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 ENDED JUNE 30, 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
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, 1999:
22,748,228
Page 1 of 15 Pages
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
a) Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......................3
b) Consolidated Statements of Operations
For the three and six months ended June 30, 1999 and 1998..............................4
c) Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 1999.................................................5
c) Consolidated Statements of Cash Flows
For the six months ended June 30, 1999 and 1998........................................6
d) Notes to Consolidated Financial Statements..................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........10
Part II. Other Information
Item 1. Legal Proceedings..............................................................................14
Item 2. Change in Securities...........................................................................14
Item 3. Defaults Upon Senior Securities................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
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SPORTSLINE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
(UNAUDITED)
June 30, December 31,
1999 1998
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $108,735 $31,684
Marketable securities....................................................... 26,264 27,391
Accounts receivable......................................................... 7,900 5,051
Deferred advertising and content costs....................................... 20,788 5,413
Prepaid expenses and other current assets.................................... 10,413 5,181
-------- -------
Total current assets..................................................... 174,100 74,720
RESTRICTED CASH EQUIVALENTS..................................................... 13,038 13,038
NONCURRENT MARKETABLE SECURITIES................................................ 78,355 26,167
LICENSING RIGHTS................................................................ 6,807 --
NONCURRENT DEFERRED ADVERTISING -AOL............................................ 9,583 13,417
NONCURRENT DEFERRED ADVERTISING AND CONTENT - CBS.............................. 37,360 --
PROPERTY AND EQUIPMENT, net..................................................... 6,723 5,367
GOODWILL........................................................................ 6,226 1,931
OTHER ASSETS.................................................................... 11,647 3,015
-------- -------
$343,839 $137,655
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $1,756 $2,545
Accrued liabilities.......................................................... 7,810 5,334
Current portion of capital lease obligations................................. 275 265
Deferred revenue............................................................. 1,952 2,067
-------- -------
Total current liabilities............................................... 11,793 10,211
CAPITAL LEASE OBLIGATIONS AND LONG TERM LOANS, net of current portion.......... 196 207
ACCRUED AOL OBLIGATION.......................................................... 8,274 8,274
CONVERTIBLE SUBORDINATED NOTES.................................................. 150,000 --
-------- -------
Total liabilities....................................................... 170,263 18,692
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 3)
MINORITY INTEREST.............................................................. 7,623 --
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued and outstanding as of June 30, 1999 and December 31, 1998........ -- --
Common stock, $0.01 par value, 200,000,000 shares authorized,
22,748,228 and 20,300,785 issued and outstanding as of
June 30, 1999 and December 31, 1998, respectively...................... 227 203
Additional paid-in capital................................................... 280,621 211,061
Accumulated deficit.......................................................... (114,895) (92,301)
-------- -------
Total shareholders' equity.............................................. 165,953 118,963
-------- -------
$343,839 $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 and per share data)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUE.............................................. $ 13,023 $ 7,013 $ 24,081 $ 13,802
COST OF REVENUE...................................... 6,784 3,970 12,167 8,384
----------- ---------- ---------- ----------
GROSS MARGIN......................................... 6,239 3,043 11,914 5,418
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Product development................................ 405 324 762 713
Sales and marketing................................ 8,251 4,632 15,038 8,994
General and administrative......................... 4,157 2,924 8,018 6,139
Depreciation and amortization...................... 6,715 3,845 12,559 7,674
----------- ---------- ---------- ----------
Total operating expenses................. 19,528 11,725 36,377 23,520
----------- ---------- ---------- ----------
LOSS FROM OPERATIONS................................. (13,289) (8,682) (24,463) (18,102)
INTEREST EXPENSE..................................... (2,078) (27) (2,264) (54)
INTEREST AND OTHER INCOME, net....................... 2,986 1,204 4,218 1,645
----------- ---------- ---------- ----------
NET LOSS............................................. $ (12,381) $ (7,505) $ (22,509) $ (16,511)
========== ========== ========== ==========
NET LOSS PER SHARE - BASIC AND DILUTED............... $ (0.55) $ (0.41) $ (1.01) $ (0.96)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -
BASIC AND DILUTED.................................. 22,627,219 18,250,189 22,261,264 17,170,329
========== ========== ========== ==========
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
(amounts 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
========== ==== ======== ========== ========
Equity transaction of subsidiary -- -- 2,275 -- 2,275
Issuance of common stock pursuant to
acquisition of Golf Club Trader, Inc. 195,850 2 426 (85) 343
Issuance of common stock pursuant to the 54,228 -- 809 -- 809
employee stock purchase plan
Noncash issuance of warrants pursuant to PGA -- -- 3,238 -- 3,238
Tour agreement
Net proceeds from exercise of warrants 24,500 -- 246 -- 246
Issuance of common stock from exercise
of employee options 89,384 1 382 -- 383
Net loss -- -- -- (12,381) (12,381)
---------- ---- -------- ---------- --------
Balances at June 30, 1999 22,748,228 $227 $280,621 $(114,895) $165,953
========== ==== ======== ========= ========
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
(amounts in thousands)
(UNAUDITED)
Six Months Ended
June 30,
-------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (22,509) $(16,511)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 12,559 7,674
Other noncash expenses ................................................ 75 65
Changes in operating assets and liabilities:
Accounts receivable ............................................... (2,708) (3,062)
Prepaid expenses and other current assets ......................... (3,880) 134
Accounts payable .................................................. (1,246) (986)
Accrued liabilities ............................................... 2,476 822
Deferred revenue .................................................. (115) (43)
--------- --------
Net cash used in operating activities ............................. (15,348) (11,907)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net ................................... (51,061) (12,951)
Purchases of property and equipment ....................................... (3,022) (1,139)
Purchase of licensing agreements .......................................... (8,500) --
Acquisition of business ................................................... (1,915) (352)
Net decrease in restricted cash............................................ -- 46
--------- --------
Net cash used in investing activities .............................. (64,498) (14,396)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock of subsidiary ................... 7,500 --
Net proceeds from issuance of common stock and exercise of common
stock warrants and options ............................................. 3,955 86,956
Proceeds from issuance of convertible subordinated notes, net of costs .... 145,443 --
Repayment of capital lease obligations and long term borrowings ........... (1) (945)
--------- --------
Net cash provided by financing activities .......................... 156,897 86,011
--------- --------
Net increase in cash and cash equivalents ..................................... 77,051 59,708
CASH AND CASH EQUIVALENTS, beginning of period ................................ 31,684 32,482
--------- --------
CASH AND CASH EQUIVALENTS, end of period ...................................... $ 108,735 $ 92,190
========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash issuance of common stock and common stock warrants to CBS ........ $ 59,688 $ 11,897
========= ========
Non-cash issuance of common stock warrants to PGA Tour .................... $ 3,238 $ --
========= ========
Non-cash issuance of common stock of subsidiary ........................... $ 2,275 $ --
========= ========
Non-cash issuance of common stock in purchase of IGO ...................... $ -- $ 1,650
========= ========
Non-cash issuance of common stock in purchase of Golf Club Trader, Inc. ... $ 428 $ --
========= ========
Equipment acquired under capital leases ................................... $ -- $ 104
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................... $ 38 $ 54
========= ========
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 USA") is at the leading edge of
media companies, providing Internet sports content, community and E-commerce on
a global basis. SportsLine USA's content includes more than 400,000 pages of
multimedia sports information, entertainment and merchandise. SportsLine USA
was founded in 1994 and its flagship Internet sports service
(www.sportsline.com) was renamed CBS SportsLine in March of 1997 as part of an
exclusive promotional and content agreement with CBS Corporation ("CBS").
SportsLine USA produces the official league Web sites for Major League
Baseball, the PGA Tour and NFL Europe League, and serves as the primary sports
content provider for America Online, Netscape and Excite.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of SportsLine USA, Inc. and its subsidiaries Golfweb, International
Golf Outlet, Inc., Golf Club Trader, Inc. and SportsLine Europe Limited (the
"Company").
The Company acquired International Golf Outlet, Inc. in June 1998 and
accounted for this transaction using the purchase method of accounting. The
purchase resulted in goodwill of $1,960,000. Such goodwill is being amortized
over an estimated life of ten years.
The Company acquired Golf Club Trader, Inc. in May 1999. The purchase
was accounted for using the pooling-of-interests method of accounting; however,
given Golf Club Trader, Inc.'s immateriality, historical results of the Company
were not restated and the results of Golf Club Trader, Inc. are included herein
beginning April 1, 1999.
SportsLine Europe Limited was formed in May 1999. In June 1999,
SportsLine Europe Limited acquired the sports division of Infosis Group
Limited. The Company accounted for this transaction using the purchase method
of accounting. The purchase resulted in goodwill of $1,978,000. SportsLine
Europe Limited financials also include the purchase of sportsweb.com, which
resulted in goodwill of $2,420,000. After consolidation, minority interest of
$7,623,000 was recorded, which consists primarily of 8% convertible
non-cumulative preferred shares of SportsLine Europe Limited.
In connection with the above purchases, the Company recognized
goodwill amortization expense of $51,000 and $102,000 for the three and six
months ended June 30, 1999, respectively.
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, 1999, and the results of operations and cash flows for
the three months and six months ended June 30, 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 on March 15,
1999. The results of operations for the three and six months ended June 30,
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
exercise of stock options and warrants (using the treasury stock method). There
were 8,014,387 and 4,016,679 options and warrants outstanding at June 30, 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 and the six months ended June 30, 1999
and 1998 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Advertising.................................................... $6,397 $4,134 $12,285 $8,553
E-commerce..................................................... 3,661 574 5,882 1,041
Membership and premium services................................ 1,318 1,104 2,659 2,112
Content licensing and other.................................... 1,647 1,201 3,255 2,096
------- ------ ------- -------
$13,023 $7,013 $24,081 $13,802
======= ====== ======= =======
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 20% and 19% of total revenue for the three
months ended June 30, 1999 and 1998, respectively. Barter transactions
accounted for 19% and 17% of total revenue for the six months ended June 30,
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 referred to above and analyzes
and controls expenses by area or department as presented on the consolidated
statements of operations. The Company currently has no material segments, but
in future periods the Company will report SportsLine Europe Limited results of
operations as a separate segment.
In June 1998, the FASB issued SFAS No. 133 as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
as amended 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 as amended 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 as amended is effective for fiscal years beginning
after June 15, 2000. A company may also implement the provision of SFAS No. 133
as amended as of the beginning of any fiscal quarter after issuance. SFAS No.
133 as amended 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 as amended 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 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 June 30, 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 $150 million
aggregate principal amount of 5% Convertible Subordinated Notes due 2006 (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 June 30, 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 May 1999, the Company's majority owned subsidiary, SportsLine
Europe Limited, acquired sportsweb.com, a United Kingdom based sports website,
from Reuters Group PLC in exchange for $2,420,000 of SportsLine Europe's common
stock (242,000 shares). SportsLine Europe will incorporate sportsweb.com into
its network of sites to be launched during the summer of 1999. In connection
with the purchase of sportsweb.com, goodwill was recorded in the amount of
$2,420,000 which will be amortized over ten years.
In May 1999, the Company completed the acquisition of Golf Club
Trader, Inc., a privately held Internet retailer of golf equipment, in exchange
for approximately $7 million of the Company's common stock (195,850 shares).
The acquisition is being accounted for under the pooling-of-interests method;
however, given Golf Club Trader, Inc.'s immateriality, historical results of the
Company were not restated and the results of Golf Club Trader, Inc. are included
herein beginning April 1, 1999. Golf Club Trader will be integrated with the
Company's wholly owned subsidiary, International Golf Outlet, Inc.
In May 1999, the Company entered into a three-year agreement with
Major League Baseball to produce the League's official site,
majorleaguebaseball.com. The Company and Major League Baseball will share all
revenue generated from the site for advertising, sponsorships, MLB-merchandise,
content licensing/syndication and any other revenue generating activities.
In June 1999, SportsLine Europe Limited acquired Infosis Group
Limited's sports division in exchange for $2,372,000 cash. Infosis supplies
sports information and data to many of the United Kingdom and Europe's leading
media companies both on and off-line. In connection with the purchase of
Infosis, goodwill was recorded in the amount of $1,978,000 which will be
amortized over ten years.
In July 1999, SportsLine Europe Limited entered into a three-year
promotional and consulting agreement with IMG, an independent producer and
packager of sports programming, in exchange for warrants to purchase in
SportsLine Europe Limited. SportsLine Europe Limited will receive production
services, consulting services and promotional support through IMG owned
television, event and media properties.
RESULTS OF OPERATIONS
Revenue
Total revenue for the quarter ended June 30, 1999 and 1998 was
$13,023,000 and $7,013,000, respectively. Total revenue for the six months
ended June 30, 1999 and 1998 was $24,081,000 and $13,802,000, respectively. The
increase in revenue was primarily due to increased advertising sales, as well
as increased revenue from the sale of merchandise, premium service fees and
content licensing.
Advertising revenue increased 55% to $6,397,000 in the three months
ended June 30, 1999 from $4,134,000 for the three months ended June 30, 1998.
Advertising revenue increased 44% to $12,285,000 for the six months ended June
30, 1999 from $8,553,000 for the six months ended June 30, 1998. The increase
in revenue was primarily due to 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.
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Membership and premium services revenue increased $214,000 in the
three months ended June 30, 1999 compared to the same period in 1998 and
$547,000 in the six months ended June 30, 1999 compared to the same period in
1998. The Company had approximately 52,700 and 56,400 paying members as of June
30, 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. While membership
revenue slightly decreased to due to fewer paying members, premium service
revenue increased due to increased participation in the Company's fantasy
sports contests as well as an increased participation in the Company's "Sports
Careers" products. Additionally, in August 1998, membership prices were
increased for the Company's vegasinsider.com site.
E-commerce revenue increased 538% to $3,661,000 in the three months
ended June 30, 1999 from $574,000 for the three months ended June 30, 1998.
E-commerce revenue increased 465% to $5,882,000 for the six months ended June
30, 1999 from $1,041,000 for the six months ended June 30, 1998. The principal
contributing factors to increased E-commerce revenue were the purchase of
International Golf Outlet in June 1998, the purchase of Golf Club Trader in May
1999 and sales of merchandise related to special events such as the US Open and
the Women's World Cup.
Content licensing and other revenue increased $446,000 in the three
months ended June 30, 1999 compared to the same period in 1998 and $1,159,000
in the six months ended June 30, 1999 compared to the same period in 1998. This
was in part due to increased revenue as a result of the Company's agreement
with AOL. 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 June 30, 1999, the Company had deferred revenue of $1,952,000
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 20% and 19% of total revenue for the three
months ended June 30, 1999 and 1998, respectively. Barter transactions
accounted for 19% and 17% of total revenue for the six months ended June 30,
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 June 30, 1999 and 1998 was
$6,784,000 and $3,970,000, respectively. Cost of revenue for the six months
ended June 30, 1999 and 1998 was $12,167,000 and $8,384,000 respectively. The
increase in cost of revenue was primarily the result of increased merchandise
costs due to higher merchandise sales and increased revenue sharing under the
Company's agreements with CBS and MLB. 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. As a percentage of revenue,
cost of revenue decreased to 52% for the three months ended June 30, 1999 from
57% for the three months ended June 30, 1998. For the six months ended June 30,
1999 and 1998 cost of revenue decreased to 51% from 61%. As E-commerce revenue
increases as a percentage of the Company's total revenue, the Company
anticipates that gross margins will decrease in future quarters. In addition,
the Company's gross margins have been, and may continue to be, adversely
affected by the negative gross margins of its newly formed majority owned
subsidiary, SportsLine Europe Limited, during its start up phase.
Operating Expenses
Product Development. For the three months ended June 30, 1999 and
1998, product development costs were $405,000 and $324,000, respectively. For
the six months ended June 30, 1999 and 1998, product development costs were
$762,000 and $713,000, respectively. The Company believes that investments in
product development are required to remain competitive. Consequently, the
Company intends to continue to invest resources in product development. As a
percentage of revenue, product development expense decreased to 3% for the three
and six months ended June 30, 1999 from 5% for the three and six months ended
June 30, 1998.
Sales and Marketing. For the three months ended June 30, 1999 and
1998, sales and marketing expense was $8,251,000 and $4,632,000, respectively.
Sales and marketing expense was $15,038,000 for the six months ended June 30,
1999 compared to $8,994,000 for the six months ended June 30, 1998. The
increase in sales and marketing expense was primarily the result of increased
advertising on other Web sites and the growth in the number of personnel and
related costs. Also in February 1999, the Company entered into a new agreement
with Netscape, which resulted in additional advertising expense. Barter
transactions accounted for approximately 32% and 29% of sales and marketing
expense for the three months ended June 30, 1999 and 1998, respectively and 30%
and 27% of sales and marketing expense for the six months ended June 30, 1999
and 1998, respectively. 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
63% for the three months ended June 30, 1999 from 66% for the three months
ended June 30, 1998. For the six months ended June 30, 1999 and 1998, sales and
marketing expense decreased to 62% from 65%. During the remainder of 1999, the
Company plans to spend more aggressively on a number of marketing related
initiatives, hiring of new employees, investments in customer targeting and
personalization tools and advertising for its Web sites.
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General and Administrative. General and administrative expense for the
three months ended June 30, 1999 and 1998 was $4,157,000 and $2,924,000,
respectively. For the six months ended June 30, 1999 general and administrative
expense was $8,018,000 compared to $6,139,000 for the six months ended June 30,
1998. The increase in general and administrative expense in each period was
primarily attributable to salary and related expenses for additional personnel,
increases in rent and occupancy expense and start up costs related to
SportsLine Europe Limited. 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 32% for the three months ended
June 30, 1999 from 42% for the three months ended June 30, 1998, and to 33% for
the six months ended June 30, 1999 from 44% for the six months ended June 30,
1998.
Depreciation and Amortization. Depreciation and amortization expense
was $6,715,000 and $3,845,000 for the three months ended June 30, 1999 and
1998, respectively. For the six months ended June 30, 1999 depreciation and
amortization expense was $12,559,000 compared to $7,674,000 for the six months
ended June 30, 1998. 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 to additional property and
equipment acquired. 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 half 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. Also, during the second
quarter, the Company's licensing agreement with, and warrants granted to, the
PGA Tour, Inc. resulted in additional amortization expense.
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 has been recorded in the balance sheet as deferred
advertising and content costs and is amortized to depreciation and amortization
expense over each related contract year. Total expense under the CBS agreement
was $6,953,000 for the six months ended June 30, 1999 and will be $7,143,000
for the remainder of 1999.
Under the Company's agreement with AOL, 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
$2,500,000 for the six months ended June 30, 1999 and will be $2,500,000 for
the remainder of 1999.
Interest Expense. Interest expense was $2,078,000 for the three months
ended June 30, 1999 compared to $27,000 for the three months ended June 30,
1998. For the six months ended June 30, 1999 and 1998, interest expense was
$2,264,000 and $54,000, respectively. The increase in interest expense was
primarily due to the accrued interest on the Convertible Subordinated Notes,
which were issued on March 24, 1999.
Interest and Other Income, Net. Interest and other income, net for the
three months ended June 30, 1999 was $2,986,000 compared to $1,204,000 for the
three months ended June 30, 1998. For the six months ended June 30, 1999 and
1998, interest and other income were $4,218,000 and $1,645,000, respectively.
The increase was primarily attributable to the higher average balance of cash
and cash equivalents and marketable securities resulting from the Company's
Convertible Subordinated Note offering in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's primary source of liquidity
consisted of $108,735,000 in cash and cash equivalents, an increase of
$77,051,000 from December 31, 1998. Short-term marketable securities at June
30, 1999 totaled $26,264,000, a decrease of $1,127,000 from December 31, 1998.
The Company invests its excess cash predominantly in instruments that are
highly liquid, of high investment grade, and generally have maturities of less
than one year with the intent to make such funds readily available for
operating and investment purposes. As of June 30, 1999, the Company also had
$78,355,000 of non-current marketable securities.
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, 1999, the Company owed $321,000 under these facilities.
As of June 30, 1999, current deferred advertising and content costs
totaled $20,788,000 and long-term deferred advertising and content costs
totaled $46,943,000. These deferred amounts represent 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 $7,810,000 as of June 30, 1999, an increase of $2,476,000 from December
31, 1998, primarily due to increases in accruals for interest expense related
to the Convertible Subordinated Note offering, advertising, and cash prizes and
awards.
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Net cash used in operating activities was $15,348,000 and $11,907,000
for the six months ended June 30, 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 $64,498,000 and $14,396,000
for the six months ended June 30, 1999 and 1998, respectively. The principal
uses of cash in investing activities were primarily for the purchase of current
and non-current marketable securities and to a lesser extent purchases of
licensing rights and property and equipment.
Net cash provided by financing activities was $156,897,000 and
$86,011,000 for the six months ended June 30, 1999 and 1998, respectively.
Financing activities during 1999 consisted principally of the issuance of the
Convertible Subordinated Notes.
Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $7.0 to $8.0 million of
property and equipment during the remainder of 1999. The capital expenditures
will relate to infrastructure and system needs for the Company's European
expansion and anticipated growth in E-commerce as well as normal operating and
financial system improvements. Additionally, 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. Phase Three, which is near completion, consists
of the renovations of software and applications, implementation of hardware
patches, development of project contingencies and completion of final testing.
Phase Four will complete the process with the development of a contingency plan
for any hardware or software failure. The Company expects to be substantially
Year 2000 compliant by the end of August 1999 with respect to its
mission-critical computing infrastructure, associated applications, and
strategic vendors/suppliers.
The Company has incurred $500,000 in direct costs in the six months
ended June 30, 1999 and will incur an additional $100,000 during the remainder
of 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.
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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 referred to above and
analyzes and controls expenses by area or department as presented on the
consolidated statements of operations. The Company currently has no material
segments, but in future periods the Company will report SportsLine Europe
Limited results of operations as a separate segment.
In June 1998, the FASB issued SFAS No. 133, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 as
amended 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 as amended 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 as
amended is effective for all fiscal of all fiscal years beginning after June 15,
2000. SFAS No. 133 as amended 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
as amended and presently does not have any derivative instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 2. CHANGE IN SECURITIES
(A) MODIFICATION OF RIGHTS OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on June 17,
1999, the stockholders of the Company approved an amendment to the Certificate
of Incorporation of the Company increasing the authorized number of shares of
Common Stock from 50,000,000 shares to 200,000,000 shares. The amendment was
filed with the Secretary of State of the State of Delaware on June 23, 1999.
The amendment to the Certificate of Incorporation enables the Board of
Directors to issue or reserve for issuance up to 200,000,000 shares of Common
Stock without further action or authorization by the stockholders, except as
required by applicable law or the rules of any stock exchange or national
securities association trading system on which the Company's Common Stock is
listed or quoted at such time.
(B) SALES OF UNREGISTERED SECURITIES DURING THE THREE MONTHS ENDED JUNE 30,
1999
During the three months ended June 30, 1999, the Company issued and
sold the following securities without registration under the Securities Act:
In May 1999, as part of the acquisition of Golf Club Trader, Inc., the
Company issued to the shareholders of Golf Club Trader a total of 195,850
shares of common stock.
During the three months ended June 30, 1999, upon exercise of
warrants, the Company issued a total of 24,500 shares of common stock for
aggregate cash of $246,650 including: (i) 500 shares of common stock to Thomas
Loeffler for cash consideration of $2,500; (ii) 2,000 shares of common stock to
John Daly for cash consideration of $20,000; (iii) 12,000 shares of common
stock to the NFL Players Association for cash consideration of $150,000; (iv)
6,000 shares of common stock to Bill Walton for cash consideration of $54,150;
and (iv) 4,000 shares of common stock to Sports Byline USA for cash
consideration of $20,000.
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In May 1999, the Company issued to the PGA Tour, Inc. warrants to
purchase 114,943 shares of Common Stock.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 17, 1999. There
were 22,428,132 shares of Common Stock entitled to vote at the meeting and a
total of 20,076,743 shares were represented at the meeting. Following are
descriptions of the matters voted on and the results of such meeting:
Proposal 1. Election of Directors
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR FROM EACH DIRECTOR
Thomas Cullen.............................................................. 19,157,486 919,257
Richard B. Horrow.......................................................... 19,034,186 1,042,557
Fredric G. Reynolds........................................................ 19,033,428 1,043,315
Proposal 2. Amendment of Certificate of Incorporation to increase the number of
authorized shares
FOR AGAINST ABSTAIN
14,765,805 5,290,923 20,015
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended June 30,
1999.
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: July 30 , 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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