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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 29, 2001 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-16611
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GLOBAL SPORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation of organization)
1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406, (610) 265-3229
(Address of principal executive offices, including zip code, telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of the close of business on March 15, 2002,
was approximately $217,629,828.(/1/) There were 38,060,527 shares of the
registrant's Common Stock outstanding as of the close of business on March 15,
2002.(/2/)
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain information required for Part III of this Form 10-K is incorporated
herein by reference to the Proxy Statement for the 2002 Annual Meeting of our
shareholders.
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(/1/) This amount equals the number of outstanding shares of the registrant's
Common Stock reduced by the number of shares that may be deemed
beneficially owned by the registrant's officers, directors and
shareholders owning in excess of 10% of the registrant's Common Stock,
multiplied by the last reported sale price for the registrant's Common
Stock on March 15, 2002. This information is provided solely for record
keeping purposes of the Securities and Exchange Commission and shall not
be construed as an admission that any officer, director or 10%
shareholder in the registrant is an affiliate of the registrant or is
the beneficial owner of any such shares. Any such inference is hereby
disclaimed.
(/2/) Excludes approximately 430,000 shares of the registrant's common Stock
which are issuable to former shareholders of Ashford.com, Inc. in
connection with the registrant's acquisition of Ashford.com, but which,
as of March 15, 2002, had not yet been issued.
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GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
TABLE OF CONTENTS
Page
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PART I
ITEM 1: BUSINESS..................................................... 1
ITEM 2: PROPERTIES................................................... 25
ITEM 3: LEGAL PROCEEDINGS............................................ 26
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 26
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT......................... 27
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 28
ITEM 6: SELECTED FINANCIAL DATA...................................... 28
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 30
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 39
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 39
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 40
ITEM 11: EXECUTIVE COMPENSATION....................................... 40
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 40
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 40
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 40
SIGNATURES.............................................................. 43
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, references to fiscal
1997, fiscal 1998, fiscal 1999, fiscal 2000, fiscal 2001 and fiscal 2002 refer
to the years ended December 31, 1997, December 31, 1998, January 1, 2000,
December 30, 2000, December 29, 2001 and the year ending December 28, 2002.
Although we refer to the retailers, manufacturers, media companies and
professional sports organizations for which we develop and operate e-commerce
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.
We intend to change our name from Global Sports, Inc. to GSI Commerce, Inc.
in May 2002, subject to stockholder approval at our 2002 Annual Meeting of
Stockholders. In connection with our name change, we also intend to change our
Nasdaq symbol from "GSPT" to "GSIC".
PART I
ITEM 1: BUSINESS.
Overview
We develop and operate electronic commerce businesses for retailers,
manufacturers, media companies and professional sports organizations. The e-
commerce businesses that we operate include the sale of products through
online retail stores over the Internet and direct response television
campaigns. Our scalable solution encompasses Web site design and development,
e-commerce technology, customer service, fulfillment, buying and
merchandising, content development and management, on-line and database
marketing and product development and sourcing. Based on these capabilities,
we can quickly and cost-effectively implement customized e-commerce businesses
for a broad range of partners.
We enable our partners to remain focused on their core businesses and avoid
substantial investments and operating expenses relating to e-commerce.
Depending on the specific needs of a partner, we can undertake either a
complete outsourcing of the partner's e-commerce activities or a more
customized solution that uses portions of our platform. We benefit from the
traffic generated by our partners' established brand franchises and extensive
advertising and promotions 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 and
coordination of the development and production of direct response
television campaigns under our partners' banners;
. extensive technology that operates and manages all aspects of multiple
e-commerce businesses including online retail stores and direct response
television campaigns;
. customer service through our 24 hours a day, seven days a week, call
center;
. fulfillment capabilities through our 300,000 square foot general
merchandise fulfillment center in Louisville, Kentucky and our 44,000
square foot specialized high value fulfillment center in Houston, Texas
that we acquired in connection with our acquisition of Ashford.com,
Inc., as well as management of a network of drop-ship vendors that ship
directly to customers;
. access to our centralized database of product descriptions and images,
as well as performance data from vendors and independent sources;
. marketing of Web sites through arrangements with online portals, an
extensive affiliate program and database email marketing programs; and
. buying, merchandising and sourcing of brand-name and unique merchandise,
access to a broad assortment of inventory from approximately 1,480
brands encompassing more than 188,000 stock keeping units, referred to
as SKUs.
We provide some or all of these services to each of our partners. In fiscal
2001, we derived virtually all of our revenues from sales of goods through our
partners' online stores and direct response television campaigns, toll-free
telephone number sales, business-to-business and group sales and related
outbound shipping charges, net of allowances for returns and discounts, as
well as from fixed and variable fees earned in connection with the development
and operation of partners' e-commerce businesses and the provision of
marketing services.
We believe that our ability to quickly and cost-effectively add new partners
creates advantages for us over our competitors. In addition, we believe our
approach can generate attractive economic returns by allowing us to operate
multiple e-commerce businesses for established brands on a common scalable
infrastructure.
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We currently operate or have agreements to operate either all or a portion
of the e-commerce businesses for 35 partners and for Fogdog, Inc., which we
acquired on December 28, 2000. On March 14, 2002, we acquired all of the
outstanding shares of Ashford.com and have operated the www.ashford.com Web
site since that date.
We are a Delaware corporation organized in 1986. Our executive offices are
located at 1075 First Avenue, King of Prussia, Pennsylvania 19406. Our
telephone number is (610) 265-3229.
Recent Developments
On March 14, 2002, we completed the acquisition of Ashford.com, a leading e-
commerce jewelry, luxury goods and corporate gifts company. Under the terms of
the acquisition, Ashford.com stockholders are receiving 0.0076 of a share of
our common stock and $0.125 in cash for each share of Ashford.com common
stock. Following the acquisition, we intend to extend our e-commerce solution
to retailers in the jewelry and luxury goods category and expand Ashford.com's
e-commerce outsource solution in the corporate gifts category.
Industry Background
Online Retailing. The U.S. market for online retail sales represents a
significant market opportunity. Forrester Research estimates that this market
will be $57.6 billion in 2002. The number of Americans who are making online
purchases is approximately 55.7 million, according to United States Department
of Commerce estimates. The Internet 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. As a result, we believe that more U.S. consumers will make online
retail purchases, and, therefore, we expect consumer demand to increase over
time. Accordingly, we believe significant opportunities exist to use the brand
and marketing power of our partners to attract consumers to the online retail
stores we operate.
The Internet has emerged as one of the fastest growing communications,
information and commerce media. 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 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 and 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.
Direct Response Television. The U.S. market for direct response television
also represents a significant market opportunity. According to the Direct
Market Association, direct response television was a $126 billion industry in
2001. Direct response television involves programs and advertisements of
various lengths that allow the advertiser to reach a targeted audience, mostly
though cable channels. Direct response television programs and advertisements
range from one-half hour or longer programs that discuss and demonstrate the
products to thirty second advertisements that merely advertise the product.
These programs and advertisements provide a toll-free telephone number and
usually provide a URL for a Web site for consumers to use to purchase
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the advertised product. Direct response television allows networks, cable
channels, manufacturers and other sellers of product to air programs and
advertisements that feature products unique to the networks' or channels'
offerings or that provide an additional distribution channel for manufacturers
and other sellers of products.
Direct response television is quickly becoming more widely accepted by
consumers and advertisers as an effective means of presenting products to
consumers. Advertisers use direct response television to reach a highly
targeted audience thus enabling advertisers to focus on the market most suited
for their products. Television networks and cable channels have established
brands and viewer loyalty. They can capitalize on these brands and create
direct response television programs and advertisements that are consistent
with their programming offered and their brands. Promotional airtime is used
to feature products that are endorsed by the brand or relate specifically to
the programming for the purpose of driving direct response campaign traffic to
the channel's toll-free telephone number and online retail store.
Challenges of E-Commerce. We believe that traditional retailers,
manufacturers, media companies and professional sports organizations which
desire to operate online retail stores or direct response television campaigns
face significant obstacles to compete successfully in e-commerce. These
companies must develop a separate infrastructure for their online retail
stores and direct response television campaigns, including Web site design and
development, development and production of direct response television programs
and advertisements, order processing, fulfillment, customer service and a
digital product database. They must also make significant capital investments
to develop in-house technology systems and incur significant expenses to
operate their e-commerce businesses. Furthermore, we believe that few viable
outsourcing options exist for these retailers to build their e-commerce
businesses.
Companies desiring to establish e-commerce retail businesses confront a
variety of obstacles to establishing cost-efficient operations. Many of them
do not have expertise in Web site development, the day-to-day operations of an
e-commerce business or processing orders. Additionally, many of them do not
have significant expertise in fulfillment of products to customers, the
provision of customer service or the acquisition of e-commerce customers.
We also believe that it is costly for single-brand e-commerce companies to
own inventory and build a sophisticated fulfillment infrastructure while
simultaneously building their brand and driving traffic to their e-commerce
businesses. Because e-commerce companies may 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.
It also is difficult for e-commerce companies to support the cost of
aggregating and maintaining comprehensive inventory in multiple categories.
Our Solution
We believe that our business model allows us to provide a comprehensive
solution to many of the challenges facing retailers, manufacturers, media
companies and professional sports organizations that desire to have e-commerce
businesses. Our platform allows us to rapidly develop and operate customized
online retail stores and direct response television businesses with
characteristics appropriate for each of our partners. Our solution enables our
partners to remain focused on their core businesses and avoid substantial
investments and operating expenses relating to their online retail stores or
direct response television campaigns. We believe that we can generate
attractive economic returns by operating multiple e-commerce businesses on a
common scalable infrastructure and by operating under the established brands
of our partners. In addition, our platform allows us to develop and operate
for partners under their brands most of the components necessary to conduct a
retail catalog business. The following are key features of our solution:
Rapid Deployment of Comprehensive E-Commerce Businesses. We can quickly
develop and implement virtually all aspects of an e-commerce business. These
aspects include Web site design and development, e-commerce technology,
customer service, fulfillment, buying and merchandising, content
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development and management, on-line and database marketing and product
development and sourcing. We customize the design and operation of a partner's
e-commerce businesses with a broad range of characteristics that include
differentiated user interfaces on partners' Web sites, partner-specific
content pages, an extensive digital catalog of product descriptions and
images, partner-specific products for direct response television campaigns and
partner specific customer service and fulfillment. Our solution allows our
partners to avoid the lengthy start-up, the complex integration effort and the
substantial fixed costs required to build and operate online retail stores or
direct response television campaigns.
Creation of Other Channels of Commerce Under Existing Brand Names. We enable
our partners to establish distinct e-commerce businesses that are consistent
with their brands and that are complementary to their existing distribution
channels. We believe that this contributes to the development and value of our
partners' existing brand identities.
Increased Return on Investment Opportunity. We operate multiple e-commerce
businesses on a common infrastructure. This allows us to capitalize on our
core technology platform and centralized inventory, product database, order
processing, fulfillment and customer service. By leveraging our investment in
technology and order fulfillment systems over all of our partners, we can
derive economies of scale and add additional partners with little incremental
spending. In addition, we aggregate demand from all of our partners' e-
commerce businesses and generally fulfill customer orders within the specific
categories that we operate from a common inventory pool or through our network
of drop ship vendors. Although we customize part of the product assortment
sold through each of our partners' online retail stores and direct response
television campaigns, a large quantity of SKUs is common among multiple
businesses. By centralizing inventory management across multiple partner
businesses, 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 shopping
experience by providing a broad or unique selection of merchandise, easy to
use Web sites, in context selling through direct response television campaigns
related to specific programming, competitive prices, value added content and
strong customer service. We believe that our 24 hours a day, seven days a week
customer service and high order accuracy promotes strong brand loyalty for our
partners. In addition, we believe that our ability to effectively respond to
customer inquiries by e-mail and telephone and to provide detailed product
information makes the shopping experience easy and enjoyable and drives repeat
purchases.
Efficient Customer Acquisition. We benefit from the brand assets and
substantial marketing budgets of our partners to reduce customer acquisition
costs. Our partners' existing marketing budgets allow us to generate exposure
and drive traffic to the e-commerce businesses that we operate. For example,
our partners generally are contractually obligated to include their Web site
addresses, referred to as URLs, and the toll-free telephone numbers in their
marketing and communication materials. Our partners' marketing includes
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 partners have
valuable, established brand franchises and existing customer bases. We believe
that this provides us with a competitive advantage because our 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
or watching our partners' television programming or advertisements, we believe
that customers are more inclined to purchase from their online retail stores
and direct response television campaigns.
Benefit from Relationships with Vendors. Many of our partners maintain long-
standing relationships with a wide variety of vendors. We also maintain strong
relationships with many of these vendors and with sources of unique products.
Therefore, unlike many entrants to e-commerce, we are able to obtain direct
access to many major brands. We believe that this provides us with an
extensive, authorized selection of brands and products for sale through our
partners' online retail stores and direct response television campaigns.
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Growth Strategy
Our objective is to generate attractive economic returns by capitalizing on
our unique business model to become the leading outsource solution for e-
commerce. The key elements of our growth strategy are as follows:
Expand Our Partner Base. We intend to increase our market share by adding
new partners that have strong brand franchises within the categories in which
we currently operate and that desire to have an e-commerce business which
includes an online retail store or direct response television campaigns or
both. New partners could include companies with major brand names in retail,
consumer products, media and entertainment, the Internet and professional
sports organizations.
Expand into New Vertical Markets. We intend to selectively expand into
categories outside of those in which we currently operate that offer
attractive characteristics with respect to size and saturation of the category
and average order value and gross margin of products offered within the
category. In this connection, in August 2001, we expanded into several
additional merchandise categories through our agreement to operate the e-
commerce business of Bluelight.com, a subsidiary of Kmart. In 2001, we
established a division to develop and operate e-commerce businesses for media
and entertainment companies, and in March 2002, we expanded into the jewelry,
luxury goods and corporate gifts categories through our acquisition of
Ashford.com.
Promote Brands Online. We intend to build awareness and drive customers to
our partners' e-commerce businesses by capitalizing on the brand assets, large
marketing budgets, customers of our partners' retail stores and viewers for
our partners' television programming and advertisements. Each of our partners
prominently features and promotes the URL and/or the toll-free telephone
number for its online retail store and its direct response television
campaigns in its marketing and communication materials. We also plan to
continue to selectively use a variety of online marketing strategies to reach
customers and viewers, including public relations, affiliate programs and
portal relationships.
Increase Repeat Purchases. We intend to build customer loyalty and drive
repeat purchases by implementing the following strategies:
. continuously enhancing our level of customer service;
. expanding our customer and product databases;
. offering new and unique products and product categories;
. implementing direct e-mail marketing techniques to target customers;
. increasing the level of personalization on our partners' e-commerce
businesses; and
. enhancing our in context product offerings related to specific
television programming.
We believe that these initiatives will drive repeat purchases as consumers
become increasingly satisfied with their online and direct response television
shopping experiences.
Enhance the Shopping Experience. We plan to continuously enhance and expand
the online stores and direct response television campaigns that we operate to
address the evolving needs of customers. We intend to improve the scope and
presentation of our product offerings by taking advantage of the unique
characteristics of the Internet and direct response television as retail media
and our relationships with vendors and sources of unique products. In
addition, we plan to invest in technology and develop features to improve the
functionality, speed, navigation and ease of use of our partners' Web sites
and the customer service we offer to support our partners' online retail
stores and direct response television campaigns.
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Pursue Growth by Acquisitions. From time to time we assess strategic
investments and acquisitions that are aligned with our goals of expanding into
new vertical markets, increasing our partner and customer base and expanding
our product offerings.
Our Operations
Web Site and Content Design, Implementation and Maintenance
We design and develop most of our partners' Web sites. We have in-house
personnel that are responsible for Web site design, management and maintenance
as well as 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 and buying guides. For
example, we have produced buying guides which help customers with their
merchandise selection and provide information about selected topics. These
guides provide customers with helpful information in selecting various
products and provide tips on use of the products. In addition, we have an in-
house photography studio which generates a large number of our photographic
images. We receive the remainder of our photographic images from our vendors.
Direct Response Television Campaigns and Product Development
We typically consult with our partners on the development and production of
direct response television campaigns. We have in-house personnel that are
responsible for working with our partners to coordinate product selection and
the development and production of direct response television marketing
campaigns. We typically purchase products from third parties or our partners
or outsource the manufacture of products to third parties. These products
usually are related to our partners' television programming or their brands.
Our personnel also work with our partners to develop in context marketing
campaigns relating to our partners' television programming. These campaigns
are either produced by our partners or outsourced to third parties for
production.
Technology.
The three major elements of our technology platform that we use to operate
our partners' e-commerce businesses are The Common Engine(TM), the front-end
and the data center.
The Common Engine(TM). We have created a core technology platform, The
Common Engine(TM), that can operate and manage all of the applications and
functionality across our partners' online retail stores and many of the
applications and functionality for our partners' direct response television
campaigns. This system allows us to add new partners with little incremental
costs. The Common Engine(TM) allows us to operate multiple stores on a common
infrastructure with each store being personalized to fit the brand equity and
identity of our individual partners. We enhance The Common Engine(TM)
continuously to improve our partners' e-commerce businesses 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 e-commerce
customer and includes content development, 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
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' online retail
stores and direct response television campaigns, including all product images
and descriptions, customer log-in and purchasing data, customer profiles,
verification requirements, brand information and shipping data. Our database
management system was created using Oracle and JDA technologies and runs on
Sun Microsystems and IBM hardware. A third-party provider hosts our data
center. System security is managed both by internal staff as well as by
security staff at our third-party host.
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Our technology infrastructure is supported by a number of fail-over back-up
systems. Much of our technology infrastructure is set up with redundancies so
that our operations can move forward seamlessly in the event of computer
malfunctions. In addition, we continuously strive to improve our partners' e-
commerce businesses by conducting functional testing.
Buying, Merchandising and Vendor Relationships
Buying, Sourcing and Consignment Inventory. In categories in which we own
inventory, we offer for sale a broad assortment of brands and items through
certain of our partners' online retail stores and direct response television
campaigns. In some categories, a partner may provide us with inventory on a
consignment basis, which we offer for sale through that partner's online
retail store and direct response television campaigns. We currently offer
customers over 1,480 brands and more than 188,000 SKUs across our partners' e-
commerce businesses and continue to add additional brands and SKUs. We have
personnel who buy and source products in the following merchandise categories:
sporting goods, branded and unique products for direct response television
campaigns and, with the acquisition of Ashford.com, jewelry, luxury goods and
corporate gifts.
Merchandising. We work with our partners to decide which brands and
merchandise to carry. We typically review with our partners what products they
are offering or plan to offer in their retail stores or their direct response
television campaigns and what television programming and advertisements they
plan to air, and determine with our partners what items we believe will be
successful on our partners' e-commerce businesses. We believe that we are able
to offer a wider variety of merchandise on our retail partners' Web sites than
might be found in most of their retail stores because we are not hindered by
space availability, although not all of our partners' Web sites carry the same
products and brand assortments. In this connection, we currently do not offer
some popular brands of sporting goods, such as Nike, although we are
authorized to sell Fogdog's remaining Nike inventory on the fogdog.com Web
site. In addition, our partners typically have the right to prevent us from
selling products which are not sold in their retail stores. We also are able
to offer our media partners the opportunity to offer to their viewers products
related to their television programming. Our buyers work with partners on
strategies for product offerings, merchandise locations within Web sites and
television campaigns and promotional activities of our partners. After
consulting with a partner on their buying or programming strategy, we then
work to enhance product selection and development.
Vendor Relationships. We believe that we have solid relationships with our
vendors and sources of unique products and we continuously seek to add new
vendors, brands and sources of unique products. During fiscal 2001, we
purchased $12.8 million and $8.7 million of inventory from two separate
vendors. These purchases accounted for 23% and 16% of the total amount of
inventory we purchased during fiscal 2001.
Pricing. We establish the prices for products that we offer for sale through
our partners' e-commerce businesses from inventory that we own. In the case of
consignment inventory, the partner is the seller of the products and
establishes the prices. For our retail partners, to the extent possible, we
strategically price these products to be consistent with the prices in our
partners' retail stores. Accordingly, we may maintain different pricing
structures for the same products across our partners' e-commerce businesses.
Marketing
Web Site Integration. We work with each of our partners to integrate URL,
Web site and toll-free telephone number information into their marketing and
advertising campaigns. Our partners usually are contractually obligated to
incorporate their URLs and toll-free telephone number into the advertising,
marketing, promotion and communication vehicles they create. These marketing
vehicles not only incorporate the URL and toll-free telephone number into the
copy or design, but the message also educates consumers about these e-commerce
businesses and drives traffic and viewers to these businesses. We believe that
our partners embrace this strategy because they realize the value in alerting
their customers and viewers to an additional distribution channel within their
brand.
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Online Marketing and Affiliate Network. We have entered into marketing
agreements, including agreements with AOL, Yahoo! and MSN eShop, through which
various of our partners are featured prominently in the shopping and other
areas of these Internet destinations. We also have agreements with many third
party Web sites, referred to as affiliates, which enable them to link to our
partners' Web sites. When a visitor clicks through an affiliate to one of our
partners' Web sites and the visit generates a sale, we compensate the
affiliate with a portion of the sale proceeds. We have implemented a revenue
share payment structure to affiliates based on actual sales or, in some cases,
clicks through the link. These online marketing and affiliate arrangements are
generally subsidized by the partners that are promoted.
E-mail Campaigns. We are dedicated to managing, strengthening and improving
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.
Order Processing and Fulfillment
Order Processing. We conduct our own order processing, claims processing
and crediting of customers. Order processing activities include electronically
capturing orders generated through the online retail stores and toll-free
telephone numbers that we operate, processing the payment method, determining
the shipping costs, adding any applicable sales tax, facilitating any coupon
or promotional discounts, sending an order confirmation to the customer and
printing a pick ticket, a packing slip, return labels and a detailed order
list that include the name of the partner through whose online retail store or
toll-free telephone number the order was received. For a typical order, after
an item has been ordered by a customer and we have determined that the order
has been packed and shipped, our computer system automatically sends an e-mail
to that customer informing them that their merchandise has been shipped.
Fulfillment. We currently conduct fulfillment out of our company-operated
fulfillment center located in Louisville, KY and through drop ship
arrangements with certain suppliers. Our fulfillment center, which currently
is leased by us from a third party, has been operational since August 2000.
The fulfillment center is 300,000 square feet and is expandable to 470,000
square feet. We also conduct jewelry, luxury goods and corporate gifts
fulfillment from our company-operated 44,000 square foot fulfillment center
located in Houston, TX. We also have drop ship arrangements with over 100
suppliers, pursuant to which we transmit to the suppliers orders received
through the online retail stores and toll-free telephone numbers that we
operate and the suppliers deliver the items ordered directly to consumers.
Distribution. We currently use UPS, USPS and Federal Express as our primary
shipping carriers for non-LTL, or less-than-truckload, items and use a variety
of trucking companies for our LTL distribution. We generally ship orders for
merchandise in our fulfillment center within two business days of receipt of
the order. Our drop shippers generally ship orders within two to five business
days for in-stock merchandise and up to six weeks for personalized, customized
or made to order merchandise.
Returns. We accept returns through mailing or delivery services. Our
partners that operate retail stores are not required to accept in-store
returns of items purchased on their Web sites. When a customer returns an item
to us, we provide the customer with a credit and then reshelve the item,
return it to the vendor or dispose of it.
Customer Service
General. We are committed to providing a high level of customer service. We
believe that superior customer service is critical to retaining long-term and
repeat customers. We offer customer service 24 hours a day, seven days a week
for most of our partners. We provide customer service for our partners under
their brand names, and our computer systems automatically identify from which
partner a customer needs information or service. Our principal customer
service facility is located within our headquarters in King of Prussia, PA.
8
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 industry or products. These professionals are able to
answer detailed questions about various categories and products to help
customers select the best merchandise for them. Service experts are trained
and experienced in working with a variety of complex customer service issues.
E-Mail or Telephone. Customers can obtain assistance through e-mail or
telephone. We aim to answer all customer e-mails within 24 hours and often are
able to respond within a shorter period of time.
Our Partners
We operate e-commerce businesses for our partners generally pursuant to
exclusive agreements. In most cases, we select and purchase inventory from
vendors, sell the inventory directly to customers through the online retail
stores and direct response television campaigns that we operate, record
revenues generated from the sale of products through those businesses and pay
a percentage of those revenues to the respective partners in exchange for the
rights to use their brand names and the promotions and advertising that our
partners agree to provide.
In the case of Bluelight.com, LLC, a subsidiary of Kmart Corporation, we
manage certain aspects of Bluelight's overall e-commerce business, including
fulfillment, technology and customer service in exchange for a combination of
fixed fees and a percentage of sales. Bluelight selects the merchandise to be
sold on the site, owns a portion of the inventory and provides in-store
marketing of the e-commerce business at its retail stores and other offline
marketing support, including newspaper circular advertising.
The following table lists our partners with which we have publicly-announced
agreements or for which we operated their e-commerce businesses as of December
29, 2001:
Retailers Professional Sports Organizations
------------------------------------ ---------------------------------
Blades Board & Skate Carolina Panthers
Bluelight (Kmart) Denver Broncos
City Sports Detroit Lions
Dick's Sporting Goods LPGA
Dunham's Sports San Diego Chargers
G.I. Joe's
Gart Sports (including Sportmart and
Oshman's)
MC Sports
Media Companies
Modell's Sporting Goods ---------------------------------
Olympia Sports Comedy Central
Pro Golf International FOXSPORTS
Sport Chalet Nickelodeon
The Athlete's Foot PAX
The Sports Authority QVC (sporting goods store)
The Golf Channel
The Sporting News
Other
------------------------------------ TV Land
Bally Total Fitness
Fitness Quest
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Competition
The market for outsourced solutions for the development and operation of e-
commerce businesses is continuously evolving and intensely competitive. We
compete with companies that can provide all or part of our solution to
companies that wish to operate online retail stores and/or direct response
television campaigns, including Web site developers and third-party
fulfillment and customer service providers. Our primary competitors in this
area currently are Amazon.com and USANetworks. We also compete with third-
party fulfillment and customer service providers, such as Federal Express,
UPS, Newroads and Submitorder.com and third-party providers such as Digital
River.
We believe that we compete with these competitors primarily on the basis of
the following:
. reputation within relevant markets for providing a quality outsourced
solution;
. the comprehensive and flexible nature of the outsourced solution
provided; and
. the quality of Web site design and development, technology, customer
service and fulfillment offered.
In addition, because we sell various products through the e-commerce
businesses that we operate, we compete with both the online and offline
businesses of:
. general merchandise retailers, such as Walmart, Target and Nordstrom;
. specialty retailers, including sporting goods retailers and jewelry and
luxury goods retailers, such as Footlocker, REI.com and Zales;
. catalog retailers, such as L.L. Bean and Eastbay; and
. manufacturers, such as Nike.
We believe that we compete with these competitors primarily on the basis of
the following:
. recognition of and trust in our partners' brands;
. the broad and unique selection of merchandise that we offer through the
online retail stores and direct response television campaigns that we
operate;
. convenience of the shopping experience;
. price;
. the amount of product information provided to customers;
. visibility and performance of the online retail stores and direct
response television campaigns that we operate; and
. quality of fulfillment and customer service.
Intellectual Property
We use our partners' names, URLs, logos and other marks in connection with
the operation and promotion of their e-commerce businesses. The agreements
with our partners generally provide us with licenses to use this intellectual
property in connection with the operation of their e-commerce businesses.
These licenses generally are co-terminous with the agreements.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable
terms in the future. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which could materially
adversely affect our business, results of operations and financial condition.
10
In order to protect our proprietary rights in services and technology, we
rely on various intellectual property laws and contractual restrictions. These
include confidentiality, invention assignment and nondisclosure agreements
with our partners, employees, contractors and suppliers. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization.
Government Regulation
We generally are not regulated other than pursuant to federal, state and
local laws applicable to businesses in general or to retailing, e-commerce or
television specifically. Certain regulatory authorities have proposed specific
laws and regulations governing the Internet and online retailing. These laws
and regulations may cover taxation, user privacy, pricing, content,
distribution, electronic contracts, characteristics and quality of products
and services, intellectual property rights and information security. Changes
in consumer protection laws also may impose additional burdens on companies
conducting business online. It is not clear how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and online commerce. Unfavorable resolution of these
issues may harm our business.
We currently provide individual personal information regarding users of a
partner's e-commerce business to that partner and to certain third parties
that we use to process credit cards, process and fulfill orders, send emails,
evaluate and maintain the performance of our Web sites. 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 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 through the Internet and
toll-free telephone numbers in multiple states, other jurisdictions may claim
that we are required to qualify to do business in those jurisdictions. 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.
Employees
As of March 15, 2002, we employed 627 full-time employees, of which
approximately 50% are based at our headquarters in King of Prussia, PA.
Discontinued Operations
Prior to our decision in 1999 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 and our Off-Price and Action Sports Division on May 26,
2000. We recognized an aggregate loss of approximately $23.2 million on the
sale of these divisions. For a more complete discussion, see Note 18 to our
consolidated financial statements included in this Annual Report on Form 10-K.
Through our Branded Division, we designed, marketed and distributed athletic
and outdoor footwear products under the RYKA brand and the Yukon brand.
Through our Off-Price and Action Sports Division, we purchased manufacturers'
closeout merchandise, 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.
11
Risk Factors
Any investment in our common stock or other securities involves a high
degree of risk. You should carefully consider the following information about
these risks, together with the other information contained in this Annual
Report on Form 10-K. 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.
All statements made in this Annual Report on Form 10-K, other than
statements of historical fact, are forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan",
"will", "would", "should", "guidance", "potential", "continue", "project",
"forecast" and similar expressions typically are used to identify forward-
looking statements. These forward-looking statements are based on then-current
expectations, beliefs, assumptions, estimates and forecasts about our business
and the industry and markets in which we operate. These statements in this
Annual Report on Form 10-K are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements. Factors which may
affect our business, financial condition and operating results include the
effects of changes in the economy, consumer spending, the stock market and the
industries in which we operate, changes affecting the Internet and e-commerce,
including online retailing and direct response marketing, our ability to
maintain relationships with strategic partners and suppliers, our ability to
timely and successfully develop, maintain and protect our technology and
product and service offerings and execute operationally, our ability to
attract and retain qualified personnel and our ability to successfully
integrate any acquisitions we may make, including our recent acquisition of
Ashford.com. More information about potential factors that could affect us are
described below. We expressly disclaim any intent or obligation to update
these forward-looking statements.
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating our e-
commerce business until the fourth quarter of 1999. Prior to the fourth
quarter of 1999, when we launched the e-commerce businesses we operate for our
partners, 100% of our revenues had been generated by our discontinued
operations. The sale of the discontinued operations was completed in May 2000.
Accordingly, 100% of our revenues are currently generated through our e-
commerce business. In addition, the nature of our e-commerce business has
undergone rapid development and change since we began operating it. 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 or a new business in an existing market,
many of which may be beyond our control. If we are unable to address these
issues, we may not be financially or operationally successful.
We expect increases in our operating expenses and continuing losses.
We incurred substantial losses in fiscal 1999, fiscal 2000 and fiscal 2001,
and as of December 29, 2001, we had an accumulated deficit of $131.7 million.
Except for the fourth quarter of fiscal 2001, we have not achieved
profitability from our continuing operations. We may not obtain enough
customer traffic or viewers or a high enough volume of purchases from the e-
commerce businesses that we operate to generate sufficient revenues to achieve
profitability. We could continue to incur operating and net losses. There can
be no assurances that we will be able to achieve profitability from our
continuing operations.
We will continue to incur significant operating expenses and capital
expenditures as we:
. enhance our distribution and order fulfillment capabilities;
. further improve our order processing systems and capabilities;
12
. develop enhanced technologies and features to improve our partners' e-
commerce businesses;
. enhance our customer service capabilities to better serve customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. continue our business development, 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 could further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
Prior to the recent expansion of our relationship with Bluelight.com,
establishment of our media and entertainment division and our recent
acquisition of Ashford.com, our business had been limited to the sporting
goods industry. Through the expansion of our Bluelight.com relationship and
the acquisition of Ashford.com, we have expanded or intend to expand our
operations into other categories. We may not be able to successfully expand
our operations into new categories.
Until recently, our business had been limited to the sporting goods
industry. Through the recent expansion of our relationship with Bluelight.com,
we have begun to expand our operations into other categories, including
consumer electronics, home products, jewelry, toys, books and music. Through
the establishment of our media and entertainment division, we have begun to
create and work with third parties to manufacture unique products related to
direct response television programming. Through our acquisition of
Ashford.com, we intend to further expand our business into the jewelry, luxury
goods and corporate gifts categories. In order to successfully expand our
business into these categories, we must develop and maintain relationships
with manufacturers and other sources of product in these categories and hire
and retain skilled personnel to help manage these areas of our business. Our
failure to successfully expand our business into these categories could limit
our ability to increase revenues.
Our success is tied to the success of the retail industry and the partners
for which we operate e-commerce businesses.
Our future success is substantially dependent upon the success of the retail
industry and the partners for which we operate e-commerce businesses. From
time to time, the retail industry has experienced downturns. Any downturn in
the retail industry could adversely affect our revenues. 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 ability to grow our business.
We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart,
pursuant to which we operate the Bluelight.com Web site. Kmart's recent
bankruptcy filing may mean that we may not realize all of the economic
benefits of that agreement.
Kmart, as well as Bluelight.com, recently filed for bankruptcy protection.
The bankruptcy court permitted Bluelight.com to pay us all amounts due prior
to the bankruptcy filing and to continue business as usual with us.
Bluelight.com has the ability to reject its agreement with us, thereby,
terminating our relationship with Bluelight.com. If Bluelight.com rejects the
e-commerce agreement or does not emerge from bankruptcy, we will not realize
all of the economic benefits of that agreement.
We enter into contracts with our partners. Some of these partners' online
retail stores account for a significant portion of our revenue. If we do not
maintain good working relationships with our partners or
13
perform as required under these agreements, it could adversely affect our
business. Additionally, if our partners terminate their contracts with us, it
could negatively affect our business.
The contracts with our partners establish new and complex relationships
between us and our partners. 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. For
fiscal 2001, sales to customers through one of our partner's e-commerce
business accounted for 25% of our revenue, sales to customers through another
of our partner's e-commerce business accounted for 19% of our revenue and
sales to our top five partners' e-commerce businesses accounted for 62% of our
revenue. For fiscal 2000, sales to customers through one of our partner's e-
commerce business accounted for 45% of our revenue, sales to customers through
another of our partner's e-commerce business accounted for 20% of our revenue
and sales to customers through our top three partners' e-commerce businesses
accounted for 71% of our revenue. If we do not maintain a good working
relationship with our partners or perform as required under these agreements,
our partners could seek to terminate the agreements prior to the end of the
term or they could decide not to renew the contracts at the end of the term.
This could adversely affect our business, financial condition and results of
operations. Moreover, our partners could decide not to renew these contracts
for reasons not related to our performance.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a
good indication of our future performance. In some future quarter, our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock likely will
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 or viewers of the online retail
stores and direct response television campaigns operated by us or the
inability to convert these visitors and viewers into customers;
. our failure to offer an appealing mix of products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites or the technology and systems we use to process customers'
orders and payments;
. the ability of our competitors to offer new or superior e-commerce
businesses, services or products;
. price competition that results in lower profit margins or losses;
. our inability to obtain or develop specific products or brands or
unwillingness of vendors to sell their products to us;
. unanticipated fluctuations in the amount of consumer spending on various
products that we sell, which tend to be discretionary spending items;
. increases in the cost of advertising;
14
. 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 the Internet, online retailing or
direct response marketing, which could increase the costs associated
with operating our businesses; and
. unfavorable economic conditions specific to the Internet, online
retailing, direct response marketing or the industries in which we
operate, which could reduce demand for the products sold through the
businesses operated by us.
Seasonal fluctuations in sales 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
disproportionate percentage of our total annual revenues. In anticipation of
increased sales activity during our fourth fiscal quarter, we may hire a
significant number of temporary employees to supplement 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 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 in the future 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 businesses 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 in the future need to fund our growth through
additional debt or equity financings or reduce costs. Further, we may not be
able to obtain financing on satisfactory terms. Our inability to finance our
growth, either internally or externally, may limit our growth potential and
our ability to execute our business strategy. If we issue securities to raise
capital, our existing stockholders may experience additional dilution or the
new securities may have rights senior to those of our common stock.
We must develop and maintain relationships with key 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.
15
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. In addition, during fiscal
2001, we purchased 23% and 16% of the total amount of inventory we purchased
during fiscal 2001 from two 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. For example,
we currently are not authorized to offer some popular brands of sporting
goods, such as Nike, although we are authorized to sell the remaining Nike
inventory held by Fogdog on the fogdog.com Web site. There can be no assurance
that we will be able to offer these brands in the future or that we will
continue to be able to offer brands we currently offer. If we are unable to
offer a sufficient assortment and quantity of quality products at acceptable
prices, we may lose sales and market share.
We may not be successful in finding, developing and marketing products that
consumers of the direct response television campaigns we operate will want to
purchase.
For the direct response television campaigns we operate, our success depends
on our ability to select products that consumers will want to purchase. We
promote these products on our partners' Web sites as well as through direct
response television programming. If we do not select products that consumers
want to purchase, this could result in lost opportunities which could reduce
sales.
We may be unable to source product for direct response television campaigns
on favorable terms. Additionally, the products we are able to source may not
be profitable.
For direct response television campaigns, our financial performance depends
on our ability to develop products or acquire the rights to products that will
be appealing to consumers. We select products based on management's retail
experience. We may not be successful in finding, developing and marketing
products that consumers will want to purchase. Any failure to meet consumers'
desires could result in lost opportunities and excess inventory which could
reduce our revenues. Additionally, we may select products that are not
profitable which could result in lower margins.
Capacity constraints or system failures could materially and adversely
affect our business, results of operations and financial condition.
Any system failure, including network, telecommunications, software or
hardware failure, that causes interruption of the availability of our
partners' online retail stores or direct response television campaigns could
result in decreased usage of these stores or access to these campaigns. If
these failures are sustained or repeated, they could reduce the attractiveness
of our partners' online retail stores and direct response television campaigns
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;
16
. computer viruses; and
. other similar events.
We have been operating e-commerce businesses for our partners for less than
three years. 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'
online retail stores or viewers of our partners' direct response television
campaigns.
In addition, we maintain our computers on which we operate our partners'
online retail stores at the facility of a third-party hosting company. We
cannot control the maintenance and operation of this facility, which is also
susceptible to similar disasters and problems. Our insurance policies may not
adequately compensate us for any losses that we may incur. Any system failure
that causes an interruption in our service or a decrease in responsiveness
could harm our relationships with our customers and result in reduced
revenues.
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use or 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 trademarks and domain names, could impair our operations.
These failures could have a material adverse effect on our ability to generate
revenues.
If we do not respond to rapid technological changes, our services could
become obsolete and we could lose customers.
Due to costs and management time required to introduce new services,
products and enhancements, we may be unable to respond to rapid technological
changes in a timely enough manner to avoid our services becoming
uncompetitive. If this happens, our customers may forgo the use of our
partners' e-commerce businesses and use those of our competitors. To remain
competitive, we must continue to enhance and improve the functionality and
features of our partners' online retail stores and direct response television
campaigns. The Internet, online retailing and the direct response marketing
are constantly changing. If competitors introduce new products and services
using new technologies or if new industry standards and practices emerge, our
partners' existing online retail stores and direct response television
campaigns and our proprietary technology and systems may become uncompetitive.
Developing our partners' e-commerce 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' online retail
stores and direct response television campaigns, our order processing systems
and our computer and telecommunications network to meet customer requirements
or emerging industry standards.
We may be subject to intellectual property claims or competition or trade
practices claims that could be costly and could disrupt our business.
17
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' online retail stores or direct response television campaigns, 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 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' e-commerce businesses 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 ability to enter into marketing and promotion agreements with
online services, search engines, directories and other Web sites to drive
traffic to the e-commerce businesses we operate. If we are unable to enter
into or properly develop these marketing and promotional agreements, our
ability to generate revenue could be adversely affected.
We have entered into marketing and promotion agreements with online
services, search engines, directories and other Web sites to provide content,
advertising banners and other links that link to our partners' online retail
stores. We expect to rely on these agreements as significant sources of
traffic to our partners' online retail stores and to generate new customers.
If we are unable to enter into satisfactory agreements on acceptable terms,
our ability to attract new customers could be harmed. Further, many of the
parties with which we may have online advertising arrangements could provide
advertising services for other marketers of goods. As a result, these parties
may be reluctant to enter into or maintain relationships with us. Failure to
achieve sufficient traffic or generate sufficient revenue from purchases
originating from third parties may result in termination of these types of
agreements. Without these relationships, we may not be able to sufficiently
increase our market share.
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, President and Chief Executive Officer. We have employment agreements
with some of our executive officers and key personnel. Due to the costs
associated with compensating executive officers and key personnel and the
competition for highly qualified personnel, we cannot be sure 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 $8.0
million. We have not obtained key person life insurance for 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 continue to hire a number of skilled personnel. Due to intense
competition for these individuals from our competitors and other employers, 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.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
Online retailing and direct response marketing are constantly evolving and
are extremely competitive. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of
18
which could seriously harm our business, financial condition and results of
operations. We compete with companies that may be able to provide solutions to
companies that wish to establish e-commerce businesses, including:
. third party providers, such as Amazon.com, USA Networks and Digital
River; and
. third-party fulfillment and customer services providers, such as Federal
Express, UPS, Newroads and Submitorder.com.
We also compete with the online and offline businesses of a variety of
companies, including:
. specialty retailers, including sporting goods and jewelry and luxury
goods retailers, such as Footlocker, REI.com and Zales;
. general merchandise retailers, such as Target, WalMart and Nordstrom;
. catalog retailers, such as L.L. Bean and Eastbay; and
. manufacturers, such as Nike.
If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
Although we operate our own fulfillment center, we rely upon multiple third
parties for the shipment of our products. We also rely upon certain vendors to
ship products directly to our customers. As a result, we are subject to the
risks associated with the ability of these vendors 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 vendors to
provide these services, or the termination or interruption of these services,
could adversely affect the satisfaction of our customers, which could result
in reduced sales.
Sporting goods and apparel and jewelry and luxury goods 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, in part, upon our ability to anticipate and respond to
trends in sporting goods and jewelry and luxury goods merchandise and
consumers' participation in sports and fashion. Consumers' tastes in sporting
goods equipment, apparel, jewelry and luxury goods are subject to frequent and
significant changes, due in part to manufacturers' efforts to influence
purchases. In addition, the level of consumer interest in a given sport or
type of fashion can fluctuate dramatically. If we fail to identify and respond
to changes in merchandising and consumer preferences, 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' tastes could result in lost opportunities which could reduce sales.
High merchandise returns could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is generally
consistent with the policies of each of our partners for which we operate e-
commerce or direct response television businesses. If merchandise returns are
significant, our revenues 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
19
asserted. Similarly, we could be subject to claims that users of our partners'
online retail stores or viewers of our partners' direct response television
campaigns were harmed due to their reliance on our product information,
product selection guides, advice or instructions. If a successful claim were
brought against us in excess of our insurance coverage, it could adversely
affect our business. Even unsuccessful claims could result in the expenditure
of funds and management time and could have a negative impact on our business.
We may be liable if third parties misappropriate our customers' personal
information.
If third parties are able to penetrate our network or telecommunications
security or otherwise misappropriate our customers' personal information or
credit card information or if we give third parties improper access to 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
be significant. In addition, the Federal Trade Commission and state agencies
have been investigating various companies regarding their use of customers'
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 March 15, 2002, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 19.1%, funds affiliated with SOFTBANK
America Inc., or SOFTBANK, beneficially owned 25.2% and Interactive Technology
Holdings, LLC, or ITH, a joint venture company of Comcast Corporation and QVC,
Inc., beneficially owned 32.2% of our outstanding common stock, including
currently exercisable warrants and options to purchase common stock. Should
they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a
position to exercise control over most matters requiring stockholder approval,
including the election or removal of directors, approval of significant
corporate transactions and the ability generally to direct our affairs.
Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH
acquired their shares of our common stock provide that SOFTBANK and ITH each
have the right to designate up to two members of our board of directors. This
concentration of ownership and SOFTBANK's and ITH's right to designate members
to our board of directors may have the effect of delaying or preventing a
change in control of us, including transactions in which stockholders might
otherwise receive a premium over current market prices for their shares.
From time to time, we may acquire or invest in other companies. There are
risks associated with potential acquisitions and investments. 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. On March 14, 2002, we acquired all of the outstanding shares of
Ashford.com, an online jewelry, luxury goods and corporate gifts retailer. We
may not realize the anticipated benefits of the acquisition of Ashford or any
other investment or acquisition. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology or products into our
business. Any acquisition, including the acquisition of Ashford.com, may
further strain our existing financial and managerial controls and reporting
systems and procedures. If we do not successfully integrate the business of
Ashford.com, the expenditures on integration efforts will reduce our cash
position without us being able to realize the expected benefits of the merger.
In addition, key personnel of an acquired company may decide not to work for
us. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Further, the physical
expansion in facilities that would occur as a result of the acquisition of
Ashford.com and any other acquisition may result in disruptions that seriously
impair our business. Finally, we may have to incur debt or issue additional
equity securities to pay for other acquisitions or investments, the issuance
of which could be dilutive to our stockholders.
20
There are certain risks associated with our acquisition of Ashford.com as a
result of litigation pending or threatened against Ashford.com at the time of
the acquisition.
The staff of the Securities and Exchange Commission has been conducting an
investigation concerning Ashford.com's accounting and disclosures relating to
its marketing agreement with Amazon.com during its fiscal years 2000 and 2001
for the purpose of determining whether the Commission should commence
enforcement proceedings in federal district court. Ashford.com has made a
submission to the staff of the Commission explaining why such a proceeding
should not be initiated. The staff has advised Ashford.com that it plans to
recommend that the Commission commence such enforcement proceedings, although
no final decision has been made. Ashford.com's audit committee completed an
internal review of certain matters relating to the staff's review prior to the
acquisition. Ashford.com has maintained that none of the accounting issues
raised by the Commission would have a material adverse effect on its financial
statements. Based on our review of the matter, we have no reason to disagree
with Ashford.com's assessment, although there can be no assurance as to the
ultimate outcome of this matter.
Since July 11, 2001, several stockholder class action complaints have been
filed in the United States District Court of the Southern District of New York
against Ashford.com, several of Ashford.com's officers and directors, and
various underwriters of Ashford.com's initial public offering. The purported
class actions have all been brought on behalf of purchasers of Ashford.com
common stock during various periods beginning on September 22, 1999, the date
of Ashford.com's initial public offering. The plaintiffs allege that
Ashford.com's prospectus, included in Ashford.com's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, was materially
false and misleading because it failed to disclose, among other things,
certain fees and commissions collected by the underwriters or arrangements
designed to inflate the price of the common stock. The plaintiffs further
allege that because of these purchases, Ashford.com's post-initial public
offering stock price was artificially inflated. As a result of the alleged
omissions in the prospectus and the purported inflation of the stock price,
the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints
have been consolidated into a single action. Ashford.com has maintained that
it has meritorious defenses against these actions and intends to vigorously
defend them. Ashford.com is also subject to various other claims and legal
actions arising in the ordinary course of business. Ashford.com also has
maintained that the ultimate disposition of these matters would not have a
material effect on Ashford.com's business, financial condition or results of
operations. Based on our review of these matters, we have no reason to
disagree with Ashford.com's assessment, although there can be no assurances as
to the ultimate outcomes of these matters.
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 manufacturers may require that our
international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
21
. 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
impact on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into United States dollars may
contribute to fluctuations in our results of operations and fluctuating
exchange rates could cause reduced revenues and/or gross margins from non-
dollar-denominated international sales.
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users and advertisers on the Internet may
not increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
.actual or perceived lack of security of information or privacy protection;
.lack of access and ease of use;
.congestion of traffic on the Internet;
.inconsistent quality of service and lack of availability of cost-
effective, high-speed service;
.possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
.excessive governmental regulation;
.uncertainty regarding intellectual property ownership; and
.lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an
increase in the number or requirements of users. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The amount of traffic on our partners' Web sites could be
materially affected if there are outages or delays in the future. The use of
the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If any of the foregoing occurs,
or if the Internet does not become a viable commercial medium, the number of
our customers could decrease. In addition, 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
online retail stores which we operate obsolete.
The technology of the Internet and online retailing 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.
22
If the costs associated with the changing technology of the Internet
prevents us from enhancing the online retail stores that we operate, those
stores could become less effective, which would reduce our competitive
advantage and put our ability to attract and retain customers at risk. While
we sell products through the direct response television campaigns, the primary
channel through which we sell products is the online retail stores that we
operate. Therefore, the potential negative impact of these stores becoming
less effective would affect us to a greater extent than it would affect a
company that has other significant channels for the sale or distribution of
its products.
In order to keep the Web sites that we operate from becoming obsolete, and
maintain our ability to attract and retain customers, we must accomplish the
following tasks:
. continuously 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 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. Online retailing is a relatively 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 online retailers 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
communicationlines and other enabling technologies.
The security risks of online retailing may discourage customers from
purchasing goods from us.
In order for online retailing 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' online retail stores and
choose not to purchase from those stores. 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' online retail stores. Concerns about
the security and privacy of transactions over the Internet could inhibit the
growth of the Internet and online retailing. Our security measures may not
effectively prohibit others from obtaining improper access to the information
on our partners' online retail stores. Any security breach could expose us to
risks of loss, litigation and liability and could seriously disrupt our
operations.
We need to continuously acquire and effectively use media space to market
and sell our direct response television campaign products.
We generally enter into exclusive agreements with media companies,
manufacturers and other sellers of products to run the direct response
television portion of their e-commerce businesses. In those agreements, the
media companies, manufacturers and other sellers of products generally agree
to certain marketing, advertising and air-time commitments for the promotion
of products sold through direct response television as well as promotion of
their online retail stores. Air-time is very valuable and is essential for the
success of direct response
23
television campaigns. If we are unable to negotiate favorable marketing,
advertising and air-time commitments in our agreements with our partners or if
our partners do not fulfill their commitments, the amount of products we could
sell likely would be lower which would cause our revenues to be lower.
Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the
failure to adequately control fraudulent credit card transactions could
increase our general and administrative expenses. We have put in place
technology and processes to help us detect the fraudulent use of credit card
information. To date, we have not suffered material losses related to credit
card fraud. However, we may in the future suffer losses as a result of orders
placed with fraudulent credit card data even though the associated financial
institution approved payment of the orders. Under current credit card
practices, we are liable for fraudulent credit card transactions because we do
not obtain a cardholder's signature.
If one or more states successfully assert that we should collect sales or
other taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for goods sold by
us and shipped into states other than Kentucky, Pennsylvania and Texas in
which we collect and remit applicable sales taxes. One or more local, state or
foreign jurisdictions may seek to impose sales tax collection obligations on
us and other out-of-state companies that engage in e-commerce. Our business
could be adversely affected if one or more states or any foreign country
successfully asserts that we should collect sales or other taxes on the sale
of our merchandise.
Existing or future government regulation could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting e-commerce and direct response television businesses. Today there
are relatively few laws specifically directed towards conducting these types
of businesses. However, due to the increasing growth and popularity of the
Internet, online retailing and direct response television, many laws and
regulations relating to these businesses, particularly the Internet, are
proposed and considered at the state and federal levels. These laws and
regulations could cover issues such as user privacy, freedom of expression,
pricing, fraud, quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability of
existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy could also harm our business. For example, United States and foreign
laws regulate our ability to use customer information and to develop, buy and
sell mailing lists. Many of these laws may not contemplate or address the
unique issues raised by the Internet, online retailing or direct response
marketing. Some laws that do contemplate or address those unique issues, such
as the Digital Millennium Copyright Act, are only beginning to be interpreted
by the courts and their applicability and reach are therefore uncertain. These
current and future laws and regulations could reduce our ability to operate
efficiently.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal and state levels
relating to privacy and the use of personal user information. Several states
have proposed legislation that would limit the uses of personal user
information online or require collectors of information to establish privacy
policies. 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
24
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, or
provide users with the ability to access, correct and delete personal
information stored by us. Even in the absence of those regulations, the
Federal Trade Commission has settled several proceedings resulting in consent
decrees in which Internet companies have been required to establish programs
regarding the manner in which personal information is collected from users and
provided to third parties. We could become a party to a similar enforcement
proceeding. These regulatory and enforcement efforts could also harm our
ability to collect demographic and personal information from users, which
could be costly or adversely affect our marketing efforts.
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. As
a result, holders of our common stock will not receive a return, if any, on
their investment unless they sell their shares of our common stock.
It may be difficult for a third party to acquire us and this could depress
our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 5,000,000 shares of preferred stock, which our 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 terms,
rights, preferences and designations set by our board, may delay, deter or
prevent a change in control of us. In addition, issuing additional shares of
common stock could result in dilution of the voting power of the current
holders of our common stock. Moreover, "anti-takeover" provisions of Delaware
law may restrict the ability of the stockholders to approve a merger or
business combination or obtain control of us. As many investors consider a
change of control as a desirable path to liquidity, delaying or preventing a
change in control of our company may reduce the number of investors interested
in our common stock, which could depress our stock price.
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,
dividend payments or stock repurchases that are unlawful under Delaware law or
any transaction in which a director has derived an improper personal benefit.
In addition, we have entered into indemnification agreements with each of our
directors. These agreements, among other things, require us to indemnify each
director for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us or in our right, arising out of the person's
services as one of our directors. Our directors are not currently subject to
legal action that would require us to indemnify them; however, if any such
actions were brought, the costs associated with such actions could be harmful
to our business.
ITEM 2: PROPERTIES.
Our principal executive offices are located in a 56,000 square foot facility
purchased by us in August 1999 and located in King of Prussia, Pennsylvania.
We operate our fulfillment center from a 300,000 square foot leased facility
located in Louisville, Kentucky. We intend to purchase our Kentucky
fulfillment center. We lease 32,000 square feet in Houston, Texas where most
of our jewelry and luxury goods operations are based and 44,000 square feet in
Houston, Texas where our jewelry and luxury goods fulfillment center is based.
25
We believe that our properties are adequate for our present needs and that
suitable additional or replacement space will be available as required.
ITEM 3: LEGAL PROCEEDINGS.
We are involved in various routine litigation incidental to our current and
discontinued businesses. We believe that the disposition of these matters will
not have a material adverse effect on our financial position or results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the fiscal
quarter ended December 29, 2001.
26
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding each of our executive
officers and key employees (information regarding each of our directors is
incorporated by reference to the section of our 2002 Proxy Statement entitled
"Proposal 1--Election of Directors"):
Name Age(/1/) Title
---- -------- -----
Michael G. Rubin........ 29 Chairman, President and Chief Executive Officer
Jordan M. Copland....... 39 Executive Vice President and Chief Financial Officer
Robert W. Liewald....... 53 Executive Vice President, Merchandising
Arthur H. Miller........ 48 Executive Vice President and General Counsel
Mark Reese.............. 39 Executive Vice President and Chief Operating Officer
Michael R. Conn......... 31 Senior Vice President, Business Development
Steven C. Davis......... 31 Senior Vice President, Marketing
Glenn Walls............. 38 Senior Vice President, Merchandising
- --------
(1) As of March 1, 2002
Michael G. Rubin has served as our Chairman of the Board and Chief Executive
Officer since July 1995 and as our President since June 2000. Mr. Rubin was
named Entrepreneur of the Year in 1994 and 2000 at the Greater Philadelphia
Entrepreneur of the Year Awards sponsored by Ernst & Young. Mr. Rubin attended
Villanova University, Villanova, Pennsylvania.
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 W. Liewald has served as our Executive Vice President, Merchandising
since July 1999 and worked as a consultant to us and to other companies in the
sporting goods industry from June 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 Foot Locker, Inc. (formerly 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 Foot Locker's specialty athletic
divisions. Also while at Foot Locker, 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 Rome Comisky & McCauley
LLP, a law firm based in Philadelphia, Pennsylvania. Mr. Miller joined Blank
Rome in April 1983.
Mark S. Reese has served as our Executive Vice President and Chief Operating
Officer since May 2000. From February 1999 to May 2000, Mr. Reese served as
Chief eCommerce Officer of Toysmart.com, an e-tailer of family products. While
at Toysmart.com, Mr. Reese was responsible for the leadership and management
of the Internet production, merchandising, fulfillment, customer care,
research, and online content groups. From December 1997 to February 1999, Mr.
Reese was a Senior Manager with Andersen Consulting's Strategic Services
practice group, where he led strategic e-commerce initiatives for Fortune 50
companies. From December 1993 to December 1997, Mr. Reese was a Managing
Associate at CSC Index, a consulting company.
27
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. From September 1994 to June 1996, Mr. Davis was
enrolled at the University of Pennsylvania's Wharton School of Business where
he received an MBA.
Glenn P. Walls has served as our Senior Vice President, Merchandising since
September 2000. From June 1995 to August 2000, Mr. Walls was Divisional
Merchandise Manager for Dick's Sporting Goods, a 95-store sporting goods
retailer based in Pittsburgh, Pennsylvania. From August 1992 to June 1995, he
was Director of Sales for Lillis Agency, where he represented athletic
footwear and sporting goods sales for 10 leading sporting goods manufacturers.
From June 1990 to August 1992, Mr. Walls was Senior Buyer, Athletics for
Endicott Johnson Retail, overseeing buying for the 210 Endicott Johnson Family
stores and the 160 Father & Son shoe stores. From January 1986 to April 1990,
Mr. Walls was an executive at Dick's Sporting Goods, serving as Men's Apparel
Buyer and Team Sports/Exercise Buyer.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Price of and Dividends on Common Stock
The following table 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. As of March 9, 2002, we had approximately 2,070
shareholders of record. In connection with our anticipated name change, we
also intend to change our Nasdaq symbol from "GSPT" to "GSIC".
Prices
-------------
High Low
------ ------
Fiscal Year Ended December 30, 2000
First Quarter.................................................. $23.88 $12.25
Second Quarter................................................. $18.25 $ 4.31
Third Quarter.................................................. $ 9.63 $ 6.25
Fourth Quarter................................................. $11.13 $ 3.53
Fiscal Year Ended December 29, 2001
First Quarter.................................................. $ 6.38 $ 2.38
Second Quarter................................................. $ 8.45 $ 3.00
Third Quarter.................................................. $19.88 $ 7.45
Fourth Quarter................................................. $21.72 $10.85
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.
ITEM 6: SELECTED FINANCIAL DATA.
The following tables present portions of our financial statements and are
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 statement of
operations data for the years ended January 1, 2000, December 30, 2000 and
December 29, 2001 and the balance sheet data as of December 30, 2000 and
December 29, 2001 are derived from our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The selected
28
statement of operations data for the years ended December 31, 1997 and 1998
and the balance sheet data as of December 31, 1997 and 1998 and January 1,
2000 are derived from our audited consolidated financial statements that are
not included in this Annual Report on Form 10-K.
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 Annual Report on
Form 10-K have been reclassified to reflect this presentation.
Fiscal Year Ended
------------------------------------
Year Ended
December 31, January 1, December 30, December 29,
---------------- ---------- ------------ ------------
1997 1998 2000 2000 2001
------- ------- ---------- ------------ ------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ -- $ -- $ 5,511 $ 42,808 $102,610
Cost of revenues........ -- -- 3,817 29,567 67,586
------- ------- -------- -------- --------
Gross profit........... -- -- 1,694 13,241 35,024
------- ------- -------- -------- --------
Operating expenses:
Sales and marketing,
exclusive of $0, $0,
$192, $1,486 and $847
reported below as
stock-based
compensation,
respectively.......... -- -- 11,609 37,730 32,390
Product development,
exclusive of $0, $0,
$20, $0 and $461
reported below as
stock-based
compensation,
respectively.......... -- -- 6,933 7,292 8,590
General and
administrative,
exclusive of $0,
$150, $2,443, $3,497
and $8,974 reported
below as stock-based
compensation,
respectively.......... 2,032 2,736 8,914 8,730 10,638
Stock-based
compensation.......... -- 150 2,655 4,983 10,282
Depreciation and
amortization.......... 357 567 728 8,074 6,662
------- ------- -------- -------- --------
Total operating
expenses............... 2,389 3,453 30,839 66,809 68,562
------- ------- -------- -------- --------
Other (income) expense:
Interest expense....... 2,013 2,367 313 407 608
Interest income........ -- -- (774) (1,815) (3,049)
Other, net............. -- -- (2) -- (502)
------- ------- -------- -------- --------
Total other (income)
expense............. 2,013 2,367 (463) (1,408) (2,943)
------- ------- -------- -------- --------
Loss from continuing
operations before
income taxes........... (4,402) (5,820) (28,682) (52,160) (30,595)
Benefit from income
taxes.................. -- 1,979 2,222 -- --
------- ------- -------- -------- --------
Loss from continuing
operations............. (4,402) (3,841) (26,460) (52,160) (30,595)
Discontinued operations:
Income from
discontinued
operations............ 247 9,665 550 -- --
Loss on disposition of
discontinued
operations............ -- -- (17,337) (5,850) --
------- ------- -------- -------- --------
Net income (loss).... $(4,155) $ 5,824 $(43,247) $(58,010) $(30,595)
======= ======= ======== ======== ========
Earnings (losses) per
share--basic and
diluted(1):
Loss from continuing
operations............ $ (1.47) $ (.34) $ (1.78) $ (2.37) $ (0.90)
Income from
discontinued
operations............ .08 .85 .04 -- --
Loss on disposition of
discontinued
operations............ -- -- (1.17) (0.27) --
------- ------- -------- -------- --------
Net income (loss).... $ (1.39) $ .51 $ (2.91) $ (2.64) $ (0.90)
======= ======= ======== ======== ========
Weighted average common
shares
outstanding(/1/):
Basic and diluted...... 2,996 11,379 14,874 22,028 34,033
======= ======= ======== ======== ========
Number of common shares
outstanding(1)......... 10,418 11,925 18,475 31,925 37,673
======= ======= ======== ======== ========
BALANCE SHEET DATA:
Net assets of
discontinued
operations............. $24,129 $41,128 $ 18,381 $ -- $ --
Total assets............ 28,043 45,053 82,736 160,173 190,765
Total long-term debt.... 20,975 20,993 2,040 5,750 5,208
Working capital......... 19,748 34,846 40,557 80,805 93,702
Stockholders' equity ... 2,157 17,094 59,309 116,300 146,267
- -------
(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.
29
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
All statements made in this Annual Report on Form 10-K, other than
statements of historical fact, are forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan",
"will", "would", "should", "guidance", "potential", "continue", "project",
"forecast" and similar expressions typically are used to identify forward-
looking statements. These forward-looking statements are based on then-current
expectations, beliefs, assumptions, estimates and forecasts about our business
and the industry and markets in which we operate. These statements in this
Annual Report on Form 10-K are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements. Factors which may
affect our business, financial condition and operating results include the
effects of changes in the economy, consumer spending, the stock market and the
industries in which we operate, changes affecting the Internet and e-commerce,
including online retailing and direct response marketing, our ability to
maintain relationships with strategic partners and suppliers, our ability to
timely and successfully develop, maintain and protect our technology and
product and service offerings and execute operationally, our ability to
attract and retain qualified personnel and our ability to successfully
integrate any acquisitions we may make, including our recent acquisition of
Ashford.com. More information about potential factors that could affect us are
described below. We expressly disclaim any intent or obligation to update
these forward-looking statements.
Overview
We develop and operate e-commerce businesses, including online retail stores
and direct response television campaigns, for retailers, manufacturers, media
companies and professional sports organizations. We enable our partners to
capitalize on their existing brands to exploit e-commerce opportunities. We
customize the design of our partners' e-commerce businesses with a broad range
of characteristics that includes differentiated user interfaces on partners'
Web sites, partner-specific content, an extensive electronic catalog of
product descriptions and images, partner specific products for direct response
television campaigns and partner specific customer service and fulfillment. We
currently derive virtually all of our revenues from the sale of goods through
our partners' online stores and direct response television campaigns, toll-
free telephone number sales, business-to-business and group sales and related
outbound shipping charges, net of allowances for returns and discounts, as
well as from fixed and variable fees earned in connection with the development
and operation of partners' e-commerce businesses and the provision of
marketing services.
Company Background
Prior to our decision to initiate our e-commerce business in 1999, we
operated two primary businesses: our Branded division and our Off-Price and
Action Sports division. Through our Branded division, we designed, marketed
and distributed athletic and outdoor footwear under the RYKA brand and the
Yukon brand. As part of our Off-Price and Action Sports division, we purchased
closeouts, overstocks, canceled orders and excess inventories of athletic,
outdoor, casual and specialty footwear, athletic apparel and athletic
equipment from manufacturers and retailers for resale, and designed and
distributed special make-up athletic equipment. In April 1999, we formalized
our plan to divest these divisions in order to focus exclusively on the
development of our e-commerce business. Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of
these divisions have been segregated from those of continuing operations and
are presented as discontinued operations.
On June 10, 1999, in order to finance our e-commerce business, we agreed to
sell to 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 date 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
30
at closing of $13.2 million and the assumption by the purchaser of $4.0
million in indebtedness. The sale of this division was completed on May 26,
2000. 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. During fiscal 1999
and 2000, we recognized an aggregate loss of approximately $23.2 million
related to the disposition of these divisions. Included in accrued expenses
and other as of December 30, 2000 and December 29, 2001 was $2.2 million and
$102,000, respectively, related to certain remaining obligations of the
discontinued operations.
On April 27, 2000, in order to continue financing our e-commerce operations,
we agreed to sell to funds affiliated with SOFTBANK 2,500,000 shares of common
stock and to Rustic Canyon Ventures, L.P. (f/k/a TMCT Ventures, L.P.), or
Rustic Canyon, 625,000 shares of common stock at a price of $8.00 per share
for an aggregate purchase price of $25.0 million. The sale of these shares was
completed on May 1, 2000. In addition, as part of this financing, we issued to
SOFTBANK warrants to purchase 1,250,000 shares of common stock and to Rustic
Canyon warrants to purchase 312,500 shares of common stock. These warrants
have a three-year term and an exercise price of $10.00 per share.
On September 13, 2000, we agreed to sell to Interactive Technology Holdings,
LLC, a joint venture company formed by Comcast Corporation and QVC, Inc., or
ITH, 5,000,000 shares of common stock at $8.15 per share for an aggregate
purchase price of $40.8 million. In addition, ITH agreed to purchase, for
approximately $563,000, five-year warrants to purchase an additional 4,500,000
shares of common stock, at prices ranging from $8.15 to $10.00 per share.
These warrants were valued at approximately $8.9 million. This investment was
completed through two separate closings. On September 13, 2000, ITH invested
$14.9 million and on October 5, 2000, ITH invested $26.4 million.
On July 20, 2001, we agreed to sell to ITH 3,000,000 shares of our common
stock at $10.00 per share for an aggregate purchase price of $30.0 million. In
addition, we issued to ITH a five-year warrant to purchase an aggregate of
300,000 shares of the Company's common stock at an exercise price of $6.00 per
share in consideration for certain corporate development services performed by
ITH on behalf of the Company. We valued the warrant at approximately $2.1
million and charged stock-based compensation expense. The investment was
completed on August 23, 2001.
In August 2001, we announced our intention to expand our business to include
developing and operating e-commerce businesses beyond the sporting goods
merchandise category. Concurrent with that announcement, we announced that we
had entered into an e-commerce agreement with Bluelight.com, LLC, a subsidiary
of Kmart Corporation. Under that agreement, we manage certain aspects of
Kmart's overall e-commerce business, including fulfillment, technology and
customer service in exchange for a combination of fixed and variable fees.
As part of our plan to selectively pursue additional opportunities outside
of sporting goods, while continuing to grow our existing sporting goods
business, on September 13, 2001, we entered into a definitive merger agreement
to acquire all of the outstanding shares of Ashford.com. The merger was
consummated March 14, 2002. Under the terms of the agreement, Ashford.com
stockholders are receiving $0.125 and 0.0076 of a share of our common stock
for each share of Ashford.com common stock. When Ashford.com stockholders
exchange all of their issued and outstanding Ashford.com common stock, we
expect to pay approximately $7.1 million in cash and to issue approximately
430,000 shares of common stock.
During fiscal 2001, we established our media and entertainment division to
develop and operate e-commerce businesses for media and entertainment
companies.
Financial Presentation
Our financial statements present:
. net revenues, which are derived from sales of goods through our
partners' online stores and direct response television campaigns, toll-
free telephone number sales, business-to-business and group sales
31
and related outbound shipping charges, net of allowances for returns and
discounts, as well as from fixed and variable fees earned in connection
with the development and operation of partners' e-commerce businesses
and the provision of marketing services.
. cost of revenues, which include the cost of products sold and inbound
freight related to these products, as well as outbound shipping and
handling costs, other than those related to promotional free shipping
and subsidized shipping and handling which are included in sales and
marketing expense.
. sales and marketing expenses, which include advertising and promotional
expenses, including promotional free shipping and subsidized shipping
and handling costs, online marketing fees, commissions to affiliates,
fulfillment costs, customer service costs, credit card fees,
merchandising costs and payroll and related expenses. These expenses
also include partner revenue share charges, which are royalty payments
made to our partners in exchange for the use of their brands, the
promotion of our partners' URLs, Web sites and toll-free telephone
numbers in their marketing and communications materials, the
implementation of programs to provide incentives to customers to shop
through the e-commerce businesses that we operate and other programs and
services provided to the customers of the e-commerce businesses that we
operate.
. product development expenses, which consist primarily of expenses
associated with planning, maintaining and operating our partners' e-
commerce businesses and payroll and related expenses for engineering,
production, creative and management information systems.
. general and administrative expenses, which consist primarily of payroll
and related expenses associated with executive, finance, human
resources, legal and administrative personnel, as well as occupancy
costs for our headquarters and other offices.
. stock-based compensation expense, which consists of the amortization of
deferred compensation expense for options granted to employees and
certain non-employees, the value of the options or warrants granted to
certain partners and investors and amortization of deferred partner
revenue share charges.
. depreciation and amortization expenses, which relate primarily to the
depreciation of our corporate headquarters, the depreciation and
amortization of the capitalized costs for our technology, hardware and
software and the depreciation of improvements, furniture and fixtures at
our corporate headquarters and our fulfillment center.
. other income and expense, which consists primarily of interest income
earned on cash, cash equivalents and short-term investments, interest
expense paid primarily in connection with the mortgage on our corporate
headquarters and interest expense on capital leases and income earned
pursuant to the terms of a lease termination agreement.
Results of Operations
Comparison of Fiscal 2001 and 2000
Net Revenues. Net revenues from continuing operations increased $59.8
million from $42.8 million in fiscal 2000 to $102.6 million in fiscal 2001. Of
the increase in net revenues from fiscal 2000 to fiscal 2001, $31.2 million
was due to the net addition of new sporting goods partners' online retail
stores that were not operated for the entirety of both fiscal 2000 and fiscal
2001 and the addition of the fogdog.com Web site after our acquisition of
Fogdog on December 28, 2000, $9.7 million was due to an increase in sales from
sporting goods partners' online retail stores that were operated for the
entirety of both periods, $8.7 million was due to an increase in sales through
direct response television campaigns primarily from the sale of one of our
partner's products and $6.9 million was due to a net increase in bulk sales.
32
Net revenues in fiscal 2001 and fiscal 2000 included $10.5 million and $3.0
million in shipping revenue, respectively.
Cost of Revenues. We incurred cost of revenues from continuing operations of
$67.6 million for fiscal 2001 and $29.6 million for fiscal 2000. As a
percentage of net revenues, cost of revenues from continuing operations was
65.9% for fiscal 2001 and 69.1% for fiscal 2000.
Gross Profit. We had gross profit from continuing operations of $35.0
million for fiscal 2001 and $13.2 million for fiscal 2000. As a percentage of
net revenues, gross profit from continuing operations was 34.1% for fiscal
2001 and 30.9% for fiscal 2000. The increase in gross profit dollars from
fiscal 2000 to fiscal 2001 was due to the increase in net revenues and the
increase in gross profit percentage was due primarily to an increase in
service fee revenue from $1.0 million in fiscal 2000 to $4.3 million in fiscal
2001 and, to a lesser extent, volume and price discounts on merchandise
purchased by us.
Sales and Marketing Expenses. Sales and marketing expenses from continuing
operations decreased $5.3 million from $37.7 million for fiscal 2000 to $32.4
million for fiscal 2001. This decrease was primarily due to a $5.6 million
decrease in advertising costs, a $3.5 million decrease in third-party
warehouse and fulfillment services costs, a $2.1 million decrease in
subsidized shipping and handling costs and a $1.3 million decrease in
professional fees, offset, in part, by a $3.3 million increase in personnel,
occupancy and other costs associated with our Kentucky fulfillment center, a
$2.6 million increase in partner revenue share charges and a $1.3 million
increase in personnel costs associated with our merchandising, customer
service and vendor operations departments.
Product Development Expenses. Product development expenses from continuing
operations increased $1.3 million from $7.3 million for fiscal 2000 to $8.6
million for fiscal 2001. This increase was primarily due to a $971,000
increase in personnel costs, an $885,000 increase in equipment and software
maintenance costs associated with the increased number of e-commerce
businesses that we operated and maintained and a $428,000 increase in
communication costs, offset, in part, by a $961,000 decrease in costs relating
to our use of professional consultants.
General and Administrative Expenses. General and administrative expenses
from continuing operations increased $1.9 million from $8.7 million for fiscal
2000 to $10.6 million for fiscal 2001. This increase was primarily due to a
$1.6 million increase in credit card chargeback activity due principally to
increased sales volume and a $1.2 million increase in insurance related
expenses and other administrative costs to support our e-commerce business,
offset, in part, by a $753,000 decrease in personnel costs.
Stock-Based Compensation Expense. Stock-based compensation expense from
continuing operations increased $5.3 million from $5.0 million for fiscal 2000
to $10.3 million for fiscal 2001. This increase was primarily the result of
higher charges associated with the issuance of warrants to our partners and
consultants and charges related to options subject to variable accounting. As
of December 29, 2001, we had an aggregate of $3.5 million of deferred stock-
based compensation remaining to be amortized. We had stock-based compensation
expense related to the amortization of deferred partner revenue share charges
of $336,000 for fiscal 2001 and $0 for fiscal 2000.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased $1.4 million from $8.1 million for fiscal 2000 to $6.7
million for fiscal 2001. This decrease was due to a $5.4 million decrease in
depreciation expense related to the change in our estimate of the useful lives
of our computer hardware and software from two years to four years. This
change in our estimate was based on management's then-current analysis of our
historical operating experience, which indicated that the original estimate
was no longer appropriate. This decrease in depreciation and amortization
expenses was offset, in part, by a $3.5 million increase in depreciation
expense related to our corporate headquarters, our Kentucky fulfillment center
and the assets purchased to build, manage and operate our e-commerce business
and a $706,000 increase in amortization of goodwill associated with our
acquisition of Fogdog. In July 2001, the Financial Accounting Standards Board,
or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets," which changes the accounting for
goodwill from an amortization method to an impairment-
33
only approach. Under an impairment-only approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead will
be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. This statement is effective
for fiscal years beginning after December 15, 2001. We are evaluating the
impact of the adoption of this standard and have not yet determined the effect
of adoption on our financial position and results of operations.
Interest (Income) Expense. We had interest income of $3.0 million and
interest expense of $608,000 for fiscal 2001 compared to interest income of
$1.8 million and interest expense of $407,000 for fiscal 2000. The increase in
interest income of $1.2 million was due to higher average balances of cash and
cash equivalents and short-term investments during fiscal 2001. The increase
in interest expense of $201,000 was primarily due to increased interest
incurred on the $5.3 million mortgage note on our corporate headquarters which
was entered into on April 20, 2000. Twelve months of interest on this note was
recorded in fiscal 2001 compared with eight months of interest in fiscal 2000.
Other Income. We had other income of $502,000 for fiscal 2001 and $0 for
fiscal 2000, respectively. This income related primarily to fees earned
pursuant to the terms of a lease termination agreement. We do not anticipate
other income to be significant in fiscal 2002.
Income Taxes. Since the sales of our discontinued operations, we have not
generated taxable income. Net operating losses generated have been carried
back to offset income taxes paid in prior years. The remaining net operating
losses will be carried forward. The use of certain net operating loss
carryforwards are subject to annual limitations based on ownership changes of
our stock, as defined by Section 382 of the Internal Revenue Code. We expect
that net operating losses of approximately $34.1 million will expire before
they can be utilized. Any otherwise recognizable deferred tax assets have been
offset by a valuation allowance for the net operating loss carryforwards.
Comparison of Fiscal 2000 and 1999
Net Revenues. Net revenues increased $37.3 million from $5.5 million in
fiscal 1999 to $42.8 million in fiscal 2000 principally due to the fact that
fiscal 1999 results reflected only two months of sales activity compared to
twelve months in fiscal 2000. Net revenues in fiscal 2000 and fiscal 1999
included $3.0 million and $70,000, respectively, in shipping revenue. Net
revenues in fiscal 2000 and fiscal 1999 also included $8.4 million and $0,
respectively, in sales from one of our partner's products through direct
response television campaigns in addition to Web site and toll-free telephone
number sales.
Cost of Revenues. We incurred cost of revenues from continuing operations of
$29.6 million for fiscal 2000 and $3.8 million for fiscal 1999. As a
percentage of net revenues, cost of revenues from continuing operations was
69.1% for fiscal 2000 and 69.3% for fiscal 1999.
Gross Profit. We had gross profit from continuing operations of $13.2
million for fiscal 2000 and $1.7 million for fiscal 1999. As a percentage of
net revenues, gross profit from continuing operations was 30.9% for fiscal
2000 and 30.7% for fiscal 1999.
Sales and Marketing Expenses. We incurred sales and marketing expenses from
continuing operations of $37.7 million for fiscal 2000 and $11.6 million for
fiscal 1999 for an increase of $26.1 million. The increase in sales and
marketing expenses for fiscal 2000 compared to fiscal 1999 was primarily the
result of increased personnel, fulfillment and marketing costs in fiscal 2000
due to the fact that we did not yet begin operating our partners' e-commerce
businesses until the fourth quarter of fiscal 1999. In addition, during the
third quarter of fiscal 2000, we incurred personnel, occupancy and other costs
associated with our Kentucky fulfillment center, as well as third-party
warehouse and fulfillment services costs. Beginning in October 2000, we
consolidated our fulfillment operations into our Kentucky fulfillment center.
Accordingly, beginning in the fourth quarter of 2000, sales and marketing
expenses reflected this consolidation. Partner revenue share charges were $1.1
million fiscal 2000 and $81,000 for fiscal 1999.
34
Product Development Expenses. We incurred product development expenses from
continuing operations of $7.3 million for fiscal 2000 and $6.9 million for
fiscal 1999. The increase in product development expenses for fiscal 2000
compared to fiscal 1999 was primarily the result of the increased number of e-
commerce businesses that we operated and maintained and increased support
costs associated with our management information systems.
General and Administrative Expenses. We incurred general and administrative
expenses from continuing operations of $8.7 million for fiscal 2000 and $8.9
million for fiscal 1999. The decrease in general and administrative expenses
for fiscal 2000 compared to fiscal 1999 was primarily due to non-recurring
costs incurred in fiscal 1999 that were related to the re-structuring of our
operations to focus on our e-commerce business.
Stock-Based Compensation Expense. We recorded stock-based compensation
expense from continuing operations of $5.0 million for fiscal 2000 and $2.7
million for fiscal 1999. The increase in stock-based compensation expense in
fiscal 2000 compared to fiscal 1999 was the result of charges associated with
the sales of warrants to investors and the issuance of stock options to
certain of our employees, offset by lower charges related to warrants issued
to our partners. As of December 30, 2000, we had an aggregate of $2.7 million
of deferred compensation remaining to be amortized.
Depreciation and Amortization Expenses. We incurred depreciation and
amortization expenses of $8.1 million for fiscal 2000 and $728,000 for fiscal
1999. The increase in these expenses in fiscal 2000 compared to fiscal 1999
reflects the depreciation related to our corporate headquarters, our Kentucky
fulfillment center and assets purchased to build, manage and operate our e-
commerce business. We did not begin operating our e-commerce business until
the fourth quarter of 1999, and, therefore, only three months of depreciation
from continuing operations were recorded in fiscal 1999.
Interest (Income) Expense. We had interest income of $1.8 million and
interest expense of $407,000 for fiscal 2000 compared to interest income of
$774,000 and interest expense of $313,000 for fiscal 1999. Interest income in
fiscal 2000 and fiscal 1999 consisted of interest earned on cash, cash
equivalents and short-term investments. Interest expense in fiscal 2000
related primarily to a $5.3 million mortgage note on our corporate
headquarters entered into on April 20, 2000. The mortgage note has a term of
ten years and bears interest at 8.49% per annum. Interest expense in fiscal
1999 related primarily to bank borrowings.
Income Taxes. Since the sales of our Branded and Off-Price and Action Sports
Divisions, we have not generated taxable income. Net operating losses
generated have been carried back to offset income taxes paid in prior years.
The remaining net operating losses will be carried forward. Any otherwise
recognizable deferred tax assets have been offset by a valuation allowance for
the net operating loss carryforwards.
Certain Related Party Transactions
We have entered into strategic alliances to provide procurement and
fulfillment services for QVC, Inc., and for certain partners which may be
considered affiliates of SOFTBANK America Inc. (or its related companies). We
recognized net revenues of $3.5 million, $3.0 million and $0 on sales to these
related parties for fiscal 2001, fiscal 2000 and fiscal 1999, respectively.
The terms of these sales are comparable to those given to our other partners,
and the amount included in accounts receivable as a result of these sales was
$236,000 and $738,000 as of December 29, 2001 and December 30, 2000,
respectively.
Critical Accounting Policies
We have identified the following as critical accounting policies to us.
Revenue Recognition
We recognize revenues from product sales or services provided when the
following revenue recognition criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable and collectibility is reasonably
assured.
35
We recognize revenue from product sales, net of estimated returns based on
historical experience, upon shipment of products to customers. The majority of
products are shipped from our fulfillment center located in Louisville, KY. We
rely upon certain vendors to ship products to customers. We act as principal
in these transactions, as orders are initiated directly through the e-commerce
businesses that we operate, we take title to the goods during shipment and
have the economic risk related to collection, customer service and returns.
We consider the criteria presented in Emerging Issues Task Force, or EITF,
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," in
determining the appropriate revenue recognition treatment. Generally, when we
are the primary obligor in a transaction, have general inventory risk, have
established the selling price, have discretion in supplier selection, have
physical loss inventory risk after customers order or during shipping and have
credit risk, or have several but not all of these indicators, we record
revenue gross as a principal.
We pay a percentage of the revenues generated from the sale of products
through the e-commerce businesses that we operate to our respective partners
in exchange for the rights to use their brand names and the promotions and
advertising that our partners agree to provide. We refer to these royalty
payments as partner revenue share charges. We have considered the revenue
reduction provisions addressed in EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products," and believe that the payment of partner revenue share charges, or
the issuance of warrants or stock in lieu of cash partner revenue share
charges, to our partners does not result in any reduction of revenues. EITF
00-25 addresses consideration paid to parties along a distribution chain. At
our discretion, we purchase merchandise from our vendors and we are
responsible for paying those vendors. The amounts purchased and the prices
paid to our vendors are not impacted by the revenue share provisions of our
agreements with our partners. Accordingly, our partners and our vendors are
not linked in the distribution chain and the provisions of EITF No. 00-25 do
not apply.
We recognize revenue from services provided as the services are rendered. If
we receive payments for services in advance, these amounts are deferred and
then recognized over the service period.
Deferred revenue consists primarily of fees paid in advance to us as of the
respective balance sheet date under an agreement to manage certain aspects of
a partner's overall e-commerce business, including fulfillment, technology and
customer service. Deferred revenue also consists of amounts received from the
sale of gift certificates redeemable on our partners' Web sites.
Accounting for Stock-Based Compensation
We account for stock options granted to employees under our qualified and
nonqualified stock option plans 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 our stock at the date of the grant over the amount an
employee must pay to acquire the stock.
We account for stock options and warrants issued to non-employees using the
fair value method prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation," and in accordance with the provisions of 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," and EITF No.
00-18, "Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees." Accordingly, compensation cost
for stock options and warrants issued to non-employees is measured using a
Black-Scholes multiple option pricing model that takes into account
assumptions as to the expected life of the option or warrant, the expected
volatility of our common stock and the risk-free interest rate over the
expected life of the option or warrant.
36
We also record stock-based compensation as deferred partner revenue share
charges are amortized. These deferred partner revenue share charges have
resulted from the exercise of a right to receive 1,600,000 shares of our
common stock in lieu of future cash revenue share payments, and were $14.1 and
$0 million as of December 29, 2001 and December 30, 2000, respectively. The
deferred partner revenue share charges are being amortized as the revenue
share expense is incurred based on actual revenues recognized in a given
period and the imputed partner revenue share percentage, which is based on the
value of the Company's common stock that was issued upon exercise of the
right.
Accounting for Internal-Use Computer Software and Web Site Development Costs
We account for internal-use computer software and Web site development costs
in accordance with the AICPA Accounting Standards Executive Committee's
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and EITF 00-2, "Accounting for Web
Site Development Costs." Accordingly, we generally capitalize costs incurred
to develop internal-use computer software during the application development
stage, including those relating to developing our partners' Web sites. We also
capitalize costs of enhancements to internal-use computer software, provided
that these enhancements result in additional functionality.
We depreciate capitalized costs using the straight-line method over their
useful lives, which are based on management's estimate of the period that
these capitalized costs will generate revenue. During the first quarter of
fiscal 2001, management increased its estimate of the useful lives of these
capitalized costs from two years to four years. This change had the effect of
decreasing the loss from continuing operations for fiscal 2001 by $5.4
million, or $0.16 per share. This increase was based on management's then-
current analysis of our historical operating experience, which indicated that
the original estimate was no longer appropriate.
Liquidity and Capital Resources
Our principal source of liquidity is our cash and cash equivalents. Our cash
and cash equivalents balance was $105.9 million and $92.0 million as of
December 29, 2001 and December 30, 2000, respectively.
In connection with our decision to focus on our e-commerce business in 1999,
we raised approximately $80.0 million in gross proceeds through an equity
financing with SOFTBANK in July 1999. We used part of the proceeds from this
financing to repay the balance on our then outstanding lines of credit, reduce
trade payables and provide operating capital related to our historical
businesses. We also used part of the proceeds to acquire property and
equipment and fund the working capital needs of our e-commerce business.
On April 20, 2000, we received $5.3 million in gross proceeds through a
mortgage financing of our corporate headquarters.
On April 27, 2000, we raised $25.0 million in gross proceeds through an
equity financing with SOFTBANK and Rustic Caynon. On September 13, 2000, we
raised $14.9 million in gross proceeds and on October 5, 2000, we raised $26.4
million in gross proceeds, through an equity financing with ITH. See "Company
Background" section above. We have used the proceeds of these financings for
additional working capital needs and general business purposes.
On August 23, 2001, we raised $30.0 million in gross proceeds through an
equity financing with ITH. See "Company Background" section above. We plan to
use the proceeds of this financing for additional working capital needs and
general business purposes.
We received an aggregate of $23.5 million in proceeds from the sales of our
discontinued operations in fiscal 1999 and fiscal 2000, as well as $35.7
million in net cash from the acquisition of Fogdog in fiscal 2000.
We have incurred substantial costs to develop our e-commerce businesses and
to recruit, train and compensate personnel for our creative, engineering,
business development, marketing, merchandising, customer service, management
information systems and administrative departments. In addition, during fiscal
2000, we invested in the required technology, equipment and personnel to make
our Kentucky fulfillment center fully
37
operational, and we intend to purchase our Kentucky fulfillment center in
fiscal 2002. As of December 29, 2001, we had cash and cash equivalents of
$105.9 million, working capital of $93.7 million and an accumulated deficit of
$131.7 million.
We used approximately $13.2 million, $37.9 million and $22.3 million in net
cash for operating activities of continuing operations during fiscal 2001,
fiscal 2000 and fiscal 1999, respectively. Net cash used for operating
activities of continuing operations during fiscal 2001 was primarily the
result of net losses from continuing operations and changes in accounts
receivable, prepaid expenses and other current assets, accounts payable,
accrued expenses and other liabilities, offset, in part, by changes in
deferred revenue, inventory, stock-based compensation and depreciation and
amortization. Net cash used for operating activities of continuing operations
during fiscal 2000 was primarily the result of net losses from continuing
operations and changes in accounts receivable, inventory, prepaid expenses and
other current assets, offset in part, by changes in refundable income taxes,
deferred revenue, accounts payable, accrued expenses and other liabilities,
stock-based compensation, and depreciation and amortization. Net cash used for
operating activities of continuing operations during fiscal 1999 was primarily
the result of net losses from continuing operations and changes in accounts
receivable, inventory, prepaid expenses and other current assets, refundable
income taxes and income taxes payable, offset, in part, by changes in accounts
payable, accrued expenses and other liabilities, deferred revenue, stock-based
compensation and depreciation and amortization.
Our investing activities during fiscal 2001 consisted primarily of purchases
of property and equipment. We made capital expenditures of $8.4 million during
fiscal 2001. We expect capital expenditures for fiscal 2002 to be between $8.0
million and $22.0 million. The actual capital expenditures that we make within
that range will depend on a number of factors, including the completion of our
intended acquisition of our Kentucky fulfillment center, although we
anticipate that a significant portion of the capital expenditure related to
that purchase will be funded through the assumption of the mortgage on that
facility. Also, during fiscal 2001, we received $947,000 in cash proceeds from
sales of short-term investments. During fiscal 2000, our investing activities
consisted of purchases of property and equipment. We made capital expenditures
of $13.7 million during fiscal 2000. Also, during fiscal 2000, we received
$13.2 million in cash proceeds from the sale our Off-Price and Action Sports
division and $35.7 million in net cash received from the acquisition of
Fogdog. During fiscal 1999, our investing activities consisted primarily of
purchases of property and equipment. We made capital expenditures of $18.4
million during fiscal 1999. Also, during fiscal 1999, we received $10.3
million in cash proceeds from the sale of our Branded division.
We had the following commitments as of December 29, 2001 concerning our debt
obligations, lease obligations, employment agreements, advertising and media
agreements, partner revenue share payment obligations and our anticipated
payments associated with our acquisition of Ashford.com.
Fiscal Year
-----------------------------------
2002 2003 2004 2005 2006 Thereafter Total
------- ------ ------ ------ ------ ---------- -------
(in thousands)
Mortgage principal...... $ 39 $ 42 $45 $ 50 $ 54 $ 5,018 $ 5,248
Mortgage interest....... 450 447 444 439 435 1,446 3,661
Capital leases.......... 565 - - - - - 565
Operating leases........ 1,410 1,292 1,112 449 - - 4,263
Employment agreements... 2,358 2,381 1,451 - - - 6,190
Advertising and media
agreements............. 880 - - - - - 880
Partner revenue share
payments............... 1,500 1,500 1,500 1,500 1,500 6,750 14,250
Acquisition of
Ashford.com............ 8,319 - - - - - 8,319
------- ------ ------ ------ ------ ------- -------
Total commitments...... $15,521 $5,662 $4,552 $2,438 $1,989 $13,214 $43,376
======= ====== ====== ====== ====== ======= =======
To date, we have financed our e-commerce operations primarily from the sale
of equity securities. Management expects that our current cash and the
collection of accounts receivable will be sufficient to meet our anticipated
cash needs for the foreseeable future. In the fourth quarter of 2001, we
realized income from continuing operations of $260,000 and income from
continuing operations, excluding non-cash charges for stock-
38
based compensation and depreciation and amortization, of $3.3 million. Those
non-cash charges aggregated $3.0 million. In addition, we expect that we will
also realize income from continuing operations, excluding non-cash charges for
stock-based compensation and depreciation and amortization, for fiscal 2002.
However, in order to fund our anticipated operating expenses and realize
income from continuing operations, including non-cash charges, our revenues
must increase significantly. If cash flows are insufficient to fund these
expenses, we may in the future need to raise additional funds in future
periods through public or private debt or equity financings or other
arrangements to fund our operations until we achieve profitability. Failure to
raise future capital when needed could seriously harm our business and
operating results. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences
or privileges senior to our common stock.
Seasonality
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that the fourth fiscal quarter will account for a
disproportionate 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. For additional information, see Note
19 to our consolidated financial statements included in this Annual Report on
Form 10-K.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not used derivative financial instruments in our investment
portfolio. We invest our excess cash in institutional Money Market accounts,
auction rate certificates and certificates of deposit. In order to minimize
risk and credit exposure, we invest with three financial institutions. 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 carry 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 it
may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates.
Our long-term debt consists of a mortgage note on our corporate
headquarters. The interest rate on the note is fixed at 8.49% per annum over
the ten year term of the note. As of December 29, 2001, the mortgage note had
an aggregate outstanding principal balance of $5.2 million.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements, supplementary data and related documents that are
included in this Annual Report on Form 10-K are listed in Item 14(a), Part IV,
of this Report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
39
PART III
This Part incorporates certain information from our definitive proxy
statement for our 2002 Annual Meeting of Shareholders (the "2002 Proxy
Statement") to be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year covered by this Annual Report
on Form 10-K. Notwithstanding such incorporation, the sections of our 2002
Proxy Statement entitled "Report of the Compensation Committee" and
"Performance Graph" shall not be deemed to be "filed" as part of this Report.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is incorporated by reference to our
2002 Proxy Statement including but necessarily limited to the sections of the
2002 Proxy Statement entitled "Proposal 1--Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance."
Information concerning our executive officers who are not also directors is
included in Item 4.1, Part I, of this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
This information is incorporated by reference to our 2002 Proxy Statement
including but necessarily limited to the section of the 2002 Proxy Statement
entitled "Executive Compensation."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to our 2002 Proxy Statement
including but necessarily limited to the section of the 2002 Proxy Statement
entitled "Principal Shareholders."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our 2002 Proxy Statement
including but necessarily limited to the section of the 2002 Proxy Statement
entitled "Certain Relationships and Related Transactions."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors--Deloitte & Touche LLP F-1
Consolidated Balance Sheets as of December 30, 2000 and December 29,
2001 F-2
Consolidated Statements of Operations for the Fiscal Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001 F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended January 1, 2000, December 30, 2000 and December 29, 2001 F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001 F-5
Notes to Consolidated Financial Statements F-6
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is included
in the financial statements or the notes thereto or is not applicable or
required.
40
3. EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Global Sports,
Inc. (filed as Appendix B to Global Sports, Inc.'s Definitive Proxy
Statement on Schedule 14A filed on April 27, 2001 and incorporated
herein by reference)
3.2 Bylaws, as amended, of Global Sports, Inc. (filed with Global Sports,
Inc.'s Registration Statement No. 33-33754 and incorporated herein by
reference)
4.1 Form of Investor Warrant (filed with Global Sports, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 29, 2001 and
incorporated herein by reference)
4.2 Form of Partner Warrant (filed with Global Sports, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 29, 2001 and
incorporated herein by reference)
4.3 Warrant to Purchase 200,000 Shares of Common Stock dated January 30,
2002
4.4 Specimen Common Stock Certificate (filed with Global Sports, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 30, 2000
and incorporated herein by reference)
4.5 Registration Rights Agreement, dated July 31, 1995, by and between
Global Sports, Inc. and MR Acquisitions, Inc. (filed with Global
Sports, Inc.'s Current Report on Form 8-K filed on July 31, 1995 and
incorporated herein by reference)
4.6 Second Amended and Restated Registration Rights Agreement, dated as of
September 13, 2000, by and between Global Sports, Inc., Interactive
Technology Holdings, LLC, SOFTBANK Capital Advisors Fund LP and TMCT
Ventures, L.P. (filed with Global Sports, Inc.'s Current Report on
Form 8-K filed on September 13, 2000 and incorporated herein by
reference)
4.7 Second Amendment to Second Amended and Restated Registration Rights
Agreement, dated as of July 20, 2001, among Global Sports, Inc.,
SOFTBANK Capital Partners LP, SOFTBANK Capital Advisors Fund LP,
Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) and Interactive
Technology Holdings, LLC (filed with Global Sports, Inc.'s Current
Report on Form 8-K filed on August 27, 2001 and incorporated herein by
reference)
10.1+ Global Sports, Inc.'s 1996 Equity Incentive Plan, amended and restated
as of January 4, 2001 (filed as Appendix A to Global Sports, Inc.'s
Definitive Proxy Statement on Schedule 14A filed on April 27, 2001 and
incorporated herein by reference)
10.2+ Global Sports, Inc.'s 2000 Employee Stock Purchase Plan (filed with
Global Sports, Inc.'s Preliminary Proxy Statement on Schedule 14A
filed on March 22, 2000 and incorporated herein by reference)
10.3+ Global Sports, Inc.'s 1987 Stock Option Plan (filed with Global
Sports, Inc.'s Registration Statement No. 33-19754-B and incorporated
herein by reference)
10.4+ Global Sports, Inc.'s 1988 Stock Option Plan (filed with Global
Sports, Inc.'s Registration Statement No. 33-27501 and incorporated
herein by reference)
10.5+ Global Sports, Inc.'s 1990 Stock Option Plan (filed with Global
Sports, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990 and incorporated herein by reference)
10.6+ Global Sports, Inc.'s 1992 Stock Option Plan (filed with Global
Sports, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 and incorporated herein by reference)
10.7+ Global Sports, Inc.'s 1993 Stock Option Plan (filed with Global
Sports, Inc.'s Form S-8 Registration Statement filed on January 3,
1994 and incorporated herein by reference)
10.8+ Global Sports, Inc.'s 1995 Stock Option Plan (filed with Global
Sports, Inc.'s Current Report on Form 8-K dated July 31, 1995 and
incorporated herein by reference)
10.9+ Global Sports, Inc.'s 1995 Non-Employee Directors' Stock Option Plan
(filed with Global Sports, Inc.'s Proxy Statement on Schedule 14A
filed on October 13, 1995 in connection with the 1995 Special Meeting
in Lieu of Annual Meeting held on November 15, 1995 and incorporated
herein by reference)
10.10+ Global Sports, Inc.'s Deferred Profit Sharing Plan and Trust (filed
with Global Sports, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference)
41
Exhibit
Number Description
------- -----------
10.11+ Employment Agreement, dated June 1, 2001, by and between Global
Sports, Inc. and Michael G. Rubin (filed with Global Sports, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference)
10.12+ Employment Agreement, dated February 24, 1999, by and between Global
Sports, Inc. and Michael R. Conn (filed with Global Sports, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and incorporated herein by reference)
10.13+ Employment Agreement, dated August 9, 1999, by and between Global
Sports, Inc. and Arthur H. Miller (filed with Global Sports, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
and incorporated herein by reference)
10.14+ Employment Agreement, dated January 10, 2000, by and between Global
Sports, Inc. and Steven Davis (filed with Global Sports, Inc.'s Annual
Report on Form 10-K for the fiscal year ended January 1, 2000 and
incorporated herein by reference)
10.15+ Employment Agreement, dated February 9, 2000, by and between Global
Sports, Inc. and Jordan M. Copland (filed with Global Sports, Inc.'s
Annual Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference)
10.16+ Employment Agreement, dated May 30, 2000 by and between Global Sports,
Inc. and Mark Reese (filed with Global Sports, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 30, 2000 and incorporated
herein by reference)
10.17* License and E-Commerce Agreement, dated July 6, 2001, by and among
Global Sports Interactive, Inc., The Sports Authority, Inc. and The
Sports Authority Michigan, Inc. (filed with Amendment No. 1 to Global
Sports, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference)
10.18* E-Commerce Agreement, dated as of August 10, 2001, by and among Global
Sports, Inc., Bluelight.com, LLC and Kmart Corporation (filed with
Amendment No. 1 to Global Sports, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 29, 2001 and incorporated herein by
reference)
10.19 Stock Purchase Agreement, dated as of July 20, 2001, by and among
Global Sports, Inc., Michael G. Rubin and Interactive Technology
Holdings, LLC (filed with Global Sports, Inc.'s Current Report on Form
8-K filed on August 27, 2001 and incorporated herein by reference)
10.20 Letter Agreement, dated as of July 20, 2001, among Global Sports,
Inc., Interactive Technology Holdings, LLC, SOFTBANK Capital Partners
LP and SOFTBANK Capital Advisors Fund LP (filed with Global Sports,
Inc.'s Current Report on Form 8-K filed on August 27, 2001 and
incorporated herein by reference)
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent (Deloitte & Touche LLP)
24.1 Power of Attorney (included on Signature Page to this Form 10-K)
- --------
+ Management contract or compensatory plan or arrangement
* Confidential treatment has been requested as to certain portions of this
exhibit. The omitted portions have been separately filed with the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
None.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf on the date indicated by the undersigned thereunto duly
authorized.
Date: April 1, 2002 GLOBAL SPORTS, INC.
By: /s/ Michael G. Rubin
----------------------------------
Michael G. Rubin,
Chairman, President and Chief
Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Rubin and Jordan M. Copland, and
each or any one of them, his true and lawful attorney-in-fact and agent, 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 to this
Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, 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 substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Michael G. Rubin Chairman, President and April 1, 2002
- -------------------------------------- Chief Executive Officer
Michael G. Rubin (principal executive
officer)
/s/ Jordan M. Copland Executive Vice President April 1, 2002
- -------------------------------------- and Chief Financial
Jordan M. Copland Officer (principal
financial officer and
principal accounting
officer)
/s/ Kenneth J. Adelberg Director April 1, 2002
- --------------------------------------
Kenneth J. Adelberg
/s/ M. Jeffrey Branman Director April 1, 2002
- --------------------------------------
M. Jeffrey Branman
/s/ Ronald D. Fisher Director April 1, 2002
- --------------------------------------
Ronald D. Fisher
/s/ Harvey Lamm Director April 1, 2002
- --------------------------------------
Harvey Lamm
43
Signature Capacity Date
--------- -------- ----
/s/ Mark S. Menell Director April 1, 2002
______________________________________
Mark S. Menell
/s/ Michael S. Perlis Director April 1, 2002
______________________________________
Michael S. Perlis
/s/ Jeffrey F. Rayport Director April 1, 2002
______________________________________
Dr. Jeffrey F. Rayport
44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Global Sports, Inc.
We have audited the accompanying consolidated balance sheets of Global
Sports, Inc. and subsidiaries (the "Company") as of December 30, 2000 and
December 29, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 29, 2001. 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 in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
30, 2000 and December 29, 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 29, 2001 in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 29, 2002
F-1
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 30, December 29,
2000 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 92,012 $105,896
Short-term investments............................ 1,789 842
Accounts receivable, net of allowance of $287 and
$239, respectively............................... 4,440 6,973
Inventory......................................... 19,202 17,779
Prepaid expenses and other current assets......... 1,485 1,502
-------- --------
Total current assets............................ 118,928 132,992
Property and equipment, net......................... 26,424 28,929
Goodwill, net....................................... 14,363 13,453
Other assets, net of accumulated amortization of $16
and $377, respectively............................. 458 15,391
-------- --------
Total assets.................................... $160,173 $190,765
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 20,214 $ 22,356
Accrued expenses and other........................ 16,272 8,196
Deferred revenue.................................. 1,317 8,193
Current portion--note payable..................... 35 39
Current portion--capital lease obligations........ 285 506
-------- --------
Total current liabilities....................... 38,123 39,290
Note payable........................................ 5,247 5,208
Capital lease obligations........................... 503 --
Commitments and contingencies....................... -- --
Stockholders' equity:
Preferred stock, Series A, $0.01 par value,
5,000,000 shares authorized; 800 and 400 shares
issued as mandatorily redeemable preferred stock
and outstanding, as of December 30,2000 and
December 29, 2001, respectively.................... -- --
Common stock, $0.01 par value, 90,000,000 shares
authorized; 31,925,098 and 37,673,808 shares issued
as of December 30, 2000 and December 29, 2001,
respectively; 31,925,098 and 37,672,598 shares
outstanding as of December 30, 2000 and December
29, 2001, respectively............................. 319 377
Additional paid in capital.......................... 217,124 277,628
Accumulated deficit................................. (101,143) (131,738)
-------- --------
116,300 146,267
Less: Treasury stock, at par........................ -- --
-------- --------
Total stockholders' equity...................... 116,300 146,267
-------- --------
Total liabilities and stockholders' equity...... $160,173 $190,765
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended
--------------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------
Net revenues........................... $ 5,511 $ 42,808 $102,610
Cost of revenues....................... 3,817 29,567 67,586
-------- -------- --------
Gross profit......................... 1,694 13,241 35,024
-------- -------- --------
Operating expenses:
Sales and marketing, exclusive of
$192, $1,486 and $847 reported
below as stock-based compensation,
respectively........................ 11,609 37,730 32,390
Product development, exclusive of
$20, $0 and $461 reported below as
stock-based compensation,
respectively........................ 6,933 7,292 8,590
General and administrative, exclusive
of $2,443, $3,497 and $8,974
reported below as stock-based
compensation, respectively.......... 8,914 8,730 10,638
Stock-based compensation............. 2,655 4,983 10,282
Depreciation and amortization........ 728 8,074 6,662
-------- -------- --------
Total operating expenses........... 30,839 66,809 68,562
-------- -------- --------
Other (income) expense:
Interest expense..................... 313 407 608
Interest income...................... (774) (1,815) (3,049)
Other, net........................... (2) -- (502)
-------- -------- --------
Total other (income) expense....... (463) (1,408) (2,943)
-------- -------- --------
Loss from continuing operations before
income taxes.......................... (28,682) (52,160) (30,595)
Benefit from income taxes.............. 2,222 -- --
-------- -------- --------
Loss from continuing operations........ (26,460) (52,160) (30,595)
Discontinued operations:
Income from discontinued operations
(net of income tax benefit of
$(583), $0 and $0 in 1999, 2000, and
2001, respectively)................. 550 -- --
Loss on disposition of discontinued
operations (net of income tax
provision of $2,160, $0 and $0 in
1999, 2000 and 2001, respectively).. (17,337) (5,850) --
-------- -------- --------
Net loss............................... $(43,247) $(58,010) $(30,595)
======== ======== ========
Earnings (losses) per share:
Basic and diluted--
Loss from continuing operations.... $ (1.78) $ (2.37) $ (0.90)
Income from discontinued
operations........................ 0.04 -- --
Loss on disposition of discontinued
operations........................ (1.17) (0.27) --
-------- -------- --------
Net loss........................... $ (2.91) $ (2.64) $ (0.90)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Retained Accumulated
Common Stock Additional Earnings Other Treasury Stock
--------------- Paid in (Accumulated Comprehensive Comprehensive ---------------
Shares Dollars Capital Deficit) Income (Loss) Income (Loss) Shares Dollars Total
------ ------- ---------- ------------ ------------- ------------- ------ ------- --------
Consolidated balance at
December 31, 1998...... 12,994 $130 $ 17,111 $ 114 $(47) 1,069 $(214) $ 17,094
Net loss................ (43,247) $(43,247) (43,247)
Translation
adjustments............ -- 47 47 47
--------
Comprehensive loss...... $(43,200)
========
Issuance of common stock
to SOFTBANK, net of
costs ................. 6,154 61 79,755 79,816
Issuance of options and
warrants to purchase
common stock in
exchange for services
....................... 3,771 3,771
Issuance of common stock
upon exercise of
options and warrants .. 396 4 1,824 1,828
------ ---- -------- --------- ---- ------ ----- --------
Consolidated balance at
January 1, 2000........ 19,544 195 102,461 (43,133) -- 1,069 (214) 59,309
Net loss................ (58,010) $(58,010) (58,010)
Translation
adjustments............ --
--------
Comprehensive loss...... $(58,010)
========
Issuance of common stock
and warrants to
SOFTBANK and Rustic
Canyon Ventures, LP,
net of costs........... 3,125 31 24,752 24,783
Issuance of common stock
and issuance of
warrants valued at
approximately $8.9
million to ITH, net of
costs.................. 5,000 50 41,263 41,313
Issuance of common stock
in acquisition of
Fogdog, Inc. .......... 5,067 51 42,305 42,356
Issuance of options and
warrants to purchase
common stock in
exchange for services
....................... 5,573 5,573
Issuance of common stock
upon exercise of
options and warrants .. 205 2 724 726
Issuance of common stock
under Employee Stock
Purchase Plan ......... 53 1 249 250
Retirement of treasury
stock.................. (1,069) (11) (203) (1,069) 214 --
------ ---- -------- --------- ---- ------ ----- --------
Consolidated balance at
December 30, 2000...... 31,925 319 217,124 (101,143) -- -- -- 116,300
Net loss................ (30,595) $(30,595) (30,595)
Translation
adjustments............ --
--------
Comprehensive loss...... $(30,595)
========
Issuance of common stock
in lieu of future cash
revenue share
payments............... 1,600 16 14,400 14,416
Issuance of common stock
to ITH, net of costs... 3,000 30 29,970 30,000
Issuance of options and
warrants to
purchase common stock
in exchange for
services............... 9,962 9,962
Issuance of common stock
upon
exercise of options and
warrants............... 958 10 5,722 5,732
Issuance of common stock
under Employee Stock
Purchase Plan.......... 191 2 683 685
Contribution from
stockholder............ 71 71
Repurchase of warrants.. (300) (300)
Purchase of treasury
stock.................. (4) 1 (4)
------ ---- -------- --------- ---- ------ ----- --------
Consolidated balance at
December 29, 2001...... 37,674 $377 $277,628 $(131,738) $ -- 1 $ -- $146,267
====== ==== ======== ========= ==== ====== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
------------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------
Cash Flows from Operating Activities:
Net loss................................. $(43,247) $(58,010) $(30,595)
Deduct:
Income from discontinued operations.... 550 -- --
Loss on disposition of discontinued
operations............................ (17,337) (5,850) --
-------- -------- --------
Loss from continuing operations.......... (26,460) (52,160) (30,595)
-------- -------- --------
Adjustments to reconcile loss from
continuing operations to net cash used
in operating activities:
Depreciation and amortization.......... 728 8,074 6,662
Stock-based compensation............... 2,655 4,983 10,282
Changes in operating assets and
liabilities, net of discontinued
operations:
Accounts receivable, net............... (2,738) (3,660) (2,533)
Inventory.............................. (10,697) (7,056) 1,423
Prepaid expenses and other current
assets................................ (845) (49) (17)
Refundable income taxes................ (1,338) 1,338 --
Income taxes payable................... (1,379) -- --
Accounts payable, accrued expenses and
other................................. 17,222 10,454 (5,296)
Deferred revenue....................... 505 130 6,876
-------- -------- --------
Net cash used in continuing
operations............................ (22,347) (37,946) (13,198)
Net cash used in discontinued
operations............................ (3,241) (670) --
-------- -------- --------
Net cash used in operating activities.. (25,588) (38,616) (13,198)
-------- -------- --------
Cash Flows from Investing Activities:
Acquisition of property and equipment,
net..................................... (18,422) (13,675) (8,433)
(Additions) reductions to goodwill and
other assets, net....................... 174 (196) (693)
Net cash received from acquisition of
Fogdog, net of acquisition costs........ -- 35,692 --
Proceeds from sale of discontinued
operations.............................. 10,317 13,200 --
(Purchases) sales of short-term
investments............................. -- (794) 947
-------- -------- --------
Net cash provided by (used in)
investing activities.................. (7,931) 34,227 (8,179)
-------- -------- --------
Cash Flows from Financing Activities:
Net repayments under line of credit...... (18,812) -- --
Repurchase of warrants................... -- -- (300)
Repayments of capital lease
obligations............................. (128) (1,394) (282)
Proceeds from mortgage note.............. -- 5,300 --
Repayments of mortgage note.............. -- (18) (35)
Proceeds from subordinated note from
SOFTBANK................................ 15,000 -- --
Purchases of treasury stock.............. -- -- (4)
Proceeds from sale of common stock and
warrants................................ 64,727 64,545 30,700
Proceeds from exercises of common stock
options and warrants.................... 1,828 623 5,111
Contribution from stockholder............ -- -- 71
Repayment of subordinated notes payable,
related party........................... (1,806) -- --
Proceeds from sale of minority interest
in subsidiary........................... 2 -- --
Costs of debt issuance................... (30) -- --
-------- -------- --------
Net cash provided by financing
activities............................ 60,781 69,056 35,261
-------- -------- --------
Net increase in cash and cash
equivalents.............................. 27,262 64,667 13,884
Cash and cash equivalents, beginning of
year..................................... 83 27,345 92,012
-------- -------- --------
Cash and cash equivalents, end of year.... $ 27,345 $ 92,012 $105,896
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
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 electronic commerce ("e-commerce") businesses of
retailers, manufacturers, media companies and professional sports
organizations. The Company currently derives virtually all of its revenues
from sales of goods through its partners' online stores and direct response
television campaigns, toll-free telephone number sales, business-to-business
and group sales and related outbound shipping charges, net of allowances for
returns and discounts, as well as from fixed and variable fees earned in
connection with the development and operation of its partners' e-commerce
businesses and the provision of marketing services. Each of the Company's
partners owns the URL address of its Web site. Based upon the terms of the
agreements with its partners, the Company owns certain components of the Web
sites and the partners own other components.
See Note 18 for a description of discontinued operations.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The following summarize the Company's significant accounting policies:
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 effects on
results of operations of the additional day in the fiscal year ended January
1, 2000, two fewer days in the fiscal year ended December 30, 2000 and one
fewer day in the fiscal year ended December 29, 2001 are not significant.
Basis of Consolidation: The financial statements presented include the
accounts of the Company and all wholly-owned subsidiaries. All significant
inter-company balances and transactions among consolidated entities have been
eliminated.
Use of Estimates: The preparation 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.
Fair Values: The estimated fair value amounts presented in these
consolidated financial statements have been determined by the Company using
available market information and appropriate methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Such fair value estimates are based on pertinent information available to
management as of December 30, 2000 and December 29, 2001, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
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. The carrying value of cash equivalents approximates their
current market value.
Short Term Investments: Short-term investments consist of commercial paper
and a certificate of deposit. The Company has classified these short-term
investments as held-to-maturity and recorded them at amortized cost.
F-6
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Property and Equipment: Property and equipment are stated at cost, net of
accumulated depreciation or amortization. Costs incurred to develop internal-
use computer software during the application development stage, including
those relating to developing the partners' Web sites, generally are
capitalized. Costs of enhancements to internal-use computer software are
capitalized, provided that these enhancements result in additional
functionality. Depreciation or amortization is provided using the straight-
line method over the estimated useful lives of the assets, which are
generally:
. Four years for computer hardware and software;
. Three to ten years for furniture, warehouse 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 or amortization are removed from the accounts and the
resulting gain or loss, if any, is recognized as a component of depreciation
or amortization expense. Expenditures for maintenance and repairs are expensed
as incurred.
Change in Useful Life of Property and Equipment: During the three-month
period ended March 31, 2001, the Company increased its estimate of the useful
lives of its computer hardware and software from two years to four years. This
change had the effect of decreasing the loss from continuing operations for
the fiscal year ended December 29, 2001 by $5.4 million, or $0.16 per share.
The increase in estimated useful lives was based on the Company's then-current
analysis of its historical operating experience, which indicated that the
original estimate was no longer appropriate.
Goodwill: Goodwill represents the excess of the purchase price over the
estimated fair value of net assets acquired in a business combination, and is
presented net of related accumulated amortization. Accumulated amortization
was $0 and $710,000 as of December 30, 2000 and December 29, 2001,
respectively.
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 the existing business. 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.
Other Assets, Net: Other assets, net consists primarily of deferred partner
revenue share charges, resulting from the exercise of a right to receive
1,600,000 shares of the Company's common stock in lieu of future cash partner
revenue share payments (see Note 6). Deferred partner revenue share charges
were $0 and $14.1 million as of December 30, 2000 and December 29, 2001,
respectively, and are being amortized as stock-based compensation as the
partner revenue share expense is incurred. The partner revenue share expense
incurred is based on actual revenues recognized in a given period and the
imputed partner revenue share percentage, which is based on the value of the
Company's common stock that was issued upon exercise of the right. Stock-based
compensation related to the amortization of deferred partner revenue share
charges was $0, $0, and $336,000 for the fiscal years ended January 1, 2000,
December 30, 2000 and December 29, 2001, respectively.
F-7
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 $47,000. Gains and losses on
foreign currency transactions for the fiscal year ended January 1, 2000
resulted in a net foreign currency loss of $104,000, and is included in
discontinued operations. There were no foreign currency transactions in the
fiscal years ended December 30, 2000 and December 29, 2001.
Deferred Revenue: Deferred revenue consists primarily of fees paid to the
Company in advance under an agreement to manage certain aspects of a certain
partner's overall e-commerce business, including fulfillment, technology and
customer service, existing at the balance sheet date. Deferred revenue also
consists of amounts received from the sale of gift certificates redeemable on
the Company's partners' Web sites.
Net Revenues: The Company currently derives virtually all of its revenues
from sales of goods through its partners' online stores and direct response
television campaigns, toll-free telephone number sales, business-to-business
and group sales, and related outbound shipping charges, net of allowances for
returns and discounts, as well as from fixed and variable fees earned in
connection with the development and operation of its partners' e-commerce
businesses and the provision of marketing services.
The Company recognizes revenues from product sales or services provided when
the following revenue recognition criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable and collectibility is reasonably
assured.
The Company recognizes revenue from product sales, net of estimated returns
based on historical experience, upon the shipment of product to customers. The
majority of product is shipped from the Company's fulfillment center located
in Louisville, KY. The Company relies on certain suppliers known as drop
shippers to ship product to customers. The Company acts as principal in these
transactions, as orders are initiated directly through the e-commerce
businesses that the Company operates, the Company takes title to the goods
during shipment and has the economic risk related to collection, customer
service and returns.
The Company considers the criteria presented in Emerging Issues Task Force
("EITF") No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent," in determining the appropriate revenue recognition treatment.
Generally, when the Company is the primary obligor in a transaction, has
general inventory risk, establishes the selling price, has discretion in
supplier selection, has physical loss inventory risk after customers order or
during shipping, and has credit risk, or has several but not all of these
indicators, the Company records revenue gross as a principal.
The Company pays a percentage of the revenues generated from the sale of
products through the e-commerce businesses that the Company operates to its
respective partners in exchange for the rights to use their brand names and
the promotions and advertising that its partners agree to provide. The Company
refers to these royalty payments as partner revenue share charges. The Company
has considered the revenue reduction provisions addressed in EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller
of the Vendor's Products," and believes that the payment of partner revenue
share charges, or the issuance of warrants or stock in lieu of cash partner
revenue share charges, to its partners does not result in any reduction of
revenues. EITF 00-25 addresses consideration paid to parties along a
distribution chain. At its discretion, the Company purchases merchandise from
its vendors and it is responsible for paying those vendors. The amounts
purchased and the prices paid to the Company's vendors are not in any way
impacted by the revenue share provisions of the Company's agreements with its
partners. Accordingly, the Company's partners and its vendors are not linked
in the distribution chain, and the provisions of EITF No. 00-25 do not apply.
F-8
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues from services provided are recognized as the services are rendered.
If the Company receives payments for services in advance, these amounts are
deferred and then recognized over the service period.
Other sources of revenue, including commissions from the sale of gift
certificates to the Company's retail partners' land-based stores and the sale
of advertising on the partners' Web sites, were not significant for the fiscal
years ended January 1, 2000, December 30, 2000 and December 29, 2001.
Cost of Revenues: Cost of revenues includes the cost of products sold and
inbound freight related to these products, as well as outbound shipping and
handling costs, other than those related to promotional free shipping and
subsidized shipping and handling which are included in sales and marketing
expense.
Sales and Marketing: Sales and marketing expenses include advertising and
promotional expenses, including promotional free shipping and subsidized
shipping and handling costs, online marketing fees, commissions to affiliates,
fulfillment costs, customer service costs, credit card fees, merchandising
costs and payroll and related expenses. These expenses also include partner
revenue share charges, which are payments made to the Company's partners in
exchange for the right to use their brands and the promotion and advertising
that the Company's partners' agree to provide. Partner revenue share charges
were $3.6 million, $1.1 million and $81,000 for the fiscal year ended December
29, 2001, December 30, 2000 and January 1, 2000, respectively.
Shipping and Handling Costs: The Company defines shipping and handling costs
as only those costs incurred for a third-party shipper to transport products
to the customer and these costs are included in cost of revenues. In some
instances, shipping and handling costs exceed shipping revenues charged to the
customer, and are subsidized by the Company. Additionally, the Company
selectively offers promotional free shipping whereby it ships merchandise to
customers free of all shipping and handling charges. The cost of promotional
free shipping and subsidized shipping and handling was $566,000, $3.0 million
and $960,000 for the fiscal years ended January 1, 2000, December 30, 2000 and
December 29, 2001, respectively, and was charged to sales and marketing
expense.
Fulfillment Costs: The Company defines fulfillment costs as personnel,
occupancy and other costs associated with its Kentucky fulfillment center,
personnel and other costs associated with its logistical support and vendor
operations departments and third-party warehouse and fulfillment services
costs. Fulfillment costs were $2.3 million, $10.6 million and $10.0 million
for the fiscal years ended January 1, 2000, December 30, 2000, and December
29, 2001, respectively, and are included in sales and marketing expense.
Advertising: The Company expenses the cost of advertising, which includes
on-line marketing fees, media, agency and production expenses, in accordance
with the AICPA Accounting Standards Executive Committee's Statement of
Position ("SOP") 93-7, "Reporting on Advertising Costs." Advertising
production costs are expensed the first time the advertisement is run. On-line
marketing fees and media (television, radio and print) placement costs are
expensed in the month the advertising appears. Agency fees are expensed as
incurred. Advertising expense was $3.9 million, $11.3 million and $5.6
million, for the fiscal years ended January 1, 2000, December 30, 2000 and
December 29, 2001, respectively, and are included in sales and marketing
expenses.
Product Development: Product development expenses consist primarily of
expenses associated with planning, maintaining and operating the partners' e-
commerce businesses, and payroll and related expenses for the engineering,
production, creative and management information systems departments.
Costs incurred to develop internal-use computer software during the
application development stage, including those relating to developing the
Company's partners' Web sites, generally are capitalized. Costs of
enhancements to internal-use computer software are also capitalized, provided
that these enhancements result in additional functionality.
F-9
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ("APB")
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 for
stock options and warrants issued to non-employees in accordance with SFAS No.
123 and 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," and EITF No. 00-18, "Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees."
Accordingly, compensation cost for stock options and warrants issued to non-
employees is measured using a Black-Scholes multiple option pricing model that
takes into account assumptions as to the expected life of the option or
warrant, the expected volatility of our common stock and the risk-free
interest rate over the expected life of the option or warrant.
The Company also records stock-based compensation as deferred partner
revenue share charges are amortized. Stock-based compensation related to the
amortization of deferred partner revenue share charges was $0, $0, and
$336,000 for the fiscal years ended January 1, 2000, December 30, 2000 and
December 29, 2001, respectively.
Income Taxes: The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in tax
rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Reclassifications: Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to those classifications
used in the current year.
New Accounting Pronouncements
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" and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities") 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
was effective for fiscal years beginning after June 15, 2000, although early
adoption was encouraged. This pronouncement was adopted by the Company in the
first quarter of 2001, and did not have a significant impact on the Company's
financial position or results of operations.
Business Combinations: In July 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141
requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. The acquisition of
Ashford.com, Inc ("Ashford.com") will be accounted for under SFAS No. 141 and
represents the first business combination the Company initiated after June 30,
2001. The Company does not expect this statement to have a significant impact
on the Company's financial position or results of operations.
F-10
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill and Other Intangible Assets: In July 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under an impairment-only approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be
reviewed for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. SFAS No. 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. Any impairment loss resulting from the transition impairment test
would be recorded as a cumulative effect of a change in accounting principle.
This statement is effective for fiscal years beginning after December 15,
2001. The Company is evaluating the impact of the adoption of this standard
and has not yet determined the effect of the adoption of this statement on its
financial position and results of operations.
Impairment or Disposal of Long-Lived Assets: In October 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of Accounting Principals Board
("APB") Opinion No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual,
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business. SFAS No. 144 retains the requirement in APB No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of or is classified as
held for sale. This statement is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The Company
does not expect this standard to have a significant impact on the Company's
financial position or results of operations.
Consideration Given by a Vendor to a Customer or Reseller: In November 2001,
the Emerging Issues Task Force reached a consensus on EITF No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products." EITF No. 01-09 addresses the accounting for
consideration given by a vendor to a customer or reseller and is a
codification of EITF No. 00-14, "Accounting for Certain Sales Incentives,"
EITF No. 00-22, "Accounting for "Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or Services
to be Delivered in the Future" and EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products." The Company has determined that the adoption of this statement will
not have a significant impact on the Company's financial position or results
of operations.
NOTE 3--ACQUISITION
On December 28, 2000, the Company completed its acquisition of Fogdog, Inc.
("Fogdog") pursuant to a definitive merger agreement executed on October 24,
2000. As consideration for the purchase, the Company issued to the
stockholders of Fogdog approximately 5.1 million shares of the Company's
common stock valued at $38.7 million based on the stock price as of the
measurement date.
The acquisition has been accounted for under the purchase method and the
acquisition costs of $44.7 million have been allocated to the assets acquired
and the liabilities assumed based upon estimates of their respective fair
values. A total of $14.4 million, representing the excess of the purchase
price over fair value of the net tangible assets acquired, has been allocated
to Goodwill and was amortized during the fiscal year ended December 29, 2001
by the straight-line method, assuming a useful life of twenty years.
F-11
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's consolidated results of operations incorporates Fogdog's
results of operations commencing upon the December 28, 2000 acquisition date.
The effect of incorporating Fogdog's results of operations for the three days
ended December 30, 2000 was not significant.
NOTE 4--PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, as of December 30,
2000 and December 29, 2001 are as follows:
December 30, December 29,
2000 2001
------------ ------------
(in thousands)
Computer hardware and software....................... $21,645 $27,120
Building and building improvements................... 6,756 7,125
Furniture, warehouse and office equipment............ 3,972 4,463
Land................................................. 1,242 1,242
Leasehold improvements............................... 1,016 3,119
Construction in progress............................. 5 --
------- -------
34,636 43,069
Less: Accumulated depreciation and amortization...... (8,212) (14,140)
------- -------
Property and equipment, net.......................... $26,424 $28,929
======= =======
NOTE 5--LEASES
Capital Leases
During the fourth quarter of fiscal 2000, the Company entered into various
capital leases for computer hardware and furniture. As of December 29, 2001,
the leases had an aggregate outstanding principal balance of $506,000 and the
Company's net investment in these capital leases was $868,000, which is
included in property and equipment. Interest expense recorded on the capital
leases for the fiscal years ended December 30, 2000 and December 29, 2001 was
$3,000 and $116,000, respectively.
Operating Leases
The Company currently leases its Louisville, KY fulfillment center as well
as certain fixed assets under noncancellable operating leases. Rent expense
under operating lease agreements was $213,000, $1.2 million, and $1.8 million
for the fiscal years ended January 1, 2000, December 30, 2000, and December
29, 2001, respectively.
F-12
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under leases as of December 29, 2001, together
with the present value of those future minimum lease payments, are as follows:
Capital Operating
Leases Leases
------- ---------
(in thousands)
2002.......................................................... $565 $1,410
2003.......................................................... -- 1,292
2004.......................................................... -- 1,112
2005.......................................................... -- 449
2006.......................................................... -- --
---- ------
Total future minimum lease payments........................... 565 $4,263
======
Less: Interest discount amount................................ 59
----
Total present value of future minimum lease payments.......... 506
Less: Current portion......................................... 506
----
Long-term portion............................................. $ --
====
NOTE 6--STOCKHOLDERS' EQUITY
Preferred Stock:
On May 24, 2001, the shareholders approved an amendment to the Company's
Certificate of Incorporation that increased the maximum number of authorized
shares of preferred stock, $.01 par value, by 4,000,000 to 5,000,000. 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 Series A preferred
stock. The redemption price of these shares of preferred stock, which
originally was contingent on certain sales and gross profit targets, ranged
from a minimum of $.01 per share to a maximum of $50.00 per share, and the
shares were redeemable over a five year period. During the fiscal year ended
January 1, 2000, 2,000 shares were redeemed for $100,000.
In connection with the sale of the Company's Off-Price and Action Sports
division (see Note 18), the Company redeemed an additional 7,200 shares on May
26, 2000 for an aggregate redemption price of $360,000. The remaining 800
shares of Series A preferred stock which were outstanding as of December 30,
2000 were redeemable over a four year period for an aggregate redemption price
of $8.00.
The Company redeemed an additional 400 shares of the Series A preferred
stock during the fiscal year ended December 29, 2001. The remaining 400 shares
which were outstanding as of December 29, 2001 are redeemable over a three
year period for an aggregate redemption price of $4.00.
Common Stock:
On May 24, 2001, the shareholders approved an amendment to the Company's
Certificate of Incorporation that increased the maximum number of authorized
shares of common stock, $.01 par value, by 30,000,000 to 90,000,000.
F-13
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 23, 2001, pursuant to the terms of a stock purchase agreement
entered into on July 20, 2001, the Company issued to Interactive Technology
Holdings, LLC, a joint venture company formed by Comcast Corporation and QVC,
Inc. ("ITH"), 3,000,000 shares of its common stock at a price of $10.00 per
share, for an aggregate purchase price of $30.0 million. At the same time, ITH
acquired 1,000,000 shares of the Company's common stock from Michael G. Rubin,
Chairman, President and Chief Executive Officer of the Company, at a price of
$10.00 per share, for an aggregate purchase price of $10.0 million.
On July 20, 2001, a right to receive 1,600,000 shares of the Company's
common stock was exercised in lieu of future cash revenue share payments. On
the day immediately preceding the exercise of the right, the closing price of
a share of the Company's common stock was $9.00, and the shares were valued at
approximately $14.4 million. The 1,600,000 shares of Global Sports common
stock issued are subject to restrictions which prohibit the transfer of such
shares. These restrictions lapse as to 10% of such shares on December 31, 2002
and as to an additional 10% of such shares on the last day of each quarter
thereafter, becoming free of all such transfer restrictions on March 31, 2005.
On September 13, 2000, the Company agreed to sell to ITH 5,000,000 shares of
common stock at $8.15 per share in cash, for an aggregate purchase price of
$40.8 million. In addition, ITH agreed to purchase, for approximately
$563,000, warrants to purchase 2,500,000 shares of the Company's common stock
at an exercise price of $10.00 per share and 2,000,000 shares of the Company's
common stock at an exercise price of $8.15 per share. These warrants have a
term of five years and were valued at approximately $8.9 million. This
investment was completed through two separate closings. On September 13, 2000,
ITH invested $14.9 million and on October 5, 2000, ITH invested $26.4 million.
The Company has granted ITH certain "demand" and "piggy-back" registration
rights with respect to the shares of common stock issued to ITH and issuable
to ITH upon exercise of the warrants.
On April 27, 2000, the Company agreed to sell to funds affiliated with
SOFTBANK America Inc. (collectively "SOFTBANK") 2,500,000 shares of common
stock and to Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) ("Rustic
Canyon") 625,000 shares of common stock at a price of $8.00 per share in cash
for an aggregate purchase price of $25.0 million. The sale of these shares was
completed on May 1, 2000. In addition, as part of this financing, the Company
issued to SOFTBANK warrants to purchase 1,250,000 shares of common stock and
to Rustic Canyon warrants to purchase 312,500 shares of common stock. These
warrants have a three-year term and an exercise price of $10.00 per share.
Employee Stock Purchase Plan:
In March 2000, the Company's board of directors adopted, and in May 2000,
the Company's shareholders approved, the 2000 Employee Stock Purchase Plan
(the "ESPP"). A total of 400,000 shares of common stock are authorized for
issuance under the ESPP, plus an annual increase equal to the lesser of (i)
50,000 shares, or (ii) such smaller number of shares as determined by the
board of directors; provided that the total aggregate number of shares
issuable under the ESPP may not exceed 900,000 shares. The ESPP is implemented
by the periodic offerings of rights to all eligible employees from time to
time, as determined by the board of directors. The maximum period of time for
an offering is 27 months. The purchase price per share at which common stock
is sold in an offering is established by the board of directors prior to the
commencement of the offering, but such price may not be less than the lower of
(i) 85% of the fair market value of a share of common stock on the date the
right to purchase such shares was granted (generally the first day of the
offering) or (ii) 85% of the fair market value of a share of common stock on
the applicable purchase date. As of December 29, 2001 and December 30, 2000,
244,546 shares and 53,290 shares, respectively, of common stock had been
issued under the ESPP.
F-14
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Treasury Stock:
During the fiscal year ended December 29, 2001, the Company repurchased
1,210 shares of the Company's common stock from former employees of Fogdog.
On March 13, 2000, the Company's Board of Directors approved the retirement
of 1,069,086 shares of treasury stock held by the Company. The treasury stock
was retired during the three-months ended April 1, 2000.
NOTE 7--STOCK OPTIONS AND WARRANTS
The Company maintains qualified and nonqualified stock option plans for
certain employees, directors and other persons (the "Plans"). Under the terms
of the Plans, the Company may grant qualified and nonqualified options and
restricted stock awards to purchase up to 7,762,571 shares of common stock to
employees, directors, and others. The options vest at various times over
periods ranging up to five years. The options, if not exercised, expire up to
ten years after the date of grant. Stock appreciation rights ("SARs") may be
granted under the Plans either alone or in tandem with stock options.
Generally, recipients of SARs 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 market 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 SARs have been granted to date under the Plans.
In connection with the Fogdog acquisition, the Company assumed all of the
outstanding options issued under the Fogdog, Inc. 1999 Stock Incentive Plan
(the "Fogdog Plan"), as well as the outstanding warrant held by Nike USA, Inc.
("Nike"). Upon closing of the merger, options outstanding under the Fogdog
Plan became options to purchase an aggregate of 381,500 shares of the
Company's common stock and the warrant outstanding held by Nike became a
warrant to purchase 555,437 shares of the Company's common stock. The terms of
the Fogdog options are similar to the terms of the options issuable under the
Company's Plans.
The following table summarizes the stock option activity for the fiscal
years ended January 1, 2000, December 30, 2000 and December 29, 2001:
Fiscal Year Ended
-----------------------------------------------------------------------
January 1, 2000 December 30, 2000 December 29, 2001
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
-------------- -------- ------------- -------- ------------- --------
(in thousands) (in thousands) (in thousands)
Outstanding, beginning
of fiscal year......... 1,189 $5.71 1,924 $11.71 4,552 $9.29
Granted and
assumed(/1/)......... 1,308 14.82 3,472 8.92 2,640 7.02
Exercised............. (346) 4.84 (202) 3.15 (889) 5.73
Cancelled............. (227) 8.03 (642) 14.93 (776) 16.21
----- ----- -----
Outstanding, end of
fiscal year............ 1,924 11.71 4,552 9.29 5,527 8.02
===== ===== =====
Exercisable, end of
fiscal year............ 571 7.81 1,399 9.82 1,960 8.82
===== ===== =====
- --------
(1) For the fiscal year ended December 30, 2000, the number of shares granted
and assumed includes the assumption of 381,500 outstanding options issued
under the Fogdog, Inc. 1999 Stock Incentive Plan assumed by the Company in
connection with the Fogdog acquisition.
F-15
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the warrant activity for the fiscal years
ended January 1, 2000, December 30, 2000 and December 29, 2001:
Fiscal Year Ended
-----------------------------------------------------------------------
January 1, 2000 December 30, 2000 December 29, 2001
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
-------------- -------- ------------- -------- ------------- --------
(in thousands) (in thousands) (in thousands)
Outstanding, beginning
of fiscal year......... 206 $6.35 488 $11.90 7,251 $9.50
Granted and
assumed(/1/)......... 333 14.42 7,045 9.59 1,237 7.48
Exercised............. (50) 7.63 (2) 7.35 (70) 7.27
Cancelled............. (1) 16.25 (280) 16.22 (601) 7.93
--- ----- -----
Outstanding, end of
fiscal year............ 488 11.90 7,251 9.50 7,817 9.27
=== ===== =====
Exercisable, end of
fiscal year............ 486 11.93 7,250 9.50 7,567 9.50
=== ===== =====
- --------
(1) For the fiscal year ended December 30, 2000, the number of shares granted
and assumed includes the assumption of the outstanding warrant to purchase
555,437 shares of the Company's common stock held by Nike assumed by the
Company in connection with the Fogdog acquisition.
During the fiscal year ended December 29, 2001, the Company granted to
employees options and restricted stock awards to purchase an aggregate of
2,385,600 shares of the Company's common stock at prices ranging from $0.01 to
$19.00 per share and granted to consultants options to purchase an aggregate
of 255,050 shares of the Company's common stock at prices ranging from $5.69
to $11.63 per share. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices at the then-current
market prices of the underlying stock during the fiscal year ended December
29, 2001 was $4.59 and $7.12 per share, respectively. The weighted average
fair value and the weighted average exercise price of the options granted with
exercise prices below the then-current market prices of the underlying stock
during the fiscal year ended December 29, 2001 was $10.44 and $1.00 per share,
respectively. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices above the then-
current market prices of the underlying stock during the fiscal year ended
December 29, 2001 was $3.02 and $6.94 per share, respectively. For the fiscal
year ended December 29, 2001, the Company recorded $3.1 million of stock-based
compensation expense relating to options and restricted stock ($2.1 million
relating to employees and $1.0 million relating to consultants).
During the fiscal year ended December 29, 2001, the Company modified the
vesting schedule or exercise price of 171,150 options. For those options
repriced, the exercise prices were changed to $6.94 per share. Because these
options were accelerated or repriced, they are subject to variable accounting,
and the Company recognized $163,000 of stock-based compensation expense for
the fiscal year ended December 29, 2001, which is included in the amount of
stock-based compensation expense relating to options described above. The
amount of stock-based compensation expense to be recognized in future periods
is $0 as there is no future vesting or service period for the modified
options.
During the fiscal year ended December 29, 2001, the Company granted to
partners and consultants warrants to purchase an aggregate of 1,236,620 shares
of the Company's common stock at prices ranging from $2.50 to $17.15 per
share. The weighted average fair value and the weighted average exercise price
of the warrants granted with exercise prices at the then-current market prices
of the underlying stock during the fiscal year ended December 29, 2001 was
$9.74 and $13.40 per share, respectively. The weighted average fair value and
the weighted average exercise price of the warrants granted with exercise
prices below the then-current market prices of the underlying stock during the
fiscal year ended December 29, 2001 was $6.81 and $4.75 per share,
respectively. For the fiscal year ended December 29, 2001, the Company
recorded $6.8 million of stock-based compensation expense relating to
warrants.
F-16
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 20, 2001, the Company issued to ITH a five-year warrant to purchase
an aggregate of 300,000 shares of the Company's common stock at an exercise
price of $6.00 per share in consideration for certain corporate development
services performed by ITH on behalf of the Company, which is included in the
number of warrants granted to partners and consultants described above. The
Company valued the warrant at approximately $2.1 million and recorded this
amount as stock-based compensation expense, which is included in the amount of
stock-based compensation expense relating to warrants for the fiscal year
ended December 29, 2001 described above.
During the fiscal year ended December 30, 2000, the Company granted to
employees options and restricted stock awards to purchase an aggregate of
2,875,439 shares of the Company's common stock at prices ranging from $0.01 to
$20.75 per share and granted to consultants options to purchase an aggregate
of 215,295 shares of the Company's common stock at prices ranging from $0.01
to $17.13 per share. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices at the then-current
market prices of the underlying stock during the fiscal year ended December
30, 2000 was $4.57 and $9.95 per share, respectively. The weighted average
fair value and the weighted average exercise price of the options granted with
exercise prices below the then-current market prices of the underlying stock
during the fiscal year ended December 30, 2000 was $12.62 and $6.93 per share,
respectively. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices above the then-
current market prices of the underlying stock during the fiscal year ended
December 30, 2000 was $4.17 and $8.15 per share, respectively. For the fiscal
year ended December 30, 2000, the Company recorded $2.2 million of stock-based
compensation expense relating to options and restricted stock. Of this amount,
$1.7 million is included in continuing operations ($1.6 million relating to
employees and $85,000 relating to consultants) and $475,000 is included in
discontinued operations. The balance of the value of options and restricted
stock granted during fiscal 2000 will be recognized as services are provided
over terms of three years.
During the fiscal year ended December 30, 2000, the Company modified the
vesting schedule or exercise price of 306,735 options. For those options
repriced, the exercise prices were changed to prices ranging from $0.01 to
$8.15 per share. Because these options were accelerated or repriced, they are
subject to variable accounting, and the Company recognized $354,000 and
$611,000 of stock-based compensation expense for the fiscal years ended
December 30, 2000 and December 29, 2001, respectively, which amounts are
included in the amounts of stock-based compensation expense relating to
options described above. Of the $354,000 of stock-based compensation expense
recognized for the fiscal year ended December 30, 2000, $19,000 is included in
continuing operations and $335,000 is included in discontinued operations. The
amount of stock-based compensation expense to be recognized in future periods
is subject to adjustment based upon changes in the price of the Company's
common stock.
During the fiscal year ended December 30, 2000, the Company granted to
partners warrants to purchase an aggregate of 426,620 shares of the Company's
common stock at prices ranging from $4.31 to $18.00 per share and issued to
investors warrants to purchase an aggregate of 6,062,500 shares of the
Company's common stock at prices ranging from $8.15 to $10.00 per share. The
weighted average fair value and the weighted average exercise price of the
warrants granted with exercise prices at the then-current market prices of the
underlying stock during the fiscal year ended December 30, 2000 was $2.81 and
$7.75 per share, respectively. The weighted average fair value and the
weighted average exercise price of the warrants granted with exercise prices
below the then-current market prices of the underlying stock during the fiscal
year ended December 30, 2000 was $6.09 and $15.36 per share, respectively. The
weighted average fair value and the weighted average exercise price of the
warrants granted and issued with exercise prices above the then-current market
prices of the underlying stock during the fiscal year ended December 30, 2000
was $2.24 and $9.44 per share, respectively. For the fiscal year ended
December 30, 2000, the Company recorded $3.3 million of stock-based
compensation expense relating to warrants, all of which is included in
continuing operations.
F-17
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fiscal year ended December 30, 2000, the Company modified the
exercise price of 293,320 warrants. The exercise prices were changed to $8.15
per share. Because these warrants were repriced, they are subject to variable
accounting, and the Company recognized $446,000 of stock-based compensation
expense for the fiscal year ended December 30, 2000, which is included in the
amount of stock-based compensation expense relating to warrants described
above. The amount of stock-based compensation expense to be recognized in
future periods is $0 as there is no future vesting or service period for the
modified warrants.
During the fiscal year ended January 1, 2000, the Company granted to
employees and consultants options and restricted stock awards to purchase an
aggregate of 1,307,907 shares (1,105,741 shares relating to employees and
202,166 shares relating to consultants) of the Company's common stock at
prices ranging from $0.01 to $24.69 per share. The weighted average fair value
and the weighted average exercise price of the options granted with exercise
prices at the then-current market prices of the underlying stock during the
fiscal year ended January 1, 2000 was $7.64 and $16.72 per share,
respectively. The weighted average fair value and the weighted average
exercise price of the options granted with exercise prices below the then-
current market prices of the underlying stock during the fiscal year ended
January 1, 2000 was $8.70 and $6.82 per share, respectively. For the fiscal
year ended January 1, 2000, the Company recorded $1.9 million of stock-based
compensation expense relating to options and restricted stock. Of this amount,
$806,000 is included in continuing operations ($217,000 relating to employees
and $589,000 relating to consultants) and $1.1 million is included in
discontinued operations. The balance of the value of options and restricted
stock granted during fiscal 1999 will be recognized as services are provided
over terms ranging from two to three years.
During the fiscal year ended January 1, 2000, the Company issued options to
purchase 123,500 shares of the Company's common stock with a fair market value
at the dates of grant amounting to $1.6 million to non-employees which are
included in the options described above. Because these options require certain
counterparty performance conditions, they are subject to variable accounting.
The Company is recording compensation expense over the five-year term of the
options as required by EITF No. 96-18 and recognized $66,000, $111,000 and
$173,000 as compensation expense for the fiscal years ended January 1, 2000,
December 30, 2000 and December 29, 2001, respectively, which amounts are
included in the amounts of stock-based compensation expense relating to
options described above. The amount of stock-based compensation expense
recognized in future periods 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 during the
fiscal year ended January 1, 2000, 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 vest, the
Company valued the awards in accordance with the provisions of SFAS No. 123
and charged the related expense to discontinued operations for the fiscal year
ended January 1, 2000. As these awards required counterparty performance
conditions, they are subject to variable accounting. The amount of stock-based
compensation expense to be recognized in future periods is $0 as there is no
future vesting or service period for the modified options.
During the fiscal year ended January 1, 2000, the Company granted to
partners and consultants warrants to purchase an aggregate of 333,320 shares
of the Company's common stock at prices ranging from $7.63 to $15.00 per
share. The weighted average fair value and the weighted average exercise price
of the warrants granted with exercise prices below the then-current market
prices of the underlying stock during the fiscal year ended January 1, 2000
was $5.81 and $14.61 per share, respectively. For the fiscal year ended
January 1, 2000, the Company recorded $1.8 million of stock-based compensation
expense relating to warrants, all of which is included in continuing
operations.
F-18
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information regarding options and warrants
outstanding and exercisable as of December 29, 2001:
Outstanding Exercisable
---------------------------------------------------- -----------------------------------
Weighted Average
Range of Remaining
Exercise Number Outstanding Contractual Life Weighted Average Number Exercisable Weighted Average
Prices (in thousands) In Years Exercise Price (in thousands) Exercise Price
-------- ------------------ ---------------- ---------------- ------------------ ----------------
$ 0.59--$ 5.56 3,272 8.40 $4.44 926 $3.86
$ 5.69--$ 8.15 3,433 5.12 7.68 2,697 7.80
$ 9.00--$10.00 4,769 3.51 9.88 4,627 9.91
$10.60--$25.00 1,848 5.36 14.92 1,259 14.17
$30.56--$74.54 22 4.12 38.01 18 37.24
------ -----
$ 0.59--$74.54 13,344 5.37 8.74 9,527 9.35
====== =====
As of December 29, 2001, 1,344,236 shares of common stock were available for
future grants under the Plans.
The Company accounts for incentive stock option awards granted to employees
under the Plans in accordance with APB Opinion No. 25, and, therefore,
compensation cost using the intrinsic method has been recognized for those
awards. If compensation cost for such awards had been determined consistent
with SFAS No. 123, the Company's pro forma net loss and losses per share for
the fiscal years ended January 1, 2000, December 30, 2000 and December 29,
2001 would have been as follows:
As Reported Pro Forma
----------- ---------
(in thousands)
Fiscal Year Ended January 1, 2000
Net loss............................................... $(43,247) $(46,850)
======== ========
Losses per share--basic and diluted.................... $ (2.91) $ (3.15)
======== ========
Fiscal Year Ended December 30, 2000
Net loss............................................... $(58,010) $(64,203)
======== ========
Losses per share--basic and diluted.................... $ (2.64) $ (2.91)
======== ========
Fiscal Year Ended December 29, 2001
Net loss............................................... $(30,595) $(38,518)
======== ========
Losses per share--basic and diluted.................... $ (0.90) $ (1.13)
======== ========
The fair value of options and restricted stock granted under the Plans
during the fiscal years ended January 1, 2000, December 30, 2000 and December
29, 2001 were estimated on the date of grant using the Black-Scholes multiple
option pricing model, with the following weighted average assumptions:
Fiscal Year Ended
---------------------------------------------------
Assumption January 1, 2000 December 30, 2000 December 29, 2001
---------- --------------- ----------------- -----------------
Dividend yield............ None None None
Expected volatility....... 50.00% 90.00% 99.00%
Average risk free interest
rate..................... 5.57% 5.26% 3.75%
Average expected lives.... 6.28 years 4.45 years 3.41 years
F-19
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of warrants granted and issued during the fiscal years ended
January 1, 2000, December 30, 2000 and December 29, 2001 were estimated on the
date of grant using the Black-Scholes multiple option pricing model, with the
following range of assumptions:
Fiscal Year Ended
-------------------------------------------------------
Assumption January 1, 2000 December 30, 2000 December 29, 2001
---------- ----------------- ----------------- -----------------
Dividend yield.......... None None None
Expected volatility..... 50.00% 50.00% - 90.00% 90.00% - 119.00%
Average risk free
interest rate.......... 5.00% - 6.30% 4.86% - 6.70% 3.58% - 4.81%
Average expected lives.. 1.00 - 3.50 years 1.00 - 3.50 years 1.00 - 5.00 years
NOTE 8--INCOME TAXES
The loss from continuing operations before income taxes and the related
benefit from income taxes were as follows:
Fiscal Year Ended
------------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------
(in thousands)
Loss from continuing operations before
income taxes:
Domestic............................... $28,682 $52,160 $30,595
Foreign................................ -- -- --
------- ------- -------
Total................................ $28,682 $52,160 $30,595
======= ======= =======
Benefit from income taxes:
Current:
Federal................................ $ 2,115 $ -- $ --
State.................................. -- -- --
Foreign................................ -- -- --
------- ------- -------
Total Current........................ $ 2,115 $ -- $ --
======= ======= =======
Deferred:
Federal................................ $ 107 $ -- $ --
State.................................. -- -- --
Foreign................................ -- -- --
------- ------- -------
Total Deferred....................... $ 107 $ -- $ --
======= ======= =======
Total:
Federal................................ $ 2,222 $ -- $ --
State.................................. -- -- --
Foreign................................ -- -- --
------- ------- -------
Total................................ $ 2,222 $ -- $ --
======= ======= =======
For the fiscal years ended December 30, 2000 and December 29, 2001, the
Company had no provision for federal and state income taxes.
As of January 1, 2000, the Company had recorded $1.3 million in refundable
income taxes resulting from the carryback of operating losses incurred during
the fiscal year ended January 1, 2000. This balance was included in current
assets as of January 1, 2000. The Company received the refund in December,
2000.
F-20
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of net deferred tax assets and liabilities as of
January 1, 2000, December 30, 2000, and December 29, 2001 consisted of the
following:
Fiscal Year Ended
------------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards........ $21,509 $71,915 $58,345
Deferred revenue........................ 206 258 3,334
Employee benefits....................... 416 1,599 2,632
Inventory............................... 241 1,066 692
Prepaid expenses........................ -- -- 143
Depreciation............................ 154 3,295 1,332
Provision for doubtful accounts......... 112 347 611
------- ------- -------
Gross deferred tax assets............... 22,638 78,480 67,089
Deferred tax liabilities.................. -- -- --
------- ------- -------
Net deferred tax assets and liabilities... 22,638 78,480 67,089
Valuation allowance..................... (22,638) (78,480) (67,089)
------- ------- -------
Net deferred tax asset.................... $ -- $ -- $ --
======= ======= =======
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
December 29, 2001, the Company had available net operating loss carryforwards
of approximately $177.1 million which expire in the years 2002 through 2021.
The use of certain net operating loss carryforwards are subject to annual
limitations based on ownership changes of the Company's stock, as defined by
Section 382 of the Internal Revenue Code. The Company expects that net
operating losses of approximately $34.1 million will expire before they can be
utilized.
The differences between the statutory federal income tax rate and the
effective income tax rate are provided in the following reconciliation:
Fiscal Year Ended
-----------------------------------
January 1, December 30, December29,
2000 2000 2001
---------- ------------ -----------
Statutory federal income tax rate......... (34.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting
from:
Valuation allowance..................... 30.8% 33.8% 32.9%
Carryback claim refund.................. (4.6)% -- --
Nondeductible amortization.............. -- -- 0.8%
Other................................... 0.1% 0.2% 0.3%
----- ----- -----
Effective income tax rate................. (7.7)% 0.0% 0.0%
===== ===== =====
F-21
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--LOSSES PER SHARE
Losses per share have been computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic and diluted losses per share is computed by
dividing net 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 losses per share because
their effect would be antidilutive.
The amounts used in calculating losses per share data are as follows:
Fiscal Year Ended
------------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------
(in thousands)
Loss from continuing operations.......... $(26,460) $(52,160) $(30,595)
Income from discontinued operations...... 550 -- --
Loss on disposition of discontinued
operations.............................. (17,337) (5,850) --
-------- -------- --------
Net loss................................. $(43,247) $(58,010) $(30,595)
======== ======== ========
Weighted average shares outstanding--
basic and diluted....................... 14,874 22,028 34,033
======== ======== ========
Outstanding common stock options having
no dilutive effect...................... 1,924 4,552 5,527
======== ======== ========
Outstanding common stock warrants having
no dilutive effect...................... 488 7,251 7,817
======== ======== ========
NOTE 10--SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK
For the fiscal year ended December 29, 2001, included in accounts receivable
is $4.8 million related to sales to one entity.
For the fiscal years ended December 30, 2000 and December 29, 2001, net
revenues included $8.4 million and $19.1 million from sales of one of our
partner's products sold primarily through its direct response television
campaigns in addition to Web site and toll-free number sales. As of December
30, 2000, the Company had $2.7 million included in accounts receivable related
to these sales, which was due over a weighted average period of eight months
from the date of sale. As of December 29, 2001, the amount included in
accounts receivable related to these sales was not significant.
Cash equivalents potentially subject the Company to credit risk. As of
December 29, 2001 the Company had $4.3 million of operating cash and $101.6
million of cash equivalents invested with three financial institutions. The
composition of these investments are regularly monitored by management.
NOTE 11--MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
During the fiscal year ended December 29, 2001, the Company purchased
inventory from two suppliers amounting to $12.8 million and $8.7 million or
23% and 16% of total inventory purchased, respectively.
During the fiscal year ended December 30, 2000, the Company purchased
inventory from a single supplier amounting to $6.0 million or 16% of total
inventory purchased.
During the fiscal year ended January 1, 2000, the Company purchased
inventory from two suppliers amounting to $2.2 million and $1.8 million or 15%
and 12% of total inventory purchased, respectively.
F-22
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No other supplier amounted to more than 10% of total inventory purchased for
any period presented.
NOTE 12--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 December 29, 2001, the Company had employment agreements with several
of its employees for an aggregate annual base salary of $2.3 million plus
bonuses and increases in accordance with the terms of the agreements.
Remaining terms of such contracts range from two to three years.
Advertising and Media Agreements
As of December 29, 2001, the Company was contractually committed for the
purchase of future advertising totaling approximately $880,000 through the
fiscal year ending December 28, 2002. The expense related to these commitments
will be recognized in accordance with the Company's accounting policy related
to advertising (see Note 2).
Partner Revenue Share Payments
As of December 29, 2001, the Company was contractually committed to minimum
cash partner revenue share payments of $375,000 per fiscal quarter through
July, 2011.
Partner Relationships
The Company operates e-commerce businesses for its partners generally
pursuant to exclusive agreements. In most cases, the Company selects and
purchases inventory from vendors, sells the inventory directly to customers
through the online retail stores and direct response television campaigns that
it operates, records revenues generated from the sale of products through
those businesses and pays a percentage of those revenues to the respective
partners in exchange for the rights to use their brand names and the
promotions and advertising that its partners agree to provide.
In the case of Bluelight.com, LLC, a subsidiary of Kmart Corporation, the
Company manages certain aspects of Bluelight's overall e-commerce business,
including fulfillment, technology and customer service in exchange for a
combination of fixed and variable fees. Bluelight selects the merchandise to
be sold on the site, owns a portion of the inventory and provides in-store
marketing of the e-commerce business at its retail stores and other offline
marketing support, including newspaper circular advertising.
The Company previously entered into an exclusive agreement with The Sports
Authority, Inc. (the "TSA Agreement") through the Company's 80.1% owned
subsidiary TheSportsAuthority.com ("TSA.com"). TSA.com paid a royalty to The
Sports Authority, Inc. based on a percentage of sales generated by TSA.com's
electronic storefront. Effective July 6, 2001, TheSportsAuthority.com was
dissolved, pursuant to a certificate of dissolution dated August 14, 2001, and
the Company entered into a new agreement with The Sports Authority, Inc., the
structure of which is consistent with the exclusive agreements described
above.
F-23
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--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 3.0% of the employee's annual salary. Total Company contributions
were $28,000, $132,000 and $269,000 for the fiscal years ended January 1,
2000, December 30, 2000 and December 29, 2001, respectively.
NOTE 14--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fiscal Year Ended
-----------------------------------
January 1, December 30, December29,
2000 2000 2001
---------- ------------ -----------
(in thousands)
Cash paid during the year for interest..... $ 1,994 $ 976 $ 608
Acquisition of Fogdog:
Fair value of assets acquired (including
goodwill)............................... $ -- $60,876 $ --
Liabilities assumed...................... -- (16,128) --
Stock issued............................. -- (42,356) --
------- ------- -------
Cash paid................................ -- 2,392 --
Cash acquired............................ -- 38,084 --
------- ------- -------
Net cash received from acquisition of
Fogdog................................ $ -- $35,692 $ --
======= ======= =======
Noncash Investing and Financing Activities:
Issuance of common stock in satisfaction of
accrued interest on subordinated note from
SOFTBANK.................................. $ 89 $ -- $ --
Issuance of common stock upon conversion of
the SOFTBANK subordinated note ........... $15,000 $ -- $ --
Issuance of common stock upon exercises of
options granted to employees of the
discontinued operations .................. $ -- $ 103 $ 638
Issuance of common stock upon the exercise
of a right in lieu of future cash partner
revenue share payments.................... $ -- $ -- $14,400
NOTE 15--BUSINESS SEGMENTS
The Company operates in one principal business segment which develops and
operates the e-commerce businesses for retailers, manufacturers, media
companies and professional sports organizations. The Company currently derives
virtually all of its revenues from the sales of goods through its partners'
online stores and direct response television campaigns, toll-free telephone
number sales, business-to-business and group sales, and related outbound
shipping charges, net of allowances for returns and discounts, as well as from
fixed and variable fees earned in connection with the development and
operation of partners' e-commerce businesses and the provision of marketing
services. All of the Company's net sales, operating results and identifiable
assets are in the United States. See Note 18 for a discussion of the Company's
discontinued operations.
F-24
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--RELATED PARTY TRANSACTIONS
The Company has entered into strategic alliances to provide procurement and
fulfillment services for QVC, Inc., and for certain partners which may be
considered affiliates of SOFTBANK America Inc. (or its related companies). The
Company recognized net revenues of $0, $3.0 million and $3.5 million on sales
to these related parties for the fiscal years ended January 1, 2000, December
30, 2000 and December 29, 2001, respectively. The terms of these sales are
comparable to those given to other partners of the Company, and the amount
included in accounts receivable as a result of these sales was $738,000 and
$236,000 as of December 30, 2000 and December 29, 2001, respectively.
The Company leased an office and warehouse facility from the Company's
Chairman, President and Chief Executive Officer. The lease was terminated
effective December 30, 2000, and a $500,000 lease termination fee was
outstanding as of December 30, 2000 and recorded in accrued expenses and
other. The fee was paid during the three-month period ended March 31, 2001.
NOTE 17--NOTE PAYABLE
Mortgage Note
On April 20, 2000, the Company entered into a $5.3 million mortgage note
collateralized by the land, building and improvements of its corporate
headquarters which have a carrying value of $7.7 million. The mortgage note
has a term of ten years and bears interest at 8.49% per annum. As of December
29, 2001, the mortgage note had an aggregate outstanding principal balance of
$5.2 million, with $39,000 classified as current, and $5.2 million classified
as long term. Annual maturities of the mortgage note for each of the fiscal
years 2002 through 2006 is $489,000. The Company recorded $318,000 and
$453,000 of interest expense related to this note during the fiscal years
ended December 30, 2000 and December 29, 2001, respectively.
The fair value of the mortgage note is estimated based on current rates
offered for similar debt with similar terms and maturity using available
market information. At December 29, 2001, the estimated fair value of the
Company's mortgage note approximates its carrying value.
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
designed and marketed the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division was 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 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) reduce the purchase price as a result of more
of the purchase price being paid in cash, (iv) provide the purchaser with a
breakup fee of $1.5 million, if the Company terminated the agreement under
certain circumstances and (v) to accelerate the vesting of options to
F-25
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 was approximately $17.2 million, consisting of a cash payment of $6.0
million deposited in an escrow account by the purchaser on March 13, 2000, a
cash payment at closing of $7.2 million and assumption of certain notes
payable by Global in the aggregate principal amount of approximately $4.0
million. For fiscal 1999, the Company recognized a loss of $5.2 million
related to the disposition of this division.
On December 29, 1999, Global sold substantially all of the assets of its
Branded division (other than the accounts receivable which totaled
approximately $6.6 million as of December 29, 1999) to American Sporting Goods
Corporation in exchange for a cash payment of $10.4 million. The Company
recognized a loss of $12.1 million on the sale of the Branded division,
including operating losses of $5.3 million 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 quarter ended June 30, 1999, management revised its estimates and
recorded a loss on disposal of $5.6 million. During the quarter ended January
1, 2000, 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 $11.7 million during
the quarter ended January 1, 2000.
On May 26, 2000, the Company completed the previously announced sale of its
Off-Price and Action Sports division. The Company received $13.2 million in
cash proceeds from the sale. This sale completed the disposition of the
Company's discontinued operations.
During the fiscal year ended December 30, 2000, the Company recognized an
additional loss on the disposition of discontinued operations of $5.9 million
resulting from actual expenses and losses differing from estimated amounts,
uncollectible accounts receivable and goodwill impairment related to these
businesses. Included in accrued expenses and other as of December 30, 2000 and
December 29, 2001 was $2.2 million and $102,000, respectively, related to
certain remaining obligations of the discontinued operations.
Net sales of discontinued operations for the fiscal years ended January 1,
2000, December 30, 2000 and December 29, 2001 were $112.8 million, $36.2
million and $0, respectively. For the period from April 20, 1999, the
measurement date, through January 1, 2000, discontinued operations incurred
net operating losses of $7.6 million, of which $5.3 million was attributable
to the Branded division and $2.3 million 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-26
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 30, 2000 and
December 29, 2001. 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.
For the Fiscal Year Ended December
30, 2000
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share
amounts)
Net revenues.......................... $ 5,719 $ 7,750 $ 9,014 $ 20,325
======== ======== ======== ========
Gross profit.......................... $ 1,767 $ 2,246 $ 2,728 $ 6,500
======== ======== ======== ========
Loss from continuing operations....... $(14,033) $(15,607) $(12,378) $(10,142)
Loss on disposition of discontinued
operations........................... -- (4,983) -- (867)
-------- -------- -------- --------
Net loss.............................. $(14,033) $(20,590) $(12,378) $(11,009)
======== ======== ======== ========
Losses per share--basic and
diluted(/1/):
Loss from continuing operations..... $ (0.76) $ (0.75) $ (0.57) $ (0.38)
Loss on disposition of discontinued
operations......................... -- (0.24) -- (0.03)
-------- -------- -------- --------
Net loss............................ $ (0.76) $ (0.99) $ (0.57) $ (0.41)
======== ======== ======== ========
Weighted average shares outstanding--
basic and diluted.................... 18,517 20,780 21,817 26,830
======== ======== ======== ========
- --------
(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.
For the Fiscal Year Ended
December 29, 2001
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- -------
(in thousands, except per share
amounts)
Net revenues.............................. $16,215 $16,953 $ 18,051 $51,391
======= ======= ======== =======
Gross profit.............................. $ 5,066 $ 5,256 $ 6,151 $18,551
======= ======= ======== =======
Income (loss) from continuing operations.. $(8,396) $(7,818) $(14,641) $ 260
Loss on disposition of discontinued
operations............................... -- -- -- --
------- ------- -------- -------
Net income (loss)......................... $(8,396) $(7,818) $(14,641) $ 260
======= ======= ======== =======
Income (losses) per share--basic and
diluted(/1/):
Income (loss) from continuing
operations............................. $ (0.26) $ (0.24) $ (0.42) $ 0.01
Loss on disposition of discontinued
operations............................. -- -- -- --
------- ------- -------- -------
Net income (loss)....................... $ (0.26) $ (0.24) $ (0.42) $ 0.01
======= ======= ======== =======
Weighted average shares outstanding--
basic.................................... 31,926 32,002 34,747 37,456
======= ======= ======== =======
Weighted average shares outstanding--
diluted.................................. 31,926 32,002 34,747 41,830
======= ======= ======== =======
- --------
(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-27
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 20--SUBSEQUENT EVENT
On March 14, 2002, the Company completed its acquisition of Ashford.com
pursuant to a definitive merger agreement executed on September 13, 2001.
Under the terms of the agreement, Ashford.com stockholders are receiving
$0.125 and 0.0076 of a share of the Company's common stock for each share of
Ashford.com common stock. The Company's primary reason for the acquisition was
to extend its outsource business model into the jewelry, luxury goods and
corporate gifts categories.
The acquisition will be accounted for under SFAS No.141 and the acquisition
costs of approximately $15.3 million will be allocated to the assets acquired
and the liabilities assumed based upon estimates of their respective fair
values.
F-28