ITEM 1. DESCRIPTION OF BUSINESS
We are a holding company that seeks to acquire businesses fitting a predefined investment strategy.
We are the parent company of Fantasy Sports, Inc., which operates the Fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com, and fantasynhra.com websites and specializes in subscription based NASCAR, college football and basketball and other fantasy sports games. We are also a shareholder in Magnolia Broadband Wireless, a startup company which is developing mobile wireless broadband products.
HISTORY
We were founded in September 1995 to pursue opportunities in South Africa as an emerging market. At that time, our business plan was to acquire, own and operate seasoned, closely held companies in South Africa with annual sales in the range of approximately $5 million to $50 million. In 1999, we shifted our focus to the Internet, technology and e-commerce sectors, and away from South Africa, by acquiring a majority stake in Leisureplanet.com, an Internet travel services company. In connection with the shift in our business plan, we changed our name to Leisureplanet Holdings, Ltd. In 2000, we disposed of our operations in South Africa, closed Leisureplanet.com and acquired 100% of Fantasy Sports, Inc. In 2001, we acquired 100% of Student Sports, Inc, which we sold in 2003. This was the only operating subsidiary in our marketing services segment. As a result of these changes and developments, we have reestablished our investment criteria. Our strategy focuses on:
o Acquiring controlling stakes in small, high quality, sports media and marketing businesses with strong management teams that are positioned to use technology and Internet related platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium term, to earnings per share through operating profit or capital appreciation.
o We aim to add value to our investments by operating in partnership with committed, incentivised, entrepreneurial management who show the vision and ability to grow their businesses into industry or niche leaders.
DESCRIPTION OF OUR SUBSIDIARIES AND INVESTMENTS
FANTASY SPORTS, INC.
Fantasy Sports, Inc. owns and operates one of America's oldest and largest subscription based NASCAR fantasy sports game. In addition, the company has developed, and offers, subscription based college football, basketball, golf and other motor sport fantasy games. All the company's games offer weekly and seasonal cash and merchandise prizes.
Currently, the Company has over 30,000 participants paying for its Spring, Fall and One Race NASCAR challenges, as well as the fantasy college football and basketball challenges and our other games. Subscription revenues for our games account for approximately 78% of our total revenues. Our NASCAR games currently generate over 90% of our subscription revenues. Participants pay between $99.95 to $169.95 to play in our seasonal games, and a $25 fee to participate in our One Race and Tournament challenges. We offer two grand prizes of $25,000 each for our NASCAR challenges and a $10,000 prize for the college football challenge winner. The winners of our One Race and Tournament challenges receive $10,000. In addition, weekly prizes and bonus points are widely distributed.
Fantasy sports participation is rapidly becoming a significant component of sports related leisure time activity. The NASCAR niche is particularly appealing as growing public interest in the sport, as evidenced by increased attendance and TV ratings for all NASCAR events, particularly the Winston Cup Series races, have made this one of America's most popular sports. This trend was strengthened in 2001 with the first national television network broadcast of the Winston Cup Series. Fantasy Sports has been operating their NASCAR challenges since 1993 and are the dominant company in this market. Our spokesperson, Ned Jarrett, a well-known NASCAR personality, lends credibility and wide public acceptance to our games. Mr. Jarrett appears in our numerous television commercials as well as on the cover of our rulebook and his reputation personifies the quality and integrity of our games. In addition, our websites offer up to the minute racing tips from Mark Garrow, the well-known broadcaster, which adds to the fun and excitement of playing the game. Contestants can visit the site and trade drivers up to the very last minute prior to a race, thereby offering the highest degree of interactive online participation.
Since 1997, Fantasy Sports has operated a full season college football challenge game, which accounts for approximately 5% of our subscription revenues at present. During 2001, we developed and deployed a tournament challenge college basketball game that generated over 2,000 paying customers in our last fiscal year. We have developed a retail business that specializes in the sale of NASCAR related die-cast cars, apparel and other merchandise. This retail operation commenced business in May 2001 and currently accounts for the remaining 22% of our overall revenues.
We currently provide an in-house corporate game for the Dana Corporation, and are seeking further corporate sponsorships for our games in order to diversify the revenue streams so that we are not solely reliant on subscription fees for our games.
MAGNOLIA BROADBAND WIRELESS
On April 14, 2000, we entered into a Securities Purchase Agreement with Magnolia Broadband, Inc. Magnolia is a start up company that is developing wireless broadband solutions for the mobile telecommunications industry. Mobile telecommunications has been and continues to be one of the fastest growing and most dynamic segments of the telecommunications industry. According to a recent Cahner's Instat Group report, semiconductor revenue for wireless handsets will reach more than $50B by 2004, driven by an expected sales volume of over 1.2 billion handsets that year.
Magnolia is developing technology to become one of the first companies to integrate smart antenna technologies into RF chip sets utilized in mobile phones. The Company's innovative chip sets are aimed at helping handset manufacturers satisfy both of their key constituencies - consumers and network operators. Magnolia's technology aims to: double power efficiency, i.e. battery life; decrease radiation at least twenty times (reducing health risks); and, significantly reduce dropped calls. We believe the technology will be attractive to network operators because, if effective, it will enable them to serve twice as many subscribers with the same infrastructure and offer better, more consistent reception to users, many of whom choose a carrier based on this critical criterion.
We invested $2,500,000 in Magnolia and received shares of preferred stock in Magnolia. We also received board representation rights and registration rights. In October 2001, we invested a further $450,000 of a total $1,500,000 offering of Magnolia's Series A Preferred Stock. We co-invested along with Selway Partners, LLC, and CIP Capital, LP. In April and May 2002 Magnolia raised a further $7.5 million in an offering of Series B Preferred Stock. In June 2003 Magnolia raised a further $6 million dollars in an offering of Series C Preferred Stock. We did not participate in either of these rounds. Currently we own approximately 5% of Magnolia on a fully diluted basis including the exercise of all employee stock options. Due to recurring losses, our investment in Magnolia at June 30, 2003, which is now accounted for under the cost method, was $831,066.
DISCONTINUED OPERATIONS
Student Sports, Inc.
On June 14, 2003, we entered into an Asset Purchase Agreement with SS Founders, Inc., pursuant to which we sold substantially all of the assets and liabilities of Student Sports, Inc. Student Sports offers unique access to the high school athletic market across multimedia platforms. As a subsidiary of Silverstar Holdings, the company's primary thrust was to offer marketing services to large corporations interested in accessing this market. Additionally, the company worked towards building a "bottom-up" revenue generation strategy based on the creation of a number of subscription based programs where products and services will be sold directly to the high school athletes, their parents and coaches. We originally acquired Student Sports in September 2001. The consideration for the sale of Student Sports was 325,686 shares of Silverstar Holdings common stock that were returned to the Company as well as the forgiveness of a maximum of 913,745 contingent shares of Silverstar Holdings that could have been payable to former Student Sports shareholders in April 2004.
EMPLOYEES
Silverstar Holdings through its US management subsidiaries employs two full time salaried employees. Fantasy Sports, Inc. currently employs 12 full time salaried employees and approximately 13 hourly employees.
Our success will depend on our ability to attract and retain highly qualified employees. We provide performance based and equity based compensation programs to reward and motivate significant contributors among our employees. Competition for qualified personnel in the industry is intense. There can be no assurance that our current and planned staffing will be adequate to support our future operations or that management will be able to hire, train, retain, motivate, and manage required personnel. Although none of our employees is represented by a labor union, there can be no assurance that our employees will not join or form a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are located at Clarendon House, Church Street, Hamilton, HM CX, Bermuda, which space is made available to us pursuant to a corporate services agreement entered into with a corporate services company in Bermuda.
Fantasy Sports, Inc. has its principal executive offices at 2009 Industrial Highway, York, Pennsylvania, 17402. These offices also contain our call center and warehouse space and cover approximately 8,000 square feet. The lease expires on December 31, 2003 and costs us approximately $60,000 per year.
Our United States management subsidiary, First South Africa Management Corp., a Delaware corporation incorporated in 1995, has its principal executive offices at 6100 Glades Road, Suite 305, Boca Raton, Florida 33434. The lease expires in February 2006 and costs us approximately $33,000 per year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed for quotation on the National Market on the Nasdaq System under the symbol SSTR. The following table sets forth, for the periods indicated the high and low closing sales prices for our common stock, as reported by Nasdaq.
High Low ---- --- Common Stock Fiscal 2001 - ------------------------ 1st Quarter........................................ $3.44 $0.94 2nd Quarter........................................ $1.17 $0.56 3rd Quarter........................................ $1.25 $0.63 4th Quarter........................................ $1.11 $0.63
Common Stock Fiscal 2002 - ------------------------ 1st Quarter........................................ $1.00 $0.38 2nd Quarter........................................ $0.62 $0.33 3rd Quarter........................................ $0.80 $0.28 4th Quarter........................................ $0.52 $0.17
Common Stock Fiscal 2003 - ------------------------ 1st Quarter........................................ $0.33 $0.10 2nd Quarter........................................ $0.27 $0.07 3rd Quarter........................................ $0.38 $0.06 4th Quarter........................................ $0.81 $0.10
The closing price of our common stock on September 20, 2003 was $0.63.
As of September 20, 2003, there were approximately 1,700 holders of our common stock, inclusive of holders whose shares were held by brokerage firms, depositaries and other institutional firms in "street name" for their customers.
We have never declared or paid any cash dividends on our common stock or our Class B common stock. We do not intend to declare or pay any dividends on our common stock or our Class B common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business.
ITEM 6.
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Information
(1) Net working capital is the net of current assets and current liabilities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND HISTORY
Silverstar Holdings Limited was incorporated in September 1995. The Company's intention is to actively pursue acquisitions fitting a pre defined investment strategy:
o Acquiring controlling stakes in small, high quality, sports media and marketing businesses with strong management teams that are positioned to use technology and Internet related platforms to fuel above average growth.
o Our investments must show an ability to contribute, in the short to medium term, to earnings per share through operating profit or capital appreciation.
o We aim to add value to our investments by operating in partnership with committed, entrepreneurial management who show the vision and ability to grow their businesses into industry or niche leaders.
The Company sold its last remaining South African operations in November 2000. The Company still has significant assets that are denominated in South African Rand. The assets include cash and notes receivable. Should the Company hold the notes until maturity the Company will continue to record income statement gains or losses to the extent that the Rand's value fluctuates relative to the US dollar. At the present time, management has no intention of disposing of the notes receivable.
On November 17, 2000, the Company acquired all of the assets and certain liabilities of Fantasy Sports (Fantasy) from GoRacing Interactive Services, Inc. Founded in 1993, Fantasy Sports operates the fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com and fantasynhra.com websites and specializes in subscription based NASCAR, college football and other fantasy sports games as well as the sale of die-cast racing cars.
On September 24, 2001, a newly created subsidiary of the Company, Student Sports, Inc., acquired all the assets and business and assumed certain liabilities of Student Sports, a media company, producing publications, television programs and various marketing initiatives for the high school sports market. On June 10, 2003, the Company disposed of substantially all the assets and liabilities of Student Sports, which was the only operating subsidiary in the marketing services segment of the Company.
In accordance with accounting principles generally accepted in the United States of America the operating results and net assets related to Student Sports have been included in discontinued operations in the company's consolidated statements of operations and consolidated balance sheets. Discontinued operations for the fiscal years ending June 30, 2003 and 2002, represent operating results for eleven and nine months, respectively. Net assets of $0.05 million and net liabilities of $0.06 million were assumed by the parent company.
The discontinued operations generated sales of $1.26 million and $1.12 million for the years ended June 30, 2003, and 2002 and net losses from operations of $0.74 million and $0.82 million, respectively.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
Revenues Revenues were $3.14 million in fiscal 2003. Revenues in the prior year were $3.10 million. The increase is the result of an increase of revenues of $0.23 million in the sale of NASCAR related die-cast cars, apparel and other items, offset by a smaller decrease in games revenue.
Cost of Sales Cost of sales were $2.01 million in fiscal 2003. Cost of sales in the prior year were $1.88 million and are attributable to Fantasy. The increase is primarily caused by increased sale of die cast collectibles.
Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal 2003 were $2.32 million, a decrease of $0.96 million over the same period in the prior year. This decrease is due to sustained efforts to reduce expenses to achieve operational profitability.
Amortization and Depreciation Amortization of intangible assets was $0.07 million in both fiscal 2003 and 2002. Depreciation expense was $0.07 million in fiscal 2003 as compared to $0.08 million in fiscal 2002.
Foreign Currency Gains Foreign currency gains or losses are related to the financial assets remaining in the discontinued South African operations. The Foreign currency gains during fiscal 2003 were $1.76 million as compared to a loss of $1.35 million in the prior year as a result of the appreciation of the South African Rand against the US dollar. These foreign currency gains or losses are non-cash items until converted into US dollars, when any unrealized gains or losses will be converted to cash.
Interest Income Interest income of $0.65 million was recorded during fiscal 2003 as compared to interest income of $0.63 million in fiscal 2002. The increase in interest income in fiscal 2003 is primarily a result of the appreciation of the South African Rand against the dollar, which affects interest earned on Notes Receivable from the sale of the Lifestyle business.
Interest Expense Interest expense during fiscal 2003 was $0.12 as compared to a non-material amount in the prior year. The increase in interest expense is attributable to interest charges incurred on short-term credit lines and lease facilities held by the Company's subsidiaries.
Provision for Income Taxes The Company is registered in Bermuda, where no tax laws are applicable. Three of the Company's subsidiaries are subject to income taxes. Up to this date, none of them has had taxable income. They have incurred losses for tax purposes. The deferred tax asset generated by the tax losses and temporary differences has been fully reserved.
Discontinued Operations Student Sports was sold in June 2003. The results for this business for both 2002 and 2003 have been included under Discontinued Operations in our financial statements.
Net Income (Loss) The Company has recognized income of $0.07 million during fiscal 2003 compared to a loss of $3.79 million during the prior year. The current year includes non-cash foreign currency gains of approximately $1.76 million due to the appreciation of the South African Rand against the US dollar of approximately 36% during the year, offset by non-cash charges of approximately $0.59 million related to the sale of Student Sports and the write down of intangible assets. The prior year loss included non-cash foreign currency losses of $1.35 million due to the devaluation of the South African Rand against the US dollar of approximately 29% during the year. The discontinued operations (Student Sports) generated net losses from operations of $0.74 million for fiscal 2003. Without these items, the net loss for fiscal 2003 would have been $0.43 million as compared to $1.61 million loss for fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues Revenues were $3.11 million in fiscal 2002 as a result of revenues earned by Fantasy Sports, which was acquired during the second quarter of fiscal 2001. Revenues in the prior year were $1.30 million and were related to Fantasy Sports. The increase is the result of recognizing a full year of Fantasy's revenues in fiscal 2002.
Cost of Sales Cost of sales were $1.88 million in fiscal 2002 as a result of Fantasy Sports's operations. Cost of sales in the prior year were $0.87 million and are attributable to Fantasy. The increase is due to a full year of operations for Fantasy Sports during Fiscal year 2002 and a bulk sale of Fantasy Sports inventory.
Selling, General and Administrative Expenses Selling, general and administrative expenses for fiscal 2002 were $3.23 million, an increase of $0.17 million over the same period in the prior year. This increase is due to having a full year of Fantasy as compared with six months in the prior year, offset by a reduction in overall corporate expenses.
Amortization and Depreciation Amortization of intangible assets decreased from $0.37 million in fiscal 2001 to $0.07 million in the current year as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets," whereby the Company no longer amortizes amounts attributable to goodwill. Depreciation expense was $0.08 million in fiscal 2002 as compared to $0.07 million in fiscal 2001.
Equity in Losses of Unconsolidated Affiliates Equity in losses of unconsolidated affiliates decreased to zero for fiscal 2002 compared to a loss of $1.92 million in fiscal 2001. The decrease is due to the Company recognizing losses to the extent of their investment in the prior year. The Company's investment in Magnolia, effective with the third quarter of fiscal 2002 is being accounted for under the cost method. Therefore, no further income or loss from Magnolia's operations will be recognized by the Company.
Foreign Currency Loss Foreign currency losses are related to the assets remaining in the discontinued South African operations. The Foreign currency losses during fiscal 2002 were $1.35 million as compared to $1.04 million in the prior year as a result of the deterioration of the South African Rand against the US dollar. These foreign currency losses are non-cash items until converted into US dollars, when any unrealized gains or losses will be converted to cash.
Interest Income Interest income of $0.63 million was recorded during fiscal 2002 as compared to interest income of $1.55 million in fiscal 2001. During fiscal 2001, the Company earned interest on the proceeds realized on the sale of Lifestyle. These proceeds were utilized to pay down debt and invested in interest bearing accounts. The decrease in interest income in fiscal 2002 is a result of lower invested cash balances, as well as the deterioration of the South African Rand against the dollar, which affects interest earned on Notes Receivable from the sale of the Lifestyle business.
Interest Expense Interest expense during fiscal 2002 was not material as compared to the $0.57 million in the prior year. The decrease in interest expense is attributable to the repayment of approximately $12 million of increasing rate subordinated convertible debentures during the third and fourth quarters of fiscal 2001.
Preference Dividend The preference dividend related to the mandatory redeemable preference shares of Lifestyle. These preferred shares were redeemed with the sale of Lifestyle and there were no additional dividends after the second quarter of fiscal 2001.
Provision for Income Taxes The Company is registered in Bermuda, where no tax laws are applicable. Three of the Company's subsidiaries are subject to income taxes. Up to this date, none of them has had taxable income. They have incurred losses for tax purposes. The deferred tax asset generated by the tax losses and temporary differences has been fully reserved.
Discontinued Operations The Lifestyle business was sold in November 2000 and has not been included in the Company's results since that time. The income during the prior year was earned before the disposition of the business.
Extraordinary Item - Gain on Extinguishment of Debt During the last half of fiscal 2001, the Company negotiated agreements with its lenders to retire $11.70 million of debentures at face value plus accrued interest. As a result, the Company recorded a gain on previously accrued sinking fund interest of $2.14 million in fiscal 2001. Since the remaining debentures were paid off at their maturity in October 2001, no such transaction occurred during fiscal 2002.
Net Loss The Company has recognized a loss of $3.79 million during fiscal 2002, as compared to a loss of $5.26 million during the prior year. The current year includes non-cash foreign currency losses of $1.35 million due to the devaluation of the South African Rand against the US dollar of approximately 29% during the year and losses from discontinued operations of $0.83 million for Student Sports, Inc. which was sold during fiscal 2003. The prior year loss included $1.04 million of non-cash foreign currency losses and $2.39 million loss on the disposal of discontinued operations, offset by the extraordinary gain on the extinguishments of debt of $2.14 million. Without these items, the net loss for fiscal 2002 would have been $2.44 million as compared to $3.97 million for fiscal 2001.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $0.9 million from $2.54 million at June 30, 2002 to $1.62 million at June 30, 2003. The balance of the remaining cash is being held for working capital purposes. The Company expects this balance to be sufficient to fund its operations and the operations of its subsidiaries for the next twelve months. During the next twelve months, it also anticipates the commencement of repayment of notes receivable due to it from the sale of First Lifestyle Holdings in South Africa. However, repayment is contingent on the borrower's collection of junior debt.
Working capital decreased by $2.16 million from $2.35 million at June 30, 2002 to $0.19 million at June 30, 2003. This is primarily due to the losses incurred by the Company's operating subsidiaries.
At June 30, 2003, the Company had borrowings of $0.28 million, which consisted of $0.22 million advances against lines of credit and $0.06 million of equipment loans.
The Company has guaranteed certain bank facilities of some of its former industrial subsidiaries in South Africa. Currently, these guarantees amount to approximately $0.7 million and are secured by like amounts of cash. The Company has reduced these guarantees from approximately $0.9 million as of June 30, 2002. These guarantees are reducing by approximately $0.013 million per month. In the event that these guarantees are called, the Company has recourse to certain assets of these subsidiaries, which should substantially cover the Company's potential exposure. Additionally, as of June 30, 2003, the Company has guaranteed approximately $0.17 million of the debt of Fantasy Sports. Such guarantee is secured by the Company's cash.
Management believes that its present financial resources are sufficient to meet its obligations for the ensuing twelve months. In addition to unrestricted cash of approximately $0.8 million at June 30, 2003, the Company expects to begin collecting on an outstanding note receivable due from the sale of First Lifestyle Holdings in March 2004, which will provide additional resources. The Company is also working to find an alternative guarantor for the approximate $700,000 it has guaranteed for the bank lines of a former South African subsidiary. Additionally, the Company believes it would be able to raise debt or equity capital should the need arise.
The Company intends to work on building its existing portfolio of subsidiaries in terms of revenues and profitability. It may also acquire further synergistic businesses and may therefore utilize a portion of its remaining cash balances and the proceeds of its disposal of Lifestyle to fund this strategy to the extent that suitable acquisition candidates can be identified. The Company may be required to incur additional
indebtedness or equity financing in connection with the funding of future acquisitions. There is no assurance that the Company will be able to secure additional indebtedness or raise additional equity to finance future acquisitions on terms acceptable to management, if at all.
OFF-BALANCE SHEET ARRANGEMENTS
In order to facilitate an orderly sale of one of its former South African subsidiaries, in 1999 the Company provided a guarantee for the bank facilities of this subsidiary in South Africa. At the time, this guarantee was provided on an unsecured basis by our wholly owned subsidiary, First South African Holdings. In November 2000, upon the subsequent sale of the majority of our South African assets and the repatriation of the cash proceeds of this sale, we were required to provide a bank guarantee to secure the continuation of this credit facility. As a result, during fiscal 2001 and 2002 we provided a bank guarantee in the amount of R9 million ($US 900,000) to secure such facility. The bank guarantee is in turn secured by the equivalent amount in US dollars. In December 2002, we negotiated a restructure of this South African facility, reducing the face amount of our guarantee to R5.5 million ($US 730,000). Our former subsidiary, in turn, is reducing its bank line through the repayment of R150,000 ($US 20,000) per month in interest and principal. Our exposure as of June 30, 2003 has been reduced to approximately R5.3 million ($US 700,000) and we anticipate it to be reduced by approximately R100,000 ($13,000) per month over the next fiscal year. At current exchange rates, we have approximately $667,000 restricted cash securing this guarantee. We are comfortable that this guarantee will be significantly reduced over the next two years, during which time we believe that alternative arrangements will be made so that this guarantee will no longer be in force.
In 2001, Fantasy Sports Inc. secured a revolving line of credit for up to $1 million from a bank. Fantasy have drawn and repaid on this line of credit from time to time. Any borrowings under this facility are guaranteed by the Company- on hand at UBS. As of June 30, 2003, Fantasy had an outstanding balance of approximately $165,000 secured by a like amount of the Company's cash. We anticipate that this line may fluctuate over the course of the current fiscal year. However, based on past experience and current anticipated cash flows, we believe that Fantasy will repay all amounts outstanding under this facility on or before March 31, 2004.
GOODWILL IMPAIRMENT TEST
We acquired Fantasy Sports, Inc. in November 2000. At the time our strategy was to aggressively expand the business by increasing our marketing in the auto-racing segment and developing new games for other niche sports markets. To this end, we hired new staff and increased our marketing and development budgets as well. This strategy was not successful, primarily due to the economic slowdown and as a result, Fantasy has incurred losses since we made this acquisition. During the seven months ended June 30, 2001, Fantasy lost $1,320,000 and had negative cash flow of $268,000. For the twelve months ended June 30, 2002, Fantasy lost $1,135,000 with negative cash flow of $566,000. For the twelve months ended June 30, 2003, Fantasy lost $314,715 with negative cash flow of $185,860.
Due to the accounting recognition of these losses, the carrying value of Fantasy has diminished since acquisition. On June 30, 2003, we performed an impairment test on the carrying value of Fantasy's goodwill. In accordance with SFAS 142, we compared the fair value of Fantasy (as a reporting unit) to the carrying value of Fantasy including goodwill. The methodology we used to determine fair value was to develop a ratio of revenue to market capitalization utilizing the Company and a comparable publicly traded company in the same industry. This ratio was then applied to Fantasy's revenue to determine fair value. The fair value exceeded Fantasy's carrying value, and therefore, no impairment of goodwill existed at June 30, 2003.
We will continue to monitor the carrying values of Fantasy and will use the same methodology on a consistent basis in the future. Should our efforts to stem the losses at Fantasy not succeed and losses and negative cash flow continue, we may be faced with goodwill impairment losses for Fantasy in the future.
FUTURE COMMITMENTS
Through June 30, 2003, Fantasy Sports Inc., the Company's remaining operating subsidiary, had incurred net losses. The Company anticipates that this situation will be rectified through a combination of expense reductions and increased revenues. However, there are no assurances that these changes will be successful. In the event that these plans are not successful, the Company may need to continue to support the operations of its subsidiary.
The Company intends to bring its operating subsidiary to profitability and to preserve its cash balances to the best of its ability. The Company anticipates continued repayments from the notes receivable from the sale of certain of its South African subsidiaries.
CRITICAL ACCOUNTING POLICIES
The following is a discussion of the accounting policies that the Company believes are critical to its operations:
REVENUES Revenues generated by Fantasy are seasonal from mid-February to the end of November. Fantasy collects its revenue at the beginning and mid-point of the season and recognizes this deferred revenue pro rata over the season. Student Sports recognized subscription revenue over the life of the subscription. For event-type revenue, revenue was recognized over the course of the contract in proportion to the expenses for the period compared to total expenses anticipated for the specific event. Revenues from television sports shows produced by Student Sports for television stations were recognized when the show aired. Student Sports, while somewhat less affected by seasonal factors, generated less revenue in the December quarter than during the rest of the year.
GOODWILL The Company adopted SFAS 142 during fiscal 2002 and no longer amortizes goodwill. The Company tests goodwill for impairment in the fourth quarter for Fantasy Sports, Inc. The goodwill impairment test for subsequent acquisitions will be performed on the one-year anniversary of the acquisition and in that period thereafter. The Company performs the impairment test in accordance with SFAS 142 "Goodwill and Other Intangible Assets." SFAS 142 requires that the fair value of the reporting unit be compared to the carrying value, including goodwill, as the first step in the impairment test. The Company determines fair value for Fantasy by developing a ratio of revenue to market capitalization utilizing the Company and comparable publicly traded companies in the same industry and applying this ratio to revenue of the reporting unit.
INTANGIBLE ASSETS Intangible assets include trademarks, customer lists and other intellectual property and non-competition agreements. Intangible assets, excluding goodwill, are stated on the basis of cost and are amortized on a straight-line basis over a period of three to ten years. Intangible assets with indefinite lives are not amortized but are evaluated for impairment annually unless circumstances dictate otherwise. Management periodically reviews intangible assets for impairment based on an assessment of undiscounted future cash flows, which are compared to the carrying value of the intangible assets. Should these cash flows not equate to or exceed the carrying value of the intangible, a discounted cash flow model is used to determine the extent of any impairment charge required.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not ordinarily hold market risk sensitive instruments for trading purposes. The company does however recognize market risk from interest rate and foreign currency exchange exposure.
INTEREST RATE RISK At June 30, 2003, the Company's cash resources earn interest at variable rates. Accordingly, the Company's return on these funds is affected by fluctuations in interest rates. Any decrease in interest rates will have a negative effect on the Company's earnings. There is no assurance that interest rates will increase or decrease over the next fiscal year.
FOREIGN CURRENCY RISK Certain of the Company's cash balances and the remaining proceeds from the sale of its South African subsidiaries are denominated in South African Rand. This exposes the Company to market risk with respect to fluctuations in the relative value of the South African Rand against the US Dollar. Due to the prohibitive cost of hedging these proceeds, the exposure has not been covered as yet. Should more favorable conditions arise, a suitable Rand hedge may be considered by management. For every 1% increase or decline in the Rand/US Dollar exchange rate, at year-end exchange rates, the Company would gain or lose $1,325 on every R1,000,000 retained in South Africa. During fiscal 2003, the South African Rand has appreciated against the US dollar by approximately 26% from the rate at June 30, 2002. At June 30, 2003, the Company had assets denominated in South African Rand of 49.58million.
The following is information concerning assets denominated in South African Rand and the foreign currency gains and losses recognized during fiscal 2003:
Foreign Currency Gain/(Loss) for the Year As of June 30, 2003 Ended June 30, 2003 In Rand In US Dollars Cash 1,282,727 $47,486 Notes Receivable 48,270,325 1,786,935 Other 33,843 (71,306)
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity and Comprehensive Loss
Statements of Cash Flows -
Notes to Consolidated Financial Statements -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Silverstar Holdings Limited Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Silverstar Holdings Limited and Subsidiaries (the Company) as of June 30, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the three years ended June 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silverstar Holdings Limited and Subsidiaries at June 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years ended June 30, 2003, in conformity with accounting principles generally accepted in the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida August 19, 2003
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 AND 2002
See notes to consolidated financial statements
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2003, 2002 AND 2001
See notes to consolidated financial statements.
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
See notes to consolidated financial statements.
SILVERSTAR HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 1. ORGANIZATION AND PRINCIPAL ACTIVITIES OF THE GROUP
Silverstar Holdings Limited (formerly Leisureplanet Holdings Ltd.) (the "Company"), was founded on September 6, 1995. The purpose of the Company has changed from acquiring and operating South African Companies to investing in companies that fit a predefined investment strategy.
On November 17, 2000, the Company acquired Fantasy Sports, Inc. ("Fantasy"). Fantasy specializes in Internet-based subscriptions for NASCAR, college football and basketball and other fantasy sports games and sale of die-cast racing cars. On September 24, 2001, the Company acquired Student Sports, Inc. ("Student Sports"), a media company producing publications, television programs and various marketing initiatives for the high school sports market. In June 2003, the company sold it's Student Sports subsidiary and it is reflected as discontinued operations in the accompanying financial statements. (See Discontinued operations below)
Additional investments have been made in other companies, which are in line with the Company's new focus (see Note 7).
DISCONTINUED OPERATIONS On June 10, 2003, the company sold substantially all assets and liabilities of Student Sports, Inc effective as of May 15, 2003. The consideration for the sale of Student Sports was 325,686 shares of Silverstar Holdings common stock that were returned to the Company as well as the forgiveness of a maximum of 913,745 contingent shares of Silverstar Holdings that could have been payable to former Student Sports shareholders in April 2004. (see Note 13)
The original investment made in Leisureplanet.com ("LPI"), the Internet travel related services company, has been unsuccessful due to a lack of further investor funding. Therefore, on August 2, 2000, LPI was placed under voluntary administration in the United Kingdom and subsequently liquidated (see Note 13).
In addition to LPI, First Lifestyle Holdings Limited ("Lifestyle"), the products segment, was also discontinued in line with the shift in strategy of the holding company. This segment was involved in the manufacture, sale and distribution of lifestyle enhancing products, which included both consumable food products and semi-durable outdoor and indoor products (see Note 13).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and incorporate the following significant accounting policies:
CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which it has a majority voting interest. Investments in affiliates are accounted for under either the equity or cost method of accounting, where appropriate. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:
Silverstar Holdings, Ltd. (Parent Company) Silverstar Holdings, Inc. First South African Management Corp. First South African Holdings, Ltd. (FSAH) Fantasy Sports, Inc.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and all highly liquid investments with original maturities of three months or less.
CONCENTRATIONS OF CREDIT AND MARKET RISKS Financial instruments that potentially subject the Company to concentrations of credit and market risk are comprised of cash and cash equivalents and notes receivable.
CASH The Company currently maintains a substantial amount of cash and cash equivalents with financial institutions in South Africa denominated in South African Rand. Changes in the value of the Rand compared to the U.S. dollar can have an unfavorable impact on the value of the cash and cash equivalents. In addition, these financial instruments are not subject to credit insurance.
The Company maintains deposit balances at U.S. financial institutions that, from time to time, may exceed federally insured limits. At June 30, 2003, there were no balances in excess of federally insured limits. The Company maintains its cash with high quality financial institutions, which the Company believes limits risk.
NOTES RECEIVABLE The Company's notes receivable are to be settled in South African Rand by South African companies. The Company's ability to collect on these notes may be affected by economic conditions in South Africa and the value of the South African Rand, as compared to the U.S. dollar. In addition, the Company's ability to withdraw these funds from South Africa after collection is restricted and may be subject to approval by the South African government.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying value of long-term notes receivable approximates fair values since interest rates are keyed to the South African prime lending rate.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Equipment is depreciated over 3 to 10 years. Leasehold improvements are amortized over the terms of the related leases.
SOFTWARE DEVELOPED FOR INTERNAL USE As a result of the acquisition of Fantasy in November 2000, the Company has adopted the provisions of AICPA Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed and Obtained for Internal Use". SOP 98-1 requires the capitalization of all internal and external costs incurred to develop internal use software during the application development stage. Fantasy operates its fantasy league through the use of software the company develops. Fantasy develops software to run its fantasy games; however, such costs were not significant during fiscal 2003, 2002 or 2001.
GOODWILL The Company tests goodwill for impairment in the fourth quarter for Fantasy Sports, Inc. The goodwill impairment test for subsequent acquisitions will be performed on the one year anniversary of the acquisition and in that period thereafter. The Company performs the impairment test in accordance with SFAS 142 "Goodwill and Other Intangible Assets." SFAS 142 requires that the fair value of the reporting unit be compared to the carrying value, including goodwill, as the first step in the impairment test. The Company determines fair value for Fantasy by developing a ratio of revenue to market capitalization utilizing the Company and comparable publicly traded companies in the same industry and applying this ratio to revenue of the reporting unit.
INTANGIBLE ASSETS Intangible assets include trademarks, customer lists, intellectual property and non-competition agreements. Intangible assets, excluding goodwill, are stated on the basis of cost and are amortized on a straight-line basis over a period of three to ten years. Intangible assets with indefinite lives are not amortized but are evaluated for impairment annually unless circumstances dictate otherwise. Management periodically reviews intangible assets for impairment based on an assessment of undiscounted future cash flows, which are compared to the carrying value of the intangible assets. Should these cash flows not equate to or exceed the carrying value of the intangible, a discounted cash flow model is used to determine the extent of any impairment charge required. Customer lists are amortized over a period of three to ten years. The patents, trademarks intellectual property and non-compete agreements related to discontinued operations were amortized over a period of three to twenty five years, up to the time of their disposal (see Note 13).
FOREIGN CURRENCY TRANSLATION The functional currency of the Company is the United States Dollar; the functional currency of First South African Holdings, Ltd. (FSAH) is the South African Rand. Accordingly, the following rates of exchange have been used for translation purposes:
Assets and liabilities are translated into United States Dollars using exchange rates at the balance sheet date. Common stock and additional paid-in capital are translated into United States Dollars using historical rates at date of issuance. Revenue, if any, and expenses are translated into United States Dollars using the weighted average exchange rates for each year. The resultant translation adjustments are reported in the statement of operations since FSAH has sold all its operating subsidiaries.
REVENUES Revenues generated by Fantasy are seasonal from mid-February to the end of November. Fantasy collects its revenue at the beginning and mid-point of the season and recognizes this deferred revenue pro rata over the season. Student Sports recognized subscription revenue over the life of the subscription. For event-type revenue, revenue was recognized over the course of the contract in proportion to the
expenses for the period compared to total expenses anticipated for the specific event. Revenues from television sports shows produced by Student Sports for television stations were recognized when the show aired. Student Sports was somewhat less affected by seasonal factors, generated less revenues in the December quarter than during the rest of the year. Revenues from Student Sports is presented in Discontinued Operations.
ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs incurred for continuing operations for the years ended June 30, 2003, 2002 and 2001 were $267,857, $426,558 and $591,894, respectively. Advertising costs incurred for discontinued operations during the years ended June 30, 2003, 2002 and 2001 were $7,015, $25,869 and $0.
INCOME TAXES The Company accounts for its income taxes using SFAS No. 109, "Accounting for Income Taxes", which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages but does not require companies to record stock-based compensation plans using a fair value based method. The Company has chosen to continue to account for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock.
If the Company used the fair value-based method of accounting to measure compensation expense for options granted at grant date as prescribed by SFAS No. 123, income/ (loss) per share from continuing operations would have been reduced to the proforma amounts indicated below.
The weighted average grant date fair value of options granted in 2003, 2002 and 2001 and the significant assumptions used in determining the underlying fair value of each option grant on the date of the grant utilizing the Black Scholes option pricing model were as follows:
2003 2002 2001 Weighted average grant-date fair value of options granted $0.14 $0.48 $0.54 Assumptions: Risk free interest rate 3.14% 3.99 to 4.4 4.96% Expected life 5 Years 5 Years 5 Years Expected volatility 127% 96% 88% Expected dividend yield 0.0% 0.0% 0.0%
NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and dilutive potential common shares which includes the dilutive effect of stock options, warrants, convertible debentures and shares to be issued in connection with the acquisition of Student Sports (see Note 3). Dilutive potential common shares for all periods presented are computed utilizing the treasury stock method. The dilutive effect of shares to be issued in connection with the acquisition of Student Sports is computed using the average market price for the quarter. The diluted share base for the years ended June 30, 2002, and 2001, excludes shares of 1,737,910,and 261,092, respectively. These shares are excluded due to their anti-dilutive effect as a result of the Company's loss from continuing operations during 2002 and 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS 141, "Business Combinations," which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. SFAS 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 30, 2001. The application of SFAS 141 did not affect any of the Company's previously reported amounts included in goodwill or other intangible assets.
Effective July 1, 2001, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective July 1, 2001 (goodwill amortization for fiscal 2002 otherwise would have been $821,098) and recorded goodwill attributable to Fantasy Sports, Inc. was tested for impairment. This impairment test is required to be performed at adoption of SFAS 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), the Company expects to perform this impairment test during the fourth quarter for Fantasy Sports. For the acquisition of Student Sports, Inc. and any subsequent acquisitions that are considered reporting units under SFAS 142, the impairment test will be performed on the one year anniversary of the acquisition and in that period thereafter.
Based on the initial impairment test on July 1, 2001, it was determined that none of the goodwill recorded was impaired. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. The Company performed the impairment test on goodwill of Fantasy Sports as of June 30, 2003 and 2002 and determined that goodwill was not impaired.
In connection with adopting SFAS 142, the useful lives and the classification of identifiable intangible assets was reassessed and it was determined that they continue to be appropriate. For the components of amortized intangible assets and pro forma results of operations for fiscal 2001 and 2000 giving effect to the adoption of SFAS 142, see Note 9.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 will be effective for the Company's financial statements beginning July 1, 2002, with earlier application encouraged. The Company believes that the adoption of this statement will not have a significant impact on the results of operations or financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement provides a single comprehensive accounting model for impairment of long-lived assets and discontinued operations. SFAS 144 will become effective in the first quarter of fiscal 2003. The Company believes that adoption of this statement will not have a significant impact on the results of operations or financial position of the Company.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." Adoption of the standard is generally required in the fiscal year beginning after May 15, 2002, with certain provisions becoming effective for financial statements issued on or after May 15, 2002. Under the standard, transactions currently classified by the Company as extraordinary items will no longer be treated as such but instead will be reported as other non-operating income or expenses. The Company adopted SFAS 145 on July 1, 2002 and the adoption of SFAS 145 did not have a material impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 will become effective in the third quarter of fiscal 2003. The Company believes that the adoption of this statement will not have a significant impact on the results of operations or financial position of the Company.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclose Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 is effective for interim or annual periods ending after December 15, 2002. The adoption of FIN 45 had no material effect on the financial statements.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS 123. The standard provides additional transition guidance for companies that elect to voluntarily adopt the accounting provisions of SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123 that permits entities to continue to apply the intrinsic value method of APB 25, Accounting for Stock Issued to Employees. As Advanced Viral continues to follow APB 25, its accounting for stock-based compensation will not change as a result of SFAS 148. SFAS 148 does require certain new disclosures in both annual and interim financial statements. The required annual disclosures are effective immediately and have been included in the Company's consolidated financial statements. The new interim disclosure provisions will be effective in the first quarter of fiscal 2004.
During April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entering into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 will not have any impact on our operating results or financial position as we do not have any derivative instruments that are affected by SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Instruments with Characteristics of both Liabilities and Equity". SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have an impact on our operating results or financial position.
NOTE 3. ACQUISITIONS
On September 24, 2001, the Company acquired all the assets and business and assumed certain liabilities of Student Sports, a media company producing publications, television programs and various marketing initiatives for the high school sports market. Under the terms of the agreement, the Company issued 900,000 Company common shares to the owners of Student Sports, and undertook to provide a further payment, as defined, of between 500,000 and 1,500,000 shares of Company common stock on March 31, 2004. On June 10, 2003 the Company sold substantially all assets and liabilities of Student Sports, Inc. (See Note 13).
On November 17, 2000, the Company acquired all of the assets and certain liabilities of Fantasy Sports ("Fantasy"). Fantasy operates the fantasycup.com, fantasycup.org, fantasycup.net, fantasystockcar.com and fantasynhra.com websites and specializes in subscription based NASCAR, college football and other fantasy sports games, as well as the sale of die-cast racing cars. The costs of the acquisition were allocated on the basis of the estimated fair value of the assets acquired and liabilities assumed as required under purchase accounting.
In connection with the acquisition of Fantasy, the Company recorded intangibles consisting of goodwill and customer lists. The customer lists are being amortized on a straight-line basis over their expected useful lives of three to ten years.
The following unaudited pro forma summary presents consolidated financial information as if the acquisition of Fantasy had occurred effective July 1, 2000. The pro forma amounts include adjustments for amortization of intangibles. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the consolidated entities.
In October 2001, the Company received $200,000 in cash and approximately $305,000 reduction in accounts payable primarily related to the acquisition of Fantasy Sports from the Seller. The cash amount, which had been held in escrow, relates to settlement of a dispute related to the acquisition of Fantasy regarding certain disclosures made by Action at the time of acquisition and has been used to reduce goodwill. Of the $305,000, $130,000 was used to reduce inventory to fair value and the remaining $175,000 relating to the purchase price was recorded as a reduction to goodwill.
NOTE 4. ACCOUNTS RECEIVABLE
NOTE 5. INVENTORIES
Inventories consist of finished goods of $168,113 and $121,630 at June 30, 2003 and 2002, respectively. During fiscal 2002, inventory values were reduced by approximately $130,000 due to a settlement with the seller of Fantasy (see Note 3) and by a bulk sale of inventory of approximately $150,000.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Depreciation expense was $94,680, $91,657, and $67,955, for the years ended June 30, 2003, 2002, and 2001, respectively. Of this depreciation expense,$26,252, $15,525, and $0, respectively, was included in discontinued operations.
NOTE 7. INVESTMENTS IN NON-MARKETABLE SECURITIES
A summary of the investments in affiliates on the consolidated financial statements is presented below:
MAGNOLIA BROADBAND, INC. On April 14, 2000, the Company purchased 3,447,774 shares of Series A Preferred stock in Magnolia Broadband ("Magnolia"), with voting rights representing a 48% interest in Magnolia, for a consideration of $2,500,000, $1,300,000 of which was recorded as goodwill. The goodwill relating to the Company's investment in Magnolia was being amortized over a three-year period. Effective July 1, 2001, the Company adopted SFAS 142 (see Note 2) at which time the unamortized balance was $831,066. Such goodwill is no longer being amortized and at June 30, 2002, such goodwill was not considered impaired.
On March 9, 2001, the Company loaned Magnolia $250,000. This loan is convertible into the type of equity security Magnolia sells in its next private placement. In connection with this loan, Magnolia issued the Company warrants to acquire 250,000 shares of Magnolia's common stock at an exercise price of $1.00 per share. The warrants expire on March 9, 2006. The value of the warrants at the date of issuance was not considered significant. At June 30, 2001, the Company provided a full valuation allowance relating this $250,000 loan.
In October 2001, the Company loaned Magnolia $200,000, which was convertible into newly reclassified Series A Preferred Stock. As part of the consideration for the Notes, the Company will exchange its existing convertible notes for new Series A Preferred shares. This note and the above note were converted into new Series A Preferred Stock in March 2002 (see below).
On March 21, 2002, Magnolia entered into an agreement whereby it raised $6 million from three institutional investors. The agreement called for an immediate infusion of $3 million, with an additional $3 million committed, but contingent on Magnolia reaching defined technical milestones. As a result of this agreement, the Company exchanged its existing shares in Magnolia for new Series A Preferred shares and has converted the October 2001 loan into these new Series A Preferred shares as well. The Company's ownership percentage was reduced to approximately 13% and further reduced when the second tranche of financing was realized. In July 2003, Magnolia closed on a $6 million Series C financing round, half of which was funded on closing with the other half dependant on the achievement of certain technical milestones. On a fully diluted basis, the Company's percentage in Magnolia will be reduced to approximately 5% should Magnolia receive full funding, as well as the exercise of outstanding Magnolia employee stock options. Effective at the time that the Company's ownership percentage was reduced below 20%, the Company was accounting for their investment in Magnolia under the cost method. While Magnolia is confident that it can meet the defined technical milestones to obtain the additional funding, there is no assurance that this will occur. Furthermore, there is no assurance that the
full amount will be sufficient for Magnolia to fund its future operations until it achieves revenues and profitability.
NOTE 8. LONG-TERM NOTES RECEIVABLE
In connection with the sale of Lifestyle, which was completed in November 2000, as well as the earlier sale of two other subsidiaries, the Company received as partial consideration three notes denominated in South African Rand. These notes are subject to foreign currency risk and a portion of one is subject to certain performance requirements of the obligee. Two notes require monthly payments ranging from R50,000 to R189,000 through June 30, 2004. The third note was for R52 million of which R20 million (plus accrued interest of $862,083) has been treated as contingent consideration to be recorded when collected. The remaining R32 million is payable to the extent the borrower collects on junior debt. Collections of junior debt will be first charged against accrued interest and the excess applied to the receivable balance not to exceed tranches of R500,000. Management does not expect to begin receiving payments on these notes until the third quarter of fiscal 2004. These notes bear interest at rates based on the lower of the South African Bankers Acceptance rate or 12% (at June 30, 2003 the rate was 12.0%). Notes receivable include accrued interest of approximately $1,381,726.
NOTE 9. INTANGIBLE ASSETS
The components of amortized intangible assets as OF JUNE 30, 2003 AND 2002 is as follows:
Amortization expense for intangible assets was $112,938 $106,375, and $0, for the years ended June 30, 2003, 2002, and 2001, respectively. Of this amortization expense, $45,938, $15,525, and $0, respectively, was included in discontinued operations.
Estimated amortization expense for the five succeeding fiscal years is as follows:
2004 $18,750 2005 2,000 2006 2,000 2007 2,000 2008 2,000
SFAS 142 was adopted July 1, 2001 for fiscal 2002. The following table shows the Company's fiscal 2003, 2002 and 2001 results, adjusted to exclude amortization related to goodwill and equity method goodwill:
The changes in goodwill balance during fiscal 2002 are as follows:
NOTE 10. ACCRUED LIABILITIES
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, 2003 was $168,151.
The company has a secured line of credit utilized by Fantasy Sports for borrowings up to $50,000, which is fully secured by inventory currently owned or hereafter acquired. This facility is payable on demand and bears interest at prime plus 1/2 %. The balance outstanding under this line of credit at June 30, 2003 was $50,000.
LONG TERM DEBT
Scheduled debt maturities for the next five fiscal years are $26,237 in fiscal 2004, $23,251 in fiscal 2005, $5,983 in fiscal 2006 and $4,650 in fiscal 2007.
INCREASING RATE SUBORDINATED CONVERTIBLE DEBENTURES 15,000 increasing rate subordinated convertible debentures of $1,000 each were issued on October 31, 1997. These debentures bore interest at 5% per annum for the year ending October 31, 2001.
The debentures were convertible into shares of common stock, at the option of the debenture holder, at any time prior to maturity at a price of $9.50 per share. The debentures may be redeemed at the option of the Company from October 31, 1998, if the Company's common stock trades at more than $14.25 per share for 30 consecutive market days. Should the debentures not be converted into shares of common stock prior to October 31, 2001, the maturity date, the redemption value of the debentures will be 122.5% of the principal amount.
During fiscal 2000, 3,000 increasing rate subordinated convertible debentures of $1,000 each were converted to shares of common stock at $9.50 per share. The unamortized debt issue costs related to these debentures was offset against additional paid-in capital. There were no debentures converted into common stock in fiscal 2001.
Debt issue costs of $669,294 relating to these debentures were being amortized over the term of the debenture issue. The charge to interest expense for fiscal year 2002 was immaterial. The charge to interest expense for fiscal year 2001 was $107,310.
As of June 30, 2001, the Company had redeemed all but $300,000 of the increasing rate convertible debentures (see below). The remaining debentures were redeemed at maturity in October 2001
DEBENTURE REDEMPTION RESERVE FUND Under the terms of the increasing rate subordinated convertible debentures, a redemption reserve fund was created to accrue for the premium required on the redemption of those debentures on October 31, 2001. This debenture redemption reserve fund was created on the straight-line basis over the remaining period of the debenture tenure. The charge to interest expense for fiscal year 2002 and 2001 for the debenture redemption reserve was $4,248 and $275,107, respectively.
In connection with redemption of the increasing rate subordinated convertible debentures in fiscal 2001, the Company recognized an extraordinary gain of $2,142,949 (net of $119,323 debenture issuance costs and $24,000 of accrued interest write-off) of previously accrued amounts in the debenture redemption reserve fund (see Note 14). The balance of the debenture redemption reserve fund at June 30, 2001 was $61,836. This was paid at maturity in October 2001.
NOTE 12. INCOME TAXES
The components of the Company's provision for income taxes were as follows:
A reconciliation of income tax computed at the statutory federal rate to income tax expense (benefit) is as follows:
At June 30, 2003, the Company has available a U.S. net operating loss carryforward of approximately $2,714,000 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, 2003 and 2002, a valuation allowance has been established against the deferred tax asset since the Company believes it is more likely than not that the amounts will not be realized.
The components of the deferred tax assets (liabilities) were as follows at June 30, 2003 and 2002:
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 2003 and 2002.
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 2003, 2002 and 2001.
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 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.
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.
The following summarizes the operating results of Student Sports, discontinued operations:
Net assets related to Student Sports discontinued operations of $ 977,793 are reported on the June 30, 2002 consolidated balance sheet. These assets consist of the following:
FIRST LIFESTYLE HOLDINGS LIMITED ("LIFESTYLE") During 2000, the Company changed its focus away from investing in South African based industries. Although Lifestyle had performed well over the past few years, it no longer fit the Company's investment strategy. On June 21, 2000 the Company received an offer from Lifestyle management to buy Lifestyle from the Company. The Company accepted the offer on September 26, 2000 at a general meeting of Lifestyle stockholders, which has been approved by the South African competition authorities.
On August 14, 2000, the Company sold an effective 13.7% interest in Lifestyle to the existing Lifestyle management as part of the plan to dispose of the Lifestyle segment. This sale was done on the same terms and conditions as the offer made by management to the remaining stockholders as contained in a circular to Lifestyle stockholders dated September 4, 2000.
Regulatory approval was obtained from the South African Monopolies Commission on October 12, 2000. Proceeds from the sale were received on November 6, 2000. Excluded from the proceeds below are R20 million of a R52 million note (denominated in South African Rand) from Salwin Investments (Pty.) Ltd. (a South African company formed for the acquisition of Lifestyle). The note accrues interest and contains provisions for the payment of interest and/or principal, based on the performance or sale of the Lifestyle assets (see Note 8).
The following summarizes the operating results of the Lifestyle discontinued operations:
Lifestyle was sold effective November 6, 2000, the date that the proceeds from the sale were made available to the Company. Therefore, the results presented above for the period ended June 30, 2001 are for a four-month period.
NOTE 14. EXTRAORDINARY ITEM
During the year ended June 30, 2001, the Company purchased and retired $11,700,000 face value of the increasing rate subordinated convertible debentures for face value plus accrued but not accreted interest. As a result of these retirements, the Company recognized an extraordinary gain of $2,142,949 of previously accrued but unpaid accreted interest (see Note 11).
NOTE 15. CASH FLOWS
Changes in operating assets and liabilities consist of the following:
NOTE 16. BUSINESS SEGMENT INFORMATION
During fiscal years 2003 and 2002 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 and is being reported as discontinued operations. As a result, as of June 30, 2003, the company operates in only one segment, consisting of fantasy sports games.
NOTE 17. 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, 2003, has granted options to purchase 921,666 shares of common stock under the Plan, of which 110,000 options have been exercised and 30,000 options expired unexercised.
The options issued under the plan still outstanding are reflected in the table below.
Significant option groups outstanding at June 30, 2003 and related weighted average exercise price and weighted average remaining life are as follows:
Options Outstanding and Exercisable ------------------------------------------------ Weighted Range of Average Exercise Exercise Prices Shares Price
Less than $1.00 130,000 $0.32 $1.00 to $2.19 330,000 1.13 $3.75 to $4.88 763,333 4.37 $5.00 to $6.00 240,000 5.02
The Company has also issued options to an employee to acquire 4.45 shares of Fantasy common stock for $47,191 per share. These options vest immediately and have 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 has a remaining life of 0.3 years.
NOTE 18. 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.
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).
Warrants outstanding at June 30, 2002 were as follows:
NOTE 19. FANTASY ESCROW AGREEMENT
In November 2000, in connection with the acquisition of Fantasy, the Company entered into an Escrow Agreement with the Seller. The Company deposited $250,000 with the escrow agent to secure various obligations of the Seller on the terms, and subject to the conditions, set forth in the Asset Purchase Agreement. Escrow funds may be released from time to time within twelve months and after the Company has given written notice of claim and such claim has been approved by the Seller. As of June 30, 2002, $200,000 was repaid to the Company from escrow funds.
NOTE 20. 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 21. 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 $0.8 million at June 30, 2003, the Company expects to begin collecting on an outstanding note receivable due from the sale of First Lifestyle Holdings in March 2004, which will provide additional resources. The Company is also working to find an alternative guarantor for the approximate $700,000 it has guaranteed for the bank lines of a former South African subsidiary. Additionally, the Company believes it would be able to raise debt or equity capital should the need arise.
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, 2003, 2002 and 2001 was approximately $137,000, $133,000 and $88,000, respectively.
Approximate future minimum lease payments under non-cancelable office and equipment lease agreements are as follows:
Year ending June 30: 2004 $ 85,103 2005 54,638 2006 33,403 2007 13,107 2008 13,107 2009 1,092 ======== $200,450 ========
LITIGATION First South Africa Holdings (FSAH), our South African subsidiary, has received notice of a claim for approximately $250,000 from a holder of FSAH Class B shares. The claimant contends a breach of their FSAH escrow agreement issued in connection with the sale of their business in 1997. We believe this claim is without merit and FSAH will vigorously defend this matter. In July 2003, FSAH settled this matter by paying an amount of R150,000 (approximately $20,000) in exchange for the receipt of 19,000 FSAH Class B Shares.
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 the resolution of pending claims will not 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 January 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 currently 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.
On December 18, 2000, the Company entered into an agreement with an employee that provides for a base salary, 250,000 stock options that vest over a period of time and 10,000 shares of the Company's common stock issued upon acceptance of the employment agreement. The agreement also allows the employee to participate in a management bonus pool. Such pool will be comprised of up to 5% of realized capital gains from the Company's investments made after April 1, 2000. In September 2002, this employee contract was terminated with 125,000 stock options vested. All other future compensation under the agreement was cancelled at that time.
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 will receive 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
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 $9 million for calendar years 2001, 2002 and 2003.
GUARANTEES
In order to facilitate an orderly sale of one of its former South African subsidiaries, in 1999 the Company provided a guarantee for the bank facilities of this subsidiary in South Africa. At the time, this guarantee was provided on an unsecured basis by our wholly owned subsidiary, First South African Holdings. In November 2000, upon the subsequent sale of the majority of our South African assets and the repatriation of the cash proceeds of this sale, we were required to provide a bank guarantee to secure the continuation of this credit facility. As a result, during fiscal 2001 and 2002 we provided a bank guarantee in the amount of R9 million ($US 900,000) to secure such facility. The bank guarantee is in turn secured by the equivalent amount in US dollars. In December 2002, we negotiated a restructure of this South African facility, reducing the face amount of our guarantee to R5.5 million ($US 730,000). Our former subsidiary, in turn, is reducing its bank line through the repayment of R150,000 ($US 20,000) per month in interest and principal. Our exposure as of June 30, 2003 has been reduced to approximately R5.3 million ($US 700,000) and we anticipate it to be reduced by approximately R100,000 ($13,000) per month over the next fiscal year. At current exchange rates, we have approximately $667,000 restricted cash securing this guarantee. We are comfortable that this guarantee will be significantly reduced over the next two years, during which time we believe that alternative arrangements will be made so that this guarantee will no longer be in force.
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 2003, 2002 or 2001.
During 2003, 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).
NOTE 22. QUARTERLY INFORMATION (UNAUDITED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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............ 57 Chairman of the Board
Clive Kabatznik......... 46 Vice Chairman of the Board, Chief Executive Officer, President and Chief Financial Officer
Cornelius J. Roodt...... 44 Director
Joseph Weil............. 48 Director
Stanley Castleton....... 56 Director
Greg Liegey............. 40 Chief Executive Officer, Fantasy Sports, Inc.
MICHAEL LEVY is our cofounder and has served as Chairman of our Board of Directors since our inception. 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 cofounder and has served as a director and our President since inception 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.
STANLEY CASTLETON is, and for the past five years has been the President of DDRM, Inc., the managing general partner and asset manager of the Hilton Anaheim, and he is currently also the Managing Member of DDRM Greatplace LLCD, a real estate development company.
JOSEPH WEIL 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.
GREGORY LIEGEY has been the Chief Executive Officer of Fantasy Sports, Inc. since we acquired that company in November 2000. He was the founder of Fantasy Sports and since its inception in 1993, he has acted as Chief Executive of that company. From 1988 to 1993, he was a manager of sales and marketing accounting at Pfaltzgraff. From 1985 to 1988, he was a senior auditor at Arthur Andersen. Mr. Liegey holds a degree in accounting from Shippensburg University.
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.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has an audit committee and a compensation committee. The audit committee is composed of Stanley Castleton and Cornelius J. Roodt. The audit committee is responsible for recommending annually to the Board of Directors the independent auditors to be retained, reviewing with the independent auditors the scope and results of the audit engagement and establishing and monitoring our financial policies and control procedures.
The compensation committee is currently composed of Michael Levy and Joseph Weil. The compensation committee has power and authority with respect to all matters pertaining to compensation and the administration of employee benefits, deferred compensation and our stock option plans.
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, 2002 were timely made.
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, 2001, June 30, 2002 and June 30, 2003. 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, 2003.
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;
The options granted to Mr. Kabatznik during fiscal year ended June 30, 2001 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 $0.75 per share.
OPTIONS GRANTED IN FISCAL 2003
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, 2003, 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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
During the fiscal year ended June 30, 2003 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, 2003. 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, 2003 or $0.30, over the exercise price of the option.
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 for every year of 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 of the Company beginning as of February 1, 2000 and continuing through and until January 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 will serve as the Chief Executive Officer, of Fantasy Sports Inc. beginning as of November 30, 2000 and continuing through and until November 30, 2003. As compensation for his services, Mr. Liegey will receive an annual base salary of $100,000 with increases at the discretion of the board of directors of Fantasy Sports Inc. In addition, Mr. Liegey received a three-year option to acquire 5% of the shares of Fantasy Sports, Inc. outstanding as of November 16, 2000, at a price equal to that paid by Silverstar Holdings upon acquisition of the assets of Fantasy Sports Inc. A similarly priced performance based three-year option to acquire a further 2.5% of the outstanding shares of Fantasy Sports Inc. as of November 16, 2000 was also issued to Mr. Liegey. This performance based option will vest on the earlier of Fantasy Sports Inc. 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.
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 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, 2003, we have granted options to purchase 485,000 shares of our common stock under our 1995 Stock Option Plan, 170,000 of which have been exercised.
NON-PLAN STOCK OPTIONS
We have granted non-plan stock options to purchase 1,110,000 shares of our common stock, 122,500 at of which were granted at an exercise price of $0.75 per share, 433,333 of which were granted at $4.10 per share, 25,000 at $2.19 per share, 330,000 at $4.75 per share and 200,000 at $5.00 per share.
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.
* Less than 1%. (1) Beneficial ownership is calculated in accordance with Rule 13d3 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 150,000 shares of our common stock issuable upon exercise of options that are immediately exercisable.
(5) Includes (i) 570,137 shares of our Class B common stock and (ii) 166,452 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 725,000 shares of our common stock issuable upon exercise of options that are immediately exercisable.
(7) Includes 190,000 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.
(9) Includes 35,000 shares of our common stock issuable upon the exercise of options that are immediately exercisable.
(10) Includes 1,100,000 shares issuable upon exercise of options that are immediately exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. 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.
In April 2003, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. 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 April 2003 evaluation. We cannot assure you, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.
ITEM 15.
(A) EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
1. FINANCIAL STATEMENTS
The following financial statements are included as required to be filed by Item 8: