amortized on a straight-line basis over their
expected useful lives of 3 to 10 years.
The following unaudited pro forma summary presents consolidated
financial information as if the acquisition of Fantasy Sports, Inc. had
occurred effective July 1, 1999. The pro forma amounts include
adjustments for amortization of intangibles. The pro forma information
does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of
operations of the consolidated entities.
Year Ended June 30,
-------------------
2001 2000
---- ----
Revenue $ 2,231,026 $ 2,611,280
========== =============
F-14
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITIONS (Continued)
Year Ended June 30,
-------------------
2001 2000
---- ----
Loss before extraordinary item $(8,472,074) $(39,178,696)
Extraordinary item - gain on extinguishment of debt 2,142,949 -
---------- ------------
Net loss $(6,329,125) $(39,178,696)
========== ===========
Loss per share - basic and diluted:
Loss before extraordinary item $(0.96) $(5.00)
Extraordinary item 0.24 -
----- -------
Net loss $(0.72) $(5.00)
===== =====
NOTE 4. ACCOUNTS RECEIVABLE
2001 2000
---- ----
Accounts receivable $ - $11,034,417
Less allowance for doubtful accounts - 426,220
---------- ------------
$ - $10,608,197
========= ==========
NOTE 5. INVENTORIES
2001 2000
---- ----
Finished goods $377,721 $5,147,642
Work in progress - 358,890
Raw materials and ingredients - 2,701,284
Supplies - 1,179,041
------------ ---------
$377,721 $9,386,857
======= =========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
2001 2000
---- ----
Land and buildings $ - $ 2,174,364
Leasehold improvements 7,264 1,265,657
Plant and equipment 251,021 23,721,346
Motor vehicles - 2,325,005
Construction in progress - 558,416
------------ ------------
258,285 30,044,788
Less accumulated depreciation 90,821 11,829,592
-------- ----------
$167,464 $18,215,196
======= ==========
Depreciation expense was $67,955, $2,906,643, and $2,510,953 for the years ended
June 30, 2001, 2000 and 1999, respectively. Of this depreciation expense, $-0-,
$2,900,153 and $2,506,667, respectively, was included in discontinued
operations.
F-15
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. INVESTMENTS IN AFFILIATES
A summary of the investments in affiliates on the consolidated
financial statements is presented below:
Effective As of and for the Year Ended
Percentage ----------------------------
Ownership June 30, 2001 June 30, 2000
--------- ------------- -------------
Investments In and Receivables From
Unconsolidated Affiliates:
HotelSupplyGroup.com 51% $ - $ 183,134
Magnolia Broadband 48 631,066 1,076,338
Hall Lifestyle Products 50 - 24,463
---------------- -----------
$ 631,066 $1,283,935
=========== =========
Share of losses of unconsolidated affiliates:
HotelSupplyGroup.com 51 $ (14,032) $ (37,223)
Magnolia Broadband (includes $250,000
provision relating to the convertible note
and $433,332 and $90,278, respectively,
of goodwill amortization) 48 (1,904,994) (213,940)
---------- ----------
$(1,919,026) $ (251,163)
========== ==========
HOTELSUPPLYGROUP.COM
On July 13, 1999 the Company organized a new company,
HotelSupplyGroup.Com Limited ("HSG"), with Intercommerce Trading
Limited. HSG is 51% owned by the Company and 49% by Intercommerce
Trading limited. However, the Company does not have a majority voting
interest; therefore, HSG has been accounted for under the equity method
in the consolidated financial statements. A stockholder's loan of
$250,000 was advanced to HSG as initial funding. As of June 30, 2001,
the Company's investment in HSG has been reduced to zero due to
uncertainty surrounding its recoverability. HSG was subsequently
liquidated.
HALL LIFESTYLE PRODUCTS LTD.
On February 21, 2000, the Company organized a new company, Hall
Lifestyle Products (Pty) Ltd ("HLP") and entered into a joint venture
agreement with HL Hall & Sons (Group Services) (Pty) Ltd ("Hall"),
whereby each venturer invested an equal sum of R275,000 into a newly
formed entity. The Company and Hall each own 50% of HLP with equal
voting rights.
The losses incurred in HLP of $23,111 in 2001 are included in the
Lifestyle discontinued operation.
MAGNOLIA BROADBAND, INC.
On April 14, 2000, the Company purchased 3,447,774 shares of Series A
Preferred stock in Magnolia Broadband ("Magnolia"), with voting rights
representing a 48% interest in Magnolia, for a consideration of
$2,500,000, $1,300,000 of which was recorded as goodwill. The goodwill
relating to the Company's investment in Magnolia is being amortized
over a three-year period.
F-16
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. INVESTMENTS IN AFFILIATES (Continued)
MAGNOLIA BROADBAND, INC. (Continued)
On March 9, 2001, the Company loaned Magnolia $250,000. This loan is
convertible into the type of equity security Magnolia sells in its next
private placement. In connection with this loan, Magnolia issued the
Company warrants to acquire 250,000 shares of Magnolia's common stock
at an exercise price of $1.00 per share. The warrants expire on March
9, 2006. The value of the warrants at the date of issuance was not
considered significant. At June 30, 2001, the Company provided a full
valuation allowance relating this $250,000 loan. Subsequent to June 30,
2001, the Company made an additional investment in Magnolia (see Note
26).
NOTE 8. LONG-TERM NOTES RECEIVABLE
In connection with the sale of Lifestyle, which was completed in
November 2000, the Company received as partial consideration three
notes denominated in South African Rand. These notes are subject to
foreign currency risk and a portion of one is subject to certain
performance requirements of the obligee. Two notes require principal
payments ranging from R175,000 to R184,000 through June 30, 2003. The
third note was for R52 million of which R20 million (plus accrued
interest) has been treated as contingent consideration to be recorded
when collected. The remaining R32 million is payable to the extent the
borrower collects on Junior debt. Collections of Junior debt will be
first charged against accrued interest and the excess applied to the
receivable balance not to exceed tranches of R500,000. These notes bear
interest at rates based on the South African prime rate (13.5% at June
30, 2001). Notes receivable include accrued interest of approximately
$270,000.
Balance at June 30, 2001 $5,444,346
Less current portion 411,266
----------
Long-term portion $5,033,080
=========
NOTE 9. INTANGIBLE ASSETS
2001 2000
---- ----
Goodwill $3,567,814 $ 5,596,624
Customer lists 215,000 -
Patents and trademarks - 5,366,800
Recipes and other intellectual property - 11,590,790
----------- ----------
3,782,814 22,554,214
Less accumulated amortization 295,015 2,424,095
----------- ----------
Intangible assets, net $3,487,799 $20,130,119
========== ===========
Amortization expense was $369,318, $2,934,686 and $1,613,206 for the years ended
June 30, 2001, 2000 and 1999, respectively. Of this amortization expense, $-0-,
$2,203,967 and $1,209,253, respectively, was included in discontinued
operations.
F-17
SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS