<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended July 1, 2000.
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 0-16611
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GLOBAL SPORTS, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406
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(Address of principal executive offices) (Zip Code)
610-265-3229
------------
(Registrant's telephone number,
including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of August 8, 2000:
Common Stock, $.01 par value 21,702,080
-------------------------------- -----------------------
(Title of each class) (Number of Shares)
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<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED JULY 1, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of January 1, 2000 and July 1, 2000 (Unaudited)..................................... 3
Condensed Consolidated Statements of Operations
for the three- and six-month periods ended June 30, 1999 and July 1, 2000 (Unaudited).. 4
Condensed Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 1999 and July 1, 2000 (Unaudited)............. 5
Notes to Unaudited Condensed Consolidated Financial Statements........................... 6 - 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................................ 10 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 26
Item 2. Changes in Securities and Use of Proceeds................................................ 26
Item 3. Defaults Upon Senior Securities.......................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders...................................... 26-27
Item 5. Other Information........................................................................ 28
Item 6. Exhibits and Reports on Form 8-K......................................................... 28
SIGNATURES................................................................................................ 29
</TABLE>
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Effective for 1999, we changed our fiscal year from the last day of December to
the Saturday nearest the last day of December. Accordingly, fiscal 1999 ended on
January 1, 2000. References to fiscal 1999 and fiscal 2000 refer to the year
ended January 1, 2000 and the year ending December 30, 2000, respectively.
Although we refer to the traditional sporting goods retailers, general
merchandisers, Internet and media companies for which we develop and operate e-
commerce sporting goods businesses as our "partners," we do not act as an agent
or legal representative for any of our partners. We do not have the power or
authority to legally bind any of our partners. Similarly, our partners do not
have the power or authority to legally bind us. In addition, we do not have the
types of liabilities for our partners that a general partner of a partnership
would have.
2
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, July 1,
2000 2000
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................... $ 27,345 $ 35,687
Short-term investments ...................................................... -- 785
Accounts receivable, net .................................................... 2,738 5,628
Inventory ................................................................... 10,697 14,452
Prepaid expenses and other current assets ................................... 2,782 2,522
Net assets of discontinued operations ....................................... 18,382 --
--------- ---------
Total current assets ..................................................... 61,944 59,074
Property and equipment, net of accumulated depreciation
and amortization ............................................................ 20,682 22,416
Other assets, net .............................................................. 110 574
--------- ---------
Total assets ............................................................. $ 82,736 $ 82,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 20,740 $ 19,315
Deferred revenue ............................................................ 505 1,268
Current portion of long-term debt ........................................... 141 182
--------- ---------
Total current liabilities ................................................ 21,386 20,765
Long-term debt ................................................................. 2,040 7,226
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000 shares
authorized; 8 shares issued as mandatorily redeemable
preferred stock as of January 1, 2000 .................................... -- --
Common stock, $0.01 par value, 60,000 authorized;
19,544 issued and 18,475 outstanding as of
January 1, 2000; 21,702 issued and outstanding as of
July 1, 2000 ............................................................. 195 217
Additional paid in capital ..................................................... 102,462 131,612
Accumulated deficit ............................................................ (43,133) (77,756)
--------- ---------
59,524 54,073
Less: Treasury stock, at cost .................................................. 214 --
--------- ---------
Total stockholders' equity ............................................... 59,310 54,073
--------- ---------
Total liabilities and stockholders' equity ............................... $ 82,736 $ 82,064
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 1999 July 1, 2000 June 30, 1999 July 1, 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues ................................................... $ -- $ 7,750 $ -- $ 13,469
Cost of revenues ............................................... -- 5,504 -- 9,456
-------- -------- -------- --------
Gross profit ............................................. -- 2,246 -- 4,013
-------- -------- -------- --------
Operating expenses:
Sales and marketing .......................................... -- 9,497 -- 19,312
Product development .......................................... 2,227 1,908 2,565 3,502
General and administrative ................................... 561 2,332 1,026 4,238
Stock-based compensation ..................................... 1,909 2,521 2,307 3,787
Depreciation and amortization ................................ 136 1,883 150 3,332
-------- -------- -------- --------
Total operating expenses ................................. 4,833 18,141 6,048 34,171
-------- -------- -------- --------
Operating loss ................................................. (4,833) (15,895) (6,048) (30,158)
Other (income) expense:
Interest (income) expense, net ............................... 100 (288) 157 (518)
-------- -------- -------- --------
Loss from continuing operations
before income tax benefit .................................... (4,933) (15,607) (6,205) (29,640)
Income tax benefit ............................................. (1,712) -- (2,221) --
-------- -------- -------- --------
Loss from continuing operations ................................ (3,221) (15,607) (3,984) (29,640)
Discontinued operations:
Income (loss) from discontinued
operations (less income tax expense
of $406 and $583 for the three- and six-
month periods ended June 30, 1999 ............................ (607) -- 550 --
Loss on disposition of discontinued
operations (net of income tax benefit of
$560 for the three- and six-month periods
ended June 30, 1999) ........................................... (5,632) (4,983) (5,632) (4,983)
-------- -------- -------- --------
Net loss ....................................................... $ (9,460) $(20,590) $ (9,066) $(34,623)
======== ======== ======== ========
Losses per share - basic and diluted:
Loss from continuing operations .............................. $ (0.27) $ (0.75) $ (0.33) $ (1.51)
Income (loss) from discontinued
operations ................................................... (0.05) -- 0.05 --
Loss on disposition of discontinued
operations ................................................... (0.46) (0.24) (0.47) (0.25)
-------- -------- -------- --------
Net loss ....................................................... $ (0.78) $ (0.99) $ (0.75) $ (1.76)
======== ======== ======== ========
Weighted average shares outstanding-
basic and diluted ............................................. 12,120 20,780 12,074 19,649
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 July 1, 2000
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ....................................................................... $ (9,066) $(34,623)
Deduct:
Income from discontinued operations ................................ 550 --
Loss on disposition of discontinued operations ..................... (5,632) (4,983)
-------- ---------
Loss from continuing operations .................................... (3,984) (29,640)
Adjustments to reconcile net loss from continuing operations to net cash used in
operating activities:
Depreciation and amortization ...................................... 339 3,332
Stock-based compensation ........................................... 2,307 3,787
Changes in operating assets and liabilities:
Deferred income taxes ..................................... (4,368) --
Accounts receivable ....................................... -- (2,890)
Inventory ................................................. -- (3,755)
Prepaid expenses and other current assets ................. 304 260
Other assets .............................................. 51 (464)
Accounts payable and accrued expenses and other ........... (628) (1,384)
Deferred revenue .......................................... -- 763
Income taxes payable ...................................... 280 --
-------- ---------
Net cash used in continuing operations ............................. (5,699) (29,991)
Net cash (used in) provided by discontinued operations ............. (1,483) 256
-------- ---------
Net cash used in operating activities .............................. (7,182) (29,735)
-------- ---------
Cash Flows from Investing Activities:
Acquisition of property and equipment, net ......................... (1,639) (5,087)
Proceeds from sale of discontinued operations ...................... -- 13,200
Purchase of short-term investment ................................. -- (785)
-------- ---------
Net cash (used in) provided by investing activities ................ (1,639) 7,328
-------- ---------
Cash Flows from Financing Activities:
Net repayments under lines of credit ............................... (7,487) --
Repayments of capital lease obligation ............................. (62) (35)
Proceeds from exercises of common stock options and warrants ....... 1,315 484
Proceeds from subordinated loan agreement .......................... 15,000 --
Proceeds from mortgage note ........................................ -- 5,300
Proceeds from sale of common stock ................................. -- 25,000
Costs of debt issuance and other ................................... (28) --
-------- ---------
Net cash provided by financing activities .......................... 8,738 30,749
-------- ---------
Net (decrease) increase in cash and cash equivalents ........................... (83) 8,342
Cash and cash equivalents, beginning of period ................................. 83 27,345
-------- ---------
Cash and cash equivalents, end of period ....................................... $ -- $ 35,687
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation,
develops and operates the electronic commerce ("e-commerce") sporting goods
businesses of several traditional sporting goods retailers, general
merchandisers, Internet companies and media companies under exclusive long-term
agreements. The Company currently derives virtually all of its revenues from the
sale of sporting goods through the Internet and other electronic media. The
Company currently does not derive revenues from the provision of services to its
partners' e-commerce sporting goods businesses. Each of the Company's partners
owns the URL address of its Web site. Based upon the terms of the agreements
with its partners, the Company owns certain components of the Web sites and the
partners own other components.
The accompanying condensed consolidated financial statements of Global have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions for Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying financial information is unaudited; however, in the opinion of
the Company's management, all adjustments (consisting solely of normal recurring
adjustments and accruals) necessary to present fairly the financial position,
results of operations and cash flows for the periods reported have been
included. The results of operations for the periods reported are not necessarily
indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements presented in the Company's Annual Report on Form 10-K/A filed with
the Securities and Exchange Commission on May 2, 2000.
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those used in the current
period.
NOTE 2- ACCOUNTING POLICIES
Deferred Revenue
Deferred revenue consists of fees to be earned in future periods under an
agreement existing at the balance sheet date, as well as amounts received from
the sale of gift certificates redeemable on our partners' Web sites.
Recent Accounting Pronouncement
In March 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued a consensus on Issue 00-2, "Accounting for Web Site
Development Costs". This consensus addresses the issue of accounting for costs
incurred to develop a Web site. The consensus is effective for Web site
development costs incurred in fiscal quarters beginning after June 30, 2000. The
Company does not expect adoption of this consensus to have a material impact on
its financial position or results of operations.
NOTE 3 - EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share for all periods have been computed in accordance
with Statement of Financial Accounting Standard No. 128, "Earnings Per Share".
Basic and diluted earnings (losses) per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Outstanding common stock options and warrants have been
excluded from the calculation of diluted earnings (losses) per share because
their effect would be antidilutive.
6
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GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The amounts used in calculating earnings (losses) per share data are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
June 30, 1999 July 1, 2000 June 30, 1999 July 1, 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Loss from continuing operations ........................ $ (3,221) $(15,607) $ (3,984) $(29,640)
Income (loss) from discontinued
operations, net of income taxes ................... (607) -- 550 --
Loss on disposition of discontinued
operations, net of income taxes ................... (5,632) (4,983) (5,632) (4,983)
======== ======== ======== ========
Net loss ............................................... $ (9,460) $(20,590) $ (9,066) $(34,623)
======== ======== ======== ========
Weighted average shares
outstanding - basic and diluted .................. 12,120 20,780 12,074 19,649
======== ======== ======== ========
Outstanding common stock options
having no dilutive effect ........................ 1,580 2,937 1,580 2,937
======== ======== ======== ========
Outstanding common stock warrants
having no dilutive effect ......................... 422 2,076 422 2,076
======== ======== ======== ========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
As of July 1, 2000, the Company had employment agreements with several of its
officers and other employees for an aggregate annual base salary of $1,628,000
plus bonuses and increases in accordance with the terms of the agreements. Terms
of such contracts range from three to five years and are subject to automatic
annual extensions.
Advertising and Media Agreements
As of July 1, 2000, the Company was contractually committed for the purchase of
future advertising totaling approximately $1.3 million for the remainder of the
fiscal year ending December 30, 2000. One such agreement requires the Company to
pay an additional fee based upon revenues generated from the advertising. In
addition, the Company contractually committed to provide barter media with a
value of no less than $5,000,000 for fiscal 2000. The barter media consists of
participation by a third party in joint advertising which the Company is
entitled to receive in one of its partner's retail stores and newspaper
promotions. The Company has no history of similar advertising arrangements for
cash. Accordingly, no revenue or expense will be recorded for this arrangement.
Minimum required joint advertising with the third party includes specific
quantities for combined traffic in the partner's retail stores and copies of
joint newspaper promotions.
NOTE 5 - EQUITY TRANSACTIONS
On April 27, 2000, the Company agreed to sell to funds affiliated with SOFTBANK
America Inc. (collectively "SOFTBANK") 2,500,000 shares of common stock and to
TMCT Ventures, L.P. ("TMCT") 625,000 shares of common stock at a price of $8.00
per share for an aggregate purchase price of $25,000,000. The sale of these
shares was completed on May 1, 2000. In addition, as part of this financing, the
Company issued to SOFTBANK warrants to purchase 1,250,000 shares of common stock
and to TMCT warrants to purchase 312,500 shares of common stock. These warrants
have a three-year term and an exercise price of $10.00 per share.
7
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In addition to the warrants described in the preceding paragraph, the Company
granted options and warrants to purchase 807,740 and 1,420,440 shares of the
Company's common stock to employees, consultants and a partner of the Company
during the three- and six-month periods ended July 1, 2000, respectively. The
range of exercise prices for all options and warrants granted was from $4.31 to
$15.00 for the three-month period ended July 1, 2000 and $3.00 to $20.75 for the
six-month period ended July 1, 2000. As a result of the grant of these options
and warrants and the amortization of deferred compensation from prior grants,
the Company recorded stock-based compensation expense of $2,521,000 for the
three-month period ended July 1, 2000 and $3,787,000 for the six-month period
ended July 1, 2000, primarily as a result of non-employee grants. As of July 1,
2000, the Company had an aggregate of $2,455,000 of deferred compensation
remaining to be amortized over the next five years.
Options and warrants to purchase 11,300 and 101,917 shares of the Company's
common stock were exercised during the three- and six-month periods ended July
1, 2000, respectively. The range of exercise prices was from $3.20 to $5.02 and
$3.20 to $15.63 for the three- and six-month periods ended July 1, 2000,
respectively. These exercises resulted in cash proceeds to the Company of
$49,000 and $484,000 for the three- and six-month periods ended July 1, 2000,
respectively.
NOTE 6 - BUSINESS SEGMENTS
The Company operates in one principal business segment which sells sporting
goods over the Internet and other electronic media. The Company develops and
operates the e-commerce sporting goods businesses of traditional sporting goods
retailers, general merchandisers, internet companies and media companies in
domestic markets. All of the Company's net sales, operating results and
identifiable assets are in the United States. See Note 7 for a discussion of the
Company's discontinued operations.
NOTE 7 - DISCONTINUED OPERATIONS
On May 26, 2000, the Company completed the previously announced sale of its Off-
Price and Action Sports division. The Company received $13.2 million in cash
proceeds from the sale. This sale completed the disposition of the Company's
discontinued operations.
During the three-month period ended July 1, 2000, the Company recognized an
additional loss on the disposition of discontinued operations of $5.0 million
resulting from actual expenses and losses differing from estimated amounts,
uncollectable accounts receivable, and goodwill impairment related to these
businesses. Included in accounts payable and accrued expenses at July 1, 2000 is
approximately $2.4 million related to certain remaining obligations of the
discontinued operations.
Net sales of discontinued operations for the three- and six-month periods ended
June 30, 1999 were $20,326,000 and $54,050,000, respectively, and for the three-
and six-month periods ended July 1, 2000 were $17,829,000 and $36,229,000,
respectively.
Net interest expense related to notes payable of discontinued operations of
$256,000 and $569,000 for the three- and six-month periods ended June 30, 1999,
respectively, and $272,000 and $619,000 for the three- and six-month periods
ended July 1, 2000, respectively, has been allocated to discontinued operations.
NOTE 8 - MORTGAGE NOTE
On April 20, 2000, the Company executed a $5,300,000 mortgage note
collateralized by the land, building, improvements, furniture and equipment of
its corporate headquarters. The mortgage note has a term of ten years and bears
interest at 8.49% per annum. The Company recorded $89,000 of interest expense
related to this note during the three-month period ended July 1, 2000.
8
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GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - SIGNIFICANT TRANSACTIONS/ CONCENTRATIONS OF CREDIT RISK
For the three- and six-month periods ended July 1, 2000, net revenues included
approximately $3.9 million and $5.8 million, respectively, of sales of one
vendor's product sold primarily through direct marketing, in addition to Web
site and other 800-number sales. The resulting accounts receivable are due over
a weighted average period of 9 months.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements relating
to our operations that are based on management's current expectations, estimates
and projections about our company and the e-commerce industry. Words such as
"expects," "intends," "plans," "projects," "believes," "estimates,"
"anticipates" and variations of these words and similar expressions are used to
identify the forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Further, we may make forward-looking statements that
are based upon assumptions as to future events that may not prove to be
accurate. Therefore, actual outcomes and results may differ materially from what
we express or forecast in these forward-looking statements. We undertake no
obligation, and do not intend, to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
A number of important factors could cause actual results to differ materially
from those indicated in our forward-looking statements. These factors include
those set forth under the heading "Risk Factors."
OVERVIEW
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandisers, Internet companies and media
companies under exclusive long-term agreements. We enable our partners to
capitalize on their existing brand assets to exploit online opportunities in the
sporting goods retail industry. We customize the design of a partner's Web site
with a broad range of characteristics that includes a differentiated user
interface, partner-specific content pages, an extensive electronic catalog of
product descriptions and images, a searchable database and interactive
communication tools. We currently derive virtually all of our revenues from the
sale of sporting goods through the Internet and other electronic media. It is
possible, however, that in the future we may derive revenues from providing
services in connection with the design, development, operation and promotion of
our partners' e-commerce sporting goods businesses.
COMPANY BACKGROUND
Prior to our decision to initiate our e-commerce sporting goods business, we
operated two primary businesses: our Branded division and our Off-Price and
Action Sports division. From inception in 1986 through December 1999, we
designed, marketed and distributed high performance athletic footwear
exclusively for women under the RYKA brand name. From December 1997 through
December 1999, as part of our Branded division, we also designed, marketed and
distributed outdoor footwear under the Yukon brand name. During the same period,
as part of our Off-Price and Action Sports division, we purchased closeouts,
overstocks, canceled orders and excess inventories of athletic, outdoor, casual
and specialty footwear, athletic apparel and athletic equipment from
manufacturers and retailers for resale, and designed and distributed special
make-up athletic equipment.
In April 1999, we formalized our plan to divest these divisions in order to
focus exclusively on the development of our e-commerce business. Accordingly,
for financial statement purposes, the assets, liabilities, results of operations
and cash flows of these divisions have been segregated from those of continuing
operations and are presented as discontinued operations.
On June 10, 1999, in order to finance our e-commerce business, we agreed to sell
to funds affiliated with SOFTBANK America, Inc. (collectively "SOFTBANK")
6,153,850 shares of common stock at a price of $13.00 per share for an aggregate
purchase price of approximately $80.0 million. The purchase price reflected the
closing price of our common stock on May 26, 1999, the day prior to the day we
and SOFTBANK agreed in principle to the transaction. The sale of these shares
was completed on July 23, 1999.
10
<PAGE>
On September 24, 1999, in furtherance of our plan to sell our historical
businesses, we entered into an agreement, as amended on March 13, 2000, to sell
our Off-Price and Action Sports division for a cash payment at closing of $13.2
million and the assumption by the purchaser of $4.0 million in indebtedness. The
sale of this division was completed on May 26, 2000. During the three-month
period ended July 1, 2000, the Company recognized an additional loss on the
disposition of discontinued operations of $5.0 million resulting from actual
expenses and losses differing from estimated amounts, uncollectable accounts
receivable, and goodwill impairment related to these businesses. Included in
accounts payable and accrued expenses at July 1, 2000 is approximately $2.4
million related to certain remaining obligations of the discontinued operations.
On April 27, 2000, in order to continue financing our e-commerce operations, we
agreed to sell to funds affiliated with SOFTBANK 2,500,000 shares of common
stock and to TMCT Ventures, L.P. ("TMCT") 625,000 shares of common stock at a
price of $8.00 per share for an aggregate purchase price of $25.0 million. The
sale of these shares was completed on May 1, 2000. In addition, as part of this
financing, we issued to SOFTBANK warrants to purchase 1,250,000 shares of common
stock and to TMCT warrants to purchase 312,500 shares of common stock. These
warrants have a three-year term and an exercise price of $10.00 per share.
RESULTS OF OPERATIONS
We did not launch our partners' Web sites and begin generating revenues from our
e-commerce business until the fourth quarter of fiscal 1999. As a result, our
historical financial statements are of limited use in making an investment
decision because they principally reflect our discontinued operations. Our
financial statements for periods prior to the fourth quarter of fiscal 1999
reflect only certain operating expenses related to our continuing operations.
Our financial statements for the fourth quarter of fiscal 1999 and forward
reflect our e-commerce business.
The Three- and Six-Month Periods Ended July 1, 2000 Compared to the Three- and
Six-Month Periods Ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, 1999 July 1, 2000 June 30, 1999 July 1, 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ -- $ 7,750 $ -- $ 13,469
Cost of revenues ................................. -- 5,504 -- 9,456
------- -------- ------- --------
Gross profit ................................... -- 2,246 -- 4,013
------- -------- ------- --------
Operating expenses:
Sales and marketing ............................ -- 9,497 -- 19,312
Product development ............................ 2,227 1,908 2,565 3,502
General and administrative ..................... 561 2,332 1,026 4,238
Stock-based compensation ....................... 1,909 2,521 2,307 3,787
Depreciation and amortization .................. 136 1,883 150 3,332
------- -------- ------- --------
Total operating expenses .................... 4,833 18,141 6,048 34,171
------- -------- ------- --------
Operating loss ................................... (4,833) (15,895) (6,048) (30,158)
Interest (income) expense, net ................. 100 (288) 157 (518)
------- -------- ------- --------
Loss from continuing operations .................. $(4,933) $(15,607) $(6,205) $(29,640)
======= ======== ======= ========
</TABLE>
Net Revenues. Net revenues are derived from sales of sporting goods through Web
sites, direct marketing, business to business group sales, 800-number sales
and related outbound shipping charges, net of returns and discounts. Net
revenues included $3.9 million for the three-month period and $5.8 million for
the six-month period ended July 1, 2000 of sales of one of our vendor's products
sold primarily through direct marketing, in addition to Web site and other 800-
number sales.
Cost of Revenues. Costs of revenues were 71.0% and 70.2% of net revenues for the
three- and six-month periods ended July 1, 2000, respectively. These costs
included the cost of products sold and inbound freight related to these
products, as well as outbound shipping costs other than those related to our
temporary subsidized shipping promotions, which are included in sales and
marketing expense.
Gross Profit. As a percentage of net revenues, gross profit was 29.0% for the
three-month period ended July 1, 2000 and 29.8% for the six-month ended July 1,
2000.
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Sales and Marketing Expenses. These expenses included advertising and
promotional expenses, including temporary subsidized shipping costs,
distribution facility expenses, customer service, merchandising costs and
payroll and related expenses. Also included in this amount are partner revenue
shares, which are payments made to our partners in exchange for the use of their
brand assets, the promotion of their URL's in marketing and communication
materials, the implementation of programs to provide incentives to in-store
customers to shop online and other programs and services provided to the
customers of our partners' Web sites. Partner revenue shares were not
significant in the three- or six-month periods ended July 1, 2000.
Product Development Expenses. Product development expenses consisted primarily
of expenses associated with content development, building, developing and
operating our partners' Web sites and payroll and related expenses for
engineering, production, creative and management information systems. The
increase in these expenses in the three- and six-month periods ended July 1,
2000, as compared to the comparable periods ended June 30, 1999, was primarily
the result of the increased number of Web sites that we are operating, as well
as support costs associated with the management information systems' operations.
General and Administrative Expenses. These expenses consisted primarily of
payroll and related expenses associated with executive, finance, human
resources, legal and administrative personnel, as well as occupancy costs for
the Company's headquarters. The increase in these expenses in the three- and
six-month periods ended July 1, 2000 over the comparable periods ended June 30,
1999, was primarily the result of increased personnel in these areas to support
our e-commerce business, as well as recruiting and other professional fees.
Depreciation and Amortization Expenses. Depreciation and amortization related
primarily to depreciating capitalized costs associated with our Common
Engine/TM/, hardware and software as well as our building and improvements,
furniture and fixtures.
Stock-Based Compensation Expense. These expenses consisted of the amortization
of deferred compensation expense for options granted to employees and certain
non-employees and the value of the options or warrants granted to certain
partners and investors. The increase in stock-based compensation in the three-
and six-month periods ended July 1, 2000, as compared to the comparable periods
ended June 30, 1999, resulted primarily from charges associated with the
private-placement financing completed during the second quarter of fiscal 2000
offset by lower costs associated with warrants issued to our partners. As of
July 1, 2000, we had an aggregate of $2.5 million of deferred compensation
remaining to be amortized over the next five years.
Interest (Income) Expense. Interest income consisted of interest earned on cash,
cash equivalents and short-term investments. In the three-month period ended
July 1, 2000, we had interest income of $288,000, net of interest expense of
$89,000, and in the six-month period ended July 1, 2000, we had interest income
of $518,000, net of interest expense of $89,000. This compares to interest
expense of $100,000 for the three-month period and $157,000 for the six-month
period ended June 30, 1999. Interest expense in fiscal 2000 related primarily to
a mortgage note on the Company's corporate headquarters. In 1999, the interest
expense related primarily to bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we financed our operations through a combination of internally
generated funds, equity financings, subordinated borrowings and bank credit
facilities. We used our bank credit facilities to fund our investment in
accounts receivable and inventory necessary to support our historical
businesses.
In connection with our decision to focus on our e-commerce business, we raised
approximately $80.0 million in gross proceeds through an equity financing with
SOFTBANK in July, 1999. We used part of the proceeds from this financing to
repay the balance on our then outstanding lines of credit, reduce trade payables
and provide operating capital related to our historical businesses. We also used
part of the proceeds to acquire property and equipment and fund working capital
for our e-commerce business. As of July 1, 2000, we had cash and cash
equivalents of approximately $35.7 million and working capital of approximately
$38.3 million.
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We have incurred substantial costs to develop our e-commerce business and to
recruit, train and compensate personnel for our creative, engineering,
marketing, merchandising, customer service, management information systems and
administration departments. As a result, we incurred substantial losses in
fiscal 1999 and the first two quarters of fiscal 2000 and, as of July 1, 2000,
had an accumulated deficit of $77.8 million. In order to expand our e-commerce
business, we intend to invest heavily in operations, Web site development,
merchandising and additional personnel in certain areas of the business. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
We used approximately $30.0 million in net cash for operating activities of
continuing operations during the six-month period ended July 1, 2000 and
approximately $5.7 million in net cash for operating activities of continuing
operations during the six-month period ended June 30, 1999. Net cash used for
operating activities of continuing operations during the six-month period ended
July 1, 2000 was primarily the result of net losses from continuing operations
and changes in inventory, accounts receivable, other assets and accounts payable
and accrued expenses, partially offset by changes in prepaid expenses, deferred
revenue, depreciation and amortization expense and stock-based compensation
expense. Net cash used for operating activities of continuing operations during
the six-month period ended June 30, 1999 was primarily the result of net losses
from continuing operations and changes in deferred income taxes and accounts
payable and accrued expenses, partially offset by depreciation and amortization
and stock-based compensation expense.
Our investing activities during the six-month period ended July 1, 2000
consisted of purchases of property and equipment. We made capital expenditures
of approximately $5.1 million during the six-month period ended July 1, 2000. In
addition, we received $13.2 million in cash proceeds for the sale of our Off-
Price and Action Sports division during the second quarter. These proceeds will
be used to fund our working capital needs.
As of July 1, 2000, we had commitments of $1.3 million relating to the
implementation of advertising and promotion programs. In addition, we have
agreed to provide a third party with not less than $5.0 million of barter media
during the term of our agreement. The barter media consists of including the
third party's logo on mutually agreed upon advertising in a partner's retail
stores and newspaper promotions.
On April 20, 2000, we received approximately $5.3 million in gross proceeds
through the mortgage financing of our corporate headquarters.
On May 1, 2000, we received approximately $25.0 million in gross proceeds from a
private placement of our common stock with SOFTBANK and TMCT. In addition, as
part of this financing, SOFTBANK and TMCT have the right to acquire up to an
additional $15.6 million of our common stock at $10.00 per share.
To date, we have financed our e-commerce operation primarily from the sale of
equity securities. Management expects that our current cash plus the liquidation
of accounts receivable will be sufficient to meet our anticipated cash needs for
at least the next 12 months. However, our revenues must increase significantly
to internally fund our anticipated operating expenses. If cash flows are
insufficient to fund these expenses, we may need to raise additional funds in
future periods through public or private financings or other arrangements to
fund our operations until we achieve profitability.
Failure to raise future capital when needed could seriously harm our business
and operating results. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
SEASONALITY
We expect to experience seasonal fluctuations in our revenues. These seasonal
patterns will cause quarterly fluctuations in our operating results. In
particular, we expect that the fourth fiscal quarter will account for a large
percentage of our total annual sales. We believe that results of operations for
a quarterly period may not be indicative of the results for any other quarter or
for the full year.
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INFLATION
Management believes that inflation has not had a material effect on our
operations.
RISK FACTORS
Any investment in shares of our common stock involves a high degree of risk.
Investors should carefully consider the following information about these risks,
together with the other information contained in this Quarterly Report on Form
10-Q and our Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission on May 2, 2000. If any of the following risks occur, our business
could be materially harmed. In these circumstances, the market price of our
common stock could decline, and investors may lose all or part of the money paid
to buy our common stock. This Quarterly Report on Form 10-Q and our Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission on May
2, 2000 contain forward-looking statements that involve risks and uncertainties.
Many factors, including those described below, may cause actual results to
differ materially from anticipated results.
Risks Particular to Our Business
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating our e-
commerce business until the fourth quarter of 1999. Prior to the fourth quarter
of 1999, when we launched the e-commerce sporting goods business we operate for
our partners, 100% of our revenues had been generated by our discontinued
operations. Now that the sale of the discontinued operations has been completed,
100% of our revenues will be generated through our e-commerce business. Based on
our limited experience with our e-commerce business, it is difficult to predict
whether we will be successful. Thus, our chances of financial and operational
success should be evaluated in light of the risks, uncertainties, expenses,
delays and difficulties associated with operating a business in a relatively new
and unproven market, many of which may be beyond our control. Our failure to
address these issues could have a material adverse effect on our business,
results of operations and financial condition.
We expect increases in our operating expenses and continuing losses.
We incurred substantial losses for fiscal 1999 and the first two quarters of
fiscal 2000 and, as of July 1, 2000, we had an accumulated deficit of $77.8
million. We have not achieved profitability from our continuing operations. We
may not obtain enough customer traffic or a high enough volume of purchases from
our partners' e-commerce sporting goods businesses to generate sufficient
revenues to achieve profitability. We believe that we will continue to incur
operating and net losses for the next few years. We believe that our losses in
fiscal 2000 will be significantly greater than our losses in fiscal 1999. There
can be no assurances that we will be able to reverse these accelerating losses.
We intend to increase our operating expenses as we:
- Develop our distribution and order fulfillment capabilities;
- Improve our order processing systems and capabilities;
- Develop enhanced technologies and features to improve our partners'
e-commerce sporting goods business;
- Expand our customer service capabilities to better serve our customers'
needs;
- Increase our general and administrative functions to support our growing
operations; and
- Increase our sales and marketing activities.
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Because we will incur many of these expenses before we receive any revenues from
our efforts, our losses will be greater than the losses we would incur if we
developed our business more slowly. In addition, we may find that these efforts
are more expensive than we currently anticipate, which would further increase
our losses. Also, the timing of these expenses may contribute to fluctuations in
our quarterly operating results.
Our success is tied to the success of the sporting goods industry and our
partners for which we operate e-commerce sporting goods businesses.
Our future success is substantially dependent upon the success of the sporting
goods industry and our partners for which we operate e-commerce sporting goods
businesses. From time to time, the sporting goods industry has experienced
downturns. Any downturn in the sporting goods industry could adversely affect
our business. In addition, if our partners were to have financial difficulties
or seek protection from their creditors, or if we are unable to replace our
partners or obtain new partners, it could adversely affect our business,
financial condition and results of operations.
We enter into long-term contracts with our partners. If we do not maintain good
working relationships with our partners or perform as required under these
agreements it could adversely affect our business.
We enter into contracts with our partners with terms ranging from five to
fifteen years. These agreements establish new and complex relationships between
our partners and us. We spend a significant amount of time and effort to
maintain our relationships with our partners and address the issues that from
time to time may arise from these new and complex relationships. If we do not
maintain a good working relationship with our partners or perform as required
under these agreements, our partners could seek to terminate the agreements
prior to the end of the term or they could decide not to renew the contracts at
the end of the term. This could adversely affect our business, financial
condition and results of operations. Moreover, our partners could decide not to
renew these contracts for reasons not related to our performance.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in the
future due to a variety of factors, many of which are outside of our control.
Because our operating results may be volatile and difficult to predict, quarter-
to-quarter comparisons of our operating results may not be a good indication of
our future performance. In some future quarter our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock may decline significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
- our inability to retain existing partners or to obtain new partners;
- our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
- decreases in the number of visitors to the e-commerce sporting goods
businesses operated by us or the inability to convert these visitors into
customers;
- our failure to offer an appealing mix of sporting goods, apparel,
footwear and other products;
- our inability to adequately maintain, upgrade and develop our partners'
Web sites, the systems used to process customers' orders and payments or
our computer network;
- the ability of our competitors to offer new or superior e-commerce
sporting goods businesses, services or products;
- price competition that results in lower profit margins or losses;
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- our inability to obtain specific products and brands or unwillingness of
vendors to sell their products to us;
- unanticipated fluctuations in the amount of consumer spending on sporting
goods and related products, which tend to be discretionary spending
items;
- increases in the cost of Internet or other advertising;
- increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
- unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
- technical difficulties, system security breaches, system downtime or
Internet slowdowns;
- seasonality;
- our inability to manage inventory levels or control inventory theft;
- our inability to manage distribution operations or provide adequate
levels of customer service;
- an increase in the level of our product returns;
- government regulations related to use of the Internet for commerce; and
- unfavorable economic conditions specific to the Internet, e-commerce or
the sporting goods industry.
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We expect to experience seasonal fluctuations in our revenues. These seasonal
patterns will cause quarterly fluctuations in our operating results. In
particular, we expect that our fourth fiscal quarter will account for a large
percentage of our total annual revenues. In anticipation of increased sales
activity during our fourth fiscal quarter, we may hire a significant number of
temporary employees to bolster our permanent staff and significantly increase
our inventory levels. For this reason, if our revenues were below seasonal
expectations during the fourth fiscal quarter, our annual operating results
could be below the expectations of securities analysts and investors.
Due to the limited operating history of our e-commerce business, it is difficult
to predict the seasonal pattern of our sales and the impact of this seasonality
on our business and financial results. In the future, our seasonal sales
patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash generated
from our business. If we do not generate cash sufficient to fund our operations,
we may need additional financing to continue our growth or our growth may be
limited.
Because we have not generated sufficient cash from operations to date, we have
funded our e-commerce operations primarily from the sale of equity securities.
Cash from revenues must increase significantly for us to fund anticipated
operating expenses internally. If our cash flows are insufficient to fund these
expenses, we may need to fund our growth through additional debt or equity
financings or reduce costs. Further, we may not be able to obtain financing on
satisfactory terms. Our inability to finance our growth, either internally or
externally, may limit our growth potential and our ability to execute our
business strategy. If we issue securities to raise capital, our existing
stockholders may experience additional dilution or the new securities may have
rights senior to those of our common stock.
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We must develop and maintain relationships with key brand manufacturers to
obtain a sufficient assortment and quantity of quality merchandise on acceptable
commercial terms. If we are unable to do so, it could adversely affect our
business, results of operations and financial condition.
We primarily purchase the products we offer directly from the manufacturers of
the products. If we are unable to develop and maintain relationships with these
manufacturers, we may be unable to obtain or continue to carry a sufficient
assortment and quantity of quality merchandise on acceptable commercial terms
and our business could be adversely impacted. We do not have written contracts
with most of our manufacturers. Manufacturers could stop selling products to us
and may ask us to remove their products or logos from our partners' Web sites.
In some circumstances, our partners purchase products directly from
manufacturers for sale on their Web sites. If we or our partners are unable to
obtain products directly from manufacturers, especially popular brand
manufacturers, we may not be able to obtain the same or comparable merchandise
in a timely manner or on acceptable commercial terms. We currently do not offer
some popular brands of sporting goods, such as Nike. There can be no assurance
that we will be able to offer these brands in the future. If we are unable to
offer a sufficient assortment and quantity of quality products at acceptable
prices, we may lose sales and market share.
Capacity constraints or system failures could materially and adversely affect
our business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that causes
interruption of the availability of our partners' Web sites could result in
decreased usage of these Web sites. If these failures are sustained or repeated,
they could reduce the attractiveness of our partners' Web sites to customers,
vendors and advertisers. Our operations are subject to damage or interruption
from:
- fire, flood, earthquake or other natural disasters;
- power losses, interruptions or brown-outs;
- Internet, telecommunications or data network failures;
- physical and electronic break-ins or security breaches;
- computer viruses; and
- other similar events.
We launched our first partners' e-commerce sporting goods businesses in the
fourth quarter of fiscal 1999. The limited time during which we have been
operating these businesses, as well as the inherent unpredictability of the
events described above, makes it difficult to predict whether the occurrence of
any of these events is likely. If any of these events do occur, they could
result in interruptions, delays or cessations in service to users of our
partners' Web sites, which could have a material adverse effect on our business,
results of operations and financial condition.
In addition, we maintain our computers on which we operate our partners' Web
sites at the site of a third-party provider. We cannot control the maintenance
and operation of this site, which is also susceptible to similar disasters and
problems. Our insurance policies may not adequately compensate us for any losses
that we may incur. Any system failure that causes an interruption in our service
or a decrease in responsiveness could harm our relationships with our customers
and result in reduced revenues.
We may be unable to protect our proprietary technology or keep up with that of
our competitors.
Our success depends to a significant degree upon the protection of our software
and other proprietary intellectual property rights. We may be unable to deter
misappropriation of our proprietary information, detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. In addition,
our competitors could, without violating our proprietary rights, develop
technologies that are as good as or better than our technology.
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Our failure to protect our software and other proprietary intellectual property
rights or to develop technologies that are as good as our competitors' could put
us at a disadvantage to our competitors. In addition, the failure of our
partners to protect their intellectual property rights, including their domain
names, could impair our operations. These failures could have a material adverse
effect on our business, results of operations and financial condition.
If we do not respond to rapid technological changes, our services could become
obsolete and we could lose customers.
We may face material delays in introducing new services, products and
enhancements. If this happens, our customers may forego the use of our partners'
e-commerce sporting goods businesses and use those of our competitors. To remain
competitive, we must continue to enhance and improve the functionality and
features of our partners' e-commerce sporting goods businesses. The Internet and
the online commerce industry are rapidly changing. If competitors introduce new
products and services using new technologies or if new industry standards and
practices emerge, our partners' existing Web sites and our proprietary
technology and systems may become obsolete.
Developing our partners' e-commerce sporting goods businesses and other
proprietary technology entails significant technical and business risks. We may
use new technologies ineffectively or we may fail to adapt our partners' Web
sites, our order processing systems and our computer network to meet customer
requirements or emerging industry standards.
We may be subject to intellectual property claims that could be costly and could
disrupt our business.
Third-parties may assert that our business or technologies infringe their
intellectual property rights. From time to time, we may receive notices from
third-parties questioning our right to present specific images or logos on our
partners' Web sites, or stating that we have infringed their trademarks or
copyrights. We may in the future receive claims that we are engaging in unfair
competition or other illegal trade practices. We may be unsuccessful in
defending against any of these claims, which could result in substantial
damages, fines or other penalties. The resolution of a claim could also require
us to change how we do business, redesign our partners' Web sites and other
systems or enter into burdensome royalty or licensing agreements. These license
or royalty agreements, if required, may not be available on acceptable terms, if
at all, in the event of a successful claim of infringement. Our insurance
coverage may not be adequate to cover every claim that third-parties could
assert against us. Even unsuccessful claims could result in significant legal
fees and other expenses, diversion of management's time and disruptions in our
business. Any of these claims could also harm our reputation.
We rely on our developing relationships with online services, search engines,
directories and other Web sites and e-commerce businesses to drive traffic to
the e-commerce sporting goods businesses we operate. If we are unable to develop
or maintain these relationships, our business, financial condition and results
of operations could be adversely affected.
We are developing relationships with online services, search engines,
directories and other Web sites and e-commerce businesses to provide content,
advertising banners and other links that link to our partners' Web sites. We
expect to rely on these relationships as significant sources of traffic to our
partners' Web sites and to generate new customers. If we are unable to develop
satisfactory relationships on acceptable terms, our ability to attract new
customers could be harmed. Further, many of the parties with which we may have
online advertising arrangements could provide advertising services for other
marketers of sporting goods. As a result, these parties may be reluctant to
enter into or maintain relationships with us. Failure to achieve sufficient
traffic or generate sufficient revenue from purchases originating from third-
parties may result in termination of these types of relationships. Without these
relationships, we may not be able to sufficiently increase our market share and
our business, financial condition and results of operations could be adversely
affected.
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Our success is dependent upon our executive officers and other key personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman and Chief Executive Officer. We have employment agreements with some of
our executive officers and key personnel. We cannot be sure, however, that we
will be able to retain or attract executive, managerial and other key personnel.
We have obtained key person life insurance for Mr. Rubin in the amount of $7.25
million. We have not obtained key person life insurance on any of our other
executive officers or key personnel.
We may be unable to hire and retain the skilled personnel necessary to develop
our business.
We intend to hire a number of skilled personnel in fiscal 2000 and beyond.
Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel in the future. Our failure to
attract and retain the highly trained personnel that are integral to our
business may limit our growth rate, which would harm our business.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
The e-commerce market is new, rapidly evolving and extremely competitive.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which could seriously harm our business,
financial condition and results of operations. We compete with a variety of
companies, including:
- online sporting goods retailers such as Chipshot.com, Fogdog.com, and
Gear.com;
- general merchandise e-commerce companies such as Mercata.com,
Onsale.com, and uBid.com;
- full-line electronic retailers that are associated with full-line
sporting good stores such as Dsports.com associated with Dick's
Sporting Goods, MVP.com, associated with Galyans and Shopsports.com
associated with Copeland's;
- e-commerce businesses of specialty sporting goods retailers and
catalogs such as Footaction.com, Footlocker.com and REI.com;
- e-commerce business of traditional and general merchandise retailers
such as Target.com and WalMart.com; and
- e-commerce businesses of sporting goods manufacturers such as
adidas.com and Nike.com.
In addition, we compete with companies that can provide part of our solutions to
companies that wish to establish e-commerce sporting goods businesses,
including:
- Web site developers, such as Sapient, Scient and Viant; and
- third-party fulfillment and customer services providers, such as
Fingerhut, Keystone Internet Services and ClientLogic.
Finally, we compete with traditional channels of distribution for sporting
goods, including full-line sporting goods retailers, specialty sporting goods
retailers, general merchandise retailers, catalogs and manufacturers' direct
stores.
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If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
We currently rely upon a third-party to handle the fulfillment of our customer
orders and the warehousing of our inventory. We also rely upon multiple third-
parties to handle the shipment of our products. As a result, we are subject to
the risks associated with the ability of these third-parties to successfully and
timely fulfill and ship customer orders and to successfully handle our inventory
delivery services to meet our shipping needs. The failure of these third-parties
to provide these services, or the termination or interruption of these services,
could adversely affect our business, results of operations and financial
condition.
We currently plan to assume responsibility for the fulfillment of the majority
of our orders during fiscal 2000. We could experience problems during the
transition of control from the third-party to us. If transition problems arise,
it could result in additional expenses and could divert management's attention
from other aspects of our business. If we are unable to successfully, timely and
cost efficiently effect this transition and perform these fulfillment services,
our business, results of operations and financial condition could be adversely
affected.
Sporting goods and apparel are subject to changing consumer preferences. If we
fail to anticipate these changes, we could experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our ability to anticipate and respond to trends in
sporting goods merchandise and consumers' participation in sports. Consumers'
tastes in apparel and sporting goods equipment are subject to frequent and
significant changes, due in part to manufacturers' efforts to incorporate
advanced technologies into some types of sporting goods. In addition, the level
of consumer interest in a given sport can fluctuate dramatically. Prior to
commencing our e-commerce business, our businesses were primarily concentrated
in athletic footwear and apparel. Accordingly, we do not have experience in the
full range of sporting goods. If we fail to identify and respond to changes in
sporting goods merchandising and recreational sports participation, our sales
could suffer and we could be required to mark down unsold inventory. This would
depress our profit margins. In addition, any failure to keep pace with changes
in consumers' recreational sports habits could allow our competitors to gain
market share which could have an adverse effect on our business, results of
operations and financial condition.
High merchandise returns could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is consistent with the
policies of each of our partners for which we operate e-commerce sporting goods
businesses. Our ability to handle a large volume of returns is unproven. If
merchandise returns are significant, our business, financial condition and
results of operations could be adversely affected.
We may be subject to product liability claims that could be costly and time
consuming.
We sell products manufactured by third-parties, some of which may be defective.
If any product that we sell were to cause physical injury or injury to property,
the injured party or parties could bring claims against us as the retailer of
the product. Our insurance coverage may not be adequate to cover every claim
that could be asserted. Similarly, we could be subject to claims that users of
our partners' Web sites were harmed due to their reliance on our product
information, product selection guides, advice or instructions. If a successful
claim were brought against us in excess of our insurance coverage, it could
adversely affect our business. Even unsuccessful claims could result in the
expenditure of funds and management time and could have a negative impact on our
business.
We may be liable if third-parties misappropriate our customers' personal
information.
If third-parties are able to penetrate our network security or otherwise
misappropriate our customers' personal information or credit card information,
we could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. They could also include claims for other misuses of
personal information, including unauthorized marketing purposes. These claims
could result in litigation. Liability for misappropriation of this information
could adversely affect our business. In addition, the Federal Trade Commission
and state agencies have been investigating various Internet companies regarding
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their use of personal information. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if
government agencies investigate our privacy practices.
We are controlled by certain principal stockholders.
As of July 1, 2000, Michael G. Rubin, our Chairman and Chief Executive Officer,
beneficially owned 37.0% and SOFTBANK beneficially owned 39.9% of our
outstanding common stock. Mr. Rubin and SOFTBANK are in a position to exercise
control over most matters requiring stockholder approval, including the election
or removal of directors, approval of significant corporate transactions, and the
ability generally to direct our affairs. Furthermore, the stock purchase
agreements pursuant to which SOFTBANK acquired its shares of our common stock
provide that SOFTBANK has the right to designate up to three members of our
board. This concentration of ownership and SOFTBANK's right to designate members
to our board may have the effect of delaying or preventing a change in control
of us, including transactions where stockholders might otherwise receive a
premium over current market prices for their shares.
There are risks associated with potential acquisitions. As a result, we may not
achieve the expected benefits of potential acquisitions.
If we are presented with appropriate opportunities, we may make investments in
complementary companies, products or technologies or we may purchase other
companies. We may not realize the anticipated benefits of any investment or
acquisition. We may not be able to successfully assimilate the additional
personnel, operations, acquired technology and products into our business. Any
acquisition may further strain our existing financial and managerial controls
and reporting systems and procedures. In addition, key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees or increase our
expenses. Further, the physical expansion in facilities that would occur as a
result of any acquisition may result in disruptions that seriously impair our
business. Finally, we may have to incur debt or issue equity securities to pay
for any acquisitions or investments, the issuance of which could be dilutive to
our stockholders.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and challenges
that could affect our profitability.
We believe that the current globalization of the economy requires businesses to
consider pursuing international expansion. In the future, we may expand into
international markets. International sales are subject to inherent risks and
challenges that could adversely affect our profitability, including:
- the need to develop new supplier and manufacturer relationships,
particularly because major sporting good manufacturers may require that
our international operations deal with local distributors;
- unexpected changes in international regulatory requirements and
tariffs;
- difficulties in staffing and managing foreign operations;
- longer payment cycles from credit card companies;
- greater difficulty in accounts receivable collection;
- potential adverse tax consequences;
- price controls or other restrictions on foreign currency; and
- difficulties in obtaining export and import licenses.
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To the extent we generate international sales in the future, any negative impact
on our international business could negatively impact our business, operating
results and financial condition as a whole. In particular, gains and losses on
the conversion of foreign payments into United States dollars may contribute to
fluctuations in our results of operations and fluctuating exchange rates could
cause reduced gross revenues and/or gross margins from dollar-denominated
international sales.
We have never paid dividends on our common stock and do not anticipate paying
dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate that
any cash dividends will be declared or paid in the foreseeable future.
It may be difficult for a third-party to acquire our company and this could
depress our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 1,000,000 shares of preferred stock, which the board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the rights,
preferences and designations set by the board, may delay, deter or prevent a
change in control of our company. Issuing additional shares of common stock
could result in dilution of the voting power of the current holders of our
common stock. In addition, "anti-takeover" provisions of Delaware law may
restrict the ability of the stockholders to approve a merger or business
combination or obtain control of our company.
There are limitations on the liabilities of our directors.
Pursuant to our amended and restated certificate of incorporation and under
Delaware law, our directors are not liable to us or our stockholders for
monetary damages for breach of fiduciary duty, except for liability for breach
of a director's duty of loyalty, acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases that are unlawful under Delaware law or
any transaction in which a director has derived an improper personal benefit.
There are risks relating to our Year 2000 compliance.
Many existing computer software programs and operating systems were designed
such that the year 1999 is the maximum date that many computer systems will be
able to process. We addressed the potential problems posed by this limitation in
our systems software to assure that it was prepared for the Year 2000. We did
not incur any Year 2000 problem as a result of the passage of January 1, 2000.
However, it is possible that problems may occur even after arrival of the Year
2000. If we or third parties with which we conduct material business experience
problems caused by Year 2000 problems, there may be a material adverse effect on
our results of operations.
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Risks Related to the Internet Industry
Our success is tied to the continued growth in the use of the Internet and the
adequacy of the Internet infrastructure.
Our future success is substantially dependent upon continued growth in the use
of the Internet. The number of users and advertisers on the Internet may not
increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
- actual or perceived lack of security of information or privacy
protection, including credit card numbers;
- lack of access and ease of use;
- congestion of traffic on the Internet;
- inconsistent quality of service and lack of availability of
cost-effective, high-speed service;
- possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
- excessive governmental regulation;
- uncertainty regarding intellectual property ownership; and
- lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet has
resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an increase
in the number or requirements of users. In addition, there have been outages and
delays on the Internet as a result of damage to the current infrastructure. The
amount of traffic on our partners' Web sites could be materially affected if
there are outages or delays in the future. The use of the Internet may also
decline if there are delays in the development or adoption of modifications by
third-parties that are required to support increased levels of activity on the
Internet. If none of the foregoing changes occur, or if the Internet does not
become a viable commercial medium, our business, results of operations and
financial condition could be materially adversely affected. In addition, even if
those changes occur, we may be required to spend significant capital to adapt
our operations to any new or emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the Web
sites which we operate obsolete.
The technology of the Internet and e-commerce is evolving rapidly for many
reasons, including:
- customers frequently changing their requirements and preferences;
- competitors frequently introducing new products and services; and
- industry associations and others creating new industry standards and
practices.
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These changes could render the Web sites which we operate obsolete. Our ability
to attract customers could be seriously impaired if we do not accomplish the
following tasks:
- continually enhance and improve our partners' Web sites;
- identify, select and obtain leading technologies useful in our
business; and
- respond to technological advances and emerging industry standards in a
cost-effective manner and timely manner.
Customers may be unwilling to use the Internet to purchase goods.
Our long-term future depends heavily upon the general public's willingness to
use the Internet as a means to purchase goods. The failure of the Internet to
develop into an effective commercial tool would seriously damage our future
operations. E-commerce is a new concept, and large numbers of customers may not
begin or continue to use the Internet to purchase goods. The demand for and
acceptance of products sold over the Internet are highly uncertain, and most e-
commerce businesses have a short track record. If consumers are unwilling to use
the Internet to conduct business, our business may not develop profitably. The
Internet may not succeed as a medium of commerce because of delays in developing
elements of the needed Internet infrastructure, such as a reliable network,
high-speed modems, high-speed communication lines and other enabling
technologies.
The security risks of e-commerce may discourage customers from purchasing goods
from us.
In order for the e-commerce market to develop successfully, we and other market
participants must be able to transmit confidential information securely over
public networks. Third-parties may have the technology or know-how to breach the
security of customer transaction data. Any breach could cause customers to lose
confidence in the security of our partners' Web sites and choose not to purchase
from those Web sites. If someone is able to circumvent our security measures, he
or she could destroy or steal valuable information or disrupt the operation of
our partners' Web sites. Concerns about the security and privacy of transactions
over the Internet could inhibit the growth of the Internet and e-commerce. Our
security measures may not effectively prohibit others from obtaining improper
access to the information on our partners' Web sites. Any security breach could
expose us to risks of loss, litigation and liability and could seriously disrupt
our operations.
Our business is subject to United States and foreign governmental regulation of
the Internet and taxation.
Congress and various state and local governments have recently passed
legislation that regulates various aspects of the Internet, including online
content, copyright infringement, user privacy, sales and advertising of certain
products and services and taxation. In addition, federal, state, local and
foreign governmental organizations are also considering legislative and
regulatory proposals that would regulate the Internet. Areas of potential
regulation include libel, pricing, quality of products and services and
intellectual property ownership. A number of proposals have been made at the
state and local level that would impose taxes on the sale of goods and services
through the Internet. These proposals, if adopted, could substantially impair
the growth of e-commerce and could adversely affect our future business, results
of operation and financial condition.
In addition, United States and foreign laws regulate our ability to use customer
information and to develop, buy and sell mailing lists. New restrictions in this
area could limit our ability to operate as planned and result in significant
compliance costs.
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Regulations imposed by the Federal Trade Commission may adversely affect the
growth of our Internet business or its marketing efforts.
The Federal Trade Commission has adopted regulations regarding the collection
and use of personal identifying information obtained from children under 13. In
addition, bills pending in Congress would extend online privacy protections to
adults. Laws and regulations of this kind may include requirements that we
establish procedures to disclose and notify users of privacy and security
policies, obtain consent from users for collection and use of information and
provide users with the ability to access, correct and delete personal
information stored by us. These regulations may also include enforcement and
remedial provisions. Even in the absence of those regulations, the Federal Trade
Commission has begun investigations into the privacy practices of other
companies that collect information on the Internet. One investigation resulted
in a consent decree under which an Internet company agreed to establish programs
to implement the principles noted above. We could become a party to a similar
investigation or enforcement proceeding, or the Federal Trade Commission's
regulatory and enforcement efforts may harm our ability to collect demographic
and personal information from users, which could be costly or adversely affect
our marketing efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk for the quarter ended July
1, 2000. See the information set forth in Item 7A of the Company's Annual Report
on Form 10-K/A for the fiscal year ended January 1, 2000 filed with the
Securities and Exchange Commission on May 2, 2000.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various routine litigation incidental to our current
and discontinued businesses. We believe that the disposition of these
matters will not have a material adverse effect on our financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective May 1, 2000, we issued and sold 2,500,000 shares of common
stock to funds affiliated with SOFTBANK America Inc. ("SOFTBANK") and
625,000 shares of common stock to TMCT Ventures, L.P. ("TMCT") at $8.00
per share for an aggregate purchase price of $25,000,000. In addition,
as part of this financing, we issued to the funds affiliated with
SOFTBANK warrants to purchase 1,250,000 shares of common stock and to
TMCT warrants to purchase 312,500 shares of common stock. These warrants
have a three-year term and an exercise price of $10.00 per share. The
issuance of the common stock and warrants was exempt from registration
pursuant to Section 4(2) of the Securities Act. We granted to the funds
affiliated with SOFTBANK and TMCT certain "demand" and "piggy-bank"
registration rights with respect to the common stock issued, and the
common stock issuable upon exercise of the warrants issued, to the funds
affiliated with SOFTBANK and TMCT. We intend to use the proceeds of this
financing for working capital and other general business purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2000, we held our Annual Meeting of Shareholders.
Proxies were solicited for the Annual Meeting pursuant to Regulation 14A
of the Securities Exchange Act of 1934. At the Annual Meeting, the
following matters were voted on:
1. Kenneth J. Adelberg, Ronald D. Fisher, Harvey Lamm, Charles R.
Lax, Mark S. Menell, Jeffrey F. Rayport and Michael G. Rubin were
elected to serve on the Board of Directors of the Company for one-year
terms and until their respective successors are duly elected and
qualified. The votes for and the votes withheld for each director were
as follows:
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Name For Withheld
---- --- --------
Kenneth J. Adelberg 17,211,141 14,589
Ronald D. Fisher 17,211,101 14,629
Harvey Lamm 17,211,141 14,589
Charles R. Lax 17,211,101 14,629
Mark S. Menell 17,211,146 14,584
Jeffrey F. Rayport 17,211,171 14,559
Michael G. Rubin 17,210,836 14,894
2. A proposal to approve (a) the Acquisition Agreement, dated
September 24, 1999, as amended, among the Company, Gen-X Acquisition
(U.S.), Inc., Gen-X Acquisition (Canada) Inc., DMJ Financial, Inc.,
James J. Salter and Kenneth J. Finkelstein relating to the sale of the
Company's Off-Price and Action Sports Division, including the same of
all of the issued and outstanding capital stock of the Company's
wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment Inc.,
and (b) the sale of the Company's Off-Price and Action Sports Division
was approved by the following vote:
For Against Abstain
--- ------- -------
17,185,632 33,542 6,556
3. A proposal to approve Indemnification Agreements to be entered
into with the Company's Directors and certain of its officers was
approved by the following vote:
For Against Abstain
--- ------- -------
16,792,584 421,313 11,833
4. A proposal to approve the Company's 2000 Employee Stock Purchase
Plan was approved by the following vote:
For Against Abstain
--- ------- -------
16,792,584 421,313 11,833
5. A proposal to approve an Amendment to the Company's 1996 Equity
Incentive Plan to increase the number of shares of Common Stock issuable
thereunder from 3,000,000 shares to 4,500,000 shares was approved by the
following vote:
For Against Abstain
--- ------- -------
17,184,280 33,036 8,414
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
+10.1 Strategic Alliance Agreement, dated April 20, 2000, between
Global Sports, Inc. and BUY.COM Inc.
27.1 Financial data schedule for the quarter ended July 1, 2000
(electronic filing only).
-----------------------
+ Confidential treatment has been requested as to certain portions
of this exhibit. The omitted portions have been separately filed
with the Securities and Exchange Commission.
(b) Reports on Form 8-K
On April 21, 2000, we filed Amendment No. 1 to the Current
Report on Form 8-K originally filed with the Securities and
Exchange Commission on December 28, 1999 regarding certain
material contracts.
On April 26, 2000, we filed Amendment No. 2 to the Current
Report on Form 8-K originally filed with the Securities and
Exchange Commission on December 28, 1999 regarding certain
material contracts.
On May 2, 2000, we filed Amendment No. 3 to the Current Report
on Form 8-K originally filed with the Securities and Exhange
Commission on December 28, 1999 regarding certain material
contracts.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
GLOBAL SPORTS, INC.
DATE: August 15, 2000 BY: /s/ Michael G. Rubin
------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
DATE: August 15, 2000 BY: /s/ Jordan M. Copland
------------------------------
Jordan M. Copland
Executive Vice President &
Chief Financial Officer
29
