<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 2000
QUOKKA SPORTS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
000-26311 94-3250045
(Commission File Number) (I.R.S. Employer Identification No.)
525 Brannan Street, Ground Floor, San Francisco, CA 94107
(Address of Principal Executive Offices)
(415) 908-3800
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
INFORMATION TO BE INCLUDED IN REPORT
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 31, 2000, pursuant to an Agreement and Plan of Merger and
Reorganization, dated as of March 1, 2000, a copy of which is attached to this
report as Exhibit 2.1 (the "Agreement"), by and among Quokka Sports, Inc. and
Subsidiaries (the Company), ZoneNetwork.com, Inc. ("Zone") and the Montana
Acquisition Corporation ("Merger Sub"), a wholly-owned subsidiary of the
Company, the Company completed the merger of Merger Sub with and into Zone (the
"Merger"). As a result of the Merger, Zone became a wholly-owned subsidiary of
the Company and Merger Sub ceased to exist. The Merger is intended to be a
tax-free reorganization for federal income tax purposes. For accounting
purposes, the Merger is being treated as a purchase. As consideration for the
transaction, 0.07193 of a share of the common stock of the Company ("Company
Common Stock") was issued for each outstanding share of the common stock and
preferred stock of Zone ("Zone Capital Stock"); the Company paid cash in lieu of
fractional shares. Outstanding options and warrants for Zone Capital Stock were
assumed by the Company and were automatically converted into options and
warrants for Company Common Stock at the same exchange ratio, except an
outstanding warrant to purchase 169,503 shares of the Series B Preferred Stock
of Zone was automatically converted into a warrant to purchase 23,849 shares of
Company Common Stock. The Company issued an aggregate of 1,411,639 shares of
Company Common Stock in exchange for the outstanding shares of Zone Capital
Stock, exclusive of any shares issuable upon exercise of outstanding options and
warrants. The holders of such shares were given certain registration rights as
set forth in an Amended and Restated Investors' Rights Agreement, dated as of
March 31, 2000, by and among the Company and the individuals and entities
identified on Exhibit A thereto, a copy of which is attached to this report as
Exhibit 4.1. Approximately ten percent (10%) of such shares were placed in
escrow to secure certain indemnification obligations contained in the Agreement.
Subject to outstanding claims, the escrow will terminate upon the earlier of (a)
the date 30 days following the receipt by the Company of four full fiscal
quarters of audited financial statements of Zone and (b) May 15, 2001. Zone
produces and operates web sites that offer digital content, products and
services targeted to enthusiasts of skiing, snowboarding, hiking, mountain
biking, and climbing. The Company intends that the Zone business will continue
to be operated in its current manner. The amount of consideration and other
terms of the Agreement were determined through arms-length negotiations between
the Company and Zone, which negotiations took into account the value of the
acquired intellectual property and workforce of Zone, among other factors. Prior
to the consummation of the Merger, there were no material relationships between
Zone and the Company or any of its affiliates, any director or officer of the
Company, or any associate of any such director or officer.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS
(a) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) Pro
Forma Condensed Consolidated Balance Sheet as of December 31, 1999 Pro
Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1999 Notes to Pro Forma Condensed Consolidated Financial
Information
(b) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED ZoneNetwork.com, Inc.
Financial Statements Report of Independent Accountants Balance Sheet as
of December 31, 1999 Statement of Operations for the Year Ended December
31, 1999 Statement of Shareholders' Deficit for the Year Ended December
31, 1999 Statement of Cash Flows for the Year Ended December 31, 1999
Notes to Financial Statements
<PAGE> 4
The pro forma condensed consolidated statements of operations for the
year ended December 31, 1999 included herein reflect the results of
operations of the Company for the year ended December 31, 1999, which
includes the results of operations for the year ended December 31, 1999
of the Company's subsidiaries, combined with the results of operations
of ZoneNetwork.com, Inc. for the year ended December 31, 1999.
<PAGE> 5
BALANCE SHEET
QUOKKA SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------
Historical
----------------------- Combined
QUOKKA ZONE Combined Adjustments Pro Forma
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash $ 3,855 $ 1,927 $ 5,782 -- $ 5,782
Restricted cash -- 115 115 -- 115
Investments in marketable securities 64,902 -- 64,902 -- 64,902
Accounts receivable, net 6,067 576 6,643 -- 6,643
Inventory, net of reserve -- 2,384 2,384 -- 2,384
Acquired programming and distribution rights 12,042 12,042 -- 12,042
Prepaid and other expenses 1,823 233 2,056 -- 2,056
-------- -------- -------- -------- --------
Total Current Assets 88,689 5,235 93,924 -- 93,924
-------- -------- -------- -------- --------
--
Property and equipment, net 10,551 2,147 12,698 12,698
Intangible assets 17,075 17,075
Other assets 640 25 665 665
-------- -------- -------- -------- --------
Total Assets $ 99,880 $ 7,407 $107,287 $ 17,075 $124,362
======== ======== ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,427 $ 3,918 $ 6,345 $ 3,474 $ 9,819
Accrued expenses 3,797 1,717 5,514 -- 5,514
Current portion of long-term debt and --
capitalized lease obligations 6,041 4,209 10,250 -- 10,250
Deferred revenues 3,864 -- 3,864 -- 3,864
-------- -------- -------- -------- --------
Total Current liabilities 16,129 9,844 25,973 3,474 29,447
-------- -------- -------- -------- --------
Long-term debt and capitalized lease
obligations, net of current portion 11,493 380 11,873 11,873
-------- -------- -------- -------- --------
Total Liabilities 27,622 10,224 37,846 3,474 41,320
-------- -------- -------- -------- --------
Stockholders' equity --
Preferred stock -- 95 95 (95) --
Common stock 4 100 104 (100) 4
Additional paid-in capital 137,460 15,323 152,783 12,637 165,420
Deferred compensation -- (102) (102) -- (102)
Warrants and other 7,831 -- 7,831 -- 7,831
Treasury stock, at cost (107) -- (107) -- (107)
Accumulated deficit (72,930) (18,234) (91,164) 1,159 (90,005)
-------- -------- -------- -------- --------
Total stockholders' equity 72,258 (2,818) 69,440 13,601 83,041
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $ 99,880 $ 7,407 $107,287 $ 17,075 $124,362
======== ======== ======== ======== ========
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed
Consolidated Financial Information
<PAGE> 6
STATEMENTS OF OPERATIONS
QUOKKA SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
---------------------------------------------------------------
Historical
----------------------- Combined
QUOKKA ZONE Combined Adjustments Pro Forma
-------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $13,070 $ 4,627 $17,697 $ -- $17,697
Cost of revenue
Production and other costs 20,070 4,356 24,426 -- 24,426
Amortization of programming and distribution rights 3,441 -- 3,441 -- 3,441
-------- -------- -------- -------- --------
Total cost of revenue 23,511 4,356 27,867 -- 27,867
-------- -------- -------- -------- --------
Gross (loss) profit (10,441) 271 (10,170) -- (10,170)
-------- -------- -------- -------- --------
Operating expenses
Research and enginieering 13,094 3,070 16,164 -- 16,164
Sales and marketing 19,525 8,177 27,702 -- 27,702
General and administrative 11,069 2,280 13,349 -- 13,349
Amortization of intangible assets -- 17,075 17,075
Depreciation 4,217 -- 4,217 4,217
-------- -------- -------- -------- --------
Total operating expenses 47,905 13,527 61,432 17,075 78,507
-------- -------- -------- -------- --------
Loss from operations (58,346) (13,256) (71,602) 17,075 (88,677)
Loss of associated venture (2,176) -- (2,176) -- (2,176)
Minority interest in net loss of consolidated subsidiary 1,936 1,936 -- 1,936
Other income/expense, net -- (11) (11) -- (11)
Interest income/(expense), net 1,702 (206) 1,496 -- 1,496
-------- -------- -------- -------- --------
Net loss $(56,884) $(13,473) $(70,357) $ 17,075 $(87,432)
-------- -------- -------- -------- --------
Pro forma net loss per share:
Net loss per share - basic and diluted $ (1.45) $ (2.15)
Weighted average shares - basic and diluted 39,366 1,270 40,636
</TABLE>
Refer also to the accompanying Notes to Pro Forma Condensed
Consolidated Financial Information
<PAGE> 7
QUOKKA SPORTS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and related
notes of Quokka Sports, Inc. (the "Company") are unaudited. However, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the financial
position and results of operations for the periods presented have been included.
These combined financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1999 included in the Company's Annual Report on Form 10-K for
that period.
In accordance with the rules and regulations of the Securities and
Exchange Commission, unaudited condensed consolidated financial statements may
omit or condense certain information and disclosures normally required for a
complete set of financial statements prepared in accordance with generally
accepted accounting principles. However, the Company believes that the notes to
the condensed consolidated financial statements contain disclosures adequate to
make the information presented not misleading.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated on
consolidation.
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 recorded amounts reported in the
unaudited condensed consolidated financial statements and accompanying notes. A
change in the facts and circumstances surrounding these estimates could result
in a change to the estimates and impact future operating results.
2. PERIODS PRESENTED
The Company and ZoneNetwork.com, Inc.'s ("Zone") fiscal year ended on
December 31. The accompanying unaudited pro forma statements of operations
information gives effect to the merger of the Company and Zone as if such merger
occurred as of January 1, 1999. The pro forma condensed consolidated statements
of operations for the year ended December 31, 1999 reflect the results of
operations of the Company for the year ended December 31, 1999, which includes
the results of operations for the year ended December 31, 1999 of the Company's
subsidiaries, combined with the results of operations of Zone for the year ended
December 31, 1999. The unaudited pro forma condensed consolidated statement of
operations is not necessarily indicative of the operating results that would
have been achieved had the transactions been in effect as of beginning of the
periods presented and should not be construed as being representative of future
operating results.
<PAGE> 8
The pro forma condensed consolidated balance sheets as of December 31,
1999, combine the assets, liabilities and stockholders' equity of the Company at
December 31, 1999 with the assets, liabilities and shareholders' equity of Zone
as of December 31, 1999.
3. PURCHASE PRICE ALLOCATION
Effective March 31, 2000, the Company acquired all the outstanding
common stock and stock rights of Zone through the issuance of 1,411,639 shares
the Company's common stock for a total purchase price of approximately $25.9
million including acquisition costs. Zone produces and operates web sites that
offer digital content, products and services targeted to enthusiasts of skiing,
snowboarding, hiking, mountain biking, and climbing. The acquisition has been
accounted for using the purchase method of accounting and accordingly the
purchase price has been allocated to the tangible and intangible assets acquired
and the liabilities assumed on the basis of their respective fair values on the
acquisition date. Of the total purchase price, approximately $34.2 million was
allocated to intangible assets, including assembled workforce, customer base and
goodwill. The intangible assets are amortized over their estimated useful lives
of two years. The purchase price assumed for the Zone acquisition is an initial
estimate of the purchase price and is subject to change (primarily as a result
of the actual amount of Company Common Stock that is ultimately issued). The
purchase price allocations for the Zone acquisition are based upon a preliminary
valuation. This valuation could change when finalized upon closing of this
transaction, based upon the facts and circumstances at that time. A change in
the purchase price or the allocation of the purchase price could have a material
effect on actual future results of the Company.
4. PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the historical
financial statements of the Company and Zone based upon assumptions made by
management for the purpose of preparing the unaudited pro forma condensed
consolidated financial statements:
(a) To reclass acquisition-related and other charges and amortization
of goodwill and purchased intangible assets for the year ended
December 31, 1999.
(b) To reclass the par value of the Company's shares issued for Zone
outstanding shares.
(c) To reflect cost and/or amortization over a two-year period of
goodwill and purchased intangible assets associated with the
acquisition of Zone.
(d) To record Zone merger costs incurred.
(e) To eliminate Zone's equity and redeemable common stock.
(f) To issue 1,411,639 shares of the Company's common stock.
<PAGE> 9
5. PRO FORMA NET INCOME PER SHARE
The pro forma combined basic net loss per share is based on the combined
weighted average number of common shares of the Company's common stock and
Zone's common stock outstanding for each period, calculated using the exchange
ratios that resulted in the issuance of 1,411,639 shares of the Company's common
stock for all of the outstanding shares of Zone as of March 31, 2000. All
employee stock options have been included in the computation of pro forma
combined diluted net income per share using the treasury stock method to the
extent such instruments were dilutive for the periods presented. The adjustment
to historical weighted average shares outstanding results from inclusion of
actual shares issued or estimated shares to be issued in conjunction with the
consummated or pending acquisition, respectively, as if such shares were
outstanding from January 1, 1999. In accordance with the definitive purchase
agreement, approximately 10% of the stock consideration to Zone (approximately
141,164 shares) will be held in a time-lapsing escrow account and have been
excluded from the pro forma basic and diluted net loss per share for the year
ended December 31, 1999.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned hereunto duly authorized.
QUOKKA SPORTS, INC.
(the Registrant)
By: /s/ Les Schmidt
------------------------------------
Les Schmidt
Executive Vice President,
Chief Financial Officer and Secretary
Dated: May 10, 2000
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1* Agreement and Plan of Merger and Reorganization, dated as of
March 1, 2000, by and among the Registrant, ZoneNetwork.com, Inc.
and Montana Acquisition Corporation.
4.1* Amended and Restated Investors' Rights Agreement, dated as of
March 31, 2000, by and among the Registrant and the individuals
and entities identified on Exhibit A thereto.
</TABLE>
* Previously filed with the Company's report on Form 8-K dated April 14,
2000. All attachments to exhibit 2.1 were omitted, but will be provided
to the Securities and Exchange Commission supplementally upon request.
<PAGE> 12
ZONENETWORK.COM, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ZoneNetwork.com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flow present fairly, in all
material respects, the financial position of ZoneNetwork.com, Inc. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. These 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 audit of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPER LLP
- -----------------------------
San Jose, California
March 30, 2000
<PAGE> 14
ZONENETWORK.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,927,453
Restricted cash
115,000
Accounts receivable 576,245
Inventory 2,384,034
Other current assets 232,952
------------
Total current assets 5,235,684
Property and equipment, net 2,147,391
Other assets 24,377
------------
Total assets $ 7,407,452
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,209,270
Accounts payable 3,917,816
Accrued liabilities 1,717,177
------------
Total current liabilities
9,844,263
Long-term debt
379,634
------------
Total liabilities 10,223,897
------------
Commitments and contingencies (Notes 3 and 6)
Shareholders' equity:
Preferred stock, $0.01 par value; shares authorized:
25,000,000 in 1999; shares issued and outstanding:
9,462,774 in 1999 94,628
Common stock, $0.01 par value; shares authorized:
50,000,000 in 1999; shares issued and outstanding:
10,045,448 in 1999 100,455
Additional paid-in capital 15,323,893
Deferred compensation (101,728)
Accumulated deficit (18,233,693)
------------
Total shareholders' deficit
(2,816,445)
------------
Total liabilities and shareholders' equity $ 7,407,452
------------
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE> 15
ZONENETWORK.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Revenues
Merchandise sales $ 3,326,896
Advertising and other 1,300,497
------------
4,627,393
Cost of revenues
Merchandise sales 4,072,842
Advertising and other 283,641
------------
4,356,483
Operating expenses
Product development costs 3,069,860
Sales and marketing 8,177,290
General and administrative 2,279,803
------------
13,526,953
------------
Loss from operations (13,256,043)
Other income, net 87,375
Other expenses (98,730)
Interest expense (205,758)
------------
Net loss $(13,473,156)
------------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 16
ZONENETWORK.COM, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON
ADDITIONAL
COMMON STOCK PREFERRED PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 4,157,648 $ 41,576 -- $ -- $ 6,405,468
2 for 1 stock split 4,157,648 41,577 (41,577)
Deferred compensation related to
grants of options and
warrants to
consultants 3,024
Deferred compensation related to
grants of options and
warrants to
employees 13,174
Amortization of deferred
compensation
Issuance of common stock upon
exercise of stock options and 321,816 3,218 21,914
warrants
Issuance of preferred stock upon
exercise of warrants 924,078 9,241 (745,581)
Issuance of warrants to Kibble & 4,185
Prentice
Issuance of warrants to Silicon 15,072
Valley Bank
Issuance of warrants to KLAS 118,313
(Landmark)
Noncash issuance of common stock
pursuant to Sportsline USA 692,462 6,925 743,075
agreement
Noncash issuance of common stock
to consultants 2,480 25 2,145
Proceeds from issuance of common
stock
net of transactions costs 713,394 7,134 600,347
Proceeds from issuance of
preferred stock
net of transaction costs 8,538,696 85,387
Net loss
------------ ------------ ------------ ------------ -----------
Balances at December 31, 1999 10,045,448 $ 100,455 $ 9,462,774 $ 94,628 $ 7,139,559
------------ ------------ ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED
ADDITIONAL
PAID-IN DEFERRED ACCUMULATED
CAPITAL COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 $ -- $ (235,255) $(4,760,537) $1,451,252
2 for 1 stock split --
Deferred compensation related to
grants of options and
warrants to
consultants (3,024) --
Deferred compensation related to
grants of options and
warrants to
employees (13,174) --
Amortization of deferred 149,725 149,725
compensation
Issuance of common stock upon
exercise of stock options and 25,132
warrants
Issuance of preferred stock upon
exercise of warrants 736,340 --
Issuance of warrants to Kibble & 4,185
Prentice
Issuance of warrants to Silicon 15,072
Valley Bank
Issuance of warrants to KLAS 118,313
(Landmark)
Noncash issuance of common stock
pursuant to Sportsline USA 750,000
agreement
Noncash issuance of common stock
to consultants 2,170
Proceeds from issuance of common
stock
net of transactions costs 607,481
Proceeds from issuance of
preferred stock
net of transaction costs 7,447,994 7,533,381
Net loss (13,473,156) (13,473,156)
------------ ------------ ------------ -----------
Balances at December 31, 1999 $ 8,184,334 $ (101,728) $(18,233,693) (2,816,445)
------------ ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 17
ZONENETWORK.COM, INC.
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(13,473,156)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 392,437
Common stock issuance to Sportsline USA, Inc. 750,000
Amortization of deferred compensation expense 149,725
Amortization of warrants issued with debt 123,254
Change in operating assets and liabilities:
Restricted cash (40,000)
Accounts receivable (466,152)
Inventory (2,232,139)
Advances and prepaid expenses (184,346)
Accounts payable 3,355,492
Other current liabilities 1,647,149
Deferred compensation to shareholder (46,500)
------------
Net cash used in operating activities (10,024,236)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,285,927)
Net cash used in investing activities (2,285,927)
------------
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to bank 600,000
Proceeds from note payable to KLAS 4,000,000
Proceeds from notes payable to lessor 35,000
Payments of notes payable to shareholders (149,416)
Payments of note payable to bank (109,271)
Payments of notes payable to lessor (4,296)
Payment of capital lease obligation (6,324)
Proceeds from issuance of common stock 634,782
Proceeds from issuance of preferred stock 7,533,381
Net cash provided by financing activities 12,533,856
------------
Net increase in cash and cash equivalents 223,693
Cash and cash equivalents at beginning of year 1,703,760
------------
Cash and cash equivalents at end of year $ 1,927,453
------------
Supplemental cash flow information:
Warrants issued for financing commitments 134,015
Common stock issuance to Sportsline USA, Inc. 750,000
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE> 18
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
ZoneNetwork.com, Inc. (the "Company") founded in December 1995, provides
content, commerce and community to targeted vertical markets. - The
Company launched MountainZone.com in March of 1996 to capitalize on the
growing popularity of outdoor sports and the explosive growth of the
World Wide Web as a new mass medium. MountainZone.com targets
individuals interested in skiing, snowboarding, mountain biking,
climbing and hiking.
In March 1999, the Company changed its name to ZoneNetwork.com, Inc.
from The Zone Network, Inc.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of a standby letter of credit which is used as
collateral for the accounts payable to Columbia Sportswear Company.
INVENTORY
Inventory consists of outdoor gear and apparel, books, videos, prints
and maps, and is valued at the lower of cost or market, cost being
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization, which includes the amortization of assets recorded
under capital leases. Fixed assets are depreciated on a straight-line
basis over the estimated useful lives of the assets (generally three to
five years). Property and equipment purchased under capital leases are
amortized on a straight-line basis over the lesser of the estimated
useful life of the asset or the lease term.
Maintenance and repairs, which neither materially add to the value of
the property nor prolong its life, are charged to expense as incurred.
Gains or losses on dispositions of capital assets are included in income
in the year of disposition.
REVENUE RECOGNITION
The Company earns its merchandise revenue from the sale of outdoor
apparel and gear through its online retail store and online auction.
Merchandise revenues, net of discounts and returns, are recognized when
the products are shipped to customers. The Company provides a provision
for anticipated sales returns.
The Company earns its advertising revenue from the sale of website
advertisements on short-term contracts. Advertising revenue is
recognized ratably over the period in which the advertisement is
displayed. Deferred revenue results from billings in excess of
recognized revenue. Advertising revenues recognized on barter
transactions are recorded at the lower of the estimated fair value of
the advertisements received or the estimated fair value of
advertisements given. Barter revenue was $320,726 for the year ended
December 31, 1999.
6
<PAGE> 19
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company earns content revenue from the licensing of its content.
Content revenue has not been material to date.
COST OF REVENUES -- MERCHANDISE SALES
Cost of revenues for merchandise sales includes product costs, product
fulfillment and inbound and outbound shipping costs.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents
and accounts receivable. Cash and cash equivalents are deposited with
high credit, quality financial institutions. Merchandise sales to
customers located predominantly in the US comprise roughly 72% of the
Company's revenue. Payments made by merchandise customers are settled
through customer credit cards and, as a result, collection is made upon
processing of the credit card transactions. As of December 31, 1999,
approximately $227,000 of credit card transactions to be processed was
outstanding in accounts receivables. The balance of accounts receivable
is comprised of advertising customers located primarily in the U.S.
Typical terms are 90 days after the completion of the advertising
campaign. AdSmart, the Company's advertising sales representative
generated about 42% of the advertising revenue and comprised 48% of the
outstanding advertising accounts receivable at December 31, 1999. In
terms of total revenues and total accounts receivable, this represents
11% and 30% respectively.
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop and enhance the Company's website. Product development costs are
expensed as incurred. The Company recognizes website development costs
in accordance with the Statement of Position ("SOP") 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." As such, the Company expenses all costs incurred in the planning
and post implementation phases of development. The Company also expenses
costs associated with the insignificant modifications to the existing
site and the development of website content as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising cost for
the year ended December 31, 1999 was $3,536,289.
INCOME TAXES
The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
STOCK-BASED COMPENSATION
Employee stock options are accounted for under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB
25") "Accounting for Stock Issued to Employees," Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123") "Account for Stock-Based
Compensation" and related interpretations.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and that affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
7
<PAGE> 20
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets for financial
impairment and continues to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not
be fully recoverable. The Company evaluates the recoverability of
long-lived assets by measuring the carrying amount of such assets
against the estimated undiscounted future cash flows associated with
these assets. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the carrying value of the
assets are reduced to their fair values. No losses for impairment have
been recognized.
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. This Statement requires the disclosure of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is the change in equity from
transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. This
Statement had no impact on the Company and, accordingly, no separate
statement of comprehensive income has been presented.
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and
Related Information," which is effective for fiscal years beginning
after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also
requires disclosures about products and services, geographic areas, and
major customers. Management uses one measurement of profitability and
does not desegregate its business for internal reporting.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting
for Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. The Statement, which is effective for the Company in
2000, requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and
measures those instruments at fair value. The Company is assessing the
requirements of SFAS No. 133 and the effects, if any, on the Company's
financial position, results of operations and cash flows.
In July 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137 ("SFAS 137") "Accounting with
Derivative Instruments and Hedging Activities Deferral of the Effective
Date of FASB Statement No. 133," which deferred the effective date until
the first fiscal quarter ending June 30, 2000. The Company will adopt
SFAS 133 in its quarter ending June 30, 2000. The Company has not
engaged in hedging activities or invested in derivative instruments.
8
<PAGE> 21
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles (GAAP) to revenue
recognition in financial statements. The Company intends to adopt SAB
101 in the quarter beginning July 1, 2000. Although the Company believes
its revenue recognition policies are in accordance with GAAP, the
Company is currently studying SAB 101 and has not determined its impact
on the Company's financial statements.
In April 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44") was issued. FIN 44 clarifies the application
of APB No. 25 for only certain issues. Among other issues, FIN 44
clarifies the definition of employee for purposes of applying APB No.
25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company has not
yet determined the impact, if any, of adopting FIN 44.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-----------
<S> <C>
Computer equipment $ 1,146,599
Furniture and other equipment 94,277
Equipment from capital leases 44,411
Software 1,193,043
Leasehold improvements 192,057
-----------
2,670,387
Accumulated depreciation and amortization (522,996)
===========
$ 2,147,391
===========
</TABLE>
Accumulated amortization for assets purchased under capital leases was
$36,181 at December 31, 1999.
9
<PAGE> 22
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-----------
<S> <C>
Note payable to KLAS $ 4,000,000
Note payable to bank 535,684
Capital lease obligations 12,516
Note payable to shareholder 10,000
Notes payable to lessors 30,704
-----------
4,588,904
Less: Current portion (4,209,270)
-----------
$ 379,634
===========
</TABLE>
NOTE PAYABLE TO KLAS
The note payable to KLAS represents a bridge loan dated November 15,
1999 by KLAS, Inc. in connection to a Loan and Security agreement with
the Company and Landmark Communications. The loan is collateralized by
the Company's assets. The note is due and payable in full in one lump
sum payment on the earliest of: (a) that date on which an equity
investment by KLAS in Company closes; (b) that date on which any similar
equity investment in Company closes; or (c) the one hundred fiftieth day
after the date of this note. The initial annual interest rate is 11%
increasing to 12% on the sixtieth day after the date of the note. The
interest raises to 13% and increases 1% on the first day of each month
thereafter on any outstanding balance after maturity. In conjunction
with this agreement, a warrant was issued to purchase 169,503 shares of
Series B Preferred Stock at an exercise price of $0.948. The number of
shares purchasable increases if the loan remains outstanding after
maturity. The fair value of this warrant was calculated at $118,313
using the Black-Scholes valuation model. In calculating the fair value
of the warrant, the Company uses interest risk free rate of 6.32%,
volatility rate of 70% and the respective instrument's exercise period.
NOTE PAYABLE TO BANK
The note payable to bank represents an equipment financing loan
collateralized by the Company's existing and future equipment purchases.
The note is due and payable in 36 monthly installments commencing
October 1, 1999. The note bears interest at 2.75% over the treasury rate
determined on the funding date (8.45% at December 31, 1999). In
connection with this agreement, a warrant was issued to purchase 27,429
shares of common stock at an exercise price of $0.875 or the price given
for the Company's Series B round of equity financing provided the event
occurs prior to February 9, 2000. The fair value of the warrant was
calculated at $15,072 using the Black-Scholes valuation model and is
being amortized over the warrant term. In calculating the fair value of
the warrant, the Company uses interest risk free rate of 6.01%,
volatility rate of 70% and the respective instrument's exercise period.
10
<PAGE> 23
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CAPITAL LEASE OBLIGATIONS
The Company has acquired certain office and computer equipment under
capital leases which expire at various dates through 2001. The capital
leases, which bear interest in the range of 10.3% to 12.9%, are
collateralized by the related assets.
NOTES PAYABLE TO SHAREHOLDERS
During 1999, the Company repaid $149,416 of the outstanding notes
payable to shareholders balance at December 31, 1998. The $10,000
remaining balance at December 31, 1999 is payable on demand to a certain
shareholder, following the next significant round of financing. The note
is interest free.
NOTE PAYABLE TO LESSOR
The note payable to lessor represents a tenant improvement loan in
connection with the lease agreement of the premises. The note is due and
payable in 57 monthly installments commencing April 1999. The note bears
interest at 12%.
As of December 31, 1999, future minimum payments under the notes payable
to KLAS, the bank and lessors and capital lease obligations are as
follows:
<TABLE>
<CAPTION>
NOTE CAPITAL
PAYABLE LEASES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
YEARS ENDING DECEMBER 31,
2000 $ 4,200,669 $ 9,695 $ 4,210,364
2001 209,515 4,040 213,555
2002 171,420 -- 171,420
2003 9,100 -- 9,100
----------- ----------- -----------
Total future principal and minimum
lease payments 4,590,704 13,735 4,604,439
Less: Amount representing interest -- (1,219) (1,219)
Less: Discount on note payable (14,316) -- (14,316)
----------- ----------- -----------
4,576,388 12,516 4,588,904
Less: Current portion (4,200,669) (8,601) (4,209,270)
----------- ----------- -----------
$ 375,719 $ 3,915 $ 379,634
=========== =========== ===========
</TABLE>
11
<PAGE> 24
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The primary components of the net deferred tax asset are:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Net operating loss carryforward $ 5,726,747
Allowances and reserves 235,234
-----------
Total deferred tax asset 5,961,981
Accelerated depreciation (2,904)
Valuation allowance (5,959,077)
-----------
Net deferred tax assets $ --
-----------
</TABLE>
As of December 31, 1999, the Company has net operating loss
carryforwards of $16,843,374 for federal tax purposes expiring in 2011
through 2019. Due to changes in the Company's ownership in 1999 and
prior years, the amount of net operating losses available to offset
future federal income tax liabilities may be limited. The amount of such
limitation, if any, has not been determined. The Company has recorded a
valuation allowance against its deferred tax assets due to uncertainty
regarding the future realization of its net operating loss.
The effective income tax rate differs from the federal statutory income
tax rate of 34% primarily as a result of the change in the valuation
allowance. The difference between the Company's effective income tax
rate and the Federal statutory rate is reconciled below.
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Federal tax rate (34.00)%
Change in valuation allowance 33.27%
Other 0.73%
---------
Net tax rate 0.00 %
---------
</TABLE>
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock may be issued in one or more series, each with such
designations, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors of the Company may determine at
the time of issuance. In July 1998, the Company amended its Articles of
Incorporation to authorize the issuance of up to 25,000,000 shares of
preferred stock. In September 1999 and November 1999, the Company
amended its Articles of Incorporation designating 3,690,986 as Series
A-1 and 12,500,000 as Series B, respectively. As of December 31, 1999,
9,462,774 shares of Series A and A-1 preferred stock has been issued.
12
<PAGE> 25
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 1999, the Company issued 4,847,710 shares of Series A preferred
stock upon the exercise of Fingerhut warrants, for total proceeds of
approximately $4.0 million.
In September 1999, the Company issued 3,690,986 shares of Series A-1
preferred stock and 924,078 shares of series A preferred stock upon the
exercise of Fingerhut warrants for total proceeds of approximately $3.5
million.
COMMON STOCK
As a part of its amendment to the Articles of Incorporation in March
1999, the Company increased the authorized number of common shares to
50,000,000.
On February 9, 1999, the Board of Directors approved a two for one stock
split for all common shares outstanding. Share amounts presented have
been retroactively adjusted to reflect the effect of the split. The
Company has the right to repurchase all or any portion of common stock
made available for sale or transfer by a shareholder.
During 1999, the Company issued 2,480 shares of common stock to
consultants with fair value of $2,170 in exchange for services provided.
In September 1999, the Company entered into a strategic alliance with
Sportsline USA Inc. in which Company would be an exclusive provider of
certain content and commerce categories within the SportsLine Service
and SportsLine Shopping Network. The three year agreement called for the
Company to design, create, and maintain a co-branded site and company
store. In exchange for the integration of the co-branded site within the
SportsLine Service and related promotion of the Company and the
co-branded site, the Company was to pay SportsLine over a three year
period approximately $10 million. In consideration for the Company's
production and delivery of the co-branded site, SportsLine was to pay
the Company roughly $1.5 million. In addition, the Company issued
692,462 shares of the Company's common stock equal to three percent
ownership of the fully diluted Company shares to SportsLine.
In February 2000, the agreement was mutually terminated in connection
with the sale of the Company.
WARRANTS
In connection with the sale of common stock to Fingerhut in December
1998, the Company issued to Fingerhut a series of warrants to purchase
shares of the Company's common stock. For total cash proceeds of
$745,581, Fingerhut received the following warrants: a warrant to
purchase 462,039 shares of common stock for an aggregate exercise price
of $1.00; a warrant to purchase that number of common shares
representing 20.2% of the Company's equity then outstanding for an
aggregate exercise price of $4.04 million; a warrant to purchase that
number of common shares representing 5.0% of the Company's equity then
outstanding for an aggregate exercise price of $1.5 million; and a
warrant to purchase that number of shares of common stock representing
5.0% of the Company's equity then outstanding for an aggregate exercise
price of $2.0 million. Unless sooner exercised, all such warrants expire
on the earlier of December 31, 2000, or the consummation of an
underwritten public offering of the Company's securities in which the
deemed market capitalization of the Company is at least $75 million.
In March 1999 and September 1999, Fingerhut warrants were exercised and
modified to allow for the issuance of Series A preferred stock upon
exercise of the warrant.
13
<PAGE> 26
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In November, 1999, the Company issued a warrant to purchase 169,503
shares of Series B preferred stock with an exercise price of $0.948 per
share, in connection with a $4.0 million bridge loan, pursuant to a Loan
and Security Agreement with Landmark Communications. The aggregate
number of preferred shares purchasable increases to 421,941 if the loan
is not paid in full by April 13, 2000 and increases by 42,194 shares per
month thereafter until the loan is paid in full. The warrant expires
after November 15, 2009. The Company determined the fair value of the
warrant to be $118,313 using the Black-Scholes option pricing model. The
fair value of the warrant was recorded as interest expense in 1999.
During 1999, the Company issued two warrants to purchase common stock at
an exercise price of $0.875. The warrant issued in connection with the
equipment financing loan entitled the holder to purchase 27,429 shares.
The Company determined the fair value of the warrant to be $15,072 using
the Black-Scholes option pricing model. The fair value of the warrant
was recorded as a discount to the loan amount and was amortized as
interest expense over five years. The warrant issued in connection with
financing services entitled the holder to purchase 4,848 shares. The
Company determined the fair value of the warrant to be $4,185, which was
expensed upon issuance.
STOCK OPTION PLAN
In January 1996, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "Plan"), which provides for the issuance of incentive
stock options ("ISO's") and non-qualified stock options to eligible
individuals responsible for the management, growth and financial success
of the Company. The Company initially reserved 650,000 shares of common
stock for issuance under the Plan. The Board of Directors subsequently
approved increases to the number of shares reserved for the Plan, the
most recent increase being in September 1999 to a total of 5,628,875
shares.
ISOs may be issued only to employees of the Company and have a maximum
term of 10 years from the date of grant. The exercise price for ISOs may
not be less than 100% of the estimated fair market value of the common
stock at the time of the grant. In the case of options granted to
holders of more than 10% of the voting power of the Company, the
exercise price may not be less than 110% of the estimated fair market
value of the common stock at the time of grant, and the term of the
option may not exceed five years. Options become exercisable in whole or
in part from time to time as determined by the Board of Directors, which
will administer the Plan. Generally, options granted under the plan vest
33.33% one year after the beginning of the vesting period and,
thereafter, 8.33% per quarter such that all options will be vested at
the end of three years.
DEFERRED STOCK COMPENSATION
During 1999, the Company issued stock options to certain employees under
the 1996 Stock Option Plan with exercise prices below the deemed fair
market value of the Company's common stock at the date of grant. In
accordance with the requirements of APB 25, the Company has recorded
deferred compensation for the difference between the exercise price of
the stock options and the fair market value of the Company's stock at
the date of grant. This deferred compensation is amortized to expense
over the period during which the options become exercisable, generally
three years. As of December 31, 1999, the Company has recorded deferred
compensation related to these options in the total amount of $13,174.
The total deferred compensation amortized to expense during 1999 was
$149,725.
14
<PAGE> 27
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the activity under the 1996 Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
---------- ---------- ----------
<S> <C> <C> <C>
Balances at December 31, 1998 815,557 2,904,477 $ 0.82
Options authorized 1,828,875 -- --
Options granted (2,061,911) 2,061,911 $ 0.85
Options exercised -- (210,274) $ 0.09
Options cancelled 65,278 (65,278) $ 0.72
---------- ---------- ----------
Balances at December 31, 1999 647,799 4,690,836 $ 0.62
</TABLE>
The following table summarizes information about stock options
outstanding under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.050 930,900 6.31 $ 0.050 930,900 $0.050
$ 0.200 200,000 6.61 $ 0.200 200,000 $0.200
$ 0.325 100,000 4.15 $ 0.325 100,000 $0.325
$ 0.400 114,125 5.55 $ 0.400 112,458 $0.400
$ 0.500 376,000 8.63 $ 0.500 186,333 $0.500
$ 0.550 166,300 7.57 $ 0.550 126,425 $0.550
$ 0.825 222,122 8.06 $ 0.825 133,788 $0.825
$ 0.875 2,581,389 9.38 $ 0.875 419,942 $0.875
- --------- --------- --------- --------- --------- ---------
4,690,836 8.26 $ 0.615 2,209,846 $0.364
--------- --------- --------- --------- ---------
</TABLE>
At December 31, 1999, 2,209,846 options were exercisable with a
weighted-average exercise price of $0.364 per share.
15
<PAGE> 28
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA STOCK COMPENSATION
The Company has adopted the disclosure only provisions of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Pro forma information regarding the net loss
is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method. The fair value of options granted in 1999 was estimated at the
date of grant using the minimum value method allowed for non-public
companies assuming no expected dividends and the following
weighted-average assumptions: risk-free interest rates of 5.50% to
6.00%; volatility of 0%; and an expected life of 4 years.
For purposes of the pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting periods. If
the Company had accounted for compensation expense related to stock
options under the fair value method prescribed by SFAS No. 123, the net
loss for the years ended December 31, 1999 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net loss
As reported $(13,473,156)
Pro forma $(13,591,747)
</TABLE>
Such pro forma disclosures may not be representative of future
compensation cost because options vest over several years and additional
grants are made each year.
The weighted-average grant date fair value of stock options granted in
1999 was $0.88.
During 1999, options to purchase 40,000 shares of the Company's common
stock, with weighted-average exercise prices of $0.55 per share and
weighted-average fair values of $0.88 per share were granted with an
exercise price below the estimated market value of the common stock at
the date of grant.
OPERATING LEASE COMMITMENTS
The Company leases office facilities and certain office equipment under
various operating leases. In July 1999, the Company entered into a one
year lease agreement for additional office space. The lease includes one
option to extend the lease term for a two year period. Future minimum
lease payments for the leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
2000 $ 230,389
2001 203,172
2002 212,856
2003 222,528
----------
$ 868,945
----------
</TABLE>
Operating lease expense was $189,645 for the year ended December 31, 1999.
16
<PAGE> 29
ZONENETWORK.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Subsequent Events
On December 23, 1999, Company management received notice from Landmark
Communication, Inc. ("Landmark") that Landmark would not proceed with
its contemplated equity investment of $20,000,000 in the Company. As a
result, on December 28, 1999, the Company's Board of Directors directed
management to limit its cash outflows and to engage an investment banker
to pursue the sale of the Company.
Company management retained BankBoston Robertson Stephens to facilitate
the sale of the Company and communicated to certain creditors of the
Company that payment of outstanding invoices would be deferred until no
earlier than the completion of a sale transaction. On January 24, 2000,
the Company signed a letter of intent for the purchase of the Company by
Quokka Sports, Inc. ("Quokka"). On March 1, 2000, Quokka and the Company
entered into an Agreement and Plan of Merger and Reorganization, which
closed on March 31, 2000. On April 4, 2000, Quokka management began
authorizing payment of past due invoices to Company creditors.
Pursuant to the acquisition of the Company by Quokka, several events
took place:
- Company terminated its contract with Sportsline USA, Inc..
effective February 29, 2000
- Company entered into an e-commerce fulfillment agreement with
Fingerhut Business Services, Inc., effective January 29, 2000.
- Effective with the closing of the merger, Quokka became guarantor
of the Silicon Valley Bank note agreement
- On March 31, 2000, management of Landmark agreed to extend the
terms of the $4,000,000 note between the Company and KLAS, Inc.
- On April 19, 2000, management gave notice to the Company's
advertising agent, AdSmart, that the Company would terminate its
agency agreement.
17
