<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
( ) Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number: 000-26865
INTERNET SPORTS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0704152
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
101 Bloor Street West, Suite 200, Toronto, Ontario, Canada, M5S 2Z7
(Address of principal executive offices) (Zip Code)
(416) 599-8800 / (416) 921-1302
(Issuer's telephone/facsimile numbers, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
------ ------
The issuer had 4,277,000 shares of common stock outstanding as of June
30, 2000.
Transitional Small Business Disclosure Format (check one)
Yes No X
------ ------
<PAGE>
INTERNET SPORTS NETWORK, INC.
FORM 10-QSB
FOR THE 3 MONTHS ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION -------
<S> <C> <C>
Item 1. Financial Statements
Comparative Unaudited Consolidated Balance Sheets 1
as at June 30, 2000 and June 30, 1999.
Comparative Unaudited Consolidated Statements of 2
Operations and Comprehensive Loss for the Three Months
Ended June 30, 2000 and the Three Months Ended June 30, 1999.
Comparative Unaudited Consolidated Statement of Shareholders' 3
Equity for the Three Months Ended June 30, 2000 and
the Three Months Ended June 30, 1999.
Comparative Unaudited Consolidated Statements of 4
Cash Flows for the Three Months Ended June 30,
2000 and the Three Months Ended June 30, 1999.
Notes to the Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 22
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 28
(b) Reports on Form 8-K 28
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(unaudited) (unaudited)
June 30, June 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 237 $ 2,601
Restricted cash (note 3) 103 -
Accounts Receivable, (net of allowance of $141, 1999 $nil) 2,970 258
Prepaid royalties (note 5) 2,693 -
Prepaid expenses 396 38
-----------------------------------
6,399 2,897
Equipment, net (note 4) 923 290
Prepaid royalties (note 5) 1,422 -
Deferred charges (note 5) 12,090 -
Purchased intangibles, net (note 2) 8,778 15,295
Goodwill, net (note 2) 2,374 5,484
-----------------------------------
$ 31,986 $ 23,966
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable $ 2,311 $ 572
Accrued liabilities 799 139
Accrued purchase price for SportsBuff - 1,000
Deferred revenue 360 -
Accrued prize commitments 230 -
Loan payable in default (note 6) 2,524 -
Convertible debt in default (note 7) 845 -
Convertible debt (note 7) 1,972 -
-----------------------------------
9,041 1,711
Convertible promissory note and accrued interest (note 8) 5,132 -
Deferred income taxes (note 10) 2,374 5,484
-----------------------------------
16,547 7,195
-----------------------------------
Commitments (note 2, 5 and 11)
Shareholders' equity (note 9)
Preferred stock 3,333 authorized, nil outstanding
Common stock and additional paid-in capital, $0.001 par
value 16,667 shares authorized 4,277 outstanding (1999 - 3,238) 53,695 24,646
Share subscription receivable for 85 shares subscribed (250) -
Deferred compensation (4,945) (1,513)
Accumulated deficit (33,061) (6,362)
-----------------------------------
15,439 16,771
-----------------------------------
$ 31,986 $ 23,966
===================================
</TABLE>
1
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
June 30, June 30,
2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 1,454 $ 672
-----------------------------------
EXPENSES
Prize commitments and other direct costs 424 242
Salaries and benefits 692 386
General and administrative 590 373
Consulting fees 234 220
Royalty expense 500 -
Advertising 99 88
Interest, bank charges and financing fees 145 4
Recapitalization and due diligence costs - 51
Depreciation 42 4
Amortization of purchased intangibles 2,339 1,296
Amortization of goodwill 777 509
Amortization of stock compensation 1,955 213
Amortization of deferred charges 1,188 -
-----------------------------------
Total expenses 8,985 3,386
-----------------------------------
Loss before income taxes (7,531) (2,714)
Deferred income tax recovery (777) (509)
-----------------------------------
Net loss and comprehensive loss (6,754) (2,205)
===================================
NET LOSS PER SHARE $ (1.63) $ (0.71)
===================================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,150 3,104
===================================
</TABLE>
2
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock and
Additional Stock
Number Paid in Subscriptions Deferred Accumulated
Of Shares Capital Receivable Compensation Deficit Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 4,086 $ 52,858 $ (250) $ (6,900) $ (26,307) $ 19,401
Shares issued on acquisition of St. Clair
Group Investments, Inc. 191 573 - - - 573
Warrants issued for financing - 264 - - - 264
Amortization of deferred compensation
related to stock options - - - 1,955 - 1,955
Net loss - - - - (6,754) (6,754)
-------------------------------------------------------------------------------
Balance at June 30, 2000 4,277 $ 53,695 $ (250) $ (4,945) $ (33,061) $ 15,439
===============================================================================
<CAPTION>
Common
Stock and
Additional Stock
Number Paid in Subscriptions Deferred Accumulated
Of Shares Capital Receivable Compensation Deficit Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 2,974 17,127 (449) (4,157) 12,521
Shares issued on acquisition of Ultimate
Sports Publishing 21 750 - - 750
Shares issued in acquisition of Innovation
Partners Inc. 103 4,066 - - 4,066
Shares issued for cash 140 1,476 - - 1,476
Deferred compensation related to stock
options - 1,277 - -
(1,277)
Amortization of deferred compensation - - - 213
related to stock options 213
Share issuance costs - (50) - - (50)
Net loss - - - (2,205) (2,205)
--------------------------------------------------------------------------------
Balance at June 30, 1999 3,238 $ 24,646 - $ (1,513) $(6,362) $ 16,771
================================================================================
</TABLE>
3
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
June 30, June 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,754) $ (2,205)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 42 4
Amortization of purchased intangibles 2,339 1,296
Amortization of goodwill 777 509
Amortization of stock compensation 1,955 213
Amortization of deferred charges 1,188 -
Deferred income tax recovery (777) (509)
CHANGES IN OTHER OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables 383 (52)
(Increase) decrease in prepaid expenses 163 (9)
Decrease in prepaid royalties 500 -
Increase (decrease) in accounts payable (652) 51
Increase (decrease) in accrued liabilities (376) (53)
Increase (decrease) in accrued prizes (106) -
Increase (decrease) in deferred revenue (314) -
----------------------------------------------------
Net cash used in operating activities (1,632) (755)
----------------------------------------------------
INVESTING ACTIVITIES
Purchase of Ultimate Sports Publishing - (860)
Cash (overdraft) acquired through acquisitions (73) 36
Purchase of St. Clair Group Investments, Inc. (1,271) -
Purchase of equipment (60) (174)
----------------------------------------------------
Net cash used in investing activities (1,404) (998)
----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of share issuance costs - 1,426
Increase in loans payable 1,234
Payments on loans payable (250)
Increase in convertible promissory note 63
Proceeds and interest from issuance of convertible debt 2,046 -
----------------------------------------------------
Net cash provided by financing activities 3,093 1,426
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 57 (327)
Cash and cash equivalents:
Beginning of period 180 2,928
----------------------------------------------------
End of period $ 237 $ 2,601
====================================================
</TABLE>
4
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: (unaudited) (unaudited)
Three Months Three Months
Ended Ended
June 30, June 30,
2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
INVESTING ACTIVITIES
Net assets of Ultimate Sports Publishing acquired for shares $ - $ (750)
Acquisition of Sportsbuff for shares and amount payable - (5,066)
Acquisition of St. Clair Group Investments, Inc. for shares (573) -
FINANCING ACTIVITIES
Shares issued on acquisition of Ultimate Sports Publishing - 750
Shares issued on acquisition of Sportsbuff - 4,066
Shares issued on acquisition of St. Clair Group Investments, Inc. 573 -
Warrants issued in lieu of financing fees 264 -
Cash interest paid $ 9 $ 4
===================================================
Cash taxes paid $ - $ -
</TABLE>
5
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective June 28, 2000 the Company affected a reverse stock split
of its common stock whereby shareholders were given one new share
for every six shares held prior to the reverse split. All share
amounts presented within these financial statements, both for the
current and comparative period have been stated on a post reverse
split basis.
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 purchase intangibles and goodwill in the accompanying
consolidation 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.
PURCHASED INTANGIBLES AND GOODWILL
Purchased intangibles consist primarily of software, licenses,
customer lists, trademarks, rights contracts and contest
agreements. Purchased intangibles of $8,778 (1999 - $15,295) are
stated net of total accumulated amortization of $10,676 (1999 -
$1,887) at June 30, 2000 in the accompanying consolidated balance
sheet. Purchased intangibles are being amortized on a
straight-line basis over two to five years.
Goodwill of $2,374 (1999 - $5,484) is stated net of total
accumulated amortization of $3,855 (1999 - $745) at June 30, 2000
in the accompanying consolidated balance sheet. Goodwill is being
amortized on a straight-line basis principally over two years.
ADVERTISING COSTS
The cost of advertising is expenses 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
Compensations". 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 of SFAS
No. 123.
6
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D...)
FOREIGN CURRENCY TRANSLATION
The functional currency 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 reported as a
separate component of other comprehensive income in shareholders'
equity. The translation adjustments as a June 30, 2000 and June
30, 1999 were insignificant.
EQUIPMENT
Equipment is recorded at cost. Amortization is provided over the
estimated useful life of the asset using the declining balance
basis at the following rates:
<TABLE>
<S> <C>
Computer software 12 months
Office equipment and furniture 60 months
Leasehold Improvements Term of the lease
Computer equipment 40 months
</TABLE>
REVENUE RECOGNITION
The Company earns revenue from membership and other fees received
for Internet-based sports information, sports contest organization
services, sports marketing and member information. Membership fees
are received prior to the beginning of a particular sport season
or event and recorded as deferred revenue until recognized in
revenue ratably over the season or upon completion of the event.
Other fees received for Internet-based sports information, sports
marketing and sports contest organization services are recognized
in income ratably over the season or upon completion of the event.
Fees from the sale of member information is recognized upon
delivery and customer acceptance. Revenues from the sale of
product in the publishing segment are recognized when product is
shipped based on gross sales less a provision for estimated
returns. Deferred revenue of $360 (1999 - $nil) was recorded on
the consolidated balance sheet as at June 30, 2000.
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.
7
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D...)
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 as the effect of
the stock options and convertible debentures are 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.
NOTE 2. BUSINESS COMBINATIONS
Effective June 1, 2000, the Company acquired 100% of the shares of
St. Clair Group Investments, Inc,. ("St. Clair"). The business of
St. Clair is to contract media and marketing rights for sports and
entertainment properties to offer a packaged marketing solution
through sponsorship, broadcast, signage, print publishing and
promotions.
The transaction is summarized as follows:
<TABLE>
<CAPTION>
=====================================================================================================
As at
May 31, 2000,
St. Clair
-----------------------------------------------------------------------------------------------------
<S> <C>
Net assets acquired at fair values:
Working capital $ 250
Equipment 382
Purchased intangibles 1,212
----------
$ 1,844
=====================================================================================================
Funded by:
Cash $ 1,271
Shares of common stock 573
----------
$ 1,844
=====================================================================================================
</TABLE>
Purchased intangibles related to the acquisition of St. Clair
consist of customer contracts, client lists and rights
contracts for sports properties.
8
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 2. BUSINESS COMBINATIONS (CONT'D...)
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 Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets acquired at fair values:
Working capital $ - $ (314) $ (314)
Equipment - 36 36
Purchased intangibles 1,610 5,344 6,954
Goodwill - 2,138 2,138
Deferred income taxes - (2,138) (2,138)
----------- ---------- ----------
$ 1,610 $ 5,066 $ 6,676
=====================================================================================================
Funded by:
Cash $ 860 $ 1,000 $ 2,860
Shares of common stock 750 4,066 4,816
----------- ---------- ---------
$ 1,610 $ 5,066 $ 7,676
=====================================================================================================
</TABLE>
Purchased intangibles related to the acquisition of Sportsbuff
consist 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.
PURCHASED INTANGIBLES
<TABLE>
<CAPTION>
=====================================================================================================
THREE MONTHS THREE MONTHS
ENDING ENDING
JUNE 30, 2000 JUNE 30, 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased intangibles, net, beginning of period $ 9,905 9,637
Purchased intangibles from acquisitions 1,212 6,954
----------- -----------
11,117 16,591
Less amortization expense (2,339) (1,296)
------------ ------------
Purchased intangibles, net, end of period $ 8,778 $ 15,295
=====================================================================================================
</TABLE>
9
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 2. BUSINESS COMBINATIONS (CONT'D...)
GOODWILL
<TABLE>
<CAPTION>
=====================================================================================================
THREE MONTHS THREE MONTHS
ENDING ENDING
JUNE 30, 2000 JUNE 30, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net, beginning of period $ 3,151 $ 3,855
Goodwill from acquisitions - 2,138
--------- -----------
3,151 5,993
Less amortization expense (777) (509)
------------ ------------
Goodwill, net, end of period $ 2,374 $ 5,484
=====================================================================================================
</TABLE>
The unaudited pro forma combined consolidated financial
information for the aggregate of the Sportsbuff and St. Clair
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 $2,844 (1999 -
$2,963); loss before income taxes of $7,979 (1999 - $3,998) net
loss of $7,202 (1999 - $3,379); and basic and diluted loss per
share of $1.73 (1999 - $1.04) for the three months ended June 30,
2000. The pro forma net loss includes amortization of purchased
intangibles and goodwill of $3,156 (1999 - $2,756) for the three
months ended June 30, 2000. 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.
NOTE 3. RESTRICTED FUNDS
The Company segregated $150 Canadian as security for a letter of
Guarantee for the Company's lease on its Toronto facilities. A
further $120 Canadian are due to be restricted under the terms of
the lease.
NOTE 4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
=====================================================================================================
JUNE 30, JUNE 30,
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 705 $ 283
Software 156 -
Leasehold Improvements 38 -
Office equipment and furniture 256 42
----------- -----------
1,155 325
Less accumulated depreciation (232) (35)
------------ ------------
Equipment, net $ 923 $ 290
=====================================================================================================
</TABLE>
10
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 5. DEFERRED CHARGES AND PREPAID ROYALTIES
LABATT BREWING COMPANY LIMITED
On August 1, 1999, the Company entered into a five year agreement
with Labatt Brewing Company Limited ("LBCL") for the promotion
rights to be the exclusive contest provider for Beer.com,. In
exchange for this exclusive agreement, the Company is granting
LBCL 167 common shares over the five year term. All 167 shares
have been placed in escrow. 33 shares are owing at the start of
each year of the contract, and distributed to LBCL on each
anniversary date of the contract. The minimum share obligation
under this agreement (33 shares) have been recorded at the market
value of the shares as at August 1, 1999 ($40.50 per share) as a
deferred charge, and is being amortized over a one year period.
SPORTSLINE.COM
On December 21, 1999, the Company entered into a four year
agreement for the promotion rights for services for
Sportsline.com, Inc. ("Sportsline"). In exchange for this
agreement, the Company has granted Sportsline 683 common shares,
and a Warrant to acquire up to 172 common shares at an exercise
price of $17.40 per share, with certain repricing rights. The
shares have been recorded at the market value of the shares at
December 21, 1999 ($17.40 per share), and the Warrant has been
recorded at its fair value estimated at the date of grant using a
Black-Scholes option pricing model ($9.36 per share underlying the
Warrant) as a deferred charge, and is being amortized over the
four year period.
As a result of the acquisition of St. Clair, the repricing rights
granted to Sportsline resulted in an increase in the number of
shares underlying Sportsline's Warrant to 241 common shares, at an
exercise price of $12.456 per share.
During the quarter, the Company issued warrants to the holder of
the 5% convertible debentures to acquire up to 141 shares of
common stock at an exercise price of $7.50 per share, expiring on
May 9, 2005. These Warrants have been recorded at its fair value
estimated at the date of grant using a Black-Scholes options
pricing model ($1.87 per share underlying the Warrant) and has
been recorded as a deferred charge, and are being amortized over
the life of the 5% convertible debentures. During the three months
ending June 30, 2000, the Company amortized $14 of the deferred
<TABLE>
<CAPTION>
<S> <C>
Shares issued to LBCL $ 1,350
Shares issued to Sportsline 11,884
Warrants issued for 5% convertible debentures 264
Warrants issued to Sportsline 1,612
------------
Total Deferred Charges 15,110
Less Accumulated Amortization (3,020)
------------
$ 12,090
============
The Sportsline Agreement calls for minimum royalty payments as
follows:
Year 1 to December 21, 2000 $ 2,750
Year 2 to December 21, 2001 3,000
Year 3 to December 21, 2002 5,000
Year 4 to December 21, 2003 7,000
------------
$ 17,750
============
</TABLE>
11
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 5. DEFERRED CHARGES AND PREPAID ROYALTIES (CONT'D...)
The Company has prepaid the minimum royalty for each of the first
two years of the agreement, totaling $5,750. Amortization of the
current year's prepaid royalty is calculated on a monthly basis.
Each month's expense is equal to the greater of (a) the amount
calculated by using a straight line amortization over the period
of the effective years' prepaid royalty, or (b) the amount that
would be otherwise payable based on the actual royalty
calculation. To the extent that the cumulative royalty payable for
the respective twelve month period exceeds the prepaid royalty
amount for that period the net excess is expensed in the period
and is due to Sportsline through an incremental cash payment
PREPAID ROYALTIES
<TABLE>
<CAPTION>
=====================================================================================================
JUNE 30, 2000
----------------------------------------------------------------------------------------------------
<S> <C>
Opening balance, March 31, 2000 $ 4,615
Additions -
Amortization expense (500)
-----------
Prepaid royalties, net $ 4,115
===========
Current portion $ 2,693
Long term portion 1,422
-----------
$ 4,115
=====================================================================================================
</TABLE>
In the event that the Company raises over $10,000 through a public
sale of its common stock, the Company is required to pay
Sportsline an amount equal to the lesser of (a) the next 12 month
minimum royalty amount, or (b) 20% of the proceeds from the public
sale of common stock. Any such payment will be treated as a
prepayment towards the minimum royalty amounts payable.
NOTE 6. LOANS PAYABLE
<TABLE>
<S> <C>
Loan payable with interest calculated at 10% per annum ("10%
Loan"). The loan is unsecured, and the principal and accrued
interest was due on March 31, 2000. The loan is in default. $ 750
Loan payable in the amount of CAD$1,800 with interest calculated
at the prime rate as reported by a major Canadian bank plus 2%
("Prime plus 2% Loan"). The loan is secured by a direct charge
over all of the assets of St. Clair, and the principal and accrued
interest are due on July 15, 2000. As of August 9, 2000 the loan
is in default. 1,203
Loan payable with interest calculated at 7.25% per annum. The note
is unsecured, and the principal and accrued interest are due the
earlier of raising an additional $4,000 through the sale of equity
instruments or June 30, 2000 (the "Maturity Date"). The loan is in
default. 240
Promissory note with interest calculated at 12% per annum. The
note is unsecured, and the principal and accrued interest are due on
June 23, 2000. The note is in default. 300
Accrued interest on loans payable 31
---------
$ 2,524
=========
</TABLE>
12
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 6. LOANS PAYABLE (CONT'D...)
The 10% Loan was initially due on December 31, 1999. In connection
with the 10% Loan, the Company granted a warrant to acquire up to
13 common shares at an exercise price of $13.08 per share.
Financing fees of approximately $23 cash were also paid in
consideration for the loan. In consideration for extending the 10%
Loan due date to March 31, 2000, the Company granted a warrant to
acquire up to 5 common shares at an exercise price of $17.40 per
share. The 13 warrants expire on October 31, 2001 and the 5
warrants expire on December 31, 2001. As of August 9, 2000 the
balance on the 10% Loan of $750 remains outstanding and is due on
demand. According to the terms of the 10% Loan, the effective
interest rate increases by 1 1/2 % for each month the 10% Loan is
overdue. As at June 30, 2000, the effective interest rate is
14.50%
NOTE 7. CONVERTIBLE DEBT
<TABLE>
<S> <C>
Series 1 convertible debentures maturing on June 30, 2000 unless
paid or converted earlier. Interest accumulates at the rate of 8%
per annum, due on maturity. The debenture is in default $ 521
Series 1 convertible debentures maturing on May 31, 2000 unless paid or
converted earlier. Interest accumulates at the rate of 8% per annum, due on
maturity. The debenture is in default 300
5% convertible debenture, maturing on May 9, 2003, unless paid or
converted earlier. Interest accrues at a rate of 5% per annum, due
on maturity. 1,956
Accrued interest payable 40
---------
$ 2,817
=========
</TABLE>
The Series 1 convertible debentures can be repaid in whole or in
part prior to maturity, without penalty. Commencing April 1, 2000,
the purchaser has the right, at its option, on or before maturity
to convert the outstanding amount. These rights will only arise in
the event the Company is able to raise gross proceeds of not less
than $5,000. The principal and accumulated interest may be
converted at the rate of (a) one common stock per $18.00 of
principal and interest if the private offering is $18.00 per share
or greater or (b) the price at which the private offering is
completed, if such price is less than $18.00 per share. Series 1
convertible debentures are secured by all of the companies
property and assets, real and personal, moveable and immovable,
tangible and intangible, of every nature and kind whatsoever,
wheresoever, both present and future. In connection with the
Series 1 convertible debentures, the Company granted warrants to
acquire up to 13 common shares at an exercise price of $17.40 per
share. Of these warrants, 5 expire on January 31, 2001, and the
remaining 8 warrants expire on February 21, 2001. The Warrants
have been recorded at their fair value estimated at the date of
grant using a Black-Scholes option pricing model ($9.36 per share
underlying the Warrant) as a deferred charge, and has been fully
amortized as at year end.
13
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 7. CONVERTIBLE DEBT (CONT'D...)
The 5% Convertible Debentures are convertible into shares of
common stock at any time during the life of the debentures, and
convert automatically into common shares at a conversion rate of
the lesser of $17.40 per common share issued, and 90% of the
market price for a period prior to conversion at the end of the
term. In connection with the 5% Convertible Debenture, the Company
granted warrants to acquire up to 141 common shares at an exercise
price of $7.50 per share, expiring on May 9, 2005. The Warrants
have been recorded at their fair value estimated at the date of
grant using a Black-Scholes option pricing model ($1.87 per share
underlying the Warrant) as a deferred charge, and is being
amortized over the life of the 5% Convertible Debenture.
NOTE 8. CONVERTIBLE PROMISSORY NOTE AND ACCRUED INTEREST
On December 21, 1999 the Company issued a Convertible Promissory
Note ("Note") for $5,000, convertible at the holders option into
common stock of the Company at a conversion price of $17.40 per
share. This conversion price may be reduced upon the Company
issuing common stock, or instruments convertible into common stock
at a price of less than $17.40 per share. The Note bears interest
at the rate of 5% per annum, payable at maturity in cash or shares
of common stock. The note has a term of four years. The Note can
be converted into shares at the Company's option following a
public offering providing gross proceeds to the Company of not
less than $20,000, having an initial per share price to the public
of not less than $30.00 per share. As at June 30, 2000 interest of
$132 has accrued on the Note.
As a result of the acquisition of St. Clair, the repricing rights
granted to Sportsline resulted in a reduction in the conversion
price to $12.456 per share.
NOTE 9. SHAREHOLDERS' EQUITY
The authorized share capital of the Company is as follows:
Common stock - authorized 16,667, issued, 4,277
Preferred stock - authorized 3,333, issued, nil
COMMON STOCK
<TABLE>
<CAPTION>
TO JUNE 30, 2000 COMMON
NUMBER STOCK AND
OF SHARES PAID-IN CAPITAL
(`000's) ($000's)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AS REPORTED MARCH 31, 2000 24,514 52,858
Impact of 6:1 reverse share split (20,428) -
Shares issued on acquisition of St. Clair 191 573
Warrants granted for promotion rights - 264
-----------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2000 4,277 53,695
=====================================================================================================
</TABLE>
14
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 9. SHAREHOLDERS' EQUITY (CONT'D...)
<TABLE>
<CAPTION>
TO JUNE 30, 1999 COMMON
NUMBER STOCK AND
OF SHARES PAID-IN CAPITAL
(`000's) ($000's)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AS REPORTED MARCH 31, 1999 17,841 17,127
Impact of 6:1 reverse share split (14,867) -
Shares issued for cash 140 1,476
Shares issued on acquisition of Sportsbuff 103 4,066
Shares issued on acquisition of Ultimate Sports 21 750
Deferred compensation related to stock options - 1,277
Share issuance costs - (50)
-----------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2000 3,238 24,646
=====================================================================================================
</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.
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 561 $ 9.12
Options granted and assumed 117 $ 30.06
Options exercised - $ -
----- -----------
June 30, 1999 678 $ 13.26
=====================================================================================================
</TABLE>
15
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 9. SHAREHOLDERS' EQUITY (CONT'D...)
TO JUNE 30, 2000
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (`000'S) EXERCISE PRICE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 2000 1,015 $ 11.22
Options granted and assumed 78 $ 18.96
Options cancelled (6) $ 4.02
Options exercised - $ -
----- -----------
June 30, 2000 1,087 $ 11.80
=====================================================================================================
</TABLE>
The following table summarizes information about options
outstanding and options exercisable at June 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>
$ 2.40 96 4.7 years 96 $ 2.40
10.50 469 4.4 years 378 10.50
25.68 33 4.9 years 0 25.68
27.24 25 4.8 years 0 27.24
30.00 9 2.8 years 4 30.00
36.00 42 5.0 years 0 36.00
42.00 4 2.8 years 0 42.00
--------------------------------------------------------------------------------------------
$ 2.40 - 42.00 678 4.5 years 478 $ 9.06
=====================================================================================================
</TABLE>
16
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 9. SHAREHOLDERS' EQUITY (CONT'D...)
The following table summarizes information about options
outstanding and options exercisable at June 30, 2000.
<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>
$ 2.40 303 4.0 years 131 $ 2.40
10.50 466 3.3 years 427 10.50
18.00 163 4.0 years 65 18.00
19.50 3 2.2 years 3 19.50
24.00 68 4.4 years -0- 24.00
24.48 17 4.0 years 6 24.48
27.24 25 3.9 years 13 27.24
28.56 3 4.0 years 1 28.56
30.00 4 0.9 years 4 30.00
36.00 34 4.0 years 15 36.00
37.25 - 1.1 years - 37.25
42.00 4 0.9 years 4 42.00
--------------------------------------------------------------------------------------------
$ 2.40 - 42.00 1,087 3.7 years 669 $ 11.04
=====================================================================================================
</TABLE>
WARRANT ACTIVITY
The following table summarizes the Company's warrant activity:
<TABLE>
<CAPTION>
=====================================================================================================
NUMBER OF WEIGHTED AVERAGE
WARRANTS (`000'S) EXERCISE PRICE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 2000 236 $ 18.96
Warrants granted 141 $ 7.50
Warrants issued due to repricing (note 5) 69 -
Warrants cancelled (33) 30.00
------ ----------
June 30, 2000 413 $ 10.98
=====================================================================================================
</TABLE>
17
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 9. SHAREHOLDERS' EQUITY (CONT'D...)
The following table summarizes information about warrants
outstanding and warrants exercisable at June 30, 2000:
<TABLE>
<CAPTION>
=====================================================================================================
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------------- --------------------------------
WEIGHTED AVERAGE
WARRANTS REMAINING CONTRACTUAL WARRANTS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- --------------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 13.08 13 1.3 years 13 $ 13.08
12.46 259 1.4 years 259 12.46
7.50 141 2.0 years 141 7.50
--------------------------------------------------------------------------------------------
$ 7.50 - 13.08 413 1.6 years 413 $ 10.79
=====================================================================================================
</TABLE>
DEFERRED COMPENSATION
Deferred compensation of $4,945 (1999 - $1,513) is stated net of
accumulated amortization of $7,840 (1999 - $233). No additional
deferred compensation was recorded during the three months ended
June 30, 2000. 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. 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 three
months ended June 30, 2000 was $1,955 (1999 - $213).
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 period ended
June 30, 2000 would have been as follows:
<TABLE>
<CAPTION>
Three Three
Months ended Months ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Net loss as reported $(7,004) $(2,205)
Net loss - pro forma $(8,841) $(2,098)
Basic and diluted loss per share as reported $ (1.05) $(0.45)
Basic and diluted loss per share - pro forma $ (1.12) ($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 98.5%
</TABLE>
The weighted average fair value of options granted during the year
was $5.08.
18
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 10. 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>
=====================================================================================================
JUNE 30, JUNE 301,
2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax recovery at combined federal and state rates $ (2,482) $ (866)
Higher effective rate attributable to income taxes
of other countries $ (802) $ (280)
Tax effect of expenses that are not deductible for
income tax purposes 2,635 852
Valuation allowance 649 294
------------- -------------
$ - $ -
=====================================================================================================
</TABLE>
At June 30, 2000, the Company had net operating loss carryfowards
of approximately $12,017. Substantially all of these carryfowards
relate to the Canadian subsidiaries and will begain to expire at
various times starting in 2001.
Significant components of the Company's deferred income tax assets
are approximately as follows:
<TABLE>
<CAPTION>
======================================================================================================
JUNE 30, JUNE 30,
2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 12,017 $ 3,193
============== =============
Total deferred income tax assets $ 3,925 $ 1,417
Valuation allowance for deferred income tax assets (3,925) (1,417)
-------------- -------------
Net deferred income tax assets $ - $ -
======================================================================================================
</TABLE>
19
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 10. INCOME TAXES (CONT'D...)
A continuity of the valuation allowance is as follows:
<TABLE>
<CAPTION>
=====================================================================================================
JUNE 30, JUNE 30,
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Opening balance $ 3,276 $ 1,123
Valuation allowance on deferred income tax asset 649 294
------------- -------------------
Closing balance $ 3,925 $ 1,417
=====================================================================================================
</TABLE>
Deferred income tax credits at June 30, 2000 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 11. 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>
Year ending March 31, Total Rent
<S> <C> <C>
2001 $ 294 $ 287
2002 295 288
2003 295 288
2004 297 290
2005 297 290
thereafter 111 111
-------------- -----------
$ 1,589 $ 1,554
============== ===========
</TABLE>
20
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
===============================================================================
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three operating segments across domestic
and international markets, contest management publishing and
sports marketing. International sales, including export sales from
the United States to Canada, represented approximately 38% (1999 -
82%) of net sales for the three months ending June 30, 2000. No
other foreign country or geographic area accounted for more than
10% of net sales in any of the periods presented. Net transfers
from Canada to the United States amounted to $903 (1999 - $nil)
for the three months ended June 30, 2000. Capital assets and
purchased intangibles in the United States equal approximately
$7,020 (1999 $12,457). 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. The company entered into the
Sports Marketing segment through its acquisition of St. Clair
in May, 2000 (Note 2)
<TABLE>
<CAPTION>
CONTEST SPORTS
MANAGEMENT PUBLISHING MARKETING TOTAL
---------- ---------- --------- -----
<S> <C> <C> <C> <C>
Revenue $ 1,018 $ 56 380 $ 1,454
Amortization of purchased intangibles 2,118 201 20 2,339
Amortization of Goodwill 777 0 0 777
Expenses 1,646 202 389 2,237
----- ------ ------ -----
$( 3,523) $(347) $ (29) ( 3,899)
--------- ------ ------
Corporate Expenses 3,105
-----
Net loss before tax $( 7,004)
=========
</TABLE>
Contest management revenues are earned primarily from fees from
consumers who pay to enter sports contests (19% of contest
management sector revenues), fees from companies that license the
contest applications (70% of contest management sector revenues)
and advertising and sponsorship revenue (12% of contest management
sector revenues). Publishing revenues are earned primarily from
newsstand sales (88% of publishing revenues) and advertising
within the publications (11% of publishing revenues). Sports
Marketing revenues are earned primarily from print sales (80% of
the Sports Marketing revenue) and advertising spots (20% of the
Sports Marketing revenue).
NOTE 13. GOING CONCERN
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 is in default of a loan
and anticipates that it will continue to generate financial losses
for the foreseeable future. In the event the Company is
unsuccessful in securing outside capital, it may be required to
curtail or cease operations altogether. As a result, substantial
doubt exists regarding the ability of the Company to continue as a
going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
21
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the results and operations and financial condition of
the company should be read in conjunction with the consolidated financial
statements, including the notes thereto, of the company contained elsewhere in
this Form 10-QSB
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, 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.
ISN financed its expenditures primarily through the sale of its common stock
and issuance of debt. Since inception through June 30, 2000, the company
issued approximately 12,982,000 common shares for net cash consideration of
approximately $10,835,000, $2,192,807 in promissory notes, and $8,076,915 in
convertible debt.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has an accumulated deficit
of $33,061,000 to June 30, 2000. The Company is currently in default with three
loans and its convertible debt. The Company anticipates that it will continue to
generate financial losses for the foreseeable future. Based on the Company's
current working capital position, and the cash required to fund the current
level of operations, the Company has sufficient liquidity to operate for
approximately two months. If the Company is unable to obtain equity or debt
financing, or generate additional cash through the sale of assets by August 31,
2000, the Company will not be able to continue operating in the short term. The
Company's long term ability to meet its liquidity requirements and to continue
operations will depend on (i) its ability to develop a long term sustainable
debt and equity financing structure, (ii) its ability to generate advertising
and sponsorship revenue on its Internet properties, (iii) the continued growth
and acceptance of the Internet and (iv) its ability to continue to provide
innovative and reliable products for its ASP client base. If the Company is
unable to reduce its operating losses, either in the short-term or the
long-term, and it is unable to secure outside capital to meet the resulting
liquidity shortfall, the Company may be forced to reduce or discontinue some or
all of its operations, sell certain of its assets, or seek protection under the
federal bankruptcy laws. 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 address its liquidity and debt situation by
(i) restructuring its outstanding debt, (ii) raising the additional capital
through the sale of additional capital stock of the Company, (iii) selling
non-core assets. There can be no assurance that the Company will succeed in any
or all of these initiatives.
22
<PAGE>
The Company's primary cash requirements are for operating activities and
acquisition activities. Cash used in operating activities for the period
ending June 30, 2000 was $1,632,000 (as compared to $755,000 for the period
ending June 30, 1999) related primarily to infrastructure costs required to
manage the continued growth of the Company and the purchase of St. Clair
totaling $1,271,000. The increase in cash used in operating activities was
due to the staffing of the operation to grow the business. Total headcount as
at June 30, 2000 was 83 as compared to 31 as at June 30, 1999.
Cash used in acquisition activities for the period ending June 30, 2000 was
$1,271,000 (as compared to $860,000 for the period ending June 30, 1999). Since
inception, the Company has funded its capital requirements by financing
activities, primarily through the sale of its equity securities, debt and
convertible debt. Capital expenditures (excluding acquisitions) during the
period ending June 30, 2000 were $60,000 as compared to $174,000 for 3 months
ended June 30, 2000. Capital expenditures were primarily for computer technology
to manage the contest management strategy. From inception to June 30, 2000 the
Company has spent $697,000 on capital equipment. ISN has no significant
commitments to acquire equipment in the future, although the Company expects to
spend approximately $800,000 in capital assets over the next 12 month period
subject to the Company's cash availability.
The Company operates in an extremely competitive industry and it will require
substantial capital from external sources in order to complete the execution of
its business plan. The Company anticipates that it will continue to generate
financial losses for the foreseeable future. In the event the Company is
unsuccessful in securing outside capital, it may be required to curtail or cease
operations altogether. As a result, substantial doubt exists regarding the
ability of the Company to continue as a going concern.
The Company's management believes that an additional $4,000,000 in funding,
as well as a seasonal line of credit in the amount of $1,000,000 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 will 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.
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 $1,500,000.
Any additional capital requirements would be due to acquisition activities,
or modifications to the current growth plans.
ISN financed the acquisition of St. Clair through the issuance of a
promissory note in the amount of $1,203,000 (CAD$1,800,000). The note was due
on July 15, 2000 and is currently in default.
As a result of the St. Clair acquisition in June 2000, the conversion price
for the SportsLine Note and Warrant were adjusted in accordance with their
terms to $12.456 per share.
As of June 30, 2000, the Company had the following principal amount of debt
outstanding:
<TABLE>
<CAPTION>
Instrument Rate Due date Proceeds
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan payable - in default 14.5% per annum March 31, 2000 750,000
Loan payable - in default 7.0% per annum June 30, 2000 240,000
Loan payable - in default 2% above prime July 15, 2000 1,203,000
Promissory note - in default 12.0% per annum June 23, 2000 300,000
Convertible debt - in default 8.0% per annum June 30, 2000 521,000
Convertible debt - in default 8.0% per annum May 31, 2000 300,000
Convertible debt 5.0% per annum December 21, 2003 5,000,000
Convertible debt 5% per annum May 9, 2003 1,956,000
-------------------------------------------------------------------------------------------------------------------
$10,270,000
===================================================================================================================
</TABLE>
23
<PAGE>
RESULTS OF OPERATIONS
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 as well
as new customers for the Company's existing games.
THREE MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1999 (UNAUDITED).
Revenue. The Company generated revenue of $1,454,000 for the period ending
June 30, 2000 as compared to revenues of approximately $672,000 for the
period ending June 30, 1999. Approximately $404,000 of the increase in
revenues was attributable to the acquisitions of St. Clair during the last
month of the period ended June 30, 1999, and the acquisitions of Ultimate
Sports Publishing and Sportsbuff in late June 1999. The remaining growth in
revenue was attributable to sales generated by the increased sales staff.
Operating expenses before depreciation, amortization and other non-cash
charges: Total operating expenses before depreciation, amortization and other
non-cash charges were $2,184,000 as compared to $1,364,000 in the period
ended June 30, 1999, for an increase of $871,000. Approximately $673,000 of
this increase was attributable to the acquisitions of Ultimate Sports
Publishing, SportsBuff and St. Clair. The overall increase is described in
more detail below:
Prize commitments and other direct costs: Expenses associated with providing
prizes for contests and other direct costs increased to $424,000 from
approximately $241,000 in three month period ended June 30, 1999.
Approximately $202,000 of costs during the current period are the result of
direct costs associated with St. Clair's operations acquired during the
period. Excluding the additional cost associated with St. Clair, Prize
commitments and other direct costs decreased by 19,000. This reduction is
attributable to synergies realized from the acquisition of Sportsbuff,
Ultimate Sports and St. Clair. Prize commitments increased by $59,000 over
the comparative period, primarily due to the acquisitions of Sportsbuff,
which offers fixed prize contests throughout the period for the major sports
(Hockey and Baseball).
Salaries and benefits: Salaries increased by $306,000 to $692,000 from
$386,000 in the three month period ending June 30, 2000. These increases were
the result of additional personnel and staff, mainly from the acquisitions of
St. Clair, Ultimate Sports Publishing and SportsBuff, combined with the
hiring of additional sales, marketing and administrative staff during the
period to manage the growth of the Company. Total staff increased from 9
people in January, 1999 to 83 people by June 30, 2000.
Consulting Fees: Consulting fees increased by $14,000 to $234,000 from $220,000
in the comparative period due to financial services, certain game development,
web design and other services provided externally. Increases in consulting fees
were minimal as a result of additional hiring that reduced the need to obtain
services externally.
Advertising: Advertising expenses increased $11,000 to $99,000 from $88,000
in the comparative period. The increase is modest in relation to the increase
in revenue from the comparative period. This is mainly due to a shift in
advertising strategy to utilize the newspaper space used to promote our
contests to promote our Company, instead of other costly media.
General and administrative: General and administrative costs increased by
$217,000 to $590,000 from $373,000 in the comparative period. This change is
made up of the following fluctuations:
- Increase in general office expenses of $112,000 as a result of the
addition of offices in Toronto as well as staff and operations as a
result of the acquisitions of Ultimate Sports, SportsBuff and St.
Clair.
- Travel and other expenses decreased $113,000 to $73,000 as a result of
closing the Vancouver office and centralizing the executive office
activities in Toronto.
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- Increase in legal and accounting fees of $136,000 as a result of costs
associated with the preparation of the Company's Securities and
Exchange Commission ("SEC") filings, documentation related to the
reverse stock split and documentation related to additional debt
financing received in the current period.
- Increase in occupancy and telephone costs of $83,000 to $132,000
compared to $49,000 for the period ending June 30, 1999. The increase
is due to the acquisition of Ultimate Sports, Sportsbuff and St. Clair
combined with the creation and substantial growth in the Toronto
offices.
Interest and bank charges increased by $141,000 to $145,000 as a result of fees
and interest on loans and convertible debt. There were no similar debt
instruments outstanding for the period ending June 30, 1999.
Amortization
The purchased intangibles and goodwill before amortization related to the
acquisitions of Sportsmark Group, Pickem Sports, Ultimate Sports Publishing,
SportsBuff, Sportsrocketravel, St. Clair and domain names totaled
$25,683,000. Amortization of purchased intangibles and goodwill for the
period ended June 30, 2000, was $3,116,000. These intangibles include
trademarks, software licenses, contractual rights and intellectual
properties. The Company is amortizing purchased intangibles and goodwill
related the acquisitions of Sportsmark Group, Pickem Sports, Ultimate Sports
Publishing, SportsBuff, Sportsrocketravel and domain names over 24 months.
The purchased intangibles related to the acquisition of St. Clair during the
period ending June 30, 2000 totaled $1,212,000. The Company is amortizing the
purchased intangibles related to St. Clair over 60 months which reflects the
average life of the contractual rights acquired through the transaction.
Depreciation was $42,000 for the period ended June 30, 2000 as compared to
$4,000 for the comparative period. The increase is due to the acquisition of
equipment.
The Company amortized $1,955,000 (1999 - $213,000) 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 of the Company's common stock as
reported by the OTC/BB at the date of issuance. The options may be exercised at
prices between $2.40 to $42.00 and vest over periods ranging from 17 to 36
months. The Company is amortizing the expense relating to the options over their
vesting periods.
Net loss from operations. The Company experienced a loss of $6,754,000 after the
benefit of deferred taxes of $777,000 for the period ended June 30, 2000 as
compared to a loss of $2,205,000 for the period ended June 30, 1999. Loss per
share for the period ended June 30, 2000 was $(1.63) compared to $ (0.71) for
the period ended June 30, 1999.
Total Assets. The total assets of the Company as of June 30, 2000 totaled
$31,986,000 compared to $23,966,000 at June 30, 1999. The increase in total
assets was attributable to the increase in deferred charges as a result of the
shares issued to SportsLine and Labatt Brewing Company Limited for their
respective contracts, which resulted in a net increase in assets of $11,840,000.
Further increase in assets is a result of the pre-payment of $5,750,000 related
to the minimum royalty owing for the next two years under the terms of the
SportsLine agreement. As at June 30, 2000, $4,115,000 remained on the balance
sheet. In addition, purchased intangibles of $1,212,000 resulting from the
acquisition of St. Clair has impacted the assets of the Company compared to June
30, 1999. These increases are offset by operating losses and amortization costs
during the period.
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FORWARD LOOKING STATEMENTS
This Report on Form 10-QSB contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Discussions containing forward-looking
statements may be found in the material set forth in this section and under
"Description of Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as in the Report generally. These
statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Specifically, this Report and the
documents incorporated into this Report by reference contain forward-looking
statements regarding:
- our financial condition, results of operations and liquidity,
including the amount of capital assets that we will need to spend
over the next 12 month period;
- the development of the internet industry and the impact of the
increasing convergence between online and offline media;
- our ability to successfully implement our business strategy to
expand our product base, our personnel and our operations and to
avoid reliance on one technology;
- our ability to create marketing solutions that integrate online
and offline media;
- the intensification of the evolving and competitive nature of the
interactive sports contests industry;
- our ability to raise additional capital through the sale of
additional capital stock of the Company;
- our ability to identify companies and assets that will complement
our business strategy and to successfully negotiate the
acquisition and subsequent integration of such companies; and
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish
to caution readers that certain important factors may have affected and
could in the future affect our actual results and could cause actual
results to differ significantly from those expressed in any
forward-looking statement. The most important factors that could
prevent us from achieving our goals, and cause the assumptions
underlying forward-looking statements and the actual results to differ
materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
- risks, uncertainties and assumptions relating to the Company's
operations and results of operations, including its ability to
continue to attract equity investments;
- the level of usage of the Internet, traffic on our Web sites and
general economic conditions and economic conditions specific to
the Internet, electronic commerce and online media;
- our ability to develop products in a timely and cost-effective
manner that are accepted by the market;
- our ability to successfully manage the Company's growth, including
our ability to hire and retain employees; and
- our ability to protect our intellectual property rights.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 9, 2000 the Company issued $1,956,000 in 5% convertible
debentures due May 9, 2003 and warrants to purchase shares of common
stock at an exercise price of $7.50 per share. The debenture and
warrants were issued to accredited investors pursuant to Rule 506 of
the U.S. Securities Act of 1933. The debentures are convertible into
shares of common stock at any time during the life of the debentures,
and convert automatically into common shares at a conversion rate of
the lesser of $17.40 per common share issued, and 90% of the market
price for a period prior to conversion at the end of the term. The
proceeds from the debentures was used to fund operations and pay down
certain loans.
On June 1, 2000, the Company issued 191,000 shares of common stock as
part of the acquisition of St. Clair Group Investments, Inc. The shares
were issued to the three shareholders of St. Clair pursuant to Section
4(2) of the US Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has defaulted on its Series 1 Convertible Debentures due to
its failure to pay principal and accrued interest on the maturity dates
(May 31, 2000 and June 30, 2000). As of August 14, 2000 the total
amount of principal and interest due is $860,000
The Company has defaulted on its 10% loan payable due to its failure to
pay principal and accrued interest on the maturity date of March 31,
2000. As of August 14, 2000 the total amount of principal and interest
due is $790,000
The Company has defaulted on its prime plus 2% loan due to its failure
to pay principal and accrued interest on the maturity date of July 15,
2000. As of August 14, 2000 the total amount of principal and interest
due is $1,215,000
The Company has defaulted on its loan payable with interest at 7.25%
due to its failure to pay principal and accrued interest on the
maturity date of June 30, 2000. As of August 14, 2000 the total amount
of principal and interest due is $249,000
The Company has defaulted on its 12% promissory note due to its failure
to pay principal and accrued interest on the maturity date of June 23,
2000. As of August 14, 2000 the total amount of principal and interest
due is $309,000
ITEM 5. OTHER INFORMATION
On July 21, 2000, Mr. Rocco Rossi tendered his resignation from the
board of directors of the Company.
On July 26, 2000, mssrs. Andrew Sturner and Mark Mariani tendered their
resignations from the board of directors of the Company.
The Company has no reason to believe that there was any disagreement by
Mr. Rossi, Mr. Sturner or Mr. Mariani with any of the Company's
operations, policies, or practices.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.6 Agreement for the acquisition of shares and debt of
St.Clair Group Investments, Inc. between Internet
Sports Network, Inc. and;
a) Cornerstone Strategic Holdings, Inc.,
b) 1075430 Ontario, Ltd. and,
c) Canadian Imperial Bank of Commerce
4.4 Form of 5% Convertible Debenture dated May 9, 2000
10.11 Employment Agreement for J. Thomas Murray
10.12 Securities Purchase Agreement for the 5% Convertible
Debenture dated May 9, 2000
10.13 Registration Rights Agreement
27 Financial Data Schedule
(b) REPORTS ON FORM 8-k:
1. Form 8-K filed on June 22, 2000 reporting Item 5
Other Events and Item 7 Financial Statements and
exhibits.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET SPORTS NETWORK, INC.
(Registrant)
Date: August 14, 2000 /s/ J. Thomas Murray
------------------------------------------
J. Thomas Murray
President and COO
Date: August 14, 2000 /s/ David Toews
------------------------------------------
David Toews
Chief Financial Officer
29
