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:
F-18
(a) If Salwin receives any payment from First Lifestyle for junior
debt, such amounts will be used to pay accrued interest on the
Note, and any balance will be applied to reduce capital in
tranches of R500,000.
(b) The shareholders of Salwin can inject funds into the company
in order to reduce the debt, without penalty.
(c) Should Salwin dispose of its shares in and claims against
First Lifestyle, the proceeds will be used to settle the Note.
If there is any shortfall in the proceeds, such amount will be
written off.
(d) Any outstanding liability will irrevocably terminate on the
20th anniversary of the Note.
The repayment by First Lifestyle of the junior debt owed to Salwin will at all
times be subject to the senior debt covenants that govern the relationship
between First Lifestyle and its bankers. As of June 30, 2004, the Company had
not received any payment from Salwin for either principal or interest. However,
the Company has continued to accrue interest on the original R31.4 million ($4.8
million) portion of the Note that it recorded upon the sale of First Lifestyle
Holdings.
The Company monitors the financial results of First Lifestyle Holdings on a
quarterly and annual basis. It is the Company's opinion that First Lifestyle is
generating sufficient cash flow to meet its senior debt obligations and senior
bank covenants. As First Lifestyle meets its bank covenants, the Company
anticipates receiving repayment of interest and principal on its notes.
Management of First Lifestyle has estimated that repayments should begin in
Fiscal 2005.
Having acquired, owned and operated the South African businesses, the Company is
well acquainted with the First Lifestyle Group, its management and its assets.
The cash flow generated by First Lifestyle has enabled it to pay down over half
its senior debt. It has met two of the three senior bank covenants governing the
repayment of its junior debt. It is the Company's belief that such repayments of
junior debt will commence in fiscal 2005. Additionally, the management of
Lifestyle cannot realize value for their shares in Lifestyle prior to the full
payment of the Salwin note. Based on these factors, the Company, has therefore
concluded that its note receivable from Salwin will be collected first via the
payment of Lifestyle junior debt and thereafter by Lifestyle's management in
order to secure free access to their shares in Lifestyle currently encumbered by
the Salwin note agreement. The timing of full payment on the loan is
undetermined.
The Company has continued to accrue interest on the Salwin Note based on its
calculation as to the realizable value of the underlying collateral for the
Note. This analysis includes both objective valuation calculations, as well as
more subjective criteria as to the likelihood of Salwin shareholders accessing
liquidity for their Lifestyle shares in the medium term. There can be no
guarantee that our analysis is correct or that the realizable value will remain
sufficient to cover the full amount of the Note. Should future circumstances
dictate a reevaluation of our assumptions, we may cease accruing interest on the
Note or may impair its carrying value.
The Company is currently in negotiations with the Salwin shareholders for early
redemption of a portion of the Note. There is no guarantee that these
discussions will result in any accelerated payments.
F-19
These notes bear interest at rates based on lower of the South African Bankers
Acceptance rate or 12% (at June 30, 2004 the rate was 8%). Notes receivable
include accrued interest of approximately $3,706,466.
June 30,
2004 2003
---------- ----------
Balance $8,116,253 $6,461,891
Less current portion 138,704 248,205
---------- ----------
Long-term portion $7,977,549 $6,213,686
========== ==========
NOTE 9. INTANGIBLE ASSETS
The components of amortized intangible assets as of June 30, 2004 and 2003 is as
follows:
Gross Carrying Accumulated
Amount Amortization
Balance at June 30, 2004:
Customer lists $215,000 $202,500
======== ========
Balance at June 30, 2003
Customer lists $215,000 $184,250
======== ========
Amortization expense for intangible assets was $18,250, $112,938 and $106,375,
for the years ended June 30, 2004, 2003, and 2002, respectively. Of this
amortization expense, $0, $45,938 and $15,525, respectively, was included in
discontinued operations.
Estimated amortization expense for the five succeeding fiscal years is as
follows:
2005 $2,000
2006 $2,000
2007 $2,000
2008 $2,000
2009 $2,000
NOTE 10. ACCRUED LIABILITIES
June 30,
2004 2003
-------- --------
Accrued prize winner cash and merchandise awards $170,222 $195,498
Payroll and related payroll expenses 14,698 52,220
Other 174,102 167,681
-------- --------
$359,022 $415,399
======== ========
F-20
NOTE 11. DEBT
Lines of Credit
In June 2002, Fantasy Sports obtained a secured line of credit facility for
borrowings up to $1.0 million, which is fully secured against cash balances held
in the Company's account. This facility is due on demand and has an interest
rate of 3.0% . The balance outstanding under this line of credit at June 30,
2004 was $305,160.
Long term debt
2004 2003
------- -------
Vehicle loans $16,276 $21,598
Capital lease obligations 19,240 38,523
------- -------
35,516 60,121
Less current portion 24,883 26,237
------- -------
Long-term debt, net $10,633 $33,884
======= =======
Scheduled debt maturities for the next five fiscal years are $24,883 in fiscal
2005, $5,983 in fiscal 2006 and $4,650 in fiscal 2007 .
NOTE 12. INCOME TAXES
The components of the Company's provision for income taxes were as follows:
2004 2003 2002
-------- ----- -----
Current:
Federal $ - $ - $ -
State - - -
-------- ----- -----
- - -
-------- ----- -----
Deferred:
Federal - - -
State - - -
-------- ----- -----
- - -
-------- ----- -----
$ - $ - $ -
======== ===== =====
A reconciliation of income tax computed at the statutory federal rate to income
tax expense (benefit) is as follows:
2004 2003 2002
------------- ------------- -------------
Tax benefit at the statutory rate of 34% $340,858 $23,578 $(1,288,192)
Tax effect on Income (loss) of non-US
Operations (324,908) (120,201) 612,297
State income taxes, net of federal income tax 1,446 (8,526) (59,638)
Travel and entertainment 447 7,407 4,376
Valuation allowance (17,843) 97,742 731,157
------------- ------------- -------------
$ - $ - $ -
============= ============= =============
F-21
At June 30, 2004, the Company has available a U.S. net operating loss
carryforward of approximately $4,643,076 which expires through 2023.
In addition to the net operating loss carryforward, the Company had deferred tax
assets which relate primarily to amortization of goodwill recorded at different
rates for tax and book purposes, deferred revenue that is deferred for book
purposes but is recognized when received for tax purposes, and accrued prize
winnings which is accrued for book purposes but deductible when paid for tax
purposes. As of June 30, 2004 and 2003, a valuation allowance has been
established against the deferred tax asset since the Company believes it is more
likely than not that that the amounts will not be realized.
The components of the deferred tax assets (liabilities) were as follows at June
30, 2004 and 2003:
Current: 2004 2003
-------------- --------------
Net operating loss $1,717,938 $1,265,986
Accrued prize winnings 57,062 66,377
Accrued pit points 5,920 5,920
Deferred revenue 256,508 309,360
-------------- --------------
2,037,428 1,647,643
Long-term:
Amortization of goodwill (161,007) (111,032)
Depreciation 8,261 21,368
-------------- --------------
(152,746) (89,664)
1,884,682 1,557,979
Total valuation allowance (1,884,682) (1,557,979)
-------------- --------------
Deferred tax asset $ - $ -
============== ==============
The Silverstar Holdings Limited is a Bermuda registered corporation where there
are no income tax laws applicable.
FSAH, a South African registered corporation, incurred no income tax charges in
fiscal year 2004 and 2003.
First South Africa Management Corp. Fantasy Sports, Inc. and Student Sports,
Inc., are U.S. registered corporations and did not incur any income tax
provision for 2004, 2003 and 2002.
F-22
NOTE 13. DISCONTINUED OPERATIONS
Student Sports, Inc.
On June 10, 2003, the Company sold substantially all the assets and liabilities
as of May 15, 2003 of Student Sports, a media company producing publications,
television programs and various marketing initiatives for the high school sports
market. The purchaser is an entity controlled by some, but not all of the
stockholders from which the Company originally acquired Student Sports in
September 2001. Those stockholders who participated in the repurchase agreed to
surrender the right to receive shares of Company common stock which they
received as contingent consideration in the Company's acquisition of Student
Sports. As a result, an obligation to issue approximately 914,000 common shares,
valued at approximately $492,000 has been included as a liability relieved in
connection with the sale in the calculation of the loss associated with the
disposition. The calculation of loss from disposition also includes the value of
the Company common stock returned, as well as the cash paid. A summary of the
calculation of the loss on disposition is approximately as follows:
Cash received $ 1,000
Common stock returned 231,000
Liability to issue common stock relieved 492,000
---------
Total consideration 724,000
Net book value transferred (987,000)
---------
Loss on disposition $(263,000)
=========
In September 2001 when Student Sports was acquired, a commitment to issue up to
1,500,000 shares of Company common stock, at the lower of $3.00 per share or the
market price of the stock, not to exceed $1,500,000 was entered into. The only
contingency for the issuance of the shares was time. The shares were to be
issued on March 31, 2004. Pursuant to EITF 97-15, the contingent consideration
was recorded at the date of acquisition as a liability of $807,000, the
1,500,000 shares at 80% ($0.538 per share) of the average market value for the
20 trading days prior to closing. The remaining liability to issue shares,
included as a liability in the accompanying consolidated balance sheet
($223,559) represents the obligation to issue common shares to those rights
holders who did not surrender their rights.
Those rights that were not surrendered entitle the holders to receive Company
common stock on March 31, 2004. The Company is currently negotiating with the
remaining rights holders in an effort to reduce or eliminate the number of
common shares that the Company must issue in connection with the contingent
consideration in light of the poor performance of Student Sports.
In accordance with accounting principles generally accepted in the United States
of America, the operating results and net assets related to Student Sports, Inc.
have been included in discontinued operations in the company's consolidated
statements of operations and consolidated balance sheets.
F-23
The following summarizes the operating results of Student Sports, discontinued
operations:
Eleven Months Nine Months
Ended Ended
May 15, June 30,
2003 2002
------------ -----------
Revenue $ 1,285,065 $ 1,121,101
============ ===========
Operating loss $ (736,947) $ (824,761)
============ ===========
Loss on disposal $ (262,754) $ -
============ ===========
Calculation of Loss on Sale of Student Sports
Book value of assets transferred $ 1,487,245
Cost of shares issued at acquisition 175,220
Liabilities transferred (501,660)
Liability to issue shares relieved, at cost (666,814)
Common shares returned at fair value on date of sale (231,237)
-----------
Loss on disposition $ 262,754
===========
F-24
NOTE 14: CASH FLOWS
Changes in operating assets and liabilities consist of the following:
2004 2003 2002
----------- ----------- -----------
Decrease (Increase) in accounts receivable $ 16,748 $ 5,413 $ (25,594)
Decrease (Increase) in inventories 148,734 (46,483) 256,091
Decrease (Increase) in prepaid expenses and current 83,425 (20,010) 56,812
assets
Increase (Decrease) in overdraft (567) 567
(Decrease) increase in accounts payable (255,867) 222,480 (180,786)
(Decrease) increase in accrued expenses (199,186) 31,294 (115,533)
Decrease in other taxes payable - - -
Decrease in income taxes payable - - -
----------- ----------- -----------
$ (206,713) $ 193,261 $ (9,010)
=========== =========== ===========
Netcash provided used in discontinued
Operations consists of the following:
Net loss of discontinued operations $ - $ (999,700) $ (824,761)
Impairment of intangible assets - 322,000 -
Depreciation and amortization - 72,190 54,900
Bad debts expense - 3,700 16,429
Changes in operating accounts - 113,481 (174,377)
Loss on Disposal of Fixed Assets - 6,502 -
Acquisition of property plant and equipment - (21,207) (64,149)
Short - term borrowings -net - 96,045 53,955
Repayment of long term debt - (14,812) (7,013)
Proceeds from equipment loans - 322,000 51,175
Cash (included in) from net assets from
discontinued operations - - (109,809)
Net loss on sale of assets - 174,801 -
----------- ----------- -----------
$ - ($ 247,000) ($1,003,650)
----------- ----------- -----------
Non-cash investing and financing activities:
Conversion of Class B shares to common
Shares $ 500 $ - $ -
=========== =========== ===========
Retirement of treasury shares $ - $ 25,135 $ 62,037
=========== =========== ===========
Financing of vehicle purchase $ - $ 22,800 $ -
=========== =========== ===========
F-25
NOTE 15. BUSINESS SEGMENT INFORMATION
During fiscal years 2003 had two reportable segments, which included strategic
business units that offered different products and services. These business
units were managed separately as Student Sports provided marketing services and
Fantasy Sports provides entertainment services. As the company has changed it's
focus, the Company sold Student Sports which is therefore being reported as
discontinued operations. As a result, continuing operations reflects that the
company operated in only one segment, consisting of fantasy sports games.
NOTE 16. STOCK OPTION PLAN
The Board of Directors has adopted the Company's 1995 Stock Option Plan. The
Stock Option Plan provides for the grant of (i) options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422 of the Internal Revenue Code to key employees and (ii)
options not so intended to qualify ("Nonqualified Stock Options") to key
employees (including directors and officers who are employees of the Company and
to directors).
The Stock Option Plan is administered by the Compensation Committee of the Board
of Directors. The committee shall determine the terms of the options exercised,
including the exercise price, the number of shares subject to the option and the
terms and conditions of exercise. No options granted under the Stock Option Plan
are transferable by the optionee other than by the will or the laws of descent
and distribution.
The exercise price of Incentive Stock Options granted under the plan must be at
least equal to the fair market value of such shares on the date of the grant
(110% of fair market value in the case of an optionee who owns or is deemed to
own more than 10% of the voting rights of the outstanding capital stock of the
Company or any of its subsidiaries). The maximum term for each Incentive Stock
Option granted is ten years (five years in the case of an optionee who owns or
is deemed to own more than 10% of the voting rights of the outstanding capital
stock of the Company or any of its subsidiaries). Options shall be exercisable
at such times and in such installments as the committee shall provide in the
terms of each individual option. The maximum number of shares for which options
may be granted to any individual in any fiscal year is 210,000.
The Stock Option Plan also contains an automatic option grant program for the
employee and non-employee Directors. Each person who is an employee director of
the Company following an annual meeting of shareholders will automatically be
granted an option for an additional 5,000 shares of common stock; non-employee
directors will receive an option for an additional 10,000 shares of common
stock. Each grant will have an exercise price per share equal to the fair market
value of the common stock on the grant date and will have a term of five years
measured from the grant date, subject to earlier termination if an optionee's
service as a board member is terminated for cause.
The Company, through June 30, 2004, has granted options to purchase 981,666
shares of common stock under the Plan, of which 145,000 options have been
exercised and 50,000 options expired unexercised.
F-26
Shares Weighted
Subject to Average
Options Exercise Price
Outstanding Per Option
------------ ----------
Balance at June 30, 2001 1,743,331 3.62
Granted - non-plan options 50,000 0.80
Granted - plan options 85,002 0.42
Expired - plan options (65,000) 4.71
----------
Balance at June 30, 2002 1,813,333 3.35
Granted - plan options 45,000 0.16
Expired - plan options (30,000) 6.00
Terminated - non- plan options (365,000) 2.58
----------
Balance at June 30, 2003 1,463,333 3.39
---------
Granted - plan options 60,000 1.61
Expired - plan options (145,000) 0.79
Expired - non-plan options (35,000) 0.35
Terminated - non- plan options (130,000) 3.77
Terminated - plan options (20,000) 2.19
----------
Balance at June 30, 2004 1,193,333 3.68
---------
Significant option groups outstanding at June 30, 2004 and related weighted
average exercise price and weighted average remaining life are as follows:
Options Outstanding and Exercisable
--------------------------------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Remaining
Prices Shares Price Life (in Years)
--------------------- ----------- --------------- ------------------
Less than $1.00 140,000 $0.46 1.95
$1.00 to $2.19 130,000 1.28 3.67
$3.75 to $4.88 683,333 4.32 1.16
$5.00 to $6.00 240,000 5.02 1.47
The Company has also issued options during 2001 to an employee to acquire 4.45
shares of Fantasy common stock for $47,191 per share. These options vested
immediately and had a life of three years. The fair value of this option
utilizing the Black Scholes option pricing model amounted to $6,451 per share.
The assumptions used in this model were as follows: risk-free interest rate
4.96%; expected life 3 years; expected volatility 0.0%; and expected dividend
yield of 0.0%. This option expired during the first quarter of fiscal 2004.
F-27
NOTE 17. WARRANTS OUTSTANDING
In consideration for the capital raising activities undertaken during 2000, the
Company issued warrants to purchase 150,000 shares of common stock at an
exercise price of $0.01 per share.
In accordance with the terms of an agreement entered into with Infospace, the
Company undertook to issue warrants over 720,000 shares of common stock valued
at $5.00 per share. Infospace was to provide services to the Leisureplanet.com
subsidiary in exchange for the Company increasing its holding in
Leisureplanet.com equal to the value placed on the warrants. These warrants have
an exercise price of $0.01 per share. As of June 30, 2000, 480,000 of these
warrants have vested and 240,000 were issued. Since the operations of
Leisureplanet.com were closed and the Infospace services ceased, no further
options have been issued. As of June 30, 2004, all the Infospace options have
expired, unexercised.
Also during fiscal 2001, Fantasy issued warrants to acquire 4.68 shares of
Fantasy common stock with an exercise price of $47,191 per share to TWI
Interactive, Inc, (see Note 21).
These warrants were issued in connection with a contract to perform consulting
services. Compensation recorded pursuant to that contract includes the fair
value of these warrants. These warrants vest immediately and have a life of four
years. The fair value of these warrants, which was determined utilizing the
Back-Scholes pricing model, amounted to approximately $8,400 per share, a total
of approximately $39,300. The assumptions used in this model were as follows:
risk free interest rate 4.96%; expected life 4 years; expected volatility 0.0%;
and expected dividend yield 0.0%.
Warrants outstanding at June 30, 2004 were as follows:
Silverstar Holdings, Ltd.
Number of Exercise Expiration
Warrant Warrants Price Date Entitlement
------- -------- ----- ---- -----------
Debenture Warrants 2001 52,189 $6.00 July 31, 2007 One share of common stock
Capital Raising Warrants 150,000 $6.00 July 31, 2007 One share of common stock
Infospace Warrants 240,000 $0.01 June 30, 2004 One share of common stock
Fantasy Sports, Inc.
Number of Exercise Expiration
Warrant Warrants Price Date Entitlement
------- -------- ----- ---- -----------
TWI Interactive, Inc. 4.68 $47,191 June 1, 2005 One share of common stock
F-28
NOTE 18. FIRST SOUTH AFRICAN HOLDINGS ESCROW AGREEMENT
The FSAH Escrow Agreement was executed prior to the closing of the Company's
offering and provided for the concurrent issuance and delivery of 729,979 shares
of Class B common stock to the FSAH escrow agent. The FSAH Escrow Agreement is
intended to provide security for the holders of FSAH Class B common stock, who
are residents in South Africa and are prohibited in terms of South African law
from holding shares in a foreign company. The FSAH Escrow Agreement provides
that the parties to this agreement that are holders of FSAH Class B common stock
will not sell such shares of stock, but may tender the shares to the FSAH escrow
agent against payment therefore by the escrow agent, which payment may consist
of the proceeds obtained from the sale of an equal number of Class B common
stock of the Company, provided that the proceeds of the sale will be delivered
to the holder of the Class B common stock in exchange for the shares in FSAH.
These shares will be tendered to the Company and they will be immediately
converted to FSAH Class A common stock.
Since the consummation of the Company's offering in January 1996, the Company
has entered into FSAC Escrow Agreements with the FSAH escrow agent, FSAH and
certain principal stockholders of the Company's subsidiaries, which were
acquired since January 1996. The terms of the FSAC Escrow Agreement are
substantially similar to the terms of the FSAH Escrow Agreement, except that the
FSAH Escrow Agreement provided for the issue of shares of Class B common stock
to the FSAH escrow agent while the FSAC Escrow Agreements provide for the issue
of shares of common stock to the FSAH escrow agent which correspond to the
issuance of FSAH Class B common stock by FSAH.
Since 2000, no further shares of common stock have been issued in terms of FSAC
or FSAH escrow agreements, nor will there be any further issuances.
NOTE 19. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Profitability and Liquidity
As reflected in the accompanying consolidated financial statements, the Company
has incurred significant operating losses and experienced negative operating
cash flows in recent years. With a view towards achieving profitability and
improving liquidity, management has adopted, and is in the process of
implementing, the following strategies:
o seek corporate sponsorships for the internet fantasy sports
gaming segment to diversify its revenue streams while focusing
on its core motor sports niche;
o reduce overhead of the operating subsidiary and continue to
look for areas in which further cost savings can be obtained.
o diversify the price points and structure of its fantasy games
and add additional premium content to attract new customers
and generate additional revenues from the existing subscriber
base.
Management believes that its present financial resources are sufficient to meet
its obligations for the ensuing twelve months. In addition to unrestricted cash
of approximately $0.93 million at June 30, 2004, the Company expects to begin
collecting on an outstanding note receivable due from the sale of First
Lifestyle Holdings, which will provide additional resources. Additionally, the
Company believes it would be able to raise debt or equity capital should the
need arise.
F-29
Management believes that the actions presently being taken by the Company will
achieve profitability and improve liquidity. However, there can be no assurance
that management's plans will be successful or that the Company will be
profitable in the future.
Leases
The Company leases office facilities and various equipment under non-cancelable
operating leases expiring through January 2006. Office facility and equipment
rent expense included in continuing operations for the years ended June 30,
2004, 2003 and 2002 was approximately $95,000, $137,000 and $133,000,
respectively.
Approximate future minimum lease payments under non-cancelable office and
equipment lease agreements are as follows:
Year ending June 30:
2005 62,574
2006 42,073
2007 13,107
2008 13,107
2009 -
=========
$130,861
=========
Litigation
The Company, from time to time, is involved in various litigation arising in the
ordinary course of business. Based on currently available information,
management believes that there are no pending claims that will have a material
adverse effect on the Companies' operating results or financial position.
Employment Agreements
Silverstar Holdings Ltd.
On April 12, 2000, the Company's Board of Directors approved an Amended and
Restated Employment Agreement (the "Employment Agreement") with the Chief
Executive Officer (CEO), who will serve as President and Chief Financial Officer
of the Company beginning as of February 1, 2000 and continuing through and until
March 31, 2005. As compensation for his services, the CEO will receive an annual
base salary of $300,000 (with five percent increases each year), and an annual
bonus of five percent of net realized capital gains upon the sale, liquidation
or distribution by the Company of any Portfolio Company (as defined in the
Employment Agreement). A Portfolio Company does not include any of the South
African entities previously owned by the Company. In the event of a Change in
Control (as defined in the Employment Agreement), the CEO may also be entitled
to a payment of five percent of any net unrealized capital gains on any
Portfolio Company, which gains may, at the option of the Company, be paid in
cash, stock of the Portfolio Company or any combination of the foregoing.
Fantasy Sports, Inc.
On November 30, 2000, Fantasy entered into Employment Agreement (the "Employment
Agreement") with an individual to serve as the Chief Executive Officer of
Fantasy beginning as of November 30, 2000 and continuing through and until
November 30, 2003. As compensation for his services, the CEO received an annual
base salary. In addition, the CEO received a three-year option to acquire 5% of
Fantasy's outstanding shares as of November 16, 2000, at a price equal to that
paid by Silverstar Holdings upon acquisition of the assets of Fantasy. A
similarly priced performance-based three-year option to acquire a further 2.5%
of the outstanding shares of Fantasy as of November 16, 2000 was issued to the
F-30
CEO. This performance-based option will vest on the earlier of Fantasy achieving
an aggregate EBITDA of $4 million for calendar years 2001 and 2002 or an
aggregate EBITDA of $9 million for calendar years 2001, 2002 and 2003. This
employment agreement terminated on November 30, 2003 with no performance based
compensation being realized. The agreement was not renewed. All of the options
expired unexercised.
Guarantees
The Company has guaranteed certain bank facilities of one of its former
industrial subsidiaries in South Africa. As per previous disclosure, in January
2004, an unrelated South African third party, entered into an agreement to
acquire the former subsidiary. This agreement reduced the Company's guarantee to
approximately $47,000, 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. The Company does not believe that it will be called upon to
meet any portion of this remaining guarantee.
Other
South African Secondary Tax on Companies at 12.5 percent is payable on all
dividends declared out of distributable reserves of South African companies.
There were no dividends of this nature declared in 2004, 2003 or 2002.
During 2004, the Company entered into various contracts with web based and
non-web based companies whereby these companies will direct their customers to
the Fantasycup.com website. For those customers that register for the fantasy
league through the website, the Company will pay commissions ranging from 12% to
50% of net revenues depending on the terms of each individual agreement. The
term of these agreements are for one year and are renewed annually unless
terminated by either party.
In June 2001, the Company entered into an agreement with TWI Interactive, Inc.
(TWI), the online arm of International Management Group (IMG). The agreement was
designed to assist Fantasy in establishing itself as the premier, independent,
subscription-based fantasy sports game producer. TWI and affiliates of IMG will
provide exclusive representation and services across a broad spectrum of its
sports marketing activities. Under the agreement, the Company will pay TWI a
monthly fee of $12,000 and commissions of 20% to 50% of net revenues generated
as a result of the services provided by TWI. The agreement also provides for TWI
to receive a four-year warrant to acquire 4.68 shares of Fantasy common stock at
$47,191 per share. There was no charge to operations in 2001 for the fair value
of the warrants since the amount was not considered material. This agreement was
terminated in June 2002, but the warrants remain outstanding and expire June 21,
2005 (see Note 18).
On October 7, 2002, Fantasy Sports entered into an agreement with Sports Team
Analysis and Tracking Systems of Missouri, Inc. ("STATS"). This agreement
subsequently modified on July 21, 2003, calls for STATS to provide hosting,
programming, customer service and marketing services for Fantasy Sports. In
consideration for these services, Fantasy pays STATS an amount of $20,000 per
month, plus a share of net profits above $350,000 per annum. This agreement
expires on December 31, 2004.
F-31
NOTE 20. QUARTERLY INFORMATION (UNAUDITED)
Quarters Ended
-----------------------------------------------------------------
September 30, December 31, March 31, June 30,
2003 2003 2004 2004 Total
--------- --------- --------- --------- ---------
Revenues $ 886,895 $ 588,796 $ 357,545 $ 534,227 $2,367,463
Income from continuing operations 434,529 347,080 88,595 159,901 1,030,015
Net income 434,529 347,080 88,595 132,319 1,002,523
Net income per share - basic and
diluted 0.05 0.04 0.01 0.02 0.12
Weighted average common stock
outstanding - basic and diluted 8,482,469 8,582,839 8,630,513 8,659,799 8,575,579
During Fiscal 2004, the Company issued 180,000 shares of Common Stock, pursuant
to the Exercise of Stock Options. The price received for such option ranged from
$0.16 to $1.03. Total consideration received by the Company was $126,450.
F-32
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure (1)
that information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and forms, and (2)
that this information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost benefit relationship of possible controls and procedures.
Prior to the filing date of this annual report, under the supervision and review
of our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
in alerting them in a timely manner to material information regarding us
(including our consolidated subsidiaries) that is required to be included in our
periodic reports to the SEC.
In addition, there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls since our
evaluation. We cannot assure you, however, that our system of disclosure
controls and procedures will always achieve its stated goals under all future
conditions, no matter how remote.
ITEM 9B. Other Information
None.
-15-
PART III.
Item 10. Directors and Executive Officers
Directors and Executive Officers
Our directors and our executive officers and the executive officers of our
subsidiaries, their ages and present position are as follows:
Name Age Positions
---- --- ---------
Michael Levy...................... 58 Chairman of the Board
Clive Kabatznik................... 47 Vice Chairman of the Board, Chief Executive Officer,
President and Chief Financial Officer
Cornelius J. Roodt................ 45 Director
Joseph Weil....................... 49 Director
John Grippo....................... 48 Director
Michael Levy is our co-founder and has served as Chairman of our Board of
Directors since our inception in 1995. Since 1987, Mr. Levy has been the Chief
Executive Officer and Chairman of the Board of Arpac L.P., a Chicago-based
manufacturer of plastic packaging machinery.
Clive Kabatznik is our co-founder and has served as a director and our President
since inception in 1995 and as our Vice Chairman, Chief Executive Officer and
Chief Financial Officer since October 1995. Mr. Kabatznik has served as
President of Colonial Capital, Inc. a Miami-based investment banking company
that specializes in advising middle market companies in areas concerning
mergers, acquisitions, private and public agency funding and debt placements.
Cornelius J. Roodt has served as a member of our Board of Directors since
December 1996 and was appointed Managing Director and Chief Financial Officer of
one of our subsidiaries, First South African Holdings (Pty.) Ltd., in July 1996.
Mr. Roodt was responsible for overseeing all of the South African operations of
First South African Holdings (Pty.) Ltd. Mr. Roodt led the buyout of First
Lifestyle Holdings and he is currently Chief Executive of the successor company,
First Lifestyle Holdings, (Pty) Ltd. He is no longer an executive officer of any
of our subsidiaries. From February 1994 to June 1996, Mr. Roodt was a senior
partner at Price Waterhouse Corporate Finance, South Africa. From January 1991
to January 1994, he was an audit partner at Price Waterhouse, South Africa.
Joseph Weil has served as a member of our Board of Directors since 2002 and has
served as the President and Chief Executive Officer of Joseph Weil & Sons, Inc.
since 1985. Joseph Weil & Sons is an independent wholesale distributor of paper
products, packaging supplies and equipment, sanitary products, janitorial
supplies and equipment, as well as food service products and office equipment.
He also serves as an active member of many business associations including
Afflink Worldwide Trade Group, which he serves as Chairman of the Board of
Directors. Since 1996, he has also served as an Executive Board Member of the
Greater Illinois chapter of the National Multiple Sclerosis Society.
John Grippo, has served as a member of our Board of Directors since 2004 and has
been the president of his own financial management practice, John Grippo, Inc.
since 2000. His firm provides services as Chief Financial Officer to small to
mid-sized public and private companies and also provides other related
-16-
accounting and consulting services. Prior to that, Mr. Grippo served as for ten
years as a Chief Financial Officer to companies in the housewares, electric
vehicles and financial services industries. He worked for five years as an
auditor with Arthur Andersen, LLP, followed by seven years in various accounting
positions in the financial services industry. He is a member of the New York
Society of Certified Public Accountants and the American Institute of Certified
Public Accountants.
All of our directors hold office until their respective successors are elected,
or until death, resignation or removal. Officers hold office until the meeting
of the Board of Directors following each Annual Meeting of Stockholders and
until their successors have been chosen and qualified.
Audit Committee of the Board of Directors
Our Board of Directors has a separate audit committee,. The audit committee is
composed of Michael Levy, John Grippo and Cornelius J. Roodt, each of whom are
independent directors as defined in Rule 10A-3 of the Securities Exchange Act of
1934. The Board of Directors has determined that Mr. Roodt meets the standards
of an audit committee "financial expert" as defined by the Sarbanes Oxley Act of
2002.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and directors, and persons who beneficially own more than 10% of our
common stock, to file initial reports of ownership and reports of changes of
ownership with the Securities and Exchange Commission and furnish copies of
those reports to us. Based solely on a review of the copies of the reports
furnished to us to date, or written representations that no reports were
required, we believe that all reports required to be filed by such persons with
respect to our fiscal year ended June 30, 2004 were timely made.
Code of Ethics
The Company's Board of Directors adopted a Code of Ethics which applies to all
of the Company's directors, executive officers and employees. A copy of the Code
of Ethics is available upon request to the Company's counsel at Jenkens &
Gilchrist Parker Chapin, LLP, Chrysler Building, 405 Lexington Avenue, 9th
Floor, New York, NY 10174.
Item 11. Executive Compensation
The following summary compensation table sets forth the aggregate compensation
we paid or accrued to our Chief Executive Officer during the fiscal years ended
June 30, 2002, June 30, 2003 and June 30, 2004. Apart from our Chief Executive
Officer, whose annual salary is $315,000, none of our executive officers of any
of our subsidiaries received compensation in excess of $100,000 during the
fiscal year ended June 30, 2004.
-17-
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------- --------------------------------
Name and Fiscal Salary Bonus Other Annual Restricted Securities
Principal Position Year Compensation Stock Awards Underlying
Ended Stock Options
June 30,
- ----------------------------------------------------- ------------------------------------------------- ----------------
$ $
Clive Kabatznik, 2004 315,000 0 --- --- 5,000
President and Chief 2003 315,000 0 --- --- 5,000
Executive Officer 2002 315,000 0 --- --- 5,000
The options granted to Mr. Kabatznik during fiscal year ended June 30, 2004
represent:
o ... an option granted under our 1995 Stock Option Plan to
purchase 5,000 shares of our common stock, which is currently
exercisable at an exercise price of $1.61 per share;
The options granted to Mr. Kabatznik during fiscal year ended June 30, 2003
represent:
o ... an option granted under our 1995 Stock Option Plan to
purchase 5,000 shares of our common stock, which is currently
exercisable at an exercise price of $0.16 per share;
The options granted to Mr. Kabatznik during fiscal year ended June 30, 2002
represent:
o ... an option granted under our 1995 Stock Option Plan to
purchase 5,000 shares of our common stock, which is currently
exercisable at an exercise price of $0.42 per share;
-18-
Options Granted in Fiscal 2004
The following table sets forth the details of options to purchase
common stock we granted to our executive officers during fiscal year ended June
30, 2004, including the potential realized value over the 5 year term of the
option based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock. Each option is immediately
exercisable.
Options Granted
---------------
Potential Realizable
Number of Percent of Total Per Expiration Date Value at Assumed Annual
Name Securities to Share Rate of Stock Price
Underlying Employees in Exercise Appreciation
Options Fiscal Year Price For Option Term
- ---------------------------------------------------------------------------------------------------------------------------
5% 10%
-- ---
Clive Kabatznik 5,000 100% $1.61 December 18, $10,250 $13,000
2008
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
During the fiscal year ended June 30, 2004 no options were exercised by
our executive officers. The following table sets forth the number of shares of
our common stock underlying unexercised stock options granted by us to our
executive officers and the value of those options at June 30, 2004. The value of
each option is based on the positive difference, if any, of the closing bid
price for our common stock on the Nasdaq National Market on June 30, 2004 or
$0.72, over the exercise price of the option.
Number of Securities Underlying Value of Unexercised In the Money
Unexercised Options at Options at Fiscal Year-End
Fiscal Year-End
------------------------------------ --------------------------------------
Name of Executive Officer Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------- ----------------- ------------------ ---------------- ---------------------
Clive Kabatznik 475,000 - $3,600 $-
Director Compensation
Except for Mr. Levy, our directors do not receive fixed compensation for their
services as directors other than options to purchase 10,000 shares of our common
stock granted to each non-employee director and options to purchase 5,000 shares
of our common stock granted to each director who is an employee, in each case
under our 1995 Stock Option Plan. Mr. Levy receives an annual consulting fee of
$60,000 and options to purchase 10,000 shares of our common stock per year,
solely in connection with his service as a member of our Board of Directors.
Directors are reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties.
Employment Agreements
On April 12, 2000, the Company's Board of Directors approved an Amended and
Restated Employment Agreement with Clive Kabatznik (the "Employment Agreement").
Pursuant to the Employment Agreement, Mr. Kabatznik will serve as the Chief
Executive Officer, President and Chief Financial Officer
-19-
of the Company beginning as of April 1, 2000 and continuing through and until
March 31, 2005. As compensation for his services, Mr. Kabatznik will receive an
annual base salary of $300,000 (with five percent increases each year), and an
annual bonus of five percent of net realized capital gains upon the sale,
liquidation or distribution by the Company of any Portfolio Company (as defined
in the Employment Agreement). A Portfolio Company does not include any of the
South African entities currently owned by the Company. In the event of a Change
in Control (as defined in the Employment Agreement), Mr. Kabatznik may also be
entitled to a payment of five percent of any net unrealized capital gains on any
Portfolio Company, which gains may, at the option of the Company, be paid in
cash, stock of the Portfolio Company or any combination of the foregoing.
On November 30, 2000, Fantasy Sports Inc. entered into Employment Agreement with
Gregory S. Liegey (the "Employment Agreement"). Pursuant to the Employment
Agreement, Mr. Liegey served as the Chief Executive Officer, of Fantasy Sports
Inc. beginning as of November 30, 2000 and continuing through and until November
30, 2003. This agreement was not renewed upon its termination.
Stock Option Plan
Our Board of Directors has adopted and our shareholders, prior to our initial
public offering, approved our 1995 Stock Option Plan. Our 1995 Stock Option Plan
provides for the grant of:
o options that are intended to qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 to key
employees; and
o options not intended to so qualify to key employees, including our
directors and officers, and to directors and consultants who are not
employees.
The total number of shares of our common stock for which options may be granted
under our 1995 Stock Option Plan is 850,000 shares.
Our 1995 Stock Option Plan is administered by the compensation committee of our
Board of Directors. The compensation committee will determine the terms of
options exercised, including the exercise price, the number of shares subject to
the option and the terms and conditions of exercise. No option granted under our
1995 Stock Option Plan is transferable by the optionee other than by will or the
laws of descent and distribution and each option is exercisable during the
lifetime of the optionee only by such optionee or his legal representatives.
The exercise price of incentive stock under our 1995 Stock Option Plan must be
at least equal to 100% of the fair market value of such shares on the date of
grant, or 110% of fair market value in the case of an optionee who owns or is
deemed to own stock possessing more than 10% of the voting rights of our
outstanding capital stock. The term of each option will be established by the
compensation committee, in its sole discretion. However, the maximum term for
each incentive stock option granted under our 1995 Stock Option Plan is ten
years, or five years in the case of an optionee who owns or is deemed to own
stock possessing more than 10% of the total combined voting power of our
outstanding capital stock. Options will become exercisable at such times and in
such installments as the compensation committee will provide in the terms of
each individual option. The maximum number of shares for which options may be
granted to any individual in any fiscal year is 210,000.
Our 1995 Stock Option Plan also contains an automatic option grant program for
our directors. Each of our non-employee directors is automatically granted an
option to purchase 10,000 shares of our common stock following each annual
meeting of shareholders. In addition, each of our employee directors is
automatically granted an option to purchase 5,000 shares of our common stock
following each annual meeting of shareholders. Each grant has an exercise price
per share equal to the fair market value of the our common
-20-
stock on the grant date, is immediately exercisable and has a term of five years
measured from the grant date, subject to earlier termination if an optionee's
service as a Board member is terminated for cause.
Through September 28, 2004, we have granted options to purchase 310,000 shares
of our common stock under our 1995 Stock Option Plan, 150,000 of which have been
exercised.
Non-Plan Stock Options
We have granted non-plan stock options to purchase 575,000 shares of our common
stock at a weighted exercise price of $4.40 per share and 433,333 options at a
weighted exercise price of $4.10 per share which expired unexercised in August
2004.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee of our Board of Directors is
now or ever has been one of our officers or employees. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on our Board of
Directors or our compensation committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 31, 2003, certain information as to
the beneficial ownership of the our common stock by:
o each person known by us to own more than five percent (5%) of
our outstanding shares;
o each of our directors;
o each of our executive officers named in the Summary
Compensation Table under "Executive Compensation"; and
o all of our directors and executive officers as a group.
Amount and Nature of Beneficial
Ownership (1)
-------------------------------- Percentage Percentage of
Name and Address of Common Stock Class B of Voting
Beneficial Shareholder Common Ownership Power
Stock (2) (1)(3) (1)(3)
----------------------------- --------------- ----------------- ------ -- ------------- -------------------
Michael Levy 96,000(4) 686,025(5) 9.0% 28.9%
9511 West River Street
Schiller Park, IL 60176
Clive Kabatznik 654,400(6) 190,000 9.7% 13.2%
6100 Glades Road
Suite 305
Boca Raton, FL 33434
Cornelius J. Roodt 115,000(7) 0 1.3% 0.9%
P.O. Box 4001
Kempton Park
South Africa
American Stock Transfer 88,907(8) 95,888(8) 2.1% 4.7%
& Trust Company
-21-
Amount and Nature of Beneficial
Ownership (1)
-------------------------------- Percentage Percentage of
Name and Address of Common Stock Class B of Voting
Beneficial Shareholder Common Ownership Power
Stock (2) (1)(3) (1)(3)
----------------------------- --------------- ----------------- ------ -- ------------- -------------------
6201 15th Avenue
Brooklyn, New York 11219
Joseph Weil 10,000(9) 0 * *
6100 Glades Road
Suite 305
Boca Raton, Florida 33434
John Grippo 25,000(10) 0 * *
6100 Glades Road
Suite 305
Boca Raton, Florida 33434
All executive officers and 989,307(11) 876,025 21.4% 44.0%
directors as a group (5
persons)
* Less than 1%.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. Shares subject to stock options,
for purposes of this table, are considered beneficially owned only to
the extent currently exercisable or exercisable within 60 days after
August 31, 2002.
(2) Except as otherwise indicated, each of the parties listed has sole
voting and investment power with respect to all shares of Class B
common stock indicated above.
(3) For the purposes of this calculation, our common stock and our Class B
common stock are treated as a single class of common stock. Our Class B
common stock is entitled to five votes per share, whereas our common
stock is entitled to one vote per share.
(4) Includes 50,000 shares of our common stock issuable upon exercise of
options that are immediately exercisable.
(5) Includes (i) 590,137 shares of our Class B common stock and (ii) 95,888
shares of our Class B common stock issued to the American Stock
Transfer & Trust Company pursuant to the terms of an escrow agreement,
which shares correspond to a like number of shares of First South
African Holdings (Pty.) Ltd. Class B stock. American Stock Transfer &
Trust Company has granted to Mr. Levy a proxy to vote each of such
shares of our Class B common stock.
(6) Includes 475,000 shares of our common stock issuable upon exercise of
options that are immediately exercisable.
(7) Includes 115,000 shares of our common stock issuable upon exercise of
options that are immediately exercisable.
(8) Based solely upon information contained in a Schedule 13G, Amendment
No. 1, dated 12/31/99 filed with the Securities and Exchange
Commission. All shares are held as escrow agent pursuant to various
escrow agreements. American Stock Transfer & Trust Company holds a
proxy to vote the shares of common stock. Michael Levy holds a proxy to
vote the shares of Class B Common Stock.
-22-
(9) Includes 10,000 shares of our common stock issuable upon the exercise
of options that are immediately exercisable.
(10) Includes 25,000 shares issuable upon exercise of options that are
immediately exercisable.
(11) Includes 675,000 shares issuable upon exercise of options that are
immediately exercisable.
Equity Compensation Plan Information
The following table contains a summary of the number of shares of Common Stock
of the Company to be issued upon the exercise of options, warrants and rights
outstanding at June 30, 2004, the weighted average exercise price of those
outstanding options, warrants and rights, and the number of additional shares of
Common Stock remaining available for future issuance under the plans as at June
30, 2004.
Equity Compensation Plan Information
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and further issuance
warrants and rights rights
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by shareholders* 310,000 $1.32 390,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plan not 575,000 $4.40 NA
approved by shareholders**
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plan not 433,333*** $4.10 NA
approved by shareholders**
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
* See Description Note 16 to the Financial Statements
** These options were granted pursuant to various employment agreements
*** These Options expired Unexercised on August 16th, 2004
-23-
Item 13. Certain Relationships and Related Transactions
Not applicable.
Item 14. Principal Accountant Fees and Services
Audit Fees
Audit fees billed to the Company by Rachlin Cohen & Holtz LLP for its
audit of the Company's financial statements and for its review of the financial
statements included in the Company's Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission for 2004 and 2003 totaled $44,061 and
$67,832, respectively.
Tax Fees
Tax fees billed to the Company by Rachlin Cohen & Holtz LLP for its tax
returns for the fiscal year 2004 and 2003 were $0, and $ 4,000, respectively.
Other Fees
No other fees were billed to the Company by Rachlin Cohen & Holtz LLP
for all other non-audit or tax services rendered to the Company for the fiscal
year 2004 and 2003, respectively.
Audit Committee Pre-Approval Policies
The Audit Committee has adopted a procedure under which all fees
charged by Rachlin Cohen & Holtz LLP must be pre-approved by the Audit
Committee, subject to certain permitted statutory de minimus exceptions.
-24-
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) EXHIBIT INDEX
Exhibit Number Description
3.1 Memorandum of Association of the Registrant(2)
3.2 Bye-Laws of the Registrant(2)
4.3 Indenture dated April 25, 1997 between the Registrant and
American Stock Transfer & Trust Company(1)
4.6 Stock Option Agreement(3)
10.2 Form of FSAH Escrow Agreement(2)
10.3 Form of First Amended and Restated Employment Agreement of
Clive Kabatznik(2)
10.4 Form of FSAM Management Agreement(2)
10.5 Form of Consulting Agreement with Michael Levy(2)
10.6 1995 Stock Option Plan(2)
10.7 Asset purchase agreement by and among First South Africa
Holdings PTY Ltd. and minority shareholders of First Lifestyle
Holdings, Ltd., Ethos Private Equity, Cornelius Roodt and
certain other purchasers and the Company, dated as of
September 24, 2000(4)
10.8 Fantasy Sports Asset Acquisition Agreement dated as of
November 17, 2000(5)
10.9 Agreement between Sports Team Analysis and Tracking Systems of
Missouri, Inc. and Fantasy Sports Enterprises dated October 7,
2002(6)
10.10 Amendment to Agreement dated July 21, 2003 between Fantasy
Sports Enterprises, Inc. and Sports Team Analysis and Tracking
Systems of Missouri, Inc.(6)
21.1 Subsidiaries of the Registrant(6)
23.1 Consent of Rachlin Cohen and Holtz(6)
31.1 Certificate Pursuant to Section 302 of the Sarbanes Oxley Act
of 2002(6)
32.1 Certification Pursuant to 18 U.S.C. Section 1350 adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(6)
- ----------
(1) Incorporated by reference is the Registrant's Current Report on Form
8-K, Exhibit 4.1 (filed on September 10, 1997).
(2) Incorporated by reference is the Registrant's Registration Statement on
Form S-1 (No. 33-99180) (filed on November 9, 1995), as amended on Form
S-1/A No. 1, Form S-1/A No. 2, Form S-1/A No. 3 (filed on December 27,
1995, January 16, 1996 and January 24, 1996, respectively) and Form
10-Q for the fiscal quarter ended March 31, 2000.
(3) Incorporated by reference is the Registrant's Registration Statement on
Form S-1 (No. 333-33561) (filed on August 13, 1997), as amended on Form
S-1/A No. 1, Form S-1/A No. 2 and For S-1/A No. 3 (filed on December 9,
1997 , January 22, 1998 and February 11, 1998, respectively).
(4) Incorporated by reference to the Company's current report on Form 8-K
filed with the Commission on October 12, 2000.
(5) Incorporated by reference to the Company's current report on Form 8-K
filed with the Commission on December 1, 2000.
(6) Filed herewith.
-25-
1. Financial Statements
The following financial statements are included as required to be filed
by Item 8:
Silverstar Holdings, Ltd.
Report of independent Certified Public Accountant
Consolidated Balance Sheets at June 30, 2004 and 2003
Consolidated Statements of Operations for the years ended June 30,
2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended June 30,
2004, 2003 and 2002
Consolidated Statement of Consolidated statements of stockholders'
equity and Comprehensive loss for the years ended June 30, 2002, 2003
and 2004
Notes to the Consolidated Financial Statements for the years ended June
30, 2004, 2003, and 2002
2. Financial Statement Schedules:
All schedules have been omitted since the required information is
included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
None.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Boca
Raton, State of Florida, on the 28th day of September, 2004.
SILVERSTAR HOLDINGS, LTD.
BY:/s/ Clive Kabatznik
----------------------------------------
Clive Kabatznik
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
Signature Title Date
/s/ Michael Levy Chairman of the Board of Directors September 28, 2004
- ------------------------------
Michael Levy
/s/ Clive Kabatznik President, Vice Chairman, Chief September 28, 2004
- ------------------------------ Executive Officer, Chief
Clive Kabatznik Financial Officer, Director and
Controller
/s/ Cornelius Roodt Director September 28, 2004
- ------------------------------
Cornelius Roodt
/s/ Joseph Weil Director September 28, 2004
- ------------------------------
Joseph Weil
/s/ John Grippo Director September 28, 2004
- ------------------------------
John Grippo
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Memorandum of Association of the Registrant(2)
3.2 Bye-Laws of the Registrant(2)
4.3 Indenture dated April 25, 1997 between the Registrant
and American Stock Transfer & Trust Company(1)
4.6 Stock Option Agreement(3)
10.2 Form of FSAH Escrow Agreement(2)
10.3 Form of First Amended and Restated Employment Agreement
of Clive Kabatznik(2)
10.4 Form of FSAM Management Agreement(2)
10.5 Form of Consulting Agreement with Michael Levy(2)
10.6 1995 Stock Option Plan(2)
10.7 Asset purchase agreement by and among First South Africa
Holdings PTY Ltd. and minority shareholders of First
Lifestyle Holdings, Ltd., Ethos Private Equity, Cornelius
Roodt and certain other purchasers and the Company, dated
as of September 24, 2000(4)
10.8 Fantasy Sports Asset Acquisition Agreement dated as of
November 17, 2000(5)
10.9 Agreement between Sports Team Analysis and Tracking
Systems of Missouri, Inc. and Fantasy Sports Enterprises
dated October 7, 2002(6)
10.10 Amendment to Agreement dated July 21, 2003 between Fantasy
Sports Enterprises, Inc. and Sports Team Analysis and
Tracking Systems of Missouri, Inc.(6)
21.1 Subsidiaries of the Registrant(6)
23.1 Consent of Rachlin Cohen and Holtz(6)
31.1 Certificate Pursuant to Section 302 of the Sarbanes Oxley
Act of 2002(6)
32.1 Certification Pursuant to 18 U.S.C. Section 1350 adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(6)
- ---------------
(1) Incorporated by reference is the Registrant's Current Report on Form
8-K, Exhibit 4.1 (filed on September 10, 1997).
(2) Incorporated by reference is the Registrant's Registration Statement on
Form S-1 (No. 33-99180) (filed on November 9, 1995), as amended on Form
S-1/A No. 1, Form S-1/A No. 2, Form S-1/A No. 3 (filed on December 27,
1995, January 16, 1996 and January 24, 1996, respectively) and Form
10-Q for the fiscal quarter ended March 31, 2000.
(3) Incorporated by reference is the Registrant's Registration Statement on
Form S-1 (No. 333-33561) (filed on August 13, 1997), as amended on Form
S-1/A No. 1, Form S-1/A No. 2 and For S-1/A No. 3 (filed on December 9,
1997 , January 22, 1998 and February 11, 1998, respectively).
(4) Incorporated by reference to the Company's current report on Form 8-K
filed with the Commission on October 12, 2000.
(5) Incorporated by reference to the Company's current report on Form 8-K
filed with the Commission on December 1, 2000.
(6) Filed herewith.