1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD MARCH 31, 1999
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 May 11, 1999:
22,428,132
Page 1 of 16 Pages
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998......... 3
Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998......................... 4
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 1999.................................. 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998......................... 6
Notes to Consolidated Financial Statements..................................... 7
2
3
SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
(UNAUDITED)
March 31, December 31,
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 160,416 $ 31,684
Marketable securities ....................................................... 37,541 27,391
Deferred advertising and content costs ...................................... 20,038 5,413
Accounts receivable ......................................................... 7,054 5,051
Prepaid expenses and other current assets ................................... 7,247 5,181
--------- ---------
Total current assets .................................................... 232,296 74,720
PROPERTY AND EQUIPMENT, net .................................................... 6,227 5,367
NONCURRENT MARKETABLE SECURITIES ............................................... 26,427 26,167
RESTRICTED CASH EQUIVALENTS .................................................... 13,039 13,038
NONCURRENT DEFERRED ADVERTISING AND CONTENT - CBS .............................. 41,681 --
NONCURRENT DEFERRED ADVERTISING -AOL ........................................... 11,500 13,417
OTHER ASSETS ................................................................... 8,990 4,946
--------- ---------
$ 340,160 $ 137,655
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 1,929 $ 2,545
Accrued liabilities ......................................................... 6,692 5,334
Current portion of capital lease obligations ................................ 265 265
Deferred revenue ............................................................ 1,817 2,067
--------- ---------
Total current liabilities .............................................. 10,703 $ 10,211
CAPITAL LEASE OBLIGATIONS, net of current portion .............................. 143 207
ACCRUED AOL OBLIGATION ......................................................... 8,274 8,274
CONVERTIBLE SUBORDINATED NOTES ................................................. 150,000 --
--------- ---------
Total liabilities ...................................................... 169,120 18,692
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued and outstanding as of March 31, 1999 and December 31, 1998 ....... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
22,384,266 and 20,300,785 issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively ..................... 224 203
Additional paid-in capital .................................................. 273,245 211,061
Accumulated deficit ......................................................... (102,429) (92,301)
--------- ---------
Total shareholders' equity .............................................. 171,040 118,963
--------- ---------
$ 340,160 $ 137,655
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
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SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share data)
(UNAUDITED)
Three Months Ended
March 31,
---------
1999 1998
---- ----
REVENUE ........................................................................ $ 11,057 $ 6,789
COST OF REVENUE ................................................................ 5,383 4,414
----------- -----------
GROSS MARGIN ................................................................... 5,674 2,375
----------- -----------
OPERATING EXPENSES:
Product development .......................................................... 357 389
Sales and marketing .......................................................... 6,786 4,363
General and administrative ................................................... 3,861 3,214
Depreciation and amortization ................................................ 5,844 3,829
----------- -----------
Total operating expenses ........................................... 16,848 11,795
----------- -----------
LOSS FROM OPERATIONS ........................................................... (11,174) (9,420)
INTEREST EXPENSE ............................................................... (186) (27)
INTEREST AND OTHER INCOME, net ................................................. 1,232 441
----------- -----------
NET LOSS ....................................................................... $ (10,128) $ (9,006)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED ......................................... $ (0.47) $ (0.56)
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -
BASIC AND DILUTED ............................................................ 21,694,499 16,087,874
=========== ===========
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
(amount in thousands except share data)
(UNAUDITED)
COMMON STOCK ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
------ ------ --------------- ------- -----
Balances at December 31, 1998 20,300,785 $203 $211,061 $ (92,301) $118,963
Noncash issuance of common stock
and warrants pursuant to CBS agreement 1,611,925 17 59,671 -- 59,688
Net proceeds from exercise of warrants 243,800 2 1,395 -- 1,397
Issuance of common stock from exercise
of employee options 227,756 2 1,118 -- 1,120
Net loss -- -- -- (10,128) (10,128)
---------- ---- -------- --------- --------
Balances at March 31, 1999 22,384,266 $224 $273,245 $(102,429) $171,040
========== ==== ======== ========= ========
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
(amount in thousands except for share data)
(UNAUDITED)
Three Months Ended
March 31,
---------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................. $ (10,128) $ (9,006)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................................... 5,844 3,829
Provision for doubtful accounts ....................................................... 51 33
Changes in operating assets and liabilities:
Accounts receivable ............................................................... (2,054) (1,262)
Prepaid expenses and other current assets ......................................... (1,497) (119)
Accounts payable .................................................................. (616) (1,120)
Accrued liabilities ............................................................... 1,358 2,472
Deferred revenue .................................................................. (250) (460)
--------- ---------
Net cash used in operating activities .............................................. (7,292) (5,633)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net ................................................... (10,150) (19)
Purchases of property and equipment ....................................................... (1,721) (592)
Net (increase) decrease of restricted certificates of deposit ............................. (1) 139
--------- ---------
Net cash used in investing activities .............................................. (11,872) (472)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and exercise of common
stock warrants and options ............................................................. 2,517 4,188
Proceeds from issuance of convertible subordinated notes, net of costs .................... 145,443 --
Repayment of capital lease obligations and long term borrowings ........................... (64) (771)
--------- ---------
Net cash provided by financing activities .......................................... 147,896 3,417
--------- ---------
Net increase (decrease) in cash and cash equivalents .......................................... 128,732 (2,688)
CASH AND CASH EQUIVALENTS, beginning of period ................................................ 31,684 32,482
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ...................................................... $ 160,416 $ 29,794
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Noncash issuance of common stock and common stock warrants pursuant to CBS agreement ...... $ 59,688 $ 11,897
========= =========
Equipment acquired under capital leases ................................................... -- $ 76
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................................... $ 19 $ 27
========= =========
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 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. GolfWeb is
an 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 consolidated financial statements
also include the financial position and results of operations of International
Golf Outlet, Inc., acquired in June 1998. 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 quarter ending March 31, 1999, $51,000 was amortized
to expense.
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 March 31, 1999, and the results of operations and cash flows for
the three months ended March 31, 1999 and 1998. The consolidated balance sheet
at December 31, 1998 has been derived from the audited financial statements as
of 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 months ended March 31, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 1999.
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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
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 7,101,156 and 3,714,139 options and warrants
outstanding at March 31, 1999 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 all periods presented.
REVENUE BY TYPE
Revenue by type for the three months ended March 31, 1999 and 1998 is
as follows:
THREE MONTHS ENDED
------------------
MARCH 31,
1999 1998
---- ----
Advertising........................................ $ 5,888 $ 4,419
E-commerce......................................... 2,221 467
Membership and premium services.................... 1,340 1,009
Content licensing and other........................ 1,608 894
------- -------
$11,057 $ 6,789
======= =======
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 18% and 15% of total revenue for the three
months ended March 31, 1999 and 1998, 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 loss is defined as the change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources. Comprehensive loss 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 analyzes its revenue streams by type as disclosed in Note 2 and
analyzes and controls expenses by area or department as presented on the
consolidated statements of operations and does not believe it has any
separately reportable business segments as defined in SFAS No. 131.
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
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SPORTSLINE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
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
September 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:
From time to time, the Company may be involved in 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.
Effective as of October 1, 1998, the Company and America Online, Inc.
("AOL") entered into an agreement ("the AOL Agreement"), which has an initial
term of three years, subject to extension for up to two additional three-year
terms at the option of AOL under certain circumstances. Under the AOL
Agreement, the Company became the premier provider of special features and
major event coverage to the Sports Channel on the AOL service, as well as an
anchor tenant in the Sports Web Center on aol.com, AOL's Web site.
cbs.sportsline.com will also be the premier national sports partner with a
presence on all Digital City local services, currently serving 50 cities, and
an anchor tenant in the Sports Channel on CompuServe. In addition, SportsLine
WorldWide will be the premier global provider of country-specific sports
content to all of AOL's international services, and the Company will be the
premier provider of licensed sports equipment and apparel as well as golf
products within the Sports Channel on the AOL service. The Company (i) paid AOL
cash in the amount of $8 million, (ii) issued AOL 550,000 shares of Common
Stock and (iii) granted AOL warrants to purchase an additional 900,000 shares
of Common Stock at exercise prices ranging from $20 to $40 per share, 450,000
of which are subject to vesting based on the Company's achievement of specified
revenue thresholds. Furthermore, the Company has agreed to make a payment to
AOL, provided, that AOL holds and does not sell any of such shares for a period
of two years, if AOL is not able to realize at least $15 million from the sale
of the 550,000 shares of Common Stock issued to it, at the end of such two-year
period (the "AOL Obligation"). The Company accrued a liability of approximately
$8,274,000 for the payment that may be required based on the value of the
Company's stock at inception of the AOL agreement and placed in escrow cash and
cash equivalents of approximately $12,500,000 to be restricted as security for
the AOL Obligation. On a pro forma basis, as of March 31, 1999, had AOL sold
the shares of the Company's common stock issued under the AOL Agreement
pursuant to the provisions of the stock liability, the Company would have
recorded a non-recurring gain of approximately $8,274,000. The ultimate amount
of any such accrued AOL Obligation will be determined upon future sale of such
shares by AOL. In addition, AOL will be eligible to share in direct revenues
attributable to AOL promotion of Company offerings on AOL brands once certain
thresholds specified in the agreement have been met. Over the three-year
agreement, the Company will receive a number of guaranteed impressions on AOL's
commercial online services and Web sites.
In March 1999, the Company completed an offering of 5% Convertible
Subordinated Notes due 2006 in the amount of $150 million of aggregate
principal (the "Convertible Subordinated Notes"). The Convertible Subordinated
Notes are convertible, at the holders option, into the Company's common stock
at an initial conversion rate of 15.355 shares of common stock per $1000
principal amount of Convertible Subordinated Notes (equivalent to a conversion
price of approximately $65.125 per share), subject to adjustment in certain
events. Interest on the Convertible Subordinated Notes is payable semiannually
on April 1 and October 1 of each year, commencing October 1, 1999. The
Convertible Subordinated Notes are unsecured and are subordinated to all
existing and future Senior Indebtedness (as defined in the Convertible
Subordinated Notes indenture) of the Company. The Convertible Subordinated
Notes may not be redeemed by the Company prior to April 2, 2002. Thereafter,
the Convertible Subordinated Notes will be redeemable at the option of the
Company, in whole or part, at the redemption prices set forth in the
Convertible Subordinated Notes indenture. As of March 31, 1999, the Company had
no material indebtedness outstanding that would have constituted Senior
Indebtedness. The Indenture will not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company can create,
incur, assume, or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create, incur, assume or
guarantee.
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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, 1998. 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 February 1999, the Company amended its 1997 agreement with CBS to
extend the original term of the agreement for five years, through 2006.
Commencing with calendar year 1999, CBS will provide advertising and promotion
in accordance with a fixed promotion schedule. The Company accelerated the
issuance to CBS of 1,052,937 shares of Common Stock and warrants to purchase
760,000 shares of Common Stock, which originally were to be issued in 2000 and
2001. The Company also issued to CBS new warrants to purchase 1,200,000 shares
of Common Stock, which vest on various dates through January 2001, and agreed
to issue to CBS on specified dates for each of the sixth through tenth contract
years Common Stock having a fair market value of $20.0 million on each issue
date. In addition, a revenue sharing provision which required the Company to
pay CBS a percentage of certain advertising revenue was replaced with a new
revenue sharing formula based on specified percentages of the Company's "Net
Revenue" (as defined in the agreement).
In March 1999, the Company completed an offering of 5% Convertible
Subordinated Notes due 2006 in the amount of $150 million of aggregate
principal (the "Convertible Subordinated Notes"). The Convertible Subordinated
Notes are convertible, at the holders option, into the Company's common stock
at an initial conversion rate of 15.355 shares of common stock per $1000
principal amount of Convertible Subordinated Notes (equivalent to a conversion
price of approximately $65.125 per share), subject to adjustment in certain
events. Interest on the Convertible Subordinated Notes is payable semiannually
on April 1 and October 1 of each year, commencing October 1, 1999. The
Convertible Subordinated Notes are unsecured and are subordinated to all
existing and future Senior Indebtedness (as defined in the Convertible
Subordinated Notes indenture) of the Company. The Convertible Subordinated
Notes may not be redeemed by the Company prior to April 2, 2002. Thereafter,
the Convertible Subordinated Notes will be redeemable at the option of the
Company, in whole or part, at the redemption prices set forth in the
Convertible Subordinated Notes indenture. As of March 31, 1999, the Company had
no material indebtedness outstanding that would have constituted Senior
Indebtedness. The Indenture will not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company can create,
incur, assume, or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create, incur, assume or
guarantee. Net proceeds of this offering will be used for working capital and
other general corporate purposes, including expansion of the Company's
marketing and advertising sales efforts, international expansion and capital
expenditures.
In April 1999, the Company entered into a five-year agreement with PGA
Tour, Inc., which will combine the editorial, promotional and marketing
resources of the PGA Tour and the Company. The new site, Golfweb@PGATOUR.com,
is expected to debut in July 1999 and will offer the most extensive offering of
golf content, tournament coverage, real-time scoring, merchandising and
interactive features to golf fans on the internet. The Company paid PGA Tour an
up-front licensing fee of $8.5 million and the two parties will share all
revenue generated from the site for advertising, sponsorships, PGA merchandise,
content licensing/syndication and any other revenue generating activities.
In May 1999, the Company formed a new subsidiary, SportsLine Europe
Limited, which will provide content, community and e-commerce to sports
enthusiasts throughout Europe. SportsLine USA will own approximately 80% of
SportsLine Europe, and Intel Corporation, MediaOne Ventures, a division of
MediaOne Group, and Reuters have acquired minority interests in the new entity.
SportsLine Europe has agreed to acquire sportsweb.com, a United Kingdom based
sports website, from Reuters. SportsLine Europe will incorporate sportsweb.com
into its network of sites. SportsLine Europe will launch during the summer of
1999.
RESULTS OF OPERATIONS
Revenue
Total revenue for the quarter ended March 31, 1999 and 1998 was
$11,057,000 and $6,789,000, respectively. The increase in revenue was primarily
due to increased advertising sales, as well as increased revenue from the sale
of merchandise, memberships and
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premium service fees and content licensing. Advertising revenue for the three
months ended March 31, 1999 and 1998 represented 53% and 65%, 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 1998, the Company increased its sales efforts, including
expanding its sales force by increasing the staff of the sales offices in New
York City, San Francisco, Chicago, Los Angeles and Detroit. 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 $331,000 in the three months ended March 31, 1999
compared to the same period in 1998. Basic membership revenue increased in each
period as a result of additional member signups and retention. The Company had
approximately 57,000 and 54,500 paying members as of March 31, 1999 and 1998,
respectively. In January 1999, the Company launched "SportsLine Rewards", a
program which offers bonus points to members for viewing pages and making
purchases. These points can be redeemed for discounts on merchandise, special
events and other premium items. Premium service revenue increased due to
increased participation in the Company's fantasy sports contests as well as an
increased number of premium products. In August 1998, membership prices were
increased for the Company's vegasinsider.com site. E-commerce revenue increased
376% to $2,221,000 in the three months ended March 31, 1999 from $467,000 for
the three months ended March 31, 1998. The principal contributing factors to
increased e-commerce revenue were the NCAA Basketball Tournament and the Super
Bowl. These special events helped drive the increases in both advertising and
e-commerce revenue. Content licensing and other revenue increased by $714,000
in the three months ended March 31, 1999 compared to the same period in 1998.
This was in part due to increased revenue as a result of the AOL agreement.
Other content revenue was also generated by a new content licensing agreement
with Excite pursuant to which a cobranded site was launched in February 1999.
As of March 31, 1999, the Company had deferred revenue of $1,817,000 relating
to cash or receivables for which services had not yet been provided.
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 18% and 15% of total revenue for the three
months ended March 31, 1999 and 1998, respectively. 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 March 31, 1999 and 1998 was
$5,383,000 and $4,414,000, respectively. The increase in cost of revenue was
primarily the result of increased merchandise costs due to higher merchandise
sales and content fees incurred. During the first quarter of 1999, the Company
increased its editorial and operations staff to support the production of
sports-related information and programming on the Company's Web sites and the
content requirements under the AOL Agreement. 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 49%
for the three months ended March 31, 1999 from 65% for the three months ended
March 31, 1998.
Operating Expenses
Product Development. For the three months ended March 31, 1999 and
1998, product development costs were $357,000 and $389,000, respectively.
During 1998, Golfweb product development and personnel were consolidated with
the Company's existing staff, and redundancies were eliminated. 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 3% for the three months ended March
31, 1999 from 6% for the three months ended March 31, 1998.
Sales and Marketing. For the three months ended March 31, 1999 and
1998, sales and marketing expense was $6,786,000 and $4,363,000, respectively.
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. Also in February 1999, the Company entered into a new
agreement with Netscape which resulted in additional advertising expense.
Barter transactions accounted for approximately 29% and 24% of sales and
marketing expense for the three months ended March 31, 1999 and 1998. The
increase in the proportionate amount of barter expense was due to the barter of
content licensing for advertising during 1999 and 1998. As a percentage of
revenue, sales and marketing expense decreased to 61% for the three months
ended March 31, 1999 from 64% for the three months ended March 31, 1998.
General and Administrative. General and administrative expense for the
three months ended March 31, 1999 and 1998 was $3,861,000 and $3,214,000,
respectively. The increase in general and administrative expense in each period
was primarily attributable to salary and related expenses for additional
personnel and increases in rent and occupancy expense. The Company increased
general and administrative expense in order to develop and maintain the
administrative infrastructure necessary to support the growth of its business.
As a percentage of revenue, general and administrative expense decreased to 35%
for the three months ended March 31, 1999 from 47% for the three months ended
March 31, 1998.
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Depreciation and Amortization. Depreciation and amortization expense
was $5,844,000 and $3,829,000 for the three months ended March 31, 1999 and
1998, respectively. The increase in depreciation and amortization expense was
primarily due to the amortization of amounts related to the Company's
agreements with CBS and AOL and to a lesser extent additional property and
equipment. The CBS agreement was amended in February 1999, which resulted in
the acceleration of the issuance of stock and warrants to CBS, resulting in
increased amortization expense in the first quarter of 1999. In future periods,
the Company anticipates total amortization expense to increase as a result of
additional amortization expense related to the shares and warrants issued under
the new AOL and CBS agreements.
Under the Company's agreement with CBS, the Company issued 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 $3,381,000 for the three months ended March 31, 1999 and will
be $10,715,000 for the remainder of 1999.
Under the Company's agreement with AOL, which was effective upon
expiration of the prior agreement in October 1998, the Company issued shares of
Common Stock and warrants to purchase Common Stock and made a cash payment in
consideration of AOL's advertising and promotional efforts. The value of the
advertising has been recorded on the balance sheet as deferred advertising
costs and is amortized to depreciation and amortization expense over each
related contract year. Total amortization expense under the AOL agreement was
$1,250,000 for the three months ended March 31, 1999 and will be $3,750,000 for
the remainder of 1999.
Interest Expense. Interest expense was $186,000 for the three months
ended March 31, 1999 compared to $27,000 for the three months ended March 31,
1998. The increase in interest expense was primarily due to the interest
recorded on the Convertible Subordinated Notes which were issued on March 24,
1999 (see "Recent Developments").
Interest and Other Income, Net. Interest and other income, net for the
three months ended March 31, 1999 was $1,232,000 compared to $441,000 for the
three months ended March 31, 1998. 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
April 1998 public equity offering and the Company's March 1999 Convertible
Subordinated Note offering.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's primary source of liquidity
consisted of $160,416,000 in cash and cash equivalents, an increase of
$128,732,000 from December 31, 1998. Short term marketable securities at March
31, 1999, totaled $37,541,000, an increase of $10,150,000 from December 31,
1998. The Company invests its excess cash predominantly in instruments that are
highly liquid, of high investment grade, and predominantly have maturities of
less than one year with the intent to make such funds readily available for
operating and investment purposes. On March 24, 1999, the Company sold
$150,000,000 of 5% Convertible Subordinated Notes due 2006. The total net
proceeds from this offering was approximately $145,443,000.
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 March 31, 1999, the Company owed $408,000 under these facilities.
As of March 31, 1999, current deferred advertising and content costs
totaled $20,038,000 and long-term deferred advertising and content costs
totaled $53,181,000, which represented costs related to the CBS and AOL
agreements. These amounts will be amortized to depreciation and amortization
expense over the terms of each agreement. Accrued liabilities totaled
$6,692,000 as of March 31, 1999, an increase of $1,358,000 from December 31,
1998, primarily due to increases in accruals for advertising, professional
fees, and the employee stock purchase plan.
Net cash used in operating activities was $7,292,000 and $5,633,000
for the three months ended March 31, 1999 and 1998, respectively. The principal
uses of cash for all periods were to fund the Company's net losses from
operations, partially offset by increases in depreciation and amortization and
accrued liabilities.
Net cash used in investing activities was $11,872,000 and $472,000 for
the three months ended March 31, 1999 and 1998, respectively. The principal
uses of cash in investing activities was for the purchase of current and
noncurrent marketable securities and for purchases of property and equipment.
Net cash provided by financing activities was $147,896,000 and
$3,417,000 for the three months ended March 31, 1999 and 1998, respectively.
Financing activities consisted principally of the issuance of the Convertible
Subordinated Notes.
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Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $3.5 million of property
and equipment during the remainder of 1999, 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 24 to 36 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
The Company utilizes a significant number of computer software
programs and operating systems across its entire organization, including
applications used in operating the Company's various Web sites, member
services, e-commerce, and various administrative and billing functions. To the
extent that the Company's software applications contain source codes that are
unable to appropriately interpret the upcoming calendar year 2000, some level
of modification, or even possible replacement of such applications may be
necessary.
The Company has retained a consulting firm to help assess the
Company's Year 2000 compliance. The assessment is currently being conducted in
four phases, the first two of which have been completed. During Phase One the
Company analyzed facilities, applications, network, distributed computing,
infrastructure, and data in order to determine the size, scope, and complexity
of the Company's exposure to Year 2000. During Phase Two specific strategies
required to bring exposure areas into compliance were formulated. Additionally,
during Phase Two, the Company began interviewing hardware, software, market
feed, and firmware vendors for Year 2000 compliance plans. The results of the
first and second phases were used to develop a compliance/renovation approach,
budget, and project plan which includes an analysis of compliance strategies,
cost parameters and timelines. During Phase Three, which is currently in
process, the Company will complete the renovations of software and
applications, implement hardware patches, develop project contingencies and
complete final testing. Phase Four will complete the process with the
development of a contingency plan for any hardware or software failure. This
phase is scheduled to begin in June 1999. The Company expects to be
substantially Year 2000 compliant by the end of June 1999 with respect to its
mission-critical computing infrastructure, associated applications, and
strategic vendors/suppliers.
The Company estimates it will incur a maximum of $500,000 in direct
costs during 1999 to support its compliance initiatives. Although the Company
expects to be Year 2000 compliant on or before December 31, 1999, 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 and the World Cup events, 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 loss is defined as the change in equity during the
financial reporting period of a business enterprise resulting from non-owner
sources. Comprehensive loss 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
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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 analyzes its revenue streams by type
as disclosed in Note 2 of the consolidated financial statements and analyzes
and controls expenses by area or department as presented on the statements of
operations and 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
September 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 March 31, 1999, 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 MARCH 31, 1999
During the three months ended March 31, 1999, the Company issued and
sold the following securities without registration under the Securities Act:
In January 1999, the Company issued to CBS 558,988 shares of Common
stock and warrants to purchase 380,000 shares of Common Stock. In February
1999, the Company amended the 1997 agreement to extend the original term of the
agreement for five years, through 2006. The Company accelerated the issuance to
CBS of 1,052,937 shares of Common Stock and warrants to purchase 760,000 shares
of Common Stock, which originally were to be issued in 2000 and 2001. The
Company also issued to CBS new warrants to purchase 1,200,000 shares of Common
Stock, which vest on various dates through January 2001, and agreed to issue to
CBS on Specified issue dates for each of the sixth through tenth contract years
Common Stock having a fair market value of $20.0 million on each issue date.
The consideration given to such shares and warrants consisted of
licenses to CBS logos and content and CBS's agreement to provide the Company
specified minimum amounts of advertising and promotion.
In February 1999, the Company issued 884 shares of Common Stock to
Lighthouse Capital, Inc. pursuant to a cashless exercise of a warrant in
accordance with its terms.
During the three months ended March 31, 1999, upon exercise of
warrants, the Company issued a total of 243,800 shares of common stock for
aggregate cash of $1,397,000 including: (i) 6,666 shares of common stock to IMG
for cash consideration of $50,000; (ii) 10,000 shares of common stock to James
Lampley for cash consideration of $126,000; (iii) 19,750 shares of common stock
to the Rice Family Trust for cash consideration of $98,750 (iv) 2,500 shares of
common stock to Thomas Loeffler for cash consideration of $12,500; (v) 32,000
shares of common stock to Shaquille O'Neal for cash consideration of $160,000;
(vi) 3,000 shares of common stock to John Daly for cash consideration of
$30,000; (vii) 100,000 shares of common stock to Joe Namath for cash
consideration of $500,000; (viii) 12,000 shares of common stock to Carmen
Policy for cash consideration of $90,000; (ix) 4,000 shares of common stock to
Keyshawn Johnson for cash consideration of $35,000; (x) 4,000 shares of common
stock to Bruce Binkow for cash consideration of $20,000; (xi) 10,000 shares of
common stock to Michael Schmidt for cash consideration of $50,000; (xii) 4,000
shares of common stock to Sports Management Group for cash consideration of
$20,000; (xiii) 8,000 shares of common stock to Gary Uberstine for cash
consideration of $40,000; (xiv) 15,000 shares of common stock to Leonard Armato
for cash consideration of $75,000; and (xv) 12,000 shares of common stock to
Edward DeBartolo for cash consideration of $90,000.
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 (the
"Securities Act"), on the basis that they were issued under circumstances not
involving a public offering.
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On March 24, 1999, the Company sold $150,000,000 aggregate principal
amount of its 5% Convertible Subordinated Notes due 2006. The notes are
convertible, at the option of the holder, into shares of common stock of the
Company at any time prior to maturity, unless previously redeemed or
repurchased, at an initial conversion rate of 15.355 shares of Common Stock per
$1,000 principal amount of notes (equivalent to a conversion price of
approximately $65.125 per share), subject to adjustment in certain events. The
notes were sold by the Company to BancBoston Robertson Stephens Inc., BT Alex.
Brown Incorporated, Hambrecht & Quist LLC and PaineWebber Incorporated
(collectively, the "Initial Purchasers") pursuant to a purchase agreement dated
March 18, 1999. The price to investors for the notes sold in the offering was
100% of the principal amount thereof for an aggregate offering price of
$150,000,000. The Company received approximately $145,000,000 in net proceeds
from the sale of the notes after the Initial Purchasers' discount of 3% of the
aggregate principal amount of the notes for an aggregate discount of $4,500,000
and after other issue costs. The sale of the notes by the Company to the
Initial Purchasers was made in reliance upon the exemption set forth in Section
4(2) of the Securities Act. The offering of the notes by the Initial Purchasers
was made in reliance on Rule 144A promulgated under the Securities Act, based
on the fact that the securities were offered or sold only to qualified
institutional buyers (as defined in Rule 144A) and the Notes were not, at the
time of issuance, of the same class as securities listed on a national
securities exchange, as "securities of the same class" is defined for purposes
of Rule 144A.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On February 25, 1999, the Company filed a current report on Form 8-K to report
that the Company amended its 1997 agreement with CBS.
On March 19, 1999, the Company filed two current reports on Form 8-K to report
that (i) on March 15, 1999 the Company announced its intention to raise $150
million through a Rule 144A offering of convertible subordinated notes and (ii)
on March 19, 1999 the Company announced that it had priced its 144A private
offering of Convertible Subordinated Notes.
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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: May 17, 1999 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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