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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 000-26865
INTERNET SPORTS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0704152
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
101 Bloor Street West, Suite 200, Toronto, Ontario, Canada, M5S 2Z7
(Address of principal executive offices) (Zip Code)
(416) 599-8800 / (416) 921-1302
(Issuer's telephone/facsimile numbers, including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. ( )
State issuer's revenue for its most recent fiscal year. $5,914,000
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
$12,029,666.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Not applicable.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of June 15, 2000: 25,660,551 shares of common stock,
$.001 par value (the "Common Stock").
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to portions of the
Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the 2000 fiscal year.
Transitional Small Business Disclosure Format (check one): Yes No X
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INTERNET SPORTS NETWORK, INC.
FORM 10-KSB
FOR THE YEAR ENDED MARCH 31, 2000
INDEX
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PART I:
<S> <C>
Item 1 Description of Business 1
Item 2 Description of Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II:
Item 5 Market Information 9
Item 6 Managements Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7 Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets at March 31, 1999 and March 31, 2000 F-2
Consolidated Statements of Operations for the periods
ended March 31, 1999 and March 31, 2000 F-3
Consolidated Statement of Stockholders Equity for
the periods ended March 31, 1999 and March 31, 2000 F-4
Consolidated Statements of Cash Flows for the periods
ended March 31, 1999 and March 31, 2000 F-5
Notes to Financial Statements F-7
Item 8 Changes and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III:
Item 9 Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 16
Item 10 Executive Compensation 16
Item 11 Security Ownership of Certain Beneficial Owners and Management 16
Item 12 Certain Relationships and Related Transactions 16
Item 13 Exhibits 17
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ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Internet Sports Network, Inc. and its subsidiaries (collectively "ISN" or the
"Company") is an Internet based application service provider ("ASP") of
marketing solutions. The Company specializes in providing online games,
contests, and promotions that enable its customers to attract users, increase
the length of user sessions, capture data, and create new revenue opportunities.
The majority of the Company's online games, contests, promotions and related
services at this time are based on sports and entertainment categories, such as
professional sports or popular culture such as movies, or stock market and
trivia games. These are games of skill.
The Company also publishes several annual sports magazines. It also provides
games and contests to traditional media such as newspapers and broadcasters and
runs them concurrently both off-line and online, cross promoting from one medium
to the other. The Company helps traditional and new media companies leverage
their most valuable asset, their existing customer base.
The Company's sources of revenue are fees from businesses that license ISN's ASP
applications; consumers who pay to enter "pay to play" contests; fees from
advertisers buying advertising space in online and offline media controlled by
the Company or such media by businesses licensing the Company's products and
services; and, from sales of magazines.
Our Executive Offices are located at 101 Bloor Street West, Suite 200, Toronto,
Ontario, Canada M5S 2Z7.
CORPORATE HISTORY
Internet Sports Network, Inc. was first incorporated in April, 1997 in the state
of Nevada. BirchTree Capital Corporation ("Birchtree"), a Florida corporation
was incorporated in the state of Florida on October 4, 1996. BirchTree was a
publicly traded corporation, trading under the symbol BITC on the Over the
Counter/Bulletin Board. Effective January 19, 1999, BirchTree issued 9,085,229
shares of its common stock in exchange for all of the outstanding shares of the
common stock of Internet Sports Network, Inc. a Nevada corporation and
subsequently merged the Nevada corporation into the Florida corporation. On
February 1, 1999, BirchTree changed its name to Internet Sports Network, Inc., a
Florida corporation, and changed its OTC/BB symbol to ISNI. The surviving
entity, Internet Sports Network, Inc., a Florida corporation (the "Company" or
"ISN") traded on the over the counter/bulletin board as ISNI until June 27,
2000. Effective June 28, 2000, the Company effected a reverse stock split of 6
to 1 and changed its OTC/BB symbol to ISPS.
Effective February 5, 1999, the Company acquired all of the shares of
SportsMark, Inc. an Alberta, Calgary, Canada corporation, SportsMark Promotions,
Inc., a Delaware corporation and Classroom 2000, Inc., an Alberta, Calgary,
Canada corporation, and assets of SMP SportsMark Promotions, International,
Inc., a Barbados Company (collectively "SportsMark" or "Sportsmark Group"). This
agreement resulted in the Company acquiring SportsMark's subscriber base and the
assets of SMP SportsMark Promotions International, Inc. which consisted of the
trademarks "Weekend Winners" and "Ultimate Draft" and all of its rights to use
U.S. Sports Contest Software. The shareholders of SportsMark received 1,500,000
shares of common stock of ISN and $1,254,000 cash as the consideration granted
in this agreement.
Effective March 5, 1999, the Company entered into a Merger Agreement with Pickem
Sports, Inc. a Maine corporation doing business in California ("Pickem") and the
individual stockholders of Pickem Sports Inc., wherein ISN would purchase all of
the stock of Pickem Sports, Inc. in exchange for one million eight hundred
sixty-seven thousand nine hundred ninety five (1,867,995) shares of common stock
of ISN and $3,000,000 in cash. This merger resulted in the Company acquiring
Pickem's web-based contest software. This software creates specific contests for
customers and strategic joint ventures from the Company's proprietary generic
programs.
Effective June 22, 1999, the Company acquired certain assets of National
Publisher Services, Inc., an Iowa corporation. These assets consisted of the
Ultimate Sports Publishing division, which is made up of the publications:
Ultimate Sports Baseball; Ultimate Sports Football; Hawes Fantasy Baseball;
Hawes Fantasy Football; Ultimate Sports Basketball, Hawes Fantasy Basketball;
and Ultimate Sports Hockey. Pursuant to this agreement, the Company also
acquired the trademarks "FTA" and "Ultimate Sports". Ultimate Sports publishes
fantasy sports
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contest publications and provides the Company with a cross-marketing tool
between traditional media and web-based media. These assets were acquired for
125,000 shares of common stock of ISN and $860,000 cash.
Effective June 30, 1999, the Company, entered into a Merger Agreement with
Innovation Partners Inc., d.b.a. SportsBuff, a Wisconsin corporation
("SportsBuff"), and the individual shareholders of SportsBuff, wherein ISN would
purchase the stock of SportsBuff in exchange for six hundred sixteen thousand
sixty (616,060) shares of common stock of ISN and $1,000,000 cash. SportsBuff
specializes in Internet and phone-based fantasy sports contests and has managed
private label and co-branded games throughout the United States. SportsBuff is a
brand name in the "salary cap" game category and `Coach B" and "Sports Buff"
suite of games.
On March 31, 2000 the Company entered into a binding Memorandum of Understanding
("MOU") to acquire a 60% interest in Sportsrockettravel.com, Inc., a wholly
owned subsidiary of iTravel 2000 Inc. in a non-monetary exchange for $1,000,000.
Sportsrockettravel.com Inc. will provide travel packages and services for sports
related events to ISN's clients.
RECENT DEVELOPMENTS
On June 1, 2000, the Company acquired all of the shares and the secured debt of
St. Clair Group Investments, Inc., an Ontario, Canada corporation ("St. Clair").
Pursuant to a Purchase Agreement, ISN acquired 20% of the outstanding shares of
St. Clair and its secured debt with a face value of $3,516,000 ($5,169,000
Canadian) in exchange for $1,300,000 ($1,900,000 Canadian) and 262,000 shares of
common stock of ISN. The remaining 80% of the outstanding shares were acquired
in exchange for 884,800 shares of common stock of ISN. St. Clair contracts media
and marketing rights for sports and entertainment properties to offer a packaged
marketing solution through sponsorship, broadcast, signage, print publishing and
promotions.
PRODUCTS AND SERVICES
ISN has a range of game, contest and promotional products operating in online
and offline media, in sports and non-sports categories. The Company also
distributes annual sports magazines through newsstands. The Company's contest
products permit the end user to participate in the level of competition,
sophistication, or cost with which they are most comfortable. These products
include applications distributed on a "white label" or on a co-branded basis
with media distribution companies, such as major web portals, television
stations and newspapers, as well as the Company's own "SportsRocket" branded
contests. Beyond its more complex game applications, the Company's
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product base has also expanded to meet the growing demand for more simple
contest and sweepstakes applications. In August 1999, a Jupiter survey
showed participation in contests and sweepstakes is one of the top 10 online
activities. Amongst these "top 10 online activities" contest participation
showed the single greatest percentage growth annually, from 27% of the online
users in 1998 to 49% in 1999. According to this survey, sports is one of the
top categories of content accessed online.
The Company's revenue is derived from fees from companies that license ISN's
applications; consumers who pay to enter "pay to play" contests; fees from third
parties advertising their products and services on web sites and offline media
where these contests take place; and, from sales of magazines. The Company has
recently expanded by adding an advertising sales force through the acquisition
of St. Clair Group to augment its ASP sales force, in order to meet the demand
from its business customers that need help attracting sponsors and advertisers
interested in reaching the audience that comes to play these games and contests.
During the year ended March 31, 2000, Sportsline.com Inc. contributed
approximately 12.5% of the consolidated revenues of the Company. No other client
contributed more than 10% of the consolidated revenues of the Company.
As marketing vehicles, the Company's online games and contests help its
business-to-business clients increase customer acquisition and retention and
improve usage and circulation of their products. The games and contests also
provide a targeted marketing opportunity to the sponsors/advertisers and
merchandisers that work with the media companies. The type of game or contest,
e.g., whether it has a sports theme or a movie theme, will attract different
types of demographic groups. For example, according to an article from Business
2.0, sports-themed contests are believed to be attractive to a targeted
demographic that is mostly male and between the ages of 18 and 45 years. By
comparison, according to research by Jupiter Communications, games with an
entertainment theme, such as movies and music, are believed to attract a larger
proportion of women and teens.
With promotion and advertising contained in their media properties, the Company
designs and manages contests such as football, baseball, basketball, golf,
NASCAR, hockey, soccer, sailing, popular culture and stock market investment
challenge contests. The net revenues from the subscriptions for the contests, or
from advertising and sponsorships are then divided between the licensee company
and ISN. The division of revenues from subscriptions varies from agreement to
agreement, and also depends on which company provides the advertising or
sponsorship. Under existing agreements, the division of revenues generally range
from as little as 40% to the Company to as much as 96% to the Company.
SAMPLE LIST OF ISN SPORTS GAMES
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FOOTBALL BASEBALL
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- NFL Fantasy Free for All - Regular - MLB Fantasy Free for All - Regular
- NFL Fantasy Free for All - Playoffs - MLB Fantasy Free for All - Playoffs
- NFL Pick'em - Regular - MLB Weekly Pickem
- NFL Pick'em - Playoffs - MLB Playoffs Pickem
- Ultimate Draft Pay to Play - MLB Ultimate Draft Pay to Play
- Sportsbuff Salary Cap - MLB Sportsbuff Salary Cap
- Superbowl Game Day - World Series Game Day
- Grey Cup Game Day - Local Team Game Day
- Local Team Game Day - 9th Inning Trivia
- Two-Minute Drill Trivia - Banner Ad Games: Cy Young
- College Bowl Pandemonium - Home Run Derby
- College Football Pick'em - College World Series Fantasy
- Banner Ad Games: Heisman Trophy - Baseball Shockwave Games
- Pick Your Pro Football - High Five
- Banner Ad Games: Super Bowl - Weekend Winners
- Football Shockwave Games
- High Five
- Weekend Winners
</TABLE>
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<TABLE>
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SAMPLE LIST OF ISN SPORTS GAMES - CONT'D
BASKETBALL HOCKEY
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- NBA Fantasy Free-for-All - Regular - NHL Fantasy Free For All Regular
- NBA Fantasy Free for All - Playoffs - NHL Fantasy Free For All Playoffs
- NBA Pickem Regular - NHL Regular Season Pick'em
- NBA Pickem Playoffs - NHL Playoffs Pick'em
- NBA Ultimate Draft Pay to Play - NHL Ultimate Draft Pay to Play
- NBA Sportsbuff Salary Cap - NHL Sportsbuff Salary Cap
- College Hoops Pick'em - Stanley Cup Finals Game Day
- Banner Ad Games: Double Dunk - Local Team Game Day
- Fastbreak Trivia - Exact Score Puck Pick'em
- March Madness - Powerplay Trivia
- High Five - Banner Ad Games: Stanley Cup
- Weekend Winners - High Five
- Weekend Winners
AUTO RACING GOLF
- CART Fantasy - PGA Fantasy Free for All
- CART Fantasy Pro - LPGA Fantasy Free for All
- F1 Fantasy - EURO Tour Fantasy Free for All
- F1 Fantasy Pro - Majors Game Day
- Stock Car Challenge - Ultimate Foursomes Fantasy
- Nascar That's Racin' - Par-5 Trivia
- Final Lap Trivia - Pick Your Pro
- Banner Ad Games: Indy 500 - Banner Ad Games: The Majors
- Pick Your Pro Autoracing
SOCCER CYCLING
- All Leagues Fantasy - Fantasy Mountain Biking
- Exact Score Soccer Pick'em - Spring Classics Pick Your Pro
- World Cup Soccer Trivia - Spring Classics Fantasy
- Fantasy Tour de France
VOLLEYBALL SAILING
- Beach Challenge - America's Cup Fantasy
- Pro Beach Challenge - America's Cup Pro
ALL SPORTS
- Sports Stock Exchange - Saturday Special Six
- Friday Fantastic Five - Sunday Select Seven
ISN NON-SPORTS GAMES
TRIVIA MOVIES
- Animated Trivia - Fantasy Movie Mogul
- No. 5Hit Trivia Contests - Academy Awards-Registered Tradmark- Game Day
- Box Office Challenge
MUSIC BUSINESS
- Fantasy Record Company Exec - Banner Ad Games: Dow Jones
- Grammy Awards Game Day - Market Trivia
- Stock Market Challenge
ROSHAMBO
- Battle the Roshambot
- Roshambo Pro
</TABLE>
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STATUS OF ANY PUBLICLY ANNOUNCED NEW PRODUCT OR SERVICE
The Company has not publicly announced any new product or service.
THE MARKET
The Company markets contests in online as well as off-line media. The Company
believes that these markets are complementary and that there is increasing
convergence between the online and off-line markets. As part of its business
plan, the Company intends to grow market share by creating marketing solutions
that integrate online and offline media.
The Company operates in an international market space, predominantly in North
America, but increasingly in South America and Europe, where the Company has
existing clients.
Jupiter Communications ("Jupiter"), an international Internet research and
strategy firm, has indicated that:
- the number of Americans online in 2000 is at more than 120 million;
- 10 million new users are expected to come online every year for the
next five years; and
- an expected 200 million Americans will be online by 2005.
At that point, according to Jupiter, Internet penetration in the home will have
achieved a rate equal to current penetration of cable television, at 76% of
households. During the next five years, the Internet in the United States will
achieve a mass media status, according to Jupiter, with the associated
advertising revenues rivaling that of traditional media, as well as direct
marketing revenues that flow from its interactive transactional and
data-gathering capabilities.
The Company believes that products of the type produced by the Company appeal to
a broad cross-section of consumers. According to consumer surveys conducted by
Jupiter and NFO Interactive, a public opinion research firm, the following
regularly play action games, fantasy games, and flight simulators:
- 61 percent of children (ages five to 12);
- 61 percent of teens (ages 13 to 18);
- 26 percent of young adults (ages 19 to 34); and
- 18 percent of adults (ages 35 to 49).
According to the same consumer surveys, the following regularly play traditional
card games, trivia games, and parlor games online:
- 47 percent of children;
- 46 percent of teens;
- 23 percent of young adults; and
- 15 percent of adults.
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The age cohorts with the largest participation rate in online games - children,
teens and young adults - are the fastest growing segments of Internet adopters,
according to Jupiter.
In offline media, the Company primarily distributes sports fantasy games, and
such sports fantasy games comprise a smaller but still significant percentage
share of the Company's online product base. According to a poll of 2,395
Americans in November and December 1999 by the US research firm, Harris Poll,
15% of Americans 18 or older, estimated at 29.6 million people, play fantasy
sports games and they spend one to four hours per week, either online or
off-line, engaged in playing these fantasy sports games.
The Company's business-to-business clients, in online and offline media, use its
games and contests as solutions to marketing needs in terms of attracting and
retaining end users. The Company's products, available in "private label" or
co-branded versions, allow for what Jupiter describes as "extremely targeted
advertising and direct marketing--the primary revenue streams for free online
game play." Games have proven to be a great way to retain an audience, getting
users to spend time in actual game play as well as convincing them to return to
a site to find games there, according to Jupiter.
Silicon Alley Reporter, a digital media industry trade publication, stated that
sports is the leading content application, and interactive sports contests are
the "killer application" that no sports web site can do without.
DISTRIBUTION
The Company's products are distributed through the Internet and are accessed
either through its licensees, through the Company's web site "Sportsrocket.com"
or through off-line entry via newspaper or magazine.
In December 1999, the Company entered into a four-year agreement with
SportsLine.com, Inc. ("SportsLine") to develop contests and games for the
Fantasy Sports Channel of SportsLine's CBS SportsLine Web site. SportsLine.com,
Inc. (NASDAQ: SPLN) is at the leading edge of media companies providing Internet
sports content, community and e-commerce on a global basis. SportsLine's content
includes more than one million pages of multimedia sports information,
entertainment and merchandise. Founded in 1994 as SportsLine USA, Inc., the
Company changed its name to SportsLine.com, Inc. in November 1999. Its flagship
Internet sports service (http://cbs.sportsline.com) was renamed CBS SportsLine
in March of 1997 as part of an exclusive promotional and content agreement with
CBS Sports. SportsLine.com, Inc. produces the official league Web sites for
Major League Baseball, the PGA TOUR and NFL Europe League, and serves as the
primary sports content provider for America Online, Netscape and Excite.
COMPETITION
The interactive sports contests industry is rapidly evolving and very
competitive, which the Company expects will intensify in the future. Barriers to
entry are minimal, allowing current and new competitors to launch new products
at a relatively low cost. The Company currently or potentially competes with
other companies which have sports related websites. These competitors include
ESPN.com, CDM, Inc., SmallWorld Sports, Sandbox, Prime Sports Interactive as
well as many other smaller competitors.
Many of the Company's current and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, other competitors may be acquired by, receive investments from, or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's competitors may be able to devote greater
resources to marketing and promotional campaigns, and devote substantially more
resources to Web site and systems development then the Company. Increased
competition may result in reduced operating margins, loss of market share and a
diminished franchise value. There can be no assurance that the Company will be
able to compete successfully against current and future competitors, and
competitive pressures faced by the Company may have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations. Further as a strategic response to changes in the competitive
environment, the Company may, from time to time, make certain service or
marketing decisions or acquisitions that could have a material adverse effect on
its business, prospects, financial condition and results of operations. New
technologies and the expansion of existing technologies may increase the
competitive pressures on the Company. In addition, companies that control access
to transactions through network access or Web browsers could promote the
Company's competitors or charge the Company a substantial fee for inclusion.
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PATENTS AND TRADEMARKS
The Company has registered the web sites www.sportspool.com,
www.internetsportsnet.com, www.ultsports.com, www.sportsbuff.com,
www.sportsrocket.com and www.pickem.com. We currently operate most of our
contests on the www.sportsrocket.com web site. The following lists other web
site names registered by the Company:
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charity4sports.com isnintranet.com isnsportsrocket.net sportsmark.com
charityforsports.com isnrocket.com isnsportsrocket.org sportspool.com
classroom2000.ab.ca isn-rocket.com isnx.com sportsrocket.com
gamesrocket.com isnrocket.net isnx.net sports-rocket.com
glue.com isn-rocket.net isnx.org sportsrocket.net
golfpool.com isnrocket.org sportrockets.com sports-rocket.net
hockeypool.com isn-rocket.org sportrockets.net sportsrocket.org
internetsportsnet.com isnrockets.com sportrockets.org sports-rocket.org
internetsportsnetwork.com isnrockets.net sports4charity.com sportsrockets.com
internetsportsnetwork.net isnrockets.org sportsbuff.com sportsrockets.net
internetsportsnetwork.org isnsportsnet.com sportsdraft.com sportsrockets.org
isngames.com isnsportsrocket.com sportsforcharity.com
</TABLE>
The Company currently has an application pending with the United States Patent
and Trademark Office ("PTO") and the Canadian Patent and Trademark Office for
registration of the name "Internet Sports Network" as a servicemark.
As part of the Sportsmark transaction, ISN acquired Sportsmark's trademarks and
tradenames filed in the Canadian trademark office including:
Sportsmark, All Star Challenge, Great Canadian Hockey draft, Fantasy Hockey
Dream Team, Fantasy Basketball Dream Team, Fairway Fantasy, Playoff Payoff,
Weekend Winners, Fantasy Baseball Dream Team, Fantasy Football Dream Team,
Hockey Draft Sweepstakes. The Sportmark trademark expires fifteen years from
January 18, 1999. All Star Challenge has recently acquired approval from the
Canadian trademark office. Its filing date will commence upon the filing of a
statement of use by the Company. Great Canadian Hockey draft will expire 15
years from April 30, 1997. Fantasy Hockey Dream Team will expire 15 years from
February 5, 1997. Fantasy Basketball Dream Team will expire 15 years from
January 14, 1997. Fantasy Football Dream Team will expire 15 years from February
24, 1989. Fairway Fantasy will expire 15 years from March 22, 1996. Playoff
Payoff will expire 15 years from August 28, 1994. Weekend Winners will expire 15
years from August 5, 1994, and Hockey Draft Sweepstakes will expire 15 years
from November 23, 1988.
As part of the transaction with National Publisher's Services, Inc., d.b.a.
Ultimate Sports, the Company was assigned the trademarks "Ultimate Sports" and
"FTA". FTA was registered with the PTO on May 4, 1998 and thus would expire by
May 3, 2008. The "FTA" trademark consisting of stylized letters was registered
with the PTO on November 14, 1997 and would expire by November 13, 2007. The
"Ultimate Sports" trademark was registered with the PTO on July 22, 1993 and
would expire July 21, 2003. The Company has filed the assignment forms with the
United States Patent and Trademark office.
As part of the merger by and between Innovation Partners, Inc. d.b.a. SportsBuff
and ISN, Wisconsin, ISN Wisconsin is the surviving entity and has all right and
title to the trademarks, trade names and proprietary information owned by
SportsBuff. Such trademarks include "Buffball" and "SportsBuff". "SportsBuff"
was registered with the PTO on July 22, 1997 and thus would expire by July 21,
2007. The mark "Buff Ball" was registered with the state of Wisconsin on
November 24, 1993 and is valid for a period of ten years.
The Company does not rely on proprietary technology in providing its
applications. While the Company uses technology which has been customized for
its own purposes, the Company has deliberately avoided becoming overly dependent
on any one technology. By avoiding reliance on any one technology, the Company
will be able to take advantage of technological advances to provide new and
improved services and superior sports contests to its subscribers.
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GOVERNMENT REGULATION; GOVERNMENT APPROVAL
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally. There are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to issues such as the protection of databases, user privacy,
pricing and characteristics and quality of products and services. The adoption
of laws or regulations in the future may decrease the growth of the Internet,
which could in turn decrease the demand for the Company's services and products
and increase the Company's costs of doing business or otherwise have an adverse
effect on the Company's business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain and could
expose ISN to substantial liability, for which the Company might not be
indemnified.
ISN's contests and games may be subject to state and federal laws governing
lotteries and gambling. The Company seeks to design its contest and game rules
to fall within exemptions from such laws and restricts participation to
individuals over 18 years of age who reside in jurisdictions within the United
States and Canada in which the contests and games are lawful. There can be no
assurance that ISN's contests and games will be exempt from such laws or that
the applicability of such laws to the Company would not have a material adverse
effect on the Company's business, results of operations and financial condition.
Due to the global nature of the Internet, it is possible that the governments of
various states of the United States or foreign countries may attempt to regulate
ISN's transmissions or to prosecute ISN for violations of their laws. Violations
of local laws may be alleged or charged by state or foreign governments. The
Company may unintentionally violate these laws and these laws may be modified,
or new laws enacted, in the future. It is also possible that states or foreign
countries may seek to impose sales taxes on out-of-state companies that engage
in commerce over the Internet. In the event that states or foreign countries
succeed in imposing sales or other taxes on Internet commerce, the growth of the
use of the Internet for commerce could slow substantially.
RESEARCH AND DEVELOPMENT COSTS
The Company has not incurred significant research and development costs. All
expenses relating to the research and development of products is expensed by the
Company as incurred.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company is not involved in a business which involves the use of materials in
a manufacturing stage where such materials are likely to result in the violation
of any existing environmental rules and/or regulations. Further, the Company
does not own any real property which would lead to liability as a land owner.
Therefore, the Company does not anticipate that there will be any costs
associated with the compliance of environmental laws and regulations.
EMPLOYEES
As of March 31, 2000, the Company employed 38 full time and 4 part time
employees. The Company has no collective bargaining agreements with its
employees. The Company believes that its employee relationships are
satisfactory. In the long term, the Company will attempt to hire additional
employees as needed based on its growth rate.
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ITEM 2. DESCRIPTION OF PROPERTIES
We lease approximately 8,000 square feet of office space in Toronto for our main
administrative offices. We also lease facilities in Vancouver, British Columbia,
Canada. The lease expires on September 30, 2000 and we sublease this space to a
third party.
In addition, we also lease approximately 15,000 square feet of office space for
our operations in Calgary, Alberta, and Palo Alto, California and recently
acquired operations in Toronto, Ontario
In the opinion of management, the Company maintains adequate insurance coverage
on all leased properties.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 31, 2000, the holders of 55.7% of the outstanding shares of Common
Stock executed a written consent adopting the following Charter Amendments:
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 May 2, 2000 an Information Statement on Schedule 14C was sent to all security
holders of record on March 31, 2000.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's common stock traded in the over-the-counter bulletin board market
as ISNI since the BirchTree Capital Corporation/ISN recapitalization of January
1999 until September 2, 1999. From September 2, 1999 until January 11, 2000 the
Company traded on the over the counter "pink sheets" as ISNI. Effective January
11, 2000, The Company's common stock traded in the over-the-counter bulletin
board market as ISNI.OB.
The following table sets forth the high and low bid prices for the Company's
common stock for each quarter within the last two fiscal years. Information is
only available since January 1999. The prices below also reflect inter-dealer
quotations, without retail mark-up, mark-down or commissions and may not
represent actual transactions:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
High Low
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year Ending March 31, 1999
--------------------------------------------------------------------------------------------------
First Quarter N/A N/A
--------------------------------------------------------------------------------------------------
Second Quarter N/A N/A
--------------------------------------------------------------------------------------------------
Third Quarter N/A N/A
--------------------------------------------------------------------------------------------------
Fourth Quarter $6.00 $2.2188
--------------------------------------------------------------------------------------------------
Fiscal Year Ending March 31, 2000
--------------------------------------------------------------------------------------------------
First Quarter $9.50 $4.625
--------------------------------------------------------------------------------------------------
Second Quarter $6.75 $2.50
--------------------------------------------------------------------------------------------------
Third Quarter $6.00 $2.00
--------------------------------------------------------------------------------------------------
Fourth Quarter $3.50 $1.375
--------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
In February-May, 1999, the Company offered up to 4,571,429 shares of common
stock for a total consideration of $6 million to $8 million to non-U.S.
residents. Investors purchased common stock totaling 4,454,472 shares for total
consideration of approximately $7,795,000. The proceeds were used to acquire
SportsMark and Pickem and to fund operations of the Company. The Company relied
upon an exemption available under Regulation S of the Act for the sale of these
securities.
In February-April 1999, the Company offered common stock to accredited U.S.
residents only. In this offering, a total of 31 investors acquired a total of
653,183 shares, for total consideration of $1,143,070. The proceeds were used to
fund the operations of the Company. The Company relied upon an exemption
available under Rule 506 of Regulation D of the Act for the sale of these
securities.
Effective June 22, 1999, the Company acquired the assets of Ultimate Sports
Publishing from National Publisher Services Inc ("NPS"). In this acquisition the
Company issued a total of 125,000 shares to NPS in exchange for the assets of
Ultimate Sports Publishing. NPS was an accredited investor The sale of these
securities was exempt from registration pursuant to Section 4(2) of the Act.
Effective June 30, 1999, the Company acquired Innovation Partners Inc (d/b/a
SportsBuff). In this acquisition the Company issued a total of 616,060 shares to
8 Innovation Partners shareholders in exchange for all of the common stock of
Innovation Partners. All of the shareholders were accredited investors. The
Company relied upon an exemption available under Rule 506 of Regulation D of the
Act for the sale of these securities. In July-September 1999, all of the stock
options granted on January 5, 1999 were exercised, resulting in the issuance of
575,000 common shares for proceeds of $230,000, of which $190,000 were provided
by a subscription receivable. The issuance of these securities was exempt from
registration pursuant to Section 3(a)(9) of the Act.
In August 1999, pursuant to a Site Development Services Agreement with Labatt
Brewing Company Limited ("LBCL"), the Company issued 1,000,000 shares of common
stock into escrow to be released at the rate of 200,000 per annum to LBCL in
exchange for an exclusive, five year agreement. The sale of these securities
was exempt from registration pursuant to Section 4(2) of the Act.
In December 1999, pursuant to a Promotion Agreement with SportsLine.com, Inc.
("Sportsline"), the Company issued 4,098,742 shares of common stock and a
warrant to purchase up to 1,033,296 shares of common stock at a price of
$2.90 per share in exchange for a 4 year agreement, with a 2 year option. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Act.
(B) HOLDERS
The number of record holders of the Company's Common Stock as of March 31, 2000
was 198.
(C) DIVIDENDS
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the results and operations and financial condition of
the company should be read in conjunction with the consolidated financial
statements, including the notes thereto, of the company contained elsewhere in
this Form 10-KSB
OVERVIEW
ISN was originally incorporated on April 28, 1997 in Nevada for the purpose
of providing interactive, computer sports entertainment through the Internet.
The Company has a limited operating history on which to evaluate its
prospects. The risks, expense, and difficulties encountered by start up
companies must be considered when evaluating ISN's prospects.
The operating expenses of ISN cannot be predicted with certainty. They will
depend on several factors, including the amount of marketing expenses, the
acceptance of the Company's services in the market, competition for such
services, and the acquisition activities of the Company. Management may be
able to control the timing of such expenses in part by speeding up or slowing
down marketing development and distribution activities and acquisition
strategies.
From its inception in April 1997 to date, ISN has incurred costs associated
with the development of its internet sports entertainment products, probable
markets and business. ISN incurred costs for conducting test marketing for
its products and received revenues as a result. The test marketing consisted
of advertising, processing membership applications and analysis of responses.
During the period, ISN purchased computer and telecommunication equipment as
necessary to conduct its operations.
ISN financed its expenditures primarily through the sale of its common stock
and issuance of debt. Since inception through March 31, 2000, the company
issued approximately 12,982,000 common shares for net cash consideration of
approximately $10,835,000, $1,240,000 in promissory notes, and $6,071,000 in
convertible debt.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has an accumulated deficit
of $26,307,000 to March 31, 2000. The Company is currently in default with a
loan and anticipates that it will continue to generate financial losses for the
foreseeable future. The Company's long term ability to meet its liquidity
requirements and to continue operations will depend on (i) its ability to
generate advertising and sponsorship revenue on its Internet properties, (ii)
the continued growth and acceptance of the Internet and (iii) its ability to
continue to provide innovative and reliable products for its ASP client base. If
the Company is unable to reduce its operating losses, either in the short-term
or the long-term, and it is unable to secure outside capital to meet the
resulting liquidity shortfall, the Company may be forced to reduce or
discontinue some or all of its operations or seek protection under the federal
bankruptcy laws. Under United States Generally Accepted Auditing Statements
substantial doubt exists regarding the ability of the Company to continue as a
going concern.
It is the intention of management to raise the additional capital through the
sale of additional capital stock of the Company, although there can be no
assurance that ISN will be able to obtain such funds.
11
<PAGE>
The Company's primary cash requirements are for operating activities and
acquisition activities. Cash used in operating activities for the year ending
March 31, 2000 was $9,222,000 (as compared to $1,606,000 for the 11 month
period ending March 31, 1999) related primarily to infrastructure costs
required to manage the continued growth of the Company and the pre-payment of
royalties to SportsLine.com totaling $5,750,000. The increase in cash used in
operating activities was due to the staffing of the operation to grow the
business. Total headcount as at March 31, 2000 was 42 as compared to 9 as at
March 31, 1999.
Cash used in acquisition activities for the year ending March 31, 2000 was
$1,860,000 (as compared to $4,254,000 for the 11 month period ending March 31,
1999). Since inception, the Company has funded its capital requirements by
financing activities, primarily through the sale of its equity securities, debt
and convertible debt. Capital expenditures (excluding acquisitions) during the
year ended March 31, 2000 were $562,000 as compared to $21,000 for the 11 months
ended March 31, 1999. Capital expenditures were primarily for computer
technology to manage the contest management strategy. From inception to March
31, 2000 the Company has spent $637,000 on capital equipment. ISN has no
significant commitments to acquire equipment in the future, although the Company
expects to spend approximately $800,000 in capital assets over the next 12 month
period.
The Company operates in an extremely competitive industry and it will require
substantial capital from external sources in order to complete the execution of
its business plan. The Company anticipates that it will continue to generate
financial losses for the foreseeable future. In the event the Company is
unsuccessful in securing outside capital, it may be required to curtail or cease
operations altogether. As a result, substantial doubt exists regarding the
ability of the Company to continue as a going concern.
The Company's management believes that an additional $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 will be required for further acquisition activity,
depending on the cash component of the purchase price of any contemplated
acquisitions. It is expected that such funds will be obtained by the sale of
additional capital stock of the Company, although there can be no assurance
that ISN will be able to obtain such funds.
Beyond the next twelve month period, the Company will require working capital
to fund operations during the off peak months (June to August). Excluding
acquisition activity, the funds required would be approximately $2,000,000.
Any additional capital requirements would be due to acquisition activities,
or modifications to the current growth plans.
During the year the Company received proceeds from the following debt
instruments:
<TABLE>
<CAPTION>
Instrument Rate Due date Proceeds
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan payable 9% per annum December 31, 2000 $250,000
Loan payable 10% per annum March 31, 2000 1,000,000
Loan payable 7% per annum June 30, 2000 240,000
Convertible debt 8% per annum June 30, 2000 521,000
Convertible debt 8% per annum May 31, 2000 300,000
Convertible debt 10% per annum April 27, 2000 250,000
---------------------------------------------------------------------------------------------------------
2,564,000
Repayments during the year (250,000)
---------------------------------------------------------------------------------------------------------
Balance, end of year $2,314,000
=========================================================================================================
</TABLE>
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
12
<PAGE>
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 and price protections. Pursuant to the purchase
agreement under which the Note and Warrant were issued (the "Purchase
Agreement"), the Company has agreed to fix the size of its Board of Directors
at seven members and to take all steps necessary to elect or cause the
election of two directors designated by SportsLine. The Purchase Agreement
also contains certain covenants which restrict the Company's power to take
various corporate actions, including issuing or selling securities, merging
the Company with another entity, selling assets, acquiring other businesses,
liquidating or dissolving the Company, without the consent of SportsLine.
ISN financed the acquisition of St. Clair through the issuance of a
promissory note in the amount of $1,800,000 Canadian to 2 investors who
provided the majority of the cash component towards the purchase of St.
Clair. The note is due on July 15, 2000. It is management's belief that the
investors will convert the promissory note into equity at the due date on
terms to be determined.
As a result of the St. Clair acquisition in June 2000, which was completed with
a valuation of $2.076 per ISN common share, the price protection conditions in
the SportsLine Note and Warrant were triggered. The Note and Warrant have been
amended to convert into 2,408,478 and 1,445,087 shares of common stock
respectively.
Subsequent to year end, the Company raised a further $2,000,000 of the 10%
Convertible Debt. These Debentures were converted into Preferred Shares
Series A on June 6, 2000. The Preferred Stock carries a 5% dividend rate,
payable in cash or Common Stock. The shares of the Series A Preferred Stock
are convertible at the option of the holder at anytime, and convert
automatically after three years into Common Stock at a conversion rate of the
lesser of $2.90 per Common Share or the average lowest market price over a
certain period of time before conversion.
The Company's management believes that the outstanding debt will be converted
into equity in the next 12 months although there can be no assurance. There were
no similar instruments outstanding for the 11 months ending March 31, 1999.
RESULTS OF OPERATIONS
The Company expects to continue to acquire companies and assets that can benefit
its business and subscriber base. Currently, ISN is reviewing potential
acquisition targets that could provide complementary games and contests as well
as new customers for the Company's existing games.
YEAR ENDED MARCH 31, 2000 (AUDITED) AS COMPARED TO THE ELEVEN MONTHS ENDED
MARCH 31, 1999 (AUDITED).
Revenue. The Company generated revenue of $5,914,000 for the year ending March
31, 2000 as compared to revenues of approximately $152,000 for the period ending
March 31, 1999. Approximately $3,000,000 of the increase in revenues was
attributable to the acquisitions of Sportsmark and Pickem during the last two
months of the period ended March 31, 1999, and the acquisitions of Ultimate
Sports Publishing and Sportsbuff in June 1999. The remaining growth in revenue
was attributable to sales generated by the increased sales staff.
Operating expenses before depreciation, amortization and other non-cash charges:
Total operating expenses before depreciation, amortization and other non-cash
charges were $10,690,000 as compared to $2,256,000 in the period ended March 31,
1999, for an increase of $8,434,000. Approximately $5,272,000 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:
Prize commitments and other direct costs: Expenses associated with providing
prizes for contests and other direct costs increased to $2,747,000 from
approximately $250,000 in eleven month period ended March 31, 1999.
Approximately $988,000 of the increase in costs during the current year are the
result of publishing costs associated with the magazine publications acquired
during the year. Prize commitments increased by $531,000 over the prior period,
primarily due to the acquisitions of Sportsmark and Sportsbuff, both of which
offer fixed prize contests throughout the year for the major sports (Football,
Baseball, Hockey and Basketball). Approximately $400,000 of the increase was the
result of costs associated with running contests either through the acquisitions
or new contests operated by the Company. $500,000 of the increase relates to
development costs associated with building out additional content for the
Company's destination site, Sportsrocket.com. The remaining increase of $78,000
is the result of various costs associated with operating the contests and
websites.
Salaries and benefits: Salaries increased by $2,182,000 to $2,567,000 from
$385,000 in the eleven month period ending March 31, 1999. These increases were
the result of additional personnel and staff, mainly from the acquisitions of
Sportsmark, Pickem Sports, Ultimate Sports Publishing and SportsBuff, combined
with the hiring of additional sales, marketing and administrative staff during
the year to manage the growth of the Company. Total staff increased from 9
people in January, 1999 to 42 people by March 31, 2000. $260,000 of the increase
in salary
13
<PAGE>
costs was the result of severance costs associated with the closing of ISN's
Vancouver and Wisconsin offices during the year.
Consulting Fees: Consulting fees increased by $927,000 to $1,194,000 from
$267,000 in the prior period due to financial services, certain game
development, web design and other services provided externally.
Advertising: Advertising expenses increased $54,000 to $421,000 from $367,000 in
the prior period. The increase is modest in relation to the increase in revenue
from the prior period. This is mainly due to a shift in advertising strategy to
utilize the newspaper space used to promote our contests to promote our Company,
instead of other costly media.
General and administrative: General and administrative costs increased by
$1,915,000 to $2,339,000 from $424,000 in the prior period. This increase is
made up of the following fluctuations:
- Increase in general office expenses of $747,000 as a result of the
addition of offices in Palo Alto, Calgary, Wisconsin and Toronto as
well staff and operations as a result of the acquisitions of
Sportsmark, Pickem, Ultimate Sports and SportsBuff.
- Increase in travel and other expenses of $438,000 to $621,000 as a
result of an increase in sales staff, increased sales efforts and
financing activities.
- Increase in legal and accounting fees of $486,000 as a result of costs
associated with the preparation of the Company's Securities and
Exchange Commission ("SEC") filings, including the Form 10 and the
agreement with SportsLine.com, Inc.
- Increase in occupancy and telephone costs of $244,000 to $316,000
compared to $72,000 for the period ending March 31, 1999. The increase
is due to the acquisition of Sportmark, Pickem Sports, Ultimate Sports
and Sportsbuff combined with the creation and substantial growth in the
Toronto offices.
Interest and bank charges increased by $174,000 to $191,000 as a result of fees
and interest on loans and convertible debt.
Amortization
The purchased intangibles and goodwill before amortization related to the
acquisitions of Sportsmark Group, Pickem Sports, Ultimate Sports Publishing,
SportsBuff, Sportsrocketravel and domain names totaled $24,471,000. Amortization
of purchased intangibles and goodwill for the year ended March 31, 2000, was
$10,588,000. The purchased intangibles and goodwill related to the acquisition
of Ultimate Sports Publishing, SportsBuff and Sportsrocketravel during the year
ending March 31, 2000 totaled $10,092,000. The Company is amortizing purchased
intangibles and goodwill over 24 months. These intangibles include trademarks,
software licenses and intellectual properties.
Depreciation was $159,000 for the year ended March 31, 2000 as compared to
$23,000 for the prior year. The increase is due to the acquisition of equipment
throughout the year.
The Company amortized $5,865,000 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.
The Company recognized a $1,461,000 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.
14
<PAGE>
Net loss from operations. The Company experienced a loss of $22,150,000 after
the benefit of deferred taxes of $2,842,000 for the year ended March 31, 2000 as
compared to a loss of $3,514,000 for the period ended March 31, 1999. Loss per
share for the year ended March 31, 2000 was $(1.06) compared to $(.45) for the
eleven months ended March 31, 1999.
Total Assets. The total assets of ISN as of March 31, 2000 totaled $32,044,000
compared to $16,715,000 at March 31, 1999. The increase in total assets was
attributable to the increase in deferred charges as a result of the shares
issued to SportsLine and Labatt Brewing Company Limited for their respective
contracts, which resulted in a net increase in assets of $13,014,000. Further
increase in assets is a result of the pre-payment of $5,750,000 related to the
minimum royalty owing for the next two years under the terms of the SportsLine
agreement. As at March 31, 2000, $4,615,000 remained on the balance sheet. In
addition, purchased intangibles and goodwill of $10,092,000 resulting from the
acquisition of SportsBuff, Ultimate Sports Publishing and Sportsrocketravel have
impacted the assets of the Company since March 31, 1999. These increases are
offset by operating losses and amortization costs during the period.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Discussions containing forward-looking
statements may be found in the material set forth in this section and under
"Description of Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as in the Report generally. These
statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Specifically, this Report and the
documents incorporated into this Report by reference contain forward-looking
statements regarding:
- the development of the Internet industry and the impact of the
increasing convergence between online and offline media;
- our ability to successfully implement our business strategy to
expand our product base, our personnel and our operations and to
avoid reliance on one technology;
- our ability to create marketing solutions that integrate online
and offline media;
- the intensification of the evolving and competitive nature of the
interactive sports contests industry;
- our ability to raise additional capital through the sale of
additional capital stock of the Company;
- our financial condition, results of operations and liquidity,
including the amount of capital assets that we will need to spend
over the next 12 month period;
- our ability to identify companies and assets that will complement
our business strategy and to successfully negotiate the
acquisition and subsequent integration of such companies; and
- our estimates that the St. Clair investors will convert a
promissory note into equity at the due date on terms to be
determined;
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish
to caution readers that certain important factors may have affected and
could in the future affect our actual results and could cause actual
results to differ significantly from those expressed in any
forward-looking statement. The most important factors that could
prevent us from achieving our goals, and cause the assumptions
underlying forward-looking statements and the actual results to differ
materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
15
<PAGE>
- risks, uncertainties and assumptions relating to the Company's
operations and results of operations, including its ability to
continue to attract equity investments;
- the level of usage of the Internet, traffic on our Web sites and
general economic conditions and economic conditions specific to
the Internet, electronic commerce and online media;
- our ability to develop products in a timely and cost-effective
manner that are accepted by the market;
- our ability to successfully manage the Company's growth,
including our ability to hire and retain employees; and
- our ability to protect our intellectual property rights.
ITEM 7 FINANCIAL STATEMENTS
The financial statements are set forth on pages F-1 through F-24
hereto.
ITEM 8 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Incorporated by reference to the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Proxy Statement.
16
<PAGE>
ITEM 13. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
(a) Exhibits
<S> <C>
2.1 Agreement for the Exchange of Common Stock between Birch Tree
Capital Corp. and Eric P. Littman, and Internet Sports Network, Inc.(1)
2.2 Share Purchase Agreement between Internet Sports Network, Inc. and
SportsMark Inc., SportsMark Promotions, Inc. & Classroom 2000 Inc.
and Assets of SMP SportsMark Promotions International, Inc.(1)
2.3 Merger Agreement between Torsten Heycke, Rafael Furst, Perry
Friedman, Pickem Sports, Inc., and Internet Sports Network, Inc.(1)
2.4 Agreement for the Purchase of Certain Assets of Ultimate Sports
Publishing, Inc. By and Between National Publisher Services, Inc.
And Internet Sports Network, Inc.(1)
2.5 Agreement and Plan of Merger between Innovation Partners, Inc. and
Internet Sports Network, Inc.(1)
3(i) Articles of Incorporation and Amendments of Internet Sports Network,
Inc.(1)
3(ii) Bylaws of Internet Sports Network, Inc.(1)
3(ii) Amended Bylaws of Internet Sports Network, Inc.(1)
4.1 Form of Consultant's Option Agreement and Certificate(1)
4.2 Form of Officer/Director Option Agreement and Certificate(1)
4.3 Common Stock Certificate Specimen(1)
10.1 Lease for Toronto office(1)
10.2 Lease for Vancouver office(1)
10.3 Employment Agreement for Bill Gibson(1)
10.4 Employment Agreement for Geoff Ford(1)
10.5 Settlement Agreement with Digital Data Networks(1)
10.6 Settlement Agreement with Patrick S. Earle(1)
10.7 Settlement Agreement with Neil Podmore(1)
10.8 Site Development Service Agreement and Escrow Agreement between the
Company and Labatt Brewing Company Limited, dated August 1, 1999(2)
10.9 Online Contests Services Agreement between the Company and Playboy
Enterprises International, Inc., dated July 15, 1999(2)
10.10 Agreement with SportsLine.com, Inc. Attached as Exhibits as follows(3):
Exhibit 10(a): Purchase Agreement
Exhibit 10(b): Note
Exhibit 10(c): Warrant
Exhibit 10(d): Letter Agreement
16. Letter from Davidson & Company(1)
21 List of Subsidiaries of Company
23.1 Consent of Independent Accountant
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by Reference to the Registrant's Registration Statement on
Form 10 previously filed with the Securities Commission.
(2) Incorporated by Reference to the Registrant's Quarterly Report for
September 30, 1999 on Form 10-QSB previously filed with the Securities
Commission.
(3) Incorporated by Reference to the Registrant's Quarterly Report for
December 31, 1999 on Form 10-Q previously filed with the Securities
Commission.
(b) Form 8-Ks
1. Form 8-K filed on March 27, 2000 reporting an Item 5 Other Event.
2. Form 8-K filed on March 28, 2000 reporting an Item 5 Other Event.
17
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Toronto,
Ontario, Canada, on June 29, 2000.
INTERNET SPORTS NETWORK, INC.
By: /s/ Andy DeFrancesco
-------------------------
ANDY DEFRANCESCO
Chairman and CEO
In accordance with the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Andy DeFrancesco
----------------------------------- Chairman and CEO June 29, 2000
Andy DeFrancesco
----------------------------------- Director
Greg O'Hara
/s/ Andrew Sturner
----------------------------------- Director June 29, 2000
Andrew Sturner
/s/ Mark Mariani
----------------------------------- Director June 29, 2000
Mark Mariani
----------------------------------- Director
Rocco Rossi
/s/ J. Thomas Murray
----------------------------------- Director June 29, 2000
J. Thomas Murray
/s/ David Toews Chief Financial Officer and
----------------------------------- principal accounting officer June 29, 2000
David Toews
</TABLE>
18
<PAGE>
AUDITORS' REPORT
To the Shareholders of
INTERNET SPORTS NETWORK, INC.
We have audited the accompanying consolidated balance sheets of INTERNET
SPORTS NETWORK, INC. as of March 31, 2000 and March 31, 1999, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the year ended March 31, 2000 and the 11 month
period ended 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted 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
audits 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, 2000 and March 31, 1999 and the consolidated
results of its operations and its cash flows for the year ended March 31,
2000 and the 11 month period ended March 31, 1999 in conformity with
accounting principles generally accepted 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
15 to the consolidated financial statements, the Company has significant cash
needs 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,
May 26, 2000 "Ernst & Young LLP"
Chartered Accountants
F1
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
====================================================================================================
March 31, March 31,
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash $ 180 $ 2,928
Restricted cash (note 4) 103 -
Accounts Receivable, (net of allowance of $14, 1999 $nil) 440 182
Prepaid royalties (note 6) 2,443 -
Prepaid expenses 113 29
-----------------------
3,279 3,139
Equipment, net (note 5) 523 84
Prepaid royalties (note 6) 2,172 -
Deferred charges (note 6) 13,014 -
Purchased intangibles, net (note 3) 9,905 9,637
Goodwill, net (note 3) 3,151 3,855
-----------------------
$ 32,044 $ 16,715
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable $ 1,035 $ 171
Accrued liabilities 197 137
Deferred revenue 544 -
Accrued prize commitments 336 31
Loan payable in default (note 7) 1,000 -
Loan payable (note 7) 240 -
Convertible debt (note 8) 1,071 -
-----------------------
4,423 339
Convertible promissory note and accrued interest (note 9) 5,069 -
Deferred income taxes (note 11) 3,151 3,855
-----------------------
12,643 4,194
-----------------------
Commitments (note 4, 6 and 13)
Shareholders' equity (note 10)
Common stock and additional paid-in capital, $0.001 par value
50,000 shares authorized
24,514 outstanding (March 31, 1999 - 17,841) 52,858 17,127
Share subscription receivable for 510 shares subscribed (250) -
Deferred compensation (6,900) (449)
Accumulated deficit (26,307) (4,157)
-----------------------
19,401 12,521
-----------------------
$ 32,044 $ 16,715
=======================
</TABLE>
F2
<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>
======================================================================================
Year Eleven Months
Ending Ending
March 31, March 31,
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 5,914 $ 152
-------------------------
EXPENSES
Prize commitments and other direct costs 2,747 250
Salaries and benefits 2,567 385
General and administrative 2,339 424
Consulting fees 1,194 267
Royalty expense 1,135 -
Advertising 421 367
Interest, bank charges and financing fees 191 17
Recapitalization and due diligence costs 96 690
Depreciation 159 23
Amortization of purchased intangibles 7,746 591
Amortization of goodwill 2,842 236
Options granted for services provided 1,461 632
Amortization of stock compensation 5,865 20
Amortization of deferred charges 1,832 -
Warrants issued in lieu of financing fees 311 -
-------------------------
Total expenses 30,906 3,902
-------------------------
Loss before income taxes (24,992) (3,750)
Deferred income tax recovery (2,842) (236)
-------------------------
Net loss and comprehensive loss (22,150) (3,514)
=========================
NET LOSS PER SHARE $ (1.06) $ (0.45)
=========================
WEIGHTED AVERAGE SHARES OUTSTANDING 20,859 7,833
=========================
</TABLE>
F3
<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
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Shares issued on acquisition of Ultimate
Sports Publishing 125 750 - - - 750
Shares issued in acquisition of Innovation -
Partners Inc. 616 4,066 - - - 4,066
Shares issued for cash 1,073 1,745 - - 1,745
Shares issued for promotion rights 4,299 13,234 - - - 13,234
Shares issued in exchange for service 50 88 - - - 88
Shares issued for subscription receivable 510 250 (250) - - -
Options related to deferred compensation - 12,316 - (12,316) - -
Options granted for services provided - 1,461 - - - 1,461
Warrants issued for promotion - 1,612 - - - 1,612
Warrants issued for financing - 311 - - - 311
Amortization of deferred compensation
related to stock options - - - 5,865 - 5,865
Share issuance costs - (102) - - - (102)
Net loss - - - - (22,150) (22,150)
------------------------------------------------------------------------
Balance at March 31, 2000 24,514 $52,858 $(250) $(6,900) $(26,307) $19,401
========================================================================
</TABLE>
F4
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===========================================================================================================
Year Ended Eleven Months Ended
March 31, 2000 March 31, 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (22,150) $ (3,514)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 159 23
Amortization of purchased intangibles 7,746 591
Amortization of goodwill 2,842 236
Debt conversion inducement - 144
Options granted for service 1,461 632
Amortization of stock compensation 5,865 20
Amortization of deferred charges 1,832 -
Non-monetary sale of member information 500 -
Warrants issued in lieu of finance fees 311 -
Shares issued for services 88 522
Deferred income tax recovery (2,842) (236)
Changes in other operating assets and liabilities:
Increase in receivables (234) (142)
(Increase) decrease in prepaid expenses (84) 16
Increase in prepaid royalties (4,615) -
Increase in accounts payable 514 72
Increase in accrued liabilities 341 30
Increase in deferred revenue 44 -
---------------------------------
Net cash used in operating activities (9,222) (1,606)
---------------------------------
INVESTING ACTIVITIES
Purchase of Ultimate Sports Publishing (860) -
Purchase of Sportsbuff (1,000) -
Purchase of Sportsmark Group of Companies - (1,254)
Purchase of Pickem Sports, Inc. - (3,000)
Cash acquired with Sportsbuff 36 -
Purchase of intangibles (60) -
Purchase of equipment (562) (21)
---------------------------------
Net cash used in investing activities (2,446) (4,275)
---------------------------------
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of share
issuance costs $102 (1999 - $463) 1,643 8,800
Proceeds and interest from issuance of
Convertible promissory note 5,069 -
Proceed from loan payable and convertible debt 2,561 -
Increase in restricted cash (103)
Payment of loan payable (250) -
---------------------------------
Net cash provided by financing activities 8,920 8,800
---------------------------------
Net increase (decrease) in cash and cash equivalents (2,748) 2,919
Cash and cash equivalents:
Beginning of period 2,928 9
---------------------------------
End of period $ 180 $ 2,928
=================================
</TABLE>
F5
<PAGE>
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(All dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
===========================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Year Ended Eleven Months Ended
March 31, 2000 March 31, 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Sale of sports contests 500 -
Advertising expense (500) -
Sale of member information 1,000 -
INVESTING ACTIVITIES
Net assets of Ultimate Sports Publishing acquired for shares $ (750) -
Net assets of Sportsbuff acquired for shares (4,066) -
Net assets of Pickem Sports, Inc. aquired for shares - (3,269)
Net assets of Sportsmark Group of Companies aquired for shares - (2,625)
Acquisition of Sportsrockettravel (1,000) -
FINANCING ACTIVITIES
Common stock issued in exchange for convertible debentures - 196
Shares issued on acquisition of Ultimate Sports Publishing 750 -
Shares issued on acquisition of Sportsbuff 4,066 -
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 88 522
Shares issued for subscription receivable 250 -
Accrued interest settled for shares - 22
Deferred compensation 12,316 -
Shares issued for promotion rights 13,234 -
Warrants issued for promotion rights 1,612
Warrants issued in lieu of financing fees 311
Common stock issued in exchange for accounts payable
paid by shareholder - 37
Cash interest paid $ 41 $ 10
===================================
Cash taxes paid $ - $ -
</TABLE>
F6
<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.
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 BTC, 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 shares of stock to the
shareholders of ISN, the Nevada corporation. For the additional
consideration of being permitted to retain 1,025 shares of common
stock of BTC and for a cash payment of $250, the Shareholder
agreed to cancel 3,975 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 shares each of common stock held by the
Shareholder for nominal proceeds. The two ISN shareholders also
agreed to the cancellation of 350 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 held by
Shareholder and 25 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.
F7
<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 shares at $0.40) 280
Debt conversion inducement 144
Legal fees on BTC transaction 71
Digital Data Networks Inc. ("DDN") settlement fee 70
DDN Shares issued on settlement (150 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 690
===
</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 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.
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 of $196 originally issued in
1997 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.
BUSINESS COMBINATIONS
The business combinations have been accounted for under the
purchase method of accounting, and the Company includes the
results of operations of the acquired business from the date of
acquisition. Net assets of the companies acquired are recorded at
their fair value at the date of acquisition. The excess of the
purchase price over the fair value of net assets acquired is
included in purchase intangibles and goodwill in the accompanying
consolidation balance sheet.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
F8
<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...)
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 revenue 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.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of its holding
of cash held by one deposit taking institutions. 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 $9,905 (1999 - $9,637) are stated net of total
accumulated amortization of $8,337 (1999 - $591) at March 31, 2000
in the accompanying consolidated balance sheet. Purchased
intangibles are being amortized on a straight-line basis
principally over two years.
Goodwill of $3,151 (1999 - $3,855) is stated net of total
accumulated amortization of $3,078 (1999 - $236) at March 31, 2000
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 intangibles
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 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 expenses as incurred.
F9
<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...)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its
employee stock options rather than the alternative fair value
accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensations". APB No. 25 provides that the compensation
expense relative to the Company's employee stock options is
measured based on the intrinsic value of the stock option. SFAS
No. 123 requires companies that continue to follow APB No. 25
to provide a pro forma disclosure of the impact of applying the
fair value of SFAS No. 123.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income" establishes
standards for the reporting and display of comprehensive income
(loss) and its components in the consolidated financial
statements. There are no items of other comprehensive income
(loss) that require additional reporting.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Canadian dollar
while its reporting currency is the United States dollar. The
assets and liabilities of the Canadian subsidiaries are translated
using the exchange rate in effect at period end, and revenues and
expenses are translated at the average rate during the period.
Exchange gains or losses on translation of the Company's net
equity investments in these subsidiaries are reported as a
separate component of other comprehensive income in shareholders'
equity. The translation adjustments as a March 31, 2000 and March
31, 1999 were insignificant.
EQUIPMENT
Equipment is recorded at cost. Amortization is provided over the
estimated useful life of the asset using the declining balance
basis at the following rates:
<TABLE>
<S> <C>
Computer software 12 months
Office equipment and furniture 60 months
Computer equipment 40 months
</TABLE>
REVENUE RECOGNITION
The Company earns revenue from membership and other fees received
for Internet-based sports information, sports contest organization
services and member information. Membership fees are received
prior to the beginning of a particular sport season or event and
recorded as deferred revenue until recognized in revenue ratably
over the season or upon completion of the event. Other fees
received for Internet-based sports information and sports contest
organization services are recognized in income ratably over the
season or upon completion of the event. Fees from the sale of
member information is recognized upon delivery and customer
acceptance. Revenues from the sale of product in the publishing
segment are recognized when product is shipped based on gross
sales less a provision for estimated returns. Deferred revenue of
$544 (1999 - $nil) was recorded on the consolidated balance sheet
as at March 31, 2000.
F10
<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 are anti-dilutive.
There are no other dilutive common stock equivalent shares
outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement No.133, "Accounting for Derivative and Hedging
Activities", which was required to be adopted in years beginning
after June 15, 1999. As a result of the issuance of Statement No.
137, the required adoption date was deferred to years beginning
after June 15, 2000. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ["SAB101"]. In March 2000, the
Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101A which deferred the implementation of SAB101 for
the Company until the three months ending June 30, 2000 reporting
period.
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.
F11
<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
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.
Effective March 31, 2000, the Company acquired 60% of the shares
of Sportsrocketravel, Inc. The business of Sportsrocketravel is to
provide sports event focused travel packages to clients.
The transactions are summarized as follows:
<TABLE>
<CAPTION>
===============================================================================================
As at As at As at
June 22, 1999, June 30, 1999, March 31, 2000,
Ultimate Sports Sportsbuff Sportsrocketravel Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets acquired at
fair values:
Working capital $ - $ (314) $ - $ (314)
Equipment - 36 - 36
Purchased intangibles 1,610 5,344 1,000 7,954
Goodwill - 2,138 2,138
Deferred income taxes - (2,138) - (2,138)
------------ ------------ ----------- ----------
$ 1,610 $ 5,066 $ 1,000 $ 7,676
===============================================================================================
Funded by:
Cash $ 860 $ 1,000 $ - $ 2,860
Shares of common stock 750 4,066 - 4,816
------------ ------------ ----------- ----------
$ 1,610 $ 5,066 $ -(1) $ 7,676
===============================================================================================
</TABLE>
(1) The interest in Sportsrocketravel, Inc. was acquired in a
non-monetary exchange for member information.
Purchased intangibles related to the acquisition of Sportsbuff
consist of developed contest software, licenses, participant
lists, customer lists, trademarks and domain names.
Purchased intangibles related to the acquisition of Ultimate
Sports consist of trademarks, customer contracts, client lists,
and domain names.
Purchased intangibles related to the acquisition of
Sportsrocketravel consist of service contracts and domain names.
Effective February 5, 1999, the Company squired 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 contests 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 contests run through the Internet.
F12
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
===============================================================================
<TABLE>
<CAPTION>
NOTE 3. BUSINESS COMBINATIONS (CONT'D...)
The transactions are summarized as follows:
=====================================================================================================
As at As at
February 5, 1999, March 5, 1999,
Sportsmark Group Pickem
of Companies Sports, Inc. Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets acquired at fair values:
Working capital $ (129) $ 9 $ (120)
Equipment 28 12 40
Purchased intangibles 3,980 6,248 10,228
Goodwill 1,592 2,499 4,091
Deferred income taxes (1,592) (2,499) (4,091)
------------ ----------- ------------
$ 3,879 $ 6,269 $ 10,148
=====================================================================================================
Funded by:
Cash $ 1,254 $ 3,000 $ 4,254
Shares of common stock 2,625 3,269 5,894
------------ ----------- ------------
$ 3,379 $ 6,269 $ 10,148
=====================================================================================================
</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.
PURCHASED INTANGIBLES
<TABLE>
<CAPTION>
=====================================================================================================
ELEVEN MONTH
YEAR ENDING PERIOD ENDING
MARCH 31, 2000 MARCH 31, 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased intangibles, net, beginning of period $ 9,637 -
Purchased intangibles from acquisitions 7,954 10,228
Domain name 60 -
----------- -----------
17,651 10,228
Less amortization expense (7,746) (591)
----------- -----------
Purchased intangibles, net, end of period $ 9,905 $ 9,637
=====================================================================================================
</TABLE>
F13
<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...)
GOODWILL
<TABLE>
<CAPTION>
=============================================================================================
ELEVEN MONTH
YEAR ENDING PERIOD ENDING
MARCH 31, 2000 MARCH 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net, beginning of period $ 3,855 $
Goodwill from acquisitions 2,138 4,091
--------- -----------
5,993 4,091
Less amortization expense (2,842) (236)
--------- -----------
Goodwill, net, end of period $ 3,151 $ 3,855
=============================================================================================
</TABLE>
The unaudited pro forma combined consolidated financial
information for the aggregate of the Sportsmark Group of
Companies, Pickem and Sportsbuff 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 $6,564 (1999 - $3,205); loss before income taxes
of $26,080 (1999 - $12,122); net loss of $22,984 (1999 - $9,269);
and basic and diluted loss per share of $1.09 (1999 - $0.84) for
the year ended March 31, 2000. The pro forma net loss includes
amortization of purchased intangibles and goodwill of $11,478
(1999 - $9,994) for the year ended March 31, 2000. This unaudited
pro forma combined consolidated financial information is presented
for illustrative purposes only and is not necessarily indicative
of the consolidated results of operations in future periods or the
results that actually would have been realized had the Company
been a combined company during the specified period.
NOTE 4. RESTRICTED FUNDS
The Company segregated $150 Canadian as security for a letter of
Guarantee for the Company's lease on its Toronto facilities. A
further $120 Canadian are due to be restricted under the terms of
the lease.
NOTE 5. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
=============================================================================================
MARCH 31, MARCH 31,
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 472 $ 83
Software 156 -
Office equipment and furniture 85 32
--------- ----------
713 115
Less accumulated depreciation (190) (31)
--------- ----------
Equipment, net $ 523 $ 84
=============================================================================================
</TABLE>
F14
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 6. DEFERRED CHARGES AND PREPAID ROYALTIES
LABATT BREWING COMPANY LIMITED
On August 1, 1999, the Company entered into a five year agreement
with Labatt Brewing Company Limited ("LBCL") for the promotion
rights to be the exclusive contest provider for Beer.com,. In
exchange for this exclusive agreement, the Company is granting
LBCL 1,000 common shares over the five year term. All 1,000 shares
have been placed in escrow. 200 shares are owing at the start of
each year of the contract, and distributed to LBCL on each
anniversary date of the contract. The minimum share obligation
under this agreement (200 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 common shares,
and a Warrant to acquire up to 1,033 common shares at an exercise
price of $2.90 per share, with certain repricing rights. 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.
<TABLE>
<S> <C>
Shares issued to LBCL $ 1,350
Shares issued to Sportsline 11,884
Warrants issued to Sportsline 1,612
------------
Total Deferred Charges 14,846
Less Accumulated Amortization (1,832)
------------
$ 13,014
============
</TABLE>
The Sportsline Agreement calls for minimum royalty payments as
follows:
<TABLE>
<S> <C>
Year 1 $ 2,750
Year 2 3,000
Year 3 5,000
Year 4 7,000
------------
$ 17,750
============
</TABLE>
The Company has prepaid the minimum royalty for each of the first
two years of the agreement, totaling $5,750. Amortization of the
current year's prepaid royalty is calculated on a monthly basis.
Each month's expense is equal to the greater of (a) the amount
calculated by using a straight line amortization over the period
of the effective years' prepaid royalty, or (b) the amount that
would be otherwise payable based on the actual royalty
calculation. To the extent that the cumulative royalty payable for
the respective twelve month period exceeds the prepaid royalty
amount for that period the net excess is expensed in the period
and is due to Sportsline through an incremental cash payment
F15
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 6. DEFERRED CHARGES AND PREPAID ROYALTIES (CONT'D...)
PREPAID ROYALTIES
<TABLE>
<CAPTION>
=============================================================
MARCH 31,
2000
-------------------------------------------------------------
<S> <C>
Opening balance $ -
Additions 5,750
Amortization expense (1,135)
-----------
Prepaid royalties, net $ 4,615
===========
Current portion $ 2,443
Long term portion 2,172
-----------
$ 4,615
=============================================================
</TABLE>
In the event that the Company raises over $10,000 through a public
sale of its common stock, the Company is required to pay
Sportsline an amount equal to the lesser of (a) the next 12 month
minimum royalty amount, or (b) 20% of the proceeds from the public
sale of common stock. Any such payment will be treated as a
prepayment towards the minimum royalty amounts payable.
NOTE 7. LOANS PAYABLE
<TABLE>
<S> <C>
Loan payable with interest calculated at 10% per annum ("10% Loan").
The loan is unsecured, and the principal and accrued interest are due
on March 31, 2000. The loan is in default. $ 1,000
Loan payable with interest calculated at 7.25% per annum. The note
is unsecured, and the principal and accrued interest are due the
earlier of raising an additional $4,000 through the sale of equity
instruments or June 30, 2000 (the "Maturity Date"). $ 240
---------
$ 1,240
=========
</TABLE>
The 10% Loan was initially due on December 31, 1999, and the
Company granted a warrant to acquire up to 80 common shares at an
exercise price of $2.18 per share. Financing fees of approximately
$23 cash were also paid in consideration for the loan. In
consideration for extending the 10% Loan due date to March 31,
2000, the Company granted an additional warrant to acquire up to
30 common shares at an exercise price of $2.90 per share. The 80
warrants expire on October 31, 2001 and the 30 warrants expire on
December 31, 2001.
Subsequent to year end, the Company repaid $250 of the 10% Loan,
plus accrued interest to March 31, 2000. As of May 26, 2000 the
balance of $750 remains outstanding and is due on demand.
According to the terms of the 10% Loan, the effective interest
rate increases by 1 1/2 % for each month the 10% Loan is overdue.
F16
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 8. CONVERTIBLE DEBT
<TABLE>
<S> <C>
Series 1 convertible debentures maturing on June 30, 2000 unless
paid or converted earlier. Interest accumulates at the rate of 8%
per annum, calculated daily, due on maturity $ 521
Series 1 convertible debentures maturing on May 31, 2000 unless paid
or converted earlier. Interest accumulates at the rate of 8% per
annum, calculated daily, due on maturity 300
10% convertible note 250
-------
$ 1,071
=======
</TABLE>
The Series 1 convertible debentures can be repaid in whole or in
part prior to maturity, without penalty. Commencing April 1, 2000,
the purchaser has the right, at its option, on or before maturity
to convert the outstanding amount. These rights will only arise in
the event the Company is able to raise gross proceeds of not less
than $5,000. The principal and accumulated interest may be
converted at the rate of (a) one common stock per $3.00 of
principal and interest if the private offering is $3.00 per share
or greater or (b) the price at which the private offering is
completed, if such price is less than $3.00 per share. Series 1
convertible debentures are secured by all of the companies
property and assets, real and personal, moveable and immovable,
tangible and intangible, of every nature and kind whatsoever,
wheresoever, both present and future. The Company granted warrants
to acquire up to 75 common shares at an exercise price of $2.90
per share. 30 of the warrants expire on January 31, 2001, and the
remaining 45 warrants expire on February 21, 2001. The Warrants
have been recorded at their fair value estimated at the date of
grant using a Black-Scholes option pricing model ($1.56 per share
underlying the Warrant) as a deferred charge, and has been fully
amortized as at year end.
The 10% convertible note initially matured on the earliest of
(a) the date the Company closed its issuance of 10% Convertible
Debentures and (b) April 27, 2000. In the event the Company
received additional financing prior to April 27, 2000 the
outstanding principal balance and all accrued interest shall
automatically be converted into Convertible Debentures. If
additional financing was not secured, the Company agreed to
issue the holder a warrant to purchase fifty thousand shares.
The exercise price would equal 110% of the closing bid price on
the trading date immediately preceding the date that is the
earlier of (a) the first date the company is in default and (b)
the date the Company informs the holder it intends to terminate
proposed placement on Convertible Debentures. The 10%
convertible note was converted into Convertible Debentures on
May 12, 2000, and the holder of the note waived their right to
receive any warrants.
Pursuant to their terms the Convertible Debentures convert
automatically into Series A Preferred Shares upon the
authorization of the Series A Preferred Stock. The Series A
Preferred Shares are convertible into common stock at a
conversion rate of the lesser of $2.90 per common share issued,
and 90% of the market price for a period prior to conversion.
The Preferred Shares are convertible at any time, at the option
of the Holder and automatically after three years. The Series A
Preferred Stock carries a 5% dividend, payable on conversion in
cash or stock, at the Company's option.
F17
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 9. CONVERTIBLE PROMISSORY NOTE AND ACCRUED INTEREST
On December 21, 1999 the Company issued a Convertible Promissory
Note ("Note") for $5,000, convertible at the holders option into
common stock of the Company at a conversion price of $2.90 per
share. This conversion price may be reduced upon the Company
issuing common stock, or instruments convertible into common stock
at a price of less than $2.90 per share. The Note bears interest
at the rate of 5% per annum, payable at maturity in cash or shares
of common stock. The note has a term of four years. The Note can
be converted into shares at the Company's option following a
public offering providing gross proceeds to the Company of not
less than $20,000, having an initial per share price to the public
of not less than $5.00 per share. As at March 31, 2000 interest of
$69 has accrued on the Note.
NOTE 10. 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
(`000's) ($000's)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at April 30, 1998 5,000 411
Shares issued in exchange for convertible
debentures 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 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>
(`000's)
--------------------------------------------------------------------
<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>
F18
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 10. SHAREHOLDERS' EQUITY (CONT'D...)
COMMON STOCK (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
(`000's)
----------------------------------------------------------------------------------
<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>
COMMON
NUMBER STOCK AND
OF SHARES PAID-IN CAPITAL
(`000's) ($000's)
------------------------------------------------------------------------------------------------------
<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.
F19
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 10. SHAREHOLDERS' EQUITY (CONT'D...)
COMMON STOCK (CONT'D)
TO MARCH 31, 2000
<TABLE>
<CAPTION>
COMMON
NUMBER STOCK AND
OF SHARES PAID-IN CAPITAL
(`000's) ($000's)
-------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE MARCH 31, 1999 17,841 17,127
Shares issued for cash 1,073 1,745
Shares issued for subscription receivable 510 250
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 - 12,316
Options granted for services - 1,075
Warrants granted for promotion rights - 1,806
Warrants granted for service - 386
Share issuance costs - (102)
-------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2000 24,514 52,741
=================================================================================================
</TABLE>
Subsequent to year end, the Company amended its Articles of
Incorporation to increase the authorized shares of common stock
from 50,000 to 100,000 and to establish a class of authorized
preferred shares, with 20,000 shares authorized.
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 April 30, 1998 - -
Options granted and assumed 3,415 $ 1.51
Options exercised (50) $ 0.80
-----
March 31, 1999 3,365 $ 1.52
=================================================================================================
</TABLE>
F20
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 10. SHAREHOLDERS' EQUITY (CONT'D...)
STOCK OPTION ACTIVITY (CONT'D)
TO MARCH 31, 2000
<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
-----
March 31, 2000 6,090 $ 1.87
===============================================================================================
</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 6,090 4.8 years 2,775 $ 1.47
===============================================================================================
</TABLE>
The following table summarizes information about options
outstanding and options exercisable at March 31, 2000.
<TABLE>
<CAPTION>
===============================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED AVERAGE
OPTIONS REMAINING CONTRACTUAL OPTIONS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- --------------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 0.40 1,850 4.3 years 783 $ 0.40
1.75 2,785 3.5 years 2,565 1.75
3.00 580 4.5 years 167 3.00
3.25 20 2.5 years 20 3.25
4.00 335 4.7 years -0- 4.00
4.08 100 4.3 years 25 4.08
4.54 150 4.1 years -0- 4.54
4.76 15 4.3 years 5 4.76
5.00 25 1.2 years 25 5.00
6.00 204 4.3 years 79 6.00
6.25 1 4.7 years 1 6.25
7.00 25 1.2 years 25 7.00
-----------------------------------------------------------------------------------------
$ 0.40 - 7.00 6,090 4.0 years 3,695 $ 1.70
===============================================================================================
</TABLE>
F21
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 10. 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 1,418 $ 3.16
Warrants cancelled - -
Warrants exercised - -
----- ---------
March 31, 2000 1,418 $ 3.16
================================================================================================
</TABLE>
In addition to the warrants issued to Sportsline and for the 10%
Loan and the Series 1 convertible debentures, the Company granted
warrants to acquire up to 200 common shares at an exercise price
of $5.00 per share, expiring on September 14, 2000. This Warrant
has been recorded at its fair value estimated at the date of grant
using a Black-Scholes option pricing model ($1.93 per share
underlying the Warrant) as an expense for the period.
The following table summarizes information about warrants
outstanding and warrants exercisable at March 31, 2000:
<TABLE>
<CAPTION>
=================================================================================================
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
WARRANTS REMAINING CONTRACTUAL WARRANTS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- --------------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 2.18 80 1.6 years 80 $ 2.18
2.90 1,138 1.7 years 1,138 2.90
5.00 200 1.5 years 200 5.00
-------------------------------------------------------------------------------------------------
$ 2.18 - 5.00 1,418 1.6 years 1,418 $ 3.16
=================================================================================================
</TABLE>
DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $12,316
(1999 - $469) during the year ended March 31, 2000. The amount
recorded represents the difference between the grant price and the
fair value of the Company's common stock for shares subject to
options granted during the period. Options granted below fair
market value and the associated weighted average exercise price
per share was 2,300 and $1.15 respectively (1999 - 150 and $1.75)
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 year ending March 31, 2000 was $5,865 (1999 -
$20).
F22
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 10. 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 year ended March
31, 2000 would have been as follows:
<TABLE>
<CAPTION>
Year ended 11 Months ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Net loss as reported $(21,998) $(3,514)
Net loss - pro forma $(23,281) $(5,559)
Basic and diluted loss per share as reported $ (1.05) $ (0.45)
Basic and diluted loss per share - pro forma $ (1.12) $ (0.71)
</TABLE>
The fair value for each option granted was estimated at the date
of grant using a Black-Scholes option pricing model, assuming no
expected dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C>
Average risk-free interest rates 5.0%
Average expected life (in years) 5.0
Volatility factor 98.5%
</TABLE>
The weighted average fair value of options granted during the year
was $5.08.
NOTE 11. 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, March 31,
2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Tax recovery at combined federal and state rates $ (7,923) $ (1,196)
Higher effective rate attributable to income taxes
of other countries $ (2,560) $ (386)
Tax effect of expenses that are not deductible for
income tax purposes 8,330 714
Valuation allowance 2,153 868
---------- ----------
$ - $ -
===========================================================================================
</TABLE>
At March 31, 2000, the Company had net operating loss
carryforwards of approximately $7,598. Substantially all of these
carryforwards relate to the Canadian subsidiaries and will begin
to expire at various times starting in 2004.
F23
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 11. INCOME TAX (CONT'D)
Significant components of the Company's deferred income tax assets
are approximately as follows:
<TABLE>
<CAPTION>
============================================================================================
MARCH 31, MARCH 31,
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 7,598 $ 2,497
========= ==========
Total deferred income tax assets $ 3,276 $ 1,123
Valuation allowance for deferred income tax assets (3,276) (1,123)
--------- ----------
Net deferred income tax assets $ - $ -
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
A continuity of the valuation allowance is as follows:
============================================================================================
MARCH 31, MARCH 31,
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Opening balance $ 1,123 $ 255
Valuation allowance on deferred income tax asset 2,153 868
---------- ----------
Closing balance $ 3,276 $ 1,123
============================================================================================
</TABLE>
Deferred income tax credits at March 31, 2000 reflect the
differences between the financial reporting and tax values of the
purchased intangibles. The deferred tax recovery in the
consolidated statement of operations and comprehensive loss
relates to the amortization of the deferred income tax liability
which resulted from the Company's acquisitions of Sportsmark,
Pickem and Sportsbuff.
NOTE 12. RELATED PARTY TRANSACTIONS
In addition to the transactions disclosed in Note 6 with respect
to LBCL and Sportsline, the Company, during the year ended March
31, 2000, has paid or accrued approximately $46 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 year months ended March 31, 2000 was
$130. Also, $41 of wages and $60 termination payment was paid to
the Company's former Chief Executive Officer and former director.
F24
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 13. COMMITMENTS
The Company leases premises and office equipment under the terms
of operating leases. The leases provide for future minimum annual
lease payments as follows:
<TABLE>
<CAPTION>
Total Rent
<S> <C> <C>
2001 $ 294 $ 287
2002 295 288
2003 295 288
2004 297 290
2005 297 290
thereafter 111 111
---------- ----------
$ 1,589 $ 1,554
========== ==========
</TABLE>
NOTE 14. 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 38% (1999 - 82%) of net sales
for the year ending March 31, 2000. No other foreign country or
geographic area accounted for more than 10% of net sales in any of
the periods presented. Net transfers from Canada to the United
States amounted to $903 (1999 - $nil) for the year ended March 31,
2000. Capital assets and purchased intangibles in the United
States equal approximately $7,020 (1999 $12,457). The remaining
capital assets and purchased intangibles are in Canada.
The Company entered into the publishing segment through its
acquisition of Ultimate Sports Publishing in June, 1999 (Note 3).
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 $ 4,545 $1,369 $ 5,914
Amortization of purchased intangibles 7,118 621 7,739
Amortization of Goodwill 2,842 0 2,842
Expenses 4,819 1,483 6,302
--------- ------ ---------
$(10,234) $ (735) (10,969)
--------- ------
Corporate Expenses 14,023
---------
Net loss before tax $(24,992)
=========
</TABLE>
Contest management revenues are earned primarily from fees from
consumers who pay to enter sports contests (25% of contest
management sector revenues), fees from companies that license the
contest applications (60% of contest management sector revenues)
and advertising and sponsorship revenue (15% of contest management
sector revenues). Publishing revenues are earned primarily from
newsstand sales (84% of publishing revenues) and advertising
within the publications (16% of publishing revenues).
F25
<PAGE>
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 15. GOING CONCERN
The Company is in an extremely competitive industry and it will
require substantial capital from outside sources in order to
complete its business plan. The Company is in default of a loan
and anticipates that it will continue to generate financial losses
for the foreseeable future. In the event the Company is
unsuccessful in securing outside capital, it may be required to
curtail or cease operations altogether. As a result, substantial
doubt exists regarding the ability of the Company to continue as a
going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
NOTE 16. 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, 2000 consolidated financial
statements.
F26
