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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23337
SPORTSLINE USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-070894
(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 March 31,
1998: 16,230,241
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 December 31, 1997 and March 31, 1998..... 3
Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1998....................... 4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 1998 ............................... 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1998....................... 6
Notes to Consolidated Financial Statements ................................ 7
2
SPORTSLINE USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
1997 1998
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 32,482,039 $ 29,794,398
Marketable securities ............................................. 1,505,909 1,525,324
Deferred advertising and content costs ............................ 517,084 9,414,064
Accounts receivable ............................................... 2,214,150 3,442,643
Prepaid expenses and other current assets ......................... 2,847,561 2,813,718
------------- -------------
Total current assets ............................................. 39,566,743 46,990,147
RESTRICTED CERTIFICATES OF DEPOSIT ................................. 138,601 --
PROPERTY AND EQUIPMENT, net ........................................ 4,169,688 4,231,681
OTHER ASSETS ....................................................... 1,850,605 1,780,599
------------- -------------
$ 45,725,637 $ 53,002,427
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 2,001,900 $ 882,240
Accrued liabilities ............................................... 3,257,708 5,730,000
Current portion of capital lease obligations ...................... 501,193 488,054
Current portion of long-term borrowings ........................... 682,159 --
Deferred revenue .................................................. 1,839,962 1,380,461
------------- -------------
Total current liabilities ........................................ 8,282,922 8,480,755
CAPITAL LEASE OBLIGATIONS, net of
current portion .................................................. 457,700 457,212
------------- -------------
Total liabilities ................................................ 8,740,622 8,937,967
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued and outstanding as of December 31, 1997
and March 31, 1998 .............................................. -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
15,019,220 and 16,230,241 issued and outstanding as of
December 31, 1997 and March 31, 1998, respectively .............. 150,192 162,302
Additional paid-in capital ........................................ 93,627,062 109,700,795
Accumulated deficit ............................................... (56,792,239) (65,798,637)
------------- -------------
Total shareholders' equity ....................................... 36,985,015 44,064,460
------------- -------------
$ 45,725,637 $ 53,002,427
============= =============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
3
SPORTSLINE USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
REVENUE ....................................... $ 1,474,427 $ 6,789,226
COST OF REVENUE ............................... 1,886,125 4,414,296
------------ ------------
GROSS MARGIN (DEFICIT) ........................ (411,698) 2,374,930
OPERATING EXPENSES:
Product development .......................... 672,219 389,130
Sales and marketing .......................... 2,231,923 4,362,863
General and
administrative ............................. 1,660,135 3,214,565
Depreciation and amortization ................ 1,394,329 3,828,798
------------ ------------
Total operating expenses .................... 5,958,606 11,795,356
------------ ------------
LOSS FROM OPERATIONS .......................... (6,370,304) (9,420,426)
INTEREST EXPENSE .............................. (33,943) (27,199)
INTEREST AND OTHER INCOME, net ................ 178,971 441,227
------------ ------------
NET LOSS ...................................... $ (6,225,276) $ (9,006,398)
============ ============
NET LOSS PER SHARE--BASIC AND DILUTED ......... $ (0.67) $ (0.56)
============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING--
BASIC AND DILUTED ........................... 9,312,707 16,087,874
============ ============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
4
SPORTSLINE USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ----------- -------------- ----------------- --------------
Balance, December 31, 1997 ............ 15,019,220 $150,192 $ 93,627,062 $ (56,792,239) $ 36,985,015
Proceeds from exercise of common
stock options ........................ 47,303 473 89,667 -- 90,140
Proceeds from exercise of common
stock warrants ....................... 47,916 479 297,770 -- 298,249
Proceeds from exercise by CBS of common
stock warrants ....................... 380,000 3,800 3,796,200 -- 3,800,000
Non-cash issuance of common stock and
common stock warrants pursuant to CBS
agreement ............................ 735,802 7,358 11,890,096 -- 11,897,454
Net loss .............................. -- -- -- (9,006,398) (9,006,398)
---------- -------- ------------ ------------- ------------
Balance, March 31, 1998 ............... 16,230,241 $162,302 $109,700,795 $ (65,798,637) $ 44,064,460
========== ======== ============ ============= ============
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
5
SPORTSLINE USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (6,225,276) $ (9,006,398)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................. 1,394,329 3,828,798
Provision for doubtful accounts ................................................ 15,825 33,801
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (54,752) (1,262,294)
Prepaid expenses and other assets ............................................. (34,421) (119,257)
Accounts payable .............................................................. (1,162,887) (1,119,660)
Accrued liabilities ........................................................... 1,299,389 2,472,292
Deferred revenue .............................................................. 195,338 (459,501)
------------ ------------
Net cash used in operating activities .......................................... (4,572,455) (5,632,219)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ............................................... -- (19,415)
Purchases of property and equipment .............................................. (741,349) (591,374)
Net redemption of restricted certificates of deposit ............................. -- 138,601
------------ ------------
Net cash used in investing activities .......................................... (741,349) (472,188)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and common stock warrants
and options ..................................................................... 7,923,276 4,188,389
Proceeds from long-term borrowings ............................................... 1,295,367 --
Repayment of long-term borrowings ................................................ (56,130) (682,159)
Repayment of capital lease obligations ........................................... (118,819) (89,464)
------------ ------------
Net cash provided by financing activities ..................................... 9,043,694 3,416,766
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 3,729,890 (2,687,641)
CASH AND CASH EQUIVALENTS, beginning of period .................................... 15,249,545 32,482,039
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 18,979,435 $ 29,794,398
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Non-cash issuance of common stock and common stock warrants pursuant
to CBS agreement ................................................................ $ 8,100,561 $ 11,897,454
============ ============
Non-cash issuance of common stock warrants pursuant to consulting agreements ..... $ 830,191 $ --
============ ============
Equipment acquired under capital leases .......................................... $ -- $ 75,837
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................... $ 50,667 $ 27,199
============ ============
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
6
SPORTSLINE USA, INC. AND SUBSIDIARY
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 broadcasted over the Internet, and syndicated to traditional
radio stations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of SportsLine USA, Inc. and its subsidiary (the "Company"). The
consolidated financial statements include the financial position and results of
operations of GolfWeb which the Company acquired on January 29, 1998 (the
"Merger"). GolfWeb was a privately-held Internet company that provides
golf-related content, interactive entertainment, membership services and
merchandise through its golfweb.com site, and its international Web sites
targeted to golf enthusiasts in Japan, the United Kingdom, Canada and
Australia. The Company is accounting for this transaction using the
pooling-of-interests method of accounting, therefore the accounts of GolfWeb
have been included retroactively in the consolidated financial statements as if
the companies had operated as one entity since inception.
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, 1998, and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998. The consolidated balance sheet at
December 31, 1997 has been derived from the audited financial statements at
that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
These financial statements should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission. The results
of operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 1998.
7
SPORTSLINE USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
PER SHARE AMOUNTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, was issued. SFAS No. 128 simplifies the methodology of
computing earnings per share and requires the presentation of basic and diluted
earnings per share. The Company's basic and diluted earnings per share are the
same, as the Company's common stock equivalents are antidilutive. The Company's
previously outstanding convertible preferred stock was converted upon
completion of the Company's initial public offering ("IPO"). Accordingly, such
shares have been reflected as common stock for all periods prior to the IPO.
SFAS No. 128 was adopted as of December 31, 1997.
Net loss per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon
conversion of all convertible preferred stock (using the if-converted method)
and shares issuable upon exercise of stock options and warrants (using the
treasury stock method).
REVENUE BY TYPE
Revenue by type for the three months ended March 31, 1997 and 1998 is as
follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1998
------------- -------------
Advertising--cash .................... $ 767,641 $4,280,370
Advertising--barter .................. 14,500 138,492
Membership--basic .................... 326,675 492,531
Membership--premium services ......... 193,874 516,100
Content licensing--barter ............ 15,000 892,001
Merchandise .......................... 156,737 467,076
Other ................................ -- 2,656
---------- ----------
$1,474,427 $6,789,226
========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, REPORTING COMPREHENSIVE INCOME was issued,
which is required to be adopted by the Company in the year ended December 31,
1998. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the change
in equity during the financial reporting period of a business enterprise
resulting from non-owner sources. The Company does not believe the
implementation of SFAS No. 130 will have a material impact on its financial
position or results of operations.
(3) COMMITMENTS AND CONTINGENCIES:
On March 25, 1997, Weatherline, Inc. ("Weatherline"), a company that
provides pre-recorded weather and sports information by telephone, filed a
complaint against the Company in the United States District Court for the
Eastern District of Missouri. Weatherline owns a United States trademark
registration for the mark "Sportsline" for use in promoting the goods and
services of others by making sports information available to customers of
participating businesses through the telephone, and claims to have used the
mark for this purpose since 1968. The complaint alleges that the Company's use
of the mark "SportsLine USA" and other marks utilizing the term "SportsLine"
infringes upon and otherwise violates Weatherline's rights under its registered
trademark and damages Weatherline's reputation. The complaint seeks a
preliminary and permanent injunction against the Company from using marks
containing the term "SportsLine" or any other similar name or mark which would
be likely to cause confusion with Weatherline's mark. The complaint also seeks
actual and punitive damages and attorneys' fees. The Company believes that its
use of the "SportsLine" mark and "SportsLine" derivative marks does not
infringe upon or otherwise violate Weatherline's trademark rights. The Company
has filed an answer in which it denied all material allegations of the
complaint and asserted
8
SPORTSLINE USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
several affirmative defenses. The action is still in the discovery stage, and a
trial is currently scheduled for September 1998. The Company intends to
vigorously defend itself against the action. The legal costs that may be
incurred by the Company in defending itself against this action could be
substantial, and the litigation could be protracted and result in diversion of
management and other resources of the Company. In a separate matter, a request
for an extension of time to oppose the Company's application to register the
current version of the SportsLine USA logo has been filed by Weatherline with
the United States Patent and Trademark Office ("USPTO"). There can be no
assurance that the Company will prevail in the lawsuit or any related
opposition proceeding at the USPTO, and an adverse decision in this lawsuit
could result in the Company being prohibited from further use and registration
of the "SportsLine" mark and "SportsLine" derivative marks and being ordered to
pay substantial damages and attorneys' fees to Weatherline, either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
From time to time, the Company may be involved in other litigation
relating to claims arising out of its operations in the normal course of
business. The Company is not currently a party to any other legal proceedings,
the adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's consolidated financial position or
results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, AMONG OTHERS, COMPETITIVE
PRESSURES, THE GROWTH RATE OF THE INTERNET, CONSTANTLY CHANGING TECHNOLOGY AND
MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS AND SERVICES. INVESTORS ARE ALSO
DIRECTED TO CONSIDER THE OTHER RISKS AND UNCERTAINTIES DISCUSSED IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING THOSE DISCUSSED
UNDER THE CAPTION "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURENCE 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 PROSPECTUS.
RECENT DEVELOPMENTS
On January 29, 1998, the Company acquired all of the outstanding capital
stock of GolfWeb in exchange for approximately 844,490 shares of common stock
and the assumption of stock options and warrants to purchase up to
approximately 53,300 additional shares of common stock. The acquisition is
being accounted for under the "pooling-of-interests" accounting method.
Accordingly, the Company's consolidated financial statements include the
accounts of GolfWeb. See Note 2 of Notes to Consolidated Financial Statements.
On March 19, 1998, the Company filed a registration statement for a public
offering (the "Secondary Offering") of 4,000,000 shares of common stock, of
which 2,288,430 shares are expected to be offered by the Company and 1,711,570
shares are expected to be offered by certain selling shareholders. It is
anticipated that the shares of common stock offered in the Secondary Offering
will be sold at a slight discount to the trading prices of the common stock at
the time of the sale. Subject to market conditions, the Company currently plans
to effect the Secondary Offering during the second quarter of 1998; however,
there can be no assurance that the Secondary Offering will occur.
RESULTS OF OPERATIONS
REVENUE
Total revenue for the three months ended March 31, 1998 and 1997 was
$6,789,000 and $1,474,000, respectively. The increase in revenue was due to
increased advertising sales, as well as increased revenue from the sale of
merchandise, memberships and premium service fees, and content licensing.
Advertising revenue for the three months ended March 31, 1998 and 1997 accounted
for approximately 65% and 53%, respectively, of total revenue. Advertising
revenue increased primarily as a result of a higher number of impressions sold
and additional sponsors advertising on the Company's Web sites. During 1997 and
the three months ended March 31, 1998, the Company increased its sales efforts,
including expanding its sales force and opening sales offices in New York City,
San Francisco and Chicago. In addition to increased sales efforts, the number of
impressions available on the Company's Web sites increased as more content was
produced. Membership revenue increased as a result of additional member signups
and retention. Basic membership fees remained the same during the three months
ended March 31, 1997 and 1998. Premium service revenue increased due to
increased participation in the Company's fantasy sports contests as well as
increased number of premium products, including the Company's VEGASINSIDER.COM
Web site, which was launched in March 1997. Merchandising revenue increased 197%
to $467,000 for the three months ended March 31, 1998 from $157,000 for the
three months ended March 31, 1997. During the fourth quarter of 1997, the
Company launched The Sports Store (thesportstore.com), which offers a variety of
branded sports merchandise, books, videos and unique collectible memorabilia. As
of
10
March 31, 1998, the Company had deferred revenue of $1,380,000 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 15% and 2% of total revenue for the three months
ended March 31, 1998 and 1997, respectively. In future periods, management
intends to maximize cash advertising and content licensing revenue, although
the Company will continue to enter into barter relationships as appropriate.
COST OF REVENUE
Cost of revenue for the three months ended March 31, 1998 and 1997 was
$4,414,000 and $1,886,000, respectively. The increase in cost of revenue was
primarily the result of increased revenue sharing, content fees,
athlete/personality fees incurred, as well as increases in editorial and
operations staff necessary for the production of sports-related information and
programming on the Company's Web sites. In addition, telecommunications cost
has increased as the Company increased its capacity to provide support and
delivery of its services to the increased traffic on its Web sites. The Company
anticipates that cost of revenue will grow as it increases staffing to expand
its services, increases its merchandising efforts, 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 65%
for the three months ended March 31, 1998 from 128% for the three months ended
March 31, 1997.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expense was $389,000 for the
three months ended March 31, 1998 compared to $672,000 for the three months
ended March 31, 1997. The decrease in product development expense in the first
quarter of 1998 is primarily the result of the reduction of product development
personnel and consultants at GolfWeb. The Company believes that significant
investments in product development are required to remain competitive.
Consequently, the Company intends to continue to invest significant resources
in product development. As a percentage of revenue, product development expense
decreased to 6% for the three months ended March 31, 1998 from 46% for the
three months ended March 31, 1997.
SALES AND MARKETING. Sales and marketing expense was $4,363,000 for the
three months ended March 31, 1998 compared to $2,232,000 for the three months
ended March 31, 1997. The increase in sales and marketing expense was primarily
the result of the growth in the number of personnel and related costs and
increased advertising on other Web sites and Internet search engines. Barter
transactions accounted for approximately 24% and 1% of sales and marketing
expense for the three months ended March 31, 1998 and 1997, respectively. The
increase in the proportionate amount of barter expense was due to the use of
barter for content licensing during 1998. As a percentage of revenue, sales and
marketing expense decreased to 64% for the three months ended March 31, 1998
from 151% for the three months ended March 31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expense for the
three months ended March 31, 1998 was $3,214,000 compared to $1,660,000 for the
three months ended March 31, 1997. The increase in general and administrative
expense in each period was primarily attributable to salary and related
expenses for additional personnel, higher professional fees and recruitment
expenses. As a percentage of revenue, general and administrative expense
decreased to 47% for the three months ended March 31, 1998 from 113% for the
three months ended March 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$3,829,000 for the three months ended March 31, 1998 compared to $1,394,000 for
the three months ended March 31, 1997. The increase in depreciation and
amortization expense was primarily due to the amortization of amounts related
to the agreement with CBS Inc. ("CBS") and to a much lesser extent additional
property and equipment.
11
Under the Company's agreement with CBS, the Company will issue at the
beginning of each contract year shares of common stock and warrants to purchase
common stock in consideration of CBS's advertising and promotional efforts and
its license to the Company of the right to use certain CBS logos and
television-related sports content. The value of the advertising and content
will be recorded annually in the balance sheet as deferred advertising and
content costs and amortized to depreciation and amortization expense over each
related contract year. Total expense under the CBS agreement was $3,000,000 for
the three months ended March 31, 1998, and will be $9,001,000 for the remainder
of 1998.
INTEREST EXPENSE. Interest expense was $27,000 for the three months ended
March 31, 1998 compared to $34,000 for the three months ended March 31, 1997.
In January 1997 the Company fully paid the balance due under a capital lease of
telecommunications equipment and in February 1998, the Company fully paid the
balance of two of its equipment lines.
INTEREST AND OTHER INCOME, NET. Interest and other income, net for the
three months ended March 31, 1998 was $441,000 compared to $179,000 for the
three months ended March 31, 1997. The increase was primarily attributable to
the higher average investments in cash and cash equivalents and marketable
securities of the proceeds from the IPO. The Company anticipates that interest
income will increase in future periods as a result of the investment of the net
proceeds from the IPO and, if completed, the Secondary Offering, pending other
uses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's primary source of liquidity consisted
of $31,320,000 in cash and marketable securities. In January 1998, CBS
exercised warrants to purchase 380,000 shares of common stock, resulting in the
net proceeds of $3,800,000.
As of December 31, 1997, the Company owed $281,000 under its equipment
line of credit which was paid in full in February 1998.
The Company has obtained revolving credit facilities that provide for the
lease financing of computers and other equipment purchases. Outstanding amounts
under the facilities bear interest at variable rates of approximately 9%. As of
March 31, 1998, the Company owed $743,000 under these facilities.
As of March 31, 1998, the Company owed $203,000 under the GolfWeb
equipment lines of credit.
As of March 31, 1998, deferred advertising and content costs totaled
$9,414,000, which represented costs related to the CBS agreement to be
amortized to depreciation and amortization expense during the year ended
December 31, 1998. Accrued liabilities totaled $5,730,000 as of March 31, 1998,
an increase of $2,472,000 from December 31, 1997, primarily due to increases in
accruals for revenue sharing, professional fees and amounts withheld for
employees' contributions under the Company's employee stock purchase plan.
Net cash used in operating activities was $5,632,000 and $4,572,000 for
the three months ended March 31, 1998 and 1997, respectively. The principal
uses of cash were to fund the Company's net losses from operations, partially
offset by increases in accrued liabilities and depreciation and amortization.
Net cash used in investing activities was $472,000 and $741,000 for the
three months ended March 31, 1998 and 1997, respectively. The principal uses
were purchases of property and equipment.
Net cash provided by financing activities was $3,417,000 and $9,044,000
for the three months ended March 31, 1998 and 1997, respectively. Financing
activities consisted principally of the issuance of equity securities.
The Company has entered into various licensing, royalty and consulting
agreements with content providers, vendors, athletes and sports organizations,
which agreements provide for consideration in
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various forms, including issuance of warrants to purchase common stock and
payment of royalties, bounties and certain other guaranteed amounts on a per
member and/or a minimum dollar amount basis over terms ranging from one to ten
years. Additionally, some of these agreements provide for a specified
percentage of advertising and merchandising revenue to be paid to the athlete
or organization from whose Web site the revenue is derived. As of December 31,
1997, the minimum guaranteed payments required to be made by the Company under
such agreements were $15,151,000. The Company's minimum guaranteed payments are
subject to reduction in the case of certain agreements based upon the
appreciation of warrants issued, the value of stock received on exercise of
such warrants and the amount of profit sharing earned under the related
agreements.
The Company intends to use the net proceeds from the IPO and, if
completed, the Secondary Offering for working capital and other general
corporate purposes, including expansion of the Company's marketing and
advertising sales efforts, content development and licensing, international
expansion and for capital expenditures. Although the Company has no material
commitments for capital expenditures, it anticipates purchasing approximately
$4,000,000 of property and equipment in 1998, primarily computer equipment and
furniture and fixtures. The Company intends to continue to pursue acquisitions
of or investments in businesses, services and technologies that are
complementary to those of the Company.
The Company believes that its current cash and marketable securities will
be sufficient to fund its working capital and capital expenditure requirements
for at least the next 12 to 18 months. However, the Company expects to continue
to incur significant operating losses for at least the next 30 to 36 months. To
the extent the Company requires additional funds to support its operations or
the expansion of its business, the Company may sell additional equity, issue
debt or convertible securities or obtain credit facilities through financial
institutions. There can be no assurance that additional financing, if required,
will be available to the Company in amounts or on terms acceptable to the
Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. While uncertainty
exists concerning the potential effects associated with such compliance, the
Company does not believe that year 2000 compliance will result in a material
adverse effect on its financial condition or results of operations.
SEASONALITY
The Company expects that its revenue will be higher leading up to and
during major U.S. sports seasons and lower at other times of the year,
particularly during the summer months. In addition, the effect of such seasonal
fluctuations in revenue could be enhanced or offset by revenue associated with
major sports events, such as the Olympics, the Ryder Cup and the World Cup,
although such events do not occur every year. The Company believes that
advertising sales in traditional media, such as television, generally are lower
in the first and third calendar quarters of each year, and that
advertisingexpenditures 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 is required to be adopted by the Company in the year ended December 31,
1998. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the change
in equity during the financial reporting period of a business enterprise
resulting from non-owner sources. The Company does not believe the
implementation of SFAS No. 130 will have a material impact on its financial
position or results of operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended March 31, 1998, there were no material
developments in previously reported litigation involving the Company.
ITEM 2. CHANGE IN SECURITIES
SALES OF UNREGISTERED SECURITIES DURING THE THREE MONTHS ENDED MARCH 31, 1998
During the three months ended March 31, 1998, the Company issued and sold
the following securities without registration under the Securities Act.
In January 1998, the Company issued to CBS 735,802 shares of common stock
and warrants to purchase 380,000 shares of common stock. The consideration for
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 addition, upon exercise of warrants that were granted to CBS
in January 1997, the Company issued to CBS 380,000 shares of common stock for
aggregate cash consideration of $3,800,000.
In January 1998, in consideration of the Company's acquisition of all of
the outstanding capital stock of GolfWeb, the Company issued to the
shareholders of GolfWeb a total of 844,490 shares of common stock.
During the three months ended March 31, 1998, upon exercise of warrants,
the Company issued a total of 47,916 shares of common stock for aggregate cash
consideration of $298,249, including (i) 20,000 shares of common stock to ETW
Corp. for cash consideration of $150,000; (ii) 10,000 shares of common stock to
Arnold Palmer Enterprises, Inc. for cash consideration of $50,000; (iii) 9,250
shares of common stock to Wayne Gretzky for cash consideration of $46,250; and
(iv) 8,666 shares of common stock to International Management Group for cash
consideration of $51,999.
No underwriter was involved in any of the above sales of securities. All
of the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended, on the basis that they
were issued under circumstances not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
During the three months ended March 31, 1998 the Company filed a Report
on Form 8-K
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(Event of January 29, 1998) to report under Item 2. "Acquisition or
Disposition of Assets" the acquisition of all the outstanding capital
stock of GolfWeb. Included in the Form 8-K were the following financial
statements: (i) Unaudited Pro Forma Balance Sheet as of September 30,
1997; (ii) Unaudited Pro Forma Statements of Operations for the years
ended December 31, 1995 and 1996 and the nine months ended September 30,
1997; (iii) GolfWeb Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997; and (iv) GolfWeb Statements of Operations,
Shareholders' Equity and Cash Flows for the period from inception
through December 31, 1995, the year ended December 31, 1996 and the nine
months ended September 30, 1997.
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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: April 15, 1998 SPORTSLINE USA, INC.
(Registrant)
/s/ Michael Levy
-------------------------------------
Michael Levy
President and Chief Executive Officer
/s/ Kenneth W. Sanders
-------------------------------------
Kenneth W. Sanders
Chief Financial Officer
16