<PAGE>
SCHEDULE 14C
(RULE 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
| | Preliminary Information Statement
|_| Confidential, for use of the Commission only (as permitted by Rule
14c-5(d)(2))
|X| Definitive Information Statement
Internet Sports Network, Inc.
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(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
|_| Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies.
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
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2) Form, schedule or registration statement no.:
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3) Filing party:
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4) Date filed:
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<PAGE>
INTERNET SPORTS NETWORK, INC.
225 RICHMOND STREET WEST, SUITE 403
TORONTO
ONTARIO, CANADA M5V 1W2
--------------------------------
NOTICE OF THE TAKING OF CORPORATE ACTION
BY WRITTEN CONSENT WITHOUT A MEETING
------------------------------
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
May 2, 2000
TO THE SHAREHOLDERS OF INTERNET SPORTS NETWORK, INC.
This is to inform you that on February 23, 2000, the Board of
Directors of Internet Sports Network, Inc. (the "Company") approved and
recommended that the following amendments to the Company's Articles of
Incorporation (the "Charter Amendments") be adopted:
1. to increase the number of authorized shares of
common stock, par value $.001 (the "Common Stock"),
of the Company to 100,000,000 shares from
50,000,000 shares; and
2. to authorize a class of preferred stock, par value
$.001, of the Company, consisting of 20,000,000
authorized shares, which may be issued in one or
more series, with such rights, preferences,
privileges and restrictions as shall be fixed by
the Company's board of directors from time to time.
On March 31, 2000, the holders of 55.7% of the outstanding shares
of Common Stock executed a written consent adopting these Charter Amendments.
Pursuant to the provisions of Florida law and the Company's
Articles of Incorporation, the holders of at least a majority of the outstanding
voting shares are permitted to approve the Charter Amendments by written consent
in lieu of a meeting, provided that prompt notice of such action is given to the
other shareholders. Pursuant to the rules and regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), an information statement must be sent to the
holders of voting stock who do not sign the written consent at least 20 days
prior to the effective date of the action. This notice, which is being sent to
all holders of record on March 31, 2000, is intended to serve as such notice
under Florida law and as the Information Statement required by the Exchange Act.
Sincerely,
Andrew A. Defrancesco
Chairman of the Board and Chief Executive Officer
<PAGE>
INTERNET SPORTS NETWORK, INC.
225 RICHMOND STREET WEST, SUITE 403
TORONTO
ONTARIO, CANADA M5V 1W2
--------------------------------
INFORMATION STATEMENT
--------------------------------
On February 23, 2000, the Board of Directors of Internet Sports
Network, Inc. (the "Company") approved and recommended that the following
amendments to the Company's Articles of Incorporation (the "Charter Amendments")
be adopted:
1. to increase the number of authorized shares of
common stock, par value $.001 (the "Common Stock"),
of the Company to 100,000,000 shares from
50,000,000 shares; and
2. to authorize a class of preferred stock, par value
$.001, of the Company, consisting of 20,000,000
authorized shares, which may be issued in one or
more series, with such rights, preferences,
privileges and restrictions as shall be fixed by
the Company's board of directors from time to time.
On March 31, 2000, the holders of 55.7% of the outstanding shares
of Common Stock executed a written consent adopting these Charter Amendments. As
of the close of business on March 31, 2000, 24,513,751 shares of the Company's
Common Stock were issued and outstanding.
A copy of the Charter Amendments is attached hereto as Annex A,
and incorporated herein by reference.
The Board of Directors determined that the increase of Common
Stock and the authorization of the "blank- check" Preferred Stock would allow
the Company the ability to meet its future financing requirements and to utilize
equity, rather than cash, to complete strategic acquisitions. In addition by
authorizing the Board of Directors to issue various series of Preferred Stock
without additional shareholder approval the Company will have flexibility to
take advantage of financing opportunities in a competitive environment. The
Board of Directors currently intends to authorize the creation of a Series A
Convertible Preferred Stock upon the effectiveness of the Charter Amendments.
This Information Statement is being mailed on or about May 2,
2000 to holders of record of Common Stock at the close of business on March 31,
2000 pursuant to Section 14(c) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Regulation 14C promulgated thereunder. The
written consent of the majority of shareholders of the Company adopting the
Charter Amendments will be effective on or about twenty (20) days following the
mailing of this Information Statement.
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
<PAGE>
AMENDMENTS TO THE ARTICLES OF INCORPORATION
PROPOSALS AND BOARD RECOMMENDATION
On February 23, 2000, the board of directors of the Company,
believing it to be in the best interests of the Company and its shareholders,
approved, and recommended that the shareholders of the Company approve,
amendments to Article IV of the Company's Articles of Incorporation to (i)
increase the number of authorized shares of Common Stock of the Company to
100,000,000 shares from 50,000,000 shares and (ii) authorize a new class of
"blank check" preferred stock, par value $.001, consisting of 20,000,000 shares
(collectively, the "Charter Amendments").
(A) INCREASE IN AUTHORIZED COMMON STOCK OF THE COMPANY
The Company's Articles of Incorporation currently authorize the
Company to issue up to 50,000,000 shares of Common Stock. As of March 31, 2000,
the Company had issued and outstanding 24,513,751 shares of Common Stock and had
reserved an additional 8,683,296 shares of Common Stock for issuance upon
exercise of outstanding warrants and options of the Company and 2,003,967 shares
of Common Stock for issuance under the Company's Convertible Notes.
As a result, the number of authorized, non-designated shares of
Common Stock available for issuance by the Company in the future has been
greatly reduced, and the Company's flexibility with respect to possible future
stock splits, equity financings, stock-for-stock acquisitions, stock dividends
or other transactions that involve the issuance of Common Stock has been
diminished. The board believes that by increasing the number of shares of
authorized Common Stock to 100,000,000 shares from 50,000,000 shares, the
Company will maintain its ability to take such actions.
(B) AUTHORIZATION OF "BLANK CHECK" PREFERRED STOCK
The term "blank check" preferred stock refers to stock for which
the designations, preferences, conversion rights, cumulative, relative,
participating, optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof are determined by the board
of directors of a company. Upon effectiveness of the Charter Amendments, the
board of directors of the Company will be entitled to authorize the designation
and issuance of up to 20,000,000 shares of Preferred Stock in one or more series
with such limitations and restrictions as may be determined in the board's sole
discretion, with no further authorization by shareholders required for the
creation and issuance thereof. The board of directors believes that having such
blank check Preferred Stock available for, among other things, the proposed
financing transaction described below, as well as possible issuances in
connection with such activities as public or private offerings of shares for
cash, dividends payable in stock of the Company, acquisitions of other companies
or businesses, and otherwise, is in the best interest of the Company and its
shareholders.
APPROVAL BY SHAREHOLDERS
As of March 31, 2000, the Company had 24,513,751 shares of its
Common Stock issued and outstanding. As of this same date, shareholders
representing 13,655,021 shares, 55.7% of the issued and outstanding shares of
Common Stock, approved the proposals to amend the Company's Articles of
Incorporation to (i) increase the number of authorized shares of Common Stock of
the Company to 100,000,000 shares from 50,000,000 shares and (ii) authorize a
new class of "blank check" preferred stock, par value $.001, consisting of
20,000,000 shares. The full text of the Charter Amendments in included as Annex
A of this Information Statement.
<PAGE>
Pursuant to the provisions of Florida law and the Company's
Articles of Incorporation, the holders of at least a majority of the outstanding
voting shares are permitted to approve the Charter Amendments by written consent
in lieu of a meeting, provided that prompt notice of such action is given to the
other shareholders. Pursuant to the rules and regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), an information statement must be sent to the
holders of voting stock who do not sign the written consent at least 20 days
prior to the effective date of the action. This notice, which is being sent to
all holders of record on March 31, 2000, is intended to serve as such notice
under Florida law and as the Information Statement required by the Exchange Act.
The Company anticipates that the Charter Amendments will be
effective 20 days after the mailing of this Information Statement, May 2, 2000
or shortly thereafter.
<PAGE>
DESCRIPTION OF SECURITIES
DESCRIPTION OF COMMON STOCK
After adoption of the Charter Amendments, the Company's
Articles of Incorporation will authorize the issuance of 100,000,000 shares of
common stock, $.001 par value per share, of which 24,513,751 shares were
outstanding at March 31, 2000. All of the outstanding shares of Common Stock are
fully paid and non-assessable.
VOTING RIGHTS. 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.
DIVIDENDS; LIQUIDATION. 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.
OTHER. 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. However,
SportsLine has been granted certain pre-emptive rights in connection with their
purchase of the Convertible Notes.
TRANSFER AGENT. 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 applicable
federal or state securities laws. The Company's transfer agent for its Common
Stock is Interwest Transfer Company, whose address is 1981 E. Murray Holiday
Road, Salt Lake City, UT 84117.
REGISTRATION RIGHTS. The Company has currently granted
piggyback registration rights with respect to approximately 8,683,296 shares
of its Common Stock issuable pursuant to outstanding options and warrants.
The Company has also entered into an Registration Rights Agreement with
respect to approximately 4,098,742 shares of Common Stock issued or issuable
to SportsLine and 6,114,110 restricted shares of Common Stock issued in
reliance of Regulation S in 1999. In addition, in connection with the
Proposed Transaction the Company may enter into an registration rights
agreement obligating the Company to register the resale of any shares of
Common Stock received upon conversion.
DESCRIPTION OF PREFERRED STOCK
After adoption of the Charter Amendments, the Company's
Articles of Incorporation will authorize the issuance of up to 20,000,000 shares
of preferred stock, par value $.001 per share in one or more series with such
limitations and restrictions as may be determined in the board's sole
discretion, with no further authorization by shareholders required for the
creation and issuance thereof.
Shares of Preferred Stock will be registered on the books of
the Company. The Company currently anticipates that the Preferred Stock will not
be registered with the Commission pursuant to Securities Exchange Act of 1934,
as amended. No transfer shall be registered unless the Company is satisfied that
such transfer will not result in a violation of any applicable federal or state
securities laws.
<PAGE>
PROPOSED ISSUANCE
The board of directors has executed a letter of intent,
pursuant to which the Company intends to issue $3.75 million of shares of
convertible preferred stock to certain institutional investors (the "Proposed
Transaction"). Upon the effectiveness of the Charter Amendments, the board of
directors intends to designate a series of preferred stock entitled the Series A
Convertible Preferred Stock (the "Series A Preferred") for issuance in
connection with the Proposed Transaction. The issuance of the Series A Preferred
is subject to various conditions, including approval of the Charter Amendments,
negotiation and execution of documentation mutually acceptable to the Company
and the Preferred Investors and other terms customary for a private placement of
equity. The Company currently anticipates that the material terms of the Series
A Preferred will include:
DIVIDENDS. Series A Preferred will accrue cumulative dividends
an annual rate of five percent (5%) of the of the stated Liquidation Preference
Amount per share per annum, payable at either the date of conversion or upon
mandatory redemption, in cash or in shares of Common Stock, or a combination
thereof at the option of the Company
VOTING. Holders of the Series A Preferred would not have
voting rights, subject to those voting rights required by applicable law;
provided, however, that the holders of the Series A Preferred will have the
right to approve, as a class, any proposal that would (i) authorize, create,
issue or increase the authorized or issued amount of any class or series of
stock, including, but not limited, to the issuance of any more shares of
previously authorized Common Stock or Preferred Stock, including the Series A
Preferred Stock, ranking prior to or on a parity with the Series A Preferred
Stock, or with respect to the distribution of assets on liquidation, dissolution
or winding up; (ii) amend, alter or repeal the provisions of the Series A
Preferred Stock, whether by merger, consolidation or otherwise, so as to
adversely affect any right, preference, privilege or voting power of the Series
A Preferred Stock; PROVIDED, HOWEVER, that any creation and issuance of another
series of Junior Stock shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; (iii) repurchase, redeem or pay
dividends on, shares of the Company's Junior Stock; (iv) amend the Certificate
of Incorporation or by-laws of the Company so as to affect materially and
adversely any right, preference, privilege or voting power of the Series A
Preferred Stock; (v) effect any distribution with respect to Junior Stock; (vi)
repurchase, redeem or pay dividends on any shares of any Preferred Stock ranking
on a parity with the Series A Preferred Stock except if a pro rata repurchase,
redemption or payment is made in respect of the Series A Preferred Stock; or
(vii) reclassify the Company's outstanding securities.
CONVERSION. The Series A Preferred would be convertible, at
the option of the holder, at any time at a rate equal to the lesser of $2.90 and
ninety percent (90%) of the average share price. In addition, the Series A
Preferred would be mandatorily converted on the third year anniversary date of
the issuance; provided, however that this mandatory conversion would occur on
the fifth anniversary date of the issuance upon certain circumstances.
LIQUIDATION. In the event of a liquidation, dissolution or
winding up of the affairs of the Company, the holders of the Series A Preferred
will be entitled to receive, before any distribution is made with respect to the
Company's Common Stock, a preferential payment of $100.00 per share.
REDEMPTION. The holders of the Series A Preferred have the
right to require the Company to redeem the Series A Preferred at a rate of 125%
of the Liquidation Preference upon the occurrence of certain events, including a
merger or consolidation in which the current holders of the Company's Common
Stock do not continue to control the surviving entity, a sale of all or
substantially all of the assets of the Company, the tender offer of more than
30% of the Company's Common Stock, the Company's failure to register the comply
with its registration rights obligations and the failure of the Company to
maintain its listing on the OTCBB. The Company has the option at any time to
redeem the Series A Preferred Stock in part or in full at a price ranging from
108% to 118% or more of the purchase price of such stock, plus any accrued or
unpaid dividends.
<PAGE>
POSSIBLE ANTI-TAKEOVER EFFECTS
In addition to financing purposes, the Company could also
issue shares of Common Stock or Preferred Stock that may, depending on the terms
of such series, make more difficult or discourage an attempt to obtain control
of the Company by means of a merger, tender offer, proxy contest or other means.
When, in the judgment of the board of directors, this action will be in the best
interest of the shareholders and the Company, such shares could be used to
create voting or other impediments or to discourage persons seeking to gain
control of the Company. Such shares also could be privately placed with
purchasers favorable to the board of directors in opposing such action. In
addition, the board of directors could authorize holders of a series of Common
or Preferred Stock to vote either separately as a class or with the holders of
the Company's Common Stock, on any merger, sale or exchange of assets by the
Company or any other extraordinary corporate transaction. The existence of the
additional authorized shares could have the effect of discouraging unsolicited
takeover attempts. The issuance of new shares also could be used to dilute the
stock ownership of a person or entity seeking to obtain control of the Company
should the board of directors consider the action of such entity or person not
to be in the best interest of the shareholders of the Company.
DILUTIVE EFFECT OF ADDITIONAL COMMON STOCK
Shareholders should be aware that the issuance of additional
shares of Common Stock and convertible Preferred Stock could have a dilutive
effect on earnings per share and on the equity ownership of the present holders
of Common Stock. In addition, the Board of Directors, will be permitted to
authorize the issuance of one or more series of convertible preferred stock,
such as the proposed issuance of Series A Preferred, whose conversion rate is
dependent on market price of the Company's Common Stock. As a result, the
Company would be unable to calculate the exact amount of Common Stock that would
be issuable upon conversion of such a series of convertible preferred stock. In
addition, the issuance of the Common Stock, upon conversion of the preferred
stock, could cause a downward pressure on the market price of the Common Stock,
thereby requiring the Company to issue additional shares of Common Stock.
Furthermore, future sales of substantial amounts of our Common Stock in the
public market, or the perception that these sales might occur, could adversely
affect the prevailing market price of the Company's Common Stock or limit the
Company's ability to raise additional capital.
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of March 31, 2000, by (i) each person
who is known by the Company to beneficially own 5% or more of the Common Stock,
(ii) each director of the Company, (iii) the Named Executive Officers, and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES BENEFICIALLY OWNED OF CLASS
<S> <C> <C>
Kenneth Crema............................................... 600,000 (1) 2.39%
Andrew A. DeFrancesco....................................... 1,797,500 (2) 7.19%
Geoff Ford.................................................. 1,750,000 (3) 7.07%
William Gibson.............................................. 1,716,667 (4) 6.94%
Mark Mariani................................................ 50,000 (5) *
Greg O'Hara................................................. 50,000 (6) *
Rocco Rossi................................................. 50,000 (7) *
Andrew Sturner.............................................. 50,000 (8) *
David Toews................................................. 83,333 (9) *
All directors and executive
officers as a group (12 persons)............................ 5,093,333 (10) 19.16%
SportsLine.com, Inc......................................... 6,854,198 (11) 25.14%
GMF2 Holdings, Inc. ........................................ 1,500,000 (12) 6.12%
</TABLE>
- ----------------------------
* Less than 1% of outstanding shares
Unless otherwise indicated, the address of each of the beneficial owners is 101
Bloor Street West, Suite 200, Toronto, Ontario, Canada M5S 2Z7.
(1) Includes 600,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(2) Includes 500,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(3) Includes (a) 250,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days and (b) 1,500,000 shares of Common Stock owned
by GMF2 Holdings, Inc. ("GMF2"), of which Mr. Ford serves as a director.
Mr. Ford disclaims beneficial ownership of those shares attributable to
other shareholders of GMF2.
(4) Includes (a) 216,667 shares of Common Stock issuable pursuant to options
exercisable within 60 days and (b) 1,500,000 shares of Common Stock owned
by GMF2 of which Mr. Gibson serves as a director. Mr. Gibson disclaims
beneficial ownership of those shares attributable to other shareholders of
GMF2.
(5) Includes 50,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(6) Includes 50,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(7) Includes 50,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(8) Includes 50,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(9) Includes 83,333 shares of Common Stock issuable pursuant to options
exercisable within 60 days.
(10) Includes 2,070,833 shares issuable pursuant to options exercisable within
60 days.
(11) Includes (a) 1,033,296 shares of Common Stock issuable pursuant to warrants
exercisable within 60 days and (b) 1,722,160 shares of Common Stock
issuable to SportsLine.com, Inc. upon the conversion of convertible debt.
SportsLine's business address is 6340 N.W. 5th Way, Ft. Lauderdale, FL
33309
(12) GMF2's business address is 10201 South Port Road, S.W., Suite 633, Calgary,
Alberta Canada T2W4X9.
<PAGE>
FINANCIAL INFORMATION
The financial statements required to be included herein
pursuant to Item 13 of Schedule 14C are attached hereto at Annex B.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
ISN was originally incorporated on April 28, 1997 in Nevada
for the purpose of providing interactive, computer sports entertainment through
the Internet. 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's products are offered on a private label,
business to business basis, and offer end users 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, trivia applications,
entertainment industry games and financial based (stock market simulation)
games. The Company also offers sports contests in offline media such as
newspapers, and publishes fantasy sports related annual magazines, 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.
The Company's sources of revenue are derived from
co-branding and Application Service Provider (ASP) arrangements, the design
and operation of fantasy sports games for offline and online customers and
the sale of magazines. As a result of the promotional agreement with
SportsLine.com, the Company expects that the majority of future revenue will
come from on-line advertising and promotions.
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 and 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. 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.
ISN financed its expenditures primarily through the sale of
its common stock and issuance of convertible debt. During the 2000 fiscal year,
the Company issued approximately 1.6 million shares of its Common Stock for net
cash consideration of approximately $2.0 million.
RESULTS OF OPERATION
NINE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO THE NINE MONTHS ENDED JANUARY
31, 1999.
REVENUE. The Company generated revenue of $3,616,000 for the
period ending December 31, 1999 as compared to revenues of approximately $84,000
for the period ending January 31, 1999. The increase in revenues was primarily
attributable to the inclusion of the operating results of Sportsmark, Ultimate
Sports Publishing,
<PAGE>
Sportsbuff and Pickem in the first half of calendar 1999. Growth in revenue was
also attributable to sales generated by the increased sales staff.
OPERATING EXPENSES BEFORE AMORTIZATION AND OTHER NON-CASH
CHARGES. Total operating expenses before amortization and other non-cash charges
were $6,849,000 as compared to approximately $1,298,000 in the period ended
January 31, 1999, for an increase of $5,551,000. Approximately $3,064,000 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 $2,036,000
from approximately $132,000 in the period ended January 31, 1999. Approximately
$595,000 of the increased costs in the current year was the result of publishing
costs associated with the magazine publications. A further $500,000 pertains to
development costs associated with additional content from Active Fitness for the
Sportsrocket.com site. The remaining increase is the result of the costs
associated with the direct operating costs of the contests, and prizing
commitments for the 1999-2000 National Football League, National Hockey League
and National Basketball Association season contests. Prize commitments increased
approximately $400,000 over the prior period, primarily for the SportsBuff
national football contest.
GENERAL AND ADMINISTRATIVE. Salaries and benefits increased
$1,549,000 to $1,790,000 from $241,000 in the nine month period ending January
31, 1999, while consulting fees increased by $650,000 to $1,020,000 from
$370,000 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 financial
services, game development, web design and for other services. Salaries and
benefits for the nine months ended December 31, 1999 also includes $110,000 in
severance costs associated with the closing of ISN's Vancouver offices.
Advertising expenses decreased $24,000 to $299,000 from $323,000 in the prior
year period. This decrease is mainly due to a significant initial promotion run
by the Company in September and October 1998, and a shift in advertising
strategy to utilize the free offline newspaper space from our contests. Other
general and administrative costs increased by $1,473,000, which resulted from
the increase in offices, staff and operations. Travel and other expenses
increased $300,000 to $405,000 as a result of an increase in sales staff,
increased sales efforts and financing activities. Legal and accounting fees
increased by $268,000 as a result of costs associated with the preparation of
the Company's Form 10 and the agreement with SportsLine.com, Inc. Interest and
bank charges increased by $73,000 to $84,000 as a result of fees and interest on
loan facilities. Occupancy and telephone costs at December 31, 1999 were
$234,000. Other general and administrative costs were $232,000 for the nine
months ending January 31, 1999.
AMORTIZATION OF PURCHASED INTANGIBLES, GOODWILL AND OTHER.
Amortization of purchased intangibles was $5,590,000 and amortization of
goodwill was $2,065,000 for the nine months ended December 31, 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.
Depreciation was $141,000 in the nine months ended December
31, 1999 as compared to $10,000 for the prior year. The increase is due to the
acquisition of equipment throughout the period.
The Company amortized $3,853,000 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 $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.
<PAGE>
The Company recognized a $1,531,000 expense for 800,000 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 $5.00 per share.
NET LOSS FROM OPERATIONS. The Company experienced a loss of
$15,225,000 after the benefit of deferred taxes of $2,065,000 for the period
ended December 31, 1999 as compared to a loss of $1,720,000 for the period ended
January 31, 1999. Loss per share in the period ended December 31, 1999 was $
(.78) compared to $ (.25) in the prior year period.
FISCAL PERIOD ENDED MARCH 31, 1999 AS COMPARED TO FISCAL PERIOD ENDED APRIL 30,
1998
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 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 that were due to mature in December
2002. This expense was calculated based on the difference between
<PAGE>
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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred a loss of $15,225,000 for the nine
months ended December 31, 1999, expects to continue to incur losses into the
future and has a working capital deficiency as at December 31, 1999 of
$1,490,000 after deducting the prepaid royalty amount. Due to the Company's
on-going losses, accumulated deficit increased from $4,157,000 as of March 31,
1999 to $19,382,000 as of December 31, 1999. The Company anticipates that it
will continue to generate financial losses for the foreseeable future. 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.
In the event the Company is unsuccessful in securing outside capital, it may be
required to curtail or cease operations altogether.
Cash and Cash Equivalents decreased from $2,928,000 at March
31, 1999 to $518,000 at December 31, 1999. This decrease was primarily due to
the use of cash to prepay certain royalties that were due to SportsLine and the
use of cash in operating activities. For the nine month period ended December
31, 1999 cash used by operating activities was $7,711,000 which is less than the
net loss due to amortization and other share-based expenses during the same
period. Net cash used in investing activities for the nine month period ended
December 31, 1999 was $2,305,000 while net cash provided by financing activities
during the same period was $7,606,000. Since inception, the Company has funded
its capital requirements by financing activities, substantially through the sale
of its equity securities.
Capital expenditures from the nine months period ended
December 31, 1999 were $457,000. Overall, capital expenditures, including those
anticipated as a result of acquisition activity, during the year ending March
31, 2001 is anticipated to approximate $1,000,000. The purchased intangibles and
goodwill before amortization related to the acquisitions of Sportsmark Group,
Pickem Sports, Ultimate Sports Publishing and SportsBuff totaled $23,377,000.
The Company's management believes that an additional
$5,000,000 in funds 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, including the proposed sale
of Series A Preferred. There can be no assurance that ISN will be able to
complete the proposed sale of the Series A Preferred on acceptable terms, if at
all, or that the Company will be able to issue additional equity on acceptable
terms, if at all.
On 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.
In connection with this acquisition the Company paid $860,000 in cash and issued
125,000 shares of its Common Stock, with a value of $750,000. On 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
<PAGE>
contest services for its clients. In connection with this acquisition, the
Company paid $1,000,000 in cash and issued 616,060 shares of its Common Stock,
with a value of $4,066,000.
On August 1, 1999, the Company entered into a five-year
agreement for the promotion rights to be the exclusive contest provider for
Beer.com. In exchange for this exclusive agreement, the Company granted Beer.com
1,000,000 shares of Common Stock over the five-year term. All 1,000,000 shares
have been placed in escrow, of this amount 200,000 shares are distributed to
Beer.com on each anniversary date of the contract. The minimum share obligation
under this agreement (200,000 shares) has 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.
On December 21, 1999, SportsLine invested $5 million in the
Company in consideration for a convertible promissory note (the "Note")
delivered by the Company and which is convertible into 1,722,240 shares of the
Company's Common Stock, and received an additional 4,098,742 shares of the
Company's Common Stock pursuant to a four-year Promotion Agreement. In addition,
the Company will make guaranteed minimum payments of $17 million to SportsLine
over the four year period of the Promotion Agreement, of which $5 million was
paid upon effectiveness of the Promotion Agreement, and ISN will share revenue
from advertising and promotions with regard to the CBS SportsLine Fantasy
Channel. The Company also issued to SportsLine a warrant (the "Warrant")
initially exercisable for up to 1,033,296 shares of Common Stock at a price of
$2.90 per share. The Note and the Warrant are subject to anti-dilution
protections.
This year, the Company intends to commence the sale of up to
$5 million of common stock of the Company on a private basis to accredited
investors who are United States and Canada residents, including the sale of
Convertible Preferred Stock discussed in this Information Statement. As
mentioned above, should the Company be unable to raise the required funds, it
will be forced to curtail operations or cease operations entirely. Beginning at
the end of the next twenty-four month period, the Company intends to operate on
cash from operations. We expect, at that point, that any additional capital
requirements would result from acquisition activities or modifications to the
current growth plans. To the extent that cash from operations is insufficient to
fund the operations of the Company at the end of the next twenty-four month
period, the Company will have to assess whether, given the status of the
Internet industry and the Company's ability to raise further funds through the
sale of debt or equity capital, it will have sufficient liquidity to continue
operations. Should the Company's cash from operations be insufficient, and
should the Company be unable to raise additional funds, it will be forced to
curtail operations or cease operating as a going concern entirely.
The Company maintains its interest in acquiring companies and
assets that can benefit the Company's business and subscriber base. Currently,
the Company is reviewing potential acquisition targets, which could provide
complementary assets and market access to the Company's existing portfolio. We
cannot assure you that these acquisitions will be completed.
<PAGE>
ANNEX A
AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
INTERNET SPORTS NETWORK, INC.
Article IV of the Articles of Incorporation are hereby amended so as
henceforth to read as follows:
"ARTICLE IV CAPITAL STOCK
The total number of shares of all classes of stock which the Company has
authority to issue is One Hundred Twenty Million (120,000,000),
consisting of One Hundred Million (100,000,000) shares of Common Stock,
par value $.001 per share (the "Common Stock"), and Twenty Million
(20,000,000) shares of Peferred Stock, par value $.001 per share (the
"Preferred Stock"). All such Common Stock is of the same class. The
Preferred Stock shall be issuable in series with such designations,
terms, limitations and relative rights and preferences as may be fixed
from time to time by the Board of Directors."
A-1
<PAGE>
ANNEX B
CONSOLIDATED FINANCIAL STATEMENTS
INTERNET SPORTS NETWORK,
INC.
MARCH 31, 1999
B-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.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 11
to the consolidated financial statements, the Company has significant cash
need and will require substantial capital from outside sources in order to
complete its business plan. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Toronto, Canada, "Ernst & Young LLP"
June 11, 1999, except for Note 11, as to Chartered Accountants
which the date is December 15, 1999.
B-2
<PAGE>
A Partnership of Incorporated Professionals
DAVIDSON & COMPANY Chartered Accountants
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
B-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.
B-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.
B-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> <C> <C> <C> <C> <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.
B-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.
B-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. ("BTC") 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 BirchTree Capital
Corporation, a Florida shell corporation with no operations
which traded on the over the counter/bulletin board as "BICP"
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 shares 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.
B-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...)
Recapitalization and due diligence costs are made up of the
following:
<TABLE>
<S> <C>
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.
B-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.
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.
B-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....)
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.
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:
<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 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.
B-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....)
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 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
B-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....)
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.
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.
B-13
<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.
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.
B-14
<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>
B-15
<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.
B-16
<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.
B-17
<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.
B-18
<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.
B-19
<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>
<CAPTION>
<S> <C>
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.
NOTE 11. GOING CONCERN
For the six months ended September 30, 1999 the Company has
realized a net decrease in cash and cash equivalents of $1,631,
which equates to 56% of the March 31, 1999 balance and has a
working capital deficiency of $169. Significant cash
expenditures have been made related to the acquisition of
Ultimate Sports Publishing division and Innovation Partners
Inc. (d/b/a Sportsbuff), other capital expenditures and
substantially increased operating costs.
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 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 doubts exist
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.
B-20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
INTERNET SPORTS NETWORK, INC.
(UNAUDITED)
DECEMBER 31, 1999
B-21
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(unaudited) (unaudited)
December 31, March 31,
1999 1999
ASSETS
<S> <C> <C>
Current
Cash and cash equivalents $ 518,000 $ 2,928,000
Receivables, net 404,000 182,000
Prepaid royalties (note 4) 2,000,000 -0-
Prepaid expenses 155,000 29,000
--------------------------------------
3,077,000 3,139,000
Equipment, net (note 3) 400,000 84,000
Prepaid royalties (note 4) 3,000,000 -0-
Deferred charges (note 4) 14,213,000 -0-
Other deferred charges 47,000 -0-
Purchased intangibles, net (note 2) 11,060,000 9,637,000
Goodwill, net (note 2) 3,929,000 3,855,000
--------------------------------------
$ 35,726,000 $ 16,715,000
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable $ 321,000 $ 171,000
Accrued liabilities 393,000 137,000
Accrued consulting fees 200,000 -0-
Deferred revenue 255,000 -0-
Accrued prize commitments 350,000 31,000
Loan payable and accrued interest (note 5) 1,048,000 -0-
--------------------------------------
2,567,000 339,000
Convertible promissory note (note 6) 5,000,000 -0-
Deferred income taxes (note 8) 3,929,000 3,855,000
--------------------------------------
11,496,000 4,194,000
--------------------------------------
Commitments (notes 4 and 10)
Shareholders' equity (note 7)
Common stock and additional paid-in capital, $0.001 par value
50,000,000 shares authorized
24,518,000 outstanding (March 31, 1999 - 17,841,000) 52,601,000 17,127,000
Share subscription receivable for 534,000 shares subscribed (294,000) -0-
Deferred compensation (8,695,000) (449,000)
Accumulated deficit (19,382,000) (4,157,000)
--------------------------------------
24,230,000 12,521,000
--------------------------------------
$ 35,726,000 $ 16,715,000
======================================
</TABLE>
B-22
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
(unaudited) (unaudited) (unaudited) (unaudited)
Nine Months Nine Months Three Months Three Months
Ending Ending Ending Ending
December 31, January 31, December 31, January 31,
1999 1999 1999 1999
<S> <C> <C> <C> <C>
REVENUE $ 3,616,000 $ 84,000 $ 1,755,000 $ 15,000
-----------------------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 2,036,000 132,000 1,116,000 58,000
Salaries and benefits 1,790,000 241,000 869,000 106,000
Consulting fees 1,020,000 370,000 504,000 324,000
Advertising 299,000 323,000 71,000 20,000
General and administrative 1,705,000 232,000 609,000 25,000
Depreciation 141,000 10,000 76,000 3,000
Amortization of purchased intangibles 5,590,000 -0- 2,150,000 -0-
Amortization of goodwill 2,065,000 -0- 780,000 -0-
Options granted for services provided 1,531,000 -0- 386,000 -0-
Amortization of stock compensation 3,853,000 -0- 2,003,000 -0-
Amortization of deferred charges 633,000 -0- 408,000 -0-
Financing fees 147,000 -0- 147,000 -0-
Recapitalization and due diligence costs 96,000 496,000 -0- 496,000
-----------------------------------------------------------------------
Total expenses 20,906,000 1,804,000 9,119,000 1,032,000
-----------------------------------------------------------------------
Net loss before income taxes (17,290,000) (1,720,000) (7,364,000) (1,017,000)
Deferred income tax recovery (2,065,000) -0- (780,000) -0-
-----------------------------------------------------------------------
Net loss and comprehensive loss (15,225,000) (1,720,000) (6,584,000) (1,017,000)
=======================================================================
NET LOSS PER SHARE $ (0.78) $ (0.25) $ (0.32) $ (0.12)
=======================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 19,637,000 7,008,000 20,817,000 8,444,000
=======================================================================
</TABLE>
B-23
<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 1,053,000 1,708,000 -0- -0- 1,708,000
Shares issued for promotion rights 4,299,000 13,234,000 -0- -0- 13,234,000
Shares issued in exchange for service 50,000 88,000 -0- -0- 88,000
Shares issued for subscription receivable 534,000 294,000 -0- -0- 294,000
Options related to deferred compensation -0- 12,099,000 (12,099,000) -0- -0-
Options granted for services provided -0- 1,531,000 -0- -0- 1,531,000
Warrants issued for promotion and financing -0- 1,806,000 -0- -0- 1,806,000
Amortization of deferred compensation
Related to stock options -0- -0- 3,853,000 -0- 3,853,000
Share issuance costs -0- (102,000) -0- -0- (102,000)
Net loss -0- -0- -0- (15,225,000) (15,225,000)
--------------------------------------------------------------------------------
Balance at December 31, 1999 24,518,000 52,601,000 (8,695,000) (19,382,000) 24,524,000
--------------------------------------------------------------------------------
Less share subscription receivable (294,000)
----------------
Total Shareholders' Equity at December 31, 1999 24,230,000
----------------
</TABLE>
B-24
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Nine Months Ended Nine Months Ended
December 31, 1999 January 31, 1999
----------------- ----------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (15,225,000) $ (1,720,000)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 141,000 10,000
Amortization of purchased intangibles 5,590,000 -0-
Amortization of goodwill 2,065,000 -0-
Options granted for service 1,531,000 -0-
Amortization of stock compensation 3,853,000 -0-
Amortization of deferred charges 780,000 -0-
Shares issued for services 88,000 340,000
Deferred income tax recovery (2,065,000) -0-
Changes in other operating assets and liabilities:
(Increase) decrease in receivables (198,000) 26,000
(Increase) decrease in prepaid expenses (126,000) 25,000
Increase in prepaid royalties (5,000,000) -0-
Increase (decrease) in accounts payable (200,000) 11,000
Increase in accrued liabilities 800,000 88,000
Increase in deferred revenue 255,000 -0-
-----------------------------------------------
Net cash used in operating activities (7,711,000) (1,220,000)
-----------------------------------------------
INVESTING ACTIVITIES
Purchase of Ultimate Sports Publishing (860,000) -0-
Purchase of Sportsbuff (1,000,000) -0-
Cash acquired with Sportsbuff 36,000 -0-
Purchase of intangibles (60,000) -0-
Purchase of equipment (421,000) (11,000)
-----------------------------------------------
Net cash used in investing activities (2,305,000) (11,000)
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of share issuance
costs $ 102,000 (1998 - $ 4,000) 1,606,000 1,364,000
Proceeds from convertible promissory note 5,000,000 -0-
Proceeds from loan payable 1,250,000 -0-
Payment of loan payable (250,000) -0-
-----------------------------------------------
Net cash provided by financing activities 7,606,000 1,364,000
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,410,000) 133,000
Cash and cash equivalents:
Beginning of period 2,928,000 9,000
-----------------------------------------------
End of period $ 518,000 $ 142,000
===============================================
</TABLE>
B-25
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Nine Months Ended Nine Months Ended
December 31, 1999 January 31, 1999
----------------- ----------------
INVESTING ACTIVITIES
<S> <C> <C>
Net assets of Ultimate Sports Publishing acquired for shares $ (750,000) -0-
Net assets of Sportsbuff acquired for shares (4,066,000) -0-
Goodwill on Sportsbuff (2,138,000) -0-
Deferred Tax on Sportsbuff 2,138,000 -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 for subscription receivable 294,000 -0-
Deferred compensation 12,099,000 -0-
Shares issued for promotion rights 13,234,000 -0-
Cash interest paid $ 10 -0-
===============================================
Cash taxes paid $ -0- -0-
===============================================
</TABLE>
B-26
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 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
nine-month periods ended December 31, 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 January 31, 1999. 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 December 31, 1998 as there is no significant seasonal
impact, except for the acquisition costs of $496,000 which relate
to transactions in January, 1999. The comparative results have not
been recast to December 31, 1998 as it is not practical, and would
not provide significant additional information.
The Company has incurred a loss of $15,225,000 for the nine months
ended December 31, 1999, expects to continue to incur losses into
the future and has a working capital deficiency as at December 31,
1999 of $1,490,000 after deducting the prepaid royalty amount.
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 $11,060,000 are stated net of total
accumulated amortization of $6,181,000 at December 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 $3,929,000 is stated net of total
accumulated amortization of $2,301,000 at December 31, 1999 in the
accompanying consolidated balance sheet. Goodwill is being
amortized on a straight-line basis principally over two years.
B-27
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D....)
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:
Computer software 100%
Office equipment and furniture 20%
Computer equipment 30%
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- $ (314,000)
Equipment -0- 36,000
Purchased intangibles 1,610,000 5,344,000
Goodwill -0- 2,138,000
Deferred income taxes -0- (2,138,000)
------------ -----------
$ 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>
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.
B-28
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
==================================================================
DECEMBER 31,
1999
------------------------------------------------------------------
<S> <C>
Computer equipment and software $ 428,000
Office equipment and furniture 144,000
--------------
572,000
Less accumulated depreciation (172,000)
---------------
Equipment, net $ 400,000
==================================================================
</TABLE>
NOTE 4. DEFERRED CHARGES AND PREPAID ROYALTIES
BEER.COM
--------
On August 1, 1999, the Company entered into a five year agreement
for the promotion rights 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.
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 4,099,000 common
shares, and a Warrant to acquire up to 1,033,000 common shares at
an exercise price of $2.90 per share. The shares have been
recorded at the market value of the shares at December 21, 1999
($2.90 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 ($1.56 per share underlying the Warrant) as a
deferred charge, and is being amortized over the four year period.
Shares issued to Beer.com $ 1,350,000
Shares issued to Sportsline 11,884,000
Warrants issued to Sportsline 1,612,000
-----------
Total Deferred Charges 14,846,000
Less Accumulated Amortization (633,000)
-----------
$14,213,000
===========
The Sportsline Agreement calls for minimum royalty payments as follows:
Year 1 $ 2,000,000
Year 2 3,000,000
Year 3 5,000,000
Year 4 7,000,000
---------------
$ 17,000,000
===============
B-29
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 4. 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 $5,000,000. Amortization of the current
year's prepaid royalty is equal to the greater of (a) the amount
calculated by using a straight line amortization over the twelve month
period of the 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.
In the event that the Company raises over $10,000,000 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 5. LOAN PAYABLE
The loan payable is for a principal amount of $1,000,000 with interest
calculated at 10% per annum. The loan is unsecured, and the principal
and accrued interest are due on March 31, 2000.
NOTE 6 CONVERTIBLE PROMISSORY NOTE
On December 21, 1999 the Company issued a Convertible Promissory Note
("Note") for $5,000,000, convertible at the holders option into common
stock of the Company at a conversion price of $2.90 per share. The Note
bears interest at the rate of 5% per annum, payable at maturity. 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 $20,000,000, having an initial
per share price to the public of not less than $5.00 per share.
NOTE 7. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK 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 1,053 1,708
Shares issued for subscription receivable 534 294
Shares issued on acquisition of Sportsbuff 616 4,066
Shares issued on acquisition of Ultimate Sports 125 750
Shares issued in exchange for promotion rights 4,299 13,234
Shares issued for services 50 88
Deferred compensation related to stock options - 12,099
Options granted for services - 1,145
Warrants granted for promotion rights - 1,806
Warrants granted for service - 386
Share issuance costs (102)
----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 24,518 52,601
==============================================================================================
</TABLE>
B-30
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 7. SHAREHOLDERS' EQUITY (CONT'D...)
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 3,365 $ 1.52
Options granted and assumed 4,035 $ 2.36
Options cancelled (735) $ 4.15
Options exercised (575) $ 0.40
------
December 31, 1999 6,090 $ 1.87
===========================================================================================
</TABLE>
The following table summarizes information about options outstanding and
options exercisable at December 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 1,850 4.6 years 783 $ 0.40
1.75 2,785 3.8 years 2,455 1.75
3.00 580 4.8 years 117 3.00
3.25 20 2.7 years 20 3.25
4.00 335 4.6 years -0- 4.00
4.08 100 4.5 years 13 4.08
4.54 150 4.4 years -0- 4.54
4.76 15 4.5 years 5 4.76
5.00 25 1.4 years 25 5.00
6.00 204 4.6 years 66 6.00
6.25 1 0.9 years 1 6.25
7.00 25 1.4 YEARS 25 7.00
--------------------------------------------------------------------------------------------
$ 0.40 - 7.00 6,090 4.2 years 3,510 $ 1.65
============================================================================================
</TABLE>
B-31
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 7. SHAREHOLDERS' EQUITY (CONT'D...)
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, 1999 - -
Warrants granted 1,343 $ 3.17
Warrants cancelled - -
Warrants exercised - -
----- ----------
December 31, 1999 1,343$ 3.17
============================================================================================
</TABLE>
The following table summarizes information about warrants outstanding
and warrants exercisable at December 31, 1999:
<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> <C>
$ 2.18 80 1.8 years 80 $ 2.18
2.90 1,063 2.0 years 1,063 2.90
5.00 200 1.9 years 200 5.00
--------------------------------------------------------------------------------------------
$ 2.18 - 5.00 1,343 2.0 years 1,343 $ 3.17
============================================================================================
</TABLE>
DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $8,695,000
during the nine months ended December 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 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 nine months
ending December 31, 1999 was $3,853,000.
B-32
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 7. 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 nine months
ended December 31, 1999 would have been as follows:
Net loss as reported $ (15,225)
Net loss - pro forma $ (15,936)
Basic and diluted loss per share as reported $ (0.78)
Basic and diluted loss per share - pro forma $ (0.81)
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 nine month
period was $5.08.
NOTE 8. 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>
========================================================================================
DECEMBER 31,
1999
----------------------------------------------------------------------------------------
<S> <C>
Tax recovery at combined federal and state rates $ (5,515,000)
Higher effective rate attributable to income taxes of other countries $ (1,782,000)
Tax effect of expenses that are not deductible for income tax purposes 5,832,000
Valuation allowance 1,465,000
-------------
$ -
========================================================================================
</TABLE>
B-33
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 8. INCOME TAXES (CONT'D...)
At December 31, 1999, the Company had net operating loss
carryforwards of approximately $5,967,000. 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>
========================================================================================
DECEMBER 31,
1999
----------------------------------------------------------------------------------------
<S> <C>
Net operating loss carryforwards $ 5,967,000
============
Total deferred income tax assets $ 2,588,000
Valuation allowance for deferred income tax assets (2,588,000)
------------
Net deferred income tax assets $ -
========================================================================================
</TABLE>
A continuity of the valuation allowance is as follows:
<TABLE>
<CAPTION>
========================================================================================
DECEMBER 31,
1999
----------------------------------------------------------------------------------------
<S> <C>
Balance at March 31, 1999 $ 1,123,000
Valuation allowance on deferred income tax asset 1,465,000
-------------
Closing balance $ 2,588,000
========================================================================================
</TABLE>
Deferred income tax credits at December 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 of Sportsmark,
Pickem and Sportsbuff.
NOTE 9. RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 1999, the Company paid
or accrued approximately $46,000 of consulting fees for financial
services provided a former director of the Company. Total
compensation paid to directors for their duties as employees of
the Company during the nine months ended December 31, 1999 was
$95,000. Also, $16,000 of wages and $60,000 termination payment
was paid to the Company's former Chief Executive Officer and
former director.
B-34
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended December 31, 1999
================================================================================
NOTE 10.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:
2000 $ 187
2001 73
2002 18
2003 5
2004 and thereafter -
---------------
$ 283
===============
NOTE 11.SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two operating segments across domestic and
international markets, contest management and publishing.
International sales, including export sales from the United States
to Canada, represented approximately 14% of net sales for the nine
months ended December 31, 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 December 31, 1999. Capital assets
and purchased intangibles in the United States equal approximately
$50,000. 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 $ 2,565,000 $1,051,000 $ 3,616,000
Amortization of purchased intangibles 5,172,000 419,000 5,591,000
Amortization of Goodwill 2,065,000 0 2,065,000
Expenses 3,346,000 774,000 4,120,000
--------- ------- ---------
$ (8,018,000) $ (142,000) (8,160,000)
------------ ----------
Corporate Expenses 9,130,000
---------
Net loss before tax $(17,290,000)
============
</TABLE>
Contest management revenues are earned primarily from fees from
consumers who pay to enter sports contests (58% of contest
management sector revenues) and fees from companies that license
the contest applications (42% of contest management sector
revenues). Publishing revenues are earned primarily from newstand
sales (89% of publishing revenues) and advertising within the
publications (11% of publishing revenues).
B-35
