1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23337
SPORTSLINE USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 65-0470894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6340 N.W. 5th Way
Fort Lauderdale, Florida 33309
(Address of principal executive offices) (Zip Code)
(954) 351-2120
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has 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, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of common stock outstanding as of June 30, 1998:
18,932,326
Page 1 of 15 Pages
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 ............ 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1997.................... 4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 1998....................................... 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997.............................. 6
Notes to Consolidated Financial Statements....................................... 7
2
3
SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 92,189,837 $ 32,482,039
Marketable securities 14,456,543 1,505,909
Deferred advertising and content costs........................................ 6,413,589 517,084
Accounts receivable........................................................... 5,211,409 2,214,150
Prepaid expenses and other current assets..................................... 2,460,465 2,847,561
------------ -------------
Total current assets..................................................... 120,731,843 39,566,743
PROPERTY AND EQUIPMENT, net...................................................... 4,180,075 4,169,688
OTHER ASSETS..................................................................... 3,756,000 1,989,206
------------ -------------
$128,667,918 $ 45,725,637
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 1,015,852 $ 2,001,900
Accrued liabilities........................................................... 4,079,971 3,257,708
Current portion of capital lease obligations.................................. 453,932 501,193
Current portion of long-term borrowings....................................... -- 682,159
Deferred revenue.............................................................. 1,796,953 1,839,962
------------ -------------
Total current liabilities................................................ 7,346,708 8,282,922
CAPITAL LEASE OBLIGATIONS, net of current portion................................ 346,228 457,700
------------ -------------
Total liabilities........................................................ 7,692,936 8,740,622
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued and outstanding as of June 30, 1998 and December 31, 1997 -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
18,932,326 and 15,019,220 issued and outstanding as of
June 30, 1998 and December 31, 1997, respectively........................ 189,323 150,192
Additional paid-in capital.................................................... 194,089,158 93,627,062
Accumulated deficit........................................................... (73,303,499) (56,792,239)
------------ -------------
Total shareholders' equity................................................ $120,974,982 36,985,015
------------ -------------
$128,667,918 $45,725,637
============ ===========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
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4
SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUE ............................... $ 7,012,871 $ 2,032,894 $ 13,802,099 $ 3,507,321
COST OF REVENUE ....................... 3,970,137 2,265,874 8,384,436 4,151,999
------------ ------------ ------------ ------------
GROSS MARGIN (DEFICIT) ................ 3,042,734 (232,980) 5,417,663 (644,678)
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Product development ................. 324,101 685,149 713,231 1,357,370
Sales and marketing ................. 4,630,826 2,737,953 8,993,689 4,969,877
General and administrative .......... 2,924,452 1,737,599 6,139,015 3,397,734
Depreciation and amortization ....... 3,845,512 3,059,938 7,674,310 4,454,265
------------ ------------ ------------ ------------
Total operating expenses ............ 11,724,891 8,220,639 23,520,245 14,179,246
============ ============ ============ ============
LOSS FROM OPERATIONS .................. (8,682,157) (8,453,619) (18,102,582) (14,823,924)
INTEREST EXPENSE ...................... (26,419) (39,908) (53,618) (73,850)
INTEREST AND OTHER INCOME, net ........ 1,203,714 254,431 1,644,940 433,402
------------ ------------ ------------ ------------
NET LOSS .............................. $(7,504,862) $(8,239,096) $(16,511,260) $(14,464,372)
============ ============ ============ ============
NET LOSS PER SHARE - -BASIC AND DILUTED $(0.41) $(0.75) $(0.96) $(1.43)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING - -
BASIC AND DILUTED ................... 18,250,189 10,935,597 17,170,329 10,128,636
============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Common Stock
----------------------- Additional Accumulated
Shares Amount Paid in Capital Deficit Total
------ ------ --------------- ------- -----
Balances at December 31, 1997 15,019,220 $150,192 $93,627,062 $(56,792,239) $36,985,015
------------- ------------- ------------- ------------- -------------
Noncash issuance of common stock
and warrants pursuant to CBS agreement 735,802 7,358 11,890,096 -- 11,897,454
Net proceeds from exercise of CBS warrants 380,000 3,800 3,796,200 -- 3,800,000
Net proceeds from exercise of warrants 47,916 479 297,770 -- 298,249
Issuance of common stock from exercise
of employee options 47,303 473 89,667 -- 90,140
Net loss (unaudited) -- -- -- (9,006,398) (9,006,398)
------------- ------------- ------------- ------------- -------------
Balances at March 31, 1998 16,230,241 162,302 109,700,795 (65,798,637) 44,064,460
------------- ------------- ------------- ------------- -------------
Net proceeds from secondary offering 2,288,430 22,884 80,817,801 -- 80,840,685
Net proceeds from exercise of warrants 50,000 500 299,500 -- 300,000
Issuance of common stock pursuant to the
Employee Stock Purchase Plan 199,060 1,991 1,351,617 -- 1,353,608
Issuance of common stock pursuant to the
purchase of International Golf Outlet 46,924 469 1,646,901 -- 1,647,370
Issuance of common stock from exercise
of employee options 117,671 1,177 272,544 -- 273,721
Net loss -- -- -- (7,504,862) (7,504,862)
------------- ------------- ------------- ------------- -------------
Balances at June 30, 1998 18,932,326 $189,323 $194,089,158 $(73,303,499) $120,974,982
============= ============= ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................... $(16,511,260) $(14,464,372)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .............................................................. 7,674,310 4,454,265
Provision for doubtful accounts ............................................................ 64,605 29,679
Changes in operating assets and liabilities:
Accounts receivable ........................................................................ (3,061,866) (406,219)
Prepaid expenses and other current assets .................................................. 133,734 (721,895)
Accounts payable ........................................................................... (986,048) 420,097
Accrued liabilities ........................................................................ 822,263 822,047
Deferred revenue ........................................................................... (43,009) 285,595
------------ ------------
Net cash used in operating activities ...................................................... (11,907,271) (9,580,803)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net .................................................... (12,950,634) --
Purchases of property and equipment, net ................................................... (1,139,066) (1,715,856)
Acquisition of business .................................................................... (352,630) --
Net redemption of restricted certificates of deposit ....................................... 46,200 --
------------ ------------
Net cash used in investing activities ...................................................... (14,396,130) (1,715,856)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and exercise of common stock
warrants and options 86,956,403 12,941,591
Proceeds from long-term borrowings ......................................................... -- 125,855
Repayment of long-term borrowings .......................................................... (682,159) --
Repayment of capital lease obligations ..................................................... (263,045) (198,034)
------------ ------------
Net cash provided by financing activities .................................................. 86,011,199 12,869,412
------------ ------------
Net increase in cash and cash equivalents .................................................. 59,707,798 1,572,753
CASH AND CASH EQUIVALENTS, beginning of period ............................................. 32,482,039 15,249,542
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ................................................... $92,189,837 $16,822,295
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash issuance of common stock and common stock warrants pursuant to CBS agreement ...... $11,897,454 $8,352,001
============ ============
Non-cash issuance of common stock warrants pursuant to consulting agreements ............... -- $2,551,143
============ ============
Non-cash issuance of common stock in purchase of IGO ....................................... $1,650,000 --
------------ ------------
Equipment acquired under capital leases .................................................... $104,310 --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ..................................................................... $53,618 $73,850
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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SPORTSLINE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS:
SportsLine USA, Inc. ("SportsLine") was incorporated on February 23,
1994 and began recognizing revenue from its operations in September 1995. The
Company is a leading Internet-based sports media company that provides branded,
interactive information and programming as well as merchandise to sports
enthusiasts worldwide. The Company's flagship site on the World Wide Web (the
"Web"), cbs.sportsline.com, delivers real-time, in-depth and compelling sports
content and programming that capitalizes on the Web's unique graphical and
interactive capabilities. The Company's other Web sites include those devoted to
sports superstars, specific sports such as golf, cricket and soccer,
international sports coverage and electronic odds and analysis on major sports
events.
The Company distributes a broad range of up-to-date news, scores,
player and team statistics and standings, photos and audio and video clips
obtained from CBS and other leading sports news organizations and the Company's
superstar athletes; offers instant odds and picks; produces and distributes
entertaining, interactive and original programming such as editorials and
analyses from its in-house staff and freelance journalists; produces and offers
contests, games, and fantasy league products and fan clubs; and sells
sports-related merchandise and memorabilia. The Company also owns and operates a
state-of-the-art radio studio from which it produces the only all-sports radio
programming that is broadcast via the Internet and syndicated to traditional
radio stations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of SportsLine USA, Inc. and its subsidiaries (the "Company"). The
consolidated financial statements include the financial position and results of
operations of GolfWeb, which the Company acquired in January 1998 (the "GolfWeb
Merger"). GolfWeb was a privately-held Internet company that provides
golf-related content, interactive entertainment, membership services and
merchandise through its golfweb.com site, and its international Web sites
targeted to golf enthusiasts in Japan, the United Kingdom, Canada and Australia.
The Company accounted for this transaction using the pooling-of-interests method
of accounting, therefore the accompanying 1997 consolidated financial statements
have been restated to include the accounts of GolfWeb as if the companies had
operated as one entity since inception. The consolidated financial statements
also include the financial position and results of operations of International
Golf Outlet, Inc., acquired in June 1998 (the "IGO Merger"). The Company
accounted for this transaction using the purchase method of accounting. The
purchase resulted in goodwill of $1,960,000 which is included in other assets in
the Company's consolidated balance sheet. Such goodwill is being amortized over
an estimated life of ten years.
In the opinion of management, the unaudited consolidated interim
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company at June 30, 1998, and the results of operations and cash flows for the
three months and the six months ended June 30, 1998 and 1997. The consolidated
balance sheet at December 31, 1997 has been derived from the audited financial
statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These financial statements should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission. The results
of operations for the three and the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 1998.
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SPORTSLINE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(Continued)
Per Share Amounts
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share, was issued. SFAS No. 128 simplifies the methodology
of computing earnings per share and requires the presentation of basic and
diluted earnings per share. The Company's basic and diluted earnings per share
are the same, since inclusion of the Company's common stock equivalents would be
antidilutive. The Company's previously outstanding convertible preferred stock
was converted upon completion of the Company's initial public offering ("IPO")
in November 1997. Accordingly, such shares have been reflected as common stock
for all periods prior to the IPO. SFAS No. 128 was adopted as of December 31,
1997.
Net loss per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable upon
conversion of all convertible preferred stock (using the if-converted method)
and shares issuable upon exercise of stock options and warrants (using the
treasury stock method). There were 2,653,136 and 4,016,679 options and warrants
outstanding at June 30, 1997 and 1998, respectively, that could potentially
dilute earnings per share in the future. Such options and warrants were not
included in the computation of diluted earnings per share because to do so
would have been antidilutive for those periods.
Revenue by Type
Revenue by type for the three and the six months ended June 30, 1997
and 1998 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
Advertising ....................... $4,134,195 $1,184,651 $8,553,057 $1,966,791
E-commerce ........................ 573,686 252,076 1,041,458 408,812
Membership and premium services.... 1,103,168 537,015 2,112,104 1,057,564
Content licensing and other ....... 1,201,822 59,152 2,095,480 74,154
----------- ----------- ----------- -----------
$7,012,871 $2,032,894 $13,802,099 $3,507,321
=========== =========== =========== ===========
Barter transactions, in which the Company received advertising or other
services or goods in exchange for content or advertising on its Web sites,
accounted for approximately 19% and 1% of total revenue for the three months
ended June 30, 1998 and 1997, respectively. Barter transactions accounted for
17% and 2% of total revenue for the six months ended June 30, 1998 and 1997
respectively.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued
which was adopted by the Company as of January 1, 1998. This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of statements of financial position.
Comprehensive income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from non-owner sources.
Comprehensive income equals the net loss for all periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. Currently, the Company does not believe it
has any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments
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SPORTSLINE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(Continued)
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in the statement of
operations unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. A company may also implement the provision
of SFAS No. 133 as of the beginning of any fiscal quarter after issuance. SFAS
No. 133 cannot be applied retroactively, and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997.
The Company has not yet adopted SFAS No. 133 and presently does not have any
derivative instruments.
(3) COMMITMENTS AND CONTINGENCIES:
On March 25, 1997, Weatherline, Inc. ("Weatherline"), a company that
provides pre-recorded weather and sports information by telephone, filed a
complaint against the Company in the United States District Court for the
Eastern District of Missouri. Weatherline owns a United States trademark
registration for the mark "Sportsline" for use in promoting the goods and
services of others by making sports information available to customers of
participating businesses through the telephone, and claims to have used the mark
for this purpose since 1968. The complaint alleges that the Company's use of the
mark "SportsLine USA" and other marks utilizing the term "SportsLine" infringes
upon and otherwise violates Weatherline's rights under its registered trademark
and damages Weatherline's reputation. The complaint seeks a preliminary and
permanent injunction against the Company from using marks containing the term
"Sportsline" or any other similar name or mark which would be likely to cause
confusion with Weatherline's mark. The complaint also seeks actual and punitive
damages and attorneys' fees. The Company believes that its use of the
"SportsLine" mark and "SportsLine" derivative marks does not infringe upon or
otherwise violate Weatherline's trademark rights. The Company has filed an
answer in which it denied all material allegations of the complaint and asserted
several affirmative defenses. The action is still in the discovery stage, and a
trial is currently scheduled for September 1998. The Company intends to
vigorously defend itself against the action. The legal costs that may be
incurred by the Company in defending itself against this action could be
substantial, and the litigation could be protracted and result in diversion of
management and other resources of the Company. In a separate matter, a request
for an extension of time to oppose the Company's application to register the
current version of the SportsLine USA logo has been filed by Weatherline with
the United States Patent and Trademark Office ("USPTO"). There can be no
assurance that the Company will prevail in the lawsuit or any related opposition
proceeding at the USPTO, and an adverse decision in this lawsuit could result in
the Company being prohibited from further use and registration of the
"SportsLine" mark and "SportsLine" derivative marks and being ordered to pay
substantial damages and attorneys' fees to Weatherline, either of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
From time to time, the Company may be involved in other litigation
relating to claims arising out of its operations in the normal course of
business. The Company is not currently a party to any other legal proceedings,
the adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's consolidated financial position or
results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements. Factors
that might cause or contribute to such differences include, among others,
competitive pressures, the growth rate of the Internet, constantly changing
technology and market acceptance of the Company's products and services.
Investors are also directed to consider the other risks and uncertainties
discussed in the Company's Securities and Exchange Commission filings, including
those discussed under the caption "Risk Factors That May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following discussion also should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Report.
Recent Developments
In April 1998, the Company completed a public offering (the "Secondary
Offering") of 4 million shares of common stock at $37.625 per share. Of the 4
million shares offered, 2,288,430 shares were offered by the Company and
1,711,570 shares by selling shareholders. The Company realized approximately
$81,000,000 in net proceeds as a result of the Secondary Offering.
In June 1998, the Company acquired all of the outstanding common stock
of International Golf Outlet, Inc. ("IGO") in exchange for $350,000 in cash and
46,924 shares of common stock. The Company also agreed to issue additional
common stock to the former shareholders of IGO if IGO meets certain revenue and
earnings targets over the three year period following the acquisition. The
acquisition was accounted for under the purchase method; a majority of the
purchase price, approximately $2 million, has been recorded as goodwill and will
be amortized over the next ten years.
Results of Operations
Revenue
Total revenue for the quarter ended June 30, 1998 and 1997 was
$7,013,000 and $2,033,000, respectively. Total revenue for the six months ended
June 30, 1998 and 1997 was $13,802,000 and $3,507,000, respectively. The
increase in revenue was primarily due to increased advertising sales, as well as
increased revenue from the sale of merchandise, memberships and premium service
fees and content licensing. Advertising revenue for the three months ended June
30, 1998 and 1997 represented 59% and 58%, respectively, of total revenue.
Advertising revenue for the six months ended June 30, 1998 and 1997 accounted
for 62% and 56%, respectively, of total revenue. Advertising revenue increased
primarily as a result of a higher number of impressions sold and additional
sponsors advertising on the Company's Web sites. During 1997 and the six months
ended June 30, 1998, the Company increased its sales efforts, including
expanding its sales force and opening sales offices in New York City, San
Francisco, Chicago and Los Angeles. In addition to increased sales efforts, the
number of impressions available on the Company's Web sites increased as more
content was produced. Membership and premium services revenue increased $566,000
in the three months ended June 30, 1998 compared to the same period in 1997 and
$1,055,000 in the six months ended June 30, 1998 compared to the same period in
1997. Basic membership revenue increased in each period as a result of
additional member signups and retention. Premium service revenue increased due
to increased participation in the Company's fantasy sports contests as well as
an increased number of premium products, including the Company's
vegasinsider.com Web site, which was launched in March 1997. E-commerce revenue
increased 128% to $574,000 in the three months ended June 30, 1998 from $252,000
for the three months ended June 30, 1997. E-commerce revenue increased 155% to
$1,041,000 for the six months ended June 30, 1998 from $409,000 for the six
months ended June 30, 1997. During the fourth quarter of 1997, the Company
launched The Sports Store (thesportstore.com), which offers a variety of branded
sports merchandise, books, videos and unique collectible memorabilia. Both
advertising and E-commerce revenue increased in part due to special events in
1998, such as the Winter Olympics and World Cup Soccer. Content licensing and
other revenue increased $1,143,000 in the three months ended June 30, 1998
compared to the same period in 1997 and $2,021,000 in the six months ended June
30, 1998 compared to the same period in 1997 primarily due to an agreement
entered into in July 1997 between the Company and America Online, Inc. ("AOL").
As of June 30, 1998, the Company had deferred revenue of $1,797,000 relating to
cash or receivables for which services had not yet been provided.
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Barter transactions, in which the Company received advertising or other
services or goods in exchange for content or advertising on its Web sites,
accounted for approximately 19% and 1% of total revenue for the three months
ended June 30, 1998 and 1997, respectively. Barter transactions accounted for
17% and 2% of total revenue for the six months ended June 30, 1998 and 1997,
respectively. Barter revenue increased in 1998 primarily due to revenue related
to the AOL agreement. In future periods, management intends to maximize cash
advertising and content licensing revenue, although the Company will continue to
enter into barter relationships when deemed appropriate.
Cost of Revenue
Cost of revenue for the three months ended June 30, 1998 and 1997 was
$3,970,000 and $2,266,000 respectively. Cost of revenue for the six months ended
June 30, 1998 and 1997 was $8,384,000 and $4,152,000, respectively. The increase
in cost of revenue was primarily the result of increased revenue sharing,
content fees and athlete/personality fees incurred, as well as increases in
editorial and operations staff necessary for the production of sports-related
information and programming on the Company's Web sites. In addition,
telecommunications cost increased as the Company increased its capacity to
provide support and delivery of its services to the increased traffic on its Web
sites. The Company anticipates that total cost of revenue will continue to grow
as it increases staffing to expand its services, increases its merchandising
efforts and incurs higher content and royalty fees, and as the Company requires
more bandwidth from its Internet service providers. As a percentage of revenue,
cost of revenue decreased to 57% for the three months ended June 30, 1998 from
111% for the three months ended June 30, 1997. For the six months ended June 30,
1998 and 1997 cost of revenue decreased to 61% from 118%.
Operating Expenses
Product Development. For the three months ended June 30, 1998 and 1997,
product development costs were $324,000 and $685,000, respectively. For the six
months ended June 30, 1998 and 1997, product development costs were $713,000 and
$1,357,000, respectively. The decrease in product development expense is
primarily the result of the reduction of product development personnel and
consultants at GolfWeb. The Company believes that significant investments in
product development are required to remain competitive. Consequently, the
Company intends to continue to invest significant resources in product
development. As a percentage of revenue, product development expense decreased
to 5% for the three months ended June 30, 1998 from 34% for the three months
ended June 30, 1997. For the six months ended June 30, 1998 and 1997 product
development expense decreased to 5% from 39%.
Sales and Marketing. For the three months ended June 30, 1998 and 1997,
sales and marketing expense was $4,631,000 and $2,738,000, respectively. Sales
and marketing expense was $8,994,000 for the six months ended June 30, 1998
compared to $4,970,000 for the six months ended June 30, 1997. The increase in
sales and marketing expense was primarily the result of the growth in the number
of personnel and related costs and increased advertising on other Web sites.
Barter transactions accounted for approximately 29% and 1% of sales and
marketing expense for the three months ended June 30, 1998 and 1997,
respectively and 27% and 1% of sales and marketing expense for the six months
ended June 30, 1998 and 1997, respectively. The increase in the proportionate
amount of barter expense was due to the barter for content licensing for
advertising during 1998. As a percentage of revenue, sales and marketing expense
decreased to 66% for the three months ended June 30, 1998 from 135% for the
three months ended June 30, 1997. For the six months ended June 30, 1998 and
1997, sales and marketing expense decreased to 65% from 142%.
General and Administrative. General and administrative expense for the
three months ended June 30, 1998 and 1997, was $2,924,000 and $1,738,000,
respectively. For the six months ended June 30, 1998 general and administrative
expense was $6,139,000 compared to $3,398,000 for the six months ended June 30,
1997. The increase in general and administrative expense in each period was
primarily attributable to salary and related expenses for additional personnel
and an increase in professional fees. As a percentage of revenue, general and
administrative expense decreased to 42% for the three months ended June 30, 1998
from 85% for the three months ended June 30, 1997, and to 44% for the six months
ended June 30, 1998 from 97% for the six months ended June 30, 1997.
Depreciation and Amortization. Depreciation and amortization expense
was $3,845,000 and $3,060,000 for the three months ended June 30, 1998 and 1997,
respectively. For the six months ended June 30, 1998 depreciation and
amortization expense was $7,674,000 compared to $4,454,000 for the six months
ended June 30, 1997., The increase in depreciation and amortization expense was
primarily due to the amortization of amounts related to the Company's March 1997
agreement with CBS Inc. ("CBS"). The Company also acquired additional property
and equipment during the first six months of 1998 which resulted in an increase
in depreciation and amortization for the period.
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Under the Company's agreement with CBS, the Company will issue at the
beginning of each contract year shares of common stock and warrants to purchase
common stock in consideration of CBS's advertising and promotional efforts and
its license to the Company of the right to use certain CBS logos and
television-related sports content. The value of the advertising and content will
be recorded annually in the balance sheet as deferred advertising and content
costs and amortized to depreciation and amortization expense over each related
contract year. Total expense under the CBS agreement was $6,000,000 for the six
months ended June 30, 1998, and will be $6,000,000 for the remainder of 1998.
Interest Expense. Interest expense was $26,000 for the three months
ended June 30, 1998 compared to $40,000 for the three months ended June 30,
1997. For the six months ended June 30, 1998 and 1997, interest expense was
$54,000 and $74,000 respectively. In February 1998, the Company fully paid the
balance of two of its equipment credit facilities.
Interest and Other Income, Net. Interest and other income, net for the
three months ended June 30, 1998 was $1,204,000 compared to $254,000 for the
three months ended June 30, 1997. For the six months ended June 30, 1998 and
1997, interest and other income was $1,645,000 and $433,000, respectively. The
increase was primarily attributable to the higher average balance of cash and
cash equivalents and marketable securities resulting from the investment of the
proceeds from the Company's IPO and the Secondary Offering.
Liquidity and Capital Resources
As of June 30, 1998, the Company's primary source of liquidity
consisted of $106,646,000 in cash and marketable securities, an increase of
$72,658,000 from December 31, 1997. In January 1998, CBS exercised warrants to
purchase 380,000 shares of common stock, resulting in the net proceeds of
$3,800,000. In April 1998 the Company completed the Secondary Offering resulting
in the net proceeds to the Company of $80,841,000. The Company invests
predominantly in instruments that are highly liquid, of high-quality investment
grade, and predominantly have maturities of less than one year with the intent
to make such funds readily available for operating and investing purposes.
As of December 31, 1997, the Company owed $281,000 under its equipment
line of credit which was paid in full in February 1998.
The Company has obtained revolving credit facilities that provide for
the lease financing of computers and other equipment purchases. Outstanding
amounts under the facilities bear interest at variable rates of approximately
9%. As of June 30, 1998, the Company owed $800,000 under these facilities.
As of June 30, 1998, deferred advertising and content costs totaled
$6,414,000, which represented costs related to the CBS agreement to be amortized
to depreciation and amortization expense during the balance of the year ended
December 31, 1998. Accrued liabilities totaled $4,080,000 as of June 30, 1998,
an increase of $822,000 from December 31, 1997, primarily due to increases in
accruals for revenue sharing and professional fees.
Net cash used in operating activities was $11,907,000 and $9,581,000
for the six months ended June 30, 1998 and 1997, respectively. The principal
uses of cash in operating activities were to fund the Company's net losses from
operations, partially offset by depreciation and amortization.
Net cash used in investing activities was $14,396,000 and $1,716,000
for the six months ended June 30, 1998 and 1997, respectively. The principal use
of cash in investing activities was for the net purchase of marketable
securities for $12,951,000 in 1998. Additionally, the Company purchased
$1,139,000 of property and equipment in 1998 consisting primarily of computer
hardware and software.
Net cash provided by financing activities was $86,011,000 and
$12,869,000 for the six months ended June 30, 1998 and 1997, respectively.
Financing activities consisted principally of the issuance of equity securities
in connection with the Company's Secondary Offering and exercise of warrants by
CBS.
The Company has entered into various licensing, royalty and consulting
agreements with content providers, vendors, athletes and sports organizations,
which agreements provide for consideration in various forms, including issuance
of warrants to purchase common stock and payment of royalties, bounties and
certain other guaranteed amounts on a per member and/or a minimum dollar amount
basis over terms ranging from one to ten years. Additionally, some of these
agreements provide for a specified percentage of advertising and merchandising
revenue to be paid to the athlete or organization from whose Web site the
revenue is derived. As of December 31, 1997, the minimum guaranteed payments
required to be made by the Company under such agreements were $15,151,000. The
Company's minimum guaranteed payments are subject to reduction in the case of
certain agreements based upon the
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appreciation of warrants issued, the value of the Company's stock received on
exercise of such warrants and the amount of profit sharing earned under the
related agreements. During June 1998, as a result of the market price of the
Company's common stock exceeding a certain level, the Company's guaranteed
minimum payments were reduced by $10 million.
Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $2 million of property and
equipment during the remainder of 1998, primarily computer equipment and
furniture and fixtures. The Company intends to continue to pursue acquisitions
of or investments in businesses, services and technologies that are
complementary to those of the Company.
The Company believes that its current cash and marketable securities
will be sufficient to fund its working capital and capital expenditure
requirements for at least the next 12 to 18 months. However, the Company expects
to continue to incur significant operating losses for at least the next 24 to 36
months. To the extent the Company requires additional funds to support its
operations or the expansion of its business, the Company may sell additional
equity, issue debt or convertible securities or obtain credit facilities through
financial institutions. There can be no assurance that additional financing, if
required, will be available to the Company in amounts or on terms acceptable to
the Company.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company is currently
designing and testing its services to be Year 2000 compliant. There can be no
assurances that the Company's current services do not contain undetected errors
or defects with Year 2000 date functions that may result in material costs to
the Company. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the Year
2000, there can be no assurances that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its internal systems.
Seasonality
The Company expects that its revenue will be higher leading up to and
during major U.S. sports seasons and lower at other times of the year,
particularly during the summer months. In addition, the effect of such seasonal
fluctuations in revenue could be enhanced or offset by revenue associated with
major sports events, such as the Olympics, the Ryder Cup and the World Cup,
although such events do not occur every year. The Company believes that
advertising sales in traditional media, such as television, generally are lower
in the first and third calendar quarters of each year, and that advertising
expenditures fluctuate significantly with economic cycles. Depending on the
extent to which the Internet is accepted as an advertising medium, seasonality
and cyclicality in the level of Internet advertising expenditures could become
more pronounced. The foregoing factors could have a material adverse affect on
the Company's business, results of operations and financial condition.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued
which was adopted by the Company as of January 1, 1998. This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of statements of financial position.
Comprehensive income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from non-owner sources.
Comprehensive income equals the net loss for all periods presented.
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In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. Currently, the Company does not believe it
has any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in the statement of operations unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the statement
of operations, and requires that a company formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. A company may
also implement the provision of SFAS No. 133 as of the beginning of any fiscal
quarter after issuance. SFAS No. 133 cannot be applied retroactively, and must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997. The Company has not yet adopted SFAS No. 133
and presently does not have any derivative instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended June 30, 1998, there were no material
developments in previously reported litigation involving the Company.
ITEM 2. CHANGE IN SECURITIES
Sales of Unregistered Securities During the Three Months Ended June 30, 1998
During the three months ended June 30, 1998, the Company issued and
sold the following securities without registration under the Securities Act:
In June 1998, as part of the Company's acquisition of all of the
outstanding stock of International Golf Outlet, Inc. ("IGO"), the Company issued
to the shareholders of IGO a total of 46,924 shares of common stock. During the
three months ended June 30, 1998, upon exercise of warrants, the Company issued
a total of 50,000 shares of common stock for aggregate cash consideration of
$300,000 including: (i) 5,000 shares of common stock to Gabrielle Reece for cash
consideration of $25,000; (ii) 5,000 shares of common stock to Lee Kolligian for
cash consideration of $25,000; (iii) 10,000 shares of common stock to William
Morris Agency, Inc. for cash consideration of $100,000; (iv) 20,000 shares of
common stock to James Walsh for cash consideration of $100,000; (v) 8,500 shares
of common stock to Pistol Pete, Inc. for cash consideration of $42,500; and (vi)
1,500 shares to IMG for cash consideration of $7,500.
No underwriter was involved in any of the above sales of securities.
All of the above securities were issued in reliance upon the exemption set forth
in Section 4(2) of the Securities Act of 1933, as amended, on the basis that
they were issued under circumstances not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11, 1998, the Company held its Annual Meeting of Shareholders.
At the meeting, the shareholders elected the following individuals as directors:
Michael Levy (with 16,948,675 affirmative votes and 10,234 votes withheld),
Joseph Lacob (with 16,929,338 affirmative votes and 29,571 votes withheld),
Andrew Nibley (with 16,948,675 affirmative votes and 10,234 votes withheld) and
James C. Walsh (with 16,948,675 affirmative votes and 10,234 votes withheld).
The shareholders also approved an amendment to the 1997 Incentive
Compensation Plan increasing the number of shares of the Company's Common Stock
reserved for issuance thereunder by 1,000,000 shares (with 13,908,755 shares
voting for, 987,711 shares voting against, 10,299 shares abstaining and
2,052,164 non-voting shares).
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 Employment Agreement, dated as of June 15, 1998, between the Company and Michael Levy.
Exhibit 10.2 Form of Letter Agreement entered into between the Company and each of Kenneth W. Sanders and
Mark J. Mariani.
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended June 30,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 SPORTSLINE USA, INC.
(Registrant)
/s/ Michael Levy
-------------------------------------
Michael Levy
President and Chief Executive Officer
/s/ Kenneth W. Sanders
--------------------------------------
Kenneth W. Sanders
Chief Financial Officer
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