On December 4, 2006, Silverstar Acquisitions achieved over 90% acceptance of its offer to acquire the shares of Empire. As a result of over 90% of the shareholders of Empire accepting Silverstar Acquisition’s offer, the offer to the remaining shareholders of Empire terminated on December 15, 2006. Silverstar Acquisitions will acquire the remaining Empire shares for a cash payment as stipulated in its offer.
The offer provided for either a cash payment of approximately $.13 per share (£.07 p), or an earn-out alternative, where the initial payment was approximately $.09 per share (£.05 p), with a further $.09 per share (£.05 p) in loan notes payable in October 2007. Additionally, there is an earn-out payable in April 2008. The earn-out is based on a formula of Empire’s EBITDA for the fiscal year ended June 30, 2007. The following pro forma financial statements assume the earn out targets will be fully achieved and the Company recorded a liability of £6,177,548 or $11,568,076 USD based on the September 30, 2006 foreign exchange rate of 1.8726 US dollar to the UK pound.
The aggregate purchase price for Empire’s stock, assuming the full earn out threshold is met, will be approximately $25 million of which amount approximately $5 million are loan notes which mature October 31, 2007 and $11.6 million are loan notes payable in April 2008 if earnings targets are achieved. $.7 million of the acquisition expenses were paid by the issuance of 406,180 shares of Silverstar’s Class A common stock. Of the remaining $7.7 million of the purchase price approximately $7.3 million has been paid by utilizing the Company’s internal cash resources. The remaining $.4 million has been accrued as a short term liability.
The unaudited pro forma balance sheet combines the historical consolidated balance sheets of the Company and Empire as if the transaction had taken place on September 30, 2006. The unaudited pro forma consolidated statements of operations for the year ended June 30, 2006 and for the three month period ended September 30, 2006 combine the historical consolidated statements of operations of the Company and Empire as if the transaction had taken place on July 1, 2005. The historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the transaction and (ii) factually supportable. In addition, with respect to the statements of operations, the pro forma events must be expected to have a continuing impact on the combined results.
This information should be read in conjunction with (i) the accompanying notes to the unaudited pro forma financial statements, (ii) the Company’s separate historical audited financial statements as of and for the year ended June 30, 2006, included in its Annual Report on Form 10-K previously filed with the U.S. Securities and Exchange Commission (“SEC”), and (iii) the Company’s separate historical financial information as of and for the three month period ended September 30, 2006, included in its Quarterly Report on Form 10-Q previously filed with the SEC.
The unaudited pro forma financial information is presented for informational purposes only. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the transaction been completed as of the date indicated. In addition, the unaudited pro forma financial information does not purport to project the future financial position or operating results of the Company after the transaction.
The pro forma adjustments are based on preliminary estimates, available information, and certain assumptions, all as more fully described in the notes to the unaudited pro forma financial statements, and may be revised as additional information becomes available.
| Silverstar Holdings | Empire Interactive | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenues (gross revenues reportable for Empire Interactive reported in acordance with U.K. GAAP totaled $36,536,098) | $ | 3,316,429 | $ | 23,672,953 | C | $ | 26,989,382 | ||||||||||
| Operating Expenses: | |||||||||||||||||
| Cost of sales (costs for sales for Empire Interactive as reported in accordance with UK GAAP totaled $18,316,014) | 398,374 | 7,743,861 | 8,142,235 | ||||||||||||||
| Development cost and royalties | 1,099,488 | 10,947,720 | 12,047,208 | ||||||||||||||
| Selling, general and administrative (SG&A expenses for Empire Interactive as reported in accordance with UK GAAP totaled $11,753,614) | 2,931,243 | 8,462,622 | C | 11,393,865 | |||||||||||||
| Amortization of intangibles | 148,797 | 3,821,594 | A | 3,970,391 | |||||||||||||
| Depreciation | 31,687 | 167,528 | 199,215 | ||||||||||||||
| Total operating expenses | 4,609,589 | 27,321,731 | 3,821,594 | 35,752,914 | |||||||||||||
| Operating loss | (1,293,160 | ) | (3,648,778 | ) | (3,821,594 | ) | (8,763,532 | ) | |||||||||
| Other Income | 39,959 | 0 | 39,959 | ||||||||||||||
| Foreign currency loss) | (749,764 | ) | (145,837 | ) | (895,601 | ) | |||||||||||
| Costs incurred with abandoned acquisition | (321,412 | ) | (321,412 | ) | |||||||||||||
| Foreign tax expense | (600,000 | ) | (600,000 | ) | |||||||||||||
| Amortization of convertible debt discounts and issuance costs | (769,566) | (769,566 | ) | ||||||||||||||
| Interest income | 633,131 | 633,131 | |||||||||||||||
| Interest expense | (560,841 | ) | (140,003 | ) | (174,836 | ) | B | (875,680 | ) | ||||||||
| Loss from continuing operations before income taxes | (3,621,653 | ) | (3,934,618 | ) | (3,996,430 | ) | (11,552,701 | ) | |||||||||
| Income tax benefit | 64,853 | 64,853 | |||||||||||||||
| Net loss from continuing operations | (3,621,653 | ) | (3,869,765 | ) | (3,996,430 | ) | (11,487,848 | ) | |||||||||
| Discontinued operations: | |||||||||||||||||
| Income from operations net of income taxes of $0.0 | 161,753 | 161,753 | |||||||||||||||
| Gain on disposition net of income taxes of $0.0 | 1,480,710 | 1,480,710 | |||||||||||||||
| Net loss | ($ 1,979,190 | ) | ($ 3,869,765 | ) | ($3,996,430 | ) | ($ 9,845,385 | ) | |||||||||
| Net Income (Loss) Per Share: | |||||||||||||||||
| Basic: | |||||||||||||||||
| Continuing Operations | ($ 0.39 | ) | ($ 1.21 | ) | |||||||||||||
| Discontinued operations | 0.18 | 0.17 | |||||||||||||||
| Net Loss | ($ 0.21 | ) | ($ 1.04 | ) | |||||||||||||
| Diluted | |||||||||||||||||
| Continuing operations | ($ 0.39 | ) | ($ 1.21 | ) | |||||||||||||
| Discontinued operations | 0.17 | 0.16 | |||||||||||||||
| Net loss | ($ 0.22 | ) | ($ 1.04 | ) | |||||||||||||
| Weighted average common stock outstanding: | |||||||||||||||||
| Basic | 9,102,286 | 9,507,446 | |||||||||||||||
| Diluted | 9,574,910 | 9,980,070 | |||||||||||||||
| Silverstar Holdings | Empire Interactive | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenues (gross revenues reportable for | |||||||||||||||||
| Empire Interactive reported in acordance with U.K | |||||||||||||||||
| GAAP totaled $10,353,717) | $ | 278,745 | $ | 8,260,882 | C | $ | 8,539,627 | ||||||||||
| Operating Expenses: | |||||||||||||||||
| Cost of sales (cost of sales for Empire Interactive as reported in accordance with UK GAAP totaled $3,590,224) | 119,209 | 1,513,221 | C | 1,632,430 | |||||||||||||
| Development cost and royalties | 68,401 | 2,367,033 | 2,435,434 | ||||||||||||||
| Selling, general and administrative (SG&A expenses for Empire Interactive as reported in accordance with UK GAAP totaled $2,252,849) | 613,955 | 2,237,017 | C | 2,850,972 | |||||||||||||
| Amortization of intangibles | 42,361 | 1,177,870 | A | 1,220,231 | |||||||||||||
| Depreciation | 7,730 | 32,933 | 40,663 | ||||||||||||||
| Total operating expenses | 851,656 | 6,150,204 | 1,177,870 | 8,179,730 | |||||||||||||
| Operating Loss | (572,911 | ) | 2,110,678 | (1,177,870 | ) | 359,897 | |||||||||||
| Other Income | 11 | 11 | |||||||||||||||
| Foreign currency loss | (262,073 | ) | (88,471 | ) | (350,544 | ) | |||||||||||
| Amortization of convertible debt discounts and issuance costs | (159,107 | ) | (159,107 | ) | |||||||||||||
| Interest income | 155,468 | 155,468 | |||||||||||||||
| Interest expense | (102,826 | ) | (34,464 | ) | (137,290 | ) | |||||||||||
| Loss From Continuing operations before income taxes | (941,438 | ) | 1,987,743 | (1,177,870 | ) | (151,504 | ) | ||||||||||
| Income tax benefit | - | (23,670 | ) | (23,670 | ) | ||||||||||||
| Net income (loss) | ($941,438 | ) | $ | 1,964,073 | (1,177,870 | ) | ($155,235 | ) | |||||||||
| Net income (loss) per share: | |||||||||||||||||
| Basic and diluted | ($0.10 | ) | ($0.02 | ) | |||||||||||||
| Weighted average common stock outstanding: | |||||||||||||||||
| Basic and diluted | 9,149,034 | 9,555,214 | |||||||||||||||
The notes to the unaudited pro forma financial statements that follow are intended to provide additional information regarding the effect of the pro forma adjustments on the consolidated financial statements.
| A. | To record amortization of acquired Intangible Assets |
| B. | To record Interest expense payable on notes held by former shareholders of Empire Interactive stock. The pro forma financial statements were prepared using the assumption that the notes held by former empire interactive shareholders would be paid in full on May 31, 2006, therefore, no interest expense on these notes has been recorded for the quarter ending September 30, 2006 |
| C. | With respect to revenue generated by the Empire via US distributors, US GAAP prescribes, on the basis of the terms of the contracts involved, that net presentation of Revenue is required for both guaranteed revenue and additional revenue in excess of guaranteed amounts. Under UK GAAP, gross presentation had been adopted. There was no effect on reported Net Income for the Pro Forma periods as shown below. |
| Year Ended June 30, 2006 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. GAAP | U.K. GAAP | Effect on Income | |||||||||
| Revenues reportable | $ | 23,672,953 | $ | 36,536,098 | ($12,863,145 | ) | |||||
| Cost of sales expense | 7,743,861 | 18,316,014 | 10,572,153 | ||||||||
| Selling general and administrative expenses | 8,462,622 | 10,753,614 | 2,290,992 | ||||||||
| Effect on income (loss) | $ | 0 | |||||||||
| Quarter Ended September 30, 2006 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. GAAP | U.K. GAAP | Effect on Income | |||||||||
| Revenues reportable | $ | 8,260,882 | $ | 10,353,717 | ($2,092,835 | ) | |||||
| Cost of sales expense | 1,513,221 | 3,590,224 | 2,077,003 | ||||||||
| Selling general and administrative expenses | 2,237,017 | 2,252,849 | 15,832 | ||||||||
| Effect on income (loss) | $ | 0 | |||||||||
Pro Forma Adjustments | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | Silverstar Holdings | Empire Interactive | Debit | Credit | Pro forma Combined | ||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||
| (Includes restricted cash of $658,693 and $647,797, respectively) | $ | 8,822,680 | $ | 23,537 | 6,943,790 | $ | 1,902,427 | ||||||||||
| Cash restricted for foreign tax estimated liability | 2,760,607 | 0 | 2,760,607 | ||||||||||||||
| Accounts receivable, net | 188,382 | 1,856,793 | 2,045,175 | ||||||||||||||
| Current portion of long term notes receivable | 172,974 | 172,974 | |||||||||||||||
| Inventory | 142,934 | 565,025 | 707,959 | ||||||||||||||
| Prepaid expenses and other current assets | 358,056 | 51,907 | 409,963 | ||||||||||||||
| Total current assets | 12,445,633 | 2,497,262 | 7,999,105 | ||||||||||||||
| Property, plant and equipment, net | 70,584 | 820,819 | 891,403 | ||||||||||||||
| Investments in non-marketable securities | 1,143,566 | 1,143,566 | |||||||||||||||
| Long term notes receivable | 373,975 | 373,975 | |||||||||||||||
| Goodwill, net | 846,335 | 846,335 | |||||||||||||||
| Intangible assets, net | 1,377,964 | 28,851,371 | D | 30,229,335 | |||||||||||||
| Deferred charges and other assets | 653,189 | 584,251 | 346,008 | E | 891,432 | ||||||||||||
| Total assets | $ | 16,911,246 | $ | 3,902,332 | $ | 42,375,151 | |||||||||||
| Current liabilities: | |||||||||||||||||
| Bank overdraft | 1,549,588 | 1,549,588 | |||||||||||||||
| Lines of credit | 658,693 | 658,693 | |||||||||||||||
| Current portion of long term debt | 121,894 | 121,894 | |||||||||||||||
| Current portion of convertible secured debenture | 1,440,000 | 1,440,000 | |||||||||||||||
| Notes payable former Empire shareholders | 4,999,761 | E | 4,999,761 | ||||||||||||||
| Accounts payable | 718,417 | 2,586,557 | 3,304,974 | ||||||||||||||
| Accrued expenses | 839,133 | 3,571,891 | 465,033 | E | 4,876,057 | ||||||||||||
| Estimated liability for foreign tax | 564,668 | 564,668 | |||||||||||||||
| Total current liabilities | 4,342,805 | 7,708,035 | 17,515,634 | ||||||||||||||
| Convertible secured debenture, net of current portion | 1,843,863 | 1,843,863 | |||||||||||||||
| Contingent liability - earn out alternative | 11,568,076 | E | 11,568,076 | ||||||||||||||
| Obligation to issue common stock | 244,392 | 244,392 | |||||||||||||||
| Total liabilities | $ | 6,431,060 | $ | 7,708,035 | $ | 31,171,965 | |||||||||||
| Stockholders' equity: | |||||||||||||||||
| Common stock, Class A, | 83,138 | 126,953 | 126,953 | 4,062 | E | 87,200 | |||||||||||
| Common stock, Class B | 8,353 | 8,353 | |||||||||||||||
| Common stock, FSAH Class B | 600 | 600 | |||||||||||||||
| Additional paid-in capital | 65,584,072 | 19,098,200 | 19,098,200 | 718,938 | E | 66,303,010 | |||||||||||
| Accumulated deficit | (55,331,795 | ) | (23,030,856 | ) | 23,030,856 | (55,331,795 | ) | ||||||||||
| Other comprehensive income | 135,818 | 135,818 | |||||||||||||||
| Total stockholders' equity | 10,480,186 | -3,805,703 | 11,203,186 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 16,911,246 | $ | 3,902,332 | $ | 42,375,151 | |||||||||||
The notes to the unaudited pro forma financicial statements that follow are intended to provide additional information regarding the effect of the pro forma adjustments on the consolidated financial statements.
| D | To record intangible assets acquired at fair market value |
| E | To record acquisition of Empire Interactive stock at estimated carrying value of $25,045,668 |
| Reclassify previously capitalized acquisition costs | $ | 346,008 | |||
| Cash paid at settlement | 6,943,790 | ||||
| Increase in accrued expenses | 465,033 | ||||
| Fair market value of 405,160 Class A shares issued as payment of | |||||
| finder's fee and other acquisition fees | 723,000 | ||||
| Notes issued to former shareholders | 4,999,761 | ||||
| Contingent liability - earn out alternative - payable upon certain earnings | |||||
| targets being met | 11,568,076 | ||||
| $ | 25,045,668 | ||||
