UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
( ) Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number: 000-26865
INTERNET SPORTS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0704152
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorpo ration or Organization)
101 Bloor Street West, Suite 200, Toronto, Ontario, Canada, M5S 2Z7
(Address of principal executive offices) (Zip Code)
(416) 599-8800 / (416) 921-1302
(Issuer's telephone/facsimile numbers, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
The issuer had 4,276,885 shares of common stock outstanding as of
September 30, 2000.
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
INTERNET SPORTS NETWORK, INC.
FORM 10-QSB
FOR THE 6 MONTHS ENDED SEPTEMBER 30, 2000
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Comparative Unaudited Consolidated Balance Sheets 1
as at September 30, 2000 and March 31, 2000.
Comparative Unaudited Consolidated Statements of 2
Operations and Comprehensive Loss for the three and six months
ended September 30, 2000 and the three and six months ended
September 30, 1999.
Comparative Unaudited Consolidated Statement of Shareholders' 3
Equity for the six months ended September 30, 2000 and
the six months ended September 30, 1999.
Comparative Unaudited Consolidated Statements of 4
Cash Flows for the six months ended September 30,
2000 and the six months ended September 30, 1999.
Notes to the Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
(a) Exhibits 32
(b) Reports on Form 8-K 32
PART I - FINANCIAL INFORMATION
ITEM 1
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED BALANCE SHEET
(ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
September 30, March 31,
ASSETS 2000 2000
Current
Cash $ 591 $ 180
Restricted cash (note 4) 103 103
Accounts receivable, (net of allowance of $141, 2000 $14) 1,794 440
Prepaid royalties (note 6) 2,938 2,443
Prepaid expenses 671 113
------------------------
6,097 3,279
Equipment, net (note 5) 856 523
Prepaid royalties (note 6) 671 2,172
Deferred charges (note 6) 10,686 13,014
Purchased intangibles, net (note 3) 6,483 9,905
Goodwill, net (note 3) 1,597 3,151
------------------------
$ 26,390 $ 32,044
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank loan (note 2) $ 378 $ -
Accounts payable 2,195 1,035
Accrued liabilities 915 197
Deferred revenue 662 544
Accrued prize commitments 263 336
Loans payable in default (note 7) 2,842 1,000
Loan Payable (note 7) -- 240
Convertible debt in default (note 8) 862 --
Convertible debt (note 8) 1,994 1,071
-----------------------
10,111 4,423
Convertible promissory note and accrued interest (note 9) 5,194 5,069
Deferred income taxes (note 11) 1,597 3,151
------------------------
16,902 12,643
------------------------
Commitments (notes 4, 6 and 12)
Shareholders' equity (note 10)
Preferred stock 3,333 authorized, nil oustanding
Common stock and additional paid-in capital, $0.001 par value
16,667 shares authorized
4,277 outstanding (2000 - 4,086) 53,695 52,858
Share subscription receivable for 85 shares subscribed (250) (250)
Deferred compensation (2,970) (6,900)
Accumulated deficit (40,987) (26,307)
------------------------
9,488 19,401
------------------------
$ 26,390 $ 32,044
========================
1
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited) (unaudited) (unaudited) (unaudited)
Six Months Six Months Three Months Three Months
Ending Ending Ending Ending
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
REVENUE $ 2,122 $ 908 $ 1,104 $ 518
---------------------------------------------------------
EXPENSES
Prize commitments and other direct costs 665 362 468 320
Salaries and benefits 1,362 899 816 513
Consulting fees 389 460 234 239
Advertising 114 227 45 140
General and administrative 976 1,081 452 686
Interest and bank charges 319 7 174 3
Depreciation 112 65 77 60
Amortization of purchased intangibles 4,634 3,440 2,295 2,144
Amortization of goodwill 1,554 1,285 777 776
Options granted for services provided - 1,145 - 1,145
Amortization of stock compensation 3,930 1,850 1,976 1,637
Amortization of deferred charges 2,592 225 1,404 225
Amortization of prepaid royalties 1,007 - 506 --
Acquisition and due diligence costs 50 96 - 45
---------------------------------------------------------
Total expenses 17,704 11,142 9,224 7,933
---------------------------------------------------------
Net loss from continuing operations
before income taxes (15,582) (10,234) (8,120) (7,415)
Deferred income tax recovery (1,554) (1,285) (777) (776)
---------------------------------------------------------
Net loss from continuing operations (14,028) (8,949) (7,343) (6,639)
Net income (loss) from discontinued
operations (note 2) (652) 308 (582) 226
---------------------------------------------------------
Net loss and comprehensive loss (14,680) (8,641) (7,925) (6,413)
=========================================================
NET LOSS PER SHARE $ (3.48) $ (2.72) $ (1.85) $ (1.96)
=========================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,213 3,178 4,277 3,265
=========================================================
2
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Common
Stock and
Additional Stock
Number Paid in Subscriptions Deferred Accumulated
Of Shares Capital Receivable Compensation Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 4,086 $ 52,858 $ (250) $ (6,900) $(26,307) $ 19,401
Shares issued on acquisition of St. Clair
Group Investments, Inc. 191 573 - - - 573
Warrants issued for financing - 264 - - - 264
Amortization of deferred compensation
related to stock options - - - 3,930 - 3,930
Net loss - - - - (14,680) (14,680)
------------------------------------------------------------------------------
Balance at September 30, 2000 4,277 $ 53,695 $ (250) $ (2,970) $(40,987) $ 9,488
==============================================================================
Common
Stock and
Additional Stock
Number Paid in Subscriptions Deferred Accumulated
Of Shares Capital Receivable Compensation Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 2,974 $ 17,127 - $ (449) $ (4,157) $ 12,521
Shares issued on acquisition of Ultimate
Sports Publishing 21 750 - - - 750
Shares issued in acquisition of
Innovation Partners Inc. 103 4,066 - - - 4,066
Shares issued for cash 157 1,526 - - 1,526
Options related to deferred compensation - 12,100 - (12,100) - -
Shares issued in exchange for deferred
charges 33 1,350 - - - 1,350
1,145 - - - 1,145
Options granted for service
Shares issued for subscription receivable 79 190 (190) - - -
Amortization of deferred compensation
related to stock options - - - 1,850 - 1,850
Share issuance costs - (50) - - - (50)
Net loss - - - (8,641) (8,641)
------------------------------------------------------------------------------
Balance at September 30, 1999 3,367 $ 38,204 $ (190) $(10,699) $(12,798) $ 14,517
==============================================================================
3
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited) (unaudited)
Six Months Ended Six Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
OPERATING ACTIVITIES
Net loss $ (14,680) $ (8,641)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation 112 65
Options granted for services provided - 1,145
Amortization of purchased intangibles 4,634 3,440
Amortization of goodwill 1,554 1,285
Amortization of stock compensation 3,930 1,850
Amortization of deferred charges 2,592 225
Deferred income tax recovery (1,554) (1,285)
CHANGES IN OTHER OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables 1,559 (276)
(Increase) in prepaid expenses (112) (26)
Decrease in prepaid royalties 1,006 -
Increase (decrease) in accounts payable (768) 21
Decrease in accrued liabilities (20) (133)
Increase (decrease) in accrued prizes (73) 275
Increase (decrease) in deferred revenue (252) 401
-----------------------------------------
Net cash used in operating activities (2,072) (1,654)
-----------------------------------------
INVESTING ACTIVITIES
Cash (overdraft) acquired through acquisitions (73) 36
Purchase of St. Clair Group Investments (1,271) -
Purchase of Ultimate Sports Publishing - (860)
Purchase of Sportsbuff - (500)
Purchase of equipment (63) (379)
-----------------------------------------
Net cash used in investing activities (1,407) (1,703)
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of share issuance costs
$ nil (1999 - $ 50) - 1,476
Increase in loans payable 1,852 250
Increase in bank loan 378 -
Payments on loans payable (250) -
Increase in convertible promissory note 125 -
Proceeds and interest from issuance of convertible debt 1,785 -
-----------------------------------------
Net cash provided by financing activities 3,890 1,726
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 411 (1,631)
Cash and cash equivalents:
Beginning of period 180 2,928
-----------------------------------------
End of period $ 591 $ 1,297
=========================================
4
INTERNET SPORTS NETWORK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D)
(ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
(unaudited) (unaudited)
Six Months Ended Six Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
INVESTING ACTIVITIES
Net assets of Ultimate Sports Publishing acquired for shares - (750)
Acquisition of Sportsbuff for shares and amunt payable - (4,066)
Acquisition of St. Clair Group Investments for shares (573) -
FINANCING ACTIVITIES
Shares issued on acquisition of Ultimate Sports Publishing - 750
Shares issued on acquisition of Sportsbuff - 4,066
Shares issued on acquisition of exclusive rights - 1,350
Shares issued on acquisition of St. Clair Group Investments 573 -
Warrants issued in lieu of financing fee 264 -
Cash interest paid $ 9 $ 7
============================================
Cash taxes paid $ - $ -
5
INTERNET SPORTS NETWORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All dollar and share amounts in thousands, except per share data)
================================================================================
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective June 28, 2000 the Company affected a reverse stock split
of its common stock whereby shareholders were given one new share
for every six shares held prior to the reverse split. All share
amounts presented within these financial statements, both for the
current and prior period have been stated on a post reverse split
basis.
BUSINESS COMBINATIONS
The business combinations have been accounted for under the
purchase method of accounting, and the Company includes the
results of operations of the acquired business from the date of
acquisition. Net assets of the companies acquired are recorded at
their fair value at the date of acquisition. The excess of the
purchase price over the fair value of net assets acquired is
included in purchase intangibles and goodwill in the accompanying
consolidation balance sheet.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
PURCHASED INTANGIBLES AND GOODWILL
Purchased intangibles consist primarily of software, licenses,
customer lists, trademarks, rights contracts and contest
agreements. Purchased intangibles of $6,483 are stated net of
total accumulated amortization of $12,971 at September 30, 2000 in
the accompanying consolidated balance sheet. Purchased intangibles
are being amortized on a straight-line basis over two to five
years.
Goodwill of $1,597 is stated net of total accumulated amortization
of $4,632 at September 30, 2000 in the accompanying consolidated
balance sheet. Goodwill is being amortized on a straight-line
basis principally over two years.
ADVERTISING COSTS
The cost of advertising is expenses as incurred
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its
employee stock options rather than the alternative fair value
accounting allowed by SFAS No. 123, "Accounting for Stock-Based
Compensations". APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based
on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro
forma disclosure of the impact of applying the fair value of SFAS
No. 123.
6
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D...)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Canadian dollar
while its reporting currency is the United States dollar. The
assets and liabilities of the Canadian subsidiaries are translated
using the exchange rate in effect at period end, and revenues and
expenses are translated at the average rate during the period.
Exchange gains or losses on translation of the Company's net
equity investments in these subsidiaries are reported as a
separate component of other comprehensive income in shareholders'
equity. The translation adjustments as a September 30, 2000 and
September 30, 1999 were insignificant.
EQUIPMENT
Equipment is recorded at cost. Amortization is provided over the
estimated useful life of the asset using the declining balance
basis at the following rates:
Computer software 12 months
Office equipment and furniture 60 months
Leasehold Improvements Term of the lease
Computer equipment 40 months
REVENUE RECOGNITION
The Company earns revenue from membership and other fees received
for Internet-based sports information, sports contest organization
services, sports marketing and member information. Membership fees
are received prior to the beginning of a particular sport season
or event and recorded as deferred revenue until recognized in
revenue ratably over the season or upon completion of the event.
Other fees received for Internet-based sports information, sports
marketing and sports contest organization services are recognized
in income ratably over the season or upon completion of the event.
Fees from the sale of member information is recognized upon
delivery and customer acceptance. Deferred revenue of $662 was
recorded on the consolidated balance sheet as at September 30,
2000, $290 of which is attributable to discontinued operations
(note 2).
PRIZE AWARDS
Members, as well as non-members, are entitled to enter into
contests provided by the Company. Prizes are awarded upon
completion of the sports season or event and are paid by the
Company or the contest's sponsors. Prize awards are fixed in
amount and determinable prior to commencement of the season or
event and are expensed at the commencement of the season or event
to which they relate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and
cash equivalents, receivables, accounts payable, accrued
liabilities, accrued prize commitments and accrued commission on
stock issuance. It is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising
from these financial instruments. The carrying amounts of these
current assets and liabilities approximate their fair values due
to their immediate or short-term nature.
7
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D...)
INCOME TAXES
Income taxes are accounted for utilizing the liability method.
Deferred income taxes are provided to represent the tax
consequence on future years for temporary differences between the
financial reporting and tax basis of assets and liabilities.
Deferred income taxes are measured utilizing enacted tax rates
expected to be in effect in the years in which the temporary
differences are expected to reverse. A valuation allowance has
been provided for the total amount of deferred tax assets that
would otherwise be recorded for income tax benefits primarily
relating to operating loss carryforwards, as realization cannot be
determined to be more likely than not.
LOSS PER SHARE
Basic loss per share excludes any dilutive effects of options and
convertible debentures. Basic loss per share is computed using the
weighted-average number of common shares outstanding during the
period and includes common shares issued subsequent to the period
end for which all consideration had been received prior to the
period end and which no other contingencies existed. Diluted loss
per share is equal to the basic loss per share as the effect of
the stock options and convertible debentures are anti-dilutive.
There are no other dilutive common stock equivalent shares
outstanding during the period. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive.
NOTE 2. DISCONTINUED OPERATIONS
Subsequent to September 30, 2000 the Company announced that it
plans to divest from its Sports Marketing and Publication
operations ("the Discontinued Businesses"). Divestitures of the
Discontinued Businesses are expected to take place during fiscal
2001.
As a result of this plan of disposal, the results of operations
for the Discontinued Businesses have been reported as discontinued
operations and previously reported financial statements have been
restated.
The summarized statements of operation for the Discontinued Businesses
are as follows:
======================================================================
(unaudited) (unaudited)
Six Months Six Months
Ending Ended
Sept. 30, Sept. 30,
2000 1999
----------------------------------------------------------------------
Revenue $ 1,714 $ 953
======================================================================
Income (loss) from operations $ (652) $ 307
======================================================================
8
NOTE 2. DISCONTINUED OPERATIONS (CONT'D...)
The summarized balance sheets for the Discounted Businesses
are as follows:
================================================================================
(unaudited)
As at As at
Sept. 30, March 31,
2000 2000
--------------------------------------------------------------------------------
Current assets $ 1,508 -
Equipment, net 353 -
Purchased intangibles 587 $ 989
Goodwill, net 1,132 -
--------------------------------------------------------------------------------
3,580 989
Current liabilities 2,361 -
--------------------------------------------------------------------------------
Net assets of discontinued operations $ 1,219 $ 989
================================================================================
On August 31, 2000 the Company entered into a demand operating loan
facility agreement, allowing the Company's wholly owned subsidiary,
St. Clair Group Investments, to borrow up to CAD$750, and an
additional CAD$250 could be borrowed up until January 31, 2001. The
facility is secured by a general security agreement over the assets
of St Clair Group of Investments Inc. As at September 30, 2000, the
Company had utilized $378 (CAD$571) of the facility, which is included
in current liabilities above.
NOTE 3. BUSINESS COMBINATIONS
Effective June 1, 2000, the Company acquired 100% of the shares of
St. Clair Group Investments, Inc,. ("St. Clair"). The business of
St. Clair is to contract media and marketing rights for sports and
entertainment properties to offer a packaged marketing solution
through sponsorship, broadcast, signage, print publishing and
promotions. St. Clair represents the Company's sports marketing
operating segment.
The transaction is summarized as follows:
================================================================================
As at May 31, 2000,
St. Clair
--------------------------------------------------------------------------------
Net assets acquired at fair values:
Working capital $ 250
Equipment 382
Purchased intangibles 1,212
----------
$ 1,844
================================================================================
Funded by:
Cash $ 1,271
Shares of common stock 573
----------
$ 1,844
================================================================================
Purchased intangibles related to the acquisition of St. Clair
consist of customer contracts, client lists and rights contracts
for sports properties. Subsequent to September 30, 2000 the
Company announced that it plans to divest its investment in St.
Clair.
9
NOTE 3. BUSINESS COMBINATIONS (CONT'D...)
Effective June 22, 1999, the Company acquired certain assets of
National Publisher Services consisting of the Ultimate Sports
Publishing division("Ultimate Sports"). Ultimate Sports publishes
annual sports magazines. Ultimate Sports represents the Company's
Publication operation. Subsequent to September 30, 2000 the
Company announced it plans to divest its Publication operations.
Effective June 30, 1999, the Company acquired 100% of the shares
of Innovation Partners Inc, (d/b/a Sportsbuff), ("Sportsbuff").
The business of Sportsbuff is to conduct and administer sports
contest services for its clients.
The transactions are summarized as follows:
=============================================================================================
As at As at
June 22, 1999, June 30, 1999,
Ultimate Sports Sportsbuff Total
---------------------------------------------------------------------------------------------
Net assets acquired at fair values:
Working capital $ - $ (314) $ (314)
Equipment - 36 36
Purchased intangibles 1,610 5,344 6,954
Goodwill - 2,138 2,138
Deferred income taxes - (2,138) (2,138)
----------- ---------- ----------
$ 1,610 $ 5,066 $ 6,676
=============================================================================================
Funded by:
Cash $ 860 $ 1,000 $ 2,860
Shares of common stock 750 4,066 4,816
----------- ---------- ---------
$ 1,610 $ 5,066 $ 7,676
=============================================================================================
Purchased intangibles related to the acquisition of Sportsbuff
consist of developed contest software, licenses, participant
lists, customer lists, trademarks and domain names.
Purchased intangibles related to the acquisition of Ultimate
Sports consist of trademarks, customer contracts, client lists,
and domain names.
PURCHASED INTANGIBLES
========================================================================================
SIX MONTHS
ENDING
SEPT. 30, 2000
----------------------------------------------------------------------------------------
Purchased intangibles, net, beginning of period $ 9,905
Purchased intangibles from acquisitions 1,212
-----------
11,117
Less amortization expense (4,634)
------------
Purchased intangibles, net, end of period $ 6,483
========================================================================================
10
NOTE 3. BUSINESS COMBINATIONS (CONT'D...)
GOODWILL
=========================================================================================
SIX MONTHS
ENDING
SEPT. 30, 2000
-----------------------------------------------------------------------------------------
Goodwill, net, beginning of period $ 3,151
Goodwill from acquisitions -
-----------
3,151
Less amortization expense (1,554)
------------
Goodwill, net, end of period $ 1,597
=========================================================================================
NOTE 4. RESTRICTED FUNDS
The Company segregated CAD$150 as security for a letter of
Guarantee for the Company's lease on its Toronto facilities. A
further CAD$120 is due to be restricted under the terms of the
lease.
NOTE 5. EQUIPMENT
Equipment consists of the following:
=========================================================================================
SEPTEMBER 30,
2000
-----------------------------------------------------------------------------------------
Computer equipment $ 706
Software 156
Leasehold Improvements 38
Office equipment and furniture 258
-----------
1,198
Less accumulated depreciation (302)
-----------
Equipment, net $ 856
=========================================================================================
11
NOTE 6. DEFERRED CHARGES AND PREPAID ROYALTIES
LABATT BREWING COMPANY LIMITED
On August 1, 1999, the Company entered into a five year agreement
with Labatt Brewing Company Limited ("LBCL") for the promotion
rights to be the exclusive contest provider for Beer.com,. In
exchange for this exclusive agreement, the Company is granting
LBCL 167 common shares over the five year term. All 167 shares
have been placed in escrow. 33 shares are owing at the start of
each year of the contract, and distributed to LBCL on each
anniversary date of the contract. The minimum share obligation
under this agreement (33 shares) have been recorded at the market
value of the shares as at August 1, 1999 ($40.50 per share) as a
deferred charge, and is being amortized over a one year period.
On August 1, 2000, the Company and LBCL mutually agreed to cancel
the agreement. Accordingly, 134 shares have been removed from
escrow and cancelled. 33 shares were distributed to LBCL.
SPORTSLINE.COM
On December 21, 1999, the Company entered into a four year
agreement for the promotion rights for services for
SportsLine.com, Inc. ("SportsLine"). In exchange for this
agreement, the Company has granted SportsLine 683 common shares,
and a Warrant to acquire up to 172 common shares at an exercise
price of $17.40 per share, with certain repricing rights. The
shares have been recorded at the market value of the shares at
December 21, 1999 ($17.40 per share), and the Warrant has been
recorded at its fair value estimated at the date of grant using a
Black-Scholes option pricing model ($9.36 per share underlying the
Warrant) as a deferred charge, and is being amortized over the
four year period.
As a result of the acquisition of St. Clair in June 2000, the
repricing rights granted to SportsLine resulted in an increase in
the number of shares underlying SportsLine's Warrant to 241 common
shares, at an exercise price of $12.456 per share.
Effective September 1, 2000, the SportsLine agreement was amended,
such that the expiry date of the agreement has been shortened to
December 31, 2001. Further, the agreement can be renewed for 2
one-year periods at the Company's option, provided minimum royalty
payments of $3,000 per annum are made. The amortization of the
deferred charges has been increased starting on September 1, 2000
to amortize the unamortized deferred charges over the remaining 16
months of the agreement.
Subsequent to September 30, 2000, and as partial consideration for
the amended agreement, the Company has agreed to grant SportsLine
warrants at a future date.
During the year, the Company issued warrants to the holder of the
5% convertible debentures to acquire up to 141 shares of common
stock at an exercise price of $7.50 per share, expiring on May 9,
2005. These Warrants have been recorded at its fair value
estimated at the date of grant using a Black-Scholes options
pricing model ($1.87 per share underlying the Warrant) and has
been recorded as a deferred charge, and are being amortized over
the life of the 5% convertible debentures. During the six months
ending September 30, 2000, the Company amortized $14 of the
deferred charge.
12
NOTE 6. DEFERRED CHARGES AND PREPAID ROYALTIES (CONT'D...)
Shares issued to LBCL $ 1,350
Shares issued to SportsLine 11,884
Warrants issued for 5% convertible debentures 264
Warrants issued to SportsLine 1,612
-----------
Total Deferred Charges 15,110
Less Accumulated Amortization (4,424)
-----------
$ 10,686
===========
The SportsLine Agreement calls for minimum royalty payments as
follows:
Year 1 to December 21, 2000 $ 2,750
Year 2 to December 21, 2001 3,000
----------
$ 5,750
----------
The Company has prepaid the minimum royalty for the full term of
the amended agreement, totaling $5,750. Amortization of the
current year's prepaid royalty is calculated on a monthly basis.
Each month's expense is equal to the greater of (a) the amount
calculated by using a straight line amortization over the period
of the effective years' prepaid royalty, or (b) the amount that
would be otherwise payable based on the actual royalty
calculation. To the extent that the cumulative royalty payable for
the respective twelve month period exceeds the prepaid royalty
amount for that period the net excess is expensed in the period
and is due to SportsLine through an incremental cash payment.
PREPAID ROYALTIES
======================================================================================
SEPT. 30, 2000
--------------------------------------------------------------------------------------
Opening balance, March 31, 2000 $ 4,616
Additions -
Amortization expense (1,007)
------------
Prepaid royalties, net $ 3,609
===========
Current portion $ 2,938
Long term portion 671
-------------
$ 3,609
=====================================================================================
In the event that the Company raises over $10,000 through a public
sale of its common stock, the Company is required to pay
SportsLine an amount equal to the lesser of (a) the next 12 month
minimum royalty amount, or (b) 20% of the proceeds from the public
sale of common stock. Any such payment will be treated as a
prepayment towards the minimum royalty amounts payable.
13
NOTE 7. LOANS PAYABLE
Loan payable with interest calculated at 10% per annum ("10% Loan"). The loan is
unsecured, and the principal and accrued interest was due on March 31, 2000. The
loan is in default. $ 750
Loan payable in the amount of CAD$1,800 and $250 with interest calculated at the
prime rate as reported by a major Canadian bank plus 2% ("Prime plus 2% Loan"). The
loan is secured by a direct charge over all of the assets and shares of St. Clair,
and the principal and accrued interest was due on August 31, 2000. The loan is in
default. 1,453
Loan payable with interest calculated at 7.25% per annum. The note is unsecured,
and the principal and accrued interest is due the earlier of raising an additional
$4,000 through the sale of equity instruments or June 30, 2000 (the "Maturity
Date"). The loan is in default. 240
Promissory note with interest calculated at 12% per annum. The note is unsecured,
and the principal and accrued interest is due on June 23, 2000. The note is in
default. 300
Accrued interest on loans payable 99
--------
$ 2,842
========
The 10% Loan was initially due on December 31, 1999. In connection
with the 10% Loan, the Company granted a warrant to acquire up to
13 common shares at an exercise price of $13.08 per share.
Financing fees of approximately $23 cash were also paid in
consideration for the loan. In consideration for extending the 10%
Loan due date to March 31, 2000, the Company granted a warrant to
acquire up to 5 common shares at an exercise price of $17.40 per
share. The 13 warrants expire on October 31, 2001 and the 5
warrants expire on December 31, 2001. As of November 10, 2000 the
balance on the 10% Loan of $750 remains outstanding and is due on
demand. According to the terms of the 10% Loan, the effective
interest rate increases by 1 1/2 % for each month the 10% Loan iS
overdue. As at September 30, 2000, the effective interest rate is
19.0%
NOTE 8. CONVERTIBLE DEBT
Series 1 convertible debentures maturing on June 30, 2000 unless
paid or converted earlier. Interest accumulates at the rate of 8%
per annum, due on maturity. The debenture is in default $ 521
Series 1 convertible debentures maturing on May 31, 2000 unless paid or
converted earlier. Interest accumulates at the rate of 8% per annum, due on
maturity. The debenture is in default 300
5% convertible debenture, maturing on May 9, 2003, unless paid or
converted earlier. Interest accrues at a rate of 5% per annum, due
on maturity. 1,956
Accrued interest payable 79
------
$2,856
======
14
NOTE 8. CONVERTIBLE DEBT (CONT'D...)
The Series 1 convertible debentures can be repaid in whole or in
part prior to maturity, without penalty. Commencing April 1, 2000,
the purchaser has the right, at its option, on or before maturity
to convert the outstanding amount. These rights will only arise in
the event the Company is able to raise gross proceeds of not less
than $5,000. The principal and accumulated interest may be
converted at the rate of (a) one common stock per $18.00 of
principal and interest if the private offering is $18.00 per share
or greater or (b) the price at which the private offering is
completed, if such price is less than $18.00 per share. Series 1
convertible debentures are secured by all of the companies
property and assets, real and personal, moveable and immovable,
tangible and intangible, of every nature and kind whatsoever,
wheresoever, both present and future. In connection with the
Series 1 convertible debentures, the Company granted warrants to
acquire up to 13 common shares at an exercise price of $17.40 per
share. Of these warrants, 5 expire on January 31, 2001, and the
remaining 8 warrants expire on February 21, 2001. The Warrants
have been recorded at their fair value estimated at the date of
grant using a Black-Scholes option pricing model ($9.36 per share
underlying the Warrant) as a deferred charge, and has been fully
amortized as at year end.
The 5% Convertible Debentures are convertible into shares of
common stock at any time during the life of the debentures, and
convert automatically into common shares at a conversion rate of
the lesser of $17.40 per common share issued, and 90% of the
market price for a period prior to conversion at the end of the
term. In connection with the 5% Convertible Debenture, the Company
granted warrants to acquire up to 141 common shares at an exercise
price of $7.50 per share, expiring on May 9, 2005. The Warrants
have been recorded at their fair value estimated at the date of
grant using a Black-Scholes option pricing model ($1.87 per share
underlying the Warrant) as a deferred charge, and is being
amortized over the life of the 5% Convertible Debenture.
NOTE 9. CONVERTIBLE PROMISSORY NOTE AND ACCRUED INTEREST
On December 21, 1999 the Company issued a Convertible Promissory
Note ("Note") for $5,000, convertible at the holders option into
common stock of the Company at a conversion price of $17.40 per
share. This conversion price may be reduced upon the Company
issuing common stock, or instruments convertible into common stock
at a price of less than $17.40 per share. The Note bears interest
at the rate of 5% per annum, payable at maturity in cash or shares
of common stock. The note has a term of four years. The Note can
be converted into shares at the Company's option following a
public offering providing gross proceeds to the Company of not
less than $20,000, having an initial per share price to the public
of not less than $30.00 per share. As at September 30, 2000
interest of $194 has accrued on the Note.
As a result of the acquisition of St. Clair, the repricing rights
granted to Sportsline resulted in a reduction in the conversion
price to $12.456 per share.
15
NOTE 10. SHAREHOLDERS' EQUITY
The authorized share capital of the Company is as follows: Common
stock - authorized 16,667, issued, 4,277 Preferred stock -
authorized 3,333, issued, nil
COMMON STOCK
TO SEPTEMBER 30, 2000
COMMON
NUMBER STOCK AND
OF SHARES PAID-IN CAPITAL
(`000's) ($000's)
---------------------------------------------------------------------------------------------
BALANCE AS REPORTED MARCH 31, 2000 24,514 52,858
Impact of 6:1 reverse share split (20,428) -
Shares issued on acquisition of St. Clair 191 573
Warrants granted for financing - 264
---------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2000 4,277 53,695
=============================================================================================
STOCK OPTIONS
Generally, options are granted by the Company's Board of Directors
at an exercise price of not less than the fair market value of the
Company's common stock at the date of grant. Options are generally
granted with a term of five years from the date of issuance.
Option vesting is varied ranging from the date of issuance to 3
years.
STOCK OPTION ACTIVITY
The following table summarizes the Company's stock option
activity:
TO SEPTEMBER 30, 2000
NUMBER OF WEIGHTED AVERAGE
SHARES (`000'S) EXERCISE PRICE
---------------------------------------------------------------------------------------------
Balance at March 31, 2000 1,015 $ 11.22
Options granted and assumed 78 $ 18.96
Options cancelled (208) $ 16.98
Options expired (8) $ 10.50
------ -----------
September 30, 2000 877 $ 10.54
=============================================================================================
16
NOTE 10. SHAREHOLDERS' EQUITY (CONT'D...)
STOCK OPTION ACTIVITY (CONT'D)
The following table summarizes information about options
outstanding and options exercisable at September 30, 2000.
============================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
OPTIONS REMAINING CONTRACTUAL OPTIONS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ------------- ------------ ---------------------------------
$ 2.40 282 3.8 years 124 $ 2.40
10.50 433 3.0 years 418 10.50
18.00 58 3.8 years 30 18.00
19.50 3 2.0 years 3 19.50
24.00 31 4.2 years 13 24.00
24.48 17 3.8 years 8 24.48
27.24 12 3.7 years 13 27.24
28.56 3 3.8 years 2 28.56
30.00 4 0.7 years 4 30.00
36.00 34 3.8 years 17 36.00
37.25 - 0.9 years - 37.25
--------------------------------------------------------------------------------------------
$ 2.40 - 37.25 877 3.5 years 632 $ 11.04
============================================================================================
WARRANT ACTIVITY
The following table summarizes the Company's warrant activity:
=============================================================================================
NUMBER OF WEIGHTED AVERAGE
WARRANTS (`000'S) EXERCISE PRICE
---------------------------------------------------------------------------------------------
Balance at March 31, 2000 236 $ 18.96
Warrants granted 141 $ 7.50
Warrants issued due to repricing (note 6) 69 -
Warrants cancelled (33) 30.00
------ ----------
September 30, 2000 413 $ 10.98
=============================================================================================
17
NOTE 10. SHAREHOLDERS' EQUITY (CONT'D...)
WARRANT ACTIVITY (CONT'D)
The following table summarizes information about warrants
outstanding and warrants exercisable at September 30, 2000:
=============================================================================================
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
WARRANTS REMAINING CONTRACTUAL WARRANTS WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
-------------- ------------ ---------- ---------------------------------
$ 13.08 13 1.0 years 13 $ 13.08
12.46 259 1.2 years 259 12.46
7.50 141 1.8 years 141 7.50
---------------------------------------------------------------------------------------------
$ 7.50 - 13.08 413 1.6 years 413 $ 10.79
=============================================================================================
DEFERRED COMPENSATION
Deferred compensation of $2,970 is stated net of accumulated
amortization of $9,815. No additional deferred compensation was
recorded during the three months ended September 30, 2000. The
amount recorded represents the difference between the grant price
and the fair value of the Company's common stock for shares
subject to options granted during the period. The amortization of
deferred compensation is charged to operations over the vesting
period of the options, which ranges from 15 months to 3 years.
Total amortization recognized in the six months ended September
30, 2000 was $3,930 (1999 - $1,850).
PRO FORMA DISCLOSURE
The Company follows the intrinsic value method in accounting for
its stock options. Had compensation cost been recognized based on
the fair value at the date of grant, the pro forma amounts of the
Company's net loss and net loss per share for the period ended
September 30, 2000 would have been as follows:
Six Six
Months ended Months ended
September, 2000 September 30, 1999
Net loss as reported $(14,680) $(8,641)
Net loss - pro forma $(15,618) $(8,910)
Basic and diluted loss per share as reported $(3.48) $(0.45)
Basic and diluted loss per share - pro forma $(3.71) ($0.47)
The fair value for each option granted was estimated at the date
of grant using a Black-Scholes option pricing model, assuming no
expected dividends and the following weighted average assumptions:
Average risk-free interest rates 5.0%
Average expected life (in years) 5.0
Volatility factor 98.5%
The weighted average fair value of options granted during the year was
$5.08.
18
NOTE 11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
A reconciliation of the combined federal and state income tax
expense to the Company's income tax expense is as follows:
=========================================================================================
SEPT. 30, SEPT. 30,
2000 1999
-----------------------------------------------------------------------------------------
Tax recovery at combined federal and state rates $ (4,970) $ (3,166)
Higher effective rate attributable to income taxes
of other countries $ (1,606) $ (1,022)
Tax effect of expenses that are not deductible for
income tax purposes 5,339 3,353
Valuation allowance 1,237 835
------------- -------------
$ - $ -
=========================================================================================
At September 30, 2000, the Company had net operating loss
carryforwards of approximately $10,468. Substantially all of these
carryforwards relate to the Canadian subsidiaries and will begin
to expire at various times starting in 2001.
Significant components of the Company's deferred income tax assets are
approximately as follows:
=========================================================================================
SEPT. 30,
2000
-----------------------------------------------------------------------------------------
Net operating loss carryforwards $ 10,468
=============
Total deferred income tax assets $ 4,513
Valuation allowance for deferred income tax assets (4,513)
--------------
Net deferred income tax assets $ -
=========================================================================================
19
NOTE 11. INCOME TAX (CONT'D...)
A continuity of the valuation allowance is as follows:
=========================================================================================
SEPT. 30,
2000
-----------------------------------------------------------------------------------------
Opening balance $ 3,276
Valuation allowance on deferred income tax asset 1,237
-------------
Closing balance $ 4,513
=========================================================================================
Deferred income tax credits at September 30, 2000 reflect the
differences between the financial reporting and tax values of the
purchased intangibles. The deferred tax recovery in the
consolidated statement of operations and comprehensive loss
relates to the amortization of the deferred income tax liability
which resulted from the Company's acquisitions of Sportsmark,
Pickem and Sportsbuff.
NOTE 12. COMMITMENTS
The Company leases premises and office equipment under the terms
of operating leases. The leases provide for future minimum annual
lease payments as follows:
Year ending March 31, Total Rent
2001 $ 294 $ 287
2002 295 288
2003 295 288
2004 297 290
2005 297 290
thereafter 111 111
-------------- -----------
$ 1,589 $ 1,554
============== ===========
20
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION
As a result of the Company's decision to discontinue its
publishing and sports marketing operations, the Company operates
in only one segment, contest management. The company provides game
management services and products across domestic and international
markets. International sales, including export sales from the
United States to Canada, represented approximately 36% (1999 -
36%) of net sales for the six months ending September 30, 2000. No
other foreign country or geographic area accounted for more than
10% of net sales in any of the periods presented. Net transfers
from Canada to the United States amounted to $745 (1999 - $nil)
for the six months ended September 30, 2000. Capital assets and
purchased intangibles in the United States equal approximately
$10,000. The remaining capital assets and purchased intangibles
are in Canada.
NOTE 14. GOING CONCERN
The Company is in an extremely competitive industry and it will
require substantial capital from outside sources in order to
complete its business plan. The Company is in default of three
loans payable, its promissory note payable and its Series 1
convertible debentures and anticipates that it will continue to
generate financial losses for the foreseeable future. In the event
the Company is unsuccessful in securing outside capital, it may be
required to curtail or cease operations altogether. As a result,
substantial doubt exists regarding the ability of the Company to
continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
21
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the results and operations and financial condition of
the Company (or "ISN") should be read in conjunction with the consolidated
financial statements, including the notes thereto, of the company contained
elsewhere in this Form 10-QSB
OVERVIEW
ISN was originally incorporated on April 28, 1997 in Nevada for the purpose of
providing interactive, computer sports entertainment through the Internet. The
Company has a limited operating history on which to evaluate its prospects. The
risks, expense, and difficulties encountered by start up companies must be
considered when evaluating ISN's prospects.
The operating expenses of ISN cannot be predicted with certainty. They will
depend on several factors, including the amount of marketing expenses, the
acceptance of the Company's services in the market, competition for such
services, and the acquisition activities of the Company. Management may be able
to control the timing of such expenses in part by speeding up or slowing down
marketing development and distribution activities and acquisition strategies.
From its inception in April 1997 to date, ISN has incurred costs associated with
the development of its internet sports entertainment products, probable markets
and business. ISN incurred costs for conducting test marketing for its products
and received revenues as a result. The test marketing consisted of advertising,
processing membership applications and analysis of responses. During the period,
ISN purchased computer and telecommunication equipment as necessary to conduct
its operations.
ISN financed its expenditures primarily through the sale of its common stock and
issuance of debt. Since inception through September 30, 2000, the company issued
approximately 12,982,000 common shares for net cash consideration of
approximately $10,835,000, $2,743,000 in loans and promissory notes, and
$7,777,000 in convertible debt.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since inception and has an accumulated
deficit of $40,987,000 to September 30, 2000. The Company is currently in
default with three loans, its promissory note and its Series 1 convertible
debentures. The Company anticipates that it will continue to generate
financial losses for the foreseeable future. Based on the Company's current
working capital position, and the cash required to fund the current level of
operations, the Company has sufficient liquidity to operate until November
30, 2000. If the Company is unable to obtain equity or debt financing, or
generate additional cash through the sale of assets by November 30, 2000, the
Company may need to cease operations and seek protection under the federal
bankrupcty laws. The Company's long term ability to meet its liquidity
requirements and to continue operations will depend on (i) its ability to
develop a long term sustainable debt and equity financing structure, (ii) its
ability to generate advertising and sponsorship revenue on its Internet
properties, (iii) the continued growth and acceptance of the Internet and
(iv) its ability to continue to provide innovative and reliable products for
its ASP client base. If the Company is unable to reduce its operating losses,
either in the short-term or the long-term, and it is unable to secure outside
capital to meet the resulting liquidity shortfall, the Company may be forced
to reduce or discontinue some or all of its operations, sell certain of its
assets, or seek protection under the federal bankruptcy laws. Under United
States Generally Accepted Auditing Statements substantial doubt exists
regarding the ability of the Company to continue as a going concern.
It is the intention of management to address its liquidity and debt situation by
(i) restructuring its outstanding debt, (ii) raising the additional capital
through the sale of additional capital stock of the Company, (iii) selling
non-core assets. There can be no assurance that the Company will succeed in any
or all of these initiatives.
22
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONT'D...)
The Company's primary cash requirements are for operating activities and
acquisition activities. Cash used in operating activities for the period ending
September 30, 2000 was $2,072,000 (as compared to $1,654,000 for the period
ending September 30, 1999) related primarily to infrastructure costs required to
manage the continued growth of the Company. The increase in cash used in
operating activities was also due to the acquisition of St. Clair Group
Investments ("St. Clair"), whose seasonality is such that the summer months
generate negative cash flow. $1,632,000 of the use of cash arose during the
first quarter of the year (1999 - $755,000). This increase was mainly due to
increased staffing of the operation. Average headcount during the first quarter
of 2000 was 48, as compared to average headcount during the same period last
year of 22. These increases in cash used in operations have been reduced during
the second quarter of the year, where cash used in operations was $440,000 (1999
- - $899,000) as a result of the increase in revenue from $518,000 in 1999 to
$1,104,000 in the current period.
Cash used in acquisition activities for the period ending September 30, 2000 was
$1,271,000 (as compared to $1,360,000 for the period ending September 30, 1999).
Since inception, the Company has funded its capital requirements by financing
activities, primarily through the issuance of equity securities, debt and
convertible debt. Capital expenditures (excluding acquisitions) during the
period ending September 30, 2000 were $63,000 as compared to $379,000 for 6
months ended September 30, 1999. Capital expenditures were primarily for
computer technology to manage the contest management strategy. From inception to
September 30, 2000 the Company has spent $646,000 on capital equipment. ISN has
no significant commitments to acquire equipment in the future, although the
Company expects to spend approximately $800,000 in capital assets over the next
12 month period.
The Company operates in an extremely competitive industry and it will require
substantial capital from external sources in order to continue operations and
complete the execution of its business plan. The Company anticipates that it
will continue to generate financial losses for the foreseeable future. In the
event the Company is unsuccessful in securing outside capital, it may be
required to curtail or cease operations altogether. As a result, substantial
doubt exists regarding the ability of the Company to continue as a going
concern.
The Company's management believes that an additional $4,000,000 in funding, as
well as a seasonal line of credit in the amount of $1,000,000 and the revenues
generated by its operations will be sufficient to fund its operations for the
next twelve months under the current plan of operations. Additional funding will
be required for further acquisition activity, depending on the cash component of
the purchase price of any contemplated acquisitions. It is expected that such
funds will be obtained by the sale of additional capital stock of the Company,
although there can be no assurance that ISN will be able to obtain such funds.
Beyond the next twelve month period, the Company will require working capital to
fund operations during the off peak months (June to August). Excluding
acquisition activity, the funds required would be approximately $1,500,000. Any
additional capital requirements would be due to acquisition activities, or
modifications to the current growth plans.
ISN financed the acquisition of St. Clair through the issuance of a
promissory note in the amount of $1,203,000 (CAD$1,800,000). The note was
increased by $250 on August 17, 2000, and the due date amended to August 31,
2000 and is currently in default. The assets and shares of St. Clair have
been pledged as security for the loan.
As a result of the St. Clair acquisition in June 2000, the conversion price for
the SportsLine Note and Warrant were adjusted in accordance with their terms to
$12.456 per share.
23
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONT'D...)
As of September 30, 2000, the Company had the following principal amount of debt
outstanding:
Instrument Rate Due date Proceeds
- --------------------------------------------------------------------------------------------------
Loan payable - in default 19.0% per annum March 31, 2000 750,000
Loan payable - in default 7.0% per annum June 30, 2000 240,000
Loan payable - in default 2% above prime August 31, 2000 1,453,000
Promissory note - in default 12.0% per annum June 23, 2000 300,000
Convertible debt - in default 8.0% per annum June 30, 2000 521,000
Convertible debt - in default 8.0% per annum May 31, 2000 300,000
Convertible debt 5.0% per annum December 21, 2003 5,000,000
Convertible debt 5% per annum May 9, 2003 1,956,000
- --------------------------------------------------------------------------------------------------
$10,520,000
==================================================================================================
24
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONT'D...)
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) AS COMPARED TO THE SIX MONTHS
ENDED SEPTEMBER 30, 1999 (UNAUDITED).
Revenue. The Company generated revenue from continuing operations of $2,122,000
for the period ending September 30, 2000 as compared to revenues of
approximately $908,000 for the period ending September 30, 1999. The increase in
revenue was attributable to sales generated through the promotion agreement with
SportsLine, as well as through a growing customer base of contest licensing
clients.
Operating expenses before depreciation, amortization and other non-cash charges:
Total operating expenses before depreciation, amortization and other non-cash
charges were $3,825,000 as compared to $3,036,000 in the period ended September
30, 1999, for an increase of $789,000. The overall increase is described in more
detail below:
Prize commitments and other direct costs: Expenses associated with providing
prizes for contests and other direct costs increased by $303,000 to $665,000
from $362,000. $116,000 of the increase is attributable to increased prize
obligations, mostly due to the addition of the products from the acquisition of
SportsBuff. The remainder of the increase is attributable to increased direct
costs incurred as a result of the inclusion of SportsBuff's operations for the
entire 6 month period as apposed to 3 months in the prior year.
Salaries and benefits: Salaries increased by $463,000 to $1,362,000 from
$899,000 in the six month period ending September 30, 2000. This increase was
the result of hiring additional sales, marketing and administrative staff during
the period to manage the growth of the Company. Average staff over the period
increased from 29 people in the six months ended September 30, 1999 to 46 people
in 2000. Further, the Company incurred a one time charge of approximately
$120,000 in severance costs during August and September 2000 as the Company
eliminated redundant, and non-core personnel.
Consulting Fees: Consulting fees decreased by $71,000 to $389,000 from $460,000
in the comparative period. The Company required less reliance on consultants as
a result of the increase in staff compared to the prior period.
Advertising: Advertising expenses decreased $113,000 to $114,000 from $227,000
in the comparative period. This is mainly due to consolidation of certain
contests due to the acquisition of SportsBuff, as well as a shift in advertising
strategy, whereby the Company no longer focuses on promoting its own brand of
contests, but is providing its clients with private label contests instead,
which require minimal advertising costs to be incurred by the Company.
25
RESULTS OF OPERATIONS (SIX MONTHS ENDING SEPTEMBER 30, 2000 VS. 1999)
CONTINUED...
General and administrative: General and administrative costs decreased by
$105,000 to $976,000 from $1,081,000 in the comparative period. This change is
made up of the following fluctuations:
- General office expenses decreased by $7,000 to $421,000 from $428,000.
Expenses in the 1999 comparative period included the costs of
relocating the executive offices from Vancouver to Toronto, and
setting up the Toronto offices. During the 2000 period, the Company
relocated its Toronto offices within the city, and expenses increased
as a result of the overall increase is staff levels, however not to
the level of the one time move in 1999.
- Travel and other expenses decreased $107,000 to $147,000 from
$254,000. The decrease in travel expense is a result of closing the
Vancouver office and centralizing the executive office activities in
Toronto during the first quarter of 1999.
- Legal and accounting fees increased $47,000 to $214,000 from $167,000
as a result of costs associated with the preparation of the Company's
Securities and Exchange Commission ("SEC") filings, documentation
related to the reverse stock split and documentation related to
additional debt financing received in the current period.
- Increase in occupancy and telephone costs of $145,000 to $278,000
compared to $133,000 for the period ending September 30, 1999. The
increase is due to the set up and substantial growth in the Toronto
offices.
Interest and bank charges increased by $312,000 to $319,000 as a result of fees
and interest on loans and convertible debt. There were no similar debt
instruments outstanding for the period ending September 30, 1999.
AMORTIZATION
The purchased intangibles and goodwill before amortization related to the
acquisitions of Sportsmark Group, Pickem Sports, Ultimate Sports Publishing,
SportsBuff, Sportsrocketravel, St. Clair and domain names totaled $25,683,000.
Amortization of purchased intangibles and goodwill for the six-month period
ended September 30, 2000, was $6,190,000. These intangibles include trademarks,
software licenses, contractual rights and intellectual properties. The Company
is amortizing purchased intangibles and goodwill related the acquisitions of
Sportsmark Group, Pickem Sports, Ultimate Sports Publishing, SportsBuff,
Sportsrocketravel and domain names over 24 months, and the purchased intangibles
related to St. Clair over 60 months.
Depreciation was $112,000 for the period ended September 30, 2000 as compared to
$65,000 for the prior period. The increase is due to the purchase of equipment.
The Company amortized $3,930,000 (1999 - $1,850,000) of costs related to stock
based compensation resulting from stock options granted to officers, employees
and directors. The compensation expense was calculated as the difference between
the option exercise price and the share price of the Company's common stock as
reported by the OTC/BB at the date of issuance. The options may be exercised at
prices between $2.40 to $37.25 and vest over periods ranging from 17 to 36
months. The Company is amortizing the expense relating to the options over their
vesting periods.
Net loss from continuing operations. The Company experienced a loss of
$14,028,000 after the benefit of deferred taxes of $1,554,000 for the six month
period ended September 30, 2000 as compared to a loss of $8,949,000 for the
period ended September 30, 1999. Loss per share from continuing operations for
the six month period ended September 30, 2000 was $(3.33) compared to $ (2.81)
for the period ended September 30, 1999.
Net income from discontinued operations. Results from discontinued operations
shifted from net income of $307,000 in 1999 to a net loss of ($652,000). This
shift is the result of the addition of St. Clair in June of 2000, whose
operations generate losses during the summer months. Further, the Company
incurred additional expenses related to its Publication operations as the
material and layout of the publications were upgraded for the calendar 2000
sports seasons.
26
RESULTS OF OPERATIONS (SIX MONTHS ENDING SEPTEMBER 30, 2000 VS. 1999)
CONTINUED...
Net loss from operations. The Company experienced a loss of $14,680,000 after
the benefit of deferred taxes of $1,554,000 for the six month period ended
September 30, 2000 as compared to a loss of $8,641,000 for the period ended
September 30, 1999. Loss per share for the six month period ended September 30,
2000 was $(3.48) compared to $ (2.72) for the period ended September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) AS COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED).
Revenue. The Company generated revenue from continuing operations of $1,104,000
for the period ending September 30, 2000 as compared to revenues of
approximately $518,000 for the period ending September 30, 1999. The increase in
revenue was generated through the promotion agreement with SportsLine, as well
as through a growing customer base of contest licensing clients.
Operating expenses before depreciation, amortization and other non-cash charges:
Total operating expenses before depreciation, amortization and other non-cash
charges were $2,189,000 as compared to $1,901,000 in the period ended September
30, 1999, for an increase of $288,000. The overall increase is described in more
detail below:
Prize commitments and other direct costs: Expenses associated with providing
prizes for contests and other direct costs increased to $468,000 from
approximately $320,000 in three month period ended September 30, 1999. The
increase of $148,000 is attributable to increased prize offerings in the
Company's contests, as well as due to the increase in contest management costs
due to the increase in revenue.
Salaries and benefits: Salaries increased by $303,000 to $816,000 from $513,000
in the three month period ending September 30, 2000. This increase is the result
of increased sales, marketing and administrative staff compared to the prior
period to manage the growth of the Company. Average staff over the period
increased from 39 people in the three months ended September 30, 1999 to 48
people in 2000. Further, the Company incurred a one time charge of approximately
$100,000 in severance costs during August and September 2000 as the Company
eliminated redundant, and non-core personnel
Consulting Fees: Consulting fees decreased by $5,000 to $234,000 from $239,000
in the comparative period. Additional hiring reduced the need to obtain
financial, development and design services externally. The bulk of the
historical consulting fees that were replaced by internal staffing was due to
hiring during the first quarter of 1999, therefore there has been little change
in these costs during the quarter.
Advertising: Advertising expenses decreased $95,000 to $45,000 from $140,000 in
the comparative period This is mainly due to the consolidation of certain
contests due to the acquisition of SportsBuff, as well as a shift in advertising
strategy, whereby the Company no longer focuses on promoting its own brand of
contests, but is providing its clients with private label contests instead,
which require minimal advertising costs to be incurred by the Company.
27
RESULTS OF OPERATIONS (THREE MONTHS ENDING SEPTEMBER 30, 2000 VS. 1999)
CONTINUED...
General and administrative: General and administrative costs decreased by
$234,000 to $452,000 from $686,000 in the comparative period. This change is
made up of the following fluctuations:
- General office expenses decreased by $166,000 to $124,000 from
$290,000. Most of the expenses in the 1999 comparative period were a
result of the one time costs of relocating the executive offices from
Vancouver to Toronto.
- Travel and other expenses increased $13,000 to $80,000 from $67,000.
The increase in travel expense of 19% is consistent with the increase
in average staffing levels of 23% from 39 to 48 people year over year.
The Company has implemented strict control over travel and
entertainment expenses.
- Legal and accounting fees decreased by $89,000 to $56,000 from
$145,000. Most of the expenses in 1999 were as a result of costs
associated with the preparation of the Company's initial Securities
and Exchange Commission ("SEC") filings and documentation related to
additional equity financing received in the period.
- Increase in occupancy and telephone costs of $64,000 to $148,000
compared to $84,000 for the period ending September 30, 1999. The
increase is due to the substantial growth and relocation of the
Toronto offices.
Interest and bank charges increased by $172,000 to $174,000 as a result of fees
and interest on loans and convertible debt. There were no similar debt
instruments outstanding for the period ending September 30, 1999.
AMORTIZATION
The purchased intangibles and goodwill before amortization related to the
acquisitions of Sportsmark Group, Pickem Sports, Ultimate Sports Publishing,
SportsBuff, Sportsrocketravel, St. Clair and domain names totaled $25,683,000.
Amortization of purchased intangibles and goodwill for the three-month period
ended September 30, 2000, was $3,072,000. These intangibles include trademarks,
software licenses, contractual rights and intellectual properties. The Company
is amortizing purchased intangibles and goodwill related the acquisitions of
Sportsmark Group, Pickem Sports, Ultimate Sports Publishing, SportsBuff,
Sportsrocketravel and domain names over 24 months, and the purchased intangibles
related to St. Clair over 60 months.
Depreciation was $77,000 for the period ended September 30, 2000 as compared to
$60,000 for the prior period. The increase is due to the purchase of equipment.
The Company amortized $1,976,000 (1999 - $1,637,000) of costs related to stock
based compensation resulting from stock options granted to officers, employees
and directors. The compensation expense was calculated as the difference between
the option exercise price and the share price of the Company's common stock as
reported by the OTC/BB at the date of issuance. The options may be exercised at
prices between $2.40 to $37.25 and vest over periods ranging from 17 to 36
months. The Company is amortizing the expense relating to the options over their
vesting periods.
Net loss from continuing operations. The Company experienced a loss of
$7,343,000 after the benefit of deferred taxes of $777,000 for the three month
period ended September 30, 2000 as compared to a loss of $6,639,000 for the
period ended September 30, 1999. Loss per share from continuing operations for
the three month period ended September 30, 2000 was $(1.71) compared to $ (2.03)
for the period ended September 30, 1999.
Net income from discontinued operations. Results from discontinued operations
shifted from a net income of $226,000 in 1999 to a net loss of ($582,000). This
shift is the result of the addition of St. Clair in June of 2000, whose
operations generate losses during the summer months. Further, the Company
incurred additional expenses related to its Publication operations as the
material and layout of the publications were upgraded for the calendar 2000
sports seasons.
28
RESULTS OF OPERATIONS (THREE MONTHS ENDING SEPTEMBER 30, 2000 VS. 1999)
CONTINUED...
Net loss from operations. The Company experienced a loss of $7,925,000 after the
benefit of deferred taxes of $777,000 for the three month period ended September
30, 2000 as compared to a loss of $6,413,000 for the period ended September 30,
1999. Loss per share for the three month period ended September 30, 2000 was
$(1.85) compared to $ (1.96) for the period ended September 30, 1999.
Total Assets. The total assets of the Company as of September 30, 2000 totaled
$26,390,000 compared to $32,044,000 at March 31, 2000. The decrease in total
assets was attributable to the amortization of deferred charges, purchased
intangibles and goodwill, totaling $8,780,000, offset by increases to purchased
intangibles and assets from the acquisition of St. Clair.
29
FORWARD LOOKING STATEMENTS
This Report on Form 10-QSB contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Discussions containing forward-looking
statements may be found in the material set forth in this section and under
"Description of Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as in the Report generally. These
statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Specifically, this Report and the
documents incorporated into this Report by reference contain forward-looking
statements regarding:
- our ability to continue operations beyond November 30, 2000;
- our ability to raise additional capital through the sale of additional
capital stock of the Company and satisfactorily resolve the
defaults on our debt;
- our financial condition, results of operations and liquidity,
including the amount of capital assets that we will need to spend over
the next 12 month period;
- the development of the internet industry and the impact of the
increasing convergence between online and offline media;
- our ability to successfully implement our business strategy to expand
our product base, our personnel and our operations and to avoid
reliance on one technology;
- our ability to create marketing solutions that integrate online and
offline media;
- the intensification of the evolving and competitive nature of the
interactive sports contests industry;
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could
in the future affect our actual results and could cause actual results to
differ significantly from those expressed in any forward-looking statement.
The most important factors that could prevent us from achieving our goals,
and cause the assumptions underlying forward-looking statements and the
actual results to differ materially from those expressed in or implied by
those forward-looking statements include, but are not limited to, the
following:
- our inability to fund the cashflow necessary to continue operations;
- risks, uncertainties and assumptions relating to the Company's
cashflow, operations and results of operations, including its
ability to restructure its debt and continue to attract equity
investments;
- the level of usage of the Internet, traffic on our Web sites and
general economic conditions and economic conditions specific to the
Internet, electronic commerce and online media;
- our ability to develop products in a timely and cost-effective manner
that are accepted by the market;
- our ability to successfully manage the Company's growth, including our
ability to hire and retain employees; and
- our ability to protect our intellectual property rights.
30
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has defaulted on its Series 1 Convertible Debentures due to
its failure to pay principal and accrued interest on the maturity dates
(May 31, 2000 and June 30, 2000). As of November 10, 2000 the total
amount of principal and interest due is $ 869,000
The Company has defaulted on its 10% loan payable due to its failure to
pay principal and accrued interest on the maturity date of March 31,
2000. As of November 10, 2000 the total amount of principal and
interest due is $796,000
The Company has defaulted on its prime plus 2% loan due to its failure
to pay principal and accrued interest on the maturity date of July 15,
2000. As of November 10, 2000 the total amount of principal and
interest due is $1,506,000
The Company has defaulted on its loan payable with interest at 7.25%
due to its failure to pay principal and accrued interest on the
maturity date of June 30, 2000. As of November 10, 2000 the total
amount of principal and interest due is $255,000
The Company has defaulted on its 12% promissory note due to its failure
to pay principal and accrued interest on the maturity date of June 23,
2000. As of November 10, 2000 the total amount of principal and
interest due is $315,000
ITEM 5. OTHER INFORMATION
On August 17, 2000, Mr. Greg O'Hara tendered his resignation from the
board of directors of the Company.
The Company has no reason to believe that there was any disagreement by
Mr. O'Hara with any of the Company's operations, policies, or
practices.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None
32
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET SPORTS NETWORK, INC.
(Registrant)
Date: November 10, 2000 /s/ J. Thomas Murray
--------------------------------
J. Thomas Murray
President and CEO
Date: November 10, 2000 /s/ David A. Toews,
---------------------------------
David A. Toews
Chief Financial Officer
33