Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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 January 1, 2000 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-16611
----------------
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 17, 2000,
was approximately $78,248,960.(/1/) There were 18,550,580 shares of the
registrant's Common Stock outstanding as of the close of business on March 17,
2000.
----------------
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 2000 Annual Meeting of the
Company's shareholders.
- --------
(/1/)This 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 sharheolders owning in
excess of 10% of the regsitrant's Common Stock, multiplied by the last
reported sale price for the registrant's Common Stock on March 17, 2000.
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 2000
TABLE OF CONTENTS
Page
----
PART I
ITEM 1: BUSINESS..................................................... 3
ITEM 2: PROPERTIES................................................... 25
ITEM 3: LEGAL PROCEEDINGS............................................ 25
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 25
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT......................... 25
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 27
ITEM 6: SELECTED FINANCIAL DATA...................................... 27
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 29
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 33
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 33
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 33
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 34
ITEM 11: EXECUTIVE COMPENSATION....................................... 34
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 34
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 34
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 35
SIGNATURES.............................................................. 38
2
PART I
ITEM 1: BUSINESS
Overview
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandisers, Internet companies and media
companies under exclusive long-term agreements. We enable our partners to
capitalize on their existing assets to exploit online opportunities in the
sporting goods retailing industry, which is estimated by the National Sporting
Goods Association to be $45.8 billion in size. Our scalable business model
takes advantage of our proprietary technology and product database, customer
service capabilities, fulfillment capabilities, relationships with vendors and
centralized inventory management. Based on these capabilities, we can quickly
and cost-effectively implement a customized e-commerce sporting goods
businesses for a broad range of partners.
We enable our partners to remain focused on their core businesses and to
avoid making substantial investments in e-commerce infrastructure and
personnel. Depending on the specific needs of the partner, we can undertake
either a complete outsourcing of its online activities or a more customized
"back-end" operation. We benefit from the traffic generated by our partners'
established brand franchises, extensive advertising, retail traffic and vendor
relationships to achieve operational efficiencies, lower customer acquisition
costs and economies of scale. We offer our partners the following:
. design, development and maintenance of customized Web sites under our
partners' banner;
. access to our centralized database of product descriptions and images,
as well as performance data from vendors and independent sources;
. extensive technology that runs, operates and manages all aspects of
multiple Web sites;
. access to a broad assortment of brand-name inventory from over 500
brands encompassing more than 60,000 stock keeping units, referred to as
SKUs;
. customer service, order processing and fulfillment capabilities; and
. marketing our partners' Web sites through arrangements with Internet
portals such as Yahoo!, as well as incremental online and offline
advertising.
We believe our ability to quickly and cost-effectively add new partners
creates advantages for us over other online competitors. These advantages
include lower product costs, broader merchandise availability and greater
operating efficiencies. In addition, we believe our approach can generate
attractive economic returns by operating multiple Web sites for established
brands on a common scalable e-commerce infrastructure.
During our first two months in business, we had net revenues of
approximately $5.5 million. We launched our initial six e-commerce sporting
goods businesses in November 1999 located at the URLs www.dunhamssports.com,
www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com,
www.thesportsauthority.com and store.webmd.com. Subsequently we announced
agreements with BlueLight.com, the exclusive online partner of Kmart, and
Oshman's Sporting Goods and we expect to launch e-commerce sporting goods
businesses for them in the second quarter of 2000. According to estimates by
Sports Trend, a trade publication, our current partners and their affiliates
generated over $5.0 billion in combined annual sporting goods revenues through
their traditional retail channels in 1998. The combined sales of our partners
in 1998 represented 11.1% of the estimated United States retail sporting goods
market.
Industry Background
Sporting Goods Retail Industry. The retail market for sporting goods
products, which includes apparel, footwear, equipment and related products
such as table games and sports memorabilia, represents a significant market
opportunity. The National Sporting Goods Association estimated this market at
$45.8 billion at retail in 1999, representing a compound annual growth rate of
3.5% since 1994. The number of people who actively
3
engaged in sports, fitness and outdoor activities grew 19% from 68.5 million
in 1987 to 81.6 million in 1996, according to Sporting Goods Manufacturers
Association estimates. We believe the sporting goods industry will continue to
benefit from growing participation and interest in sports, fitness and outdoor
activities and, as a result, we expect consumer demand to increase over time.
In addition, retail gross margins in sporting goods typically exceed 30% and
tend to be higher than retail gross margins in many other consumer products
categories, such as books, toys, computers and electronics. Finally, the ten
largest sporting goods retailers in the United States accounted for 36% of all
sporting goods sales in 1998, and no single retailer represented more than 10%
of the market, according to Sports Trend estimates. As a result, we believe
significant opportunities exist to better fulfill customer and manufacturer
needs by centralizing inventory and creating a comprehensive product database
from among the thousands of vendors and millions of SKUs in the sporting goods
industry.
We believe that e-commerce will contribute to additional growth in the
sporting goods industry. E-commerce revenues are expected to represent
approximately 8% of sporting goods sales by 2004, according to Forrester
Research estimates. Forrester Research also estimates that online sales of
sporting goods reached $165.0 million in 1999 and are projected to exceed $4.2
billion by 2004, a compound annual growth rate of 91%. In addition, we believe
that total catalog sales of sporting goods products are sizeable, supporting
the notion that customers are willing to purchase sporting goods through
direct sales.
Advantages of Online Retailing. The Internet has emerged as one of the
fastest growing communications, information and commerce mediums.
International Data Corporation estimates that there were approximately 142
million Internet users worldwide at the end of 1998 and expects this number to
grow to approximately 502 million by the end of 2003. Business' and consumers'
acceptance of the Internet as a communication, information and commerce
platform has created the foundation for significant growth in business-to-
consumer and business-to-business commerce. The number of online purchasers is
projected to increase from approximately 31 million at the end of 1998 to
approximately 183 million by 2003, according to International Data
Corporation. Forrester Research estimates that online purchases by United
States consumers will grow from approximately $20.3 billion in 1999 to
approximately $184.5 billion in 2004.
The Internet is an attractive marketplace for both online retailers and
consumers. Online retailers are able to "display" a larger number and wider
variety of products at a lower cost than physical stores and catalogs, which
have limitations on inventory, shelf and catalog space. In addition, online
retailers do not incur the costs of managing and maintaining a retail store
base or the significant printing and mailing costs of catalogs. Online
retailers also enjoy significant merchandising flexibility with the ability to
easily and frequently adjust their featured selections and editorial content
to better respond to consumers' needs. Finally, online retailers can more
easily obtain demographic and behavioral data about customers. This increases
opportunities for targeted marketing programs and to provide personalized
services to their customers.
The Internet also offers a number of advantages to consumers. Consumers can
enjoy the time savings, convenience and flexibility of shopping online 24
hours a day, seven days a week with access to a broader selection of products
than is traditionally available in a retail store. In addition, online
retailing allows for personalized shopping experiences through the delivery of
content, purchasing advice, community and electronic features such as reminder
and suggestion services. Consumers also benefit from greater access to product
information and heightened attention to customer service.
Challenges of Online Retailing. We believe traditional sporting goods
retailers face significant obstacles to compete successfully in e-commerce.
Traditional retailers must develop a separate infrastructure for their
Internet operations, including Web design, order processing, fulfillment,
customer service and a descriptive product database. Traditional retailers
must also make significant capital investments to develop in-house technology
systems as well as to attract and retain personnel to support an online
business. Given the smaller size of the leading sporting goods retailers
relative to leading retailers in other consumer goods categories, it is
particularly difficult for sporting goods retailers to generate levels of e-
commerce sales that justify building a separate infrastructure. Furthermore,
we believe very few viable outsourcing options exist for sporting goods
retailers to build their online business.
4
Online sporting goods retailers confront obstacles to establish cost-
efficient operations in the sporting goods business. Due to the lack of master
distributors and the multitude of independent vendors in the sporting goods
industry, online retailers face the challenge of establishing and maintaining
relationships with hundreds of vendors. This makes it difficult for them to
access a broad selection of branded sporting goods products. In addition, we
believe that it is costly for single-brand online retailers to own inventory
and build sophisticated fulfillment infrastructure while simultaneously
spending to build their brand and drive traffic. Because most online retailers
rely on a single brand, they find it more difficult to establish multiple
partnerships with traditional retailers. Online retailers tend to make large
investments to build and maintain their brand awareness, resulting in high
customer acquisition costs. In addition, online retailers have a disadvantage
to traditional retailers in that they do not offer in-store returns and
exchanges and can not satisfy customers' desire to touch and feel products,
such as athletic footwear and sporting apparel. Also, it is difficult for
online retailers to support the cost of aggregating and maintaining
comprehensive inventory in each category. This difficulty arises because
sporting goods products come in an extensive array of shapes, sizes and
weights, ranging from small fishing lures to bulky motorized treadmills.
The Global Sports Solution
We believe our business model allows us to provide a comprehensive solution
to many of the challenges facing traditional and online sporting goods
retailers. Our platform allows us to rapidly develop and operate customized e-
commerce sporting goods businesses with characteristics appropriate for each
of our partners. Our solution enables our partners to remain focused on their
core businesses and to avoid making substantial investments in e-commerce
infrastructure and personnel. In addition, we believe we can generate
attractive economic returns by operating multiple Web sites on a common
scalable e-commerce infrastructure. We derive further economic benefit by
operating under the established brands of our partners. The following are key
features of our solution:
Rapid Deployment of a Comprehensive E-Commerce Business. We can quickly
develop and implement all aspects of an e-commerce sporting goods business.
These aspects include Web site design, buying and merchandising, order
processing, fulfillment and customer service. We customize the design of a
partner's Web site with a broad range of characteristics that include a
differentiated user interface, partner-specific content pages, an extensive
electronic catalog of product descriptions and images, a searchable database
and interactive communication tools. Our solution allows the partner to avoid
the lengthy start-up, the complex integration effort and the substantial fixed
cost required to build and operate an e-commerce business.
Creation of Distinct Online Identities Under Existing Brand Names. We enable
our partners to establish distinct e-commerce businesses. We believe this
contributes to the development of their independent online brand, reinforces
their existing brand identity and reduces cannibalization from other online
competitors. In addition, we seek to increase the value of their entire
business by establishing an online image and a shopping experience that is
commensurate with their brand.
Increased Return on Investment Opportunity. We operate multiple e-commerce
sporting goods businesses on a common infrastructure. This allows us to
capitalize on our core computer technology, which we refer to as The Common
Engine(TM), and centralized inventory, product database, order processing,
fulfillment and customer service. Because we focus exclusively on sporting
goods e-commerce, we can derive economies of scale and add additional partners
with minimal incremental spending. In addition, we aggregate demand from all
of our partners' Web sites and fulfill all customer orders from a common
inventory pool. Although we customize part of the product assortment on each
Web site we operate, a large quantity of SKUs is common among multiple Web
sites. By centralizing inventory management across multiple partner Web sites,
we are able to increase the frequency of inventory turns, thus reducing
obsolescence risk and financing costs.
Positive and Convenient Shopping Experience. We offer a compelling online
shopping experience by providing a broad selection of merchandise, easy to use
Web sites, competitive prices, value added content and strong customer
service. We believe our 24 hours a day, seven days a week in-house customer
service and high
5
order accuracy promotes strong brand loyalty for our partners. In addition, we
believe our ability to respond to customer inquiries by e-mail, telephone and
online chat to provide detailed product information makes the shopping
experience easy and enjoyable and drives repeat purchases. The customer's
online shopping experience is further enhanced by the option to return goods
purchased online to most of our partners' respective retail stores.
Efficient Customer Acquisition. We benefit from the brand assets and
substantial marketing budgets of our partners to reduce our customer
acquisition costs. Our partners' existing marketing budgets allow us to
generate exposure and drive traffic to the Web sites without expensive
incremental investment in customer acquisition. For example, each partner is
contractually obligated to include its Web site address, referred to as a URL,
in its marketing and communication materials. In addition, during fiscal 1999,
our current traditional sporting goods retail partners, Dunham's Sports, MC
Sports, Oshman's Sporting Goods, Sport Chalet, The Athletes Foot and The
Sports Authority, spent on a combined basis in excess of $100.0 million on
marketing. This included television, radio, print and outdoor advertising,
point of purchase displays, cash register receipts, shopping bags, employee
uniforms and promotional events designed to attract and retain customers.
Finally, our retail partners have valuable, established brand franchises and
existing customer bases. We believe this provides us with a competitive
advantage because our retail partners have a heritage and reputation that
lends a degree of comfort to the customer. By having an established history of
purchasing from our partners' retail stores, we believe a customer will be
more inclined to purchase from their online stores.
Benefit from Relationships with Vendors. Our partners maintain long-standing
relationships with sporting goods vendors. We also maintain strong
relationships with these vendors. Therefore, unlike many entrants to the
online sporting goods marketplace, we are able to obtain direct access to most
major brands. We believe this provides us with one of the most extensive,
authorized selections of sporting goods brands and products available on the
Internet today. In addition, we benefit from the buying experience of our
partners, which further reduces our costs and improves our margins.
Growth Strategy
Our objective is to generate attractive economic returns by capitalizing on
our unique business model to become the leading e-commerce company in the
sporting goods category. The key elements of our growth strategy are as
follows:
Expand Our Partner Base. We intend to increase our market share by adding
new partners with strong brand franchises who are seeking to enter the e-
commerce sporting goods business. New partners could include companies with
major brand names in specialty and full-line retail, consumer products,
Internet and media. For example, in January 2000 we announced a new alliance
with Oshman's Sporting Goods and in March 2000, we announced a new alliance
with BlueLight.com. We expect to launch these e-commerce sporting goods
businesses during the second quarter of fiscal 2000.
Promote Our Online Brands. We intend to build awareness and drive traffic to
our e-commerce sporting goods businesses by capitalizing on the brand assets,
large marketing budgets and retail traffic of our partners. Each of our
partners prominently features and promotes its URL in its marketing and
communications materials. We have initiated programs with our traditional
retail partners to provide incentives, such as coupons, to in-store customers
to shop online. We also plan to continue to selectively use a variety of
online and offline marketing strategies to reach our customers, including
direct marketing, co-branding, co-op advertising, public relations, affiliate
programs, portal relationships, traditional print and broadcast media
advertising. In addition, we intend to test in-store computer kiosks with
direct links to some of our traditional retail partners' online sporting goods
businesses to provide customers with access to inventory not available in the
retail stores.
Increase Repeat Purchases. We intend to build customer loyalty and drive
repeat purchases by implementing the following strategies:
. continually enhancing our level of customer service;
6
. expanding our customer and product databases;
. offering new products and product categories;
. implementing direct marketing techniques to target customers; and
. increasing the level of personalization on our partners' online sporting
goods businesses.
We believe these initiatives will drive repeat purchases as consumers become
increasingly satisfied with their online shopping experiences.
Enhance the Online Shopping Experience. We plan to continually enhance and
expand our online stores to address the evolving needs of our customers. We
plan to invest in technology to maximize the flexibility and speed to market
of our Web site enhancements. We intend to improve the presentation of our
product offerings by taking advantage of the unique characteristics of the
Internet as a retail medium. Specifically, we plan to develop features that
improve the functionality, speed, navigation and ease of use of our partners'
Web sites. Another key factor in enhancing the online shopping experience will
be to continue building and expanding upon our fulfillment and order
processing capabilities.
Capitalize on International Market Opportunities. We plan to explore
offering our e-commerce solution in international markets to address the
global demand to purchase sporting goods products online. We believe our
business model is well suited for penetration of these markets by partnering
with well-established local companies.
Pursue Growth by Acquisitions. From time to time we assess strategic
investments and acquisitions that are aligned with our goal of increasing our
partner and customer base and expanding our product offerings.
Global Sports' Operations
Web Site Design, Implementation, and Maintenance
We design most of our partners' Web sites. We have dedicated in-house
personnel that are responsible for Web site design, management, maintenance,
creative and content modifications. We implement all changes to current Web
sites and oversee the creation of new front-end Web sites for most new
partners, ensuring that the look and feel of their Web sites meet all parties'
satisfaction. We also generate content for each of our partners' Web sites,
including product images, product descriptions, buying guides, sport-specific
information, as well as related sports and informational content. For example,
we have produced buying guides which will help customers with their
merchandise selection and to provide information about selected sports. These
guides provide customers with helpful information in selecting various pieces
of sports equipment and provide tips on sports play. In addition, we have an
in-house photography studio and generate approximately 70% of our photographic
images. We receive the remainder of our photographic images from our vendors.
Technology. The three major elements of our Web sites' technology are The
Common Engine(TM), the front-end and the data center.
The Common Engine(TM). We have created a core computer technology system,
The Common Engine(TM), that operates and manages all of the applications and
functionality across all of our partners' Web sites. This system allows us to
add new front-end Web sites with minimal incremental costs. The Common
Engine(TM) is a template that is used to create and personalize each Web site
to fit the brand equity and identity of the individual partners. We update The
Common Engine(TM) continually to improve our partners' Web sites and enrich
the overall customer experience.
The Front-End. The front-end represents the overall look and feel of our
partners' Web sites. The front-end is the interface with the customer and
includes logo placement, graphic design, color palette, navigation and links.
We use the front-end to communicate special promotions, content feature and
product collections as well as the unique merchandising strategy of each of
our partners.
7
The Data Center. The data center is our database management system that
controls all of the information housed within our partners' Web sites,
including all product images and descriptions, customer log-in data, customer
profiles, verification requirements, brand information and tax and shipping
data. Our database management system was created utilizing Oracle Technologies
and runs on Sun Microsystems hardware. A third-party provider hosts our data
center. System security is managed both by internal staff as well as by
security staff at our third-party host.
Additional Technology Information. Our technology infrastructure is
supported by a fully-integrated back-up system. We believe this ensures our
operations can move forward seamlessly in the event of computer malfunctions.
In addition, we continuously strive to improve our partners' Web sites by
conducting functional testing.
Buying, Vendor Relationships and Merchandising
Buying. We offer a broad assortment of brands and items on each of our
partners' Web sites. We currently offer customers over 500 brands and more
than 60,000 SKUs across our partners' Web sites and continue to add additional
brands and SKUs. We have dedicated buyers for the following merchandise
categories: footwear, licensed/team products, men's branded apparel, women's
and children's branded apparel, accessories, exercise, indoor recreation,
outdoor recreation, golf, racquet sports and team sports.
We capitalize on our partners' merchandising experience to offer a wide
brand and product assortment for our customers. When deciding which brands and
merchandise to carry, we first review what our partners are offering in their
retail stores and determine what items we believe will be successful on our
partners' Web sites. We can offer a wider variety of merchandise on our Web
sites than might be found in one of their retail stores because we are not
hindered by space availability, although not all of our partners' Web sites
carry the same product and brand assortment. After consulting a partner on
their buying strategy, we then work to enhance product selection. We expand
product lines, provide brand extensions and look to add significant value to
the product selection currently offered in our partners' stores. These types
of extensions might include a broader diversity of sizes and styles and a
larger range of price points.
Vendor Relationships. We believe we have solid relationships with our
vendors, and we are working to continuously add new vendors and brands. Our
buyers work with merchandisers to streamline the strategies for product
offerings, merchandise locations within the Web sites and promotional
activities of our partners.
Merchandising. Our merchandising strategy allows us to offer a highly
customized and flexible product mix. We work with our partners to ensure that
our product offerings are consistent with any upcoming in-store promotions or
advertising specials. We make changes to the home pages and lead category
pages of our partners' Web sites frequently to reflect seasonal or promotional
trends and to keep their Web sites fresh.
Pricing
We establish the prices for all products offered on our partners' Web sites.
We strategically price these products to be consistent with the prices in our
partners' retail stores. Accordingly, we maintain different pricing structures
for products across each of our partners' Web sites. We use our proprietary
technology to implement these pricing structures and to make daily updates to
our prices, including markdowns and sales.
Marketing
Web Site Integration. We work with each of our partners to make certain that
URL and Web site integration are a mainstay of their marketing and advertising
campaigns. Our retail sporting goods partners spend more than $100.0 million
per year to build and promote their brands, and BlueLight.com's exclusive
retail partner, Kmart, dedicates a meaningful portion of space within its 72
million weekly advertising circulars to promote its sporting goods business.
Each of our partners is contractually obligated to incorporate its URL into
every type of advertising, marketing, promotion and communication vehicles it
creates. These marketing vehicles
8
not only incorporate the URL into the copy or design, but the message also
educates people about these e-commerce sporting goods businesses and drives
traffic to these Web sites. We believe our partners embrace this strategy
because they realize the value in alerting their customers to an additional
distribution channel within their brand.
Online Marketing Relationships. In 1999, we signed a marketing agreement
with Yahoo!, a leading global Internet company, in which our partners' Web
sites are featured throughout the Yahoo! Shopping service and other areas of
the Yahoo! Network. We also formed a marketing relationship with PeoplePC, in
which our partners' Web sites will be featured to PeoplePC members throughout
PeoplePC's multiple channels of outreach. We have a marketing relationship
with Rodale, the publisher of well-known publications such as Men's Health,
Prevention, New Woman, and Runner's World, which provides users of our
partners' Web sites with access to sports and fitness content and information
from Rodale's range of sports and fitness book titles. We are dedicated to
managing, strengthening and improving our customer relationships. We have
implemented personalized customer e-mail campaigns, which inform customers
about upcoming specials, promotions, new brands, or merchandise in which they
might be interested.
Offline Marketing Opportunities. We periodically produce advertising or
marketing materials to communicate a special event or promotion occurring on
one of our partners' Web sites. We produce these materials to augment our
partners' own advertising campaigns.
Affiliate Network. We have agreements with many outside Web sites, referred
to as affiliates, which enable them to link to one of our partners' Web sites.
When a visitor clicks through an affiliate to one of our partners' Web sites,
and the visit generates a sale, then the affiliate is compensated with a
portion of the sale proceeds. We have implemented a sliding scale for revenue
payments to affiliates depending on the volume of sales generated from the
link.
Order Processing and Fulfillment
Order Processing. We use Priority Fulfillment Services, referred to as PFS,
as our third-party order processing vendor. We use JDA software for our
internal order processing technology vendor. During fiscal 2000, we plan to
assume the responsibility of all order processing, returns processing, claims
processing and crediting of customers. Order processing activities include
electronically capturing the order, processing the payment method, determining
the shipping costs, adding any applicable sales tax, facilitating any coupon
or promotional discounts and printing a pick ticket. The pick ticket includes
the name of the partner from whom the order was received, a packing slip,
return labels and detailed order list.
Fulfillment. We currently use PFS as our third-party fulfillment vendor.
During fiscal 2000, we plan to assume responsibility for the fulfillment for
all large and oversized items, referred to as Less than Truckload or LTL, sold
on our partners' Web sites. These large items will be fulfilled by us within a
90,000 square foot facility to be leased in Memphis, Tennessee. PFS will
continue to manage the fulfillment of non-LTL items.
We have our own dedicated warehouse and fulfillment space within PFS'
facilities. The portion of PFS' facility that we use is completely separated
and segregated from all other PFS customers and/or operations. We use
approximately 200,000 square feet of PFS' facilities in Memphis, Tennessee for
fulfillment of non-LTL items for the forseeable future.
After a pick ticket is generated, it either will be forwarded to PFS for
fulfillment, in the case of non-LTL items, or will be forwarded to our
fulfillment center in Memphis, in the case of LTL items. Fulfillment will be
handled in the same way, whether it is managed by us or by PFS. After the pick
ticket is reviewed, the ordered items are gathered, the accuracy of items are
verified and the items, appropriate receipts and return labels are packed,
sealed and shipped. After an item has been ordered by a customer, PFS
electronically notifies us when the order has been received, packed and
shipped. Our computer system then automatically sends an e-mail to that
customer informing them that their merchandise is on its way
9
We also provide value-added fulfillment services, such as at-home assembly
of LTL items and racquet stringing. At-home assembly for LTL items can be
purchased for an additional charge on some of our partners' Web sites. These
Web sites automatically offer the customer the opportunity to purchase at-home
assembly at the time of sale. If a customer purchases at-home assembly of an
item, information about coordinating their at-home assembly is included in the
package during the fulfillment phase. The customer can then call Huffy
Corporation, our assembly provider, to coordinate and schedule the at-home
assembly of their product.
Distribution. We currently use UPS as our shipping carrier for non-LTL items
and use Associated Global for our LTL distribution. We ship virtually all of
the orders received on our partners' Web sites within one business day.
Returns. We accept returns through our partners' respective stores and
through mailing or delivery services. All of our retail partners, except
Dunham's Sports, accept in-store returns of items purchased on their Web site.
If a customer returns an item to a retail store, the store will offer the
customer a credit or exchange. If it is an item that the particular store
location carries, then the store will reshelve the item. If the specific
retail location does not carry that item, the store will return the item to us
to reshelve. If a customer returns an item directly to us, we provide the
customer with either a credit or exchange from our partners' Web site and then
reshelve the item.
In the case of BlueLight.com, where we only manage their sporting goods
product database and facilitate merchandise procurement and fulfillment,
BlueLight.com will process the orders, generate the pick tickets and forward
them to us for fulfillment. We will then either fulfill the order or forward
it to PFS as appropriate. BlueLight.com has agreed to use commercially
reasonable efforts to have Kmart accept in-store returns for merchandise
purchased on BlueLight.com. Any returns made to a Kmart store will be
forwarded to BlueLight.com's return processing center, from which
BlueLight.com will coordinate regular shipments of products back to us to be
reshelved.
Customer Service
General. We are committed to providing the highest level of customer
service. We believe that superior customer service is critical to retaining
long-term and repeat customers. We offer 24 hours a day, seven days a week
live customer service for all of our partners, except BlueLight.com, who will
manage their own customer service functions. However, we will be assisting
BlueLight.com's representatives with problem-solving and product-oriented
issues. We currently have significant excess capacity in our call center. We
expect to increase our customer service staff as we increase both the number
of our partners and our overall volume. We programmed our computer systems to
automatically identify from which partner the customer needs information or
service. Our customer service facility is located within our headquarters.
Category Experts and Service Experts. In our effort to provide customers
with the most thorough and accurate information possible, we have both
category experts and service experts on staff within the customer service
department. Category experts have a particular interest in and detailed
knowledge of particular sports or products. These professionals are able to
answer detailed questions about various sports and products to help customers
select the best equipment or merchandise for them. Service experts are trained
and experienced in working with a variety of complex customer service issues.
E-Mail, Telephone or Online Chat. Customers can obtain assistance through e-
mail, telephone or online chat. Our online chat capabilities are called
LiveRep. We utilize eGain's application process for our LiveRep solution.
During LiveRep sessions, customer service representatives can answer simple
merchandise questions or help a person navigate the site page-by-page in more
complex situations. We aim to answer all customer e-mails within 24 hours, and
are often able to respond within a shorter period of time.
10
Company Overview
Description of Agreements with our Partners
According to Sports Trend, the combined retail sporting goods sales of our
partners and their affiliates was $5.1 billion in 1998, accounting for 11.1%
of the estimated United States retail sporting goods market. In 1999, our
partners and their affiliates had in the aggregate approximately 3,300 stores
covering all 50 states. We estimate that Dunham's Sports, MC Sports, Oshman's
Sporting Goods, Sport Chalet, The Athlete's Foot and The Sports Authority
invested in excess of $100.0 million in marketing their retail stores to
consumers in 1999. In addition, a majority of the approximately 72 million
weekly newspaper circulars distributed in 1999 by BlueLight.com's retail
partner, Kmart, featured sporting goods products.
We currently have three different structures for our agreements:
. Exclusive Licensing Agreements. These agreements give us the exclusive
right to operate a partner's e-commerce sporting goods business. We
record all revenues generated on our partners' Web sites and pay a
percentage of those revenues to the partners in exchange for the e-
commerce rights to their brand names and in-store promotions of the e-
commerce sporting goods businesses in the partners' retail stores.
. Subsidiary and Exclusive License Agreement. We have formed a subsidiary,
The SportsAuthority.com, Inc., which is 80.1% owned by us and 19.9%
owned by The Sports Authority. The Sports Authority's ownership position
in the subsidiary could increase to 49.9% over time, depending upon the
achievement of financial and sales goals or the exercise of options set
forth in the agreement. The SportsAuthority.com has the exclusive right
to operate The Sports Authority's e-commerce sporting goods business. We
pay a nominal royalty to The Sports Authority based on a percentage of
sales generated by the subsidiary.
. Long-Term Distribution Agreement. We entered into an agreement with
BlueLight.com. whereby we will provide a product information database to
BlueLight.com that it will use to merchandise the sporting goods
department of its flagship Web site. BlueLight.com will process orders
for sporting goods on its Web site and deliver the orders to us
electronically. We will then sell the products to BlueLight.com at a
predetermined discount to their selling price and pick, pack and ship
the products to consumers on behalf of BlueLight.com. BlueLight.com will
perform all its own customer service.
The following table summarizes the different agreements we have with each of
our partners.
Partner URL Nature of Agreement Date Operational
- ----------------------- -------------------------- -------------------------------- -------------------------
BlueLight.com www.bluelight.com long-term distribution agreement Expected to launch in the
second quarter of 2000
Dunham's Sports www.dunhamssports.com exclusive licensing agreement November 1999
Healtheon/WebMD store.webmd.com exclusive licensing agreement November 1999
MC Sports www.mcsports.com exclusive licensing agreement November 1999
Oshman's Sporting Goods www.oshmans.com exclusive licensing agreement Expected to launch in the
second quarter of 2000
Sport Chalet www.sportchalet.com exclusive licensing agreement November 1999
The Athlete's Foot www.theathletesfoot.com exclusive licensing agreement November 1999
The Sports Authority www.thesportsauthority.com majority-owned subsidiary and November 1999
exclusive licensing agreement
Our typical agreement gives us the long-term exclusive rights to a partner's
e-commerce sporting goods business and the commitment from the partner to
promote its Web site. In exchange, we commit to develop and operate a unique
and customized Web site for the partner and pay to the partner a percentage of
all net sales generated on the Web site. Our various agreements last for five
to 15 years.
BlueLight.com. The sporting goods inventory on the BlueLight.com sporting
goods department will consist of items provided by us, enhanced by a range of
current Kmart product offerings. As Kmart's exclusive
11
e-commerce partner, BlueLight.com is uniquely positioned to capture a large
portion of their customers that shop online. BlueLight.com's retail partner,
Kmart, is the third largest retailer of sporting goods in the United States,
with estimated annual sporting goods sales in excess of $2.0 billion according
to Sports Trend. BlueLight.com will capitalize on its relationship with Kmart
to drive customers to its e-commerce shopping portal. We believe that the
nationwide retailer's powerful brand, supported by more than $36.0 billion in
annual sales, will be utilized to actively promote BlueLight.com throughout
its more than 2,100 retail stores and through its 72 million weekly
advertising circulars.
Dunham's Sports. Dunham's Sports operates 107 full-line sporting goods
stores, located in strip shopping centers, in 11 states, with a focus on the
Mid-Atlantic and Great Lakes regions of the country. Its 1998 sales were
estimated by Sports Trend to be $225.0 million. Dunham's Sports positioning
is, "The big names bring you in, the low prices bring you back."
Healtheon/WebMD. We have agreed with The Sports Authority and
Healtheon/WebMD to create and operate a sports, medicine and fitness e-
commerce sporting goods business. Healtheon/WebMD has committed extensive
promotional resources to drive traffic to the Web site, including taking
advantage of its strategic relationships with MSN, Lycos, Excite, Readers'
Digest and CNN. Through TheSportsAuthority.com, we record 100% of the revenue
from the transactions on the Healtheon/WebMD health and fitness e-commerce
store, and Healtheon/WebMD receives a percentage revenue share payment on all
product sales. Healtheon/WebMD is the first end-to-end Internet healthcare
company connecting physicians and consumers to the entire healthcare industry.
Healtheon/WebMD was formed in November 1999 as a result of the merger of
Healtheon Corporation, WebMD, Inc., MEDE America and Medcast.
MC Sports. MC Sports operates 66 full-line sporting goods stores located in
shopping malls and strip shopping centers in six states, primarily in the
Midwest and Great Lakes areas. Its 1998 sales were estimated by Sports Trend
to be $235.0 million. MC Sports is heavily involved in its local communities
and is positioned as a "hometown," caring retailer.
Oshman's Sporting Goods. Oshman's operates 42 super stores and 16
traditional stores located in strip shopping centers and enclosed malls in 15
states, with concentration in the Southwest and Northwest United States. Its
1999 sales were $306.0 million. Oshman's utilizes an oval racetrack store
theme, featuring concept shops and demo areas where customers can try
merchandise prior to purchasing.
Sport Chalet. Sport Chalet operates 21 big box full-line sporting goods
stores located in shopping malls and strip shopping centers in Southern
California. Its 1998 sales were $155.0 million. Sport Chalet positions itself
as a leading sporting goods retailer in Southern California providing
outstanding customer service and the best brands available.
The Athlete's Foot. The Athlete's Foot operates 750 specialty athletic
footwear stores located in shopping malls and strip shopping centers, in 40
countries around the world. Its 1998 sales were estimated by Sports Trend to
be $700.0 million. The Athlete's Foot positions itself as the world's
definitive athletic and leisure footwear retailer.
The Sports Authority. The Sports Authority operates 196 stores located in
strip shopping centers and urban street locations in 32 states, most of which
are big box stores. Its 1999 sales were $1.5 billion. The Sports Authority
positions itself as "The Authority" on sporting goods with a large assortment
of merchandise encompassing a wide range of both team and individual sports.
Competition
The online market is new, rapidly evolving and intensely competitive. Our
primary competitors are currently:
. online e-commerce sporting goods retailers such as Chipshot.com,
Fogdog.com and Gear.com;
12
. general merchandise e-commerce companies such as Mercata.com, Onsale.com
and uBid.com;
. full-line electronic retailers that are associated with full-line
sporting goods stores such as Shopsports.com, associated with
Copeland's, Dsports.com, associated with Dick's Sporting Goods, and
MVP.com, associated with Galyans;
. e-commerce businesses of specialty sporting goods retailers and catalogs
such as Footaction.com, Footlocker.com and REI.com;
. e-commerce businesses of traditional general merchandise retailers such
as Target.com and Wal-Mart.com; and
. e-commerce businesses of sporting goods manufacturers such as adidas.com
and Nike.com.
In addition, we compete with companies that can provide part of our
solutions to companies that wish to establish e-commerce sporting goods
business, including:
. Web site developers, such as Sapient, Scient and Viant; and
. third-party fulfillment and customer service providers, such as
Fingerhut, Keystone Internet Services and ClientLogic.
Finally, we compete with traditional channels of distribution for sporting
goods, including full-line sporting goods retailers, specialty sporting goods
retailers, general merchandise retailers, catalogs and manufacturers' direct
stores.
We believe that we compete primarily on the basis of the following:
. recognition of and trust in our partners' brands;
. the broad selection of merchandise that we offer on our partners' Web
sites;
. convenience of the shopping experience;
. ability to return products to our partners' respective retail stores;
. price; and
. the amount of product information provided to customers.
Government Regulation
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly
applicable to retailing or e-commerce. However, as the Internet becomes
increasingly popular, it is possible that a number of laws and regulations may
be adopted with respect to the Internet. These laws may cover issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Furthermore, the growth of e-commerce may prompt calls
for more stringent consumer protection laws. Several states have proposed
legislation to limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission has also initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties and has adopted regulations restricting the
collection and use of information from minors online. We do not currently
provide individual personal information regarding our users to third parties
other than our partners and we currently do not identify registered users by
age. However, the adoption of additional privacy or consumer protection laws
could create uncertainty in Web usage and reduce the demand for our products
and services or require us to redesign our partners' Web sites.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
qualification to do business and export or import matters. The vast majority
of these laws were adopted prior to the advent of the Internet. As a result,
they do not contemplate or address the unique issues of the Internet
13
and related technologies. Changes in laws intended to address these issues
could create uncertainty in the Internet marketplace. This uncertainty could
reduce demand for our services or increase the cost of doing business as a
result of litigation costs or increased service delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we
are required to qualify to do business in each state or foreign country. Our
failure to qualify in a jurisdiction where we are required to do so could
subject us to taxes and penalties. It could also hamper our ability to enforce
contracts in these jurisdictions. The application of laws or regulations from
jurisdictions whose laws do not currently apply to our business could have a
material adverse effect on our business, results of operations and financial
condition.
Employees
As of March 20, 2000, we employed 184 full-time employees in our e-commerce
business. Our employees are based primarily at our headquarters in King of
Prussia, Pennsylvania.
Discontinued Operations
Prior to our decision to focus exclusively on our e-commerce business, we
operated two sporting goods businesses, our Branded Division and our Off-Price
and Action Sports Division. We sold our Branded Division on December 29, 1999.
We have an agreement to sell our Off-Price and Action Sports Division, which
we expect will be completed in the second quarter of fiscal 2000.
Through our Off-Price and Action Sports Division, we purchased
manufacturers' closeout merchandise, overstocks and canceled orders, as well
as excess inventories from manufacturers and retailers, for resale to
retailers principally in the United States and Canada. We resold this
merchandise to sporting goods stores, off-price specialty stores, department
stores, footwear stores and independent retailers. The merchandise that we
purchased and distributed included a wide variety of athletic, outdoor, casual
and specialty footwear, athletic apparel, ski and snowboard equipment, in-line
skates, skateboards and sunglasses. We also designed and distributed
snowboards, skateboards and related merchandise for selected retailers.
Through our Branded Division, we designed, marketed and distributed athletic
and outdoor footwear products under the RYKA brand and the Yukon brand. RYKA
is a high performance athletic footwear brand designed exclusively for women.
Yukon is a performance outdoor and rugged casual footwear brand designed for
men, women and children.
We operated our historical business from a 75,000 square-foot office and
warehouse facility in King of Prussia, Pennsylvania that we leased from
Michael G. Rubin, our Chairman and Chief Executive Officer. In addition, we
own a 12,000 square-foot facility in North York, Ontario that we used
primarily for our Off-Price and Action Sports Division. This facility is being
sold as part of the sale of our Off-Price and Action Sports Division. We also
used third-party public warehouses in California and Ontario, Canada for our
Branded Division.
As of March 20, 2000, we employed 55 full-time employees in our Off-Price
and Action Sports Division.
Risk Factors
Any investment in shares of our common stock involves a high degree of risk.
You should carefully consider the following information about these risks,
together with the other information contained in this 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. This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. Many factors, including those described
below, may cause actual results to differ materially from anticipated results.
14
Risks Particular to Our Business
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating the e-
commerce sporting goods businesses of our partners until the fourth quarter of
1999. Prior to the fourth quarter of 1999, when we launched the e-commerce
sporting goods business we operate for our partners, 100% of our revenues had
been generated by our discontinued operations. Upon completion of the sale of
discontinued operations, 100% of our revenues will be generated through our
e-commerce business. Based on our limited experience with our e-commerce
business, it is difficult to predict whether we will be successful. Thus, our
chances of financial and operational success should be evaluated in light of
the risks, uncertainties, expenses, delays and difficulties associated with
operating a business in a relatively new and unproven market, many of which
may be beyond our control. Our failure to address these issues could have a
material adverse effect on our business, results of operations and financial
condition.
We expect significant increases in our operating expenses and continuing
losses.
We incurred substantial losses for fiscal 1999 and, as of January 1, 2000 we
had an accumulated deficit of $43.1 million. We have not achieved
profitability from our continuing operations. We may not obtain enough
customer traffic or a high enough volume of purchases from our partners' e-
commerce sporting goods businesses to generate sufficient revenues to achieve
profitability. We believe that we will continue to incur operating and net
losses for the next few years. We believe that our losses in fiscal 2000 will
be significantly greater than our losses in fiscal 1999. There can be no
assurances that we will be able to reverse these accelerating losses. We
intend to increase our operating expenses substantially as we:
. enhance and expand our third-party distribution and order fulfillment
capabilities or develop our own;
. improve our order processing systems and capabilities by transitioning
order processing from our current third-party provider to in-house;
. develop enhanced technologies and features to improve our partners' e-
commerce sporting goods businesses;
. expand our customer service capabilities to better serve our customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. increase our sales and marketing activities.
Because we will incur many of these expenses before we receive any revenues
from our efforts, our losses will be greater than the losses we would incur if
we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which would further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
Our success is tied to the success of the sporting goods industry and our
partners for which we operate e-commerce sporting goods businesses.
Our future success is substantially dependent upon the success of the
sporting goods industry and our partners for which we operate e-commerce
sporting goods businesses. From time to time, the sporting goods industry has
experienced downturns. Any downturn in the sporting goods industry could
adversely affect our business. In addition, if our partners were to have
financial difficulties or seek protection from their creditors, or if we are
unable to replace our partners or obtain new partners, it could adversely
affect our business, financial condition and results of operations.
We enter into long-term contracts with our partners. If we do not maintain
good working relationships with our partners or perform as required under
these agreements it could adversely affect our business.
We enter into contracts with our partners with terms ranging from five to 15
years. These agreements establish new and complex relationships between our
partners and us. We spend a significant amount of time
15
and effort to maintain our relationships with our partners and address the
issues that from time to time may arise from these new and complex
relationships. If we do not maintain a good working relationship with our
partners or perform as required under these agreements, our partners could
seek to terminate the agreements prior to the end of the term or they could
decide not to renew the contracts at the end of the term. This could adversely
affect our business, financial condition and results of operations. Moreover,
our partners could decide not to renew these contracts for reasons not related
to our performance.
Although we refer to the traditional sporting goods retailers, general
merchandisers, Internet companies and media companies for which we develop and
operate e-commerce sporting goods businesses as our "partners," we do not act
as an agent or legal representative for any of our partners. We do not have
the power or authority to legally bind any of our partners. Similarly, our
partners do not have the power or authority to legally bind us. In addition,
we do not have the types of liabilities for our partners that a general
partner of a partnership would have. Our current partners include The
Athlete's Foot, BlueLight.com, Dunham's Sports, Healtheon/WebMD, MC Sports,
Oshman's Sporting Goods, Sport Chalet and The Sports Authority.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a
good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
. our inability to retain existing partners or to obtain new partners;
. our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to the e-commerce sporting goods
businesses operated by us or the inability to convert these visitors
into customers;
. our failure to offer an appealing mix of sporting goods, apparel,
footwear and other products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites, the systems used to process customers' orders and payments or
our computer network;
. the ability of our competitors to offer new or superior e-commerce
sporting goods businesses, services or products;
. price competition that results in lower profit margins or losses;
. our inability to obtain specific products and brands or unwillingness of
vendors to sell their products to us;
. unanticipated fluctuations in the amount of consumer spending on
sporting goods and related products, which tend to be discretionary
spending items;
. increases in the cost of Internet or other advertising;
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
16
. seasonality;
. our inability to manage inventory levels or control inventory theft;
. our inability to manage distribution operations or provide adequate
levels of customer service;
. an increase in the level of our product returns;
. government regulations related to use of the Internet for commerce; and
. unfavorable economic conditions specific to the Internet, e-commerce or
the sporting goods industry.
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that our fourth fiscal quarter will account for a
large percentage of our total annual sales. In anticipation of increased sales
activity during our fourth fiscal quarter, we may hire a significant number of
temporary employees to bolster our permanent staff and significantly increase
our inventory levels. For this reason, if our revenues were below seasonal
expectations during the fourth fiscal quarter, our annual operating results
could be below the expectations of securities analysts and investors.
Due to the limited operating history of our e-commerce business, it is
difficult to predict the seasonal pattern of our sales and the impact of this
seasonality on our business and financial results. In the future, our seasonal
sales patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash
generated from our business. If we do not generate cash sufficient to fund our
operations, we may need additional financing to continue our growth or our
growth may be limited.
Because we have not generated sufficient cash from operations to date, we
have funded our e-commerce operations primarily from the sale of equity
securities. Cash from revenues must increase significantly for us to fund
anticipated operating expenses internally. If our cash flows are insufficient
to fund these expenses, we may need to fund our growth through additional debt
or equity financings or reduce costs. Further, we may not be able to obtain
financing on satisfactory terms. Our inability to finance our growth, either
internally or externally, may limit our growth potential and our ability to
execute our business strategy. If we issue securities to raise capital, our
existing stockholders may experience additional dilution or the new securities
may have rights senior to those of our common stock.
We must develop and maintain relationships with key brand manufacturers to
obtain a sufficient assortment and quantity of quality merchandise on
acceptable commercial terms. If we are unable to do so, it could adversely
affect our business, results of operation and financial condition.
We primarily purchase the products we offer directly from the manufacturers
of the products. If we are unable to develop and maintain relationships with
these manufacturers, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on acceptable
commercial terms and our business could be adversely impacted. We do not have
written contracts with most of our manufacturers. Manufacturers could stop
selling products to us and may ask us to remove their products or logos from
our partners' Web sites. In some circumstances, our partners purchase products
directly from manufacturers for sale on their Web sites. If we or our partners
are unable to obtain products directly from manufacturers, especially popular
brand manufacturers, we may not be able to obtain the same or comparable
merchandise in a timely manner or on acceptable commercial terms. We currently
do not offer some popular brands of sporting goods, such as Nike. There can be
no assurance that we will be able to offer these brands in the future. If we
are unable to offer a sufficient assortment and quantity of quality products
at acceptable prices, we may lose sales and market share.
17
Capacity constraints or system failures could materially and adversely
affect our business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that
causes interruption of the availability of our partners' Web sites could
result in decreased usage of these Web sites. If these failures are sustained
or repeated, they could reduce the attractiveness of our partners' Web sites
to customers, vendors and advertisers. Our operations are subject to damage or
interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
. computer viruses; and
. other similar events.
We launched our first e-commerce sporting goods businesses in the fourth
quarter of fiscal 1999. The limited time during which we have been operating
these businesses, as well as the inherent unpredictability of the events
described above, makes it difficult to predict whether the occurrence of any
of these events is likely. If any of these events do occur, they could result
in interruptions, delays or cessations in service to users of our partners'
Web sites, which could have a material adverse effect on our business, results
of operations and financial condition.
In addition, we maintain our computers on which we operate our partners' Web
sites at the site of a third-party provider. We cannot control the maintenance
and operation of this site, which is also susceptible to similar disasters and
problems. We have no formal disaster recovery plan, and our insurance policies
may not adequately compensate us for any losses that we may incur. Any system
failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with our customers and result in
reduced revenues. See "Business--Technology."
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use and take appropriate steps to enforce our intellectual property rights. In
addition, our competitors could, without violating our proprietary rights,
develop technologies that are as good as or better than our technology. Our
failure to protect our software and other proprietary intellectual property
rights or to develop technologies that are as good as our competitors' could
put us at a disadvantage to our competitors. In addition, the failure of our
partners to protect their intellectual property rights, including their domain
names, could impair our operations. These failures could have a material
adverse effect on our business, results of operations and financial condition.
If we do not respond to rapid technological changes, our services could
become obsolete and we could lose customers.
We may face material delays in introducing new services, products and
enhancements. If this happens, our customers may forego the use of our e-
commerce sporting goods businesses and use those of our competitors. To remain
competitive, we must continue to enhance and improve the functionality and
features of our e-commerce sporting goods businesses. The Internet and the
online commerce industry are rapidly changing. If competitors introduce new
products and services using new technologies or if new industry standards and
practices emerge, our partners' existing Web sites and our proprietary
technology and systems may become obsolete.
18
Developing our e-commerce sporting goods businesses and other proprietary
technology entails significant technical and business risks. We may use new
technologies ineffectively or we may fail to adapt our partners' Web sites,
our order processing systems and our computer network to meet customer
requirements or emerging industry standards.
We may be subject to intellectual property claims that could be costly and
could disrupt our business.
Third parties may assert that our business or technologies infringe their
intellectual property rights. From time to time, we may receive notices from
third parties questioning our right to present specific images or logos on our
partners' Web sites, or stating that we have infringed their trademarks or
copyrights. We may in the future receive claims that we are engaging in unfair
competition or other illegal trade practices. We may be unsuccessful in
defending against any of these claims, which could result in substantial
damages, fines or other penalties. The resolution of a claim could also
require us to change how we do business, redesign our partners' Web sites and
other systems or enter into burdensome royalty or licensing agreements. These
license or royalty agreements, if required, may not be available on acceptable
terms, if at all, in the event of a successful claim of infringement. Our
insurance coverage may not be adequate to cover every claim that third parties
could assert against us. Even unsuccessful claims could result in significant
legal fees and other expenses, diversion of management's time and disruptions
in our business. Any of these claims could also harm our reputation.
We rely on our developing relationships with online services, search engines
and directories to drive traffic to the e-commerce sporting goods businesses
we operate. If we are unable to develop or maintain these relationships, our
business, financial condition and results of operations could be adversely
affected.
We are developing relationships with online services, search engines and
directories to provide content and advertising banners that link to our
partners' Web sites. We expect to rely on these relationships as significant
sources of traffic to our partners' Web sites and to generate new customers.
If we are unable to develop satisfactory relationships with high-traffic Web
sites on acceptable terms, our ability to attract new customers could be
harmed. Further, many of the Web sites with which we may have online
advertising arrangements could provide advertising services for other
marketers of sporting goods. As a result, these Web sites may be reluctant to
enter into or maintain relationships with us. Failure to achieve sufficient
traffic or generate sufficient revenue from purchases originating from third-
party Web sites may result in termination of these types of relationships.
Without these relationships, we may not be able to sufficiently increase
market share and our business, financial condition and results of operations
could be adversely affected.
Our success is dependent upon our executive officers and other key
personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman and Chief Executive Officer. We have employment agreements with some
of our executive officers and key personnel. We cannot be sure, however, that
we will be able to retain or attract executive, managerial and other key
personnel. We have obtained key person life insurance for Mr. Rubin in the
amount of $7.25 million. We have not obtained key person life insurance on any
of our other executive officers or key personnel.
We may be unable to hire and retain the skilled personnel necessary to
develop our business.
We intend to hire a significant number of skilled personnel in fiscal 2000
and beyond. Competition for these individuals is intense, and we may not be
able to attract, assimilate or retain highly qualified personnel in the
future. Our failure to attract and retain the highly trained personnel that
are integral to our business may limit our growth rate, which would harm our
business.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
19
The e-commerce market is new, rapidly evolving and extremely competitive. In
addition, there is a significant amount of capital currently available to fund
existing and potential competitors. Increased competition could result in
price reductions, reduced gross margins and loss of market share, any of which
could seriously harm our business, financial condition and results of
operations. We compete with a variety of companies, including:
. online sporting goods retailers such as Chipshot.com, Fogdog.com and
Gear.com;
. general merchandise e-commerce companies such as Mercata.com,
Onsale.com, and uBid.com;
. full-line electronic retailers that are associated with full-line
sporting goods stores such as Dsports.com associated with Dick's
Sporting Goods, MVP.com, associated with Galyans, and Shopsports.com
associated with Copeland's
. e-commerce businesses of specialty sporting goods retailers and catalogs
such as Footaction.com, Footlocker.com and REI.com;
. e-commerce businesses of traditional general merchandise retailers such
as Target.com and Wal-Mart.com; and
. e-commerce businesses of sporting goods manufacturers such as adidas.com
and Nike.com.
In addition, we compete with companies that can provide part of our
solutions to companies that wish to establish e-commerce sporting goods
businesses, including:
. Web site developers, such as Sapient, Scient and Viant; and
. third-party fulfillment and customer services providers, such as
Fingerhut, Keystone Internet Services and ClientLogic.
Finally, we compete with traditional channels of distribution for sporting
goods, including full-line sporting goods retailers, specialty sporting goods
retailers, general merchandise retailers, catalogs and manufacturers' direct
stores.
If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
We currently rely upon a third-party to handle the fulfillment of our
customer orders and the warehousing of our inventory. We also rely upon
multiple third parties to handle the shipment of our products. As a result, we
are subject to the risks associated with the ability of these third parties to
successfully and timely fulfill and ship customer orders and to successfully
handle our inventory delivery services to meet our shipping needs. The failure
of these third parties to provide these services, or the termination or
interruption of these services, could adversely affect our business, results
of operations and financial condition.
We currently plan to assume responsibility for the fulfillment of large and
oversized product orders during fiscal 2000 and may assume responsibility for
the fulfillment of other product orders in fiscal 2000. We could experience
problems during the transition of control from third-party to us. If
transition problems arise, it could result in additional expenses and could
divert management's attention from other aspects of our business. If we are
unable to successfully, timely and cost efficiently effect this transition and
perform these fulfillment services, our business, results of operations and
financial condition could be adversely affected.
Sporting goods and apparel are subject to changing consumer preferences. If
we fail to anticipate these changes, we could experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our ability to anticipate and respond to trends in
sporting goods merchandise and consumers' participation in sports. Consumers'
tastes in apparel and sporting goods equipment are subject to frequent and
significant changes, due in part to manufacturers' efforts to incorporate
advanced technologies into some types of sporting goods. In addition, the
level of consumer interest in a given sport can fluctuate
20
dramatically. Prior to commencing our e-commerce business, our businesses were
primarily concentrated in athletic footwear and apparel. Accordingly, we do
not have experience in the full range of sporting goods. If we fail to
identify and respond to changes in sporting goods merchandising and
recreational sports participation, our sales could suffer and we could be
required to mark down unsold inventory. This would depress our profit margins.
In addition, any failure to keep pace with changes in consumers' recreational
sports habits could allow our competitors to gain market share which could
have an adverse effect on our business, results of operations and financial
condition.
High merchandise returns could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is consistent with
the policies of each of our partners for which we operate e-commerce sporting
goods businesses. Our ability to handle a large volume of returns is unproven.
If merchandise returns are significant, our business, financial condition and
results of operations could be adversely affected.
We may be subject to product liability claims that could be costly and time
consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted. Similarly, we could be subject to claims
that users of our partners' Web sites were harmed due to their reliance on our
product information, product selection guides, advice or instructions. If a
successful claim were brought against us in excess of our insurance coverage,
it could adversely affect our business. Even unsuccessful claims could result
in the expenditure of funds and management time and could have a negative
impact on our business.
We may be liable if third parties misappropriate our customers' personal
information.
If third parties are able to penetrate our network security or otherwise
misappropriate our customers' personal information or credit card information,
we could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. They could also include claims for other misuses of
personal information, including unauthorized marketing purposes. These claims
could result in litigation. Liability for misappropriation of this information
could adversely affect our business. In addition, the Federal Trade Commission
and state agencies have been investigating various Internet companies
regarding their use of personal information. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if government agencies investigate our privacy practices.
We are controlled by certain principal stockholders.
As March 17, 2000, Michael G. Rubin, our Chairman and Chief Executive
Officer, beneficially owned 43.3% and funds affiliated with SOFTBANK America
Inc., referred to as SOFTBANK, beneficially owned 33.2% of our outstanding
common stock. Mr. Rubin and SOFTBANK are in a position to exercise control
over most matters requiring stockholder approval, including the election or
removal of directors, approval of significant corporate transactions, and the
ability generally to direct our affairs. Furthermore, the stock purchase
agreement pursuant to which SOFTBANK acquired its shares of our common stock
provides that SOFTBANK has the right to designate up to two members of our
board, depending on the number of shares of our common stock held by SOFTBANK.
This concentration of ownership and SOFTBANK's right to designate members to
our board may have the effect of delaying or preventing a change in control of
us, including transactions where stockholders might otherwise receive a
premium over current market prices for their shares.
There are risks associated with potential acquisitions. As a result, we may
not achieve the expected benefits of potential acquisitions.
21
If we are presented with appropriate opportunities, we may make investments
in complementary companies, products or technologies or we may purchase other
companies. We may not realize the anticipated benefits of any investment or
acquisition. We may not be able to successfully assimilate the additional
personnel, operations, acquired technology and products into our business. The
proposed acquisition may further strain our existing financial and managerial
controls and reporting systems and procedures. In addition, key personnel of
the acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees or
increase our expenses. Further, the physical expansion in facilities that
would occur as a result of any acquisition may result in disruptions that
seriously impair our business. Finally, we may have to incur debt or issue
equity securities to pay for any acquisitions or investments, the issuance of
which could be dilutive to our stockholders.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to consider pursuing international expansion. In the future, we may expand
into international markets. International sales are subject to inherent risks
and challenges that could adversely affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting goods manufacturers may require that
our international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
aspects on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into United States dollars may
contribute to fluctuations in our results of operations and fluctuating
exchange rates could cause reduced gross revenues and/or gross margins from
dollar-denominated international sales.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate
that any cash dividends will be declared or paid in the foreseeable future.
There are risks relating to our Year 2000 compliance.
Many existing computer software programs and operating systems were designed
such that the year 1999 is the maximum date that many computer systems will be
able to process. We addressed the potential problems posed by this limitation
in our systems software to assure that it was prepared for the Year 2000. We
did not incur any Year 2000 problem as a result of the passage of January 1,
2000. However, it is possible that problems may occur even after arrival of
the Year 2000. If we or third parties with which we conduct material business
experience problems caused by Year 2000 problems, there may be a material
adverse effect on our results of operations.
It may be difficult for a third-party to acquire our company and this could
depress our stock price.
22
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 1,000,000 shares of preferred stock, which the board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the rights,
preferences and designations set by the board, may delay, deter or prevent a
change in control of our company. Issuing additional shares of common stock
could result in dilution of the voting power of the current holders of our
common stock. In addition, "anti-takeover" provisions of Delaware law may
restrict the ability of the stockholders to approve a merger or business
combination or obtain control of our company.
There are limitations on the liabilities of our directors.
Pursuant to our amended and restated certificate of incorporation and under
Delaware law, our directors are not liable to us or our stockholders for
monetary damages for breach of fiduciary duty, except for liability for breach
of a director's duty of loyalty, acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
for dividend payments or stock repurchases that are unlawful under Delaware
law or any transaction in which a director has derived an improper personal
benefit.
Risks Related to the Internet Industry
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users and advertisers on the Internet may
not increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
. actual or perceived lack of security of information, including credit
card numbers;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of cost-
effective, high-speed service;
. possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an
increase in the number or requirements of users. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The amount of traffic on our partners' Web sites could be
materially affected if there are outages or delays in the future. The use of
the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If none of the foregoing changes
occur, or if the Internet does not become a viable commercial medium, our
business, results of operations and financial condition could be materially
adversely affected. In addition, even if those changes occur, we may be
required to spend significant capital to adapt our operations to any new or
emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the Web
sites which we operate obsolete.
The technology of the Internet and e-commerce is evolving rapidly for many
reasons, including:
. customers frequently changing their requirements and preferences;
23
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
These changes could render the Web sites which we operate obsolete. Our
ability to attract customers could be seriously impaired if we do not
accomplish the following tasks:
. continually enhance and improve our partners' Web sites;
. identify, select and obtain leading technologies useful in our business;
and
. respond to technological advances and emerging industry standards in a
cost-effective manner and timely manner.
Customers may be unwilling to use the Internet to purchase goods.
Our long-term future depends heavily upon the general public's willingness
to use the Internet as a means to purchase goods. The failure of the Internet
to develop into an effective commercial tool would seriously damage our future
operations. E-commerce is a new concept, and large numbers of customers may
not begin or continue to use the Internet to purchase goods. The demand for
and acceptance of products sold over the Internet are highly uncertain, and
most e-commerce businesses have a short track record. If consumers are
unwilling to use the Internet to conduct business, our business may not
develop profitably. The Internet may not succeed as a medium of commerce
because of delays in developing elements of the needed Internet
infrastructure, such as a reliable network, high-speed modems, high-speed
communication lines and other enabling technologies.
The security risks of e-commerce may discourage customers from purchasing
goods from us.
In order for the e-commerce market to develop successfully, we and other
market participants must be able to transmit confidential information securely
over public networks. Third parties may have the technology or know-how to
breach the security of customer transaction data. Any breach could cause
customers to lose confidence in the security of our partners' Web sites and
choose not to purchase from those Web sites. If someone is able to circumvent
our security measures, he or she could destroy or steal valuable information
or disrupt the operation of our partners' Web sites. Concerns about the
security and privacy of transactions over the Internet could inhibit the
growth of the Internet and e-commerce. Our security measures may not
effectively prohibit others from obtaining improper access to the information
on our partners' Web sites. Any security breach could expose us to risks of
loss, litigation and liability and could seriously disrupt our operations.
Our business is subject to United States and foreign governmental regulation
of the Internet and taxation.
Congress and various state and local governments have recently passed
legislation that regulates various aspects of the Internet, including online
content, copyright infringement, user privacy, sales and advertising of
certain products and services and taxation. In addition, federal, state, local
and foreign governmental organizations are also considering legislative and
regulatory proposals that would regulate the Internet. Areas of potential
regulation include libel, pricing, quality of products and services and
intellectual property ownership. A number of proposals have been made at the
state and local level that would impose taxes on the sale of goods and
services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and could adversely affect our
future business, results of operation and financial condition.
In addition, United States and foreign laws regulate our ability to use
customer information and to develop, buy and sell mailing lists. New
restrictions in this area could limit our ability to operate as planned and
result in significant compliance costs.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of our Internet business or its marketing efforts.
The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under 13. In addition, bills pending in Congress would extend online privacy
protections to adults. Laws and regulations of this kind may include
requirements that we establish
24
procedures to disclose and notify users of privacy and security policies,
obtain consent from users for collection and use of information and provide
users with the ability to access, correct and delete personal information
stored by us. These regulations may also include enforcement and remedial
provisions. Even in the absence of those regulations, the Federal Trade
Commission has begun investigations into the privacy practices of other
companies that collect information on the Internet. One investigation resulted
in a consent decree under which an Internet company agreed to establish
programs to implement the principles noted above. We could become a party to a
similar investigation or enforcement proceeding, or the Federal Trade
Commission's regulatory and enforcement efforts may harm our ability to
collect demographic and personal information from users, which could be costly
or adversely affect our marketing efforts.
ITEM 2: PROPERTIES
Our principal executive offices are located in a newly-renovated 56,000
square foot facility purchased by us on August 20, 1999 and located in King of
Prussia, Pennsylvania. In addition, we utilize a third-party warehousing
facility in Memphis, Tennessee in connection with the operation of our e-
commerce business.
We believe that our owned and third-party properties are adequate for our
present needs and that suitable additional or replacement space will be
available as required.
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 the Company's shareholders during the
fiscal quarter ended January 1, 2000.
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding each of our executive
officers and key employees:
Name Age(/1/) Title
---- -------- -----
Jordan M. Copland....... 37 Executive Vice President and Chief Financial Officer
Robert W. Liewald....... 51 Executive Vice President, Merchandising
Arthur H. Miller........ 46 Executive Vice President and General Counsel
Michael R. Conn......... 29 Senior Vice President, Business Development
Steven C. Davis......... 29 Senior Vice President, Marketing
Michael A. Balik........ 39 Vice President, Management and Information Systems
William L. Meisle....... 39 Vice President, Production
Donald R. Murphy........ 56 Vice President, Operations
Joseph P. Romello....... 49 Vice President, Engineering
- --------
(/1/) As of March 17, 2000
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.
25
Robert W. Liewald has served as our Executive Vice President, Merchandising
since July 1999 and worked as a consultant to us from December 1998 to July
1999. From January 1995 to June 1998, Mr. Liewald served as Senior Executive
Vice President of FILA USA, an athletic footwear and apparel manufacturer.
From June 1972 to January 1995, Mr. Liewald held a variety of positions at
Venator Group, an athletic footwear and apparel retailer based in New York,
New York, most recently as Senior Vice President, Corporate Merchandiser with
merchandising responsibility for all of Venator Group's specialty athletic
divisions. Also while at Venator, Mr. Liewald served as Vice President,
General Merchandise Manager for Champs Sports and Vice President, Merchandise
Manager at Foot Locker and Lady Foot Locker.
Arthur H. Miller has served as our Executive Vice President and General
Counsel since September 1999. From January 1988 to September 1999, Mr. Miller
was a partner in the Corporate department of Blank Rome Comisky & McCauley
LLP, a law firm based in Philadelphia, Pennsylvania. Mr. Miller joined Blank
Rome in April 1983.
Michael R. Conn has served as our Senior Vice President, Business
Development since February 1999. From June 1993 to February 1999, Mr. Conn
served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank
based in New York, New York. Mr. Conn worked as a sell-side securities analyst
specializing in footwear, apparel, retail and leisure products. While at
Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst
Team.
Steven C. Davis has served as our Senior Vice President Marketing since
January 2000. From June 1996 to January 2000, Mr. Davis held a number of
management positions at Just for Feet, Inc., a specialty sporting goods
retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice
President of Marketing and previously he served as Director of Marketing and
Director of Special Projects. In the summer of 1995, Mr. Davis served as a
marketing consultant for Dell Computer Corporation. From January 1990 until
September 1994, Mr. Davis was Manager of Park Operations for Anheuser Busch
Theme Parks, Inc.
Michael A. Balik has served as our Vice President, Management Information
Systems since May 1999. From December 1996 to May 1999, Mr. Balik served as
Director of Management Information Systems for Cherrydale Farms, a
manufacturer of confectionery products based in Allentown, Pennsylvania. From
March 1993 to October 1996 Mr. Balik was Director of Information Systems for I
Got It at Gary's, a super-discount drugstore chain based in Eagleville,
Pennsylvania.
William L. Meisle has served as our Vice President, Production since January
2000. From January 1993 to December 1999, Mr. Meisle held a number of
positions of increasing responsibility at Medical Broadcasting Company, a
strategic interactive marketing and communications services company based in
Philadelphia, Pennsylvania. From December 1997 to December 1999, Mr. Meisle
served as Senior Strategic Analyst and Creative Director. Also while at
Medical Broadcasting Company, he served as Director, Interactive Services,
Project Director and Production Manager.
Donald R. Murphy has served as our Vice President, Operations, since April
1999. From October 1997 to April 1999, Mr. Murphy was Vice President/General
Manager for the Home Shopping Network based in Roanoke, Virginia. From October
1995 to October 1997, he was Vice President of Operations at an institutional
food distribution center owned by PYA/Monarch Food Service in Raleigh, North
Carolina. From September 1989 to October 1995 Mr. Murphy served as a Warehouse
Supervisor for Kraft Food Service in Salem, Missouri.
Joseph P. Romello has served as our Vice President, Engineering since May
1999. From May 1997 to May 1999, Mr. Romello served as an independent
engineering consultant to Donaldson, Lufkin and Jenrette, an investment
banking firm based in New York, New York. From June 1996 to May 1997, Mr.
Romello served an independent engineering consultant to a number of consumer
companies, including Netscape, Gap, Inc. and Levi Strauss. From May 1995 to
June 1996, Mr. Romello served as Director of Business Development for
Persistence, an object relational middle-ware software vendor based in San
Mateo, California.
26
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price of and Dividends on Common Stock
From September 18, 1995 through June 15, 1998, the Company's common stock
was traded on the NASD Over-the-Counter Bulletin Board. Effective June 16,
1998, the Company was approved for inclusion on the Nasdaq SmallCap Market,
and effective May 3, 1999 on the Nasdaq National Market where it is currently
included for quotation. As of March 17, 2000, the Company had approximately
1971 shareholders of record.
The following table sets forth the high and low bid prices per share of the
Company's common stock as reported on the Nasdaq Over-the-Counter Bulletin
Board for the periods presented prior to and including June 15, 1998. For the
periods presented from June 16, 1998 to April 30, 1999, the following table
sets forth the high and low sales prices per share of the Company's common
stock as reported on the Nasdaq SmallCap Market. For the periods presented
from and after May 3, 1999, the table below sets forth the high and low sales
prices as reported on the Nasdaq National Market. The prices shown do not
include retail markups, markdowns or commissions.
Prices
--------------
High Low
------- ------
Year Ended December 31, 1998
First Quarter................................................. $ 5.69 $ 2.56
Second Quarter (April 1-June 15).............................. $ 7.75 $ 5.19
Second Quarter (June 16-June 30).............................. $ 7.25 $ 5.63
Third Quarter................................................. $ 8.00 $ 4.63
Fourth Quarter................................................ $ 8.06 $ 4.25
Year Ended January 1, 2000
First Quarter................................................. $17.375 $ 7.00
Second Quarter................................................ $36.875 $12.00
Third Quarter................................................. $25.125 $14.50
Fourth Quarter................................................ $ 25.25 $12.00
The Company has never declared or paid a cash dividend on its common stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate declaring or paying any cash dividends on
its common stock for the foreseeable future.
Recent Sales of Unregistered Securities
On July 23, 1999, SOFTBANK America Inc., through certain of its affiliates
(collectively, "SOFTBANK"), acquired an aggregate of 6,153,850 shares of the
Company's common stock at a price of $13.00 per share (the closing price on
May 26, 1999, the day prior to the day the Company and SOFTBANK agreed in
principle to the transaction) for an aggregate purchase price of approximately
$80.0 million.
This transaction was not a public offering, nor were any underwriters or
underwriting discounts or commissions involved. Based upon information
available to the Company as of the date of the above transaction, including
certain representations and warranties of SOFTBANK, the Company believes that
the transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended, by reason of Section 4(2) thereof.
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
27
notes to our financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected statements of
operations data for the years ended December 31, 1997 and 1998 and January 1,
2000 and the balance sheet data as of December 31, 1998 and January 1, 2000
are derived from our consolidated financial statements that have been audited
by Deloitte & Touche LLP, independent auditors, included elsewhere in this
Annual Report on Form 10-K. The selected statement of operations data for the
years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our audited consolidated
statements that are not included in this 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
Year Ended December 31, Ended
---------------------------------- January 1,
1995 1996 1997 1998 2000
------- ------- ------- ------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ -- $ -- $ -- $ -- $ 5,511
Cost of revenues............... -- -- -- -- 3,817
------- ------- ------- ------- --------
Gross profit.................. -- -- -- -- 1,694
Operating expenses:
Sales and marketing........... -- -- -- -- 11,609
Product development........... -- -- -- -- 7,264
General and administrative.... 5,644 2,853 2,389 3,453 9,311
Stock-based compensation,
primarily related to sales
and marketing................ -- -- -- -- 2,655
------- ------- ------- ------- --------
Total operating expenses.... 5,644 2,853 2,389 3,453 30,839
------- ------- ------- ------- --------
Other (income) expenses:
Interest expense.............. 796 1,152 2,013 2,367 313
Interest income............... -- -- -- -- (774)
Other, net.................... -- -- -- -- (2)
------- ------- ------- ------- --------
Total other (income)
expense.................... 796 1,152 2,013 2,367 (463)
------- ------- ------- ------- --------
Loss from continuing operations
before income taxes........... (6,440) (4,005) (4,402) (5,820) (28,682)
Benefit from income taxes...... -- -- -- 1,979 2,222
------- ------- ------- ------- --------
Loss from continuing
operations.................... (6,440) (4,005) (4,402) (3,841) (26,460)
Discontinued operations:
Income from discontinued
operations................... 6,465 3,261 247 9,665 550
Loss on disposition of
discontinued operations...... -- -- -- -- (17,337)
------- ------- ------- ------- --------
Net income (loss).............. $ 25 $ (744) $(4,155) $ 5,824 $(43,247)
------- ------- ------- ------- --------
Earnings (losses) per share--
basic and diluted(/1/):
Loss from continuing
operations................... $ (3.75) $ (1.56) $ (1.47) $ (.34) $ (1.78)
Income from discontinued
operations................... 3.76 1.27 .08 .85 .04
Loss on disposition of
discontinued operations...... -- -- -- -- (1.17)
------- ------- ------- ------- --------
Net income (loss)........... $ .01 $ (.29) $ (1.39) $ .51 $ (2.91)
======= ======= ======= ======= ========
Weighted average common shares
outstanding(/1/):
Basic and diluted............. 1,717 2,568 2,996 11,379 14,874
======= ======= ======= ======= ========
Number of common shares
outstanding(/1/).............. 2,307 2,832 10,418 11,925 18,475
======= ======= ======= ======= ========
BALANCE SHEET DATA:
Net assets of discontinued
operations.................... $12,673 $11,797 $24,129 $41,128 $ 18,381
Total assets................... 15,030 16,435 28,043 45,053 82,736
Total long-term debt........... 5,001 5,905 20,975 20,993 2,040
Working capital................ 2,839 2,022 19,748 34,846 40,558
Stockholders' equity
(deficiency).................. 93 (552) 2,157 17,094 59,310
- --------
(/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.
28
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and the notes to those statements appearing elsewhere in this
Annual Report on Form 10-K. This discussion and analysis contains forward-
looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward-looking
statements as a result of factors including those discussed in "Risk Factors"
and elsewhere in this Annual Report on Form 10-K.
Overview
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandisers, Internet companies and media
companies under exclusive long-term agreements. We enable our partners to
capitalize on their existing brand assets to exploit online opportunities in
the $45.8 billion sporting goods retail industry. We customize the design of a
partner's Web site with a broad range of characteristics that includes a
differentiated user interface, partner-specific content pages, an extensive
electronic catalog of product descriptions and images, a searchable database
and interactive communication tools. We launched our initial six e-commerce
sporting goods businesses in November 1999: www.dunhamssports.com,
www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com,
www.thesportsauthority.com and store.webmd.com. We have announced agreements
with BlueLight.com and Oshman's Sporting Goods to launch their e-commerce
sporting goods businesses in the second quarter of 2000.
Company Background
Prior to our decision to initiate our e-commerce sporting goods business, we
operated two primary businesses, our Branded Division and our Off-Price and
Action Sports Division. From inception in 1986 through December 1999, we
designed, marketed and distributed high performance athletic footwear
exclusively for women under the RYKA brand name. From December 1997 through
December 1999, as part of our Branded Division, we also designed, marketed and
distributed outdoor footwear under the Yukon brand name. During the same
period, as part of our Off-Price and Action Sports Division, we purchased
closeouts, overstocks, canceled orders and excess inventories of athletic,
outdoor, casual and specialty footwear, athletic apparel and athletic
equipment from manufacturers and retailers for resale, and designed and
distributed special make-up athletic equipment.
In April 1999, we formalized our plan to divest these divisions in order to
focus exclusively on the development of our e-commerce business. Accordingly,
for financial statement purposes, the assets, liabilities, results of
operations and cash flows of these divisions have been segregated from that of
continuing operations and are presented as discontinued operations. Our
consolidated financial statements included in this Annual Report on Form 10-K
have been reclassified to reflect this presentation.
On June 10, 1999, in order to finance our e-commerce business, we agreed to
sell to funds affiliated with SOFTBANK 6,153,850 shares of common stock at a
price of $13.00 per share for an aggregate purchase price of approximately
$80.0 million. The purchase price reflected the closing price of our common
stock on May 26, 1999, the day prior to the day we and SOFTBANK agreed in
principle to the transaction. The sale of these shares was completed on July
23, 1999.
On September 24, 1999, in furtherance of our plan to sell our historical
businesses, we entered into an agreement, as amended on March 13, 2000, to
sell our Off-Price and Action Sports Division for a cash payment at closing of
$13.2 million and the assumption by the purchaser of $4.0 million in
indebtedness. We are seeking stockholder approval of this sale at our annual
stockholders meeting to be held on May 15, 2000. Michael G. Rubin, our
Chairman and Chief Executive Officer, who beneficially owns approximately
43.3% of our outstanding shares, and SOFTBANK, who beneficially owns
approximately 33.2% of our outstanding shares, have indicated that they intend
to vote for approval of the sale. We expect the sale to close soon after our
annual stockholders meeting. For fiscal 1999, we have recognized a loss of
approximately $5.2 million related to the disposition of this division.
29
On December 29, 1999, we sold substantially all of the assets of our Branded
Division, other than accounts receivable of approximately $6.6 million, for a
cash payment of approximately $10.4 million. For fiscal 1999, we have
recognized a loss of approximately $12.1 million related to the disposition of
this division.
Financial Presentation
We did not launch our partners' e-commerce businesses until the fourth
quarter of 1999. As a result, our historical financial statements are of
limited use in making an investment decision because they principally reflect
our discontinued operations. Our financial statements for the fourth quarter
of 1999 and forward will reflect our e-commerce business. These financial
statements will present:
. revenues, which are derived from the sale of merchandise, net of
returns, and are recognized when the merchandise is shipped;
. cost of revenues, which consists of the purchase price of the products
sold and net freight costs, other than outbound shipping costs related
to our temporary free shipping promotions which are included in sales
and marketing expenses;
. sales and marketing expenses, which consist primarily of partner revenue
shares, advertising and promotional expenses, including temporary free-
shipping, distribution facility expenses, order processing fees, and
payroll and related expenses for personnel engaged in marketing, buying,
merchandising, client services, fulfillment and customer service;
. product development expenses, which consist primarily of expenses
associated with building, developing and operating our partners' Web
sites; payroll and related expenses for engineering, production,
creative and management information systems; and depreciation expense
related to capitalized hardware and software;
. general and administrative expenses, which consist primarily of payroll
and related expenses for administrative, finance, human resources, legal
and executive personnel, and costs associated with the operation and
maintenance of our headquarters facility and professional services; and
. stock-based compensation expense, which relates to the grant of options,
warrants and stock awards considered to be compensatory, because the
estimated fair value for accounting purposes of the options and stock
awards granted to employees was greater than the stock price on the date
of grant or because the options or warrants were granted to non-
employees.
Results of Operations
Fiscal 1999 and Fiscal 1998
Net Revenues. We had net revenues from continuing operations of $5.5 million
for fiscal 1999 and no net revenues from continuing operations for fiscal
1998. In fiscal 1999, we operated www.theathletesfoot.com,
www.dunhamssports.com, www.mcsports.com, www.sportchalet.com,
www.thesportsauthority.com, and store.webmd.com. We derived $2.7 million of
our net revenues from the sale of product through our partners' Web sites. We
derived $2.8 million of our total net revenues from Healtheon/WebMD through
the sale of product to support the launch of the WebMD Sports & Fitness Store,
store.webmd.com. Other sources of revenue during the year, including sales of
gift certificates to our partners' retail stores, the sale of advertising
space on our partner's Web site, auction.thesportsauthority.com and outbound
shipping charges to consumers, were not significant during the period. We
derived no net revenues from continuing operations for any period prior to
November 1999 as we did not operate any Web sites during those periods.
Cost of Revenues. We incurred cost of revenues from continuing operations of
$3.8 million for fiscal 1999 and no cost of revenues from continuing
operations for fiscal 1998. As a percentage of net revenues, cost of revenues
was 69.3% for fiscal 1999.
30
Gross Profit. We had gross profit from continuing operations of $1.7 million
for fiscal 1999 and no gross profit from continuing operations for fiscal
1998. As a percentage of net revenues, gross profit from continuing operations
was 30.7% for fiscal 1999.
Sales and Marketing Expenses. We incurred sales and marketing expenses from
continuing operations of $11.6 million for fiscal 1999 and no sales and
marketing expenses from continuing operations for fiscal 1998.
Product Development Expenses. We incurred product development expenses from
continuing operations of $7.3 million for fiscal 1999 and no product
development expenses from continuing operations for fiscal 1998. A meaningful
portion of our product development expenses in fiscal 1999 was paid to a
third-party Web site development company. Because we are currently handling
more development internally, we do not anticipate that a significant portion
of our product development expenses in fiscal 2000 will be for third-party Web
site development services.
General and Administrative Expenses. We incurred general and administrative
expenses from continuing operations of $9.3 million for fiscal 1999 and $3.5
million for fiscal 1998. While our continuing operations were not in existence
in fiscal 1998, the recorded expenses reflect costs for personnel, facilities
and professional fees that are currently associated with our continuing
operations.
Stock-Based Compensation, Primarily Related to Sales and Marketing,
Expense. We recorded stock-based compensation expense from continuing
operations of $2.7 million for fiscal 1999. This expense related to the
amortization of deferred compensation expense for options granted to employees
and some non-employees and to the value of the options or warrants granted to
some other non-employees. Of the $2.7 million of stock-based compensation
expense, $1.9 million related to warrants granted to our partners, $555,000
related to options or warrants granted to non-employees and $217,000 related
to options granted to employees. As of January 1, 2000, we had an aggregate of
$1.6 million of deferred compensation remaining to be amortized.
Interest. Interest income consists of interest earned on cash and cash
equivalents. Interest expense relates primarily to bank borrowings. In fiscal
1999, we had interest income of $463,000, net of interest expense. In fiscal
1998, we had $2.4 million of interest expense, net of interest income.
Fiscal 1998 and Fiscal 1997
Because our continuing operations were not in existence in fiscal 1998 or
fiscal 1997, we had no net revenues, cost of sales or operating expenses
related to our continuing operations, other than general and administrative
expenses of $3.5 million in fiscal 1998 and $2.4 million in fiscal 1997. These
general and administrative expenses reflect the costs of personnel, facilities
and professional fees that are currently associated with our continuing
operations. Accordingly, comparisons of results from continuing operations for
fiscal 1998 and fiscal 1997 are not meaningful.
Liquidity and Capital Resources
Historically, we financed our operations through a combination of internally
generated funds, equity financings, subordinated borrowings and bank credit
facilities. We used our bank credit facilities to fund our investment in
accounts receivable and inventory necessary to support our historical
businesses.
In connection with our decision to focus exclusively on our e-commerce
business, we raised approximately $80.0 million in gross proceeds through our
equity financing with SOFTBANK in July 1999. We used part of the proceeds from
this financing to repay the balance on our then outstanding lines of credit,
reduce trade payables and provide operating capital related to our historical
businesses. We also used part of the proceeds to acquire property and
equipment and fund working capital for our e-commerce business. As of January
1, 2000, we had cash and cash equivalents of approximately $27.3 million, and
working capital of approximately $40.6 million, which included approximately
$18.4 million of net assets of discontinued operations.
31
We have incurred substantial costs to develop our e-commerce business and to
recruit, train and compensate personnel for our creative, engineering,
marketing, advertising, merchandising, customer service and administration
departments. As a result, we have incurred substantial losses for fiscal 1999
and, as of January 1, 2000, had an accumulated deficit of $43.1 million. In
order to expand our e-commerce business, we intend to invest heavily in
operations, Web site development, marketing, merchandising and additional
personnel. We therefore expect to continue to incur substantial operating
losses for the foreseeable future.
We used approximately $22.2 million in net cash for operating activities of
continuing operations in fiscal 1999, while we generated approximately $1.1
million in net cash from operating activities of continuing operations in
fiscal 1998. Net cash used in operating activities of continuing operations in
fiscal 1999 was primarily the result of net losses from continuing operations
and changes in inventory and accounts receivable, partially offset by changes
in accounts payable and accrued expenses and stock-based compensation expense.
Net cash generated from operating activities of continuing operations in
fiscal 1998 was primarily the result of net losses from continuing operations
and changes in accounts payable and accrued expenses.
Our investing activities in fiscal 1999 consisted of purchases of property
and equipment. We made capital expenditures of approximately $18.4 million in
fiscal 1999, which were partially offset by $10.4 million in proceeds of the
sale of our Branded Division.
As of January 1, 2000, we had commitments of $6.4 million relating to the
implementation of advertising and promotion programs.
In the second quarter of fiscal 2000, we expect to receive a cash payment of
$13.2 million relating to the sale of our Off-Price and Action Sports
Division.
Management expects that our current cash position combined with the proceeds
from the sale of our Off-Price and Action Sports Division, will be sufficient
to meet our anticipated cash needs for at least the next 12 months. However,
we may need to raise additional funds in future periods through public or
private financings or other arrangements to fund our operations until we
achieve profitability. Failure to raise capital when needed could seriously
harm our business and operating results. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders would be reduced. Furthermore, these equity securities might have
rights, preferences or privileges senior to our common stock.
Seasonality
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that the fourth fiscal quarter will account for a
large percentage of our total annual sales. We believe that results of
operations for a quarterly period may not be indicative of the results for any
other quarter or for the full year.
Inflation
Management believes that inflation has not had a material effect on our
operations.
Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products need to accept four digit entries to distinguish
21st century dates from 20th century dates. This could result in system
failures or miscalculations causing disruption of operations for any company
using computer programs or hardware.
With respect to our Branded Division and its Off-Price and Action Sports
Division, we maintained a management information system that provided, among
other things, comprehensive customer order processing, inventory, production,
accounting and management information for the marketing, selling,
manufacturing and
32
distribution functions of our business. Subsequent to the sale of the Branded
Division on December 29, 1999, we use these systems only for the Off-Price and
Action Sports Division and in connection with the collection of the accounts
receivable of the Branded Division which it retained.
We completed, as of April 1, 1999, a Year 2000 project which evaluated,
identified, corrected, reprogrammed, and tested our existing systems for Year
2000 compliance. We enhanced our key information systems to improve our
functionality and increase performance during the first quarter of 1999,
making these applications Year 2000 compliant. The costs of these upgrades of
approximately $150,000 were charged to operations as incurred. Upon
consummation of the sale of the Off-Price and Action Sports Division and
collection of the accounts receivable of the Branded Division, we will not
have any need for these systems.
Our e-commerce business is a new enterprise and accordingly, we have
purchased or developed most of the software and hardware we use in our e-
commerce business during fiscal 1999. While this does not uniformly protect us
against Year 2000 exposure, we believe our exposure is limited because the
systems we use are not based upon legacy hardware or software systems.
We updated our office networking system software to be Year 2000 compliant
during the third quarter of fiscal 1999. The costs of the process did not have
a material impact on our results of operations, financial position, liquidity
or capital resources.
In addition to making our own systems Year 2000 compliant, we contacted the
customers and key suppliers of our Branded Division and Off-Price and Action
Sports Division to determine the extent to which the systems of these
customers and suppliers are Year 2000 compliant and the extent to which we
could be affected by the failure of these third parties to become Year 2000
compliant. We cannot presently estimate the impact of the failure of these
third parties to become Year 2000 compliant, however, subsequent to January 1,
2000, we have not encountered any problems related to Year 2000 issues. There
can be no assurance, however, that future Year 2000 issues, if any, will not
arise.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We invest our excess cash in debt
instruments of the United States Government and its agencies and in high-
quality corporate issuers. We limit the amount of credit exposure to any one
issuer. We protect and preserve our invested funds by limiting default, market
and reinvestment risk.
Investments in both fixed rate and floating rate interest earning-
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest rates or we
may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, 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.
33
PART III
This Part incorporates certain information from the Company's definitive
proxy statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy
Statement") filed with the Securities and Exchange Commission not later than
120 days after the end of the Company's fiscal year covered by this Annual
Report on Form 10-K. Notwithstanding such incorporation, the sections of the
Company's 2000 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 the directors of the Company is incorporated by
reference to the Company's 2000 Proxy Statement including but necessarily
limited to the sections of the 2000 Proxy Statement entitled "Proposal 1--
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
Information concerning executive officers of the Company 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 the Company's 2000 Proxy
Statement including but necessarily limited to the section of the 2000 Proxy
Statement entitled "Executive Compensation."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's 2000 Proxy
Statement including but necessarily limited to the section of the 2000 Proxy
Statement entitled "Principal Shareholders."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's 2000 Proxy
Statement including but necessarily limited to the section of the 2000 Proxy
Statement entitled "Certain Relationships and Related Transactions."
34
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 31, 1998 and January 1,
2000 F-2
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 1997, December 31, 1998 and January 1, 2000 F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Fiscal Years Ended December 31, 1997, December 31, 1998 and January
1, 2000 F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 1997, December 31, 1998 and January 1, 2000 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.
3. EXHIBITS
2.1(/1/) Securities Purchase Agreement dated June 21, 1995 by and between
the Company and MR Acquisitions, Inc.
2.2(/2/) First Amendment to Securities Purchase Agreement by and between
the Company and MR Acquisitions, Inc. dated July 31, 1995.
2.3(/3/) Second Amended and Restated Agreement and Plan of Reorganization,
as amended, among RYKA Inc., a Delaware corporation, KPR Sports
International, Inc., a Pennsylvania corporation, Apex Sports
International, Inc., a Pennsylvania corporation, MR Management,
Inc., a Pennsylvania corporation, and Michael G. Rubin.
2.4(/4/) Stock Purchase Agreement dated as of May 12, 1998 by and among
Global Sports, Inc., DMJ Financial Inc., James J. Salter, Kenneth
J. Finkelstein and certain other individuals and entities.
2.5(/5/) Asset Purchase Agreement, dated December 29, 1999, among American
Sporting Goods Corporation and RYKA Inc., KPR Sports
International, Inc., G.S.I., Inc., Apex Sports International,
Inc. and Global Sports, Inc.
2.6(/6/) Acquisition Agreement, dated September 24, 1999, as amended, among
the Company, Gen-X Acquisition (U.S.), Inc., Gen-X Acquisition
(Canada) Inc., DMJ Financial, Inc., James J. Salter and Kenneth
J. Finkelstein
3.1(/3/) Amended and Restated Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware on
December 15, 1997.
3.2(/7/) The Company's Bylaws, as amended.
4.1(/7/) Specimen of Common Stock Certificate.
10.1(/8/)* 1987 Stock Option Plan.
10.2(/9/)* 1988 Stock Option Plan.
10.3(/10/)* 1990 Stock Option Plan.
10.4(/11/)* 1992 Stock Option Plan.
10.5(/12/)* 1993 Stock Option Plan.
10.6(/2/)* 1995 Stock Option Plan.
10.7(/13/)* 1995 Non-Employee Directors' Stock Option Plan.
10.8* 1996 Equity Incentive Plan (amended and restated as of November
16, 1999).
35
10.9(/14/)* Deferred Profit Sharing Plan and Trust.
10.10(/15/)* 2000 Employee Stock Purchase Plan
10.11(/2/)* Employment Agreement dated July 31, 1995 by and between the
Company and Steven A. Wolf.
10.12(/16/)* Employment Agreement dated September 25, 1996 by and between the
Company and Michael G. Rubin.
10.13(/16/)* First Amendment to the Employment Agreement dated September 25,
1996 by and between the Company and Michael G. Rubin.
10.14(/17/)* Employment Agreement dated May 12, 1998 by and between the
Company and James J. Salter.
10.15(/17/)* Employment Agreement dated January 1, 1999 by and between the
Company and Arthur I. Carver.
10.16(/17/) Employment Agreement dated February 24, 1999 by and between the
Company and Michael R. Conn.
10.17(/18/)* Employment Agreement dated March 28, 1999 by and between the
Company and Michael Golden.
10.18(/19/)* Employment Agreement dated August 9, 1999 by and between the
Company and Arthur H. Miller.
10.19* Employment Agreement dated January 10, 2000 by and between the
Company and Steven Davis.
10.20* Employment Agreement dated February 9, 2000 by and between the
Company and Jordan M. Copland.
10.21(/2/) Registration Rights Agreement by and between the Company and MR
Acquisitions, Inc.
10.22(/19/) Omnibus Services Agreement dated April 1, 1999 by and between the
Company and Organic, Inc.
10.23(/19/) Amendment No. 1 to the Omnibus Services Agreement dated April 1,
1999 by and between the Company and Organic, Inc.
10.24(/19/) Independent Contractor Services Agreement dated June 29, 1999 by
and between the Company and Foundry, Inc.
10.25(/19/) Addendum No. 1 to the Independent Contractor Services Agreement
dated June 29, 1999 by and between the Company and Foundry, Inc.
10.26(/19/) Agreement of Sale dated July 27, 1999 by and between the Company
and IL First Avenue Associates L.P. for acquisition of property
at 1075 First Avenue, King of Prussia, PA.
10.27(/19/) Advertising and Promotion Agreement dated October 3, 1999 by and
between the Company and Yahoo! Inc. ("Yahoo").
10.28+ Amendment No. 1 to Advertising and Promotion Agreement dated
February 15, 2000 by and between the Company and Yahoo.
10.29(/19/) Transaction Management Services Agreement dated June 10, 1999 by
and between the Company and Priority Fulfillment Services, Inc.
10.30(/19/) E-Commerce Agreement dated February 1, 1999 by and between Global
Sports Interactive, Inc. ("GSI") and Michigan Sporting Goods
Distributors, Inc. ("MC Sports")
10.31 First Amendment to E-Commerce Agreement dated June 17, 1999 by
and between GSI and MC Sports.
10.32(/20/) E-Commerce Management Agreement dated March 10, 1999 by and
between GSI and The Athlete's Foot Stores, Inc.
10.33(/20/) E-Commerce Agreement dated March 23, 1999 by and between GSI and
Dunham's Athleisure Corporation ("Dunham's").
10.34 Amendment to E-Commerce Agreement dated May 25, 1999 by and
between GSI and Dunham's.
10.35 Amendment to E-Commerce Agreement dated December 5, 1999 by and
between GSI and Dunham's.
10.36(/20/) E-Commerce Management Agreement dated March 31, 1999 by and
between GSI and Sport Chalet, Inc.
10.37(/20/) E-Commerce Venture Agreement dated May 7, 1999 by and between GSI
and The Sports Authority, Inc. ("TSA").
10.38(/20/) Amendment No. 1 to the E-Commerce Venture Agreement dated May 14,
1999 by and between GSI and TSA.
10.39(/20/) License Agreement dated May 14, 1999 by and among TSA, The Sports
Authority Michigan, Inc. and TheSportsAuthority.com, Inc.
("TSA.com").
10.40(/20/) E-Commerce Services Agreement dated May 14, 1999 by and between
GSI and TSA.com.
36
10.41(/20/) E-Commerce Agreement dated May 14, 1999 by and among TSA and
TSA.com.
10.42(/20/) Agreement dated May 14, 1999, by and between TSA and the Company.
10.43+ E-Commerce Management Agreement dated December 30, 1999 by and
between GSI and Oshman's Sporting Goods, Inc.-Services.
10.44+ Strategic Alliance Agreement dated February 28, 2000 by and among
GSI and Bluelight.Com LLC.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (electronic filing only).
- --------
*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.
(/1/) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 21, 1995.
(/2/) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 31, 1995.
(/3/) Incorporated by reference to the Company's Definitive Proxy Materials
filed November 12, 1997.
(/4/) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 27, 1998.
(/5/) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 13, 2000.
(/6/) Incorporated by reference to the Company's Quarterly Report on Form 10-
Q/A for the nine-month period ended September 30, 1999, filed March 21,
2000.
(/7/) Incorporated by reference to the Company's Registration Statement No. 33-
33754.
(/8/) Incorporated by reference to the Company's Registration Statement No. 33-
19754-B.
(/9/) Incorporated by reference to the Company's Registration Statement No. 33-
27501.
(/10/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine-month period ended September 30, 1990.
(/11/) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(/12/) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on January 3, 1994.
(/13/) Incorporated by reference to the Company's Proxy Statement filed on
October 13, 1995 in connection with the 1995 Special Meeting in lieu of
Annual Meeting held on November 15, 1995.
(/14/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three-month period ended March 31, 1998.
(/15/) Incorporated by reference to the Company's Preliminary Proxy Statement
filed on March 22, 2000 in connection with the 2000 Annual Meeting.
(/16/) Incorporated)by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(/17/) Incorporated)by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(/18/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three-month period ended March 31, 1999.
(/19/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine-month period ended September 30, 1999.
(/20/) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 28, 1999.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
January 1, 2000.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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: March 30, 2000 GLOBAL SPORTS, INC.
/s/ Michael G. Rubin
By: _________________________________
Michael G. Rubin,
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
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 Title Date
--------- ----- ----
/s/ Michael G. Rubin Chairman and Chief March 30, 2000
______________________________________ Executive Officer
Michael G. Rubin (principal executive
officer)
/s/ Jordan M. Copland Executive Vice President March 30, 2000
______________________________________ and Chief Financial
Jordan M. Copland Officer (principal
financial officer and
principal accounting
officer)
/s/ Kenneth J. Adelberg Director March 30, 2000
______________________________________
Kenneth J. Adelberg
/s/ Harvey Lamm Director March 30, 2000
______________________________________
Harvey Lamm
/s/ Charles R. Lax Director March 30, 2000
______________________________________
Charles R. Lax
/s/ Jeffrey F. Rayport Director March 30, 2000
______________________________________
Dr. Jeffrey F. Rayport
/s/ Ronald D. Fisher Director March 30, 2000
______________________________________
Ronald D. Fisher
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
---------
Independent Auditors' Report--Deloitte & Touche LLP................. F-1
Consolidated Balance Sheets as of December 31, 1998 and January 1,
2000............................................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 1997, December 31, 1998 and January 1, 2000........... F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Fiscal Years Ended December 31, 1997, December 31, 1998 and January
1, 2000............................................................ F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 1997, December 31, 1998 and January 1, 2000........... F-5
Notes to Consolidated Financial Statements.......................... F-6--F-27
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Global Sports, Inc.
We have audited the accompanying consolidated balance sheets of Global
Sports, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
January 1, 2000 and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for each of the three years
in the period ended January 1, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
January 1, 2000 and the results of their operations and their cash flows for
each of the three years in the period ended January 1, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 22, 2000
F-1
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, January 1,
1998 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 83,169 $ 27,345,263
Accounts receivable, net.......................... -- 2,738,201
Inventory......................................... -- 10,697,438
Prepaid expenses and other current assets......... 599,224 1,444,634
Refundable income taxes........................... -- 1,337,584
Net assets of discontinued operations............. 41,127,839 18,380,806
----------- ------------
Total current assets............................ 41,810,232 61,943,926
Property and equipment, net of accumulated deprecia-
tion and amortization.............................. 2,988,714 20,681,724
Other assets, net................................... 253,626 109,887
----------- ------------
Total assets.................................... $45,052,572 $ 82,735,537
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,595,996 $ 15,761,340
Accrued advertising, promotion and other ex-
penses........................................... 56,028 5,483,300
Income taxes payable.............................. 1,378,820 --
Current portion--capital lease obligation, related
party............................................ 127,966 141,016
Subordinated notes payable, related party......... 1,805,841 --
----------- ------------
Total current liabilities....................... 6,964,651 21,385,656
Notes payable, bank................................. 18,812,156 --
Capital lease obligation, related party............. 2,181,265 2,040,249
Mandatorily redeemable preferred stock.............. 100 80
Commitments and contingencies.......................
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized in 1998 and 1999; 10,000 and 8,000
shares issued as mandatorily redeemable preferred
stock in 1998 and 1999, respectively............. -- --
Common stock, $0.01 par value, 20,000,000 and
60,000,000 shares authorized in 1998 and 1999;
12,994,464 and 19,544,249 shares issued in 1998
and 1999, respectively; 11,925,378 and 18,475,163
shares outstanding in 1998 and 1999,
respectively..................................... 129,947 195,442
Additional paid in capital........................ 17,111,166 102,460,622
Accumulated other comprehensive loss.............. (47,431) --
Retained earnings (accumulated deficit)........... 114,535 (43,132,695)
----------- ------------
17,308,217 59,523,369
Less: Treasury stock, at cost..................... 213,817 213,817
----------- ------------
Total stockholders' equity...................... 17,094,400 59,309,552
----------- ------------
Total liabilities and stockholders' equity...... $45,052,572 $ 82,735,537
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------
Fiscal Year Ended
1997 1998 January 1, 2000
----------- ----------- -----------------
Net revenues....................... $ -- $ -- $ 5,510,576
Cost of revenues................... -- -- 3,816,767
----------- ----------- ------------
Gross profit..................... -- -- 1,693,809
Operating expenses:
Sales and marketing.............. -- -- 11,608,556
Product development.............. -- -- 7,264,425
General and administrative....... 2,389,223 3,452,914 9,310,744
Stock-based compensation,
primarily related to sales and
marketing....................... -- -- 2,654,834
----------- ----------- ------------
Total operating expenses....... 2,389,223 3,452,914 30,838,559
----------- ----------- ------------
Other (income) expenses:
Interest expense................. 2,013,028 2,366,935 312,655
Interest income.................. -- -- (774,139)
Other, net....................... -- -- (1,999)
----------- ----------- ------------
Total other (income) expenses.. 2,013,028 2,366,935 (463,483)
----------- ----------- ------------
Loss from continuing operations
before income taxes............... (4,402,251) (5,819,849) (28,681,267)
Benefit from income taxes.......... -- 1,978,749 2,220,878
----------- ----------- ------------
Loss from continuing operations.... (4,402,251) (3,841,100) (26,460,389)
Discontinued operations:
Income from discontinued
operations (net of income tax
provisions (benefits) of $--,
$3,879,567, and $(582,804) in
1997, 1998 and 1999,
respectively)................... 246,956 9,664,956 549,838
Loss on disposition of
discontinued operations (net of
income tax provision of
$2,159,916)..................... -- -- (17,336,679)
----------- ----------- ------------
Net income (loss).................. $(4,155,295) $ 5,823,856 $(43,247,230)
=========== =========== ============
Earnings (losses) per share:
Basic and diluted--
Loss from continuing opera-
tions......................... $ (1.47) $ (.34) $ (1.78)
Income from discontinued opera-
tions......................... .08 .85 .04
Loss on disposition of discon-
tinued operations............. -- -- (1.17)
----------- ----------- ------------
Net income (loss).............. $ (1.39) $ .51 $ (2.91)
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock Treasury Stock
------------------- --------------------
Retained Accumulated
Additional Earnings Other
Paid in (Accumulated Comprehensive Comprehensive
Shares Dollars Capital Deficit) Income (Loss) Income (Loss) Shares Dollars Total
---------- -------- ------------ ------------ ------------- ------------- --------- --------- ------------
Combined balance
at December 31,
1996........... 2,000 $ 2,000 $ 1,066,758 $ (1,554,026) $(41,865) 100 $ 25,000 $ (502,133)
Net loss........ (4,155,295) $ (4,155,295) (4,155,295)
Translation
adjustments.... 6,345 6,345 6,345
------------
Comprehensive
loss........... $ (4,148,950)
============
Warrant
compensation
related to
former
officer........ 152,333 152,333
Equity in stock
issuances of
RYKA Inc....... 356,534 356,534
Adjustments
arising from
reorganization,
1,608.06-for-1
stock split and
change from no
par value to
$.01 per
share.......... 3,316,111 31,184 (6,184) (100) (25,000) --
Common stock
issued in
acquisition of
RYKA Inc. and
acquisition of
treasury
stock.......... 8,169,086 81,691 6,431,691 1,069,086 (213,817) 6,299,565
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
December 31,
1997........... 11,487,197 114,875 8,001,132 (5,709,321) (35,520) 1,069,086 (213,817) 2,157,349
Net income...... 5,823,856 $ 5,823,856 5,823,856
Translation
adjustments.... (11,911) (11,911) (11,911)
------------
Comprehensive
income......... $ 5,811,945
============
Acquisition of
the Gen-X
Companies...... 1,500,000 15,000 8,936,850 8,951,850
Issuance of
warrants to
purchase common
stock in
exchange for
services....... 150,000 150,000
Issuance of
common stock
upon exercise
of options..... 7,267 72 23,184 23,256
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
December 31,
1998........... 12,994,464 129,947 17,111,166 114,535 (47,431) 1,069,086 (213,817) 17,094,400
Net loss........ (43,247,230) $(43,247,230) (43,247,230)
Translation
adjustments.... 47,431 47,431 47,431
------------
Comprehensive
loss........... $(43,199,799)
============
Issuance of
common stock to
SOFTBANK, net
of costs....... 6,153,850 61,538 79,755,065 79,816,603
Issuance of
options and
warrants to
purchase common
stock in
exchange for
services....... 3,770,778 3,770,778
Issuance of
common stock
upon exercise
of options and
warrants....... 395,935 3,957 1,823,613 1,827,570
---------- -------- ------------ ------------ -------- --------- --------- ------------
Consolidated
balance at
January 1,
2000........... 19,544,249 $195,442 $102,460,622 $(43,132,695) $ -- 1,069,086 $(213,817) $ 59,309,552
========== ======== ============ ============ ======== ========= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------
Fiscal Year
Ended
January 1,
1997 1998 2000
----------- ----------- ------------
Cash Flows from Operating Activities:
Net income (loss).................... $(4,155,295) $ 5,823,856 $(43,247,230)
Deduct:
Income from discontinued
operations........................ 246,956 9,664,956 549,838
Loss on disposal of discontinued
operations........................ -- -- (17,336,679)
----------- ----------- ------------
Loss from continuing operations...... (4,402,251) (3,841,100) (26,460,389)
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 368,227 567,310 728,000
Loss on disposition of equipment... -- 19,819 --
Stock-based compensation expense... 152,333 150,000 2,654,834
Changes in operating assets and
liabilities, net of acquisitions and
discontinued operations:
Accounts receivable................ -- -- (2,738,201)
Inventory.......................... -- -- (10,697,438)
Prepaid expenses and other current
assets............................ (3,551,074) (168,945) (845,410)
Refundable income taxes............ -- -- (1,337,584)
Other assets....................... (576,542) 33,571 173,739
Accounts payable and accrued
expenses.......................... 491,169 4,292,548 17,727,273
Income taxes payable............... -- -- (1,378,820)
----------- ----------- ------------
Net cash provided by (used in)
continuing operations............. (7,518,138) 1,053,203 (22,173,996)
Net cash provided by (used in)
discontinued operations........... (1,629,605) 1,617,846 (3,241,206)
----------- ----------- ------------
Net cash provided by (used in)
operating activities.............. (9,147,743) 2,671,049 (25,415,202)
----------- ----------- ------------
Cash Flows from Investing Activities:
Proceeds from sale of discontinued
operations.......................... -- -- 10,317,322
Acquisition of property and
equipment........................... (231,987) (397,990) (18,421,010)
----------- ----------- ------------
Net cash used in investing
activities........................ (231,987) (397,990) (8,103,688)
----------- ----------- ------------
Cash Flows from Financing Activities:
Net borrowings (repayments) under
line of credit...................... 9,984,077 (1,853,992) (18,812,156)
Costs of debt issuance............... (266,304) (80,000) (30,000)
Repayments of capital lease
obligation.......................... (105,378) (116,124) (127,966)
Proceeds from subordinated note from
SOFTBANK............................ -- -- 15,000,000
Proceeds from issuance of common
stock to SOFTBANK................... -- -- 64,727,378
Proceeds from exercises of common
stock options and warrants.......... -- 23,256 1,827,570
Proceeds from sale of minority
interest in subsidiary.............. -- -- 1,999
Repayment of subordinated notes
payable, related party.............. (416,000) (250,000) (1,805,841)
----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. 9,196,395 (2,276,860) 60,780,984
----------- ----------- ------------
Effect of exchange rate changes on cash
and cash equivalents.................. 6,345 (11,911) --
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents...................... (176,990) (15,712) 27,262,094
Cash and cash equivalents, beginning of
year.................................. 275,871 98,881 83,169
----------- ----------- ------------
Cash and cash equivalents, end of
year.................................. $ 98,881 $ 83,169 $ 27,345,263
=========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest............................ $ 1,882,198 $ 3,056,160 $ 1,993,647
=========== =========== ============
Supplemental disclosure of non-cash
investing and financing activities:
Notes payable issued in
acquisitions........................ $ -- $ 6,000,000 $ --
=========== =========== ============
Issuance of common stock of affiliate
at a price per share in excess of
the Company's carrying amount....... $ 356,534 $ -- $ --
=========== =========== ============
Refinancing of revolving credit
agreement........................... $16,718,420 $ -- $ --
=========== =========== ============
Issuance of common stock for
acquisition of the Gen-X Companies.. $ -- $ 8,951,850 $ --
=========== =========== ============
Issuance of mandatorily redeemable
preferred stock..................... $ -- $ 100 $ --
=========== =========== ============
Issuance of common stock in
satisfaction of accrued interest on
subordinated note from SOFTBANK..... $ -- $ -- $ 89,225
=========== =========== ============
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 the electronic commerce ("e-commerce") sporting goods
businesses of several traditional sporting goods retailers, general
merchandisers, internet and media companies under exclusive long-term
agreements. The Company's partners include The Sports Authority, Oshman's
Sporting Goods, The Athlete's Foot, Sport Chalet, MC Sports, Dunham's Sports,
BlueLight.com and Healtheon/WebMD.
See Note 18 for a description of discontinued operations.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The following summarize the Company's significant accounting policies, some
of which apply only to discontinued operations (see Note 18):
Fiscal Year: During 1999, the Company changed its fiscal year end date from
a calendar year end to a year end date representing the Saturday closest to
December 31, beginning with the fiscal year ended January 1, 2000. The fiscal
year is named for the calendar year ending on that December 31. The effect on
results of operations of the extra day in the fiscal year ended January 1,
2000 is not significant.
Principles of Consolidation: The financial statements presented include the
accounts of Global Sports, Inc., a Delaware corporation, and the following
wholly-owned or controlled subsidiaries:
Global Sports Interactive, Inc. (PA)
TheSportsAuthority.com, Inc. (PA)
APEX Sports International, Inc. (PA)
KPR Sports International, Inc. (PA)
MR Management, Inc. (PA)
1075 First Global Associates, LLC (PA)
RYKA Inc. (PA)
G.S.I., Inc. (DE)
Gen-X Holdings, Inc. (WA)
Gen-X Equipment Inc. (Ontario)
Lamar Snowboards, Inc. (MO)
All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates: The presentation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates and assumptions.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with maturities at date of purchase of three months or less to be
cash equivalents. At January 1, 2000, the Company had $26,749,053 of excess
cash invested in a money market fund with a major financial institution, which
is included in cash and cash equivalents. Interest income related to this
investment for the fiscal year ended January 1, 2000 was $774,139.
Inventory: Inventory, primarily consisting of sporting goods, athletic
equipment, footwear and apparel, is valued at the lower of cost (determined
using the first-in, first-out method) or market.
F-6
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment: Property and equipment are stated at cost, net of
accumulated depreciation or amortization. Depreciation or amortization is
provided using the straight-line method over the estimated useful lives of the
assets, which are generally:
. Two years for computer hardware and software and capitalized software
development costs;
. Three to seven years for furniture and office equipment;
. The lesser of fifteen years or lease term for leasehold improvements;
. Fifteen years for building improvements; and
. Thirty years for buildings.
Upon retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain
or loss, if any, is reflected in results of operations. Expenditures for
maintenance and repairs are expensed as incurred.
Goodwill, Intangibles and Other Assets: The cost of goodwill and intangibles
is amortized on a straight-line basis over ten to twenty years. Goodwill is
reported net of accumulated amortization of $777,376 in 1998. Intangibles,
which principally represent the cost of acquiring licenses, patents and
trademarks, are reported net of accumulated amortization of $270,124 in 1998.
Amortization of goodwill and intangibles is included in discontinued
operations. As a result of the disposition of the Branded division on December
29, 1999 (see Note 18), goodwill and intangibles were fully amortized and the
related charge is included in the loss on disposition of discontinued
operations.
Closing and other fees incurred at the inception of loan facilities are
deferred and are amortized over the term of the loan agreement (see Note 15).
As a result of the disposition of the Branded division on December 29, 1999
(see Note 18), the Company accelerated the amortization of the balance of all
such loan fees and the related charge is included in the loss on disposition
of discontinued operations. As of December 31, 1998, the unamortized balance
of all such loan fees was $247,772.
The realizability of goodwill, intangibles and other assets is evaluated
periodically as events or circumstances indicate a possible inability to
recover the carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on existing company businesses. The
analyses necessarily involve significant management judgment. Any impairment
loss, if indicated, is measured as the amount by which the carrying amount of
the goodwill or intangible assets exceeds its estimated fair value.
Long-Lived Assets: The realizability of long-lived assets is evaluated
periodically as events or circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on existing company businesses. The
analyses necessarily involve significant management judgment. Any impairment
loss, if indicated, is measured as the amount by which the carrying amount of
the asset exceeds the estimated fair value of the asset.
Sale of Stock by an Equity Method Investee: Prior to the 1997 reorganization
(see Note 16), changes in the KPR Companies' proportionate share of the
underlying equity of RYKA, an equity method investee, which result from the
issuance of additional securities by such investee, were credited directly to
additional paid-in capital. In 1997, $356,534 of such gains were credited to
additional paid-in capital (see Note 17).
Foreign Currency Translation: In accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency
Translation, exchange adjustments resulting from foreign
F-7
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
currency transactions generally are recognized currently in income, whereas
adjustments resulting from translations of financial statements are reflected
in accumulated other comprehensive income (loss). The cumulative currency
translation loss as of December 31, 1998 was $47,431. Gains and losses on
foreign currency transactions for the fiscal years ended December 31, 1998 and
January 1, 2000 resulted in net foreign currency losses of $194,064 and
$103,955, respectively, and are included in discontinued operations. There
were no foreign currency transactions in 1997.
Financial Instruments: Gains and losses on foreign currency hedges of
existing assets or liabilities are included in the carrying amounts of those
assets or liabilities and recognized in income as part of the related
transaction. Unrealized gains and losses related to qualifying hedges of firm
commitments are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs.
Fair Value of Financial Instruments: The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and notes payable are a
reasonable estimate of their fair values at December 31, 1998 and January 1,
2000, based on the short maturity of these instruments.
Net Revenues: Net revenues include primarily revenues generated from the
sale of product through the Company's Web sites. Revenues from product sales,
net of discounts and allowances for returns, are recognized upon the shipment
of product to customers. Other sources of revenues, including the sale of gift
certificates to the Company's retail partners' land-based stores, the sale of
advertising on the Company's Web sites and outbound shipping charges, were not
significant for the fiscal year ended January 1, 2000.
Promotional Shipping Costs: During 1999, as part of a promotion in
connection with the launch of the Company's Web sites, the Company offered
free shipping on certain orders. The expense related to this temporary
promotion for the year ended January 1, 2000 was $566,091 and has been
included in selling and marketing expense.
Advertising: The Company expenses the cost of advertising in accordance with
the AICPA Accounting Standards Executive Committee's Statement of Position
("SOP") 93-7, Reporting on Advertising Costs. Advertising expense was
$2,471,731 for the fiscal year ended January 1, 2000. Advertising expense of
discontinued operations was $431,753 and $1,774,753 for the fiscal years ended
December 31, 1997 and December 31, 1998, respectively.
Product Development: Product development expenses consist primarily of
expenses associated with building, developing and operating the partners' Web
sites; payroll and related expenses for engineering, production, creative and
management information systems; and depreciation expense related to
capitalized hardware and software.
Stock-Based Compensation: SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options issued to employees is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company accounts for stock-based compensation issued to non-
employees in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Income Taxes: Prior to December 15, 1997, the KPR Companies (see Note 16)
had elected to be taxed as S Corporations, under provisions of the Internal
Revenue Code and various state income tax regulations. As such,
F-8
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
current taxable income had been included on the income tax returns of the then
sole shareholder for federal and state income tax purposes and no provision
had been made for federal income taxes. On December 15, 1997, the KPR
Companies effected a merger with RYKA Inc. As a result of the merger, the KPR
Companies' S election was terminated. The Company, now renamed Global Sports,
Inc., is considered a C corporation and is subject to federal and state income
taxes. As such, taxes on income are provided based upon SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed for differences between the financial
statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future. Such deferred income tax asset and
liability computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
New Accounting Pronouncements
Computer Costs: In March 1998, the AICPA Accounting Standards Executive
Committee issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal-use software. This
statement was adopted on January 1, 1999 and did not have a material effect on
the Company's results of operations, cash flows or financial position.
Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive
Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities. The
statement requires that costs of start-up activities, including organization
costs, be expensed as incurred. This statement was adopted on January 1, 1999
and did not have a material effect on the Company's results of operations,
cash flows or financial position.
Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133) establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
F-9
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, as of December 31,
1998 and January 1, 2000 are as follows:
December 31, January 1,
1998 2000
------------ -----------
Computer hardware and software.................... $ 957,654 $10,178,971
Building.......................................... -- 6,437,916
Building--under capital lease (see Note 4)........ 2,666,958 2,666,958
Furniture and office equipment.................... 232,414 1,793,037
Land.............................................. -- 1,240,000
Leasehold improvements............................ 336,926 328,042
Construction in progress.......................... 17,392 33,725
---------- -----------
4,211,344 22,678,649
Less: Accumulated depreciation and amortization... (1,222,630) (1,996,925)
---------- -----------
Property and equipment, net....................... $2,988,714 $20,681,724
========== ===========
NOTE 4--CAPITAL LEASE
In September 1994, the Company entered into a fifteen-year capital lease
with its Chairman and Chief Executive Officer, for its former corporate
headquarters and warehouse space. The rental amount is subject to annual
increases based on the Consumer Price Index and is currently $351,396 per
annum. The Company pays all insurance and maintenance relating to the leased
property. The mortgages on the leased property are collateralized by
guarantees of a subsidiary of the Company and have an aggregate outstanding
principal balance of $1,525,169 and $1,456,101 as of December 31, 1998 and
January 1, 2000, respectively. As of December 31, 1998 and January 1, 2000,
the Company's net investment in this capital lease was $2,007,035, and
$1,801,884, respectively, which were included in property and equipment.
Interest recorded on this capital lease for the fiscal years ended December
31, 1997, December 31, 1998 and January 1, 2000 was $242,120, $234,345,
$223,430, respectively.
Future minimum lease payments under this capital lease at January 1, 2000,
together with the present value of those future minimum lease payments, are as
follows:
2000........................................................... $ 351,396
2001........................................................... 351,396
2002........................................................... 351,396
2003........................................................... 351,396
2004........................................................... 351,396
Thereafter..................................................... 1,669,136
----------
Total future minimum lease payments............................ 3,426,116
Less: Interest discount amount................................. 1,244,851
----------
Total present value of future minimum lease payments........... 2,181,265
Less: Current portion.......................................... 141,016
----------
Long-term portion.............................................. $2,040,249
==========
In November 1999, the Company relocated its corporate headquarters to a
Company-owned facility and is currently negotiating the termination of the
lease on its former corporate headquarters. Management expects that this lease
termination will not have a material effect on future results of operations,
cash flows or financial position.
F-10
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
shares.
In connection with the acquisition of the Gen-X Companies on May 12, 1998,
the Company issued 10,000 shares of mandatorily redeemable preferred stock.
The redemption price of these preferred shares is contingent on certain sales
and gross profit targets, ranging from a minimum of $.01 per share to a
maximum of $50.00 per share, and are redeemable over a five year period.
During the fiscal year ended January 1, 2000, 2,000 shares were redeemed for
$100,000 (see Note 18).
Common Stock
On July 13, 1999, the shareholders approved an amendment to the Company's
Certificate of Incorporation that increased the maximum number of authorized
shares of common stock by 40,000,000 to 60,000,000.
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered
into a stock purchase agreement and related agreements for the sale of
6,153,850 shares of the Company's common stock to certain affiliates of
SOFTBANK at a price of $13.00 per share (the closing price on May 26, 1999,
the day prior to the day the Company and SOFTBANK agreed in principle to the
transaction) for an aggregate purchase price of $80,000,050, reduced by
transaction costs of $183,447 and accrued interest of $89,225 and principal
related to an interim loan from SOFTBANK. In order to provide capital to the
Company until closing, which occurred on July 23, 1999, the Company and
SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999
pursuant to which SOFTBANK loaned the Company $15,000,000 at an interest rate
of 4.98% per annum until closing. At the July 23, 1999 closing, this loan
amount was converted into shares of the Company's common stock.
On April 21, 1997, RYKA sold 125,000 shares of its common stock for $750,000
to certain private investors. The proceeds from this sale were used to repay
$385,000 of the Subordinated Note Payable owed to the KPR Companies from RYKA
and to enable the Company to open $810,000 in letter of credit agreements for
the benefit of KPR.
In connection with the investment in RYKA Inc. in 1995, MR Acquisitions,
L.L.C. ("MR Acquisitions"), a company wholly-owned by the Company's Chairman
and Chief Executive Officer, was granted contingent warrants to purchase
455,000 shares of common stock. As of December 31, 1997, MR Acquisitions had
exercised warrants to purchase 361,587 of the 455,000 shares of RYKA common
stock for which it paid an aggregate exercise price of $72,317. These 361,587
shares represent the full number of warrants that MR Acquisitions was entitled
to exercise under the terms of the warrants. MR Acquisitions was not entitled
to exercise the remaining warrants for 93,413 shares because certain
contingencies were not fully satisfied.
NOTE 6--STOCK OPTIONS AND WARRANTS
As part of the 1997 reorganization (see Note 16), on December 15, 1997 the
Company assumed eight separate stock option plans (the "Plans"). Under the
terms of the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990
Stock Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the
1995 Stock Option Plan, the 1995 Non-Employee Directors' Stock Option Plan and
the 1996 Equity Incentive Plan (as amended), the Company may grant qualified
and nonqualified options and warrants to purchase up to 31,321;
F-11
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17,500; 37,500; 43,750; 45,000; 75,000; 12,500 and 3,000,000 shares of common
stock, respectively, to employees, directors and consultants of the Company.
The options and warrants vest at various times over periods ranging up to five
years. The options and warrants, if not exercised, expire up to ten years
after the date of grant. Stock appreciation rights ("SAR's") may be granted
under the Plans either alone or in tandem with stock options. Generally,
recipients of SAR's are entitled to receive, upon exercise, cash or shares of
common stock (valued at the then fair market value of the company's common
stock) equal to such fair market value on the date of exercise minus such fair
value on the date of grant of the shares subject to the SAR, although certain
other measurements also may be used. A SAR granted in tandem with a stock
option is exercisable only if and to the extent that the option is exercised.
No SAR's have been granted to date under the Plans.
Pursuant to option grant letters issued by RYKA prior to the 1997
reorganization (see Note 16), but not pursuant to any formal plan ("Non-Plan
Grants"), the Company assumed options issued to certain individuals to
purchase shares of the company's common stock at prices which approximated
fair market value at the date of grant. The options vest at various times over
periods ranging up to five years and, if not exercised, expire up to ten years
after the date of grant.
The following table summarizes the stock option activity for the fiscal
years ended December 31, 1997, December 31, 1998 and January 1, 2000:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Assumed as of December 15, 1997.......................... 219,547 $10.90
Granted................................................ 441,850 3.69
Exercised ............................................. -- --
Canceled............................................... (118,716) 8.95
---------
Outstanding as of December 31, 1997...................... 542,681 5.45
Granted................................................ 695,750 5.79
Exercised.............................................. (7,267) 3.20
Canceled............................................... (42,583) 6.24
---------
Outstanding as of December 31, 1998...................... 1,188,581 5.71
Granted................................................ 1,307,907 14.82
Exercised.............................................. (345,937) 4.84
Canceled............................................... (226,934) 8.03
---------
Outstanding as of January 1, 2000........................ 1,923,617 11.71
=========
F-12
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the stock warrant activity for the fiscal
years ended December 31, 1997, December 31, 1998 and January 1, 2000:
Weighted
Number Average
of Exercise
Shares Price
------- --------
Assumed as of December 15, 1997.......................... 236,486 $5.37
Granted................................................ -- --
Exercised.............................................. -- --
Canceled............................................... -- --
-------
Outstanding as of December 31, 1997...................... 236,486 5.37
Granted................................................ 67,000 6.71
Exercised.............................................. -- --
Canceled............................................... (96,552) 4.27
-------
Outstanding as of December 31, 1998...................... 206,934 6.35
Granted................................................ 333,320 14.42
Exercised.............................................. (49,998) 7.63
Canceled............................................... (923) 16.25
-------
Outstanding as of January 1, 2000........................ 489,333 11.90
=======
During the fiscal year ended January 1, 2000, the Company granted to
retailers, consultants, and employees options, warrants, and discounted stock
awards to purchase an aggregate of 1,641,227 shares (1,105,741 shares relating
to employees and 535,486 shares relating to retailers and consultants) of the
Company's common stock at prices ranging from $0.01 to $24.69 per share. The
value of options, warrants and discounted stock options granted during 1999
amounted to $5,341,195 ($406,069 relating to employees and $4,935,126 relating
to retailers and consultants) of which the Company reflected $3,770,778 as
expense in the fiscal year ended January 1, 2000. The balance will be
recognized as services are provided over terms ranging from four to five
years. Of the amount recognized as expense during the fiscal year ended
January 1, 2000, $2,654,834 is included in continuing operations ($217,476
relating to employees and $2,437,358 relating to retailers and consultants)
and $1,115,945 is included in discontinued operations.
During the latter part of the fiscal year ended January 1, 2000, the Company
issued warrants to purchase 123,500 shares of the Company's common stock with
a fair value at the dates of grant amounting to $1,579,495 to non-employees
which are included in the options and warrants described above. Because these
warrants require certain counterparty performance conditions, they are subject
to variable plan accounting. The Company is recording compensation expense
over the five-year term of the warrants as required by EITF No. 98-16 and
recognized $66,170 as compensation expense for the fiscal year ended January
1, 2000. The amount of compensation expense recognized in future years is
subject to adjustment based upon changes in the price of the Company's common
stock.
In connection with the disposition of its historical businesses in fiscal
1999, the Company accelerated the vesting of 415,441 options previously
granted to employees of the discontinued operations as an inducement to remain
with the businesses for a period of ninety days following their sale. For
accounting purposes, the Company considers this action a cancellation of a
previous award and the grant of a new award. Since the grantees will not be
employees of the Company when the options are vested, the Company valued the
awards in accordance with the provisions of SFAS No. 123 and charged the
related expense to discontinued operations in fiscal 1999. As these awards
require counterparty performance conditions, they are subject to variable plan
accounting and the ultimate cost to be recognized for these awards is subject
to adjustment based upon changes in both the number of employees and the price
of the Company's common stock through the ninetieth day after the businesses
are sold.
F-13
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998, the Company issued options and
warrants to purchase 695,750 shares of common stock to various employees at a
range of prices from $2.86 to $7.81 and with terms of five to ten years. The
Company also issued warrants to purchase 67,000 shares of common stock to
various consultants and sales agents at a range of prices from $5.11 to $7.94
and with terms of five to ten years. The Company recorded a charge of $150,000
in 1998 related to these warrants which is included in stock-based
compensation.
The following table summarizes information about options and warrants
outstanding and exercisable as of January 1, 2000:
Outstanding Exercisable
--------------------------------------------- ----------------------------
Range of Weighted Average
Exercise Number Remaining Weighted Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------- ----------- ---------------- ---------------- ----------- ----------------
$ .01 -
$ 6.13 525,333 7.32 years $3.95 414,168 $ 3.89
$ 6.25 -
$11.00 493,033 6.00 7.38 171,700 8.18
$11.20 -
$13.00 204,511 7.97 12.14 56,011 12.45
$13.13 -
$15.00 514,120 4.23 14.89 339,620 14.97
$15.13 -
$30.00 675,953 9.39 18.49 75,553 17.89
--------- ---------
$ .01 -
$30.00 2,412,950 7.02 11.75 1,057,052 9.60
========= =========
As of January 1, 2000, 927,918 shares of common stock were available for
future grants under the Plans.
The Company accounts for the Plans in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized for
those incentive stock option awards granted to employees. Had compensation
cost for such awards been determined consistent with SFAS No. 123, Accounting
for Stock Based Compensation, the Company's pro forma net income (loss) and
earnings (losses) per share for the fiscal years ended January 1, 2000,
December 31, 1998 and December 31, 1997 would have been as follows:
As Reported Pro Forma
------------ ------------
Year Ended December 31, 1997
Net loss...................................... $ (4,155,295) $ (4,805,295)
============ ============
Losses per share--basic and diluted........... $ (1.39) $ (1.60)
============ ============
Year Ended December 31, 1998
Net income.................................... $ 5,823,856 $ 4,711,383
============ ============
Earnings per share--basic and diluted......... $ .51 $ .41
============ ============
Fiscal Year Ended January 1, 2000
Net loss...................................... $(43,247,230) $(46,850,325)
============ ============
Losses per share--basic and diluted........... $ (2.91) $ (3.15)
============ ============
The weighted average fair value of the stock options granted during the
fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000
were $1.49, $3.79 and $14.82 per share, respectively.
F-14
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted under the Plans during the fiscal years
ended December 31, 1997, December 31, 1998 and January 1, 2000 were estimated
on the date of grant using the Black-Scholes multiple option pricing model,
with the following assumptions:
Fiscal Year
Year Ended Year Ended Ended
Assumption December 31, 1997 December 31, 1998 January 1, 2000
---------- ----------------- ----------------- ---------------
Dividend yield.......... None None None
Expected volatility..... 50.00% 77.17% 50.00%
Average risk free
interest rate.......... 6.10% 5.16% 5.57%
Average expected lives.. 5.00 years 5.76 years 6.28 years
NOTE 7--INCOME TAXES
The loss from continuing operations before income taxes and the related
benefit from income taxes were as follows:
For the Fiscal Years Ended
---------------------------------
December 31, 1998 January 1, 2000
----------------- ---------------
Loss from continuing operations before
income taxes:
Domestic............................... $5,819,849 $28,681,267
Foreign................................ -- --
---------- -----------
Total................................. $5,819,849 $28,681,267
========== ===========
Benefit from income taxes:
Current:
Federal................................ $1,978,749 $ 2,114,352
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total Current......................... $1,978,749 $ 2,114,352
========== ===========
Deferred:
Federal................................ $ -- $ 106,526
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total Deferred........................ $ -- $ 106,526
========== ===========
Total:
Federal................................ $1,978,749 $ 2,220,878
State.................................. -- --
Foreign................................ -- --
---------- -----------
Total................................. $1,978,749 $ 2,220,878
========== ===========
For the year ended December 31, 1997, the Company had no provision for
federal and state income taxes.
F-15
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of net deferred tax assets and liabilities as of
December 31, 1998 and January 1, 2000 consisted of the following:
December 31, 1998 January 1, 2000
----------------- ---------------
Deferred tax assets:
Net operating loss carryforwards..... $ 8,035,764 $ 21,508,643
Deferred revenue..................... -- 205,549
Employee benefits.................... -- 416,473
Inventory............................ -- 241,308
Depreciation......................... -- 154,408
Provision for doubtful accounts...... 308,600 111,925
----------- ------------
Gross deferred tax assets.......... 8,344,364 22,638,306
Deferred tax liabilities............... -- --
----------- ------------
Net deferred tax assets and
liabilities........................... 8,344,364 22,638,306
Valuation allowance.................. (8,344,364) (22,638,306)
----------- ------------
Net deferred tax asset................. $ -- $ --
=========== ============
Due to the uncertainty surrounding the realization of the Company's tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of
January 1, 2000, the Company had available net operating loss carryforwards of
approximately $54,759,299 which expire in the years 2002 through 2018. The use
of certain net operating loss carryforwards may be subject to annual
limitations based on ownership changes of the Company's stock, as defined by
Section 382 of the Internal Revenue Code.
The differences between the statutory federal income tax rate and the
effective income tax rate are provided in the following reconciliation:
December 31, January 1,
1998 2000
------------ ----------
Statutory federal income tax rate.................. 34.0% (34.0)%
Increase (decrease) in taxes resulting from:
Valuation allowance.............................. -- 30.8
Carryback claim refund........................... -- (4.6)
Other............................................ -- .1
---- -----
Effective income tax rate.......................... 34.0% (7.7)%
==== =====
NOTE 8--EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share have been computed in accordance with SFAS No.
128, Earnings Per Share. Basic and diluted earnings (losses) per share is
computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding during the year. Outstanding common stock
options and warrants have been excluded from the calculation of diluted
earnings (losses) per share because their effect would be antidilutive.
F-16
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts used in calculating earnings (losses) per share data are as
follows:
Fiscal Year
Year Ended Year Ended Ended
December 31, 1997 December 31, 1998 January 1, 2000
----------------- ----------------- ---------------
Loss from continuing
operations............... $(4,402,251) $(3,841,100) $(26,460,389)
Income from discontinued
operations............... 246,956 9,664,956 549,838
Loss on disposition of
discontinued operations.. -- -- (17,336,679)
----------- ----------- ------------
Net income (loss)......... $(4,155,295) $ 5,823,856 $(43,247,230)
=========== =========== ============
Weighted average shares
outstanding--
basic and diluted........ 2,996,027 11,378,918 14,874,018
=========== =========== ============
Outstanding common stock
options having no
dilutive effect.......... 542,681 533,132 1,923,617
=========== =========== ============
Outstanding common stock
warrants having no
dilutive effect.......... 236,486 384,117 489,333
=========== =========== ============
NOTE 9--SIGNIFICANT CUSTOMER/CONCENTRATIONS OF CREDIT RISK
For the fiscal year ended January 1, 2000, net revenues include revenues
from Healtheon/WebMD of $2,792,350 through the sale of product to support the
launch of the WebMD Sports & Fitness Store. As of January 1, 2000,
Healtheon/WebMD represented substantially all of the balance in accounts
receivable. During 1999, the Company also agreed to purchase advertising from
Healtheon/WebMD in the aggregate amount of $3,000,000 to occur in 1999 through
the second quarter of 2000.
NOTE 10--MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
The Company purchased inventory from two suppliers during the fiscal year
ended January 1, 2000 amounting to $2,206,882 and $1,764,021 or 15% and 12% of
total inventory purchased, respectively. As of January 1, 2000, the Company
had $1,624,321 and $1,737,666, respectively, in amounts owed to these
suppliers included in accounts payable. No other supplier amounted to more
than of 10% of total inventory purchased for any period presented.
NOTE 11--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various routine litigation, including litigation
in which the Company is a plaintiff, incidental to its business. The Company
believes that the disposition of such routine litigation will not have a
material adverse effect on the financial position or results of operations of
the Company.
Employment Agreements
As of January 1, 2000, the Company had employment agreements with several of
its officers for an aggregate annual base salary of $1,543,300 plus bonus and
increases in accordance with the terms of the agreements. Terms of such
contracts range from three to five years and are subject to automatic annual
extensions.
Advertising and Media Agreements
As of January 1, 2000, the Company was contractually committed for the
purchase of future advertising totaling approximately $6,447,000 (including
the remaining commitment referred to in Note 9 with a significant
F-17
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
customer) and to provide barter media of no less than $5,000,000 for the
fiscal year ending December 30, 2000. One such agreement requires the Company
to pay an additional fee based upon revenues generated from the advertising.
Retailer Relationships
The Company's retailer alliances are separated into two different
structures. The Company's arrangement with The Athlete's Foot, Oshman's
Sporting Goods, MC Sports, Dunham's Sporting Goods, Sport Chalet and
Healtheon/WebMD are exclusive licensing arrangements ranging in term from five
to ten years, whereby the Company records 100% of all revenues generated on
the electronic storefronts and pays a percentage of those revenues to the
partner in exchange for the electronic rights to their brand name and the
promotion of the electronic storefront in the partner's stores, Web site
and/or marketing and communications materials. Healtheon/WebMD, The Sports
Authority, Inc. and the Company are presently operating in accordance with a
binding letter of intent, which expired on October 29, 1999, and the parties
are in the process of negotiating a formal contract. The Company entered into
a fifteen-year exclusive agreement with The Sports Authority, Inc. (the "TSA
Agreement"), via the Company's 80.1%-owned subsidiary TheSportsAuthority.com
("TSA.com"). TSA.com pays a royalty to The Sports Authority, Inc. based on a
percentage of sales generated by the TSA.com's electronic storefront. On or
after February 1, 2002, The Sports Authority, Inc. has the right to receive
(for no consideration) up to an additional 30% interest in TSA.com if certain
performance targets are met. The Sports Authority, Inc. has an option to
purchase, on the earlier to occur of May 9, 2002 or an initial public offering
of shares of TSA.com common stock, up to a total ownership interest of 49.9%
in TSA.com at a price determined by a formula defined in the TSA Agreement.
NOTE 12--SAVINGS PLAN
The Company sponsors a voluntary defined contribution savings plan covering
all U.S. employees. Company contributions to the plan for each employee may
not exceed 1.5% of the employee's annual salary. Total Company contributions
were $18,594, $21,431 and $28,147 for the fiscal years ended December 31,
1997, December 31, 1998 and January 1, 2000, respectively.
NOTE 13--BUSINESS SEGMENTS
The Company operates in one principal business segment which develops and
operates the e-commerce sporting goods businesses of traditional sporting
goods retailers, general merchandisers, internet and media companies in
domestic markets. All of the domestic net sales, operating results and
identifiable assets are in the United States. See Note 18 for a discussion of
the Company's discontinued operations.
NOTE 14--RELATED PARTY TRANSACTIONS
The Company leases an office and warehouse facility from the Company's
Chairman and Chief Executive Officer (see Note 4).
A summary of the KPR Companies' related party transactions with RYKA Inc.
(prior to the 1997 reorganization--see Note 16) for the year ended December
31, 1997 is as follows:
Financial Statement
Nature of Transaction Classification 1997
--------------------- ---------------------------- -------
Rent................................... Other (income) expenses $45,521
Interest on subordinated debt.......... Interest expense $56,854
F-18
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--NOTES PAYABLE
Notes Payable, Bank
The components of the notes payable, bank balances as of December 31, 1998
and January 1, 2000 are as follows:
December 31, 1998 January 1, 2000
----------------- ---------------
Revolving credit facility, secured by
substantially all assets of KPR and
RYKA (weighted average interest rate
at December 31, 1998--8.15%).......... $18,812,156 $ --
=========== =====
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and
Security Agreement (the "Loan Agreement"). Under the Loan Agreement, as
amended, the Company had access to a combined credit facility of $40,000,000
which was comprised of the KPR Companies' credit facility of $35,000,000 and
RYKA's credit facility of $5,000,000. The term of the Loan Agreement was five
years expiring on November 19, 2002. The KPR Companies and RYKA had an
interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate)
plus two hundred seventy-five basis points. Under the Loan Agreement, both the
KPR Companies and RYKA may have borrowed up to the amount of their revolving
line based upon 85% of their eligible accounts receivable and 65% of their
eligible inventory, as those terms are defined in the Loan Agreement. The Loan
Agreement also included 50% of outstanding letters of credit as collateral for
borrowing.
All borrowings under this line were repaid in full as of January 1, 2000 and
the credit facility is in the process of being terminated. The total interest
incurred in connection with this facility was $1,088,554 for the fiscal year
ending January 1, 2000. The maximum amount outstanding on this line during the
fiscal year ended January 1, 2000 was $25,459,189.
Subordinated Notes Payable, Related Party
The components of the subordinated notes payable balances as of December 31,
1998 and January 1, 2000 are as follows:
December 31, 1998 January 1, 2000
----------------- ---------------
Subordinated notes payable to
shareholder (interest rate at
December 31, 1998--8.25%)............. $1,805,841 $ --
========== =====
At December 31, 1998, the Company had $1,805,841 in outstanding subordinated
notes payable held by its Chairman and Chief Executive Officer, plus accrued
interest on such notes of $24,094 which was recorded in accrued expenses. This
debt consists primarily of a note representing undistributed Subchapter S
corporation retained earnings previously taxed to him as the sole shareholder
of the KPR Companies prior to the 1997 reorganization (see Note 16). Interest
accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR
(Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Based
on its Loan Agreement, the Company is permitted to make regular payments of
interest on the subordinated notes and to further reduce principal on a
quarterly basis, commencing subsequent to the first quarter of 1998, in an
amount up to 50% of the cumulative consolidated net income of the Company.
During 1998, aggregate principal payments of $250,000 were made. On July 27,
1999, the principal balance of $1,805,841 plus interest accrued to date of
$58,987 was repaid in full, for which a waiver was obtained from the Company's
primary lender.
F-19
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--REORGANIZATION
On December 15, 1997, the Company consummated a reorganization (the
"Reorganization"), among RYKA Inc. ("RYKA"), KPR Sports International, Inc.
("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three
companies collectively referred to as the "KPR Companies"), and Michael G.
Rubin, the former sole shareholder of the KPR Companies and now the Chairman
and Chief Executive Officer of the Company. As part of the Reorganization, (i)
RYKA was renamed Global Sports, Inc., (ii) the Company transferred all of its
assets and liabilities to RYKA in exchange for all of the issued and
outstanding shares of capital stock of RYKA, (iii) a subsidiary of the Company
merged with and into KPR, with KPR surviving the merger as a wholly-owned
subsidiary of the Company, (iv) the Company acquired all of the issued and
outstanding shares of capital stock of Apex and MR Management, and (v) the
Company issued to Mr. Rubin an aggregate of 8,169,086 of its common stock in
exchange for all of the issued and outstanding shares of capital stock of the
KPR Companies.
Immediately after the Reorganization, Mr. Rubin, the former sole shareholder
of the KPR Companies, then owned approximately 78% of the outstanding voting
power of the Company. Accordingly, the Reorganization was accounted for as a
reverse purchase under generally accepted accounting principles pursuant to
which the KPR Companies were considered to be the acquiring entity and the
Company was the acquired entity for accounting purposes, even though the
Company was the surviving legal entity. Accordingly, references to the
Company's financial statements refer to the financial statements of the KPR
Companies prior to the Reorganization and to the financial statements of the
KPR Companies, including RYKA, Inc., after the Reorganization.
NOTE 17--INVESTMENT IN RYKA INC.
A summary of activity relating to the Company's investment in RYKA Inc. for
the year ended December 31, 1997 follows:
Investment in RYKA, December 31, 1996.......................... $1,167,986
Equity in net loss of RYKA..................................... (592,093)
Equity in stock issuances of RYKA.............................. 356,534
Additional advances............................................ 12,311
Amortization of negative goodwill.............................. 12,446
RYKA partial repayment of initial advance...................... (385,000)
----------
Investment in RYKA, December 14, 1997.......................... $ 572,184
==========
During 1997, RYKA issued for cash 125,000 shares of common stock for $6.00
per share, which was in excess of the Company's per share carrying amount.
Also in 1997, MR Acquisitions exercised its warrants to purchase an additional
361,587 RYKA shares. The Company accounted for these transactions as an
increase in both its investment and additional paid-in capital. As of December
14, 1997, just prior to the Reorganization (See Note 16), the Company had a
33% equity interest in the net assets of RYKA.
NOTE 18--DISCONTINUED OPERATIONS
On April 20, 1999, the Company formalized a plan to sell two of its
businesses, the Branded division and the Off-Price and Action Sports division,
in order to focus exclusively on its e-commerce business. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division is a third-party distributor and make-to-order marketer
of off-price footwear, apparel and sporting goods. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of these divisions have been segregated from those of continuing
operations and are presented in the Company's financial
F-20
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements as discontinued operations. The accompanying financial statements
have been reclassified to reflect this presentation.
On September 24, 1999, the Company and a management group led by James J.
Salter and Kenneth J. Finkelstein entered into an acquisition agreement
providing for the sale of the Company's Off-Price and Action Sports division,
including the sale of all of the issued and outstanding capital stock of the
Company's wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment
Inc. (collectively, the "Gen-X Companies"). On March 13, 2000, the acquisition
agreement was amended to, inter alia, (i) extend the date after which either
party could terminate the acquisition agreement, (ii) provide for a larger
portion of the purchase price to be paid in cash instead of a combination of
cash and promissory notes, (iii) to reduce the purchase price as a result of
more of the purchase price being paid in cash, (iv) to provide the purchaser
with a breakup fee of $1,500,000, and (v) to accelerate the vesting of options
to purchase an aggregate of 281,930 shares of Global Common Stock held by
certain employees of Global. Pursuant to the terms of the acquisition
agreement, as amended, the aggregate purchase price for the Off-Price and
Action Sports division is approximately $17,200,000, consisting of a cash
payment of $6,000,000 deposited in an escrow account by the purchaser on March
13, 2000, a cash payment at closing of $7,200,000 and assumption of certain
notes payable by Global in the aggregate principal amount of approximately
$4,000,000.
On December 29, 1999, Global sold substantially all of the assets of its
Branded division (other than the accounts receivable which totaled
approximately $6,600,000 as of December 29, 1999) to American Sporting Goods
Corporation in exchange for a cash payment of $10,447,409. The Company
recognized a loss of $12,102,841 on the sale of the Branded division,
including operating losses of $5,289,344 subsequent to the measurement date of
April 20, 1999.
Upon initial adoption of the plan to sell these businesses, management
expected to recognize a gain upon the disposal of its historical businesses.
During the second quarter of fiscal 1999, management revised its estimates and
recorded a loss on disposal of $5,632,158. During the fourth quarter of fiscal
1999, when the Company consummated the sale of its Branded division, the
proceeds from the sale were substantially lower than formerly anticipated. As
a result of this transaction and the renegotiation of the sales price for the
Off-Price and Action Sports division, management made further revisions to its
estimates and recognized additional losses on disposal of $11,704,521 during
the fourth quarter of fiscal 1999.
Net sales of discontinued operations for the fiscal years ended December 31,
1997, December 31, 1998 and January 1, 2000 were $60,671,407, $131,434,971 and
$112,823,357, respectively. For the period subsequent to April 20, 1999, the
measurement date, discontinued operations incurred net operating losses of
$7,575,861, of which $5,289,344 was attributable to the Branded division and
$2,286,517 was attributable to the Off-Price and Action Sports division. The
income tax provision for discontinued operations arose as a result of the
taxable income of a foreign subsidiary as well as a tax provision related to
gains on the disposal of certain intangibles owned by a U.S. subsidiary.
F-21
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The discontinued operations components of amounts reflected in the balance
sheets are as follows:
December 31, January 1,
1998 2000
------------ ------------
Balance Sheet Data:
Cash........................................ $ 772,916 $ 590,952
Accounts receivable......................... 36,782,732 29,692,418
Inventory................................... 20,954,168 3,518,312
Property and equipment...................... 1,397,189 1,242,526
Goodwill and intangibles.................... 16,507,073 11,148,024
Other assets................................ 936,293 499,650
Accounts payable and accrued expenses....... (16,192,954) (10,360,404)
Subordinated notes payable.................. (1,999,065) --
Note payable, banks......................... (14,823,955) (15,520,167)
Notes payable, other........................ (3,206,558) (2,430,505)
------------ ------------
Net assets of discontinued
operations(/1/).......................... $ 41,127,839 $ 18,380,806
============ ============
--------
(/1/) Included in current assets.
Acquisition of Discontinued Operations
Prior to its decision to focus exclusively on its e-commerce business, the
Company acquired Gen-X Holdings Inc. and Gen-X Equipment Inc. on May 12, 1998.
The Gen-X Companies were privately-held companies based in Toronto, Ontario
specializing in selling off-price sporting goods and winter sports equipment
(including ski and snowboard equipment), in-line skates, sunglasses,
skateboards and specialty footwear. In consideration for the stock of the Gen-
X Companies, the Company issued 1,500,000 shares of its common stock and
contingent consideration in the form of non-interest bearing notes and 10,000
shares of mandatorily redeemable preferred stock in the aggregate amount of
$5,000,000. The notes are payable and shares are redeemable at an aggregate of
$1,000,000 per year over a five-year period upon achieving certain sales and
gross profit targets. The total purchase price, including acquisition expenses
of approximately $330,000 but excluding the contingent consideration described
above ($1,000,000 of which was paid in May of 1999), was $9,279,645. This
purchase price is based on the 5-day average market price of the 1,500,000
shares discounted by 10% to reflect restrictions on the transferability of
these shares.
The following table details the allocation of the total consideration:
Fair value of assets acquired................................. $13,913,937
Fair value of liabilities assumed............................. (13,765,000)
Goodwill...................................................... 9,130,708
-----------
$ 9,279,645
===========
During fiscal 1999, the Gen-X Companies achieved the first of their sales
and gross profit targets, and accordingly, in May 1999, the Company redeemed
2,000 shares of the mandatorily redeemable preferred stock for $100,000 and
paid $900,000 against the contingent notes payable, resulting in a
corresponding increase to goodwill of $1,000,000.
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc.
("Lamar"), a privately-held manufacturer of snowboards, bindings and related
products based in San Diego, California. In consideration for
F-22
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the stock of Lamar, the Company paid $250,000 in cash and issued notes in the
aggregate principal amount of $1,000,000, payable over five years. The fair
value of the assets acquired was $927,124 and the fair value of the
liabilities assumed was $1,881,116, resulting in goodwill of $2,203,992.
Notes Payable of Discontinued Operations
The components of the notes payable, banks balances as of December 31, 1998
and January 1, 2000 are as follows:
December
31, January 1,
1998 2000
----------- -----------
Revolving credit facility, secured by substantially
all assets of the Gen-X Companies (weighted average
interest rate at January 1, 2000--7.71%)........... $14,500,000 $15,240,000
Mortgage payable, secured by building due 8/15/09
(interest rate at January 1, 2000--7.91%).......... 323,955 280,167
----------- -----------
Total............................................. $14,823,955 $15,520,167
=========== ===========
The Company has a line of credit of approximately $20,000,000 for use by the
Gen-X Companies, which is available for either direct borrowing or for import
letters of credit. The loan bears interest at prime plus one half percent and
is secured by a general security agreement covering substantially all of the
Gen-X Companies' assets. As of January 1, 2000, draws of $15,240,000 were
committed under this line. Based on available collateral and outstanding
import letters of credit commitments an additional $9,184,000 was available
for borrowing as of January 1, 2000. The maximum amount outstanding on this
line during the fiscal year ended January 1, 2000 was $15,240,000.
Notes payable, banks includes a mortgage payable secured by land and
building in Ontario, Canada of $280,167 bearing interest at the bank's cost of
funds plus 2.5% and maturing on August 15, 2009.
The components of the notes payable, other balances as of December 31, 1998
and January 1, 2000 are as follows:
December
31, January 1,
1998 2000
---------- ----------
Note payable to Ride, Inc., due 12/31/02 (interest
rate as of January 1, 2000--8%)...................... $1,600,000 $1,200,000
Notes payable to former shareholders of Lamar, due
7/27/03 (interest rate as of January 1, 2000--6%).... 1,606,558 1,230,505
---------- ----------
Total.............................................. $3,206,558 $2,430,505
========== ==========
Other debt related to the Gen-X Companies includes an outstanding loan
payable to Ride Inc. of $1,200,000. The original loan of $2,000,000 is
repayable in equal quarterly installments of $100,000 which commenced on March
31, 1998 and bears interest at the prime lending rate.
Notes payable, other also includes $1,230,505 of promissory notes payable to
the former shareholders of Lamar. The notes are payable in five equal annual
installments and bear interest at 6% per annum.
F-23
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the subordinated notes payable balances as of December 31,
1998 and January 1, 2000 are as follows:
December 31, January 1,
1998 2000
------------ ----------
Subordinated notes payable to former shareholders
of the Gen-X Companies, due January 1, 2000...... $1,999,065 $--
========== ====
Upon closing the Gen-X transaction on May 12, 1998, several subordinated
notes payable were executed with the former shareholders of the Gen-X
Companies for an aggregate of $1,999,065 which is payable upon the earlier of
the Company raising certain additional capital or in four equal consecutive
quarterly payments beginning March 31, 1999. This note bears interest at 7%
per annum until December 31, 1998 and the prime lending rate thereafter.
Net interest expense incurred related to notes payable of discontinued
operations amounting to $-- , $905,197 and $2,430,151 for the fiscal years
ended December 31, 1997, December 31, 1998 and January 1, 2000, respectively,
has been allocated to discontinued operations.
Property and Equipment of Discontinued Operations
The major classes of property and equipment, at cost, as of December 31,
1998 and January 1, 2000 are as follows:
December 31, January 1,
1998 2000
------------ ----------
Computers and equipment........................ $ 574,040 $ 693,100
Building....................................... 686,365 678,375
Leasehold improvement.......................... 21,846 14,247
Land........................................... 268,800 268,800
---------- ----------
1,551,051 1,654,522
Less: Accumulated depreciation and
amortization.................................. (153,862) (411,996)
---------- ----------
Property and equipment, net................. $1,397,189 $1,242,526
========== ==========
Purchase Commitments of Discontinued Operations
As of January 1, 2000, outstanding purchase commitments exist totaling
$2,412,167.
Related Party Transactions of Discontinued Operations
For the year ended December 31, 1997, the KPR Companies' purchased $196,274
of inventory from RYKA Inc. (prior to the Reorganization).
Financial Instruments of Discontinued Operations
The Company uses derivative financial instruments to manage the impact of
foreign exchange rate changes on earnings and cash flows. The Company does not
enter into financial instruments for trading or speculative purposes. The
counterparties to these contracts are major financial institutions with high
credit ratings and the Company does not have significant exposure to any one
counterparty. Management believes the risk of loss is remote and in any event
would be immaterial.
F-24
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of its foreign exchange risk management strategy, the Company uses
forward exchange contracts to minimize currency risk on anticipated inventory
purchases and cash flows from collections of accounts receivable. The terms of
these contracts are typically from one to three months. From time to time
during 1998 and 1999, the Company entered into several forward currency
exchange contracts with one of its main lending banks, accounted for as direct
hedges on certain of its accounts payable exposures in Swiss Francs, German
Marks and British Pounds. All gains and losses from such contracts are
recognized in cost of sales as the related inventories are sold. The Company
had no amounts outstanding related to these contracts as of January 1, 2000.
Significant Customers/Concentrations of Credit Risk of Discontinued
Operations
The Company's sales and accounts receivable of discontinued operations were
primarily with major national retail stores. If the financial condition or
operations of these customers deteriorate substantially, the Company's
operating results could be adversely affected. Credit risk with respect to
other trade accounts receivable is generally diversified due to the large
number of entities comprising the Company's customer base and mitigated in
part by credit insurance. The Company performs ongoing credit evaluations of
its customers' financial condition and generally the Company does not require
collateral.
For the fiscal years ended December 31, 1997, December 31, 1998 and January
1, 2000, net sales to key customers each amounting to in excess of 10% of net
sales are as follows:
Fiscal Year Ended
-----------------------------------
December 31, December 31 January 1,
1997 1998 2000
------------ ----------- ----------
Customer A............................ N/A 27% N/A
Customer B............................ 22% 13% 13%
Customer C............................ 13% N/A N/A
As of December 31, 1998, accounts receivable for Customer A and Customer B
amounted to $8,881,106 and $4,080,369, respectively, or 24% and 11%,
respectively, of total accounts receivable outstanding. As of January 1, 2000,
accounts receivable for Customer B amounted to $1,957,882, or 5% of total
accounts receivable outstanding in discontinued operations.
Major Suppliers/Economic Dependency of Discontinued Operations
Inventory purchased for the fiscal years ended December 31, 1997 and
December 31 1998 from a supplier amounted to 26% and 11%, respectively, of
total inventory purchased. As of December 31, 1997, the amount owed to this
supplier was $11,261,105, or 70% of total accounts payable outstanding. As of
December 31, 1998 and January 1, 2000, the Company had no amounts owed to this
supplier. No other supplier amounted to in excess of 10% of total inventory
purchased for each of the years then ended.
F-25
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Statement of Operations
information for each quarter of the fiscal years ended December 31, 1998 and
January 1, 2000. The Company believes that the following information reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future period.
For the Year Ended December 31, 1998
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- -----------
Net revenues................. $ -- $ -- $ -- $ --
========== ========== ========== ===========
Gross profit................. -- -- -- --
========== ========== ========== ===========
Loss from continuing
operations.................. $ (439,448) $ (452,616) $ (875,998) $(2,073,038)
Income from discontinued
operations.................. 1,971,021 1,258,993 3,314,628 3,120,314
---------- ---------- ---------- -----------
Net income................... $1,531,573 $ 806,377 $2,438,630 $ 1,047,276
========== ========== ========== ===========
Losses per share--basic and
diluted(/1/):
Loss from continuing
operations................ $ (.04) $ (.04) $ (.07) $ (.17)
Income from discontinued
operations................ .19 .11 .27 .26
---------- ---------- ---------- -----------
Net income................. $ .15 $ .07 $ .20 $ .09
========== ========== ========== ===========
Weighted average shares
outstanding--basic and
diluted..................... 10,418,198 11,226,403 11,922,515 11,925,378
========== ========== ========== ===========
- --------
/(1)/Thesum of the quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
For the Fiscal Year Ended January 1, 2000
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- ------------
Net revenues............... $ -- $ -- $ -- $ 5,510,576
========== =========== =========== ============
Gross profit............... -- -- -- 1,693,809
========== =========== =========== ============
Loss from continuing
operations................ $ (763,287) $(3,221,021) $(7,116,645) $(15,359,436)
Income (loss) from
discontinued operations... 1,157,175 (607,335) -- --
Gain (loss) on disposition
of discontinued
operations................ -- (5,632,158) 97,951 (11,802,472)
---------- ----------- ----------- ------------
Net income (loss).......... $ 393,888 $(9,460,514) $(7,018,694) $(27,161,908)
========== =========== =========== ============
Losses per share--basic and
diluted(/1/):
Loss from continuing
operations.............. $ (.06) $ (.27) $ (.42) $ (.83)
Income (loss) from
discontinued
operations.............. .09 (.05) -- --
Gain (loss) on
disposition of
discontinued
operations.............. -- (.46) -- (.64)
---------- ----------- ----------- ------------
Net income (loss)........ $ .03 $ (.78) $ (.42) $ (1.47)
========== =========== =========== ============
Weighted average shares
outstanding--basic and
diluted................... 12,018,517 12,120,085 16,824,139 18,424,942
========== =========== =========== ============
- --------
/(1)/The sum of the quarterly per share amounts may not equal per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each
period.
F-26
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 20--SUBSEQUENT EVENT
On February 29, 2000, the Company entered into a long-term agreement with
BlueLight.com, an independent company formed to operate the e-commerce
businesses of Kmart Corporation, to manage the merchandising, warehousing and
fulfillment of BlueLight.com's sporting goods category.
F-27