<PAGE>
Filed with the Securities and Exchange Commission on March 3, 2000
Registration No. 333-91701
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
BROADBAND SPORTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 514191 95-4673805
(State or other jurisdiction of (North American Industry (I.R.S. Employer
incorporation or organization) Classification System) Identification No.)
</TABLE>
2120 Colorado Avenue
Santa Monica, California 90404
(310) 453-8100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Richard D. Nanula
Chairman of the Board and Chief Executive Officer
Broadband Sports, Inc.
2120 Colorado Avenue
Santa Monica, California 90404
(310) 453-8100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies of all communications to be sent to:
<TABLE>
<S> <C>
Kenneth L. Guernsey, Esq.
Robert M. Mattson Jr., Esq. Michael J. Sullivan, Esq.
Martin P. Florman, Esq. Michael W. Hauptman, Esq.
Steven E. Meck, Esq. Cecilia M. Mao, Esq.
MORRISON & FOERSTER LLP COOLEY GODWARD LLP
19900 MacArthur Boulevard One Maritime Plaza, 20th Floor
Irvine, California 92612 San Francisco, California 94111
(949) 251-7500 (415) 693-2000
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of each class of Amount to Offering Price Aggregate Registration
securities to be registered be Registered Per Share Offering Price(2) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock ($0.001 par value)(1)... 3,795,000 $10.00 $37,950,000 $12,788(3)
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 495,000 shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act.
(3) Previously paid.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (Subject to Completion)
Issued March 3, 2000
3,300,000 Shares
[LOGO OF BROADBANDSPORTS]
COMMON STOCK
-----------
Broadband Sports, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $8 and $10
per share.
-----------
We have applied to have the shares of common stock approved for quotation on
the Nasdaq National Market under the symbol "FANS."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 9.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Broadband Sports
-------- ------------- ----------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
Broadband Sports has granted the underwriters the right to purchase up to an
additional 495,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
CHASE H&Q
BEAR, STEARNS & CO. INC.
, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
[Screen shots of various Broadband Sports Web sites]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Special Note Regarding Forward-Looking Statements......................... 25
Use of Proceeds........................................................... 26
Dividend Policy........................................................... 26
Capitalization............................................................ 27
Dilution.................................................................. 28
Selected Consolidated and Combined Financial Data......................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 30
Industry Background....................................................... 41
Broadband Sports.......................................................... 43
Management................................................................ 62
Certain Relationships and Related Transactions............................ 72
Principal Stockholders.................................................... 74
Description of Capital Stock.............................................. 76
Shares Eligible for Future Sale........................................... 80
Underwriters.............................................................. 82
Legal Matters............................................................. 84
Experts................................................................... 84
Additional Information.................................................... 85
Index to Financial Statements............................................. F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
Until , 2000, 25 days after commencement of this offering, all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
References to and information contained on our Web sites do not constitute
part of this prospectus.
ATHLETE DIRECT is a registered United States service mark of Athlete Direct,
Inc., a wholly-owned subsidiary of Broadband Sports. ATHLETE DIRECT, BROADBAND
SPORTS, COLLEGE SPORTS XCHANGE, CSX, PRO SPORTS XCHANGE, PSX, ROTONEWS, THE
WRITER NETWORK, SPORTSAUTHENTICS.COM, WHERE ATHLETES AND FANS INTERACT and the
PSX, Athlete Direct, RotoNews and Broadband Sports logos are also trademarks
and service marks of Broadband Sports. All other brand names and trademarks
appearing in this prospectus are the property of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in the prospectus.
BROADBAND SPORTS
Broadband Sports is a leading Internet provider of original content and
commerce for hundreds of individual sports communities. These geographically
dispersed communities are composed of fans who follow individual sports, teams
and athletes and are characterized by their demand for content and commerce
relating to their particular sports interests. In aggregate, sports fans spent
approximately $100 billion in 1999 on such sports-related items as spectator
sports, equipment, licensed goods, publications, apparel and footwear,
according to a December 1999 report in Street & Smith's SportsBusiness Journal.
We believe that we are well positioned to reach these communities through our
development of multiple distinct online media divisions. Each of these
divisions leverages its own set of proprietary assets to create content,
commerce and community offerings, targeting various online sports communities.
Through our distribution arrangements with AOL, eBay, Fox, Yahoo!, and uBid,
and through our own Web sites, we believe that we can efficiently reach these
sports communities with the type of content and commerce offerings they desire,
thereby enabling us to derive revenues from multiple sources, including
syndication, advertising, electronic commerce and subscriptions.
To date, we have developed four online media divisions:
. Athlete Direct -- Athlete Direct is a leading provider of athlete Web
sites. Athlete Direct currently has contracts with more than 260
athletes. These contracts provide us with exclusive online rights for
each of the athletes, with the exception that athletes can participate
elsewhere in a limited number of online chats. We create and operate the
official Web sites for athletes such as:
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<S> <C> <C> <C>
Troy Aikman Sergei Fedorov Anna Kournikova Keith Van Horn
Drew Bledsoe Kevin Garnett Karl Malone Michael Waltrip
Barry Bonds Ken Griffey, Jr. Nomar Garciaparra Bernie Williams
Kobe Bryant Tony Gwynn Mike Piazza Ricky Williams
Brett Favre Mia Hamm Dennis Rodman Steve Young
</TABLE>
We create Web sites offering unique content and commerce that is related
to each of the individual athletes. Our athletes provide interactive
content and authentic sports-related merchandise and collectibles that are
not readily available elsewhere. By aggregating numerous athlete sites
under one network, Athlete Direct can consistently provide fans with new,
original content and commerce.
4
<PAGE>
. Pro Sports Xchange and College Sports Xchange -- Pro Sports Xchange and
its collegiate arm, College Sports Xchange, are leading providers of in-
depth team and player information online. Pro Sports Xchange covers all
Major League Baseball, National Football League, National Basketball
Association and National Hockey League sports teams and players, and
College Sports Xchange covers every Division I college football and
basketball team. The communities that follow these teams and players are
seeking the latest and best inside information, which is not readily
available through other online or offline media outlets. Pro Sports
Xchange is able to provide up-to-date information through its network of
over 280 local and regional sports writers, all of whom are under
contract to provide us with online content.
. RotoNews -- RotoNews is a leading online fantasy sports Web site. Fantasy
sports Web sites provide content and services to consumers who are
involved in simulations that track the performance of real sports teams
and players. RotoNews offers proprietary news, games and statistical
services, and league management services that enable players to compete
against one another. Because participants invest significant time
learning league rules, becoming familiar with the user interface and
personalizing their sites by entering specific league and player
information, we believe that RotoNews creates significant user loyalty
and generates frequent visits of extended duration.
. SportsAuthentics.com -- SportsAuthentics.com is an Internet retailer of
sports collectibles and merchandise. Because of the large number of teams
and available products, traditional retailers cannot effectively
inventory the full range of products necessary to satisfy the demand of
fans of different teams and players. We address the limitations of the
current distribution channels by providing team and athlete products to
fans outside of their local markets and authentic, player/team endorsed
products. We are also able to offer unique products that are not readily
available elsewhere.
We syndicate our distinctive sports content through various distribution
relationships, including AOL, Fox Sports, and Yahoo!. The distribution of our
content and products across multiple platforms, including our own Web sites,
enables us to target numerous sports communities, increase brand awareness and
promote our product offerings. By targeting these communities, our divisions
enable us to derive revenues from multiple sources, including:
. Content Syndication. While the majority of Internet companies pay fees to
distribute their content and product offerings online, the
distinctiveness and in-depth analysis of our content has enabled us to
receive syndication fees from our distribution relationships with AOL,
Fox Sports and Yahoo!.
. Advertising. We offer advertisers the opportunity to target an attractive
demographic, the 18 to 35 year-old male audience, and associate their
brands with high-profile athletes and sports personalities.
. Electronic Commerce. We offer sports fans an easy-to-use environment for
purchasing authentic player and team-related merchandise and
collectibles.
. Subscription. We offer subscriptions to premium content offerings such as
My Baseball Daily that provide in-depth, original information about teams
and players. Information included in our premium content offerings is
available only for purchase and generally is not available through
traditional media sources.
5
<PAGE>
We believe that we can use our proprietary assets, distribution relationships
and common technology platform to effectively deliver our content and commerce
to sports communities. We intend to continue to leverage these aspects of our
business to develop additional divisions focused on fans of sports we do not
currently cover.
----------------
We are a Delaware corporation. Our principal executive offices are located at
2120 Colorado Avenue, Santa Monica, California 90404, and our telephone number
is (310) 453-8100.
RECENT DEVELOPMENTS
On December 3, 1999, we entered into an agreement with Lycos, Inc. Lycos owns
and operates a number of different Web sites, including www.lycos.com. Under
this agreement, we will create and maintain a co-branded sports site with
Lycos, whereby we will become the principal provider of sports content to
Lycos, which includes providing Lycos athlete sites, news, fantasy games and
other sports content. Lycos will provide promotion for our sports content and
products and will provide links back to our co-branded Web site. Lycos has
agreed to pay us a content syndication fee as well as a share of advertising
revenue generated from the Lycos sports area. We will also sell merchandise and
collectibles through the Lycos Web site, and we will pay Lycos a percentage of
revenues from these sales. The agreement extends for a period of two years,
with successive one year renewal periods unless either party terminates. We
expect that this agreement will become operational in the first quarter of
2000.
6
<PAGE>
THE OFFERING
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<C> <S>
Common stock offered................................ 3,300,000 shares
Common stock to be outstanding after this offering.. 30,679,266 shares(1)
Use of proceeds..................................... To repay outstanding indebtedness of
approximately $4.5 million, to redeem
outstanding shares of series A preferred
stock for $2.3 million, and for general
corporate purposes, including the
continued development of our Web sites,
the enhancement of our technology
infrastructure, the expansion into other
markets and working capital. We may use
a portion of the net proceeds to acquire
or invest in complementary businesses,
technologies, assets or products. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. FANS
</TABLE>
- --------------------
(1) Outstanding share information excludes 2,185,131 shares of restricted
common stock and an aggregate of 12,804,412 shares of common stock reserved
for issuance under our stock option plans, of which options to purchase
5,149,061 shares of common stock were outstanding as of February 15, 2000
at a weighted average price of $5.14 per share, assuming a public offering
price of $9.00. In addition, outstanding share information also excludes
warrants to purchase 50,459 shares of common stock at a weighted average
price of $6.88 per share. The number of shares of common stock to be
outstanding is based on the number of shares outstanding on February 15,
2000.
In this prospectus, "Broadband Sports," "we," "us," and "our" refer to
Broadband Sports, Inc. and our wholly owned subsidiaries, and not to the
underwriters.
Unless otherwise stated, all information in this prospectus:
. gives effect to a 20-for-1 stock split, which was effective on December
4, 1998;
. assumes the redemption upon the closing of this offering of all of our
outstanding series A preferred stock for approximately $2.3 million;
. assumes the conversion of our outstanding shares of series C preferred
stock and our outstanding shares of series B preferred stock into an
aggregate of 4,771,666 shares of common stock;
. assumes the effectiveness prior to the closing of this offering of an
amendment to our certificate of incorporation providing for (i) an
authorized capital of 75,000,000 shares of common stock and 5,000,000
shares of preferred stock and (ii) a 1-for-10 reverse stock split of the
outstanding common stock; and
. assumes no exercise of the underwriters' over-allotment option.
7
<PAGE>
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
The combined financial statements of Athlete Direct LLC and Pro Sports
Xchange LLC (the "Predecessor Companies") as of December 31, 1997 and for the
period from February 1, 1996 through December 31, 1996 and for the year ended
December 31, 1997 and the two months ended February 27, 1998, have been
prepared on a combined basis due to the respective companies' common ownership.
The summary consolidated and combined financial data presented below are
derived from our financial statements included at the end of this prospectus.
The pro forma consolidated balance sheet data reflects the application of net
proceeds from the sale of our common stock in this offering at an assumed
initial public offering price of $9.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses, the
repayment of outstanding indebtedness of approximately $4.5 million, the
redemption of the outstanding mandatorily redeemable series A preferred stock
for $2.3 million and the conversion of the Series B and Series C convertible
preferred stock into an aggregate of 4,771,666 shares of common stock. See "Use
of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
Predecessor Companies
------------------------------------------
Period Broadband Sports, Inc.
February 1, 1996 -------------------------
(inception) Two Months Ten Months
Through Year Ended Ended Ended Year Ended
December 31, December 31, February 27, December 31, December 31,
1996 1997 1998 1998 1999
---------------- ------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated and
Combined Statement of
Operations:
Revenues................ $ 219 $1,874 $507 $2,719 $ 8,734
Gross profit............ (195) 574 211 683 2,370
Total operating
expenses............... 164 1,277 368 4,966 20,149
Operating loss.......... 359 703 157 4,283 17,779
Net loss................ 359 700 157 4,356 17,796
Historical loss per
share basic and
diluted (1)............ $ 0.20 $ 0.82
Pro forma loss per share
basic and diluted (2).. $ 0.20 $ 0.75
Weighted average common
and common equivalent
shares outstanding.....
Historical (1)........ 21,704 21,783
Pro forma (2)......... 21,704 23,729
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Actual Pro Forma
------- ---------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................... $18,374 $38,161
Working capital............................................... 20,411 40,234
Total assets.................................................. 29,170 48,958
Revolving loan due to stockholder............................. 4,468 --
Long term portion of capital lease obligation................. 246 246
Mandatorily redeemable Series A preferred stock............... 2,330 --
Series B convertible preferred stock.......................... 16,520 --
Series C convertible preferred stock.......................... 14,840 --
Total stockholders' equity.................................... 18,521 45,142
</TABLE>
- -------------------
(1) See notes to the consolidated and combined financial statements for an
explanation of the determination of the number of shares used in computing
basic and diluted per share amounts.
(2) Gives effect to the issuance and conversion of the Series B convertible
preferred stock as having been outstanding from the issuance date of May
25, 1999 and the Series C convertible preferred stock as having been
outstanding from the issuance date of November 24, 1999.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be seriously
affected, the trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks Related To Our Business
Because we have operated our business for only two years, it is difficult to
evaluate our prospects
In 1998, Broadband Sports was incorporated for the purpose of combining
Athlete Direct and Pro Sports Xchange, each of which had operated
independently prior to our inception. In 1999, the Company acquired RotoNews
and formed SportsAuthentics.com. Because we have a limited operating history,
you should consider and evaluate our operating prospects in light of the risks
and difficulties frequently encountered by relatively new companies,
particularly companies in the rapidly evolving online industry. These risks
include our ability to do the following:
. provide sports-related content and commerce;
. maintain existing and develop new distribution relationships as well as
relationships with athletes, sports writers, sports personalities,
agents, and advertisers;
. successfully market and promote our www.athletedirect.com site;
. create and maintain a common technology platform that supports the
creation and distribution of all of our content and commerce offerings
across all of our sports media divisions;
. achieve projected levels of online traffic and revenues, particularly on
our www.athletedirect.com site, which has only been in operation for a
short period of time;
. build an electronic commerce infrastructure and increase our fulfillment
capabilities; and
. further develop and extend our brands.
Our future growth will depend substantially on our ability to address these
risks and the other risks described below. We cannot assure you that we will
succeed in addressing any of these risks and, if we fail to address these
risks, our business would be adversely affected.
We incurred a net loss of $4.4 million for the ten months ended December 31,
1998 and a net loss of $17.8 million for the year ended December 31, 1999 and
anticipate losses for the foreseeable future
We have incurred net losses in each quarterly and annual period since we
began operations. As of December 31, 1999, we had an accumulated deficit of
$22.2 million. We expect to incur increasing net losses and negative cash
flows on a quarterly and annual basis in the foreseeable future. We need to
generate significant revenues to achieve profitability, and we cannot assure
you that our revenues will be sufficient to achieve this goal. We have
incurred substantial costs to do the following:
. acquire, develop and enhance our assets and properties;
. create, introduce and enhance our content and product offerings;
9
<PAGE>
. acquire, develop and implement our technology infrastructure; and
. attract and retain qualified personnel.
We intend to continue these efforts and, in addition, to increase spending to
do the following:
. drive traffic to our current and future online sites;
. build an electronic commerce infrastructure and increase our fulfillment
capabilities;
. integrate all of our divisions onto a common technological platform; and
. build awareness of our brands.
If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, our business would be adversely affected.
Fluctuations in our operating results may adversely affect our stock price
Some of the factors that could cause our revenues and operating results to
fluctuate include the following:
. the addition or loss of distribution relationships, advertisers or
athletes;
. the introduction by us or by our competitors of new sites, content and
products;
. positive or negative events or publicity concerning particular sports,
leagues, teams or athletes;
. the amount and timing of our capital expenditures and other costs related
to the expansion of our operations;
. seasonal trends in sporting events related to major U.S. sports seasons
and events and during the summer and year-end vacation and holiday
periods;
. changes in demand for, and availability of supply of, merchandise and
collectibles;
. a change in the composition of revenues and the related costs of those
revenues;
. technical difficulties or system downtime affecting the online medium
generally or on our online sites in particular; and
. general economic conditions, as well as economic conditions specific to
the online medium, electronic commerce, content syndication, online
advertising and the sports industry.
Some of our operating expenses, including personnel costs and rent expense,
are planned or committed in advance in anticipation of future revenues, which
are difficult to predict. If our revenues in a particular quarter are lower
than we anticipate, we may not be able to reduce spending in that quarter. As
a result, any shortfall in revenues could adversely affect our operating
results.
Because of these factors, we believe that historical and any period-to-
period comparisons of our operating results are not necessarily meaningful and
you should not view them as indicators of our future performance. If our
operating results in any period fall below the expectations of securities
analysts and investors, the market price of our shares would likely decline.
10
<PAGE>
We may experience difficulties in the successful marketing and promotion of
our www.athletedirect.com site
Historically, Athlete Direct has been available on the AOL proprietary
network, and more recently, on the World Wide Web through distribution
relationships with Yahoo! and eBay. We have not recognized material revenue
from the www.athletedirect.com site to date but expect that advertising and
electronic commerce revenues from this site will represent a greater
percentage of our overall revenues in the future. Growth of revenue from this
site depends on our ability to successfully market and promote the site on a
timely basis. We cannot assure you that we will be successful in marketing and
promoting the www.athletedirect.com site on a timely basis, if at all. We
anticipate that our marketing initiatives will require the hiring of
additional marketing personnel and the implementation of online and offline
marketing campaigns. We do not currently have significant internal marketing
resources and we do not have significant experience in planning and executing
the marketing initiatives described above. Further, we cannot assure you that
even if our marketing initiatives are successful, the www.athletedirect.com
site will attract a significant level of traffic or revenues.
Our future growth depends on our existing AOL relationship and our ability
to enter into new distribution relationships
To date, we have derived a significant portion of our revenues from our AOL
and uBid relationships. For the ten months ended December 31, 1998, AOL
accounted for approximately 46% of our revenues. For the twelve months ended
December 31, 1999, AOL and uBid accounted for approximately 44% and 17% of our
revenues, respectively. We expect that a limited number of distribution
relationships will continue to have a significant impact on our expected
growth for the foreseeable future.
Accordingly, our future success depends on our ability to retain our
existing AOL and uBid relationships and to attract new relationships on a
timely basis and on terms favorable to us. Failure to do so could adversely
affect our business.
We have in the past entered into a distribution relationship that limits
our ability to distribute the collectibles offered by SportsAuthentics.com. We
may in the future enter into distribution arrangements with exclusivity
provisions that may limit our ability to enter into favorable arrangements
with complementary businesses and thereby limit our growth. We cannot assure
you that we will achieve the strategic objectives of these relationships or
that any of the parties with whom we have distribution relationships will
perform their respective obligations as agreed.
We need to continue to develop original content to attract our target
audience
Our future success depends on our ability to continue to develop original
content that is interesting and engaging to our target audience. If our
content does not reflect the preferences of our target audience, our traffic
could decrease or the demographic characteristics of our audience could
change. Either of these results would adversely affect our ability to
syndicate our content, sell subscriptions for premium content products,
conduct electronic commerce and attract advertisers. Our ability to develop
original content depends on several factors, including the following:
. acquiring and retaining online rights relating to athletes, sports
writers and sports personalities;
. the level and quality of participation of our athletes, sports writers
and sports personalities;
. monitoring and adapting to changing consumer preferences;
11
<PAGE>
. effectively integrating leading-edge technologies to create and
distribute content utilizing original sports programming; and
. the technical expertise and creativity of our production and content
staff to produce content for distribution in a broadband environment.
We depend on athletes and other sports personalities to provide original
content to attract distribution relationships, advertisers and traffic
We believe that our future success depends on our ability to maintain our
existing agreements and to secure additional agreements with athletes and
sports personalities, such as broadcasters, commentators, coaches and other
non-athlete public figures in sports. Our business would be adversely affected
by any of the following:
. cancellations or non-renewal of these agreements or the renewal of these
agreements on terms less favorable to us;
. decreased participation by our athletes and sports personalities on our
online sites or failure of athletes to perform under their agreements
with us;
. poor performance of our athletes, or negative events or publicity
relating to our athletes or sports personalities;
. increased costs of acquiring or retaining athletes and sports
personalities; and
. increased competition to obtain agreements with athletes and sports
personalities.
Competition for online rights to use and market the voices, attributes and
original first-person content provided by athletes and sports personalities is
intense. Competitors may be able to offer our athletes and sports
personalities a better online opportunity. If we lose the services of, or the
online rights related to, any high-profile athlete or a significant number of
athletes or sports personalities, or if we are unable to continue to attract
high-profile athletes or sports personalities, our business would be adversely
affected. We cannot assure you that any athlete or sports personality will
continue his or her relationship with us, or that our athletes or sports
personalities will not decide to affiliate with a competitor.
In addition, we believe that approximately 30 sports agents represent more
than 50% of the prominent U.S. professional athletes within Major League
Baseball, the National Football League, the National Basketball Association
and the National Hockey League. Although we currently work with a number of
these agents, adverse changes in our relationships with these sports agents
could adversely affect our business. Although these agents have a fiduciary
responsibility to present the athletes they represent with the best
opportunities, in the event that any of these agents establishes a strategic
relationship or other affiliation with one or more of our competitors or
directly provides online content relating to the athletes they represent, our
business could be adversely affected.
We depend on our network of sports writers for original content
We rely on a network of independent sports writers to deliver original and
timely sports content. Our future success depends substantially upon our
ability to maintain our existing relationships with, and the continued efforts
of, our network of sports writers. We will also need to attract and retain
additional sports writers. We currently have exclusive online agreements with
over 280 sports writers.
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If we are unable to continue to attract and retain sports writers with
appropriate qualifications, the amount of sports news and information we could
offer would decrease and our business would be adversely affected. In
addition, we believe that certain sports writers may have a large and loyal
following among our readers. If we were to lose the services of any one of
these sports writers, the demand for our content could decrease. A significant
reduction in the demand for our content could adversely affect our business.
We cannot assure you that each writer will continue his or her relationship
with us, or that our sports writers will not decide to affiliate with a
competitor.
Our agreements require our sports writers to provide us with original
content for our exclusive online use. However, certain content produced by our
sports writers who are also employed by newspapers may be published online by
these newspapers and other third parties. We face the risk that certain
newspapers may prohibit our sports writers from working for us, which could
adversely affect our business. We face possible liability for claims brought
by third parties, such as newspapers, asserting ownership of content published
by us. Any claim would likely result in our incurring substantial costs and
may adversely affect our business.
We must effectively implement our branding strategy
A growing number of online sites and traditional media companies, some of
which already have well-established brands, offer content and products that
compete with ours. As a result, we believe we must pursue an aggressive
branding strategy in order to attract users, advertisers, distribution
relationships, athletes, sports writers and sports personalities. We have not
yet developed strong brand identities. If we fail to implement our branding
strategy effectively and on a timely basis, it would adversely affect our
business. We believe the importance of brand recognition will increase as
additional companies offer content and products similar to ours.
Competition in our industry is growing, and we may have difficulty competing
with companies providing content or products similar to ours
We compete for users, advertising, syndication, commerce and subscription
revenues, as well as for athletes, sports writers, sports personalities and
other content providers, with many other entities, such as:
. entities that provide access to sports-related content and services (many
of which have been established by traditional media companies through Web
entities targeted to sports enthusiasts generally), Web search and
retrieval services and other high-traffic Web entities;
. sports agents, leagues and other third parties that have existing
relationships with a number of athletes and sports personalities;
. vendors of sports information, merchandise, products and services
distributed through online sites and other means, including retail
stores, mail, facsimile and private online bulletin board services; and
. television, radio and other established media entities that broadcast
sporting events.
We have and might have in the future business relationships with some of our
competitors, some of whom offer access to our services through their own Web
sites, and some of the parties with whom we currently have distribution
relationships may become competitors in the future. We anticipate that, as the
Internet and other interactive distribution systems converge with traditional
television broadcasting and cable, significant competition might come from the
providers of broadband networks, including sports-oriented cable networks.
Some of our existing competitors, as well as a number of
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potential new competitors, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do, and may be better able to
attract athletes, sports writers, sports personalities and other content
providers, as well as distribution relationships, agents, advertisers, viewers
and consumers. These competitors may be able to respond more quickly than we
can to new technologies and changes in online user preferences and to devote
greater resources than we can to building our business. These competitors may
develop content and product offerings comparable or superior to ours.
Barriers to entry are minimal, and current and potential competitors can
launch new online sites at a relatively low cost. We expect that the number of
our direct and indirect competitors will increase in the future and this might
adversely affect our business, operating results and financial condition.
Increased competition could result in lower revenues and loss of users, any of
which could materially adversely affect our business, operating results and
financial condition.
We need to expand our direct advertising sales force and internal marketing
team
We have limited experience in marketing our divisions and selling
advertisements, and we have relied primarily on third parties to sell
advertisements and sponsorships on our online sites and to provide us with
marketing support. We have only recently hired a Vice President of Advertising
and intend to develop our internal sales force to sell advertising and
sponsorships on our online sites. In addition, we intend to continue to expand
our internal marketing resources. Expanding our internal sales force and
marketing organization involves a number of risks, including the following:
. our ability to hire, retain, integrate and motivate sales and marketing
personnel;
. the length of time necessary for new sales and marketing personnel to
become productive; and
. the competition we face from other companies in hiring and retaining
sales and marketing personnel.
Our business would be adversely affected if we do not continue to develop
and maintain an effective sales force or expand our marketing team.
Our business success depends on our ability to attract and retain
advertisers
Our failure to attract a significant number of advertisers or sponsors to
our online sites could adversely affect our business and financial results.
Currently, our internal advertising sales force sells advertising directly,
and we also sell advertising through agencies that represent advertisers. Most
of our advertising contracts for our current online sites have historically
been, and we anticipate that in the near term, they will be, short term and/or
subject to termination by the advertiser at any time with little notice.
Accordingly, the cancellation or deferral of even a limited number of orders
could adversely affect our quarterly performance.
Historically, we have not recognized material revenue from sponsorships. We
intend to sell sponsorships of our athletes' sites to existing sponsors of
these athletes. The failure to sell a significant number of advertisements and
sponsorships would adversely affect our business and financial results.
Our ability to attract and retain advertisers and sponsors will depend on
several factors, including the following:
. our ability to retain athletes, sports personalities and other content
providers;
. our ability to achieve, demonstrate and maintain a significant level of
traffic from the attractive 18 to 35-year old male demographic group;
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. the general market for athlete sponsorships;
. the pricing of advertising on other online sites;
. advertisers' acceptance of the current banner size on the AOL proprietary
network, which is smaller than traditional advertising banners on the
World Wide Web;
. content introductions by us and our competitors; and
. our ability to develop and retain a skilled advertising sales force.
We may not be able to obtain sufficient supplies of merchandise or
collectibles to meet customer demand or to manage inventory effectively
The market for sports merchandise and collectibles is highly volatile and
subject to consumer trends relating to particular sporting events and the
popularity of particular athletes and teams. As a result, demand for certain
merchandise and collectibles can often be intense or short-lived. To date, we
have sourced only a limited amount of collectibles from our athletes. We
cannot assure you that we will be able to procure collectibles from our
athletes on a timely basis, if at all. We may be unable to obtain sufficient
inventory of merchandise or collectibles to meet demand on a timely basis, if
at all. In the future, we intend to maintain a larger inventory of sports
merchandise and collectibles. Maintaining a larger inventory subjects us to
numerous risks, including funding, obsolescence and price erosion. If we are
unsuccessful in effectively managing our inventory, we may be forced to sell
our inventory at a discount or loss.
Our business success depends on our ability to generate electronic commerce
and to develop a scalable commerce platform and distribution capabilities
If we do not generate increased revenues from electronic commerce, our
growth will be limited and our business could be adversely affected. To grow
our electronic commerce revenues, however, we will have to create or source
sports merchandise and collectibles that are appealing to a large number of
online consumers. We will also have to continue to create online environments
that are conducive to electronic commerce, build or license a sufficiently
robust and scalable electronic commerce platform and increase our order
fulfillment capabilities. We have only been involved in distribution and
fulfillment operations for approximately 12 months. Our failure to build these
capabilities in a timely manner could adversely affect our business. If we
fail to meet any of these challenges, our business would be adversely
affected.
Our collectibles provided by third parties may be subject to fraud
We acquire the majority of our collectibles from third-party providers and
sell them through our independent auction Web sites and our online sites. We
rely on guarantees made by these third-party providers as to the authenticity
of these collectibles. Although we do not independently verify the
authenticity of third-party collectibles, we guarantee and verify our Athlete
Direct collectibles, which are provided to us directly by our athletes. To the
extent that any collectible sold by us is not authentic, we could be subject
to, among other things, significant negative publicity and litigation. Any
negative publicity generated as a result of actual or perceived fraudulent or
deceptive collectibles or any litigation, regardless of the merits, could
adversely affect our business.
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Our growth may strain our resources
Our business has grown rapidly over the last three years. The number of our
employees has grown from approximately 13 employees at May 1, 1998 to 165
employees at December 31, 1999. The scope of our operating and financial
systems has also expanded significantly. Our rate of growth places a
significant strain on our resources for a number of reasons, including the
following:
. the need for the continued development of our financial and information
management systems;
. the need to manage our distribution relationships as well as
relationships with numerous athletes, sports writers, sports
personalities, and other third parties;
. the difficulties in hiring and retaining skilled personnel necessary to
support our current level of business and to grow our multiple sources of
revenue; and
. the need to train and manage our growing employee base.
The addition of new sports media or other divisions and the attention they
demand may also strain our management resources. We cannot assure you that we
will adequately address these risks, and if we do not, our business could be
adversely affected.
Our business model depends on us generating revenues from our premium
content products
To date, only a limited number of online users have been willing to pay for
content sold through the Internet. If this market for subscription-based
premium content products does not develop or develops more slowly than we
expect, our business could be adversely affected. Even if this market
develops, it is possible that the renewal rate of our subscribers may be
significantly lower than we expect, which could also adversely affect our
business.
We may not be able to respond to technological changes, and may not remain
competitive with others that are better able to respond to these changes
quickly
The online industry is characterized by rapid technological change, changes
in user and customer preferences, frequent new content and product
introductions and enhancements, and emerging industry standards. The
introduction of new technologies and the emergence of new industry standards
and practices can render our existing offerings less attractive and
unmarketable. In addition, if we are unable to integrate new technologies and
standards effectively, or to introduce new content and products, our ability
to remain competitive will be adversely affected. We are in the process of
implementing the technology platform that is currently supporting the storage,
delivery and display of our original content and commerce for
www.athletedirect.com across our other sports media divisions. If we are
unsuccessful in the implementation of this technology platform across our
other sports media divisions, we would not be able to realize the financial
and operating efficiencies planned by our investments in this technology
platform and our business would be adversely affected. Our future success will
depend, in part, on numerous factors, including our ability to do the
following:
. enhance our existing offerings;
. develop new offerings that address the increasingly sophisticated and
varied needs of our prospective users;
. respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis;
. develop, enhance and improve the responsiveness, functionality and
features of our online sites;
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. provide compelling audio and video content for distribution in a
broadband environment as broadband access becomes more widely available;
and
. license or acquire leading technologies.
If we are unable to integrate and capitalize on new technologies and
standards effectively, our business could be adversely affected.
Any inability to protect our intellectual property rights could adversely
affect our business
Proprietary rights are important to our success and our competitive
position. To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws, confidentiality agreements with third
parties, and license agreements with consultants, vendors and customers.
Despite such protection, a third party could, without authorization, copy or
otherwise misappropriate information from our database. Our agreements with
employees, consultants and others who participate in development activities
could be breached. We may not have adequate remedies for any breach, and our
trade secrets may otherwise become known or independently developed by
competitors. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States,
and effective copyright, trademark and trade secret protection may not be
available in those jurisdictions.
We have applied for registration of several trademarks in the United States
and we will seek to register additional trademarks as appropriate. The uses
for which we have applied for registration of these trademarks include
providing online retail services, and delivering sports information,
photographs, interactive chat rooms and fan message boards through the
Internet. We believe that securing these registrations is vital to the
successful marketing and promotion of our lines of business. We cannot assure
you that we will be successful in obtaining the trademarks for which we have
applied. Even if these applications mature to registration, they may be
successfully challenged by others or invalidated. If the applications do not
register because third parties own the trademarks, or if our rights to use the
trademarks are challenged by owners of similar rights, the use of the
trademarks may be restricted unless we enter into arrangements with the third
parties, which may be unavailable on commercially reasonable terms.
We also use content from athletes, sports writers, sports personalities and
other third parties and it is possible that we could become subject to
infringement actions based upon this content. We generally obtain
representations as to the origin and ownership of this content; however, this
may not adequately protect us. Any of these claims, with or without merit,
could subject us to costly litigation and the diversion of our technical and
management personnel.
There has been substantial litigation in the computer and online industries
regarding intellectual property assets. Third parties may claim infringement
by us with respect to current and future products, trademarks or other
proprietary rights, or we may counterclaim against these parties. Any claims
or counterclaims, with or without merit, could be time-consuming, result in
costly litigation, divert management's attention, cause product release
delays, require us to redesign our products or require us to enter into
royalty or licensing agreements, any of which could harm our business. These
royalty and licensing agreements, if required, may not be available on terms
acceptable to us, if at all.
Our business may be restricted by rights of sports leagues and players'
associations
The operation of our business and our ability to expand into new areas may
be restricted by rights of sports leagues and players' associations. Sports
leagues, such as the National Football League, typically own league and team
trademarks, and we may be required to obtain a license to any of those
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trademarks that we use. In addition, the leagues also own other rights, such
as the rights to display highlights of games, that we may wish to use in our
business in the future. License agreements with the leagues for trademarks or
other rights, if required, may not be available on terms acceptable to us or
at all, and failure to obtain these license agreements could adversely affect
our business.
Players' associations have certain rights to license athlete names,
likenesses and other attributes for groups of athletes, referred to as group
licensing rights. We may be required to pay for or otherwise obtain licenses
from players' associations for these group licensing rights in order to
conduct certain aspects of our business. If licenses were not available or
were not provided on terms acceptable to us and we were required to modify our
online sites, our business would be adversely affected. We, and agents for
some of the athletes with whom we have contracts, have received correspondence
from the National Football League Players' Association telling us to cease
creating, selling, advertising and promoting Web sites for athletes
represented by the players' association. On January 27, 2000, a complaint was
filed in the United States District Court of California by the National
Football League Players Association and the National Football League Players,
Inc. against Athlete Direct. The complaint alleges that by operating its Web
site, Athlete Direct is violating certain rights that the plaintiffs have to
license the names, likenesses and other attributes for groups of six or more
football players for products that are sold at retail or used as promotional
items. The complaint also alleges that by entering into contracts with
football players with whom the plaintiffs already have contracts, Athlete
Direct is interfering with the plaintiffs' contractual relationships with
these football players. The complaint seeks declaratory relief and unspecified
damages. Approximately 80% of the athletes who play in the National Football
League and for whom we provide individual Web sites have a relationship with
the NFLPA. Although we do not believe that the NFLPA's suit has merit, and
although we intend to contest the suit vigorously, if the NFLPA were to
prevail on its claims and/or if athletes and agents determine not to work with
us because of the players' association claims or actions, our business would
be adversely affected. This litigation, whether or not determined in our favor
or settled by the parties, may be costly and may divert the efforts and
attention of our management from normal business operations.
The loss of key personnel, or the inability to attract and retain
additional, qualified personnel, could adversely affect our business
Our future success depends, in significant part, upon the continued services
of a relatively small number of key senior management personnel. The key
senior management personnel who are important to our success are Richard D.
Nanula, Chief Executive Officer and Chairman of the Board, Tyler J. Goldman,
President, Broadband Studios, a division of Broadband Sports, and Ross B.
Schaufelberger, Senior Vice President, Business Development. Mr. Nanula has
been with us for fewer than 12 months. We have entered into employment
agreements with all of the aforementioned officers. However, we cannot assure
you that we will be able to retain these or other key employees or that we
will be successful in attracting, assimilating and retaining other personnel
in the future. In particular, we need to hire qualified marketing,
advertising, sales and merchandise personnel as well as engineers to assist
with our Web sites and our technology infrastructure. These personnel are in
high demand. The loss of any of our senior management personnel or the
inability to attract and retain additional, qualified personnel could
adversely affect our business.
We may acquire other businesses and we may have difficulty integrating these
businesses
We acquired RotoNews in February 1999 and may in the future broaden the
scope of our business by acquiring additional businesses that complement our
current content or product offerings, increase
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our market share or otherwise offer growth opportunities. However, our
experience in acquiring and assimilating other companies is limited. We may
not be successful in overcoming problems encountered in connection with future
acquisitions, and our inability to do so could adversely affect our business.
Future acquisitions would expose us to increased risks, including risks
associated with the following:
. assimilating new operations, technologies, products, sites and personnel;
. diverting resources from our existing businesses, sites and technologies;
. diverting management's attention from other business concerns;
. entry into new markets in which we have limited or no experience;
. the inability to generate revenues from new sites sufficient to offset
associated acquisition costs;
. maintaining uniform standards, controls, procedures and policies; and
. the impairment of our distribution relationships or our relationships
with employees and other customers as a result of integration of new
businesses.
Failure to integrate successfully any business, product, technology or
personnel would adversely affect our business.
Because business acquisitions typically involve significant amounts of
intangible assets, our operating results may be adversely affected by
amortization of intangible assets acquired. In addition, in the event of
future acquisitions or business combinations, we could do the following:
. issue equity securities that would dilute current stockholders'
percentage ownership in us;
. use cash or incur substantial debt; or
. assume contingent liabilities.
We plan to expand into international markets, which involves additional
risks
As part of our business strategy, we plan to expand into international
markets, which involves additional risks. At this time, our planning has not
reached the stage of identifying a specific region or regions for any such
expansion. In marketing our content and products internationally, we will face
new competitors. In addition, expansion into international markets will
require us to hire and retain additional personnel to execute our
international strategy and may require us to create localized versions of our
content on a cost effective basis. We cannot assure you that we will be
successful in attracting, hiring or retaining the necessary personnel,
creating localized versions of our content or marketing or distributing our
content or products abroad. Even if we are successful, our international
revenues may not offset the expense of establishing and maintaining
international operations. To date, we have limited experience in marketing and
distributing our content and products internationally. Additional difficulties
and risks inherent in doing business internationally include the following:
. compliance with a variety of local regulatory requirements and changes in
those requirements;
. export controls relating to technology, tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. potentially weaker protection of intellectual property rights in foreign
countries, including the possibility that our trademarks will not be
available for our use in those countries;
. political instability in foreign countries;
. fluctuations in foreign currency exchange rates;
. longer payment cycles and greater difficulty in collecting accounts
receivable;
. seasonality in sports outside of the United States; and
. potentially adverse tax consequences.
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Risks Related To Our Industry
Our business depends on the development and growth of electronic commerce on
the Internet and other online media
The use of online media for retail transactions, particularly those for
sports-related products, is a recent development, and the continued demand and
growth of a market for services and products via online media is uncertain.
Online media may ultimately prove not to be a viable commercial marketplace
for a number of reasons, including the following:
. unwillingness of consumers to shift their purchasing from traditional
retailers to online retailers;
. lack of acceptable transaction and data security;
. concern for privacy of personal information;
. limitations on access and ease of use;
. congestion leading to delayed or extended response times;
. inadequate development of infrastructure of online media to keep pace
with increased levels of use; and
. increased government regulation and taxation.
Malfunctions of third-party systems and the strain on our own systems due to
increased traffic could adversely affect our business
In the past, our online sites have experienced significant increases in
traffic when there are significant sports-related events. To the extent the
number of users increases, our online sites must accommodate a high volume of
traffic. Our online sites have in the past and may in the future experience
slower response times or other problems for a variety of reasons. If increases
in user traffic result in system interruptions or increases in response time,
it could result in a loss of potential or existing users or advertisers and,
if sustained or repeated, could reduce the attractiveness of our online sites
to users, content providers and advertisers. In addition, our users depend on
Internet service providers, and other online service providers for access to
our online sites. These providers have experienced significant outages in the
past, particularly as a result of increased traffic, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems in the future. These types of occurrences could cause users to
perceive our online sites as not functioning properly and therefore adversely
affect our ability to attract and retain users, content providers and
advertisers. While neither we nor insofar as we know any of the persons with
whom we make connections have incurred any outages or failures due to the year
2000, there is still a possibility that year 2000 outages or failures may
occur and may cause our systems to malfunction.
Any failure of our network infrastructure could decrease the availability of
our content and products
The performance, reliability and availability of our online sites are
critical to our reputation and ability to attract and retain users, content
providers and advertisers. We cannot guarantee that:
. we will have uninterrupted access to the Internet;
. our users will be able to reach our Internet sites; or
. communications via our Internet sites will be secure.
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Despite precautions taken by us and by the companies that now host or in the
future may host our Internet sites, our system is susceptible to natural and
man-made disasters such as earthquakes, fires, floods, power loss and
sabotage. Our system is also vulnerable to disruptions from computer viruses
and attempts by hackers to penetrate our network security. We do not currently
have redundant systems or a formal disaster recovery plan.
Any disruption in our users' Internet access provided by third-party
services or any failure of third parties to handle higher volumes of Internet
users to our Internet sites could adversely affect our business.
Services based on sophisticated software and computer systems often
encounter development delays and the underlying software may contain
undetected errors that could cause system failures when introduced. Any system
error or failure that causes interruption in availability of content or an
increase in response time could result in a loss of potential or existing
advertisers, content providers and users and, if sustained or repeated, could
reduce the attractiveness of our content services to such entities or
individuals. Expanding our network infrastructure could require substantial
financial and operational resources in 2000 and future periods.
Our revenues depend on advertisers and sponsors adopting the Internet and
other online media as an attractive platform
The Internet and other online media have not been available for a sufficient
period of time to gauge their effectiveness as advertising platforms when
compared with traditional media. There is intense competition among sellers of
advertising space on online media, making it difficult to project advertising
revenues or anticipate whether we or the parties with whom we have
distribution relationships will be successful in selling advertising space.
Market acceptance of online media as an advertising platform is highly
uncertain for a number of reasons, including the following:
. lack of widely accepted standards for measuring the extent of Internet
traffic;
. concerns about privacy and security among users;
. the limited acceptance to date of online media for widespread commercial
use; and
. inadequate development of the network infrastructure and enabling
technologies.
Tracking and measurement standards for advertising are evolving and create
uncertainty about the viability of advertising on the Internet
It is important to our advertisers that we accurately measure the size and
demographics of our user base and the delivery of advertisements on our online
sites. There are currently no widely accepted standards to measure the
effectiveness of online media as a platform for attracting audiences or
targeting particular demographic groups. If measurement standards do not
develop, we may be unable to retain current, or attract new, advertisers. We
depend on third parties to provide measurement services for the delivery of
advertisements on our sites. These third parties use proprietary software to
deliver advertisements and measure the delivery of these advertisements. If
they are unable to provide these services in the future, we would be required
to perform them ourselves or obtain them from another provider. This could
cause us to incur additional costs or cause interruptions in our business
while we are replacing these services. We are implementing additional systems
designed to record demographic data on our users. If we do not develop these
systems successfully, we may not be able to accurately evaluate the
demographic characteristics of our users. Companies may not advertise on our
online sites or may pay less for advertising if they do not perceive our
measurements, or measurements made by third parties, to be reliable.
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Online security concerns could hinder electronic commerce
The need to securely transmit confidential information over online media has
been a significant barrier to electronic commerce and electronic
communications. Any well-publicized compromise of security could deter people
from using the Internet or other online media or from using it to conduct
transactions that involve transmitting confidential information, such as
credit card numbers. We transmit personal information such as credit card
numbers and store proprietary information such as customer names, addresses
and purchase trends. To the extent that our activities or those of third-party
contractors involve the storage and transmission of proprietary or personal
information, security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our business may be
adversely affected if our security measures do not prevent security breaches,
and we cannot assure you that we can prevent any security breaches. In
addition, we may be subject to liability for orders placed with fraudulent
credit card data even though the associated financial institution approved
payment of the orders. Under current credit card practices, a merchant is
liable for fraudulent credit card transactions where, as is the case with the
transactions we process, the merchant does not obtain a cardholder's
signature. Fraudulent use of credit card data in the future could adversely
affect our business.
In addition, we could be liable for the misuse of personal information. The
Federal Trade Commission, the European Union and certain state and local
authorities have been investigating certain Internet companies regarding their
use of personal information. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if
these authorities choose to investigate our privacy practices.
We could be subject to liability for online content
The nature and breadth of content disseminated by us on our online sites and
through our distribution relationships could expose us to liability in various
areas, including claims relating to:
. defamation, libel, negligence, personal injury and other legal theories
based on the nature and content of the material we publish or distribute;
. copyright or trademark infringement or wrongful action due to the actions
of third parties; and
. use of third-party content made available through our online sites or
through content and material posted by parties with whom we have
distribution relationships and participants on online pages or in chat
rooms and bulletin boards, such as information provided by our sports
writers.
Because of the large amount of content that is provided to us by our sports
writers on a daily basis, it is difficult to verify the originality or
accuracy of this information. Any claim would likely result in our incurring
substantial costs and would also be a drain on our financial and other
resources. In addition, we might experience disruptions in our distribution
relationships as well as in our relationships with our athletes, sports
writers, sports personalities, advertisers, partners and other third parties.
This could reduce traffic on our online sites, negatively affect our user
base, or reduce our revenue from advertising and electronic commerce.
Imposition of government regulations and other legal uncertainties
associated with lotteries and gambling could adversely affect our business
RotoNews' occasional use of prizes in its fantasy sports games may subject
some of its games to state and federal laws governing lotteries and gambling.
These laws vary from jurisdiction to jurisdiction and are complex and
uncertain both in application and enforcement. RotoNews seeks to design its
games so as not to constitute lotteries or gambling under these laws and,
where possible, to
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fall within exemptions from applicable laws. We cannot assure you that our
contests will be exempt from such laws or that the applicability of such laws
will not adversely affect our business. Failure to comply with applicable laws
could materially harm our business.
Risks Associated With Our Offering
We may need additional financing to achieve our business objectives or
achieve profitability
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering, will be sufficient to meet our anticipated
working capital and capital expenditure needs for at least the 18 months
following the date of this prospectus. Nevertheless, we may need to raise
additional funds to maintain and develop our position in the marketplace. We
cannot assure you that additional financing will be available on terms
favorable to us, or at all. If we cannot obtain needed funds on acceptable
terms, or at all, we would be limited in our ability to do the following:
. fund more rapid expansion;
. develop or enhance existing content or products;
. upgrade our technological infrastructure;
. build our multiple brands;
. respond to competitive pressures; or
. acquire complementary products, businesses or technologies.
Even if we succeed in raising additional funding, it may have a dilutive
effect on the percentage of ownership of our then-current stockholders because
we may need to raise these funds by issuing equity or convertible debt
securities. Also, any new securities may have rights and privileges senior to
the rights of the common stock.
Our officers, directors and principal stockholders can exert control over
matters requiring stockholder approval
After this offering, executive officers, directors and holders of 5% or more
of our outstanding common stock will, in the aggregate, beneficially own
approximately 75% of our outstanding common stock. These stockholders will be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control and
may make some transactions more difficult or impossible without the support of
these stockholders.
Provisions in our charter documents and Delaware law may delay or prevent an
acquisition of our company
Upon the closing of this offering, our certificate of incorporation and
bylaws will contain provisions which could make it harder for a third party to
acquire us without the consent of our board of directors. For example, if a
potential acquiror were to make a hostile bid for us, the acquiror would not
be able to call a special meeting of stockholders to remove our board of
directors or act by written consent without a meeting. In addition, our board
of directors will have staggered terms which makes it difficult to remove them
all at once. The acquiror would also be required to provide advance notice of
its proposal to remove directors at an annual meeting. The acquiror also will
not be able to cumulate votes at a meeting, which will require the acquiror to
hold more shares to gain representation on the board of directors than if
cumulative voting were permitted.
Our board of directors also has the ability to issue preferred stock which
would significantly dilute the ownership of a hostile acquiror. In addition,
Section 203 of the Delaware General Corporation Law
23
<PAGE>
limits business combination transactions with 15% stockholders that have not
been approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation. These provisions may apply even if the offer may be considered
beneficial by some stockholders.
Our board of directors could choose not to negotiate with an acquiror that
it did not feel was in the strategic interests of Broadband Sports. If the
acquiror was discouraged from offering to acquire us or prevented from
successfully completing a hostile acquisition by the antitakeover measures,
you could lose the opportunity to sell your shares at a favorable price.
The number of shares that will be eligible for sale in the open market in
the near future could depress our stock price
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. After this
offering, we will have outstanding 32,864,397 shares of common stock. Of these
shares, the 3,300,000 shares being offered hereby are freely tradable. This
leaves 29,564,397 shares eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
3,300,000 The date of this prospectus
28,824,266 180 days after the date of this prospectus
32,864,397 At various times after 180 days from the date of this prospectus
</TABLE>
Our directors, officers and stockholders and substantially all of our
optionees have agreed that they will not sell, directly or indirectly, any
common stock without the prior written consent of Morgan Stanley and Co.
Incorporated for a period of 180 days from the date of this prospectus.
Upon the closing of this offering, we intend to file a registration
statement to register for resale the 12,804,412 shares of common stock
reserved for issuance under our stock option plans. We expect this
registration to become effective immediately upon filing. As of February 15,
2000, options to purchase a total of 5,149,061 shares of common stock were
outstanding, of which 914,440 shares will be immediately exercisable upon the
closing of this offering. These stock options generally have exercise prices
significantly below the assumed initial public offering of our common stock.
The possible sale of a significant number of these shares may cause the price
of our common stock to fall.
Certain stockholders, representing approximately 24,509,304 shares of common
stock, have the right, subject to conditions, to include their shares in
certain registration statements relating to our securities. By exercising
their registration rights and causing a large number of shares to be
registered and sold in the public market, these holders may cause the price of
the common stock to fall. In addition, any demand to include such shares in
our registration statements could have an adverse effect on our ability to
raise needed capital.
As a new investor, you will experience immediate and substantial dilution
The initial public offering price is expected to be substantially higher
than the net tangible book value per share of the outstanding common stock
immediately after the offering. Investors purchasing common stock in this
offering, therefore, will incur immediate dilution of $7.71 in net tangible
book value per share, assuming an initial public offering price of $9.00 per
share. To the extent that outstanding stock options to purchase common stock
are exercised, there will be further dilution. See "Dilution."
24
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements.
25
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,300,000 shares of
common stock in this offering will be approximately $26.6 million, assuming an
initial public offering price of $9.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that
our net proceeds will be $30.8 million.
We intend to use the net proceeds to:
. repay outstanding indebtedness of approximately $4.5 million; and
. redeem our outstanding mandatorily redeemable series A preferred stock
for $2.3 million.
The balance of the net proceeds will be used for general corporate purposes,
including the continued development of our Web sites, the enhancement of our
technology infrastructure, the expansion into other markets and working
capital. We believe the net proceeds from this offering and current cash and
cash equivalents will be sufficient to fund our working capital and capital
expenditure requirements for at least the next 18 months.
We have not identified specific uses for all such proceeds. Accordingly, our
management team will have broad discretion in applying the net proceeds. We
may use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, assets or products. We currently have no agreements
or understandings with respect to any such acquisitions. Pending such uses, we
intend to invest the net proceeds of this offering in short-term, interest-
bearing, investment grade securities, certificates of deposit or direct
guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance operations and the growth of
our business and do not anticipate paying any cash dividends on our common
stock in the foreseeable future. We may incur indebtedness in the future which
may prohibit or effectively restrict the payment of dividends, although we
have no current plans to do so. Any future determination to pay cash dividends
will be at the discretion of our board of directors.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization as of December 31, 1999:
(a) on an actual basis;
(b) on a pro forma basis to reflect the following adjustments;
. the sale of 3,300,000 shares of common stock and the receipt of the
net proceeds from the sale of common stock, at an assumed initial
public offering price of $9.00 per share and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses;
. the repayment of outstanding indebtedness of $4.5 million, which was
outstanding at December 31, 1999.
. the redemption of our outstanding mandatorily redeemable series A
preferred stock for $2.3 million; and
. the conversion of our series B and series C convertible preferred
stock into an aggregate of 4,771,666 shares of common stock;
The table below should be read in conjunction with the more detailed
financial statements and the related notes, which are included elsewhere in
this prospectus:
<TABLE>
<CAPTION>
As of
December 31,
1999(1)
-----------------
Pro
Actual Forma
-------- -------
(in thousands)
<S> <C> <C>
Revolving loan due to stockholder....................... $ 4,468 $ --
-------- -------
Long term portion of capital lease obligation........... 246 246
-------- -------
Mandatorily redeemable series A preferred stock, $0.001
par value, 2,000,000 shares authorized actual;
2,000,000 shares issued and outstanding actual; no
shares issued and outstanding pro forma................ 2,330 --
-------- -------
Preferred stock, $0.001 par value, 50,000,000 authorized
actual, 5,000,000 authorized pro forma
Series B convertible preferred stock; 34,000,000 shares
authorized; 29,166,663 shares issued and outstanding
actual; no shares authorized, issued and outstanding
pro forma............................................. 16,520 --
Series C convertible preferred stock; 20,000,000 shares
authorized; 18,550,000 shares issued and outstanding
actual; no shares authorized, issued and outstanding
pro forma............................................. 14,840 --
Common stock, $0.001 par value, 306,000,000 shares
authorized, 24,742,731 shares issued and outstanding
actual; 75,000,000 shares authorized, 32,814,327 issued
and outstanding pro forma.............................. 25 33
Additional paid-in capital.............................. 31,394 89,367
Receivable from stockholder............................. (16,701) (16,701)
Deferred stock compensation............................. (5,405) (5,405)
Accumulated deficit..................................... (22,152) (22,152)
-------- -------
Total stockholders' equity............................ 18,521 45,142
-------- -------
Total capitalization................................ $ 25,565 $45,388
======== =======
</TABLE>
- ---------------------
(1) The preceding table excludes (a) an aggregate of 12,804,412 shares of
common stock reserved for issuance under our stock option plans, of which
options to purchase 5,199,061 shares of common stock were outstanding as
of December 31, 1999 at a weighted average exercise price of $5.14 per
share, assuming a public offering price of $9.00 and (b) warrants to
purchase 50,459 shares of common stock at a weighted average exercise
price of $6.88 per share.
27
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $15.6 million or $0.53 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and divided by the total number of shares
of common stock outstanding, after giving effect to the automatic redemption
of the mandatorily redeemable series A preferred stock, and the conversion of
the series B and series C convertible preferred stock into an aggregate of
4,771,666 shares of common stock upon the closing of this offering. Dilution
in pro forma net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the pro forma net tangible book value per share of common
stock immediately after the closing of this offering. After giving effect to
the sale of the 3,300,000 shares of common stock offered by us at an assumed
initial public offering price of $9.00 per share, and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value at December 31,
1999 would have been approximately $42.3 million or $1.29 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $0.76 per share to existing stockholders and an immediate dilution of
$7.71 per share to new investors of common stock. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $9.00
Pro forma net tangible book value per share as of December
31, 1999.................................................... $0.53
Increase in pro forma net tangible book value per share
attributable to new investors............................... 0.76
-----
Pro forma net tangible book value per share after this
offering...................................................... 1.29
-----
Dilution per share to new investors............................ $7.71
=====
</TABLE>
The following table summarizes, on an as adjusted basis to give effect to
the offering at an assumed initial public offering price of $9.00 per share,
before deducting estimated underwriting discounts and commissions and estimate
offering expenses, as of December 31, 1999, the differences between the
existing stockholders and new investors with respect to the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased(1) Total Consideration
--------------------- ---------------------- Average Price
Number Percentage Amount Percentage Per Share
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 27,281,763 89.21% $37,571,616 55.85% $1.38
New investors........... 3,300,000 10.79% 29,700,000 44.15 9.00
---------- ------ ----------- ------
Total................. 30,581,763 100.00% $67,271,616 100.00%
========== ====== =========== ======
</TABLE>
- ---------------------
(1) The preceding table excludes (a) an aggregate of 12,804,412 shares of
common stock reserved for issuance under our stock option plans, of which
options to purchase 5,199,061 shares of common stock were outstanding as
of December 31, 1999 at a weighted average exercise price of $5.14 per
share, assuming a public offering price of $9.00, (b) 2,232,634 shares of
restricted common stock and (c) warrants to purchase 50,459 shares of
common stock at a weighted average exercise price of $6.88 per share.
28
<PAGE>
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
The statement of operations data set forth below for the fiscal year ended
December 31, 1997, the two months ended February 27, 1998, the ten months
ended December 31, 1998, and the year ended December 31, 1999, and the
selected balance sheet data as of December 31, 1998 and 1999 have been derived
from our financial statements, which have been audited by Ernst &
Young LLP, independent auditors, included elsewhere in this prospectus. The
statement of operations data for the period from inception (February 1, 1996)
through December 31, 1996 and the combined balance sheet data as of
December 31, 1996 and 1997 are derived from financial statements of the
Predecessor Companies that are not included herein. You should read the
selected consolidated and combined financial and operating data set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Predecessor Companies Broadband Sports, Inc.
------------------------------------------ -------------------------
The period
February 1, 1996
(inception) Two months Ten months
through Year ended ended ended Year ended
December 31, December 31, February 27, December 31, December 31,
1996 1997 1998 1998 1999
---------------- ------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated and
Combined Statement of
Operations Data:
Revenues................ $ 219 $ 1,874 $ 507 $ 2,719 $ 8,734
Cost of revenues........ 414 1,300 296 2,036 6,364
----- ------- ----- ------- --------
Gross profit (loss)..... (195) 574 211 683 2,370
Operating expenses:
Sales and marketing.... 4 154 69 592 7,244
Product development.... 8 22 9 137 1,270
General and
administrative........ 97 672 136 1,537 7,001
Depreciation........... 3 15 4 43 489
Amortization of
goodwill.............. -- -- -- 244 363
Amortization of
deferred stock
compensation and
deferred incentives
(1)................... 52 414 150 2,413 3,782
----- ------- ----- ------- --------
Total operating
expenses............ 164 1,277 368 4,966 20,149
----- ------- ----- ------- --------
Operating loss.......... (359) (703) (157) (4,283) (17,779)
Interest income......... -- 3 -- -- 345
Interest and other
expense................ -- -- -- (73) (362)
----- ------- ----- ------- --------
Net loss................ $(359) $ (700) $(157) $(4,356) $(17,796)
===== ======= ===== ======= ========
Historical loss per
share basic and
diluted (2)............ $ .20 $ .82
Pro forma loss per share
basic and diluted (3).. $ .20 $ .75
Weighted average common
and common equivalent
shares outstanding.....
Historical (2)......... 21,704 21,783
Pro forma (3).......... 21,704 23,729
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Companies Broadband Sports, Inc.
------------- --------------------------
December 31,
------------- December 31, December 31,
1996 1997 1998 1999
------ ------ ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated and Combined Balance
Sheet Data:
Cash and cash equivalents............ $ 258 $ 53 $ 213 $18,374
Working capital ..................... 209 587 403 20,411
Total assets......................... 1,172 1,971 2,356 29,170
Revolving loan due to stockholder.... -- -- 1,998 4,468
Long term portion of capital lease
obligation.......................... -- -- -- 246
Mandatorily redeemable series A
preferred stock..................... -- -- 2,150 2,330
Series B convertible preferred
stock............................... -- -- -- 16,520
Series C convertible preferred
stock............................... -- -- -- 14,840
Total stockholders' equity........... 909 1,631 (2,388) 18,521
</TABLE>
- ------------------
(1) All amortization of deferred stock compensation related to employees and
deferred incentives related to non-employees has been aggregated and shown
as a separate line item in the statements of operations.
(2) See notes to the consolidated and combined financial statements for an
explanation of the determination of the number of shares used in computing
basic and diluted per share amounts.
(3) Gives effect to the conversion of the series B convertible preferred stock
as having been outstanding from the issuance date of May 25, 1999, and the
conversion of the series C convertible preferred stock as having been
outstanding from the issuance date of November 24, 1999.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes to those statements included
elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Our actual results could
differ materially from those anticipated in the forward-looking statements as
a result of certain factors, including, but not limited to, those discussed in
"Risk Factors" and elsewhere in this prospectus.
Overview
Broadband Sports is a leading Internet provider of original content and
commerce for hundreds of individual sports communities. We use our proprietary
assets -- such as contractual relationships with athletes, writers and sports
personalities -- to create content and commerce offerings targeting
geographically dispersed sports communities who follow individual sports,
teams and athletes.
We have established distribution relationships with AOL, eBay, Fox, Yahoo!,
and uBid which, along with our own Web sites, enable us to reach numerous
sports communities, increase awareness of our brands, and promote our content
and commerce offerings.
Broadband Sports was founded by Tyler J. Goldman and was incorporated in
February 1998 to combine Athlete Direct, Inc. and Pro Sports Xchange, Inc.
under common ownership. Initial funding was primarily provided by one venture
capital investor. Athlete Direct began operations in September 1996 and Pro
Sports Xchange LLC began operations in February 1996. Broadband Sports
purchased all of the outstanding stock of the Predecessor Companies in
February 1998 for $2,209,964. The acquisitions were accounted for as purchase
transactions and $877,516 of goodwill was recorded which is being amortized
using the straight-line method over three years. In February 1999, Broadband
Sports acquired the assets of Manna Mir Research, Inc., for $225,000 in cash
and contingent consideration of up to an additional $205,000. Manna Mir
Research, Inc. owned and operated the fantasy sports site, rotonews.com. These
assets were contributed to a newly formed subsidiary, RotoNews, Inc. In
connection with the acquisition of Manna Mir Research, Inc., we recorded
$254,074 of goodwill which is being amortized using the straight-line method
over three years. In March 1999, Broadband Sports formed a new subsidiary,
SportsAuthentics.com, Inc., to market and distribute sports-related
merchandise and collectibles.
Revenues. We currently derive revenues from four sources: content
syndication, advertising, electronic commerce and subscriptions. We earn
content syndication revenues through a license to display our original
content. Our content includes the Pro Sports Xchange and College Sports
Xchange Insider Team Reports, the Pro Sports Xchange, College Sports Xchange
and Player Notes, as well as the individual athlete sites produced by Athlete
Direct. Content syndication revenues are recognized over the period of the
license agreement as we deliver such content. In addition to cash payments,
our distribution relationships provide us with guaranteed promotion and
placement for our original content as well as promotional links to our
subscription products and our sports-related merchandise and collectible
products. Advertising revenues represent the sale of advertisements and
sponsorships and are recognized ratably over the period in which they are
displayed, provided that no significant obligations remain and collection of
the resulting receivable is probable. Electronic commerce revenues represent
the sale of sports-related merchandise and collectibles and are recognized
once the product has been shipped and collection of the resulting receivable
is probable. Subscription revenues represent customer subscriptions to our
premium content offerings and are recognized ratably over the
30
<PAGE>
subscription period, which is typically a professional sports season.
Subscriptions are generally billed in advance and charged directly to
customers' credit cards. Deferred revenues relate to subscription fees that
have been collected but for which revenues have not yet been recognized.
During the year ended December 31, 1999, we entered into certain agreements
whereby we received non-monetary benefits. Revenues were recorded at fair
value based upon our history of receiving cash for similar transactions. See
Notes 2 and 11 of Notes to Consolidated and Combined Financial Statements.
We currently generate revenues from our four online media divisions:
. Athlete Direct, which creates and operates individual athlete Web sites,
launched its initial site on the AOL proprietary network in the third
quarter of 1996 and recognized its first content syndication revenues
from AOL in that quarter. Since the third quarter of 1996, Athlete Direct
has maintained a distribution relationship with AOL, which was exclusive
through March 1999. Under the terms of the new agreement with AOL, that
terminates on June 30, 2001, Athlete Direct creates and maintains
individual athlete sites on the AOL proprietary network for which Athlete
Direct earns a content syndication fee. In May 1999, Athlete Direct
entered into an agreement with Yahoo! to syndicate its content to Yahoo!
Sports which terminates in June 2000. These agreements provide guaranteed
promotion and placement for our original content as well as promotional
links to our subscription products and our sports-related merchandise and
collectible products. In addition, Athlete Direct currently sells
collectibles through its distribution relationship with eBay.
To date, Athlete Direct has derived revenues primarily from content
syndication and, to a lesser extent, from the sale of advertising and
electronic commerce. To augment the distribution of our content and
products, we released the Athlete Direct Web site in the last quarter of
1999 which users can access directly or through links from AOL, Yahoo! or
eBay. To date, we have not actively promoted www.athletedirect.com and it
has not generated material revenues.
. Pro Sports Xchange, which provides team and player information, editorial
content and other similar sports content, initially recognized revenues
from content syndication in the first quarter of 1996. During 1997, Pro
Sports Xchange entered into syndication relationships that limited
distribution for its content to three individual distribution
relationships. These distribution restrictions expired in December 1998.
Currently, Pro Sports Xchange's distribution relationships include AOL,
AOL.com, Fox Sports and Yahoo!. These distribution agreements provide for
Pro Sports Xchange to license its content for display on third party
sites. Pro Sports Xchange derives revenues primarily from content
syndication and, to a lesser extent, the sale of subscriptions to its
premium content offerings. Currently, the psx.com, Web site is used
solely to distribute Pro Sports Xchange premium content products.
. RotoNews derives its revenues from the sale of advertisements on its Web
site, rotonews.com.
. SportsAuthentics.com derives electronic commerce revenues from the sale
of sports merchandise and collectibles. SportsAuthentics.com distributes
products both through its distribution relationship with uBid and on the
AOL platform. Currently, SportsAuthentics.com does not sell products
directly through its own Web site but intends to do so within the next
12 months.
Cost of Revenues. Our cost of revenues includes compensation and benefits
for editorial and operations personnel, and telecommunications, Internet
access and computer-related expenses for the support and delivery of our
services. Cost of revenues also includes the cost of sports-related
merchandise and collectibles sold and the royalties paid to certain athletes,
sportswriters and sports personalities based on a percentage of the revenues
or gross profits generated.
31
<PAGE>
Operating Expenses.
Sales and Marketing. Sales and marketing expenses consist of advertising and
promotional expenditures, salaries and related expenses for personnel engaged
in marketing, advertising sales, customer service, fulfillment and public
relations. We provide financial guarantees in certain contracts that we enter
into with athletes, sports writers and sports personalities. In some cases,
these guarantees exceed the current revenues generated by the contracted party
and we attribute this additional value to the marketing services that we
receive contractually from the athletes, sports writers and sports
personalities. We amortize these advances on a straight-line basis over the
term of the contracts. We classify the portion of the guarantees that are
directly earned against revenue for the period as cost of revenues and any
excess as sales and marketing expense.
Product Development. Product development expenses consist primarily of
employee compensation and benefits, and consulting and development fees
required to enhance existing and develop new product and content offerings.
General and Administrative. General and administrative expenses consist of
salary and related costs for general corporate functions as well as
professional service fees and facilities expenses.
Depreciation. Depreciation expenses consist of the depreciation of property
and equipment.
Amortization. Amortization expenses consist of the amortization of goodwill
associated with the acquisitions of Athlete Direct and Pro Sports Xchange in
February 1998 and RotoNews in February 1999 and deferred stock compensation
and deferred incentive costs. Amortization of deferred stock compensation and
deferred incentives has been aggregated and shown on a separate line item on
the statement of operations since they both relate to stock options.
We intend to recognize $8.3 million of additional amortization expense
related to deferred stock compensation and deferred incentives existing as of
December 31, 1999 as follows:
<TABLE>
<CAPTION>
Deferred
Stock Deferred
Year Compensation Incentives
---- ------------ ----------
(in millions)
<S> <C> <C>
2000................................................. $3.1 $0.9
2001................................................. 1.8 0.9
2002................................................. 0.5 0.6
2003................................................. -- 0.3
2004................................................. -- 0.2
---- ----
Total.............................................. $5.4 $2.9
==== ====
</TABLE>
During January and February 2000, we issued options for which we will be
recording deferred stock compensation and deferred incentive costs of
approximately $4.3 million. We will record amortization expense in connection
with such deferred stock compensation and deferred incentives over the next
five years.
Interest Expense. Interest expense consists of interest incurred on our
existing revolving loan due to NMSS in the amount of $4.5 million. The
interest rate is 1% above the prime rate. All amounts borrowed under the
revolving note mature and are payable the earlier of February 27, 2003 or upon
the occurrence of other reorganization transactions including an initial
public offering that results in net proceeds to us of at least $10 million.
Interest Income. Interest income represents interest earned on cash and cash
equivalents and marketable securities.
32
<PAGE>
Income Taxes. No provision for Federal or state income taxes has been
recorded as we incurred net operating losses for each period presented. As of
December 31, 1999, we had approximately $15.0 million of net operating loss
carryforwards for Federal income tax purposes, available to offset future
taxable income. Due to the change in our ownership interests in connection
with this offering and prior private placements, future utilization of the net
operating loss carryforwards may be subject to certain annual limitations.
These net operating losses begin to expire in 2009. Given our limited
operating history, losses incurred to date and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax assets meets the criteria required by generally
accepted accounting principles and, accordingly, a full 100% valuation
allowance has been recorded to reduce the deferred income tax assets to zero.
See Note 8 of Notes to Consolidated and Combined Financial Statements.
Results of Operations
The following tables set forth statement of operations data for the periods
indicated as a percentage of revenues.
<TABLE>
<CAPTION>
Period from Two Months Ten Months
February 1, 1996 Year ended ended ended Year ended
to December 31, December 31, February 27, December 31, December 31,
1996 1997 1998 1998 1999
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 189.0 69.4 58.4 74.9 72.9
------ ------ ----- ------ ------
Gross profit (loss)..... (89.0) 30.6 41.6 25.1 27.1
Operating expenses:
Sales and marketing... 1.9 8.2 13.8 21.8 82.9
Product development... 3.6 1.2 1.7 5.0 14.5
General and
administrative....... 44.4 35.9 26.8 56.5 80.2
Depreciation.......... 1.3 0.8 0.7 1.6 5.6
Amortization of
goodwill............. -- -- -- 9.0 4.2
Amortization of
deferred stock
compensation and
deferred incentives.. 24.0 22.0 29.6 88.7 43.3
------ ------ ----- ------ ------
Total operating
expenses............... 75.2 68.1 72.6 182.6 230.7
------ ------ ----- ------ ------
Operating loss.......... 164.2 37.5 31.0 157.5 (203.6)
Interest and other
expense................ (0.1) (0.1) -- 2.7 (0.2)
------ ------ ----- ------ ------
Net loss................ 164.1 37.4 31.0 160.2 (203.8)
====== ====== ===== ====== ======
</TABLE>
All amortization of deferred stock compensation related to employees and
deferred incentives related to non-employees has been aggregated and shown as
a separate line item in the statement of operations presented above.
Ten Months Ended December 31, 1998 and Year Ended December 31, 1999
The following discussion of results of operations compares the ten months
ended December 31, 1998 and the year ended December 31, 1999. As expected, due
to the different number of months in the comparative periods, our results of
operations fluctuate significantly and as a result may not be meaningful.
Revenues. Revenues increased $6.0 million, to $8.7 million, or 221.3%, for
the year ended December 31, 1999 from $2.7 million for the ten months ended
December 31, 1998. The increase in revenues was primarily the result of a
127.9% increase in content syndication revenues from additional distribution
relationships and, to a lesser extent, increases in advertising and electronic
commerce revenues due to higher traffic, the introduction of additional
content offerings and new distribution relationships.
33
<PAGE>
Cost of Revenues. Cost of revenues increased $4.4 million to $6.4 million
for the year ended December 31, 1999 from $2.0 million for the ten months
ended December 31, 1998. Our gross margin increased to 27.1% from 25.1% for
the year ended December 31, 1999 from the ten months ended December 31, 1998.
The decrease in cost of revenues as a percentage of total revenues was
primarily attributable to the previously discussed 127.9% increase in
syndication revenues for the year ended December 31, 1999 as compared to the
ten months ended December 31, 1998. The increase in cost of revenues on an
absolute basis was primarily the result of an additional 41 employees in
editorial and operations.
Sales and Marketing. Sales and marketing expenses increased $6.7 million to
$7.2 million for the year ended December 31, 1999 from $592,000 for the ten
months ended December 31, 1998. As a percentage of total revenues, these costs
increased from approximately 21.8% for the ten months ended December 31, 1998
to 82.9% for the year ended December 31, 1999. This increase was primarily
attributable to a $3.2 million increase in the marketing expenses incurred
under our distribution relationships, an increase in amortization of advances
paid to athletes, increased advertising and marketing activity and the hiring
of an additional 52 sales and marketing employees. As part of our distribution
relationships, we will incur marketing expenses of approximately $293,000 per
month with these parties over the contractual term of the agreements. (See
Note 11 to the Notes to Consolidated and Combined Financial Statements). We
intend to pursue a branding and marketing campaign in connection with the
www.athletedirect.com site and in support of our other divisions. Accordingly,
we expect sales and marketing expenses to increase in absolute dollars in the
future.
Product Development. Product development expenses increased $1.1 million to
$1.3 million for the year ended December 31, 1999 from $137,000 for the ten
months ended December 31, 1998. As a percentage of total revenues, product and
development expenses represented 5.0% and 14.5% for the ten months ended
December 31, 1998 and the year ended December 31, 1999, respectively. This
increase was primarily attributable to the costs of an additional 29 personnel
associated with the www.athletedirect.com site, network operations and other
new programming initiatives. We intend to invest additional resources on the
further development of our online sites, upgrades to our technological
infrastructure, integration of a common back-end platform across all our
divisions, and other product development efforts in the future. As a result,
we expect product development expenses to increase in absolute dollars in the
future.
General and Administrative. General and administrative expenses increased
$5.5 million to $7.0 million for the year ended December 31, 1999 from $1.5
million for the ten months ended December 31, 1998. As a percentage of
revenues, our general and administrative expenses increased from approximately
56.5% for the ten months ended December 31, 1998 to 80.2% for the year ended
December 31, 1999. This increase in general and administrative expenses was
primarily attributable to increased facility expenses related to our overall
personnel growth, headcount expenses associated with the hiring of 18
additional employees and increased professional services fees. During 1999, we
expensed approximately $680,000 of costs incurred in connection with the
Company's initial public offering. We expect general and administrative costs
to increase in absolute dollars in the future as we continue to hire personnel
and build our operational infrastructure.
Depreciation. Depreciation expenses increased $446,000 to $489,000 for the
year ended December 31, 1999 from $43,000 for the ten months ended December
31, 1998. The increase in depreciation was due to increases in facilities and
equipment. We expect depreciation expenses to continue to increase as we
invest in additional property and equipment in the future.
Amortization. Amortization expenses increased $1.4 million to $3.8 million
for the year ended December 31, 1999 from approximately $2.4 million for the
ten months ended December 31, 1998. This increase in amortization expense was
primarily due to the increased amortization of deferred
34
<PAGE>
stock compensation and deferred incentive costs related to stock options
granted to employees and third parties during the year ended December 31,
1999. We also incurred deferred stock compensation charges associated with the
sale of common stock to our Chief Executive Officer in November, 1999. Because
we intend to continue hiring personnel and signing additional athletes, sports
writers and sports personalities, we may incur additional deferred stock
compensation and deferred incentive costs in the future.
Interest and other Expense. Interest and other expense increased $289,000 to
approximately $362,000 for the year ended December 31, 1999 from approximately
$73,000 for the ten months ended December 31, 1998. The increase in interest
and other expense is primarily attributable to higher interest expense as a
result of a higher outstanding balance on our revolving loan due to
stockholders during the year ended December 31, 1999.
Interest Income. Interest income increased $345,000 for the year ended
December 31, 1999 from zero for the ten months ended December 31, 1998. We
generated this income by investing the proceeds from the series B and series C
convertible preferred stock issued during the second and fourth quarters of
1999.
Year Ended December 31, 1997 and Ten Months ended December 31, 1998
The following discussion of results of operations compares the year ended
December 31, 1997 and the ten months ended December 31, 1998. As expected, due
to the different number of months in the comparative periods, our results of
operations fluctuate significantly and as a result may not be meaningful.
Revenues. Revenues increased approximately $800,000, or 45.1%, to $2.7
million for the ten months ended December 31, 1998 from $1.9 million for the
year ended December 31, 1997. The increase from 1997 to 1998 was primarily the
result of additional content syndication revenues and, to a lesser extent,
increased advertising and electronic commerce revenues which were the result
of increased traffic and additional content offerings.
Cost of Revenues. Cost of revenues increased approximately $700,000 to $2.0
million for the ten months ended December 31, 1998 from $1.3 million for the
year ended December 31, 1997. Our gross margin decreased from 30.6% for the
year ended December 31, 1997 to 25.2% for the ten month period ended
December 31, 1998. These increases in cost of revenues were primarily the
result of increased hiring, particularly in editorial and operations staff, as
well as increases in revenues and gross profit sharing with athletes and third
party content providers.
Sales and Marketing. Sales and marketing expenses increased $438,000 to
$592,000 for the ten months ended December 31, 1998 from $154,000 for the year
ended December 31, 1997. The increase in sales and marketing expenses in 1998
from 1997 was primarily attributable to increases in our sales and marketing
staff and an increase in amortization of advances paid to non-employees.
Product Development. Product development expenses increased $115,000 to
$137,000 for the ten months ended December 31, 1998 from $22,000 for the year
ended December 31, 1997. The increase in product development expenses in 1998
from 1997 was primarily attributable to hiring additional technical personnel
in 1998.
General and Administrative. General and administrative expenses increased
approximately $800,000 to $1.5 million for the ten months ended December 31,
1998 from $672,000 for the year ended December 31, 1997. The increases in
general and administrative expenses in each period were primarily attributable
to salary and related expenses for additional personnel, increased costs
related to a new facility and an increase in professional fees.
35
<PAGE>
Depreciation. Depreciation expenses increased $28,000 to $43,000 for the ten
months ended December 31, 1998 from $15,000 for the year ended December 31,
1997. The increase in depreciation expenses in 1998 from 1997 was due to the
purchase of additional property and equipment.
Amortization. Amortization expense increased $2.3 million to $2.7 million
for the ten months ended December 31, 1998 from $414,000 for the year ended
December 31, 1997. The increases in amortization expense in 1998 from 1997 was
primarily due to amortization of deferred stock compensation and incentives
and the amortization of goodwill related to our acquisition of Pro Sports
Xchange.
Interest and other Expense. We incurred no interest and other expense during
the year ended December 31, 1997. Interest and other expense was approximately
$73,000 for the ten months ended December 31, 1998. The interest expense was
primarily due to interest incurred on our existing revolving loan due to
stockholders for the ten months ended December 31, 1998.
Quarterly Results of Operations
The following table sets forth the unaudited quarterly statement of
operations data for our six most recent quarters, through December 31, 1999,
and as a percentage of revenues for our six most recent quarters. The
unaudited quarterly information has been derived from our unaudited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods covered. The quarterly data
should be read in conjunction with our financial statements and related notes.
The operating results for any quarter are not necessarily indicative of the
operating results for any future period.
36
<PAGE>
All amortization of deferred stock compensation related to employees and
deferred incentives relating to non-employees has been aggregated and shown on
a separate line item in the statement of operations. For a more detailed
description of deferred stock compensation and deferred incentives. See Note 9
to the Notes to Consolidated and Combined Financials.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 890 $ 811 $ 1,553 $ 1,758 $ 2,414 $ 3,009
Cost of revenues........ 712 631 786 1,371 1,655 2,552
------- ------- ------- ------- ------- -------
Gross profit............ 178 180 767 387 759 457
Operating expenses:
Sales and marketing... 70 382 977 1,331 2,180 2,756
Product development... 40 51 195 272 247 556
General and
administrative....... 584 449 814 1,473 1,811 2,903
Depreciation.......... 15 17 30 87 151 221
Amortization of
goodwill ............ 73 74 80 94 95 94
Amortization of
deferred stock
compensation and
deferred incentives.. 463 585 694 690 536 1,862
------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,245 1,558 2,790 3,947 5,020 8,392
------- ------- ------- ------- ------- -------
Operating loss.......... (1,067) (1,378) (2,023) (3,560) (4,261) (7,935)
Interest income......... -- -- -- 43 156 146
Interest and other
expenses............... (18) (33) (54) (91) (99) (118)
------- ------- ------- ------- ------- -------
Net loss................ $(1,085) $(1,411) $(2,077) $(3,608) $(4,204) $(7,907)
======= ======= ======= ======= ======= =======
As a Percentage of
Revenues:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 80.0 77.8 50.6 78.0 68.6 84.8
------- ------- ------- ------- ------- -------
Gross profit............ 20.0 22.2 49.4 22.0 31.4 15.2
Operating expenses:
Sales and marketing... 7.9 47.1 62.9 75.7 90.3 91.6
Product development... 4.5 6.3 12.5 15.5 10.2 18.5
General and
administrative....... 65.6 55.4 52.4 83.8 75.0 96.4
Depreciation.......... 1.7 2.1 1.9 5.0 6.3 7.3
Amortization of
goodwill............. 8.2 9.1 5.2 5.3 3.9 3.1
Amortization of
deferred stock
compensation and
deferred incentives.. 52.0 72.1 44.7 39.2 22.2 61.9
------- ------- ------- ------- ------- -------
Total operating
expenses............ 139.9 192.1 179.6 224.5 207.9 278.8
------- ------- ------- ------- ------- -------
Operating loss.......... (119.9) (169.9) (130.2) (202.5) (176.5) (263.6)
Interest income......... -- -- -- 2.4 6.5 4.8
Interest and other
expenses............... (2.0) (4.1) (3.5) (5.1) (4.1) (3.9)
------- ------- ------- ------- ------- -------
Net loss................ (121.9) (174.0) (133.7) (205.2) (174.1) (262.7)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues were derived primarily from a limited number of content syndication
relationships in 1998. The fixed nature of these agreements resulted in
limited volatility in quarterly revenues during 1998. As our revenue mix
shifts to a higher proportion of revenues being derived from advertising and
electronic commerce, quarterly revenues may fluctuate more significantly than
in prior quarters.
Cost of revenues has increased each quarter due to higher editorial and
content costs and third-party fees paid to athletes and content providers.
Operating expenses exclusive of amortization of deferred stock compensation
and deferred incentives have increased each quarter on both an absolute and a
percentage basis as we have significantly increased our headcount and built
our infrastructure to support the growth of our business as well as increased
spending on marketing, product development and professional fees.
37
<PAGE>
Liquidity and Capital Resources
From inception through February 1998, we and the Predecessor Companies have
funded our operations primarily through capital contributions and to a lesser
extent, from the cash generated by operations. Since February 1998, we have
funded our operations through a $4.5 million revolving loan that was
established by our principal stockholder and have raised an aggregate of
approximately $35.0 million, net of offering expenses, through the sale of our
equity securities. Interest on outstanding debt accrues at an annual rate of
prime plus 1% (8.75% and 9.50% at December 31, 1998 and 1999, respectively)
and the borrowings under the credit line are secured by our assets. All
amounts borrowed under the credit line mature and become due upon the closing
of this offering. At December 31, 1999, the outstanding balance on this credit
line was approximately $4.5 million.
We and the Predecessor Companies have entered into various licensing,
royalty, distribution, and consulting agreements with various online sites,
vendors and other non-employees. The remaining terms of these agreements
provide for the payment of royalties, bounties, and certain guaranteed amounts
on a per member and/or minimum dollar amount basis. Additionally, some
agreements provide for a specified percentage of advertising and merchandising
revenue to be paid to non-employees from whose online site the revenue is
derived. There are minimum guaranteed payments required under these agreements
at December 31, 1999 totalling $3.3 million, as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000...................................... $1,334,999
2001...................................... 1,033,500
2002...................................... 459,167
2003...................................... 205,000
2004...................................... 125,000
Thereafter................................ 125,000
----------
Total................................... $3,282,666
==========
</TABLE>
We expect to enter into additional agreements in the future. The terms of
these agreements may not reflect the terms of the agreements entered into in
the future.
At December 31, 1999, we had approximately $18.4 million in cash and cash
equivalents. Net cash used in operating activities was $14.3 million for the
year ended December 31, 1999 and $1.4 million for the ten months and December
31, 1998. Net cash used in operating activities resulted primarily from our
net operating losses, adjusted for certain non-cash items, including
amortization of deferred stock compensation and deferred incentives. Non-cash
charges related to the issuance of these options were $3.8 million and $2.4
million for the year ended December 31, 1999 and the ten months ended December
31, 1998, respectively. Non-cash charges relating to depreciation expenses for
the year ended December 31, 1999 and the ten months ended December 31, 1998
were $489,000 and $43,000, respectively.
Net cash used in investing activities was $2.6 million and $2.4 million for
the year ended December 31, 1999 and the ten months ended December 31, 1998,
respectively. Net cash used in investing activities resulted primarily from
capital expenditures related to purchases of computer software and equipment
for $2.1 million during the year ended December 31, 1999 and $190,000 during
the ten months ended December 31, 1998. During 1998 we acquired the
predecessor companies for $2.2 million and during 1999 we acquired RotoNews
for $256,000 and contingent consideration of an additional $205,000.
38
<PAGE>
Net cash provided by financing activities was $35.0 million and $4.1 million
for the year ended December 31, 1999 and the ten months ended December 31,
1998, respectively. Net cash provided by financing activities for the ten
months ended December 31, 1998 includes capital contributions of $2.1 million
and borrowings of $2.0 million from the revolving loan due to stockholder. The
$35.0 million provided in the year ended December 31, 1999 includes $16.5
million of proceeds from the issuance of series B convertible preferred stock,
$2.5 million of proceeds from the revolving loan due to stockholder and $16.0
million of proceeds from the issuance of series C convertible preferred stock
to various investors and common stock to our Chief Executive Officer.
We have experienced a substantial increase in our capital expenditures since
our inception, consistent with the growth in our operations and staffing, and
we anticipate that this will continue for the foreseeable future. These
expenditures are primarily for computer equipment, software, lease
commitments, furniture and fixtures. We had no material commitments for
capital expenditures at December 31, 1999, but we expect to incur capital
expenditures and other lease expenses of approximately $5.0 million in 2000.
Additionally, we will continue to evaluate possible investments in businesses,
products and technologies, and plan to expand our sales and marketing programs
and conduct more significant brand promotions. In October 1999, we entered
into an equipment lease agreement where we can finance up to a maximum amount
of $2.8 million in capital expenditures. The agreement is for three years with
an interest rate of 7.5%. This line will help us finance our capital
investments.
We believe our current cash and cash equivalents will be sufficient to fund
our working capital and capital expenditure requirements for at least the next
12 months exclusive of the net proceeds from this offering. However, we expect
to continue to incur significant operating losses for the foreseeable future.
To the extent we require additional funds to support our operations or the
expansion of our business, we may sell additional equity, issue debt or
convertible securities or obtain credit facilities through financial
institutions. The sale of additional equity or convertible securities will
result in additional dilution to our stockholders. We cannot assure you that
additional financing, if required, will be available to us in amounts or on
terms acceptable to us, if at all. If funding is insufficient at any time in
the future, we may be limited in our ability to fund expansion, develop or
enhance content or products, respond to competitive pressures or take
advantage of business opportunities.
Seasonality
We expect that our revenues will be higher leading up to and during major
U.S. sports seasons and sporting events and during the year-end holiday
periods, and lower at other times of the year, particularly during the summer
months. In addition, the effect of such seasonal fluctuations in revenues
could be enhanced or offset by revenues associated with certain major sporting
events, such as the Superbowl, or the effects of having our athletes
participate in events that do not occur on an annual basis, such as the
Olympics and the World Cup.
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the change in the century. If not corrected, many computer software
applications could fail or create erroneous results during or beyond the year
2000. We use internally developed and third-party software, technology and
other services that may fail due to the year 2000 phenomenon. For example, we
are dependent on the financial institutions
39
<PAGE>
involved in processing our customers' credit card payments and a third party
that hosts our servers. We are also dependent on telecommunications vendors to
maintain our network and the United States Postal Service and other third-
party carriers to deliver orders to customers.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also
depend on the year 2000 compliance of the computer systems and financial
services used by consumers. Thus, the infrastructure necessary to support our
operations consists of networks of computers and telecommunication systems
located throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet have successfully corrected or avoided year 2000
problems, but it is not possible to predict whether there still could be some
potential negative impact from year 2000 issues. A significant disruption in
the ability of consumers to reliably access the Internet or portions of it or
to use credit cards would have an adverse effect on demand for our services
and would have a material adverse effect on us. Any failure of our material
systems, our vendors' material systems or the Internet to be year 2000
compliant could also have material adverse consequences for us. Such
consequences could include difficulties in operating our Web site effectively,
taking product orders, making product deliveries or conducting other
fundamental parts of our business.
Because the majority of our infrastructure is new, costs attributable to our
year 2000 efforts were not material and we do not expect to incur any
additional costs. The costs associated with our year 2000 compliance program
did not include time and costs that may be incurred as a result of any
potential failure of third parties to become year 2000 compliant or costs to
implement our future contingency plans. If systems important to our operations
have not been made year 2000 compliant, or if third parties fail to make their
systems year 2000 compliant in a timely manner, the year 2000 issue could
negatively affect our business. Our contingency plans in the event of such
failures include a high level of redundancy across all our systems (databases
and production platforms), which would offer us parallel services as required.
We have also installed a real-time backup both at our data centers and within
our internal network, which would offer us a migration path of all critical
data. An internal year 2000 workgroup is responsible for patching and updating
all our systems with the latest software provided by our vendors, as well as
implementing any recovery schedule.
Qualitative and Quantitative Disclosures About Market Risk
Our sales from inception to date have been made to U.S. customers and, as a
result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets.
However, in future periods, we expect to sell in foreign markets, including
Europe and Asia. As our sales are made in U.S. dollars, a strengthening of the
U.S. dollar could make our products less competitive in foreign markets. At
December 31, 1999, we did not hold any significant short or long-term
investments and, therefore, did not have any market risk exposure related to
changes in interest rates related to such investments. As of December 31,
1999, we were exposed to interest rate risk on our outstanding revolving loan
due to stockholder. The table below presents principal amounts by expected
maturity date and the weighted average interest rates of debt obligations
which are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------
2000 2001 2002 2003
---------- ---------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C>
Revolving loan due to stockholder...... $ -- $ -- $ -- $4,468
Weighted average interest rate......... -- -- -- 8.81%
</TABLE>
40
<PAGE>
INDUSTRY BACKGROUND
The Sports Market
Sports is one of the most popular forms of entertainment, generating intense
interest and profound loyalty among sports fans worldwide. Approximately 87%
of the U.S. population over the age of 11 consider themselves sports fans,
according to the 1998 espn/chilton Sports Poll. The popularity of sports has
produced one of the largest industries in the world, creating substantial
business opportunities, such as providing sports-related entertainment,
products and advertising. Sports fans spent approximately $100 billion in 1999
on such sports-related items as spectator sports, equipment, licensed goods,
publications, apparel and footwear, according to a December 1999 report in
Street & Smith's SportsBusiness Journal. More specifically, in 1999:
. Retailers sold approximately $40 billion of licensed sports merchandise,
sports equipment and apparel; and
. Sports-related advertising was approximately $28 billion.
In addition to advertising, many corporations spend significant amounts of
sponsorship dollars annually to associate their brands with individual
athletes and sporting events.
Although the sports market is large, it is also highly fragmented,
comprising hundreds of individual sports communities who are devoted to their
favorite leagues, teams and athletes and desire higher levels of interaction
with the players they admire. Many of these individual communities are
sizeable in their own right and often consist of geographically dispersed
sports fans. Whether it be Dallas Cowboys fans or a fantasy baseball league,
each distinct community includes numerous sports fans who desire timely,
original and in-depth information and authentic merchandise and collectibles
related to their favorite leagues, teams and athletes. The Dallas Cowboys, for
example, generated over $50 million in home game receipts and suite revenues,
and fans bought approximately $300 million of Dallas Cowboys merchandise in
1998, according to Forbes magazine.
Emergence of the Internet
The Internet has emerged as a mass medium for commerce and communication,
enabling millions of people worldwide to be entertained, interact, distribute
and collect information, create communities among individuals with similar
interests and make purchases electronically. International Data Corporation
projects that worldwide Internet use will grow from approximately 142 million
users at the end of 1998 to 399 million users in 2002.
As a platform for commerce, the Internet enables businesses to reach a
worldwide audience, achieve greater economies of scale and operate with less
physical infrastructure, while providing consumers with greater convenience
and access to a broad selection of content and products. International Data
Corporation projects that the value of goods and services purchased worldwide
on the Internet will grow from approximately $50 billion in 1998 to $734
billion in 2002. As an advertising medium, the Internet provides numerous
advantages over traditional media, including the ability to target specific
demographic groups, measure the effectiveness of advertising campaigns and
modify these campaigns in response to real-time feedback. Forrester Research
projects that total annual spending on Internet advertising will reach $15
billion in 2003.
41
<PAGE>
Traditional Sports Media and Commerce
While traditional mass media, such as broadcast and cable television, radio,
newspapers and magazines, are effective in providing sports programming and
content to a broad audience, these media are limited in their ability to
efficiently tailor their content to appeal to the specific interests of
distinct sports communities. In addition, traditional media are constrained in
their ability to enable sports fans to interact with each other and with their
favorite athletes, writers and sports personalities.
Similarly, we believe that traditional retail distribution channels face a
number of challenges in providing a satisfying shopping experience for
consumers of sports merchandise and collectibles within individual sports
communities. Traditional retail distribution channels are generally limited in
their ability to provide a broad selection of products related to teams and
players outside of their local markets. They are also limited in their ability
to quickly alter their inventory or presentation of sports offerings in
response to specific sporting event outcomes and milestones.
Existing Internet Sports Offerings
In response to the limitations of traditional sports media and commerce, the
Internet has emerged as an attractive and growing channel for the distribution
of sports content and products. Approximately 36 million people in the United
States accessed sports information on the Internet in 1998, 40% more than in
1997, as estimated by the espn/chilton Sports Poll. According to the November
1999 Media Metrix report, approximately 46% of Internet users are between the
ages of 12 and 34. The Internet has become a medium of choice for individuals
in this age group. We believe that sports has become a popular application
over the Internet because, among other reasons, there is a significant overlap
between the demographic of Internet users and sports fans.
Although there are many Web sites that include sports information as part of
their content offerings, these sites typically offer general information and
do not provide content and commerce targeted at distinct sports communities.
Most sites do not create communities for fans to interact with one another and
with athletes and other sports personalities or offer electronic commerce
integrated into their sports content. Because their sports content is
typically generic, these sites are required to incur significant marketing
expenses to differentiate themselves from other sites with comparable
information.
Because of these limitations and the desire to attract users, Internet
portals and other destination sites continue to seek ways to differentiate
their sites by expanding and enriching their offerings with distinctive
content, including sports content. This demand has created a significant
market for syndicated content, including sports content, that is original,
entertaining and informative.
42
<PAGE>
BROADBAND SPORTS
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated and Combined Financial Statements and Notes to
Consolidated and Combined Financial Statements appearing elsewhere in this
prospectus.
Broadband Sports is a leading Internet provider of original content and
commerce for hundreds of individual sports communities. We use our proprietary
assets -- such as contractual relationships with athletes, writers and sports
personalities -- to create content, commerce and community offerings targeting
geographically dispersed sports communities who follow individual sports,
teams and athletes.
Currently, we have four distinct online media divisions through which we
reach these sports communities. Athlete Direct creates and operates athlete
Web sites for more than 260 athletes. Pro Sports Xchange and its collegiate
arm, College Sports Xchange, provide in-depth online team and player
information covering all Major League Baseball, National Football League,
National Basketball Association, and National Hockey League teams and players
and all Division I college football and basketball teams. RotoNews, a leading
online fantasy sports Web site, provides proprietary news, games and
statistical services. SportsAuthentics.com is an Internet retailer of sports
collectibles and merchandise.
We have established distribution relationships with AOL, eBay, Fox, Yahoo!,
and uBid which, along with our own Web sites, enable us to target numerous
sports communities, increase awareness of our brands, and promote our content
and commerce offerings.
Through these distribution relationships, and through operation of our Web
sites, we are able to derive revenue from multiple sources, including content
syndication, advertising, electronic commerce and sale of subscriptions to
premium content offerings.
Our Strategy
Our objective is to be the leading online provider of proprietary sports
content and products to a large number of sports communities worldwide. Key
strategies to achieve our objective include:
Continue to Acquire Proprietary Assets. Athletes, writers and sports
personalities are fundamental to the growth and popularity of sports. We
intend to both continue adding to our existing asset base of athletes, writers
and sports personalities, and to develop and acquire new types of proprietary
assets. During 1999, we added more than 200 athletes, writers and sports
personalities to our various divisions.
Continue to Develop Original Content, Programming and Related Product
Offerings. Currently, we believe we are the leading provider of athlete-
oriented content, in-depth player and team information, and fantasy news
online. While some Internet businesses provide unique content and a large
number offer products, very few companies create their own proprietary content
and sell the products that they develop. We intend to continue to leverage our
proprietary assets to create and offer both original content and products
targeted at both the distinct sports communities we now serve as well as new
sports communities we do not currently target, such as archery and yachting.
This will include an increase in the number of divisions we develop, programs
we produce and commerce products we create.
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<PAGE>
Capitalize on Multiple Distribution Relationships. We currently distribute
our content and products through leading online sites such as AOL, eBay, Fox
Sports, uBid and Yahoo!. The distinctiveness of our original content and
products provides significant value to our distribution relationships. We
intend to continue to distribute our content and products across multiple
platforms to target distinct sports communities, increase brand awareness of
our divisions, promote our product offerings and generate revenues from
multiple sources for us and the other parties to our distribution
relationships. To augment the distribution of our content and products, we
intend to pursue additional distribution relationships and to release new Web
sites, including the www.sportsauthentics.com site and other individual
athlete Web sites.
Increase Traffic and Build Awareness of Our Divisions. To date, we have
capitalized on the nature of our offerings and the efforts of the parties with
whom we have distribution relationships to create traffic and promote our
divisions. In addition to using our present distribution relationships to
create traffic and enhance awareness of our divisions, we intend to market our
brands and divisions through both traditional media and online campaigns and
to leverage the significant brand-name recognition of our high-profile
athletes and sports personalities to effectively promote their sites. For
instance, due to Mia Hamm's high profile during the 1999 Women's World Cup,
she was able to generate over 600,000 page impressions over a period of only a
few days.
Capitalize on Evolving Broadband Opportunities. We believe that online
sports-related content will become more compelling in a broadband environment.
To address this opportunity, we intend to offer enriched broadband
programming, such as the creation of a 24 hours a day, seven days a week
broadband commerce environment featuring individual athlete hosts, the
broadcast of event-related programming, and the development of real-time
reports from our sports writers and personalities. We intend to develop these
types of broadband programming to capitalize on the benefits of a number of
emerging platforms and standards.
Capitalize on Common Infrastructure. We are building a common technology
backbone across all of our divisions. We believe that this will enable us to
achieve significant cost savings in technology development, bring new
divisions to market in an expeditious manner and capture the value in the
relationship between our various divisions and the communities they serve. For
example, a Green Bay Packer fan reading a Pro Sports Xchange editorial product
about his team can be identified and offered a related product such as a Brett
Favre signed football.
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Our Divisions
To capitalize on the opportunities within the online sports marketplace, we
develop branded divisions that combine original content and products. We offer
our content and products through our distribution relationships to effectively
reach sports fans within distinct sports communities. Currently, we own and
operate four online sports media divisions:
<TABLE>
<CAPTION>
Primary Distribution
Division http Revenue Sources Relationships
- -------- ------------------------ ------------------- -------------------------
[Athlete Direct Logo]
<S> <C> <C> <C>
Official athlete sites, www.athletedirect.com Content Syndication AOL
original athlete Advertising eBay
programming, Electronic Commerce Yahoo!
communities and online
stores
[PSX Logo]
In-depth professional www.psx.com Content Syndication AOL
and collegiate team and Subscription AOL.com
player information from Advertising Fox Sports
our network of sports Yahoo!
writers
[RotoNews Logo]
Comprehensive fantasy www.rotonews.com Advertising Cox Media (Fastball.com)
news, games and Subscription New York Post
statistical and San Diego Tribune
commissioner services Sandbox.net
Wall Street Sports
[SportsAuthentics.com Logo]
Sports-related www.sportsauthentics.com Electronic Commerce AOL
merchandise and (under construction) uBid
collectibles
</TABLE>
Athlete Direct
Commencing operations in 1996, Athlete Direct is a leading developer,
publisher and aggregator of high-quality, official online sites for athletes,
based on the number of athletes under contract. Athlete Direct's athlete
relationships include some of the world's most prominent athletes across 10
sports, including football, baseball, basketball, auto racing and tennis.
Currently, Athlete Direct has contracts
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with more than 260 athletes. These contracts provide Athlete Direct with
exclusive online rights to use and market the athletes' voices, attributes and
original first-person content, with the exception that athletes can
participate elsewhere in a limited number of online chats.
Athlete Direct is an online destination site for sports fans to obtain
information about, interact with and purchase products relating to, their
favorite athletes. Athlete Direct aggregates individual athlete sites within
the Athlete Direct-branded network. The individual athlete sites within this
network create a focal point for sports communities to interact with their
favorite athletes through chat rooms and email, access original athlete-
oriented content, participate in community activities and purchase merchandise
and collectibles in an environment that specifically capitalizes on the
athlete's image and appeal. For example, just prior to Superbowl XXXIII,
Athlete Direct created an original multimedia feature in which Jamal Anderson,
star running back of the Atlanta Falcons, explained to his fans how to perform
the "Dirty Bird" dance. At the same time, Athlete Direct offered fans an
opportunity to buy exclusive, limited "Dirty Bird" merchandise and related
collectibles.
Athlete Direct designs each athlete site to target a distinct sports
community consisting of fans of the athlete and the athlete's team or sport.
Athlete Direct and its athletes provide users with original content, including
online programs, breaking news, interviews, journals, live online chats, email
correspondence and online fan clubs. By aggregating numerous athlete sites
from a variety of sports, Athlete Direct can consistently provide sports
communities with fresh and original content and products throughout the year.
By contrast, independently operated individual athlete sites are generally
restricted to the content that can be provided by an individual athlete and
limited by the duration of the athlete's season and the athlete's ability to
participate on his or her site on a continual basis. Additionally, Athlete
Direct enables fans to purchase merchandise and collectibles directly from the
athletes' stores located within the athletes' sites.
Athlete Direct offers its athletes a number of benefits, including a
complete online solution in terms of design, publishing, marketing, promotion
and day-to-day operation of their sites. Through Athlete Direct's online
sites, athletes can interact with a larger number of fans more effectively
than through traditional personal appearances such as card shows, radio and
television interviews or mailings. Additionally, participation in their sites
provides athletes with the opportunity to manage their public and media
interactions more effectively, control distribution of selected products,
create a platform to derive additional revenues from existing and new
sponsors, and receive greater financial benefit from the sale of related
merchandise and collectibles. As a member of the Athlete Direct network, each
athlete benefits from the traffic generated directly by his or her site as
well as from the traffic generated by the other athlete sites and the traffic
generated by Athlete Direct's distribution relationships.
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Features of our Athlete Sites
Below is an example of an individual athlete's official site along with a
description of the exclusive features which are available within each such
site on the Athlete Direct network.
[Screen shot of Athlete Direct home page for Ken Griffey Jr. marked
by numbers corresponding to the features described above.]
1. Athlete Journal--Regular updates from the athlete offering fresh,
entertaining perspectives on events related to the athlete's sport and other
non-sports-related activities. These journals often contain an athlete's
thoughts on key games and events within the athlete's sport, and can be in
both a text or multimedia format.
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2. Athlete Store--Electronic storefront offering athlete-signed memorabilia,
collectible items and other team-licensed merchandise. Some athletes' sites
may provide a personal audio greeting from the athlete to his or her fans upon
entering the store.
3. Athlete Community Area--Suite of interactive features, including
regularly scheduled chats, bulletin boards for fan and athlete postings and
other interactive activities. The site also includes the athlete's message
board, which is an interactive bulletin board where fans can communicate with
each other on a variety of topics. Additionally, an athlete can interact with
his or her fans by posting responses to fan questions on the message board.
4. Fan Club--This area includes original athlete commentary, regular email
bulletins of upcoming events, new product offerings in the athlete's store and
other new information targeted at the athlete's community of fans.
5. Gameday--Current news about the athlete during his or her season,
including original commentary, recent events, game statistics and other
highlights.
6. Multimedia Gallery--Recent and archived photos of players and teams. This
area also includes original multimedia programming created around the
individual athlete.
7. Fun Zone--Regular contests in which community members participate, with
chances to win a variety of athlete-related or sports-related prizes and
products.
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Distribution
From inception through March 31, 1999, Athlete Direct distributed its
content exclusively on AOL. Subsequently, Athlete Direct expanded its
relationship with AOL on a non-exclusive basis. Under the agreement, AOL
continues to provide Athlete Direct with its own separately branded area and
with certain guaranteed promotion, including promotion of a separate Stars
Area within the AOL Sports Channel and an anchor tenancy position within the
AOL Kids Channel. Athlete Direct also has an agreement with Yahoo! under which
it provides Yahoo! with certain exclusive athlete content for a select number
of athletes, produces live athlete events, develops fan clubs for each of its
athletes within the Yahoo! Clubs area and creates individual athlete stores
that are integrated within the Yahoo! Stores area. As part of this agreement,
Athlete Direct receives continuous placement on the front page of the Yahoo!
Sports area and the front of Yahoo! Sports screens. In addition, Athlete
Direct has a distribution agreement with eBay which allows continuous
placement on the front of eBay's sports collectibles page with links to
various pages featuring Athlete Direct's athletes. On each of these athlete
pages, Athlete Direct offers collectibles in the eBay auction format, such as
in the example below.
[Two screen shots of the athlete page for Anna Kournikova
on the eBay web site at www.eBay.com]
The above distribution relationships complement the traffic generated by
individual athlete sites such as www.kournikova.com, which provide links
between our individual athlete sites and our Web sites, as well as the traffic
generated within the Athlete Direct network.
In the fourth quarter of 1999, we launched the www.athletedirect.com site
and began actively advertising and promoting this site commencing in the first
quarter of 2000.
Revenue Sources
Syndication. The distinctiveness of our content and programming has
generally enabled us to command licensing fees and receive valuable
distribution. We currently receive syndication revenues from AOL and Yahoo!.
Advertising. Athlete Direct offers advertisers the opportunity to benefit
from the association of their products and brands with Athlete Direct athletes
and to target an attractive 18 to 35 year-old male
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<PAGE>
demographic group. In addition, advertisers, including existing sponsors of
our athletes, can sponsor the sites of athletes and other areas within Athlete
Direct. In 1998, Athlete Direct sold advertising to companies such as Coca-
Cola, Converse, eBay, Electronic Arts, Fila, Fox Sports, HBO, PeopleSoft and
Prime Sports.
Electronic Commerce--Merchandise. Athlete Direct currently offers sports
merchandise through each athlete's online store. This merchandise includes
licensed team and player apparel and league, event and team merchandise and
collectibles. By selling through individual athlete's stores, we believe that
we offer fans a logical venue for purchasing player-related and team-related
products in a contextually rich environment, 24 hours a day, seven days a
week. Although Athlete Direct currently sources substantially all of its
merchandise from third-party vendors, we anticipate that, in the future, we
will create certain Athlete Direct-branded merchandise for individual athletes
and events.
Electronic Commerce--Collectibles. Athlete Direct offers its own branded
products, typically consisting of autographed and game-worn and game-used
items. Athlete Direct's products are sourced directly from its athletes and
sold through the athletes' sites online and through Athlete Direct's
distribution relationships. We believe that this approach greatly reduces the
likelihood of fraud, a common characteristic of the sports collectibles
market. To date, Athlete Direct has sourced only a limited amount of
collectibles from its athletes, and we cannot assure you that Athlete Direct
will be able to procure collectibles on a timely basis in the future, if at
all. See "Risk Factors--We may not be able to obtain sufficient supplies of
merchandise or collectibles to meet customer demand or to manage inventory
effectively."
Pro Sports Xchange
Pro Sports Xchange is a leading online provider of in-depth team and player
information, based on the number of teams and players that Pro Sports Xchange
covers on a regular basis. Pro Sports Xchange is built around The Writer
Network, which was formed in the early 1990s to enable local sports
journalists to cover sports on a national basis by exchanging detailed
information relating to the local teams and athletes they covered. Today, Pro
Sports Xchange has evolved into a network of over 280 local and regional
sports writers, who are under contract with Pro Sports Xchange and have
granted Pro Sports Xchange online rights.
The Pro Sports Xchange network of sports writers includes some of the top
beat writers who write for major publications in their respective cities.
Typically, writers cover the same team for an extended period of time and have
privileged access to players, coaches and other team officials. As a result,
these sports writers possess in-depth information about the teams and players
they cover that is not generally published or distributed by traditional
media. With the proliferation of multiple media channels, such as cable,
satellite and the Internet, sports fans are able to easily access general
information, such as scores, statistics and game summaries. However, space
limitations resulting from the costs of production and distribution have
limited traditional media's ability to provide in-depth, timely information on
a broad scale. Pro Sports Xchange addresses the demand of sports fans within
various communities for more in-depth coverage of particular sports, teams or
athletes.
Because Pro Sports Xchange generates original and detailed information and
distributes this content online, Pro Sports Xchange can cost-effectively
deliver large volumes of in-depth information to geographically dispersed
sports fans. Pro Sports Xchange's offerings include original editorials,
predictions, opinions, injury reports, roster moves, trades and other
commentary on teams and players. Pro Sports Xchange provides this content to a
large number of sports communities. Pro Sports Xchange produces and
distributes original content covering over 110 professional sports teams and,
through College Sports Xchange, its college division, over 300 collegiate
sports teams. The following table lists of the professional and collegiate
teams covered by the Pro Sports Xchange and College Sports Xchange writer
networks.
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<PAGE>
TEAMS COVERED BY THE PRO SPORTS XCHANGE AND COLLEGE SPORTS XCHANGE WRITER
NETWORKS
Professional Teams
<TABLE>
<S> <C> <C> <C> <C>
Anaheim Angels Chicago Bulls Florida Marlins Minnesota Twins Philadelphia 76ers
Anaheim Mighty Ducks Chicago Cubs Florida Panthers Minnesota Vikings Philadelphia Eagles
Arizona Cardinals Chicago White Sox Golden State Warriors Montreal Canadiens Philadelphia Flyers
Arizona Diamondbacks Cincinnati Bengals Green Bay Packers Montreal Expos Philadelphia Phillies
Atlanta Braves Cincinnati Reds Houston Astros Nashville Predators Phoenix Coyotes
Atlanta Falcons Cleveland Browns Houston Rockets New England Patriots Phoenix Suns
Atlanta Hawks Cleveland Cavaliers Indiana Pacers New Jersey Devils Pittsburgh Penguins
Baltimore Orioles Cleveland Indians Indianapolis Colts New Jersey Nets Pittsburgh Pirates
Baltimore Ravens Colorado Avalanche Jacksonville Jaguars New Orleans Saints Pittsburgh Steelers
Boston Bruins Colorado Rockies Kansas City Chiefs New York Giants Portland Trailblazers
Boston Celtics Dallas Cowboys Kansas City Royals New York Islanders Sacramento Kings
Boston Red Sox Dallas Mavericks Los Angeles Clippers New York Jets San Antonio Spurs
Buffalo Bills Dallas Stars Los Angeles Dodgers New York Knicks San Diego Chargers
Buffalo Sabres Denver Broncos Los Angeles Kings New York Mets San Diego Padres
Calgary Flames Denver Nuggets Los Angeles Lakers New York Rangers San Jose Sharks
Carolina Hurricanes Detroit Lions Miami Dolphins New York Yankees Seattle Mariners
Carolina Panthers Detroit Pistons Miami Heat Oakland Athletics Seattle Sonics
Charlotte Hornets Detroit Red Wings Milwaukee Brewers Oakland Raiders San Francisco 49ers
Chicago Bears Detroit Tigers Milwaukee Bucks Orlando Magic San Francisco Giants
Chicago Blackhawks Edmonton Oilers Minnesota Timberwolves Ottawa Senators St. Louis Blues
St. Louis Cardinals
St. Louis Rams
Tampa Bay Bucaneers
Tampa Bay Devil Rays
Tampa Bay Lightning
Tennessee Titans
Texas Rangers
Toronto Blue Jays
Toronto Maple Leafs
Toronto Raptors
Utah Jazz
Vancouver Canucks
Vancouver Grizzlies
Washington Capitals
Washington Redskins
Washington Wizards
</TABLE>
Colleges and Universities
<TABLE>
<S> <C> <C> <C>
*Air Force *Colorado Howard *Mississippi
*Akron *Colorado State High Point *Mississippi State
*Alabama *Columbia *Idaho Miss. Valley St.
Alabama State Connecticut Idaho State *Missouri
*Alabama-Birmingham Coppin State *Illinois Missouri-Kansas City
Albany *Cornell Illinois State Monmouth
Alcorn State Creighton Illinois-Chicago Montana
American *Dartmouth *Indiana Montana St.
Appalachian State Davidson Indiana State Morehead State
*Arizona Dayton Iona Morgan State
*Arizona State Delaware *Iowa Mount St. Mary's
Arkansas-- Delaware State *Iowa State Murray State
Pine Bluff DePaul IUPUI *Navy
*Arkansas Detroit Jackson State *Nebraska
*Arkansas State Denver Jacksonville *Nevada-Las Vegas
Arkansas-Little Rock Drake Jacksonville State *Nevada-Reno
*Army Drexel James Madison New Hampshire
*Auburn *Duke *Kansas *New Mexico
Austin Peay State Duquesne *Kansas State *New Mexico State
*Ball State Elon *Kent New Orleans
*Baylor *East Carolina *Kentucky Niagara
Belmont (Tn.) Eastern Illinois La Salle Nicholls State
Bethune-Cookman Eastern Kentucky Lafayette Norfolk State
*Boise State *Eastern Michigan Lamar *North Carolina
*Boston College E. Tennessee State Lehigh N. Car. A&T State
Boston Eastern Washington Liberty *North Carolina State
*Bowling Green Evansville Long Beach State North Carolina-Charlotte
Bradley Fairfield Long Island University NC--Asheville
*Brigham Young Fairleigh Dickinson Louisiana-Monroe NC--Greensboro
*Brown *Florida *Louisiana State No. Carolina-Wilmington
Bucknell Florida A&M *Louisiana Tech *North Texas
*Buffalo Florida Atlantic *Louisville Northeastern
Butler Florida International Loyola, Chicago Northern Arizona
Cal Poly-San Luis Obispo *Florida State Loyola, Md. *Northern Illinois
Cal State-Northridge Fordham Loyola Marymount Northern Iowa
Cal State-Fullerton *Fresno State Maine *Northwestern
*California Berkeley Furman Manhattan Northwestern State
California Irvine George Mason Marist *Notre Dame
California Santa Barbara George Washington Marquette Oakland
Campbell Georgetown *Marshall *Ohio
Canisius *Georgia *Maryland *Ohio State
Centenary Georgia Southern Md.-Baltimore County *Oklahoma
Central Connecticut State Georgia State Maryland-Eastern Shore *Oklahoma State
*Central Florida *Georgia Tech Massachusetts Old Dominion
*Central Michigan Gonzaga McNeese State Oral Roberts
Charleston Southern Grambling St. *Memphis *Oregon
Chattanooga Hampton Mercer *Oregon State
Chicago State Hartford *Miami Pacific
*Cincinnati *Harvard *Miami (Ohio) *Penn State
*Clemson *Hawaii *Michigan *Pennsylvania
Cleveland State Hofstra *Michigan State Pepperdine
Coastal Carolina Holy Cross *Middle Tenn. State *Pittsburgh
Col. of Charleston *Houston *Minnesota Portland
Colgate
Portland State Tennessee State
Prairie View A&M Tennessee Tech
*Princeton Tennessee-Martin
Providence *Texas
*Purdue *Texas A&M
Quinnipiac *Texas Christian
Radford *Texas Tech
Rhode Island Texas-Arlington
*Rice *Texas-El Paso
Richmond Texas-Pan American
Rider Texas-San Antonio
Robert Morris Texas Southern
*Rutgers The Citadel
Sacramento State *Toledo
Sam Houston State Towson
Samford Troy State
San Diego *Tulane
*San Diego State *Tulsa
San Francisco *UCLA
*San Jose State *Utah
Santa Clara *Utah State
Seton Hall Valparaiso
Siena *Vanderbilt
*SMU Vermont
South Alabama Villanova
*South Carolina *Virginia
S. Carolina State Virginia Commonwealth
South Florida *Virginia Tech
SE Missouri State VMI
SE Louisiana Wagner
Southern *Wake Forest
*Southern California *Washington
Southern Illinois *Washington State
*Southern Mississippi Weber State
Southern Utah *West Virginia
Southwest Missouri State Western Carolina
SW Texas State Western Illinois
*Southwestern La. Western Kentucky
St. Bonaventure *Western Michigan
St. Francis (NY) Wichita State
St. Francis (PA) William & Mary
St. John's Winthrop
St. Joseph's *Wisconsin
St. Louis Wisconsin-Green Bay
St. Mary's Wisconsin-Milwaukee
St. Peter's Wofford
*Stanford Wright State
Stephen F. Austin *Wyoming
Stetson Xavier
Stony Brook *Yale
*Syracuse Youngstown State
*Temple
*Tennessee
</TABLE>
- -----------------
* Covers both Division I football and basketball. All other schools only offer
Division I basketball programs.
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<PAGE>
Pro Sports Xchange collects and stores the information it receives from its
writer network through its proprietary database. This information is then
packaged into two general types of content offerings: offerings that are
syndicated to online sites and specialized content offerings that are sold on
a subscription basis. Some of our current content offerings include:
<TABLE>
<S> <C> <C>
Product Description Price
------- ----------- -----
Pro Sports Xchange Insider In-depth coverage of all Varying content syndication fee
Team Reports............... National Football League,
Major League Baseball,
National Basketball
Association and National
Hockey League teams and
daily editorial features
College Sports Xchange In-depth coverage of all Varying content syndication fee
Insider Team Reports....... Division I college football
and basketball teams
Player Notes................ Daily highlights of key Varying content syndication fee
player news from Major
League Baseball and the
National Football League
My Baseball Daily........... Daily personalized updates $9.95 per season per subscription
regarding players selected
in subscribers' portfolios
The Minor League Scout...... Daily information on minor $9.95 per season per subscription
league baseball teams and
players
Fred Edelstein's NFL
Football Insider........... Weekly National Football $19.95 per year per subscription
League gossip
Fred Edelstein's NFL Draft
Report..................... Annual insider view of the $9.95 per subscription
National Football League
draft
Wrestling Observer.......... In-depth coverage of $9.95 per month or $99.95
professional wrestling annually
</TABLE>
By working with Pro Sports Xchange, sports writers are able to generate
additional income and, in certain cases, further develop their individual
brand names. Sports writers in the Pro Sports Xchange network are paid a flat
fee for syndicated content and can participate with Pro Sports Xchange in
revenues derived from the sale of subscription-based premium content
offerings.
Distribution and Revenue Sources
Pro Sports Xchange syndicates its content through AOL, Internet portals and
other destination sites and sells its premium content offerings to users on a
subscription basis. The Pro Sports Xchange Insider Team Reports and College
Sports Xchange Insider Team Reports are currently provided for all teams to
online sites such as AOL, AOL.com and Fox Sports. In addition, Pro Sports
Xchange produces the Team Areas for all major professional and college teams
within AOL Sports, providing team and player feeds and news updates, among
other production responsibilities. Pro Sports Xchange controls the majority of
promotional links within the Team Areas, which it uses to cross-promote our
other divisions. Player Notes are syndicated to many online sites, including
AOL, Fox Sports and Yahoo!. All of the third parties licensing Pro Sports
Xchange content are obligated to promote Pro Sports Xchange's premium products
as part of their license agreements. These premium products are also
distributed through a number of online sites, including Allstar Stats, Prime
Sports Interactive and Total Quality Stats.
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RotoNews
RotoNews was founded in 1997 and was acquired by us in February 1999.
RotoNews is a leading online fantasy sports site, offering player news, games
and statistical services, as well as league management services that enable
players to compete against one another and are commonly referred to as
commissioner services.
Unlike most competing fantasy sites, RotoNews offers its full suite of
fantasy news and services free of charge to consumers. This strategy has
helped RotoNews build a significant audience base. RotoNews currently operates
commissioner services for over 48,000 active leagues representing over 200,000
fantasy players. RotoNews supplements its commissioner services with regular
player updates, which are delivered both through the rotonews.com site and
through free email subscriptions. RotoNews currently has over 296,000
registered users and sends out regular emails to over 55,000 email
subscribers. To extend its brand and build its traffic, RotoNews provides
player content and commissioner services to other sites, including online
newspapers and other sports sites.
Fantasy sports have experienced significant growth in the United States over
the past several years. Currently, millions of fantasy sports fans play their
games, receive their statistics, or access information about their fantasy
teams online. Leading sports sites that provide fantasy games have
traditionally charged users fees to participate in their fantasy games or to
use commissioner and statistical services. Because players invest significant
time in entering specific league and player information, setting-up league
rules, becoming familiar with the user interface and researching archived
information, we believe that these services create significant user loyalty
and generate frequent visits of extended duration.
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<PAGE>
RotoNews Features
Below is a copy of the RotoNews home Web page and an example commissioner
page for an individual league, along with a description of selected features
available on Rotonews.com.
[Screen shot of RotoNews web site marked by numbers corresponding
to the features described above.]
1. Commissioner Services--Offers fantasy sports participants commissioner
services with daily statistics, updated standings, bulletin boards and other
league and management services covering the National Football League, the
National Basketball Association, Major League Baseball and the National Hockey
League.
2. Player News--Up-to-date player information, news and statistics, as well
as searchable athlete databases for various sports and leagues.
National Football League, -- Latest player information, statistical
National Basketball projections and player rankings with a
Association, Major League searchable database for every player.
Baseball, National Hockey Additionally, offers feature stories,
League columns and team previews.
Golf -- Latest player information with a
searchable database for many professional
golfers on the Pro Golf Association tour
and other worldwide tours.
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<PAGE>
Auto Racing -- Latest driver information, with a
searchable database for NASCAR Formula One
and other auto-racing series.
-- Latest news and information for many of
Wrestling the professional wrestlers within the
World Wrestling Federation, World
Championship Wrestling and Extreme
Championship Wrestling.
College Football -- Latest news and information on individual
college players within Division I NCAA
football.
3. MyRotoNews--Provides users with a personalized Web page with news and
statistics tailored to players chosen by the user.
4. Email Reports--Twice-weekly email newsletter providing up to date player
news and information.
5. Office Pools--Online management tool for traditional office pools.
Creates an easy-to-use graphical interface for participants to enter their
picks online, see updated standings, access relevant team and player
information and communicate with each other.
6. Fantasy Forum--Online community where users can share thoughts on fantasy
sports topics, seek advice and information with other community members as
well as seek participants for their online leagues.
Distribution and Revenue Sources
In addition to operating its Web site, rotonews.com, RotoNews has entered
into distribution agreements with Fastball.com (owned by Cox Media),
Sandbox.net, Wall Street Sports and the online versions of the New York Post
and San Diego Union Tribune. Pursuant to these distribution agreements,
RotoNews typically provides statistical services and/or fantasy games in a co-
branded format.
To date, RotoNews has derived revenues from the sale of advertising on its
Web site. RotoNews also sells advertising placements within email newsletters
it regularly sends to its customers. In addition, RotoNews receives a share of
the advertising sold on the sites to which it provides commissioner services
and/or player information. In March 1999, RotoNews began selling subscriptions
to Pro Sports Xchange's premium content offerings, such as My Baseball Daily.
To date, RotoNews has not derived significant revenues from these premium
content offerings.
SportsAuthentics.com
SportsAuthentics.com is an online retailer of sports-related merchandise and
collectibles. Founded in the first quarter of 1999, SportsAuthentics.com
aggregates products from a large number of providers, including Athlete
Direct. SportsAuthentics.com offers a broad range of products across major
U.S. sports, including baseball, football, basketball, hockey, boxing and auto
racing. Although SportsAuthentics.com does not source its products directly
from athletes in the case of memorabilia, it works to carefully select
reputable providers who represent that they produce such products directly
from the source and provide legally binding certificates of authenticity.
SportsAuthentics.com's objective is to become the premier provider of
sports-related merchandise and collectibles. SportsAuthentics.com currently
offers over 10,000 stock keeping units and believes it has become one of the
largest sellers of collectibles online.
We believe there is a significant opportunity to sell these types of
products online because of the limitations inherent in traditional retail
distribution. Because of the large number of teams and
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<PAGE>
available products, traditional retailers cannot effectively inventory the
large number of available products necessary to satisfy the demand of fans of
different teams and athletes. Similarly, sports retailers have had a difficult
time offering a wide range of collectibles and trading products, where the
number of items is even larger.
SportsAuthentics.com addresses some of the limitations of current
distribution channels by:
. providing access to products 24 hours, seven days a week;
. offering an extensive selection of products updated on a regular basis;
. offering flexible pricing, including auction-based selling; and
. targeting customers based on preference and buying patterns.
Distribution and Revenue Sources
SportsAuthentics.com currently sells the majority of its products through an
exclusive relationship with uBid, a leading online business-to-consumer
auction site. As part of this relationship, SportsAuthentics.com provides
sports memorabilia on the uBid.com site as illustrated below.
[Screen shot of uBid web site at www.uBid.com displaying
sports memorabilia offered by SportsAuthentics.com,
and insert with close-up of memorabilia offered.]
SportsAuthentics.com also operates individual team stores within the AOL
Team Areas. SportsAuthentics.com is currently in the process of opening up
additional online storefronts, though no assurances can be given when such
stores will open. SportsAuthentics.com intends to launch a branded online
retail presence in the second quarter of 2000.
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SportsAuthentics.com handles all order fulfillment and customer service
associated with its sales. SportsAuthentics.com handles the majority of its
order fulfillment through its own distribution center.
Strategic Relationships
We have established a number of strategic relationships to obtain original
sports content, provide broad distribution of our content and products and
increase consumer awareness of our branded divisions. These relationships
include:
Content and Product Agreements
Athletes
Athlete Direct currently has agreements with over 260 athletes that have
terms ranging from two to eight years. These agreements generally provide
Athlete Direct with exclusive rights to the athletes' online participation, as
well as rights to use the athletes' names, likenesses and other attributes in
connection with the online medium. The exclusivity provisions of these
agreements permit the athletes to engage in limited online activities on
behalf of their leagues, teams and sponsors.
Under these agreements, athletes are required to participate in their online
sites in specified manners and at specified times. This participation
generally includes engaging in online chats, responding to fan emails,
publishing online journals and providing audio content for online
distribution. Each athlete shares in the gross profits generated from the
athlete's site, including revenues derived from sales of merchandise,
collectibles and advertisements. Pursuant to their agreements, some athletes
are guaranteed minimum royalties. In addition, certain athletes received stock
options in connection with the signing of their agreements.
Sports Writers
We have agreements with over 280 sports writers, which typically have a two-
year term with a one-year extension at our option. These local and regional
writers provide Pro Sports Xchange with original sports-related content. The
majority of these writers are beat writers who cover a particular team or
conference for a traditional publication, such as a newspaper. The agreements
require the writers to create original, in-depth content for Pro Sports
Xchange, provide Pro Sports Xchange with exclusive rights to this content and
restrict the writers from performing services for anyone, other than Pro
Sports Xchange, that provides online products or services. However, these
agreements do permit the writers to provide similar information to, and to
perform services for, daily newspapers, including newspapers that maintain
online sites, that are the primary employers of the writers. We pay our
writers a flat fee for content that we syndicate and, in some cases, a
percentage of revenues derived from sales of subscriptions to selected premium
content offerings.
Distribution Agreements
AOL
In January 1999, we entered into an interactive services agreement with AOL.
Under this agreement, AOL is required to pay to us a license fee for
programming and syndicated content. This programming and syndicated content
includes both Pro Sports Xchange team-by-team coverage of professional
baseball, basketball, football and hockey and NCAA Division I college
basketball and football, as well as a minimum of 50 individual athlete sites
from Athlete Direct.
In accordance with the agreement, Athlete Direct has created and operates a
separately branded Athlete Direct area within both the AOL Sports Channel and
the AOL Kids Channel. These sites are
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promoted through the AOL Sports channel, including Sports Stars screens which
Athlete Direct programs and through an anchor tenancy position within the AOL
Kids Channel. AOL receives a percentage of revenues derived from placements
and the sale of merchandise, collectibles and subscription-based premium
content offerings through the Athlete Direct sites on AOL.
Pro Sports Xchange also provides content designed to appeal to fantasy
sports fans within the AOL Fantasy Center and, in exchange, receives
guaranteed promotion for its subscription-based premium content offerings. The
agreement expires June 30, 2001, unless earlier terminated. AOL has the option
to extend the agreement for up to two additional one-year terms.
During the year ended December 31, 1999, AOL accounted for approximately 44%
of our revenues. The loss of this relationship, or a material adverse change
in this relationship, would have a material adverse effect on our business.
eBay
In April 1999, Athlete Direct entered into a co-branding and advertising
agreement with eBay, under which eBay acts as Athlete Direct's official online
person-to-person auction venue for sports collectibles on behalf of its
athletes. Pursuant to the agreement, Athlete Direct creates individual athlete
sites within the eBay site. Athlete Direct updates content on these sites and
provides signed collectibles for sale through eBay's auction environment. The
various pages and auctions are promoted by eBay on certain selected pages,
including at the top of eBay's primary collectibles channel. Unless earlier
terminated, this agreement terminates in April 2001.
Fox Sports
In September 1998, Pro Sports Xchange entered into a content license
agreement with News America Digital Publishing, Inc. ("NADP"), an affiliate of
Fox Entertainment Group, Inc. Under this agreement, Pro Sports Xchange
receives a syndication fee for providing Insider Team Reports and other
content for distribution on foxsports.com. NADP is required to promote Pro
Sports Xchange's premium content offerings products. Pro Sports Xchange pays
NADP a royalty based on the net revenues of premium content products sold
through Fox Sports Online. This agreement expires in December 2001.
uBid
In March 1999, SportsAuthentics.com entered into a two-year agreement with
uBid. Under the uBid agreement, SportsAuthentics.com is the exclusive provider
of sports collectibles on the www.uBid.com site. As part of this agreement,
SportsAuthentics.com has agreed to offer a specified minimum dollar value
worth of products on the www.uBid.com site each week. SportsAuthentics
receives prominent branding within all areas of www.uBid.com where
SportsAuthentics products are offered. uBid receives a percentage of gross
revenues for sales made on its site.
Yahoo!
In May 1999, Athlete Direct and Pro Sports Xchange entered into an agreement
with Yahoo! to provide Athlete Direct content and Pro Sports Xchange content
to Yahoo! in exchange for a monthly license fee and promotion and placement
within Yahoo! Sports and other Yahoo! divisions. Athlete Direct produces a
minimum of 24 individual athlete fan clubs and individual athlete stores for
Yahoo! and delivers a regular schedule of live events. Yahoo! receives a
percentage of revenue derived from
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electronic commerce sold within the Yahoo! site. In addition, pursuant to this
agreement, Pro Sports Xchange licenses to Yahoo! player content to be
incorporated into Yahoo!'s Fantasy Area and its MyYahoo! service. Pro Sports
Xchange licenses and receives promotion and placement to promote its
subscription products. This agreement expires in June 2000, and automatically
renews for an additional year unless either party elects not to renew the
agreement.
Technology
We use state-of-the-art technology to support our business. Our
www.athletedirect.com site and all of our individual athlete sites include
open application standard interfaces emphasizing a model that is highly
scalable, flexible, modular and has a high degree of automation and redundancy
in order to minimize single points of failure. The software platform and
architecture for the www.athletedirect.com site and individual athlete sites
is available through multiple Sun Microsystems servers, and integrated with an
Oracle relational database, Netscape Enterprise server and Broadvision's One-
to-One enterprise relationship management application environment.
To publish content on the AOL proprietary network, we employ AOL's
proprietary "Rainman" mark-up language. Production involves creation and
editing of text and graphics, which are uploaded from our offices to the AOL
mainframe. For our AOL advertisements, Athlete Direct pages reference
Web-based URLs to generate banner advertisements, which are controlled through
DART, a proprietary advertisement-reporting software.
Pro Sports Xchange and CollegeSports Xchange use a number of Sun
Microsystems servers integrated with an Oracle relational database, Netscape
Enterprise server, Netscape PublishingXpert 2.2 for publishing, Broadvision's
One-to-One enterprise relationship management application environment, and
secure credit card capture and billing. In addition, Pro Sports Xchange uses
customized software for real-time update of content by sports writers and
editors, and an extensive modem pool for dial-up remote access.
The RotoNews platform uses a combination of Microsoft NT with SQL Server,
IIS, Cold Fusion and ASP together with an Oracle relational database, and
Broadvision's One-to-One enterprise relationship management application
environment.
We intend to consolidate the technologies used by all of our properties into
a single, common infrastructure built around a Sun, Oracle and Broadvision
infrastructure. This common platform will emphasize interoperability,
scalability and stability.
We maintain most of our computer systems with Exodus Communications in its
El Segundo, California facility, which provides us with Internet connectivity
via multiple DS-3 and OC-3 links. Exodus also provides human technical
monitoring of all production services 24 hours a day, seven days a week as
well as protection against damage from fire, hurricanes, earthquakes, power
loss, telecommunications failure and break-ins and full redundancy so that a
failure in the network is automatically routed to a different provider. We
also employ in-house monitoring systems, which include automated diagnostic
software, that generate reports and pager calls in the event of system
failures. Notwithstanding these precautions, any system failure that causes an
interruption of service or a failure of our third-party providers to handle
higher volumes of Internet traffic could have a material adverse effect on our
business.
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Sales and Marketing
We have recently expanded our advertising and sales efforts, including the
opening of a dedicated advertising sales office in New York. To date, we have
sold advertising primarily through the parties with whom we have a
distribution relationship, such as AOL, and have worked with outside sales
agencies in such efforts. As we continue to expand, we intend to create a
larger internal sales force and open offices in additional cities.
Similar to our sales efforts, in our marketing efforts, we work very closely
with parties with whom we have a distribution relationship including AOL,
Yahoo!, eBay and uBid. These parties provide us with placement within their
services, driving traffic to our content and products. In addition, we have
purchased selected promotion on various online sites like Pro Football Weekly
and Sportsline.com for certain of our products. With our www.athletedirect.com
site and other products, we anticipate spending a larger amount of marketing
dollars, including expenditures for offline marketing.
Government Regulation
We are subject to the same federal, state and local laws as other businesses
on the Internet. There are currently relatively few laws directed specifically
toward online media businesses. Due to the increasing popularity and use of
the Internet and online businesses, however, it is possible that laws and
regulations will be adopted with respect to the Internet and online
businesses. Such laws could cover issues such as user privacy, pricing, fraud,
content and quality of products and services, taxation, advertising, freedom
of expression, intellectual property rights and information security. The laws
governing online media remain largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy and libel
apply to online media generally. Such legislation could hamper the growth in
use of online media generally and decrease the acceptance of online media as a
communications and commercial medium, which could have an adverse affect on
our business.
We cannot assure you that violations of local or other laws will not be
alleged or charged by local, state or foreign governments, that we might not
unintentionally violate such laws or that such laws will not be modified, or
new laws enacted, in the future. In addition, the growing popularity and use
of online media has burdened the existing telecommunications infrastructure
and many areas with high traffic have begun to experience interruptions in
phone service. As a result, certain local telephone carriers have petitioned
governmental agencies to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and
to impose access fees on Internet service providers and online service
providers. If any of these petitions or the relief that they seek is granted,
the costs of communicating via online media could increase substantially,
potentially adversely affecting the growth in the use of online media. Any of
these developments could have an adverse effect on our business.
We generally do not collect sales or other taxes on goods sold on our online
sites to users located outside of California. However, one or more states may
seek to impose sales tax collection obligations on companies like ours that
engage in or facilitate online commerce. A number of proposals have been made
at the state and local level that would impose additional taxes on the sale of
goods and services online. Such proposals, if adopted, could substantially
impair the growth of electronic commerce and increase our costs and could
adversely affect our opportunity to derive financial benefit from electronic
commerce. If any state or foreign country were to successfully assert that we
should collect sales or other taxes on the exchange of merchandise on our
system, our business could be adversely affected. In October 1998, the
Internet Tax Freedom Act was signed into law placing a three-year moratorium
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which expires in 2001 on new state and local taxes on Internet commerce.
Existing state or local laws were excluded from the moratorium. Once this
moratorium is lifted, new federal or state taxes may be imposed on Internet
commerce. Future laws imposing taxes or other regulations on Internet commerce
could adversely affect our business.
We currently hold various Web addresses relating to our assets and brands,
including broadbandsports.com, athletedirect.com, psx.com, rotonews.com and
sportsauthentics.com. We may not be able to prevent third parties from
acquiring Web addresses that are similar to our addresses, which could
adversely affect our business. In addition, a number of third parties have
registered as domain names the names of a number of Athlete Direct's athletes
under contract. We may not be able to acquire these Web addresses in a cost-
effective manner, or at all, which could adversely affect our business. The
acquisition and maintenance of Web addresses generally is regulated by
governmental agencies and their designees. The regulation of Web addresses in
the United States and in foreign countries and the application of trademark
laws to Web addresses is uncertain and subject to change. As a result, we may
not be able to acquire or maintain relevant Web addresses in all countries in
a cost-effective manner, or at all, where we may conduct business.
Employees
As of December 31, 1999, we had 165 employees. Our ability to attract and
retain highly qualified employees will be a principal determinant of our
success. Competition for qualified personnel in the industry is high. We
cannot assure you that our current and planned staffing will be adequate to
support our future operations or that management will be able to hire, train,
retain, motivate and manage the required personnel. None of our employees is
represented by a labor union and we have not experienced any work stoppages.
We consider our relations with our employees to be good.
Facilities
We are headquartered in Santa Monica, California, where we lease 31,242
square feet located at 2120 Colorado Avenue, Santa Monica, California. The
lease expires November 14, 2006.
In October 1999, we entered into a lease for approximately 2,700 square feet
located at 350 Fifth Avenue, New York, New York. The lease expires October 31,
2002.
In addition, we sublease two offices and common areas at 820 Grant Avenue,
Novato, California. The sublease for the two offices and common areas are on a
month-to-month basis. We have an option to renew the sublease for an
additional one-year period at the same monthly rental rates if the lessor
exercises its option to renew for an additional year. We believe that our
current facilities will be adequate to accommodate our needs for the
foreseeable future.
Legal Proceedings
Other than as set forth above in "Risk Factors--Our business may be
restricted by rights of sports leagues and players associations," we are not
currently subject to any material legal proceedings. We may from time to time
become a party to various legal proceedings arising in the ordinary course of
our business. Any such proceeding against us, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of our
executive officers and directors as of February 15, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard D. Nanula........ 39 Chief Executive Officer and Chairman of the Board
Tyler J. Goldman......... 33 President, Broadband Studios and Director
Ross B. Schaufelberger... 32 Senior Vice President, Business Development
Gregory S. Hebner........ 31 Chief Financial Officer
Jose A. Royo............. 33 Chief Technology Officer
John Collins............. 37 Vice President, New Media Programming
Thomas F.X. Beusse....... 35 Vice President, Advertising
Steven M. Larkin......... 41 Vice President, Electronic Commerce
Marla P. Messing......... 35 Vice President, Program Marketing
Jeffrey N. Pollack....... 35 Vice President, New Media Publishing
Ahmed O. Alfi(2)......... 43 Director
W. Allen Beasley......... 31 Director
Frank J. Biondi, Jr...... 54 Director
Stephen D. Greenberg(1).. 51 Director
Douglas Leone(2)......... 42 Director
Geoffrey Y. Yang(1)...... 40 Director
</TABLE>
- ---------------------
(1) Member of the audit committee
(2) Member of the compensation committee
Richard D. Nanula has served as our Chief Executive Officer and one of our
directors since November 1999. From August 1998 to May 1999, Mr. Nanula served
as the President and Chief Operating Officer at Starwood Hotels & Resorts
Worldwide, a Fortune 500 global hotel company. From February 1996 to March
1998 and August 1991 to November 1994, Mr. Nanula served as the Chief
Financial Officer of The Walt Disney Company. From November 1994 to February
1996, Mr. Nanula was the President of the Disney Stores Worldwide. From
December 1989 to August 1991, Mr. Nanula served as the Treasurer of The Walt
Disney Company. Mr. Nanula received a B.A. degree from the University of
California at Santa Barbara and an M.B.A. degree from Harvard University.
Tyler J. Goldman is the founder of Broadband Sports and has served as
President of Broadband Studios, the arm of Broadband Sports focused on new
divisions, since November 1999. Mr. Goldman has served as a director of
Broadband Sports since inception. From inception through October 1999, Mr.
Goldman served as our Chief Executive Officer and President. From 1995 to
December 1997, Mr. Goldman served as an associate at the law offices of
Steinberg & Moorad, an independent provider of athlete services. From 1992 to
1995, Mr. Goldman served as an associate at Wilson Sonsini Goodrich and
Rosati, P.C., a law firm focused on technology companies. Mr. Goldman received
an A.B. degree from Dartmouth College, and J.D. and Masters of Management
degrees from Northwestern University.
Ross B. Schaufelberger has served as our Senior Vice President, Business
Development since our inception. Mr. Schaufelberger is a founder of Athlete
Direct and has served as President of Athlete Direct since February 1996. From
July 1990 to February 1996, Mr. Schaufelberger served as Vice President of
Marketing and Business Development at STATS, Inc., a provider of online sports
statistical information. Mr. Schaufelberger received a B.A. degree from the
University of Pennsylvania.
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Gregory S. Hebner has served as our Chief Financial Officer since May 1998.
From August 1997 to May 1998, Mr. Hebner served as a senior analyst within the
Technology and New Media Group of the Strategic Planning Department for The
Walt Disney Company. From 1995 to 1997, Mr. Hebner was a graduate student at
Harvard University. From November 1993 to August 1995, Mr. Hebner worked as an
operations manager for Premark International, a consumer goods company. From
August 1991 to November 1993, Mr. Hebner served as an auditor for
PricewaterhouseCoopers LLP, an independent accounting firm. Mr. Hebner
received a B.S. degree in Accountancy from the University of Illinois, and
M.B.A. degree from Harvard University. Mr. Hebner is a certified public
accountant.
Jose A. Royo has served as our Chief Technical Officer since December 1998.
From August 1998 to December 1998, Mr. Royo served as a Program Manager for
Trilogy Software, a provider of front-office software. From October 1997 to
August 1998, Mr. Royo served as the Chief Information Officer for Crimson
Solutions, a software company developing solutions for higher education. From
September 1993 to August 1997, Mr. Royo served as Lead Software Engineer for
Harvard University. From September 1990 to September 1997, Mr. Royo served as
an instructor in the Department of East Asian Studies at Harvard University.
Mr. Royo received a B.A. degree from Earlham College, and A.M., Ph.D. and
M.B.A. degrees from Harvard University.
John Collins has served as our Vice President, New Media Programming since
November 1999. From April 1991 to November 1999, Mr. Collins served as a
senior programming and sales executive for the National Football League. From
April 1994 to November 1999, Mr. Collins served as the Senior Vice President
of Programming and Sales and the Vice President of Programming and Sales at
the National Football League. From April 1991 to April 1994, Mr. Collins
served as Vice President Sales and Marketing for NFL Films. Mr. Collins
received a B.S. degree from Long Island University.
Thomas F.X. Beusse has served as our Vice President, Advertising Sales since
August 1999. From November 1992 to July 1999 Mr. Beusse served as an
advertising executive for Sports Illustrated, a division of Time-Warner. From
August 1996 to July 1999, Mr. Beusse was the advertising director for Sports
Illustrated's New York office. From August 1989 to November 1992, Mr. Beusse
held various sales positions for Times Mirror Magazines and Hachette
Publishing. Mr. Beusse received a B.A. degree from Ithaca College.
Steven M. Larkin has served as our Vice President, Electronic Commerce since
January 2000. From February 1998 to January 2000, Mr. Larkin served as the
Chief Merchandising Officer for the Federated Direct Division of Federated
Department Stores. From September 1995 to February 1998, Mr. Larkin served as
Vice President of Merchandising for the Catalog Division of Fingerhut
Corporation. From December 1989 to September 1995, Mr. Larkin served as the
Vice President of Merchandising for an operating division of Federated
Department Stores. Mr. Larkin received a B.S. degree from The School of
Management at Boston University.
Marla P. Messing has served as our Vice President, Program Marketing since
February 2000. From January 1997 to December 1999, Ms. Messing served as the
President and CEO of the The 1999 Womens World Cup Soccer Tournament, which
took place in June and July of 1999. From January 1995 to June 1996, Ms.
Messing served as the Senior Vice President of Major League Soccer. From March
1992 to December 1994, Ms. Messing served in a number of roles, including as
the Executive Vice President of the 1994 (Mens) World Cup Soccer Tournament.
Ms. Messing received a B.A. degree from the University of Michigan and a J.D.
from the University of Chicago Law School.
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Jeffery N. Pollack has served as our Vice President, New Media Publishing
since January 2000. From May 1999 to January 2000, Mr. Pollack served as Vice
President of Marketing and Corporate Communications at the National Basketball
Association. From March 1998 to May 1999, Mr. Pollack served as the
Communications Consultant to the National Basketball Association during
collective bargaining negotiations with the National Basketball Players
Association. Mr. Pollack was the founder of The Sports Business Daily, the
first daily trade publication for the sports industry, and served as its
President from February 1994 to March 1998. Mr. Pollack received a B.S. from
the Medill School of Journalism at Northwestern University and an M.P.S. from
The Graduate School of Political Management.
Ahmed O. Alfi has served as a director of Broadband Sports since inception.
Mr. Alfi is the President of Netcubator, the Managing Member of NMSS Partners
LLC, an investment company. From January 1992 to present, Mr. Alfi has served
as Chairman and Chief Executive Officer of Alfigen, a genetic diagnostic
company. Mr. Alfi also serves as a director of Toytime.com, an online toy
retailer and Insureon.com, an online business insurance exchange. Mr. Alfi
received a B.S. degree from California State University, Northridge.
W. Allen Beasley has served as a director of Broadband Sports since May
1999. Since September 1999, Mr. Beasley has been a principal of Redpoint
Ventures, a venture capital firm. From June 1998 to September 1999, Mr.
Beasley was an associate of Institutional Venture Partners, a venture capital
firm. From August 1995 to December 1997, Mr. Beasley worked in various
marketing positions for Ipsilon Networks, Inc. a provider of high-performance
networking equipment. From June 1994 to August 1995, Mr. Beasley worked in
business development for Synopsys, Inc. a provider of design automation
software. Mr. Beasley received an A.B. degree in Economics and a M.B.A. degree
from Stanford University.
Frank J. Biondi, Jr. has served as a director of Broadband Sports since May
1999. Since February 1999, Mr. Biondi has served as Senior Managing Director
of WaterView Advisors, LLC, an investment management firm that acts as the
advisor to WaterView Partners, L.P. Mr. Biondi served as Chairman of the Board
and Chief Executive Officer of Universal Studios, Inc., a media company, from
April 1996 until November 1998. From July 1987 until January 1996, he was
President, Chief Executive Officer and a director of Viacom, Inc., a media
company. Mr. Biondi has also served as a director of The Bank of New York,
Vail Resorts, Inc., a resort operator, and About.com as well as several
privately held companies. Mr. Biondi received an A.B. degree in psychology
from Princeton University and a M.B.A. degree from Harvard University.
Stephen D. Greenberg has served as a director of Broadband Sports since May
1999. Since April 1999, Mr. Greenberg has been a member of General Catalyst
LLC, an investment company. Mr. Greenberg has also served as President of
Classic Sports Network, Inc., a cable television programming service, from
November 1993 through November 1998. From April 1993 to November 1993, Mr.
Greenberg served as President of Stephen D. Greenberg, P.C., an independent
business consulting firm. From January 1990 to April 1993, Mr. Greenberg
served as Deputy Commissioner and Chief Operating Officer of Major League
Baseball. Mr. Greenberg serves as a director on the board of directors of The
Topps Company, a marketer of sports cards. Mr. Greenberg received a B.A.
degree from Yale University, and a J.D. degree from the University of
California at Los Angeles.
Douglas Leone has served as a director of Broadband Sports since May 1999.
Mr. Leone has been a partner of Sequoia Capital since July 1988. Mr. Leone
served on the board of directors of International Network Services, an
enterprise network service provider, from June 1993 to 1998 and
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Arbor Software, a software company, from June 1991 to 1997. Mr. Leone is
currently on the board of directors of Scient Corporation and VA Linux Systems
as well as several privately held companies. Mr. Leone holds a B.S. degree in
Mechanical Engineering from Cornell University, an M.S. degree in Industrial
Engineering from Columbia University, and an M.S. degree in Management from
the Massachusetts Institute of Technology.
Geoffrey Y. Yang has served as a director of Broadband Sports since May
1999. Since June 1987, Mr. Yang has been a partner of Institutional Venture
Partners (IVP), a venture capital firm. He is also a Managing Director of
Redpoint Ventures, a venture capital firm. He is a director of Ask Jeeves,
Inc., an online provider of question answering services for consumers and
corporate websites, MMC Networks, Inc., a developer of network processors,
TiVo, Inc., a provider of personal video recorders and personalized TV
services, and Turnstone Systems, Inc., a telecommunication equipment company,
as well as several privately held companies. He has also been a director of
Excite, Inc., an online portal company. Mr. Yang received a B.A. degree in
Economics and a B.S.E. degree in Information Systems Engineering from
Princeton University and a M.B.A. degree from Stanford University.
Board Composition
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, three of the nominees to the board will be
elected to one-year terms, three will be elected to two-year terms and two
will be elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Ahmed O. Alfi, W. Allen Beasley and Frank J. Biondi, Jr.
have been designated Class I directors whose term expires at the 2001 annual
meeting of stockholders. Tyler Goldman, Stephen D. Greenberg and Douglas Leone
have been designated Class II directors whose term expires at the 2002 annual
meeting of stockholders. Richard D. Nanula and Geoffrey Y. Yang have been
designated Class III directors whose term expires at the 2003 annual meeting
of stockholders. For more information on the classified board, see the section
entitled "Description of Capital Stock -- Anti-takeover effects of provisions
of our certificate and bylaws and Delaware law."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
Board Committees
In May 1999, the board established an audit committee and a compensation
committee. The audit committee monitors the accounting practices and
procedures and the scope of internal and external audits and will recommend
the appointment of the independent auditors. All members of the audit
committee must be independent directors. The members of the audit committee
are Stephen D. Greenberg and Geoffrey Y. Yang. The compensation committee
evaluates and approves the compensation policies for the executive officers
and administers our employee benefit plans. The members of the compensation
committee are Ahmed O. Alfi and Douglas Leone. All members of the compensation
committee must be independent directors.
Director Compensation
We reimburse members of our board of directors for out-of-pocket expenses
incurred in the performance of their duties as directors. To date, two non-
employee directors have each received a grant of options to purchase 25,000
shares of common stock at an exercise price of $5.30 per share.
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The 2000 stock incentive plan provides for automatic grants of stock options
to non-employee directors. Each non-employee director, upon initial election
or appointment to our board of directors, is entitled to receive options to
purchase 25,000 shares of common stock at an exercise price equal to the fair
value on the date of grant and follow-on grants of options to purchase 10,000
shares of common stock at an exercise price equal to the fair value on the
date of grant at the conclusion of each annual meeting of stockholders.
Director grants under the 2000 stock incentive plan shall vest annually over
the remaining term of the director. We reserve the right to amend the
arrangement with directors with respect to future grants. No member of our
board of directors currently receives any additional cash compensation for his
services as a director.
Compensation Committee Interlocks and Insider Participation
The compensation committee will make compensation recommendations to the
board. No interlocking relationship exists between the board or compensation
committee and the board or compensation committee of any other company, nor
has any interlocking relationship existed in the past. Mr. Alfi, who is on our
compensation committee, is a partner of NMSS Partners, LLC, which extended a
$4.5 million credit facility to us in February 1998. Mr. Leone, who is also on
our compensation committee, is a partner of Sequoia Capital, which purchased
our series B preferred stock in May 1999 and series C preferred stock in
November 1999. For more information, see page 73 under "Certain Relationships
and Related Transactions."
Executive Compensation
The following table sets forth information concerning the compensation paid
by us to our chief executive officer and our four other most highly
compensated executive officers who served as executive officers during fiscal
1999 and whose total compensation for fiscal 1999 exceeded $100,000 (the
"named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------------
--------------------- Awards Underlying
Name and Principal Position Salary($) Bonus($) Options/SARS(#)(1)
- --------------------------- ---------- --------- ------------------
<S> <C> <C> <C>
Richard D. Nanula(2)................... $ 30,000 $ -- --
Chairman of the Board and Chief
Executive Officer
Tyler J. Goldman....................... 150,000 30,000 --
President, Broadband Studios
Ross B. Schaufelberger................. 125,000 25,000 --
Senior Vice President, Business
Development
Gregory S. Hebner...................... 115,000 24,000 --
Chief Financial Officer
Jose A. Royo........................... 135,000 62,000 126,834
Chief Technical Officer
</TABLE>
- ---------------------
(1) Consists of shares issuable pursuant to options granted under the 1998
Equity Incentive Plan.
(2) Mr. Nanula became our Chief Executive Officer in November 1999. His
expected annual salary for the year 2000 is $180,000.
66
<PAGE>
Option Grants In Fiscal 1999
The following table sets forth certain information regarding stock options
granted during 1999 to the named executive officers, including the potential
realizable value over the 10-year term of the options based on annual rates of
stock appreciation of 5% and 10%, compounded annually. These assumed rates of
appreciation comply with the rules of the SEC and do not represent our
estimate of future stock prices. Actual gains, if any, on stock option
exercises will depend on the future performance of our common stock. In 1999,
we granted options to acquire up to 2,306,664 shares to employees,
consultants, directors and service providers, all under the 1998 equity
incentive plan and all at an exercise price equal to not less than the fair
value of our common stock on the date of grant as determined in good faith by
the board. Optionees may pay the exercise price by check, note, delivery of
already-owned shares of our common stock or any other instrument the board
will accept.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Option Term(2)
Options Employees in Exercise Price Expiration ---------------------
Name Granted(1)(#) Fiscal Year(%) Per Share Date 5% 10%
- ---- ------------- -------------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Nanula....... -- -- -- -- -- --
Tyler J. Goldman........ -- -- -- -- -- --
Ross B. Schaufelberger.. -- -- -- -- -- --
Gregory S. Hebner....... -- -- -- -- -- --
Jose A. Royo............ 126,834 8.0% $6.00 9/1/09 $478,664 $1,212,843
</TABLE>
- ---------------------
(1) All options granted to the named executive officers during 1999 were
granted under the 1998 equity incentive plan. See "Stock Plans."
(2) Potential realizable values are at an assumed initial public offering
price of $9.00 per share and are net of exercise price but before taxes
associated with exercise.
Aggregated Option Exercises During Fiscal 1999 and Fiscal Year-End Option
Values
No options were exercised during 1999 by our chief executive officer or any
of the other named executive officers. The following table sets forth
information about the number and year-end value of exercisable and
unexercisable options held by the named executive officers in the table below
as of December 31, 1999. The "Value of Unexercised In-the-Money Options at
December 31, 1999" is based on an assumed initial public offering price of
$9.00 per share, minus the exercise price, multiplied by the number of shares
underlying the option.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1999(1) December 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard D. Nanula.......... -- -- -- --
Tyler J. Goldman........... -- -- -- --
Ross B. Schaufelberger..... -- -- -- --
Gregory S. Hebner.......... 176,470 58,824 $1,561,760 $ 520,592
Jose A. Royo............... 29,843 216,362 259,634 1,159,391
</TABLE>
- ---------------------
(1) All options were granted under our 1998 equity incentive plan. Mr.
Hebner's options vest quarterly and become exercisable as to 29,412 shares
each quarter commencing upon employment.
67
<PAGE>
Stock Plans
1998 Equity Incentive Plan. Our 1998 Equity Incentive Plan was approved by
the board of directors and stockholders in December 1998. The 1998 equity
incentive plan provides for the grant of options intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended, nonqualified stock options, the sale of restricted stock and
the grant of other securities or benefits with a value derived from the value
of common stock. The 1998 equity incentive plan also provides for the transfer
or sale of common stock to selected individuals in connection with the
performance of services for us. Initially, 3,529,412 shares of common stock
were reserved for issuance under the 1998 equity incentive plan. The 1998
equity incentive plan was amended to increase the number of shares of common
stock reserved for issuance by 2,174,026 to a total of 5,703,437 shares. We do
not intend to grant further awards under the 1998 equity incentive plan after
the completion of this offering.
As of February 15, 2000, options to purchase 5,149,061 shares had been
granted and were outstanding under the 1998 equity incentive plan. The board
of directors or a committee designated by the board is authorized to
administer the 1998 equity incentive plan, including the selection of
individuals to whom grants of options are made, issuances of common stock, the
terms of such grants or issuances, possible amendments to the terms of such
grants or issuances and the interpretation of the terms of, and adoption of
rules for, the 1998 equity incentive plan. The maximum term of any stock
option granted under the 1998 equity incentive plan is ten years, except that
with respect to incentive stock options granted to a person possessing more
than 10% of our combined voting power, the term of these stock options may not
exceed five years.
The exercise price of incentive stock options granted under the 1998 equity
incentive plan must be at least 100% of the fair value of the common stock on
the grant date except that the exercise price of incentive stock options
granted to a 10% stockholder must be at least 110% of the fair market value on
the grant date. The aggregate fair value on the date of grant of the common
stock for which incentive stock options are exercisable for the first time by
an employee during any calendar year may not exceed $100,000. The purchase
price of shares of common stock granted under the 1998 equity incentive plan
must be at least 85% of the fair value of the common stock on the grant date
except that the purchase price of shares of common stock granted to a 10%
stockholder must be at least 110% of the fair value on the grant date. The
individual agreements under the 1998 equity incentive plan may provide us with
repurchase rights under the terms and conditions set forth in the equity
incentive plan. Employee grants generally become exercisable at the rate of
25% per year over four years; non-employee grants generally become exercisable
at the rate of 20% per year over five years. Incentive stock options cannot be
transferred and other options can be transferred only in the discretion of the
administrator of the plan, but cease to vest if they are transferred. The 1998
equity incentive plan will terminate in 2008, unless earlier terminated by the
board.
The 1998 equity incentive plan provides that we can cancel any unexpired,
unpaid or deferred award (whether or not vested) at any time if the recipient
of the award violates certain agreements with us or competes with our business
within one year after termination of employment or engagement with us or
renders services for a competitor during this time. In addition, if the
recipient has violated any of these agreements within 180 days of exercise of
an award, the recipient is obligated to pay us the amount of any gain realized
or payment received as a result of the rescinded exercise. This payment must
be made by returning to us all shares of capital stock that the recipient
received in connection with the rescinded exercise, or if the shares have been
transferred by the recipient, by paying in cash to us the fair value of the
shares transferred at the time of transfer of the shares.
68
<PAGE>
Except as otherwise provided in an individual award agreement, in the event
of a merger in which we are not the surviving entity, the sale of all or
substantially all of our assets or a reverse merger resulting in a change of
control, each grant which is at the time outstanding under the 1998 equity
incentive plan shall, unless the plan administrator in its discretion decides
differently, will terminate immediately prior to the consummation of such
proposed transaction, unless the grant is assumed or an equivalent grant is
substituted by the successor corporation.
2000 Stock Incentive Plan. Our 2000 Stock Incentive Plan was approved by the
board of directors and stockholders in January 2000. The 2000 stock incentive
plan provides for the grant of options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended,
nonqualified stock options and stock appreciation rights. The 2000 stock
incentive plan also provides for the transfer or sale of common stock to
selected individuals in connection with the performance of services for us.
Initially, 7,100,975 shares of common stock were reserved for issuance under
the 2000 stock incentive plan. This number will be increased annually by a
number equal to the lesser of three percent of the number of shares of common
stock outstanding as of December 31 of the immediately preceding calendar year
or a number to be determined by the board of directors.
The board of directors or a committee designated by the board is authorized
to administer the 2000 stock incentive plan, including the selection of
individuals to whom grants of options are made, issuances of common stock, the
terms of these grants or issuances, possible amendments to the terms of these
grants or issuances and the interpretation of the terms of, and adoption of
rules for, the 2000 stock incentive plan. The maximum term of any stock option
granted under the stock incentive plan is ten years, except that with respect
to incentive stock options granted to a person possessing more than 10% of our
combined voting power, the term of these stock options may not exceed five
years.
The exercise price of incentive stock options granted under the 2000 stock
incentive plan must be at least 100% of the fair value of the common stock on
the grant date except that the exercise price of incentive stock options
granted to a 10% stockholder must be at least 110% of the fair value on the
grant date. The aggregate fair value on the date of grant of the common stock
for which incentive stock options are exercisable for the first time by an
employee during any calendar year may not exceed $100,000. The purchase price
of shares of common stock granted under the stock incentive plan must be at
least 85% of the fair value of the common stock on the grant date except that
the purchase price of shares of common stock granted to a 10% stockholder must
be at least 100% of the fair value on the grant date. The individual
agreements under the 2000 stock incentive plan may provide us with repurchase
rights under the terms and conditions set forth in the 2000 stock incentive
plan. Employee grants generally become exercisable at the rate of 25% per year
over four years; non-employee grants generally become exercisable at the rate
of 20% per year over five years.
The 2000 stock incentive plan provides for automatic grants of stock options
to non-employee directors. Each non-employee director, upon initial election
or appointment to our board of directors, is entitled to receive options to
purchase 25,000 shares of common stock at an exercise price equal to the fair
value on the date of grant and follow-on grants of options to purchase 10,000
shares of common stock at an exercise price equal to the fair value on the
date of grant at the conclusion of each annual meeting of stockholders.
Director grants under the 2000 stock incentive plan shall vest annually over
the remaining term of the director.
In the event of a merger in which we are not the surviving entity, the sale
of all or substantially all of our assets or a reverse merger resulting in a
change of control, each grant which is at the time outstanding under the 2000
stock incentive plan shall, unless the plan administrator in its discretion
69
<PAGE>
decides differently, immediately prior to the specified effective date of such
transaction, automatically . To the extent it has not been previously
exercised, the grant will terminate immediately prior to the consummation of
such proposed transaction, unless the grant is assumed or an equivalent grant
is substituted by the successor corporation.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan was
approved in January 2000 by the board and stockholders. The stock purchase
plan is intended to qualify as an "employee stock purchase plan" under Section
423 of the Internal Revenue Code in order to provide our employees with an
opportunity to purchase common stock through payroll deductions. An aggregate
of 400,000 shares of common stock have been reserved for issuance under the
stock purchase plan and made available for purchase thereunder, subject to
adjustment in the event of a stock split, stock dividend or other similar
change in the common stock or our capital structure. All of our employees (and
employees of our "subsidiary corporations" and "parent corporations" (as
defined by the Internal Revenue Code) designated by the administrator of the
stock purchase plan) whose customary employment is for more than five months
in any calendar year and more than 20 hours per week are eligible to
participate in the stock purchase plan. Non-employee directors, consultants,
and employees subject to the rules or laws of a foreign jurisdiction that
prohibit or make impractical the participation of such employees in the stock
purchase plan are not eligible to participate in the stock purchase plan.
The stock purchase plan designates offer periods and exercise dates. Offer
periods are generally overlapping periods of 24 months. The initial offer
period will begin on the effective date of this offering and ends on ,
. Additional offer periods will commence each August 1 and February 1.
Purchase periods are generally six-month periods, with the initial purchase
period commencing on the effective date of the stock purchase plan and ending
on July 31, 2000. Thereafter, purchase periods will commence each August 1 and
February 1. Exercise dates are the last date of each purchase period. In the
event we merge with or into another corporation or sell all or substantially
all of our assets, or in the event certain other transactions in which our
stockholders before the transaction own less than 50% of the total combined
voting power of our outstanding securities following the transaction, the
administrator of the stock purchase plan may elect to shorten the offer period
then in progress.
On the first day of each offer period, a participating employee is granted a
purchase right, which is a form of option to be automatically exercised on the
forthcoming exercise dates within the offer period during which deductions are
to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the stock purchase plan.
When the purchase right is exercised, the participant's withheld salary is
used to purchase shares of common stock. The price per share at which shares
of common stock are to be purchased under the stock purchase plan during any
purchase period is the lesser of (A) 85% of the fair value of the common stock
on the date of the grant of the option (the commencement of the offer period)
or (B) 85% of the fair value of the common stock on the exercise date (the
last day of a purchase period). The participant's purchase right is exercised
in this manner on each exercise date arising in the offer period unless, on
the first day of any purchase period, the fair value of the common stock is
lower than the fair value of the common stock on the first day of the offer
period. If so, the participant's participation in the original offer period is
terminated, and the participant is automatically enrolled in the new offer
period effective the same date.
70
<PAGE>
401(k) Plan
We have a 401(k) plan pursuant to which eligible employees may elect to
reduce their current salary by up to the statutorily prescribed annual limit
and have the amount of the reduction contributed to the 401(k) plan.
Contributions to the 401(k) plan by us are discretionary and, to date, we have
not made any contribution to the 401(k) plan. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code so that contributions
by participants to the 401(k) plan, and income earned on plan contributions,
are not taxed to participants until withdrawn from the 401(k) plan.
Employment Agreements
Under an employment agreement dated November 1999, we will pay Richard D.
Nanula a base salary of $180,000 per year plus performance bonuses at the
discretion of the compensation committee of the board of directors. Other than
as provided in his restricted stock purchase agreement, neither we nor Mr.
Nanula shall have any further obligation to each other by way of compensation
or otherwise if terminated.
Under an employment agreement dated February 1998, we pay Tyler J. Goldman a
base salary of $150,000 per year plus performance bonuses at the discretion of
the compensation committee of the board of directors. After completion of this
offering, Mr. Goldman's base salary will be increased to an amount to be
determined by the compensation committee. The employment agreement has a term
of three years; however, if Mr. Goldman is terminated for any reason other
than for cause, he is entitled to a severance payment equal to six months of
his then-current base salary at the time of termination.
Under an employment agreement dated February 1998, we pay Ross B.
Schaufelberger a base salary of $125,000 per year plus performance bonuses at
the discretion of the compensation committee of the board of directors. The
employment agreement has a term of three years; however, if Mr. Schaufelberger
is terminated for any reason other than for cause, he is entitled to a
severance payment equal to six months of his then-current base salary payable
monthly in six equal installments.
71
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with our formation, NMSS Partners, LLC ("NMSS") purchased all
of our 2,000,000 shares of outstanding mandatory redeemable series A preferred
stock for $1.00 per share and extended to us a $4.5 million revolving credit
facility. In connection with the closing of this offering, all of the series A
preferred stock will be redeemed for approximately $2.3 million and the $4.5
million credit facility will be repaid. NMSS owns more than 5% of our company,
and two of its members, Ahmed O. Alfi and Amre Youness, were directors of our
company at the time of these transactions. Mr. Alfi continues to serve as a
director on our board of directors and is also the sole shareholder of the
managing member of NMSS.
In May 1999, we sold 29,166,663 shares of our series B convertible preferred
stock at $0.60 per share. Each share of series B preferred stock will be
converted to one tenth of a share of common stock upon the closing of this
offering for an aggregate of 2,916,666 shares of common stock. In connection
with this financing, we entered into an agreement that provides for certain
rights relating to the registration of our common stock under the Securities
Act of 1933, as amended. WaterView Capital Management LLC, formerly known as
BRCM LLC, and General Catalyst LLC each purchased 3,333,333 shares of series B
convertible preferred stock. Frank J. Biondi, Jr. is a member of our board of
directors and is affiliated with WaterView Capital Management LLC, and Stephen
D. Greenberg is a member of our board of directors and is affiliated with
General Catalyst LLC. Also in May 1999, funds affiliated with Institutional
Venture Partners and Sequoia Capital each acquired shares of common stock
representing more than 5% of our company from existing stockholders. In
addition to WaterView Capital Management LLC and General Catalyst LLC, Tyler
Goldman, our President, Broadband Studios, Ross Schaufelberger, our Senior
Vice President, Business Development, NMSS, and funds affiliated with
Institutional Venture Partners and Sequoia Capital entered into the agreement
regarding registration rights. W. Allen Beasley and Geoffrey Y. Yang are
members of our board of directors and are affiliated with Institutional
Venture Partners, and Douglas Leone is a member of our board of directors and
is affiliated with Sequoia Capital.
In November 1999, we sold 18,550,000 shares of our series C convertible
preferred stock at $0.80 per share. Each share of series C convertible
preferred stock will be converted to one tenth of a share of common stock upon
the closing of this offering for an aggregate of 1,855,000 shares of common
stock. Of the 18,550,000 shares of series C convertible preferred stock sold,
funds affiliated with Sequoia Capital and Institutional Venture Partners each
purchased 1,250,000 shares, WaterView Partners L.P. purchased 375,000 shares
and General Catalyst LLC purchased 250,000 shares. Frank J. Biondi, Jr. is a
member of our board of directors and is affiliated with WaterView Partners
L.P.
In November 1999, pursuant to a restricted stock purchase agreement, we sold
an aggregate of 3,038,981 shares of common stock at $6.00 per share to Richard
D. Nanula for approximately $18,233,885. In connection with the restricted
stock purchase agreement, Mr. Nanula entered into a note with us, which had a
principal amount of approximately $15,200,906. The note bears interest at the
rate of approximately 6% per annum.
A number of our officers have entered into employment agreements with us.
See "Management--Executive Compensation" and "--Employment Agreements."
72
<PAGE>
The following describes our directors who are affiliated with entities that
are beneficial owners of our common stock:
<TABLE>
<CAPTION>
Shares
beneficially
owned as of
Director Affiliation with Stockholder February 15, 2000
-------- ---------------------------- -----------------
<S> <C> <C>
Mr. Alfi Managing Member, NMSS Partners, LLC 7,885,976(1)
Mr. Beasley Associate, Institutional Venture Partners 3,225,000
Mr. Biondi, Jr. Senior Managing Director, WaterView Advisors, LLC, 395,833
the Investment Manager of WaterView Partners, L.P.
(WaterView Capital Management LLC, formerly known as
BRCM LLC, is the general partner of WaterView
Partners, L.P.)
Mr. Greenberg Member, General Catalyst LLC 272,222
Mr. Leone Partner, Sequoia Capital 3,225,000
Mr. Yang Partner, Institutional Venture Partners 3,225,000
</TABLE>
- ---------------------
(1) Excludes 2,000,000 shares of mandatorily redeemable series A preferred
stock.
Prior to the offering, we intend enter into indemnification agreements with
each of our executive officers and directors. These agreements may require us,
among other things, to indemnify them (other than for liabilities arising from
willful misconduct of a culpable nature) and to advance their expenses
incurred as a result of any proceedings against them as to which they could be
indemnified. See "Description of Capital Stock--Limitation of liability and
indemnification matters."
73
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of February 15, 2000, and as
adjusted to reflect our sale of shares for:
. each person (or group of affiliated persons) who we know to own
beneficially more than 5% of our common stock;
. each of our named executive officers and directors; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, the address for each of the listed individuals
is c/o Broadband Sports, Inc., 2120 Colorado Avenue, Santa Monica, California
90404. Except as otherwise indicated, and subject to applicable community
property laws, the listed persons have sole voting and investment power with
respect to all shares of common stock held by them. The numbers of shares in
the table assumes no exercise of the underwriters' over-allotment option.
Applicable percentage ownership in the table is based on 29,564,397 shares
of common stock outstanding as of February 15, 2000, and 32,864,397 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC. Shares of
common stock subject to options that are presently exercisable or exercisable
within 60 days of February 15, 2000 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding those
options, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. To the extent that any
shares are issued upon exercise of options or other rights to acquire our
capital stock that are presently outstanding or granted in the future or
reserved for issuance under our stock plans, there will be further dilution to
new investors.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned
Shares -----------------
Beneficially Prior to After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
NMSS Partners, LLC (1)......................... 7,885,976 26.68% 24.00%
301 North Lake Avenue
Suite 910
Pasadena, CA 91101
Ahmed O. Alfi (1).............................. 7,885,976 26.68% 24.00
Tyler J. Goldman............................... 3,791,666 12.83% 11.54
Entities affiliated with Institutional Venture
Partners (2).................................. 3,225,000 10.91% 9.81
Institutional Venture Partners
3000 Sand Hill Road
Suite 290
Menlo Park, CA 94025
Geoffrey Y. Yang (2)........................... 3,225,000 10.91 9.81
Entities affiliated with Sequoia Capital (3)... 3,225,000 10.91 9.81
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned
Shares -----------------
Beneficially Prior to After
Owned Offering Offering
------------ -------- --------
<S> <C> <C> <C>
Douglas Leone (3).............................. 3,225,000 10.91% 9.81%
Richard D. Nanula.............................. 3,038,981 10.28 9.25
Ross B. Schaufelberger......................... 978,750 3.31 2.98
Frank J. Biondi, Jr. (4)....................... 395,833 1.34 1.20
Stephen D. Greenberg (5)....................... 272,222 * *
W. Allen Beasley............................... -- -- --
Gregory S. Hebner (6).......................... 208,383 * *
Jose A. Royo (7)............................... 39,169 * *
All executive officers and directors as a group
(16 persons).................................. 23,060,980 78.01 70.17
</TABLE>
- ---------------------
* Less Than 1%
(1) Represents 7,885,976 shares held by NMSS Partners, LLC. Mr. Alfi, one of
our directors, is a director and member of NMSS.
(2) Represents 98,144 shares held by IVP Broadband Fund, L.P., 3,069,010
shares held by Institutional Venture Partners VIII, L.P. and 57,847 shares
held by IVM Investment Fund VIII, LLC. Mr. Yang, one of our directors, is
a partner of Institutional Venture Partners.
(3) Represents 1,935,000 shares held by Sequoia Capital Franchise Fund,
1,169,127 shares held by Sequoia Capital VIII, 14,835 shares held by
Sequoia International Technology Partners VIII, 77,400 shares held by
Sequoia International Technology Partners VIII (Q), 25,800 shares held by
CMS Partners LLC and 2,838 shares held by Sequoia 1997. Mr. Leone, one of
our directors, is a partner of Sequoia Capital.
(4) Represents 247,222 shares held by WaterView Capital Management, LLC
(formerly BRCM LLC), 37,500 shares held by WaterView Partners, L.P. and
25,000 shares held by Mr. Biondi. Mr. Biondi, one of our directors, is
Senior Managing Director of WaterView Advisors LLC, the Investment Manager
of WaterView Partners L.P. WaterView Capital Management LLC is the general
partner of WaterView Partners L.P. Mr. Biondi disclaims beneficial
ownership of the shares held by WaterView Capital Management, LLC and
WaterView Partners, L.P., except to the extent of his pecuniary interest
therein.
(5) Represents 25,000 shares subject to options issued under the 1998 equity
incentive plan which are immediately exercisable. Also represents 247,222
shares held by General Catalyst LLC. Mr. Greenberg, one of our directors,
is a director and a member of General Catalyst LLC. Mr. Greenberg
disclaims beneficial ownership of the shares held by General Catalyst LLC,
except to the extent of his pecuniary interest therein.
(6) Represents 205,883 shares subject to options issued under the 1998 equity
incentive plan, which are exercisable within 60 days of February 15, 2000.
(7) Represents shares subject to options issued under the 1998 equity
incentive plan, which are exercisable within 60 days of February 15, 2000.
75
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and certain provisions of our
charter and bylaws are only summaries and are qualified by reference to our
charter and bylaws filed as exhibits to the registration statement of which
this prospectus is a part. At the closing of the offering our authorized
capital stock will consist of 75,000,000 shares of common stock, $0.001 par
value per share, and 5,000,000 shares of preferred stock, $0.001 par value per
share. As of February 15, 2000, there were 2,000,000 shares of mandatorily
redeemable series A preferred stock outstanding, 29,166,663 shares of series B
convertible preferred stock outstanding and 18,550,000 shares of series C
convertible preferred stock outstanding. The shares of mandatorily redeemable
series A preferred stock outstanding prior to this offering will be redeemed
upon the closing of this offering, the shares of series B convertible
preferred stock outstanding prior to this offering will be converted into
2,916,666 shares of common stock upon the closing of this offering and the
shares of series C convertible preferred stock outstanding prior to this
offering will be converted into 1,855,000, shares of common stock upon the
closing of this offering.
Common Stock
Holders of the common stock are entitled to receive, when and if declared by
the board, dividends and other distributions in cash, stock or property from
our assets or funds legally available for those purposes, subject to any
dividend preferences that may be attributable to preferred stock. Holders of
common stock are entitled to one vote for each share held of record on all
matters on which stockholders may vote. Holders of common stock are not
entitled to cumulative voting for the election of directors.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable. In the event of our liquidation, dissolution or
winding up, subject to any liquidation preferences that may be attributed to
preferred stock, holders of common stock are entitled to share ratably in the
assets available for distribution.
Based on the number of shares outstanding on February 15, 2000, after this
offering there will be 32,864,397 shares of common stock outstanding,
including 24,792,731 shares of common stock currently outstanding, 2,916,666
shares to be issued upon conversion of the series B convertible preferred
stock, 1,855,000 shares to be issued upon conversion of the series C
convertible preferred stock, and 3,300,000 shares to be issued in this
offering.
Preferred Stock
Upon the closing of this offering, 5,000,000 shares of preferred stock will
be authorized and no shares will be issued or outstanding. The board has the
authority, without further action by the stockholders, to issue the shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
and purchase fund provisions, and the number of shares constituting any series
and the designation of such series. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation. The issuance of preferred stock could also have the effect of
delaying, deferring or preventing a change in control. We have no present plan
to issue any additional shares of preferred stock.
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<PAGE>
Warrants
As of February 15, 2000, warrants to purchase up to 28,292 and 22,167 shares
of common stock were outstanding at a purchase price of $6.00 and $8.00 per
share, respectively. The warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise
of the warrant in the event of stock dividends, stock splits, reorganizations
and reclassifications and consolidations.
Anti-takeover Effects of our Certificate and Bylaws and Delaware law
Upon the closing of this offering, some provisions of Delaware law and our
certificate of incorporation and bylaws could make the following more
difficult:
. acquisition of Broadband Sports by means of a tender offer;
. acquisition of Broadband Sports by means of a proxy contest or
otherwise; or
. removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. For more information on
the classified board, see the section entitled "Management--Board
Composition." This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not
77
<PAGE>
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Cumulative voting provides for a minority stockholder to vote a portion or all
of its shares for one or more candidates for seats on the board of directors.
Without cumulative voting, a minority stockholder will not be able to gain as
many seats on our board of directors based on the number of shares of our
stock that such stockholder holds than if cumulative voting were permitted.
The elimination of cumulative voting makes it more difficult for a minority
stockholder to gain a seat on our board of directors to influence the board of
directors' decision regarding a takeover.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of
any attempt to change control of Broadband Sports. These and other provisions
may have the effect of deferring hostile takeovers or delaying changes in
control or management of Broadband Sports.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that our
directors are not personally liable for monetary damages to us or our
stockholders for breach of fiduciary duties as a director, except for
liability for:
. any breach of the duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of Delaware General Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of liability provided in the certificate of incorporation does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
Indemnification Agreements. Our certificate of incorporation and bylaws
authorize us to indemnify our directors, officers, employees and other agents,
by agreements or otherwise, to the fullest extent permitted under Delaware
law. We plan to enter into separate indemnification agreements with our
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require us, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers, to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
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<PAGE>
Indemnification under Bylaws. Our bylaws require us to indemnify our
directors, officers, employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence on the part of the indemnified party.
Indemnification under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors
and officers and persons that control us pursuant to the foregoing provisions,
or otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Pending indemnification proceedings. At present, there is no pending
litigation or proceeding involving any of our directors, officers, employees
or other agents where indemnification will be required or permitted. We are
not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
Registration Rights of Certain Holders
After this offering, the holders of approximately 24,509,304 shares of
common stock will be entitled to certain rights to register these shares under
the Securities Act of 1933 pursuant to an investors' rights agreement. These
holders all have "Piggyback" rights. If we propose to register any of our
common stock for our own account or for the account of other security holders,
the holders of these 24,509,304 shares of common stock are entitled to notice
of such registration and are entitled to include their shares in the
registration, subject to the ability of underwriters to limit the number of
shares included in the offering.
Subject to certain limitations in the investors' rights agreement, the
holders of an aggregate of 900,555 shares of common stock are also entitled to
demand registration rights pursuant to which the holders of at least a
majority of such shares may require us to use our best efforts to register
such shares for public resale. Any holder or holders of such shares may also
require us to register all or a portion of their registrable securities on
Form S-3 when we are eligible to use that form, provided, among other
limitations, that the proposed aggregate price to the public is at least
$500,000 and that we shall not have effected two of these in any 12-month
period.
We will bear all fees, costs and expenses of such registrations, other than
underwriting discounts and commissions.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company. Its address is 40 Wall Street, New York, NY 10005
and its telephone number at this location is (212) 936-5100.
Listing
We have applied to have the shares of common stock approved for quotation on
the Nasdaq National Market under the symbol "FANS."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
there can be no assurance that a significant public market for our common
stock will develop or be sustained after this offering. Future sales of
substantial amounts of our common stock, including shares issued upon exercise
of outstanding options and warrants, in the public market after this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Upon completion of this offering, based on the number of shares outstanding
on February 15, 2000, we will have 32,864,397 outstanding shares of common
stock, 33,359,397 shares if the underwriters exercise their over-allotment
option in full, assuming no exercise of outstanding warrants and options. Of
these shares, 3,300,000 shares, plus an additional 495,000 shares if the
underwriters exercise their over-allotment option in full, of common stock
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act unless purchased by our affiliates.
Approximately 29,564,397 shares held by our directors, officers and
shareholders are subject to "lock-up" agreements generally providing that,
these shareholders will not (1) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock or
(2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the common
stock, whether any of these transactions described in (1) or (2) are to be
settled by delivery of common stock or such other securities, in cash or
otherwise, for a period of 180 days following the date of the final prospectus
for this offering without the prior written consent of Morgan Stanley & Co.
Incorporated. The restrictions described in this paragraph do not apply to:
. the sale to the underwriters of the shares of common stock to be sold in
the offering;
. the issuance by us of shares of common stock upon the exercise of an
existing option or an existing warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing;
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
. issuances of certain shares of common stock or options to purchase
shares of common stock pursuant to our employee benefit plans as in
existence on the date of this prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (1) 1% of the number of shares of common stock then
outstanding, which will equal approximately 328,644 shares immediately after
this offering or (2) the average weekly trading volume of the
common stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 also are subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about us. Under Rule 144(k), a person who is not
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<PAGE>
deemed to have been an affiliate of Broadband Sports at any time during the
three months preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of
any prior owner except an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to Broadband Sports who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares.
As of the effective date of the registration statement, holders of 2,450,930
shares of common stock will be entitled to "piggyback" registration rights
with respect to their shares. Holders of 900,555 of these shares can also
require Broadband Sports to register their shares at any time following
180 days after the date of this prospectus, subject to certain conditions.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Hambrecht & Quist LLC and Bear,
Stearns & Co. Inc. are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the respective number
of shares of common stock set forth opposite the names of the underwriters
below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................
Hambrecht & Quist LLC.............................................
Bear, Stearns & Co. Inc. .........................................
---------
Total............................................................ 3,300,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions, including the absence of any material change in our business, and
the receipt of certain certificates, opinions and letters from us, our counsel
and the independent auditors. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus if any shares
are taken. However, the underwriters are not required to take or pay for the
share covered by the underwriters over-allotment option described below.
Morgan Stanley Dean Witter Online, Inc. is acting as a dealer in connection
with this distribution and will be the sole distributor of shares of common
stock over the Internet to its eligible account holders.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriters may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to certain
other dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
The following table summarizes the per share and total underwriting
discounts and commissions we will pay to the underwriters. These amounts are
equal to the difference between the initial public offering price and the
amount paid to us by the underwriters.
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
-------------- --------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.0 million.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 495,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
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The underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent such option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares of common stock as the number listed next to such underwriter's name in
the preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table.
At our request, the underwriters have reserved up to shares of common
stock to be issued by us and offered hereby for sale, at the initial public
offering price, to directors, officers, employees, members of their families,
business associates, friends of the company and other persons with whom we
have or may seek to establish strategic relationships. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these individuals purchase such reserved shares. Any reserved shares
that are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered by this prospectus.
Pursuant to the regulations of the National Association of Securities Dealers,
Inc., certain purchasers of the reserved shares may have to agree not to sell,
transfer, assign or hypothecate their shares for a period of 90 days after the
date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We, the directors, officers, shareholders and certain optionholders of ours
have agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, we will not, during the period
ending 180 days after the date of this prospectus, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise, after the date of
this prospectus.
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock to be sold in
the offering;
. the issuance by us of shares of common stock upon the exercise of an
existing option or an existing warrant or the conversion of a security
outstanding on the date of this prospectus, of which the underwriters
have been advised in writing;
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
. issuances of certain shares of common stock or options to purchase shares
of common stock pursuant to our employee benefit plans as in existence on
the date of this prospectus.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically,
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the underwriters may over-allot in connection with the offering, creating a
short position in the common stock for their own account. In addition, to
cover over-allotments or to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in the
offering if the syndicate repurchases previously distributed shares of common
stock in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
We have applied to have the shares of common stock approved for quotation on
the Nasdaq National Market under the symbol "FANS."
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The public offering price for the shares of common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be our record of operations, our current financial
position and future prospects and our industry in general, the experience of
our management, sales, earnings and certain of our other financial and
operating information in recent periods, the price-earnings ratios, price-
sales ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to ours. The estimated
public offering price range set forth on the cover page of this prospectus is
subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Morrison & Foerster LLP, Irvine, California. Certain matters in connection
with this offering will be passed upon for the Underwriters by Cooley Godward
LLP, San Francisco, California. Upon the completion of this offering, certain
attorneys of Morrison & Foerster LLP will beneficially own an aggregate of
16,667 shares of our common stock.
EXPERTS
The consolidated financial statements of Broadband Sports, Inc. as of
December 31, 1999 and 1998 and for the year ended December 31, 1999 and ten
months ended December 31, 1998 and the combined financial statements of the
Predecessor Companies for the year ended December 31, 1997 and the two months
ended February 27, 1998 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
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<PAGE>
ADDITIONAL INFORMATION
Broadband Sports has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered
hereby. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules that are a part of
the registration statement which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to
Broadband Sports and the common stock, reference is made to the registration
statement and the exhibits and schedules that are a part of the registration
statement. With respect to statements contained in this prospectus as to the
contents of any agreement or other document in each instance reference is made
to the copy of such agreement or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
You may read and copy any document we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. Our SEC filings are also available to the public from the
SEC's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934,
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms and the SEC's Web site, which is described above.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Broadband Sports, Inc.
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 and Pro Forma
Stockholders' Equity at December 31, 1999 (Unaudited).................... F-3
Combined Statements of Operations for the Predecessor Companies for the
the Year ended December 31, 1997 and the Two months ended February 27,
1998 and the Consolidated Statements of Operations of the Company for the
Ten months ended December 31, 1998 and the Year ended December 31, 1999.. F-4
Combined Statements of Cash Flows for the Predecessor Companies for the
Year ended December 31, 1997 and the Two months ended February 27, 1998
and the Consolidated Statements of Cash Flows of the Company for the Ten
months ended December 31, 1998 and the Year ended December 31, 1999...... F-5
Combined Statements of Owners' Equity for the Predecessor Companies for
the Year ended December 31, 1997 and the Two months ended February 27,
1998 and the Consolidated Statements of Stockholders' (Deficit) Equity of
the Company for the Ten months ended December 31, 1998 and the Year ended
December 31, 1999........................................................ F-6
Notes to Consolidated and Combined Financial Statements................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Broadband Sports, Inc.
We have audited the accompanying consolidated balance sheets of Broadband
Sports, Inc. (the "Company") as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' (deficit) equity, and
cash flows of the Company for the year ended December 31, 1999 and the ten
months ended December 31, 1998 and the combined statements of operations,
owners' equity, and cash flows of the Predecessor Companies for the year ended
December 31, 1997 and the two months ended February 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December
31, 1999 and 1998 and the results of operations and cash flows of the Company
for the year ended December 31, 1999 and the ten months ended December 31,
1998 and the results of operations and cash flows of the Predecessor Companies
for the year ended December 31, 1997 and the two months ended February 27,
1998, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Los Angeles, California
February 9, 2000
F-2
<PAGE>
Broadband Sports, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity at
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ -------------
(Unaudited)
(See Note 1)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 212,997 $ 18,373,878
Investments......................... 51,588 285,688
Accounts receivable, net............ 262,208 1,947,310
Advances and deferred incentives.... 421,414 990,705
Inventory........................... 17,223 425,287
Prepaid expenses and other current
assets............................. 33,929 1,993,482
----------- ------------
Total current assets.............. 999,359 24,016,350
Fixed assets, net..................... 200,099 2,125,678
Goodwill, net......................... 633,762 524,760
Advances and deferred incentives...... 503,509 2,348,538
Other assets.......................... 19,324 155,074
----------- ------------
Total assets...................... $ 2,356,053 $ 29,170,400
=========== ============
Liabilities and stockholders'
(deficit) equity
Current liabilities:
Accounts payable.................... $ 153,364 $ 668,149
Accrued liabilities................. 438,540 2,937,545
Deferred revenues................... 4,000 --
----------- ------------
Total current liabilities......... 595,904 3,605,694
Revolving loan due to stockholder..... 1,998,085 4,468,085
Capital lease obligation.............. -- 245,918
Commitments and contingencies (Note
10)..................................
Mandatorily redeemable series A
preferred stock, $0.001 par value,
2,000,000 shares authorized, issued
and outstanding December 31, 1998 and
1999; none issued or outstanding pro
forma................................ 2,150,000 2,330,000 $ --
Stockholders' equity (deficit):
Series B convertible preferred
stock; $0.001 par value, no shares
authorized December 31, 1998;
34,000,000 shares authorized,
29,166,663 shares issued and
outstanding December 31, 1999; no
shares authorized, issued or
outstanding pro forma.............. -- 16,519,487 --
Series C convertible preferred
stock; $0.001 par value, no shares
authorized December 31, 1998,
20,000,000 shares authorized,
18,550,000 issued and outstanding
December 31, 1999; no shares
authorized, issued or outstanding
pro forma.......................... -- 14,840,000 --
Common stock, $0.001 par value,
235,294,118 shares authorized,
21,703,750 issued and outstanding
December 31, 1998; 306,000,000
shares authorized, 24,742,731
issued and outstanding December 31,
1999; 29,514,397 issued and
outstanding pro forma.............. 21,704 24,743 29,515
Additional paid-in capital.......... 3,750,328 31,394,026 62,748,741
Receivable from stockholders........ -- (16,700,906) (16,700,906)
Deferred stock compensation......... (1,804,189) (5,404,567) (5,404,567)
Accumulated deficit................. (4,355,779) (22,152,080) (22,152,080)
----------- ------------ ------------
Total stockholders' (deficit)
equity........................... (2,387,936) 18,520,703 18,520,703
----------- ------------ ------------
Total liabilities and
stockholders' (deficit) equity... $ 2,356,053 $ 29,170,400 $ 26,840,400
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Broadband Sports, Inc.
Consolidated Statements of Operations
and the Predecessor Companies Combined Statements of Operations
<TABLE>
<CAPTION>
Predecessor Companies
-------------------------
Two months Ten months
Year ended ended ended Year ended
December 31, February 27, December 31, December 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................ $1,873,930 $ 507,224 $ 2,718,628 $ 8,734,182
Cost of revenues........ 1,300,062 296,401 2,035,669 6,363,939
---------- --------- ----------- ------------
Gross profit............ 573,868 210,823 682,959 2,370,243
Operating expenses:
Sales and marketing... 154,487 69,290 592,102 7,244,393
Product development... 22,000 8,822 136,682 1,269,746
General and
administrative....... 671,946 136,117 1,536,967 7,000,948
Depreciation.......... 15,195 3,678 43,246 489,324
Amortization of
goodwill............. -- -- 243,754 363,076
Amortization of
deferred stock
compensation and
deferred incentives.. 413,510 149,613 2,413,317 3,781,901
---------- --------- ----------- ------------
Total operating
expenses............... 1,277,138 367,520 4,966,068 20,149,388
---------- --------- ----------- ------------
Operating loss.......... (703,270) (156,697) (4,283,109) (17,779,145)
Interest income......... 3,056 -- -- 345,343
Interest expense........ -- -- (66,962) (362,499)
Other expense........... -- -- (5,708) --
---------- --------- ----------- ------------
Net loss................ $ (700,214) $(156,697) $(4,355,779) $(17,796,301)
========== ========= =========== ============
Historical loss per
share-- basic and
diluted................ $ .20 $ .82
=========== ============
Pro forma loss per
share--basic and
diluted ............... $ .20 $ .75
=========== ============
Weighted average common
and common equivalent
shares outstanding
Historical............ 21,703,750 21,782,753
=========== ============
Pro forma............. 21,703,750 23,728,835
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Broadband Sports, Inc.
Consolidated Statements of Cash Flows
and the Predecessor Companies Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Predecessor Companies
-------------------------
Two months Ten months Year
Year ended ended ended ended
December 31, February 27, December 31, December 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating activities
Net loss.................. $(700,214) $(156,697) $(4,355,779) $(17,796,301)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization of
goodwill................ 15,195 3,678 287,000 852,400
Amortization of deferred
stock compensation and
deferred incentives..... 413,510 149,613 2,413,317 3,781,901
Stock compensation
expense................. -- -- 8,519 --
Changes in operating
assets and liabilities:
Accounts receivable...... (172,497) 16,643 (79,556) (1,685,102)
Inventory................ (4,002) (1,925) (11,296) (408,064)
Prepaid expenses and
other assets............ (37,619) 12,000 (22,514) (1,592,400)
Accounts payable......... 68,763 45,596 39,005 514,785
Accrued liabilities...... 149,687 (61,605) 275,000 2,054,452
Deferred revenue......... (141,000) (43,500) 1,000 (4,000)
--------- --------- ----------- ------------
Net cash used in operating
activities............... (408,177) (36,197) (1,445,304) (14,282,329)
Investing activities
Purchase of property and
equipment................ (39,029) (5,278) (190,113) (2,079,082)
Acquisitions, net of cash
acquired................. -- -- (2,198,083) (256,074)
Purchase of investments... -- -- (51,588) (234,100)
--------- --------- ----------- ------------
Net cash used in investing
activities............... (39,029) (5,278) (2,439,784) (2,569,256)
Financing activities
Capital contributions..... 242,737 -- -- --
Issuance of common stock.. -- -- 100,000 3,032,979
Issuance of mandatorily
redeemable preferred
stock.................... -- -- 2,000,000 --
Issuance of convertible
preferred stock.......... -- -- -- 29,509,487
Proceeds from revolving
loan due to stockholder.. -- -- 1,998,085 2,470,000
--------- --------- ----------- ------------
Net cash provided by
financing activities..... 242,737 -- 4,098,085 35,012,466
--------- --------- ----------- ------------
Net increase (decrease) in
cash and cash
equivalents.............. (204,469) (41,475) 212,997 18,160,881
Cash and cash equivalents
at beginning of the
period................... 257,825 53,356 -- 212,997
--------- --------- ----------- ------------
Cash and cash equivalents
at end of the period..... $ 53,356 $ 11,881 $ 212,997 $ 18,373,878
========= ========= =========== ============
Supplemental disclosure of
cash flow information:
Cash paid for:
Interest................. $ -- $ -- $ 33,605 $ 351,231
========= ========= =========== ============
Income taxes............. $ -- $ -- $ -- $ --
========= ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Broadband Sports, Inc.
Consolidated Statements of Stockholders' (Deficit) Equity and the
Predecessor Companies Combined Statements of Owners' Equity
<TABLE>
<CAPTION>
Series C Series B
Preferred Stock Preferred Stock Common Stock Additional Deferred
---------------------- ---------------------- ------------------ Paid-in Stock Owners'
Shares Amount Shares Amount Shares Amount Capital Compensation Equity
---------- ----------- ---------- ----------- ---------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997.. -- $ -- -- $ -- -- $ -- $ -- $ -- $ 909,257
Capital
contributions... -- -- -- -- -- -- -- -- 242,737
Deferred
incentives...... -- -- -- -- -- -- -- -- 1,051,034
Deferred stock
compensation.... -- -- -- -- -- -- -- (504,700) 504,700
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- -- 127,872 --
Net loss........ -- -- -- -- -- -- -- -- (700,214)
---------- ----------- ---------- ----------- ---------- ------- ----------- ----------- ----------
Balance at
December 31,
1997............. -- -- -- -- -- -- -- (376,828) 2,007,514
Deferred
incentives...... -- -- -- -- -- -- -- -- 51,833
Deferred stock
compensation.... -- -- -- -- -- -- -- (61,800) 61,800
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- -- 42,743 --
Net loss........ -- -- -- -- -- -- -- -- (156,697)
---------- ----------- ---------- ----------- ---------- ------- ----------- ----------- ----------
Balance at
February 27,
1998............. -- $ -- -- $ -- -- $ -- $ -- $ (395,885) $1,964,450
========== =========== ========== =========== ========== ======= =========== =========== ==========
Issuance of
common stock.... -- $ -- -- $ -- 20,000,000 $20,000 $ 80,000 $ --
Issuance of
common stock.... -- -- -- -- 1,703,750 1,704 6,815 --
Deferred
incentives...... -- -- -- -- -- -- 52,833 --
Deferred stock
compensation.... -- -- -- -- -- -- 3,760,680 (3,760,680)
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 1,956,491
Accretion of
dividends
payable for
mandatorily
redeemable
series A
preferred
stock........... -- -- -- -- -- -- (150,000) --
Net loss........ -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ------- ----------- -----------
Balance at
December 31,
1998............. -- -- -- -- 21,703,750 21,704 3,750,328 (1,804,189)
Issuance of
common stock.... -- -- -- -- 3,038,981 3,039 18,230,846 --
Issuance of
Series B
convertible
Preferred
Stock........... -- -- 29,166,663 16,519,487 -- -- -- --
Issuance of
Series C
convertible
Preferred
Stock........... 18,550,000 14,840,000 -- -- -- -- -- --
Issuance of
warrants ....... -- -- -- -- -- -- 252,904 --
Deferred
incentives ..... -- -- -- -- -- -- 2,585,308 --
Deferred stock
compensation ... -- -- -- -- -- -- 6,754,640 (6,754,640)
Amortization of
deferred stock
compensation ... -- -- -- -- -- -- -- 3,154,262
Accretion of
dividends
payable for
mandatorily
redeemable
series A
preferred
stock........... -- -- -- -- -- -- (180,000) --
Net loss ....... -- -- -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ------- ----------- -----------
Balance at
December 31,
1999............. 18,550,000 $14,840,000 29,166,663 $16,519,487 24,742,731 $24,743 $31,394,026 $(5,404,567)
========== =========== ========== =========== ========== ======= =========== ===========
<CAPTION>
Receivable
from Accumulated
Stockholders Deficit Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance at
January 1, 1997.. $ -- $ -- $ 909,257
Capital
contributions... -- -- 242,737
Deferred
incentives...... -- -- 1,051,034
Deferred stock
compensation.... -- -- --
Amortization of
deferred stock
compensation ... -- -- 127,872
Net loss........ -- -- (700,214)
============= ------------- -------------
Balance at
December 31,
1997............. -- -- 1,630,686
Deferred
incentives...... -- -- 51,833
Deferred stock
compensation.... -- -- --
Amortization of
deferred stock
compensation ... -- -- 42,743
Net loss........ -- -- (156,697)
============= ------------- -------------
Balance at
February 27,
1998............. $ -- $ -- $ 1,568,565
============= ============= =============
Issuance of
common stock.... $ -- $ -- $ 100,000
Issuance of
common stock.... -- -- 8,519
Deferred
incentives...... -- -- 52,833
Deferred stock
compensation.... -- -- --
Amortization of
deferred stock
compensation.... -- -- 1,956,491
Accretion of
dividends
payable for
mandatorily
redeemable
series A
preferred
stock........... -- -- (150,000)
Net loss........ -- (4,355,779) (4,355,779)
------------- ------------- -------------
Balance at
December 31,
1998............. -- (4,355,779) (2,387,936)
Issuance of
common stock.... (15,200,906) -- 3,032,979
Issuance of
Series B
convertible
Preferred
Stock........... -- -- 16,519,487
Issuance of
Series C
convertible
Preferred
Stock........... (1,500,000) -- 13,340,000
Issuance of
warrants ....... -- -- 252,904
Deferred
incentives ..... -- -- 2,585,308
Deferred stock
compensation ... -- -- --
Amortization of
deferred stock
compensation ... -- -- 3,154,262
Accretion of
dividends
payable for
mandatorily
redeemable
series A
preferred
stock........... -- -- (180,000)
Net loss ....... -- (17,796,301) (17,796,301)
------------- ------------- -------------
Balance at
December 31,
1999............. $(16,700,906) $(22,152,080) $ 18,520,703
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements
December 31, 1999
1. Company Formation, Business and Basis of Presentation
Broadband Sports, Inc. ("Broadband Sports" or the "Company") was
incorporated in the state of Delaware on February 20, 1998 and commenced
operations on February 28, 1998. Athlete Direct LLC began operations in
September 1996. Pro Sports Xchange LLC began operations in February 1996.
In connection with the formation of Broadband Sports, Athlete Direct, Inc.
("Athlete Direct") and Pro Sports Xchange, Inc. ("Pro Sports Xchange") were
incorporated on February 27, 1998. On February 27, 1998, Athlete Direct LLC
was merged with and into Athlete Direct, Inc. and each 1% membership interest
was exchanged for 700,000 shares of common stock of Athlete Direct, Inc. On
February 27, 1998, Pro Sports Xchange LLC was merged with and into Pro Sports
Xchange, Inc. and each 1% membership interest was exchanged for 1,000,000
shares of common stock of Pro Sports Xchange, Inc. On February 27, 1998,
Broadband Sports purchased all of the outstanding common stock of Athlete
Direct, Inc. and Pro Sports Xchange, Inc. for a combined purchase price of
$2,209,964 (including acquisition costs of $169,964).
The acquisitions have been accounted for as purchase transactions;
accordingly, the fair market value assigned in each acquisition was allocated
to the net assets acquired based on their estimated fair market values. The
determination of the aggregate cost in excess of net assets acquired is set
forth below:
<TABLE>
<S> <C>
Current assets.................................................. $ 765,012
Non-current assets.............................................. 848,335
Cost in excess of net assets acquired........................... 877,516
Current liabilities............................................. 277,899
Non-current liabilities......................................... 3,000
</TABLE>
The cost in excess of net assets acquired in the acquisitions has been
allocated to goodwill and is being amortized using the straight-line method
over three years. The accompanying consolidated financial statements include
the results of operations since the effective date of the acquisitions.
Through its wholly-owned subsidiary, Pro Sports Xchange, the Company,
through its network of local and regional sports writers, produces original,
in-depth content covering major professional sports (e.g. football, baseball,
basketball, and hockey) as well as major Division I College Sports (e.g.
basketball and football). Through its wholly owned subsidiary, Athlete Direct,
the Company develops and aggregates individual athlete sites under the Athlete
Direct branded network, creating an online destination for sports fans to
obtain information about, interact with, and purchase products relating to
their favorite athletes. The Company currently derives its revenue from four
major revenue streams: content syndication, advertising, electronic commerce
and subscriptions.
On February 26, 1999, the Company purchased certain assets and liabilities
of Manna Mir Research, Inc. ("Manna Mir") for $225,000 in cash and contingent
consideration of up to an additional $205,000. Manna Mir operates a fantasy
sports-related Web site under the name RotoNews.
F-7
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
1. Company Formation, Business and Basis of Presentation--(Continued)
The Company has only a limited operating history and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets. These risks include, among
others, the Company's ability to provide sports-related content and commerce,
maintain existing and develop new strategic relationships, successfully market
the www.athletedirect.com Web site, achieve and maintain projected levels of
online traffic, build an electronic commerce infrastructure, increase its
fulfillment capabilities and extend its brands.
Basis of Presentation
The consolidated financial statements as of December 31, 1998 and 1999 and
for the ten months ended December 31, 1998 and the year ended December 31,
1999, include the accounts of Broadband Sports and its majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
The combined financial statements of Athlete Direct LLC and Pro Sports
Xchange LLC (the "Predecessor Companies") for the year ended December 31, 1997
and the two months ended February 27, 1998, have been prepared on a combined
basis due to the respective companies' common ownership. All capital
contributions to the Predecessor Companies from the LLC members have been
recorded as owner's equity in stockholders' equity. Earnings per share have
not been presented for the Predecessor Companies as the presentation would not
be meaningful due to the significant change in the capital structure of the
Predecessor Companies following their acquisitions. All significant balances
and transactions between the Predecessor Companies have been eliminated in the
combined financial statements. The financial statements of the Predecessor
Companies do not necessarily reflect the results of operations or financial
position that would have existed had the companies operated as a single
consolidated entity.
The pro forma stockholders' equity at December 31, 1999 has been presented
to reflect the conversion of 18,550,000 shares of series C convertible
preferred stock and 29,166,663 shares of series B convertible preferred stock
into an aggregate of 4,771,666 shares of common stock and the redemption of
the mandatorily redeemable series A preferred stock in connection with the
change in capitalization that will occur upon the occurrence of an initial
public offering with net proceeds to the Company that exceed $15,000,000 (for
Series B and Series C conversion) or $10,000,000 (for Series A redemption).
2. Significant Accounting Policies
Revenue Recognition
Content syndication revenue is recognized over the period of the content
syndication agreement as the Company delivers its content. Advertising revenue
is recognized ratably over the period in which the advertising is displayed,
provided that no significant obligations remain and collection of
F-8
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
2. Significant Accounting Policies--(Continued)
the resulting receivable is probable. Company obligations may include
guarantees of a minimum number of "impressions" or times that an advertisement
appears in page views downloaded by users. In the event impressions are not
delivered in accordance with the contractual terms, the Company will provide
additional impressions to make up the shortfall. To date all impressions have
been delivered in accordance with the contractual commitments. Revenues from
electronic commerce is recognized once the product has been shipped and
collection of the resulting receivable is probable. Subscription revenue is
recognized ratably over the subscription period, which is often a professional
sports season. Subscriptions are charged directly to the customers' credit
card and are billed in advance. Accordingly, amounts received for which
services have not yet been provided are recorded as deferred revenues. During
the year ended December 31, 1999, the Company entered into certain agreements
whereby it received nonmonetary benefits. Revenues were recognized at fair
value based on the Company's history of receiving cash for similar
transactions. (See Note 11).
Advances
The Company and the Predecessor Companies have entered into various
licensing, royalty, distribution, and consulting agreements with various
online sites, vendors and other non-employees. Additionally, some agreements
provide for a specified percentage of advertising and merchandising revenue to
be paid to non-employees from whose online site the revenue is derived. The
agreements provide for the payment of royalties, bounties, and certain
guaranteed amounts on a per member and/or minimum dollar amount basis. These
non-employees are also required to provide certain marketing services pursuant
to their agreements. In some cases these guarantees provide for minimum
payment for a specified period of time in advance of the advertising and
merchandising revenues received and marketing services provided. The Company
records these minimum payments as advances and amortizes them over the term of
the contracts with the portion of the advances attributable to the percentage
of advertising and merchandising revenues earned recognized as a cost of
revenues and any excess amortization being recognized as sales and marketing
expense.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Investments
At December 31, 1998 and 1999, short-term investments consist of debt
instruments with maturity dates less than one year. The Company accounts for
investments in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's short-term investments are classified as held-to-
maturity as of the balance sheet date and are reported at amortized cost.
F-9
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
2. Significant Accounting Policies--(Continued)
Inventory
Inventory consists primarily of licensed sports-related merchandise and
collectibles and is stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost and
depreciated using the straight-line method over its estimated useful life,
ranging from three to seven years. Property and equipment consist primarily of
computers, software, furniture, and equipment. Upon the sale or retirement of
assets, the cost and accumulated depreciation are removed from the account and
any gain or loss is recognized. Maintenance and repairs are charged to expense
when incurred.
Product Development
Product development expenses consist of expenses incurred by the Company in
the development and creation of its Web sites. Product development expenses
include compensation and related expenses, and costs incurred in developing
features and functionality of the service. Product development costs are
expensed as incurred.
Advertising
Advertising costs are expensed as incurred. The Company incurred advertising
costs of $2,000, $345,000 and $612,000 for the year ended December 31, 1997,
the ten months ended December 31, 1998, and the year ended December 31, 1999,
respectively.
Income Taxes
Prior to the acquisitions, the federal and state taxable income or loss of
Athlete Direct LLC and Pro Sports Xchange LLC were recognized on the separate
tax returns of the LLC members. Current and deferred taxes have not been
provided on a pro forma basis because the effects are insignificant.
The Company adopted SFAS No. 109 "Accounting for Income Taxes" on February
20, 1998. Accordingly, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
Impairment of Long-Lived Assets and Intangibles
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of," the Company
periodically reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate
F-10
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
2. Significant Accounting Policies--(Continued)
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows (on an undiscounted basis) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Loss Per Share
Historical net loss per share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Due to the
anti-dilutive effects of common stock equivalents, historical basic and
diluted loss per share are the same.
Pro forma loss per share gives effect to the conversion of the series B and
series C convertible preferred stock into an aggregate of 4,771,666 shares of
common stock as having been outstanding from the issuance date of May 25, 1999
and November 24, 1999, respectively.
Stock Based Compensation
The Company is subject to SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). As allowed by SFAS No. 123, the Company
accounts for stock based compensation to employees in accordance with APB 25,
"Accounting for Stock Issued to Employees." In cases where exercise prices are
less than the fair value as of the grant date, compensation expense is
recognized over the vesting period. The Company accounts for options issued to
its vendors and non-employees based upon the fair value of the services
received or the fair value of options, whichever is more determinable.
Unaudited pro forma financial information, assuming that the Company had
adopted the measurement standards of SFAS No. 123, is included in Note 9.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. Cash is
deposited with high-credit, quality financial institutions and may exceed
F.D.I.C. insured limits. The Company's accounts receivable are generally
unsecured and are derived from revenue earned from customers located in the
U.S. and are denominated in U.S. dollars.
America Online, Inc. ("AOL") accounted for approximately 47%, 49%, 46% and
44% of revenue for the year ended December 31, 1997, the two months ended
February 27, 1998, the ten months ended December 31, 1998, and the year ended
December 31, 1999, respectively. AOL accounted for approximately 59% and 14%
of accounts receivable at December 31, 1998 and 1999, respectively.
F-11
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
2. Significant Accounting Policies--(Continued)
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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Segments and Related Information
The Company views its operations as principally one segment and the
financial information disclosed herein materially represents all of the
financial information related to the Company's principal operating segment.
The Company manages its media divisions as one combined entity, allocates
resources and analyzes information used to operate the business on a combined
basis.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes the standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on available-for-
sale securities. The Company had no comprehensive income items to report for
any of the periods presented.
F-12
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Computers and equipment........................... $138,353 $1,609,290
Software and computer applications................ 96,036 669,299
Furniture and fixtures............................ 8,956 12,473
Capital leases.................................... -- 333,821
Leasehold improvements............................ -- 3,783
-------- ----------
243,345 2,628,666
Less accumulated depreciation and amortization.... (43,246) (502,988)
-------- ----------
$200,099 $2,125,678
======== ==========
</TABLE>
During the ten months ended December 31, 1998 and the year ended December
31, 1999, the Company wrote off fully amortized fixed assets with a gross
value of $21,653 and $29,582, respectively.
4. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Accrued compensation............................... $ -- $ 341,785
Initial public offering costs...................... -- 501,432
Professional fees.................................. 69,030 464,625
Accrued royalties and content costs................ 317,906 325,630
Accrued facility costs............................. -- 678,136
Other.............................................. 51,604 625,937
-------- ----------
$438,540 $2,937,545
======== ==========
</TABLE>
5. Revolving Loan Due to Stockholder
On February 27, 1998, the Company entered into a Revolving Loan Agreement
("Revolving Loan") with a stockholder whereby the stockholder made available
to the Company $4,500,000. All amounts borrowed under the Revolving Loan are
secured by, among other things, accounts and notes receivable, inventory,
equipment, licensing agreements, and intellectual property of the Company.
Amounts borrowed under the Revolving Loan bear interest at the prime rate plus
1% (9.5% at December 31, 1999) and are payable monthly on the last day of the
month. All amounts borrowed under the Revolving Loan mature and are payable
the earlier of February 27, 2003 or upon the occurrence of other
reorganization transactions including an initial public offering which results
in net proceeds to the Company of at least $10 million. The Revolving Loan
contains covenants and other restrictions with which the Company must comply,
including, among others, restrictions on additional indebtedness and payment
of dividends. The Company was in compliance with these covenants at December
31, 1999. As of December 31, 1999, the Company had $31,915 available to be
drawn under the revolving loan agreement.
F-13
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
6. Preferred Stock
Mandatorily Redeemable Series A Preferred Stock
On February 27, 1998, the Company entered into a Series A Preferred Stock
Purchase Agreement with a shareholder whereby the Company agreed to sell and
issue to the shareholder 2,000,000 shares of the Company's Mandatorily
Redeemable Series A Preferred Stock ("Series A") at a purchase price of $1.00
per share. The Series A has no voting rights except on items that directly may
adversely impact the Series A stockholders. Dividends accumulate at $0.09 per
share per year from the date of issuance and are payable upon the occurrence
of a liquidation event, as defined. The Series A has a liquidation preference
of $1.00 per share, plus all declared, or undeclared but accumulated and
unpaid dividends on such shares. The Series A shall be redeemed for $1.00 per
share plus all declared, or undeclared but accumulated and unpaid dividends,
upon the occurrence of either i) a sale of a 50% interest of the Company, or
ii) an initial public offering of net proceeds of at least $10 million. The
Company increased the carrying value of the Series A by $150,000 and $180,000
for the ten months ended December 31, 1998 and the year ended December 31,
1999, respectively, to account for the accretion of undeclared but accumulated
and unpaid dividends.
Series B Convertible Preferred Stock
In May 1999, the Company issued the series B convertible preferred stock
("Series B"), $0.001 par value which resulted in net proceeds of approximately
$16,500,000, representing 29,166,663 shares issued and outstanding at $0.60
per share. The holders of shares of Series B are entitled to receive dividends
at the rate of $0.054 per share per year if declared by the Board of
Directors. Such dividends are not cumulative. Each share of Series B is
convertible into fully paid and nonassessable shares of common stock as
determined by dividing $0.60 by the Series B conversion price, as defined. In
the event of a public offering of the Company's common stock that exceeds
$15,000,000 all outstanding shares of series B preferred stock will
automatically be converted into common stock.
Series C Convertible Preferred Stock
In November 1999, the Company issued the series C convertible preferred
stock ("Series C"), $0.001 par value, consisting of 20,000,000 authorized
shares. The holders of shares of Series C are entitled to receive dividends at
the rate of $0.072 per share per year if declared by the Board of Directors.
Such dividends are not cumulative. The Company issued the Series C resulting
in net proceeds of $14,490,000, representing 18,550,000 shares issued and
outstanding at $0.80 per share. Each share of Series C is convertible to fully
paid and nonassessable shares of common stock as determined by dividing $0.80
by the Series C conversion price, as defined. In the event of a public
offering of the Company's common stock which results in net proceeds to the
Company of at least $15,000,000, all outstanding shares of Series C will
automatically be converted into common stock. The Company issued 4,375,000
shares valued at $350,000 to third parties for services rendered.
Upon the occurrence of a liquidation event, as defined, any remaining assets
of the Company, after payment in full of the liquidation preference of the
Series A, will be distributed pro rata to holders of the Series B, Series C
preferred stock and common stock based on the number of shares of common stock
held by each (assuming full conversion of the Series B and the Series C).
F-14
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
7. Stockholders' Equity
On February 27, 1998, the Board of Directors approved the employment
agreements of two employees which included the issuance of 1,703,750 shares of
common stock on April 1, 1998 at a purchase price of $8,519. The fair value of
the shares issued in exchange for services provided to the Company was
recorded as compensation expense.
On December 4, 1998, the Company's Articles of Incorporation were amended
increasing the amount of shares the Company is authorized to issue to
235,294,118 shares reflecting a 20-for-1 common stock split approved by the
Board of Directors. Par value remained unchanged at $0.001 per share.
In May 1999, the Company amended its Certificate of Incorporation to, among
other matters, increase the authorized number of shares of common and
preferred stock to 300,000,000 and 50,000,000, respectively. In November,
1999, the Company further amended its Certificate of Incorporation to increase
the authorized number of shares of common and preferred stock to 306,000,000
and 56,000,000, respectively.
In November, 1999, the Company entered into an employment agreement with its
Chairman and Chief Executive Officer. In connection with the employment
agreement, the Company has issued 3,038,981 shares of common stock at $6.00
per share. The purchase price for the shares was paid in cash and through
issuance of a secured recourse promissory note ("Promissory Note") by the
Company in the amount of $15,200,906. The Promissory Note bears interest at a
rate of 6.02% per year. Principal and interest payments are due in full no
later than on the ten year anniversary of the Promissory Note. Of the
3,038,981 shares issued, 758,844 shares vested immediately and the remaining
2,280,137 shares will vest in equal monthly installments over the next four
years, allowing for certain exceptions.
The Company's Board of Directors has authorized management to file a
registration statement with the Securities and Exchange Commission to permit
the Company to sell shares of its common stock to the public. The Company's
Board of Directors intends to declare a 1 to 10 reverse stock split for each
share of common stock then outstanding to become effective upon the occurrence
of an initial public offering. Accordingly, the accompanying financial
statements and footnotes have been retroactively restated to reflect the
reverse stock split.
8. Income Taxes
The Predecessor Company was formed as a limited liability company and was
treated as a partnership for income tax purposes. As such, the individual LLC
members recorded on their individual tax returns their allocated portion of
federal and state taxable income and expenses and accordingly the Predecessor
Companies were not subject to federal and state income taxation.
The Company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception. As a
result of the net operating losses, the provision for income taxes consists
solely of minimum state taxes which has been included in general and
administrative expense.
F-15
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
8. Income Taxes--(Continued)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate.
<TABLE>
<CAPTION>
Ten months For the Year
ended ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Statutory federal income tax benefit............... (34)% (34)%
State income tax benefit........................... (2) (5)
Valuation allowance................................ 17 32
Non-deductible stock compensation.................. 16 6
Non-deductible goodwill amortization............... 3 1
--- ---
-- % -- %
=== ===
</TABLE>
The components of deferred tax assets and related valuation allowance are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 648,000 6,030,000
Stock compensation................................... 363,000 1,083,000
Other................................................ 120,000 456,000
----------- ----------
1,131,000 7,569,000
Less valuation allowance............................. (1,131,000) (7,569,000)
----------- ----------
Net deferred tax assets................................ $ -- $ --
=========== ==========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the net deferred
tax assets in future tax returns, the Company has placed a valuation allowance
equal to its net deferred tax assets.
At December 31, 1998 and 1999, the Company has net operating losses for both
federal and state income tax purposes of approximately $1.6 million and $15.0
million respectively, which are available to offset future taxable income, if
any, through 2020 and 2006, respectively.
9. Equity Incentive Plan
On December 4, 1998, the Board of Directors and stockholders of the Company
adopted the 1998 Equity Incentive Plan (the "Equity Incentive Plan"). The
Incentive Plan provides for the granting, at the discretion of an
administrator as appointed by the Board of Directors, of up to 15% of the
number of shares of the Company's common stock authorized for issuance. Each
grant of options under the Equity Incentive Plan vest on a case-by-case basis
as approved by the administrator, generally over a range of two to eight years
from the date of grant and expire not more than 10 years from the date of
grant.
In January 2000, the Board of Directors and stockholders approved the 2000
Stock Incentive Plan (the "Stock Incentive Plan"). In January 2000, a total of
7,100,975 shares of common stock were reserved for issuance under the 2000
Stock Incentive Plan. This number will be increased annually by
F-16
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
9. Equity Incentive Plan--(Continued)
a number equal to the lesser of three percent of the number of shares of
common stock outstanding as of December 31 of the immediately preceding
calendar year or a number to be determined by the Company's Board of
Directors. The maximum term of any stock option granted under the Stock
Incentive Plan is ten years, with certain exceptions. Employee grants
generally become exercisable at the rate of 25% per year over four years; non-
employee grants generally become exercisable at the rate of 20% per year over
five years. The Stock Incentive Plan will terminate in 2010, unless earlier
terminated by the Board of Directors.
In January 2000, the Board of Directors and stockholders approved the 2000
Employee Stock Purchase Plan (the "Stock Purchase Plan"). An aggregate of
400,000 shares of common stock were reserved for issuance under the Stock
Purchase Plan and made available for purchase thereunder, subject to
adjustment in the event of a stock split, stock dividend or other similar
change in the common stock or the Company's capital structure. All of the
Company's employees whose customary employment is for more than five months in
any calendar year and more than 20 hours per week are eligible to participate
in the Stock Purchase Plan.
Deferred stock compensation for employees and deferred incentives for non-
employees represent the fair value of options that have been granted to
employees and non-employees during 1998 and 1999. Such amounts were recorded
as deferred stock compensation in stockholders' equity for employees and
deferred incentives for non-employees. The Company calculated the fair value
of each option to non-employees on the date of grant using an option pricing
model as prescribed by SFAS No. 123. The fair value of options granted to
non-employees is evenly amortized from the beginning of the service period.
Amounts recorded for options granted to employees represent the difference
between the grant price and the deemed fair value of the Company's common
stock based on a recent common stock equity transaction. The following table
outlines total deferred stock compensation for employees and deferred
incentives for non-employees for all periods presented:
<TABLE>
<CAPTION>
Predecessor Companies
-------------------------
Two months Ten months
Year ended ended ended Year ended
December 31, February 27, December 31, December 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Employees............... $ 504,700 $ 61,800 $3,364,795 $6,754,640
Non-employees........... 1,051,034 51,833 52,833 2,585,308
---------- -------- ---------- ----------
Total................. $1,555,734 $113,633 $3,417,628 $9,339,948
========== ======== ========== ==========
</TABLE>
All amortization of deferred stock compensation related to employees and
deferred incentives related to non-employees has been aggregated and shown as
a separate line item in the statements of operations.
F-17
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
9. Equity Incentive Plan--(Continued)
A summary of changes in outstanding options under the Equity Incentive Plan
is as follows:
<TABLE>
<CAPTION>
Employees Non-employees Total
--------------------- --------------------- ---------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
February 28, 1998...... -- $ -- -- $ -- -- $ --
Granted................. 791,235 0.16 426,250 0.15--9.00 1,217,485 0.15--9.00
Exercised............... -- -- -- -- -- --
Cancelled............... 24,000 0.15 -- -- 24,000 0.15
--------- ----------- --------- ----------- --------- -----------
Outstanding at
December 31, 1998...... 767,235 0.16 426,250 0.15--9.00 1,193,485 0.15--9.00
Granted................. 1,674,264 0.30--6.00 824,450 3.50--9.00 2,498,714 0.30--9.00
Exercised............... -- -- -- -- -- --
Cancelled............... 94,050 0.15--6.00 106,000 9.00 200,050 0.15--9.00
--------- ----------- --------- ----------- --------- -----------
Outstanding at December
31, 1999............... 2,347,449 $0.15--6.00 1,144,700 $0.15--9.00 3,492,149 $0.15--9.00
========= =========== ========= =========== ========= ===========
</TABLE>
Options available for future grant totaled 2,335,926 and 37,263 at December
31, 1998 and December 31, 1999, respectively. The weighted average fair value
of options granted during 1998 and 1999 were $5.30 and $6.78 respectively.
F-18
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
9. Equity Incentive Plan--(Continued)
The weighted average exercise prices for options granted and exercisable and
the weighted average remaining contractual life for options outstanding, are
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Price Shares Life (Years) Price Shares Price
- -------------------------- --------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Employees
$0.15................... 767,235 9.3 $0.15 400,971 $ 0.15
Non-employees
$0.15-0.16.............. 379,500 8.2 $0.15 115,675 $ 0.15
1.20................... 10,000 8.2 1.20 2,000 1.20
3.50................... 23,750 9.6 3.50 -- --
9.00................... 13,000 9.4 9.00 -- --
December 31, 1999
Employees
$0.15................... 760,235 8.3 $0.15 507,890 $ 0.15
0.30................... 313,630 9.1 0.30 36,280 0.30
1.84................... 42,500 9.3 1.84 -- --
6.00................... 1,231,084 9.8 6.00 -- --
Non-employees
$0.15-0.16.............. 379,500 7.3 $0.15 264,425 $0. 15
1.20................... 10,000 7.2 1.20 4,000 1.20
3.50................... 61,750 9.1 3.50 3,250 3.50
5.30................... 50,000 9.4 5.30 50,000 5.30
6.00................... 566,250 9.8 6.00 -- --
9.00................... 77,200 9.4 9.00 -- --
</TABLE>
SFAS No. 123 requires disclosure of pro forma net loss and pro forma basic
and diluted loss per share based upon the fair value of the options issued.
The Company calculated the fair value of each option grant on the date of the
grant using an option pricing model as prescribed by SFAS No. 123 using the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate................. 5.5%
Expected life (in years)................ 5
Dividend yield.......................... 0%
Volatility.............................. 65%
</TABLE>
This option valuation model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-19
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
9. Equity Incentive Plan--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Predecessor Companies
-------------------------
Two months Ten months
Year ended ended ended Year ended
December 31, February 27, December 31, December 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro forma net loss........ $701,207 $157,029 $4,372,254 $20,926,594
Pro forma basic and
diluted loss per share... 0.20 0.96
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
10. Commitments and Contingencies
The Company leases office facilities and certain computer and communications
equipment under non-cancellable leases that expire at various dates through
December 31, 2006. Rent expense amounted to approximately $9,170, $8,431,
$155,163 and $320,758 for the year ended December 31, 1997, the two months
ended February 27, 1998 (the Predecessor Companies), the ten months ended
December 31, 1998 and the year ended December 31, 1999 (the Company),
respectively.
Future minimum lease payments for capital and operating leases at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ----------
<S> <C> <C>
2000................................................. 109,490 $1,395,389
2001................................................. 137,641 1,322,773
2002................................................. 126,172 1,359,716
2003................................................. -- 1,290,106
2004................................................. -- 1,339,864
Thereafter........................................... -- 2,624,328
------- ----------
373,303 $9,332,176
==========
Net minimum lease payments under capital leases......
Less amount representing interest.................... (39,482)
-------
Present value of net minimum lease payments under
capital leases...................................... 333,821
=======
</TABLE>
F-20
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
10. Commitments and Contingencies--(Continued)
The Company and the Predecessor Companies have entered into various
licensing, royalty, distribution, and consulting agreements with various
online sites, vendors and other non-employees. The remaining terms of these
agreements provide for the payment of royalties, bounties, and certain
guaranteed amounts on a per member and/or minimum dollar amount basis.
Additionally, some agreements provide for a specified percentage of
advertising and merchandising revenue to be paid to non-employees from whose
online site the revenue is derived. Minimum guaranteed payments required under
such agreements at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000............................ $1,334,999
2001............................ 1,033,500
2002............................ 459,167
2003............................ 205,000
2004............................ 125,000
Thereafter...................... 125,000
----------
Total......................... $3,282,666
==========
</TABLE>
On August 9, 1999, the Company entered into a Reimbursement Agreement with a
lender whereby the lender agreed to provide a letter of credit in the amount
of $1,414,581. The average undrawn face amount of the letter of credit bears a
commitment fee of 1.5%. In connection with the Reimbursement Agreement, the
Company issued the lender a warrant to purchase 28,292 shares of the Company's
common stock at a purchase price of $6.00 per share, subject to adjustment as
provided in the Warrant Agreement. The fair value of the warrant of $144,288
was calculated using an option pricing model as prescribed by SFAS No. 123.
The maximum term of the warrant is ten years.
In October, 1999, the Company entered into an equipment master lease
agreement with a capacity to borrow up to $2.8 million. The term of the
agreement is for three years with an interest rate of 7.5%. As part of this
agreement, the lessor will receive a warrant to purchase 22,167 shares of the
Company's common stock at $8.00 per share. The fair value of the warrant of
$108,616 was calculated using an option pricing model as prescribed by SFAS
No. 123. The maximum term of the warrant is ten years.
On January 27, 2000, a complaint was filed in the United States District
Court of California by the National Football League Players Association and
the National Football League Players, Inc. against Athlete Direct. The
complaint alleges that by operating its Web site, Athlete Direct is violating
certain rights that the plaintiffs have to license the names, likenesses and
other attributes for groups of six or more football players for products that
are sold at retail or used as promotional items. The complaint also alleges
that by entering into contracts with football players with whom the plaintiffs
already have contracts, Athlete Direct is interfering with the plaintiffs'
contractual relationships with these football players. The complaint seeks
declaratory relief and unspecified damages. Approximately 80% of the athletes
who play in the National Football League and for whom the Company provides
individual Web sites have a relationship with the NFLPA. Although the Company
does not believe
F-21
<PAGE>
Broadband Sports, Inc.
and
The Predecessor Companies
Notes to Consolidated and Combined Financial Statements--(Continued)
10. Commitments and Contingencies--(Continued)
that the NFLPA's suit has merit, and although it intends to contest the suit
vigorously, if the NFLPA were to prevail on its claims and/or if athletes and
agents determine not to work with the Company because of the players'
association claims or actions, the Company's business would be adversely
affected.
From time to time, the Company is involved in other litigation relating to
claims arising out of its operations in the normal course of business.
Management believes, however, that the ultimate outcome of all pending
litigation should not have a material adverse effect on the Company's
financial position and results of operations.
11. Significant Transactions
In January 1999, the Company entered into an interactive services agreement
with AOL. Under this agreement, the Company records a monthly license fee for
content and programming valued at approximately $288,000 per month. Such
content and programming includes the syndication of its Athlete Direct content
both within the AOL Sports Channel and the AOL Kids Channel as well as
providing content and programming for the professional and college team areas
within the AOL Sports Channel. AOL is also entitled to receive a percentage of
revenues derived from the sale of sports-related merchandise and subscription
products by the Company on AOL. The Company also receives guaranteed placement
and banner impressions from AOL for which it records a monthly expense valued
at approximately $232,000 per month. The agreement expires June 30, 2001 and
AOL has the option to extend the agreement for up to two additional one-year
terms.
In May 1999, the Company entered into a distribution agreement with Yahoo!
to syndicate its content and programming to Yahoo! Sports. In exchange for
delivery of this content and programming, the Company receives a monthly cash
payment of approximately $28,000 per month and guaranteed advertising
impressions, which are valued at approximately $61,000 per month. Yahoo!
receives a percentage of the electronic commerce sold by the Company on the
Yahoo! site. This agreement expires in June 2000 with both parties having
options to extend the agreement for one year under similar terms.
12. Defined Contribution Plan
Effective November 1, 1998, the Company adopted a 401(k) Plan covering all
of the Company's employees who are at least 21 years old. Employees may elect
to contribute up to 15% of their wages to the 401(k) Plan and are eligible to
enroll on the first day of every quarter. The Company, at its discretion, may
make contributions to the 401(k) Plan, which are allocated among the
participants. No contributions were made by the Company in 1998 or 1999.
13. Subsequent Events (Unaudited)
During January and February 2000 the Company granted options to purchase
approximately 1.6 million shares of common stock to employees and non-
employees. In connection with such options, the Company will record
approximately $4.3 million of deferred stock compensation and deferred
incentives. Such options generally vest over a four year period.
F-22
<PAGE>
[LOGO OF BROADBANDSPORTS]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities hereunder other than
underwriting discounts and commissions.
<TABLE>
<CAPTION>
Amount to
be Paid
----------
<S> <C>
Registration fee................................................. $ 12,788
NASD filing fee.................................................. 5,100
Nasdaq National Market listing fee............................... 90,000
Printing and Engraving expenses..................................
Legal fees and expenses..........................................
Blue Sky qualification fees and expenses......................... 5,000
Accounting fees and expenses.....................................
Directors' and Officers' securities act liability insurance......
Transfer Agent and registrar fees................................
Miscellaneous....................................................
----------
Total........................................................ $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") contains
detailed provisions on indemnification of directors and officers against
expenses, judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with legal proceedings. Section 102(a)(7) of
the DGCL permits a provision in the certificate of incorporation of each
corporation organized thereunder, such as Broadband Sports, eliminating or
limiting, with certain exceptions, the personal liability of a director of the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. The Certificate of Incorporation of Broadband Sports
eliminates the liability of each of its directors to its stockholders or
Broadband Sports for monetary damages for breach of fiduciary duty to the full
extent provided by the DGCL, as such law exists or may hereafter be amended.
Indemnification applies to any threatened, pending or completed action, suit
or proceeding, whether, civil, criminal, administrative or investigative.
Indemnification may include all expenses (including attorneys' fees,
judgments, fines, ERISA excise taxes and amounts paid in settlement)
reasonably incurred by the indemnified person.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement..................................... 1.1
Amended and Restated Certificate of Incorporation.................. 3.1
Certificate of Amendment to Amended and Restated Certificate of
Incorporation..................................................... 3.2
Form of Second Amended and Restated Certificate of Incorporation... 3.3
Amended and Restated Bylaws........................................ 3.4
Form of Indemnification Agreements................................. 10.9
</TABLE>
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
From February 1998 through February 15, 2000, Broadband Sports issued and
sold the following securities:
(a) In February 1998, we issued and sold an aggregate of 20,000,000 shares
of common stock to a group of stockholders for an aggregate purchase
price of $100,000, which transaction was deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act.
(b) In February 1998, we issued and sold 2,000,000 shares of series A
preferred stock to NMSS, an institutional venture capital fund, for a
purchase price of $2,000,000, which transaction was deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act.
(c) In April 1998, we issued and sold an aggregate of 1,703,750 shares of
common stock to Tyler J. Goldman and Ross Schaufelberger, two officers
of Broadband Sports, for an aggregate value of $8,519 which transaction
was deemed exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act.
(d) In May 1999, we issued and sold an aggregate of 29,166,663 shares of
series B convertible preferred stock for $0.60 per share to
institutional venture capital funds and two accredited investors, for
an aggregate purchase price of approximately $17.5 million, which
transaction was deemed exempt from registration under the Securities
Act in reliance upon Section 4(2) of the Securities Act.
(e) In August 1999, we issued warrants to purchase up to 28,292 shares of
common stock at a purchase price of $6.00 per share to an institutional
lending and leasing company, which transaction was deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act.
(f) In October 1999, we issued warrants to purchase up to 22,167 shares of
common stock at a purchase price of $8.00 per share to an institutional
lending and leasing company, which transaction was deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act.
(g) In November 1999, we issued and sold an aggregate of 3,038,981 shares
of common stock to Richard D. Nanula, in connection with his employment
contract, at $6.00 per share, for an aggregate purchase price of
approximately $18,233,885, which transaction was deemed exempt from
registration under the Securities Act in reliance upon Section 4(2) of
the Securities Act.
(h) In November 1999, we issued and sold an aggregate of 18,550,000 shares
of series C convertible preferred stock for $0.80 per share to
accredited investors, for an aggregate purchase price of $14.8 million,
which transaction was deemed exempt from registration under the
Securities Act in reliance upon Section 4(2) of the Securities Act.
The recipients of securities in each such transaction described in
paragraphs (a) through (h) above represented their intentions to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access to information about us.
II-2
<PAGE>
From February 1998 through February 15, 2000, Broadband Sports issued an
aggregate of 24,792,731 shares of our common stock at exercise prices ranging
from $0.15 to the initial offering price to the public. These issuances were
made under a written compensatory benefit plan or contract and were deemed
exempt from registration under the Securities Act in reliance upon Rule 701 of
Regulation F adopted under the Securities Act.
Item 16. Exhibits and Financial Statements
(a) Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Certificate of Amendment to Amended and Restated Certificate of
Incorporation
3.3* Form of Second Amended and Restated Certificate of Incorporation
3.4* Amended and Restated Bylaws
4.1** Specimen Stock Certificate
5.1** Form of Opinion of Morrison & Foerster LLP
10.1* 1998 Equity Incentive Plan
10.2** 2000 Stock Incentive Plan
10.3* Investors' Rights Agreement
10.4* Form of Warrant to Comdisco
10.5* Restricted Stock Purchase Agreement between the Registrant and
R. Nanula
10.6* Employment Agreement for R. Nanula
10.7* Employment Agreement for T. Goldman
10.8* Revolving Loan Agreement, dated February 27, 1998 between the
Registrant, Athlete Direct, Inc., Pro Sports Xchange and NMSS
Partners, LLC
10.9* Form of Indemnification Agreement
10.10* Standard Office Lease, dated January 10, 1996 as amended between
LAOP IV, LLC, and Smartalk Teleservices, Inc.
10.11* Sublease, dated April 1, 1998 between Smartalk Teleservices, Inc.
and The RHL Group, Inc.
10.12* Sub-Sublease Agreement, dated April 1, 1998 between The RHL Group,
Inc. and Registrant
10.13*+ Lease, dated July 30, 1999, between Spieker Properties, L.P. and
Registrant, as amended
10.13.1**+ First Amendment to Office Lease, dated October 1, 1999, between
Spieker Properties L.P. and Registrant
10.13.2** Second Amendment to Lease, dated December 29, 1999, between Spieker
Properties L.P. and Registrant
10.14*+ Interactive Services Agreement, dated January 1, 1999 between
Registrant (and its wholly owned subsidiaries, Pro Sports Xchange,
Inc., and Athlete Direct, Inc.) and America Online, Inc.
10.15* Employment Agreement for R. Schaufelberger
10.16**+ Agreement, dated as of December 2, 1999 by and between Lycos, Inc.
and Registrant
10.17** 2000 Employee Stock Purchase Plan
21.1* Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2** Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1)
24.1* Power of Attorney (See II-5 of the Registration Statement filed
with the SEC on November 26, 1999.)
27.1* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Portions have been omitted pursuant to a confidential treatment request.
(b) Financial Statement Schedules
No schedules are included because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
II-3
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described under Item 14 above, or otherwise, the registrants has
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(c) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(d) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denomination and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of Santa Monica, County of Los Angeles, State of California, on March
3, 2000.
BROADBAND SPORTS, INC.
By:
/s/ Richard D. Nanula
___________________________________
Richard D. Nanula
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
the City of Santa Monica, County of Los Angeles, State of California, on March
3, 2000.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard D. Nanula Chairman of the Board and March 3, 2000
____________________________________ Chief Executive Officer
Richard D. Nanula (Principal Executive
Officer)
/s/ Gregory S. Hebner Chief Financial Officer March 3, 2000
____________________________________ (Principal Financial and
Gregory S. Hebner Accounting Officer)
* President, Broadband Studios March 3, 2000
____________________________________ and Director
Tyler J. Goldman
* Director March 3, 2000
____________________________________
Ahmed O. Alfi
* Director March 3, 2000
____________________________________
W. Allen Beasley
* Director March 3, 2000
____________________________________
Frank J. Biondi, Jr.
* Director March 3, 2000
____________________________________
Stephen D. Greenberg
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director March 3, 2000
____________________________________
Douglas Leone
* Director March 3, 2000
____________________________________
Geoffery Y. Yang
</TABLE>
/s/ Gregory S. Hebner
*By: __________________________
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Certificate of Amendment to Amended and Restated Certificate of
Incorporation
3.3* Form of Second Amended and Restated Certificate of Incorporation
3.4* Amended and Restated Bylaws
4.1** Specimen Stock Certificate
5.1** Form of Opinion of Morrison & Foerster LLP
10.1* 1998 Equity Incentive Plan
10.2** 2000 Stock Incentive Plan
10.3* Investors' Rights Agreement
10.4* Form of Warrant to Comdisco
10.5* Restricted Stock Purchase Agreement between the Registrant and
R. Nanula
10.6* Employment Agreement for R. Nanula
10.7* Employment Agreement for T. Goldman
10.8* Revolving Loan Agreement, dated February 27, 1998 between the
Registrant, Athlete Direct, Inc., Pro Sports Xchange and NMSS
Partners, LLC
10.9* Form of Indemnification Agreement
10.10* Standard Office Lease, dated January 10, 1996 as amended between
LAOP IV, LLC, and Smartalk Teleservices, Inc.
10.11* Sublease, dated April 1, 1998 between Smartalk Teleservices, Inc.
and The RHL Group, Inc.
10.12* Sub-Sublease Agreement, dated April 1, 1998 between The RHL Group,
Inc. and Registrant
10.13*+ Lease, dated July 30, 1999, between Spieker Properties, L.P. and
Registrant, as amended
10.13.1**+ First Amendment to Office Lease, dated October 1, 1999, between
Spieker Properties L.P. and Registrant
10.13.2** Second Amendment to Lease, dated December 29, 1999, between Spieker
Properties L.P. and Registrant
10.14*+ Interactive Services Agreement, dated January 1, 1999 between
Registrant (and its wholly-owned subsidiaries, Pro Sports Xchange,
Inc., and Athlete Direct, Inc.) and America Online, Inc.
10.15* Employment Agreement for R. Schaufelberger
10.16**+ Agreement, dated as of December 2, 1999 by and between Lycos, Inc.
and Registrant
10.17** 2000 Employee Stock Purchase Plan
21.1* Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2** Consent of Morrison & Foerster LLP (included in the opinion filed
herewith as Exhibit 5.1)
24.1* Power of Attorney (See II-5 of the Registration Statement filed
with the SEC on November 26, 1999.)
27.1* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Portions have been omitted pursuant to a confidential treatment request.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and in the
headnote under "Selected Consolidated and Combined Financial Data" and to the
use of our report dated February 9, 2000 in Amendment No. 2 to the
Registration Statement on Form S-1 (SEC File No. 333-91701) and related
Prospectus of Broadband Sports, Inc. for the registration of 3,300,000 shares
of its common stock.
/s/ Ernst & Young LLP
Los Angeles, California
March 3, 2000
