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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT 3
TO-FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
INTERNET SPORTS NETWORK, INC.
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(Name of Small Business Issuer in its charter)
FLORIDA 65-0704152
- ---------------------------- --------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
225 Richmond Street West, Suite 403, Toronto, Ontario, Canada M5V 1W2
(Address of principal executive offices) (Zip Code)
(416) 599-8800
(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
NONE NONE
Securities to be registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
-----------------------------
(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
1. FORM AND YEAR OF ORGANIZATION
Internet Sports Network, Inc. was first incorporated in April, 1997 in
the state of Nevada. BirchTree Capital Corporation, a Florida corporation was
incorporated in the state of Florida on October 4, 1996. BirchTree Capital
Corporation was a publicly traded corporation, trading under the symbol BITC on
the Over the Counter/Bulletin Board. Effective January 19, 1999, the
stockholders of Internet Sports Network, Inc. a Nevada corporation initiated the
exchange of one hundred percent (100%) of their shares in that corporation for
nine million eighty five thousand two hundred twenty nine (9,085,229) shares of
BirchTree Capital Corporation. On February 1, 1999, BirchTree Capital
Corporation changed its name to Internet Sports Network, Inc., a Florida
corporation, and changed its OTC/BB symbol to ISNI. On February 22, 1999,
Internet Sports Network, Inc., a Nevada corporation merged into Internet Sports
Network, Inc. a Florida corporation with the Florida corporation being the
surviving entity. The surviving entity, Internet Sports Network, Inc., a Florida
corporation (the "Company" or "ISN") traded on the over the counter/bulletin
board as ISNI.
2. ANY BANKRUPTCY, RECEIVERSHIP OR SIMILAR PROCEEDING.
Not Applicable.
3. ANY MATERIAL RECLASSIFICATION, MERGER, CONSOLIDATION, OR
PURCHASE OR SALE OF A SIGNIFICANT AMOUNT OF ASSETS NOT IN THE ORDINARY COURSE OF
BUSINESS.
In January 1999, Internet Sports Network, Inc., then a privately held
Nevada corporation, entered into an agreement with Birchtree Capital
Corporation, a Florida shell corporation with no operations which traded on the
over the counter/bulletin board as "BITC" and its majority shareholder, Eric
Littman. Pursuant to this agreement, Birchtree Capital Corporation issued in
excess of 9,000,000 shares of stock to the shareholders of Internet Sports
Network, Inc., the Nevada corporation. For the additional consideration of being
permitted to retain 1,025,000 shares of common stock of Birchtree Capital
Corporation and for the cash payment of $250,000, Mr. Littman agreed to cancel
3,975,000 shares of common stock held in his name. At the time of this
transaction, the Company did not have sufficient cash resources to pay the
consideration requested by Mr. Littman. Certain of our shareholders, Benitz &
Partners and Mark Valentine, agreed to pay the cash consideration portion to Mr.
Littman in exchange for receiving an option to purchase 500,000 shares each of
common stock held by Mr. Littman. Benitz & Partners and Mark Valentine also
agreed to the cancellation of 350,000 shares each of their Internet Sports
Network, a Nevada corporation, common stock. Effective January 19, 1999, the
stockholders of Internet Sports Network, Inc. a Nevada corporation initiated the
exchange of one hundred percent (100%) of their shares for an equal number of
shares of common stock of Birchtree Capital Corporation. On February 1, 1999,
Birchtree Capital Corporation changed its name to Internet Sports Network, Inc.,
a Florida corporation, and changed its OTC/BB symbol to ISNI. On February 22,
1999, Internet Sports Network, Inc., a Nevada corporation merged into Internet
Sports Network, Inc. a Florida corporation with the Florida corporation being
the surviving entity. The capitalization of the resulting company, Internet
Sports Network, Inc., a Florida corporation was less than 1% of the issued and
outstanding shares of common stock held by former Birchtree Capital Corporation
shareholders and greater than 99% of the issued and outstanding shares of common
stock held by former Internet Sports Network, Inc. a Nevada corporation.
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Effective February 5, 1999, the Company acquired all of the shares of
SportsMark, Inc. an Alberta, Calgary, Canada corporation, SportsMark Promotions,
Inc., a Delaware corporation and Classroom 2000, Inc., an Alberta, Calgary,
Canada corporation, and assets of SMP SportsMark Promotions, International,
Inc., a Barbados Company (collectively "SportsMark" or "Sportsmark Group"). This
agreement resulted in the Company acquiring SportsMark's subscriber base and the
assets of SMP SportsMark Promotions International, Inc. which consisted of the
trademarks "Weekend Winners" and "Ultimate Draft" and all of its rights to use
U.S. Sports Contest Software. The shareholders of SportsMark received 1,500,000
shares of common stock of ISN and $1,254,000 cash as the consideration granted
in this agreement.
On March 5, 1999, ISN California, Inc. a California corporation was
incorporated as a wholly owned subsidiary of ISN. Effective March 5, 1999, the
Company entered into a Merger Agreement with Pickem Sports, Inc. a Maine
corporation doing business in California ("Pickem") and the individual
stockholders of Pickem Sports Inc., wherein ISN would purchase all of the stock
of Pickem Sports, Inc. in exchange for one million eight hundred seventy-seven
thousand nine hundred ninety five (1,867,995) shares of common stock of ISN and
$3,000,000 in cash. Also, pursuant to this Agreement, Pickem Sports, Inc. merged
with ISN California, Inc. with ISN California, Inc. being the surviving entity.
This merger resulted in the Company acquiring Pickem's web-based contest
software. This software creates specific contests for customers and strategic
joint ventures from the Company's proprietary generic programs.
Effective June 22, 1999, the Company acquired certain assets of
National Publisher Services, Inc., an Iowa corporation. These assets consisted
of the Ultimate Sports Publishing division, which is made up of the
publications: Ultimate Sports Baseball; Ultimate Sports Football; Hawes Fantasy
Baseball; Hawes Fantasy Football; Ultimate Sports Basketball, Hawes Fantasy
Basketball; and Ultimate Sports Hockey. Pursuant to this agreement, the Company
also acquired the trademarks "FTA" and "Ultimate Sports". Ultimate Sports
publishes fantasy sports contest publications and provides the Company with a
cross-marketing tool between traditional media and web-based media. These assets
were acquired for 125,000 shares of common stock of ISN and $860,000 cash.
ISN Wisconsin, a Wisconsin corporation was incorporated as a wholly
owned subsidiary of ISN. Effective June 30, 1999, the Company, ISN Wisconsin,
Inc., Innovation Partners Inc., d.b.a. SportsBuff, a Wisconsin corporation
("SportsBuff"), and the individual shareholders of SportsBuff entered into a
Merger Agreement, wherein ISN would purchase the stock of SportsBuff in exchange
for six hundred sixteen thousand sixty (616,060) shares of common stock of ISN
and $1,000,000 cash. Also, pursuant to this Agreement, Innovation Partners, Inc.
merged with ISN Wisconsin, Inc. with ISN Wisconsin, Inc. being the surviving
entity.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is in an extremely competitive industry and it will require
substantial capital from outside sources in order to complete its business plan.
The Company anticipates that it will continue to generate financial losses for
the forseeable future. In the event the Company is unsuccessful in securing
outside capital, it may be required to curtail or cease operations altogether.
Under United States Generally Accepted Auditing Statements substantial doubt
exists regarding the ability of the Company to continue as a going concern.
The Company has sustained losses since its inception. For the period
from April 28, 1997 (inception) to April 30, 1998, the Company sustained losses
of $643,000. For the period from May 1, 1998 to March 31, 1999, the Company
sustained losses of $3,514,000. Management expects substantial losses for the
foreseeable future.
ISN operates in two business segments, sports entertainment (providing
sports related games, contests and content) and publishing. The percentage
allocations to each industry sector are 55% from sports entertainment and 45%
publishing based on management's estimate of the revenues generated from each
sector for the six month period ended as of September 30, 1999 on a pro forma
historical basis. Sports entertainment revenues are earned primarily from fees
from consumers who pay to enter sports contests (82% of sports entertainment
sector revenues) and fees from
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companies that license the contest applications (18% of sports entertainment
sector revenues).
The Company has recently entered the publishing sector through
the acquisition of Ultimate Sports on June 22, 1999 whereby it produces and
distributes annual pre-season sports magazines which provide content about
sports teams and players prior to the start of the given sports season. This
sector contributed 45% of the Company's gross revenues for the six month
period ended September 30, 1999. Publishing revenues are earned primarily
from newstand sales (89% of publishing revenues) and advertising within the
publications (11% of publishing revenues).
Company management believes that there is a trend away from revenues
generated by consumers paying fees to enter sports contests, toward an
advertising model, where consumers are provided the game free of charge and
revenues are generated primarily by either other businesses licensing the
Company's games and contests or advertisers paying to advertise or sponsor the
Company's games and contests. The Company further believes that the publishing
sector will not grow at the same rate as sports entertainment, and therefore
will become a smaller component of its gross revenues in the future relative to
the sports entertainment segment of its revenue model.
C. NARRATIVE DESCRIPTION OF BUSINESS.
ISN is an Internet based sports media and entertainment company
specializing in interactive sports contests, as well as offering some non-sports
games and contests. The Company offers consumers the opportunity to get involved
in their favorite sports by playing skill-testing contests based upon the
outcomes of real-life sporting events, such contests being generally known as
"fantasy sports". As well as fantasy sports, the Company offers
non-fantasy-style contests such as Internet animation games that emulate the
action of a real game, and trivia-question applications. The Company's sources
of revenue are fees from consumers who pay to enter "pay to play" contests,
revenues from media companies that license ISN's applications, and fees from
third parties advertising their products and services on web sites and offline
media where these contests take place.
The Company also offers sports contests in offline media such as
newspapers in order to augment its Internet distribution channel and to
establish its brand in offline channels as a migration path for the rapidly
growing number of consumers moving from offline to online media usage.
1. PRINCIPAL PRODUCTS AND THEIR MARKETS
THE MARKET
The Company markets contests in online as well as off-line media. There
has been no formal study of the fantasy sports market size, but various industry
publications such as Business 2.0 and Silicon Alley Reporter, estimate there is
somewhere between 11 to 15 million fantasy sports players online. These players
participate in a variety of pay-to-play contests as well as
advertising-supported no-fee contests.
According to Media Matrix, an Internet and Digital Media measurement
firm, as of August, 1999, there has been a continuing growth trend in the number
of visitors, in the amount of content viewed and the number of hours users spent
online over the past twelve months. Media Matrix indicated that:
- The number of monthly visitors (at home and work combined) to the
Internet grew more than 11 percent since July 1998 from 56.6 million to 62.9
million in July 1999.
- The average number of unique web pages viewed per visitor per day
increased by 25 percent to 40.1 pages in July 1999 from 32.2 pages in July 1998.
- The average number of unique pages viewed per month increased nearly
50 percent over the past twelve months, from 330 unique pages per visitor in
July 1998 to 487 per visitor in July 1999.
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- the number of days users accessed the Internet increased nearly 20
percent from 10.3 days in July 1998 to 12.1 days in July 1999. Internet users
spent over 36 percent more time on the Internet in July 1999 than a year ago-an
increase from 5.8 average hours per person in July 1998 to 7.9 hours in June
1999.
In August 1999, Jupiter Communications, a provider of research on
Internet consumer behavior and Internet commerce, published a survey of
attitudes, behaviors and demographics of the online user. This survey estimate
the potential online market for sports and non-sports contests.
According to this survey, participation in contests and sweepstakes is
one of the top 10 online activities. Amongst these "top 10 online activities"
contest participation showed the single greatest percentage growth annually,
from 27% of the online users in 1998 to 49% in 1999. According to this survey,
sports is one of the top categories of content accessed online.
Silicon Alley Reporter, a digital media industry trade publication,
stated that sports is the leading content application, and interactive sports
contests are the "killer application" that no sports web site can do without.
THE PRODUCTS
ISN has a range of contest products operating in online and offline
media, in sports and non-sports categories. The Company's products permit the
customer to subscribe to the level of competition, sophistication, and cost with
which they are most comfortable.
The Company's primary revenue is currently derived from subscription
packages. These products include contests co-branded with media distribution
companies, such as major web portals, television stations and newspapers, as
well as the Company's own "Sportsrocket" branded contests.
The contest products provide a target marketing opportunity to the
sponsors/advertisers and merchandisers that work with the media companies, as
such contest products are believed, according to an articles from Business 2.0,
to be attractive to a targeted demographic that is mostly male and between the
ages of 18 and 45 years. With promotion and advertising contained in their media
properties, the Company designs and manages contests such as football, baseball,
basketball, golf, NASCAR, hockey or investment challenge contests. The net
revenues from the subscriptions for the contests are then divided between the
media company and the Company. The division of revenues from subscriptions
varies per the agreement. Under existing agreements, the division of revenues
range from as little as 80% to the Company to as much as 96% to the Company.
The Company also designs and manages contests on a fee-for-service
basis for major Internet portals and for other media companies. These contests
are client-customized, sports and non-sports games, contests and promotions.
While the Company's limited operating history renders it difficult to reach any
conclusions, the goal of these products and services is to: drive and sustain
traffic to the customer's web sites; attract sponsors and general advertising
revenues; promote the sponsor's products and services; convert casual visitors
to long-lasting members; build brand awareness; assist in gathering important
user information through registrations and surveys; and, create
cross-promotional opportunities between off-line and online media.
The Company's current marketing plan focuses on:
1. INCREASING PRIVATE LABEL ARRANGEMENTS WITH LEADING MEDIA
COMPANIES AND CONSUMER-PRODUCTS COMPANIES. The Company believes there is an
increasing demand for contest products, especially in online media. The Company
has recently entered into agreements with Labatt Brewing Company,
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Ltd. and Playboy Enterprises. These agreements are to develop and maintain
contest sites for each of these companies websites. In the case of Labatt's,
the website is Beer.com, and in the case of Playboy, the website is Playboy
Online. Although hosted on the Company's server, the Company's technology
allows the contest site to appear to be on the media companies web site. The
Company intends to aggressively pursue additional relationships with large
companies who traditionally have an offline market but are seeking to
increase their online traffic through providing content on their web site.
While varying in the percentage split, these agreements require the Company
and the media company to share contest site generated contest revenue,
advertising and merchandising.
2. INCREASING CROSS-PROMOTIONS FROM OFF-LINE MEDIA TO ONLINE
MEDIA. The Company believes that, through its experience in running contests
with media companies that have off-line (newspaper and television) and online
media products, there exists significant opportunity to capture consumer
attention through off-line media and to cross-promote these consumers to online
media.
3. MAGAZINE COMPANIES. The Company believes that certain
magazines can be effective distribution vehicles for increased sales of the
Company's premium series of contests. For example, in June, 1999 the Company
acquired certain assets of National Publisher Services, Inc. These assets were
comprised primarily of fantasy sports league statistics magazines in which the
Company then prominently advertised in online and offline games and contests.
While the Company does not anticipate entering into partnership arrangements
with magazines, it will continue to consider potential acquisitions of magazines
which will potentially provide consumers for its games and contests.
4. INTERNATIONAL GROWTH. While the Company does not currently
operate or advertise contests other than in Canada and the United States, the
Company anticipates that it will eventually expand its operations to South
America, Asia and Europe. This international strategy is at an extremely early
juncture and there is no assurance that the Company will be successful in
penetrating these international markets.
2. STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICE.
Not applicable.
3. THE SOURCES AND AVAILABILITY OF RAW MATERIALS.
Not applicable.
4. THE IMPORTANCE OF PATENTS, TRADEMARKS, LICENSES, FRANCHISES
AND CONCESSIONS HELD.
The Company currently has an application pending with the United States
Patent and Trademark Office ("PTO") and the Canadian Patent and Trademark Office
for registration of the name "Internet Sports Network" as a servicemark. The
Company has registered the websites WWW.SPORTSPOOL.COM,
WWW.INTERNETSPORTSNET.COM, WWW.ULTSPORTS.COM, WWW.INTERNETSPORTSNETWORK.COM,
WWW.SPORTSBUFF.COM, WWW.SPORTSROCKET.COM AND WWW.PICKEM.COM. The Company
currently operates most of its contests on the WWW.SPORTSROCKET.COM website.
As part of the Sportsmark transaction, ISN acquired Sportsmark's
trademarks and tradenames filed in the Canadian trademark office including:
Sportsmark, All Star Challenge, Great Canadian Hockey draft, Fantasy Hockey
Dream Team, Fantasy Basketball Dream Team, Fairway Fantasy, Playoff Payoff,
Weekend Winners, Fantasy Baseball Dream Team, Fantasy Football Dream Team,
Hockey Draft Sweepstakes. The Sportmark trademark expires fifteen years from
January 18, 1999. All Star Challenge has recently acquired approval from the
Canadian trademark office. It's filing date will commence upon the filing of a
statement of use by the Company. Great Canadian Hockey draft will expire 15
years from April 30, 1997. Fantasy Hockey Dream Team will expire 15 years from
February 5, 1997. Fantasy Basketball Dream Team will expire 15 years from
January 14, 1997. Fantasy
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Football Dream Team will expire 15 years from February 24, 1989. Fairway
Fantasy will expire 15 years from March 22, 1996. Playoff Payoff will expire
15 years from August 28, 1994. Weekend Winners will expire 15 years from
August 5, 1994, and Hockey Draft Sweepstakes will expire 15 years from
November 23, 1988.
As part of the transaction with National Publisher's Services, Inc.,
d.b.a. Ultimate Sports, the Company was assigned the trademarks "Ultimate
Sports" and "FTA". FTA was registered with the PTO on May 4, 1998 and thus would
expire by May 3, 2008. The "FTA" trademark consisting of stylized letters was
registered with the PTO on November 14, 1997 and would expire by November 13,
2007. The "Ultimate Sports" trademark was registered with the PTO on July 22,
1993 and would expire July 21, 2003. The Company has filed the assignment forms
with the United States Patent and Trademark office.
As part of the merger by and between Innovation Partners, Inc. d.b.a.
SportsBuff and ISN, Wisconsin, ISN Wisconsin is the surviving entity and has all
right and title to the trademarks, trade names and proprietary information owned
by SportsBuff. Such trademarks include "Buffball" and "SportsBuff". "SportsBuff"
was registered with the PTO on July 22,1997 and thus would expire by July 21,
2007. The mark "Buff Ball" was registered with the state of Wisconsin on
November 24, 1993 and is valid for a period of ten years.
The Company does not rely on proprietary technology in providing its
sports entertainment services. While the Company uses technology which has been
customized for its own purposes, the Company has deliberately avoided becoming
overly dependent on any one technology. By avoiding reliance on any one
technology, the Company will be able to take advantage of technological advances
to provide new and improved services and superior sports contests to its
subscribers.
ISN has no collective labor agreements.
5. THE EXTENT TO WHICH THE BUSINESS OF THE SEGMENT IS OR MAY
BE SEASONAL.
Sports contests are geared towards the sports season for a
particular sport. As an example, the football season runs from September to the
Super Bowl in January; the hockey season runs from September through to the
playoffs in June; and the baseball season runs from April through to the World
Series in October. The Company offers contests surrounding most major sporting
seasons, however the majority of cash is received in the months prior to the
start of a given sports' season. As a result, the Company's cash flows tend to
be focused in the late summer, early fall prior to the Football (NFL),
Basketball (NBA) and Hockey (NHL) seasons. Cash flow representing approximately
40% of the Company's annual revenues are received in September to November.
Additional revenues are received during each sport season through weekly
contests and transaction revenues, however the bulk of cash receipts occur at
the start of each season. Revenue is recognized for accounting purposes evenly
over the course of the associated sporting event or season, therefore revenues
are higher from September to March, during the 3 main sport seasons discussed
above.
Magazine publishing occurs prior to the start of the four
major sporting league seasons (National Football League, Major League Baseball,
National Basketball Association and National Hockey League). As a result,
publishing revenues occur in June - July (Football) (40% of annual publishing
revenue), September - October (Hockey and Basketball) (30% of annual publishing
revenue) and February - March (Baseball) (30% of annual publishing revenue).
6. THE PRACTICE OF THE REGISTRANT AND THE INDUSTRY RELATING TO
WORKING CAPITAL ITEMS.
This item is not applicable to this industry or segment.
7. DEPENDENCE ON A SINGLE OR FEW CUSTOMERS.
Not applicable.
8. BACKLOG ORDERS.
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Not applicable
9. GOVERNMENT APPROVAL.
No government approval is required for any of the Company's
current products or services.
10. COMPETITION
The Company is in an extremely competitive industry and it will require
substantial capital from outside sources in order to complete its business plan.
The Company anticipates that it will continue to generate financial losses for
the forseeable future. In the event the Company is unsuccessful in securing
outside capital, it may be required to curtail or cease operations altogether.
Under United States Generally Accepted Auditing Statements substantial doubt
exists regarding the ability of the Company to continue as a going concern.
The interactive sports contests industry is rapidly evolving and very
competitive, which the Company expects will intensify in the future. Barriers to
entry are minimal, allowing current and new competitors to launch new products
at a relatively low cost. The Company currently or potentially competes with
other companies which have sports related websites. These competitors include
ESPN.com, CDM, Inc., CBS Sportsline.com, SmallWorld Sports, Sandbox,
Commissioner.com, Prime Sports Interactive as well as many other smaller
competitors.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand name recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, other competitors may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's competitors may be able to devote greater
resources to marketing and promotional campaigns, and devote substantially more
resources to Web site and systems development then the Company. Increased
competition may result in reduced operating margins, loss of market share and a
diminished franchise value. There can be no assurance that the Company will be
able to compete successfully against current and future competitors, and
competitive pressures faced by the Company may have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations. Further as a strategic response to changes in the competitive
environment, the Company may, from time to time, make certain service or
marketing decisions or acquisitions that could have a material adverse effect on
its business, prospects, financial condition and results of operations. New
technologies and the expansion of existing technologies may increase the
competitive pressures on the Company. In addition, companies that control access
to transactions through network access or Web browsers could promote the
Company's competitors or charge the Company a substantial fee for inclusion.
11. RESEARCH AND DEVELOPMENT COSTS
Not Applicable.
12. COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND
REGULATIONS
The Company is not involved in a business which involves the use of
materials in a manufacturing stage where such materials are likely to result in
the violation of any existing environmental rules and/or regulations. Further,
the Company does not own any real property which would lead to liability as a
land owner. Therefore, the Company does not anticipate that there will be any
costs associated with the compliance of environmental laws and regulations.
13. EMPLOYEES
As of the date hereof, the Company employed 34 full-time employees and
5 part-time employees. The Company hires independent contractors on an "as
needed" basis only. The Company has no collective bargaining agreements with its
employees. The Company believes that its employee relationships are
satisfactory. In the long term, the Company will attempt to hire additional
employees as needed based on its growth rate.
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D. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS.
1. ISN currently derives 100% of its net sales from the United
States of America and Canada. A detailed discussion of the information on the
basis of geographic areas is set forth below and in the Financial exhibits
provided in item 15 below. There were no transfers between geographic areas
during the periods ending March 31, 1999 and April 30, 1998. Identifiable assets
in the United States equal approximately $12,457,000 and $0 in fiscal 1999 and
1998, respectively. The remaining identifiable assets are in Canada. The
$12,457,000 of identifiable assets in the United States consist of the
following:
- Purchased intangibles (net) $8,891,000
- Goodwill(net) 3,556,000
- Capital assets 10,000
The purchased intangibles were comprised of trademarks, licenses to use
tradenames, software licenses, customer lists and newspaper advertising
contracts. A complete list of trademarks and tradenames are provided in Item 1
C. 4, "The importance of Patents, Trademarks, Licenses, Franchises and
Concessions held"
i. REVENUE ATTRIBUTION.
For the 11 month period ending March 31, 1999, reflecting the results
of acquired companies outlined on page 1 from the dates of acquisition, with
comparative figures for the period from April 28, 1997 (inception) through April
30, 1998:
A. United States: Of the Company's net revenues
$28,000 is attributable to U.S. customers, consisting of 18% of the Company's
total revenues. In 1998, there were no net revenues attributable to U.S.
customers.
B. All foreign countries: Of the Company's revenues
$124,000 is attributable to all foreign countries, consisting of 82% of the
Company's total revenues. In 1998, $77,000 or 100% of the Company's net revenues
were attributable to Canadian customers. All foreign countries, for purposes of
this calculation is limited to Canada.
ii. LONG-LIVED ASSETS.
Not Applicable.
2. CROSS REFERENCE TO FINANCIAL STATEMENTS.
The information requested by this section is contained in the
Financial Exhibits and provided in Item 2.
3. RISKS ATTENDANT TO FOREIGN OPERATIONS.
The primary risk attendant to foreign operations of ISN is the
effect of currency exchange rates. The unit of measurement of the Company is
the Canadian dollar while the reporting currency is the United States dollar.
The assets and liabilities of the Canadian subsidiaries are translated using
the exchange rate in effect at the year end, and revenue and expenses are
translated at the average rate during the period. Exchange gains or losses on
translation of the Company's net equity investments in these subsidiaries are
recognized as a component of other comprehensive income. The translation
adjustments as of March 31, 1999 and April 30, 1998 were insignificant. The
impact of an appreciation in the value of the Canadian dollar in relation to
the United Stated dollar
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could have an adverse impact on the results from operations on the Company.
Management is aware of this risk, and presently does not believe that it
would be cost effective to hedge this risk at this time.
As at March 31, 1999, stated in United States dollar equivalents,
$128,000 of the Company's $3,139,000 current assets were denominated in Canadian
dollars, and $137,000 of the Company's $339,000 current liabilities were
denominated in Canadian dollars for a net Canadian dollar denominated liability
of $9,000. All other amounts are denominated in United States dollars. The
Company has not entered into any currency exchange contracts.
It is the Company's policy when gathering information from subscribers
to permit each subscriber to provide only information required to identify the
subscriber and to mark as option certain information fields, and to permit the
subscriber to opt out of receiving announcements, advertising and marketing from
the Company and its affiliates. The Company endeavors to comply with all privacy
requirements of those countries to which is subject to jurisdiction. The Company
currently generates 100% of its revenue from United States and Canadian sources
and as a result believes that it is in compliance with all laws associated with
internet commerce.
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4. INTERIM FINANCIAL INFORMATION.
The financial data for geographic areas is not indicative of future
operations of the Company. The Company has made several acquisitions based in
the United States during 1999, and as such related revenues and expenses from
the United States will increase significantly as a percentage of total revenue
and in gross amounts. For the six months ending September 30, 1999, revenue
attributable to the United States and Canada are as follows:
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<CAPTION>
REVENUE %
<S> <C> <C>
United States $1,572,000 84.5
Canada $ 289,000 15.5
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TOTAL $1,861,000 100.0
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</TABLE>
E. AVAILABLE INFORMATION.
Not Applicable.
F. REPORTS TO SECURITY HOLDERS.
Not Applicable.
G. ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS.
Not Applicable.
ITEM 2 FINANCIAL INFORMATION
The Company is in an extremely competitive industry and it will require
substantial capital from outside sources in order to complete its business plan.
The Company anticipates that it will continue to generate financial losses for
the forseeable future. In the event the Company is unsuccessful in securing
outside capital, it may be required to curtail or cease operations altogether.
Under United States Generally Accepted Auditing Statements substantial doubt
exists regarding the ability of the Company to continue as a going concern.
SELECTED HISTORICAL FINANCIAL DATA
The following is management's discussion and analysis of ISN's financial
condition and results of operations. Detailed information is contained in the
financials included in this document. This section contains forward-looking
statements that involve risks and uncertainties, such as statements of ISN's
plans, objectives, expectations and intentions. The cautionary statements made
in this document should be read as being applicable to all related
forward-looking statements wherever they appear in this document.
The following table sets forth, for the periods indicated, selected financial
information for the Company:
INTERNET SPORTS NETWORK, INC.
SELECTED HISTORICAL
FINANCIAL DATA SCHEDULE
FROM INCEPTION TO MARCH 31, 1999
<TABLE>
<CAPTION>
Period from April 28
11 months ended 1997 (inception) to
March 31, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Net sales or operating revenues 152,000 77,000
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Prize commitments and other direct costs 250,000 41,000
Other costs and expenses 1,466,000 670,000
Interest and bank charges 17,000 9,000
Stock compensation, stock options and debenture
related costs 796,000 -0-
BTC transaction and other due diligence costs 546,000 -0-
Amortization of purchased intangibles and goodwill 827,000 -0-
-------------------------------------
Net loss before tax (3,750,000) (643,000)
Deferred tax recovery 236,000 -0-
-------------------------------------
Loss from operations (3,514,000) (643,000)
-------------------------------------
-------------------------------------
Loss from operations per common share (0.45) (0.17)
-------------------------------------
-------------------------------------
As at As at
March 31, 1999 April 30, 1998
-------------- ---------------
Cash and cash equivalents 2,928,000 9,000
Other current assets 211,000 76,000
-------------------------------------
Total current assets 3,139,000 85,000
Purchased intangibles and goodwill, net 13,492,000 -0-
Equipment, net 84,000 46,000
-------------------------------------
Total Assets 16,715,000 131,000
-------------------------------------
-------------------------------------
Total current liabilities 339,000 167,000
Deferred income taxes 3,855,000 -0-
Long-Term obligations -0- 196,000
-------------------------------------
Total liabilities 4,194,000 363,000
-------------------------------------
Common stock 17,127,000 425,000
Share subscriptions receivable -0- (14,000)
Deferred compensation (449,000) -0-
Accumulated deficit (4,157,000) (643,000)
-------------------------------------
Total shareholders' equity 12,521,000 (232,000)
-------------------------------------
Total liabilities and shareholders' equity 16,715,000 131,000
-------------------------------------
-------------------------------------
Cash dividends per common share -0- -0-
Cash dividends declared per common share -0- -0-
</TABLE>
12
<PAGE>
INTERNET SPORTS NETWORK, INC.
SELECTED HISTORICAL FINANCIAL DATA SCHEDULE
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Six Months Six Months Three Months Three Months
Ending Ending Ending Ending
September 30, October 31, September 30, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
REVENUE $ 1,861,000 $ 69,000 $ 1,189,000 $ 61,000
-------------------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 920,000 74,000 763,000 47,000
Salaries and benefits 921,000 135,000 535,000 85,000
Consulting fees 516,000 46,000 296,000 35,000
Advertising 228,000 303,000 140,000 282,000
General and administrative 1,096,000 207,000 611,000 166,000
Depreciation 65,000 7,000 60,000 3,000
Amortization of purchased intangibles 3,440,000 -0- 2,145,000 -0-
Amortization of goodwill 1,285,000 -0- 776,000 -0-
Options granted for services provided 1,145,000 -0- 1,145,000 -0-
Amortization of stock compensation 1,850,000 -0- 1,637,000 -0-
Amortization of deferred charges 225,000 -0- 225,000 -0-
Acquisition costs 96,000 -0- 45,000 -0-
-------------------------------------------------------------------
Total expenses 11,787,000 772,000 8,378,000 608,000
-------------------------------------------------------------------
Net loss before income taxes (9,926,000) (703,000) (7,189,000) (547,000)
Deferred income tax recovery (1,285,000) -0- (776,000) -0-
-------------------------------------------------------------------
(8,641,000) (703,000) (6,413,000) (547,000)
-------------------------------------------------------------------
-------------------------------------------------------------------
Net loss and comprehensive loss
NET LOSS PER SHARE $ (0.45) $ (0.11) $ (0.33) $ (0.08)
-------------------------------------------------------------------
-------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 19,069,000 6,290,000 19,591,000 6,580,000
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
13
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1999
<S> <C>
Current
Cash and cash equivalents $ 1,297,000
Receivables 482,000
Prepaid expenses 55,000
----------------------------
1,834,000
Equipment, net 434,000
Deferred charges,net 1,125,000
Purchased intangibles, net 13,127,000
Goodwill, net 4,697,000
----------------------------
$ 21,217,000
============================
Current
Accounts payable $ 542,000
Accrued liabilities 35,000
Purchase price liability 500,000
Deferred revenue 401,000
Accrued prize commitments 275,000
Loan payable 250,000
----------------------------
2,003,000
Deferred income taxes 4,697,000
----------------------------
6,700,000
----------------------------
Shareholders' equity
Common stock and additional paid-in capital, 38,204,000
Share subscription receivable for 475,000 shares subscribed (190,000)
Deferred compensation (10,699,000)
Accumulated deficit (12,798,000)
----------------------------
14,517,000
----------------------------
$21,217,000
============================
</TABLE>
14
<PAGE>
SUMMARY UNAUDITED PRO-FORMA FINANCIAL DATA
The following presents summary unaudited pro-forma consolidated
financial information, which gives effect to the various acquisitions of the
Company occurring in the relevant periods. This summary pro-forma financial
information should be read in conjunction with such Historical and Pro-forma
Financial Data, the financial statements and Management's Discussion and
Analysis of Operations and Financial Condition of ISN. Pro-forma information
is presented based upon historical information and, accordingly, is not
necessarily indicative of future financial positions or results of operations.
The accompanying unaudited pro-forma consolidated statement of
operations is presented for the 11 months ended March 31, 1999. The pro-forma
consolidated statement of operations gives effect to the following
acquisitions as if they had occurred at the beginning of the period, May 1,
1998: Sportsmark Group (acquired on February 5, 1999, therefore an additional
9 months of results, since 2 months were included in the reported results),
Pickem (acquired on March 5, 1999, therefore an additional 10 months of
results, since 1 month was included in the reported results), and Sportsbuff
(acquired on June 30, 1999, therefore an additional 11 months of results,
since no results were included in the reported results).
A pro-forma balance sheet is not presented here, as all transactions
impacting the pro-forma information have been reflected in the consolidated
unaudited balance sheet as at September 30, 1999 presented herein.
PRO-FORMA INCOME STATEMENT (UNAUDITED)
11 MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ISN
SportsMark California
As Reported Group (Pickem) Sportsbuff Pro-forma Adj Note Pro-forma
------------ ---------- ---------- ---------- ------------- ---- ---------
A B C D
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE 152,000 1,558,000 179,000 1,212,000 - 3,101,000
EXPENSES
Prize Commitments and other
direct Costs 250,000 628,000 35,000 606,000 - 1,519,000
Other Costs and Expenses 1,622,000 504,000 120,000 537,000 187,000 E 2,970,000
Interest and Bank charges 17,000 4,000 - 5,000 - 26,000
Promotion and Advertising 367,000 55,000 (1,000) 1,000 - 422,000
Amortization of Capital Assets 23,000 8,000 15,000 28,000 - 74,000
Stock compensation, stock option
and Debenture related costs 796,000 - - - -
Amortization of purchased 827,000 - - - 9,165,000 F 9,992,000
Intangibles and goodwill
----------------------------------------------------------------------- ---------------
NET LOSS BEFORE TAXES (3,750,000) 359,000 10,000 35,000 (9,352,000) (12,698,000)
Deferred income Tax Expense
(recovery) (236,000) 8,000 (1,000) - (2,571,000) G,H (2,800,000)
------------------------------------------------------------------------ ---------------
NET INCOME (LOSS) (3,514,000) 351,000 11,000 35,000 (6,781,000) (9,898,000)
======================================================================== ===============
</TABLE>
NOTES TO THE CONSOLIDATED PRO-FORMA FINANCIAL STATEMENTS FOR THE ELEVEN
MONTHS ENDED MARCH 31, 1999:
The following is a description of the pro-forma adjustments referenced in the
consolidated pro-forma financial statements:
15
<PAGE>
<TABLE>
<S> <C>
A. Represents the results reported for the 11 month period ending March
31, 1999. These figures include the results from Sportsmark Group from
February 5, 1999 to March 31, 1999 and the results of Pickem from March
5, 1999 to March 31, 1999.
B. Pro-forma results from Sportsmark Group are calculated by taking the
results from the 12 month periods ending December 31, 1998 for
Sportsmark Promotions Inc, Classroom 2000 Inc and SMP SportsMark
Promotions, International, Inc, and the 12 month period ending November
30, 1998 for Sportsmark Inc. and deducting the first month of results
to reflect 11 months of results. The results of operations for the
period February 5, 1999 to March 31, 1999 were deducted from the 11
month results to arrive at the pro-forma amounts included in this
column.
C. Pro-forma results from Pickem are calculated by taking the results from
the 12 month period ending December 31, 1998 and deducting the first
month of results to reflect 11 months of results. The results of
operations for the period March 5, 1999 to March 31, 1999 were deducted
from the 11 month results to arrive at the pro-forma amounts included
in this column.
D. Pro-forma results from Sportsbuff are calculated by taking the results
from the 11 month period ending March 31, 1999. No reductions to this
amount have been reflected, as no results for Sportsbuff were included
in the results of operations for the 11 month period ending March 31,
1999. The acquisition of Sportsbuff consisted of purchased intangibles
and goodwill of $5,087,000 and $2,035,000 respectively, the related
deferred income tax liability of $2,035,000, paid for with $1,000,000
cash and $4,066,000 in common stock. Also Sportsbuff reflected capital
stock of $8,000 and accumulated deficit of $29,000 at the start of the
period.
E. Acquisition costs associated with the acquisition of Sportsbuff 50,000
Additional wages and benefits expense to reflect amounts taken as
dividends by Sportsmark Group during the period before acquisition 137,000
-------
TOTAL 187,000
=========
F. Additional amortization of purchased intangibles from the
beginning of the period to the date of acquisition
- Sportsmark (9 months) 1,493,000
- Pickem (10 months) 2,604,000
- Sportsbuff (11 months) 2,331,000
Additional amortization relating to 11 months of amortization of
the variance in the calculation of purchased intangibles if the
acquisitions of Sportsmark and Pickem had occurred at the
beginning of the year. 166,000
-------
Total amortization of purchased intangibles 6,594,000
---------
Additional amortization of goodwill from the beginning of the
period to the date of acquisition
- Sportsmark (9 months) 597,000
- Pickem (10 months) 1,041,000
- Sportsbuff (11 months) 933,000
---------
Total amortization of goodwill 2,571,000
---------
Total amortization of purchased intangibles and goodwill 9,165,000
=========
G. Additional amortization of deferred taxes from the beginning of
the period to the date of acquisition
- Sportsmark (9 months) 597,000
- Pickem (10 months) 1,041,000
- Sportsbuff (11 months) 933,000
---------
Total amortization of deferred taxes 2,571,000
=========
H. The deferred income tax liability and the goodwill arose as a result of
the differences between the financial reporting and tax values of the
purchased intangibles acquired through the Sportsmark Group, Sportbuff
and Pickem acquisitions. The deferred income tax liability is amortized
into income over the same period
as the goodwill.
</TABLE>
16
<PAGE>
Pro-forma results include the results of operations for SportsBuff for the 6
month period ending September 30, 1999, as if the acquisition had occurred at
the beginning of the period. The accompanying unaudited pro-forma consolidated
statement of operations is presented for the 6 months ended September 30, 1999
and gives effect to the acquisition as if it had occurred at May 1, 1998. A
pro-forma balance sheet is not presented here, as all acquisitions impacting the
pro-forma information have been reflected in the consolidated unaudited balance
sheet as at September 30, 1999 presented herein.
Pro-Forma Statements
6 MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ISN Pro-Forma
As Reported Wisconsin Total Adjustments Note Pro-Forma
------------ ------------ ------------ ----------- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 1,861,000 $ 238,000 $ 2,099,000 - $ 2,099,000
-----------------------------------------------------------------------------------
EXPENSES
Prize commitments and
other direct costs 920,000 276,000 1,196,000 - 1,196,000
Salaries and benefits 921,000 63,000 984,000 - 984,000
Consulting fees 516,000 5,000 521,000 - 521,000
Advertising 228,000 1,000 229,000 - 229,000
General and
administrative 1,096,000 89,000 1,185,000 - 1,185,000
Depreciation 65,000 2,000 67,000 - 67,000
Amortization of purchased
intangibles/goodwill 4,725,000 - 4,725,000 890,000 A 5,615,000
Options granted for services 1,145,000 - 1,145,000 - 1,145,000
Amortization of stock
compensation 1,850,000 - 1,850,000 - 1,850,000
Amortization of deferred charges 225,000 - 225,000 - 225,000
Acquisition costs 96,000 - 96,000 - 96,000
-----------------------------------------------------------------------------------
TOTAL EXPENSES 11,787,000 436,000 12,223,000 890,000 13,113,000
-----------------------------------------------------------------------------------
Net loss before income taxes (9,926,000) (198,000) (10,124,000) (890,000) (11,014,000)
Deferred Income Tax
Expense (Recovery) (1,285,000) - (1,285,000) (254,000) A (1,539,000)
-----------------------------------------------------------------------------------
NET LOSS (8,641,000) (198,000) (8,839,000) (636,000) (9,475,000)
===================================================================================
Net Loss per Share (0.49)
============
Weighted Average Shares
Outstanding 19,069,000 306,000 19,375,000 19,375,000
===================================================================================
</TABLE>
A. Pro-forma adjustments consist of three months of amortization of the
purchased intangibles and related goodwill on the acquisition of Sportsbuff,
from the start of the period (April 1, 1999) to the date of acquisition (June
30, 1999). Amortization is being calculated on a straight line basis over two
years for purchased intangibles and goodwill of $5,087,000 and $2,035,000
respectively as calculated if the acquisition occurred on May 1, 1998. The
related amortization for purchased intangibles and goodwill is $636,000 and
$254,000 totaling $890,000. The related deferred tax impact is equal to the
goodwill amount of $254,000.
17
<PAGE>
OVERVIEW
ISN was originally incorporated on April 28, 1997 in Nevada for the
purpose of providing interactive, computer sports entertainment through the
Internet. The Company has a limited operating history on which to evaluate its
prospects. The risks, expense, and difficulties encountered by start up
companies must be considered when evaluating ISN's prospects.
The operating expenses of ISN cannot be predicted with certainty. They
will depend on several factors, including the amount of marketing expenses, the
acceptance of the Company's services in the market, and competition for such
services, and the acquisition activities of the Company. Management may be able
to control the timing of such expenses in part by speeding up or slowing down
marketing development and distribution activities and acquisition strategies.
From its inception in April 1997 to date, ISN has incurred costs
associated with the development of its internet sports entertainment products,
probable markets and business. ISN incurred costs for conducting test marketing
for its products and received revenues as a result. The test marketing consisted
of advertising, processing membership applications and analysis of responses.
During the period, ISN purchased computer and telecommunication equipment as
necessary to conduct its operations.
18
<PAGE>
ISN financed its expenditures primarily through the sale of its common
stock. Since inception through March 31, 1999, the company issued approximately
10,256,000 million common shares for net cash consideration of approximately
$9,178,000.
19
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has an
accumulated deficit of $12,798,000 to September 30, 1999. The Company
anticipates that it will continue to generate financial losses for the
forseeable future. In the event the Company is unsuccessful in securing
outside capital, it may be required to curtail or cease operations
altogether. Under United States Generally Accepted Auditing Statements
substantial doubt exists regarding the ability of the Company to continue as
a going concern.
It is the intention of management to raise the additional capital
through the sale of additional capital stock of the Company, although there
can be no assurance that ISN will be able to obtain such funds.
Cash used by operating activities is $1,606,000, which is less than the
net loss due to amortization and other share based expenses. Since inception,
the Company has funded its capital requirements by financing activities,
substantially through the sale of its equity securities.
Capital expenditures from inception to March 31, 1999 were $115,000.
ISN has current commitments to upgrade its management
information system, telecommunications system and office
equipment to accommodate anticipated growth at an estimated
cost of $250,000 over the next six months. Overall, capital
expenditures, including those anticipated as a result of
acquisition activity, during the year ending March 31, 2000 is
anticipated to approximate $1,000,000.
The Company's management believes that an additional $3,000,000 in
funds combined with the funds already raised in private offerings and the
revenues generated by its operations will be sufficient to fund its operations
for the next twelve months under the current plan of operations. Additional
funding may be required for further acquisition activity, depending on the cash
component of the purchase price of any contemplated acquisitions. It is expected
that such funds will be obtained by the sale of additional capital stock of the
Company, although there can be no assurance that ISN will be able to obtain such
funds.
20
<PAGE>
Beyond the next twelve month period, the Company will require working
capital to fund operations during the off peak months (June to August).
Excluding acquisition activity, the funds required would be approximately $2
million (bringing the total funding requirement to $5,000,000 when combined with
the $3,000,000 discussed above), however after this period, the Company expects
to be able to operate with its cash from operations from that point forward. Any
additional capital requirements would be due to acquisition activities, or
modifications to the current growth plans.
The Company maintains its interest in acquiring companies and assets
which can benefit the Company's business and subscriber base. Currently, the
Company is reviewing potential acquisition targets which could provide
complimentary assets and market access to the Company's existing portfolio.
These acquisitions are not assured at this time, and there is a risk that these
acquisitions will not be completed.
RESULTS OF OPERATIONS
AMORTIZATION
The purchased intangibles and goodwill related to the acquisitions of
Sportsmark and Pickem totaled $14,319,000. Amortization for the eleven months
ending March 31, 1999, was $827,000. The purchased intangibles and goodwill
related to the acquisition of Ultimate Sports Publishing and SportsBuff totaled
$9,058,000. Amortization for the six months ended September 30, 1999 was
$4,725,000. The Company is amortizing purchased intangibles and goodwill over 24
months. These intangibles include trademarks, software licenses and intellectual
properties.
The Company expects to continue to acquire companies and assets that can
benefit its business and subscriber base. Currently, ISN is reviewing potential
acquisition targets that could provide complementary games and contests and as
well as new customers for the Company's existing games.
SIX MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) AS COMPARED TO THE SIX MONTHS
ENDED OCTOBER 31, 1998 (UNAUDITED).
REVENUE. The Company generated revenue of $1,861,000 for the period ending
September 30, 1999 as compared to revenues of approximately $69,000 for the
period ending October 31, 1998. The increase in revenues was primarily
attributable to the inclusion of the operating results of Sportsmark, Ultimate
Sports Publishing, Sportsbuff and Pickem in 1999.
21
<PAGE>
OPERATING EXPENSES. Total operating expenses were $3,746,000 as compared to
approximately $772,000 in the period ended October 31, 1998, for an increase of
$2,974,000. Approximately $1,932,000 of this increase was attributable to the
acquisitions of Sportsmark, Pickem Sports, Ultimate Sports Publishing and
SportsBuff. The overall increase is described in more detail below:
PRIZES AND OTHER DIRECT COSTS. Expenses associated with providing prizes for
contests and other direct costs increased to $920,000 from approximately $74,000
in the period ended October 31, 1998. Approximately $560,000 of the increased
costs in 1999 were the result of publishing costs associated with the magazine
publications. The remaining increase is the result of the costs associated with
the direct operating costs of the contests, and ISN prizing commitments for the
1999-2000 National Football League season contests. Prize commitments increased
approximately $200,000 over the prior period, primarily for the SportsBuff
national contest.
GENERAL AND ADMINISTRATIVE. Salaries and benefits increased $786,000 to $920,000
from $135,000 in the six month period in 1998, while consulting fees increased
by $470,000 to $516,000 from $46,000 in the prior year period. These increases
were the result of additional personnel and staff, mainly from the acquisitions
of Sportsmark, Pickem Sports, Ultimate Sports Publishing and SportsBuff, and
consultants hired for game development, web design and for other services.
Salaries and benefits for the six months ended September 30, 1999 also includes
$110,000 in severance costs associated with the closing of ISN's Vancouver
offices. Advertising expenses decreased $75,000 to $228,000 from $303,000 in the
prior year period. This decrease is mainly due to a significant initial
promotion run by the Company in September-October 1998. Other general and
administrative costs increased by $889,000, the majority of which resulted from
travel and other expenses which increased $215,000 to $256,000 as a result of an
increase in sales staff, increased sales efforts and financing activities.
Occupancy, telephone and legal and accounting costs at September 30, 1999 were
$305,000. The majority of legal and accounting fees relate to costs associated
with preparing regulatory filings.. Interest expense and bank charges equaled
$7,000. Other general and administrative costs were $207,000 for the six months
ending October 31, 1998. Depreciation was $65,000 in the six months ended
September 30, 1999 as compared to $7,000 for the prior year. This increase is
due to equipment acquisition throughout the period.
AMORTIZATION OF PURCHASED INTANGIBLES, GOODWILL AND OTHER. Amortization of
purchased intangibles was $3,440,000 and amortization of goodwill was $1,285,000
for the six months ended September 30, 1999 compared to no amortization of such
amounts in the prior year period. The amortization was related to the purchases
of Sportsmark, Pickem Sports, Ultimate Sports Publishing and SportBuff. The
Company is amortizing the cost of these acquisitions over 24 months.
The Company amortized $1,850,000 of costs related to stock based compensation
resulting from stock options granted to officers, employees and directors. The
compensation expense was calculated as the difference between the option
exercise price and the share price as reported by the OTC/BB of the Company's
common stock at the date of issuance. The options may be exercised at prices
between $0.40 to $6.00 and vest over periods ranging from 17 to 36 months. The
Company is amortizing the expense relating to the options over their vesting
periods. Also, the Company expensed $96,000 of acquisition costs related to the
purchase of SportsBuff and Ultimate Sports Publishing, as well as due diligence
costs associated with potential transactions that were not completed.
The Company is recognizing a $1,145,000 expense for 600,000 stock options
granted to consultants in lieu of compensation for services provided to the
Company. This amount was calculated using the Black-Scholes options pricing
model. The options may be exercised between $4.00 and $4.08 per share.
NET LOSS FROM OPERATIONS. The Company experienced a loss of $8,641,000 after the
benefit of deferred taxes of $1,285,000 for the period ended September 30, 1999
as compared to a loss of $703,000 for the period ended October 31, 1998. Loss
per share in the period ended September 30, 1999 was $ (.45) compared to $ (.11)
in the prior year period.
THREE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) AS
COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED).
22
<PAGE>
REVENUE. The Company generated revenue of $1,189,000 for the three month period
ending September 30, 1999 as compared to revenues of approximately $61,000 for
the three month period ending October 31, 1998. The increase in revenues was
primarily attributable to the inclusion of the operating results of Sportsmark,
Ultimate Sports Publishing, Sportsbuff and Pickem in 1999.
OPERATING EXPENSES. Total operating expenses were $2,405,000 as compared to
approximately $608,000 in the period ended October 31, 1998, for an increase of
$1,797,000. Approximately $1,304,000 of this increase was attributable to the
acquisitions of Sportsmark, Pickem Sports, Ultimate Sports Publishing and
SportsBuff. The overall increase is described in more detail below:
PRIZES AND OTHER DIRECT COSTS. Expenses associated with providing prizes for
contests and other direct costs increased to $763,000 from $47,000 in the period
ended October 31, 1998. Approximately $360,000 of the increased costs in 1999
were the result of publishing costs associated with the magazine publications.
The remaining increase is the result of the costs associated with the direct
operating costs of the contests, and ISN prizing commitments for the 1999-2000
National Football League season contests. Prize commitments increased
approximately $200,000 over the prior period, primarily for the SportsBuff
national contest.
GENERAL AND ADMINISTRATIVE. Salaries and benefits increased $450,000 to $535,000
from $85,000 in the three month period in 1998, while consulting fees increased
by $261,000 to $296,000 from $35,000 in the prior year period. These increases
were the result of additional personnel and staff, mainly from the acquisitions
of Sportsmark, Pickem Sports, Ultimate Sports Publishing and SportsBuff, and
consultants hired for game development, web design and for other services.
Salaries and benefits for the three months ended September 30, 1999 also
includes $110,000 in severance costs associated with the closing of ISN's
Vancouver offices. Advertising expenses decreased $142,000 to $140,000 from
$282,000 in the prior year period. This decrease is mainly due to a significant
initial promotion run by the Company in September-October 1998 as well as a move
from direct to consumer advertising to a business to business approach. Other
general and administrative costs increased by $445,000, the majority of which
resulted from travel and other expenses which increased $38,000 to $76,000 as a
result of an increase in sales staff, increased sales efforts and financing
activities. Occupancy, telephone and legal and accounting costs for the three
months ending September 30, 1999 were $234,000. The majority of legal and
accounting fees relate to costs associated with preparing regulatory filings.
Interest expense and bank charges equaled $3,000. Other general and
administrative costs were $156,000 for the three months ending October 31, 1998.
Depreciation was $60,000 in the three months ended September 30, 1999 as
compared to $3,000 for the prior year. This increase is due to equipment
acquisition throughout the year.
AMORTIZATION OF PURCHASED INTANGIBLES, GOODWILL AND OTHER. Amortization of
purchased intangibles was $2,145,000 and amortization of goodwill was $776,000
for the three months ended September 30, 1999 compared to no amortization of
such amounts in the prior year period. The amortization was related to the
purchases of Sportsmark, Pickem Sports, Ultimate Sports Publishing and
SportBuff. The Company is amortizing the cost of these acquisitions over 24
months.
The Company amortized $1,637,000 of costs related to stock based compensation
resulting from stock options granted to officers, employees and directors. The
compensation expense was calculated as the difference between the option
exercise price and the share price as reported by the OTC/BB of the Company's
common stock at the date of issuance. The options may be exercised at prices
between $0.40 to $6.00 and vest over periods ranging from 17 to 36 months. The
Company is amortizing the expense relating to the options over their vesting
periods. Also, the Company expensed $45,000 of acquisition costs related to the
purchase of SportsBuff, as well as due diligence costs associated with potential
transactions that were not completed.
The Company is recognizing a $1,145,000 expense for 600,000 stock options
granted to consultants in lieu of compensation for services provided to the
Company. This amount was calculated using the Black-Scholes options pricing
model. The options may be exercised between $4.00 and $4.08 per share.
NET LOSS FROM OPERATIONS. The Company experienced a loss of $6,413,000 after the
benefit of deferred taxes of $776,000 for the period ended September 30, 1999 as
compared to a loss of $547,000 for the period ended
23
<PAGE>
October 31, 1998. Loss per share in the period ended September 30, 1999 was $
(.33) compared to $ (.08) in the prior year period.
TOTAL ASSETS. The total assets of ISN as of September 30, 1999 totaled
$21,217,000 compared to $16,715,000 at March 31, 1999. The increase in total
assets was attributable to the net increase in purchased intangibles and
goodwill of $9,058,000 resulting from the acquisition of SportsBuff and Ultimate
Sports Publishing. See chart below for summary of assets acquired in the two
transactions. Further increase in assets of $2,600,000 is from the funds raised
from the sale of common stock not spent to date. These increases are offset by
operating losses and amortization costs during the period.
<TABLE>
<CAPTION>
===================================================================================================================
As at As at
June 22, 1999 June 30, 1999
Ultimate Sports Sportsbuff
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets acquired at fair values:
Working capital $ 0 $ (290,000)
Equipment 0 36,000
Purchased intangibles 1,610,000 5,320,000
Goodwill 0 2,128,000
Deferred income taxes 0 (2,128,000)
----------- -----------
$ 1,610,000 $ 5,066,000
------------ ------------
Funded by:
Cash $ 860,000 $ 1,000,000
Shares of common stock 750,000 4,066,000
----------- -----------
$ 1,610,000 $ 5,066,000
===================================================================================================================
</TABLE>
24
<PAGE>
FISCAL PERIOD ENDED MARCH 31, 1999 (AUDITED) AS COMPARED TO FISCAL PERIOD ENDED
APRIL 30, 1998 (AUDITED)
REVENUE. Revenue totaled $152,000 for the eleven months ended March 31, 1999 as
compared to revenue of $77,000 for the period from April 28, 1997 (inception) to
April 30, 1998. Approximately $67,000 of the revenue increase was attributable
to the acquisitions of the Sportsmark and Pickem companies. The revenues include
two months of operating results for Sportsmark and one month for Pickem.
OPERATING EXPENSES. Total operating expenses were $1,733,000 in the eleven
months ended March 31, 1999 compared to $720,000 in the period ended April 30,
1998. Increases in operating expenses relating to the acquisitions of the
Sportsmark and Pickem companies were $260,000.
PRIZE COMMITMENTS AND OTHER DIRECT EXPENSES. Expenses associated with providing
prizes for contests were $250,000 in the eleven months ended March 31, 1999
compared to $41,000 in the period ended April 30, 1998. The increase in these
expenses resulted from increases in the number of contests and the number of
prizes awarded to contestants and other direct expenses.
GENERAL AND ADMINISTRATIVE. Salaries and benefits expenses were $385,000 in the
eleven months ended March 31, 1999 compared to $223,000 in the period ended
April 30, 1998. Consulting fees were $267,000 in the eleven months ended March
31, 1999 compared to $67, 000 in period ended April 30, 1998. The higher
expenses were the result of increases in personnel, particularly in sales and
marketing, the addition of personnel costs associated with
25
<PAGE>
the acquisition of Sportsmark and Pickem and increased consulting fees paid
for game developers and other services. Advertising expenses were $367,000 in
the eleven months ended March 31, 1999 compared to $185,000 in the period
ended April 30, 1998. Other general and administrative expenses totaled
$464,000, including $78,000 for general expenses such as utilities, office
supplies, etc, $72,000 for occupancy and telephone, $86,000 for legal and
accounting, $188,000 for travel and other, $23,000 for depreciation and
$17,000 for interest and bank charges, in the eleven months ended March 31,
1999 compared to $204,000 in the period ended April 30, 1998.
AMORTIZATION OF PURCHASED INTANGIBLES, GOODWILL AND OTHER. Amortization of
purchased intangibles and goodwill was $591,000 and $236,000, respectively, for
the eleven months ended March 31, 1999 compared to none in the period ended
April 30, 1998. The amortization was related to the purchases of Sportsmark and
Pickem and the cost of these acquisitions as well as those of Ultimate Sports
and SportsBuff are being amortized over 24 months.
In the eleven months ended March 31, 1999, ISN recognized $632,000 of expense
related to 970,000 stock options issued to consultants and outside entities for
various services provided to the Company. This amount was calculated using the
Black-Scholes options pricing model. The options may be exercised between $.40
and $1.75 per share. The Company also issued stock options to employees at $1.75
per share and recognized $20,000 of stock based compensation expense associated
with these options. The expense was calculated as the difference between the
option exercise price and the market value per share of ISN's common stock at
the date of issuance, and is being amortized over the vesting period of the
options.
The Company recognized $144,000 of expense associated with the early conversion
of convertible debentures due to mature in December 2002. This expense was
calculated based on the difference between the conversion rate of $.40 per share
actually used to convert the debentures to common stock as compared to the
conversion rate of $1.75, contemplated in the debenture agreement. A further
$546,000 of expenses were incurred associated with our transaction with
BirchTree Capital and with other transaction related costs.
NET LOSS FROM OPERATIONS. The Company experienced a loss of $3,514,000, after
the benefit of $236,000 for deferred taxes for the eleven months ended March 31,
1999 as compared to a loss of $643,000 for the period from inception to April
30, 1998. The loss per share for the eleven months ending March 31, 1999 was $
(.45) per share and for the period from inception to April 30, 1998 was $ (.17 )
per share. The increased loss per share attributable to expenses discussed
above, were offset by an increase in the weighted average number of shares
outstanding from 3,813,000 to 7,833,000.
TOTAL ASSETS. The total assets of ISN as of March 31, 1999 totaled $16,715,000
compared to $131,000 at April 30, 1998. The increase in total assets was
attributable to two areas of significance:
- Increases in cash and cash equivalents of $2,919,000 due to the sale
of common stock, which raised approximately $8,786,000 less operating losses and
acquisition costs.
- The purchased intangibles and goodwill from the acquisition of
Sportsmark and Pickem totaled $10,228,000 and $4,091,000 respectively on which
1999 amortization was $827,000. These intangibles include trademarks, software
licenses and intellectual properties as well as a $4,091,000 tax effect. See
chart below for summary of assets acquired in the two transactions.
<TABLE>
<CAPTION>
As at
February 5, 1999 As at
Sportsmark Group March 5, 1999
of Companies Pickem Sports, Inc. Combined
<S> <C> <C> <C>
Net assets acquired at fair value
Working Capital ($129,000) $9,000 ($120,000)
Equipment 28,000 12,000 40,000
Purchased Intangibles & Goodwill 5,572,000 8,747,000 14,319,000
Deferred income taxes (1,592,000) (2,499,000) (4,091,000)
-----------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
-----------------------------------------------------------------------
$3,879,000 $6,269,000 $10,148,000
=======================================================================
Funded by:
Cash 1,254,000 3,000,000 4,254,000
Shares issued 2,625,000 3,269,000 5,894,000
=======================================================================
$3,879,000 $6,269,000 $10,148,000
=======================================================================
</TABLE>
YEAR 2000
The Company has developed and acquired its computer systems with an
objective to be Year 2000 compliant. ISN has engaged the services of qualified
technicians to determine the extent to which it may be vulnerable to third party
Year 2000 issues. As a relatively new corporation, all computer equipment
purchased, in August 1997 and August 1998, is Year 2000 compliant. The internal
software written by ISN's programmers is written with the long-date format
included and consequently is Year 2000 compliant. ISN uses Microsoft software
and has installed all the available "patches" to up-date this software. While
Microsoft "patches" have been installed as they have become available from
Microsoft, this affects less than .0005% of ISN's software and does not impact
on the on-going operation of the Company.
All of ISN's information technology equipment and non-related
information technology equipment has been tested or verified to be compliant by
the manufacturer. Verification was received by the manufacturer by providing a
certificate or by reviewing manufacturers web sites for verification. The
Company is in the process of installing patches or purchasing new equipment that
will ensure Year 2000 compliance for any items and suppliers which were
identified as non-compliant. All of the Company's material vendors have been
contacted and have provided the Company with information as to their compliance.
Based on these vendors' assurances, the Company believes that the vendors are
compliant as at October 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's only significant exposure is to foreign currency risk
related to the movement in the Canadian dollar in relation to the United
States dollar. The Company has not entered into any currency exchange
instruments nor any derivative instruments. Management is aware of this risk
and presently does not believe that it would be cost effective to hedge this
risk at this time.
27
<PAGE>
ISN has investigated its third party communications suppliers such as
the telephone company and its Internet service provider and found that all were
in the process of becoming Year 2000 compliant by October 31, 1999. Based upon
current information, management believes that the necessary modifications have
been made internally to effectively continue ISN into the Year 2000, however,
management is continuing to monitor internal systems, and to assess the
readiness of its systems, to ensure Year 2000 compliance. As a contingency, ISN
has identified other communication suppliers who could provide the necessary
service at a minimal cost to the Company, and a minimal effect on the operations
of the Company. In the event no other communication suppliers can be found,
there could be a material adverse effect on the Company and its operations.
The Company has identified all Year 2000 issues and believes that all
material changes have been made to complete its readiness as of October 31,
1999. Based upon current information, Management believes that all remaining
Year 2000 issues are insignificant in nature and do not adversely effect the
total business operations of the Company. Since all Year 2000 issues are
insignificant, the costs to address them are not extreme. The Company
anticipates costs of becoming Year 2000 compliant to be in the range of $35,000
to $50,000.
ITEM 3. DESCRIPTION OF PROPERTY
The main administrative offices of the Company are located at 225
Richmond Street West, Suite 403, Toronto, Ontario, Canada M5V 1W2. The Company
leases approximately 2,270 square feet of office space in Toronto. The lease
expires on May 31, 2000 and requires lease payments of approximately $2,500 per
month. The Company also operated administrative offices at 700-509 Richards St.
Vancouver, British Columbia, Canada V6B 2Z6. At this location, the Company
leases approximately 3,155 square feet of office space. The lease expires on
September 30, 2000 and currently requires lease payments of $26,028.72 per year.
The Company has formally closed the Vancouver offices, and is currently seeking
a sublease tenant for the Vancouver office space.
ISN California, Inc. operates at 3260 Hillview Ave., Palo Alto,
California 94304. The lease is an oral, month to month lease and requires lease
payments of approximately $2,933 per month.
Sportsmark's offices are located at 10201 Southport Road S.W. Calgary,
Canada T2W 4X9. Sportsmark leases approximately 3,516 square feet in Calgary.
The lease expires on March 31, 2000 and requires lease payments of approximately
$1,100 per month.
ISN Wisconsin, Inc. operates at 625 57th St, Suite 700 Kenosha,
Wisconsin 53140. ISN Wisconsin leases approximately 2,300 square feet. The lease
is a three year lease which expires January 31, 2002, although ISN Wisconsin has
an option to terminate the lease on January 31, 2000 with 120 day prior written
notice to the landlord. The lease requires payments of approximately $1,725 per
month. The Company has given written notice of its intent to terminate the
lease.
28
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of March 31, 1999 by (i) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, the address for each
stockholder is 225 Richmond Street West, Suite 403, Toronto, Ontario, Canada M5V
1W2.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Title of Class Names/Address of Beneficial Owner Amount and Nature of Beneficial Percent of Outstanding
of shares Ownership Common Stock Beneficially
Owned
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Andrew DeFrancesco 950,650 5.3%
Chairman of the Board/President
- --------------------------------------------------------------------------------------------------------------------
Common Patrick S. Earle 1,102,957 6.2%
700-509 Richards St.
Vancouver, BC
V6B 2Z6 Canada
- --------------------------------------------------------------------------------------------------------------------
Common Kenneth Crema -0-
Director/Chief Executive 0%
Officer
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Common Geoff Ford 675,000 3.8%
10201 Southport Road S.W.
Suite 633 Director/Chief Operating
Calgary, Alberta Canada T2W 4X9 Officer/Senior Vice-President
Marketing and Sales
- --------------------------------------------------------------------------------------------------------------------
Common Brett Lindros 280,000 1.6%
Director
- --------------------------------------------------------------------------------------------------------------------
Common David Toews -0-
Chief Financial 0%
Officer/Secretary
- --------------------------------------------------------------------------------------------------------------------
Common Estimated all other shareholders 15,935,350 89.3%
- --------------------------------------------------------------------------------------------------------------------
Common All executive Officers and Directors 1,905,650 10.7%
as a Group (5 persons)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO SECURITY OWNERSHIP
(1) Directors, executive officers and 5% shareholders comprise
3,008,607 of the approximate total of 17,841,000 issued and outstanding shares
of the Company as of March 31, 1999. By virtue of their direct ownership of the
Common Stock of the Company, management positions and organizational efforts,
may be deemed "control persons" of the Company, as those terms are defined in
the Securities Act of 1933 (the "Act"), and the rules and regulations
thereunder.
30
<PAGE>
(2) Management and insider shareholdings shown do not include 1,655,000
outstanding options at March 31, 1999 to purchase common stock at the varying
exercise prices from $.40 to $1.75 per share issued to the individuals named,
until such time as said options are exercised.
31
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and officers of Internet Sports Network are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Andrew A. DeFrancesco 28 Chairman of the Board, President
Ken Crema 36 Chief Executive Officer and Director
David Toews 31 Chief Financial Officer and Secretary
Geoff Ford 45 Chief Operating Officer and Director
Brett Lindros 23 Director of Sports Media Properties
</TABLE>
ANDREW A. DEFRANCESCO has served as Chairman of the Board and President of
Internet Sports since March 1999. Prior to this time, he was an executive
Vice-President at Dominick & Dominick Securities, Inc. Canada with
responsibility for institutional equity sales and trading, and sourcing and
structuring of equity and debt financing. Prior to joining Dominick in October,
1997, Mr. DeFrancesco held positions as Manager of Institutional Trading and
Sales from April 1994 to April 1995 and Associate Director, Corporate Finance
from April 1995 to July 1997, at C.M. Oliver & Company Limited. From March 1993
to March 1994, he served as an associate financial advisor at Midland Walwyn
(now Merrill Lynch Canada). Mr. DeFrancesco received his Bachelor of Arts in
Economics and Politics from the University of Western Ontario in 1992.
KEN CREMA has served as Chief Executive Officer and a Director of Internet
Sports since May 1999. Before joining us, Mr. Crema had been involved in
Electronic Direct Marketing, a company he founded in 1987 as a provider of
business solutions including customer service support, order processing and
distribution services. Under Mr. Crema's direction as Chief Executive Officer
and Chairman, Electronic Direct Marketing grew to over 900 employees to become
an established private company, servicing clients including AT&T, Compaq and
Microsoft. In 1998, Mr. Crema sold Electronic Direct Marketing to Teletech, a
global customer care system integration company. Mr. Crema studied Business
Administration at Sir Wilfred Laurier University in Waterloo, Ontario.
DAVID TOEWS has served as Chief Financial Officer and Secretary of Internet
Sports since June 1999. Prior to joining ISN, Mr. Toews was Vice President of
Finance of EDM Electronic Direct Marketing Ltd./TeleTech Canada in Toronto
Ontario. In this position he was responsible for all aspects of financial
reporting, pricing and control for the Canadian operation of TeleTech Canada.
From March 1996 to September 1997, Mr. Toews was Controller of Tee-Comm
Electronics Inc. in Milton, Ontario. From 1990 to March, 1996, Mr. Toews was
employed by Coopers & Lybrand, joining in the general practice and finishing his
last year there as an audit manager. Mr. Toews holds a Bachelor of Commerce
(Honours) from McMaster University in Hamilton, Ontario and earned the Chartered
Accountant Designation in 1992.
GEOFF FORD has served as Chief Operating Officer and Director of Internet Sports
since February 1999. Mr. Ford co-founded Sportsmark, Inc. in 1986 when the
company created and introduced the first large scale commercial sports contests
to the Canadian and American public. Mr. Ford concurrently ran his own
consulting firm, Spectrum Information Systems Inc. from 1986 until 1992 when he
sold his interests in the consulting firm to dedicate his full time to
Sportsmark. Mr. Ford sold his interest in Sportsmark to Internet Sports &
Entertainment Network, Inc. in 1999 and joined the Company in his current
position. Mr. Ford graduated from the University of Calgary with a Bachelor of
Commerce degree in 1977.
BRETT LINDROS has served as Director of Sports Media Properties and Director of
Internet Sports since May, 1999. Mr. Lindros is a former National Hockey League
player and current co-host of "Be a Player! The Hockey Show" on
32
<PAGE>
The Sports Network. Mr. Lindros was born, and completed his high school
education in London, Ontario, Canada. He entered the NHL immediately upon
graduation. Drafted by the New York Islanders in 1994 in the first round, Mr.
Lindros made great strides as an NHL player until a concussion injury stopped
his career short in 1996. Mr. Lindros is using his experience and knowledge
to continue his connection with hockey and the NHL. He brings to the board of
directors not only his well-known name in hockey, but his knowledge of the
game and its players.
IN NOVEMBER, 1999 STEPHEN SADLER, ALBERT GNAT AND DAVID SAMUEL RESIGNED FROM THE
COMPANY'S BOARD OF DIRECTORS.
33
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table and attached notes sets forth the compensation of
the Company's executive officers and directors during each of the fiscal years
since inception of the Company. The remuneration described in the table does not
include the cost to the Company of benefits furnished to the named executive
officers, including premiums for health insurance, reimbursement of expenses,
and other benefits provided to such individual that are extended in connection
with the ordinary conduct of the Company's business. The value of such benefits
cannot be precisely determined, but the executive officers named below did not
receive other compensation in excess of the lesser of $25,000 or 10% of such
officer's cash compensation.
During the 1997-1998 fiscal year, beginning April 28, 1997 (inception)
through April 30, 1998, no Officer or Director received any cash consideration
for salary, nor any aggregate remuneration for health insurance and expenses, in
excess of $40,000.
During the 1998-1999 fiscal year, beginning May 1, 1998 through March
31, 1999, two directors received cash consideration for salary, in excess of
$40,000. Patrick Earle received $96,000 and Roger Earle received $58,500.
The following table sets forth all compensation scheduled to be
received for services rendered to the Company in all capacities during the
1999-2000 fiscal year by those persons who are the Company's executive officers
and directors. No such individuals are scheduled to receive a total annual
salary and bonus which exceeds $100,000 during the 1999-2000 fiscal year, ending
March 31, 2000.
<TABLE>
<CAPTION>
- -------------------------- ---------------------------------------- -----------------------------------------------
LONG TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ---------------------- ---------------------
Name and Principal Other Restricted Securities LTIP All other
Position Year Salary Bonus annual Stock Underlying Payouts Compen-
Compen- Awards Options/ sation
sation SARs
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew
DeFrancesco 2000 $80,000 TBD None None 950,000(2) None None
Chairman, President (1)
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
Kenneth Crema 2000 $80,000 TBD None None 850,000(3) None None
Chief Executive Officer
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
</TABLE>
34
<PAGE>
<TABLE>
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoff Ford 2000 $75,000 TBD None None 450,000(4) None None
Director/Chief Operating
Officer/Senior Vice-
President Marketing
and Sales
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
Brett Lindros 2000 0 0 None None 275,000(4) None None
Director/Director of
Sports Media
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
David Toews Chief 2000 $73,000 TBD None None 150,000(5) None None
Financial Officer/
Secretary
- -------------------------- ------ ---------- ---------- ----------- ----------- ------------- ---------- ----------
</TABLE>
See financial statements for fiscal year detail of executive
compensation.
NOTES TO EXECUTIVE COMPENSATION
(1) In order to maintain reduced operating overhead and provide
incentives, certain officers, directors and employees received options to
purchase common stock at a price of $0.40 per share in lieu of cash
consideration for salaries accrued but not paid. Officers and directors of the
Company were granted a total of 1,425,000 options to purchase shares of
restricted common stock in lieu of compensation pursuant to a July 22, 1999,
board of directors meeting. Andrew DeFrancesco received 700,000 shares of common
stock, in lieu of cash consideration, and at a cost basis of $.40 per share, for
services rendered but not paid during the period April 28, 1997 through January
19, 1999. These shares were provided to Mr. DeFrancesco for his role in the
BirchTree Capital Corp. transaction and not in his capacity as Chairman or
President.
(2) Reflects options granted by the Company to Andrew DeFrancesco in
January 1999 to purchase 200,000 shares of Company Common Stock at the exercise
price of $.40 per share with such options expiring on or before January 4, 2004;
and options granted to Andrew DeFrancesco to purchase 250,000 shares of Company
Common Stock at the exercise price of $1.75 per share granted in January 1999;
and options granted to Andrew DeFrancesco to purchase 500,000 shares of Company
Common Stock at the exercise price of $0.40 per share vesting 50% November 1,
1999 and 50% November 1, 2000, granted in July 1999. See "Options Outstanding"
and "Certain Transactions".
(3) Reflects options granted by the Company to Ken Crema in January
1999 to purchase 350,000 shares of Company Common Stock at the exercise price of
$1.75 per share; and options granted to Ken Crema to purchase
35
<PAGE>
500,000 shares of Company Common Stock at the exercise price of $0.40 per
share vesting 50% November 1, 1999 and 50% November 1, 2000, granted in July
1999. See "Options Outstanding" and "Certain Transactions".
(4) Reflects options granted by the Company to Geoff Ford, and Brett
Lindros in February 1999 to purchase 150,000 shares of Company Common Stock at
the exercise price of $1.75 per share; with such options expiring on or before
March 25, 2004; and options granted to Geoff Ford and Brett Lindros to purchase
300,000 and 125,000 shares of Company Common Stock, respectively, at the
exercise price of $0.40 per share vesting 33% November 1, 1999, 33% November 1,
2000 and 34% November 1, 2001, granted in July 1999. See "Options Outstanding"
and "Certain Transactions."
(5) Reflects options to purchase 50,000 shares of common stock granted
to David Toews as an incentive to accept service with the Company as Vice
President of Finance and subsequently Chief Financial Officer in February, 1999
at the exercise price of $1.75 per share; with such options expiring on or
before March 25, 2004. An additional 100,000 options at the exercise price of
$4.275 were granted in June, 1999.
The Company carries officers and directors liability insurance,
disability and life insurance benefits, as well as health insurance. The health
disability and life insurance benefits are available to employees of the Company
only. Only three executive officers or directors are currently covered by
employment agreements. The Company does not maintain any pension plan, profit
sharing plan or similar retirement or employee benefit plans.
Mr. Ford's employment agreement is for a term of three years. The terms
of this agreement specifies a salary as disclosed herein above.
<TABLE>
<CAPTION>
----------------------------------------------------------- ---------- ------------ ------------------
Individual Grants As of March 31, 1999 Grant Date Value
----------------------------------------------------------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Name Number of Percent of Exercise Expiration Grant date
securities total or base Date present value $
underlying options/SARs price
Options/SARs granted to ($/Sh)
granted (#) employees in
fiscal year
------------------------- ----------------- --------------- ---------- ------------ ------------------
Andrew DeFrancesco 200,000 5.9% $.40 2/28/04 $0
250,000 7.3% $1.75 3/25/04 $0
------------------------- ----------------- --------------- ---------- ------------ ------------------
Ken Crema 350,000 10.4% $1.75 3/25/04 $0
------------------------- ----------------- --------------- ---------- ------------ ------------------
Geoff Ford 150,000 4.4% $1.75 3/25/04 $0
------------------------- ----------------- --------------- ---------- ------------ ------------------
Brett Lindros 150,000 4.4% $1.75 3/25/04 $0
------------------------- ----------------- --------------- ---------- ------------ ------------------
David Toews 50,000 1.5% $1.75 3/25/04 $0
------------------------- ----------------- --------------- ---------- ------------ ------------------
</TABLE>
36
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
In January 1999, Internet Sports Network, Inc., then a privately held
Nevada corporation, entered into an agreement with BirchTree Capital
Corporation, a Florida shell corporation with no operations which traded on the
over the counter/bulletin board as "BICP" and its majority shareholder, Eric
Littman. Pursuant to this agreement, BirchTree Capital Corporation issued in
excess of 9,000,000 shares of stock to the shareholders of Internet Sports
Network, Inc., the Nevada corporation. For the additional consideration of being
permitted to retain 1,025,000 shares of common stock of BirchTree Capital
Corporation and for the cash payment of $250,000, Mr. Littman agreed to cancel
3,975,000 shares of common stock held in his name. At the time of this
transaction, the Company did not have sufficient cash resources to pay the
consideration requested by Mr. Littman. Certain of ISN's shareholders, Benitz &
Partners and Mark Valentine, agreed to pay the cash consideration portion to Mr.
Littman in exchange for receiving an option to purchase 500,000 shares each of
common stock held by Mr. Littman. Benitz & Partners and Mark Valentine also
agreed to the cancellation of 350,000 shares each of their Internet Sports
Network, a Nevada corporation, common stock. Effective January 19, 1999, the
stockholders of Internet Sports Network, Inc. a Nevada corporation initiated the
exchange of one hundred percent (100%) of their shares for an equal number of
shares of common stock of BirchTree Capital Corporation. On February 1, 1999,
BirchTree Capital Corporation changed its name to Internet Sports Network, Inc.,
a Florida corporation, and changed its OTC/BB symbol to ISNI. On February 22,
1999, Internet Sports Network, Inc., a Nevada corporation merged into Internet
Sports Network, Inc. a Florida corporation with the Florida corporation being
the surviving entity.
The capitalization of the resulting company, Internet Sports Network,
Inc., a Florida corporation was less than 1% of the issued and outstanding
shares of common stock held by former BirchTree Capital Corporation shareholders
and greater than 99% of the issued and outstanding shares of common stock held
by former Internet Sports Network, Inc. a Nevada corporation. Former BirchTree
shareholders held a total of 50,000 shares after the transaction consisting of
25,000 held by Mr. Littman and 25,000 held in the public float. This transaction
provided the Company with access to a public market and quote for its
securities.
Officers and directors of the Company were granted options to purchase
common stock at the exercise price of $.40 per share on January 5, 1999. The
right to purchase 155,000 shares of common stock were granted to these officers
and directors with a further 350,000 granted to consultants who later became
officers and/or directors. Options to purchase 100,000 shares of ISN's common
stock have been exercised, the remaining 405,000 may be exercised presently and
expire on February 28, 2004. These options were granted as an incentive to
continue service with the Company.
ISN's directors were granted 1.3 million options to purchase common
stock pursuant to an option agreement on January 19, 1999. This option agreement
vested immediately and is exercisable over a five year period at the exercise
price of $1.75 per share. The shares underlying the options are subject to
piggyback and demand registration rights. These options were granted as an
incentive to continue service with the Company
On February 1, 1999 pursuant to an option agreement, Mr. Ford and
Mr. Gibson were each issued 150,000 options in connection with the
acquisition of Sportsmark and their appointment to the Company's Board of
Directors. Also on February 1, 1999, two key employees of Sportsmark, and on
March 5, 1999 two key employees of Pick'em each received 75,000 options
(300,000 options in the aggregate). All of these options are exercisable over
a five year period at an exercise price of $1.75. With the exception of those
options granted to Mr. Ford and Mr. Gibson, which vest immediately, 25% of
the options granted vest every six months commencing March 26, 1999 and
ending March 26, 2001. Vesting is conditioned upon employment on the vesting
date. If the Company is acquired, merged, or reorganized, or if the services
of the officers are terminated without cause by the board of directors, all
options vest immediately. These options have piggyback and demand
registration rights. These options were granted as an incentive to continue
service with the Company
37
<PAGE>
In February 1999, the Company granted 250,000 options to purchase
common stock at the exercise price of $1.75 to Dominick & Dominick
Securities, Inc. as payment for financial services rendered to the Company
since its inception in lieu of a payment of a fee. This option is exercisable
for a period of two years commencing February 3, 1999 and ending February 2,
2001. Dominick & Dominick Securities, Inc. transferred 200,000 of the options
to companies affiliated with Dominick or its affiliates resulting in Dominick
holding 50,000 options. Also in February, 1999, 50,000 options were granted
to Sandalwood Investments as compensation for consulting services. 250,000
options to purchase common stock were reserved to grant to individual
professional athletes in exchange for their services. Of the athlete options,
165,000 options have been granted to date in exchange for services to be
rendered to the Company. These options vest in 2000 and are exercisable for a
two year period. The athlete options are granted to induce professional
athletes to act as spokespersons for the Company.
In June 1999, the Company entered into a settlement agreement with Mr.
Patrick S. Earle, former director and President to terminate his employment with
and director's position. This agreement requires the Company to pay Mr. Earle
cash consideration of $60,000.
On July 22, 1999, the board of directors of the Company authorized the
issuance of 1,850,000 options to purchase shares of restricted common stock at
the exercise price of $0.40 to certain directors, officers and management in
lieu of compensation. 783,333 of these options vested on November 1, 1999,
783,333 vest on November 1, 2000 and the remaining 283,334 options vest on
November 1, 2001, with vesting being conditional on continuing employment with
the Company. The vested stock options are exerciseable until July 21, 2004..As
set forth in the Executive Compensation chart under Item 6, the Company issued
1,425,000 of the foregoing options as follows: 500,000 Andrew DeFrancesco,
500,000 Ken Crema, 300,000 Geoff Ford and 125,000 Brett Lindros.
On July 30, 1999, the Company entered into a settlement agreement with
Mr. Neil Podmore, a former officer, to terminate employment. This agreement
requires the Company to pay $50,000 to Mr. Podmore and to grant him options to
purchase 54,000 common shares at an exercise price of $6.00 per share.
ITEM 8. LEGAL PROCEEDINGS
To the best knowledge of management, there are no other legal
proceedings pending or threatened against the Company.
ITEM 9. MARKET PRICE OF AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON EQUITY
AND OTHER STOCKHOLDERS MATTERS
A. MARKET INFORMATION
MARKET FOR THE ISSUER'S COMMON STOCK
AND RELATED MATTERS
The Company's common stock traded in the over-the-counter bulletin
board market as ISNI since the BirchTree Capital Corporation/ISN
recapitalization of January 1999 until September 2, 1999. Thereafter, the
Company has traded on the over the counter "pink sheets" as ISNI.
38
<PAGE>
The following table sets forth the high and low bid prices for the
Company's common stock for each quarter within the last two fiscal years.
Information is only available since January 1999. The prices below also reflect
inter-dealer quotations, without retail mark-up, mark-down or commissions and
may not represent actual transactions:
<TABLE>
<CAPTION>
QUARTER ENDED LOW BID HIGH BID
-------------------------------------------------------------
<S> <C> <C>
March 31, 1999 $2.22 $5.88
June 30, 1999 $4.63 $9.50
July 22, 1999 $2.63 $6.69
</TABLE>
39
<PAGE>
B. HOLDERS
As of September 30, 1999, there were approximately 180 holders of
Company Common Stock, as reported by the Company's transfer agent.
C. DIVIDENDS
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
As part of the initial incorporation of Internet Sports Network in
Nevada in April, 1997, the Company issued stock to certain of its founders at
the stock's par value or $.001. This issuance consisted of 1,102,957 shares of
common stock issued to Patrick Earle, 100,000 shares issued to Caulfield
Management and 450,000 shares issued to Mr. Neil Podmore. The sale of these
securities were exempt from registration on the basis of Section 3(a)(11) of the
Securities Act of 1933 (the "Act"). The proceeds of this sale were used to fund
incorporation and other start-up costs of the Company.
In July 1997, the Company sold common stock at the price of $.02 per
share to 22 investors all of whom were non-U.S. Residents, and of whom only 3
were non-accredited but sophisticated investors as defined under Regulation D of
the Act. In connection with this issuance the Company relied upon an exemption
available under Regulation S of the Act. The issuance consisted of a total of
1,767,500 shares of common stock with total proceeds raised of approximately
$35,000. The funds were used for operations of the Company.
In Fall of 1997, the Company sold common stock at the price of $.25 per
share to 17 investors all of whom were accredited and all of whom were non-U.S.
residents. All of these investors had a pre-existing shareholder and business
relationship with the Company. In connection with this issuance, the Company
relied upon an exemption available under Regulation S of the Act. The issuance
consisted of 1,579,543 shares issued with 1,449,543 issued for net cash proceeds
of approximately $361,000 and a further 130,000 issued in satisfaction of
accounts payable amounting to $32,500, for a total of approximately $396,000.
The proceeds were used for the operations of the Company.
In November and December 1997, the Company sold convertible debentures,
convertible to common stock at a rate of one share for every $1.50 principal
amount of debenture, to five individuals pursuant to an offering relying upon
Rule 506 of the Act. All of the investors were accredited investors. The Company
raised a total of $196,500 selling 131 debentures. The proceeds of the offering
were used to expand the Company's services and to begin a marketing program of
these services. These investors agreed, on or about November, 1998 to convert
their debentures to common stock of the Company at the conversion ratio of one
share per $.40 of principal resulting in 491,250 shares issued.
In June through September 1998, the Company offered common stock of
the Company at a price of $.40 per share. The Company sold 2,001,000 shares
of common stock to 22 investors raising approximately $801,000. The shares
were sold to accredited investors only who were non-U.S. Residents in
reliance on Rule 506 of the Act. The proceeds were used to fund Company
operations.
40
<PAGE>
In late November-December 1998, the Company had entered into an
agreement with Digital Data Network, Inc. ("Digital Data") to conduct a share
exchange wherein Digital Data would be the surviving entity to be renamed
Internet Sports Network, Inc. Pursuant to that agreement, Digital Data and two
directors of Digital Data agreed to pay a total of $370,000 to the Company in
exchange for shares of common stock at $.40 per share. Digital Data ., while not
an accredited investor, had access through its due diligence process to all
material information regarding the Company. The directors were accredited
investors who also had access to information by reason of their participation in
the due diligence process. The Company relied upon an exemption available under
3(a)(11) of the Act. In late December, 1998, the Company realized that it would
not have shareholder approval of the agreement with Digital Data . Accordingly,
and in accordance with the agreement with Digital Data the Company terminated
the agreement with Digital Data . In accordance with the terms of a settlement
agreement between Digital Data and the Company, the Company paid $70,000 and
150,000 shares valued at $0.40 per share, or $60,000 to Digital Data in exchange
for a mutual release of claims. The initial $370,000 paid by the Digital Data
directors to the Company was refunded in full.
In early January, 1999, the Company issued a total of 650,000 shares to
Brett and Eric Lindros for services rendered to the Company and to Colony
Investments for financial advisory services rendered to the Company. The Company
relied upon an exemption available under 3(a)(11) of the Act. All three
investors are accredited investors. No funds were received in this transaction.
In January 1999, the Company entered into a share exchange agreement
with BirchTree Capital Corp. In that agreement, the shareholders of the Company
exchanged their shares for stock in BirchTree Capital Corp. The total newly
issued shares contemplated to be issued under this agreement consisted of up to
9,085,229 shares of common stock of BirchTree Capital Corp. to be delivered to
Internet Sports Network shareholders who delivered their stock for exchange. No
funds were received in this transaction.
In January 1999, the Company issued 700,000 shares of common stock to
Mr. Andrew DeFrancesco. These shares were issued in exchange for services
rendered by Mr. DeFrancesco in the BirchTree Capital Corporation transaction and
were valued at $.40 per share. The Company relied on an exemption available
under Regulation S of the Act. Mr. DeFrancesco is an accredited investor with a
long history with the Company. No funds were received by the Company in this
transaction.
In March 1999, the Company offered up to $1,000,000 worth of common
stock utilizing Rule 504 of Regulation D of the Securities Act of 1933 at the
price of $1.75 per share. In this offering, 20 shareholders purchased a total of
571,000 shares of common stock at a total price of $999,425. The funds raised
hereby were used to acquire SportsMark and to fund Company operations.
On February 5, 1999, the Company acquired the Sportsmark Group for
1,500,000 shares of common stock and cash. The SportsMark entities were
accredited investors as that term is used in Regulation D of the Act. The
Company relied upon Regulation S as an exemption to this offering.
In February-May, 1999, the Company offered up to 4,571,429 shares of
common stock for a total consideration of $6 million to $8 million to non-U.S.
residents. Investors purchased common stock totaling a total of 4,454,472 shares
for a total consideration of approximately $7,795,000. The proceeds were used to
acquire SportsMark and Pickem and to fund operations of the Company.
Effective March 5, 1999, the Company acquired Pickem Sports. In this
acquisition the Company issued a total of 1,987,955 shares to 3 Pickem
shareholders in exchange for all of the common stock of Pickem. The
41
<PAGE>
Pickem shareholders were accredited investors and the Company relied on the
exemption available under 3(a)(11) of the Act for this issuance.
In February-April 1999, the Company offered common stock to accredited
U.S. residents only, relying upon an exemption available under Rule 506 of
Regulation D of the Act. In this offering, a total of 31 investors acquired a
total of 653,183 shares, for a total consideration of $1,143,070. The proceeds
were used to fund the operations of the Company.
Effective June 22, 1999, the Company acquired the assets of Ultimate
Sports Publishing from National Publisher Services Inc ("NPS"). In this
acquisition the Company issued a total of 125,000 shares to NPS in exchange for
the assets of Ultimate Sports Publishing. NPS was an accredited investor and the
Company relied on the exemption available under 3(a)(11) of the Act for this
issuance.
Effective June 30, 1999, the Company acquired Innovation Partners Inc
(d/b/a Sportsbuff). In this acquisition the Company issued a total of 616,060
shares to 8 Innovation Partners shareholders in exchange for all of the common
stock of Innovation Partners. the Pickem shareholders were accredited investors
and the Company relied on the exemption available under 3(a)(11) of the Act for
this issuance.
In July-September 1999, all of the stock options granted on January 5,
1999 were exercised, resulting in the issuance of 575,000 common shares for
proceeds of $230,000. $190,000 of the proceeds were provided by a subscription
receivable.
In August 1999, pursuant to a Site Development Services Agreement with
Labatt Brewing Company Limited ("LBCL"), the Company issued 1,000,000 shares of
common stock into escrow to be released 200,000 per annum to LBCL in exchange
for an exclusive, five year agreement.
ITEM 11. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of common stock, $.001 par value per share, of which
approximately 17,841,000 shares were outstanding at March 31, 1999.
Holders of shares of common stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of common stock
have no cumulative voting rights. Accordingly, the holders of in excess of 50%
of the aggregate number of shares of Common Stock outstanding will be able to
elect all of the directors of the Company and to approve or disapprove any other
matter submitted to a vote of all shareholders.
See "Principal Shareholders."
Holders of shares of common stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time, by the Board of
Directors in its discretion, from funds legally available therefor. The Company
does not currently anticipate paying any dividends on its Common Stock. In the
event of a liquidation, dissolution or winding up of the Company, the holders of
shares of common stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities. Holders of common stock have no preemptive
rights to purchase the Company's common stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the common stock. All of
the outstanding shares of common stock are fully paid and non-assessable.
Shares of Common Stock are registered at the transfer agent and are
transferable at such office by the registered holder (or duly authorized
attorney) upon surrender of the Common Stock certificate, properly endorsed. No
transfer shall be registered unless the Company is satisfied that such transfer
will not result in a violation of any
42
<PAGE>
applicable federal or state securities laws. The Company's transfer agent is
Interwest Transfer Company, whose address is 1981 E. Murray Holiday Road,
Salt Lake City, UT 84117.
OPTIONS
As of March 31, 1999, the Company had authorized a total of 3,415,000
options; of which 2,550,000 were held by officers and directors of the Company
at March 31, 1999 and of which 1,300,000 were held by now current officers and
directors of the Company. See Stock Option Summary for number of options issued,
exercise price, and expiration for each holder thereof.
As of September 30, 1999, the Company had authorized a total of
6,484,000 options, of which 2,775,000 are held by now current officers and
directors of the company. See Stock Option Summary for number of options issued,
exercise price, and expiration for each holder thereof.
In general, each Option (i) entitles the holder thereof to purchase one
share of Common Stock, (ii) will be exercisable for a period of (varied time),
commencing (a varied number of) months from the final delivery by the Company of
Common Stock (each Unit consisting of one share of Common Stock) sold in the
offering and (iii) is detachable and separately transferable only during such
exercise period.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Corporation Law and the Company's Certificate of
Incorporation and Bylaws authorize indemnification of a director, officer,
employee or agent of the Company against expenses incurred by him or her in
connection with any action, suit, or proceeding to which such person is named a
party by reason of having acted or served in such capacity, except for
liabilities arising from such person's own misconduct or negligence in
performance of duty. In addition, even a director, officer, employee or agent of
the Company who was found liable for misconduct or negligence in the performance
of duty may obtain such indemnification if, in view of all the circumstances in
the case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In response to this item, the Company hereby incorporates the Financial
Statements attached hereto as an Exhibit and states that the reporting of
Supplementary Data is not applicable to the Company.
ITEM 14. ACCOUNTANTS
The Company has engaged Ernst & Young, LLP as its auditors as of May
19, 1999 replacing Davidson & Company who were dismissed as of that date. The
decision to engage Ernst & Young, LLP was approved by the Board of Directors.
There were no disagreements with Davidson & Company during the period ended
April 30, 1998 or during the interim period until the date of their dismissal.
Davidson & Company originally expressed an opinion under generally
accepted auditing standards in Canada for the consolidated financial statements
for the period from inception to April 30, 1998 which contained a Canada -
United States reporting difference with respect to a going concern uncertainty.
Since the date of completion of their audit of the consolidated financial
statements and initial issuance of their report
43
<PAGE>
thereon dated June 25, 1998, which contained a Canada - United States
reporting difference regarding the Company's ability to continue as a going
concern, the Company, as discussed in Note 6 in the audited consolidated
financial statements for the period ended March 31, 1999, has completed
issuances of its common stock resulting in net proceeds of $8,800,000.
Therefore, the conditions that raised substantial doubt about whether the
Company will continue as a going concern no longer exist. Davidson & Company
has subsequently issued an opinion under generally accepted auditing
standards in the United States for the consolidated financial statements for
the period from April 28, 1997 (inception) to April 30, 1998 with an
explanatory paragraph as to the removal of the going concern certainty
without reservation or reporting difference which is dual dated as of June 25,
1998 and March 31, 1999. There was no adverse opinion or disclaimer of
opinion. The opinion was not qualified due to uncertainty, audit scope, or
accounting principles.
44
<PAGE>
ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(A) Consolidated financial statements for the Company for the period
from inception, April 28, 1997 to April 30, 1998 and for the
eleven months ending March 31, 1999;
(B) Consolidated Pro-forma financial statements (unaudited) for the
Company for the eleven months ended March 31, 1999;
(C) Classroom 2000 Inc. financial statements for the one month ended
January 31, 1999;
(D) Classroom 2000 Inc. financial statements for the years ended
December 31, 1998 and 1997;
(E) SportsMark, Inc. financial statements for the two months ended
January 31, 1999;
(F) SportsMark, Inc. financial statements for the years ended
November 30 1998 and 1997;
(G) SportsMark Promotions, Inc. financial statements for the one
month ended January 31, 1999;
(H) SportsMark Promotions, Inc. financial statements for the years
ended December 31, 1998 and 1997;
(I) Consolidated financial statements (unaudited) for the Company
for the six months ending September 30, 1999 and 1998;
(J) Innovation Partners, Inc. d.b.a. SportsBuff financial statements
for the year ending December 31, 1998;
(K) Consolidated Pro-forma financial statements (unaudited) for the
Company for the six month period ending September 30, 1999;
(L) Innovation Partners, Inc. d.b.a. SportsBuff financial statements
(unaudited) for the six month period ending June 30, 1999;
(M) Pickem Sports, Inc. financial statements for the periods ending
December 31, 1997 and 1998.*
(b) Exhibits
2.1 Agreement for the Exchange of Common Stock between Birch Tree
Capital Corp. and Eric P. Littman, and Internet Sports
Network, Inc.*
2.2 Share Purchase Agreement between Internet Sports Network, Inc.
and SportsMark Inc., SportsMark Promotions, Inc. & Classroom
2000 Inc. and Assets of SMP SportsMark Promotions
International, Inc. *
2.3 Merger Agreement between Torsten Heycke, Rafael Furst, Perry
Friedman, Pickem Sports, Inc., and Internet Sports Network,
Inc.*
2.4 Agreement for the Purchase of Certain Assets of Ultimate
Sports Publishing, Inc. By and Between National Publisher
Services, Inc. And Internet Sports Network, Inc.*
45
<PAGE>
2.5 Agreement and Plan of Merger between Innovation Partners, Inc.
and Internet Sports Network, Inc.*
3(i) Articles of Incorporation and Amendments of Internet Sports
Network, Inc.*
3(ii) Bylaws of Internet Sports Network, Inc.*
4.1 Form of Consultant's Option Agreement and Certificate*
4.2 Form of Officer/Director Option Agreement and Certificate*
4.3 Common Stock Certificate Specimen*
10.1 Lease for Toronto office*
10.2 Lease for Vancouver office*
10.3 Employment Agreement for Bill Gibson*
10.4 Employment Agreement for Geoff Ford*
10.5 Settlement Agreement with Digital Data Networks*
10.6 Settlement Agreement with Patrick S. Earle*
10.7 Settlement Agreement with Neil Podmore*
16. Letter from Davidson & Company
21 List of Subsidiaries of Company*
*Previously filed
46
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
INTERNET SPORTS NETWORK, INC.
By: /S/ KEN CREMA
-------------------------
Ken Crema
Its: Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ KEN CREMA Chief Executive Officer, Director November 18, 1999
- -----------------------------
Ken Crema
/S/ ANDREW DEFRANCESCO Chairman of the Board, President November 18, 1999
- -----------------------------
Andrew DeFrancesco
/S/ GEOFF FORD Director, Chief Operating Officer November 18, 1999
- ----------------------------- Senior Vice President
Geoff Ford Marketing and Sales
/S/ BRETT LINDROS Director, Director of Sports Media November 18, 1999
- ----------------------------- Relations
Brett Lindros
/S/ DAVID TOEWS Chief Financial Officer, Secretary November 18, 1999
- -----------------------------
David Toews
</TABLE>
47
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
INTERNET SPORTS NETWORK,
INC.
MARCH 31, 1999
A-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of
INTERNET SPORTS NETWORK, INC.
We have audited the accompanying consolidated balance sheet of INTERNET
SPORTS NETWORK, INC. as of March 31, 1999, and the related consolidated
accompanying statements of operations and comprehensive loss, shareholders'
equity and cash flows for the 11 months ending March 31, 1999. 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 in accordance with generally accepted auditing
standards in the United States. Those standards 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. 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 our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of March 31, 1999 and the consolidated results of its
operations and its cash flows for the 11 months ending March 31, 1999 in
conformity with generally accepted accounting principles in the United States.
Toronto, Canada, "Ernst & Young LLP"
June 11, 1999. Chartered Accountants
A-2
<PAGE>
DAVIDSON & COMPANY Chartered Accountants A Partnership of
Incorporated Professionals
- ------------------------------------------------------------------------------
AUDITORS' REPORT
To the Shareholders of
Internet Sports Network, Inc.
We have audited the consolidated balance sheet of Internet Sports Network, Inc.
(A Development Stage Company) as at April 30, 1998 and the consolidated
statements of operations, cash flows and shareholders' equity for the period
from April 28, 1997 (Inception) to April 30, 1998. 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 in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated June 25, 1998, which
report contained Canada - U.S. reporting conflict regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 6, has
completed issuances of its common stock resulting in net proceeds of $8,800,000.
Therefore, the conditions that raised substantial doubt about whether the
Company will continue as a going concern no longer exist.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at April 30, 1998
and the results of its operations, cash flows and shareholders' equity for the
period from April 28, 1997 (Inception) to April 30, 1998 in accordance with
generally accepted accounting principles in the United States.
"DAVIDSON & COMPANY"
- ------------------------------------------------------------------------------
Vancouver, Canada Chartered Accountants
June 25, 1998
except for Note 6, as to which
the date is March 31, 1999
A Member of Accounting Group International
Suite 1200, Stock Exchange Tower, 609 Granville Street, P.O. Box 10372,
Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
TELEPHONE (604) 687-0947 FAX (604) 687-6172
A-3
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===================================================================================================================
MARCH 31, APRIL 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
(U. S. Dollars)
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 2,928 $ 9
Receivables 182 31
Prepaid expenses 29 45
--------- ---------
3,139 85
Purchased intangibles, net (Note 3) 9,637 -
Goodwill, net (Note 3) 3,855 -
Equipment, net (Note 4) 84 46
--------- ---------
$ 16,715 $ 131
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable $ 171 $ 95
Accrued liabilities 80 72
Accrued prize commitments 31 -
Accrued commission on stock issuance 57 -
--------- ---------
339 167
Deferred income taxes (Note 7) 3,855 -
Convertible debentures (Note 5) - 196
--------- ---------
4,194 363
--------- ---------
Commitments (Note 9)
Shareholders' equity (Note 6)
Common stock and additional paid-in capital, $0.001 par value,
50,000 shares authorized (1998 - 20,000)
17,841 outstanding (1998 - 5,000) 17,127 425
Share subscriptions receivable for 1,703 shares subscribed - (14)
Deferred compensation (449) -
Accumulated deficit (4,157) (643)
---------- ----------
12,521 (232)
--------- ----------
$ 16,715 $ 131
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-4
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS and COMPREHENSIVE LOSS
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===================================================================================================================
FISCAL YEAR
APRIL 28, 1997
(INCEPTION)
11 MONTHS ENDING THROUGH
MARCH 31, 1999 APRIL 30, 1998
- ------------------------------------------------------------------------------------------------------------------
(U.S. Dollars)
<S> <C> <C>
REVENUES $ 152 $ 77
---------------- ----------------
EXPENSES
Prize commitments and other direct costs 250 41
Wages and salaries 385 223
Consulting fees 267 67
Advertising 367 185
Depreciation 23 8
Interest and bank charges 17 9
General and administrative 424 187
Amortization of purchased intangibles 591 -
Amortization of goodwill 236 -
Debt conversion inducement (Note 5) 144 -
Options granted for services provided 632 -
Amortization of deferred compensation 20 -
Recapitalization and due diligence costs (Note 2) 546 -
---------------- ----------------
Total expenses 3,902 720
---------------- ----------------
Loss before income taxes (3,750) (643)
Deferred income tax recovery (Note 7) 236 -
---------------- ----------------
Net loss and comprehensive loss $ (3,514) $ (643)
===================================================================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.45) $ (0.17)
===================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,833 3,813
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-5
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===================================================================================================================================
COMMON
STOCK AND
ADDITIONAL STOCK
NUMBER PAID IN SUBSCRIPTIONS DEFERRED ACCUMULATED
OF SHARES CAPITAL RECEIVABLE COMPENSATION DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
(U.S. Dollars)
<S> <C>
Founders' shares subscribed upon inception
on April 28, 1997 for $0.001 per share 1,653 $ 2 $ (2) $ - $ - $ -
Shares issued for cash 3,217 398 (12) - - 386
Shares issued in exchange for amounts payable 130 33 - - - 33
Share issuance costs - (8) - - - (8)
Net loss - - - - (643) (643)
-------- -------- -------- -------- -------- --------
Balance at April 30, 1998 5,000 425 (14) - (643) (232)
Shares issued in exchange for convertible
debentures 491 362 - - - 362
Shares issued in exchange for amounts payable 93 37 - - - 37
Existing outstanding shares of BTC on
January 19, 1999 1,050 - - - - -
Shares cancelled in conjunction with
recapitalization of the Company (700) - - - - -
Shares issued on acquisition of Sportsmark Group
of Companies 1,500 2,625 - - - 2,625
Shares issued on acquisition of Pickem Sports, Inc. 1,868 3,269 - - - 3,269
Shares issued for services 1,500 522 - - - 522
Shares issued for cash 7,039 9,249 - - - 9,249
Deferred compensation related to stock options - 469 - (469) - -
Amortization of deferred compensation related
to stock options - - - 20 - 20
Options granted for services provided - 632 - - - 632
Payment of subscription receivable - - 14 - - 14
Share issuance costs - (463) - - - (463)
Net loss - - - - (3,514) (3,514)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 17,841 $ 17,127 $ - $ (449) $ (4,157) $ 12,521
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-6
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===================================================================================================================
FISCAL YEAR
APRIL 28, 1997
(INCEPTION)
11 MONTHS ENDING THROUGH
MARCH 31, 1999 APRIL 30, 1998
- -------------------------------------------------------------------------------------------------------------------
(U.S. Dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,514) $ (643)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 23 8
Amortization of deferred compensation 20 -
Amortization of purchased intangibles 591 -
Amortization of goodwill 236 -
Deferred income tax recovery (236) -
Debt conversion inducement 144 -
Options granted for services provided 632 -
Shares issued for services 522 -
Changes in other operating assets and liabilities:
Increase in receivables (142) (31)
Decrease (increase) in prepaid expenses 16 (45)
Increase in accounts payable 72 128
Increase in accrued liabilities 30 72
---------------- ----------------
Net cash used in operating activities (1,606) (511)
---------------- ----------------
INVESTING ACTIVITIES
Purchase of Sportsmark Group of Companies (1,254) -
Purchase of Pickem Sports, Inc. (3,000) -
Purchase of equipment (21) (54)
---------------- -----------------
Net cash used in investing activities (4,275) (54)
---------------- ----------------
FINANCING ACTIVITIES
Proceeds from sale of convertible debentures - 196
Proceeds from sale of capital stock, net of share issuance costs
($463; April 30, 1998 - $8) 8,800 378
---------------- ----------------
Net cash provided by financing activities 8,800 574
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,919 9
CASH AND CASH EQUIVALENTS:
Beginning of period 9 -
---------------- ----------------
End of period $ 2,928 $ 9
===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
INVESTING ACTIVITIES
Net assets of Pickem Sports, Inc. acquired for shares $ (3,269) $ -
Net assets of Sportsmark Group of Companies acquired for shares (2,625) -
FINANCING ACTIVITIES
Common stock issued in exchange for
convertible debentures 196 -
Shares issued on acquisition of Pickem Sports, Inc. 3,269 -
Shares issued on acquisition of Sportsmark Group of Companies 2,625 -
Shares issued for services 522 -
Accrued interest settled for shares 22 -
Common stock issued in exchange for accounts
payable paid by shareholder 37 33
===================================================================================================================
Cash interest paid $ 10 -
Cash taxes paid - -
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
A-7
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 1. NATURE AND CONTINUANCE OF OPERATIONS
Internet Sports Network, Inc. ("ISN" or the "Company") was
incorporated on April 28, 1997 (Inception) under the laws of
the State of Nevada, United States and its principal business
activities include the development and marketing of sports
contest organization services administered through the
Internet. Substantially all of the Company's operations are
conducted by its wholly-owned subsidiaries in the United States
and Canada.
Pursuant to the recapitalization of the Company, the Purchase of
Birch Tree Capital Corp. net assets and subsequent merger, the
state of incorporation has changed to Florida, United States.
During the fiscal period ended April 30, 1998, the Company was
considered to be in the development stage.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
RECAPITALIZATION OF THE COMPANY AND PURCHASE OF BIRCH TREE
CAPITAL CORP. NET ASSETS
Effective January 19, 1999, ISN, then a privately held Nevada
corporation, entered into an agreement with Birch Tree Capital
Corporation, a Florida shell corporation with no operations which
traded on the over the counter/bulletin board as "BICP" ("BTC")
formed on October 6, 1996 and its majority shareholder (the
"Shareholder"). At the time of the agreement, BTC had no assets
and no liabilities. Pursuant to this agreement, BTC issued in
excess of 9,000,000 shares of stock to the shareholders of ISN,
the Nevada corporation. For the additional consideration of being
permitted to retain 1,025,000 shares of common stock of BTC and
for a cash payment of $250,000, the Shareholder agreed to cancel
3,975,000 shares of common stock held in his name. Two of ISN's
existing shareholders, agreed to pay the cash consideration
portion to the Shareholder in exchange for receiving an option to
purchase 500,000 shares each of common stock held by the
Shareholder for nominal proceeds. The two ISN shareholders also
agreed to the cancellation of 350,000 shares each of their ISN, a
Nevada corporation, common stock. Effective January 19, 1999, the
stockholders of ISN, a Nevada corporation initiated the exchange
of one hundred percent (100%) of their shares for an equal number
of shares of common stock of BTC. On February 1, 1999, BTC changed
its name to Internet Sports Network, Inc., a Florida corporation,
and changed its OTC/BB symbol to ISNI. On February 22, 1999, ISN,
a Nevada corporation merged into ISN a Florida corporation with
the Florida corporation being the surviving entity.
As a result of the above transactions, the former BTC
shareholders held less than 1% of sheares of ISN consisting of
25,000 held by Shareholder and 25,000 held in the public float.
This transaction provided the Company with access to a public
market and quote for its securities. Accordingly, this has been
accounted for as a recapitalization of the Company and the
issuance of shares to the former shareholders of BTC. The legal
parent company, BTC, was deemed to be a continuation of ISN,
and accordingly, these consolidated financial statements are a
continuation of the financial statements of ISN, the legal
subsidiary and not the legal parent. In these consolidated
financial statements the comparative figures are those of ISN.
As a result of the transaction, ISN's year end was changed to
March 31.
The transaction has been accounted for using the purchase method
with the cost of the purchase being a nominal value of $1.
A-8
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D...)
RECAPITALIZATION OF THE COMPANY AND PURCHASE OF BIRCH TREE CAPITAL
CORP. NET ASSETS (CONT'D...)
<TABLE>
<CAPTION>
<S> <C>
Recapitalization and due diligence costs are made up of the
following:
Commission on BTC transaction (700,000 shares at $0.40) 280
Legal fees on BTC transaction 71
Digital Data Networks Inc. ("DDN") settlement fee 70
DDN Shares issued on settlement (150,000 shares at $0.40) 60
Legal fees on DDN proposed transaction 15
Legal fees on acquisition of the Sportsmark Group of Companies and Pickem Sports, Inc. 50
------
Total recapitalization and due diligence costs 546
======
</TABLE>
In late November-December 1998, the Company had entered into an
agreement with DDN to conduct a share exchange wherein DDN
would be the surviving entity to be renamed Internet Sports
Network, Inc. Pursuant to that agreement, DDN and two directors
of DDN agreed to pay a total of $370 to the Company in exchange
for shares of common stock at $.40 per share. In late December,
1998, the Company realized that it would not have shareholder
approval of the agreement with DDN. Accordingly, the Company
terminated the agreement. As part of a settlement between the
two companies, DDN was reimbursed $70 for the costs it incurred
in connection with the transaction and retained 150,000 shares
of common stock of the Company, valued at $60, or $0.40 per
share, which has been included in the Statement of Operations
and Comprehensive loss within Recapitalization and due
diligence costs. The rest of the common stock was returned to
the Company and the full $370 was refunded.
BUSINESS COMBINATIONS
The business combinations have been accounted for under the
purchase method of accounting, and the Company includes the
results of operations of the acquired business from the date of
acquisition. Net assets of the companies acquired are recorded at
their fair value at the date of acquisition. The excess of the
purchase price over the fair value of net assets acquired is
included in purchased intangibles and goodwill in the
accompanying consolidated balance sheet.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
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 consolidated 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
The Company has defined cash and cash equivalents to include cash
and time deposits with original maturities of 90 days or less.
A-9
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of its
holdings of cash held by one deposit taking institution. The
Company manages its credit risk by depositing its cash in
high-quality, regulated deposit taking institutions.
PURCHASED INTANGIBLES AND GOODWILL
Purchased intangibles consist primarily of software, licenses,
customer lists, trademarks and contest agreements. Purchased
intangibles of approximately $9,637 are stated net of total
accumulated amortization of $591 at March 31, 1999 in the
accompanying consolidated balance sheet. Purchased intangibles
are being amortized on a straight-line basis principally over
two years.
Goodwill of approximately $3,855 is stated net of total
accumulated amortization of $236 at March 31, 1999 in the
accompanying consolidated balance sheet. Goodwill is being
amortized on a straight-line basis principally over two years.
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the carrying
value of intangible assets and other long-lived assets is
reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest
impairment. To date, no such impairment has been indicated.
Should there be an impairment in the future, the Company will
measure the amount of the impairment based on discounted
expected future cash flows from the impaired assets. The cash
flow estimates that will be used will contain management's best
estimates, using appropriate and customary assumptions and
projections at the time.
A-10
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
ADVERTISING COSTS
The cost of advertising is expensed as incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its
employee stock options rather than the alternative fair value
accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation". APB No. 25 provides that the compensation
expense relative to the Company's employee stock options is
measured based on the intrinsic value of the stock option. SFAS
No. 123 requires companies that continue to follow APB No. 25
to provide a pro forma disclosure of the impact of applying the
fair value method of SFAS No. 123. The Company accounts for
options granted to non-employees, by applying the fair value
accounting as prescribed by SFAS No. 123. The fair value of
options granted to non-employees is estimated at the date of
grant using a Black-Scholes option pricing model.
SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal business segment across
domestic and international markets. International sales,
including export sales from the United States to Canada,
represented approximately 82% and 100% of net sales for the
periods ended March 31, 1999 and April 30, 1998, respectively.
No other foreign country or geographic area accounted for more
than 10% of net sales in any of the periods presented. There
were no transfers between geographic areas during the periods
ended March 31, 1999 and April 30, 1998. Capital assets and
purchased intangibles in the United States equalled
approximately $12,457 and nil in fiscal 1999 and 1998,
respectively. The remaining capital assets and purchased
intangibles are in Canada.
COMPREHENSIVE INCOME (LOSS)
As of May 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income (loss) and its
components in the consolidated financial statements. There are no
items of comprehensive income (loss) that require additional
reporting.
FOREIGN CURRENCY TRANSLATION
The unit of measurement of the Company is the Canadian dollar
while its reporting currency is the United States dollar. The
assets and liabilities of the Canadian subsidiaries are
translated using the exchange rate in effect at period end, and
revenues and expenses are translated at the average rate during
the period. Exchange gains or losses on translation of the
Company's net equity investments in these subsidiaries are
deferred as a separate component of other comprehensive income.
The translation adjustments as at March 31, 1999 and April 30,
1998 were insignificant.
A-11
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
EQUIPMENT
Equipment is recorded at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the
assets using the declining balance basis at the following rates:
Office equipment and furniture 20%
Computer equipment 30%
REVENUE RECOGNITION
The Company earns revenue from membership and other fees
received for Internet-based sports information and sports
contest organization services. Membership fees are received
prior to the beginning of a particular sport season or event
and recorded as deferred income until recognized in income
ratably over the season or upon completion of the event. Other
fees received for Internet-based sports information and sports
contest organization services are recognized in income ratably
over the season or upon completion of the event. There was no
deferred revenue recorded on the consolidated balance sheets as
at March 31, 1999 and April 30, 1998.
A-12
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
PRIZE AWARDS
Members, as well as non-members, are entitled to enter into
contests provided by the Company. Prizes are awarded upon
completion of the sports season or event and are paid by the
Company or the contest's sponsors. Prize awards are fixed in
amount and determinable prior to commencement of the season or
event and are expensed at the commencement of the season or event
to which they relate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and
cash equivalents, receivables, accounts payable, accrued
liabilities, accrued prize commitments and accrued commission on
stock issuance. It is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising
from these financial instruments. The carrying amounts of these
current assets and liabilities approximate their fair values due
to their immediate or short-term nature.
INCOME TAXES
Income taxes are accounted for utilizing the liability method.
Deferred income taxes are provided to represent the tax
consequence on future years for temporary differences between
the financial reporting and tax basis of assets and
liabilities. Deferred income taxes are measured utilizing
enacted tax rates expected to be in effect in the years in
which the temporary differences are expected to reverse. A
valuation allowance has been provided for the total amount of
deferred tax assets that would otherwise be recorded for income
tax benefits primarily relating to operating loss
carryforwards, as realization cannot be determined to be more
likely than not.
LOSS PER SHARE
Basic loss per share excludes any dilutive effects of options and
convertible debentures. Basic loss per share is computed using the
weighted-average number of common shares outstanding during the
period and includes common shares issued subsequent to the period
end for which all consideration had been received prior to the
period end and which no other contingencies existed. Diluted loss
per share is equal to the basic loss per share
A-13
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
as the effect of the stock options and convertible debentures
is anti-dilutive. There are no other dilutive common stock
equivalent shares outstanding during the period. Common stock
equivalent shares are excluded from the computation if their
effect is anti-dilutive.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
New accounting pronouncements having relative applicability to
the Company include Statements of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and
Other Post-retirement Benefits", effective for fiscal years
beginning after December 15, 1998 and No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for
fiscal years beginning after June 15, 2000. SFAS No. 132
revises employers' disclosures about pension and other
post-retirement benefit plans. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance
sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative
is designed as part of a hedge transaction and, if it is, the
type of hedge transaction. The
A-14
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D...)
Company does not expect that the adoption of SFAS Nos. 132 and
133 will have a material impact on its consolidated financial
statements because the Company does not provide for pension or
other post-retirement benefits, nor does it currently hold any
derivative instruments. Adoption of these statements will not
impact the Company's financial position, results of operations
or cash flows and any effect will be limited to the form and
content of disclosures.
Additionally, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" and Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities",
which are effective for fiscal years beginning after December 15,
1998. Adoption of these standards is not expected to have a
material impact on the Company's financial position, results of
operations or cash flows.
NOTE 3. BUSINESS COMBINATIONS
Effective February 5, 1999, the Company acquired 100% of the
shares of three companies under common ownership and software
license rights from a fourth company (the "Sportsmark Group of
Companies"). The Sportsmark Group of Companies conduct and
administer sports contest services for their clients.
Effective March 5, 1999, the Company acquired 100% of the
shares of Pickem Sports, Inc. ("Pickem"). The business of
Pickem consisted of adaptable software to support the Company's
growth in sports pools run through the Internet.
A-15
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 3. BUSINESS COMBINATIONS (CONT'D...)
The transactions are summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
As at
February 5, 1999, As at
Sportsmark Group March 5, 1999,
of Companies Pickem Sports, Inc.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets acquired at fair values:
Working capital $ (129) $ 9
Equipment 28 12
Purchased intangibles 3,980 6,248
Goodwill 1,592 2,499
Deferred income taxes (1,592) (2,499)
-------------- -------------
$ 3,879 $ 6,269
===========================================================================================================================
Funded by:
Cash $ 1,254 $ 3,000
Shares of common stock 2,625 3,269
------------- -------------
$ 3,879 $ 6,269
===========================================================================================================================
</TABLE>
Purchased intangibles related to the acquisition of the Sportsmark Group of
Companies consist of developed contest software, licenses, participant lists,
customer lists, trademarks and domain names.
Purchased intangibles related to the acquisition of Pickem consist of
developed contest software, customer contracts, client lists, contest
agreements, trademarks and domain names.
A-16
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 3. BUSINESS COMBINATIONS (CONT'D...)
The unaudited pro forma combined consolidated financial
information for the aggregate of the Sportsmark Group of
Companies and Pickem acquisitions described above and accounted
for under the purchase method of accounting, as though the
acquisitions had occurred on May 1, 1998, would have resulted
in net sales of $2,053; loss before income taxes of $8,624; net
loss of $6,750; and basic and diluted loss per share of $0.63
for the period ended March 31, 1999. The pro forma net loss
includes amortization of purchased intangibles and goodwill of
$6,562 for the period ended March 31, 1999. This unaudited pro
forma combined consolidated financial information is presented
for illustrative purposes only and is not necessarily
indicative of the consolidated results of operations in future
periods or the results that actually would have been realized
had the Company been a combined company during the specified
period.
A-17
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
===========================================================================================================================
MARCH 31, APRIL 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 83 $ 33
Office equipment and furniture 32 21
------------- -------------
115 54
Less accumulated depreciation (31) (8)
-------------- -------------
Equipment, net $ 84 $ 46
===========================================================================================================================
</TABLE>
NOTE 5. CONVERTIBLE DEBENTURES
Convertible debentures bear interest, payable quarterly, at the
rate of 10% per annum and were to mature on December 12, 2002.
The debentures could have been prepaid at any time without
penalty. Commencing in December 1998, each debenture was
convertible, at the option of the holder, unless previously
redeemed or repurchased, at a convertible rate of one share of
common stock per $1.50 principal amount of debenture.
In order to facilitate the recapitalization of the Company and
purchase of the net assets of BTC, the Company offered to
exchange the principal amount of debentures for shares of the
Company's common stock at a per share price of $0.40 resulting
in the issuance of approximately 491 common shares. The value
of shares issued on conversion of the debentures includes the
inducement provided to the debenture holders of $144 and $22 of
accrued interest which had been previously charged to the
consolidated statement of operations and comprehensive loss was
forfeited by the debenture holders on conversion.
A-18
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 6. SHAREHOLDERS' EQUITY
COMMON STOCK
The authorized share capital of ISN which, for accounting
purposes, is deemed to have acquired BTC effective January 19,
1999, consisted of 20,000 common shares with a par value of
$0.001. Changes in the capital stock of ISN to January 19, 1999,
the effective date of the transaction with BTC, were as follows:
<TABLE>
<CAPTION>
NUMBER COMMON STOCK AND
OF SHARES PAID-IN CAPITAL
$
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Founders' shares subscribed upon inception
on April 25, 1997 for $0.001 per share,
net of subscription receivable 1,653 --
Shares issued for cash, net of subscription
receivable 3,217 386
Shares issued in exchange for amounts payable 130 33
Share issuance costs -- (8)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1998 5,000 411
Shares issued in exchange for convertible
debentures (Note 5) 491 362
Shares issued in exchange for amounts payable 93 37
Shares issued for services 1,500 522
Shares issued for cash 2,001 801
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 19, 1999 9,085 2,133
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During June and July 1997, ISN offered for sale to a group of
initial investors, 1,768 shares of its common stock at a per
share price of $0.02. Commencing in July 1997, ISN issued
approximately 1,449 shares of its common stock at a per share
price of $0.25.
During the period ended January 19, 1999, 1,500 shares were
issued for services rendered at prices ranging from $0.28 to
$0.40 per share. Included in this total are 950 shares issued
to officers and directors of ISN for marketing and financing
services.
AS AT JANUARY 19, 1999
For accounting purposes, the share capital of the continuing
consolidated entity as at January 19, 1999 is computed as
follows:
<TABLE>
<CAPTION>
$
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Existing share capital and paid-in capital of ISN,
January 19, 1999 2,133
Ascribed value of the shares of BTC --
- ---------------------------------------------------------------------------------------------------------------------------
SHARE CAPITAL AT JANUARY 19, 1999 2,133
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-19
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 6. SHAREHOLDERS' EQUITY (CONT'D...)
As a result of the recapitalization and the issuance of shares
to the former shareholders of BTC, ISN became a wholly-owned
subsidiary of BTC. For accounting purposes, at January 19,
1999, the outstanding shares of the continuing consolidated
entity consisted of the number of BTC shares issued to that
date with an ascribed value equal to the share capital of the
continuing consolidated entity as computed above. As part of
the BTC transaction the authorized share capital of the Company
was increased to 50,000 common shares with a par value of
$0.001. As a result, the number of outstanding shares of BTC as
at January 19, 1999 is computed as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Existing outstanding shares of BTC, January 19, 1999 1,050
Share transactions related to the business combination
Issued to ISN shareholders 9,085
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING COMMON SHARES AT JANUARY 19, 1999 10,135
===========================================================================================================================
</TABLE>
TO MARCH 31, 1999
<TABLE>
<CAPTION>
NUMBER COMMON STOCK AND
OF SHARES PAID-IN CAPITAL
$
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE JANUARY 19, 1999 10,135 2,133
Shares issued for cash, net of subscription receivable 5,038 8,462
Shares cancelled (700) --
Shares issued on acquisition of Sportsmark Group of Companies 1,500 2,625
Shares issued on acquisition of Pickem Sports, Inc. 1,868 3,269
Deferred compensation related to stock options -- 469
Options granted for services -- 632
Share issuance costs -- (463)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 17,841 17,127
===========================================================================================================================
</TABLE>
Included in the shares outstanding as at March 31, 1999 are 561
shares to be issued for which all consideration has been received
and which no other contingencies exist.
STOCK OPTIONS
Generally, options are granted by the Company's Board of
Directors at an exercise price of not less than the fair market
value of the Company's common stock at the date of grant.
Options are generally granted with a term of five years from
the date of issuance. Option vesting is varied ranging from the
date of issuance to 2 years. The exercise price for options
granted prior to the transaction with BTC was equal to the
price of shares issued through private placements in effect at
the date of grant. Subsequent to the transaction with BTC, the
exercise price for options remained equal to the private
placement price, which represented a discount to the quoted
market price.
A-20
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 6. SHAREHOLDERS' EQUITY (CONT'D...)
During the period ended March 31, 1999, the Company issued 970
options to parties other than employees and directors for
services rendered. The fair value of these options of $632 was
charged to operations.
STOCK OPTION ACTIVITY
The following table summarizes the Company's stock option
activity:
<TABLE>
<CAPTION>
==========================================================================================================================
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at inception and April 30, 1998 - $ -
Options granted and assumed 3,415 1.51
Options exercised 50 .80
--------------- -------------
March 31, 1999 3,365 $ 1.52
===========================================================================================================================
</TABLE>
The following table summarizes information about options
outstanding and options exercisable at March 31, 1999:
<TABLE>
<CAPTION>
===========================================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
OPTIONS REMAINING CONTRACTUAL OPTIONS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0.40 575 5.0 years 575 $ 0.40
1.75 2,790 4.7 years 2,200 1.75
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.40 - 1.75 3,365 4.8 years 2,775 $ 1.47
===========================================================================================================================
</TABLE>
Subsequent to period end, 450 options were granted. The
intrinsic value of the options at the date of grant was $1,277.
These options vest at various intervals through June 2001. An
officer of the Company received 100 of these options. The
officers' options had an exercise price of $4.28, vest
periodically through December 1, 2000 and had an intrinsic
value of $285.
DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $469
during the period ended March 31, 1999. The amount recorded
represents the difference between the grant price and the fair
value of the Company's common stock for shares subject to
options granted in fiscal 1999. Options granted below fair
market value and the associated weighted average exercise price
per share were 150 and $1.75 during fiscal 1999. The
amortization of deferred compensation will be charged to
operations over the vesting period of the options, which is 2
years. Total amortization recognized in fiscal 1999 was $20. No
options were granted in fiscal 1998.
A-21
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 6. SHAREHOLDERS' EQUITY (CONT'D...)
PRO FORMA DISCLOSURE
The Company follows the intrinsic value method in accounting
for its stock options. Had compensation cost been recognized
based on the fair value at the date of grant from options
granted in fiscal 1999, the pro forma amounts of the Company's
net loss and net loss per share for fiscal 1999 would have been
as follows:
<TABLE>
<S> <C>
Net loss as reported $(3,514)
Net loss - pro forma $(5,559)
Basic and diluted loss per share as reported $(0.45)
Basic and diluted loss per share - pro forma $(0.71)
</TABLE>
The fair value for each option granted was estimated at the
date of grant using a Black-Scholes option pricing model,
assuming no expected dividends and the following weighted
average assumptions:
<TABLE>
<S> <C>
Average risk-free interest rates 5.0%
Average expected life (in years) 5.0
Volatility factor 75.0%
</TABLE>
The weighted average fair value of options granted during fiscal
1999 was $1.25.
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
A reconciliation of the combined federal and state income tax
expense to the Company's income tax expense is as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
MARCH 31, APRIL 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax recovery at combined federal and state rates $ (1,196) $ (218)
Higher effective rate attributable to income taxes of other countries $ (386) $ (70)
Tax effect of expenses that are not deductible for income tax purposes 714 33
Valuation allowance 868 255
------------- -------------
$ - $ -
===========================================================================================================================
</TABLE>
At March 31, 1999, the Company had net operating loss
carryforwards of approximately $2,497. Substantially all of these
carryforwards relate to the Canadian subsidiaries and will begin
to expire at various times starting in 2004.
A-22
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 7. INCOME TAXES (CONT'D...)
Significant components of the Company's deferred income tax
assets are approximately as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
MARCH 31, APRIL 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 2,497 $ 570
------------ -----------
------------ -----------
Total deferred income tax assets $ 1,123 $ 255
Valuation allowance for deferred income tax assets (1,123) (255)
------------ -----------
Net deferred income tax assets $ - $ -
===========================================================================================================================
</TABLE>
A continuity of the valuation allowance is as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
MARCH 31, APRIL 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Opening balance $ 255 $ -
Valuation allowance on deferred income tax asset 868 255
------------- -------------
Closing balance $ 1,123 $ 255
===========================================================================================================================
</TABLE>
Deferred income tax credits at March 31, 1999 reflect the
differences between the financial reporting and tax values of the
purchased intangibles. The deferred tax recovery in the
consolidated statement of operations and comprehensive loss
relates to the amortization of the deferred income tax liability
which resulted from the Company's acquisitions during 1999.
NOTE 8. RELATED PARTY TRANSACTIONS
During the period ended April 30, 1998, the Company paid or
accrued approximately $49,000 of consulting fees for financial
services provided by one of the Company's directors and $54,000
of wages to the Company's Chief Executive Officer, who is also
one of the Company's directors and largest shareholder.
One of the Company's shareholders has, from time to time, paid
directly to third party vendors certain of the Company's
expenditures. These amounts paid on behalf of the Company are
recorded as non-cash reductions of accounts payable. During the
eleven-month period ended March 31, 1999 and the period ended
April 30, 1998, an officer and director of the Company received
approximately 93,000 and 130,000 shares of the Company's common
stock in exchange for amounts owed for expenditures made on
behalf of the Company, which approximated $37,000 and $33,000,
respectively.
A-23
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
==============================================================================
NOTE 9. COMMITMENTS
The Company leases premises, office equipment and an automobile
under the terms of operating leases. The leases provide for
future minimum annual lease payments as follows:
<TABLE>
<C> <S>
2000 $ 187
2001 73
2002 18
2003 5
2004 and thereafter -
-------------
$ 283
-------------
-------------
</TABLE>
NOTE 10. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been
reclassified from statements previously presented to conform to
the presentation of the March 31, 1999 consolidated financial
statements.
A-24
<PAGE>
PRO FORMA INCOME STATEMENT (UNAUDITED)
11 MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ISN
SportsMark California
As Reported Group (Pickem) Sportsbuff Pro-forma Adj Note Pro-forma
A B C D
----------- ---------- --------- ---------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE 152,000 1,558,000 179,000 1,212,000 - 3,101,000
EXPENSES
Prize Commitments and other direct 250,000 628,000 35,000 606,000 - 1,519,000
Costs
Other Costs and Expenses 1,622,000 504,000 170,000 557,000 187,000 H,I 2,970,000
Interest and Bank charges 17,000 4,000 - 5,000 26,000
Promotion and Advertising 367,000 55,000 (1,000) 1,000 - 422,000
Amortization of Capital Assets 23,000 8,000 15,000 28,000 - 74,000
Stock compensation, stock option and
Debenture related costs 796,000 - - - - 796,000
Amortization of purchased 827,000 - - - 9,165,000 E,F,G,J 9,992,000
Intangibles and goodwill
----------- ---------- --------- ---------- ----------- -----------
NET LOSS BEFORE TAXES (3,750,000) 350,000 10,000 35,000 (9,352,000) (12,692,000)
Deferred income Tax Expense
(recovery) (236,000) 4,000 (1,000) - (2,571,000) E,F,G,K (2,800,000)
----------- ---------- --------- ---------- ----------- -----------
NET INCOME (LOSS) (3,514,000) 351,000 11,000 35,000 (6,781,000) (9,898,000)
----------- ---------- --------- ---------- ----------- -----------
----------- ---------- --------- ---------- ----------- -----------
</TABLE>
B-1
<PAGE>
PRO FORMA INCOME STATEMENT (UNAUDITED)
11 MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ISN
SportsMark California
As Reported Group (Pickem) Sportsbuff Pro-forma Adj Note Pro-forma
A B C D
----------- ---------- --------- ---------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 2,928,000 - 114,000 (1,000,000) D 2,042,000
Other Current Assets 211,000 - - 103,000 - 314,000
----------- ---------- --------- ---------- ----------- -----------
Total Current Assets 3,139,000 - - 217,000 (1,000,000) 2,356,000
Purchased Intangibles and goodwill,
net 13,492,000 351,000 11,000 - (2,043,000) D,E,F,G,J 11,811,000
Equipment, net 84,000 - - 31,000 115,000
----------- ---------- --------- ---------- ----------- -----------
TOTAL ASSETS 16,715,000 351,000 11,000 348,000 (3,043,000) 14,282,000
=========== ========== ========= ========== =========== ===========
Total current liabilities 329,000 - - 234,000 50,000 I 623,000
Deferred Income Taxes 3,855,000 - - - (536,000) D,E,F,G,K 3,319,000
----------- ---------- --------- ---------- ----------- -----------
TOTAL LIABILITIES 4,194,000 - - 234,000 (486,000) 3,942,000
----------- ---------- --------- ---------- ----------- -----------
Sharholder's Equity
Share Capital 17,127,000 - - 8,000 4,058,000 D 21,193,000
Deferred Compensation (449,000) - - - - (449,000)
Accumulated Deficit (4,157,000) 351,000 11,000 6,000 (6,615,000) D,H (10,404,000)
----------- ---------- --------- ---------- ----------- -----------
Total Shareholder's Equity 12,321,000 351,000 11,000 14,000 (2,557,000) 10,340,000
----------- ---------- --------- ---------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 16,715,000 351,000 11,000 248,000 (3,043,000) 14,282,000
=========== ========== ========= ========== =========== ===========
</TABLE>
B-2
<PAGE>
NOTES TO THE CONSOLIDATED PRO-FORMA FINANCIAL STATEMENTS FOR THE ELEVEN MONTHS
ENDED MARCH 31, 1999:
The consolidated pro-forma statement of operations includes the operating
results of the Sportsmark Group of Companies for the first 9 months of the
period and Pickem for the first 10 months of the period. It also includes the
operating results of Sportsbuff for the full 11 months of the period. No balance
sheet is provided as the effects of the acquisitions is included in the
September 30, 1999 financial information.
The following is a description of the pro-forma adjustments referenced in the
consolidated pro-forma financial statements:
A. Represents the results reported for the 11 month period ending March
31, 1999. These figures include the results from Sportsmark Group from
February 5, 1999 to March 31, 1999 and the results of Pickem from March
5, 1999 to March 31, 1999.
B. Pro-forma results from Sportsmark Group are calculated by taking the
results from the 12 month periods ending December 31, 1998 for
Sportsmark Promotions Inc, Classroom 2000 Inc and SMP SportsMark
Promotions, International, Inc, and the 12 month period ending November
30, 1998 for Sportsmark Inc. and deducting the first month of results
to reflect 11 months of results. The results of operations for the
period February 5, 1999 to March 31, 1999 were deducted from the 11
month results to arrive at the pro-forma amounts included in this
column.
C. Pro-forma results from Pickem are calculated by taking the results from
the 12 month period ending December 31, 1998 and deducting the first
month of results to reflect 11 months of results. The results of
operations for the period March 5, 1999 to March 31, 1999 were deducted
from the 11 month results to arrive at the pro-forma amounts included
in this column.
D. Pro-forma results from Sportsbuff are calculated by taking the results
from the 11 month period ending March 31, 1999. No reductions to this
amount have been reflected, as no results for Sportsbuff were included
in the results of operations for the 11 month period ending March 31,
1999. The acquisition of Sportsbuff consisted of purchased intangibles
and goodwill of $5,087,000 and $2,035,000 respectively, the related
deferred income tax liability of $2,035,000, paid for with $1,000,000
cash and $4,066,000 in common stock. Also Sportsbuff reflected capital
stock of $8,000 and accumulated deficit of $29,000 at the start of the
period.
E. Recording 9 months of additional amortization of purchased intangibles
and goodwill arising from the Sportsmark Group acquisition totaling
$1,493,000 and $597,000 respectively. Also recording the additional
amortization of the deferred income tax liability of $597,000.
F. Recording 10 months of additional amortization of purchased intangibles
and goodwill arising from the Pickem Sports acquisition totaling
$2,604,000 and $1,041,000 respectively. Also recording the additional
amortization of the deferred income tax liability of $1,041,000.
G. Recording 11 months of amortization of the Sportsbuff purchased
intangibles and goodwill totaling $2,331,000 and $933,000 respectively.
Also recording the additional amortization of the deferred income tax
liability of $933,000.
H. Recording $137,000 of additional wages and benefits expense to reflect
amounts taken as dividends by Sportsmark during the period before the
acquisition.
I. Accrual of $50,000 of acquisition costs associated with the purchase of
Sportsbuff.
J. Additional amortization of $166,000 relating to 11 months of
amortization of the variance in the calculation of purchased
intangibles if the acquisition of Sportsmark Group and Pickem had
occurred on May 1, 1998. Purchased intangibles would have increased by
$362,000 had the acquisitions occurred at the beginning of the year.
K. The deferred income tax liability and the goodwill arose as a result of
the differences between the financial reporting and tax values of the
purchased intangibles acquired through the Sportsmark Group, Sportbuff
and Pickem acquisitions. The deferred income tax liability is amortized
into income over the same period as the goodwill.
B-3
<PAGE>
CLASSROOM 2000 INC.
FINANCIAL STATEMENTS
JANUARY 31, 1999
C-1
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Classroom 2000 Inc.
We have audited the balance sheet of CLASSROOM 2000 INC. as at January 31,
1999 and the statements of earnings and retained earnings and cash flows for
the one month period then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at January 31, 1999 and
the results of its operations and its cash flows for the one month period
then ended in accordance with generally accepted accounting principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 4, 1999 Chartered Accountants
C-2
<PAGE>
CLASSROOM 2000 INC.
BALANCE SHEET
JANUARY 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 2,212
- ------------------------------------------------------------------------------
<S> <C>
LIABILITIES
CURRENT
Accounts payable $ 6,067
Due to affiliated company (Note 3) 13,998
--------
20,065
DUE TO SHAREHOLDER (Note 4) 56,700
--------
76,765
--------
SHAREHOLDER'S EQUITY
SHARE CAPITAL (Note 5) 100
RETAINED EARNINGS (DEFICIT) (74,653)
--------
(74,553)
--------
$ 2,212
- ------------------------------------------------------------------------------
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
C-3
<PAGE>
CLASSROOM 2000 INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C>
REVENUE $ 152
--------
EXPENSES
Interest and bank charges 518
Office 4,972
--------
5,490
--------
NET EARNINGS (LOSS) (5,338)
RETAINED EARNINGS (DEFICIT), beginning of period (69,315)
--------
RETAINED EARNINGS (DEFICIT), end of period $(74,653)
- ------------------------------------------------------------------------------
</TABLE>
C-4
<PAGE>
CLASSROOM 2000 INC.
STATEMENT OF CASH FLOWS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (5,338)
Net change in non-cash working capital balances (854)
--------
Cash flows from (used in) operating activities (6,192)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliated companies 4,972
--------
INCREASE (DECREASE) IN CASH (1,220)
CASH, beginning of period 3,432
--------
CASH, end of period $ 2,212
- ------------------------------------------------------------------------------
</TABLE>
C-5
<PAGE>
CLASSROOM 2000 INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
1. GENERAL
Classroom 2000 Inc., is a privately owned company which was incorporated
on June 17, 1997 under the Alberta Business Corporations Act.
2. SIGNIFICANT ACCOUNTING POLICY
REVENUE RECOGNITION
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event
CHANGE IN ACCOUNTING POLICY
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has not been applied
retroactively, as the impact of the change on prior periods is not
significant.
3. DUE TO AFFILIATED COMPANY
During the period the company had the following transactions with
Sportsmark Inc. which has certain shareholders who are also shareholders
of Sportsmark Holdings Inc.:
Balance , beginning of the period $ 9,026
Advances 7,079
Repayments (2,107)
-------
Balance, end of period $13,998
-------
4. DUE TO SHAREHOLDER
Sportsmark Holdings Inc. advanced the company $56,700 with no fixed
terms of repayment.
5. SHARE CAPITAL
AUTHORIZED
Unlimited number of Class A voting shares
Unlimited number of Class B non-voting shares
Unlimited number of Class C non-voting shares
ISSUED
100 Class A voting shares $ 100
-------
C-6
<PAGE>
CLASSROOM 2000 INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
6. INCOME TAXES
The company has non-capital income tax loss carry forwards of
approximately $68,616 and charitable donations carry forwards of $2,635
available to apply against future years taxable income. The charitable
donations expire in 2002 and the non-capital income tax loss carry
forwards expire as follows:
2004 $ 63,098
2006 5,518
-----------
$ 68,616
-----------
7. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 Class A voting shares were sold to
Internet Sports Network, Inc. which is an unrelated company.
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, due to affiliated
companies, due to shareholder and accounts payables. Unless otherwise
noted, it is management's opinion that the company is not exposed to
significant interest, currency or credit risks arising from these
financial instruments. The fair value of these financial instruments
approximate carrying values, unless otherwise noted.
10. COMPARATIVE FIGURES
Comparative figures for the one month period ended January 31, 1998 are
not shown as this information was not readily obtainable.
C-7
<PAGE>
CLASSROOM 2000 INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
D-1
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Classroom 2000 Inc.
We have audited the balance sheets of CLASSROOM 2000 INC. as at December 31,
1998 and December 31, 1997 and the statements of earnings and retained
earnings and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and
December 31, 1997 and the results of its operations and its cash flows for
the years then ended in accordance with generally accepted accounting
principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 4, 1999 Chartered Accountants
D-2
<PAGE>
CLASSROOM 2000 INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 3,432 $ 33,218
===========================================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 6,921 $ 24,437
Due to affiliated companies (Note 3) 9,026 37,450
--------------- ---------------
15,947 61,887
DUE TO SHAREHOLDER (Note 4) 56,700 41,700
--------------- ---------------
72,647 103,587
--------------- ---------------
SHAREHOLDER'S EQUITY
SHARE CAPITAL (Note 5) 100 100
RETAINED EARNINGS (DEFICIT) (69,315) (70,469)
--------------- ---------------
(69,215) (70,369)
--------------- ---------------
$ 3,432 $ 33,218
===========================================================================================================================
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
D-3
<PAGE>
CLASSROOM 2000 INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 220,435 $ 69,473
--------------- ---------------
EXPENSES
Advertising and promotion 42,443 17,798
Consulting 1,233 35,000
Interest and bank charges 2,034 1,354
Office 104,963 62,299
Professional fees 33,152 4,985
Salaries 35,456 18,506
--------------- ---------------
219,281 139,942
--------------- ---------------
NET EARNINGS (LOSS) 1,154 (70,469)
RETAINED EARNINGS (DEFICIT), beginning of year (70,469) -
--------------- ---------------
RETAINED EARNINGS (DEFICIT), end of year $ (69,315) $ (70,469)
============================================================================================================================
</TABLE>
D-4
<PAGE>
CLASSROOM 2000 INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 1,154 $ (70,469)
Net change in non-cash working capital balances (42,831) 24,437
--------------- ---------------
Cash flows (used in) operating activities (41,677) (46,032)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholders 15,000 41,700
Advances from (payments to) affiliated companies (3,109) 37,450
Issuance of share capital - 100
--------------- ---------------
Cash flows from financing activities 11,891 79,250
--------------- ---------------
INCREASE (DECREASE) IN CASH (29,786) 33,218
CASH, beginning of year 33,218 -
--------------- ---------------
CASH, end of year $ 3,432 $ 33,218
===========================================================================================================================
</TABLE>
D-5
<PAGE>
CLASSROOM 2000 INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
1. GENERAL
Classroom 2000 Inc., is a privately owned company which was incorporated
on June 17, 1997 under the Alberta Business Corporations Act.
2. SIGNIFICANT ACCOUNTING POLICY
Revenue Recognition
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event
CHANGE IN ACCOUNTING POLICY
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has not been applied
retroactively, as the impact of the change on prior periods is not
significant.
3. DUE TO AFFILIATED COMPANIES
During the year the company had the following transactions with
Sportsmark Inc. which has certain shareholders who are also shareholders
of Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Balance, beginning of year $ 37,450 $ -
Management fees and GST - 37,450
Advances 59,819 15,601
Repayments (88,243) (15,601)
--------------------------------
Balance, end of year $ 9,026 $ 37,450
--------------------------------
</TABLE>
During the year the company had the following transactions with
Sportsmark Promotions Inc. which is owned by the shareholder of the
company:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Balance, beginning of year $ - $ -
Advances 10,369 -
Repayments (10,369) -
--------------------------------
Balance, end of year $ - $ -
--------------------------------
</TABLE>
D-6
<PAGE>
CLASSROOM 2000 INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
4. DUE TO SHAREHOLDER
During the year the company had the following transactions with
Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ 41,700 $ -
Advances 50,000 41,700
Repayments (35,000) -
--------------------------------
Balance, end of year $ 56,700 $ 41,700
-------------------------------
</TABLE>
5. SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Authorized
Unlimited number of Class A voting shares Unlimited number of Class
B non-voting shares Unlimited number of Class C non-voting shares
Issued
100 Class A voting shares $ 100 $ 100
------------------------------
</TABLE>
6. INCOME TAXES
The company has non-capital income tax loss carry forwards of
approximately $63,098 and charitable donations carry forwards of $2,635
available to apply against future years taxable income. These carry
forwards expire as follows:
<TABLE>
<CAPTION>
Expires Amount
------- ------
<S> <C> <C>
Charitable donations 2002 $ 2,635
Non-capital income tax loss 2004 $63,098
</TABLE>
7. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 Class A voting shares were sold to
Internet Sports Network, Inc. which is an unrelated company.
D-7
<PAGE>
CLASSROOM 2000 INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, due to affiliated
companies, due to shareholder and accounts payable. Unless otherwise
noted, it is management's opinion that the company is not exposed to
significant interest, currency or credit risks arising from these
financial instruments. The fair value of these financial instruments
approximate carrying values, unless otherwise noted.
10. COMPARATIVE FIGURES
Certain changes have been made to the comparative figures to correspond
with current year presentation.
D-8
<PAGE>
SPORTSMARK INC.
FINANCIAL STATEMENTS
JANUARY 31, 1999
E-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Sportsmark Inc.
We have audited the balance sheet of SPORTSMARK INC. as at January 31, 1999
and the statements of earnings and retained earnings and cash flows for the
two month period then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at January 31, 1999 and
the results of its operations and its cash flows for the two month period
then ended in accordance with generally accepted accounting principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 11, 1999 Chartered Accountants
E-2
<PAGE>
SPORTSMARK INC.
BALANCE SHEET
JANUARY 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT
Accounts receivable $ 174,428
Prepaid expenses 1,284
- ---------------------------------------------------------------------------------------------------------------------------
175,712
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL ASSETS (Note 3) 40,940
- ---------------------------------------------------------------------------------------------------------------------------
$ 216,652
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness $ 38,229
Accounts payable 93,971
Deferred revenue 233,000
- ---------------------------------------------------------------------------------------------------------------------------
365,200
- ---------------------------------------------------------------------------------------------------------------------------
Due to affiliated companies (Note 4) 299,352
- ---------------------------------------------------------------------------------------------------------------------------
664,552
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 5) 2
RETAINED EARNINGS (DEFICIT) (447,902)
- ---------------------------------------------------------------------------------------------------------------------------
(447,900)
- ---------------------------------------------------------------------------------------------------------------------------
$ 216,652
===========================================================================================================================
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
E-3
<PAGE>
SPORTSMARK INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE TWO MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE $ 273,212
============================================================================================================================
EXPENSES
Amortization 2,011
Automobile (294)
Computer processing 10,462
Entertainment 2,786
Interest and bank charges 3,107
Office 3,395
Postage 39,005
Professional fees 4,075
Rent 8,572
Telephone 4,964
Travel, advertising and promotion 11,796
Wages and consulting 82,531
---------------
172,410
---------------
NET EARNINGS (LOSS) 100,802
- ----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), beginning of period (548,704)
============================================================================================================================
RETAINED EARNINGS (DEFICIT), end of period $ (447,902)
============================================================================================================================
</TABLE>
E-4
<PAGE>
SPORTSMARK INC.
STATEMENT OF CASH FLOWS
FOR THE TWO MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 100,802
- ----------------------------------------------------------------------------------------------------------------------------
Item not affecting cash
Amortization 2,011
---------------
102,813
- ----------------------------------------------------------------------------------------------------------------------------
Net change in non-cash working capital balances (293,934)
---------------
Cash flows (used in) operating activities (191,121)
---------------
CASH FLOWS FROM INVESTING ACTIVITY
Purchase of capital assets (4,385)
---------------
CASH FLOWS FROM FINANCING ACTIVITY
Payments to affiliated companies (17,692)
---------------
DECREASE IN CASH (213,198)
CASH, beginning of period 174,969
---------------
CASH (DEFICIENCY), end of period $ (38,229)
============================================================================================================================
</TABLE>
E-5
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
1. GENERAL
Sportsmark Inc., is a privately owned company which was incorporated on
October 20, 1986 under the Alberta Business Corporations Act.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event
Change in Accounting Policy
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has been applied retroactively.
As a result of this retroactive restatement, the opening deficit has
been increased by $389,000, revenue for the period has been increased
by $156,000 and deferred revenue has been increased by $233,000.
Capital Assets
Capital assets are recorded at cost and are amortized using the following
annual rates and method:
Office equipment - 20% declining balance
Computer equipment - 30% declining balance
Foreign Exchange
Assets, liabilities, revenue or expenses arising from foreign
transactions are translated into Canadian dollars by the use of the
exchange rate in effect at that date. At period end monetary items
denominated in foreign currency are adjusted to reflect the exchange
rate in effect at the period end date and any gain or loss which
results is included in the net earnings for that period.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Office equipment $ 20,676 $ 16,909 $ 3,767
Computer equipment 167,351 130,178 37,173
-------------------------------------------------------------------------------
$ 188,027 $ 147,087 $ 40,940
-------------------------------------------------------------------------------
</TABLE>
E-6
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
4. DUE TO AFFILIATED COMPANIES
During the period the company had the following transactions with
Sportsmark Holdings Inc. which is owned by certain individuals who are
shareholders of the company:
Balance, beginning of period $ (317,044)
Foreign exchange adjustment 3,695
--------------
Balance, end of period $ (313,349)
---------------
During the period the company had the following transactions with
Sportsmark Promotions Inc. which is owned by Sportsmark Holdings Inc.:
Balance, beginning of period $ -
Advances 53,970
Payments received (53,970)
-------------
Balance, end of period $ -
--------------
During the period the company had the following transactions with
Classroom 2000 Inc. which is owned by Sportsmark Holdings Inc.:
Balance, beginning of period $ -
Advances 14,369
Payments received (372)
-------------
Balance, end of period $ 13,997
--------------
5. SHARE CAPITAL
Authorized
50 Class A common voting shares without nominal or par value
50 Class B common non-voting shares without nominal or par
value
Unlimited number of Class C common voting shares Unlimited number
of Class D preferred non-voting shares with a
fixed non-cumulative dividend at the rate of .375% and
redeemable at $1,000 per share
Issued
100 Class C common voting shares $ 1
1,200 Class D preferred non-voting shares 1
-------------
$ 2
-------------
E-7
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
6. INCOME TAX
The company has non-capital income tax loss carry forwards of
approximately $257,274 available to apply against future years taxable
income. These non-capital losses expire as follows:
2003 $ 60,521
2004 60,034
2005 85,108
2006 51,611
Deferred income taxes arising from deferred revenue and income tax loss
carry forwards have not been given recognition in these statements. The
total estimated net deferred income tax asset not recorded is $7,000
7. COMMITMENTS
The minimum rentals payable under long-term operating leases, exclusive
of certain operating costs for which the company is responsible are as
follows:
1999 $ 66,957
2000 28,086
2001 9,708
--------------
$ 104,751
8. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 Class C common voting shares and 1200
Class D preferred non-voting shares were sold to Internet Sports Network,
Inc. which is an unrelated company.
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, due to affiliated
companies and accounts payables. Unless otherwise noted, it is
management's opinion that the company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
carrying values, unless otherwise noted.
E-8
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
10. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
11. COMPARATIVE FIGURES
Comparative figures for the two month period ended January 31, 1998 are
not shown as the information was not readily obtainable.
E-9
<PAGE>
SPORTSMARK INC.
FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
F-1
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Sportsmark Inc.
We have audited the balance sheets of SPORTSMARK INC. as at November 30, 1998
and November 30, 1997 and the statements of earnings and retained earnings
and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at November 30, 1998 and
November 30, 1997 and the results of its operations and its cash flows for
the years then ended in accordance with generally accepted accounting
principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 11, 1999 Chartered Accountants
F-2
<PAGE>
SPORTSMARK INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 174,969 $ 102,498
Accounts receivable 95,161 103,535
Prepaid expenses 2,635 -
---------------------------------------
272,765 206,033
CAPITAL ASSETS (Note 3) 38,565 47,497
---------------------------------------
$ 311,330 $ 253,530
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 153,988 $ 154,013
Deferred revenue 389,000 493,000
---------------------------------------
542,988 647,013
DUE TO AFFILIATED COMPANIES (Note 4) 317,044 164,124
---------------------------------------
860,032 811,137
===========================================================================================================================
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 5) 2 2
RETAINED EARNINGS (DEFICIT) (548,704) (557,609)
---------------------------------------
(548,702) (557,607)
- ---------------------------------------------------------------------------------------------------------------------------
$ 311,330 $ 253,530
===========================================================================================================================
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
F-3
<PAGE>
SPORTSMARK INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 1,268,305 $ 1,391,780
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Amortization 14,626 17,795
Automobile 604 4,352
Computer processing 233,045 248,424
Entertainment 4,608 6,425
Interest and bank charges 16,471 8,217
Office 80,977 134,719
Postage 198,945 187,914
Professional fees 12,810 128,776
Rent 52,120 52,268
Royalties 16,453 -
Telephone 90,961 92,721
Travel, advertising and promotion 55,777 104,864
Wages and consulting 482,003 477,436
---------------------------------------
1,259,400 1,463,911
---------------------------------------
NET EARNINGS (LOSS) 8,905 (72,131)
==========================================================================================================================
RETAINED EARNINGS (DEFICIT), beginning of year (557,609) (485,478)
RETAINED EARNINGS (DEFICIT), end of year $ (548,704) $ (557,609)
==========================================================================================================================
</TABLE>
F-4
<PAGE>
SPORTSMARK INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 8,905 $ (72,131)
Item not affecting cash
Amortization 14,626 17,795
-----------------------------
23,531 (54,336)
Net change in non-cash working capital balances (98,285) (72,056)
- -------------------------------------------------------------------------------------------
Cash flows (used in) operating activities (74,754) (126,392)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITY
Purchase of capital assets (5,694) (13,073)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITY
Advances from (payments to) affiliated companies 152,919 (29,722)
--------- ----------
INCREASE (DECREASE) IN CASH 72,471 (169,187)
CASH, beginning of year 102,498 271,685
--------- ----------
CASH, end of year $ 174,969 $ 102,498
===========================================================================================
</TABLE>
F-5
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 and 1997
1. GENERAL
Sportsmark Inc., is a privately owned company which was incorporated on
October 20, 1986 under the Alberta Business Corporations Act.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event
CHANGE IN ACCOUNTING POLICY
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has been applied retroactively.
As a result of this retroactive restatement, the opening deficit has
been increased by $493,000 (1997 - $514,000), revenue for the year has
been increased by $104,000 (1997 - $21,000) and deferred revenue has
been increased by $389,000 (1997 - $493,000).
CAPITAL ASSETS
Capital assets are recorded at cost and are amortized using the
following annual rates and method:
Office equipment - 20% declining balance
Computer equipment - 30% declining balance
FOREIGN EXCHANGE
Assets, liabilities, revenue or expenses arising from foreign
transactions are translated into Canadian dollars by the use of the
exchange rate in effect at that date. At year end monetary items
denominated in foreign currency are adjusted to reflect the exchange
rate in effect at the year end date and any gain or loss which results
is included in the net earnings for that year.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------
Accumulated
Cost Amortization Net Book Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office equipment $ 20,675 $ 16,776 $ 3,899 $ 42,803
Computer equipment 162,966 128,300 34,666 4,694
------------------------------------------------------------------------------
$ 183,641 $ 145,076 $ 38,565 $ 47,497
------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 and 1997
4. DUE TO AFFILIATED COMPANIES
During the year the company had the following transactions with
Sportsmark Holdings Inc. which is owned by certain individuals who are
shareholders of the company:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ (201,574) $ (193,846)
Advanced during the year (100,000) -
Foreign exchange adjustment (15,470) (7,728)
--------------------------------
Balance, end of year $ (317,044) $ (201,574)
--------------------------------
</TABLE>
During the year the company had the following transactions with
Sportsmark Promotions Inc. which is owned by Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ - $ -
Revenue 134,758 81,750
Advances 27,009 -
Payments received (161,767) (81,750)
--------------------------------
Balance, end of year $ - $ -
--------------------------------
During the year the company had the following transactions with
Classroom 2000 Inc. which is owned by Sportsmark Holdings Inc.:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ 37,450 $ -
Revenue and GST - 37,450
Advances 51,149 -
Payments received (88,599) -
--------------------------------
Balance, end of year $ - $ 37,450
--------------------------------
</TABLE>
F-7
<PAGE>
SPORTSMARK INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 and 1997
5. SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
AUTHORIZED
50 Class A common voting shares without nominal or par value
50 Class B common non-voting shares without nominal or par
value
Unlimited number of Class C common voting shares Unlimited number
of Class D preferred non-voting shares with a
fixed non-cumulative dividend at the rate of .375% and
redeemable at $1,000 per share
ISSUED
100 Class C common voting shares $ 1 $ 1
1,200 Class D preferred non-voting shares 1 1
--------------------------------
$ 2 $ 2
--------------------------------
</TABLE>
6. INCOME TAX
The company has non-capital income tax loss carry forwards of
approximately $205,663 available to apply against future years taxable
income. The non-capital losses expire as follows:
<TABLE>
<S> <C>
2003 $ 60,521
2004 60,034
2005 85,108
</TABLE>
Deferred income taxes arising from deferred revenue and income tax loss
carry forwards have not been given recognition in these statements. The
total estimated net deferred income tax asset not recorded is $37,000
(1998 - $74,000)
7. COMMITMENTS
The minimum rentals payable under long-term operating leases, exclusive
of certain operating costs for which the company is responsible are as
follows:
<TABLE>
<S> <C>
1999 $ 80,195
2000 28,086
2001 9,708
---------------
$ 117,989
---------------
</TABLE>
8. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 Class C common voting shares and
1200 Class D preferred non-voting shares were sold to Internet Sports
Network, Inc. which is an unrelated company.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 and 1997
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, accounts
receivables, due to affiliated companies and accounts payables. Unless
otherwise noted, it is management's opinion that the company is not
exposed to significant interest, currency or credit risks arising from
these financial instruments. The fair value of these financial
instruments approximate carrying values, unless otherwise noted.
10. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
F-9
<PAGE>
SPORTSMARK PROMOTIONS INC.
FINANCIAL STATEMENTS
JANUARY 31, 1999
G-1
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Sportsmark Promotions Inc.
We have audited the balance sheet of SPORTSMARK PROMOTIONS INC. as at January
31, 1999 and the statements of earnings and retained earnings and cash flows
for the one month period then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at January 31, 1999 and
the results of its operations and its cash flows for the one month period
then ended in accordance with generally accepted accounting principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 7, 1999 Chartered Accountants
G-2
<PAGE>
SPORTSMARK PROMOTIONS INC.
BALANCE SHEET
JANUARY 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
CURRENT
Cash $ 23,104
Due from affiliated companies (Note 3) 78,256
---------------
101,360
INCORPORATION COSTS 936
---------------
$ 102,296
---------------
---------------
LIABILITIES
CURRENT
Accounts payable $ 11,340
---------------
Deferred revenue 3,000
---------------
14,340
---------------
SHAREHOLDER'S EQUITY
SHARE CAPITAL (Note 5) 100
RETAINED EARNINGS 87,956
---------------
$ 102,296
---------------
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
G-3
<PAGE>
SPORTSMARK PROMOTIONS INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE $ 1,000
EXPENSES
Office 97
---------------
NET EARNINGS (LOSS) 903
RETAINED EARNINGS, beginning of period 86,953
---------------
RETAINED EARNINGS, end of period $ 87,856
---------------
---------------
</TABLE>
G-4
<PAGE>
SPORTSMARK PROMOTIONS INC.
STATEMENT OF CASH FLOWS
FOR THE ONE MONTH PERIOD ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 903
Net change in non-cash working capital balances (65,743)
---------------
Cash flows (used in) operating activities (64,840)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholder 2,000
Payments to affiliated companies (169,984)
---------------
Cash flows from (used in) financing activities (167,984)
---------------
DECREASE IN CASH (232,824)
CASH, beginning of period 255,928
---------------
CASH, end of period $ 23,104
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
G-5
<PAGE>
SPORTSMARK PROMOTIONS INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
1. GENERAL
Sportsmark Promotions Inc., is a privately owned company which was
incorporated on June 24, 1992 under the State of Delaware and which
operates in the State of Arizona. As the company was incorporated in the
United States of America and has all of its operations in the United
States of America the financial statements are reported in United States
dollars.
2. SIGNIFICANT ACCOUNTING POLICY
REVENUE RECOGNITION
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event.
CHANGE IN ACCOUNTING POLICY
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has been applied retroactively.
As a result of this retroactive restatement, retained earnings has been
decreased by $4,000, revenue for the period has been increased by
$1,000 and deferred revenue has been increased by $3,000.
3. DUE FROM AFFILIATED COMPANIES
During the period, the company had the following transactions with
Sportsmark Promotions International Inc. which is owned by Sportsmark
Holdings Inc.:
<TABLE>
<CAPTION>
<S> <C>
Balance , beginning of period $ (91,728)
Advances 24,422
Repayments 145,562
-------------
Balance, end of period $ 78,256
-------------
-------------
</TABLE>
During the period, the company had the following transactions with
Sportsmark Inc. which has certain shareholders who are also shareholders
of Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
<S> <C>
Balance , beginning of period $ -
Advances 52,127
Repayments (52,127)
-------------
Balance, end of period $ -
-------------
-------------
</TABLE>
4. DUE FROM SHAREHOLDER
During the period, the company had the following transactions with
Sportsmark Holdings Inc.:
<TABLE>
<S> <C>
Balance , beginning of period $ 2,000
Repayments (2,000)
--------------
Balance, end of period $ -
--------------
</TABLE>
G-6
<PAGE>
SPORTSMARK PROMOTIONS INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
5. SHARE CAPITAL
<TABLE>
<CAPTION>
<S> <C>
AUTHORIZED
10,000 voting shares
ISSUED
100 voting shares $ 100
-----------
</TABLE>
6. INCOME TAXES
The company has net operating loss carry forwards of approximately
$16,928 which are available to apply against future years taxable
income in the State of Arizona. These carry forwards expire in 2003.
7. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 voting shares were sold to Internet
Sports Network, Inc. which is an unrelated company.
8. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, due from affiliated
companies and accounts payables. Unless otherwise noted, it is
management's opinion that the company is not exposed to significant
interest, currency or credit risk arising from these financial
instruments. The fair value of these financial instruments approximate
carrying values, unless otherwise noted.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
10. COMPARATIVE FIGURES
Comparative figures for the one month period ended January 31, 1998 are
not shown as the information was not readily obtainable.
G-7
<PAGE>
SPORTSMARK PROMOTIONS INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
H-1
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Sportsmark Promotions Inc.
We have audited the balance sheets of SPORTSMARK PROMOTIONS INC. as at
December 31, 1998 and December 31, 1997 and the statements of earnings and
retained earnings and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and
December 31, 1997 and the results of its operations and its cash flows for
the years then ended in accordance with generally accepted accounting
principles.
"Hudson & Company"
Calgary, Alberta HUDSON & COMPANY
June 7, 1999 Chartered Accountants
H-2
<PAGE>
SPORTSMARK PROMOTIONS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 255,928 $ 375,469
Due from shareholder (Note 4) 2,000 2,000
---------------------------------------
257,928 377,469
INCORPORATION COSTS 936 936
---------------------------------------
$ 258,864 $ 378,405
===========================================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 76,083 $ 134,428
Deferred revenue 4,000 6,000
Income taxes payable - 1,405
Due to affiliated companies (Note 3) 91,728 134,593
---------------------------------------
171,811 276,426
---------------------------------------
SHAREHOLDER'S EQUITY
SHARE CAPITAL (Note 5) 100 100
RETAINED EARNINGS 86,953 101,879
- ---------------------------------------------------------------------------------------------------------------------------
87,053 101,979
- ---------------------------------------------------------------------------------------------------------------------------
$ 258,864 $ 378,405
===========================================================================================================================
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
_________________________________, Director
_________________________________, Director
H-3
<PAGE>
SPORTSMARK PROMOTIONS INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 52,728 $ 128,590
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Consulting fees 50,000 101,000
Interest and bank charges - 851
Office 186 268
Professional fees 17,468 1,429
---------------------------------------
67,654 103,548
---------------------------------------
Earnings (loss) before income taxes (14,926) 25,042
- ---------------------------------------------------------------------------------------------------------------------------
INCOME TAXES - 1,405
---------------------------------------
NET EARNINGS (LOSS) (14,926) 23,637
- ---------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, beginning of year 101,879 78,242
- ---------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, end of year $ 86,953 $ 101,879
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
H-4
<PAGE>
SPORTSMARK PROMOTIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (14,926) $ 23,637
Net change in non-cash working capital balances (61,750) (25,611)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows (used in) operating activities (76,676) (1,974)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (payments to) affiliated companies (42,865) 85,576
---------------------------------------
INCREASE (DECREASE) IN CASH (119,541) 83,602
CASH, beginning of year 375,469 291,867
---------------------------------------
CASH, end of year $ 255,928 $ 375,469
===========================================================================================================================
</TABLE>
H-5
<PAGE>
SPORTSMARK PROMOTIONS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
1. GENERAL
Sportsmark Promotions Inc., is a privately owned company which was
incorporated on June 24, 1992 under the State of Delaware and which
operates in the State of Arizona. As the company was incorporated in the
United States of America and has all of its operations in the United
States of America the financial statements are reported in United States
dollars.
2. SIGNIFICANT ACCOUNTING POLICY
REVENUE RECOGNITION
The company earns revenue from membership and other fees received from
newspaper, magazine and internet-based sports information and sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred
income until recognized in income ratably over the season or upon
completion of the event.
CHANGE IN ACCOUNTING POLICY
The company has changed its policy for the accounting of revenue
recognition from recording revenues as received to the policy stated
above. This change in accounting policy has been applied retroactively. As
a result of this retroactive restatement, opening retained earnings has
been decreased by $6,000 (1997 - $25,000), revenue for the year has been
increased by $2,000 (1997 - $19,000) and deferred revenue has been
increased by $4,000 (1997 - $6,000).
3. DUE TO AFFILIATED COMPANIES
During the year the company had the following transactions with Sportsmark
Inc. which has certain shareholders who are also shareholders of
Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Balance, beginning of year $ 49,735 $ -
Consulting fees 50,000 101,000
Advances 10,228 8,735
Repayments (109,963) (60,000)
--------------------------------
Balance, end of year $ - $ 49,735
-------------------------------
</TABLE>
During the year the company had the following transactions with Sportsmark
Promotions International Inc. which is owned by Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ 84,858 $ 49,017
Revenue 50,728 109,590
Advances 290,211 183,812
Repayments (334,069) (257,561)
--------------------------------
Balance, end of year $ 91,728 $ 84,858
--------------------------------
</TABLE>
During the year the company had the following transactions with Classroom
2000 Inc. which is owned by Sportsmark Holdings Inc.:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Balance, beginning of year $ - $ -
Advances 7,000 -
Repayments (7,000) -
--------------------------------
Balance, end of year $ - $ -
--------------------------------
</TABLE>
H-6
<PAGE>
SPORTSMARK PROMOTIONS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
4. DUE FROM SHAREHOLDER
In a prior year the company advanced Sportsmark Holdings Inc. $2,000, with
no fixed terms of repayment.
5. SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
AUTHORIZED
10,000 voting shares
ISSUED
100 voting shares $ 100 $ 100
--------------------------------
</TABLE>
6. INCOME TAXES
The company has net operating loss carry forwards of approximately $16,928
which are available to apply against future years taxable income in the
State of Arizona. These carry forwards expire in 2003.
7. SUBSEQUENT EVENTS
Effective February 1, 1999, the 100 voting shares were sold to Internet
Sports Network, Inc. which is an unrelated company.
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
H-7
<PAGE>
SPORTSMARK PROMOTIONS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
9. FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, due from shareholder,
due to affiliated companies and accounts payables. Unless otherwise noted,
it is management's opinion that the company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
carrying values, unless otherwise noted.
10. COMPARATIVE FIGURES
Certain changes have been made to the comparative figures to correspond
with current year presentation.
H-8
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
INTERNET SPORTS NETWORK, INC.
(UNAUDITED)
SEPTEMBER 30, 1999
I-1
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(unaudited) (Note 1)
September 30, March 31,
1999 1999
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 1,297,000 $ 2,928,000
Receivables 482,000 182,000
Prepaid expenses 55,000 29,000
--------------------------------------
1,834,000 3,139,000
Equipment, net (note 3) 434,000 84,000
Deferred charges (note 4) 1,125,000 -0-
Purchased intangibles, net (note 2) 13,127,000 9,637,000
Goodwill, net (note 2) 4,697,000 3,855,000
--------------------------------------
$ 21,217,000 $ 16,715,000
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable $ 542,000 $ 171,000
Accrued liabilities 35,000 137,000
Purchase price liability (note 2) 500,000 -0-
Deferred revenue 401,000 -0-
Accrued prize commitments 275,000 31,000
Loan payable (Note 6) 250,000 -0-
--------------------------------------
2,003,000 339,000
Deferred income taxes (note 7) 4,697,000 3,855,000
--------------------------------------
6,700,000 4,194,000
--------------------------------------
Shareholders' equity (note 5)
Common stock and additional paid-in capital, $0.001 par
Value
50,000,000 shares authorized
20,200,000 outstanding (March 31, 1999 - 17,841,000) 38,204,000 17,127,000
Share subscription receivable for 475,000 shares
subscribed (190,000) -0-
Deferred compensation (10,699,000) (449,000)
Accumulated deficit (12,798,000) (4,157,000)
--------------------------------------
14,517,000 12,521,000
--------------------------------------
$ 21,217,000 $ 16,715,000
======================================
</TABLE>
I-2
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
(unaudited) (unaudited) (unaudited) (unaudited)
Six Months Six Months Three Months Three Months
Ending Ending Ending Ending
September 30, October 31, September 30, October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE $ 1,861,000 $ 69,000 $ 1,189,000 $ 61,000
-------------------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 920,000 74,000 763,000 47,000
Salaries and benefits 921,000 135,000 535,000 85,000
Consulting fees 516,000 46,000 296,000 35,000
Advertising 228,000 303,000 140,000 282,000
General and administrative 1,096,000 207,000 611,000 166,000
Depreciation 65,000 7,000 60,000 3,000
Amortization of purchased intangibles 3,440,000 -0- 2,145,000 -0-
Amortization of goodwill 1,285,000 -0- 776,000 -0-
Options granted for services provided 1,145,000 -0- 1,145,000 -0-
Amortization of stock compensation 1,850,000 -0- 1,637,000 -0-
Amortization of deferred charges 225,000 -0- 225,000 -0-
Acquisition costs 96,000 -0- 45,000 -0-
-------------------------------------------------------------------
Total expenses 11,787,000 772,000 8,378,000 608,000
-------------------------------------------------------------------
Net loss before income taxes (9,926,000) (703,000) (7,189,000) (547,000)
Deferred income tax recovery (1,285,000) -0- (776,000) -0-
-------------------------------------------------------------------
Net loss and comprehensive loss (8,641,000) (703,000) (6,413,000) (547,000)
===================================================================
NET LOSS PER SHARE $ (0.45) $ (0.11) $ (0.33) $ (0.08)
===================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 19,069,000 6,290,000 19,591,000 6,580,000
===================================================================
</TABLE>
I-3
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock and
Additional
Number Paid in Deferred Accumulated
Of Shares Capital Compensation Deficit Total
--------- ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999 17,841,000 17,127,000 (449,000) (4,157,000) 12,521,000
Shares issued on acquisition of Ultimate
Sports Publishing 125,000 750,000 -0- -0- 750,000
Shares issued in acquisition of Innovation
Partners Inc. 616,000 4,066,000 -0- -0- 4,066,000
Shares issued for cash 943,000 1,526,000 -0- -0- 1,526,000
Deferred compensation related to stock
options -0- 12,100,000 (12,100,000) -0- -0-
Shares issued in exchange for deferred
charges 200,000 1,350,000 -0- -0- 1,350,000
Options granted for service -0- 1,145,000 -0- -0- 1,145,000
Shares issued for subscription receivable 475,000 190,000 -0- -0- 190,000
Amortization of deferred compensation
related to stock options -0- -0- 1,850,000 -0- 1,850,000
Share issuance costs -0- (50,000) -0- -0- (50,000)
Net loss -0- -0- -0- (8,641,000) (8,641,000)
-------------------------------------------------------------------------------------
Balance at September 30, 1999 20,200,000 38,204,000 (10,699,000) (12,798,000) 14,707,000
-------------------------------------------------------------------------------------
Less share subscription receivable (190,000)
-----------------
Total Shareholders' Equity at September 30, 1999 14,517,000
-----------------
</TABLE>
I-4
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Six Months Ended Six Months Ended
September 30, 1999 October 31, 1998
------------------ ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,641,000) $ (703,000)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 65,000 7,000
Amortization of stock compensation 1,850,000 -0-
Options granted for services provided 1,145,000 -0-
Amortization of deferred charges 225,000 -0-
Amortization of purchased intangibles 3,440,000 -0-
Amortization of goodwill 1,285,000 -0-
Deferred income tax recovery (1,285,000) -0-
Changes in other operating assets and liabilities:
Increase in receivables (276,000) (13,000)
Increase in prepaid expenses (26,000) (54,000)
Increase in accounts payable 21,000 28,000
Increase in accrued liabilities 142,000 51,000
Increase in deferred revenue 401,000 -0-
--------------------------------------------------
Net cash used in operating activities (1,654,000) (684,000)
--------------------------------------------------
INVESTING ACTIVITIES
Purchase of Ultimate Sports Publishing (860,000) -0-
Purchase of Sportsbuff (500,000) -0-
Cash acquired with Sportsbuff 36,000 -0-
Purchase of equipment (379,000) (10,000)
--------------------------------------------------
Net cash used in investing activities (1,703,000) (10,000)
--------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of share issuance costs
$ 50,000 (1998 - $ 4,000) 1,476,000 692,000
Proceeds from loan payable 250,000 -0-
--------------------------------------------------
Net cash provided by financing activities 1,726,000 692,000
--------------------------------------------------
Net decrease in cash and cash equivalents (1,631,000) (2,000)
Cash and cash equivalents:
Beginning of period 2,928,000 9,000
--------------------------------------------------
End of period $ 1,297,000 $ 7,000
==================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
INVESTING ACTIVITIES
Net assets of Ultimate Sports Publishing acquired for shares $ (750,000) -0-
Net assets of Sportsbuff acquired for shares (4,066,000) -0-
FINANCING ACTIVITIES
Shares issued on acquisition of Ultimate Sports Publishing 750,000 -0-
Shares issued on acquisition of Sportsbuff 4,066,000 -0-
Shares issued on acquisition of exclusive rights 1,350,000 -0-
==================================================
Cash interest paid $ 7 -0-
==================================================
Cash taxes paid $ -0- -0-
</TABLE>
I-5
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three- and six-month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for
the year ended March 31, 2000.
The balance sheet at March 31, 1999 has been derived from the
audited financial statements at that date but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements.
The comparative figures shown in the consolidated statement of
operations and comprehensive loss and consolidated statement of
cash flows are for the periods ending October 31, 1998. The
comparative fiscal period started on May 1, 1998, while the
current fiscal year started on April 1, 1999, as a result of the
Company changing its year end from April 30 to March 31 as part of
the recapitalization in January of 1999. These comparative figures
are comparable to those that would be presented for the periods
ending September 30, 1998 as there is no significant seasonal
impact. The comparative results have not been recast to September
30, 1998 as it is not practical, and would not provide significant
additional information.
The Company has incurred a loss ot $8,641,000 for the six
months ended September 30, 1999, expects to continue to incur
losses into the future and has a working capital deficiency as
at September 30, 1999 of $169,000. These conditions raise
substantial doubt regarding the Company's ability to continue
as a going concern. The Company's ability to continue as a
going concern is dependent upon, among other things, the
ability of the Company to raise additional financing. These
consolidated financial statements do not include any
adjustments to the amounts and classification of assets and
liabilities that might be necessary should the Company be
unable to continue as a going concern.
PURCHASED INTANGIBLES AND GOODWILL
Purchased intangibles consist primarily of software, licenses,
customer lists, trademarks and contest agreements. Purchased
intangibles of approximately $13,127,000 are stated net of total
accumulated amortization of $4,031,000 at September 30, 1999 in
the accompanying consolidated balance sheet. Purchased intangibles
are being amortized on a straight-line basis principally over two
years.
Goodwill of approximately $4,697,000 is stated net of total
accumulated amortization of $1,521,000 at September 30, 1999 in
the accompanying consolidated balance sheet. Goodwill is being
amortized on a straight-line basis principally over two years.
FOREIGN CURRENCY TRANSLATION
The unit of measurement of the Company is the Canadian dollar
while its reporting currency is the United States dollar. The
assets and liabilities of the Canadian subsidiaries are translated
using the exchange rate in effect at period end, and revenues and
expenses are translated at the average rate during the period.
Exchange gains or losses on translation of the Company's net
equity investments in these subsidiaries are deferred as a
separate component of other comprehensive income. The translation
adjustment at September 30, 1999 is not significant.
I-6
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 2. BUSINESS COMBINATIONS
Effective June 22, 1999, the Company acquired certain assets of
National Publisher Services consisting of the Ultimate Sports
Publishing division.("Ultimate Sports"). Ultimate Sports publishes
annual sports magazines.
Effective June 30, 1999, the Company acquired 100% of the shares
of Innovation Partners Inc, (d/b/a Sportsbuff), ("Sportsbuff").
The business of Sportsbuff is to conduct and administer sports
contest services for its clients.
The transactions are summarized as follows:
<TABLE>
<CAPTION>
============================================================================================================
As at As at
June 22, 1999, June 30, 1999,
Ultimate Sports Sportsbuff
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets acquired at fair values:
Working capital $ 0 $ (290,000)
Equipment 0 36,000
Purchased intangibles 1,610,000 5,320,000
Goodwill 0 2,128,000
Deferred income taxes 0 (2,128,000)
----------- -----------
$ 1,610,000 $ 5,066,000
------------ ------------
Funded by:
Cash $ 860,000 $ 1,000,000
Shares of common stock 750,000 4,066,000
----------- -----------
$ 1,610,000 $ 5,066,000
============================================================================================================
</TABLE>
$500,000 of the cash component of the purchase price of Sportsbuff
was paid in July, 1999. The remaining $500,000 is due in October,
1999.
Purchased intangibles related to the acquisition of Sportsbuff
consists of developed contest software, licenses, participant
lists, customer lists, trademarks and domain names.
Purchased intangibles related to the acquisition of Ultimate
Sports consist of trademarks, customer contracts, client lists,
and domain names.
I-7
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
============================================================================
SEPTEMBER 30,
1999
- ----------------------------------------------------------------------------
<S> <C>
Computer equipment $ 418,000
Office equipment and furniture 112,000
--------------
530,000
Less accumulated depreciation (96,000)
---------------
Equipment, net $ 434,000
============================================================================
</TABLE>
NOTE 4. DEFERRED CHARGES
On August 1, 1999, the Company entered into a five year agreement
to be the exclusive contest provider for Beer.com. In exchange for
this exclusive agreement, the Company is granting Beer.com
1,000,000 common shares over the five year term. All 1,000,000
shares have been placed in escrow. 200,000 shares are owing at the
start of each year of the contract, and distributed to Beer.com on
each anniversary date of the contract. The minimum share
obligation under this agreement (200,000 shares) have been
recorded at the market value of the shares as at August 1, 1999
($6.75 per share) as a deferred charge, and is being amortized
over a one year period.
NOTE 5. SHAREHOLDERS' EQUITY
COMMON STOCK
<TABLE>
<CAPTION>
Common
Number stock and
of shares paid-in capital
(`000's) ($000's)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE MARCH 31, 1999 17,841 17,127
Shares issued for cash 943 1,526
Shares issued for subscription receivable 475 190
Shares issued on acquisition of Sportsbuff 616 4,066
Shares issued on acquisition of Ultimate Sports 125 750
Shares issued in exchange for exclusive rights 200 1,350
Deferred compensation related to stock options -- 12,100
Options granted for services -- 1,145
Share issuance costs -- (50)
- ------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1999 20,200 38,204
============================================================================================================
</TABLE>
STOCK OPTIONS
Generally, options are granted by the Company's Board of Directors
at an exercise price of not less than the fair market value of the
Company's common stock at the date of grant. Options are generally
granted with a term of five years from the date of issuance.
Option vesting is varied ranging from the date of issuance to 3
years.
I-8
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 5. SHAREHOLDERS' EQUITY (CONT'D...)
STOCK OPTION ACTIVITY
The following table summarizes the Company's stock option
activity:
<TABLE>
<CAPTION>
=============================================================================================================
NUMBER OF WEIGHTED AVERAGE
SHARES (000'S) EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 1999 3,365 $ 1.52
Options granted and assumed 3,104 2.05
Options cancelled (10) 1.75
Options exercised (575) 0.40
------ ---------
September 30, 1999 5,884 $ 1.91
============================================================================================================
</TABLE>
The following table summarizes information about options
outstanding and options exercisable at September 30, 1999:
<TABLE>
<CAPTION>
============================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- -----------------------------------
WEIGHTED AVERAGE
OPTIONS REMAINING CONTRACTUAL OPTIONS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- --------------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 0.40 1,850 4.7 years 0 $ 0.40
1.75 2,815 4.1 years 2,380 1.75
4.28 200 4.6 years 0 4.28
4.54 150 4.5 years 0 4.54
5.00 50 2.5 years 25 5.00
6.00 304 4.8 years 54 6.00
7.00 25 2.8 YEARS 25 7.00
- -----------------------------------------------------------------------------------------------
$ 0.40 - 7.00 5,884 4.5 years 2,870 $ 1.67
=============================================================================================================================
</TABLE>
DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $12,100
during the six months ended September 30, 1999. The amount
recorded represents the difference between the grant price and the
fair value of the Company's common stock for shares subject to
options granted during the period. Options granted below fair
market value and the associated weighted average exercise price
per share were 2,300 and $1.15 during the period. The amortization
of deferred compensation is charged to operations over the vesting
period of the options, which ranges from 15 months to 3 years.
Total amortization recognized in the six months ending September
30, 1999 was $1,850,000
I-9
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 5. SHAREHOLDERS' EQUITY (CONT'D...)
PRO FORMA DISCLOSURE
The Company follows the intrinsic value method in accounting for
its stock options. Had compensation cost been recognized based on
the fair value at the date of grant, the pro forma amounts of the
Company's net loss and net loss per share for the six months ended
September 30, 1999 would have been as follows:
Net loss as reported $(8,641) Net loss - pro forma $(8,910) Basic
and diluted loss per share as reported $(0.45) Basic and diluted
loss per share - pro forma $(0.47)
The fair value for each option granted was estimated at the date
of grant using a Black-Scholes option pricing model, assuming no
expected dividends and the following weighted average assumptions:
Average risk-free interest rates 5.0%
Average expected life (in years) 5.0
Volatility factor 98.5%
The weighted average fair value of options granted during the six
month period was $5.35.
NOTE 6. LOAN PAYABLE
The loan payable is for a principal amount of $250,000 with
interest calculated at 9% per annum. The loan in unsecured, and is
due on December 31, 1999.
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
A reconciliation of the combined federal and state income tax
expense to the Company's income tax expense is as follows:
<TABLE>
<CAPTION>
========================================================================================================
SEPTEMBER 30,
1999
- --------------------------------------------------------------------------------------------------------
<S> <C>
Tax recovery at combined federal and state rates $ (3,166,000)
Higher effective rate attributable to income taxes of other countries $ (1,022,000)
Tax effect of expenses that are not deductible for income tax purposes 3,353,000
Valuation allowance 835,000
-------------
$ -
========================================================================================================
</TABLE>
I-10
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 7. INCOME TAXES (CONT'D...)
At September 30, 1999, the Company had net operating loss
carryforwards of approximately $4,477,000. Substantially all of
these carryforwards relate to the Canadian subsidiaries and will
begin to expire at various times starting in 2004.
Significant components of the Company's deferred income tax assets
are approximately as follows:
<TABLE>
<CAPTION>
========================================================================================================
SEPTEMBER 30,
1999
- --------------------------------------------------------------------------------------------------------
<S> <C>
Net operating loss carryforwards $ 4,477,000
============
Total deferred income tax assets $ 1,958,000
Valuation allowance for deferred income tax assets (1,958,000)
------------
Net deferred income tax assets $ -
========================================================================================================
</TABLE>
A continuity of the valuation allowance is as follows:
<TABLE>
<CAPTION>
=========================================================================================================
SEPTEMBER 30,
1999
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Balance at March 31, 1999 $ 1,123,000
Valuation allowance on deferred income tax asset 835,000
-------------
Closing balance $ 1,958,000
========================================================================================================
</TABLE>
Deferred income tax credits at September 30, 1999 reflect the
differences between the financial reporting and tax values of the
purchased intangibles. The deferred tax recovery in the
consolidated statement of operations and comprehensive loss
relates to the amortization of the deferred income tax liability
which resulted from the Company's acquisitions of Sportsmark,
Pickem and Sportsbuff.
NOTE 8. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 1999, the Company paid or
accrued approximately $46,000 of consulting fees for financial
services provided by one of the Company's directors. Also, $16,000
of wages and $60,000 termination payment was paid to the Company's
former Chief Executive Officer and former director. Approximately
$30,000 of wages were paid to the Company's Chief Operating
Officer, who is also a director of the Company.
I-11
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended September 30, 1999
===============================================================================
NOTE 9. COMMITMENTS
The Company leases premises and office equipment under the terms
of operating leases. The leases provide for future minimum annual
lease payments as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 187
2001 73
2002 18
2003 5
2004 and thereafter -
---------------
$ 283
===============
</TABLE>
NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two operating segments, contest
management and publishing, across domestic and Canadian markets.
Canadian sales, including export sales from the United States
to Canada, represented approximately 14% of net sales for the six
months ended September 30, 1999. No other foreign country or
geographic area accounted for more than 10% of net sales in any of
the periods presented. There were no transfers between geographic
areas during the period ended September 30, 1999. Capital assets
and purchased intangibles in the United States equal approximately
$17,000. The remaining capital assets and purchased intangibles
are in Canada.
The Company entered into the publishing segment through its
acquisition of Ultimate Sports Publishing in June, 1999 (Note 2).
There have been no material changes in assets relating to the
publishing segment since that time.
<TABLE>
<CAPTION>
Contest
Management Publishing Total
---------- ---------- -----
<S> <C> <C> <C>
Revenue 901,000 960,000 1,861,000
Amortization of purchased intangibles 3,222,000 218,000 3,440,000
Amortization of Goodwill 1,285,000 0 1,285,000
Expenses 1,528,000 646,000 2,174,000
---------- ------- ----------
(5,134,000) 96,000 (5,038,000)
---------- -------
Corporate Expenses 4,888,000
Net loss before tax (9,926,000)
===========
</TABLE>
Sports entertainment revenues are earned primarily from fees
from consumers who pay to enter sports contests (82% of sports
entertainment sector revenues) and fees from companies that
license the contest applications (18% of sports entertainment
sector revenues). Publishing revenues are earned primarily from
newstand sales (89% of publishing revenues) and advertising
within the publications (11% of publishing revenues).
I-12
<PAGE>
FINANCIAL STATEMENTS
INNOVATION PARTNERS INC.
DECEMBER 31, 1998
J-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
INNOVATION PARTNERS INC.
We have audited the accompanying balance sheet of INNOVATION PARTNERS INC. as
of December 31, 1998, and the related accompanying statements of operations
and comprehensive loss, shareholders' deficiency and cash flows for the year
then ended. 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 in accordance with generally accepted auditing
standards in the United States. Those standards 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. 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 our audit
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 1998 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles in the
United States.
Toronto, Canada, "Ernst & Young LLP"
September 3, 1999 Chartered Accountants
J-2
<PAGE>
INNOVATION PARTNERS INC.
BALANCE SHEET
[Expressed in U.S. dollars]
As at December 31
<TABLE>
<CAPTION>
1998
$
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents 97,576
Accounts receivable 42,168
- ------------------------------------------------------------------------------------------------------------------
139,744
Equipment, net [NOTE 3] 28,305
- ------------------------------------------------------------------------------------------------------------------
168,049
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT
Accounts payable 81,497
Accrued prizes payable 143,675
Deferred revenue 3,658
Loans payable 15,424
Stock repurchase agreement payable [NOTE 4] 14,400
- ------------------------------------------------------------------------------------------------------------------
258,654
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' DEFICIENCY
Capital stock
Authorized
9,000 common shares with par value of $1
Issued
8,190 common shares 8,190
Additional paid-in capital 36,764
Deficit (135,559)
- ------------------------------------------------------------------------------------------------------------------
(90,605)
- ------------------------------------------------------------------------------------------------------------------
168,049
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
J-3
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS
[Expressed in U.S. dollars]
Year ended December 31
<TABLE>
<CAPTION>
1998
$
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE 1,257,255
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 283,036
Wages and salaries 222,559
Advertising 128,747
Postage and production costs 97,278
Write-off of bad debts 69,437
Printing and reproduction 68,111
Travel and entertainment 53,578
Licensing fees 37,172
Depreciation 32,630
Telephone 32,253
Internet services 27,971
Interest and bank charges 4,945
General and administrative 272,882
- ------------------------------------------------------------------------------------------------------------------
1,330,599
- ------------------------------------------------------------------------------------------------------------------
NET LOSS AND COMPREHENSIVE LOSS (73,344)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
J-4
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF SHAREHOLDERS' DEFICIENCY
[Expressed in U.S. dollars]
Year ended December 31
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
ADDITIONAL
CAPITAL PAID-IN
STOCK CAPITAL DEFICIT TOTAL
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR 9,000 57,554 (62,215) 4,339
Stock redemptions (810) (20,790) -- (21,600)
Net loss for the year -- -- (73,344) (73,344)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR 8,190 36,764 (135,559) (90,605)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
J-5
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF CASH FLOWS
[Expressed in U.S. dollars]
Year ended December 31
<TABLE>
<CAPTION>
1998
$
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net loss (73,344)
Adjustment to reconcile net loss to
cash provided by operating activities:
Depreciation 32,630
Changes in non-cash working capital
balances related to operations
Accounts receivable (42,168)
Accounts payable (58,530)
Accrued prizes payable 143,675
Deferred revenue 3,658
- ------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 5,921
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment (41,427)
- ------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (41,427)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of loans payable (48,493)
Repayment of stock repurchase agreements payable (7,200)
- ------------------------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (55,693)
- ------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH DURING THE YEAR (91,199)
Cash and cash equivalents, beginning of year 188,775
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 97,576
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
Cash interest paid 3,401
Cash taxes paid --
- ------------------------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS
Stock redemption agreements
Capital stock (810)
- ------------------------------------------------------------------------------------------------------------------
Additional paid in Capital (20,790)
Stock redemption agreement payable 21,600
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
J-6
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
[Expressed in U.S. dollars]
1. NATURE AND CONTINUANCE OF OPERATIONS
Innovation Partners Inc., doing business as Sports Buff, was incorporated in
1993 under the laws of the State of Wisconsin and its principal business
activities include conducting and administering sports contest services through
the Internet and the newspaper media.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of its holdings of cash held by deposit
taking institutions. The Company manages its credit risk by depositing its cash
in high-quality, regulated deposit taking institutions.
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ["FASB"] Statement of
Financial Accounting Standard ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the carrying
value of fixed assets and other long-lived assets is reviewed on a regular basis
for the existence of facts or circumstances, both internally and externally,
that may suggest impairment. To date, no such impairment has been indicated.
Should there be an impairment in the future, the Company will measure the amount
of the impairment based on discounted expected future cash flows from the
impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
ADVERTISING COSTS
The cost of advertising is expensed as incurred.
J-7
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
[Expressed in U.S. dollars]
COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. There are no items of comprehensive
income (loss) that require additional reporting.
EQUIPMENT
Equipment is recorded at cost less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets using the declining
balance basis at the following annual rates:
Office equipment and furniture 20%
Computer equipment 30%
REVENUE RECOGNITION
The Company earns revenue from membership and other fees received for sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred income
until recognized in income ratably over the season or upon completion of the
event.
PRIZE AWARDS
Members, as well as non-members, are entitled to enter into contests provided by
the Company. Prizes are awarded upon completion of the sports season or event
and are paid by the Company or the contest's sponsors. Prize awards are fixed in
amount and determinable prior to commencement of the season or event and are
expensed at the commencement of the season or event to which they relate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued prizes payable.
It is management's opinion that the Company is not exposed to significant
interest currency or credit risks arising from these financial instruments. The
carrying values of these current assets and liabilities approximate their fair
values due to their immediate or short-term nature.
INCOME TAXES
The Company is an S Corporation for corporate income tax purposes. Under this
election, taxable income and tax attributes pass through the Company to the
personal income tax returns of the shareholders. Accordingly, income taxes have
not been recorded in the Company's financial statements for the year ended
December 31,1998.
J-8
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
[Expressed in U.S. dollars]
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
New accounting pronouncements having relative applicability to the Company
include Statements of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits", effective for
fiscal years beginning after December 15, 1998 and No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for fiscal years
beginning after June 15, 2000. SFAS No. 132 revises employers' disclosures
about pension and other post-retirement benefit plans. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheets at their
fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not expect that the adoption of SFAS
Nos. 132 and 133 will have a material impact on its financial statements
because the Company does not provide for pension or other post-retirement
benefits, nor does it currently hold any derivative instruments. Adoption of
these statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and
content of disclosures.
Additionally, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities", which are effective for fiscal years beginning after
December 15, 1998. Adoption of these standards is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
1998
$
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Computer equipment 96,143
Office equipment and furniture 13,853
- ------------------------------------------------------------------------------------------------------------------
109,996
Less accumulated depreciation 81,691
- ------------------------------------------------------------------------------------------------------------------
EQUIPMENT, NET 28,305
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
J-9
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
[Expressed in U.S. dollars]
4. STOCK REDEMPTION AGREEMENTS
In August 1998, two shareholders elected to redeem all or a portion of their
shares of capital stock. The Company purchased and immediately cancelled 810
shares of capital stock at a purchase price of $26.67 from the two shareholders.
The proceeds were agreed to be repayable by the Company in twelve equal monthly
installments. At December 31, 1998, $14,400 representing the final eight monthly
payments of $1,800, pursuant to the stock redemption agreements was outstanding.
5. SUBSEQUENT EVENT
Effective June 30, 1999, the Company was merged with ISN Wisconsin, with ISN
Wisconsin being the surviving entity. ISN Wisconsin is a wholly-owned subsidiary
of Internet Sports Network Inc. a Florida Corporation.
J-10
<PAGE>
PRO-FORMA STATEMENTS (UNAUDITED)
6 MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ISN Pro-Forma
As Reported Wisconsin Total Adjustments Note Pro-forma
----------- --------- ----- ----------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $1,861,000 $ 238,000 $ 2,099,000 - $ 2,099,000
------------------------------------------------------------- ------------
EXPENSES
Prize commitments and
other direct costs 920,000 276,000 1,196,000 - 1,196,000
Salaries and benefits 921,000 63,000 984,000 - 984,000
Consulting fees 516,000 5,000 521,000 - 521,000
Advertising 228,000 1,000 229,000 - 229,000
General and
administrative 1,096,000 89,000 1,185,000 - 1,185,000
Depreciation 65,000 2,000 67,000 - 67,000
Amortization of purchased
intangibles/goodwill 4,725,000 - 4,725,000 890,000 A 5,615,000
Options granted for services 1,145,000 - 1,145,000 - 1,145,000
Amortization of stock
compensation 1,850,000 - 1,850,000 - 1,850,000
Amortization of deferred charges 225,000 - 225,000 - 225,000
Acquisition costs 96,000 - 96,000 - 96,000
------------------------------------------------------------- ------------
TOTAL EXPENSES 11,787,000 436,000 12,223,000 890,000 13,113,000
------------------------------------------------------------- ------------
Net loss before income taxes (9,926,000) (198,000) (10,124,000) (890,000) (11,014,000)
Deferred Income Tax
Expense (Recovery)
(1,285,000) - (1,285,000) (254,000) A (1,539,000)
------------------------------------------------------------- ------------
NET LOSS (8,641,000) (198,000) (8,839,000) (636,000) (9,475,000)
------------------------------------------------------------- ------------
------------------------------------------------------------- ------------
Net Loss per Share (0.49)
------------
------------
Weighted Average Shares
Outstanding 19,069,000 306,000 19,375,000 19,375,000
------------------------------------------------------------- ------------
------------------------------------------------------------- ------------
</TABLE>
A. Pro-forma adjustments consist of three months of amortization of the
purchased intangibles and related goodwill on the acquisition of
Sportsbuff, from the start of the period (April 1, 1999) to the date
of acquisition (June 30, 1999). Amortization is being calculated on a
straight line basis over two A. years for purchased intangibles and
goodwill of $5,087,000 and $2,035,000 respectively as calculated if
the acquisition occurred on April 1, 1999. The related amortization
for purchased intangibles and goodwill is $636,000 and $254,000. The
related deferred tax impact is equal to the goodwill amounts.
K-1
<PAGE>
FINANCIAL STATEMENTS
INNOVATION PARTNERS INC.
(Unaudited)
JUNE 30, 1999
L-1
<PAGE>
INNOVATION PARTNERS INC.
BALANCE SHEET
(UNAUDITED)
[Expressed in U.S. dollars]
As at June 30
<TABLE>
<CAPTION>
1999
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents 36,247
Accounts receivable 26,327
- -----------------------------------------------------------------------------------------------------
62,574
Equipment, net [NOTE 3] 35,694
- -----------------------------------------------------------------------------------------------------
98,268
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT
Accounts payable 146,912
Accrued prizes payable 121,400
Loans payable 77,079
Stock repurchase agreement payable [NOTE 4] 7,200
- -----------------------------------------------------------------------------------------------------
352,591
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' DEFICIENCY
Capital stock
Authorized
9,000 common shares with par value of $1
Issued
8,190 common shares 8,190
Additional paid-in capital 36,764
Deficit (299,277)
- -----------------------------------------------------------------------------------------------------
(254,323)
- -----------------------------------------------------------------------------------------------------
98,268
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
L-2
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS
(UNAUDITED)
[Expressed in U.S. dollars]
Six months ended June 30
<TABLE>
<CAPTION>
1999
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
REVENUE 382,889
- -----------------------------------------------------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 142,276
Wages and salaries 135,872
Advertising 97,274
Postage and production costs 24,732
Write-off of bad debts 12,987
Printing and reproduction 14,593
Travel and entertainment 13,693
Licensing fees 10,900
Depreciation 4,154
Telephone 6,186
Internet services 6,784
Interest and bank charges 876
General and administrative 76,280
- -----------------------------------------------------------------------------------------------------
546,607
- -----------------------------------------------------------------------------------------------------
NET LOSS AND COMPREHENSIVE LOSS (163,718)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
L-3
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF SHAREHOLDERS' DEFICIENCY
(UNAUDITED)
[Expressed in U.S. dollars]
Six months ended June 30
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------
ADDITIONAL
CAPITAL PAID-IN
STOCK CAPITAL DEFICIT TOTAL
$ $ $ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR 8,190 36,764 (135,559) (90,605)
Stock redemptions -- -- -- --
Net loss for the year -- -- (163,718) (163,718)
- -----------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR 8,190 36,764 (299,277) (254,323)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
L-4
<PAGE>
INNOVATION PARTNERS INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
[Expressed in U.S. dollars]
Six months ended June 30
<TABLE>
<CAPTION>
1999
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net loss (163,718)
Adjustment to reconcile net loss to
cash provided by operating activities:
Depreciation 4,154
Changes in non-cash working capital
balances related to operations
Accounts receivable 15,841
Accounts payable 65,415
Accrued prizes payable (22,275)
Deferred revenue (3,658)
- -----------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES (104,241)
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment (11,543)
- -----------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (11,543)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in loans payable 61,655
Repayment of stock repurchase agreements payable (7,200)
- -----------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES 54,455
- -----------------------------------------------------------------------------------------------------
NET DECREASE IN CASH DURING THE YEAR (61,329)
Cash and cash equivalents, beginning of year 97,576
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 36,247
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
Cash interest paid 1,200
Cash taxes paid --
- -----------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS
None
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
L-5
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
[Expressed in U.S. dollars]
Six Months ending June 30, 1999
1. NATURE AND CONTINUANCE OF OPERATIONS
Innovation Partners Inc., doing business as Sports Buff, was incorporated in
1993 under the laws of the State of Wisconsin and its principal business
activities include conducting and administering sports contest services through
the Internet and the newspaper media.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of its holdings of cash held by deposit
taking institutions. The Company manages its credit risk by depositing its cash
in high-quality, regulated deposit taking institutions.
LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ["FASB"] Statement of
Financial Accounting Standard ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the carrying
value of fixed assets and other long-lived assets is reviewed on a regular basis
for the existence of facts or circumstances, both internally and externally,
that may suggest impairment. To date, no such impairment has been indicated.
Should there be an impairment in the future, the Company will measure the amount
of the impairment based on discounted expected future cash flows from the
impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using appropriate and customary assumptions and
projections at the time.
ADVERTISING COSTS
The cost of advertising is expensed as incurred.
L-6
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
[Expressed in U.S. dollars]
COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. There are no items of comprehensive
income (loss) that require additional reporting.
EQUIPMENT
Equipment is recorded at cost less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets using the declining
balance basis at the following annual rates:
<TABLE>
<S> <C>
Office equipment and furniture 20%
Computer equipment 30%
</TABLE>
REVENUE RECOGNITION
The Company earns revenue from membership and other fees received for sports
contest organization services. Membership fees are received prior to the
beginning of a particular sport season or event and recorded as deferred income
until recognized in income ratably over the season or upon completion of the
event.
PRIZE AWARDS
Members, as well as non-members, are entitled to enter into contests provided by
the Company. Prizes are awarded upon completion of the sports season or event
and are paid by the Company or the contest's sponsors. Prize awards are fixed in
amount and determinable prior to commencement of the season or event and are
expensed at the commencement of the season or event to which they relate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued prizes payable.
It is management's opinion that the Company is not exposed to significant
interest currency or credit risks arising from these financial instruments. The
carrying values of these current assets and liabilities approximate their fair
values due to their immediate or short-term nature.
L-7
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
[Expressed in U.S. dollars]
INCOME TAXES
The Company is an S Corporation for corporate income tax purposes. Under this
election, taxable income and tax attributes pass through the Company to the
personal income tax returns of the shareholders. Accordingly, income taxes have
not been recorded in the Company's financial statements for the six months ended
June 30, 1999.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
New accounting pronouncements having relative applicability to the Company
include Statements of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits", effective for
fiscal years beginning after December 15, 1998 and No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for fiscal years
beginning after June 15, 2000. SFAS No. 132 revises employers' disclosures about
pension and other post-retirement benefit plans. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheets at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not expect that the adoption of SFAS Nos. 132 and
133 will have a material impact on its financial statements because the Company
does not provide for pension or other post-retirement benefits, nor does it
currently hold any derivative instruments. Adoption of these statements will not
impact the Company's financial position, results of operations or cash flows and
any effect will be limited to the form and content of disclosures.
Additionally, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use" and Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", which are effective for fiscal years beginning after December 15,
1998. Adoption of these standards is not expected to have a material impact on
the Company's financial position, results of operations or cash flows.
3. EQUIPMENT
<TABLE>
<CAPTION>
Equipment consists of the following:
1999
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
Computer equipment 98,686
Office equipment and furniture 13,853
- -----------------------------------------------------------------------------------------------------
112,539
Less accumulated depreciation 85,845
- -----------------------------------------------------------------------------------------------------
EQUIPMENT, NET 35,694
- -----------------------------------------------------------------------------------------------------
</TABLE>
L-8
<PAGE>
INNOVATION PARTNERS INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
[Expressed in U.S. dollars]
4. STOCK REDEMPTION AGREEMENTS
In August 1998, two shareholders elected to redeem all or a portion of their
shares of capital stock. The Company purchased and immediately cancelled 810
shares of capital stock at a purchase price of $26.67 from the two shareholders.
The proceeds were agreed to be repayable by the Company in twelve equal monthly
installments. At June 30, 1999, $7,200 representing the final four monthly
payments of $1,800, pursuant to the stock redemption agreements was outstanding.
5. SUBSEQUENT EVENT
Effective June 30, 1999, the Company was merged with ISN Wisconsin, with ISN
Wisconsin being the surviving entity. ISN Wisconsin is a wholly-owned subsidiary
of Internet Sports Network Inc. a Florida Corporation.
L-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
DAVIDSON & COMPANY Chartered Accountants A Partnership of Incorporated
Professionals
- -----------------------------------------------------------------------------------------------------
</TABLE>
October 21, 1999
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, DC
USA 20549
Dear Sirs:
RE: INTERNET SPORTS NETWORK INC. (THE "COMPANY")
We were the previous principal auditors of the above Company. On June 25, 1998,
we reported on the financial statements of the Company for the period from
inception to April 30, 1998, and subsequently issued an audit opinion under
generally accepted auditing standards in the United States with an explanatory
paragraph as to the removal of the going concern certainty without reservation
or reporting conflict which is dual dated as of June 25, 1998 and March 31,
1999. On May 19, 1999, we were dismissed as auditors for the Company.
We have reviewed the second amendment to the Form 10 registration statement (the
"Form 10") filed by the Company and agree with the statements disclosed by the
Company under item 14, Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. There was no adverse opinion or disclaimer
of opinion. The opinion was not qualified due to uncertainty, audit scope or
accounting principles.
We consent to the use of our report and to the reference to our firm in the
registration statement on Form 10.
Yours very truly,
"DAVIDSON & COMPANY"
DAVIDSON & COMPANY
Chartered Accountants
cc: Internet Sports Network, Inc.
A Member of Accounting Group International
Suite 1200, Stock Exchange Tower, 609 Granville Street, P.O. Box 10372,
Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
