<PAGE>
As filed with the Securities and Exchange Commission on April 3, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Global Sports, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 04-2958132
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1075 First Avenue
King of Prussia, PA 19406
(610) 265-3229
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Arthur H. Miller
Executive Vice President and General Counsel
1075 First Avenue
King of Prussia, PA 19406
(610) 265-3229
Facsimile: (610) 265-1730
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Francis E. Dehel William C. Stern
Blank Rome Comisky & McCauley LLP Morrison & Foerster LLP
One Logan Square 1290 Avenue of the Americas
Philadelphia, PA 19103 New York, NY 10104
(215) 569-5500 (212) 468-8000
Facsimile: (215) 569-5555 Facsimile: (212) 468-7900
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$0.01 per share........ 5,750,000 $18.00 $103,500,000 $27,324
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</TABLE>
(1) Includes 750,000 shares which the underwriters have a right to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
Calculated in accordance with Rule 457(c) based upon the average of the
high and low prices for the common stock on March 27, 2000, as reported on
the Nasdaq National Market System.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not a solicitation to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 3, 2000
Global Sports, Inc.
5,000,000 Shares
Common Stock
Global Sports, Inc. is offering 5,000,000 shares of its common stock. Our
common stock is quoted on the Nasdaq National Market under the symbol "GSPT."
On March 28, 2000 the last sale price of our common stock as reported by the
Nasdaq National Market was $19.13.
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Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Global Sports, Inc.................................. $ $
</TABLE>
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
A selling stockholder has granted to the underwriters a 30-day option to
purchase up to an aggregate of 750,000 additional shares of common stock to
cover over-allotments. The underwriters expect to deliver the shares of common
stock to purchasers on [ ].
--------------
Joint book-running managers
Robertson Stephens Merrill Lynch & Co.
E*OFFERING
The date of this prospectus is , 2000.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. Unless the context requires
otherwise, in this prospectus, references to "Global," "we," "us," and "our"
refer to Global Sports, Inc. and its subsidiaries.
Although we refer to the traditional sporting goods retailers, general
merchandisers, Internet companies 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. Our current partners include BlueLight.com, Dunham's
Sports, Healtheon/WebMD, MC Sports, Oshman's Sporting Goods, Sport Chalet, The
Athlete's Foot and The Sports Authority.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 20
Use of Proceeds.......................................................... 20
Price Range of Common Stock.............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 24
Business................................................................. 29
Management............................................................... 43
Related Party Transactions............................................... 45
Principal and Selling Stockholders....................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Where You Can Find Additional Information................................ 56
Index to Financial Statements............................................ 57
</TABLE>
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Our logo and certain titles of our products and services mentioned in
this prospectus are our service marks and trademarks. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" beginning on page 7 and the
financial statements before deciding to invest in shares of our common stock.
Our Company
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 assets to exploit online opportunities
in the sporting goods retailing industry, which is estimated by the National
Sporting Goods Association to be $45.8 billion in size. Our platform allows us
to rapidly develop and operate customized e-commerce sporting goods businesses
with a broad range of characteristics appropriate to each of our partners.
Depending on the specific needs of the partner, we can quickly undertake either
a complete outsourcing of their online activities or a more customized "back-
end" operation. As a result, we allow our partners to remain focused on their
core businesses and to avoid making substantial investments in e-commerce
infrastructure and personnel. We believe we can generate attractive economic
returns by operating multiple e-commerce sporting goods businesses on a common
scalable e-commerce infrastructure. We derive further economic benefit by
capitalizing on the established brands of our partners. Our current partners
include:
. BlueLight.com, the exclusive online partner of Kmart;
. Dunham's Sports;
. Healtheon/WebMD;
. MC Sports;
. Oshman's Sporting Goods;
. Sport Chalet;
. The Athlete's Foot; and
. The Sports Authority.
We believe a significant opportunity exists to sell sporting goods
online. Forrester Research estimates that online sales of sporting goods
reached $165.0 million in 1999 and are projected to exceed $4.2 billion by
2004, a compound annual growth rate of 91%. Despite the large size of the
industry, we believe traditional and online sporting goods retailers face
significant obstacles in establishing cost-efficient and successful e-commerce
businesses. Traditional retailers must make significant capital investments to
create a separate infrastructure for their Internet operations and develop in-
house technology capabilities. In addition, we believe they have very few
viable outsourcing options to build their online business. Online retailers
also face challenges establishing cost-efficient operations in the sporting
goods business. They must establish and maintain relationships with hundreds of
vendors which could make it difficult for them to access a broad selection of
branded sporting goods products. In addition, we believe that it is costly for
single-brand online retailers to maintain comprehensive inventory and build
sophisticated fulfillment infrastructure, while also spending to build their
brands and drive traffic. Finally, online retailers are unable to offer in-
store returns and exchanges.
3
<PAGE>
We believe our business model allows us to provide a comprehensive
solution to many of the challenges facing traditional and online sporting goods
retailers. Key features of our solution are the following:
. Rapid Deployment of a Comprehensive E-Commerce Business. We can quickly
develop and implement fully-integrated and customized e-commerce
sporting goods businesses for our partners.
. Creation of Distinct Online Identities Under Existing Brand Names. We
help develop an independent online brand for our partners, reinforce
their existing brand identity and reduce cannibalization from other
online competitors.
. Increased Return on Investment Opportunity. We operate multiple e-
commerce sporting goods businesses on a common infrastructure, which
allows us to derive economies of scale and operational efficiencies and
add additional partners with minimal incremental spending.
. Positive and Convenient Shopping Experience. We offer a compelling
online shopping experience by providing a broad selection of
merchandise, easy-to-use Web sites, competitive prices, value-added
content and strong customer service. In addition, we believe that the
option to return goods purchased online to our partners' retail stores
further enhances the shopping experience.
. Efficient Customer Acquisition. We benefit from the brand assets and
substantial marketing budgets of our partners to reduce our customer
acquisition costs.
. Benefit from Relationships with Vendors. We are able to obtain direct
access to major brands and products because of our partners' and our
strong vendor relationships and buying experience.
Our objective is to generate attractive economic returns by capitalizing
on our unique business model to become the leading e-commerce company in the
sporting goods category. We intend to achieve this goal by pursuing the
following key growth strategies:
. Expand our Partner Base. We intend to increase our market share by
adding new partners with strong brand franchises who are seeking to
enter the e-commerce sporting goods business.
. Promote our Online Brands Through Integration With our Partners'
Marketing. We intend to build awareness and drive traffic to our
partners' Web sites by capitalizing on the brand assets, large
marketing budgets and retail traffic of our partners.
. Increase Repeat Purchases. We intend to build customer loyalty and
drive repeat purchases by offering an increasingly satisfying online
shopping experience to customers.
. Enhance the Online Shopping Experience. We plan to continually enhance
and expand our online stores to address the evolving needs of our
customers.
The Offering
<TABLE>
<S> <C>
Common stock offered by us.............. 5,000,000 shares
Common stock outstanding after the
offering.............................. 23,550,580 shares
Use of proceeds......................... For working capital, capital
expenditures and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol........... GSPT
</TABLE>
Unless otherwise stated, all share information contained in this
prospectus excludes:
. 2,160,304 shares of common stock issuable upon exercise of stock
options outstanding as of March 17, 2000, at a weighted average
exercise price of $11.48 share; and
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<PAGE>
. 559,541 shares of common stock issuable upon exercise of warrants
outstanding as of March 17, 2000, at a weighted average exercise price
of $13.01 per share.
Unless otherwise indicated, all information contained in this prospectus
assumes that the underwriters do not exercise their option to purchase
additional shares to cover over-allotments from the selling stockholder,
Michael G. Rubin, our Chairman and Chief Executive Officer. Mr. Rubin is
sometimes referred to in this prospectus as the selling stockholder.
Change in Fiscal Year
For all years prior to 1999 our fiscal year ended on December 31.
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 1997, fiscal 1998, fiscal 1999 and
fiscal 2000 refer to the years ended December 31, 1997 and 1998, the year ended
January 1, 2000 and the year ending December 30, 2000.
Our Corporate Profile
We were incorporated in Delaware in 1986. Our principal executive offices
are located at 1075 First Avenue, King of Prussia, Pennsylvania 19406, and our
telephone number is (610) 265-3229. Our corporate Web site address is
www.globalsports.com. We are not incorporating the information on our Web site
into this prospectus, and we do not intend to make our Web site a part of this
prospectus.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
Below is a summary of our historical consolidated financial data. We
derived the consolidated statement of operations and consolidated balance sheet
data from our audited consolidated financial statements. You should read this
summary data together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
The as adjusted balance sheet data gives effect to the sale of the
5,000,000 shares of common stock that we are offering under this prospectus at
an assumed public offering price of $18.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses.
On April 20, 1999, we formalized a plan to sell our Branded Division and
our Off-Price and Action Sports Division in order to focus exclusively on 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 that of continuing operations and are presented as discontinued
operations. The following summary consolidated financial data and our
consolidated financial statements included in this prospectus have been
reclassified to reflect this presentation. See "Business--Discontinued
Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Year Ended
January 1,
1995 1996 1997 1998 2000
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.................... $ -- $ -- $ -- $ -- $ 5,511
Cost of revenues................ -- -- -- -- 3,817
------- ------- ------- ------- --------
Gross profit.................. -- -- -- -- 1,694
Operating expenses:
Sales and marketing........... -- -- -- -- 11,609
Product development........... -- -- -- -- 7,264
General and administrative.... 5,644 2,853 2,389 3,453 9,311
Stock-based compensation,
primarily related to sales
and marketing............... -- -- -- -- 2,655
------- ------- ------- ------- --------
Total operating expenses... 5,644 2,853 2,389 3,453 30,839
======= ======= ======= ======= ========
Loss from continuing
operations.................... (6,440) (4,005) (4,402) (3,841) (26,460)
======= ======= ======= ======= ========
Loss from continuing operations
per share:
Basic and diluted............. $ (3.75) $ (1.56) $ (1.47) $ (.34) $ (1.78)
Weighted average shares--
basic and diluted(1)........ 1,717 2,568 2,996 11,379 14,874
</TABLE>
<TABLE>
<CAPTION>
January 1, 2000
---------------
As
Actual Adjusted
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<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................................... 27,345 111,245
Working capital................................................. 40,558 124,458
Total assets.................................................... 82,736 166,636
Total stockholders' equity...................................... 59,310 143,210
</TABLE>
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(1) All share and per share amounts give effect to the December 15, 1997 1-for-
20 reverse stock split as if it had occurred for all periods presented.
6
<PAGE>
RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. 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 you may lose all or part of the money
you paid to buy our common stock. This prospectus contains 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 Related 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
the e-commerce sporting goods businesses of our partners until the fourth
quarter of 1999. Prior to the fourth quarter of 1999, when we launched the e-
commerce sporting goods businesses we operate for our partners, 100% of our
revenues had been generated by our discontinued operations. Upon completion of
the sale of our discontinued operations, 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 significant increases in our operating expenses and continuing
losses.
We incurred substantial losses for fiscal 1999 and, as of January 1,
2000, we had an accumulated deficit of $43.1 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 substantially as we:
. enhance and expand our third-party distribution and order fulfillment
capabilities or develop our own;
. improve our order processing systems and capabilities by transitioning
order processing from our current third-party provider to in-house;
. develop enhanced technologies and features to improve our partners' e-
commerce sporting goods businesses;
. 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.
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.
7
<PAGE>
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 15 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.
Although we refer to the traditional sporting goods retailers, general
merchandisers, Internet companies 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. Our current partners include
BlueLight.com, Dunham's Sports, Healtheon/WebMD, MC Sports, Oshman's Sporting
Goods, Sport Chalet, The Athlete's Foot and The Sports Authority.
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;
8
<PAGE>
. 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;
. 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 sales. 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
9
<PAGE>
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.
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 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. We have no formal disaster recovery plan, and 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. See "Business--Technology."
10
<PAGE>
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. 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 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 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 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
and directories 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 and
directories to provide content and advertising banners 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 with high-traffic Web sites
on acceptable terms, our ability to attract new customers could be harmed.
Further, many of the Web sites with which we may have online advertising
arrangements could provide advertising services for other marketers of sporting
goods. As a result, these Web sites may be reluctant to enter into or maintain
relationships with us. Failure to achieve sufficient traffic or
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generate sufficient revenue from purchases originating from third-party Web
sites may result in termination of these types of relationships. Without these
relationships, we may not be able to sufficiently increase market share and our
business, financial condition and results of operations could be adversely
affected.
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 significant 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.
In addition, there is a significant amount of capital currently available to
fund existing and potential competitors. 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 goods 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 businesses of traditional general merchandise retailers
such as Target.com and Wal-Mart.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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We may not be able to compete successfully against our potential
competitors.
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 large
and oversized product orders during fiscal 2000 and may assume responsibility
for the fulfillment of other product orders in 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.
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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
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 the date of this prospectus, Michael G. Rubin, our Chairman and
Chief Executive Officer, beneficially owned 43.3% and funds affiliated with
SOFTBANK America Inc., referred to as SOFTBANK, beneficially owned 33.2% of our
outstanding common stock. After this offering and assuming no additional
issuances of common stock, Mr. Rubin and SOFTBANK will beneficially own or
control, directly or indirectly, 14,178,896 shares of our common stock, which
in the aggregate will represent approximately 60.2% of the outstanding shares
of our 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 agreement pursuant to which SOFTBANK acquired its shares of our
common stock provides that SOFTBANK has the right to designate up to two
members of our board, depending on the number of shares of our common stock
held by SOFTBANK. 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. The proposed 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 goods manufacturers may require
that our international operations deal with local distributors;
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. 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.
To the extent we generate international sales in the future, any negative
aspects 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.
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 issues, there may be a
material adverse effect on our results of operations.
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.
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Risks Related to the Sale of the Off-Price and Action Sports Division
Upon completion of the sale of the Off-Price and Action Sports Division, we
will have sold the two divisions which, until the fourth quarter of 1999,
accounted for 100% of our revenues.
We entered into an agreement with the management team of the Off-Price
and Action Sports Division to sell the division to them. We expect this
agreement to close in the second quarter of fiscal 2000. On December 29, 1999
we sold our Branded Division, through which we designed, marketed and
distributed our branded footwear products, to a third-party. Until the fourth
quarter of 1999, when we launched the e-commerce sporting goods businesses we
operate for our partners, 100% of our revenues had been generated by the Off-
Price and Action Sports Division and the Branded Division. Upon completion of
the sale of the Off-Price and Action Sports Division, 100% of our revenues will
be generated through our e-commerce business. To date, our e-commerce business
has generated limited revenues while incurring substantial expenses for its
development. If we are not successful implementing and operating our e-commerce
business, it will have a material adverse effect on our business, results of
operations and financial condition.
Conditions precedent may prevent the closing of the sale of the Off-Price and
Action Sports Division.
There are several conditions precedent to the closing of the sale of the
Off-Price and Action Sports Division, including stockholder approval, the
truthfulness of the parties' representations and warranties and satisfaction of
the parties' various obligations. We can offer no assurance that we or the
purchasers of the Off-Price and Actions Sports Division will either meet or
waive all of the conditions. If the conditions precedent are not met or waived,
the sale of the Off-Price and Action Sports Division would not be completed and
we would be forced to either search for another prospective purchaser, continue
to operate the Off-Price and Action Sports Division or liquidate the assets of
the division. Searching for another prospective purchaser could be costly and
time consuming and there is no guarantee that we would find another prospective
purchaser to acquire the Off-Price and Action Sports Division on terms
acceptable to us. If we are required to continue to operate the Off-Price and
Action Sports Division, our senior management might be prevented from focusing
exclusively on our e-commerce business and our capital resources may not be
sufficient to fund both the e-commerce business and the Off-Price and Action
Sports Division. Furthermore, operating the Off-Price and Action Sports
Division might create a conflict of interest with our e-commerce business and
would result in us competing directly with some of our customers.
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, 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.
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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.
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.
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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.
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.
Risks Related to this Offering
The market price for our common stock, like other technology stocks, may
continue to be volatile. Significant declines in the market price for our
common stock could result in class-action securities litigation against us.
The market prices of the securities of Internet-related companies have
been especially volatile, including the market price of our common stock. The
value of your investment in our common stock could decline due to the impact of
any of the following factors upon the market price of our common stock:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations;
. competitive developments;
. changes in financial estimates by securities analysts;
. failure in one or more future quarters of our operating results to
meet the expectations of securities analysts or investors;
. changes in market valuations of Internet-related companies;
. additions or departures of key personnel, notably our management team
and experienced engineers;
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. conditions and trends in the Internet and e-commerce industries; and
. general economic conditions.
Further, the stock markets, particularly the Nasdaq National Market on
which our common stock is listed, have experienced substantial price and volume
fluctuations. These fluctuations have particularly affected the market prices
of equity securities of many technology and Internet-related companies and have
often been unrelated or disproportionate to the operating performance of those
companies. The trading prices of many technology companies' stocks are at or
near historical highs. These high trading prices may not be sustained. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against that company. Litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources. See "Price Range
of Common Stock."
Future sales of our common stock may cause our stock price to decline.
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop
in the market price of our common stock. Upon completion of this offering, we
will have outstanding 23,550,580 shares of common stock. All of these shares,
except for approximately 14,587,203 shares held by Michael G. Rubin, funds
affiliated with SOFTBANK and some other stockholders, will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are held by our "affiliates." In addition, as of March 17, 2000, we
had outstanding options and warrants to purchase a total of 2,719,845 shares of
our common stock.
The 14,587,203 shares of common stock held by Mr. Rubin, funds affiliated
with SOFTBANK and some other stockholders are "restricted securities," as that
term is defined under Rule 144 of the Securities Act. Of these shares,
approximately 8,433,353 shares are eligible for sale and 6,153,850 shares will
be eligible for sale between June 10, 2000 and July 23, 2000, subject only to
volume, manner of sale and notice requirements of Rule 144.
Our directors, executive officers and funds affiliated with SOFTBANK, who
hold a total of 14,315,896 shares of our common stock and options to purchase
355,250 shares of our common stock, have executed lock-up agreements that limit
their ability to sell common stock. These stockholders have agreed not to sell
or otherwise dispose of any shares of our common stock for a period of 90 days
from the date of this prospectus without the consent of FleetBoston Robertson
Stephens, Inc. When the lock-up agreements expire, these shares and shares
underlying outstanding stock options will become eligible for sale, in some
cases only subject to the volume, manner of sale and notice requirements of
Rule 144.
Our management will have broad discretion to spend a large portion of the net
proceeds of this offering and may spend the proceeds in ways with which you do
not agree.
We estimate that the net proceeds from the sale of the 5,000,000 shares
of common stock offered by us will be approximately $83.9 million, after
deducting estimated underwriting discounts and estimated offering expenses.
We plan to use the net proceeds for working capital, capital expenditures
and general corporate purposes. Our board of directors and management may apply
much of the net proceeds of this offering to uses that you may not consider
desirable. The failure of management to apply these funds effectively could
have a material adverse effect on our business, financial condition and
operating results. For more information on how we intend to use the proceeds
from this offering, see "Use of Proceeds."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements relating to our
operations that are based on management's current expectations, estimates and
projections about our company and the online 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."
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 5,000,000 shares
of common stock that we are offering will be approximately $83.9 million, based
on an assumed public offering price of $18.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any proceeds from the shares sold by the selling
stockholder if the underwriters exercise their over-allotment option in full.
We plan to use these proceeds for working capital, capital expenditures
and general corporate purposes. Capital expenditures could include acquiring or
leasing and equipping a fulfillment center and obtaining additional hardware
and technologies. Pending use of the net proceeds, we intend to invest the net
proceeds of this offering in short-term, interest-bearing, investment grade
securities.
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PRICE RANGE OF COMMON STOCK
Through June 15, 1998, our common stock was traded on the NASD Over-the-
Counter Bulletin Board. On December 15, 1997, we changed our name from RYKA,
Inc. to Global Sports, Inc. and we changed our trading symbol from "RYKA" to
"GSPT." On June 16, 1998, we were approved for inclusion on the Nasdaq SmallCap
Market and on May 3, 1999, we were approved for inclusion on the Nasdaq
National Market where we are currently included for quotation.
The following table sets forth the high and low bid prices per share of
our common stock as reported on the Nasdaq Over-the-Counter Bulletin Board for
the periods presented prior to and including June 15, 1998. For the periods
presented from June 16, 1998 to April 30, 1999, the following table sets forth
the high and low sales prices per share of our common stock as reported on the
Nasdaq SmallCap Market. For the periods presented from and after May 3, 1999,
the table below sets forth the high and low sales prices as reported on the
Nasdaq National Market. The prices shown do not include retail markups,
markdowns or commissions.
<TABLE>
<CAPTION>
Prices
--------------
High Low
------- ------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter.............................................. $ 5.69 $ 2.56
Second Quarter (April 1-June 15)........................... $ 7.75 $ 5.19
Second Quarter (June 16-June 30)........................... $ 7.25 $ 5.63
Third Quarter.............................................. $ 8.00 $ 4.63
Fourth Quarter............................................. $ 8.06 $ 4.25
Year Ended January 1, 2000:
First Quarter.............................................. $17.375 $ 7.00
Second Quarter............................................. $36.875 $12.00
Third Quarter.............................................. $25.125 $14.50
Fourth Quarter............................................. $ 25.25 $12.00
Year Ended December 30, 2000:
First Quarter (through March 28, 2000)..................... $ 23.88 $12.25
</TABLE>
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate declaring or paying any cash dividends on our
common stock for the foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of January 1, 2000:
. on an actual basis; and
. on an as adjusted basis to reflect the receipt and application by us
of the estimated net proceeds from this offering.
You should read this table in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and related notes and the other financial
information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
January 1, 2000
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share data)
<S> <C> <C>
Mandatorily redeemable preferred stock................... $ 0 $ 0
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, 8,000 shares issued and outstanding as
mandatorily redeemable preferred stock............... -- --
Common stock, $0.01 par value; 60,000,000 shares
authorized; 19,544,249 shares issued and 18,475,163
shares outstanding; actual; 24,544,249 shares issued
and 23,475,163 shares outstanding, as adjusted....... 195 245
Additional paid-in capital............................... 102,461 186,311
Retained earnings (accumulated deficit).................. (43,133) (43,133)
Less: Treasury stock at cost............................. 213 213
------- --------
Total stockholders' equity............................. 59,310 143,210
------- --------
Total capitalization................................... $59,310 $143,210
======= ========
</TABLE>
The share numbers above exclude:
. 1,923,617 shares issuable upon the exercise of outstanding stock
options as of January 1, 2000, at a weighted average exercise price of
$11.71 per share;
. 489,333 shares issuable upon the exercise of warrants outstanding as
of January 1, 2000 with a weighted average exercise price of $11.90;
and
. 927,918 shares available for future grants under our stock option
plans.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table presents portions of our financial statements and is
not complete. You should read the following selected consolidated financial
data together with our consolidated financial statements and related notes to
our financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected statements of operations
data for the years ended December 31, 1997 and 1998 and January 1, 2000 and the
balance sheet data as of December 31, 1998 and January 1, 2000 are derived from
our consolidated financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, included elsewhere in this prospectus. The
selected statement of operations data for the years ended December 1995 and
1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited consolidated statements that are not included in this
prospectus.
On April 20, 1999, we formalized a plan to sell our Branded Division and
our Off-Price and Action Sports Division in order to focus exclusively on 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 that of continuing operations and are presented as discontinued
operations. The following selected consolidated financial data and our
consolidated financial statements included in this prospectus have been
reclassified to reflect this presentation.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended
---------------------------------- January 1,
1995 1996 1997 1998 2000
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................... $ -- $ -- $ -- $ -- $ 5,511
Cost of revenues............... -- -- -- -- 3,817
------- ------- ------- ------- --------
Gross profit.................. -- -- -- -- 1,694
Operating expenses:
Sales and marketing........... -- -- -- -- 11,609
Product development........... -- -- -- -- 7,264
General and administrative.... 5,644 2,853 2,389 3,453 9,311
Stock-based compensation,
primarily related to sales
and marketing................ -- -- -- -- 2,655
------- ------- ------- ------- --------
Total Operating Expenses.... 5,644 2,853 2,389 3,453 30,839
------- ------- ------- ------- --------
Other (income) expenses:
Interest expense.............. 796 1,152 2,013 2,367 313
Interest income............... -- -- -- -- (774)
Other, net.................... -- -- -- -- (2)
------- ------- ------- ------- --------
Total other (income)
expense.................... 796 1,152 2,013 2,367 (463)
------- ------- ------- ------- --------
Loss from continuing operations
before income taxes........... (6,440) (4,005) (4,402) (5,820) (28,682)
Benefit from income taxes...... -- -- -- 1,979 2,222
------- ------- ------- ------- --------
Loss from continuing
operations.................... (6,440) (4,005) (4,402) (3,841) (26,460)
Discontinued operations:
Income from discontinued
operations................... 6,465 3,261 247 9,665 550
Loss on disposition of
discontinued operations...... -- -- -- -- (17,337)
------- ------- ------- ------- --------
Net income (loss).............. $ 25 $ (744) $(4,155) $ 5,824 $(43,247)
======= ======= ======= ======= ========
Earnings (losses) per share--
basic and diluted(1) :
Loss from continuing
operations................... $ (3.75) $ (1.56) $ (1.47) $ (.34) $ (1.78)
Income from discontinued
operations................... 3.76 1.27 .08 .85 .04
Loss on disposition of
discontinued operations...... -- -- -- -- (1.17)
------- ------- ------- ------- --------
Net income (loss)........... $ .01 $ (.29) $ (1.39) $ .51 $ (2.91)
======= ======= ======= ======= ========
Weighted average common shares
outstanding(1):
Basic and diluted............. 1,717 2,568 2,996 11,379 14,874
======= ======= ======= ======= ========
Number of common shares
outstanding(1)................ 2,307 2,832 10,418 11,925 18,475
======= ======= ======= ======= ========
Balance Sheet Data:
Working capital................ $ 2,839 $ 2,022 $19,748 $34,846 $ 40,558
Net assets of discontinued
operations.................... 12,673 11,797 24,129 41,128 18,381
Total assets................... 15,030 16,435 28,043 45,053 82,736
Total long-term debt........... 5,001 5,905 20,975 20,993 2,040
Stockholders' equity
(deficiency).................. 93 (552) 2,157 17,094 59,310
</TABLE>
- -------
(1) All share and per share amounts give effect to the December 15, 1997 1-for-
20 reverse stock split as if it had occurred for all periods presented.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking statements as a
result of factors including those discussed in "Risk Factors" and elsewhere in
this prospectus.
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 $45.8 billion 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 launched our initial six e-
commerce sporting goods businesses in November 1999: www.dunhamssports.com,
www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com,
www.thesportsauthority.com and store.webmd.com. We have announced agreements
with BlueLight.com and Oshman's Sporting Goods to launch their e-commerce
sporting goods businesses in the second quarter of 2000.
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 that
of continuing operations and are presented as discontinued operations. Our
consolidated financial statements included in this prospectus have been
reclassified to reflect this presentation.
On June 10, 1999, in order to finance our e-commerce business, we agreed
to sell to funds affiliated with 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.
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. We
are seeking stockholder approval of this sale at our annual stockholders
meeting to be held on May 15, 2000. Michael G. Rubin, our Chairman and Chief
Executive Officer, who beneficially owns approximately 43.3% of our outstanding
shares, and SOFTBANK, who beneficially owns approximately 33.2% of our
outstanding shares,
24
<PAGE>
have indicated that they intend to vote for approval of the sale. We expect the
sale to close soon after our annual stockholders meeting. For fiscal 1999, we
have recognized a loss of approximately $5.2 million related to the disposition
of this division.
On December 29, 1999, we sold substantially all of the assets of our
Branded Division, other than accounts receivable of approximately $6.6 million,
for a cash payment of approximately $10.4 million. For fiscal 1999, we have
recognized a loss of approximately $12.1 million related to the disposition of
this division.
Financial Presentation
We did not launch our partners' e-commerce businesses until the fourth
quarter of 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 the fourth quarter of
1999 and forward will reflect our e-commerce business. These financial
statements will present:
. revenues, which are derived from the sale of merchandise, net of
returns, and are recognized when the merchandise is shipped;
. cost of revenues, which consists of the purchase price of the products
sold and net freight costs, other than outbound shipping costs related
to our temporary free shipping promotions which are included in sales
and marketing expenses;
. sales and marketing expenses, which consist primarily of partner
revenue shares, advertising and promotional expenses, including
temporary free-shipping, distribution facility expenses, order
processing fees, and payroll and related expenses for personnel
engaged in marketing, buying, merchandising, client services,
fulfillment and customer service;
. product development expenses, which consist primarily of expenses
associated with building, developing and operating our partners' Web
sites; payroll and related expenses for engineering, production,
creative and management information systems; and depreciation expense
related to capitalized hardware and software;
. general and administrative expenses, which consist primarily of
payroll and related expenses for administrative, finance, human
resources, legal and executive personnel, and costs associated with
the operation and maintenance of our headquarters facility and
professional services; and
. stock-based compensation, primarily related to sales and marketing,
expense, which includes the grant of options, warrants and stock
awards considered to be compensatory, because the estimated fair value
for accounting purposes of the options and stock awards granted to
employees was greater than the stock price on the date of grant or
because the options or warrants were granted to non-employees.
Results of Operations
Fiscal 1999 and Fiscal 1998
Net Revenues. We had net revenues from continuing operations of $5.5
million for fiscal 1999 and no net revenues from continuing operations for
fiscal 1998. In fiscal 1999, we operated www.dunhamssports.com,
www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com,
www.thesportsauthority.com and store.webmd.com. We derived $2.8 million of our
total net revenues from Healtheon/WebMD through the sale of product to support
the launch of the WebMD Sports & Fitness Store, store.webmd.com. We derived no
net revenues from continuing operations for any period prior to November 1999
as we did not operate any Web sites during those periods.
25
<PAGE>
Cost of Revenues. We incurred cost of revenues from continuing operations
of $3.8 million for fiscal 1999 and no cost of revenues from continuing
operations for fiscal 1998. As a percentage of net revenues, cost of revenues
was 69.3% for fiscal 1999.
Gross Profit. We had gross profit from continuing operations of $1.7
million for fiscal 1999 and no gross profit from continuing operations for
fiscal 1998. As a percentage of net revenues, gross profit from continuing
operations was 30.7% for fiscal 1999.
Sales and Marketing Expenses. We incurred sales and marketing expenses
from continuing operations of $11.6 million for fiscal 1999 and no sales and
marketing expenses from continuing operations for fiscal 1998.
Product Development Expenses. We incurred product development expenses
from continuing operations of $7.3 million for fiscal 1999 and no product
development expenses from continuing operations for fiscal 1998. A meaningful
portion of our product development expenses in fiscal 1999 was paid to a third-
party Web site development company. Because we are currently handling more
development internally, we do not anticipate that a significant portion of our
product development expenses in fiscal 2000 will be for third-party Web site
development services.
General and Administrative Expenses. We incurred general and
administrative expenses from continuing operations of $9.3 million for fiscal
1999 and $3.5 million for fiscal 1998. While our continuing operations were not
in existence in fiscal 1998, the recorded expenses reflect costs for personnel,
facilities and professional fees that are currently associated with our
continuing operations.
Stock-Based Compensation, Primarily Related to Sales and Marketing,
Expense. We recorded stock-based compensation expense from continuing
operations of $2.7 million for fiscal 1999. This expense related to the
amortization of deferred compensation expense for options granted to employees
and some non-employees and to the value of the options or warrants granted to
some other non-employees. Of the $2.7 million of stock-based compensation
expense, $1.9 million related to warrants granted to our partners, $555,000
related to options or warrants granted to non-employees and $217,000 related to
options granted to employees. As of January 1, 2000, we had an aggregate of
$1.6 million of deferred compensation remaining to be amortized.
Interest. Interest income consists of interest earned on cash and cash
equivalents. Interest expense relates primarily to bank borrowings. In fiscal
1999, we had interest income of $463,000, net of interest expense. In fiscal
1998, we had $2.4 million of interest expense, net of interest income.
Fiscal 1998 and Fiscal 1997
Because our continuing operations were not in existence in fiscal 1998 or
fiscal 1997, we had no net revenues, cost of sales or operating expenses
related to our continuing operations, other than general and administrative
expenses of $3.5 million in fiscal 1998 and $2.4 million in fiscal 1997. These
general and administrative expenses reflect the costs of personnel, facilities
and professional fees that are currently associated with our continuing
operations. Accordingly, comparisons of results from continuing operations for
fiscal 1998 and fiscal 1997 are not meaningful.
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 exclusively on our e-commerce
business, we raised approximately $80.0 million in gross proceeds through our
equity financing with SOFTBANK in July 1999. We
26
<PAGE>
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 January 1, 2000, we had cash and cash equivalents of
approximately $27.3 million, and working capital of approximately $40.6
million, which included approximately $18.4 million of net assets of
discontinued operations.
We have incurred substantial costs to develop our e-commerce business and
to recruit, train and compensate personnel for our creative, engineering,
marketing, advertising, merchandising, customer service and administration
departments. As a result, we have incurred substantial losses for fiscal 1999
and, as of January 1, 2000, had an accumulated deficit of $43.1 million. In
order to expand our e-commerce business, we intend to invest heavily in
operations, Web site development, marketing, merchandising and additional
personnel. We therefore expect to continue to incur substantial operating
losses for the foreseeable future.
We used approximately $22.2 million in net cash for operating activities
of continuing operations in fiscal 1999, while we generated approximately $1.1
million in net cash from operating activities of continuing operations in
fiscal 1998. Net cash used in operating activities of continuing operations in
fiscal 1999 was primarily the result of net losses from continuing operations
and changes in inventory and accounts receivable, partially offset by changes
in accounts payable and accrued expenses and stock-based compensation expense.
Net cash generated from operating activities of continuing operations in fiscal
1998 was primarily the result of net losses from continuing operations and
changes in accounts payable and accrued expenses.
Our investing activities in fiscal 1999 consisted of purchases of
property and equipment. We made capital expenditures of approximately $18.4
million in fiscal 1999, which were partially offset by $10.4 million in
proceeds of the sale of our Branded Division.
As of January 1, 2000, we had commitments of $6.4 million relating to the
implementation of advertising and promotion programs.
In the second quarter of fiscal 2000, we expect to receive a cash payment
of $13.2 million relating to the sale of our Off-Price and Action Sports
Division.
Management expects that our current cash position combined with the
proceeds from the sale of our Off-Price and Action Sports Division, exclusive
of the proceeds of this offering, will be sufficient to meet our anticipated
cash needs for at least the next 12 months. However, 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 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.
Inflation
Management believes that inflation has not had a material effect on our
operations.
27
<PAGE>
Quantitative And Qualitative Disclosures About Market Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We invest our excess cash in debt
instruments of the United States Government and its agencies and in high-
quality corporate issuers. We limit the amount of credit exposure to any one
issuer. We protect and preserve our 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, our future investment income
may fall short of expectations due to changes in interest rates or we may
suffer losses in principal if forced to sell securities which have declined in
market value due to changes in interest rates.
Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products need to accept four digit entries to distinguish
21st century dates from 20th century dates. This could result in system
failures or miscalculations causing disruption of operations for any company
using computer programs or hardware.
With respect to our discontinued operations, our Branded Division and our
Off-Price and Action Sports Division, we maintained a management information
system that provided, among other things, comprehensive customer order
processing, inventory, production, accounting and management information for
the marketing, selling, manufacturing and distribution functions of our
business. Subsequent to the sale of the Branded Division on December 29, 1999,
we use these systems only for the Off-Price and Action Sports Division and in
connection with the collection of the accounts receivable of the Branded
Division which we retained.
We completed, as of April 1, 1999, a Year 2000 project which evaluated,
identified, corrected, reprogrammed and tested our existing systems for Year
2000 compliance. We enhanced our key information systems to improve our
functionality and increase performance during the first quarter of fiscal 1999,
making these applications Year 2000 compliant. The costs of these upgrades of
approximately $150,000 were charged to operations as incurred. Upon
consummation of the sale of the Off-Price and Action Sports Division and
collection of the accounts receivable of the Branded Division, we will not have
any need for these systems.
Our e-commerce business is a new enterprise and accordingly, we have
purchased or developed most of the software and hardware we use in our e-
commerce business during fiscal 1999. While this does not uniformly protect us
against Year 2000 exposure, we believe our exposure is limited because the
systems we use are not based upon legacy hardware or software systems.
We updated our office networking system software to be Year 2000
compliant during the third quarter of fiscal 1999. The cost of the process did
not have a material impact on our results of operations, financial position,
liquidity or capital resources.
In addition to making our own systems Year 2000 compliant, we contacted
the customers and key suppliers of our Branded Division and Off-Price and
Action Sports Division to determine the extent to which the systems of these
customers and suppliers are Year 2000 compliant and the extent to which we
could be affected by the failure of these third parties to become Year 2000
compliant. We cannot presently estimate the impact of the failure of these
third parties to become Year 2000 compliant, however, subsequent to January 1,
2000, we have not encountered any problems related to Year 2000 issues. We
cannot offer any assurances, however, that future Year 2000 issues, if any,
will not arise.
28
<PAGE>
BUSINESS
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 assets to exploit online opportunities
in the sporting goods retailing industry, which is estimated by the National
Sporting Goods Association to be $45.8 billion in size. Our scalable business
model takes advantage of our proprietary technology and product database,
customer service capabilities, fulfillment capabilities, relationships with
vendors and centralized inventory management. Based on these capabilities, we
can quickly and cost-effectively implement a customized e-commerce sporting
goods businesses for a broad range of partners.
We enable our partners to remain focused on their core businesses and to
avoid making substantial investments in e-commerce infrastructure and
personnel. Depending on the specific needs of the partner, we can undertake
either a complete outsourcing of its online activities or a more customized
"back-end" operation. We benefit from the traffic generated by our partners'
established brand franchises, extensive advertising, retail traffic and vendor
relationships to achieve operational efficiencies, lower customer acquisition
costs and economies of scale. We offer our partners the following:
. design, development and maintenance of customized Web sites under our
partners' banner;
. access to our centralized database of product descriptions and images,
as well as performance data from vendors and independent sources;
. extensive technology that runs, operates and manages all aspects of
multiple Web sites;
. access to a broad assortment of brand-name inventory from over 500
brands encompassing more than 60,000 stock keeping units, referred to
as SKUs;
. customer service, order processing and fulfillment capabilities; and
. marketing our partners' Web sites through arrangements with Internet
portals such as Yahoo!, as well as incremental online and offline
advertising.
We believe our ability to quickly and cost-effectively add new partners
creates advantages for us over other online competitors. These advantages
include lower product costs, broader merchandise availability and greater
operating efficiencies. In addition, we believe our approach can generate
attractive economic returns by operating multiple Web sites for established
brands on a common scalable e-commerce infrastructure.
During our first two months in business, we had net revenues of
approximately $5.5 million. We launched our initial six e-commerce sporting
goods businesses in November 1999 located at the URLs www.dunhamssports.com,
www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com,
www.thesportsauthority.com and store.webmd.com. Subsequently we announced
agreements with BlueLight.com, the exclusive online partner of Kmart, and
Oshman's Sporting Goods and we expect to launch e-commerce sporting goods
businesses for them in the second quarter of 2000. According to estimates by
Sports Trend, a trade publication, our current partners and their affiliates
generated over $5.0 billion in combined annual sporting goods revenues through
their traditional retail channels in 1998. The combined sales of our partners
in 1998 represented 11.1% of the estimated United States retail sporting goods
market.
Industry Background
Sporting Goods Retail Industry
The retail market for sporting goods products, which includes apparel,
footwear, equipment and related products such as table games and sports
memorabilia, represents a significant market opportunity. The National
29
<PAGE>
Sporting Goods Association estimated this market at $45.8 billion at retail in
1999, representing a compound annual growth rate of 3.5% since 1994. The number
of people who actively engaged in sports, fitness and outdoor activities grew
19% from 68.5 million in 1987 to 81.6 million in 1996, according to Sporting
Goods Manufacturers Association estimates. We believe the sporting goods
industry will continue to benefit from growing participation and interest in
sports, fitness and outdoor activities and, as a result, we expect consumer
demand to increase over time. In addition, retail gross margins in sporting
goods typically exceed 30% and tend to be higher than retail gross margins in
many other consumer products categories, such as books, toys, computers and
electronics. Finally, the ten largest sporting goods retailers in the United
States accounted for 36% of all sporting goods sales in 1998, and no single
retailer represented more than 10% of the market, according to Sports Trend
estimates. As a result, we believe significant opportunities exist to better
fulfill customer and manufacturer needs by centralizing inventory and creating
a comprehensive product database from among the thousands of vendors and
millions of SKUs in the sporting goods industry.
We believe that e-commerce will contribute to additional growth in the
sporting goods industry.E-commerce revenues are expected to represent
approximately 8% of sporting goods sales by 2004, according to Forrester
Research estimates. Forrester Research also estimates that online sales of
sporting goods reached $165.0 million in 1999 and are projected to exceed $4.2
billion by 2004, a compound annual growth rate of 91%. In addition, we believe
that total catalog sales of sporting goods products are sizeable, supporting
the notion that customers are willing to purchase sporting goods through direct
sales.
Advantages of Online Retailing
The Internet has emerged as one of the fastest growing communications,
information and commerce mediums. International Data Corporation estimates that
there were approximately 142 million Internet users worldwide at the end of
1998 and expects this number to grow to approximately 502 million by the end of
2003. Business' and consumers' acceptance of the Internet as a communication,
information and commerce platform has created the foundation for significant
growth in business-to-consumer and business-to-business commerce. The number of
online purchasers is projected to increase from approximately 31 million at the
end of 1998 to approximately 183 million by 2003, according to International
Data Corporation. Forrester Research estimates that online purchases by United
States consumers will grow from approximately $20.3 billion in 1999 to
approximately $184.5 billion in 2004.
The Internet is an attractive marketplace for both online retailers and
consumers. Online retailers are able to "display" a larger number and wider
variety of products at a lower cost than physical stores and catalogs, which
have limitations on inventory, shelf and catalog space. In addition, online
retailers do not incur the costs of managing and maintaining a retail store
base or the significant printing and mailing costs of catalogs. Online
retailers also enjoy significant merchandising flexibility with the ability to
easily and frequently adjust their featured selections and editorial content to
better respond to consumers' needs. Finally, online retailers can more easily
obtain demographic and behavioral data about customers. This increases
opportunities for targeted marketing programs and to provide personalized
services to their customers.
The Internet also offers a number of advantages to consumers. Consumers
can enjoy the time savings, convenience and flexibility of shopping online 24
hours a day, seven days a week with access to a broader selection of products
than is traditionally available in a retail store. In addition, online
retailing allows for personalized shopping experiences through the delivery of
content, purchasing advice, community and electronic features such as reminder
and suggestion services. Consumers also benefit from greater access to product
information and heightened attention to customer service.
Challenges of Online Retailing
We believe traditional sporting goods retailers face significant
obstacles to compete successfully in e-commerce. Traditional retailers must
develop a separate infrastructure for their Internet operations, including Web
design, order processing, fulfillment, customer service and a descriptive
product database. Traditional
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retailers must also make significant capital investments to develop in-house
technology systems as well as to attract and retain personnel to support an
online business. Given the smaller size of the leading sporting goods retailers
relative to leading retailers in other consumer goods categories, it is
particularly difficult for sporting goods retailers to generate levels of e-
commerce sales that justify building a separate infrastructure. Furthermore, we
believe very few viable outsourcing options exist for sporting goods retailers
to build their online business.
Online sporting goods retailers confront obstacles to establish cost-
efficient operations in the sporting goods business. Due to the lack of master
distributors and the multitude of independent vendors in the sporting goods
industry, online retailers face the challenge of establishing and maintaining
relationships with hundreds of vendors. This makes it difficult for them to
access a broad selection of branded sporting goods products. In addition, we
believe that it is costly for single-brand online retailers to own inventory
and build sophisticated fulfillment infrastructure while also spending to build
their brands and drive traffic. Because most online retailers rely on a single
brand, they find it more difficult to establish multiple partnerships with
traditional retailers. Online retailers tend to make large investments to build
and maintain their brand awareness, resulting in high customer acquisition
costs. In addition, online retailers have a disadvantage to traditional
retailers in that they do not offer in-store returns and exchanges and can not
satisfy customers' desire to touch and feel products, such as athletic footwear
and sporting apparel. Also, it is difficult for online retailers to support the
cost of aggregating and maintaining comprehensive inventory in each category.
This difficulty arises because sporting goods products come in an extensive
array of shapes, sizes and weights, ranging from small fishing lures to bulky
motorized treadmills.
The Global Sports Solution
We believe our business model allows us to provide a comprehensive
solution to many of the challenges facing traditional and online sporting goods
retailers. Our platform allows us to rapidly develop and operate customized e-
commerce sporting goods businesses with characteristics appropriate for each of
our partners. Our solution enables our partners to remain focused on their core
businesses and to avoid making substantial investments in e-commerce
infrastructure and personnel. In addition, we believe we can generate
attractive economic returns by operating multiple Web sites on a common
scalable e-commerce infrastructure. We derive further economic benefit by
operating under the established brands of our partners. The following are key
features of our solution:
Rapid Deployment of a Comprehensive E-Commerce Business
We can quickly develop and implement all aspects of an e-commerce
sporting goods business. These aspects include Web site design, buying and
merchandising, order processing, fulfillment and customer service. We customize
the design of a partner's Web site with a broad range of characteristics that
include a differentiated user interface, partner-specific content pages, an
extensive electronic catalog of product descriptions and images, a searchable
database and interactive communication tools. Our solution allows the partner
to avoid the lengthy start-up, the complex integration effort and the
substantial fixed cost required to build and operate an e-commerce business.
Creation of Distinct Online Identities Under Existing Brand Names
We enable our partners to establish distinct e-commerce businesses. We
believe this contributes to the development of their independent online brand,
reinforces their existing brand identity and reduces cannibalization from other
online competitors. In addition, we seek to increase the value of their entire
business by establishing an online image and a shopping experience that is
commensurate with their brand.
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Increased Return on Investment Opportunity
We operate multiple e-commerce sporting goods businesses on a common
infrastructure. This allows us to capitalize on our core computer technology,
which we refer to as The Common Engine(TM), and centralized inventory, product
database, order processing, fulfillment and customer service. Because we focus
exclusively on sporting goods e-commerce, we can derive economies of scale and
add additional partners with minimal incremental spending. In addition, we
aggregate demand from all of our partners' Web sites and fulfill all customer
orders from a common inventory pool. Although we customize part of the product
assortment on each Web site we operate, a large quantity of SKUs is common
among multiple Web sites. By centralizing inventory management across multiple
partner Web sites, we are able to increase the frequency of inventory turns,
thus reducing obsolescence risk and financing costs.
Positive and Convenient Shopping Experience
We offer a compelling online shopping experience by providing a broad
selection of merchandise, easy-to-use Web sites, competitive prices, value-
added content and strong customer service. We believe our 24 hours a day, seven
days a week in-house customer service and high order accuracy promotes strong
brand loyalty for our partners. In addition, we believe our ability to respond
to customer inquiries by e-mail, telephone and online chat to provide detailed
product information makes the shopping experience easy and enjoyable and drives
repeat purchases. The customer's online shopping experience is further enhanced
by the option to return goods purchased online to most of our partners'
respective retail stores.
Efficient Customer Acquisition
We benefit from the brand assets and substantial marketing budgets of our
partners to reduce our customer acquisition costs. Our partners' existing
marketing budgets allow us to generate exposure and drive traffic to the Web
sites without expensive incremental investment in customer acquisition. For
example, each partner is contractually obligated to include its Web site
address, referred to as a URL, in its marketing and communication materials. In
addition, during fiscal 1999, our current traditional sporting goods retail
partners, Dunham's Sports, MC Sports, Oshman's Sporting Goods, Sport Chalet,
The Athletes Foot and The Sports Authority, spent on a combined basis in excess
of $100.0 million on marketing. This included television, radio, print and
outdoor advertising, point of purchase displays, cash register receipts,
shopping bags, employee uniforms and promotional events designed to attract and
retain customers. Finally, our retail partners have valuable, established brand
franchises and existing customer bases. We believe this provides us with a
competitive advantage because our retail partners have a heritage and
reputation that lends a degree of comfort to the customer. By having an
established history of purchasing from our partners' retail stores, we believe
a customer will be more inclined to purchase from their online stores.
Benefit from Relationships with Vendors
Our partners maintain long-standing relationships with sporting goods
vendors. We also maintain strong relationships with these vendors. Therefore,
unlike many entrants to the online sporting goods marketplace, we are able to
obtain direct access to most major brands. We believe this provides us with one
of the most extensive, authorized selections of sporting goods brands and
products available on the Internet today. In addition, we benefit from the
buying experience of our partners, which further reduces our costs and improves
our margins.
Growth Strategy
Our objective is to generate attractive economic returns by capitalizing
on our unique business model to become the leading e-commerce company in the
sporting goods category. The key elements of our growth strategy are as
follows:
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Expand Our Partner Base
We intend to increase our market share by adding new partners with strong
brand franchises who are seeking to enter the e-commerce sporting goods
business. New partners could include companies with major brand names in
specialty and full-line retail, consumer products, Internet and media. For
example, in January 2000 we announced a new alliance with Oshman's Sporting
Goods and in March 2000, we announced a new alliance with BlueLight.com. We
expect to launch these e-commerce sporting goods businesses during the second
quarter of fiscal 2000.
Promote Our Online Brands
We intend to build awareness and drive traffic to our e-commerce sporting
goods businesses by capitalizing on the brand assets, large marketing budgets
and retail traffic of our partners. Each of our partners prominently features
and promotes its URL in its marketing and communications materials. We have
initiated programs with our traditional retail partners to provide incentives,
such as coupons, to in-store customers to shop online. We also plan to continue
to selectively use a variety of online and offline marketing strategies to
reach our customers, including direct marketing, co-branding, co-op
advertising, public relations, affiliate programs, portal relationships,
traditional print and broadcast media advertising. In addition, we intend to
test in-store computer kiosks with direct links to some of our traditional
retail partners' online sporting goods businesses to provide customers with
access to inventory not available in the retail stores.
Increase Repeat Purchases
We intend to build customer loyalty and drive repeat purchases by
implementing the following strategies:
. continually enhancing our level of customer service;
. expanding our customer and product databases;
. offering new products and product categories;
. implementing direct marketing techniques to target customers; and
. increasing the level of personalization on our partners' online
sporting goods businesses.
We believe these initiatives will drive repeat purchases as consumers become
increasingly satisfied with their online shopping experiences.
Enhance the Online Shopping Experience
We plan to continually enhance and expand our online stores to address
the evolving needs of our customers. We plan to invest in technology to
maximize the flexibility and speed to market of our Web site enhancements. We
intend to improve the presentation of our product offerings by taking advantage
of the unique characteristics of the Internet as a retail medium. Specifically,
we plan to develop features that improve the functionality, speed, navigation
and ease of use of our partners' Web sites. Another key factor in enhancing the
online shopping experience will be to continue building and expanding upon our
fulfillment and order processing capabilities.
Capitalize on International Market Opportunities
We plan to explore offering our e-commerce solution in international
markets to address the global demand to purchase sporting goods products
online. We believe our business model is well suited for penetration of these
markets by partnering with well-established local companies.
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Pursue Growth by Acquisitions
From time to time we assess strategic investments and acquisitions that
are aligned with our goal of increasing our partner and customer base and
expanding our product offerings.
Global Sports' Operations
Web Site Design, Implementation, and Maintenance
We design most of our partners' Web sites. We have dedicated in-house
personnel that are responsible for Web site design, management, maintenance,
creative and content modifications. We implement all changes to current Web
sites and oversee the creation of new front-end Web sites for most new
partners, ensuring that the look and feel of their Web sites meet all parties'
satisfaction. We also generate content for each of our partners' Web sites,
including product images, product descriptions, buying guides, sport-specific
information, as well as related sports and informational content. For example,
we have produced buying guides which will help customers with their merchandise
selection and to provide information about selected sports. These guides
provide customers with helpful information in selecting various pieces of
sports equipment and provide tips on sports play. In addition, we have an in-
house photography studio and generate approximately 70% of the photographic
images used on our partners' Web sites. We receive the remainder of our
photographic images from our vendors.
Technology
The three major elements of our Web sites' technology are The Common
Engine(TM), the front-end and the data center.
The Common Engine(TM)
We have created a core computer technology system, The Common Engine(TM),
that operates and manages all of the applications and functionality across all
of our partners' Web sites. This system allows us to add new front-end Web
sites with minimal incremental costs. The Common Engine(TM) is a template that
is used to create and personalize each Web site to fit the brand equity and
identity of the individual partners. We update The Common Engine(TM)
continually to improve our partners' Web sites and enrich the overall customer
experience.
The Front-End
The front-end represents the overall look and feel of our partners' Web
sites. The front-end is the interface with the customer and includes logo
placement, graphic design, color palette, navigation and links. We use the
front-end to communicate special promotions, content feature and product
collections as well as the unique merchandising strategy of each of our
partners.
The Data Center
The data center is our database management system that controls all of
the information housed within our partners' Web sites, including all product
images and descriptions, customer log-in data, customer profiles, verification
requirements, brand information and tax and shipping data. Our database
management system was created utilizing Oracle technologies and runs on Sun
Microsystems hardware. A third-party provider hosts our data center. System
security is managed both by internal staff and by security staff at our third-
party host.
Additional Technology Information
Our technology infrastructure is supported by a fully-integrated back-up
system. We believe this ensures our operations can move forward seamlessly in
the event of computer malfunctions. In addition, we continuously strive to
improve our partners' Web sites by conducting functional testing.
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Buying, Vendor Relationships and Merchandising
Buying. We offer a broad assortment of brands and items on each of our
partners' Web sites. We currently offer customers over 500 brands and more than
60,000 SKUs across our partners' Web sites and continue to add additional
brands and SKUs. We have dedicated buyers for the following merchandise
categories: footwear, licensed/team products, men's branded apparel, women's
and children's branded apparel, accessories, exercise, indoor recreation,
outdoor recreation, golf, racquet sports and team sports.
We capitalize on our partners' merchandising experience to offer a wide
brand and product assortment for our customers. When deciding which brands and
merchandise to carry, we first review what our partners are offering in their
retail stores and determine what items we believe will be successful on our
partners' Web sites. We can offer a wider variety of merchandise on our Web
sites than might be found in one of their retail stores because we are not
hindered by space availability, although not all of our partners' Web sites
carry the same product and brand assortment. After consulting a partner on
their buying strategy, we then work to enhance product selection. We expand
product lines, provide brand extensions and look to add significant value to
the product selection currently offered in our partners' stores. These types of
extensions might include a broader diversity of sizes and styles and a larger
range of price points.
Vendor Relationships. We believe we have solid relationships with our
vendors, and we are working to continuously add new vendors and brands. Our
buyers work with merchandisers to streamline the strategies for product
offerings, merchandise locations within the Web sites and promotional
activities of our partners.
Merchandising. Our merchandising strategy allows us to offer a highly
customized and flexible product mix. We work with our partners to ensure that
our product offerings are consistent with any upcoming in-store promotions or
advertising specials. We make changes to the home pages and lead category pages
of our partners' Web sites frequently to reflect seasonal or promotional trends
and to keep their Web sites fresh.
Pricing
We establish the prices for all products offered on our partners' Web
sites. We strategically price these products to be consistent with the prices
in our partners' retail stores. Accordingly, we maintain different pricing
structures for products across each of our partners' Web sites. We use our
proprietary technology to implement these pricing structures and to make daily
updates to our prices, including markdowns and sales.
Marketing
Web Site Integration. We work with each of our partners to make certain
that URL and Web site integration are a mainstay of their marketing and
advertising campaigns. Our retail sporting goods partners spend more than
$100.0 million per year to build and promote their brands, and BlueLight.com's
exclusive retail partner, Kmart, dedicates a meaningful portion of space within
its 72 million weekly advertising circulars to promote its sporting goods
business. Each of our partners is contractually obligated to incorporate its
URL into every type of advertising, marketing, promotion and communication
vehicles it creates. These marketing vehicles not only incorporate the URL into
the copy or design, but the message also educates people about these e-commerce
sporting goods businesses and drives traffic to these Web sites. We believe our
partners embrace this strategy because they realize the value in alerting their
customers to an additional distribution channel within their brand.
Online Marketing Relationships. In 1999, we signed a marketing agreement
with Yahoo!, a leading global Internet company, in which our partners' Web
sites are featured throughout the Yahoo! Shopping service and other areas of
the Yahoo! Network. We also formed a marketing relationship with PeoplePC, in
which our partners' Web sites will be featured to PeoplePC members throughout
PeoplePC's multiple channels of outreach. We have a marketing relationship with
Rodale, the publisher of well-known publications such as Men's Health,
Prevention, New Woman, and Runner's World, which provides users of our
partners' Web sites
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with access to sports and fitness content and information from Rodale's range
of sports and fitness book titles. We are dedicated to managing, strengthening
and improving our customer relationships. We have implemented personalized
customer e-mail campaigns, which inform customers about upcoming specials,
promotions, new brands, or merchandise in which they might be interested.
Offline Marketing Opportunities. We periodically produce advertising or
marketing materials to communicate a special event or promotion occurring on
one of our partners' Web sites. We produce these materials to augment our
partners' own advertising campaigns.
Affiliate Network. We have agreements with many outside Web sites,
referred to as affiliates, which enable them to link to one of our partners'
Web sites. When a visitor clicks through an affiliate to one of our partners'
Web sites, and the visit generates a sale, then the affiliate is compensated
with a portion of the sale proceeds. We have implemented a sliding scale for
revenue payments to affiliates depending on the volume of sales generated from
the link.
Order Processing and Fulfillment
Order Processing. We use Priority Fulfillment Services, referred to as
PFS, as our third-party order processing vendor. We use JDA software for our
internal order processing technology vendor. During fiscal 2000, we plan to
assume the responsibility of all order processing, returns processing, claims
processing and crediting of customers. Order processing activities include
electronically capturing the order, processing the payment method, determining
the shipping costs, adding any applicable sales tax, facilitating any coupon or
promotional discounts and printing a pick ticket. The pick ticket includes the
name of the partner from whom the order was received, a packing slip, return
labels and detailed order list.
Fulfillment. We currently use PFS as our third-party fulfillment vendor.
During fiscal 2000, we plan to assume responsibility for the fulfillment for
all large and oversized items, referred to as Less than Truckload or LTL, sold
on our partners' Web sites. These large items will be fulfilled by us within a
90,000 square foot facility to be leased in Memphis, Tennessee. PFS will
continue to manage the fulfillment of non-LTL items for the foreseeable future.
We have our own dedicated warehouse and fulfillment space within PFS'
facilities. The portion of PFS' facility that we use is completely separated
and segregated from all other PFS customers and/or operations. We use
approximately 200,000 square feet of PFS' facilities in Memphis, Tennessee for
fulfillment of non-LTL items.
After a pick ticket is generated, it either will be forwarded to PFS for
fulfillment, in the case of non-LTL items, or will be forwarded to our
fulfillment center in Memphis, in the case of LTL items. Fulfillment will be
handled in the same way, whether it is managed by us or by PFS. After the pick
ticket is reviewed, the ordered items are gathered, the accuracy of items are
verified and the items, appropriate receipts and return labels are packed,
sealed and shipped. After an item has been ordered by a customer, PFS
electronically notifies us when the order has been received, packed and
shipped. Our computer system then automatically sends an e-mail to that
customer informing them that their merchandise is on its way.
We also provide value-added fulfillment services, such as at-home
assembly of LTL items and racquet stringing. At-home assembly for LTL items can
be purchased for an additional charge on some of our partners' Web sites. These
Web sites automatically offer the customer the opportunity to purchase at-home
assembly at the time of sale. If a customer purchases at-home assembly of an
item, information about coordinating their at-home assembly is included in the
package during the fulfillment phase. The customer can then call Huffy
Corporation, our assembly provider, to coordinate and schedule the at-home
assembly of their product.
Distribution. We currently use UPS as our shipping carrier for non-LTL
items and use Associated Global for our LTL distribution. We ship virtually all
of the orders received on our partners' Web sites within one business day.
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Returns. We accept returns through our partners' respective stores and
through mailing or delivery services. All of our retail partners, except
Dunham's Sports, accept in-store returns of items purchased on their Web site.
If a customer returns an item to a retail store, the store will offer the
customer a credit or exchange. If it is an item that the particular store
location carries, then the store will reshelve the item. If the specific retail
location does not carry that item, the store will return the item to us to
reshelve. If a customer returns an item directly to us, we provide the customer
with either a credit or exchange from our partners' Web site and then reshelve
the item.
In the case of BlueLight.com, where we only manage their sporting goods
product database and facilitate merchandise procurement and fulfillment,
BlueLight.com will process the orders, generate the pick tickets and forward
them to us for fulfillment. We will then either fulfill the order or forward it
to PFS as appropriate. Bluelight.com has agreed to use commercially reasonable
efforts to have Kmart accept in-store returns for merchandise purchased on
BlueLight.com. Any returns made to a Kmart store will be forwarded to
BlueLight.com's return processing center, from which BlueLight.com will
coordinate regular shipments of products back to us to be reshelved.
Customer Service
General. We are committed to providing the highest level of customer
service. We believe that superior customer service is critical to retaining
long-term and repeat customers. We offer 24 hours a day, seven days a week live
customer service for all of our partners, except BlueLight.com, who will manage
their own customer service functions. However, we will be assisting
BlueLight.com's representatives with problem-solving and product-oriented
issues. We currently have significant excess capacity in our call center. We
expect to increase our customer service staff as we increase both the number of
our partners and our overall volume. We programmed our computer systems to
automatically identify from which partner the customer needs information or
service. Our customer service facility is located within our headquarters.
Category Experts and Service Experts. In our effort to provide customers
with the most thorough and accurate information possible, we have both category
experts and service experts on staff within the customer service department.
Category experts have a particular interest in and detailed knowledge of
particular sports or products. These professionals are able to answer detailed
questions about various sports and products to help customers select the best
equipment or merchandise for them. Service experts are trained and experienced
in working with a variety of complex customer service issues.
E-Mail, Telephone or Online Chat. Customers can obtain assistance through
e-mail, telephone or online chat. Our online chat capabilities are called
LiveRep. We utilize eGain's application process for our LiveRep solution.
During LiveRep sessions, customer service representatives can answer simple
merchandise questions or help a person navigate the site page-by-page in more
complex situations. We aim to answer all customer e-mails within 24 hours, and
are often able to respond within a shorter period of time.
Company Overview
Description of Agreements with our Partners
According to Sports Trend, the combined retail sporting goods sales of
our partners and their affiliates was $5.1 billion in 1998, accounting for
11.1% of the estimated United States retail sporting goods market. In 1999, our
partners and their affiliates had in the aggregate approximately 3,300 stores
covering all 50 states. We estimate that Dunham's Sports, MC Sports, Oshman's
Sporting Goods, Sport Chalet, The Athlete's Foot and The Sports Authority
invested in excess of $100.0 million in marketing their retail stores to
consumers in 1999. In addition, a majority of the approximately 72 million
weekly newspaper circulars distributed in 1999 by BlueLight.com's retail
partner, Kmart, featured sporting goods products.
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We currently have three different structures for our agreements:
. Exclusive Licensing Agreements. These agreements give us the exclusive
right to operate a partner's e-commerce sporting goods business. We
record all revenues generated on our partners' Web sites and pay a
percentage of those revenues to our partners for the right to operate
their e-commerce sporting goods businesses.
. Subsidiary and Exclusive Licensing Agreement. We have formed a
subsidiary, The SportsAuthority.com, Inc., which is 80.1% owned by us
and 19.9% owned by The Sports Authority. The Sports Authority's
ownership position in the subsidiary could increase to 49.9% over
time, depending upon the achievement of financial and sales goals or
the exercise of options set forth in the agreement. The
SportsAuthority.com has the exclusive right to operate The Sports
Authority's e-commerce sporting goods business. We pay a nominal
royalty to The Sports Authority based on a percentage of sales
generated by the subsidiary.
. Long-Term Distribution Agreement. We entered into an agreement with
BlueLight.com whereby we will provide a product information database
to BlueLight.com that it will use to merchandise the sporting goods
department of its flagship Web site. BlueLight.com will process orders
for sporting goods on its Web site and deliver the orders to us
electronically. We will then sell the products to BlueLight.com at a
predetermined discount to their selling price and pick, pack and ship
the products to consumers on behalf of BlueLight.com. BlueLight.com
will perform all its own customer service.
The following table summarizes the different agreements we have with each
of our partners:
<TABLE>
<CAPTION>
Partner URL Nature of Agreement Date Operational
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
BlueLight.com www.bluelight.com long-term distribution Expected to launch in
agreement the second quarter
of 2000
- --------------------------------------------------------------------------------
Dunham's Sports www.dunhamssports.com exclusive licensing agreement November 1999
- --------------------------------------------------------------------------------
Healtheon/WebMD store.webmd.com exclusive licensing agreement November 1999
- --------------------------------------------------------------------------------
MC Sports www.mcsports.com exclusive licensing agreement November 1999
- --------------------------------------------------------------------------------
Oshman's Sporting Goods www.oshmans.com exclusive licensing agreement Expected to launch in
the second quarter
of 2000
- --------------------------------------------------------------------------------
Sport Chalet www.sportchalet.com exclusive licensing agreement November 1999
- --------------------------------------------------------------------------------
The Athlete's Foot www.theathletesfoot.com exclusive licensing agreement November 1999
- --------------------------------------------------------------------------------
The Sports Authority www.thesportsauthority.com majority-owned subsidiary and November 1999
exclusive licensing agreement
</TABLE>
Our typical agreement gives us the long-term exclusive rights to a
partner's e-commerce sporting goods business and the commitment from the
partner to promote its Web site. In exchange, we commit to develop and operate
a unique and customized Web site for the partner and pay to the partner a
percentage of all net sales generated on the Web site. Our various agreements
last for five to 15 years.
BlueLight.com. The sporting goods inventory on the BlueLight.com sporting
goods department will consist of items provided by us, enhanced by a range of
current Kmart product offerings. As Kmart's exclusive e-commerce partner,
BlueLight.com is uniquely positioned to capture a large portion of their
customers that
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shop online. BlueLight.com's retail partner, Kmart, is the third largest
retailer of sporting goods in the United States, with estimated annual sporting
goods sales in excess of $2.0 billion according to Sports Trend. BlueLight.com
will capitalize on its relationship with Kmart to drive customers to its e-
commerce shopping portal. We believe that the nationwide retailer's powerful
brand, supported by more than $36.0 billion in annual sales, will be utilized
to actively promote BlueLight.com throughout its more than 2,100 retail stores
and through its 72 million weekly advertising circulars.
Dunham's Sports. Dunham's Sports operates 107 full-line sporting goods
stores, located in strip shopping centers, in 11 states, with a focus on the
Mid-Atlantic and Great Lakes regions of the country. Its 1998 sales were
estimated by Sports Trend to be $225.0 million. Dunham's Sports positioning is,
"The big names bring you in, the low prices bring you back."
Healtheon/WebMD. We have agreed with The Sports Authority and
Healtheon/WebMD to create and operate a sports, medicine and fitness e-commerce
sporting goods business. Healtheon/WebMD has committed extensive promotional
resources to drive traffic to the Web site, including taking advantage of its
strategic relationships with MSN, Lycos, Excite, Readers' Digest and CNN.
Through TheSportsAuthority.com, we record 100% of the revenue from the
transactions on the Healtheon/WebMD health and fitness e-commerce store, and
Healtheon/WebMD receives a percentage revenue share payment on all product
sales. Healtheon/WebMD is the first end-to-end Internet healthcare company
connecting physicians and consumers to the entire healthcare industry.
Healtheon/WebMD was formed in November 1999 as a result of the merger of
Healtheon Corporation, WebMD, Inc., MEDE America and Medcast.
MC Sports. MC Sports operates 66 full-line sporting goods stores located
in shopping malls and strip shopping centers in six states, primarily in the
Midwest and Great Lakes areas. Its 1998 sales were estimated by Sports Trend to
be $235.0 million. MC Sports is heavily involved in its local communities and
is positioned as a "hometown," caring retailer.
Oshman's Sporting Goods. Oshman's operates 42 super stores and 16
traditional stores located in strip shopping centers and enclosed malls in 15
states, with concentration in the Southwest and Northwest United States. Its
1999 sales were $306.0 million. Oshman's utilizes an oval racetrack store
theme, featuring concept shops and demo areas where customers can try
merchandise prior to purchasing.
Sport Chalet. Sport Chalet operates 21 big box full-line sporting goods
stores located in shopping malls and strip shopping centers in Southern
California. Its 1998 sales were $155.0 million. Sport Chalet positions itself
as a leading sporting goods retailer in Southern California providing
outstanding customer service and the best brands available.
The Athlete's Foot. The Athlete's Foot operates 750 specialty athletic
footwear stores located in shopping malls and strip shopping centers, in 40
countries around the world. Its 1998 sales were estimated by Sports Trend to be
$700.0 million. The Athlete's Foot positions itself as the world's definitive
athletic and leisure footwear retailer.
The Sports Authority. The Sports Authority operates 196 stores located in
strip shopping centers and urban street locations in 32 states, most of which
are big box stores. Its 1999 sales were $1.5 billion. The Sports Authority
positions itself as "The Authority" on sporting goods with a large assortment
of merchandise encompassing a wide range of both team and individual sports.
Competition
The online market is new, rapidly evolving and intensely competitive. Our
primary competitors are currently:
. online e-commerce 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;
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. full-line electronic retailers that are associated with full-line
sporting goods 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 businesses of traditional general merchandise retailers
such as Target.com and Wal-Mart.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
business, including:
. Web site developers, such as Sapient, Scient and Viant; and
. third-party fulfillment and customer service 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.
We believe that we compete primarily on the basis of the following:
. recognition of and trust in our partners' brands;
. the broad selection of merchandise that we offer on our partners' Web
sites;
. convenience of the shopping experience;
. ability to return products to our partners' respective retail stores;
. price; and
. the amount of product information provided to customers.
Government Regulation
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly
applicable to retailing or e-commerce. However, as the Internet becomes
increasingly popular, it is possible that a number of laws and regulations may
be adopted with respect to the Internet. These laws may cover issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Furthermore, the growth of e-commerce may prompt calls
for more stringent consumer protection laws. Several states have proposed
legislation to limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission has also initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties and has adopted regulations restricting the
collection and use of information from minors online. We do not currently
provide individual personal information regarding our users to third parties
other than our partners and we currently do not identify registered users by
age. However, the adoption of additional privacy or consumer protection laws
could create uncertainty in Web usage and reduce the demand for our products
and services or require us to redesign our partners' Web sites.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
qualification to do business and export or import matters. The vast majority of
these laws were
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adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address these issues could create
uncertainty in the Internet marketplace. This uncertainty could reduce demand
for our services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we
are required to qualify to do business in each state or foreign country. Our
failure to qualify in a jurisdiction where we are required to do so could
subject us to taxes and penalties. It could also hamper our ability to enforce
contracts in these jurisdictions. The application of laws or regulations from
jurisdictions whose laws do not currently apply to our business could have a
material adverse effect on our business, results of operations and financial
condition.
Facilities
Our principal executive offices are located in a newly-renovated 56,000
square foot facility purchased by us on August 20, 1999 and located in King of
Prussia, Pennsylvania. In addition, we utilize a third-party warehousing
facility in Memphis, Tennessee in connection with the operation of our e-
commerce business.
We believe that our owned and third-party properties are adequate for our
present needs and that suitable additional or replacement space will be
available as required.
Employees
As of March 20, 2000, we employed 184 full-time employees in our e-
commerce business. Our employees are based primarily at our headquarters in
King of Prussia, Pennsylvania.
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 condition or results
of operations.
Discontinued Operations
Prior to our decision to focus exclusively on our e-commerce business, we
operated two sporting goods businesses, our Branded Division and our Off-Price
and Action Sports Division. We sold our Branded Division on December 29, 1999.
We have an agreement to sell our Off-Price and Action Sports Division, which we
expect will be completed in the second quarter of fiscal 2000.
Through our Off-Price and Action Sports Division, we purchased
manufacturers' closeout merchandise, overstocks and canceled orders, as well as
excess inventories from manufacturers and retailers, for resale to retailers
principally in the United States and Canada. We resold this merchandise to
sporting goods stores, off-price specialty stores, department stores, footwear
stores and independent retailers. The merchandise that we purchased and
distributed included a wide variety of athletic, outdoor, casual and specialty
footwear, athletic apparel, ski and snowboard equipment, in-line skates,
skateboards and sunglasses. We also designed and distributed snowboards,
skateboards and related merchandise for selected retailers.
Through our Branded Division, we designed, marketed and distributed
athletic and outdoor footwear products under the RYKA brand and the Yukon
brand. RYKA is a high performance athletic footwear brand designed exclusively
for women. Yukon is a performance outdoor and rugged casual footwear brand
designed for men, women and children.
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We operated our historical business from a 75,000 square-foot office and
warehouse facility in King of Prussia, Pennsylvania that we leased from Michael
G. Rubin, our Chairman and Chief Executive Officer. For more information
regarding this lease and our negotiation of its termination, see "Related Party
Transactions" on page 45. In addition, we own a 12,000 square-foot facility in
North York, Ontario that we used primarily for our Off-Price and Action Sports
Division. This facility is being sold as part of the sale of our Off-Price and
Action Sports Division. We also used third-party public warehouses in
California and Ontario, Canada for our Branded Division.
As of March 20, 2000, we employed 55 full-time employees in our Off-Price
and Action Sports Division.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information regarding each of our
executive officers and directors and some of our key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael G. Rubin........ 27 Chairman of the Board and Chief Executive Officer
Jordan M. Copland....... 37 Executive Vice President and Chief Financial Officer
Robert Liewald.......... 51 Executive Vice President, Merchandising
Arthur H. Miller........ 47 Executive Vice President and General Counsel
Michael R. Conn......... 29 Senior Vice President, Business Development
Steven C. Davis......... 29 Senior Vice President, Marketing
Michael A. Balik........ 39 Vice President, Management Information Systems
William Meisle.......... 39 Vice President, Production
Donald Murphy........... 56 Vice President, Operations
Joseph Romello.......... 49 Vice President, Engineering
Kenneth J.
Adelberg(1)(2)........ 47 Director
Ronald D. Fisher........ 53 Director
Harvey Lamm(1).......... 64 Director
Charles R. Lax(1)(2).... 40 Director
Dr. Jeffrey F.
Rayport(2)............ 40 Director
</TABLE>
- --------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Michael G. Rubin has been Chairman and Chief Executive Officer of Global
Sports, Inc., formerly named RYKA, Inc., since July 1995. Mr. Rubin was also
Chairman, Chief Executive Officer and sole stockholder of KPR Sports
International, Inc., a company involved in the off-price athletic footwear and
apparel business, and its affiliated companies from 1985 to December 1997, when
KPR Sports International, Inc. and its affiliated companies and RYKA, Inc.
reorganized to form Global Sports, Inc.
Jordan M. Copland has served as our Executive Vice President and Chief
Financial Officer since February 2000. From March 1999 to February 2000, Mr.
Copland served as Senior Vice President and Chief Financial Officer of Virgin
Entertainment Group, Inc.'s United States-based Megastore and global e-commerce
businesses. While at Virgin, Mr. Copland oversaw financial administration and
technology. From October 1990 to March 1999, Mr. Copland held a variety of
positions with increasing responsibility within The Walt Disney Company, a
worldwide entertainment company. Most recently, Mr. Copland was Vice President
of Finance and Planning for the Disney Consumer Products division. He has also
held various leadership and management positions within several other divisions
of Disney, including the Disney Publishing Group, Disney Consumer Products
Europe, the Middle East and Africa and Walt Disney Records.
Robert Liewald has served as our Executive Vice President, Merchandising
since July 1999 and worked as a consultant to us from December 1998 to July
1999. From January 1995 to June 1998, Mr. Liewald served as Senior Executive
Vice President of FILA USA, an athletic footwear and apparel manufacturer. From
June 1972 to January 1995, Mr. Liewald held a variety of positions at Venator
Group, an athletic footwear and apparel retailer based in New York, New York,
most recently as Senior Vice President, Corporate Merchandiser with
merchandising responsibility for all of Venator Group's specialty athletic
divisions. Also while at Venator, Mr. Liewald served as Vice President, General
Merchandise Manager for Champs Sports and Vice President, Merchandise Manager
at Foot Locker and Lady Foot Locker.
Arthur H. Miller has served as our Executive Vice President and General
Counsel since September 1999. From January 1988 to September 1999, Mr. Miller
was a partner in the Corporate department of Blank
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Rome Comisky & McCauley LLP, a law firm based in Philadelphia, Pennsylvania.
Mr. Miller joined Blank Rome in April 1983.
Michael R. Conn has served as our Senior Vice President, Business
Development since February 1999. From June 1993 to February 1999, Mr. Conn
served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank
based in New York, New York. Mr. Conn worked as a sell-side securities analyst
specializing in footwear, apparel, retail and leisure products. While at
Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst
Team.
Steven C. Davis has served as our Senior Vice President Marketing since
January 2000. From June 1996 to January 2000, Mr. Davis held a number of
management positions at Just for Feet, Inc., a specialty sporting goods
retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice
President of Marketing and previously he served as Director of Marketing and
Director of Special Projects. In the summer of 1995, Mr. Davis served as a
marketing consultant for Dell Computer Corporation. From January 1990 to
September 1994, Mr. Davis was Manager of Park Operations for Anheuser Busch
Theme Parks, Inc.
Michael A. Balik has served as our Vice President, Management Information
Systems since May 1999. From December 1996 to May 1999, Mr. Balik served as
Director of Management Information Systems for Cherrydale Farms, a manufacturer
of confectionery products based in Allentown, Pennsylvania. From March 1993 to
October 1996 Mr. Balik was Director of Information Systems for I Got It at
Gary's, a super-discount drugstore chain based in Eagleville, Pennsylvania.
William Meisle has served as our Vice President, Production since January
2000. From January 1993 to December 1999, Mr. Meisle held a number of positions
of increasing responsibility at Medical Broadcasting Company, a strategic
interactive marketing and communications services company based in
Philadelphia, Pennsylvania. From December 1997 to December 1999, Mr. Meisle
served as Senior Strategic Analyst and Creative Director. Also while at Medical
Broadcasting Company, he served as Director, Interactive Services, Project
Director and Production Manager.
Donald Murphy has served as our Vice President, Operations, since April
1999. From October 1997 to April 1999, Mr. Murphy was Vice President/General
Manager for the Home Shopping Network based in Roanoke, Virginia. From October
1995 to October 1997, he was Vice President of Operations at an institutional
food distribution center owned by PYA/Monarch Food Service in Raleigh, North
Carolina. From September 1989 to October 1995 Mr. Murphy served as a Warehouse
Supervisor for Kraft Food Service in Salem, Missouri.
Joseph Romello has served as our Vice President, Engineering since May
1999. From May 1997 to May 1999, Mr. Romello served as an independent
engineering consultant to Donaldson, Lufkin and Jenrette, an investment banking
firm based in New York, New York. From June 1996 to May 1997, Mr. Romello
served an independent engineering consultant to a number of consumer companies,
including Netscape, Gap, Inc. and Levi Strauss. From May 1995 to June 1996, Mr.
Romello served as Director of Business Development for Persistence, an object
relational middle-ware software vendor based in San Mateo, California.
Kenneth J. Adelberg has served as one of our directors since July, 1995.
Mr. Adelberg has served as President and Chief Executive Officer of The HiFi
House Group of Companies, a privately-held consumer electronics company based
in Broomall, Pennsylvania, since 1987. Mr. Adelberg is a founding stockholder
and a director of Republic Bank, Philadelphia, Pennsylvania. Mr. Adelberg is
also a director of Trackpower, Inc.
Ronald D. Fisher has served as one of our directors since March 2000. Mr.
Fisher has been Chief Executive Officer of SOFTBANK Global Ventures, which
oversees all private equity organizations of SOFTBANK Corp., a leading provider
of information and technology services for the digital information industry,
since March 2000. Mr. Fisher has been Managing General Partner of SOFTBANK
Capital Partners, an Internet venture investment group established in July 1999
and sponsored by SOFTBANK Corp., since 1995. From October 1995 to March 2000,
Mr. Fisher was vice chairman of SOFTBANK Holdings, Inc., a United States
subsidiary of SOFTBANK Corp. From January 1990 to September 1995, Mr. Fisher
was Chief Executive Officer of Phoenix Technologies, Ltd., a developer and
marketer of system software products for personal computers. Mr. Fisher is also
a director of SOFTBANK Corp., Japan, InsWeb Corporation and Ziff Davis
Publishing.
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developer and marketer of system software products for personal computers. Mr.
Fisher is also a director of SOFTBANK Corp., Japan, InsWeb Corporation and Ziff
Davis Publishing.
Harvey Lamm has served as one of our directors since March 1998. Mr. Lamm
has served as a director and Chief Executive Officer of Vintek Corporation, a
privately-held company specializing in automated title and risk management for
automotive finance institutions based in Philadelphia, Pennsylvania, since
1996. From 1990 to 1996, Mr. Lamm was a full-time private investor. From 1967
to 1990, Mr. Lamm served as Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer of Subaru of America, Inc., until its
acquisition by Fuji Heavy Industries Ltd. Mr. Lamm helped found Subaru of
America, Inc.
Charles R. Lax has served as one of our directors since July 1999. Mr.
Lax is a General Partner and a co-founder of SOFTBANK Capital Partners, an
Internet venture investment group established in July 1999 and sponsored by
SOFTBANK Corp., a leading provider of information and technology services for
the digital information industry. Mr. Lax was also a co-founder and has been a
General Partner of SOFTBANK Technology Ventures, an early-stage venture capital
group affiliated with SOFTBANK Corp., since November 1997. From March 1996 to
November 1997, he was Vice President of SOFTBANK Holdings Inc., a United States
subsidiary of SOFTBANK Corp. From June 1993 to March 1996, Mr. Lax was a
partner at Vimac Partners LLC., a venture capital firm based in Boston,
Massachusetts. Mr. Lax is also a director of Art Technology Group, Inc., 1-800-
Flowers.com, Inc., Interliant, Inc. and Webhire, Inc.
Dr. Jeffrey F. Rayport has served as one of our directors since May 1999.
Since 1998, Dr. Rayport has been Executive Director of the Monitor Marketspace
Center, the technology and e-commerce media unit of Monitor Company, a global
strategic consulting company based in Cambridge, Massachusetts. Dr. Rayport has
served as a faculty member of the Service Management Interest Group at the
Harvard Business School since 1995. Dr. Rayport is also a director of Be free
and AGENCY.com.
Employment Agreements
Since our decision to initiate our e-commerce business, we have hired
five executive officers, Messrs. Conn, Copland, Davis, Liewald and Miller, in
addition to Mr. Rubin. We have employment agreements with all executive
officers except Mr. Liewald. These employment agreements have terms of four to
five years and provide for annual base salaries, bonuses, stock options, stock
award grants and other employee benefits. We may terminate each of these
employment agreements for cause, which is defined in the individual agreements.
Except for Mr. Rubin, if we terminate any of these agreements for any reason
other than death, disability or cause, we would be required to pay the
executive the severance set forth in his agreement. Each of these agreements
contains a restrictive covenant prohibiting the executive from competing with
us or hiring or soliciting our employees for a period of time specified in his
agreement.
RELATED PARTY TRANSACTIONS
Prior to moving to our current location, our main executive offices and
warehouse were located in King of Prussia, Pennsylvania in a 75,000 square foot
facility leased from Mr. Rubin, our Chairman and Chief Executive Officer. The
lease for this facility expires on September 30, 2009. We pay approximately
$29,000 per month, plus maintenance and utilities, for the facility. Payments
by us to Mr. Rubin under the lease totalled $349,008 in fiscal 1999. We
currently are in the process of negotiating a termination of the lease for this
facility.
In July 1999, we repaid to Mr. Rubin the outstanding balance of a
subordinated note that evidenced a loan by Mr. Rubin to us. The outstanding
principal balance of the note at the time of repayment was $1,805,841 and
accrued interest, at prime rate plus 0.25%, for fiscal 1999 was $82,661.
On July 23, 1999, certain funds affiliated with SOFTBANK acquired an
aggregate of 6,153,850 shares of our common stock at a price of $13.00 per
share for an aggregate purchase price of approximately $80.0
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<PAGE>
million. This $13.00 per share reflects the closing price on May 26, 1999, the
day prior to the day we and SOFTBANK agreed in principle to the transaction.
Messrs. Fisher and Lax, members of our board of directors, are Managing
Directors of the general partner of SOFTBANK Capital Partners and SOFTBANK
Capital Advisors Fund, the funds through which SOFTBANK acquired its shares.
On January 5, 1999, Mr. Lamm, a member of our board of directors, was
granted a non-incentive stock option to purchase 50,000 shares of our common
stock at an exercise price of $7.625 per share, the closing price on the date
of grant. This option was granted to Mr. Lamm in connection with consulting
services provided by Mr. Lamm.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of March 17, 2000, by:
. each person, or group of affiliated persons, who we know beneficially
owns more than 5% in the aggregate of the outstanding shares of our
common stock;
. each of our executive officers whose compensation exceeded $100,000
during fiscal 1999;
. each of our directors; and
. all directors and executive officers as a group.
Under the rules of the SEC, beneficial ownership includes voting or
investment power with respect to securities and includes the shares issuable
under stock options or warrants that are exercisable within 60 days of the date
of this prospectus. Shares issuable under stock options or warrants are deemed
outstanding for computing the percentage of the person holding options but are
not outstanding for computing the percentage of any other person.
The percentage of beneficial ownership for the following table is based
upon 18,550,580 shares of common stock outstanding as of March 17, 2000 and
23,550,580 shares of common stock outstanding after the completion of this
offering. Entries denoted by an asterisk are less than 1%.
<TABLE>
<CAPTION>
Name and Position and Address Number of Shares Percent Prior Percent After
of Beneficial Owner Beneficially Owned to the Offering the Offering
----------------------------- ------------------ --------------- -------------
<S> <C> <C> <C>
Michael G. Rubin(1)........... 8,025,046 43.3% 34.1%
Chairman of the Board and
Chief Executive Officer
Michael Golden(2)............. 67,500(3) * *
Executive Vice President, E-
Commerce
Michael R. Conn............... 26,500(4) * *
Senior Vice President,
Business Development
Steven A. Wolf................ 22,750(5) * *
Vice President
Kenneth J. Adelberg........... 129,500(6) * *
Director
Ronald D. Fisher.............. 6,168,850(7) 33.2% 26.2%
Director
Harvey Lamm................... 90,000(8) * *
Director
Charles R. Lax................ 6,168,850(9) 33.2% 26.2%
Director
Dr. Jeffrey F. Rayport........ 18,750(10) * *
Director
SOFTBANK Affiliates........... 6,153,850(11) 33.2% 26.1%
All executive officers and 14,671,146(12) 77.6% 61.4%
directors as a group (13
persons)....................
</TABLE>
- --------
(1) Assumes no exercise of the underwriters' overallotment option. In the event
that the underwriters' overallotment option is exercised in full, Mr. Rubin
has agreed to sell 750,000 shares. Accordingly, after the offering, Mr.
Rubin would beneficially own 30.9% and all executive officers and directors
as a group will beneficially own 59.1% of the outstanding common stock. Mr.
Rubin's address is c/o Global Sports, Inc., 1075 First Avenue, King of
Prussia, Pennsylvania 19406.
(2) In February, 2000, Mr. Golden's employment with us terminated.
(3) Consists of 67,500 shares of common stock issuable pursuant to options
awarded to Mr. Golden under our 1996 Equity Incentive Plan, which options
are exercisable within 60 days of the date of the table.
(4) Consists of 25,000 shares of common stock issuable pursuant to options
awarded to Mr. Conn under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of the table.
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<PAGE>
(5) Consists of 22,750 shares of common stock issuable pursuant to options
awarded to Mr. Wolf under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of the table.
(6) Includes 56,250 shares of common stock issuable pursuant to options awarded
to Mr. Adelberg under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of this table.
(7) Includes 15,000 shares of common stock issuable pursuant to options awarded
to Mr. Fisher under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of this table, 6,069,542 shares of
common stock held by SOFTBANK Capital Partners and 84,308 shares of common
stock held by SOFTBANK Capital Advisors Fund. Mr. Fisher is the Vice
Chairman of SOFTBANK Corp. and the Managing General Partner of SOFTBANK
Capital Partners. Mr. Fisher disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest. Mr. Fisher's
address is c/o SOFTBANK, 1188 Centre Street, Newton Center, Massachusetts
02459.
(8) Includes 90,000 shares of common stock issuable pursuant to options awarded
to Mr. Lamm under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of this table.
(9) Includes 15,000 shares of common stock issuable pursuant to options awarded
to Mr. Lax under our 1996 Equity Incentive Plan, which options are
exercisable within 60 days of the date of this table, 6,069,542 shares of
common stock held by SOFTBANK Capital Partners and 84,308 shares of common
stock held by SOFTBANK Capital Advisors Fund. Mr. Lax is a Managing
Director of the general partner of each of these SOFTBANK entities. Mr. Lax
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest. Mr. Lax's address is c/o SOFTBANK, 1188 Centre Street,
Newton Center, Massachusetts 02459.
(10) Includes 18,750 shares of common stock issuable pursuant to options
awarded to Dr. Rayport under our 1996 Equity Incentive Plan, which options
are exercisable within 60 days of the date of this table.
(11) Consists of 6,069,542 shares of common stock held by SOFTBANK Capital
Partners and 84,308 shares of common stock held by SOFTBANK Capital
Advisors Fund. The business address of SOFTBANK is 1188 Centre Street,
Newton Center, Massachusetts 02459.
(12) Includes an aggregate of 355,250 shares of common stock issuable pursuant
to options awarded to our executive officers and directors, which options
are exercisable within 60 days of the date of this table. See note (1).
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 60,000,000 shares of common
stock, $0.01 par value per share, and 1,000,000 shares of preferred stock,
$0.01 par value per share. As of March 17, 2000, there were outstanding:
. 18,550,580 shares of common stock held of record by approximately
1,971 stockholders of record;
. options to purchase 2,160,304 shares of common stock;
. warrants to purchase 559,541 shares of common stock; and
. 8,000 shares of Series A preferred stock held of record by one
stockholder of record.
Common Stock
Each outstanding share of common stock is, and all shares of common stock
to be outstanding upon completion of this offering will be, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of Series A preferred stock and any series of preferred stock
which we may designate in the future.
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of common stock are
entitled to receive dividends out of assets legally available at the times and
in the amounts as our board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders
and does not have cumulative voting rights. Accordingly, the holders of a
majority of the shares of common stock can elect all of the directors then
standing for election.
No Preemptive or Other Rights. Holders of common stock are not entitled
to preemptive, subscription, conversion or redemption rights.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, the holders of our common stock and any
participating preferred stock outstanding at that time are entitled to receive
ratably our net assets available after the payment of all debts and other
claims and payment of any liquidation preferences on any outstanding preferred
stock.
Preferred Stock
General. Our board of directors is authorized to issue up to an aggregate
of 1,000,000 shares of preferred stock in one or more series without
stockholder approval. The board has the discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences of
each series of preferred stock.
Issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could among
other things:
. have the effect of making it more difficult for a third-party to
acquire, or of discouraging a third-party from attempting to acquire,
a majority of our outstanding voting stock;
. cause the market price of our common stock to decline; or
. impair the voting and other rights of the holders of our common stock.
In May 1998, we issued 10,000 shares of Series A preferred stock in connection
with our acquisition of assets included in our Off-Price and Action Sports
Division. In June 1999, we redeemed 2,000 shares of Series A Preferred Stock
for an aggregate redemption price of $100,000. We have no current plans to
issue any additional shares of preferred stock.
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<PAGE>
Series A Preferred Stock
Dividend Rights. Holders of Series A preferred stock are not entitled to
receive any dividends.
Voting Rights. Holders of Series A preferred stock have no voting
rights, except as required by applicable law.
No Conversion Rights. The Series A preferred stock is not convertible
into any other class or series of our capital stock.
Mandatory Redemption. Shares of Series A preferred stock are redeemable
over a period ending on June 30, 2003. The redemption price is $50.00 per
share if our Off-Price and Action Sports Division achieves specified sales and
gross profit targets. If those targets are not met, the redemption price is
$.01 per share. The maximum aggregate redemption price of the remaining
outstanding shares of Series A preferred stock is $400,000. We have agreed to
redeem 7,200 shares of Series A preferred stock for an aggregate redemption
price of $360,000 upon the sale of our Off-Price and Action Sports Division.
We will redeem the remaining 800 shares of Series A preferred stock ratably
beginning on June 30, 2000 through 2003 at a nominal value.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, after payment of claims to our creditors, the
holders of the Series A preferred stock are entitled to receive the redemption
amount still outstanding, without interest, before any payment or distribution
to the holders of common stock.
Warrants
As of March 17, 2000, we had outstanding warrants to purchase an
aggregate of 559,541 shares of our common stock at a weighted average exercise
price of $13.01 per share. These warrants have terms of one to ten years with
an average term of 6.4 years. These warrants expire between May 2000 and April
2009.
Registration Rights
The holders of approximately 6,153,850 shares of common stock and the
holders of warrants to purchase an aggregate of 2,500 shares of common stock
have the right to require us to register their shares or the shares underlying
their warrants with the SEC so that those shares may be publicly resold. They
also have the right to include these shares in any registration statement we
file. The holders of warrants to purchase an aggregate of 12,660 shares of
common stock also have the right to include their shares in any registration
statement we file.
Anti-Takeover Provisions
Our certificate of incorporation provides that our board of directors
may issue preferred stock with voting or other rights without stockholder
action. These provisions may have the effect of delaying, discouraging or
preventing changes in our management.
We are subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A business
combination includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to a number of
exceptions, an interested stockholder is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
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The possible issuance of preferred stock and the requirements of Delaware
law could have the effect of delaying, deferring or preventing a change in
control of us, including without limitation, discouraging a proxy contest or
making more difficult the acquisition of a substantial block of our common
stock. The provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock.
Indemnification of Directors and Executive Officers and Limitation of Liability
Articles/Bylaws. Our amended and restated certificate of incorporation
contains provisions permitted under Delaware law relating to the liability of
directors. The provisions eliminate a director's liability for monetary damages
for a breach of fiduciary duty, except in circumstances involving wrongful
acts, such as the breach of a director's duty of loyalty or acts or omissions
which involve intentional misconduct or a knowing violation of law. In
addition, our bylaws provide indemnification of our directors and officers to
the fullest extent permitted by Delaware law.
Proposed Indemnification Agreements. We also intend to enter, pending
stockholder approval, into separate indemnification agreements with our
directors and some of our officers that provide them indemnification protection
that is greater than the protection currently provided under Delaware General
Corporation Law. We are seeking stockholder approval of these proposed
agreements at our annual stockholder meeting to be held on May 15, 2000.
The proposed indemnification agreements, among other things, will:
. confirm the present indemnity provided by our bylaws and provide that
this indemnity will continue despite future changes in our bylaws, as
the indemnification agreements will be our contractual obligations,
unlike our bylaws which may be amended by our stockholders or our
board;
. provide further indemnification to the fullest possible extent
permitted by law against all expenses (including attorneys' fees),
judgments, fines and settlement amounts paid or incurred by a director
or officer in any action or proceeding, including any action by us or
in our own right, on account of service as our director, officer,
employee, attorney or agent or any of our subsidiaries or any other
company or enterprise at our request;
. cover all actions and proceedings, even if they arise from acts or
omissions by a director or officer occurring before the execution of
the agreements;
. continue in force so long as the individual continues to serve in such
capacity on our behalf and cover liabilities related to his activities
in any such capacity regardless of future changes to our corporate
documents;
. provide for payment of expenses in advance of a final disposition of
the action or suit, regardless of the recipient's ability to make
repayments, and all advances will be unsecured and interest-free;
. provide protection during the determination process in the event there
is a change of control of us or our board and grant our directors and
officers rights to appeal a denial of indemnification to a court of
competent jurisdiction; and
. except as discussed below with respect to violations of Section 16(b)
of the Exchange Act and expenses or liabilities which are covered by
insurance, provide that directors or officers who rely on our records
or upon information supplied by our officers, legal counsel, outside
accountants or appraisers are deemed to have acted in a manner which
would entitle our directors or officers to indemnification under the
indemnification agreements.
However, a director or officer will not be entitled to indemnification
under these agreements unless that director or officer acted in good faith and
in a manner reasonably believed to be in or not opposed to our best interests.
In addition, no indemnification will be provided in respect of any suit in
which judgment is rendered against a director or officer for an accounting of
profits from a purchase or sale of our securities in violation of
51
<PAGE>
Section 16(b) of the Exchange Act, or of any successor statute, or for
expenses or liabilities which have been paid directly to a director or officer
by an insurance carrier under a policy of directors' and officers' liability
insurance.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American
Securities Transfer Incorporated. The address of our transfer agent and
registrar is 12039 West Alameda Parkway, Lakewood, Colorado 80228, and its
telephone number at this location is (303) 234-5300.
Listing
Our common stock is quoted on the Nasdaq National Market under the
trading symbol "GSPT."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a large number of shares of our common stock, including shares
issued upon exercise of outstanding warrants or options, in the market after
this offering could cause a drop in the market price of our common stock.
Upon completion of this offering, we will have outstanding 23,550,580
shares of common stock. All of these shares, except for 14,587,203 shares held
by Michael G. Rubin, funds affiliated with SOFTBANK and some other
stockholders, will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are held by our
"affiliates." In addition, as of March 17, 2000, we had outstanding options
and warrants to purchase a total of 2,719,845 shares of our common stock.
The 14,587,203 shares of common stock held by Mr. Rubin, funds
affiliated with SOFTBANK and some other stockholders are "restricted
securities," as that term is defined under Rule 144 of the Securities Act. Of
these shares, approximately 8,433,353 shares are eligible for sale and
6,153,850 shares will be eligible for sale between June 10, 2000 and July 23,
2000, subject only to volume, manner of sale and notice requirements of Rule
144.
Lock-Up Agreements. Each of our directors, executive officers and funds
affiliated with SOFTBANK, who hold a total of 14,315,896 shares of our common
stock, has agreed that, without the prior written consent of FleetBoston
Robertson Stephens Inc., they will not offer to sell, contract to sell or
dispose of any shares of common stock or any securities that may be
convertible into or exchanged for shares of common stock for a period of 90
days after the date of this prospectus. FleetBoston Robertson Stephens Inc.
may, at any time without notice, release all or any portion of the securities
subject to the lock-up agreements. There are no agreements between the
representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
90 days after the date of this prospectus.
Future Sales. We have agreed that, without the prior written consent of
FleetBoston Robertson Stephens Inc., we will not issue, sell or dispose of any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock for a period of 90 days after the date
of this prospectus. This lock-up does not apply to:
. the issuance of shares of common stock upon the exercise or conversion
of outstanding options, warrants or convertible securities;
. our issuance of stock options under existing stock option plans; and
. the issuance of shares of common stock in an acquisition transaction.
52
<PAGE>
Rule 144. In general, under Rule 144 as currently in effect, a person who
has beneficially owned common stock for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which
will equal approximately 235,506 shares of common stock immediately
after this offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 in connection with the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Any person, or persons whose shares are aggregated, who is not deemed to
have been one of our affiliates at any time during the three months preceding a
sale, and who owns shares that are "restricted securities" under Rule 144 that
were purchased from us, or any affiliate, at least two years previously, would
be entitled to sell the shares under Rule 144(k) without regard to the volume
limitations, manner-of-sale provisions, public information requirements or
notice requirements.
Registration Rights. Upon completion of this offering, the holders of
approximately 6,169,010 shares of outstanding common stock or warrants to
purchase common stock or their transferees, will be entitled to various rights
with respect to the registration of these shares under the Securities Act.
Registration of these shares under the Securities Act would result in these
shares becoming freely tradeable without restriction under the Securities Act
immediately upon the effectiveness of the registration, except for shares
purchases by affiliates.
Stock Plans. We filed a registration statement on Form S-8 under the
Securities Act covering shares of common stock reserved for issuance under our
stock option plans. As of March 17, 2000, we had outstanding options to
purchase 2,160,304 shares of common stock. Shares registered under this
registration statement on Form S-8 will, subject to Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the lock-up agreements expire.
53
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and E*OFFERING Corp., have severally agreed with us, subject to
the terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their respective names
below. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
E*OFFERING Corp.......................................................
---------
Total................................................................. 5,000,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to
offer the shares of common stock to the public at the public offering price set
forth on the cover page of this prospectus and to certain dealers at this price
less a concession of not in excess of $ per share, of which $ per share
may be reallowed to other dealers. After this offering, the public offering
price, concession and reallowance to dealers may be reduced by the
representatives. No reduction shall change the amount of proceeds to be
received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Over-Allotment Option
The selling stockholder has granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to an aggregate of 750,000 additional shares of common stock to
cover over-allotments, if any, at the public offering price less the
underwriting discount set forth on the cover page of this prospectus. If the
underwriters exercise their over-allotment option to purchase any of the
additional 750,000 shares of common stock, the underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof as the number of shares to be purchased by each of them
bears to the total number of shares of common stock offered in this offering.
If purchased, these additional shares will be sold by the underwriters on the
same terms as those on which the shares offered hereby are being sold. The
selling stockholder will be obligated, pursuant to the over-allotment option,
to sell shares to the underwriters to the extent the over-allotment option is
exercised. The underwriters may exercise the over-allotment option only to
cover over-allotments made in connection with the sale of the shares of common
stock offered in this offering.
The following table summarizes the compensation to be paid by us and the
selling stockholder to the underwriters:
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Over- Over-
Per Share Allotment Allotment
--------- --------- ---------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discounts and commissions payable
by us.........................................
Underwriting discounts and commissions payable
by the selling stockholder....................
</TABLE>
We estimate that the expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $700,000.
54
<PAGE>
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling stockholder against certain civil liabilities,
including liabilities under the Securities Act, and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-Up Agreements
Each of our executive officers, directors and funds affiliated with
SOFTBANK has agreed, subject to specified exceptions, not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock or any options or warrants to
purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by those holders or with respect to which they
have the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. This restriction terminates after the close of trading
of the shares on the 90th day of (and including) the day the shares offered by
this prospectus commenced trading on the Nasdaq National Market. However,
FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time
or from time to time before the termination of the 90-day period, without
notice, release all or any portion of the securities subject to lock-up
agreements. There are no existing agreements between the representatives and
any of our stockholders who have executed a lock-up agreement providing consent
to the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the lock-
up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of shares in this
offering, the issuance of our common stock upon the exercise of outstanding
options or warrants and the issuance of options under existing stock option and
incentive plans provided that those options do not vest prior to the expiration
of the lock-up period.
Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"GSPT."
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Securities Act, persons participating in this offering may engage in
transactions that may have the effect of stabilizing or maintaining the market
price of the shares of common stock at a level above that which might otherwise
prevail in the open market. These transactions may include:
. stabilizing bids, which are bids for or the purchase of the common
stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock;
. syndicate covering transaction bids, which are bids for or the
purchase of the common stock on behalf of the underwriters to cover
purchase orders filed by the underwriters above the 5,000,000 shares
offered by this prospectus; and
. penalty bids, which are arrangements permitting the representatives to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with this offering if the common stock
originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has
therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions
may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
55
<PAGE>
LEGAL MATTERS
An opinion letter will be delivered by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania, to the effect that the shares of common stock being
offered by this prospectus will, when issued as contemplated by this
prospectus, be validly issued, fully paid and non-assessable. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The consolidated financial statements included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the Exchange Act, which
means we are required to file annual, quarterly and special reports, proxy
statements and other information with the SEC. Our SEC filings are available to
the public over the Internet at the SEC's Web site at http://www.sec.gov. You
may also read and copy any document we file with the SEC at its Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
We filed a registration statement on Form S-3 to register with the SEC
the shares of common stock to be issued in this offering. This prospectus is
part of that registration statement. As allowed by the SEC's rules, this
prospectus does not contain all of the information you can find in the
registration statement or the exhibits to the registration statement. The SEC
allows us to "incorporate by reference" into this prospectus the information we
have filed with the SEC. The information incorporated by reference is an
important part of this prospectus, and the information that we file
subsequently with the SEC will automatically update this prospectus. Absent
unusual circumstances, we will have no obligation to amend this prospectus,
other than filing subsequent information with the SEC. The historical and
future information that is incorporated by reference in this prospectus is
considered to be part of this prospectus and can be obtained at the locations
described above. We also incorporate by reference any filings we make with the
SEC under Section 13(a), 13(c), 14 or (15(d) of the Exchange Act after the
initial filing of the registration statement and before the time that all of
the securities offered by this prospectus are sold. We incorporate by reference
our Annual Report on Form 10-K for fiscal 1999.
You may request a copy of any information that we incorporate by
reference into the registration statement or this prospectus, at no cost, by
writing or telephoning us. Please send your request to:
Global Sports, Inc.
1075 First Avenue
King of Prussia, Pennsylvania 19406
610-265-3229
Attn: Paul D. Cataldo, Assistant Secretary
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Global Sports, Inc.
We have audited the accompanying consolidated balance sheets of Global
Sports, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
January 1, 2000 and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for each of the three years
in the period ended January 1, 2000. 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 of America. Those standards require that we plan
and perform the audit 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
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, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998 and January 1, 2000 and the results of their operations and their cash
flows for each of the three years in the period ended January 1, 2000 in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 22, 2000
F-1
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 83,169 $ 27,345,263
Accounts receivable, net.......................... -- 2,738,201
Inventory......................................... -- 10,697,438
Prepaid expenses and other current assets......... 599,224 1,444,634
Refundable income taxes........................... -- 1,337,584
Net assets of discontinued operations............. 41,127,839 18,380,806
----------- ------------
Total current assets............................ 41,810,232 61,943,926
Property and equipment, net of accumulated deprecia-
tion and amortization.............................. 2,988,714 20,681,724
Other assets, net................................... 253,626 109,887
----------- ------------
Total assets.................................... $45,052,572 $ 82,735,537
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,595,996 $ 15,761,340
Accrued advertising, promotion and other ex-
penses........................................... 56,028 5,483,300
Income taxes payable.............................. 1,378,820 --
Current portion--capital lease obligation, related
party............................................ 127,966 141,016
Subordinated notes payable, related party......... 1,805,841 --
----------- ------------
Total current liabilities....................... 6,964,651 21,385,656
Notes payable, bank................................. 18,812,156 --
Capital lease obligation, related party............. 2,181,265 2,040,249
Mandatorily redeemable preferred stock.............. 100 80
Commitments and contingencies.......................
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized in 1998 and 1999; 10,000 and 8,000
shares issued as mandatorily redeemable preferred
stock in 1998 and 1999, respectively............. -- --
Common stock, $0.01 par value, 20,000,000 and
60,000,000 shares authorized in 1998 and 1999;
12,994,464 and 19,544,249 shares issued in 1998
and 1999, respectively; 11,925,378 and 18,475,163
shares outstanding in 1998 and 1999,
respectively..................................... 129,947 195,442
Additional paid in capital........................ 17,111,166 102,460,622
Accumulated other comprehensive loss.............. (47,431) --
Retained earnings (accumulated deficit)........... 114,535 (43,132,695)
----------- ------------
17,308,217 59,523,369
Less: Treasury stock, at cost..................... 213,817 213,817
----------- ------------
Total stockholders' equity...................... 17,094,400 59,309,552
----------- ------------
Total liabilities and stockholders' equity...... $45,052,572 $ 82,735,537
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
Fiscal Year Ended
1997 1998 January 1, 2000
----------- ----------- -----------------
<S> <C> <C> <C>
Net revenues....................... $ -- $ -- $ 5,510,576
Cost of revenues................... -- -- 3,816,767
----------- ----------- ------------
Gross profit..................... -- -- 1,693,809
Operating expenses:
Sales and marketing.............. -- -- 11,608,556
Product development.............. -- -- 7,264,425
General and administrative....... 2,389,223 3,452,914 9,310,744
Stock-based compensation,
primarily related to sales and
marketing....................... -- -- 2,654,834
----------- ----------- ------------
Total operating expenses....... 2,389,223 3,452,914 30,838,559
----------- ----------- ------------
Other (income) expenses:
Interest expense................. 2,013,028 2,366,935 312,655
Interest income.................. -- -- (774,139)
Other, net....................... -- -- (1,999)
----------- ----------- ------------
Total other (income) expenses.. 2,013,028 2,366,935 (463,483)
----------- ----------- ------------
Loss from continuing operations
before income taxes.............. (4,402,251) (5,819,849) (28,681,267)
Benefit from income taxes.......... -- 1,978,749 2,220,878
----------- ----------- ------------
Loss from continuing operations.... (4,402,251) (3,841,100) (26,460,389)
Discontinued operations:
Income from discontinued
operations (net of income tax
provisions (benefits) of $--,
$3,879,567, and $(582,804) in
1997, 1998 and 1999,
respectively)................... 246,956 9,664,956 549,838
Loss on disposition of
discontinued operations (net of
income tax provision of
$2,159,916)..................... -- -- (17,336,679)
----------- ----------- ------------
Net income (loss).................. $(4,155,295) $ 5,823,856 $(43,247,230)
=========== =========== ============
Earnings (losses) per share:
Basic and diluted--
Loss from continuing opera-
tions......................... $ (1.47) $ (.34) $ (1.78)
Income from discontinued opera-
tions......................... .08 .85 .04
Loss on disposition of discon-
tinued operations............. -- -- (1.17)
----------- ----------- ------------
Net income (loss).............. $ (1.39) $ .51 $ (2.91)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------- --------------------
Retained Accumulated
Additional Earnings Other
Paid in (Accumulated Comprehensive Comprehensive
Shares Dollars Capital Deficit) Income (Loss) Income (Loss) Shares Dollars Total
---------- -------- ------------ ------------ ------------- ------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined balance
at December 31,
1996........... 2,000 $ 2,000 $ 1,066,758 $ (1,554,026) $(41,865) 100 $ 25,000 $ (502,133)
Net loss........ (4,155,295) $ (4,155,295) (4,155,295)
Translation
adjustments.... 6,345 6,345 6,345
------------
Comprehensive
loss........... $ (4,148,950)
============
Warrant
compensation
related to
former
officer........ 152,333 152,333
Equity in stock
issuances of
RYKA Inc....... 356,534 356,534
Adjustments
arising from
reorganization,
1,608.06-for-1
stock split and
change from no
par value to
$.01 per
share.......... 3,316,111 31,184 (6,184) (100) (25,000) --
Common stock
issued in
acquisition of
RYKA Inc. and
acquisition of
treasury
stock.......... 8,169,086 81,691 6,431,691 1,069,086 (213,817) 6,299,565
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
December 31,
1997........... 11,487,197 114,875 8,001,132 (5,709,321) (35,520) 1,069,086 (213,817) 2,157,349
Net income...... 5,823,856 $ 5,823,856 5,823,856
Translation
adjustments.... (11,911) (11,911) (11,911)
------------
Comprehensive
income......... $ 5,811,945
============
Acquisition of
the Gen-X
Companies...... 1,500,000 15,000 8,936,850 8,951,850
Issuance of
warrants to
purchase common
stock in
exchange for
services....... 150,000 150,000
Issuance of
common stock
upon exercise
of options..... 7,267 72 23,184 23,256
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
December 31,
1998........... 12,994,464 129,947 17,111,166 114,535 (47,431) 1,069,086 (213,817) 17,094,400
Net loss........ (43,247,230) $(43,247,230) (43,247,230)
Translation
adjustments.... 47,431 47,431 47,431
------------
Comprehensive
loss........... $(43,199,799)
============
Issuance of
common stock to
SOFTBANK, net
of costs....... 6,153,850 61,538 79,755,065 79,816,603
Issuance of
options and
warrants to
purchase common
stock in
exchange for
services....... 3,770,778 3,770,778
Issuance of
common stock
upon exercise
of options and
warrants....... 395,935 3,957 1,823,613 1,827,570
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
January 1,
2000........... 19,544,249 $195,442 $102,460,622 $(43,132,695) $ -- 1,069,086 $(213,817) $ 59,309,552
========== ======== ============ ============ ======== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
Fiscal Year
Ended
January 1,
1997 1998 2000
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................... $(4,155,295) $ 5,823,856 $(43,247,230)
Deduct:
Income from discontinued
operations........................ 246,956 9,664,956 549,838
Loss on disposal of discontinued
operations........................ -- -- (17,336,679)
----------- ----------- ------------
Loss from continuing operations...... (4,402,251) (3,841,100) (26,460,389)
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 368,227 567,310 728,000
Loss on disposition of equipment... -- 19,819 --
Stock-based compensation expense... 152,333 150,000 2,654,834
Changes in operating assets and
liabilities, net of acquisitions and
discontinued operations:
Accounts receivable................ -- -- (2,738,201)
Inventory.......................... -- -- (10,697,438)
Prepaid expenses and other current
assets............................ (3,551,074) (168,945) (845,410)
Refundable income taxes............ -- -- (1,337,584)
Other assets....................... (576,542) 33,571 173,739
Accounts payable and accrued
expenses.......................... 491,169 4,292,548 17,727,273
Income taxes payable............... -- -- (1,378,820)
----------- ----------- ------------
Net cash provided by (used in)
continuing operations............. (7,518,138) 1,053,203 (22,173,996)
Net cash provided by (used in)
discontinued operations........... (1,629,605) 1,617,846 (3,241,206)
----------- ----------- ------------
Net cash provided by (used in)
operating activities.............. (9,147,743) 2,671,049 (25,415,202)
----------- ----------- ------------
Cash Flows from Investing Activities:
Proceeds from sale of discontinued
operations.......................... -- -- 10,317,322
Acquisition of property and
equipment........................... (231,987) (397,990) (18,421,010)
----------- ----------- ------------
Net cash used in investing
activities........................ (231,987) (397,990) (8,103,688)
----------- ----------- ------------
Cash Flows from Financing Activities:
Net borrowings (repayments) under
line of credit...................... 9,984,077 (1,853,992) (18,812,156)
Costs of debt issuance............... (266,304) (80,000) (30,000)
Repayments of capital lease
obligation.......................... (105,378) (116,124) (127,966)
Proceeds from subordinated note from
SOFTBANK............................ -- -- 15,000,000
Proceeds from issuance of common
stock to SOFTBANK................... -- -- 64,727,378
Proceeds from exercises of common
stock options and warrants.......... -- 23,256 1,827,570
Proceeds from sale of minority
interest in subsidiary.............. -- -- 1,999
Repayment of subordinated notes
payable, related party.............. (416,000) (250,000) (1,805,841)
----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. 9,196,395 (2,276,860) 60,780,984
----------- ----------- ------------
Effect of exchange rate changes on cash
and cash equivalents.................. 6,345 (11,911) --
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents...................... (176,990) (15,712) 27,262,094
Cash and cash equivalents, beginning of
year.................................. 275,871 98,881 83,169
----------- ----------- ------------
Cash and cash equivalents, end of
year.................................. $ 98,881 $ 83,169 $ 27,345,263
=========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest............................ $ 1,882,198 $ 3,056,160 $ 1,993,647
=========== =========== ============
Supplemental disclosure of non-cash
investing and financing activities:
Notes payable issued in
acquisitions........................ $ -- $ 6,000,000 $ --
=========== =========== ============
Issuance of common stock of affiliate
at a price per share in excess of
the Company's carrying amount....... $ 356,534 $ -- $ --
=========== =========== ============
Refinancing of revolving credit
agreement........................... $16,718,420 $ -- $ --
=========== =========== ============
Issuance of common stock for
acquisition of the Gen-X Companies.. $ -- $ 8,951,850 $ --
=========== =========== ============
Issuance of mandatorily redeemable
preferred stock..................... $ -- $ 100 $ --
=========== =========== ============
Issuance of common stock in
satisfaction of accrued interest on
subordinated note from SOFTBANK..... $ -- $ -- $ 89,225
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS
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 and media companies under exclusive long-term
agreements. The Company's partners include The Sports Authority, Oshman's
Sporting Goods, The Athlete's Foot, Sport Chalet, MC Sports, Dunham's Sports,
BlueLight.com and Healtheon/WebMD.
See Note 18 for a description of discontinued operations.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The following summarize the Company's significant accounting policies,
some of which apply only to discontinued operations (see Note 18):
Fiscal Year: During 1999, the Company changed its fiscal year end date
from a calendar year end to a year end date representing the Saturday closest
to December 31, beginning with the fiscal year ended January 1, 2000. The
fiscal year is named for the calendar year ending on that December 31. The
effect on results of operations of the extra day in the fiscal year ended
January 1, 2000 is not significant.
Principles of Consolidation: The financial statements presented include
the accounts of Global Sports, Inc., a Delaware corporation, and the following
wholly-owned or controlled subsidiaries:
Global Sports Interactive, Inc. (PA)
TheSportsAuthority.com, Inc. (PA)
APEX Sports International, Inc. (PA)
KPR Sports International, Inc. (PA)
MR Management, Inc. (PA)
1075 First Global Associates, LLC (PA)
RYKA Inc. (PA)
G.S.I., Inc. (DE)
Gen-X Holdings, Inc. (WA)
Gen-X Equipment Inc. (Ontario)
Lamar Snowboards, Inc. (MO)
All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates: The presentation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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 revenues and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with maturities at date of purchase of three months or less to be
cash equivalents. At January 1, 2000, the Company had $26,749,053 of excess
cash invested in a money market fund with a major financial institution, which
is included in cash and cash equivalents. Interest income related to this
investment for the fiscal year ended January 1, 2000 was $774,139.
Inventory: Inventory, primarily consisting of sporting goods, athletic
equipment, footwear and apparel, is valued at the lower of cost (determined
using the first-in, first-out method) or market.
F-6
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment: Property and equipment are stated at cost, net
of accumulated depreciation or amortization. Depreciation or amortization is
provided using the straight-line method over the estimated useful lives of the
assets, which are generally:
. Two years for computer hardware and software and capitalized software
development costs;
. Three to seven years for furniture and office equipment;
. The lesser of fifteen years or lease term for leasehold improvements;
. Fifteen years for building improvements; and
. Thirty years for buildings.
Upon retirement or other disposition of these assets, the cost and
related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is reflected in results of operations.
Expenditures for maintenance and repairs are expensed as incurred.
Goodwill, Intangibles and Other Assets: The cost of goodwill and
intangibles is amortized on a straight-line basis over ten to twenty years.
Goodwill is reported net of accumulated amortization of $777,376 in 1998.
Intangibles, which principally represent the cost of acquiring licenses,
patents and trademarks, are reported net of accumulated amortization of
$270,124 in 1998. Amortization of goodwill and intangibles is included in
discontinued operations. As a result of the disposition of the Branded division
on December 29, 1999 (see Note 18), goodwill and intangibles were fully
amortized and the related charge is included in the loss on disposition of
discontinued operations.
Closing and other fees incurred at the inception of loan facilities are
deferred and are amortized over the term of the loan agreement (see Note 15).
As a result of the disposition of the Branded division on December 29, 1999
(see Note 18), the Company accelerated the amortization of the balance of all
such loan fees and the related charge is included in the loss on disposition of
discontinued operations. As of December 31, 1998, the unamortized balance of
all such loan fees was $247,772.
The realizability of goodwill, intangibles and other assets is
evaluated periodically as events or circumstances indicate a possible inability
to recover the carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on existing company businesses. The
analyses necessarily involve significant management judgment. Any impairment
loss, if indicated, is measured as the amount by which the carrying amount of
the goodwill or intangible assets exceeds its estimated fair value.
Long-Lived Assets: The realizability of long-lived assets is evaluated
periodically as events or circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on existing company businesses. The
analyses necessarily involve significant management judgment. Any impairment
loss, if indicated, is measured as the amount by which the carrying amount of
the asset exceeds the estimated fair value of the asset.
Sale of Stock by an Equity Method Investee: Prior to the 1997
reorganization (see Note 16), changes in the KPR Companies' proportionate share
of the underlying equity of RYKA, an equity method investee, which result from
the issuance of additional securities by such investee, were credited directly
to additional paid-in capital. In 1997, $356,534 of such gains were credited to
additional paid-in capital (see Note 17).
Foreign Currency Translation: In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency
Translation, exchange adjustments resulting from foreign
F-7
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
currency transactions generally are recognized currently in income,
whereas adjustments resulting from translations of financial statements are
reflected in accumulated other comprehensive income (loss). The cumulative
currency translation loss as of December 31, 1998 was $47,431. Gains and losses
on foreign currency transactions for the fiscal years ended December 31, 1998
and January 1, 2000 resulted in net foreign currency losses of $194,064 and
$103,955, respectively, and are included in discontinued operations. There were
no foreign currency transactions in 1997.
Financial Instruments: Gains and losses on foreign currency hedges of
existing assets or liabilities are included in the carrying amounts of those
assets or liabilities and recognized in income as part of the related
transaction. Unrealized gains and losses related to qualifying hedges of firm
commitments are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs.
Fair Value of Financial Instruments: The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and notes payable are a
reasonable estimate of their fair values at December 31, 1998 and January 1,
2000, based on the short maturity of these instruments.
Net Revenues: Net revenues include primarily revenues generated from
the sale of product through the Company's Web sites. Revenues from product
sales, net of discounts and allowances for returns, are recognized upon the
shipment of product to customers. Other sources of revenues, including the sale
of gift certificates to the Company's retail partners' land-based stores, the
sale of advertising on the Company's Web sites and outbound shipping charges,
were not significant for the fiscal year ended January 1, 2000.
Promotional Shipping Costs: During 1999, as part of a promotion in
connection with the launch of the Company's Web sites, the Company offered free
shipping on certain orders. The expense related to this temporary promotion for
the year ended January 1, 2000 was $566,091 and has been included in selling
and marketing expense.
Advertising: The Company expenses the cost of advertising in accordance
with the AICPA Accounting Standards Executive Committee's Statement of Position
("SOP") 93-7, Reporting on Advertising Costs. Advertising expense was
$2,471,731 for the fiscal year ended January 1, 2000. Advertising expense of
discontinued operations was $431,753 and $1,774,753 for the fiscal years ended
December 31, 1997 and December 31, 1998, respectively.
Product Development: Product development expenses consist primarily of
expenses associated with building, developing and operating the partners' Web
sites; payroll and related expenses for engineering, production, creative and
management information systems; and depreciation expense related to capitalized
hardware and software.
Stock-Based Compensation: SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options issued to employees is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company accounts for stock-based compensation issued to non-
employees in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Income Taxes: Prior to December 15, 1997, the KPR Companies (see Note
16) had elected to be taxed as S Corporations, under provisions of the Internal
Revenue Code and various state income tax regulations. As such,
F-8
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
current taxable income had been included on the income tax returns of
the then sole shareholder for federal and state income tax purposes and no
provision had been made for federal income taxes. On December 15, 1997, the
KPR Companies effected a merger with RYKA Inc. As a result of the merger, the
KPR Companies' S election was terminated. The Company, now renamed Global
Sports, Inc., is considered a C corporation and is subject to federal and
state income taxes. As such, taxes on income are provided based upon SFAS No.
109, Accounting for Income Taxes, which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed for differences between the
financial statements and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future. Such deferred income tax asset
and liability computations are based on enacted tax laws and rates applicable
to periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
New Accounting Pronouncements
Computer Costs: In March 1998, the AICPA Accounting Standards Executive
Committee issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal-use software. This
statement was adopted on January 1, 1999 and did not have a material effect on
the Company's results of operations, cash flows or financial position.
Start-Up Costs: In April 1998, the AICPA Accounting Standards
Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. The statement requires that costs of start-up activities,
including organization costs, be expensed as incurred. This statement was
adopted on January 1, 1999 and did not have a material effect on the Company's
results of operations, cash flows or financial position.
Derivative Instruments: SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133) establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
F-9
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, as of December
31, 1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ -----------
<S> <C> <C>
Computer hardware and software.................... $ 957,654 $10,178,971
Building.......................................... -- 6,437,916
Building--under capital lease (see Note 4)........ 2,666,958 2,666,958
Furniture and office equipment.................... 232,414 1,793,037
Land.............................................. -- 1,240,000
Leasehold improvements............................ 336,926 328,042
Construction in progress.......................... 17,392 33,725
---------- -----------
4,211,344 22,678,649
Less: Accumulated depreciation and amortization... (1,222,630) (1,996,925)
---------- -----------
Property and equipment, net....................... $2,988,714 $20,681,724
========== ===========
</TABLE>
NOTE 4--CAPITAL LEASE
In September 1994, the Company entered into a fifteen-year capital
lease with its Chairman and Chief Executive Officer, for its former corporate
headquarters and warehouse space. The rental amount is subject to annual
increases based on the Consumer Price Index and is currently $351,396 per
annum. The Company pays all insurance and maintenance relating to the leased
property. The mortgages on the leased property are collateralized by guarantees
of a subsidiary of the Company and have an aggregate outstanding principal
balance of $1,525,169 and $1,456,101 as of December 31, 1998 and January 1,
2000, respectively. As of December 31, 1998 and January 1, 2000, the Company's
net investment in this capital lease was $2,007,035, and $1,801,884,
respectively, which were included in property and equipment. Interest recorded
on this capital lease for the fiscal years ended December 31, 1997, December
31, 1998 and January 1, 2000 was $242,120, $234,345, $223,430, respectively.
Future minimum lease payments under this capital lease at January 1,
2000, together with the present value of those future minimum lease payments,
are as follows:
<TABLE>
<S> <C>
2000........................................................... $ 351,396
2001........................................................... 351,396
2002........................................................... 351,396
2003........................................................... 351,396
2004........................................................... 351,396
Thereafter..................................................... 1,669,136
----------
Total future minimum lease payments............................ 3,426,116
Less: Interest discount amount................................. 1,244,851
----------
Total present value of future minimum lease payments........... 2,181,265
Less: Current portion.......................................... 141,016
----------
Long-term portion.............................................. $2,040,249
==========
</TABLE>
In November 1999, the Company relocated its corporate headquarters to a
Company-owned facility and is currently negotiating the termination of the
lease on its former corporate headquarters. Management expects that this lease
termination will not have a material effect on future results of operations,
cash flows or financial position.
F-10
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value. The preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
shares.
In connection with the acquisition of the Gen-X Companies on May 12,
1998, the Company issued 10,000 shares of mandatorily redeemable preferred
stock. The redemption price of these preferred shares is contingent on certain
sales and gross profit targets, ranging from a minimum of $.01 per share to a
maximum of $50.00 per share, and are redeemable over a five year period. During
the fiscal year ended January 1, 2000, 2,000 shares were redeemed for $100,000
(see Note 18).
Common Stock
On July 13, 1999, the shareholders approved an amendment to the
Company's Certificate of Incorporation that increased the maximum number of
authorized shares of common stock by 40,000,000 to 60,000,000.
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK")
entered into a stock purchase agreement and related agreements for the sale of
6,153,850 shares of the Company's common stock to certain affiliates of
SOFTBANK at a price of $13.00 per share (the closing price on May 26, 1999, the
day prior to the day the Company and SOFTBANK agreed in principle to the
transaction) for an aggregate purchase price of $80,000,050, reduced by
transaction costs of $183,447 and accrued interest of $89,225 and principal
related to an interim loan from SOFTBANK. In order to provide capital to the
Company until closing, which occurred on July 23, 1999, the Company and
SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999
pursuant to which SOFTBANK loaned the Company $15,000,000 at an interest rate
of 4.98% per annum until closing. At the July 23, 1999 closing, this loan
amount was converted into shares of the Company's common stock.
On April 21, 1997, RYKA sold 125,000 shares of its common stock for
$750,000 to certain private investors. The proceeds from this sale were used to
repay $385,000 of the Subordinated Note Payable owed to the KPR Companies from
RYKA and to enable the Company to open $810,000 in letter of credit agreements
for the benefit of KPR.
In connection with the investment in RYKA Inc. in 1995, MR
Acquisitions, L.L.C. ("MR Acquisitions"), a company wholly-owned by the
Company's Chairman and Chief Executive Officer, was granted contingent warrants
to purchase 455,000 shares of common stock. As of December 31, 1997, MR
Acquisitions had exercised warrants to purchase 361,587 of the 455,000 shares
of RYKA common stock for which it paid an aggregate exercise price of $72,317.
These 361,587 shares represent the full number of warrants that MR Acquisitions
was entitled to exercise under the terms of the warrants. MR Acquisitions was
not entitled to exercise the remaining warrants for 93,413 shares because
certain contingencies were not fully satisfied.
NOTE 6--STOCK OPTIONS AND WARRANTS
As part of the 1997 reorganization (see Note 16), on December 15, 1997
the Company assumed eight separate stock option plans (the "Plans"). Under the
terms of the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990 Stock
Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the 1995
Stock Option Plan, the 1995 Non-Employee Directors' Stock Option Plan and the
1996 Equity Incentive Plan (as amended), the Company may grant qualified and
nonqualified options and warrants to purchase up to 31,321;
F-11
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17,500; 37,500; 43,750; 45,000; 75,000; 12,500 and 3,000,000 shares of
common stock, respectively, to employees, directors and consultants of the
Company. The options and warrants vest at various times over periods ranging up
to five years. The options and warrants, if not exercised, expire up to ten
years after the date of grant. Stock appreciation rights ("SAR's") may be
granted under the Plans either alone or in tandem with stock options.
Generally, recipients of SAR's are entitled to receive, upon exercise, cash or
shares of common stock (valued at the then fair market value of the company's
common stock) equal to such fair market value on the date of exercise minus
such fair value on the date of grant of the shares subject to the SAR, although
certain other measurements also may be used. A SAR granted in tandem with a
stock option is exercisable only if and to the extent that the option is
exercised. No SAR's have been granted to date under the Plans.
Pursuant to option grant letters issued by RYKA prior to the 1997
reorganization (see Note 16), but not pursuant to any formal plan ("Non-Plan
Grants"), the Company assumed options issued to certain individuals to purchase
shares of the company's common stock at prices which approximated fair market
value at the date of grant. The options vest at various times over periods
ranging up to five years and, if not exercised, expire up to ten years after
the date of grant.
The following table summarizes the stock option activity for the fiscal
years ended December 31, 1997, December 31, 1998 and January 1, 2000:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Assumed as of December 15, 1997.......................... 219,547 $10.90
Granted................................................ 441,850 3.69
Exercised ............................................. -- --
Canceled............................................... (118,716) 8.95
---------
Outstanding as of December 31, 1997...................... 542,681 5.45
Granted................................................ 695,750 5.79
Exercised.............................................. (7,267) 3.20
Canceled............................................... (42,583) 6.24
---------
Outstanding as of December 31, 1998...................... 1,188,581 5.71
Granted................................................ 1,307,907 14.82
Exercised.............................................. (345,937) 4.84
Canceled............................................... (226,934) 8.03
---------
Outstanding as of January 1, 2000........................ 1,923,617 11.71
=========
</TABLE>
F-12
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the stock warrant activity for the
fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Assumed as of December 15, 1997.......................... 236,486 $5.37
Granted................................................ -- --
Exercised.............................................. -- --
Canceled............................................... -- --
-------
Outstanding as of December 31, 1997...................... 236,486 5.37
Granted................................................ 67,000 6.71
Exercised.............................................. -- --
Canceled............................................... (96,552) 4.27
-------
Outstanding as of December 31, 1998...................... 206,934 6.35
Granted................................................ 333,320 14.42
Exercised.............................................. (49,998) 7.63
Canceled............................................... (923) 16.25
-------
Outstanding as of January 1, 2000........................ 489,333 11.90
=======
</TABLE>
During the fiscal year ended January 1, 2000, the Company granted to
retailers, consultants, and employees options, warrants, and discounted stock
awards to purchase an aggregate of 1,641,227 shares (1,105,741 shares relating
to employees and 535,486 shares relating to retailers and consultants) of the
Company's common stock at prices ranging from $0.01 to $24.69 per share. The
value of options, warrants and discounted stock options granted during 1999
amounted to $5,341,195 ($406,069 relating to employees and $4,935,126 relating
to retailers and consultants) of which the Company reflected $3,770,778 as
expense in the fiscal year ended January 1, 2000. The balance will be
recognized as services are provided over terms ranging from four to five years.
Of the amount recognized as expense during the fiscal year ended January 1,
2000, $2,654,834 is included in continuing operations ($217,476 relating to
employees and $2,437,358 relating to retailers and consultants) and $1,115,945
is included in discontinued operations.
During the latter part of the fiscal year ended January 1, 2000, the
Company issued warrants to purchase 123,500 shares of the Company's common
stock with a fair value at the dates of grant amounting to $1,579,495 to non-
employees which are included in the options and warrants described above.
Because these warrants require certain counterparty performance conditions,
they are subject to variable plan accounting. The Company is recording
compensation expense over the five-year term of the warrants as required by
EITF No. 98-16 and recognized $66,170 as compensation expense for the fiscal
year ended January 1, 2000. The amount of compensation expense recognized in
future years is subject to adjustment based upon changes in the price of the
Company's common stock.
In connection with the disposition of its historical businesses in
fiscal 1999, the Company accelerated the vesting of 415,441 options previously
granted to employees of the discontinued operations as an inducement to remain
with the businesses for a period of ninety days following their sale. For
accounting purposes, the Company considers this action a cancellation of a
previous award and the grant of a new award. Since the grantees will not be
employees of the Company when the options are vested, the Company valued the
awards in accordance with the provisions of SFAS No. 123 and charged the
related expense to discontinued operations in fiscal 1999. As these awards
require counterparty performance conditions, they are subject to variable plan
accounting and the ultimate cost to be recognized for these awards is subject
to adjustment based upon changes in both the number of employees and the price
of the Company's common stock through the ninetieth day after the businesses
are sold.
F-13
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998, the Company issued options and
warrants to purchase 695,750 shares of common stock to various employees at a
range of prices from $2.86 to $7.81 and with terms of five to ten years. The
Company also issued warrants to purchase 67,000 shares of common stock to
various consultants and sales agents at a range of prices from $5.11 to $7.94
and with terms of five to ten years. The Company recorded a charge of $150,000
in 1998 related to these warrants which is included in stock-based
compensation.
The following table summarizes information about options and warrants
outstanding and exercisable as of January 1, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------- ----------------------------
Range of Weighted Average
Exercise Number Remaining Weighted Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .01 -
$ 6.13 525,333 7.32 years $3.95 414,168 $ 3.89
$ 6.25 -
$11.00 493,033 6.00 7.38 171,700 8.18
$11.20 -
$13.00 204,511 7.97 12.14 56,011 12.45
$13.13 -
$15.00 514,120 4.23 14.89 339,620 14.97
$15.13 -
$30.00 675,953 9.39 18.49 75,553 17.89
--------- ---------
$ .01 -
$30.00 2,412,950 7.02 11.75 1,057,052 9.60
========= =========
</TABLE>
As of January 1, 2000, 927,918 shares of common stock were available
for future grants under the Plans.
The Company accounts for the Plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for those incentive stock option awards granted to employees. Had
compensation cost for such awards been determined consistent with SFAS No. 123,
Accounting for Stock Based Compensation, the Company's pro forma net income
(loss) and earnings (losses) per share for the fiscal years ended January 1,
2000, December 31, 1998 and December 31, 1997 would have been as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
------------ ------------
<S> <C> <C>
Year Ended December 31, 1997
Net loss...................................... $ (4,155,295) $ (4,805,295)
============ ============
Losses per share--basic and diluted........... $ (1.39) $ (1.60)
============ ============
Year Ended December 31, 1998
Net income.................................... $ 5,823,856 $ 4,711,383
============ ============
Earnings per share--basic and diluted......... $ .51 $ .41
============ ============
Fiscal Year Ended January 1, 2000
Net loss...................................... $(43,247,230) $(46,850,325)
============ ============
Losses per share--basic and diluted........... $ (2.91) $ (3.15)
============ ============
</TABLE>
The weighted average fair value of the stock options granted during the
fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000
were $1.49, $3.79 and $14.82 per share, respectively.
F-14
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted under the Plans during the fiscal
years ended December 31, 1997, December 31, 1998 and January 1, 2000 were
estimated on the date of grant using the Black-Scholes multiple option pricing
model, with the following assumptions:
<TABLE>
<CAPTION>
Fiscal Year
Year Ended Year Ended Ended
Assumption December 31, 1997 December 31, 1998 January 1, 2000
---------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Dividend yield.......... None None None
Expected volatility..... 50.00% 77.17% 50.00%
Average risk free
interest rate......... 6.10% 5.16% 5.57%
Average expected lives.. 5.00 years 5.76 years 6.28 years
</TABLE>
NOTE 7--INCOME TAXES
The loss from continuing operations before income taxes and the related
benefit from income taxes were as follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------
December 31, 1998 January 1, 2000
----------------- ---------------
<S> <C> <C>
Loss from continuing operations before
income taxes:
Domestic............................... $5,819,849 $28,681,267
Foreign................................ -- --
---------- -----------
Total................................. $5,819,849 $28,681,267
========== ===========
Benefit from income taxes:
Current:
Federal................................ $1,978,749 $ 2,114,352
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total Current......................... $1,978,749 $ 2,114,352
========== ===========
Deferred:
Federal................................ $ -- $ 106,526
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total Deferred........................ $ -- $ 106,526
========== ===========
Total:
Federal................................ $1,978,749 $ 2,220,878
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total................................. $1,978,749 $ 2,220,878
========== ===========
</TABLE>
For the year ended December 31, 1997, the Company had no provision for
federal and state income taxes.
F-15
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of net deferred tax assets and liabilities
as of December 31, 1998 and January 1, 2000 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 January 1, 2000
----------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..... $ 8,035,764 $ 21,508,643
Deferred revenue..................... -- 205,549
Employee benefits.................... -- 416,473
Inventory............................ -- 241,308
Depreciation......................... -- 154,408
Provision for doubtful accounts...... 308,600 111,925
----------- ------------
Gross deferred tax assets.......... 8,344,364 22,638,306
Deferred tax liabilities............... -- --
----------- ------------
Net deferred tax assets and
liabilities.......................... 8,344,364 22,638,306
Valuation allowance.................. (8,344,364) (22,638,306)
----------- ------------
Net deferred tax asset................. $ -- $ --
=========== ============
</TABLE>
Due to the uncertainty surrounding the realization of the Company's tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of January
1, 2000, the Company had available net operating loss carryforwards of
approximately $54,759,299 which expire in the years 2002 through 2018. The use
of certain net operating loss carryforwards may be subject to annual
limitations based on ownership changes of the Company's stock, as defined by
Section 382 of the Internal Revenue Code.
The differences between the statutory federal income tax rate and the
effective income tax rate are provided in the following reconciliation:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ----------
<S> <C> <C>
Statutory federal income tax rate.................. 34.0% (34.0)%
Increase (decrease) in taxes resulting from:
Valuation allowance.............................. -- 30.8
Carryback claim refund........................... -- (4.6)
Other............................................ -- .1
---- -----
Effective income tax rate.......................... 34.0% (7.7)%
==== =====
</TABLE>
NOTE 8--EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share have been computed in accordance with SFAS
No. 128, Earnings Per Share. Basic and diluted earnings (losses) per share is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the year. Outstanding common stock options
and warrants have been excluded from the calculation of diluted earnings
(losses) per share because their effect would be antidilutive.
F-16
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts used in calculating earnings (losses) per share data are as
follows:
<TABLE>
<CAPTION>
Fiscal Year
Year Ended Year Ended Ended
December 31, 1997 December 31, 1998 January 1, 2000
----------------- ----------------- ---------------
<S> <C> <C> <C>
Loss from continuing
operations.............. $(4,402,251) $(3,841,100) $(26,460,389)
Income from discontinued
operations.............. 246,956 9,664,956 549,838
Loss on disposition of
discontinued
operations.............. -- -- (17,336,679)
----------- ----------- ------------
Net income (loss)......... $(4,155,295) $ 5,823,856 $(43,247,230)
=========== =========== ============
Weighted average shares
outstanding--
basic and diluted....... 2,996,027 11,378,918 14,874,018
=========== =========== ============
Outstanding common stock
options having no
dilutive effect......... 542,681 533,132 1,923,617
=========== =========== ============
Outstanding common stock
warrants having no
dilutive effect......... 236,486 384,117 489,333
=========== =========== ============
</TABLE>
NOTE 9--SIGNIFICANT CUSTOMER/CONCENTRATIONS OF CREDIT RISK
For the fiscal year ended January 1, 2000, net revenues include
revenues from Healtheon/WebMD of $2,792,350 through the sale of product to
support the launch of the WebMD Sports & Fitness Store. As of January 1, 2000,
Healtheon/WebMD represented substantially all of the balance in accounts
receivable. During 1999, the Company also agreed to purchase advertising from
Healtheon/WebMD in the aggregate amount of $3,000,000 to occur in 1999 through
the second quarter of 2000.
NOTE 10--MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
The Company purchased inventory from two suppliers during the fiscal
year ended January 1, 2000 amounting to $2,206,882 and $1,764,021 or 15% and
12% of total inventory purchased, respectively. As of January 1, 2000, the
Company had $1,624,321 and $1,737,666, respectively, in amounts owed to these
suppliers included in accounts payable. No other supplier amounted to more than
of 10% of total inventory purchased for any period presented.
NOTE 11--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various routine litigation, including
litigation in which the Company is a plaintiff, incidental to its business. The
Company believes that the disposition of such routine litigation will not have
a material adverse effect on the financial position or results of operations of
the Company.
Employment Agreements
As of January 1, 2000, the Company had employment agreements with
several of its officers for an aggregate annual base salary of $1,543,300 plus
bonus 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 January 1, 2000, the Company was contractually committed for the
purchase of future advertising totaling approximately $6,447,000 (including the
remaining commitment referred to in Note 9 with a significant
F-17
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
customer) and to provide barter media of no less than $5,000,000 for 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.
Retailer Relationships
The Company's retailer alliances are separated into two different
structures. The Company's arrangement with The Athlete's Foot, Oshman's
Sporting Goods, MC Sports, Dunham's Sporting Goods, Sport Chalet and
Healtheon/WebMD are exclusive licensing arrangements ranging in term from five
to ten years, whereby the Company records 100% of all revenues generated on the
electronic storefronts and pays a percentage of those revenues to the partner
in exchange for the electronic rights to their brand name and the promotion of
the electronic storefront in the partner's stores, Web site and/or marketing
and communications materials. Healtheon/WebMD, The Sports Authority, Inc. and
the Company are presently operating in accordance with a binding letter of
intent, which expired on October 29, 1999, and the parties are in the process
of negotiating a formal contract. The Company entered into a fifteen-year
exclusive agreement with The Sports Authority, Inc. (the "TSA Agreement"), via
the Company's 80.1%-owned subsidiary TheSportsAuthority.com ("TSA.com").
TSA.com pays a royalty to The Sports Authority, Inc. based on a percentage of
sales generated by the TSA.com's electronic storefront. On or after February 1,
2002, The Sports Authority, Inc. has the right to receive (for no
consideration) up to an additional 30% interest in TSA.com if certain
performance targets are met. The Sports Authority, Inc. has an option to
purchase, on the earlier to occur of May 9, 2002 or an initial public offering
of shares of TSA.com common stock, up to a total ownership interest of 49.9% in
TSA.com at a price determined by a formula defined in the TSA Agreement.
NOTE 12--SAVINGS PLAN
The Company sponsors a voluntary defined contribution savings plan
covering all U.S. employees. Company contributions to the plan for each
employee may not exceed 1.5% of the employee's annual salary. Total Company
contributions were $18,594, $21,431 and $28,147 for the fiscal years ended
December 31, 1997, December 31, 1998 and January 1, 2000, respectively.
NOTE 13--BUSINESS SEGMENTS
The Company operates in one principal business segment which develops
and operates the e-commerce sporting goods businesses of traditional sporting
goods retailers, general merchandisers, internet and media companies in
domestic markets. All of the domestic net sales, operating results and
identifiable assets are in the United States. See Note 18 for a discussion of
the Company's discontinued operations.
NOTE 14--RELATED PARTY TRANSACTIONS
The Company leases an office and warehouse facility from the Company's
Chairman and Chief Executive Officer (see Note 4).
A summary of the KPR Companies' related party transactions with RYKA
Inc. (prior to the 1997 reorganization--see Note 16) for the year ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Financial Statement
Nature of Transaction Classification 1997
--------------------- ---------------------------- -------
<S> <C> <C>
Rent................................... Other (income) expenses $45,521
Interest on subordinated debt.......... Interest expense $56,854
</TABLE>
F-18
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--NOTES PAYABLE
Notes Payable, Bank
The components of the notes payable, bank balances as of December 31,
1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 January 1, 2000
----------------- ---------------
<S> <C> <C>
Revolving credit facility, secured by
substantially all assets of KPR and RYKA
(weighted average interest rate at
December 31, 1998--8.15%)............... $18,812,156 $ --
=========== =====
</TABLE>
On November 20, 1997, the KPR Companies and RYKA entered into a Loan
and Security Agreement (the "Loan Agreement"). Under the Loan Agreement, as
amended, the Company had access to a combined credit facility of $40,000,000
which was comprised of the KPR Companies' credit facility of $35,000,000 and
RYKA's credit facility of $5,000,000. The term of the Loan Agreement was five
years expiring on November 19, 2002. The KPR Companies and RYKA had an interest
rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two
hundred seventy-five basis points. Under the Loan Agreement, both the KPR
Companies and RYKA may have borrowed up to the amount of their revolving line
based upon 85% of their eligible accounts receivable and 65% of their eligible
inventory, as those terms are defined in the Loan Agreement. The Loan Agreement
also included 50% of outstanding letters of credit as collateral for borrowing.
All borrowings under this line were repaid in full as of January 1,
2000 and the credit facility is in the process of being terminated. The total
interest incurred in connection with this facility was $1,088,554 for the
fiscal year ending January 1, 2000. The maximum amount outstanding on this line
during the fiscal year ended January 1, 2000 was $25,459,189.
Subordinated Notes Payable, Related Party
The components of the subordinated notes payable balances as of
December 31, 1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 January 1, 2000
----------------- ---------------
<S> <C> <C>
Subordinated notes payable to
shareholder (interest rate at
December 31, 1998--8.25%)........... $1,805,841 $ --
========== =====
</TABLE>
At December 31, 1998, the Company had $1,805,841 in outstanding
subordinated notes payable held by its Chairman and Chief Executive Officer,
plus accrued interest on such notes of $24,094 which was recorded in accrued
expenses. This debt consists primarily of a note representing undistributed
Subchapter S corporation retained earnings previously taxed to him as the sole
shareholder of the KPR Companies prior to the 1997 reorganization (see Note
16). Interest accrues on such notes at the Company's choice of prime plus 1/4%
or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points.
Based on its Loan Agreement, the Company is permitted to make regular payments
of interest on the subordinated notes and to further reduce principal on a
quarterly basis, commencing subsequent to the first quarter of 1998, in an
amount up to 50% of the cumulative consolidated net income of the Company.
During 1998, aggregate principal payments of $250,000 were made. On July 27,
1999, the principal balance of $1,805,841 plus interest accrued to date of
$58,987 was repaid in full, for which a waiver was obtained from the Company's
primary lender.
F-19
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--REORGANIZATION
On December 15, 1997, the Company consummated a reorganization (the
"Reorganization"), among RYKA Inc. ("RYKA"), KPR Sports International, Inc.
("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three
companies collectively referred to as the "KPR Companies"), and Michael G.
Rubin, the former sole shareholder of the KPR Companies and now the Chairman
and Chief Executive Officer of the Company. As part of the Reorganization, (i)
RYKA was renamed Global Sports, Inc., (ii) the Company transferred all of its
assets and liabilities to RYKA in exchange for all of the issued and
outstanding shares of capital stock of RYKA, (iii) a subsidiary of the Company
merged with and into KPR, with KPR surviving the merger as a wholly-owned
subsidiary of the Company, (iv) the Company acquired all of the issued and
outstanding shares of capital stock of Apex and MR Management, and (v) the
Company issued to Mr. Rubin an aggregate of 8,169,086 of its common stock in
exchange for all of the issued and outstanding shares of capital stock of the
KPR Companies.
Immediately after the Reorganization, Mr. Rubin, the former sole
shareholder of the KPR Companies, then owned approximately 78% of the
outstanding voting power of the Company. Accordingly, the Reorganization was
accounted for as a reverse purchase under generally accepted accounting
principles pursuant to which the KPR Companies were considered to be the
acquiring entity and the Company was the acquired entity for accounting
purposes, even though the Company was the surviving legal entity. Accordingly,
references to the Company's financial statements refer to the financial
statements of the KPR Companies prior to the Reorganization and to the
financial statements of the KPR Companies, including RYKA, Inc., after the
Reorganization.
NOTE 17--INVESTMENT IN RYKA INC.
A summary of activity relating to the Company's investment in RYKA Inc. for
the year ended December 31, 1997 follows:
<TABLE>
<S> <C>
Investment in RYKA, December 31, 1996.......................... $1,167,986
Equity in net loss of RYKA..................................... (592,093)
Equity in stock issuances of RYKA.............................. 356,534
Additional advances............................................ 12,311
Amortization of negative goodwill.............................. 12,446
RYKA partial repayment of initial advance...................... (385,000)
----------
Investment in RYKA, December 14, 1997.......................... $ 572,184
==========
</TABLE>
During 1997, RYKA issued for cash 125,000 shares of common stock for
$6.00 per share, which was in excess of the Company's per share carrying
amount. Also in 1997, MR Acquisitions exercised its warrants to purchase an
additional 361,587 RYKA shares. The Company accounted for these transactions
as an increase in both its investment and additional paid-in capital. As of
December 14, 1997, just prior to the Reorganization (See Note 16), the Company
had a 33% equity interest in the net assets of RYKA.
NOTE 18--DISCONTINUED OPERATIONS
On April 20, 1999, the Company formalized a plan to sell two of its
businesses, the Branded division and the Off-Price and Action Sports division,
in order to focus exclusively on its e-commerce business. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division is a third-party distributor and make-to-order marketer
of off-price footwear, apparel and sporting goods. 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 in the Company's financial
F-20
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements as discontinued operations. The accompanying financial
statements have been reclassified to reflect this presentation.
On September 24, 1999, the Company and a management group led by James
J. Salter and Kenneth J. Finkelstein entered into an acquisition agreement
providing for the sale of the Company's Off-Price and Action Sports division,
including the sale 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. (collectively, the "Gen-X Companies"). On March 13, 2000, the acquisition
agreement was amended to, inter alia, (i) extend the date after which either
party could terminate the acquisition agreement, (ii) provide for a larger
portion of the purchase price to be paid in cash instead of a combination of
cash and promissory notes, (iii) to reduce the purchase price as a result of
more of the purchase price being paid in cash, (iv) to provide the purchaser
with a breakup fee of $1,500,000, and (v) to accelerate the vesting of options
to purchase an aggregate of 281,930 shares of Global Common Stock held by
certain employees of Global. Pursuant to the terms of the acquisition
agreement, as amended, the aggregate purchase price for the Off-Price and
Action Sports division is approximately $17,200,000, consisting of a cash
payment of $6,000,000 deposited in an escrow account by the purchaser on March
13, 2000, a cash payment at closing of $7,200,000 and assumption of certain
notes payable by Global in the aggregate principal amount of approximately
$4,000,000.
On December 29, 1999, Global sold substantially all of the assets of
its Branded division (other than the accounts receivable which totaled
approximately $6,600,000 as of December 29, 1999) to American Sporting Goods
Corporation in exchange for a cash payment of $10,447,409. The Company
recognized a loss of $12,102,841 on the sale of the Branded division, including
operating losses of $5,289,344 subsequent to the measurement date of April 20,
1999.
Upon initial adoption of the plan to sell these businesses, management
expected to recognize a gain upon the disposal of its historical businesses.
During the second quarter of fiscal 1999, management revised its estimates and
recorded a loss on disposal of $5,632,158. During the fourth quarter of fiscal
1999, when the Company consummated the sale of its Branded division, the
proceeds from the sale were substantially lower than formerly anticipated. As a
result of this transaction and the renegotiation of the sales price for the
Off-Price and Action Sports division, management made further revisions to its
estimates and recognized additional losses on disposal of $11,704,521 during
the fourth quarter of fiscal 1999.
Net sales of discontinued operations for the fiscal years ended
December 31, 1997, December 31, 1998 and January 1, 2000 were $60,671,407,
$131,434,971 and $112,823,357, respectively. For the period subsequent to April
20, 1999, the measurement date, discontinued operations incurred net operating
losses of $7,575,861, of which $5,289,344 was attributable to the Branded
division and $2,286,517 was attributable to the Off-Price and Action Sports
division. The income tax provision for discontinued operations arose as a
result of the taxable income of a foreign subsidiary as well as a tax provision
related to gains on the disposal of certain intangibles owned by a U.S.
subsidiary.
F-21
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The discontinued operations components of amounts reflected in the
balance sheets are as follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Cash......................................... $ 772,916 $ 590,952
Accounts receivable.......................... 36,782,732 29,692,418
Inventory.................................... 20,954,168 3,518,312
Property and equipment....................... 1,397,189 1,242,526
Goodwill and intangibles..................... 16,507,073 11,148,024
Other assets................................. 936,293 499,650
Accounts payable and accrued expenses........ (16,192,954) (10,360,404)
Subordinated notes payable................... (1,999,065) --
Note payable, banks.......................... (14,823,955) (15,520,167)
Notes payable, other......................... (3,206,558) (2,430,505)
------------ ------------
Net assets of discontinued
operations(/1/).......................... $ 41,127,839 $ 18,380,806
============ ============
</TABLE>
--------
(/1/) Included in current assets.
Acquisition of Discontinued Operations
Prior to its decision to focus exclusively on its e-commerce business,
the Company acquired Gen-X Holdings Inc. and Gen-X Equipment Inc. on May 12,
1998. The Gen-X Companies were privately-held companies based in Toronto,
Ontario specializing in selling off-price sporting goods and winter sports
equipment (including ski and snowboard equipment), in-line skates, sunglasses,
skateboards and specialty footwear. In consideration for the stock of the Gen-X
Companies, the Company issued 1,500,000 shares of its common stock and
contingent consideration in the form of non-interest bearing notes and 10,000
shares of mandatorily redeemable preferred stock in the aggregate amount of
$5,000,000. The notes are payable and shares are redeemable at an aggregate of
$1,000,000 per year over a five-year period upon achieving certain sales and
gross profit targets. The total purchase price, including acquisition expenses
of approximately $330,000 but excluding the contingent consideration described
above ($1,000,000 of which was paid in May of 1999), was $9,279,645. This
purchase price is based on the 5-day average market price of the 1,500,000
shares discounted by 10% to reflect restrictions on the transferability of
these shares.
The following table details the allocation of the total consideration:
<TABLE>
<S> <C>
Fair value of assets acquired................................. $13,913,937
Fair value of liabilities assumed............................. (13,765,000)
Goodwill...................................................... 9,130,708
-----------
$ 9,279,645
===========
</TABLE>
During fiscal 1999, the Gen-X Companies achieved the first of their
sales and gross profit targets, and accordingly, in May 1999, the Company
redeemed 2,000 shares of the mandatorily redeemable preferred stock for
$100,000 and paid $900,000 against the contingent notes payable, resulting in a
corresponding increase to goodwill of $1,000,000.
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc.
("Lamar"), a privately-held manufacturer of snowboards, bindings and related
products based in San Diego, California. In consideration for
F-22
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the stock of Lamar, the Company paid $250,000 in cash and issued notes in
the aggregate principal amount of $1,000,000, payable over five years. The fair
value of the assets acquired was $927,124 and the fair value of the liabilities
assumed was $1,881,116, resulting in goodwill of $2,203,992.
Notes Payable of Discontinued Operations
The components of the notes payable, banks balances as of December 31,
1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December
31, January 1,
1998 2000
----------- -----------
<S> <C> <C>
Revolving credit facility, secured by substantially
all assets of the Gen-X Companies (weighted
average interest rate at January 1, 2000--7.71%).. $14,500,000 $15,240,000
Mortgage payable, secured by building due 8/15/09
(interest rate at January 1, 2000--7.91%)......... 323,955 280,167
----------- -----------
Total............................................. $14,823,955 $15,520,167
=========== ===========
</TABLE>
The Company has a line of credit of approximately $20,000,000 for use
by the Gen-X Companies, which is available for either direct borrowing or for
import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering substantially
all of the Gen-X Companies' assets. As of January 1, 2000, draws of $15,240,000
were committed under this line. Based on available collateral and outstanding
import letters of credit commitments an additional $9,184,000 was available for
borrowing as of January 1, 2000. The maximum amount outstanding on this line
during the fiscal year ended January 1, 2000 was $15,240,000.
Notes payable, banks includes a mortgage payable secured by land and
building in Ontario, Canada of $280,167 bearing interest at the bank's cost of
funds plus 2.5% and maturing on August 15, 2009.
The components of the notes payable, other balances as of December 31,
1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December
31, January 1,
1998 2000
---------- ----------
<S> <C> <C>
Note payable to Ride, Inc., due 12/31/02 (interest
rate as of January 1, 2000--8%)..................... $1,600,000 $1,200,000
Notes payable to former shareholders of Lamar, due
7/27/03 (interest rate as of January 1, 2000--6%)... 1,606,558 1,230,505
---------- ----------
Total.............................................. $3,206,558 $2,430,505
========== ==========
</TABLE>
Other debt related to the Gen-X Companies includes an outstanding loan
payable to Ride Inc. of $1,200,000. The original loan of $2,000,000 is
repayable in equal quarterly installments of $100,000 which commenced on March
31, 1998 and bears interest at the prime lending rate.
Notes payable, other also includes $1,230,505 of promissory notes
payable to the former shareholders of Lamar. The notes are payable in five
equal annual installments and bear interest at 6% per annum.
F-23
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the subordinated notes payable balances as of
December 31, 1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ----------
<S> <C> <C>
Subordinated notes payable to former shareholders
of the Gen-X Companies, due January 1, 2000..... $1,999,065 $--
========== ====
</TABLE>
Upon closing the Gen-X transaction on May 12, 1998, several
subordinated notes payable were executed with the former shareholders of the
Gen-X Companies for an aggregate of $1,999,065 which is payable upon the
earlier of the Company raising certain additional capital or in four equal
consecutive quarterly payments beginning March 31, 1999. This note bears
interest at 7% per annum until December 31, 1998 and the prime lending rate
thereafter.
Net interest expense incurred related to notes payable of discontinued
operations amounting to $-- , $905,197 and $2,430,151 for the fiscal years
ended December 31, 1997, December 31, 1998 and January 1, 2000, respectively,
has been allocated to discontinued operations.
Property and Equipment of Discontinued Operations
The major classes of property and equipment, at cost, as of December
31, 1998 and January 1, 2000 are as follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ----------
<S> <C> <C>
Computers and equipment........................ $ 574,040 $ 693,100
Building....................................... 686,365 678,375
Leasehold improvement.......................... 21,846 14,247
Land........................................... 268,800 268,800
---------- ----------
1,551,051 1,654,522
Less: Accumulated depreciation and
amortization................................. (153,862) (411,996)
---------- ----------
Property and equipment, net................. $1,397,189 $1,242,526
========== ==========
</TABLE>
Purchase Commitments of Discontinued Operations
As of January 1, 2000, outstanding purchase commitments exist totaling
$2,412,167.
Related Party Transactions of Discontinued Operations
For the year ended December 31, 1997, the KPR Companies' purchased
$196,274 of inventory from RYKA Inc. (prior to the Reorganization).
Financial Instruments of Discontinued Operations
The Company uses derivative financial instruments to manage the impact
of foreign exchange rate changes on earnings and cash flows. The Company does
not enter into financial instruments for trading or speculative purposes. The
counterparties to these contracts are major financial institutions with high
credit ratings and the Company does not have significant exposure to any one
counterparty. Management believes the risk of loss is remote and in any event
would be immaterial.
F-24
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of its foreign exchange risk management strategy, the Company
uses forward exchange contracts to minimize currency risk on anticipated
inventory purchases and cash flows from collections of accounts receivable. The
terms of these contracts are typically from one to three months. From time to
time during 1998 and 1999, the Company entered into several forward currency
exchange contracts with one of its main lending banks, accounted for as direct
hedges on certain of its accounts payable exposures in Swiss Francs, German
Marks and British Pounds. All gains and losses from such contracts are
recognized in cost of sales as the related inventories are sold. The Company
had no amounts outstanding related to these contracts as of January 1, 2000.
Significant Customers/Concentrations of Credit Risk of Discontinued Operations
The Company's sales and accounts receivable of discontinued operations
were primarily with major national retail stores. If the financial condition or
operations of these customers deteriorate substantially, the Company's
operating results could be adversely affected. Credit risk with respect to
other trade accounts receivable is generally diversified due to the large
number of entities comprising the Company's customer base and mitigated in part
by credit insurance. The Company performs ongoing credit evaluations of its
customers' financial condition and generally the Company does not require
collateral.
For the fiscal years ended December 31, 1997, December 31, 1998 and
January 1, 2000, net sales to key customers each amounting to in excess of 10%
of net sales are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
December 31, December 31 January 1,
1997 1998 2000
------------ ----------- ----------
<S> <C> <C> <C>
Customer A............................ N/A 27% N/A
Customer B............................ 22% 13% 13%
Customer C............................ 13% N/A N/A
</TABLE>
As of December 31, 1998, accounts receivable for Customer A and
Customer B amounted to $8,881,106 and $4,080,369, respectively, or 24% and 11%,
respectively, of total accounts receivable outstanding. As of January 1, 2000,
accounts receivable for Customer B amounted to $1,957,882, or 5% of total
accounts receivable outstanding in discontinued operations.
Major Suppliers/Economic Dependency of Discontinued Operations
Inventory purchased for the fiscal years ended December 31, 1997 and
December 31 1998 from a supplier amounted to 26% and 11%, respectively, of
total inventory purchased. As of December 31, 1997, the amount owed to this
supplier was $11,261,105, or 70% of total accounts payable outstanding. As of
December 31, 1998 and January 1, 2000, the Company had no amounts owed to this
supplier. No other supplier amounted to in excess of 10% of total inventory
purchased for each of the years then ended.
F-25
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Statement of Operations
information for each quarter of the fiscal years ended December 31, 1998 and
January 1, 2000. The Company believes that the following information reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues................. $ -- $ -- $ -- $ --
========== ========== ========== ===========
Gross profit................. -- -- -- --
========== ========== ========== ===========
Loss from continuing
operations.................. $ (439,448) $ (452,616) $ (875,998) $(2,073,038)
Income from discontinued
operations.................. 1,971,021 1,258,993 3,314,628 3,120,314
---------- ---------- ---------- -----------
Net income................... $1,531,573 $ 806,377 $2,438,630 $ 1,047,276
========== ========== ========== ===========
Losses per share--basic and
diluted(/1/):
Loss from continuing
operations................ $ (.04) $ (.04) $ (.07) $ (.17)
Income from discontinued
operations................ .19 .11 .27 .26
---------- ---------- ---------- -----------
Net income................. $ .15 $ .07 $ .20 $ .09
========== ========== ========== ===========
Weighted average shares
outstanding--basic and
diluted..................... 10,418,198 11,226,403 11,922,515 11,925,378
========== ========== ========== ===========
</TABLE>
- --------
/(1)/Thesum of the quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
<TABLE>
<CAPTION>
For the Fiscal Year Ended January 1, 2000
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues............... $ -- $ -- $ -- $ 5,510,576
========== =========== =========== ============
Gross profit............... -- -- -- 1,693,809
========== =========== =========== ============
Loss from continuing
operations................ $ (763,287) $(3,221,021) $(7,116,645) $(15,359,436)
Income (loss) from
discontinued operations... 1,157,175 (607,335) -- --
Gain (loss) on disposition
of discontinued
operations................ -- (5,632,158) 97,951 (11,802,472)
---------- ----------- ----------- ------------
Net income (loss).......... $ 393,888 $(9,460,514) $(7,018,694) $(27,161,908)
========== =========== =========== ============
Losses per share--basic and
diluted(/1/):
Loss from continuing
operations.............. $ (.06) $ (.27) $ (.42) $ (.83)
Income (loss) from
discontinued
operations.............. .09 (.05) -- --
Gain (loss) on
disposition of
discontinued
operations.............. -- (.46) -- (.64)
---------- ----------- ----------- ------------
Net income (loss)........ $ .03 $ (.78) $ (.42) $ (1.47)
========== =========== =========== ============
Weighted average shares
outstanding--basic and
diluted................... 12,018,517 12,120,085 16,824,139 18,424,942
========== =========== =========== ============
</TABLE>
- --------
/(1)/The sum of the quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
F-26
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 20--SUBSEQUENT EVENT
On February 29, 2000, the Company entered into a long-term agreement
with BlueLight.com, an independent company formed to operate the e-commerce
businesses of Kmart Corporation, to manage the merchandising, warehousing and
fulfillment of BlueLight.com's sporting goods category.
F-27
<PAGE>
PART II
Item 14. Other Expenses Of Issuance And Distribution.
The following table indicates the expenses to be incurred in connection
with the offering described in this registration statement, all of which will
be paid by Global Sports. All amounts are estimates, other than the SEC
registration fee, the NASD fee, and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration fee............................................... $ 27,324
NASD fee........................................................... $ 10,850
Nasdaq listing fee................................................. $ 17,500
Accounting fees and expenses....................................... $100,000
Legal fees and expenses............................................ $200,000
Printing and engraving............................................. $100,000
Transfer Agent fees and expenses................................... $ 10,000
Blue sky fees and expenses......................................... $ 10,000
Miscellaneous expenses............................................. $224,326
--------
Total............................................................ $700,000
========
</TABLE>
Item 15. Indemnification Of Directors And Officers.
The Delaware General Corporation Law provides, in substance, that
Delaware corporations shall have the power, under specified circumstances, to
indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by third parties and in
connection with actions or suits by or in the right of the corporation, by
reason of the fact that they were or are such directors, officers, employees
and agents, against expenses (including attorneys' fees) and, in the case of
actions, suits or proceedings brought by third parties, against judgments,
fines and amounts paid in settlement actually and reasonably incurred in any
such action, suit or proceedings.
Our Bylaws also provide for indemnification to the fullest extent
permitted by the Delaware General Corporation Law. Reference is made to the
Bylaws of the Company.
As permitted by the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation eliminates the personal liability of our
directors to us and our stockholders, in certain circumstances, for monetary
damages arising from a breach of the director's fiduciary duty.
The company has obtained directors' and officers' liability insurance
which covers certain liabilities, including liabilities to Global and its
stockholders, in the amount of $5.0 million.
In addition, Global intends, subject to stockholder approval, to enter
into indemnification agreements with its directors and officers.
Section [ ] of the Underwriting Agreement provides for indemnification
and contribution by Global and the underwriters for certain liabilities under
the Underwriting Agreement.
II-1
<PAGE>
Item 16.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<C> <S>
3. Exhibits
1.1 Form of Underwriting Agreement (to be filed by amendment).
2.1(1) Securities Purchase Agreement dated June 21, 1995 by and between the
Company and MR Acquisitions, Inc.
2.2(2) First Amendment to Securities Purchase Agreement by and between the
Company and MR Acquisitions, Inc. dated July 31, 1995.
2.3(3) Second Amended and Restated Agreement and Plan of Reorganization, as
amended, among RYKA Inc., a Delaware corporation, KPR Sports
International, Inc., a Pennsylvania corporation, Apex Sports
International, Inc., a Pennsylvania corporation, MR Management, Inc.,
a Pennsylvania corporation, and Michael G. Rubin.
2.4(4) Stock Purchase Agreement dated as of May 12, 1998 by and among Global
Sports, Inc., DMJ Financial Inc., James J. Salter, Kenneth J.
Finkelstein and certain other individuals and entities.
2.5(5) Asset Purchase Agreement, dated December 29, 1999, among American
Sporting Goods Corporation and RYKA Inc., KPR Sports International,
Inc., G.S.I., Inc., Apex Sports International, Inc. and Global Sports,
Inc.
2.6(6) 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
3.1(3) Amended and Restated Certificate of Incorporation of the Company filed
with the Secretary of State of the State of Delaware on December 15,
1997.
3.2(7) The Company's Bylaws, as amended.
4.1(7) Specimen of Common Stock Certificate.
5.1 Opinion of Blank Rome Comisky & McCauley LLP (to be filed by
amendment).
23.1 Consent of Independent Auditors.
23.2 Consent of Blank Rome Comisky & McCauley LLP (to be included in the
opinion to be filed on
Exhibit 5.1)
24.1 Power of Attorney (included on Page II-4)
27.1(8) Financial Data Schedule
</TABLE>
- --------
*Management contract or compensatory plan or arrangement
(1)Incorporated by reference to the Company's Current Report on Form 8-K dated
June 21, 1995.
(2)Incorporated by reference to the Company's Current Report on Form 8-K dated
July 31, 1995.
(3)Incorporated by reference to the Company's Definitive Proxy Materials filed
November 12, 1997.
(4)Incorporated by reference to the Company's Current Report on Form 8-K dated
May 27, 1998.
(5)Incorporated by reference to the Company's Current Report on Form 8-K dated
January 13, 2000.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A
for the nine-month period ended September 30, 1999, filed March 21, 2000.
(7)Incorporated by reference to the Company's Registration Statement No. 33-
33754.
(8)Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 2000, filed on March 30, 2000.
(b) Financial Statement Schedules.
Not Applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual
II-2
<PAGE>
report pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 15, or otherwise,
the registrant has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification by
the registrant against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against pubic policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bonafide
offering thereof.
II-3
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in King of Prussia, Pennsylvania, on March 28, 2000.
Global Sports, Inc.
/s/ Michael G. Rubin
By: _________________________________
Name: Michael G. Rubin
Title: Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Rubin and Kenneth Adelberg, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including, without
limitation, post-effective amendments) to this Registration Statement and any
registration statement filed under Rule 462 under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on March 28,
2000 in the capacities indicated:
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ Michael G. Rubin Chairman of the Board and Chief
______________________________________ Executive Officer (principal
Michael G. Rubin executive officer)
/s/ Jordan M. Copland Executive Vice President and Chief
______________________________________ Financial Officer (principal
Jordan M. Copland financial officer and principal
accounting officer)
/s/ Kenneth J. Adelberg Director
______________________________________
Kenneth J. Adelberg
/s/ Ronald D. Fisher Director
______________________________________
Ronald D. Fisher
/s/ Harvey Lamm Director
______________________________________
Harvey Lamm
/s/ Dr. Jeffrey F. Rayport Director
______________________________________
Dr. Jeffrey F. Rayport
/s/ Charles R. Lax Director
______________________________________
Charles R. Lax
</TABLE>
II-4
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Global Sports, Inc. on
Form S-3 of our report dated March 22, 2000 appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Consolidated
Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 31, 2000
