================================================================================
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, 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.
(Exact name of Registrant as specified in its charter)
Bermuda N/A
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX, Bermuda
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's telephone number, including area code (441) 295-1422
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
- --------------------------------------------------------------------------------
("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 17, 2003, was $4,614,425.
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 17, 2003, there were 7,552,347 shares of the Registrant's Common
Stock outstanding and 926,025 shares of the Registrant's Class B Common Stock
outstanding
PART I.
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 a
shareholder in Magnolia Broadband Wireless, a startup company which is
developing mobile 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. In
2001, we acquired 100% of Student Sports, Inc, which we sold in 2003. This was
the only operating subsidiary in our marketing services segment. 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, sports media and
marketing businesses with strong management teams that are positioned to
use technology and Internet related platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium
term, to earnings per share through operating profit or capital
appreciation.
o We aim to add value to our investments by operating in partnership with
committed, incentivised, entrepreneurial management who show the vision and
ability to grow their businesses into industry or niche leaders.
DESCRIPTION OF OUR SUBSIDIARIES AND INVESTMENTS
FANTASY SPORTS, INC.
Fantasy Sports, 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, basketball, golf and
other motor sport fantasy games. All the company's games offer weekly and
seasonal cash and merchandise prizes.
Currently, the Company has over 30,000 participants paying for its Spring, Fall
and One Race NASCAR challenges, as well as the fantasy college football and
basketball challenges and our other games. Subscription revenues for our games
account for approximately 78% of our total revenues. Our NASCAR games currently
generate over 90% of our subscription 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 $10,000 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.
-2-
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 was strengthened
in 2001 with the first national television network broadcast of the Winston Cup
Series. 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.
Since 1997, Fantasy Sports has operated a full season college football challenge
game, which accounts for approximately 5% of our subscription revenues at
present. During 2001, we developed and deployed a tournament challenge college
basketball game that generated over 2,000 paying customers in our last fiscal
year. We have developed a retail business that specializes in the sale of NASCAR
related die-cast cars, apparel and other merchandise. This retail operation
commenced business in May 2001 and currently accounts for the remaining 22% of
our overall revenues.
We currently provide an in-house corporate game for the Dana Corporation, and
are seeking further 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.
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.
We invested $2,500,000 in Magnolia and received shares of preferred stock in
Magnolia. We also received board representation rights and registration rights.
In October 2001, we invested a further $450,000 of a total $1,500,000 offering
of Magnolia's Series A Preferred Stock. We co-invested along with Selway
Partners, LLC, and CIP Capital, LP. In April and May 2002 Magnolia raised a
further $7.5 million in an offering of Series B Preferred Stock. In June 2003
Magnolia raised a further $6 million dollars in an offering of Series C
Preferred Stock. We did not participate in either of these rounds. Currently we
own approximately 5% of Magnolia on a fully diluted basis including the exercise
of all employee stock options. Due to recurring losses, our investment in
Magnolia at June 30, 2003, which is now accounted for under the cost method, was
$831,066.
-3-
DISCONTINUED OPERATIONS
Student Sports, Inc.
On June 14, 2003, we entered into an Asset Purchase Agreement with SS Founders,
Inc., pursuant to which we sold substantially all of the assets and liabilities
of Student Sports, Inc. Student Sports offers unique access to the high school
athletic market across multimedia platforms. As a subsidiary of Silverstar
Holdings, the company's primary thrust was to offer marketing services to large
corporations interested in accessing this market. Additionally, the company
worked towards building a "bottom-up" revenue generation strategy based on the
creation of a number of subscription based programs where products and services
will be sold directly to the high school athletes, their parents and coaches. We
originally acquired Student Sports in September 2001. The consideration for the
sale of Student Sports was 325,686 shares of Silverstar Holdings common stock
that were returned to the Company as well as the forgiveness of a maximum of
913,745 contingent shares of Silverstar Holdings that could have been payable to
former Student Sports shareholders in April 2004.
EMPLOYEES
Silverstar Holdings through its US management subsidiaries employs two full time
salaried employees. Fantasy Sports, Inc. currently employs 12 full time salaried
employees and approximately 13 hourly employees.
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 8,000 square feet. The lease expires
on December 31, 2003 and costs us approximately $60,000 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 2006 and costs us approximately $33,000 per year.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
-4-
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
---- ---
Common Stock 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
Common Stock Fiscal 2002
- ------------------------
1st Quarter........................................ $1.00 $0.38
2nd Quarter........................................ $0.62 $0.33
3rd Quarter........................................ $0.80 $0.28
4th Quarter........................................ $0.52 $0.17
Common Stock Fiscal 2003
- ------------------------
1st Quarter........................................ $0.33 $0.10
2nd Quarter........................................ $0.27 $0.07
3rd Quarter........................................ $0.38 $0.06
4th Quarter........................................ $0.81 $0.10
The closing price of our common stock on September 20, 2003 was $0.63.
As of September 20, 2003, there were approximately 1,700 holders of our common
stock, inclusive 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.
-5-
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Information
STATEMENT OF OPERATIONS DATA YEARS ENDED JUNE 30,
1999 2000 2001 2002 2003
Revenues $ - $ - $ 1,301,432 $ 3,107,324 $ 3,141,448
Total operating expenses 2,504,838 2,491,128 4,362,413 5,295,375 4,456,082
Operating loss (2,504,838) (2,491,128) (3,060,981) (2,188,051) (1,314,634)
Interest (expense)/income (2,403,997) (1,363,360) 976,107 615,294 638,011
Income (Loss) from continuing operations
before
income taxes (6,208,976) (4,232,603) (5,010,726) (2,964,039) 1,069,049
Net Income (Loss) from continuing operations (6,210,195) (4,233,222) (5,010,726) (2,964,039) 1,069,049
(Loss)/gain from discontinued operations (4,916,267) (34,429,264) - (824,761) (736,947)
Loss on disposition - - (2,389,383) - (262,754)
Extraordinary Item - gain on extinguishments
of debt - - 2,142,949 - -
Net (loss)/income (11,126,462) (38,662,486) (5,257,160) (3,788,800) 69,348
Income (Loss) per share - from continuing
Operations $ (0.95) $ (0.54) $ (0.57) $ (0.34) .12
BALANCE SHEET DATA AS OF JUNE 30,
1999 2000 2001 2002 2003
Total assets $ 102,615,018 $ 94,266,439 $ 15,931,857 $ 11,722,781 $
12,354,162
Long term liabilities 33,598,244 15,473,769 - - 349,289
Net working capital (1) 28,276,771 31,414,757 4,253,001 2,345,828 192,081
Stockholders' equity 2,090,966 5,595,870 13,578,710 10,212,073 10,025,049
(1) Net working capital is the net of current assets and current liabilities.
ITEM 7. 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.
-6-
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 and consolidated balance sheets. Discontinued
operations for the fiscal years ending June 30, 2003 and 2002, represent
operating results for eleven and nine months, respectively. Net assets of $0.05
million and net liabilities of $0.06 million were assumed by the parent company.
The discontinued operations generated sales of $1.26 million and $1.12 million
for the years ended June 30, 2003, and 2002 and net losses from operations of
$0.74 million and $0.82 million, respectively.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
Revenues
Revenues were $3.14 million in fiscal 2003. Revenues in the prior year were
$3.10 million. The increase is the result of an increase of revenues of $0.23
million in the sale of NASCAR related die-cast cars, apparel and other items,
offset by a smaller decrease in games revenue.
Cost of Sales
Cost of sales were $2.01 million in fiscal 2003. Cost of sales in the prior year
were $1.88 million and are attributable to Fantasy. The increase is primarily
caused by increased sale of die cast collectibles.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2003 were $2.32 million,
a decrease of $0.96 million over the same period in the prior year. This
decrease is due to sustained efforts to reduce expenses to achieve operational
profitability.
Amortization and Depreciation
Amortization of intangible assets was $0.07 million in both fiscal 2003 and
2002. Depreciation expense was $0.07 million in fiscal 2003 as compared to $0.08
million in fiscal 2002.
Foreign Currency Gains
Foreign currency gains or losses are related to the financial assets remaining
in the discontinued South African operations. The Foreign currency gains during
fiscal 2003 were $1.76 million as compared to a loss of $1.35 million in the
prior year as a result of the appreciation of the South African Rand against the
US dollar. These foreign currency gains or losses are non-cash items until
converted into US dollars, when any unrealized gains or losses will be converted
to cash.
-7-
Interest Income
Interest income of $0.65 million was recorded during fiscal 2003 as compared to
interest income of $0.63 million in fiscal 2002. The increase in interest income
in fiscal 2003 is primarily a result of the appreciation of the South African
Rand against the dollar, which affects interest earned on Notes Receivable from
the sale of the Lifestyle business.
Interest Expense
Interest expense during fiscal 2003 was $0.12 as compared to a non-material
amount in the prior year. The increase in interest expense is attributable to
interest charges incurred on short-term credit lines and lease facilities held
by the Company's subsidiaries.
Provision for Income Taxes
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to income taxes. Up to this date, none of
them has had taxable income. They have incurred losses for tax purposes. The
deferred tax asset generated by the tax losses and temporary differences has
been fully reserved.
Discontinued Operations
Student Sports was sold in June 2003. The results for this business for both
2002 and 2003 have been included under Discontinued Operations in our financial
statements.
Net Income (Loss)
The Company has recognized income of $0.07 million during fiscal 2003 compared
to a loss of $3.79 million during the prior year. The current year includes
non-cash foreign currency gains of approximately $1.76 million due to the
appreciation of the South African Rand against the US dollar of approximately
36% during the year, offset by non-cash charges of approximately $0.59 million
related to the sale of Student Sports and the write down of intangible assets.
The prior year loss included non-cash foreign currency losses of $1.35 million
due to the devaluation of the South African Rand against the US dollar of
approximately 29% during the year. The discontinued operations (Student Sports)
generated net losses from operations of $0.74 million for fiscal 2003. Without
these items, the net loss for fiscal 2003 would have been $0.43 million as
compared to $1.61 million loss for fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues
Revenues were $3.11 million in fiscal 2002 as a result of revenues earned by
Fantasy Sports, which was acquired during the second quarter of fiscal 2001.
Revenues in the prior year were $1.30 million and were related to Fantasy
Sports. The increase is the result of recognizing a full year of Fantasy's
revenues in fiscal 2002.
Cost of Sales
Cost of sales were $1.88 million in fiscal 2002 as a result of Fantasy Sports's
operations. Cost of sales in the prior year were $0.87 million and are
attributable to Fantasy. The increase is due to a full year of operations for
Fantasy Sports during Fiscal year 2002 and a bulk sale of Fantasy Sports
inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2002 were $3.23 million,
an increase of $0.17 million over the same period in the prior year. This
increase is due to having a full year of Fantasy as compared with six months in
the prior year, offset by a reduction in overall corporate expenses.
-8-
Amortization and Depreciation
Amortization of intangible assets decreased from $0.37 million in fiscal 2001 to
$0.07 million in the current year as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets," whereby the Company no longer amortizes amounts attributable to
goodwill. Depreciation expense was $0.08 million in fiscal 2002 as compared to
$0.07 million in fiscal 2001.
Equity in Losses of Unconsolidated Affiliates
Equity in losses of unconsolidated affiliates decreased to zero for fiscal 2002
compared to a loss of $1.92 million in fiscal 2001. The decrease is due to the
Company recognizing losses to the extent of their investment in the prior year.
The Company's investment in Magnolia, effective with the third quarter of fiscal
2002 is being accounted for under the cost method. Therefore, no further income
or loss from Magnolia's operations will be recognized by the Company.
Foreign Currency Loss
Foreign currency losses are related to the assets remaining in the discontinued
South African operations. The Foreign currency losses during fiscal 2002 were
$1.35 million as compared to $1.04 million in the prior year as a result of the
deterioration of the South African Rand against the US dollar. These foreign
currency losses are non-cash items until converted into US dollars, when any
unrealized gains or losses will be converted to cash.
Interest Income
Interest income of $0.63 million was recorded during fiscal 2002 as compared to
interest income of $1.55 million in fiscal 2001. During fiscal 2001, the Company
earned interest on the proceeds realized on the sale of Lifestyle. These
proceeds were utilized to pay down debt and invested in interest bearing
accounts. The decrease in interest income in fiscal 2002 is a result of lower
invested cash balances, as well as the deterioration of the South African Rand
against the dollar, which affects interest earned on Notes Receivable from the
sale of the Lifestyle business.
Interest Expense
Interest expense during fiscal 2002 was not material as compared to the $0.57
million in the prior year. The decrease in interest expense is attributable to
the repayment of approximately $12 million of increasing rate subordinated
convertible debentures during the third and fourth quarters of fiscal 2001.
Preference Dividend
The preference dividend related to the mandatory redeemable preference shares of
Lifestyle. These preferred shares were redeemed with the sale of Lifestyle and
there were no additional dividends after the second quarter of fiscal 2001.
Provision for Income Taxes
The Company is registered in Bermuda, where no tax laws are applicable. Three of
the Company's subsidiaries are subject to income taxes. Up to this date, none of
them has had taxable income. They have incurred losses for tax purposes. The
deferred tax asset generated by the tax losses and temporary differences has
been fully reserved.
Discontinued Operations
The Lifestyle business was sold in November 2000 and has not been included in
the Company's results since that time. The income during the prior year was
earned before the disposition of the business.
-9-
Extraordinary Item - Gain on Extinguishment of Debt
During the last half of fiscal 2001, the Company negotiated agreements with its
lenders to retire $11.70 million of debentures at face value plus accrued
interest. As a result, the Company recorded a gain on previously accrued sinking
fund interest of $2.14 million in fiscal 2001. Since the remaining debentures
were paid off at their maturity in October 2001, no such transaction occurred
during fiscal 2002.
Net Loss
The Company has recognized a loss of $3.79 million during fiscal 2002, as
compared to a loss of $5.26 million during the prior year. The current year
includes non-cash foreign currency losses of $1.35 million due to the
devaluation of the South African Rand against the US dollar of approximately 29%
during the year and losses from discontinued operations of $0.83 million for
Student Sports, Inc. which was sold during fiscal 2003. The prior year loss
included $1.04 million of non-cash foreign currency losses and $2.39 million
loss on the disposal of discontinued operations, offset by the extraordinary
gain on the extinguishments of debt of $2.14 million. Without these items, the
net loss for fiscal 2002 would have been $2.44 million as compared to $3.97
million for fiscal 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $0.9 million from $2.54 million at June 30, 2002 to $1.62
million at June 30, 2003. The balance of the remaining cash is being held for
working capital purposes. The Company expects this balance to be sufficient to
fund its operations and the operations of its subsidiaries for the next twelve
months. During the next twelve months, it also anticipates the commencement of
repayment of notes receivable due to it from the sale of First Lifestyle
Holdings in South Africa. However, repayment is contingent on the borrower's
collection of junior debt.
Working capital decreased by $2.16 million from $2.35 million at June 30, 2002
to $0.19 million at June 30, 2003. This is primarily due to the losses incurred
by the Company's operating subsidiaries.
At June 30, 2003, the Company had borrowings of $0.28 million, which consisted
of $0.22 million advances against lines of credit and $0.06 million of equipment
loans.
The Company has guaranteed certain bank facilities of some of its former
industrial subsidiaries in South Africa. Currently, these guarantees amount to
approximately $0.7 million and are secured by like amounts of cash. The Company
has reduced these guarantees from approximately $0.9 million as of June 30,
2002. These guarantees are reducing by approximately $0.013 million per month.
In the event that these guarantees are called, the Company has recourse to
certain assets of these subsidiaries, which should substantially cover the
Company's potential exposure. Additionally, as of June 30, 2003, the Company has
guaranteed approximately $0.17 million of the debt of Fantasy Sports. Such
guarantee is secured by the Company's cash.
Management believes that its present financial resources are sufficient to meet
its obligations for the ensuing twelve months. In addition to unrestricted cash
of approximately $0.8 million at June 30, 2003, the Company expects to begin
collecting on an outstanding note receivable due from the sale of First
Lifestyle Holdings in March 2004, which will provide additional resources. The
Company is also working to find an alternative guarantor for the approximate
$700,000 it has guaranteed for the bank lines of a former South African
subsidiary. Additionally, the Company believes it would be able to raise debt or
equity capital should the need arise.
The Company intends to work on building its existing portfolio of subsidiaries
in terms of revenues and profitability. It may also acquire further synergistic
businesses and may therefore utilize a portion of its remaining cash balances
and the proceeds of its disposal of Lifestyle to fund this strategy to the
extent that suitable acquisition candidates can be identified. The Company may
be required to incur additional
-10-
indebtedness or equity financing in connection with the funding of future
acquisitions. There is no assurance that the Company will be able to secure
additional indebtedness or raise additional equity to finance future
acquisitions on terms acceptable to management, if at all.
OFF-BALANCE SHEET ARRANGEMENTS
In order to facilitate an orderly sale of one of its former South African
subsidiaries, in 1999 the Company provided a guarantee for the bank facilities
of this subsidiary in South Africa. At the time, this guarantee was provided on
an unsecured basis by our wholly owned subsidiary, First South African Holdings.
In November 2000, upon the subsequent sale of the majority of our South African
assets and the repatriation of the cash proceeds of this sale, we were required
to provide a bank guarantee to secure the continuation of this credit facility.
As a result, during fiscal 2001 and 2002 we provided a bank guarantee in the
amount of R9 million ($US 900,000) to secure such facility. The bank guarantee
is in turn secured by the equivalent amount in US dollars. In December 2002, we
negotiated a restructure of this South African facility, reducing the face
amount of our guarantee to R5.5 million ($US 730,000). Our former subsidiary, in
turn, is reducing its bank line through the repayment of R150,000 ($US 20,000)
per month in interest and principal. Our exposure as of June 30, 2003 has been
reduced to approximately R5.3 million ($US 700,000) and we anticipate it to be
reduced by approximately R100,000 ($13,000) per month over the next fiscal year.
At current exchange rates, we have approximately $667,000 restricted cash
securing this guarantee. We are comfortable that this guarantee will be
significantly reduced over the next two years, during which time we believe that
alternative arrangements will be made so that this guarantee will no longer be
in force.
In 2001, Fantasy Sports Inc. secured a revolving line of credit for up to $1
million from a bank. Fantasy have drawn and repaid on this line of credit from
time to time. Any borrowings under this facility are guaranteed by the Company-
on hand at UBS. As of June 30, 2003, Fantasy had an outstanding balance of
approximately $165,000 secured by a like amount of the Company's cash. We
anticipate that this line may fluctuate over the course of the current fiscal
year. However, based on past experience and current anticipated cash flows, we
believe that Fantasy will repay all amounts outstanding under this facility on
or before March 31, 2004.
GOODWILL IMPAIRMENT TEST
We acquired Fantasy Sports, Inc. in November 2000. At the time our strategy was
to aggressively expand the business by increasing our marketing in the
auto-racing segment and developing new games for other niche sports markets. To
this end, we hired new staff and increased our marketing and development budgets
as well. This strategy was not successful, primarily due to the economic
slowdown and as a result, Fantasy has incurred losses since we made this
acquisition. During the seven months ended June 30, 2001, Fantasy lost
$1,320,000 and had negative cash flow of $268,000. For the twelve months ended
June 30, 2002, Fantasy lost $1,135,000 with negative cash flow of $566,000. For
the twelve months ended June 30, 2003, Fantasy lost $314,715 with negative cash
flow of $185,860.
Due to the accounting recognition of these losses, the carrying value of Fantasy
has diminished since acquisition. On June 30, 2003, we performed an impairment
test on the carrying value of Fantasy's goodwill. In accordance with SFAS 142,
we compared the fair value of Fantasy (as a reporting unit) to the carrying
value of Fantasy including goodwill. The methodology we used to determine fair
value was to develop a ratio of revenue to market capitalization utilizing the
Company and a comparable publicly traded company in the same industry. This
ratio was then applied to Fantasy's revenue to determine fair value. The fair
value exceeded Fantasy's carrying value, and therefore, no impairment of
goodwill existed at June 30, 2003.
-11-
We will continue to monitor the carrying values of Fantasy and will use the same
methodology on a consistent basis in the future. Should our efforts to stem the
losses at Fantasy not succeed and losses and negative cash flow continue, we may
be faced with goodwill impairment losses for Fantasy in the future.
FUTURE COMMITMENTS
Through June 30, 2003, Fantasy Sports Inc., the Company's remaining operating
subsidiary, had incurred net losses. The Company anticipates that this situation
will be rectified through a combination of expense reductions and increased
revenues. However, there are no assurances that these changes will be
successful. In the event that these plans are not successful, the Company may
need to continue to support the operations of its subsidiary.
The Company intends to bring its operating subsidiary to profitability and to
preserve its cash balances to the best of its ability. The Company anticipates
continued repayments from the notes receivable from the sale of certain of its
South African subsidiaries.
CRITICAL ACCOUNTING POLICIES
The following is a discussion of the accounting policies that the Company
believes are critical to its operations:
REVENUES
Revenues generated by Fantasy are seasonal from mid-February to the end of
November. Fantasy collects its revenue at the beginning and mid-point of the
season and recognizes this deferred revenue pro rata over the season. Student
Sports recognized subscription revenue over the life of the subscription. For
event-type revenue, revenue was recognized over the course of the contract in
proportion to the expenses for the period compared to total expenses anticipated
for the specific event. Revenues from television sports shows produced by
Student Sports for television stations were recognized when the show aired.
Student Sports, while somewhat less affected by seasonal factors, generated less
revenue in the December quarter than during the rest of the year.
GOODWILL
The Company adopted SFAS 142 during fiscal 2002 and no longer amortizes
goodwill. The Company tests goodwill for impairment in the fourth quarter for
Fantasy Sports, Inc. The goodwill impairment test for subsequent acquisitions
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 determines fair
value for Fantasy 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.
-12-
ITEM 7A. 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, 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. 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% increase or decline in the Rand/US Dollar exchange
rate, at year-end exchange rates, the Company would gain or lose $1,325 on every
R1,000,000 retained in South Africa. During fiscal 2003, the South African Rand
has appreciated against the US dollar by approximately 26% from the rate at June
30, 2002. At June 30, 2003, the Company had assets denominated in South African
Rand of 49.58million.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during fiscal 2003:
Foreign Currency
Gain/(Loss) for the Year
As of June 30, 2003 Ended June 30, 2003
In Rand In US Dollars
Cash 1,282,727 $47,486
Notes Receivable 48,270,325 1,786,935
Other 33,843 (71,306)
-13-
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity and Comprehensive Loss F-4
Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Silverstar Holdings Limited
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Silverstar
Holdings Limited and Subsidiaries (the Company) as of June 30, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the three years ended June 30,
2003. 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 audits provide a reasonable basis
for our 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 Limited and Subsidiaries at June 30, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the three years ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
August 19, 2003
F-1
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
ASSETS 2003 2002
------------ ------------
Current Assets:
Cash and cash
equivalents
(includes restricted cash of $835,951 and $953,955 in 2003 and 2002, respectively) $ 1,617,629 $ 2,540,667
Accounts receivable, net 17,816 25,594
Inventories 168,113 121,630
Current portion of long-term notes receivable 248,205 409,971
Prepaid expenses and other current assets 120,142 96,336
Net assets of discontinued operations 0 977,793
------------ ------------
Total Current Assets 2,171,905 4,171,991
Property, Plant and Equipment, net 140,301 113,062
Investments in Non-Marketable Securities 843,566 843,566
Long-Term Notes Receivable 6,213,686 3,859,138
Goodwill, net 2,947,824 2,947,824
Intangible Assets, net 30,750 97,750
Deferred Charges and Other Assets 6,130 4,855
------------ ------------
Total Assets
$ 12,354,162 $ 12,038,186
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $
$ 567 -
Lines of credit 218,851 50,000
Current portion of long-term debt 26,237
Accounts payable 482,697 240,530
Accrued expenses 415,399 341,531
Deferred revenue 836,073 878,647
------------ ------------
Total Current Liabilities 1,979,824 1,510,708
------------ ------------
Long-Term Debt 33,884 -
Obligation Related to Acquisition 315,405 315,405
------------ ------------
Total Liabilities 2,329,113 1,826,113
------------ ------------
Commitments, Contingencies and Other Matters - -
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; 7,503,924 and
8,001,310 shares issued and outstanding, respectively 75,039 80,013
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 $0.001 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 63,512,472 63,763,870
Accumulated deficit (53,572,528) (53,641,876)
------------ ------------
Total Stockholders' Equity 10,025,049 10,212,073
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,354,162 $ 12,038,186
============ ============
See notes to consolidated financial statements
F-2
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Revenues $ 3,141,448 $ 3,107,324 $ 1,301,432
----------- ----------- -----------
Operating Expenses:
Cost of sales 2,005,598 1,879,967 869,185
Selling, general and administrative 2,315,056 3,272,286 3,055,955
Amortization of intangibles 67,000 67,000 369,318
Depreciation 68,428 76,122 67,955
----------- ----------- -----------
4,456,082 5,295,375 4,362,413
----------- ----------- -----------
Operating Loss (1,314,634) (2,188,051) (3,060,981)
Interest in Losses of Unconsolidated Affiliates - - (1,919,026)
Other (Expense) Income (17,443) (45,934) 200,757
Preference Dividend - (165,109)
Foreign Currency Gain ( Loss) 1,763,115 (1,345,348) (1,042,474)
Interest Income 650,329 627,019 1,548,882
Interest Expense (12,318) (11,725) (572,775)
----------- ----------- -----------
Income (Loss) from Continuing Operations Before Income Taxes 1,069,049 (2,964,039) (5,010,726)
Provision for Income Taxes - - -
----------- ----------- -----------
Income (Loss) From Continuing Operations 1,069,049 (2,964,039) (5,010,726)
Discontinued Operations:
Loss from operations, net of income taxes of
$0, $0 and $0, respectively (736,947) (824,761) -
Loss on disposition, net of income taxes of $0, $0 and $0,
Respectively (262,754) - (2,389,383)
----------- ----------- -----------
Income (Loss) Before Extraordinary Item 69,348 (3,788,800) (7,400,109)
Extraordinary Item - Gain on Extinguishment of Debt,
net of Income Taxes of $0 - - 2,142,949
----------- ----------- -----------
Net Income (Loss) $ 69,348 $(3,788,800) $(5,257,160)
=========== =========== ===========
Income (Loss) Per Share - Basic and Diluted:
Continuing Operations $ 0.12 $ (0.34) $ (0.57)
Discontinued Operations (0.11) (0.09) (0.27)
----------- ----------- -----------
Income (Loss) Before Extraordinary Item .01 (0.43) (0.84)
Extraordinary Item - - 0.24
----------- ----------- -----------
Net Income (Loss) $ .01 $ (0.43) $ (0.60)
=========== =========== ===========
Weighted Average Common Stock Outstanding:
Basic and diluted 8,704,620 8,750,937 8,849,663
=========== =========== ===========
See notes to consolidated financial statements.
F-3
Silverstar Silverstar
Holdings Ltd. Holdings Ltd.
Class A Class B
Common Stock Common Stock
--------- ---------- ------- ----------
Shares Amount Shares Amount
--------- ---------- ------- ----------
YEAR ENDED JUNE 30, 2001:
BALANCE, JUNE 30, 2000 8,368,676 $ 83,687 946,589 $ 9,466
========= ========== ======= ==========
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
========= ========== ======= ==========
YEAR ENDED JUNE 30, 2002:
Stock issued for acquisition 900,000 9,000 - -
Purchase and retirement of treasury (77,000) (770) - -
stock
Net Loss - - - -
--------- ---------- ------- ----------
Balance, June 30, 2002 8,001,310 $ 80,013 946,589 $ 9,466
========= ========== ======= ==========
YEAR ENDED JUNE 30, 2003:
Purchase and retirement of Treasury
stock (171,700) (1,717) - -
Stock redemtpion -(sale of
subsidiary) (325,686) (3,257) - -
Net Income - -
Balance, June 30, 2003 7,503,924 $ 75,039 946,589 $ 9,466
========= ========== ======= ==========
First SA Holdings
Class B Additional
Common Stock Paid-in
Shares Amount Capital
YEAR ENDED JUNE 30, 2001:
BALANCE, JUNE 30, 2000 2,671,087 $ 600 $ 64,307,442
========= ============ ============
Disposal of FSAH - translation loss - - -
Stock issued to employee - - 7,400
Issuance of warrants for services - - 34,326
Purchase and retirement of treasury
stock - - (999,231)
Net loss - - -
--------- ------------ ------------
Balance, June 30, 2001 2,671,087 $ 600 $ 63,349,937
========= ============ ============
YEAR ENDED JUNE 30, 2002:
Stock issued for acquisition - - 475,200
Purchase and retirement of treasury - - (61,267)
stock
Net Loss - - -
--------- ------------ ------------
Balance, June 30, 2002 2,671,087 $ 600 $ 63,763,870
========= ============ ============
YEAR ENDED JUNE 30, 2003:
Purchase and retirement of Treasury
stock - - (23,418)
Stock redemtpion -(sale of
subsidiary) (227,710) - -
Net Income - - 69,348
Balance, June 30, 2003 2,671,087 $ 600 $ 63,512,472
========= ============ ============
Accumulated
Other
Accumulated Comprehensive
Deficit Income (Loss) Total
------------ ------------ ------------
YEAR ENDED JUNE 30, 2001:
BALANCE, JUNE 30, 2000 $(44,595,916) $(14,209,409) $ 5,595,870
============ ============ ============
Disposal of FSAH - translation loss - 14,209,409 14,209,409
Stock issued to employee - - 7,500
Issuance of warrants for services - - 34,326
Purchase and retirement of treasury
stock - - (1,011,235)
Net loss (5,257,160) - (5,257,160)
------------ ------------ ------------
Balance, June 30, 2001 $(49,853,076) $ - $ 13,578,710
============ ============ ============
YEAR ENDED JUNE 30, 2002:
Stock issued for acquisition - 484,200
Purchase and retirement of treasury - - (62,037)
stock
Net Loss (3,788,800) - (3,788,800)
------------ ------------ ------------
Balance, June 30, 2002 $(53,641,876) $ - $ 10,212,073
============ ============ ============
YEAR ENDED JUNE 30, 2003:
Purchase and retirement of Treasury
stock - - (25,135)
Stock redemtpion -(sale of
subsidiary) (231,237)
Net Income 69,348
------------ ------------ ------------
Balance, June 30, 2003 $(53,572,528) 0 $ 10,025,049
============ ============ ============
F-4
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---------- ---------- ----------
Cash Flows from Operating Activities:
Net income( loss) from continuing operations $ 1,069,049 $(2,964,039) (5,010,726)
Provision for doubtful accounts 3,365 - -
Dividend charge - - 165,109
Depreciation and amortization 135,428 143,132 437,273
Deferred income taxes - - -
Foreign currency (gains) losses (1,704,106) 1,212,220 1,092,145
Non-cash interest income on notes receivable (603,984) (465,590) (515,950)
Issuance of stock and warrants for services - - 41,826
Changes in operating assets and liabilities, net 193,261 (9,010) (943,728)
Decrease in other assets (2,274) 171,583 32,351
Creation of debenture redemption reserve fund 4,248 266,748
Loss on disposal of fixed assets 182 - -
Equity in losses of affiliates - - 1,919,026
---------- ---------- ----------
Net Cash Used in Continuing Operations (909,079) (1,907,456) (2,515,926)
Net Cash Used in Discontinued Operations (247,000) (1,003,650) (1,090,173)
---------- ---------- ----------
Net Cash Used in Operating Activities (1,156,079) (2,911,106) (3,606,099)
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds on disposal of discontinued operations - - 11,102,549
Acquisition of intangibles - - (49,332)
Acquisition of property, plant and equipment (24,701) (36,628) (1,662,725)
Proceeds on disposal of property, plant and equipment - - 74,150
Purchase price adjustments 200,000 -
Investment in affiliates (212,500) -
Decrease in long-term note receivable 115,308 428,607 612,160
Loan to affiliate - - (250,000)
Repayment of loans by affiliates - - 161,500
Acquisition of subsidiaries (net of cash of $0,
$0, $0 and 863,337) - (120,711) (3,454,569)
Other 1,042
---------- ---------- ----------
Net Cash Provided by Investing Activities 90,607 258,768 6,534,775
---------- ---------- ----------
F-5
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Cash Flows from Financing Activities:
Short term borrowings, net $ 168,851 $ (42,887) $ (999,883)
Repayment of long-term debt (1,282) (366,084) (1,246,822)
Redemption of debentures - - (11,700,000)
Redemption of preferred shares - - (8,153,928)
Treasury stock transactions (25,135) (62,037) (1,011,232)
------------ ------------ ------------
Net Cash (Used in) Provided by Financing Activities 142,434 (471,008) (23,111,865)
Effect of Exchange Rate Changes on Cash (4,005,865)
------------ ------------ ------------
Net Decrease in Cash and Cash Equivalents (923,038) (3,123,346) (24,189,054)
Cash and Cash Equivalents, Beginning 2,540,667 5,664,013 29,853,067
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,617,629 $ 2,540,667 $ 5,664,013
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 12,318 $ 6,001 $ 373,574
============ ============ ============
Cash paid during the period for income taxes $ - $ - $ -
============ ============ ============
See notes to consolidated financial statements.
F-6
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 1. ORGANIZATION AND PRINCIPAL ACTIVITIES OF THE GROUP
Silverstar Holdings Limited (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 and sale of die-cast racing cars.
On September 24, 2001, the Company acquired Student Sports, Inc. ("Student
Sports"), a media company producing publications, television programs and
various marketing initiatives for the high school sports market. In June 2003,
the company sold it's Student Sports subsidiary and it is reflected as
discontinued operations in the accompanying financial statements. (See
Discontinued operations below)
Additional investments have been made in other companies, which are in line with
the Company's new focus (see Note 7).
DISCONTINUED OPERATIONS
On June 10, 2003, the company sold substantially all assets and liabilities of
Student Sports, Inc effective as of May 15, 2003. The consideration for the sale
of Student Sports was 325,686 shares of Silverstar Holdings common stock that
were returned to the Company as well as the forgiveness of a maximum of 913,745
contingent shares of Silverstar Holdings that could have been payable to former
Student Sports shareholders in April 2004. (see Note 13)
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. Therefore, on August 2, 2000, LPI was placed under voluntary
administration in the United Kingdom and subsequently liquidated (see Note 13).
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 13).
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 either the equity or cost method of
accounting, where appropriate. 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:
F-7
Silverstar Holdings, Ltd. (Parent Company)
Silverstar Holdings, Inc.
First South African Management Corp.
First South African Holdings, Ltd. (FSAH)
Fantasy Sports, Inc.
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.
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 a substantial amount of 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.
The Company maintains deposit balances at U.S. financial
institutions that, from time to time, may exceed federally
insured limits. At June 30, 2003, there were no balances in
excess of federally insured limits. The Company maintains its
cash with high quality financial institutions, which the Company
believes limits risk.
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. In addition, the Company's ability
to withdraw these funds from South Africa after collection is
restricted and may be subject to approval by the South African
government.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable 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-8
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.
Equipment is 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.
Fantasy develops software to run its fantasy games; however, such costs were not
significant during fiscal 2003, 2002 or 2001.
GOODWILL
The Company tests goodwill for impairment in the fourth quarter for Fantasy
Sports, Inc. The goodwill impairment test for subsequent acquisitions 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 determines fair value for Fantasy
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, 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. Customer
lists are amortized over a period of three to ten years. The patents, trademarks
intellectual property and non-compete agreements related to discontinued
operations were amortized over a period of three to twenty five years, up to the
time of their disposal (see Note 13).
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.
REVENUES
Revenues generated by Fantasy are seasonal from mid-February to the end of
November. Fantasy collects its revenue at the beginning and mid-point of the
season and recognizes this deferred revenue pro rata over the season. Student
Sports recognized subscription revenue over the life of the subscription. For
event-type revenue, revenue was recognized over the course of the contract in
proportion to the
F-9
expenses for the period compared to total expenses anticipated for the specific
event. Revenues from television sports shows produced by Student Sports for
television stations were recognized when the show aired. Student Sports was
somewhat less affected by seasonal factors, generated less revenues in the
December quarter than during the rest of the year. Revenues from Student Sports
is presented in Discontinued Operations.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs incurred for
continuing operations for the years ended June 30, 2003, 2002 and 2001 were
$267,857, $426,558 and $591,894, respectively. Advertising costs incurred for
discontinued operations during the years ended June 30, 2003, 2002 and 2001 were
$7,015, $25,869 and $0.
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.
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.
2003 2002 2001
------------- ----------- -----------
Income (loss) continuing operations as reported $ 1,069,049 $(2,964,039) $(5,010,726)
Less: Compensation expense for options
Awards determined by the fair-value-based
Method (15,472) (868,002) (838,648)
------------- ----------- -----------
Proforma net income/(loss) from continuing
Operations $ 1,053,577 $(3,832,041) $(5,849,374)
============= =========== ===========
Basic:
As reported $0.12 $(0.39) $(0.57)
Pro forma $0.12 (0.48) (0.66)
Assuming Full dilution:
As reported $0.10 N/A N/A
Pro forma $0.10 N/A N/A
F-10
The weighted average grant date fair value of options granted in 2003, 2002 and
2001 and the significant assumptions used in determining the underlying fair
value of each option grant on the date of the grant utilizing the Black Scholes
option pricing model were as follows:
2003 2002 2001
Weighted average grant-date fair value of
options granted $0.14 $0.48 $0.54
Assumptions:
Risk free interest rate 3.14% 3.99 to 4.4 4.96%
Expected life 5 Years 5 Years 5 Years
Expected volatility 127% 96% 88%
Expected dividend yield 0.0% 0.0% 0.0%
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding and dilutive potential common shares which includes the dilutive
effect of stock options, warrants, convertible debentures and shares to be
issued in connection with the acquisition of Student Sports (see Note 3).
Dilutive potential common shares for all periods presented are computed
utilizing the treasury stock method. The dilutive effect of shares to be issued
in connection with the acquisition of Student Sports is computed using the
average market price for the quarter. The diluted share base for the years ended
June 30, 2002, and 2001, excludes shares of 1,737,910,and 261,092, respectively.
These shares are excluded due to their anti-dilutive effect as a result of the
Company's loss from continuing operations during 2002 and 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS 141, "Business Combinations," which requires
all business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. SFAS 141 also sets forth guidelines for applying the
purchase method of accounting in the determination of intangible assets,
including goodwill acquired in a business combination, and expands financial
disclosures concerning business combinations consummated after June 30, 2001.
The application of SFAS 141 did not affect any of the Company's previously
reported amounts included in goodwill or other intangible assets.
Effective July 1, 2001, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased effective July 1, 2001 (goodwill amortization for fiscal
2002 otherwise would have been $821,098) and recorded goodwill attributable to
Fantasy Sports, Inc. was tested for impairment. This impairment test is required
to be performed at adoption of SFAS 142 and at least annually thereafter. On an
ongoing basis (absent any impairment indicators), the Company expects to perform
this impairment test during the fourth quarter for Fantasy Sports. For the
acquisition of Student Sports, Inc. and any subsequent acquisitions that are
considered reporting units under SFAS 142, the impairment test will be performed
on the one year anniversary of the acquisition and in that period thereafter.
Based on the initial impairment test on July 1, 2001, it was determined that
none of the goodwill recorded was impaired. Impairment adjustments recognized
after adoption, if any, generally are required to be recognized as operating
expenses. The Company performed the impairment test on goodwill of Fantasy
Sports as of June 30, 2003 and 2002 and determined that goodwill was not
impaired.
F-11
In connection with adopting SFAS 142, the useful lives and the classification of
identifiable intangible assets was reassessed and it was determined that they
continue to be appropriate. For the components of amortized intangible assets
and pro forma results of operations for fiscal 2001 and 2000 giving effect to
the adoption of SFAS 142, see Note 9.
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 August 2001, the 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 will become effective in the first quarter of fiscal 2003.
The Company believes that adoption of this statement will 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 Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclose Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 is effective for interim or annual periods ending
after December 15, 2002. The adoption of FIN 45 had no material effect on the
financial statements.
F-12
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of SFAS 123. The
standard provides additional transition guidance for companies that elect to
voluntarily adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123
that permits entities to continue to apply the intrinsic value method of APB 25,
Accounting for Stock Issued to Employees. As Advanced Viral continues to follow
APB 25, its accounting for stock-based compensation will not change as a result
of SFAS 148. SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are effective
immediately and have been included in the Company's consolidated financial
statements. The new interim disclosure provisions will be effective in the first
quarter of fiscal 2004.
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 will 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 is not expected to have an impact on our operating results or financial
position.
NOTE 3. ACQUISITIONS
On September 24, 2001, 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. Under the terms of the agreement, the Company issued
900,000 Company common shares to the owners of Student Sports, and undertook to
provide a further payment, as defined, of between 500,000 and 1,500,000 shares
of Company common stock on March 31, 2004. On June 10, 2003 the Company sold
substantially all assets and liabilities of Student Sports, Inc. (See Note 13).
On November 17, 2000, the Company acquired all of the assets and certain
liabilities of Fantasy Sports ("Fantasy"). Fantasy 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. 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.
In connection with the acquisition of Fantasy, the Company recorded intangibles
consisting of goodwill and customer lists. The customer lists are being
amortized on a straight-line basis over their expected useful lives of three to
ten years.
The following unaudited pro forma summary presents consolidated financial
information as if the acquisition of Fantasy had occurred effective July 1,
2000. 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.
F-13
Year ended
June 30, 2001
-----------
Revenue $ 2,231,026
===========
Loss before extraordinary item $(8,472,074)
Extraordinary item - gain on extinguishment of debt 2,142,949
-----------
Net loss $(6,329,125)
===========
Loss per share - basic and diluted:
Loss before extraordinary item $(0.96)
Extraordinary item 0.24
-----------
Net loss $(0.72)
===========
In October 2001, the Company received $200,000 in cash and approximately
$305,000 reduction in accounts payable primarily related to the acquisition of
Fantasy Sports from the Seller. The cash amount, which had been held in escrow,
relates to settlement of a dispute related to the acquisition of Fantasy
regarding certain disclosures made by Action at the time of acquisition and has
been used to reduce goodwill. Of the $305,000, $130,000 was used to reduce
inventory to fair value and the remaining $175,000 relating to the purchase
price was recorded as a reduction to goodwill.
NOTE 4. ACCOUNTS RECEIVABLE
2003 2002
------- -----------
Accounts receivable $17,816 $ 25,594
Less allowance for doubtful accounts - -
------- -----------
$17,816 $ 25,594
======= ===========
NOTE 5. INVENTORIES
Inventories consist of finished goods of $168,113 and $121,630 at June 30, 2003
and 2002, respectively. During fiscal 2002, inventory values were reduced by
approximately $130,000 due to a settlement with the seller of Fantasy (see Note
3) and by a bulk sale of inventory of approximately $150,000.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
2003 2002
-------- --------
Leasehold improvements $ 24,736 $ 15,853
Plant and equipment 336,229 262,327
Motor vehicles 34,912 -
-------- --------
395,877 278,180
Less accumulated depreciation 255,576 165,118
-------- --------
$140,301 $113,062
======== ========
Depreciation expense was $94,680, $91,657, and $67,955, for the years ended June
30, 2003, 2002, and 2001, respectively. Of this depreciation expense,$26,252,
$15,525, and $0, respectively, was included in discontinued operations.
F-14
NOTE 7. INVESTMENTS IN NON-MARKETABLE SECURITIES
A summary of the investments in affiliates on the consolidated financial
statements is presented below:
Effective As of and for the Year
Percentage Ended
Ownership June 30, 2003 June 30, 2002
---------- ------------- -------------
Investments In and Receivables From
Unconsolidated Affiliates:
Magnolia Broadband 13 and 48 831,066 831,066
Other 12,500 12,500
-------- --------
$843,566 $843,566
======== ========
Share of losses of
unconsolidated affiliates:
Magnolia Broadband 13 and 48
-
-------- --------
$ - $ -
======== ========
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 was being amortized over a three-year period. Effective July 1, 2001,
the Company adopted SFAS 142 (see Note 2) at which time the unamortized balance
was $831,066. Such goodwill is no longer being amortized and at June 30, 2002,
such goodwill was not considered impaired.
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.
In October 2001, the Company loaned Magnolia $200,000, which was convertible
into newly reclassified Series A Preferred Stock. As part of the consideration
for the Notes, the Company will exchange its existing convertible notes for new
Series A Preferred shares. This note and the above note were converted into new
Series A Preferred Stock in March 2002 (see below).
On March 21, 2002, Magnolia entered into an agreement whereby it raised $6
million from three institutional investors. The agreement called for an
immediate infusion of $3 million, with an additional $3 million committed, but
contingent on Magnolia reaching defined technical milestones. As a result of
this agreement, the Company exchanged its existing shares in Magnolia for new
Series A Preferred shares and has converted the October 2001 loan into these new
Series A Preferred shares as well. The Company's ownership percentage was
reduced to approximately 13% and further reduced when the second tranche of
financing was realized. In July 2003, Magnolia closed on a $6 million Series C
financing round, half of which was funded on closing with the other half
dependant on the achievement of certain technical milestones. On a fully diluted
basis, the Company's percentage in Magnolia will be reduced to approximately 5%
should Magnolia receive full funding, as well as the exercise of outstanding
Magnolia employee stock options. Effective at the time that the Company's
ownership percentage was reduced below 20%, the Company was accounting for their
investment in Magnolia under the cost method. While Magnolia is confident that
it can meet the defined technical milestones to obtain the additional funding,
there is no assurance that this will occur. Furthermore, there is no assurance
that the
F-15
full amount will be sufficient for Magnolia to fund its future operations until
it achieves revenues and profitability.
NOTE 8. LONG-TERM NOTES RECEIVABLE
In connection with the sale of Lifestyle, which was completed in November 2000,
as well as the earlier sale of two other subsidiaries, 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 monthly payments
ranging from R50,000 to R189,000 through June 30, 2004. The third note was for
R52 million of which R20 million (plus accrued interest of $862,083) 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.
Management does not expect to begin receiving payments on these notes until the
third quarter of fiscal 2004. These notes bear interest at rates based on the
lower of the South African Bankers Acceptance rate or 12% (at June 30, 2003 the
rate was 12.0%). Notes receivable include accrued interest of approximately
$1,381,726.
June 30,
2003 2002
---------- ----------
Balance $6,461,891 $4,269,109
Less current portion 248,205 409,971
---------- ----------
Long-term portion $6,213,686 $3,859,138
========== ==========
NOTE 9. INTANGIBLE ASSETS
The components of amortized intangible assets as OF JUNE 30, 2003 AND 2002 is as
follows:
Gross Carrying Accumulated
Amount Amortization
Balance at June 30, 2003:
Customer lists $215,000 $184,250
======== ========
Balance at June 30, 2002
Customer lists $215,000 $117,250
======== ========
Amortization expense for intangible assets was $112,938 $106,375, and $0, for
the years ended June 30, 2003, 2002, and 2001, respectively. Of this
amortization expense, $45,938, $15,525, and $0, respectively, was included in
discontinued operations.
Estimated amortization expense for the five succeeding fiscal years is as
follows:
2004 $18,750
2005 2,000
2006 2,000
2007 2,000
2008 2,000
SFAS 142 was adopted July 1, 2001 for fiscal 2002. The following table shows the
Company's fiscal 2003, 2002 and 2001 results, adjusted to exclude amortization
related to goodwill and equity method goodwill:
F-16
Year Ended June 30,
2003 2002 2001
----------- -------------- -------------
Income (Loss) before extraordinary items-as Reported $ 69,348 $ (3,788,800) $ (7,400,109)
Add back: - -
Goodwill amortization - - 244,765
Equity method goodwill amortization - - 433,326
Goodwill amortization - discontinued operations - - 56,245
Deduct:
Increase in loss on disposition - - -
----------- -------------- -------------
Income (Loss) before extraordinary items - as adjusted $ 69,348 $ (3,788,800) $ 6,665,773
=========== ============== =============
Net income (loss) - as reported $ 69,348 $ (3,788,800) $ (5,257,160)
Add back:
Goodwill amortization - - 244,765
Equity method goodwill amortization - - 433,326
Goodwill amortization - discontinued operations - - 56,245
Deduct:
Increase in loss on disposition - - -
----------- -------------- -------------
Net loss - as adjusted $ 69,348 $ (3,788,800) $ (4,522,824)
=========== ============== =============
Income (Loss) per share - basic and diluted:
Inc.(Loss) before extraordinary items - as reported $ 0.01 $ (0.43) $ (0.84)
Add back:
Goodwill amortization - - 0.03
Equity method goodwill amortization - - 0.05
Goodwill amortiz