UNITED STATES
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________________
Commission file number 0-27494
SILVERSTAR HOLDINGS, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda 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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 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
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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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes No X
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates 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 the last
business day of the Registrant's most recently completed second fiscal quarter.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of September 13, 2004, was $6,106,357.
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 13, 2004, there were 7,812,347 shares of the Registrant's Common
Stock outstanding and 876,025 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, and fantasystockcar.com,
websites and specializes in subscription based NASCAR, college football and
basketball and other fantasy sports games. We are also a minority shareholder in
Magnolia Broadband Wireless, a startup company which is developing mobile
wireless broadband products.
History
We were founded in September 1995 as a Bermuda corporation 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. Currently, our strategy focuses
on:
o Acquiring controlling stakes in small, high quality game related 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, and
other motor sport fantasy games. All the company's games offer weekly and
seasonal cash and merchandise prizes.
Currently, the Company has over 25,000 paid game plays 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
and ancillary services account for over 90% 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
-2-
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.
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 Nextel 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 Nextel Cup
Series. Fantasy Sports has been operating their NASCAR challenges since 1993 and
is one of the leading companies in this market. 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 developed a retail business that specialized in the sale of NASCAR
related die-cast cars, apparel and other merchandise. This retail operation
commenced business in May 2001 and accounted for approximately 22% of our
overall revenues in fiscal 2003. Due to ongoing losses, this operation was
closed during the second quarter of fiscal 2004. It accounted for approximately
7% of our overall revenues during the fiscal year ended 2004.
We have substantially reduced our overhead in order to maximize profitability at
Fantasy Sports. This was primarily achieved by the reduction of marketing
expenses and general and administrative overhead through the outsourcing of our
hosting, programming and customer service functions to Stats, Inc.
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.
Due to the increased popularity of online Fantasy Sports, we have faced
increased competition over the past few years from both large media companies,
such as, ESPN.com, CBS Sportsline, FoxSports.com, and Nascar.com, as well as
from numerous small companies such as, Fanball.com, CDM Sports, All-Star Stats
and Sportsbuff. While we believe that we still are the largest subscription
based NASCAR fantasy business, there is no assurance that we will be able to
maintain this position against our competitors.
There has been increasing governmental scrutiny of online gambling operations,
however, to the best of our knowledge, the online fantasy sports business has
not been included in this category. Fantasy Sports games have traditionally been
differentiated from gambling due to the element of skill involved, as well as
the ability of participants to play through the US mail, without paying a fee.
Although we have received legal comfort in this regard, there can be no
guarantee that governmental regulations may not change or be applied to our
business, in the future.
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 in 2004, driven by an expected sales volume of over 1.2
billion handsets that year.
-3-
Magnolia is developing technology to become one of the first companies to
integrate smart antenna technologies into RF chip sets utilized in mobile
phones. Their aim is to create chip sets that increase the capacity and coverage
of existing networks at little additional cost.
Magnolia is a fabless semiconductor company building RF solutions by combining
innovative Signal Processing technologies and novel Integrated Circuit solutions
for the cellular industry. The combination of these innovations enables the
wireless network operators to push out the Diversity Antenna capabilities to the
edge of their networks, while enabling the handset manufacturers to offer these
benefits economically.
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. In April 2004, Magnolia raised a further $3 million in an
offering of convertible notes. We did not participate in any of these rounds.
Currently we own approximately 4% 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, 2004, which is now accounted for under the
lower of cost or market method, was $831,066.
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 two full time
salaried employees and one hourly employee.
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.
-4-
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 867 Clare Lane,
York, Pennsylvania, 17402. These offices are approximately 980 square feet. The
lease expires on December 31, 2004. It is renewably annually and costs us
approximately $8,580 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.
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 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
Common Stock Fiscal 2004
1st Quarter........................................ $1.51 $0.38
2nd Quarter........................................ $2.69 $1.00
3rd Quarter........................................ $2.41 $1.31
4th Quarter........................................ $1.63 $0.86
The closing price of our common stock on September 13, 2004 was $0.80.
As of September 13, 2004, there were approximately 2,400 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.
-5-
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 Years ended June 30,
2000 2001 2002 2003 2004
Revenues $ - $ 1,301,432 $ 3,107,324 $ 3,141,448 $ 2,367,463
Total operating expenses 2,491,128 4,362,413 5,295,375 4,456,082 3,239,802
Operating loss (2,491,128) (3,060,981) (2,188,051) (1,314,162) (872,339)
Interest (expense)/income (1,363,360) 976,107 615,294 638,011 603,352
Foreign Currency Gain (loss) (80,702) (1,042,474) (1,345,348) 1,763,115 1,287,291
Income (Loss) from continuing operations
before
income taxes (4,232,603) (5,010,726) (2,964,039) 1,069,049 1,030,105
Net Income (Loss) from continuing operations (4,233,222) (5,010,726) (2,964,039) 1,069,049 1,030,105
(Loss)/gain from discontinued operations (34,429,264) - (824,761) (736,947) -
Loss on disposition - (2,389,383) - (262,754) (27,582)
Extraordinary Item - gain on extinguishments
of debt - 2,142,949 - - -
Net (loss)/income (38,662,486) (5,257,160) (3,788,800) 69,348 1,002,523
Income (Loss) per share - from continuing
Operations $(0.54) $(0.57) $(0.34) $0.12 $0.12
Balance Sheet Data As of June 30,
2000 2001 2002 2003 2004
Total assets $ 94,266,439 $ 15,931,857 $ 11,722,781 $ 12,354,162 $ 13,265,458
Long term liabilities 15,473,769 - - 349,289 234,192
Net working capital (deficiency) (1) 31,414,757 4,253,001 2,345,828 192,081 (177,981)
Stockholders' equity 5,595,870 13,578,710 10,212,073 10,025,049 11,422,107
(1) Net working capital (deficiency) 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.
-6-
o We aim to add value to our investments by operating in partnership with
committed, entrepreneurial management who show the vision and ability to
grow their businesses into industry or niche leaders.
The Company sold its last remaining South African operations in November 2000.
The Company still has significant assets that are denominated in South African
Rand. The assets include cash and notes receivable. Should the Company hold the
notes until maturity the Company will continue to record income statement gains
or losses to the extent that the Rand's value fluctuates relative to the US
dollar. At the present time, management has no intention of disposing of the
notes receivable.
On November 17, 2000, the Company acquired all of the assets and certain
liabilities of Fantasy Sports (Fantasy) from GoRacing Interactive Services, Inc.
Founded in 1993, Fantasy Sports operates the fantasycup.com, fantasycup.org,
fantasycup.net, fantasystockcar.com and fantasynhra.com websites and specializes
in subscription based NASCAR, college football and other fantasy sports games as
well as the sale of die-cast racing cars.
On September 24, 2001, a newly created subsidiary of the Company, Student
Sports, Inc., acquired all the assets and business and assumed certain
liabilities of Student Sports, a media company, producing publications,
television programs and various marketing initiatives for the high school sports
market. On June 10, 2003, the Company disposed of substantially all the assets
and liabilities of Student Sports, which was the only operating subsidiary in
the marketing services segment of the Company.
In accordance with accounting principles generally accepted in the United States
of America the operating results and net assets related to Student Sports have
been included in discontinued operations in the company's consolidated
statements of operations 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 2004 compared to Fiscal 2003
Revenues
Revenues were $2.37 million in fiscal 2004 as compared to $3.14 million in the
prior year. The decrease was primarily the result of Fantasy Sports decision to
discontinue selling die-cast collectibles and apparel during the quarter ended
December 31, 2003. Sales of merchandise decreased from $0.81 million in fiscal
2003 to $0.17 million in fiscal 2004.
Cost of Sales
Cost of sales were $1.41 million in fiscal 2004 as compared to $2.01 million in
the prior year. The decrease is primarily a result of decreases in the cost of
prizes awarded, fulfillment expenses, direct labor costs and the cost of
merchandise and apparel sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2004 were $1.78 million,
a decrease of $0.54 million over the same period in the prior year. This
decrease was caused by the implementation of cost cutting measures primarily to
payroll and related costs at the corporate and operating levels.
-7-
Amortization and Depreciation
Amortization of intangible assets decreased to $0.02 million in fiscal 2004 from
$0.07 million in fiscal 2003 as a result of a customer list becoming fully
amortized at September 30, 2003. Depreciation expense was $0.04 million in
fiscal 2004 as compared to $0.07 million in fiscal 2003.
Foreign Currency Gains
Foreign currency gains or losses are related to the financial assets remaining
in the South African operations. The Foreign currency gains during fiscal 2004
were $1.29 million as compared to gains of $1.76 million in fiscal 2003. These
gains are the result of fluctuations of the South African Rand against the US
dollar. During the year ended June 30, 2004 the Rand appreciated approximately
17% against the U.S. dollar while it appreciated 26% in fiscal 2003.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.
Interest Income
Interest income of $0.63 million was recorded during fiscal 2004 as compared to
interest income of $0.65 million in fiscal 2003. Interest income is primarily
earned on Notes Receivable from the sale of the Lifestyle business and is
affected by the fluctuation of the South African Rand against the US dollar.
Interest Expense
Interest expense during fiscal 2004 was $0.025 million as compared to $0.012
million in the prior year. The increase in interest expense is attributable to
interest charges incurred on short-term credit lines held by Fantasy Sports,
Inc.
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
2003 and 2002 have been included under Discontinued Operations in our financial
statements. During fiscal 2004 the company recognized losses of $0.027 million
on assets formerly used by Student Sports that were retained by the parent
company when Student Sports was sold in 2003.
Net Income(Loss)
The Company has recognized income of $1.00 million during fiscal 2004 compared
to income of $0.07 million during the prior year. Operating losses for fiscal
2004 were $0.87 million as compared to $1.31 million in Fiscal 2003. The
improvement in income in fiscal 2004 was primarily the result of selling Student
Sports which generated significant losses in fiscal 2003, a reduction of cost of
sales at Fantasy Sports, and a reduction in general and administrative costs at
both the operational and corporate levels. The current year includes non-cash
foreign currency gains of approximately $1.29 million due to the appreciation of
the South African Rand against the US dollar of approximately 17 %. During
fiscal 2003 net income included non-cash foreign currency gains of $1.76 million
due to the appreciation of the South African Rand against the US dollar of
approximately 36%.
-8-
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.
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 million 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
2003 and 2002 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
-9-
$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.
Financial condition, liquidity and capital resources
Cash decreased by $0.38 million from $1.62 million at June 30, 2003 to $1.24
million at June 30, 2004. 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 $0.37 million from $0.19 million at June 30, 2003
to an ($0.18) million working capital deficiency at June 30, 2004. This decrease
is primarily caused by the reduction in cash balances used to fund operations.
Accrued interest earned during the year has been classified as part of the Long
- - Term Notes Receivable.
At June 30, 2004, the Company had borrowings of $0.34 million, which consisted
of $0.31 million advances against lines of credit, secured by the Company's cash
and $0.03 million of equipment loans.
In the future the Company expects to meet its short and long term obligations in
part through the collection of amounts due from outstanding notes receivable.
Those notes, which are denominated in South African Rand, are to be collected
once certain debt covenants have been satisfied in connection with senior debt
to which repayment has been subordinated. The Company monitors the financial
results of First Lifestyle Holdings on a quarterly and annual basis. It is the
Company's opinion, based on reviews of audited financial statements, reviews of
the debt covenant compliance calculations, reviews of budgets and inquiries of
management of First Lifestyle Holdings, that First Lifestyle Holdings is
generating sufficient cash flow from operations to meet its senior debt
obligations and be in compliance with the senior debt covenants. The management
of First Lifestyle Holdings estimates that repayments of the amounts due should
begin in Fiscal 2005.
Once the funds are collected in South African Rand, the Company expects to
repatriate those funds to the United States. The Company believes that
repatriation of the full amount is allowable under current South African foreign
currency regulations. Over the last six years the Company has, from time to
time, repatriated funds from South Africa without restriction. However, there
can be no guarantee that the South African foreign currency regulations will not
change in the future in a manner that might restrict the Company's ability to
repatriate the remaining assets.
In the future the Company intends to add additional operating subsidiaries which
will produce revenues and net profits. The Company may utilize a portion of the
working capital in connection with the acquisition or establishment of those
operations. The Company may also be required to secure additional debt or equity
funding in connection with the funding of those future acquisitions. There is no
assurance that the Company will be able to secure additional indebtedness or
raise additional equity to finance future acquisitions on terms acceptable to
management.
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The following table is a summary of contractual obligations recorded as of June
30, 2004.
Payments due by period
More than
Contractual Obligations Total Less than 1 Year 1-3 years 3-5 years 5 years
Long-Term Debt Obligations $ 35,516 $ 24,883 $ 10,633 - -
Operating Lease Obligations 130,861 62,574 55,180 13,107 -
Purchase Obligations 265,000 180,000 85,000 - -
Employment Contracts 236,250 236,250 - - -
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Total $667,627 $503,707 $150,813 $ 13,107 -
==========================================================================
Purchase Obligations
Purchase obligations include a contract between Fantasy Sports, Inc. and a media
and marketing consultant for services provided through November 30, 2006. At a
minimum the company is obligated to pay $60,000 per year which is reflected on
the table of contractual obligations. If certain incentive or additional
services are performed additional obligations accrue.
Purchase obligations also include a contract between Fantasy Sports, Inc. and
another corporation to provide web site hosting and customer service functions
through December 31, 2004. The company is obligated to pay $20,000 per month
through December 31, 2004 which is reflected on the table of contractual
obligations. Additional obligations could become payable under this contract if
Fantasy Sports, Inc. achieves specific net profit benchmarks which are
summarized below.
Potential Obligation
0% of net profits between $0 and $350,000
100% of net profits between $350,000 and $500,000
40% of net profits between $500,000 and $750,000
45% of net profits between $750,000 and $1,000,000
50% of net profits over $1,000,000
Employment Contracts
Pursuant to an employment agreement Mr. Clive Kabatznik will serve as Chief
Executive Officer, President and Chief Financial Officer of the Company through
March 31, 2005. Mr. Kabatznik is paid $315,000 on an annual basis.
-11-
Off-Balance Sheet Arrangements
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. In January 2004, an unrelated South
African third party, entered into an agreement to acquire the former subsidiary.
This agreement reduced the Company's guarantee to approximately $47,000,
reducing monthly through August 31, 2004. At June 30, 2004, this guarantee stood
at approximately $20,000 and was secured by like amounts of cash. As of August
31, 2004, this amount equaled $2,500 and will reduce to $0 by the end of
September 2004. The Company does not believe that it will be called upon to meet
any portion of this remaining guarantee.
In 2001, Fantasy Sports Inc. secured a revolving line of credit for up to $1
million from a bank. Fantasy has drawn and repaid on this line of credit from
time to time. Any borrowings under this facility are guaranteed by the Company's
cash on hand. As of June 30, 2004, Fantasy had an outstanding balance of
approximately $305,160 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, 2005, however there can be no assurance that these amount
will be repaid.
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. For the twelve months ended June 30, 2004, Fantasy earned
$52,785 with positive cash flow of $105,665.
Due to the accounting recognition of these losses, the carrying value of Fantasy
has diminished since acquisition. On June 30, 2004, 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, 2004.
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, 2004, Fantasy Sports Inc., the Company's remaining operating
subsidiary, generated a small profit after substantial operating losses in
previous years. The Company anticipates that this situation will be maintained
and improved through a combination of expense reductions and increased
-12-
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 increase the profitability of its operating subsidiary
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.
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.
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.
-13-
Any movements of interest rates as they relate to outstanding debt would be
immaterial to the financial results of the Company.
Interest rate risk
At June 30, 2004, the Company's cash resources earn interest at variable rates.
Accordingly, the Company's return on these funds is affected by fluctuations in
interest rates. Any decrease in interest rates will have a negative effect on
the Company's earnings. 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 $1,594 on every
R1,000,000 retained in South Africa. During fiscal 2004, the South African Rand
has appreciated against the US dollar by approximately 17% from the rate at June
30, 2003. At June 30, 2004, the Company had assets denominated in South African
Rand of 51.30 million.
The following is information concerning assets denominated in South African Rand
and the foreign currency gains and losses recognized during fiscal 2004:
Foreign Currency
Balance Gain/(Loss) for the Year
As of June 30, 2004 Ended June 30, 2004
In Rand In US Dollars
Cash 324,573 $ 8,771
Notes Receivable 50,929,489 1,376,343
Other 45,916 (19,928)
-14-
SILVERSTAR HOLDINGS LIMITED and Subsidiaries
TABLE OF CONTENTS
-----------------
PAGE
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years ended June 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and
2003, and the consolidated results of their operations and their cash flows for
each of the three years ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
August 18, 2004
F-1
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
ASSETS 2004 2003
------------ ------------
Current Assets:
Cash and cash
equivalents
(includes restricted cash of $321,096 and $835,951 in 2004 and 2003, respectively) $ 1,235,310 $ 1,617,629
Accounts receivable, net 1,068 17,816
Inventories 19,379 168,113
Current portion of long-term notes receivable 138,704 248,205
Prepaid expenses and other current assets 36,717 120,142
------------ ------------
Total Current Assets 1,431,178 2,171,905
------------ ------------
Property, Plant and Equipment, net 49,856 140,301
Investments in Non-Marketable Securities 843,566 843,566
Long-Term Notes Receivable 7,977,549 6,213,686
Goodwill, net 2,947,824 2,947,824
Intangible Assets, net 12,500 30,750
Deferred Charges and Other Assets 2,985 6,130
------------ ------------
Total Assets
$ 13,265,458 $ 12,354,162
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ - $ 567
Lines of credit 305,160 218,851
Current portion of long-term debt 24,883 26,237
Accounts payable 226,830 482,697
Accrued expenses 359,022 415,399
Deferred revenue 693,264 836,073
------------ ------------
Total Current Liabilities 1,609,159 1,979,824
------------ ------------
Long-Term Debt 10,633 33,884
Obligation to issue common stock 223,559 315,405
------------ ------------
Total Liabilities 1,843,351 2,329,113
------------ ------------
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; 7,798,924 and
7,503,924 shares issued and outstanding, respectively 77,989 75,039
Common stock, Class B, $0.01 par value; 2,000,000 shares authorized; 896,589 and
946,589 shares issued and outstanding, respectively 8,966 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 63,904,557 63,512,472
Accumulated deficit (52,570,005) (53,572,528)
------------ ------------
Total Stockholders' Equity 11,422,107 10,025,049
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,265,458 $ 12,354,162
============ ============
See notes to consolidated financial statements
F-2
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Revenues $ 2,367,463 $ 3,141,448 $ 3,107,324
----------- ----------- -----------
Operating Expenses:
Cost of sales 1,405,728 2,005,598 1,879,967
Selling, general and administrative 1,776,619 2,315,056 3,272,286
Amortization of intangibles 18,250 67,000 67,000
Depreciation 39,205 68,428 76,122
----------- ----------- -----------
3,239,802 4,456,082 5,295,375
----------- ----------- -----------
Operating Loss (872,339) (1,314,634) (2,188,051)
Other (Expense) Income 11,801 (17,443) (45,934)
Foreign Currency Gain ( Loss) 1,287,291 1,763,115 (1,345,348)
Interest Income 628,737 650,329 627,019
Interest Expense (25,385) (12,318) (11,725)
----------- ----------- -----------
Income (Loss) from Continuing Operations Before Income Taxes 1,030,105 1,069,049 (2,964,039)
Provision for Income Taxes - - -
----------- ----------- -----------
Income(Loss) From Continuing Operations 1,030,105 1,069,049 (2,964,039)
Discontinued Operations:
Loss from operations, net of income taxes of
$0 and $0, respectively - (736,947) (824,761)
Loss on disposition, net of income taxes of $0 and $0,
respectively (27,582) (262,754) -
----------- ----------- -----------
Net Income (Loss) $ 1,002,523 $ 69,348 $(3,788,800)
=========== =========== ===========
Income (Loss) Per Share - Basic and Diluted:
Continuing Operations $ 0.12 $ 0.12 $ (0.34)
Discontinued Operations (0.00) (0.11) (0.09)
----------- ----------- -----------
Net Income (Loss) $ 0.12 $ 0.01 $ (0.43)
=========== =========== ===========
Weighted Average Common Stock Outstanding:
Basic and diluted 8,575,579 8,704,620 8,750,937
=========== =========== ===========
See notes to consolidated financial statements.
F-3
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
YEARS ENDED JUNE 30, 2004 2003 AND 2002
Silverstar Silverstar
Holdings Ltd. Holdings Ltd.
Class A Class B
Common Stock Common Stock
Shares Amount Shares Amount
--------- ------------ ------- ------------
Year Ended June 30, 2002:
Balance, June 30, 2001 7,178,310 $ 71,783 946,589 $ 9,466
========= ============ ======= ============
Stock issued for acquisition 900,000 9,000 - -
Purchase and retirement of
treasury stock (77,000) (770) - -
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
========= ============ ======= ============
Year Ended June 30, 2004:
Stock issued 245,000 2,450 - -
Conversion of shares 50,000 500 (50,000) (500)
Net Income - - - -
Balance, June 30, 2004 7,798,924 $ 77,989 896,589 $ 8,966
========= ============ ======= ============
First SA Holdings
Class B Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ------------ ------------ ------------ ------------
Year Ended June 30, 2002:
Balance, June 30, 2001 2,671,087 $ 600 $ 63,349,937 $(49,853,076) $ 13,578,710
========= ============ ============ ============ ============
Stock issued for acquisition - - 475,200 - 484,200
Purchase and retirement of
treasury stock - - (61,267) - (62,037)
Net Loss - - - (3,788,800) (3,788,800)
--------- ------------ ------------ ------------ ------------
Balance, June 30, 2002 2,671,087 $ 600 $ 63,763,870 $(53,641,876) $ 10,212,073
========= ============ ============ ============ ============
Year Ended June 30, 2003:
Purchase and retirement of
Treasury stock - - (23,418) - (25,135)
Stock redemtpion -(sale of
subsidiary) (227,980) - (231,237)
Net Income - - - 69,348 69,348
Balance, June 30, 2003 2,671,087 $ 600 $ 63,512,472 $(53,572,528) $ 10,025,049
========= ============ ============ ============ ============
Year Ended June 30, 2004:
Stock issued - - 392,085 - 394,535
Conversion of shares - - - - -
Net Income - - - 1,002,523 1,002,523
Balance, June 30, 2004 2,671,087 $ 600 $ 63,904,557 $(52,570,005) $ 11,422,107
========= ============ ============ ============ ============
F-4
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income( loss) from continuing operations $ 1,002,523 $ 1,069,049 $(2,964,039)
Provision for doubtful accounts - 3,365 -
Depreciation and amortization 57,455 135,428 143,132
Foreign currency (gains) losses (1,261,824) (1,704,106) 1,212,220
Non-cash interest income on notes receivable (611,720) (603,984) (465,590)
Changes in operating assets and liabilities, net (206,713) 193,261 (9,010)
(Increase) Decrease in other assets 3,145 (2,274) 171,583
Creation of debenture redemption reserve fund - - 4,248
Loss on disposal of fixed assets 51,065 182 -
Net Cash Used in Continuing Operations (966,069) (909,079) (1,907,456)
Net Cash Used in Discontinued Operations - (247,000) (1,003,650)
----------- ----------- -----------
Net Cash Used in Operating Activities (966,069) (1,156,079) (2,911,106)
----------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (542) (24,701) (36,628)
Proceeds on disposal of property, plant and equipment 1,220 - -
Purchase price adjustments - - 200,000
Investment in affiliates - - (212,500)
Decrease in long-term note receivable 218,679 115,308 428,607
Acquisition of subsidiaries (net of cash of $0,
$0 , $0 and 863,337) - - (120,711)
----------- ----------- -----------
Net Cash Provided by Investing Activities 219,357 90,607 258,768
----------- ----------- -----------
F-5
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
Cash Flows from Financing Activities:
Short term borrowings, net $ 86,309 $ 168,851 $ (42,887)
Repayment of long-term debt (24,605) (1,282) (366,084)
Issuance of stock 302,689 - -
Treasury stock transactions - (25,135) (62,037)
----------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities 364,393 142,434 (471,008)
----------- ----------- -----------
Net Decrease in Cash and Cash Equivalents (382,319) (923,038) (3,123,346)
Cash and Cash Equivalents, Beginning 1,617,629 2,540,667 5,664,013
----------- ----------- -----------
Cash and Cash Equivalents, Ending $ 1,235,310 $ 1,617,629 $ 2,540,667
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 25,385 $ 12,318 $ 6,001
=========== =========== ===========
Cash Paid during the year for income taxes $ - $ - $ -
=========== =========== ===========
See notes to consolidated financial statements.
F-6
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
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. 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)
Investments have been made in other companies, which are in line with the
Company's new focus (see Note 7).
The Company currently has both Class A and Class B common shares. Holders of
Class A Common Stock have one vote per share on each matter submitted to a vote
of the shareholders and a ratable right to the net assets of the Company upon
liquidation. Holders of the Common Stock do not have preemptive rights to
purchase additional shares of Common Stock or other subscription rights. The
Common Stock carries no conversion rights and is not subject to redemption or to
any sinking fund provisions. All shares of Common Stock are entitled to share
equally in dividends from legally available resources as determined by the board
of directors. Upon dissolution or liquidation of the Company, whether voluntary
or involuntary, holders of the Common Stock, are entitled to receive assets of
the Company available for distribution to the shareholders. As of September 13,
2004, the Company currently has 7,812,347 outstanding shares of Class A Common
Stock, that are validly authorized and issued, fully paid and non-assessable.
Class B and Class A Common Stock are substantially identical except that the
holders of Class B Common Stock have 5 votes per share on each matter considered
by shareholders. Each share of Class B Common Stock is automatically converted
into one share of Class A Common Stock upon sale or death of the shareholder. As
of September 13, 2004, the Company currently has 876,025 outstanding shares of
Class B Common Stock, that are validly authorized and issued, fully paid and
non-assessable.
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)
F-7
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:
Silverstar Holdings, Ltd. (Parent Company)
Silverstar Holdings, Inc.
First South African Management Corp.
First South African Holdings, Ltd. (FSAH)
Fantasy Sports, Inc.
Student 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, 2004, there were 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
F-8
to collect on these notes may be affected by the financial
condition of the debtor's 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.
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 2004, 2003 or 2002.
Goodwill
The Company tests goodwill for impairment in the fourth quarter for Fantasy
Sports, Inc. The goodwill impairment test for subsequent acquisitions, if any,
will be performed on the one year anniversary of the acquisition and in that
period thereafter. The Company performs the impairment test in accordance with
SFAS 142 "Goodwill and Other Intangible Assets." SFAS 142 requires that the fair
value of the reporting unit be compared to the carrying value, including
goodwill, as the first step in the impairment test. The Company 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
F-9
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.
Revenue Recognition
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. 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, 2004, 2003 and 2002 were
$291,200, $267,857 and $426,558, respectively. Advertising costs incurred for
discontinued operations during the years ended June 30, 2003 and 2002 were
$7,015 and $25,869.
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.
F-10
2004 2003 2002
------------- ------------- -----------
Income (loss) continuing operations as reported $ 1,030,105 $ 1,069,049 $(2,964,039)
Less: Compensation expense for options
Awards determined by the fair-value -based
Method (88,888) (15,472) (868,002)
------------- ------------- -----------
Proforma net income/(loss) from continuing
Operations $ 941,127 $ 1,053,577 $(3,832,041)
============= ============= ===========
Basic:
As reported $ 0.12 $ 0.12 $ (0.39)
Pro forma $ 0.11 $ 0.12 (0.48)
Assuming Full dilution :
As reported $ 0.11 $ 0.10 N/A
Pro forma $ 0.10 $ 0.10 N/A
The weighted average grant date fair value of options granted in 2004, 2003 and
2002 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:
2004 2003 2002
---- ---- ----
Weighted average grant-date fair value of
options granted $1.44 $0.14 $0.48
Assumptions:
Risk free interest rate 3.17% 3.14% 3.99 to 4.48%
Expected life 5 Years 5 Years 5 Years
Expected volatility 142% 127% 96%
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 year ended
June 30, 2002 excludes shares of 1,737,910. These shares are excluded due to
their anti-dilutive effect as a result of the Company's loss from continuing
operations during 2002 .
F-11
Recently Issued Accounting Standards
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its
Exposure Draft, "Share-Based Payment," which is a proposed amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." The Exposure Draft
would require all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. FASB expects that a final standard would be effective for public
companies for fiscal years beginning after December 15, 2004. The Company does
not intend to adopt a fair-value based method of accounting for stock-based
employee compensation until a final standard is issued by the FASB that requires
this accounting.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46")
which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements." FIN 46 requires a variable interest entity (VIE) to be
consolidated by a company that is considered to be the primary beneficiary of
that VIE. In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities," ("FIN 46-R) to address certain
FIN 46 implementation issues. FIN 46 and FIN 46-R apply immediately to variable
interest entities created after January 31, 2003. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a VIE that is acquired before February 1,
2003. The adoption of FIN 46 and FIN 46-R does not have a material impact on our
financial statements.
During May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 ("SFAS 150"), "Accounting for Certain Instruments with Characteristics of
both Liabilities and Equity". SFAS 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not to have a material impact on our operating results or financial
position.
During April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. SFAS 149 is effective
for contracts entering into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The adoption of SFAS 149 did not have any impact on our operating
results or financial position as we do not have any derivative instruments that
are affected by SFAS 149 at this time.
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 Silverstar Holdings continues to
follow APB 25, its accounting for stock-based compensation did 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.
F-12
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 was effective for interim or annual periods ending
after December 15, 2002. The adoption of FIN 45 had no material effect on the
financial statements.
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 adoption of this
statement did not have a significant impact on the results of operations or
financial position of the Company.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." Adoption of the standard is generally required in the fiscal
year beginning after May 15, 2002, with certain provisions becoming effective
for financial statements issued on or after May 15, 2002. Under the standard,
transactions currently classified by the Company as extraordinary items will no
longer be treated as such but instead will be reported as other non-operating
income or expenses. The Company adopted SFAS 145 on July 1, 2002 and the
adoption of SFAS 145 did not have a material impact on the Company's financial
position or results of operations.
In 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 adoption of this statement did not have a significant impact on the results
of operations or financial position of the Company.
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 was effective for the Company's financial statements
beginning July 1, 2002. The adoption of this statement did not have a
significant impact on the results of operations or financial position of the
Company.
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. 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.
F-13
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, 2004, 2003 and 2002 and determined that goodwill was not
impaired.
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,
see Note 9.
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.
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).
The costs of the acquisition were allocated on the basis of the estimated fair
values of the assets acquired and liabilities assumed. The acquisition was
accounted for as a purchase. The intangible assets identified in connection with
the acquisition were recorded (and amortized where applicable) in accordance
with the provisions of SFAS No. 142.
Acquisition cost $1,414,858
==========
Net assets acquired:
Current assets, primarily accounts receivable $ 255,426
Fixed assets 41,410
Intangible assets 1,341,038
----------
Total assets 1,637,874
----------
Current liabilities 208,720
Long-term debt 14,296
----------
Total liabilities 223,016
----------
$1,414,858
==========
F-14
The following unaudited pro forma summary presents consolidated financial
information as if the acquisition of Student Sports had occurred effective July
1, 2001. The pro forma amounts, which include the results of operations of
Student Sports, were compiled using the cash basis of accounting. The Company
believes that these results do not differ materially from generally accepted
accounting principles. 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, 2002
-----------
Revenue $ 4,597,144
===========
Loss before discontinued operations and extraordinary item (4,073,069)
Discontinued operations -
Extraordinary item -
-----------
Net loss $(4,073,069)
===========
Loss per share - basic and diluted:
Loss before discontinued operations and extraordinary item $ (0.37)
Discontinued operations -
Extraordinary item -
-----------
Net loss $ (0.37)
===========
NOTE 4. ACCOUNTS RECEIVABLE
2004 2003
------- -------
Accounts receivable $1,068 $17,816
Less allowance for doubtful accounts - -
------- -------
$1,068 $17,816
======= ========
NOTE 5. INVENTORIES
Inventories consist of finished goods of $19,379 and $168,113 at June 30, 2004
and 2003, respectively.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
2004 2003
-------- --------
Leasehold improvements $ - $ 24,736
Plant and equipment 204,447 336,229
Motor vehicles 34,912 34,912
-------- --------
239,359 395,877
Less accumulated depreciation 189,503 255,576
-------- --------
$ 49,856 $140,301
======== ========
Depreciation expense was $39,205 and $94,680 and $91,657 for the years ended
June 30, 2004, 2003, and 2002, respectively. Of this depreciation expense, $0,
$26,252 and $15,525, respectively, was included in discontinued operations.
F-15
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 Ended
Percentage ---------------------------
Ownership June 30, 2004 June 30, 2003
--------- ------------- -------------
Investments In and Receivables From
Unconsolidated Affiliates:
Magnolia Broadband 5 and 13 831,066 831,066
Other 12,500 12,500
-------------- ----------
$843,566 $843,566
============== ============
Share of losses of unconsolidated
affiliates:
Magnolia Broadband 5 and 13 - -
-------------- -------------
$ - $ -
============== ============
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. In December 2003,
Magnolia received the second half of this financing round. On a fully diluted
basis, the Company's percentage in Magnolia was reduced to approximately
F-16
5%. In April, 2004, Magnolia received a further $3 million from its existing
venture capital investors in the form of a convertible note, convertible into
Series C Preferred Shares. Magnolia will need to obtain additional funding to
fund its future operations until it achieves revenues and profitability. While
Magnolia has successfully raised capital in the past, there is no assurance that
it will be able to do so in the future.
Magnolia Broadband is a development stage company established to develop and
market wireless based chips primarily for the mobile handset market.
The Company initially invested in Magnolia based on the track record of
Magnolia's founder, positive industry feedback together with the results of an
independent study commissioned by the Company to evaluate Magnolia's basic
technological premise and its market applications.
In assessing the fair value of our investment in Magnolia, we monitor their
progress through monthly board meetings and additional formal and informal
communications. Magnolia, since inception, has set technical goals and
timelines, which were invariably met or surpassed. Furthermore, the company
excelled in hiring high level technical staff with advanced degrees and
experience in management of corporations such as Bell Labs, Motorola, and
Anadigics. The willingness of highly qualified individuals to leave established
corporations for a start-up opportunity provided validation for our belief in
Magnolia's potential. This promise was further validated by the significant
investments made by leading venture capital funds in April 2002 and July 2003,
and by positive responses from potential customers, most notably SK Telecom and
Sprint PCS.
Based on Magnolia's achievements, some of which are summarized above, the
Company concluded that these positive accomplishments support the variables
considered in developing the valuations for the private placement transactions
which the Company used as a basis for concluding that its investment in Magnolia
was not reflected at a value in excess of fair value on its financial
statements.
The Company's ongoing monitoring and evaluation described above continues. Over
the next twelve months, among other goals, Magnolia anticipates commercial
production of its first Chipset product, as well as engineered samples of a
second commercial Chipset product. Furthermore, it plans to have successfully
completed pre-production of a first commercial design handset with a handset
manufacturer. Additionally, a further engineering prototype handset is to be
developed with a second handset manufacturer, as well as a commercial
relationship with a handset manufacturer are anticipated over the next twelve
months. The Company will continue to monitor Magnolias' progress and will
evaluate the carrying value of its investment based upon these milestones being
met.
In performing our analysis of the possible impairment of our investment in
Magnolia as of June 30, 2002, 2003 and 2004, we considered our investment in
Magnolia in total in accordance with paragraph 19(h) of APB No. 18. In
performing our analysis for 2002, we obtained the financial statements of
Magnolia to determine their historical cash flow requirements to assist us in
evaluating future cash flow needs. We noted that Magnolia had received
$3,000,000 in funding in March 2002. Given the available cash at June 30, 2002,
we determined that Magnolia would be able to operate through January or February
of 2003 without additional funding. However, per Magnolia's agreement with the
investor, the investor was required to fund Magnolia with another $3,000,000 if
certain defined technical milestones were reached in December 2002. Based on
information provided by Magnolia, we felt comfortable that the milestone in
December 2002 would be reached. As a result, we concluded that our investment in
Magnolia at June 30, 2002 was not impaired pursuant to the criteria in APB 18
paragraph 19(h). Subsequently, Magnolia did meet the milestone and the
$3,000,000 in additional funding was received.
Furthermore, to determine that our investment in Magnolia was carried at the
lower of cost or market on June 30, 2002, the Company computed the value of its
holdings in Magnolia Broadband by multiplying
F-17
the number of shares it owned by the March 21, 2002 private placement price.
This resulted in a fair value that was greater than the carrying value of our
investment.
In performing our analysis for 2003, we looked to the $6 million in financing
Magnolia received in July 2003 from a Series C Preferred Stock Purchase
Agreement with existing investors. Under this agreement, Magnolia will receive
additional funds from further sales of Series C Preferred Stock to these
investors if certain operational milestones are met. The Company determined that
based on the $6 million funding received from Magnolia in July 2003 and the
progress Magnolia had made in developing its technology and meeting milestones,
the Company's investment in Magnolia is not considered impaired at June 30,
2003. We again computed the fair value of our holdings in Magnolia Broadband by
multiplying the number of shares we owned by the July 2003 private placement
price, which resulted in a fair value that was greater than the carrying value
of our investment.
Furthermore, in performing our analysis for 2004, we looked to the $6 million in
financing Magnolia received in July 2003 from a Series C Preferred Stock
Purchase Agreement with existing investors, as well as the convertible notes
received by Magnolia in April 2004. The Company determined that based on the $6
million funding received from Magnolia in July 2003 and the terms of the notes,
as well as the progress Magnolia had made in developing its technology and
meeting milestones, as described above, the Company's investment in Magnolia is
not considered impaired at June 30, 2004. We again computed the fair value of
our holdings in Magnolia Broadband by multiplying the number of shares we owned
by the July 2003 private placement price, as well as the conversion price of the
April 2004 Convertible Note, which resulted in a fair value that was greater
than the carrying value of our investment.
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 receivable 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 debtor. Two of the notes require
monthly payments ranging from R50,000 ($7,000) to R189,000 ($25,000). The
Company has received all scheduled payments with respect to the first of these
notes, including interest in a timely fashion. The second note has a balance of
approximately $60,000 outstanding. This note had been repaid, on a monthly
basis, and in a timely fashion for over three years. During the last six months
some payments have been deferred, however, we continue to accrue interest and
anticipate that the note, plus all interest, will be reapid in full, during
fiscal 2005. The third note was for R52 million ($8 million) of which R20
million ($3.1 million) (plus accrued interest) has been treated as contingent
consideration to be recorded when collected as it is secured only by the
debtor's stock in Lifestyle and therefore collection is not assured. R31.4
million ($4.8 million) of the third note, is payable as the borrower collects on
junior debt. Collections of junior debt will be first charged against accrued
interest with 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 2005. These notes bear interest at
rates as defined (at June 30, 2004 the rate was 8.0%).
With respect to the Lifestyle note, the Company's South African subsidiary,
First South African Holdings (Pty) Ltd (FSAH) received a note receivable, in the
face amount of $8,000,000 from Salwin Investments (Pty) Ltd, a special purpose
company, owned by First Lifestyle Holdings management. The purpose of the
transaction was to enable the management of First Lifestyle Holdings (five
executive directors) to acquire shares in First Lifestyle Holdings Limited. This
note is payable on the following basis: