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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number: 0-23337
SPORTSLINE.COM, 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 33309
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (954) 351-2120
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(Title of Class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of March 21, 2000, was approximately $985,728,538 based on
the $37.875 closing price for the Common Stock on The Nasdaq National Market on
such date. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of
February 29, 2000 was 25,935,515.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
2000 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report, are incorporated by reference into Part III of this
report.
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EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K (this "Amendment") is being filed by
SportsLine.com, Inc. to correct an omission and certain-typographical and
rounding errors included in the information provided in response to the Items
set forth below of its Annual Report on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission on March 30, 2000
(the "Form 10-K"). The following changes have been made to the information set
forth in the Form 10-K:
o The information required by Item 4. Submission of Matters to a Vote of
Security Holders, which was unintentionally omitted from the Form
10-K, is included herein.
o In Item 6. Selected Financial Data, certain numerical corrections
have been made in the table. Specifically, the Cost of Revenue for
Sports.com Limited for 1999 has been changed to $2,542 from $2,548
and the Total Operating Expenses, Loss from Operations and Interest
and other income, net amounts for SportsLine.com, Inc. for 1998 have
been changed to $53,157, $39,837 and $4,446, respectively, from
$53,158, $39,838 and $4,447, respectively.
o In Item 8. Financial Statements and Supplementary Data, the number of
authorized shares of common stock has been corrected in the
Consolidated Balance Sheets to read "200,000,000" instead of
"50,000,000."
o In Item 8. Financial Statements and Supplementary Data, language in
Note 5 to the Consolidated Financial Statements has been revised from
"... the Company realized a benefit of approximately $3,400 resulting
in the cancellation of the AOL obligation" to "... the Company
realized a benefit of approximately $3,400 resulting from the
cancellation of the AOL Obligation."
o In Item 8. Financial Statements and Supplementary Data, in Note 8 to
the Consolidated Financial Statements the Total minimum lease payments
-- Operating has been changed to $15,989 from $15,990.
o In Item 8. Financial Statements and Supplementary Data, language in
Note 8 to the Consolidated Financial Statements has been revised from
"The Company recorded a non-recurring charge of approximately $1.1
million associated with such settlement in 1998" to "The Company
recorded a non-recurring charge of approximately $1,100 associated
with such settlement in 1998" as the dollar amounts are stated in
thousands in the Notes to the Consolidated Financial Statements.
i
INDEX TO ITEMS
Page
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PART I.......................................................................................................... 1
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 14
Item 3. Legal Proceedings........................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......................................... 15
PART II......................................................................................................... 16
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 16
Item 6. Selected Financial Data..................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 34
Item 8. Financial Statements and Supplementary Data................................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 57
PART III........................................................................................................ 58
Item 10. Directors and Executive Officers of the Registrant......................................... 58
Item 11. Executive Compensation..................................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 58
Item 13. Certain Relationships and Related Transactions............................................. 58
PART IV......................................................................................................... 58
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 58
ii
PART I
ITEM 1. BUSINESS.
CERTAIN STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS 'BELIEVES,' 'ANTICIPATES,'
'ESTIMATES,' 'EXPECTS,' AND WORDS OF SIMILAR IMPORT, CONSTITUTE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. READERS ARE REFERRED TO THE 'RISK FACTORS' SECTION OF THE 'MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS'
CONTAINED HEREIN, WHICH IDENTIFIES IMPORTANT RISK FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD LOOKING
STATEMENTS.
SportsLine.com, Inc., formerly SportsLine USA, Inc. (together with its
subsidiaries, 'SportsLine' or 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. SportsLine produces and
distributes original, interactive sports content, including editorials and
analyses, radio shows, contests, games, fantasy league products and fan clubs.
SportsLine also distributes a broad range of up-to-date news, scores, player and
team statistics and standings, photos, audio clips and video clips obtained from
CBS and other leading sports news organizations, as well as SportsLine's
superstar athletes. SportsLine produces the official Web sites for several
organizations including Major League Baseball, the PGA TOUR and NFL Europe
League. In addition, SportsLine is the primary sports content provider for
America Online, Excite and Netscape.
The Company has established a number of important strategic relationships
to increase awareness of the SportsLine brand, build traffic on its Web sites
and develop proprietary programming. In March 1997, SportsLine established a
strategic alliance with CBS pursuant to which SportsLine's flagship Web site was
renamed 'cbs.sportsline.com' and receives extensive network television
advertising and on-air promotion, primarily during CBS television sports
broadcasts such as the NFL, the NCAA Men's Basketball Tournament, NCAA Football,
PGA TOUR events, U.S. Open tennis and the Daytona 500. The CBS agreement was
amended in February 1999 to extend its term through 2006. See 'Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.' The Company believes that its relationship with CBS, in particular
the branding of its flagship Web site as 'cbs.sportsline.com' and the promotion
the Company receives on CBS television broadcasts, will enable it to establish
SportsLine as a broadly recognized worldwide consumer brand. The Company also
has distribution agreements and relationships with a number of other partners
including America Online, Excite, Netscape, Westwood One, theglobe.com, Major
League Baseball and the PGA TOUR. See '--Strategic Relationships.'
In May 1999, the Company established Sports.com Limited ('Sports.com')
(formerly known as SportsLine Europe Limited) as a European-based, majority
owned subsidiary. Intel Corporation, MediaOne Ventures and Reuters hold minority
interests in Sports.com. In August 1999, the sports.com Web site was launched as
the home of sports sites for fans of European sports, including soccer, rugby
and cricket. Sports.com operates country-specific Web sites through locally
based operating subsidiaries that deliver real-time, in-depth European sports
content and programming that capitalizes on the Web's unique graphical and
interactive capabilities. Sports.com has established local subsidiaries in the
United Kingdom and France and plans to establish local subsidiaries in Germany,
Italy and Spain within the next 12 months. Sports.com has formed strategic
relationships with IMG, France Telecom Multimedia, Rete Srl and Manchester
United.
SPORTS INFORMATION, PROGRAMMING AND DISTRIBUTION
SportsLine offers a broad range of sports-related information and
programming, which it delivers through its network of Web sites and other
distribution channels.
Information and Programming
News and Editorials The Company's news organization
provides up-to-date general sports news and
information for all major professional and
college sports 24 hours a day, seven days a
week, including previews, game summaries, audio
and video clips and color photographs, obtained
from strategic partners and a variety of
leading sports news organizations such as The
Associated Press, CBS, Reuters
1
and SportsTicker. The Company also publishes
exclusive editorials and analyses from its
in-house staff of writers and editors and
freelance sports journalists.
Scores, Statistics and The Company delivers continuously updated,
Odds real-time scores, schedules, standings,
player and team statistics and odds for all
major professional and college sports from
data providers including The Associated
Press, Data Broadcasting Corporation and
SportsTicker and directly from the NBA, MLB,
NFL and WNBA.
Fantasy Leagues and Fantasy league enthusiasts can participate in
Contests SportsLine leagues or form their own leagues
with customized rules, scoring and
reporting. The Company administers player
transactions (e.g., drafts, trades, starting
lineup selection and disabled list and minor
league moves) and provides summaries of
scoring, standings and roster transactions.
Proprietary contests feature cash prizes,
limited edition sports memorabilia and other
awards based on the results of weekly,
season-long or special event related games
of skill. Regular sweepstakes and
'giveaways' feature cash prizes, sports
memorabilia, event tickets and other
merchandise.
Live Game Simulations The Company broadcasts
web-based real-time animated recreations of
major sporting events including NBA, NFL, Major
League Baseball, World Cup Soccer and NCAA
Tournament basketball games.
Local and Personalized The Company packages its information and
Content programming to enable users to follow local
or regional team and event coverage,
including weekly stories from college sports
publications and team coverage from staff
writers located in strategic cities across
the nation. The Company's 'Personal
SportsPage' enables members to personalize
the information and programming they receive
over the web and 'Personal SportsMail'
delivers personalized content to members by
e-mail. The Company also began a Rewards
program in 1999 which allows member to earn
points redeemable for prizes by accessing
the Web sites and accumulating page views.
Community Content The Company hosts monitored interactive
chat sessions with sports superstars and
personalities, and experts on subjects such as
sports memorabilia and fantasy leagues. The
Company also hosts monitored forums devoted to
sports-related topics.
Audio The Company's radio studio produces over 20
hours of original, live programming each
week, including interviews with superstars
and notable sports personalities and regular
commentary from leading sports analysts. The
Company also 'cybercasts' syndicated radio
shows from Sports Byline USA, Sports
Overnight America and various experts on
sports-related topics, and produces and
distributes audio clips of interviews, press
conferences and other audio surrounding
major sports events.
Video The Company produces original video programming
surrounding major sports events, live video
interviews with sports celebrities and
'cybercasts' featuring live video interviews
and daily video clips covering events such as
the Company's coverage of major events such as
the XVIII Olympic Winter Games and the Super
Bowl XXXIV. The Company also distributes video
highlights from the PGA TOUR, NBA, NHL, CBS
Sports and other sources.
2
Web Sites
cbs.sportsline.com, the Company's flagship Web site, features
comprehensive, in-depth coverage of all major professional and college sports on
a domestic and international basis, including the following:
Baseball Football
Major League Baseball National Football League
Minor League Baseball Canadian Football League
College College
Hockey Basketball
National Hockey League National Basketball Association
International Hockey League Women's National Basketball Association
American Hockey League American Basketball League
College College
Auto Racing Olympic Sports
Boxing Rugby
Cricket Skiing
Cycling Soccer
Golf Tennis
Health and Fitness Volleyball
Horse Racing Women's Sports
cbs.sportsline.com has won numerous awards, including the Internet Services
Association's 'Outstanding Innovation' award for Baseball LIVE! (1996); a 'Gold
Medal' for Outstanding Olympic Coverage from The Wall Street Journal (1996); a
'Members' Choice' designation from AOL (1996-1998); NetGuide's 'Platinum Award'
as one of the best sites on the Web (1996); NetGuide's 'Platinum Award' for
overall site excellence (1997); 'Editor's Choice' from UK Plus (1997), PC
Magazine's top 25 sites on the Web (1997); the Webby Award for sports (1998); a
'Revolution' award for Soccernet in the U.K. (1999); NetGuide's 'Best Sports
Site' (1999); PC Magazine's top 100 sites on the Web (1999); US News and World
Report's 'The Best of the Web: Sports' (1999); and Best Football Site from
Yahoo! Internet Life (2000).
cbs.sportsline.com's comprehensive approach is illustrated by its coverage
of Major League Baseball. In addition to up-to-date news, scores, standings,
rosters, transaction reports and exclusive editorial commentary,
cbs.sportsline.com features Baseball LIVE!, an online 'stadium' that utilizes
Shockwave technology to enable users to view a graphical depiction of real-time
play-by-play action of Major League Baseball games in progress. Additional
baseball coverage includes player and team statistics that are sortable by
position, team and standing; chat rooms and baseball newsgroup links and
contests. Fantasy league enthusiasts also can purchase SportsLine's fantasy
league products, which include Fantasy Baseball and Commissioner. Fantasy
Baseball enables participants to manage their own fantasy- or rotisserie-style
baseball league in season-long and playoff competitions. Participants form
leagues of up to 20 teams and utilize cbs.sportsline.com to administer all
player transactions (for example, drafts, trades, starting lineup selection,
disabled list and minor league moves) and obtain weekly summaries of scoring,
standings and roster transactions. cbs.sportsline.com also offers Fantasy
Baseball participants the ability to communicate in specially reserved chat
rooms. Commissioner provides fantasy and rotisserie league participants a fully
configurable interface to manage their own leagues, including customizing rules,
scoring and reporting to their own preferences.
golfweb.com, acquired by the Company in January 1998, provides golf-related
content, interactive entertainment, membership services, golf course discounts
and merchandise domestically. In April 1999, the Company and the PGA TOUR agreed
to combine the golfweb.com site with pgatour.com and to co-produce one
comprehensive golf site, pgatour.com. The site offers the only real-time scoring
on the Internet from the PGA TOUR, SENIOR PGA TOUR and NIKE TOUR events. The
site also features news covering other golf organizations and international
tours. Additionally, the site focuses on recreational golf, travel opportunities
and golf instruction and features a variety of interactive tools such as course
guides, reviews and message boards. Pgatour.com also features the PGA TOUR SHOP,
the official online pro shop of the PGA TOUR offering a complete line of golf
equipment, accessories, apparel and other products including PGA TOUR branded
merchandise.
3
sports.com, launched as a separate Web site in August 1999, is dedicated to
providing comprehensive coverage of European sports. The Web site is produced
and operated by the Company's European subsidiary, Sports.com which entered into
a three year promotional package with IMG, the largest independent producer and
packager of sports programming in the world. The Web site, sports.com, is the
focal point of a network of sport and country sites presented to consumers
including: football.sports.com which provides live coverage and real time
scoring of soccer; rugby.sports.com which features live match centers, live
scoring, timely editorial content, real-time statistics for all the major
divisions of rugby in England, Scotland, Ireland and Wales; and
france.sports.com which provides extensive, French-language coverage of all
sports relevant to the French sports fan. Sports.com is the official internet
media partner of Manchester United and was the exclusive Internet sports media
partner for the official site of the 1999 Rugby World Cup.
vegasinsider.com, launched as a separate Web site in March 1997, provides
sports gaming information and features electronic odds on all major sports
events from the Las Vegas casinos, including the Stardust, the Flamingo Hilton,
the MGM Grand and Bally's, plus lines from nationally recognized oddsmakers.
Handicapping information includes commentary, matchup analysis and picks from
some of the nation's leading sports handicappers. The site's news reporting is
focused on a gaming perspective and provides detailed statistical and matchup
analysis tools, including 'against-the-spread' and 'straight-up' records, team
and player statistics and injury and weather reports. Live scoreboards provide
breaking news and scores, updates, recaps and boxscores. Most of the content on
vegasinsider.com is available only to paying members.
majorleaguebaseball.com, launched in June 1999, is the official Web site of
Major League Baseball. The site includes live game audio broadcasts, daily and
historical video highlights, real-time statistics and updates and team and
player information. In addition, it features the sale of official licensed
merchandise and contains fantasy competitions and interactive features including
playable online games and Baseball LIVE, which provides real-time pitch-by-pitch
coverage of every game in an exciting, animated format.
Web Sites for Sports Superstars and Personalities. SportsLine has created
and maintains Web sites for several sports superstars and personalities,
including Joe Namath, Michael Jordan (jordan.sportsline.com), Tiger Woods
(tigerwoods.com), Shaquille O'Neal (shaq.com), Cal Ripken, Jr. (2131.com), Mike
Schmidt and John Daly (gripitandripit.com). The Company has packaged these Web
sites in a unique and entertaining site that includes all of SportsLine's
athlete spokespersons. The superstar athlete site includes features and insights
from athletes, the opportunity to belong to fan clubs, as well as radio
interviews and chat sessions from active and retired athletes from around the
world of sports.
Other Web Sites. SportsLine has created Web sites for sports organizations
and major sports events, including the San Francisco Forty-Niners NFL franchise
(sf49ers.com), the World of Wrestling Magazine (wrestleline.com), the 1999 Major
League Baseball All-Star Game (mlballstargame.com) and the 1999 Major League
Baseball official post-season site (worldseries.com).
SportsLine is responsible for the technical development, production and
maintenance of the Web sites it creates for athletes and sports organizations,
as well as customer service, technical support and billing associated with the
sale of premium features or merchandise. SportsLine's third party Web site
agreements are for terms ranging from one to ten years and generally provide
SportsLine the exclusive right to create a Web site for a sports superstar,
personality, organization or affinity group, as well as to receive certain
content for the Web site to use the athlete or organization's name, logos and
other materials to promote the Company's business and products. In consideration
for the rights granted under its third party Web site agreements, SportsLine has
issued warrants to purchase Common Stock and, in certain instances, agreed to
make cash payments. The Company generally is entitled to receive a percentage of
the sponsorship, advertising and other revenue generated from the third party
Web sites it develops.
Other Distribution Channels
The inclusion of cbs.sportsline.com in AOL's services and the integration
of cbs.sportsline.com into Excite Sports and Netscape Sports makes the Company's
sports content and programming readily accessible to the millions of Web users
that access the Internet via these platforms. The Company believes that its
original sports radio shows have broad appeal and in August 1999 entered into an
agreement to syndicate certain of its radio programming, both on the Internet
and nationally to over-the-air sports talk radio stations. As of December 31,
4
1999, the Company had three radio programs in syndication in association with
the Westwood One Radio Network: 'The Drive' broadcast in 12 markets, 'NFL Today'
broadcast in 65 markets and 'NFL Sunday' broadcast in 420 markets. The Company
also intends to develop distribution and revenue opportunities in other media,
including news wire services, publications and e-mail.
STRATEGIC RELATIONSHIPS
SportsLine has established strategic relationships to provide marketing and
cross promotional opportunities, to increase consumer awareness of the
SportsLine brand, to build traffic on its Web sites and to obtain exclusive
sports content for its Web sites.
CBS. In March 1997, the Company entered into a strategic alliance with CBS
pursuant to which the Company's flagship Web site was renamed
'cbs.sportsline.com'. The agreement provides for cbs.sportsline.com to receive,
among other things, extensive network television advertising and on-air
promotion during the term of the agreement, primarily during CBS television
sports broadcasts such as the NFL, the NCAA Men's Basketball Tournament, NCAA
Football, PGA TOUR events, U.S. Open tennis and the Daytona 500. In addition,
the Company has the right to use certain CBS logos and television-related sports
content on cbs.sportsline.com and in connection with the operation and promotion
of that Web site. CBS and the Company seek to maximize revenue through a joint
advertising sales effort. The agreement also provides the Company access to
certain CBS television-related sports content and the potential to create
distribution and revenue opportunities with more than 200 CBS affiliates
throughout the United States. The CBS agreement was amended in February 1999 to
extend its term through 2006. See 'Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
AOL. In July 1997, the Company entered into a strategic programming and
distribution agreement with America Online, Inc. ('AOL') pursuant to which
cbs.sportsline.com became the first 'anchor tenant' on AOL's Sports Channel. In
October 1998, the Company and AOL entered into a new three-year agreement and
significantly expanded their online relationship to provide Company-produced
sports news and statistics, special features, major event coverage and
merchandise on several key AOL brands around the world. 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 is 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,
the Company became the premier provider of licensed sports equipment and apparel
as well as golf products within the Sports Channel on the AOL service.
Excite. In October 1998, the Company entered into a three-year strategic
relationship with Excite, Inc. making the Company the exclusive provider of
sports content on the Excite Sports Channel.
Netscape. In January 1999, the Company entered into a strategic
relationship with Netscape Communications Corporation making the Company the
premier sports content provider for the Netcenter Sports Channel as well as the
exclusive provider for news, information and merchandise for NFL, NBA, NHL, MLB,
golf, soccer, tennis, auto racing and NCAA basketball and football. In addition,
cbs.sportsline.com is featured as a default content 'channel' in the Channel
Finder of Netscape's Netcaster Software which utilizes 'push' delivery to give
users the ability to subscribe to dynamic Web content and to browse these
channels and Web sites offline from their desktop.
France Telecom Multimedia. In November 1999, the Company's majority owned
subsidiary, Sports.com Limited entered into a strategic agreement with France
Telecom Multimedia, a subsidiary of France Telecom SA under which Sports.com
produces and hosts co-branded sports channels for France Telecom's Internet
portal, Voila, and its Internet service provider, Wanadoo, in France. The sites
offer live match centers of events, timely analysis and real-time statistics, as
well as an online store.
theglobe.com. In February 2000, the Company entered into an agreement under
which theglobe.com will exclusively develop and operate community services for
the Company. Under the terms of the agreement, theglobe.com will co-brand and
customize community services, including e-mail clubs, home page building tools
and message boards, for the Company's Web sites and fantasy sports service.
5
Westwood One. In August 1999, the Company entered into a three-year
agreement with Westwood One, Inc. Under this agreement, the Company produces
sports content for Westwood One/CBS Radio Sports' coverage of live sporting
events. In addition, Westwood One was granted the right to syndicate the
Company's radio programs ('The Drive,' 'NFL Today' and 'NFL Sunday').
WebMD. In August 1999, the Company entered into a two-year agreement with
WebMD under which WebMD became the exclusive sponsor and content provider for
the Company's Health & Wellness Web site. WebMD is providing the latest health
and medical news, information and updates and access to daily interactive health
oriented events and online support communities. Additionally, WebMD is the
official sponsor of all injury reports in the Company's coverage of professional
and collegiate athletics.
MVP.com. Effective as of January 1, 2000, the Company entered into a
10-year strategic e-commerce and marketing agreement with MVP.com, Inc., a new
sports and outdoor e-commerce company, pursuant to which MVP acquired and will
operate the Company's domestic e-commerce business, including its e-commerce
subsidiaries International Golf Outlet, Inc., Golf Club Trader, Inc. and Tennis
Direct, Inc. See 'Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments.'
Sports Superstars and Organizations. The Company has established strategic
relationships with sports superstars and personalities, including Michael
Jordan, Tiger Woods, Joe Namath, Shaquille O'Neal, Cal Ripken, Jr., Mike Schmidt
and John Daly. Each of these individuals has agreed to serve as a spokesperson
for the Company, to permit the Company to use his or her name, likeness and
photographs on promotional materials and to be available to the Company to
provide input on business and marketing strategies. The Company also maintains
cross promotional relationships with other sports organizations and affinity
groups for which it has created Web sites, including the PGA TOUR, Major League
Baseball, World of Wrestling Magazine and Sports Careers, a career consulting
and placement service.
IMG. In July 1999, the Company's majority owned subsidiary, Sports.com
Limited, entered into a three-year promotional and consulting agreement with IMG
under which IMG provides Sports.com production services, consulting services and
promotional support through IMG-owned television, event and media properties.
Other Media Relationships. In addition to promotion on CBS television
sports broadcasts, SportsLine receives radio promotion through its strategic
media relationships with Sports Byline USA, the nation's largest syndicated
sports radio network, including on-air commercials and live endorsements by Ron
Barr, Sports Byline USA's Emmy Award winning host. Additionally, the Company has
an agreement with FT.com, the Web site of the Financial Times, to be the sports
partner of FT.com and provide domestic and international sports news and
information.
ADVERTISING AND SALES
The Company believes that the demographics of its audience are similar to
the traditional sports advertisers' target market. Based on Company sponsored
market research, users of the SportsLine's U.S. Web sites are predominantly
male, 87% are between the ages of 18 to 54, 62% have college degrees and 43%
have an annual income greater than $75,000. In Europe, Sports.com is completing
its first survey of its audience, but believes that the demographics of its
audience is predominantly male between the ages of 18 and 49. The Company
currently derives, and expects to continue to derive, a substantial portion of
its revenue from advertising on its Web sites. The Company sells 'banner'
advertisements that allow interested readers to link directly to the
advertisers' own Web sites or to promotional sites created by SportsLine. The
Company also offers sponsorship opportunities that enable advertisers to
associate their corporate messages with the Company's coverage of athletes and
marquee events (such as the World Series, the Super Bowl, the Olympics, the NBA
Playoffs and the Stanley Cup Playoffs), special features of the Company's Web
sites (including ScoreCenters or Baseball LIVE!) and special promotions,
contests and events. SportsLine targets as advertisers on its Web sites
traditional sports advertisers, such as consumer product and service companies,
technology companies, sporting goods manufacturers and automobile companies.
Advertising revenue has been derived principally from short-term
advertising contracts on a per impression basis or for a fixed fee based on a
minimum number of impressions. SportsLine's advertising rates generally
6
range from $10.00 to $50.00 per thousand impressions. To enable advertisers to
verify the number of impressions received by their advertisements and monitor
their advertisements' effectiveness, the Company provides its advertisers with
third party audit reports showing data on impressions received by their
advertisements.
SportsLine's in-house sales staff develops and implements its advertising
strategies, including identifying strategic accounts and developing
presentations and promotional materials. The Company has sales personnel located
in Fort Lauderdale, New York, Chicago, San Francisco, Los Angeles, and Detroit.
The Company also capitalizes on its cross-marketing relationships with sports
superstars, personalities, organizations and affinity groups by seeking
sponsorships and advertisements from their sponsors. The Company coordinates its
advertising sales efforts for cbs.sportsline.com with CBS's television network
advertising sales personnel.
No advertiser accounted for more than 9% of the Company's revenue during
1999 or 1998.
MEMBERSHIPS AND PREMIUM OFFERINGS
Although the majority of information and programming on the Company's Web
sites is free, SportsLine offers membership programs and other premium services
on cbs.sportsline.com and vegasinsider.com.
The following table sets forth certain information, as of December 31,
1999, concerning the Company's membership and premium service offerings:
MEMBERSHIPS DESCRIPTION PRICE RANGE
- ------------------- -------------------------------------------------------------------- -----------------
SPORTSLINE REWARDS SportsLine Rewards. Membership program in which members are rewarded ( Free
for visiting the site, purchasing merchandise or fantasy products (
and utilizing sponsors. Members can redeem earned points for (
merchandise or participate in special chats or emails. )
(
(
(
)
)
)
SportsLine Rewards Plus. Same as SportsLine Rewards, except that ( $39.95 annually
members receive bonus rewards and savings on the purchase of (
merchandise and fantasy products. Members can also receive tickets )
to special events. (
(
)
)
GOLFWEB Players Club. Personalized golf instruction; performance tracking; ( $39.95 annually
discounts on greens fees, golf travel and merchandise; online golf )
handicap. (
)
)
VEGAS INSIDER Electronic Odds. Fifteen minute delayed odds from premier Las Vegas ( $29.95 monthly
casinos. ( $199.95 annually
(
Detailed Match-up Analysis. Game logs, 'against-the-spread' and (
'straight-up' records, team and player statistics, injury and (
weather reports and detailed write-ups. (
(
Handicapping Experts. Picks, match-up analysis and editorial (
commentary. (
(
Member Chat Rooms. Meet and compare notes with other members who are (
serious about handicapping. (
)
7
PREMIUM SERVICES DESCRIPTION PRICE RANGE
- --------------------- ------------------------------------------------------------ ---------------------
)
FANTASY LEAGUES AND Commissioner. Functional, easy to use fantasy and rotisserie ( $19.95 - $99.95
FANTASY TOOLS league management software and statistics services. (
(
Challenge Game. Multi-player leagues featuring overall, (
conference, league and weekly prizes. (
(
Fantasy Software/tools. Team and league management, (
including sortable stats, Fantasy Scoring Center, Stats (
Projector and Trends Analysis. (
)
)
(
ODDS AND PICKS Electronic Odds. Instant odds from premier Las Vegas ) $99.95 monthly
casinos. ( $999.00 annually
)
)
(
Pick Packs. Expert picks for college and professional games ) $9.95 to $49.95 per
from well-known handicappers. ( pick pack
)
)
JOB LISTINGS Sports Careers. Exclusive job listings in multiple sports ( $14.95 monthly
categories. Also includes articles, audio, tips, success ) $19.95 semiannually
stories and company contacts. ( $149.95 annually
)
For certain products, SportsLine offers potential members a 30-day free
trial period. As is typical in the online services industry, a portion of the
users who access the Company's service on a trial basis do not become members,
and each month a portion of SportsLine's members terminate their memberships.
The Company believes that its conversion and retention rates are consistent with
industry averages for online and similar services.
MERCHANDISE
SportsLine maintains a comprehensive online retail site featuring more than
15,000 items, including event-driven merchandise (such as World Series
Lockerroom Caps), licensed team gear and apparel, unique sports superstar
memorabilia, health and fitness products and sports equipment. The site
features: (i) an intuitive search tool, resulting in the presentation of the
product image, description, price and a quick check-out feature to assist in
making purchases; (ii) dynamically generated related product offerings which
suggest similar products for sales as that requested; (iii) private
password-protected shopper profiles which expedite ordering for return shoppers;
(iv) automatic e-mail confirmation of orders; and (v) instant member discounts
for shoppers who are CBS SportsLine Rewards Plus members or Golfweb members. The
store also has an auction site where the Company can put items from its stores
up for auction. SportsLine also maintains several co-branded stores such as the
Official Major League Baseball store, the PGA TOUR store and the SportsSound
store.
During June 1998, the Company acquired igogolf.com, a leading Internet golf
retailer, which offers a full selection of name brand golf equipment and
accessories from manufacturers including Callaway, Cobra, Titleist, TaylorMade,
Ping, Wilson, Orlimar and many others. igogolf.com has established the ability
with many of these manufacturers to offer direct and/or drop shipping
capabilities which allow for fast and efficient shipment to the end-consumer.
Additionally, igogolf.com keeps an inventory of new and used golf equipment and
accessories for direct shipment to the end-consumer. In May 1999, SportsLine
acquired golfclubtrader.com which buys and sells used and new golf equipment and
in September 1999 the Company acquired tennisdirect.com, an online retailer of
tennis equipment.
In the first quarter of 2000, SportsLine entered into a 10-year strategic
e-commerce and marketing agreement with MVP.com, Inc. ('MVP'), a new sports and
outdoor e-commerce company, pursuant to which MVP acquired and will operate the
Company's domestic e-commerce business. Effective as of January 1, 2000,
8
MVP has assumed responsibility, at its expense, for the design, hosting,
operation and ongoing maintenance of the Company's e-commerce operations,
including those mentioned above, and is entitled to all revenue generated from
the sales of goods and services pursuant thereto. As consideration for this
right, MVP has issued equity to the Company and will pay SportsLine promotional
fees based on the amount of revenue generated, with minimum cash payments of
$120 million over the 10-year term. In connection with this agreement, the
Company sold three of its subsidiaries which engage in e-commerce activity,
International Golf Outlet, Inc., Golf Club Trader, Inc. and TennisDirect.com,
Inc., to MVP in exchange for additional equity in MVP.
MARKETING
The Company's agreement with CBS provides for cbs.sportsline.com to
receive, extensive network television advertising and on-air promotion,
primarily during CBS television sports broadcasts such as the NFL, the NCAA
Men's Basketball Tournament, NCAA Football, PGA TOUR events, U.S. Open tennis
and the Daytona 500. The Company also receives a variety of on-air promotional
mentions on Westwood One/CBS Radio Sports stations. The Company's European
subsidiary, Sports.com, receives television promotion through its agreement with
IMG. Sports.com's sites and product attributes are promoted contextually and
repeated in such IMG-produced programs such as 'Trans World Sport' and 'Futbol
Mundial.'
Another effective source of advertising for SportsLine has been Web
advertising. The Company advertises on a number of leading Web sites, including
Yahoo!, Excite, Lycos, Alta Vista, Netscape and USA Today. SportsLine also
actively pursues links from other popular Web sites, and the Company's Web sites
are listed in the directories of most major search engine sites, including
Yahoo!, Excite, Alta Vista and Lycos.
SportsLine employs a variety of methods to promote the SportsLine brand and
attract traffic and new members to its Web sites. In addition to on-air
promotion on CBS television sports broadcasts and Westwood One radio stations
and advertising on other Web sites, SportsLine advertises in targeted
publications, on outdoor billboards and on sports talk radio stations,
distributes promotional materials at selected sports events and engages in an
ongoing public relations campaign. SportsLine also has conducted limited direct
mail campaigns targeting online or sports-oriented consumers. Whenever possible,
the Company utilizes cross promotional arrangements to secure advertising and
other promotional considerations.
SportsLine's agreements with sports organizations and affinity groups
typically provide for the Company to receive exposure in any print, television
and marketing vehicles utilized by the organizations or affinity groups to
promote themselves or their products or services and for the distribution of the
Company's promotional materials at events or industry shows in which they
participate.
MEMBER SERVICE AND SUPPORT
The Company believes that member service and support are important to its
ability to attract and retain members. The Company's member support staff
provides toll free telephone support, responds to customer requests concerning
technical aspects of SportsLine's Web sites or certain third party software and
conducts inbound and outbound telemarketing on an 18 hour a day, seven day a
week basis. The Company does not charge for service and support.
COMPETITION
The market for Internet services and products is intensely competitive and
rapidly changing. SportsLine competes, directly and indirectly, for advertisers,
viewers, members, content providers, merchandise sales and rights to sports
events with the following categories of companies: (i) Web sites targeted to
sports enthusiasts generally (such as ESPN.com, and CNN and Sports Illustrated's
CNN/SI and Fox Sports) or to enthusiasts of particular sports (such as Web sites
maintained by the NFL, the NBA and the NHL); (ii) publishers and distributors of
traditional off-line media (such as television, radio and print), including
those targeted to sports enthusiasts, many of which have established or may
establish Web sites; (iii) general purpose consumer online services such as AOL
and Microsoft Network, each of which provides access to sports-related content
and services; (iv) vendors of sports information, merchandise, products and
services distributed through other means, including retail stores, mail,
facsimile and private bulletin board services; and (v) Web search and retrieval
services, such as Alta Vista, Excite, Lycos and Yahoo!, and other high-traffic
Web sites, such as those operated
9
by CNET and Netscape. The Company anticipates that the number of its direct and
indirect competitors will increase in the future. Management believes that
SportsLine's most significant competitors are ESPN.com, Fox Sports and CNN/SI
Web sites which offer a variety of sports content.
In Europe, Sports.com's most significant competitive challenge is from
media companies that are familiar names in their respective markets and have an
existing newsgathering, promotion and distribution infrastructure. Sports.com's
most significant competitors include Sporting Life and Football & Rugby 365. In
addition, during 1999 Sports.com terminated its relationships with Soccernet and
CricInfo to host and co-produce its web sites. As a result, Soccernet and
CricInfo now compete with Sports.com.
The Company believes that the principal competitive factors in attracting
and retaining users and members are the depth, breadth and timeliness of
content, the ability to offer compelling and entertaining content and brand
recognition. Other important factors in attracting and retaining users include
ease of use, service quality and cost. The Company believes that the principal
competitive factor in attracting and retaining content providers and
merchandisers is SportsLine's ability to offer sufficient incremental revenue
from licensing fees, bounties and online sales of product or services. The
Company believes that the principal competitive factors in attracting
advertisers include the number of users and members of SportsLine's Web sites,
the demographics of SportsLine's user and membership bases, price and the
creative implementation of advertisement placements. There can be no assurance
that the Company will be able to compete favorably with respect to these
factors.
Many of SportsLine's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, significantly greater name recognition and substantially larger user
or membership bases than SportsLine and, therefore, have a significantly greater
ability to attract advertisers and users. In addition, many of these competitors
may be able to respond more quickly than the Company to new or emerging
technologies and changes in Internet user requirements and to devote greater
resources than the Company to the development, promotion and sale of their
services. There can be no assurance that SportsLine's current or potential
competitors will not develop products and services comparable or superior to
those developed by SportsLine or adapt more quickly than the Company to new
technologies, evolving industry trends or changing Internet user preferences.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which would materially and adversely affect the
Company's business, results of operations and financial condition. In addition,
as SportsLine expands internationally, it may face new competition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, or that competitive pressures faced by the
Company would not have a material adverse effect on its business, results of
operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
SportsLine is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally. There are
currently few laws or regulations directly applicable to access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to issues such as the protection of databases, user privacy,
pricing and characteristics and quality of products and services. The adoption
of laws or regulations in the future may decrease the growth of the Internet,
which could in turn decrease the demand for the Company's services and products
and increase the Company's costs of doing business or otherwise have an adverse
effect on the Company's business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain and could
expose SportsLine to substantial liability, for which the Company might not be
indemnified by content providers.
SportsLine's contests and sweepstakes may be subject to state and federal
laws governing lotteries and gambling. The Company seeks to design its contest
and sweepstakes rules to fall within exemptions from such laws and restricts
participation to individuals over 18 years of age who reside in jurisdictions
within the United States and Canada in which the contests and sweepstakes are
lawful. There can be no assurance that SportsLine's contests and sweepstakes
will be exempt from such laws or that the applicability of such laws to the
Company would not have a material adverse effect on the Company's business,
results of operations and financial condition.
10
Due to the global nature of the Internet, it is possible that the
governments of various states of the United States or foreign countries may
attempt to regulate SportsLine's transmissions or to prosecute SportsLine for
violations of their laws. Violations of local laws may be alleged or charged by
state or foreign governments. The Company may unintentionally violate these laws
and these laws may be modified, or new laws enacted, in the future. It is also
possible that states or foreign countries may seek to impose sales taxes on
out-of-state companies that engage in commerce over the Internet. In the event
that states or foreign countries succeed in imposing sales or other taxes on
Internet commerce, the growth of the use of the Internet for commerce could slow
substantially.
INTELLECTUAL PROPERTY
SportsLine's performance and ability to compete are dependent to a
significant degree on its internally developed content and technology. The
Company relies on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements with its employees and
with third parties and contractual provisions to establish and protect its
proprietary rights. There can be no assurance that the steps taken by SportsLine
to protect its proprietary rights will be adequate, that SportsLine will be able
to secure trademark registrations for all of its marks in the United States
and/or foreign countries, or that third parties will not infringe upon or
misappropriate the Company's copyrights, trademarks, service marks and similar
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain foreign countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the Company's services. In the future, litigation may be necessary to enforce
and protect the Company's trade secrets, copyrights and other intellectual
property rights.
On December 28, 1999, an action entitled Fantasy Sports Properties, Inc. v.
SportsLine.com, Inc., Yahoo! Inc., ESPN, Inc. and Sandbox Entertainment, Inc.,
was commenced against the Company and the named-codefendants in the United
States District Court for the Eastern District of Virginia. The plaintiff seeks
damages and injunctive relief for the alleged infringement by the Company and
the named co-defendants of a patent entitled 'Computerized Statistical Football
Game,' issued by the United States Patent and Trademark Office, which is
allegedly owned by the plaintiff. The Company in its Answer, Affirmative
Defenses and Counterclaim has taken the position that it has not infringed the
patent in suit, that the patent in suit is invalid, and the Company seeks a
Declaratory Judgment of non-infringement and invalidity. The Company intends to
vigorously defend itself in this action.
On August 16, 1999, an action entitled Shopsports.com v. SportsLine USA,
Inc., was commenced against the Company in the United States District Court for
the Central District of California. The plaintiff seeks damages and injunctive
relief in connection with the Company's use of a tertiary domain name which the
plaintiff alleges infringes on plaintiff's trademark rights. The action is being
consolidated with a declaratory judgment action, commenced by the Company,
seeking a judgment that the use of the tertiary URL 'shop.sportsline.com' did
not infringe on plaintiff's common law rights. The Company intends to vigorously
defend itself in this action.
There can be no assurance that third parties will not bring copyright or
trademark infringement claims against SportsLine or claim that the Company's use
of certain technologies violates a patent. If it is determined that SportsLine
has infringed upon a third party's proprietary rights, there can be no assurance
that any necessary licenses or rights could be obtained on terms satisfactory to
the Company, if at all. The inability to obtain any required license on
satisfactory terms could have a material adverse effect on the Company's
business, results of operations and financial condition. SportsLine may also be
subject to litigation to defend against claims of infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. If competitors of SportsLine prepare and file applications in
the United States that claim trademarks used or registered by the Company,
SportsLine may oppose those applications and have to participate in proceedings
before the USPTO to determine priority of rights to the trademark, which could
result in substantial costs to the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome could require SportsLine to license
disputed rights from third parties or to cease using such trademarks. Any such
litigation would be costly and divert management's attention, either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Adverse determinations in such litigation
could result in the loss of certain of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties, or prevent the Company from selling its
11
services, any one of which could have a material adverse effect on SportsLine's
business, results of operations and financial condition. In addition, inasmuch
as SportsLine licenses a substantial portion of its content from third parties,
its exposure to copyright infringement actions may increase; because the Company
must rely upon such third parties for information as to the origin and ownership
of such licensed content. SportsLine generally obtains representations as to the
origins and ownership of such licensed content and generally obtains
indemnification to cover any breach of any such representations; however, there
can be no assurance that such representations will be accurate or that such
indemnification will provide adequate compensation for any breach of such
representations.
In 1998, the Company settled a lawsuit over the use of the mark
'SportsLine' and received as part of the settlement an assignment of the
plaintiff's United States trademark registration for the 'SportsLine' mark. The
Company has applied to register in the United States a number of marks, several
of which include the term 'SportsLine.' The Company has filed applications to
register 'SportsLine' marks in Australia and the United Kingdom. There can be no
assurance that the Company will be able to secure adequate protection for these
trademarks in the United States or in foreign countries. Many foreign countries
have a 'first-to-file' trademark registration system; and thus the Company may
be prevented from registering its marks in certain countries if third parties
have previously filed applications to register or have registered the same or
similar marks. It is possible that competitors of the Company or others will
adopt product or service names similar to the Company's, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect its 'SportsLine' mark and
other marks adequately could have a material adverse effect on the Company's
business, results of operations and financial condition.
SportsLine grants users of cbs.sportsline.com a license to use the
Company's service under an agreement that prohibits the unauthorized
reproduction or distribution of SportsLine's licensed and proprietary content.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's service or to obtain and
use information that SportsLine or its content providers regard as proprietary.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate SportsLine's copyrights, trademarks, service marks and similar
proprietary rights.
EMPLOYEES
SportsLine had 453 full-time employees in the United States and 93
full-time employees in Europe as of December 31, 1999. In the United States, 100
were in editorial and operations, 97 were in technical and product development,
169 were in sales and marketing and 87 were in finance and administration. In
Europe, 34 were in editorial and operations, 12 were in technical and product
development, 18 were in sales and marketing and 29 in finance and
administration. The Company's future success depends in large part upon its
ability to attract and retain highly qualified employees. Competition for such
personnel is intense, and there can be no assurance that SportsLine will be able
to retain its senior management or other key employees or that it will be able
to attract and retain additional qualified personnel in the future. The
Company's employees are not represented by any collective bargaining
organization, and the Company considers its relations with its employees to be
good.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
SportsLine makes its Web sites available through multiple servers, running
on Sun Solaris, Microsoft Windows and Microsoft NT operating systems. SportsLine
uses the Netscape family of Commercial Applications Software for its Web
servers, publishing systems, merchandise systems and secure credit card capture
and billing. Capabilities in place include bulletin boards, mail, chat
(including regular text based chat as well as Virtual Reality worlds with
integrated chat), news groups, merchandising, streaming audio and video, and
interactive Java and Shockwave applications.
SportsLine maintains all of its computer systems at its Fort Lauderdale,
Florida corporate headquarters and maintains mirror sites for its Web sites at
host facilities in Santa Clara, California, Jersey City, New Jersey and Herndon,
Virginia. The Company's operations are dependent upon its ability to protect its
systems against damage from fire, hurricanes, power loss, telecommunications
failure, break-ins, computer viruses and other events beyond the Company's
control. SportsLine maintains access to the Internet through two third-party
12
providers, each of which maintains a DS3 connection running at 45 megabits per
second connected to two routers in the Company's facility. Redundant fiber optic
cables from the Company's building connect with each local Internet provider's
fiber network. SportsLine's Internet connections are fully redundant, so that if
a failure in the network or equipment of one service provider occurs, traffic is
automatically routed through to the other provider. All of the Company's
computer equipment is powered by an uninterruptible power supply ('UPS'), which
is backed up by a diesel generator designed to provide power to the UPS within
seconds of a power outage. In addition, all of the Company's production systems
are copied to backup tapes each night and stored at a third party, off-site
storage facility. All of SportsLine's computer equipment is insured at
replacement cost and SportsLine has developed a comprehensive, out-of-state
disaster recovery plan to respond to system failures. The Company has an
arrangement with Comdisco Disaster Recovery Services ('CDRS') which provides
that in the event the Company's facility cannot provide service for any reason,
the Company's backup tapes would be shipped to Comdisco's New Jersey facility
where they will be loaded to replicate and restore the Company's service.
Moreover, SportsLine has reserved space in CDRS's Business Recovery Center in
Atlanta, Georgia. In the event of a system failure, SportsLine's engineering and
content production staff would have access to hardware and software in Atlanta
similar to that used at SportsLine's facility. The Company's future plans
include replacing the Atlanta facility with its already existing operations in
Tacoma, Washington. Notwithstanding the precautions taken by the Company, any
disruption in SportsLine's Internet access, failure of SportsLine's third party
providers to handle higher volumes of users or damage or failure that causes
system disruptions or other significant interruptions in SportsLine's operations
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's European subsidiary, Sports.com is heavily dependent on
SportsLine for its technical infrastructure, content building and deployment.
Sports.com's Web sites are hosted by the Company's facilities in Herndon,
Virginia. During 2000, Sports.com plans to build a data center in London and
expand its technical operations in Europe.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
- --------------------------------------- --- -----------------------------------------------------------------
Michael Levy........................... 53 Chairman of the Board, President and Chief Executive Officer
Dan Leichtenschlag..................... 38 Senior Vice President of Operations and Chief Technology Officer
Mark J. Mariani........................ 43 President, Sales and Marketing
Kenneth W. Sanders..................... 43 Senior Vice President and Chief Financial Officer
Andrew S. Sturner...................... 35 President, Corporate and Business Development
MICHAEL LEVY has served as the President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in February 1994. From
1979 through March 1993, Mr. Levy served as President, Chief Executive Officer
and as a director of Lexicon Corporation, a high technology company specializing
in data communications and signal processing technology. From January 1988 to
June 1993, Mr. Levy also served as Chairman of the Board and Chief Executive
Officer of Sports-Tech International, Inc., a company engaged in the
development, acquisition, integration and sale of computer software, equipment
and computer-aided video systems used by professional, collegiate and high
school sports programs. Between June 1993 and February 1994, Mr. Levy was a
private investor. Mr. Levy is a director of iVillage, Inc. and NetCreations,
Inc.
DAN LEICHTENSCHLAG has served as the Company's Senior Vice President of
Operations since June 1999. Mr. Leichtenschlag joined the Company as Director of
Operations in May 1995 and was promoted to the position of Vice President of
Engineering in 1997, and given the title of Chief Technology Officer in 1998.
From June 1983 to April 1995, Mr. Leichtenschlag served in various technical and
management capacities at General Electric including Manager, GEnie Systems
Development, GE's on-line service and Manager, UNIX Software Development.
MARK J. MARIANI has served as the Company's Executive Vice President, Sales
since April 1996 and was appointed President, Sales and Marketing in June 1999.
From August 1991 to March 1996, Mr. Mariani served as Executive Vice President
of Sports Sales for Turner Broadcasting Sales, Inc. From June 1990 to August
1991,
13
Mr. Mariani served as Senior Vice President and National Sales Manager for CNN
in New York, and from May 1986 to June 1990, Mr. Mariani served as Vice
President for CNN Sales Midwest. Prior to joining Turner Broadcasting, Mr.
Mariani served as an Account Executive for WBBM, an owned and operated CBS
television station in Chicago, Illinois. Mr. Mariani is a director of Internet
Sports Network, Inc.
KENNETH W. SANDERS has served as the Vice President and Chief Financial
Officer of the Company since September 1997 and was appointed Senior Vice
President in October 1998. From January 1996 to August 1997, Mr. Sanders served
as Senior Vice President, Chief Financial Officer of Paging Network, Inc., the
world's largest paging company. From May 1993 to December 1995, Mr. Sanders
served as Executive Vice President, Chief Financial Officer and a director of
CellStar Corporation, an integrated wholesaler and retailer of cellular phones
and related products. Between July 1979 and April 1993, Mr. Sanders was with
KPMG Peat Marwick, most recently as an Audit Partner from July 1990 to April
1993.
ANDREW S. STURNER has served as the Company's Vice President, Business
Development since June 1995 and was appointed President, Corporate and Business
Development in June 1999. From May 1994 to June 1995, Mr. Sturner served as Vice
President of Business Development for MovieFone, Inc., an interactive telephone
service company. From March 1993 to May 1994, Mr. Sturner served as President of
Interactive Services, an interactive audiotext development company which he
co-founded in 1992. From August 1990 to March 1993, Mr. Sturner was a bankruptcy
associate at the law firm of Stroock & Stroock & Lavan. Mr. Sturner is a
director of Internet Sports Network, Inc.
ITEM 2. PROPERTIES.
SportsLine's corporate headquarters are located in Fort Lauderdale,
Florida. The Company currently leases approximately 45,000 square feet in three
adjacent buildings under three leases, which expire in April 2000, June 2000 and
November 2001, respectively. The Company has an option to extend one of these
leases for a five-year term. SportsLine also leases sales offices in Chicago,
New York, San Francisco, Los Angeles and Denver, a news operation office in
Tacoma, Washington and a fantasy operations office in New York. The Company's
new subsidiary in Europe currently has three leased spaces located in London,
Leeds and Paris. The Company has entered into an agreement to lease a commercial
building in Fort Lauderdale, Florida consisting of approximately 81,000 square
feet. The lease is for a term of ten years for total rent commitments of up to
$13 million, commencing upon occupancy, with options to extend the lease for two
additional five-year terms. SportsLine anticipates moving its corporate
headquarters into this new building in April 2000.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to the patent and trademark litigation described in 'Item
1. Business - Intellectual Property.'
From time to time, SportsLine 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 SportsLine's financial position or results of operations.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of stockholders held on November 19, 1999, the
following proposals were approved:
SHARES IN SHARES SHARES SHARES NON-
FAVOR OPPOSED ABSTAINING VOTING
---------- --------- ---------- -----------
Amend the Company's Certificate of Incorporation to change
the name of the Company to
SportsLine.com, Inc........................................ 21,045,334 18,435 2,310 --
Amend the 1997 Incentive Compensation Plan to increase the number of shares
available for issuance thereunder from
3,000,000 to 5,500,000..................................... 14,579,863 3,154,260 21,322 3,310,634
Amend the 1997 Employee Stock Purchase Plan to increase the number of shares
available for issuance thereunder from
500,000 to 1,000,000....................................... 17,302,613 514,144 23,497 3,225,825
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICES FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol 'SPLN' since November 13, 1997. The following table sets forth
for the periods indicated the range of high and low closing prices per share of
Common Stock, as reported by the Nasdaq National Market:
HIGH LOW
----- -----
1998
First Quarter............................................ 32.38 11.75
Second Quarter........................................... 38.38 22.75
Third Quarter............................................ 37.50 13.00
Fourth Quarter........................................... 19.13 7.69
1999
First Quarter............................................ 57.81 17.00
Second Quarter........................................... 54.75 30.69
Third Quarter............................................ 40.75 17.00
Fourth Quarter........................................... 63.25 25.25
SportsLine has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. SportsLine
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
As of March 21, 2000, the Company had approximately 237 shareholders of
record. The Company believes that the number of beneficial owners of the Common
Stock is in excess of 300.
SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED DECEMBER 31, 1999
(1) In January 1999, pursuant to a March 1997 agreement with CBS, the
Company issued to CBS 558,988 shares of Common Stock and warrants to purchase
380,000 shares of Common Stock. In February 1999, the Company amended the 1997
agreement and accelerated the issuance to CBS of 1,052,937 shares of Common
Stock and warrants to purchase 760,000 shares of Common Stock, which originally
were to be issued in 2000 and 2001. The Company also issued to CBS new warrants
to purchase 1,200,000 shares of Common Stock, which vest on various dates
through January 2001, and agreed to issue to CBS on Specified issue dates for
each of the sixth through tenth contract years Common Stock having a fair market
value of $20.0 million on each issue date.
The consideration 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 December 1999, the Company issued 380,000 shares to CBS upon exercise of
its warrants in cash consideration of $7,600,000.
(2) In February 1999, the Company issued 884 shares of Common Stock to
Lighthouse Capital, Inc.pursuant to a cashless exercise of a warrant in
accordance with its terms.
(3) 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.
(4) In May 1999, the Company issued to the PGA Tour, Inc. warrants to
purchase 114,943 shares of Common Stock as consideration for three-year
promotional and production agreement.
(5) The Company issued 282,960 shares of Common Stock to Kleiner Perkins
Caufield & Byers VII and 7,256 shares of Common Stock to KPCB Information
Sciences Zaibatsu Fund II pursuant to the cashless exercise of warrants granted
in 1995 in accordance with their terms.
16
(6) In October 1999, the Company issued to Westwood One 450,000 shares of
Common Stock as consideration for a three-year promotional and programming
agreement.
(7) In December 1999, as part of the acquisition of Daedalus World Wide
Corporation ('DWWC'), the Company issued to the shareholders of DWWC a total of
599,998 shares of Common Stock.
(8) During the year ended December 31, 1999, in connection with
acquisitions of other businesses the Company issued an aggregate of 124,320
shares of Common Stock.
(9) During the year ended December 31, 1999, upon exercise of warrants by
holders other than CBS, the Company issued a total of 658,334 shares of Common
Stock for aggregate cash of $3,985,150 including:
Consideration
Number of shares received by
Holder of Warrants received SportsLine
---------------- -------------
IMG.................................................................... 13,334 $ 100,000
James Lampley.......................................................... 10,000 126,000
Rice Family Trust...................................................... 19,750 98,750
Thomas Loeffler........................................................ 3,000 15,000
Shaquille O'Neal....................................................... 32,000 160,000
John Daly.............................................................. 5,000 50,000
Joe Namath............................................................. 100,000 500,000
Carmen Policy.......................................................... 12,000 90,000
Keyshawn Johnson....................................................... 4,000 35,000
Bruce Binkow........................................................... 4,000 20,000
Michael Schmidt........................................................ 10,000 50,000
Sports Management Group................................................ 4,000 20,000
Gary Uberstine......................................................... 8,000 40,000
Leonard Armato......................................................... 15,000 75,000
Edward DeBartolo....................................................... 12,000 90,000
NFL Players Association................................................ 12,000 150,000
Bill Walton............................................................ 6,000 54,150
Sports Byline USA...................................................... 4,000 20,000
Estate of Burk Zanft................................................... 200,000 1,000,000
Monica Seles........................................................... 5,000 25,000
Richard Horrow......................................................... 10,000 50,000
Eldrick T. Woods....................................................... 20,000 150,000
James Walsh............................................................ 80,000 400,000
Lee Kolligian.......................................................... 250 1,250
Michael Jordan......................................................... 64,000 640,000
Gabrielle Reece........................................................ 5,000 25,000
No underwriter was involved in any of the above sales of securities. All of
the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended (the 'Securities Act'),
on the basis that they were issued under circumstances not involving a public
offering.
ITEM 6. SELECTED FINANCIAL DATA.
The following data should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in Item 8 of this
Form 10K. The selected consolidated balance sheet data set forth below as of
December 31, 1998 and 1999, and the selected consolidated statement of
operations data for the three
17
years ended December 31, 1999 have been derived from the Company's audited
consolidated financial statements.
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,(1)
(UNAUDITED)
U.S. SPORTS.COM TOTAL
-------- ---------- -----------
1999 1999 1999 1998 1997 1996 1995
-------- ---------- ----------- ----------- ----------- ---------- ----------
(In thousands, except for share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenue...................... $ 58,284 $ 1,994 $ 60,278 $ 30,551 $ 12,014 $ 3,058 $ 100
Cost of revenue.............. 31,536 2,542 34,078 17,231 10,431 4,233 818
-------- ---------- ----------- ----------- ----------- ---------- ----------
Gross margin (deficit)....... 26,748 (548) 26,200 13,320 1,583 (1,175) (718)
Operating expenses:
Product development........ 1,587 -- 1,587 1,313 2,541 1,445 721
Sales and marketing........ 34,463 1,989 36,452 20,481 14,019 7,115 1,456
General and
administrative........... 17,306 2,757 20,063 13,159 8,305 5,644 3,081
Depreciation and
amortization............. 24,809 997 25,806 17,104 11,689 993 206
Other non-recurring charge
for settlement of
litigation............... -- -- -- 1,100 -- -- --
-------- ---------- ----------- ----------- ----------- ---------- ----------
Total operating
expenses............... 78,165 5,743 83,908 53,157 36,554 15,197 5,464
-------- ---------- ----------- ----------- ----------- ---------- ----------
Loss from operations......... (51,417) (6,291) (57,708) (39,837) (34,971) (16,372) (6,182)
Interest expense............. (4,392) -- (4,392) (118) (146) (161) (51)
Interest and other income,
net........................ 8,783 193 8,976 4,446 940 430 125
-------- ---------- ----------- ----------- ----------- ---------- ----------
Loss before extraordinary
gain....................... (47,026) (6,098) (53,124) (35,509) (34,177) (16,103) (6,108)
Extraordinary gain on
extinguishment of debt..... 36,027 -- 36,027 -- -- -- --
-------- ---------- ----------- ----------- ----------- ---------- ----------
Net loss..................... $(10,999) $ (6,098) $ (17,097) $ (35,509) $ (34,177) $ (16,103) $ (6,108)
-------- ---------- ----------- ----------- ----------- ---------- ----------
-------- ---------- ----------- ----------- ----------- ---------- ----------
Net loss per share--basic and
diluted....................
Loss per share before
extraordinary gain....... $ (2.31) $ (1.94) $ (3.08) $ (2.31) $ (1.59)
Extraordinary gain......... 1.57 -- -- -- --
----------- ----------- ----------- ---------- ----------
Net loss per share--basic and
diluted.................... $ (0.74) $ (1.94) $ (3.08) $ (2.31) $ (1.59)
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Weighted average common and
common equivalent shares
outstanding--basic and
diluted.................... 23,018,224 18,305,927 11,107,534 6,971,369 3,835,977
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Cash and marketable securities........................... $120,973 $ 85,242 $33,988 $15,250 $ 1,175
Working capital (deficit)................................ 97,229 64,509 31,284 12,519 (1,349)
Total assets............................................. 271,461 137,655 45,726 19,984 3,901
Long-term obligations, net of current maturities......... 19,608 207 458 685 770
Total shareholders' equity............................... 224,656 118,963 36,985 15,426 405
- ------------------
(1) The selected financial data gives effect to acquisitions which were
accounted for under the 'pooling-of-interests' accounting method. See Note 2
of Notes to Financial Statements.
18
ITEM 7. 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 as a result of
certain risk factors, including those set forth under 'Risk Factors that May
Affect Future Results,' below and elsewhere in this Report. The following
discussion also should be read in conjunction with the information set forth in
'Item 6. Selected Financial Data' and the Company's Consolidated Financial
Statements and Notes thereto included in 'Item 8. Financial Statements and
Supplementary Data' of this Annual Report on Form 10-K.
OVERVIEW
The Company derives most of its revenue from advertising, e-commerce and
membership and premium services sales. Advertising revenue, e-commerce revenue
and fees from memberships and premium services constituted approximately 50%,
27% and 9%, respectively, of the Company's total revenue in 1999; 58%, 12% and
16%, respectively, of the Company's total revenue in 1998; and 53%, 9% and 22%,
respectively, of the Company's total revenue in 1997. The Company also derives
revenue from content licensing, primarily barter. Advertising revenue has been
derived principally from short-term advertising contracts on a per impression
basis or for a fixed fee based on a minimum number of impressions. Advertising
revenue also includes sponsorship opportunities that enable advertisers to
associate their corporate messages with the Company's coverage of athletes and
marquee events for a fee. E-commerce revenue is derived from sales of sports
memorabilia, equipment, licensed apparel and other sports related items.
Although most of the content on the Company's Web sites is free, users of the
Company's Web sites can purchase memberships and premium services for a fee. The
Company's majority owned subsidiary, Sports.com Limited which was formed in May
1999 has contributed to the growth in revenues and accounted for approximately
3% of total revenue in 1999. The Company has had agreements to syndicate certain
of its radio programming on traditional radio stations since November 1997. As
of December 31, 1999, the Company has three radio programs in syndication: 'The
Drive' broadcast in 12 markets, 'NFL Today' broadcast in 65 markets and 'NFL
Sunday' broadcast in 420 markets pursuant to SportsLine's agreement with
Westwood One entered into in August 1999. Through December 31, 1999, the
Company's syndication revenue has not been significant.
Advertising revenue is recognized in the period in which the advertisement
is displayed, provided that no significant obligations remain and collection of
the resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of 'impressions,' or times that advertisements
appear in page views downloaded by users. Revenue relating to annual memberships
and seasonal sports contests is recognized ratably over the life of the
membership agreement or contest period. Accordingly, amounts received for which
services have not yet been provided are recorded as deferred revenue on the
Company's balance sheets. Content licensing revenue is recognized over the
period of the license agreement as the Company delivers its content. Merchandise
revenue is recognized once the product has been shipped and payment is
reasonably assured.
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 was accounted for
under the 'pooling-of interests' accounting method. Accordingly, the Company's
consolidated financial statements include the accounts of Golfweb. See Notes 2
and 5 of Notes to Consolidated Financial Statements.
On June 29, 1998, the Company acquired International Golf Outlet, Inc.
('IGO'), a privately-held Internet retailer of fine golf equipment and
accessories, for $2 million, consisting of $350,000 in cash and $1.65 million of
Common Stock (46,924 shares). The Company also agreed to issue to the IGO
shareholders additional Common Stock, valued at $1.5 million at the time of
acquisition (42,658 shares), if IGO meets certain annual revenue and earnings
targets over the three year period following the acquisition. These targets were
met for the first period and, accordingly, during 1999 the Company issued 14,220
additional shares of Common Stock valued at $249,000 to the former IGO
shareholders. See Notes 2 and 5 of Notes to Consolidated Financial Statements.
In May 1999, the Company acquired Golf Club Trader, Inc. for approximately
$7 million of Common Stock (195,850 shares). The purchase was accounted for
using the pooling-of-interests method of accounting; however,
19
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. See Notes 2 and 5 of Notes to Consolidated Financial
Statements.
Sports.com Limited, formerly known as SportsLine Europe Limited
('Sports.com'), was formed in May 1999 as a majority owned subsidiary of the
Company. In June 1999, Sports.com acquired the sports division of Infosis Group.
The Company accounted for this transaction using the purchase method of
accounting. The accompanying financial statements also include the purchase of
Sportsweb. In connection with the initial capitalization of Sports.com and the
acquisition of Sportsweb, the Company recorded a liability of $7,443,000 on its
balance sheet to reflect its minority interest in Sports.com.
In December 1999, the Company acquired Daedalus World Wide Corporation for
consideration valued at approximately $31,780,000 consisting of $4,000,000 cash
and $27,780,000 of Common Stock (599,998 shares). The transaction was accounted
for using the purchase method of accounting. See Notes 2 and 5 of Notes to
Consolidated Financial Statements.
The Company acquired other businesses during 1999, and accounted for these
transactions using the purchase method of accounting. The two businesses were
acquired in exchange for an aggregate of $2,373,000 cash and $2,555,000 of the
Company's common stock (124,322 shares). See Notes 2 and 5 of Notes to
Consolidated Financial Statements.
RECENT DEVELOPMENTS
In the first quarter of 2000, SportsLine entered into a 10-year strategic
e-commerce and marketing agreement with MVP.com, Inc., a new sports and outdoor
e-commerce company, pursuant to which MVP acquired and will operate the
Company's domestic e-commerce business. Effective as of January 1, 2000, MVP
assumed responsibility, at its expense, for the design, hosting, operation and
ongoing maintenance of the Company's e-commerce operations, including those
mentioned above, and is entitled to all revenue generated from the sales of
goods and services pursuant thereto. As consideration for this right, MVP has
issued equity to the Company and will pay SportsLine promotional fees based on
the amount of revenue generated, with minimum cash payments of $120 million over
the 10-year term. In connection with this agreement, the Company sold three of
its subsidiaries which engage in e-commerce activity (International Golf Outlet,
Inc., Golf Club Trader, Inc. and TennisDirect.com, Inc.) to MVP in exchange for
additional equity in MVP.
In January 2000, Sports.com completed a second round of funding, raising
gross proceeds of $52.5 million through the issuance of Series B Preferred
Stock. Proceeds from the funding will be used for working capital and other
general corporate purposes, including expansion into new countries, additional
marketing and advertising sales activities and capital expenditures.
RESULTS OF OPERATIONS
Revenue
Total revenue for the year ended December 31, 1999 was $60,278,000 compared
to $30,551,000 for the year ended December 31, 1998 and $12,014,000 for the year
ended December 31, 1997. The increase in revenue in each period was primarily
due to increased advertising sales, as well as increased revenue from the sale
of merchandise, memberships and premium service fees, and content licensing.
Advertising revenue increased $12,272,000 in 1999 compared to 1998 and
$11,369,000 in 1998 compared to 1997. Advertising revenue for the years ended
December 31, 1999, 1998 and 1997 accounted for approximately 50%, 58% 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 1999, the Company generated
additional revenue in connection with the Company's advertising and sponsorship
agreements with WebMD, MountainZone.com and CareerPath. International
advertising revenue accounted for approximately 3% of total advertising revenue
during 1999 and the Company expects international advertising revenue to
continue to grow in future years. Additionally, during 1999 and 1998 the Company
increased the number of impressions available for advertising by increasing its
content and through its
20
agreements with PGA TOUR and Major League Baseball, among others, to produce the
official Web sites of the organizations.
Membership and premium services revenue increased $597,000 in 1999 compared
to 1998 and $2,331,000 in 1998 compared to 1997. 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 basic
membership revenue decreased in 1999 due to a restructuring of the Company's
membership program, premium service revenue increased due to increased
participation in the Company's fantasy sports contests as well as increased
participation in the Company's 'Sports Careers' products. Membership and premium
service revenue increased in 1998 from 1997 due to increased member signups as
well as an increased number of premium products.
E-commerce revenue increased to $16,486,000 in 1999 compared to $3,600,000
and $1,049,000 in 1998 and 1997, respectively. 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. The principal contributing factors to increased e-commerce revenue
were increased product assortment, a new order entry platform and better product
promotion through the Company's relationships with CBS and AOL. The purchase of
two e-commerce businesses in 1999 and one in 1998 also contributed to increased
sales of merchandise from year to year. E-commerce revenue is expected to
decline significantly in future periods as a result of the sale of the Company's
domestic e-commerce operations to MVP.com; however, advertising revenue is
expected to increase as a result of the promotion fees to be paid by MVP.com to
the Company. See '--Recent Developments.'
Content licensing and other revenue increased $3,972,000 during 1999
compared to 1998 and $2,254,000 during 1998 compared to 1997 due to the
Company's agreement with AOL. Content licensing and other revenue also increased
during 1999 as a result of the Company's agreement with Excite and content
revenue generated by Sports.com.
As of December 31, 1999, the Company had deferred revenue of $4,160,000
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 17%, 19% and 19% of total revenue for 1999, 1998 and
1997, respectively. Barter revenue decreased in 1999 compared to 1998 and 1997
primarily due to a greater growth rate of cash revenue versus barter revenue. 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 consists primarily of content fees to third parties and
payroll and related expenses for the Company's editorial and operations staff
who are responsible for creating content on the Company's Web sites and radio
programs. Telecommunications, Internet access and computer related expenses for
the support and delivery of the Company's services are also included in cost of
revenue. Cost of revenue also includes the cost of merchandise sold. Also
included in cost of revenue are royalty and other payments paid to certain
content providers, technology and marketing partners and celebrity athletes
based on membership levels or percentage of revenue generated subject, in
certain instances, to specified minimum amounts.
Cost of revenue was $34,078,000 in 1999 compared to $17,231,000 and
$10,431,000 for 1998 and 1997, respectively. The increase in cost of revenue for
each period was primarily the result of increased merchandise costs due to
higher merchandise sales and is also the result of increased revenue sharing
under the Company's agreements with CBS, Major League Baseball and PGA TOUR. In
addition, telecommunications cost has increased for each period as the Company
increased its capacity to support and deliver its services to the increased
traffic on its Web sites. Other increases in cost of revenue reflect the
relatively high level of revenue splits and rights payments required to initiate
the start up of Sports.com (which accounted for 4% of total cost of revenue
during 1999). During 1999 and 1998 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
21
requirements under the AOL agreement as well as the official sites of Major
League Baseball and PGA TOUR. As a percentage of revenue, cost of revenue
increased to 57% for the year ended December 31, 1999 from 56% in December 31,
1998 and decreased as compared to 87%, for the year ended December 31, 1997,
respectively.
Operating Expenses
Product Development. Product development expense consists primarily of
consulting and employee compensation and related expenses required to support
the development of existing and new service offerings and proprietary content.
These costs are expensed as incurred.
Product development expense was $1,587,000 for the year ended December 31,
1999 compared to $1,313,000 and $2,541,000 for the years ended December 31, 1998
and 1997, respectively. The increase in product development expense in 1999 is
primarily the result of increased product development personnel and consultants
and the associated costs. The decrease in product development expense in 1998
from 1997 was primarily attributable to the reduction of technical personnel and
associated costs relating to the purchase of GolfWeb. The Company believes that
significant 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 year ended December 31, 1999 from 4% and 21%, for the
years ended December 31, 1998 and 1997, respectively.
Sales and Marketing. Sales and marketing expense consists of salaries and
related expenses, advertising, marketing, promotional, business development and
public relations expenses and member acquisition costs. Member acquisition costs
consist primarily of the direct costs of member solicitation, including
advertising on other Web sites and the cost of obtaining qualified prospects
from direct marketing programs and from third parties. The Company expenses
member acquisition costs as incurred.
Sales and marketing expense was $36,452,000 for the year ended December 31,
1999 compared to $20,481,000 and $14,019,000 for the years ended December 31,
1998 and 1997, respectively. The increase in sales and marketing expense in each
period was primarily the result of an increase in the number of personnel and
related costs, increased advertising on other Web sites as well as in print and
other media, prizes awarded to contestants in the Company's various contests and
costs associated with the Company's new 'Rewards' program. Also in February
1999, the Company entered into an agreement with Netscape which resulted in
additional marketing expense. Sports.com accounted for 5% of sales and marketing
expense. The Company intends to continue to aggressively promote the sports.com
brand worldwide in order to attract traffic and new users to its Web sites.
Barter transactions accounted for approximately 30%, 27% and 16% of sales and
marketing expense for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in the proportionate amount of barter expense was due
to the use of barter for content licensing during 1999 and 1998. As a percentage
of revenue, sales and marketing expense decreased to 60% for the year ended
December 31, 1999 from 67% and 117% for the years ended December 31, 1998 and
1997, respectively.
General and Administrative. General and administrative expense consists of
salary and related costs for executive, finance and accounting, technical and
customer support, human resources and administrative functions as well as
professional service fees. General and administrative expense for the year ended
December 31, 1999 was $20,063,000 compared to $13,159,000 and $8,305,000 for the
years ended December 31, 1998 and 1997, respectively. The increase in general
and administrative expense in each period was primarily attributable to salary
and related expenses for additional personnel and to a lesser extent an increase
in system support for the Company's technological operations and with an
increase in rents and related expenses. The Company increased general and
administrative expense in each year to develop and maintain the administrative
infrastructure necessary to support the growth of its business. As the result of
the expansion in Europe, Sports.com accounted for 14% of total general and
administrative expense in 1999. The Company expects to continue to incur
additional start up expenses as Sports.com continues its expansion in the
European market. As a percentage of revenue, general and administrative expense
decreased to 33% for the year ended December 31, 1999 from 43% and 69%, for the
years ended December 31, 1998 and 1997, respectively, as the Company achieved
certain economies of scale utilizing its core infrastructure.
Depreciation and Amortization. Depreciation and amortization expense
consists of the depreciation of property and equipment, amortization of costs
associated with consulting agreements and, beginning in March
22
1997, the amortization of deferred advertising and content costs relating to the
CBS agreement. Depreciation and amortization expense for the year ended December
31, 1999 was $25,806,000 compared to $17,104,000 and $11,689,000 for the years
ended December 31, 1998 and 1997, respectively. The increase in depreciation and
amortization from 1997 to 1998 was due to the Company's agreements with CBS,
which began in March 1997, and AOL, which began in October 1998. The increase in
depreciation and amortization in 1999 from 1998 was due to the amendment to the
CBS agreement in February 1999 which increased the number of warrants issued to
CBS by 1,200,000, as well as new agreements with PGA TOUR and Westwood One
involving the issuance of shares and warrants. Additionally, in 1999 there was a
full year of expense related to the AOL agreement as opposed to three months'
expense in 1998. Depreciation and amortization also increased in 1999 and 1998
due to increased amounts of property and equipment and goodwill amortization for
acquired companies. The Company expects depreciation and amortization expense to
increase as a result of the continuing agreements mentioned above and the
goodwill amortization of recent acquisitions.
In February 1999, the Company amended its 1997 agreement with CBS to extend
the original term of the agreement for five years, through 2006. Commencing with
calendar year 1999, CBS will provide advertising and promotion in accordance
with a fixed promotion schedule. The Company accelerated the issuance to CBS of
1,052,937 shares of Common Stock and warrants to purchase 760,000 shares of
Common Stock, which originally were to be issued in 2000 and 2001. The Company
also issued to CBS new warrants to purchase 1,200,000 shares of Common Stock,
which vest on various dates through January 2001, and agreed to issue to CBS on
specified dates for each of the sixth through tenth contract years Common Stock
having a fair market value of $20.0 million on each issue date.
Under the Company's agreement with CBS, the Company has 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 as depreciation and amortization
expense over each related contract year. See Note 5 of Notes to Consolidated
Financial Statements. Total expense under the CBS agreement was $14,096,000 for
the year ended December 31, 1999 and $12,002,000 for the year ended December 31,
1998, and will be $17,286,000 in 2000, $17,286,000 in 2001 and $22,286,000
annually from 2002 to 2006.
Under the Company's current agreement with AOL which was effective upon
expiration of the prior agreement in October 1998, the Company has 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 in the balance sheet as deferred advertising costs
and amortized to depreciation and amortization expense over each related
contract year. In December 1999, the Company realized a benefit of approximately
$3.4 million resulting from the reversal of the liability related to the
Company's long-term agreement with AOL. Such benefit was reflected as a
reduction to depreciation and amortization expense in 1999. See Note 5 of Notes
to Consolidated Financial Statements. Total expense under the new AOL agreement
was $4,220,000 for the year ended December 31, 1999 and will be $4,499,000 in
2000 and $4,227,000 in 2001.
Interest Expense. Interest expense was $4,392,000 for the year ended
December 31, 1999 compared to $118,000 and $146,000 for the years ended December
31, 1998 and 1997, respectively. Interest expense during 1999 consisted
primarily of interest paid on the Convertible Subordinated Notes thus causing
the increase in interest expense from 1999 to 1998. The decrease in interest
expense from 1997 to 1998 was due to the payment in full of two equipment lines
in February 1998 and one of the Company's capital leases for computer equipment
in June 1998. The Company anticipates that interest expense will decrease in the
immediate future as a result of the repurchase and retirement of approximately
$130,000,000 of the $150,000,0000 Convertible Subordinated Notes.
Interest and Other Income, Net. Interest and other income, net primarily
represents interest earned on cash and cash equivalents and marketable
securities. Interest and other income, net for the year ended December 31, 1999
was $8,976,000 compared to $4,447,000 and $940,000 for the years ended December
31, 1998 and 1997, respectively. The increase from 1999 to 1998 was primarily
attributable to the Company's investment of the proceeds of the Convertible
Subordinated Note offering in March 1999. The increase from 1998 to 1997 was due
to the investment of the proceeds of the Company's initial public offering and
the Company's April 1998
23
secondary offering in cash and cash equivalents. The Company anticipates that
interest income will decrease in future periods as a result of the use of
approximately $90,100,000 of cash to repurchase the Convertible Subordinated
Notes and the use of marketable securities for working capital and other
purposes.
Extraordinary Gain. During the second half of 1999, the Company repurchased
$130,392,000 of its Convertible Subordinated Notes for approximately $90,100,000
and as a result, the Company recognized an extraordinary gain of $36,027,000,
net of unamortized debt issuance costs.
Income Taxes. No provision for Federal and state income taxes has been
recorded as the Company incurred net operating losses for each period presented.
As of December 31, 1999, the Company had approximately $97,000,000 of net
operating loss carryforwards for Federal income tax purposes, expiring beginning
in 2009, available to offset future taxable income. Given the Company's losses
incurred to date and the difficulty in accurately forecasting the Company's
future results, management does not believe that the realization of the related
deferred income tax assets meets the criteria required by generally accepted
accounting principles and, accordingly, a full 100% valuation allowance has been
recorded to reduce the deferred income tax assets to zero. See Note 7 of Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company's primary source of liquidity
consisted of $45,968,000 in cash and cash equivalents. As of December 31, 1999,
the Company has $24,953,000 in current marketable securities and $50,052,000 in
noncurrent marketable securities, which mature at various dates from January
2001 to May 2001. In February 2000, CBS exercised warrants to purchase 500,000
shares of Common Stock resulting in net proceeds of $11,500,000.
In January 2000, Sports.com completed a second round of funding, raising
gross proceeds of $52.5 million through the issuance of Series B Preferred
Stock. Proceeds from the funding will be used for working capital and other
general corporate purposes, including expansion into new countries, additional
marketing and advertising sales activities and capital expenditures.
In March 1999, the Company completed an offering of $150,000,000 aggregate
principal amount of 5% Convertible Subordinated Notes due 2006. Total net
proceeds to the Company from this offering were approximately $145,443,000. In
August 1999, the Company repurchased $60,000,000 of its Convertible Subordinated
Notes for approximately $36,400,000, and as a result, the Company recognized an
extraordinary gain of $21,800,000, net of amortized debt issuance costs. In
October 1999, the Company repurchased an additional $70,300,000 of its
Convertible Subordinated Notes for approximately $53,700,000 and as a result,
the Company recognized an extraordinary gain of approximately $14,200,000, net
of expenses and unamortized debt issuance costs. Convertible Subordinated Notes
in an aggregate principal amount of approximately $20,000,000 remain
outstanding.
The Company has obtained revolving credit facilities that provide for the
lease financing of computers and other equipment. Outstanding amounts under the
facilities bear interest at variable rates of approximately 9%. As of December
31, 1999, the Company owed $170,000 under these facilities.
As of December 31, 1999, current deferred advertising and content costs
totaled $19,530,000, which represented costs related to the CBS and AOL
agreements to be amortized to depreciation and amortization expense during the
year ended December 31, 2000. Long term deferred advertising and content costs
related to the above agreements totaled $32,398,000 at December 31, 1999.
Accrued liabilities totaled $12,128,000 as of December 31, 1999, an increase of
$6,794,000 from December 31, 1998, primarily due to increases in accruals for
cost of revenue sharing, professional fees, accrued payroll and accrued expenses
relating to Sports.com.
Net cash used in operating activities was $29,710,000, $25,295,000 and
$22,048,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The principal uses of cash for all periods were to fund the Company's net losses
from operations, partially offset by increases in deferred revenue, accrued
liabilities and depreciation and amortization and other noncash charges.
Net cash used in investing activities was $34,190,000, $69,185,000 and
$3,937,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The principal uses in 1999 were for purchases of current and
24
noncurrent marketable securities and to a lesser extent purchases of property
and equipment, licensing rights and acquisition of businesses. The principal
uses in 1998 were for purchases of current and noncurrent marketable securities
and for purchases of property and equipment. In 1997 the principal use was for
the purchase of property and equipment.
Net cash provided by financing activities was $78,184,000, $93,682,000, and
$43,217,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Financing activities in 1999 consisted principally of the issuance and
repurchase of Convertible Subordinated Notes. In 1998 and 1997 financing
activities consisted principally of the issuance of equity securities, including
shares of Common Stock sold in the Company's initial public offering and
secondary public offering.
The Company has entered into various licensing, royalty and consulting
agreements with content providers, vendors, athletes and sports organizations,
which agreements provide for consideration in various forms, including issuance
of warrants to purchase Common Stock and payment of royalties, bounties and
certain other guaranteed amounts on a per member and/or a minimum dollar amount
basis over terms ranging from one to ten years. Additionally, some of these
agreements provide for a specified percentage of advertising and merchandising
revenue to be paid to the athlete or organization from whose Web site the
revenue is derived. As of December 31, 1999, the minimum guaranteed payments
required to be made by the Company under such agreements were $15,990,000. 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.
Although the Company has no material commitments for capital expenditures,
it anticipates purchasing approximately $17.6 million of property and equipment
during 2000, including $12.9 million in domestic operations and $4.7 million
related to international operations. The capital expenditures will relate to
infrastructure and system needs for the Company's European expansion 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 worldwide working capital and capital expenditure
requirements for at least the next 24 to 36 months. However, on a consolidated
basis 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. The sale of additional equity
or convertible securities will result in additional dilution to the Company's
shareholders. 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
To date the Company's systems have not experienced any material disruption
due to the onset of the Year 2000, however we cannot assure that we will not
experience disruptions in the future as a consequence of Year 2000 issues. To
date the Company has completed all phases of preparedness for Year 2000 however;
we cannot quantify the amount of the Company's potential exposure, but do not
believe it to be material.
SEASONALITY
The Company expects that its revenue will be higher leading up to and
during major U.S. sports seasons and lower at other times of the year,
particularly during the summer months. In addition, the effect of such seasonal
fluctuations in revenue could be enhanced or offset by revenue associated with
major sports events, such as the Olympics, the Ryder Cup and the World Cup,
although such events do not occur every year. The Company believes that
advertising sales in traditional media, such as television, generally are lower
in the first and third calendar quarters of each year, and that advertising
expenditures fluctuate significantly with economic cycles. Depending on the
extent to which the Internet is accepted as an advertising medium, seasonality
and cyclicality in the level of Internet advertising expenditures could become
more pronounced. The foregoing factors could have a material adverse affect on
the Company's business, results of operations and financial condition.
25
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, 'Reporting Comprehensive Income,' during
the year ended December 31, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income (loss) and its components in a
full set of financial statements. The objective of SFAS No. 130 is to report
comprehensive income (loss), a measure of all changes in equity of an enterprise
that result from transactions and other economic events in a period, other than
transactions with owners. The Company has elected to disclose comprehensive
income (loss) in the consolidated statements of stockholders equity.
In June 1999, the Financial Accounting Standards Board ('FASB') issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Defferal
of FASB Statement No. 133. SFAS No. 137 defers for one year the effective date
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 effective for the year ended
December 31, 2001. The Company believes that the adoption of SFAS No. 133 will
not have a material impact on its consolidated financial statements, as it has
entered into no derivative contracts and has no current plans to do so in the
future.
The Company adopted SOP 98-1, 'Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use' effective January 1, 1999. SOP
98-1 establishes criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should be
capitalized. Such adoption did not have a material effect on the Company's
financial position or results of operations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
SportsLine's business and the value of its stock is subject to a number of
risks. Some of those risks are described below.
We have only been operating our business since August 1995
We were incorporated in February 1994 and commercially introduced our first
Web site in August 1995. We first recognized revenue from operations in the
quarter ended September 30, 1995. Accordingly, we have a limited operating
history upon which you may evaluate us. You should consider our prospects in
light of the risks, expenses and difficulties frequently encountered by early
stage companies in new and rapidly evolving markets, including the
Internet-based advertising, information services and commerce markets. As an
early stage online content provider and commerce company, we have an evolving
and unpredictable business model, we face intense competition, we must
effectively manage our growth and we must respond quickly to rapid changes in
customer demands and industry standards. To address these risks, we must provide
compelling and original content to our users, we must maintain our existing
relationships and effectively develop new relationships with advertisers,
advertising agencies and other third parties, we must develop and upgrade our
technology and respond to competitive developments, and we must attract, retain
and motivate qualified personnel. We may not succeed in addressing these
challenges and risks.
We have an accumulated deficit and we anticipate further losses
We have incurred significant losses since we began doing business. To date,
we have achieved only limited revenue and our ability to generate significant
revenue is subject to substantial uncertainty. We may not ever generate
sufficient revenue to meet our expenses or achieve or maintain profitability. We
incurred net operating losses of $16.1 million during 1996, $34.2 million during
1997, $35.5 million during 1998, and $53.1 million during 1999. As of December
31, 1999, we had an accumulated deficit of $109.5 million. We expect to continue
to incur losses for at least the next 24 to 36 months.
Since inception, we have incurred substantial costs to develop and enhance
our technology, to create, introduce and enhance our service offerings, to
acquire and develop content, to build traffic on our Web sites, to acquire
members, to establish marketing relationships and to build an administrative
organization. We intend to
26
continue these efforts and we plan to increase our spending for marketing and
for the development and acquisition of content. We have entered into various
licensing, royalty and consulting agreements with content providers, vendors,
athletes and sports organizations, which agreements provide for consideration in
various forms, including issuance of warrants to purchase shares of our 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,
1999, the minimum guaranteed payments we were required to make under such
agreements were $8,797,000. Our 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. Also, we
recorded non-cash expense of $14,000,000 and $12,000,000 for the year ended
December 31, 1999 and 1998, respectively, related to our agreement with CBS and
will record an additional $146,000,000 of non-cash expense over the remaining
term of our agreement with CBS. Additionally, as of December 31, 1999, non-cash
expense under our agreement with AOL will total $8,726,000 over the remaining
term of that agreement.
Our quarterly results may fluctuate and our future revenues are unpredictable
and may be seasonal
Due to our limited operating history and the unpredictability of our
industry, we cannot accurately forecast our revenue. Our revenues for the
foreseeable future will continue to come from a mix of advertising, merchandise
sales, membership and premium service fees, content licensing, Web site
development and syndication fees. We are likely to experience fluctuations in
quarterly revenue and operating results due to the level of advertising revenue
within each quarter. We base our current and future expense levels on our
investment plans and estimates of future revenues. Our expenses are to a large
extent fixed. We may not be able to adjust our spending quickly if our revenues
fall short of our expectations.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:
o the level of usage of the Internet,
o the level of traffic on our Web sites,
o demand for Internet advertising,
o seasonal trends in both Internet usage and advertising placements,
o the addition or loss of advertisers,
o the advertising budgeting cycles of individual advertisers,
o the number of users that purchase memberships, merchandise or premium
services,
o the amount and timing of capital expenditures and other costs relating to
the expansion of our operations,
o the introduction of new sites and services by us or our competitors,
o price competition or pricing changes in the industry, and
o general economic conditions and economic conditions specific to the
Internet, electronic commerce and online media.
Furthermore, we expect that our 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 World Cup events, although such
events do not occur every year. We believe 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 in which case our revenues
may be affected by such seasonal and cyclical patterns.
27
Due to all of the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is possible that our operating results may fall below the
expectations of securities analysts or investors in some future quarter which
would likely cause the trading price of our common stock to decline.
We are dependent upon our relationship with CBS to execute our business plan
In March 1997, we entered into a five-year agreement with CBS, pursuant to
which our flagship Web site was renamed 'cbs.sportsline.com.' We amended our
agreement with CBS in February 1999 to extend the term through 2006. Over the
term of the agreement, we have the right to use certain CBS logos and
television-related sports content and will receive extensive network television
advertising and on-air promotions. These network television advertising and
on-air promotions, as well as the association of our brand with CBS, are
important elements of our strategy to increase awareness of the SportsLine brand
and build traffic on our Web sites. Under the agreement, CBS has the right to
receive specified percentages of our net revenues. The agreement requires us to
maintain and operate our flagship Web site, cbs.sportsline.com, in accordance
with certain guidelines and restrictions and to cease using any content on
cbs.sportsline.com which CBS determines conflicts, interferes with or is
detrimental to CBS's reputation or business or which becomes subject to any
third party restriction or claim which would prohibit, limit or restrict the use
of such content on the Internet. CBS has the right to terminate the agreement
upon the acquisition by a CBS competitor of 40% or more of the voting power of
our equity securities or in certain other circumstances, including if we breach
a material term or condition or the agreement or if we become insolvent or
subject to bankruptcy or similar proceedings.
We cannot assure you that CBS will perform its obligations under the
agreement, or that the agreement will significantly increase consumer awareness
of our brand or build traffic on our Web sites. Any failure of CBS to perform
its material obligations under the agreement, or the termination of the
agreement prior to the end of its term, would have a material adverse effect on
our business, results of operations and financial condition.
We rely on other strategic relationships in order to execute our business plan
In addition to our relationship with CBS, we have entered into other
strategic relationships with sports superstars and personalities, sports
organizations, commercial online services (such as AOL), third party Web sites
(such as Excite and Netscape) and developers of browsers and other
Internet-based products. We rely on these relationships to increase awareness of
our brand among consumers, to create revenue opportunities and to obtain content
for our Web sites. We cannot assure you that a party to any of our strategic
agreements will perform its obligations as agreed or that we will be able to
specifically enforce any such agreement. Many of these strategic agreements are
short-term in nature and certain of these agreements may be terminated by either
party on short notice. Our failure to maintain or renew these existing strategic
relationships, to establish additional strategic relationships or to fully
capitalize on any such relationship could have a material adverse effect on our
business, results of operations and financial condition.
We may not be able to compete successfully
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated with no substantial barriers to entry,
and we expect that competition will continue to intensify. Competition could
result in less user traffic to our Web sites, price reductions for our
advertising, reduced margins or loss of market share, any of which would have a
material adverse effect on our business, results of operations and financial
condition.
28
We compete for advertisers, viewers, members, content providers,
merchandise sales and rights to sports events with the following categories of
companies:
o online services or Web sites targeted to sports enthusiasts generally
(such as ESPN.com, CNN and Sports Illustrated's CNN/SI and Fox Sports) or
to enthusiasts of particular sports (such as Web sites maintained by the
NFL, the NBA and the NHL),
o publishers and distributors of traditional off-line media (such as
television, radio and print), including those targeted to sports
enthusiasts, many of which have established or may establish Web sites,
o general purpose consumer online services such as AOL and Microsoft
Network, each of which provides access to sports-related content and
services,
o vendors of sports information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile
and private bulletin board services, and
o Web search and retrieval services and portals, such as AltaVista, Excite,
Go.com, Lycos, Netscape and Yahoo!, and other high-traffic Web sites.
Our ability to compete depends on many factors, many of which are outside
of our control. These factors include the quality of content provided by us and
by our competitors, the ease of use of services developed either by us or by our
competitors, the timing and market acceptance of new and enhanced services
developed either by us or by our competitors, and sales and marketing efforts by
us and our competitors.
Based on our review of publicly available documents, we believe some of our
existing competitors, as well as potential new competitors, have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger user or membership
bases than we do. This may allow them to devote greater resources than we can to
the development and promotion of their services. In addition, some of these
competitors may be able to respond more quickly than us to new or emerging
technologies and changes in Internet user requirements and to devote greater
resources than us to the development, promotion and sale of their services.
There can be no assurance that our current or potential competitors will not
develop products and services comparable or superior to those developed by us or
adapt more quickly than us to new technologies, evolving industry trends or
changing Internet user preferences. In addition, as we expand internationally we
are likely to face new competition. There can be no assurance that we will be
able to compete successfully against current and future competitors, or that
competitive pressures would not have a material adverse effect on our business,
results of operations and financial condition.
We are dependent on certain content providers and are required to make
significant payments to such content providers
We rely on independent content providers for sports news, scores,
statistics and other sports information. Our future success depends, in
significant part, on our ability to maintain and renew our relationships with
these content providers and to build new relationships with other content
providers. Our agreements with content providers generally are short-term and
may be terminated by the content provider if we fail to fulfill our obligations
under the applicable agreement. Some of our content providers compete with one
another and, to some extent, with us for advertising and members. Termination of
one or more significant content provider agreements would decrease the
availability of sports news and information which we can offer our customers and
could have a material adverse effect on our business, results of operations and
financial condition.
Most of our agreements with content providers are nonexclusive, and many of
our competitors offer, or could offer, content that is similar or the same as
that obtained by us from such content providers. In addition, the growing reach
and use of the Internet have further intensified competition in this industry.
Consumers have gained free access to certain information provided directly on
the Internet by certain content providers. To the extent that content providers,
including but not limited to our current suppliers, provide information to users
at a lower cost than us or at minimal or no cost, our business, results of
operations and financial condition could be materially adversely affected.
29
Fees payable to content providers constitute a significant portion of our
cost of revenue. There can be no assurance that these content providers will
enter into or renew agreements with us on the same or similar terms as those
currently in effect. If we are required to increase the fees payable to our
content providers, such increased payments could have a material adverse effect
on our business, results of operations and financial condition.
Effectively managing our growth may be difficult
We have rapidly and significantly expanded our operations and anticipate
that significant expansion of our operations will continue to be required in
order to address potential market opportunities. This growth is likely to place
a significant strain on our management, operational and financial resources and
systems. To manage our growth, we must implement systems and train and manage
our employees. In addition, it may become necessary to increase the capacity of
our software, hardware and telecommunications systems on short notice. We cannot
assure you that our management will be able to effectively or successfully
manage our growth.
Our acquisition strategy has certain risks
Our acquisition strategy is subject to the following risks:
o we may not be able to identify additional suitable acquisition candidates
available for sale at reasonable prices,
o acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures,
o we may not be able to consummate any acquisition or successfully
integrate services, products and personnel of any acquisition into our
operations,
o we may acquire companies in markets in which we have little experience,
and
o we may be required to incur debt or issue equity securities, which may be
dilutive to existing shareholders, to pay for acquisitions.
Our strategy to expand internationally has certain risks
We plan to continue to expand our business internationally and expect that
our international operations will be subject to most of the risks inherent in
our business generally. We can not assure you that revenue from international
operations will increase in the future or that operating losses will not be
incurred from such operations. In addition, there are certain risks inherent in
doing business in international markets, such as:
o changes in regulatory requirements, tariffs and other trade barriers,
o fluctuations in currency exchange rates,
o potentially adverse tax consequences,
o difficulties in managing or overseeing foreign operations, and
o differences in consumer preferences and requirements in different
markets.
We may not be able to protect our proprietary rights and we may infringe the
proprietary rights of others
Proprietary rights are important to our success and competitive position.
In 1996, we were issued a United States trademark registration for our former
SportsLine USA logo. We have applied to register in the United States a number
of marks, several of which include the term 'SportsLine.' We have filed
applications to register 'SportsLine' marks in Australia, the United Kingdom and
other countries. We can not assure you that we will be able to secure adequate
protection for these trademarks in the United States or in foreign countries.
Although we seek to protect our proprietary rights, our actions may be
inadequate to protect any trademarks and other proprietary rights or to prevent
others from claiming violations of their trademarks and other proprietary
rights. In addition, effective copyright and trademark protection may be
unenforceable or limited in certain countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our work. We
also license content from third parties and it is possible that we could become
subject to infringement actions based
30
upon the content licensed from those third parties. We generally obtain
representations as to the origin and ownership of such licensed content;
however, this may not adequately protect us. Any of these claims, with or
without merit, could subject us to costly litigation and divert the attention of
our technical and management personnel.
Our business is at risk of system failures, delays and inadequacy
The performance of our Web sites is critical to our reputation and ability
to attract and retain users, advertisers and members. Services based on
sophisticated software and computer systems often encounter development delays
and the underlying software may contain undetected errors or failures when
introduced. Any system error or failure that causes interruption in availability
or an increase in response time could result in a loss of potential or existing
users, advertisers or members and, if sustained or repeated, could reduce the
attractiveness of our Web sites to users and advertisers. A sudden and
significant increase in the number of users of our Web sites also could strain
the capacity of the software, hardware or telecommunications systems we deploy,
which could lead to slower response time or system failures. In addition, if the
number of Web pages or users of our Web sites increases substantially, our
hardware and software infrastructure may not be able to adequately handle the
increased demand. Our operations also are dependent upon receipt of timely feeds
and computer downloads from content providers, and any failure or delay in the
transmission or receipt of such feeds and downloads, whether on account of our
system failure, our content providers, the public network or otherwise, could
disrupt our operations. Any failure or delay that causes interruptions in our
operations could have a material adverse effect on our business, results of
operations and financial condition.
Our success is dependent on our key personnel
Our future success depends, in part, upon the continued service of our
senior management and other key personnel. Although we are the beneficiary of a
key man life insurance policy covering Michael Levy, our President and Chief
Executive Officer, and in June 1998 we entered into an employment agreement with
Mr. Levy which continues in effect through December 31, 2003, the loss of his
services or the services of one or more of our other executive officers or key
employees could have a material adverse effect on our business, results of
operations and financial condition. Our future success also depends on our
continuing ability to attract and retain highly qualified technical, editorial
and managerial personnel. Competition for such personnel is intense, and we
have, at times, experienced difficulties in attracting the desired number of
such individuals.
Our business depends on the growth of the Internet
Our market is new and rapidly evolving. Our success is highly dependent
upon continued growth in the use of the Internet generally and, in particular,
as a medium for advertising, information services and commerce. Internet usage
may be inhibited for a number of reasons, such as:
o the Internet infrastructure may not be able to support the demands placed
on it, and its performance and reliability may decline as usage grows,
o security and authentication concerns with respect to the transmission
over the Internet of confidential information, such as credit card
numbers, and attempts by unauthorized computer users, so-called hackers,
to penetrate online security systems,
o privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent, and
o the lack of availability of cost-effective, high-speed services.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our Web
sites, could be adversely affected.
31
Adoption of the Internet as an advertising medium is uncertain
Our business, results of operations and financial condition would be
materially adversely affected if the Internet advertising market develops more
slowly than we expect or if we are unsuccessful in increasing our advertising
revenues. We derive a substantial portion of our revenue from the sale of
advertisements on our Web sites. Since the Internet advertising market is new
and rapidly evolving, we cannot yet gauge its effectiveness as compared to
traditional advertising media.
The adoption of Internet advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Advertisers that have traditionally relied
upon other advertising media may be reluctant to advertise on the Internet.
These businesses may find Internet advertising to be less effective than
traditional advertising media for promoting their products and services. Many
potential advertisers have little or no experience using the Internet for
advertising purposes. Consequently, they may allocate only limited portions of
their advertising budgets to Internet advertising.
Advertisers may not advertise on our Web sites or may pay less for
advertising on our Web sites if they do not believe that they can reliably
measure the effectiveness of Internet advertising or the demographics of the
user viewing their advertisements. We use both internal measurements and
measurements provided to us by third parties. If these third parties are unable
to continue to provide these services, we would have to perform them ourselves
or obtain them from another provider. This could cause us to incur additional
costs or cause interruptions in our business while we are replacing these
services. In addition, we are implementing additional systems designed to record
demographic data on our users. If we do not implement these systems
successfully, we may not be able to accurately evaluate the demographic
characteristics of our users. Moreover, 'filter' software programs that limit or
prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this software could adversely affect the
commercial viability of Internet advertising.
To the extent that minimum guaranteed impression levels are not met ratably
over the contract period, we defer recognition of the corresponding pro-rata
portion of the revenues related to such unfulfilled obligation until the
guaranteed impression levels are achieved. Advertising based on impressions, or
the number of times an advertisement is delivered to users, comprises virtually
all of our current revenues. To the extent that minimum impression levels are
not achieved for any reason, we may be required to provide additional
impressions after the contract term, which would reduce our advertising
inventory.
Our revenues could be adversely affected if we are unable to adapt to other
Internet advertising pricing models that are adopted as industry standard. It is
difficult to predict which, if any, pricing models for Internet advertising will
emerge as the industry standard. This makes it difficult to project our future
advertising rates and revenues.
We may not be able to adapt as Internet technologies and customer demands
continue to evolve
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our Web sites and introducing new services to address
our customers' changing demands. We could incur substantial costs if we need to
modify our services or infrastructure in order to adapt to changes affecting
providers of Internet services. Our business, results of operations and
financial condition could be materially adversely affected if we incurred
significant costs to adapt, or cannot adapt, to these changes.
Concerns regarding security of transactions and transmitting confidential
information over the Internet
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information. We cannot assure you that advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments will not result in a compromise or breach of the algorithms we use
to protect customer transaction data. If any such compromise of our security
were to occur it could have a material adverse effect on our business, results
of operations and financial condition. If someone is able to
32
circumvent our security measures, such person could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of Internet transactions and the privacy of users may
also inhibit the growth of the Internet generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
our activities or the activities of third party contractors involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could expose us to a risk of loss or litigation and possible
liability. We cannot assure you that our security measures will prevent security
breaches or that failure to prevent such security breaches would not have a
material adverse effect on our business, results of operations and financial
condition.
Regulatory and legal uncertainties could harm our business
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for our service,
increase our cost of doing business or otherwise have a material adverse effect
on our business, results of operations and financial condition. There is, and
will be, an increasing number of laws and regulations pertaining to the
Internet. These laws or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing.
Our contests and sweepstakes may be subject to state and federal laws
governing lotteries and gambling. We seek to design our contest and sweepstakes
rules to fall within exemptions from such laws and restricts participation to
individuals over 18 years of age who reside in jurisdictions within the United
States and Canada in which the contests and sweepstakes are lawful. We cannot
assure you that our contests and sweepstakes will be exempt from such laws or
that the applicability of such laws to us would not have a material adverse
effect on our business, results of operations and financial condition.
We may be liable for the content we make available on the Internet
We may be subject to legal claims relating to the content we make available
on our Web sites, or the downloading and distribution of such content. For
example, persons may bring claims against us if material that is inappropriate
for viewing by young children can be accessed from our Web sites. Claims could
also involve such matters as defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed. Any
costs or imposition of liability that is not covered by insurance or in excess
of insurance coverage could have a material adverse effect on our business,
results of operations and financial condition. Implementing measures to reduce
our exposure to this liability may require us to spend substantial resources and
limit the attractiveness of our service to users.
We may not be able to acquire or maintain effective Web addresses
We hold rights to various Web domain names, including 'cbs.sportsline.com,'
'golfweb.com' and 'vegasinsider.com,' among others. Governmental agencies
typically regulate domain names. These regulations are subject to change. We may
not be able to acquire or maintain appropriate domain names in all countries in
which we do business. Furthermore, regulations governing domain names may not
protect our trademarks and similar proprietary rights. We may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or diminish the value of our trademarks and other proprietary rights.
33
The price of our common stock is highly volatile
The trading price of our common stock fluctuates significantly. For
example, during the 52-week period ended December 31, 1999, the reported closing
price of our common stock on the Nasdaq National Market was as high as $63.25
and as low as $17.00. The trading price of the common stock may fluctuate in
response to a number of events and factors, such as:
o quarterly variations in operating results,
o announcements of technological innovations,
o new services, products and strategic developments by us or our
competitors,
o changes in financial estimates or recommendations by securities analysts,
and
o the operating and stock price performance of other companies.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of companies within
certain industry groups such as technology companies and Internet-related
companies in particular, and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may materially
adversely affect the trading price of our common stock, regardless of our
operating performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company has not
used derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company protects and preserves
its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants......................................................... 36
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................... 37
Consolidated Statements of Operations for years ended December 31, 1999, 1998 and 1997..................... 38
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998 and
1997..................................................................................................... 39
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................. 40
Notes to Consolidated Financial Statements................................................................. 41
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To SportsLine.com, Inc.:
We have audited the accompanying consolidated balance sheets of
SportsLine.com, Inc. (a Delaware corporation), formerly SportsLine USA, Inc.,
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SportsLine.com, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with auditing standards generally accepted in
the United States.
Arthur Andersen LLP
Fort Lauderdale, Florida,
January 24, 2000
36
SPORTSLINE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
December 31,
--------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 45,968 $ 31,684
Marketable securities................................................................... 24,953 27,391
Deferred advertising and content costs.................................................. 19,530 5,413
Accounts receivable, net................................................................ 11,875 5,051
Prepaid expenses and other current assets............................................... 14,657 5,181
-------- --------
Total current assets................................................................. 116,983 74,720
RESTRICTED CASH EQUIVALENTS............................................................... 489 13,038
NONCURRENT MARKETABLE SECURITIES.......................................................... 50,052 26,167
LICENSING RIGHTS.......................................................................... 4,533 --
NONCURRENT DEFERRED ADVERTISING--AOL...................................................... 3,682 13,417
NONCURRENT DEFERRED ADVERTISING AND CONTENT--CBS.......................................... 28,716 --
PROPERTY AND EQUIPMENT, net............................................................... 10,351 5,367
GOODWILL.................................................................................. 42,823 1,931
OTHER ASSETS.............................................................................. 13,832 3,015
-------- --------
$271,461 $137,655
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 3,296 $ 2,545
Accrued liabilities..................................................................... 12,128 5,334
Current portion of capital lease obligations............................................ 170 265
Deferred revenue........................................................................ 4,160 2,067
-------- --------
Total current liabilities............................................................ 19,754 10,211
CONVERTIBLE SUBORDINATED NOTES............................................................ 19,608 --
CAPITAL LEASE OBLIGATIONS, net of current portion......................................... -- 207
ACCRUED GUARANTEE OBLIGATION.............................................................. -- 8,274
-------- --------
Total liabilities.................................................................... 39,362 18,692
-------- --------
MINORITY INTEREST......................................................................... 7,443 --
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and
outstanding as of December 31, 1999 and 1998, respectively........................... -- --
Common stock, $0.01 par value, 200,000,000 shares authorized, 25,358,788 and 20,300,785
issued and outstanding as of December 31, 1999 and 1998, respectively................ 254 203
Additional paid-in capital.............................................................. 333,879 211,061
Accumulated other comprehensive income.................................................. 7 --
Accumulated deficit..................................................................... (109,484) (92,301)
-------- --------
Total shareholders' equity........................................................... 224,656 118,963
-------- --------
$271,461 137,655
-------- --------
-------- --------
The accompanying notes to consolidated financial statements are
an integral part of these consolidated balance sheets.
37
SPORTSLINE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
REVENUE............................................................. $ 60,278 $ 30,551 $ 12,014
COST OF REVENUE..................................................... 34,078 17,231 10,431
----------- ----------- -----------
GROSS MARGIN........................................................ 26,200 13,320 1,583
----------- ----------- -----------
OPERATING EXPENSES:
Product development............................................... 1,587 1,313 2,541
Sales and marketing............................................... 36,452 20,481 14,019
General and administrative........................................ 20,063 13,159 8,305
Depreciation and amortization..................................... 25,806 17,104 11,689
Other non-recurring charge for settlement of litigation........... -- 1,100 --
----------- ----------- -----------
Total operating expenses....................................... 83,908 53,157 36,554
----------- ----------- -----------
LOSS FROM OPERATIONS................................................ (57,708) (39,837) (34,971)
INTEREST EXPENSE.................................................... (4,392) (118) (146)
INTEREST AND OTHER INCOME, net...................................... 8,976 4,446 940
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY GAIN...................................... (53,124) (35,509) (34,177)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (Note 4)............... 36,027 -- --
----------- ----------- -----------
NET LOSS............................................................ $ (17,097) $ (35,509) $ (34,177)
----------- ----------- -----------
----------- ----------- -----------
NET LOSS PER SHARE--BASIC AND DILUTED...............................
Loss per share before extraordinary gain.......................... $ (2.31) $ (1.94) $ (3.08)
Extraordinary gain (Note 4)....................................... 1.57 -- --
----------- ----------- -----------
Net loss per share--basic and diluted............................. $ (0.74) $ (1.94) $ (3.08)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING--BASIC AND DILUTED.................................... 23,018,224 18,305,927 11,107,534
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
38
SPORTSLINE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(amounts in thousands, except share data)
SERIES A, B AND C
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------ ---------- ------ ----------
Balance, December 31, 1996............................................... 14,496,109 $ 145 3,014,288 $ 30 $ 37,866
Net proceeds from issuance of common stock.............................. -- -- 4,398,494 44 35,521
Proceeds from exercise of common stock options.......................... -- -- 42,521 -- 34
Proceeds from exercise of common stock warrants......................... -- -- 960,000 10 7,910
Conversion of preferred stock into common stock......................... (14,496,109) (145) 5,798,434 58 87
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- -- 752,273 7 8,294
Non-cash issuance of common stock and common stock warrants pursuant to
consulting and advertising agreements................................. -- -- 53,210 1 3,915
Net loss and comprehensive loss......................................... -- -- -- -- --
----------- ------ ---------- ------ ----------
Balance, December 31, 1997............................................... -- -- 15,019,220 150 93,627
Net proceeds from issuance of common stock.............................. -- -- 2,288,430 23 80,818
Proceeds from exercise of common stock options.......................... -- -- 317,203 3 881
Proceeds from exercise of common stock warrants......................... -- -- 236,189 2 1,445
Proceeds from issuance of common stock pursuant to employee stock
purchase plan......................................................... -- -- 329,085 3 2,279
Non-cash issuance of common stock pursuant to purchase of International
Golf Outlet........................................................... -- -- 46,924 1 1,668
Non-cash issuance of common stock and common stock warrants pursuant to
AOL agreement......................................................... -- -- 550,000 6 7,619
Proceeds from exercise of CBS warrants.................................. -- -- 760,000 8 9,492
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- -- 735,802 7 11,890
Non-cash issuance of common stock and common stock warrants pursuant to
consulting agreements and purchase of service mark.................... -- -- 17,932 -- 1,342
Net loss and comprehensive loss......................................... -- -- -- -- --
----------- ------ ---------- ------ ----------
Balance, December 31, 1998............................................... -- -- 20,300,785 203 211,061
Non-cash issuance of common stock pursuant to purchase of advertising... -- -- 450,000 5 8,995
Proceeds from exercise of common stock options.......................... -- -- 644,913 6 2,984
Proceeds from exercise of common stock warrants......................... -- -- 949,434 10 3,974
Proceeds from issuance of common stock pursuant to employee stock
purchase plan......................................................... -- -- 101,561 1 1,553
Non-cash issuance of warrants pursuant to PGA Tour agreement............ -- -- -- -- 2,105
Equity activity of subsidiary, net...................................... -- -- -- -- 4,936
Proceeds from exercise of CBS warrants.................................. -- -- 380,000 4 7,596
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- -- 1,611,925 16 59,672
Non-cash issuance of common stock pursuant to acquisition of
businesses............................................................ -- -- 920,170 9 31,003
Comprehensive loss:
Net loss.............................................................. -- -- -- -- --
Cumulative translation adjustment..................................... -- -- -- -- --
Comprehensive loss......................................................
----------- ------ ---------- ------ ----------
Balance, December 31, 1999............................................... -- $ -- 25,358,788 $254 $333,879
----------- ------ ---------- ------ ----------
----------- ------ ---------- ------ ----------
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED COMPREHENSIVE
INCOME DEFICIT LOSS
------------- ----------- -------------
Balance, December 31, 1996............................................... $ -- $ (22,615)
Net proceeds from issuance of common stock.............................. -- --
Proceeds from exercise of common stock options.......................... -- --
Proceeds from exercise of common stock warrants......................... -- --
Conversion of preferred stock into common stock......................... -- --
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- --
Non-cash issuance of common stock and common stock warrants pursuant to
consulting and advertising agreements................................. -- --
Net loss and comprehensive loss......................................... -- (34,177) $ (34,177)
------------- ----------- -------------
-------------
Balance, December 31, 1997............................................... -- (56,792)
Net proceeds from issuance of common stock.............................. -- --
Proceeds from exercise of common stock options.......................... -- --
Proceeds from exercise of common stock warrants......................... -- --
Proceeds from issuance of common stock pursuant to employee stock
purchase plan......................................................... -- --
Non-cash issuance of common stock pursuant to purchase of International
Golf Outlet........................................................... -- --
Non-cash issuance of common stock and common stock warrants pursuant to
AOL agreement......................................................... -- --
Proceeds from exercise of CBS warrants.................................. -- --
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- --
Non-cash issuance of common stock and common stock warrants pursuant to
consulting agreements and purchase of service mark.................... -- --
Net loss and comprehensive loss......................................... (35,509) $ (35,509)
------------- ----------- -------------
-------------
Balance, December 31, 1998............................................... -- (92,301)
Non-cash issuance of common stock pursuant to purchase of advertising... -- --
Proceeds from exercise of common stock options.......................... -- --
Proceeds from exercise of common stock warrants......................... -- --
Proceeds from issuance of common stock pursuant to employee stock
purchase plan......................................................... -- --
Non-cash issuance of warrants pursuant to PGA Tour agreement............ -- --
Equity activity of subsidiary, net...................................... -- --
Proceeds from exercise of CBS warrants.................................. -- --
Non-cash issuance of common stock and common stock warrants pursuant to
CBS agreement......................................................... -- --
Non-cash issuance of common stock pursuant to acquisition of
businesses............................................................ -- (86)
Comprehensive loss:
Net loss.............................................................. -- (17,097) $ (17,097)
Cumulative translation adjustment..................................... 7 -- 7
-------------
Comprehensive loss...................................................... $ (17,090)
------------- ----------- -------------
-------------
Balance, December 31, 1999............................................... $ 7 $(109,484)
------------- -----------
------------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
39
SPORTSLINE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands, except share data)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $(17,097) $(35,509) $(34,177)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 25,806 17,104 11,689
Provision for doubtful accounts.............................................. 341 167 72
Minority interest in operations of consolidated subsidiary................... (372) -- --
Loss on disposal of assets................................................... 7 83 --
Extraordinary gain on liquidation of debt.................................... (36,027) -- --
Changes in operating assets and liabilities:
Accounts receivable........................................................ (6,927) (3,057) (1,614)
Prepaid expenses and other assets.......................................... (4,121) (6,929) (1,832)
Accounts payable........................................................... (376) 543 1,173
Accrued liabilities........................................................ 6,963 2,076 1,632
Deferred revenue........................................................... 2,093 227 1,009
-------- -------- --------
Net cash used in operating activities........................................ (29,710) (25,295) (22,048)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities, net.......................................... (21,447) (52,052) (1,506)
Purchases of property and equipment, net......................................... (8,627) (3,781) (2,431)
Acquisition of businesses........................................................ (8,165) (353) --
Purchase of licensing rights..................................................... (8,500) -- --
Purchase of service mark......................................................... -- (100) --
Net change in restricted cash.................................................... 12,549 (12,899) --
-------- -------- --------
Net cash used in investing activities........................................ (34,190) (69,185) (3,937)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and exercise of common stock warrants
and option..................................................................... 16,128 94,955 43,519
Net proceeds from issuance of preferred stock of subsidiary...................... 7,500 -- --
Proceeds from issuance of convertible subordinated notes, net of costs........... 145,443 -- --
Repurchase of convertible subordinated notes, net of costs....................... (90,585) -- --
Proceeds from long-term borrowings............................................... -- -- 353
Repayment of long-term borrowings................................................ -- (682) (384)
Repayment of capital lease obligations........................................... (302) (591) (271)
-------- -------- --------
Net cash provided by financing activities.................................... 78,184 93,682 43,217
-------- -------- --------
Net increase (decrease) in cash and cash equivalents......................... 14,284 (798) 17,232
CASH AND CASH EQUIVALENTS, beginning of year....................................... 31,684 32,482 15,250
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year............................................. $ 45,968 $ 31,684 $ 32,482
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash issuance of common stock and common stock warrants pursuant to CBS
agreement...................................................................... $ 59,688 $ 11,897 $ 8,301
-------- -------- --------
-------- -------- --------
Non-cash issuance of common stock warrants pursuant to purchase of advertising... $ 9,000 $ -- $ --
-------- -------- --------
-------- -------- --------
Non-cash issuance of common stock warrants pursuant to PGA Tour agreement........ $ 2,105 $ -- $ --
-------- -------- --------
-------- -------- --------
Non-cash issuance of common stock and common stock warrants pursuant to AOL
agreement...................................................................... $ -- $ 7,625 $ --
-------- -------- --------
-------- -------- --------
Non-cash issuance of common stock warrants pursuant to consulting agreements and
purchase of service mark....................................................... $ -- $ 1,342 $ 3,915
-------- -------- --------
-------- -------- --------
Non-cash issuance of common stock warrants pursuant to acquisition of
businesses..................................................................... $ 30,926 $ 1,650 $ --
-------- -------- --------
-------- -------- --------
Equity activity of subsidiary.................................................... $ 4,936 $ -- $ --
-------- -------- --------
-------- -------- --------
Equipment acquired under capital leases.......................................... $ -- $ 104 $ 670
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................... $ 2,384 $ 109 $ 176
-------- -------- --------
-------- -------- --------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
40
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(1) NATURE OF OPERATIONS:
SportsLine.com, Inc. ('SportsLine.com', formerly SportsLine USA, Inc.) was
incorporated on February 23, 1994 and began recognizing revenue from its
operations in September 1995. The Company is at the leading edge of media
companies, providing Internet sports content, community and e-commerce on a
global basis. SportsLine.com's content includes more than 100,000,000 pages of
multimedia sports information, entertainment and merchandise. In addition,
Sports.com Limited ('Sports.com'), a majority owned subsidiary of
SportsLine.com, Inc., launched the first of its sites in August 1999,
Football.Sports.com, following in September with Rugby.Sports.com and
France.Sports.com. Sports.com now covers all major sports in Europe along with
producing additional country specific local language sites for Germany, Italy
and Spain. The Company's flagship Internet sports service (www.sportsline.com)
was renamed CBS SportsLine in March 1997 as part of an exclusive promotional and
content agreement with CBS Corporation ('CBS'). SportsLine.com 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.
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 sells sports-related merchandise and
memorabilia.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
SportsLine.com and its subsidiaries (the 'Company').
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 was accounted for
under the 'pooling-of-interests' accounting method. Accordingly, the Company's
consolidated financial statements include the accounts of GolfWeb for all years
presented.
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 $2,048. In August 1999 additional stock was
issued for meeting revenue and other goals which increased goodwill in the
amount of $249. 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.
The Company acquired several other businesses during 1999 in exchange for
an aggregate of $2,373 cash and $2,555 of common stock (124,322 shares), and
accounted for these transactions using the purchase method of accounting. The
purchases resulted in goodwill of $4,946, which will be amortized over an
estimated life of seven to ten years.
Sports.com Limited ('Sports.com', formerly known as SportsLine Europe
Limited) was formed in May 1999. In May 1999, Sports.com purchased Sportsweb,
the Company accounted for this transaction using the purchase method of
accounting which resulted in goodwill of $2,420. In June 1999, Sports.com
acquired the sports division of Infosis Group. The Company also accounted for
this transaction using the purchase method of
41
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
accounting resulting in goodwill of $2,526. In connection with the initial
capitalization of Sports.com, a liability of $7,443 has been reflected in the
Company's consolidated balance sheet to reflect the minority interest in
Sports.com.
The Company acquired Daedalus Worldwide, Inc. in December 1999. The
transaction was accounted for using the purchase method of accounting. The
purchase resulted in goodwill of $31,880 which will be amortized over an
estimated life of seven years.
The acquisitions accounted for using the purchase method have been
allocated to the assets purchased and liabilities assumed based upon their fair
values at the dates of acquisition. The portions of the purchase prices being
allocated to goodwill are being amortized over a straight-line basis over seven
to ten years. The acquired companies are included in the Company's consolidated
financial statements from the dates of acquisition. The purchase price for the
year ended December 31, 1999 is allocated as follows:
Tangible Assets (includes cash acquired of $19).................................... $ 1,073
Intangible Assets.................................................................. 41,772
Liabilities........................................................................ (1,127)
-------
Total Purchase Price............................................................... $41,718
-------
-------
The following unaudited pro forma financial information presents the
consolidated operations of the Company and the acquired companies as if the
acquisitions had occurred at the beginning of the periods presented,
respectively, after giving effect to certain adjustments including increased
amortization of goodwill related to the acquisitions. The unaudited pro forma
information is provided for informational purposes only and should not be
construed to be indicative of the Company's consolidated results of operations
had the acquisitions been consummated on the dates assumed and do not project
the Company's results of operations for any future period:
1999 1998
-------- --------
Revenue................................................................ $ 61,891 $ 34,740
Net loss............................................................... $(22,785) $(41,591)
Diluted net loss per share............................................. $ (0.96) $ (2.19)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities includes highly liquid investments with original
maturities in excess of three months but less than one year. Noncurrent
marketable securities are those investments with original maturities in excess
of one year. Such marketable securities are classified as 'held to maturity'
and, accordingly, are carried at cost which approximates market value as of
December 31, 1999 and 1998.
42
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Investments at December 31 are as follows:
December 31,
--------------------
1999 1998
-------- --------
U.S. Government Agencies......................................................... $ 61,644 $ 36,370
Corporate Bonds.................................................................. 13,361 17,188
-------- --------
Total Marketable Securities...................................................... 75,005 53,558
Less: Current Marketable Securities.............................................. (24,953) (27,391)
-------- --------
Noncurrent Marketable Securities................................................. $ 50,052 $ 26,167
-------- --------
-------- --------
RESTRICTED CASH
Restricted cash includes cash and cash equivalents pertaining to restricted
certificates of deposit for two landlords and a supplier as discussed in Note 8.
DEFERRED ADVERTISING AND CONTENT COSTS
Deferred advertising and content costs relates to unamortized costs under
the CBS and AOL agreements discussed in Note 5. Such costs are capitalized as
the equity instruments are issued. These costs are then charged to operations as
depreciation and amortization as the Company receives advertising and other
benefits under the agreements.
LICENSING AND CONSULTING AGREEMENTS
The cost of license and consulting agreements, which is primarily a result
of issuances of warrants to purchase common stock (see Note 6), is being
amortized using the straight-line method over the term of the related agreements
(from one to ten years) beginning in August 1995, when cbs.sportsline.com first
became commercially available. Such costs totaled approximately $18,602, $5,562
and $4,090 for the years ended December 31, 1999, 1998 and 1997, respectively.
Accumulated amortization on such amounts was approximately $4,365, $2,089 and
$1,516 at December 31, 1999, 1998 and 1997, respectively. The current portion of
such amounts is reflected in prepaid expenses and other current assets and the
long-term portion in other assets in the accompanying consolidated balance
sheets. Amortization expense under these agreements amounted to approximately
$3,134, $1,643 and $1,316 for the years ended December 31, 1999, 1998 and 1997,
respectively, and is included in depreciation and amortization expense in the
accompanying consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment is carried at historical cost and is being
depreciated and amortized using the straight-line method over the shorter of the
estimated useful life of the asset or the lease period.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the account and any gain or loss is recognized.
43
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 are as follows:
December 31,
-----------------
1999 1998
------- ------
Revenue sharing............................................ $ 2,849 $1,111
Professional fees.......................................... 1,392 412
Advertising costs.......................................... 957 620
Health insurance........................................... 929 341
Payroll.................................................... 897 --
Other...................................................... 5,104 2,850
------- ------
$12,128 $5,334
------- ------
------- ------
REVENUE RECOGNITION
Revenue recognition policies for advertising, e-commerce, membership and
premium services and content licensing are set forth below.
Advertising Revenue
Advertising revenue is derived from the sale of advertising on the
Company's Web sites. Advertising revenue is recognized in the period the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of 'impressions,'
or times that an advertisement is viewed by users of the Company's Web sites.
Amounts received or billed for which impressions have not yet been delivered are
reflected as deferred revenue in the accompanying consolidated balance sheets.
E-Commerce Revenue
E-commerce revenue is derived from the sales of limited edition
memorabilia, licensed apparel, golf equipment and other sports-related products.
E-commerce revenue is recognized once the product has been shipped and payment
is assured.
Membership and Premium Services Revenue
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. For additional fees, members are also eligible to participate in
sports contests to win cash prizes and merchandise. The 'Rewards' program offers
only yearly memberships and thus are recognized ratably over the life of the
membership agreement.
Revenue relating to monthly memberships is recognized in the month the
service is provided. Revenue relating to yearly memberships and sports contests
is recognized ratably over the life of the membership agreement or contest
period. Accordingly, amounts received for which services have not yet been
provided are reflected as deferred revenue in the accompanying consolidated
balance sheets.
44
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Content Licensing Revenue
Content licensing revenue is derived from the licensing of certain of the
Company's content to third parties. Content licensing revenue is recognized over
the period of the license agreement as the Company delivers content.
Barter Transactions
The Company recognizes advertising and content licensing revenue as a
result of barter transactions primarily with certain other Internet-related
companies. Such revenue is recognized based on the fair value of the
consideration received, which generally consists of advertising displayed on the
other companies' Web sites. Barter revenue and the corresponding expense is
recognized in the period the advertising is displayed.
Revenue by Type
Revenue by type for the years ended December 31, 1999, 1998 and 1997 is as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Advertising.................................................. $29,970 $17,698 $ 6,329
E-commerce................................................... 16,486 3,600 1,048
Membership and premium services.............................. 5,629 5,032 2,701
Content licensing and other.................................. 8,193 4,221 1,936
------- ------- -------
$60,278 $30,551 $12,014
------- ------- -------
------- ------- -------
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 17%, 19% and 19% of total revenue for the years
ended December 31, 1999, 1998 and 1997, respectively.
COST OF REVENUE
Cost of revenue consists primarily of content and royalty fees, cost of
merchandise sold, payroll and related expenses for the editorial and operations
staff, telecommunications and computer-related expenses for the support and
delivery of the Company's services. Royalty payments are paid to certain content
providers and technology and marketing partners based on membership levels
subject, in certain instances, to specified minimum amounts.
SALES AND MARKETING
Sales and marketing expense consists of salaries and related expenses,
advertising, marketing, promotional, business development, public relations
expenses and member acquisition costs. Member acquisition costs consist
primarily of the direct costs of member solicitation, including advertising on
other Web sites and Internet search engines and the cost of obtaining qualified
prospects from direct marketing programs and third parties. No indirect costs
are included in member acquisition costs. In accordance with American Institute
of Certified Public Accountants ('AICPA') Statement of Position, 93-7, Reporting
on Advertising Costs, the Company may in the future capitalize such
direct-response advertising costs if historical evidence is available to
indicate that the advertising results in a future benefit. Until that time, all
such costs are expensed as incurred. All other advertising and marketing costs
are charged to expense at the time the advertising takes place.
45
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
PER SHARE AMOUNTS
In February 1997, Statement of Financial Accounting Standards ('SFAS') No.
128, Earnings Per Share, was issued. SFAS No. 128 simplifies the methodology of
computing earnings per share and requires the presentation of basic and diluted
earnings per share. The Company's basic and diluted earnings per share are the
same, since 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') in November 1997.
Accordingly, such shares have been reflected as common stock for all periods
prior to the IPO. SFAS No. 128 was adopted as of December 31, 1997.
Net loss per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon
conversion of all convertible preferred stock (using the if-converted method)
and shares issuable upon exercise of stock options and warrants (using the
treasury stock method). There were approximately 7,711,000, 5,187,000 and
3,475,000 options and warrants outstanding at December 31, 1999, 1998 and 1997,
respectively, that could potentially dilute earnings per share in the future.
Such options and warrants were not included in the computation of diluted loss
per share because to do so would have been antidilutive for all periods
presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, primarily consisting of cash and cash
equivalents, marketable securities, accounts receivable, restricted cash
equivalents, accounts payable and Convertible Subordinated Notes, approximate
fair value due to their short-term nature and/or market rates of interest.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. The Company's cash management and
investment policies restrict investments to low risk, highly-liquid securities
and the Company performs periodic evaluations of the credit standing of the
financial institutions with which it deals. Accounts receivable from customers
outside the United States increased due to the acquisition of the European
subsidiary but are not material. The Company performs ongoing credit evaluations
and generally requires no collateral. The Company maintains an allowance for
doubtful accounts and such losses have not been significant. The allowance
46
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
for doubtful accounts amounted to $423 and $230 at December 31, 1999 and 1998,
respectively, and its activity is as follows:
1999 1998 1997
----- ---- ----
January 1 balance..................................................... $ 230 $ 87 $ 27
Provision for doubtful accounts....................................... 329 166 73
Write-off of bad debts................................................ (136) (23) (13)
----- ---- ----
December 31 balance................................................... $ 423 $230 $ 87
----- ---- ----
----- ---- ----
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of the assets. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.
STOCK-BASED COMPENSATION
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued. SFAS No. 123 allows either adoption of a fair value based method of
accounting for employee stock options and similar equity instruments or
continuation of the measurement of compensation cost relating to such plans
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has elected to continue to use the intrinsic value based method.
Accordingly, pro forma disclosures required to be presented by SFAS No. 123 for
companies continuing to utilize the intrinsic value based method are presented
in Note 6.
SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information for the year ended December 31, 1998. 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.
Beginning in the third quarter of 1999, the Company began operating in two
segments. The following information is disclosed, per SFAS No. 131, based on the
method management uses to organize financial information for making operating
decisions and assessing performance. The Company currently has two principal
business segments: United States and Europe.
A summary of the segment financial information is as follows:
Year ended
December 31, 1999
--------------------
Total revenue:
United States.......................................... $ 58,284
Europe................................................. 1,994
----------
$ 60,278
----------
----------
47
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Depreciation and amortization:
United States.................................................... $ 24,809
Europe........................................................... 997
----------
$ 25,806
----------
----------
Loss from operations:
United States.................................................... $ (51,417)
Europe........................................................... (6,291)
----------
$ (57,708)
----------
----------
Extraordinary gain on retirement of debt:
United States.................................................... $ 36,027
Europe........................................................... --
----------
$ 36,027
----------
----------
Net loss before extraordinary gain:
United States.................................................... $ (47,026)
Europe........................................................... (6,098)
----------
$ (53,124)
----------
----------
Total assets as of December 31, 1999:
United States.................................................... $ 259,730
Europe........................................................... 11,731
----------
$ 271,461
----------
----------
Capital Expenditures:
United States.................................................... $ 7,346
Europe........................................................... 1,281
----------
$ 8,627
----------
----------
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, 'Reporting Comprehensive Income,' during
the year ended December 31, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income (loss) and its components in a
full set of financial statements. The objective of SFAS No. 130 is to report
comprehensive income (loss), a measure of all changes in equity of an enterprise
that result from transactions and other economic events in a period, other than
transactions with owners. The Company has elected to disclose comprehensive
income (loss) in the consolidated statements of shareholders' equity.
In June 1999, the Financial Accounting Standards Board ('FASB') issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of FASB Statement No. 133. SFAS No. 137 defers for one year the effective date
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 effective for the year ended
December 31, 2001. The Company believes that the adoption of SFAS No. 133 will
not have a material impact on its consolidated financial statements, as it has
entered into no derivative contracts and has no current plans to do so in the
future.
48
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
The Company adopted SOP 98-1, 'Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use' effective January 1, 1999. SOP
98-1 establishes criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should be
capitalized. Such adoption did not have a material effect on the Company's
financial position or results of operations.
(3) PROPERTY AND EQUIPMENT, NET:
Property and equipment, net consists of the following:
Estimated December 31,
Useful Lives ------------------
(Years) 1999 1998
------------ ------- -------
Computer equipment......................................... 2-3 $17,015 $ 8,617
Furniture, fixtures and leasehold improvements............. 3-7 2,380 1,765
------- -------
19,395 10,382
Less-accumulated depreciation and amortization............. (9,044) (5,015)
------- -------
$10,351 $ 5,367
------- -------
------- -------
Included in property and equipment is equipment acquired under capital
leases amounting to approximately $1,245 for both December 31, 1999 and 1998
less accumulated amortization amounting to $1,051 and $800, respectively.
Depreciation and amortization expense on property and equipment amounted to
approximately $4,085, $2,606 and $1,815 for the years ended December 31, 1999,
1998 and 1997, respectively.
(4) DEBT:
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
holder's 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 are 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 December 31, 1999, the
Company had no material indebtedness outstanding that would have constituted
Senior Indebtedness. The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company can create,
incur, assume, or guarantee, nor does the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create, incur, assume or
guarantee.
In August 1999, the Company repurchased $60,000 of its Convertible
Subordinated Notes for approximately $36,400, and as a result, the Company
recognized an extraordinary gain of $21,800, net of amortized debt issuance
costs. In October 1999, the Company repurchased $70,300 of its Convertible
Subordinated Notes for approximately $53,700, and as a result, the Company
recognized an extraordinary gain of approximately $14,200, net of expenses and
unamortized debt issuance costs. Convertible Subordinated Notes in an aggregate
principal amount of approximately $20,000 remain outstanding as of December 31,
1999.
49
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(4) DEBT:--(CONTINUED)
In July 1997, the Company entered into a $2,500 equipment line of credit
with a leasing company. The equipment line carries interest at the rate of 7.75%
plus 1/4%. Borrowings are payable monthly over 36 months. As of December 31,
1999, $170 was outstanding.
(5) SHAREHOLDERS' EQUITY:
Upon completion of the Company's IPO on November 13, 1997, the convertible
preferred stock converted into common stock at the ratio of 0.4 shares of common
stock for each share of preferred stock. All then existing classes of preferred
stock ceased to be authorized, and were replaced by the preferred stock
discussed below.
On April 14, 1997, the Board of Directors authorized the filing of an
Amended and Restated Certificate of Incorporation which became effective upon
the completion of the IPO. Pursuant to the terms of the Amended and Restated
Certificate of Incorporation, the Board of Directors authorized the issuance of
up to an aggregate of 1,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rates, conversion rights, voting rights, terms
of redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The Company has no present plans to issue any
shares of preferred stock.
In March 1997, the Company entered into a five-year agreement with CBS Inc.
('CBS'). In consideration of the advertising and promotional efforts of CBS and
its license to the Company of the right to use certain CBS logos and
television-related sports content, CBS will receive 3,100,000 shares of common
stock over the term of the agreement (752,273, 735,802, 558,988, 567,579 and
485,358 shares in 1997, 1998, 1999, 2000 and 2001, respectively). CBS will also
have the right to receive 60% of the Company's advertising revenue on
cbs.sportsline.com pages related to certain 'signature events' (such as the NCAA
Men's Basketball Tournament, the 1998 Winter Olympics, U.S. Open Tennis, PGA
TOUR events and the Daytona 500) and 50% of the Company's advertising revenue on
other cbs.sportsline.com pages containing CBS television-related sports content.
The CBS agreement also provides that the Company shall issue to CBS on the first
business day of each contract year warrants to purchase 380,000 shares of common
stock at per share exercise prices ranging from $10 in 1997 to $30 in 2001. Such
warrants are exercisable at any time during the contract year in which they are
granted. The value of the advertising and content will be recorded annually in
the consolidated balance sheets as deferred advertising and content costs and
amortized to depreciation and amortization expense over each related contract
year. Amounts amortized to expense in 1999, 1998 and 1997 totaled $14,096,
$12,002 and $7,835, respectively, consisting of amortization relating to
advertising of $11,000 for both 1999 and 1998 and $7,000 relating to 1997,
content of $518 for both 1999 and 1998 and $431 for 1997, and expense related to
warrants of $2,578, $484 and $404, respectively, and are included in
depreciation and amortization in the accompanying consolidated statements of
operations for the years ended December 31, 1999, 1998 and 1997.
In February 1999, the Company amended and extended its agreement with CBS.
In consideration of additional promotional and advertising opportunities the
Company agreed to accelerate the issuance of the remaining shares that were
formerly to be issued in 2000 and 2001 (567,579 and 485,358 shares,
respectively), issue additional warrants to purchase 1,200,000 shares of common
stock at per share exercise prices ranging from $23 in 1999 to $45 in 2001 and
issue additional shares of common stock valued at $100 million between 2002 and
2006. Additionally, the revenue sharing provisions relating to the 60% share for
signature events and the 50% share for CBS content pages were eliminated and
replaced by a new revenue sharing formula which is
50
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(5) SHAREHOLDERS' EQUITY:--(CONTINUED)
calculated on a broader revenue base and at a lower rate. Total annual amounts
to be amortized to expense in accordance with the CBS agreement and amendment
are as follows:
2000................................ $ 17,286
2001................................ 17,286
2002................................ 22,286
2003................................ 22,286
2004................................ 22,286
2005................................ 22,286
2006................................ 22,286
--------
$146,002
--------
--------
In November 1997, the Company completed an underwritten initial public
offering ('IPO') of 3,500,000 shares of Common Stock. Of the 3,500,000 shares
sold in the IPO, 2,693,549 shares were sold at a price to the public of $8.00
per share and 672,043 shares and 134,408 shares were sold to Intel Corporation
and Mitsubishi Corporation, respectively, at a price of $7.44 per share. In
December 1997, the underwriters exercised their over-allotment option to
purchase an additional 525,000 shares of Common Stock. The total net proceeds to
the Company from the IPO were approximately $30,000.
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 was accounted for
under the 'pooling-of-interests' accounting method. Accordingly, the Company's
consolidated financial statements include the accounts of GolfWeb for all years
presented.
In April 1998, the Company completed a public offering (the 'Secondary
Offering') of 4 million shares of common stock at $37.625 per share. Of the four
million shares offered, 2,288,430 shares were offered by the Company and
1,711,570 shares by selling shareholders. The Company realized approximately
$81,000 in net proceeds as a result of the Secondary Offering.
On June 29, 1998, the Company acquired International Golf Outlet, Inc.
('IGO'), a privately-held Internet retailer of fine golf equipment and
accessories, for $2,000, consisting of $350 in cash and $1,650 of common stock
(46,924 shares). The Company also agreed to issue to the IGO shareholders
additional common stock, valued at $1,500 at the time of acquisition, if IGO
meets certain revenue and earnings targets over the three year period following
the acquisition. Accordingly, during 1999 the Company issued 14,220 additional
shares of Common Stock valued at $249 to IGO resulting from earnings goals being
met for the first year of operations subsequent to the acquisition.
Effective as of October 1, 1998, upon expiration of a pre-existing
agreement, the Company and America Online, Inc. ('AOL') entered into an
agreement (the 'AOL Agreement'), which has an initial term of three years,
subject to extension for up to two additional three-year terms at the option of
AOL under certain circumstances. Under the AOL Agreement, the Company became the
premier provider of special features and major event coverage to the Sports
Channel on the AOL service, as well as an anchor tenant in the Sports Web Center
on aol.com, AOL's Web site. cbs.sportsline.com will also be the premier national
sports partner with a presence on all Digital City local services, currently
serving 50 cities, and an anchor tenant in the Sports Channel on CompuServe. In
addition, SportsLine WorldWide will become the premier global provider of
country-specific sports content to all of AOL's international services, and the
Company will become 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 $8,000, (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
51
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(5) SHAREHOLDERS' EQUITY:--(CONTINUED)
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 $15,000 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'). During December 1999,
AOL sold shares of the Company's common stock and the Company realized a benefit
of approximately $3,400 resulting from the cancellation of the AOL Obligation.
Such benefit was reflected as a reduction of depreciation and amortization
expense in 1999. 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 May 1999, the Company acquired Golf Club Trader, Inc. for approximately
$7,000 of common stock (195,850 shares).
In December 1999, the Company acquired Daedalus World Wide Corporation for
consideration valued at approximately $31,780 consisting of $4,000 cash and
$27,780 of common stock (599,998 shares).
The Company acquired other business during 1999 in exchange for an
aggregate of $2,373 cash and $2,555 of common stock (124,322 shares).
In October 1999, the Company issued 450,000 shares of common stock to
Westwood One as consideration for a three-year promotional and programming
agreement.
In January 1998, CBS exercised its 1997 warrants resulting in net proceeds
of $3,800 to the Company. In December 1998, CBS exercised its 1998 warrants
resulting in net proceeds of $5,700 to the Company. In December 1999, CBS
exercised its 1999 warrants resulting in net proceeds of $7,600. The Company has
reserved sufficient shares of its common stock to cover issuance of common stock
under the CBS Agreement, exercises of common stock warrants and the stock
option, incentive compensation and employee stock purchase plans discussed in
Note 6.
(6) WARRANTS, STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:
Common stock warrants issued in 1999, 1998 and 1997 to non-employees for
services rendered primarily under consulting agreements were valued on the date
of grant using the Black-Scholes option pricing model. The following is a
summary of warrants granted, exercised, canceled and outstanding and the
assumptions utilized involving the grants in 1999, 1998 and 1997:
1999 1998 1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Warrants outstanding, beginning
of year............................ 2,365,000 $17.51 2,018,000 $ 7.16 1,050,000 $ 5.23
Granted.............................. 2,455,000 29.53 1,355,000 27.08 1,933,000 8.71
Exercised............................ (1,329,000) 9.73 (996,000) 10.99 (960,000) 8.25
Canceled............................. (40,000) 5.00 (12,000) 8.84 (5,000) 5.00
---------- --------- ---------
Warrants outstanding, end
of year............................ 3,451,000 29.20 2,365,000 17.51 2,018,000 7.16
---------- --------- ---------
---------- --------- ---------
52
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(6) WARRANTS, STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:--(CONTINUED)
The range of exercise prices of warrants outstanding at December 31, 1999
was $5.00--$45.00. The weighted average fair value of warrants granted during
1999, 1998 and 1997 was $9.22, $2.43 and $2.83, respectively. There were
1,094,000 warrants exercisable at December 31, 1999 at a weighted average
exercise price of $29.14 per share.
Assumptions utilized to value warrants are as follows:
Risk-Free
Volatility Dividend Interest Estimated
Factor Yield Rates Lives
---------- -------- ----------- ---------
1999 grants................................................. 75% 0% 4.5% - 6.2% 1-5
1998 grants................................................. 40%-65% 0% 4.5% - 5.9% 1-5
1997 grants................................................. 40% 0% 5.7% - 6.7% 1-9
In 1995, the Company adopted a stock option plan (the '1995 Plan') under
which the Company is authorized to issue a total of 1,200,000 incentive stock
options and nonqualified stock options to purchase common stock to be granted to
employees, nonemployee members of the Board of Directors and certain consultants
or independent advisors who provide services to the Company. Options become
exercisable for 25% of the option shares upon the optionee's completion of one
year of service, as defined, with the balance vesting in successive equal
monthly installments upon the optionee's completion of each of the next 36
months of service. The maximum term of the options is 10 years.
On April 14, 1997, the Company adopted the 1997 Incentive Compensation Plan
(the 'Incentive Plan'). Pursuant to the Incentive Plan, the total number of
shares of common stock that may be subject to the granting of awards shall be
equal to: (i) 2,000,000 shares, plus (ii) the number of shares with respect to
awards previously granted under the Incentive Plan that terminate without being
exercised, expire, are forfeited or canceled, and the number of shares of common
stock that are surrendered in payment of any awards or any tax withholding
requirements. The Incentive Plan became effective upon completion of the IPO.
The Incentive Plan provides for grants of stock options, stock appreciation
rights, restricted stock, deferred stock, other stock-related awards and
performance or annual incentive awards at not less than the fair market value of
the underlying common stock that may be settled in cash, stock or other
property. On November 19, 1999 the Company's shareholders approved amending the
Incentive Plan to increase the number of shares available for issuance to
5,500,000.
A summary of the activity relating to the Company's employee stock option
plans as of December 31, 1999, 1998 and 1997, and changes during the years then
ended is presented below:
1999 1998 1997
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year..... 2,821,704 $ 9.60 1,457,000 $ 5.13 683,664 $ 1.42
Granted.............................. 2,470,100 28.78 1,980,157 12.72 904,388 7.50
Exercised............................ (546,549) 5.62 (314,525) 2.77 (42,521) 0.80
Forfeited............................ (484,459) 16.94 (300,928) 15.10 (88,531) 2.60
--------- --------- ---------
Outstanding at end of year........... 4,260,796 20.39 2,821,704 9.60 1,457,000 5.13
--------- --------- ---------
--------- --------- ---------
Options exercisable at end
of year............................ 775,049 11.76 462,175 5.05 331,778 1.56
--------- --------- ---------
--------- --------- ---------
53
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(6) WARRANTS, STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:--(CONTINUED)
The weighted average fair value of options granted during 1999, 1998 and
1997 was $21.32, $4.89 and $3.10, respectively. During 1998, certain outstanding
employee stock options were repriced to $14.0625 for officers and to $8.00 for
other employees. In September 1998, the Company repriced 230,000 options held by
certain officers and directors to reduce their exercise price to the then
current market value and, in October 1998, repriced 625,382 options held by
certain other employees to the then current market value.
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
Options Outstanding
------------------------------------------------------
Weighted Options Exercisable
Average -----------------------------------
Outstanding at Remaining Weighted Exercisable at Weighted
Range of December 31, Contractual Average December 31, Average
Exercise Prices 1999 Life (In Years) Exercise Price 1999 Exercise Price
- ------------------- -------------- --------------- ----------------- -------------- -----------------
$ 0.63 to $5.00 165,942 6.60 $ 3.56 108,777 $ 3.15
5.01 to 8.00 911,523 7.90 8.00 326,294 8.00
8.01 to 15.00 547,656 8.60 14.00 181,941 14.04
15.01 to 20.00 959,475 9.30 16.60 88,037 15.78
20.01 to 30.00 394,900 8.40 24.15 -- --
30.01 to 40.00 986,000 9.40 32.64 70,000 31.75
40.01 to 60.00 295,300 9.90 46.38 -- --
-------------- --------------
4,260,796 8.80 20.39 775,049 11.76
-------------- --------------
-------------- --------------
Pro forma information is required by SFAS No. 123 and has been determined
as if the Company had accounted for its stock-based compensation plans under the
fair value method. The fair value of each option grant was estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: risk-free interest rates of 4.6% to 5.6%, 5.7% to 6.7% and 6.0% to
6.6%, dividend yield of 0% for all years, expected volatility factor of 100%,
65% and 40% and expected life of 4.39 years for all years.
The Company's pro forma information follows for the years ended December
31:
1999 1998 1997
-------- -------- --------
Net loss--As reported.......................................................... $(17,097) $(35,509) $(34,177)
Pro forma net loss............................................................. (26,397) (37,090) (34,664)
Net loss per share--basic and diluted--As reported............................. $ (0.74) $ (1.94) $ (3.08)
Net loss per share basic and diluted--Pro forma................................ $ (1.15) $ (2.03) $ (3.12)
On April 14, 1997, the Company adopted the Employee Stock Purchase Plan
(the 'Purchase Plan') under which 500,000 shares of common stock are reserved.
The Purchase Plan became effective upon completion of the IPO. The Purchase Plan
provides eligible employees, as defined therein, the right to purchase shares of
common stock. The purchase price per share will be equal to 85% of the fair
market value as of certain measurement dates. Such purchases are limited in any
calendar year to the lower of 25% of the employee's total annual compensation or
$25,000. On November 19, 1999, the Purchase Plan was amended to increase the
number of shares reserved for issuance to 1,000,000. Shares of common stock
issued under the plan were 101,561 and 329,085 in 1999 and 1998, respectively.
In January 1996, the Company adopted a retirement plan that qualifies under
Section 401(k) of the Internal Revenue Code. Under this plan, participating
employees, as defined, may defer a portion of their pretax earnings,
54
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(6) WARRANTS, STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:--(CONTINUED)
up to the Internal Revenue Service annual contribution limits. There is
currently no matching of employee contributions by the Company.
(7) INCOME TAXES:
No provision for Federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1999. At December
31, 1999, the Company had approximately $97,000 of net operating loss
carryforwards for Federal income tax reporting purposes available to offset
future taxable income; such carryforwards expire beginning in 2009. Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period.
Deferred tax assets at December 31, 1999 and 1998 consist primarily of the
tax effect of net operating loss carryforwards which amounted to approximately
$97,000 and $33,000, respectively. Other deferred tax assets and liabilities are
not significant. The Company has provided a full 100% valuation allowance on the
deferred tax assets at December 31, 1999 and 1998 to reduce such deferred income
tax assets to zero as it is management's belief that realization of such amounts
do not meet the criteria required by generally accepted accounting principles.
Management will review the valuation allowance requirement periodically and make
adjustments as warranted.
(8) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and computer and communications equipment
under noncancellable leases that expire on various dates through 2009. The
office leases require the Company to pay operating costs, including property
taxes and maintenance costs and include rent adjustment clauses. The Company has
committed to a ten year lease for its new corporate headquarters beginning in
2000. Management anticipates that it will be able to sublease its existing
facilities at rates equivalent to its existing lease rates so as not to incur a
material expense. Under the terms of one office lease, the Company has provided
a letter of credit to the landlord. The letter of credit is secured by a
restricted certificate of deposit of approximately $92 as of December 31, 1999.
Under the terms of an additional office lease the Company has provided a letter
of credit to the landlord. The letter of credit is secured by a restricted
certificate of deposit of approximately $297 as of December 31, 1999.
Additionally, the Company has provided a letter of credit to one of its
suppliers. The letter of credit is secured by a restricted certificate of
deposit of approximately $100 as of December 31, 1999.
Rent expense amounted to approximately $1,716, $735 and $570 for the years
ended December 31, 1999, 1998 and 1997, respectively.
55
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(8) COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
Future minimum lease payments for all leases are as follows as of December
31, 1999:
Capital Operating
------- ---------
2000..................................................... $ 178 $ 2,060
2001..................................................... -- 1,765
2002..................................................... -- 1,675
2003..................................................... -- 1,652
2004..................................................... -- 1,586
Thereafter............................................... -- 7,251
------- ---------
Total minimum lease payments............................. 178 $15,989
---------
---------
Less: amount representing interest....................... (8)
-------
Lease obligations reflected as current................... $ 170
-------
-------
The Company has entered into various licensing, royalty and consulting
agreements with various content providers, vendors and sports celebrities. The
remaining terms of these agreements range from one to eight years. These
agreements provide for the payment of royalties, bounties and certain guaranteed
amounts, some of which are on a per member basis. Additionally, some 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.
Minimum guaranteed payments required under such agreements are as follows
as of December 31, 1999:
2000................................................................. $4,491
2001................................................................. 3,918
2002................................................................. 388
------
$8,797
------
------
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. In 1998,
the Company and Weatherline settled a lawsuit in which Weatherline alleged that
the Company had infringed on its trademark. In connection with the settlement,
Weatherline assigned to the Company its United States trademark registration for
the mark 'Sportsline.' The Company recorded a non-recurring charge of
approximately $1,100 associated with such settlement in 1998.
On December 28, 1999, an action entitled Fantasy Sports Properties, Inc. v.
SportsLine.com, Inc., Yahoo! Inc., ESPN, Inc. and Sandbox Entertainment, Inc.,
was commenced against the Company and the named-codefendants in the United
States District Court for the Eastern District of Virginia. The plaintiff seeks
damages and injunctive relief for the alleged infringement by the Company and
the named co-defendants of a patent entitled 'Computerized Statistical Football
Game,' issued by the United States Patent and Trademark Office, which is
allegedly owned by the plaintiff. The Company in its Answer, Affirmative
Defenses and Counterclaim has taken the position that it has not infringed the
patent in suit, that the patent in suit is invalid, and the Company seeks a
Declaratory Judgment of non-infringement and invalidity. The Company intends to
vigorously defend itself in this action.
On August 16, 1999, an action entitled Shopsports.com v. SportsLine USA,
Inc., was commenced against the Company in the United States District Court for
the Central District of California. The plaintiff seeks damages and injunctive
relief in connection with the Company's use of a tertiary domain name which the
plaintiff alleges infringes on plaintiff's trademark rights. The action is being
consolidated with a declaratory judgment action, commenced by the Company,
seeking a judgment that the use of the tertiary URL 'shop.sportsline.com' did
not infringe on plaintiff's common law rights. The Company intends to vigorously
defend itself in this action.
56
SPORTSLINE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except share and per share data)
(8) COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
In the opinion of management, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
Reference is made to the Index to Financial Statements set forth in 'Item
8. Financial Statements and Supplementary Data' of this Annual Report on Form
10-K.
2. Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (the 'Commission') are not
required under the related instructions, the required information is contained
in the financial statements and notes thereto or are not applicable, and
therefore have been omitted.
3. Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K:
EXHIBIT DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (3.1) (1)
3.2 Amendment of Article IV of the Amended and Restated Certificate of Incorporation (3.2)(2)
3.3 Amendment of Article I of the Amended and Restated Certificate of Incorporation (filed herewith)
3.4 Form of Amended and Restated Bylaws (3.2) (1)
10.1* 1995 Stock Option Plan (10.1) (3)
10.2 Form of Indemnification Agreement between the Company and each of its directors and executive officers
(10.2) (2)
10.3* 1997 Incentive Compensation Plan, as amended (previously filed)
10.4* Employee Stock Purchase Plan, as amended (previously filed)
58
EXHIBIT DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------
10.5 Amended and Restated Investors' Rights Agreement dated as of September
25, 1996, among the Company, the holders of the Company's Series A,
Series B and Series C Preferred Stock, The Estate of Burk Zanft and
Michael Levy (10.5) (3)
10.6 Agreement dated March 5, 1997 between the Company and CBS Inc. (10.6) (3)
10.7* Consulting Agreement dated September 1, 1994, between the Company and Horrow Sports Ventures (10.10)
(3)
10.8* Agreement dated June 1996 between the Company and Michael P. Schulhof (10.11) (3)
10.9 Agreement dated August 1994 between the Company and Planned Licensing, Inc. (10.12) (3)
10.10* Stock Option between the Company and Gerry Hogan (10.19) (4)
10.11 Agreement and Plan of Merger dated as of January 15, 1998, among the Company, GolfWeb.Com, Inc. and
GolfWeb (excluding Exhibits thereto), and Amendment No. 1 to the Merger Agreement dated of January 29,
1998, among the Company, GolfWeb.Com, Inc. and GolfWeb (2.1; 2.2)(5)
10.12+ Premier Sports Information and Commerce Agreement, effective as of October 1, 1998, by and between the
Company and America Online, Inc. (10.1) (7)
10.13 Amendment to Agreement, effective as of January 1, 1999, between the Company and CBS Broadcasting, Inc.
(99.1) (8)
10.14* Amended and Restated Employment Agreement, dated as of January 28,
2000, between the Company and Michael Levy (previously filed)
10.15* Amended and Restated Employment Agreement, dated as of January 28, 2000, between the Company and
Kenneth W. Sanders (previously filed)
10.16* Amended and Restated Employment Agreement, dated as of January 28, 2000, between the Company and Daniel
L. Leichtenschlag (previously filed)
10.17* Employment Agreement, dated as of January 28, 2000, between the Company and Andrew S. Sturner (previously
filed)
10.18* Employment Agreement, dated as of January 28, 2000, between the Company and Mark J. Mariani (previously
filed)
10.19 First Amendment to License and Consulting Agreement between the Company and Planned Licensing, Inc.
dated as of October 16, 1999 (previously filed)
21.1 Subsidiaries of the Company (previously filed)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule--For SEC use only (previously filed)
- ------------------
(1) Incorporated by reference to an exhibit shown in the preceding parentheses
and filed with the Company's Registration Statement on Form S-1
(Registration No. 333-62685).
(2) Incorporated by reference to an exhibit shown in the preceding parentheses
and filed with the Company's Registration Statement on Form S-1
(Registration No. 333-78921).
(3) Incorporated by reference to an exhibit shown in the preceding parentheses
and filed with the Company's Registration Statement on Form S-1
(Registration No. 333-25259).
(4) Incorporated by reference to an exhibit shown in the preceding parentheses
and filed with the Company's Registration Statement on Form S-8
(Registration No. 333-46029).
(5) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Report on Form 8-K (Event of January 29, 1998).
(6) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Report on Form 10-Q for the quarterly period
ending June 30, 1998.
(7) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Report on Form 10-Q for the quarterly period
ending September 30, 1998.
(8) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Company's Report on Form 8-K (Event of February 10,
1999).
+ Confidential treatment granted to certain portions of this Exhibit
* Management Contract or Compensatory Plan
59
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the fourth quarter ended
December 31, 1999. Information regarding the items reported on is as follows:
Date Item Reported On
- ------------------ -------------------------------------------------------------------------------------------
October 22, 1999 Item 5. Other Events. The Company announced (i)
that it had repurchased $60 million aggregate principal
amount of the Convertible Subordinated Notes as of August
26, 1999 and (ii) that its offer to purchase any and all
outstanding Convertible Subordinated Notes expired on
October 19, 1999 and that approximately $70 million
aggregate principal amount of the Convertible Subordinated
Notes had been tendered and accepted for payment.
December 22, 1999 Item 2. Acquisition or Disposition of Assets. The Company announced the acquisition of
Daedalus World Wide Corporation.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SPORTSLINE.COM, INC.
By: /s/ Kenneth W. Sanders
--------------------------------------
Kenneth W. Sanders
Senior Vice President and Chief Financial Officer
May 8, 2000
61
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
23.1 Consent of Arthur Andersen LLP