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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 30, 2000 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-16611
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GLOBAL SPORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
(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 20, 2001,
was approximately $30,024,423.(/1/) There were 28,915,401 shares of the
registrant's Common Stock outstanding as of the close of business on March 20,
2001.(/2/)
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain information required for Part III of this Form 10-K is incorporated
herein by reference to the Proxy Statement for the 2001 Annual Meeting of our
shareholders.
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(/1/) This amount equals the number of outstanding shares of the registrant's
Common Stock reduced by the number of shares that may be deemed
beneficially owned by the registrant's officers, directors and
shareholders owning in excess of 10% of the registrant's Common Stock,
multiplied by the last reported sale price for the registrant's Common
Stock on March 20, 2001. This information is provided solely for record
keeping purposes of the Securities and Exchange Commission and shall not
be construed as an admission that any officer, director or 10%
shareholder in the registrant is an affiliate of the registrant or is
the beneficial owner of any such shares. Any such inference is hereby
disclaimed.
(/2/)Excludes 3,009,139 shares of the registrant's Common Stock which are
issuable to former shareholders of Fogdog, Inc. in connection with the
registrant's acquisition of Fogdog, but which, as of March 20, 2001, had
not yet been issued.
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GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 30, 2000
TABLE OF CONTENTS
Page
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PART I
ITEM 1: BUSINESS..................................................... 1
ITEM 2: PROPERTIES................................................... 24
ITEM 3: LEGAL PROCEEDINGS............................................ 24
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 24
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT......................... 24
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 26
ITEM 6: SELECTED FINANCIAL DATA...................................... 26
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................... 27
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.................................................... 34
SIGNATURES.............................................................. 37
For all years prior to 1999 our fiscal year ended on December 31. Effective
for 1999, we changed our fiscal year from the last day of December to the
Saturday nearest the last day of December. Accordingly, fiscal 1999 ended on
January 1, 2000 and fiscal 2000 ended on December 30, 2000. References to
fiscal 1998, fiscal 1999, fiscal 2000 and fiscal 2001 refer to the years ended
December 31, 1998, January 1, 2000, December 30, 2000 and the year ending
December 29, 2001.
Although we refer to the traditional sporting goods retailers, general
merchandise retailers, 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
Bally Total Fitness, BlueLight.com, buy.com, Dunham's Sports, FOXSPORTS.com,
G.I. Joe's, iQVC, MC Sports, Oshman's Sporting Goods, Sport Chalet, The
Athlete's Foot, The Sports Authority and WebMD.
PART I
ITEM 1: BUSINESS.
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandise retailers, Internet companies
and media companies under exclusive agreements. We enable our partners to
capitalize on their existing assets to exploit online opportunities in the
sporting goods retailing industry. Our scalable e-commerce solution
encompasses our proprietary technology platform, customer service,
fulfillment, buying and merchandising, and product content. Based on these
capabilities, we can quickly and cost-effectively implement 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 operations. Depending on
the specific needs of the partner, we can undertake either a complete
outsourcing of a partner's online activities or a more customized "back-end"
operation. We benefit from the traffic generated by our partners' established
brand franchises, extensive advertising and retail traffic 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' banners;
. extensive technology that runs, operates and manages all aspects of
multiple Web sites;
. customer service through our call center;
. fulfillment capabilities through our 300,000 square foot fulfillment
center;
. access to our centralized database of product descriptions and images,
as well as performance data from vendors and independent sources;
. marketing our partners' Web sites through arrangements with Internet
portals such as Yahoo!, AOL and MSN, as well as incremental online
advertising; and
. access to a broad assortment of brand-name inventory from approximately
1,100 brands encompassing more than 150,000 stock keeping units,
referred to as SKUs.
We provide some or all of these services to each of our partners. We
currently derive virtually all of our revenues from the sale of merchandise
through our partners' Web sites, direct marketing, business to business group
sales, 800-number sales and related outbound shipping charges.
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 allowing us to operate multiple Web sites for
established brands on a common scalable e-commerce infrastructure.
We launched our initial six partners' 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. During fiscal 2000, we launched two additional partners'
e-commerce sporting goods businesses located at the URLs store.foxsports.com
and www.oshmans.com and we commenced performing distribution services for
three additional partners whose Web sites are located at the URLs
www.bluelight.com, www.buy.com and www.iqvc.com. During fiscal 2001, we
launched the e-commerce sporting goods business for another partner at the URL
www.ballystore.com and we entered into an agreement with G.I. Joe's to operate
its e-commerce sporting goods business, which is expected to launch in the
second quarter of fiscal 2001. On December 28, 2000, we acquired all of the
outstanding shares of Fogdog, Inc. and have operated the www.fogdog.com Web
site since that date.
According to estimates by Sports Trend, a trade publication, our current
partners and their affiliates generated approximately $5.0 billion in combined
annual sporting goods revenues through their traditional retail channels in
1999.
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Historical Businesses
Until the second quarter of fiscal 1999, we operated two sporting goods
businesses, our Branded Division and our Off-Price and Action Sports Division.
On April 20, 1999, we formalized a plan to sell these divisions in order to
focus exclusively on our e-commerce business. The sale of the Branded Division
was completed on December 29, 1999 and the sale of the Off-Price and Action
Sports Division was completed on May 26, 2000. For a more complete description
of the Branded Division and Off-Price and Action Sports Division, see "--
Discontinued Operations."
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
$47.2 billion at retail in 2000. The number of Americans who actively engaged
in sports, fitness and outdoor activities in 1998 was 167 million, 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, no single retailer
represented more than 11% 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 7.6% of sporting goods sales by 2004, according to Gomez
Advisors estimates. Gomez Advisors also estimates that online sales of
sporting goods reached $526 million in 2000 and are projected to exceed $3.8
billion by 2004.
Advantages of Online Retailing. The Internet has emerged as one of the
fastest growing communications, information and commerce mediums. Business'
and consumers' acceptance of the Internet as a communication, information and
commerce platform has created the foundation for significant growth in
business-to-consumer and business-to-business commerce.
The Internet is an attractive marketplace for both online retailers and
consumers. Online retailers are able to "display" a larger number and wider
variety of products at a lower cost than physical stores and catalogs, which
have limitations on inventory, 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 digital product database. Traditional retailers must
also make significant capital investments to develop in-house technology
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systems. Furthermore, we believe that very few viable outsourcing options
exist for sporting goods retailers to build their online businesses.
Online sporting goods retailers confront obstacles to establishing 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. 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.
Our 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
operations. 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 and an extensive
digital catalog of product descriptions and images. Our solution allows our
partners 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 Online Identities Under Existing Brand Names. We enable our
partners to establish a distinct e-commerce business that is commensurate with
their brands. We believe this contributes to the development and value of our
partners' existing brand identity.
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 technology platform and centralized inventory, product
database, order processing, fulfillment and customer service. Because we focus
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 partner's Web site we operate, a large quantity of SKUs is
common among multiple Web sites. By centralizing inventory management across
multiple partner Web sites, we are able to increase the frequency of inventory
turns, thus reducing obsolescence risk and financing costs.
Positive and Convenient Shopping Experience. We offer a compelling online
shopping experience by providing a broad selection of merchandise, easy to use
Web sites, competitive prices, value added content and strong customer
service. We believe our 24 hours a day, seven days a week in-house customer
service and high order accuracy promotes strong brand loyalty for our
partners. In addition, we believe our ability to respond to
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customer inquiries by e-mail and telephone to provide detailed product
information makes the shopping experience easy and enjoyable and drives repeat
purchases.
Efficient Customer Acquisition. We benefit from the brand assets and
substantial marketing budgets of our partners to reduce our customer
acquisition costs. Our partners' existing marketing budgets allows 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. Our partners' marketing includes
television, radio, print and outdoor advertising, point of purchase displays,
cash register receipts, shopping bags, employee uniforms and promotional
events designed to attract and retain customers. Finally, our 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 customers are 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.
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, during fiscal 2000 we launched e-commerce
sporting goods businesses for BlueLight.com, buy.com, Fogdog, FOXSPORTS.com
and iQVC and so far during fiscal 2001, we launched an e-commerce sporting
goods business for Bally Total Fitness and we announced a new alliance with
G.I. Joe's, for which we expect to launch an e-commerce sporting goods
business in the second quarter of fiscal 2001.
Promote Online Brands. We intend to build awareness and drive traffic to our
partners' 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 also plan to continue to selectively use a
variety of online marketing strategies to reach our customers, including
public relations, affiliate programs and portal relationships.
Increase Repeat Purchases. We intend to build customer loyalty and drive
repeat purchases by implementing the following strategies:
.continually enhancing our level of customer service;
.expanding our customer and product databases;
.offering new products and product categories;
.implementing direct e-mail 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.
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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 partners' Web sites. 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.
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.
Our Operations
Web Site and Content 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 and maintenance
as well as creative and content modifications. We implement all changes to
current Web sites and oversee the creation of new front-end Web sites for most
new partners, ensuring that the look and feel of their Web sites meet all
parties' satisfaction. We also generate content for each of our partners' Web
sites, including product images, product descriptions and buying guides. For
example, we have produced buying guides which help customers with their
merchandise selection and provide information about selected 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 which generates approximately 50% of our
photographic images. We receive the remainder of our photographic images from
our vendors.
Technology. The three major elements of our partners' Web sites' technology
are The Common Engine(TM), the front-end and the data center.
The Common Engine(TM). We have created a core technology platform, The
Common Engine(TM), that 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 enhance
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 content development, logo placement, graphic design, color palette,
navigation and links. We use the front-end to communicate special promotions,
content feature and product collections as well as the merchandising strategy
of each of our partners.
The Data Center. The data center is our database management system that
controls all of the information housed within our partners' Web sites,
including all product images and descriptions, customer log-in data, customer
profiles, verification requirements, brand information 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 that
our operations can move forward seamlessly in the event of computer
malfunctions. In addition, we continuously strive to improve our partners' Web
sites by conducting functional testing.
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Buying, Vendor Relationships and Merchandising
Buying. We offer a broad assortment of brands and items on each of our
partners' Web sites. We currently offer customers over 1,100 brands and more
than 150,000 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.
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 believe that we are
able to offer a wider variety of merchandise on our partners' 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. In this connection, we currently do not offer
some popular brands of sporting goods, such as Nike, although we are
authorized to sell Fogdog's remaining Nike inventory on the fogdog.com Web
site. In addition, our partners typically have the right to require us not to
sell products which are not sold in their retail stores. 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. During fiscal 2000, we purchased $6.0 million of
inventory from a single vendor. These purchases accounted for 16.0% of the
total amount of inventory we purchased during fiscal 2000.
Pricing
We establish the prices for 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.
Marketing
Web Site Integration. We work with each of our partners to make certain that
URL and Web site promotion are a mainstay of their marketing and advertising
campaigns. Our partners are contractually obligated to incorporate their URLs
into the advertising, marketing, promotion and communication vehicles they
create. These marketing vehicles not only incorporate the URL into the copy or
design, but the message also educates people about these e-commerce sporting
goods businesses and drives traffic to these Web sites. We believe our
partners embrace this strategy because they realize the value in alerting
their customers to an additional distribution channel within their brand.
Online Marketing Relationships. We have entered into marketing agreements
with AOL, Yahoo!, MSN eShop and Excite@Home.com on which various of our
partners are featured prominently throughout the shopping, sports and outdoors
and other areas of these Internet destinations. 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.
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.
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Order Processing and Fulfillment
Order Processing. We conduct our own order 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 a
detailed order list.
Fulfillment. We currently conduct fulfillment out of our company-operated
fulfillment center located in Louisville, KY. This fulfillment center, which
is leased by us from a third party, has been operational since August 2000.
The fulfillment center is 300,000 square feet and is expandable to 450,000
square feet. We also have agreements with some of our suppliers, pursuant to
which the suppliers deliver items directly to consumers, called drop shipping.
We primarily use drop shipping for large and oversized items referred to as
Less than Truckload or LTL.
After a pick ticket is generated, it 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 and we have determined that the order has been
packed and shipped, our computer system automatically sends an e-mail to that
customer informing them that their merchandise is on its way.
Distribution. We currently use UPS and USPS as our primary shipping carriers
for non-LTL items and use a variety of trucking companies for our LTL
distribution. We generally ship orders received on our partners' Web sites
within two business days.
Returns. We accept returns through mailing or delivery services. Our retail
partners are not required to accept in-store returns of items purchased on
their Web site. 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.
Distribution Agreements. In the case of Bluelight.com, buy.com and iQVC
where we only manage the sporting goods product database and facilitate
merchandise procurement and fulfillment, these partners process the orders and
forward them to us for fulfillment. We then fulfill the order.
Customer Service
General. We are committed to providing a high level of customer service. We
believe that superior customer service is critical to retaining long-term and
repeat customers. We offer live customer service 24 hours a day, seven days a
week for all of our partners, except Bluelight.com, buy.com and iQVC, which
each manage their own customer service functions. However, we do assist
Bluelight.com's, buy.com's and iQVC's representatives with problem-solving and
product-oriented issues. We provide customer service for our partners under
their brand names, and our computer systems automatically identify from which
partner a customer needs information or service. Our 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 or Telephone. Customers can obtain assistance through e-mail or
telephone. We aim to answer all customer e-mails within 24 hours, and are
often able to respond within a shorter period of time.
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Company Overview
Description of Agreements with Our Partners
In 2000, our partners and their affiliates had in the aggregate more than
3,300 stores covering all 50 states. Our partners spend significant amounts in
marketing their retail stores to consumers.
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
purchase inventory from vendors, sell the inventory on our partners' Web
sites, record all revenues generated on the Web sites and pay a
percentage of those revenues to the partners in exchange for the e-
commerce rights to their brand names, promotions of the e-commerce
sporting goods businesses in the partners' retail stores and
advertising.
. 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
purchase inventory from vendors, sell the inventory on The
SportsAuthority.com's Web site, record all revenues generated on the Web
site and pay a nominal royalty to The Sports Authority based on a
percentage of sales generated by the subsidiary in exchange for the e-
commerce right to The Sports Authority's brand name, promotions of its
e-commerce sporting goods business in its retail stores and advertising.
. Distribution Agreements. Pursuant to these agreements, we provide a
product information database to each of these partners which they use to
merchandise the sporting goods department of their flagship Web sites.
These partners process orders for sporting goods on their Web sites and
deliver the orders to us electronically. We then sell the products from
our inventory and transfer title to them at a predetermined discount to
the selling price of the same products offered for sale on the Web sites
of the traditional sporting goods retailers for which we operate Web
sites and we pick, pack and ship the products to consumers on behalf of
these partners. These partners perform all of their own customer
service.
The following table summarizes the different agreements we have with each of
our partners:
Partner URL Nature of Agreement Date Operational
- ----------------------- -------------------------- ----------------------------- -------------------------
Bally Total Fitness www.ballystore.com Exclusive licensing agreement February 2001
Bluelight.com www.bluelight.com Distribution agreement June 2000
buy.com www.buy.com Distribution agreement July 2000
Dunham's Sports www.dunhamssports.com Exclusive licensing agreement November 1999
FOXSPORTS.com store.foxsports.com Exclusive licensing agreement August 2000
G.I. Joe's www.gijoes.com Exclusive licensing agreement Expected to launch in the
second quarter of 2001
MC Sports www.mcsports.com Exclusive licensing agreement November 1999
Oshman's Sporting Goods www.oshmans.com Exclusive licensing agreement June 2000
iQVC www.iqvc.com Distribution agreement November 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
WebMD store.webmd.com Exclusive licensing agreement November 1999
- --------
Our typical agreement gives us the 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
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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.
Bally Total Fitness. Bally Total Fitness is the largest, and only
nationwide, commercial operator of fitness centers, with approximately four
million members and nearly 390 fitness centers located in 28 states and
Canada. With more than 120 million annual visits to its fitness centers, Bally
Total Fitness offers a unique platform for distribution of a wide range of
products and services targeted to active, fitness-conscious adult consumers.
Bluelight.com. The sporting goods inventory on the Bluelight.com sporting
goods department consists of items provided by us, enhanced by a range of
Kmart product offerings. Bluelight.com is Kmart's exclusive e-commerce
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. We believe that Bluelight.com benefits from Kmart's
powerful brand which is supported by more than $36.0 billion in annual sales
of all merchandise and more than 2,100 retail stores.
buy.com. buy.com is a leading superstore and low price leader, offering over
850,000 SKUs in a broad range of categories, including computer hardware and
peripherals, software, office supplies, consumer electronics, books, videos,
DVDs, games, music, sporting goods, golf, clearance equipment, and travel
booking services. buy.com, the recipient of a four-and-a-half star rating from
BizRate.com, was recently named "Best of the Web" in the computer and
electronics category by Forbes Magazine, Spring 2000, and #1 on the Gomez
Advisors Internet Computer Scorecard for the third time, Summer 2000.
Dunham's Sports. Dunham's Sports operates 112 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 1999 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."
FOXSPORTS.com. FOXSPORTS.com, a division of News Corporation's News Digital
Media, is a leading sports destination on the Internet for up-to-the-minute
statistics, news and scores for all professional, college and high school
sports. The sports store on FOXSPORTS.com, developed and operated by us, is
positioned to take advantage of the significant traffic on FOXSPORTS.com and
the demographics of these visitors, which match those of sporting goods
shoppers.
G.I. Joe's. G.I. Joe's is an Oregon-based retailer specializing in sporting
goods, automotive, active and outdoor clothing, and footwear. G.I. Joe's has
17 full-line retail stores throughout Oregon and Washington. G.I. Joe's is one
of the 15 largest full-line sporting goods retailers in the United States,
with 2000 sales of approximately $161 million.
iQVC. iQVC, which according to Forrester's Power Rankings was the Internet's
number one general merchandise retailer in August 2000, is the online
retailing division of QVC, Inc. QVC, Inc., a $3.3 billion company, is an e-
commerce leader, marketing a wide variety of brand name products in such
categories as home furnishings, licensed products, fashion, beauty,
electronics and fine jewelry. QVC reaches more than 75 million homes in the
United States.
MC Sports. MC Sports operates 68 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 1999 sales were estimated by Sports Trend
to be $249.0 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 superstores and 15 traditional
stores located in strip shopping centers and enclosed malls in 15 states, with
a concentration in the Southwest and Northwest United States. Its 1999 sales
were $309.0 million. Oshman's utilizes an oval racetrack store theme,
featuring concept shops and demonstration areas where customers can try
merchandise prior to purchasing.
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Sport Chalet. Sport Chalet operates 22 big box full-line sporting goods
stores located in shopping malls and strip shopping centers in Southern
California. Its 1999 sales were $166.0 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 720 specialty athletic
footwear stores located in shopping malls and strip shopping centers, in 40
countries around the world. Its 1999 sales were estimated by Sports Trend to be
$500.0 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 approximately $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.
WebMD. We entered into a letter of intent with WebMD to create and operate a
sports, medicine and fitness e-commerce sporting goods business. The letter of
intent expired on October 29, 1999, but the parties generally have been
operating under the terms of the letter of intent. WebMD is the first end-to-
end Internet healthcare company connecting physicians and consumers to the
entire healthcare industry. WebMD was formed in November 1999 as a result of
the merger of Healtheon Corporation, WebMD, Inc., MEDE America and Medcast.
Description of Agreement with Fitness Quest, Inc.
During fiscal 2000, we entered into an agreement with Fitness Quest, Inc.
pursuant to which we were granted the exclusive right to operate Fitness
Quest's e-commerce business. We record all revenues generated on the Web site
and pay a percentage of those revenues to Fitness Quest for the exclusive right
to operate the Fitness Quest Web site and for certain services provided by
Fitness Quest.
Description of the Fogdog Web Site
We own Fogdog and operate the www.fogdog.com Web site in a manner similar to
the Web sites we operate pursuant to exclusive licensing agreements.
Competition
The online market is rapidly evolving and intensely competitive. Our primary
competitors are currently:
. e-commerce businesses that are associated with full-line sporting goods
stores such as Shopsports.com, associated with Copeland's Sports;
. e-commerce businesses of specialty sporting goods retailers and catalogs
such as 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.
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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;
. price;
. the amount of product information provided to customers;
. visibility of our Web sites, including design, speed and navigation; and
. quality of fulfillment and customer service.
Intellectual Property
We use our partners' names, URLs, logos and other marks in connection with
the operation and promotion of our partners' Web sites. The agreements with our
partners generally provide us with limited, non-exclusive licenses to use this
intellectual property in connection with the operation of their e-commerce
sporting goods businesses. These licenses are co-terminous with the agreements.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable
terms in the future. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which could materially
adversely affect our business, results of operations and financial condition.
In order to protect our proprietary rights in services and technology, we
rely on various intellectual property laws and contractual restrictions. These
include confidentiality, invention assignment and nondisclosure agreements with
our partners, employees, contractors and suppliers. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
intellectual property without our authorization.
Government Regulation
We are generally not regulated other than pursuant to federal, state and
local laws applicable to businesses in general or to retailing or e-commerce
specifically. Certain regulatory authorities have proposed specific laws and
regulations governing the Internet and online commerce. These laws and
regulations may cover taxation, user privacy, pricing, content, distribution,
electronic contracts, characteristics and quality of products and services,
intellectual property rights and information security. Changes in consumer
protection laws also may impose additional burdens on companies conducting
business online. It is not clear how existing laws governing issues such as
property ownership, sales and other taxes, libel and personal privacy apply to
the Internet and online commerce. Unfavorable resolution of these issues may
harm our business.
We currently provide individual personal information regarding users of our
Web sites to the partner for which we operate each Web site and to certain
third parties that we use to process credit cards, fulfill orders, send emails
and provide store locator services. 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
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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 1, 2001, we employed 457 full-time employees. Approximately 258
of our employees are based at our headquarters in King of Prussia, PA, 174 of
our employees are based at our fulfillment center in Louisville, KY, and 25 of
our employees are based at our west coast technology operations in San
Francisco, California.
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
and our Off-Price and Action Sports Division on May 26, 2000. We recognized an
aggregate loss of approximately $23.2 million on the sale of these divisions.
For a more complete discussion, see Note 19 to our consolidated financial
statements included in this Annual Report on Form 10-K.
Off-Price and Action Sports Division
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.
The sales force for our Off-Price and Action Sports Division consisted of
sales executives who dealt exclusively with off-price and special make-up
merchandise and who were compensated on a commission basis. We sold our off-
price and action sports merchandise to approximately 2,300 retail accounts. Our
Off-Price and Action Sports Division competed with large retailers that
purchased off-price and action sports merchandise on a direct basis, footwear
manufacturers that disposed of excess merchandise through their own retail
outlet operations and several independent resellers of footwear, athletic
apparel and sporting goods.
In May 1998, we acquired Gen-X Holdings Inc. and Gen-X Equipment Inc., two
privately-held companies based in Toronto, Ontario specializing in selling off-
price sporting goods.
Branded Division
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. RYKA
products included the following categories: aerobic fitness, cross-training,
running, walking and aqua aerobics.
Yukon is a performance outdoor and rugged casual footwear brand designed for
men, women and children. Yukon products included the following categories:
hiking boots, cross-terrain boots, trail walking shoes, rugged casual shoes and
work boots.
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Prior to selling the Branded Division, we developed a variety of promotional
programs for our RYKA and Yukon brands. Because of our limited resources,
however, we historically concentrated our marketing efforts on less costly,
grass-roots approaches, such as point-of-purchase and other retailer
promotions. We relied principally on independent sales organizations to sell
RYKA and Yukon footwear to their customer accounts. These independent sales
organizations covered all 50 states and Canada and were compensated on a
commission basis. The primary customers of our branded products were athletic
footwear stores, sporting goods stores, department stores and independent
retailers.
The products of our Branded Division competed with other branded products, as
well as with private label products sold by retailers, including some of our
customers. RYKA competed with many brands of athletic footwear, including Nike,
Reebok, adidas, Avia, Asics, New Balance and Saucony. Yukon competed with a
number of other brands of rugged outdoor and casual footwear, including
Timberland, Rockport (a division of Reebok), Nike ACG, Columbia, Hi-Tec,
Merrell, Vasque and Wolverine. In varying degrees, depending on the product
category involved, we competed on the basis of style, price, quality, comfort
and brand name prestige and recognition.
Our products were designed and developed in-house, although we periodically
used outside design firms to supplement our design efforts. Products of our
Branded Division were produced by independent contract manufacturers in Asia.
We did not own or operate any manufacturing facilities. We oversaw the key
phases of production from initial prototype manufacture through initial
production runs to final manufacture. We sought to use, whenever possible,
manufacturers that had previously produced our footwear, which we believed
enhanced continuity and quality while controlling production costs.
Facilities and Employees
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, President and Chief Executive Officer. In addition, we
owned a 12,000 square-foot facility in North York, Ontario that we used
primarily for our Off-Price and Action Sports Division. This facility was 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.
We currently do not have any employees in our Off-Price and Action Sports
Division or Branded 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. These forward-looking statements are based on
current expectations, beliefs, assumptions, estimates and forecasts about our
business and the industry and markets in which we operate. The statements in
this Annual Report on Form 10-K are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements. Factors which may
affect our business, financial condition and operating results include the
effects of changes in the economy, the stock market and the sporting goods
industry generally, changes affecting the Internet and e-commerce, our ability
to maintain relationships with strategic partners and suppliers, our ability to
timely and successfully develop, maintain and protect our technology and
product and service offerings and execute operationally, our ability to attract
and retain qualified personnel and
13
our ability to successfully integrate our recent acquisition of Fogdog, Inc.
More information about potential factors that could affect us are described
below. We expressly disclaim any intent or obligation to update these forward-
looking statements.
Risks Particular to Our Business
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating our e-
commerce business until the fourth quarter of 1999. Prior to the fourth quarter
of 1999, when we launched the e-commerce sporting goods businesses we operate
for our partners, 100% of our revenues had been generated by our discontinued
operations. The sale of the discontinued operations was completed in May 2000.
Accordingly, 100% of our revenues are generated through our e-commerce
business. Based on our limited experience with our e-commerce business, it is
difficult to predict whether we will be successful. Thus, our chances of
financial and operational success should be evaluated in light of the risks,
uncertainties, expenses, delays and difficulties associated with operating a
business in a relatively new and unproven market, many of which may be beyond
our control. Our failure to address these issues could have a material adverse
effect on our business, results of operations and financial condition.
We expect increases in our operating expenses and continuing losses.
We incurred substantial losses for fiscal 1999 and fiscal 2000 and, as of
December 30, 2000, we had an accumulated deficit of $101.1 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 could continue to incur operating and net
losses for the foreseeable future. There can be no assurances that we will be
able to achieve profitability from our continuing operations.
We will continue to incur significant operating expenses and capital
expenditures as we:
. enhance our distribution and order fulfillment capabilities;
. further improve our order processing systems and capabilities;
. develop enhanced technologies and features to improve our partners' e-
commerce sporting goods business;
. expand our customer service capabilities to better serve our customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. increase our sales and marketing activities.
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.
14
We enter into 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.
The contracts with our partners establish new and complex relationships
between us and our partners. We spend a significant amount of time and effort
to maintain our relationships with our partners and address the issues that
from time to time may arise from these new and complex relationships. If we do
not maintain a good working relationship with our partners or perform as
required under these agreements, our partners could seek to terminate the
agreements prior to the end of the term or they could decide not to renew the
contracts at the end of the term. This could adversely affect our business,
financial condition and results of operations. Moreover, our partners could
decide not to renew these contracts for reasons not related to our performance.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in the
future due to a variety of factors, many of which are outside of our control.
Because our operating results may be volatile and difficult to predict,
quarter-to-quarter comparisons of our operating results may not be a good
indication of our future performance. In some future quarter our operating
results may fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may decline significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
. our inability to retain existing partners or to obtain new partners;
. our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to the e-commerce sporting goods
businesses operated by us or the inability to convert these visitors
into customers;
. our failure to offer an appealing mix of sporting goods, apparel,
footwear and other products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites, the systems used to process customers' orders and payments or
our computer network;
. the ability of our competitors to offer new or superior e-commerce
sporting goods businesses, services or products;
. price competition that results in lower profit margins or losses;
. 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 advertising;
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
. seasonality;
. our inability to manage inventory levels or control inventory theft;
. our inability to manage distribution operations or provide adequate
levels of customer service;
. an increase in the level of our product returns;
. government regulations related to use of the Internet for commerce; and
. unfavorable economic conditions specific to the Internet, e-commerce or
the sporting goods industry.
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We expect to experience seasonal fluctuations in our revenues. These seasonal
patterns will cause quarterly fluctuations in our operating results. In
particular, we expect that our fourth fiscal quarter will account for a large
15
percentage of our total annual revenues. In anticipation of increased sales
activity during our fourth fiscal quarter, we may hire a significant number of
temporary employees to bolster our permanent staff and significantly increase
our inventory levels. For this reason, if our revenues were below seasonal
expectations during the fourth fiscal quarter, our annual operating results
could be below the expectations of securities analysts and investors.
Due to the limited operating history of our e-commerce business, it is
difficult to predict the seasonal pattern of our sales and the impact of this
seasonality on our business and financial results. In the future, our seasonal
sales patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash generated
from our business. If we do not generate cash sufficient to fund our
operations, we may need additional financing to continue our growth or our
growth may be limited.
Because we have not generated sufficient cash from operations to date, we
have funded our e-commerce operations primarily from the sale of equity
securities. Cash from revenues must increase significantly for us to fund
anticipated operating expenses internally. If our cash flows are insufficient
to fund these expenses, we may need to fund our growth through additional debt
or equity financings or reduce costs. Further, we may not be able to obtain
financing on satisfactory terms. Our inability to finance our growth, either
internally or externally, may limit our growth potential and our ability to
execute our business strategy. If we issue securities to raise capital, our
existing stockholders may experience additional dilution or the new securities
may have rights senior to those of our common stock.
We must develop and maintain relationships with key brand manufacturers to
obtain a sufficient assortment and quantity of quality merchandise on
acceptable commercial terms. If we are unable to do so, it could adversely
affect our business, results of operations and financial condition.
We primarily purchase the products we offer directly from the manufacturers
of the products. If we are unable to develop and maintain relationships with
these manufacturers, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on acceptable
commercial terms and our business could be adversely impacted. We do not have
written contracts with most of our manufacturers. Manufacturers could stop
selling products to us and may ask us to remove their products or logos from
our partners' Web sites. In some circumstances, our partners purchase products
directly from manufacturers for sale on their Web sites. If we or our partners
are unable to obtain products directly from manufacturers, especially popular
brand manufacturers, we may not be able to obtain the same or comparable
merchandise in a timely manner or on acceptable commercial terms. We currently
are not authorized to offer some popular brands of sporting goods, such as
Nike, although we are authorized to sell Fogdog's remaining Nike inventory on
the fogdog.com Web site. There can be no assurance that we will be able to
offer these brands in the future. If we are unable to offer a sufficient
assortment and quantity of quality products at acceptable prices, we may lose
sales and market share.
Capacity constraints or system failures could materially and adversely affect
our business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that
causes interruption of the availability of our partners' Web sites could result
in decreased usage of these Web sites. If these failures are sustained or
repeated, they could reduce the attractiveness of our partners' Web sites to
customers, vendors and advertisers. Our operations are subject to damage or
interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
16
. computer viruses; and
. other similar events.
We launched our first partners' e-commerce sporting goods businesses in the
fourth quarter of fiscal 1999. The limited time during which we have been
operating these businesses, as well as the inherent unpredictability of the
events described above, makes it difficult to predict whether the occurrence of
any of these events is likely. If any of these events do occur, they could
result in interruptions, delays or cessations in service to users of our
partners' Web sites, which could have a material adverse effect on our
business, results of operations and financial condition.
In addition, we maintain our computers on which we operate our partners' Web
sites at the facility of a third-party hosting company. We cannot control the
maintenance and operation of this facility, which is also susceptible to
similar disasters and problems. Our insurance policies may not adequately
compensate us for any losses that we may incur. Any system failure that causes
an interruption in our service or a decrease in responsiveness could harm our
relationships with our customers and result in reduced revenues.
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use 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 forgo the use of our partners'
e-commerce sporting goods businesses and use those of our competitors. To
remain competitive, we must continue to enhance and improve the functionality
and features of our partners' e-commerce sporting goods businesses. The
Internet and the online commerce industry are rapidly changing. If competitors
introduce new products and services using new technologies or if new industry
standards and practices emerge, our partners' existing Web sites and our
proprietary technology and systems may become obsolete.
Developing our partners' e-commerce sporting goods businesses and other
proprietary technology entails significant technical and business risks. We may
use new technologies ineffectively or we may fail to adapt our partners' Web
sites, our order processing systems and our computer network to meet customer
requirements or emerging industry standards.
We may be subject to intellectual property claims or competition or trade
practices 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 these claims, which could result in substantial damages,
fines or other
17
penalties. The resolution of a claim could also require us to change how we do
business, redesign our partners' Web sites and other systems or enter into
burdensome royalty or licensing agreements. These license or royalty
agreements, if required, may not be available on acceptable terms, if at all,
in the event of a successful claim of infringement. Our insurance coverage may
not be adequate to cover every claim that third parties could assert against
us. Even unsuccessful claims could result in significant legal fees and other
expenses, diversion of management's time and disruptions in our business. Any
of these claims could also harm our reputation.
We rely on our developing relationships with online services, search
engines, directories and other Web sites and e-commerce businesses to drive
traffic to the e-commerce sporting goods businesses we operate. If we are
unable to develop or maintain these relationships, our business, financial
condition and results of operations could be adversely affected.
We have relationships with online services, search engines, directories and
other Web sites and e-commerce businesses to provide content, advertising
banners and other links that link to our partners' Web sites. We expect to
rely on these relationships as significant sources of traffic to our partners'
Web sites and to generate new customers. If we are unable to develop
satisfactory relationships on acceptable terms, our ability to attract new
customers could be harmed. Further, many of the parties with which we may have
online advertising arrangements could provide advertising services for other
marketers of sporting goods. As a result, these parties may be reluctant to
enter into or maintain relationships with us. Failure to achieve sufficient
traffic or generate sufficient revenue from purchases originating from third-
parties may result in termination of these types of relationships. Without
these relationships, we may not be able to sufficiently increase our market
share and our business, financial condition and results of operations could be
adversely affected.
Our success is dependent upon our executive officers and other key
personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman, President and Chief Executive Officer. We have employment agreements
with some of our executive officers and key personnel. 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 continue to hire a number of skilled personnel. Competition for
these individuals is intense, and we may not be able to attract, assimilate or
retain highly qualified personnel in the future. Our failure to attract and
retain the highly trained personnel that are integral to our business may
limit our growth rate, which would harm our business.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
The e-commerce market is rapidly evolving and extremely competitive.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which could seriously harm our business,
financial condition and results of operations. We compete with a variety of
companies, including:
. e-commerce businesses that are associated with full-line sporting goods
stores such as Shopsports.com, associated with Copeland's Sports;
. e-commerce businesses of specialty sporting goods retailers and catalogs
such as Footlocker.com and REI.com;
. e-commerce businesses of traditional general merchandise retailers such
as Target.com and WalMart.com; and
18
. 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.
Although we operate our own fulfillment center, we rely upon multiple third
parties for the shipment of our products. We also rely upon certain vendors to
ship products directly to our customers, especially LTL items. As a result, we
are subject to the risks associated with the ability of these vendors to
successfully and timely fulfill and ship customer orders and to successfully
handle our inventory delivery services to meet our shipping needs. The failure
of these vendors to provide these services, or the termination or interruption
of these services, could adversely affect our business, results of operations
and financial condition.
Sporting goods and apparel are subject to changing consumer preferences. If
we fail to anticipate these changes, we could experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our ability to anticipate and respond to trends in
sporting goods merchandise and consumers' participation in sports. Consumers'
tastes in apparel and sporting goods equipment are subject to frequent and
significant changes, due in part to manufacturers' efforts to incorporate
advanced technologies into some types of sporting goods. In addition, the
level of consumer interest in a given sport can fluctuate dramatically. Prior
to commencing our e-commerce business, our businesses were primarily
concentrated in athletic footwear and apparel. Accordingly, we do not have
significant 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 generally
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.
19
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
or if we give third parties improper access to our customers' personal
information or credit card information, we could be subject to liability. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. They could also
include claims for other misuses of personal information, including
unauthorized marketing purposes. These claims could result in litigation.
Liability for misappropriation of this information could adversely affect our
business. In addition, the Federal Trade Commission and state agencies have
been investigating various Internet companies regarding their use of personal
information. We could incur additional expenses if new regulations regarding
the use of personal information are introduced or if government agencies
investigate our privacy practices.
We are controlled by certain principal stockholders.
As of March 20, 2001, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 27.9%, funds affiliated with SOFTBANK
America Inc., or SOFTBANK, beneficially owned 29.9% and Interactive Technology
Holdings, LLC, or ITH, a joint venture company formed by Comcast Corporation
and QVC, Inc., beneficially owned 17.3% of our outstanding common stock.
Should they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a
position to exercise control over most matters requiring stockholder approval,
including the election or removal of directors, approval of significant
corporate transactions and the ability generally to direct our affairs.
Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH
acquired their shares of our common stock provide that SOFTBANK has the right
to designate up to three members of our board and ITH has the right to
designate up to two members of our board. This concentration of ownership and
SOFTBANK's and ITH's right to designate members to our board may have the
effect of delaying or preventing a change in control of us, including
transactions in which stockholders might otherwise receive a premium over
current market prices for their shares.
From time to time, we may acquire or invest in other companies. There are
risks associated with potential acquisitions and investments. As a result, we
may not achieve the expected benefits of potential acquisitions.
If we are presented with appropriate opportunities, we may make investments
in complementary companies, products or technologies or we may purchase other
companies. We may not realize the anticipated benefits of any investment or
acquisition. We may not be able to successfully assimilate the additional
personnel, operations, acquired technology and products into our business. Any
acquisition may further strain our existing financial and managerial controls
and reporting systems and procedures. In addition, key personnel of the
acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees or
increase our expenses. Further, the physical expansion in facilities that
would occur as a result of any acquisition may result in disruptions that
seriously impair our business. Finally, we may have to incur debt or issue
equity securities to pay for any acquisitions or investments, the issuance of
which could be dilutive to our stockholders.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to consider pursuing international expansion. In the future, we may expand
into international markets. International sales are subject to inherent risks
and challenges that could adversely affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting good manufacturers may require that
our international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
20
. 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
impact on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into United States dollars may
contribute to fluctuations in our results of operations and fluctuating
exchange rates could cause reduced gross revenues and/or gross margins from
non-dollar-denominated international sales.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate
that any cash dividends will be declared or paid in the foreseeable future.
It may be difficult for a third party to acquire us and this could depress
our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 1,000,000 shares of preferred stock, which the board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the terms,
rights, preferences and designations set by the board, may delay, deter or
prevent a change in control of us. 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 us.
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. In addition, we have entered into indemnification agreements with
each of our directors. These agreements, among other things, require us to
indemnify each director for certain expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by us or in our right, arising out
of the person's services as one of our directors.
Risks Related to the Internet Industry
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users and advertisers on the Internet may
not increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
. actual or perceived lack of security of information or privacy
protection;
. lack of access and ease of use;
21
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of cost-
effective, high-speed service;
. possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an
increase in the number or requirements of users. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The amount of traffic on our partners' Web sites could be
materially affected if there are outages or delays in the future. The use of
the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If none of the foregoing changes
occur, or if the Internet does not become a viable commercial medium, our
business, results of operations and financial condition could be materially
adversely affected. In addition, even if those changes occur, we may be
required to spend significant capital to adapt our operations to any new or
emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the Web
sites which we operate obsolete.
The technology of the Internet and e-commerce is evolving rapidly for many
reasons, including:
. customers frequently changing their requirements and preferences;
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
These changes could render the Web sites that 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 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 relatively new concept, and large numbers of
customers may not begin or continue to use the Internet to purchase goods. The
demand for and acceptance of products sold over the Internet are highly
uncertain, and most 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
22
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.
Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the
failure to adequately control fraudulent credit card transactions could reduce
our net revenues and our gross margin. We have put in place technology to help
us detect the fraudulent use of credit card information. To date, we have not
suffered material losses related to credit card fraud. However, we may in the
future suffer losses as a result of orders placed with fraudulent credit card
data even though the associated financial institution approved payment of the
orders. Under current credit card practices, we are liable for fraudulent
credit card transactions because we do not obtain a cardholder's signature.
If one or more states successfully assert that we should collect sales or
other taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than Kentucky and Pennsylvania. One or
more local, state or foreign jurisdictions may seek to impose sales tax
collection obligations on us and other out-of-state companies that engage in
online commerce. Our business could be adversely affected if one or more
states or any foreign country successfully asserts that we should collect
sales or other taxes on the sale of our merchandise.
Existing or future government regulation could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards conducting business on the Internet. However,
due to the increasing popularity and use of the Internet, many laws and
regulations relating to the Internet are being debated at the state and
federal levels. These laws and regulations could cover issues such as user
privacy, freedom of expression, pricing, fraud, quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy could also harm our business.
For example, United States and foreign laws regulate our ability to use
customer information and to develop, buy and sell mailing lists. The vast
majority of these laws were adopted prior to the advent of the Internet, and
do not contemplate or address the unique issues raised thereby. Those laws
that do reference the Internet, such as the Digital Millennium Copyright Act,
are only beginning to be interpreted by the courts and their applicability and
reach are therefore uncertain. These current and future laws and regulations
could adversely affect our future business, results of operation and financial
condition.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal and state levels
relating to online privacy and the use of personal user information. Several
states have proposed legislation that would limit the uses of personal user
information gathered online or require online services to establish privacy
policies. The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under 13. In addition, bills pending in Congress would extend online privacy
protections to adults. Laws and regulations of this kind may include
requirements that we establish procedures to disclose and notify users of
privacy and security policies, obtain consent from users for collection and
use of information, or provide users with the ability to access, correct and
delete personal information stored by us. Even in the
23
absence of those regulations, the Federal Trade Commission has settled several
proceedings resulting in consent decrees in which Internet companies have been
required to establish programs regarding the manner in which personal
information is collected from users and provided to third parties. We could
become a party to a similar enforcement proceeding. These regulatory and
enforcement efforts could also harm our ability to collect demographic and
personal information from users, which could be costly or adversely affect our
marketing efforts.
ITEM 2: PROPERTIES.
Our principal executive offices are located in a 56,000 square foot facility
purchased by us in August 1999 and located in King of Prussia, Pennsylvania.
In addition, we operate our fulfillment center from a 300,000 square foot
leased facility located in Louisville, KY and we lease office space in San
Francisco, California where our west coast technology operations are based.
We believe that our properties are adequate for our present needs and that
suitable additional or replacement space will be available as required.
ITEM 3: LEGAL PROCEEDINGS.
We are involved in various routine litigation incidental to our current and
discontinued businesses. We believe that the disposition of these matters will
not have a material adverse effect on our financial position or results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the fiscal
quarter ended December 30, 2000.
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding each of our executive
officers and key employees (information regarding each of our directors is
incorporated by reference to the section of our 2001 Proxy Statement entitled
"Proposal 1 - Election of Directors"):
Name Age(/1/) Title
---- -------- -----
Michael G. Rubin........ 28 Chairman, President and Chief Executive Officer
Jordan M. Copland....... 38 Executive Vice President and Chief Financial Officer
Robert W. Liewald....... 52 Executive Vice President, Merchandising
Arthur H. Miller........ 47 Executive Vice President and General Counsel
Mark Reese.............. 38 Executive Vice President and Chief Operating Officer
Michael R. Conn......... 30 Senior Vice President, Business Development
Steven C. Davis......... 30 Senior Vice President, Marketing
Glenn Walls............. 37 Senior Vice President, Merchandising
- --------
(/1/)As of March 1, 2001
Michael G. Rubin has served as our Chairman of the Board and Chief Executive
Officer since July 1995 and as our President since June 2000. Mr. Rubin was
named Entrepreneur of the Year in 1994 and 2000 at the Greater Philadelphia
Entrepreneur of the Year Awards sponsored by Ernst & Young. Mr. Rubin attended
Villanova University, Villanova, Pennsylvania.
Jordan M. Copland has served as our Executive Vice President and Chief
Financial Officer since February 2000. From March 1999 to February 2000, Mr.
Copland served as Senior Vice President and Chief Financial Officer of Virgin
Entertainment Group, Inc.'s United States-based Megastore and global e-
commerce businesses.
24
While at Virgin, Mr. Copland oversaw financial administration and technology.
From October 1990 to March 1999, Mr. Copland held a variety of positions with
increasing responsibility within The Walt Disney Company, a worldwide
entertainment company. Most recently Mr. Copland was Vice President of Finance
and Planning for the Disney Consumer Products division. He has also held
various leadership and management positions within several other divisions of
Disney, including the Disney Publishing Group, Disney Consumer Products
Europe, the Middle East and Africa and Walt Disney Records.
Robert W. Liewald has served as our Executive Vice President, Merchandising
since July 1999 and worked as a consultant to us and to other companies in the
sporting goods industry from June 1998 to July 1999. From January 1995 to June
1998, Mr. Liewald served as Senior Executive Vice President of FILA USA, an
athletic footwear and apparel manufacturer. From June 1972 to January 1995,
Mr. Liewald held a variety of positions at 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.
Mark S. Reese has served as our Executive Vice President and Chief Operating
Officer since May 2000. From February 1999 to May 2000, Mr. Reese served as
Chief eCommerce Officer of Toysmart.com, an e-tailer of family products. While
at Toysmart.com, Mr. Reese was responsible for the leadership and management
of the Internet production, merchandising, fulfillment, customer care,
research, and online content groups. From December 1997 to February 1999, Mr.
Reese was a Senior Manager with Andersen Consulting's Strategic Services
practice group, where he led strategic e-commerce initiatives for Fortune 50
companies. From December 1993 to December 1997, Mr. Reese was a Managing
Associate at CSC Index, a consulting company.
Michael R. Conn has served as our Senior Vice President, Business
Development since February 1999. From June 1993 to February 1999, Mr. Conn
served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank
based in New York, New York. Mr. Conn worked as a sell-side securities analyst
specializing in footwear, apparel, retail and leisure products. While at
Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst
Team.
Steven C. Davis has served as our Senior Vice President, Marketing since
January 2000. From June 1996 to January 2000, Mr. Davis held a number of
management positions at Just for Feet, Inc., a specialty sporting goods
retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice
President of Marketing and previously he served as Director of Marketing and
Director of Special Projects. From September 1994 to June 1996, Mr. Davis was
enrolled at the University of Pennsylvania's Wharton School of Business where
he received an MBA. From January 1990 to September 1994, Mr. Davis was Manager
of Park Operations for Anheuser Busch Theme Parks, Inc.
Glenn P. Walls has served as our Senior Vice President, Merchandising since
September 2000. From June 1995 to August 2000, Mr. Walls was Divisional
Merchandise Manager for Dick's Sporting Goods, a 95-store sporting goods
retailer based in Pittsburgh, Pennsylvania. From August 1992 to June 1995, he
was Director of Sales for Lillis Agency, where he represented athletic
footwear and sporting goods sales for 10 leading sporting goods manufacturers.
From June 1990 to August 1992, Mr. Walls was Senior Buyer, Athletics for
Endicott Johnson Retail, overseeing buying for the 210 Endicott Johnson Family
stores and the 160 Father & Son shoe stores. From January 1986 to April 1990,
Mr. Walls was an executive at Dick's Sporting Goods, serving as Men's Apparel
Buyer and Team Sports/Exercise Buyer.
25
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Price of and Dividends on Common Stock
Effective June 16, 1998, we were approved for inclusion on the Nasdaq
SmallCap Market, and effective May 3, 1999 we were approved for inclusion on
the Nasdaq National Market. As of March 20, 2001, we had approximately 2,100
shareholders of record.
For the periods presented from January 1, 1999 to April 30, 1999, the
following table sets forth the high and low sales prices per share of our
common stock as reported on the Nasdaq SmallCap Market. For the periods
presented from and after May 3, 1999, the table below sets forth the high and
low sales prices as reported on the Nasdaq National Market. The prices shown
do not include retail markups, markdowns or commissions.
Prices
---------------
High Low
------- -------
Fiscal 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
Fiscal Year Ended December 30, 2000
First Quarter................................................ $23.375 $ 14.00
Second Quarter............................................... $ 15.00 $4.3125
Third Quarter................................................ $ 9.00 $6.8125
Fourth Quarter............................................... $9.9375 $ 4.00
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate declaring or paying any cash dividends on our
common stock for the foreseeable future.
Recent Sales of Unregistered Securities
On October 22, 2000, we issued a warrant to The Sports Authority to purchase
50,000 shares of our common stock at an exercise price of $7.75 per share. The
warrant was issued to The Sports Authority in connection with certain of our
obligations under the agreements pursuant to which we operate The Sports
Authority's e-commerce sporting goods business. The issuance of the warrant
was exempt from registration pursuant to Section 4(2) of the Securities Act.
ITEM 6: SELECTED FINANCIAL DATA.
The following tables present portions of our financial statements and are
not complete. You should read the following selected consolidated financial
data together with our consolidated financial statements and related notes to
our financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected statements of
operations data for the years ended December 31, 1998, January 1, 2000 and
December 30, 2000 and the balance sheet data as of January 1, 2000 and
December 30, 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 year ended December 31, 1996 and 1997 and the balance
sheet data as of December 31, 1996, 1997 and 1998 are derived from our audited
consolidated statements that are not included in this Annual Report on Form
10-K.
26
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 Fiscal Year
Year Ended December 31, Ended Ended
------------------------- January 1, December 30,
1996 1997 1998 2000 2000
------- ------- ------- ----------- ------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ -- $ -- $ -- $ 5,511 $ 42,808
Cost of revenues........ -- -- -- 3,817 29,567
------- ------- ------- -------- --------
Gross profit........... -- -- -- 1,694 13,241
Operating expenses:
Sales and marketing.... -- -- -- 11,609 37,730
Product development.... -- -- -- 6,933 7,292
General and
administrative........ 2,853 2,389 2,736 8,914 8,730
Stock-based
compensation.......... -- -- 150 2,655 4,983
Depreciation and
amortization.......... 321 357 567 728 8,074
------- ------- ------- -------- --------
Total operating
expenses........... 2,853 2,389 3,453 30,839 66,809
------- ------- ------- -------- --------
Other (income) expenses:
Interest expense....... 1,152 2,013 2,367 313 407
Interest income........ -- -- -- (774) (1,815)
Other, net............. -- -- -- (2) --
------- ------- ------- -------- --------
1,152 2,013 2,367 (463) (1,408)
Loss from continuing
operations before
income taxes........... (4,005) (4,402) (5,820) (28,682) (52,160)
Benefit from income
taxes.................. -- -- 1,979 2,222 --
------- ------- ------- -------- --------
Loss from continuing
operations............. (4,005) (4,402) (3,841) (26,460) (52,160)
Discontinued operations:
Income from
discontinued
operations............ 3,261 247 9,665 550 --
Loss on disposition of
discontinued
operations............ -- -- -- (17,337) (5,850)
------- ------- ------- -------- --------
Net income (loss)... $ (744) $(4,155) $ 5,824 $(43,247) $(58,010)
======= ======= ======= ======== ========
Earnings (losses) per
share--basic and
diluted(/1/):
Loss from continuing
operations............ $ (1.56) $ (1.47) $ (.34) $ (1.78) $ (2.37)
Income from
discontinued
operations............ 1.27 .08 .85 .04 --
Loss on disposition of
discontinued
operations............ -- -- -- (1.17) (0.27)
------- ------- ------- -------- --------
Net income (loss)... $ (.29) $ (1.39) $ .51 $ (2.91) $ (2.64)
======= ======= ======= ======== ========
Weighted average common
shares
outstanding(/1/):
Basic and diluted...... 2,568 2,996 11,379 14,874 22,028
======= ======= ======= ======== ========
Number of common shares
outstanding(/1/)....... 2,832 10,418 11,925 18,475 31,925
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Net assets of
discontinued
operations............. $11,797 $24,129 $41,128 $ 18,381 $ --
Total assets............ 16,435 28,043 45,053 82,736 160,173
Total long-term debt.... 5,905 20,975 20,993 2,040 5,750
Working capital......... 2,022 19,748 34,846 40,557 80,805
Stockholders' equity
(deficiency)........... (552) 2,157 17,094 59,309 116,300
- --------
(/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.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following discussion and analysis contains forward-looking statements
relating to our operations that are based on management's current
expectations, estimates and projections about us and the e-commerce industry.
These forward-looking statements are based on current expectations, beliefs,
assumptions, estimates
27
and forecasts about our business and the industry and markets in which we
operate. The statements in this Annual Report on Form 10-K are not guarantees
of future performance and involve risks, uncertainties and assumptions which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and
operating results include the effects of changes in the economy, the stock
market and the sporting goods industry generally, changes affecting the
Internet and e-commerce, our ability to maintain relationships with strategic
partners and suppliers, our ability to timely and successfully develop,
maintain and protect our technology and product and service offerings and
execute operationally, our ability to attract and retain qualified personnel
and our ability to successfully integrate our recent acquisition of Fogdog,
Inc. More information about potential factors that could affect us are
described under the heading "Risk Factors." We expressly disclaim any intent
or obligation to update these forward-looking statements.
Overview
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandise retailers, Internet companies
and media companies generally under exclusive agreements. We enable our
partners to capitalize on their existing brand assets to exploit online
opportunities in the sporting goods retail industry. We customize the design
of a partner's Web site with a broad range of characteristics that includes a
differentiated user interface, partner-specific content pages, an extensive
electronic catalog of product descriptions and images, a searchable database
and interactive communication tools. We currently derive virtually all of our
revenues from the sale of sporting goods through our partners' Web sites,
direct marketing, business to business group sales, 800-number sales and
related outbound shipping charges.
Company Background
Prior to our decision to initiate our e-commerce sporting goods business, we
operated two primary businesses: our Branded division and our Off-Price and
Action Sports division. From inception in 1986 through December 1999, we
designed, marketed and distributed high performance athletic footwear
exclusively for women under the RYKA brand name. From December 1997 through
December 1999, as part of our Branded division, we also designed, marketed and
distributed outdoor footwear under the Yukon brand name. During the same
period, as part of our Off-Price and Action Sports division, we purchased
closeouts, overstocks, canceled orders and excess inventories of athletic,
outdoor, casual and specialty footwear, athletic apparel and athletic
equipment from manufacturers and retailers for resale, and designed and
distributed special make-up athletic equipment.
In April 1999, we formalized our plan to divest these divisions in order to
focus exclusively on the development of our e-commerce business. Accordingly,
for financial statement purposes, the assets, liabilities, results of
operations and cash flows of these divisions have been segregated from those
of continuing operations and are presented as discontinued operations.
On June 10, 1999, in order to finance our e-commerce business, we agreed to
sell to SOFTBANK 6,153,850 shares of common stock at a price of $13.00 per
share for an aggregate purchase price of approximately $80.0 million. The
purchase price reflected the closing price of our common stock on May 26,
1999, the day prior to the date we and SOFTBANK agreed in principle to the
transaction. The sale of these shares was completed on July 23, 1999.
On September 24, 1999, in furtherance of our plan to sell our historical
businesses, we entered into an agreement, as amended on March 13, 2000, to
sell our Off-Price and Action Sports division for a cash payment at closing of
$13.2 million and the assumption by the purchaser of $4.0 million in
indebtedness. The sale of this division was completed on May 26, 2000. On
December 29, 1999, we sold substantially all of the assets of our Branded
division, other than accounts receivable of approximately $6.6 million, for a
cash payment of approximately $10.4 million. During fiscal 1999 and 2000, we
recognized an aggregate loss of approximately $23.2 million related to the
disposition of these divisions. Included in accounts payable and accrued
expenses at December 30, 2000 is approximately $2.2 million related to certain
remaining obligations of the discontinued operations.
28
On April 27, 2000, in order to continue financing our e-commerce operations,
we agreed to sell to funds affiliated with SOFTBANK 2,500,000 shares of common
stock and to Rustic Canyon Ventures, L.P. (f/k/a TMCT Ventures, L.P.), or
TMCT, 625,000 shares of common stock at a price of $8.00 per share for an
aggregate purchase price of $25.0 million. The sale of these shares was
completed on May 1, 2000. In addition, as part of this financing, we issued to
SOFTBANK warrants to purchase 1,250,000 shares of common stock and to TMCT
warrants to purchase 312,500 shares of common stock. These warrants have a
three-year term and an exercise price of $10.00 per share.
On September 13, 2000, we agreed to sell to Interactive Technology Holdings,
LLC, a joint venture company formed by Comcast Corporation and QVC, Inc., or
ITH, 5,000,000 shares of common stock at $8.15 per share for an aggregate
purchase price of $40.8 million. In addition, ITH agreed to purchase, for
approximately $563,000, warrants to purchase an additional 4,500,000 shares of
common stock, at prices ranging from $8.15 to $10.00 per share. This
investment was completed through two separate closings. On September 13, 2000,
ITH invested $14.9 million and on October 5, 2000, ITH invested $26.4 million.
Financial Presentation
We did not launch our partners' Web sites and begin generating revenues from
our e-commerce business until the fourth quarter of fiscal 1999. As a result,
our historical financial statements prior to the fourth quarter of fiscal 1999
are of limited use in making an investment decision because they principally
reflect our discontinued operations. Our financial statements for periods
prior to the fourth quarter of fiscal 1999 reflect only certain operating
expenses related to our continuing operations. Our financial statements for
the fourth quarter of fiscal 1999 and forward reflect our e-commerce business.
These latter financial statements present:
. net revenues, which are derived from sales of sporting goods through our
partners' Web sites, direct marketing, business to business group sales
and 800-number sales, and related outbound shipping charges, net of
returns and discounts. Net revenues are also derived from fees earned in
connection with marketing. Net revenues are recorded as these fees are
earned.
. cost of revenues, which include the cost of products sold and inbound
freight related to these products, as well as outbound shipping and
handling costs, other than those related to promotional free shipping
and subsidized shipping and handling which are included in sales and
marketing expense.
. sales and marketing expenses, which include advertising and promotional
expenses, including promotional free shipping and subsidized shipping
and handling costs, distribution facility expenses, customer service
costs, merchandising costs and payroll and related expenses. These
expenses also include partner revenue shares, which are payments made to
our partners in exchange for the use of their brands, the promotion of
the URLs and partners' Web sites in their marketing and communication
materials, the implementation of programs to provide incentives to our
partners' in-store customers to shop online and other programs and
services provided to the customers of our partners' Web sites.
. product development expenses, which consist primarily of expenses
associated with planning, maintaining and operating our partners' Web
sites and payroll and related expenses for engineering, production,
creative and management information systems.
. general and administrative expenses, which consist primarily of payroll
and related expenses associated with executive, finance, human
resources, legal and administrative personnel, as well as occupancy
costs for our headquarters.
. stock-based compensation expense, which consists of the amortization of
deferred compensation expense for options granted to employees and
certain non-employees and the value of the options or warrants granted
to certain partners and investors for services.
29
. depreciation and amortization expenses, which relate primarily to the
depreciation of our corporate headquarters, the depreciation of the
capitalized costs for our technology, hardware and software, and the
depreciation of improvements, furniture and fixtures at our corporate
headquarters and our fulfillment center.
. interest, which consists of interest income earned on cash, cash
equivalents and short term investments, net of interest expense paid
primarily in connection with the mortgage on our corporate headquarters
and interest expense on capital leases.
Results of Operations
Comparison of Fiscal 2000 and 1999
Net Revenues. Net revenues increased $37.3 million from $5.5 million in
fiscal 1999 to $42.8 million in fiscal 2000 principally due to the fact that
fiscal 1999 results reflected only two months of sales activity compared to
twelve months in fiscal 2000, increased sales from Web sites operated in both
periods, and the addition of new sites in fiscal 2000. In fiscal 1999, we
operated www.dunhamssports.com, www.mcsports.com, www.sportchalet.com,
www.theathletesfoot.com, www.thesportsauthority.com, and store.webmd.com.,
while in fiscal 2000, we also operated store.foxsports.com and www.oshmans.com
and we provided fulfillment services for www.bluelight.com, www.buy.com,
www.fogdog.com and www.iqvc.com. Net revenues included $8.4 million in fiscal
2000 from sales of one of our vendor's products primarily through direct
marketing in addition to Web site and other 800-number sales. We do not
anticipate revenues from direct marketing efforts to be significant in fiscal
2001.
Cost of Revenues. We incurred cost of revenues from continuing operations of
$29.6 million for fiscal 2000 and $3.8 million for fiscal 1999. As a
percentage of net revenues, cost of revenues from continuing operations was
69.1% for fiscal 2000 and 69.3% for fiscal 1999.
Gross Profit. We had gross profit from continuing operations of $13.2
million for fiscal 2000 and $1.7 million for fiscal 1999. As a percentage of
net revenues, gross profit from continuing operations was 30.9% for fiscal
2000 and 30.7% for fiscal 1999.
Sales & Marketing Expenses. We incurred sales and marketing expenses from
continuing operations of $37.7 million for fiscal 2000 and $11.6 million for
fiscal 1999 for an increase of $26.1 million. The increase in sales and
marketing expenses for fiscal 2000 compared to fiscal 1999 was primarily the
result of increased personnel, fulfillment and marketing costs in fiscal 2000
due to the fact that we did not yet begin operating our e-commerce businesses
until the fourth quarter of fiscal 1999. In addition, during the third quarter
of fiscal 2000 we incurred certain costs associated with the fulfillment of
orders from two distribution centers. Beginning in October 2000, we
consolidated our fulfillment operations into one distribution center operated
by us. Accordingly, beginning in the fourth quarter of 2000, sales and
marketing expenses reflected this consolidation. Partner revenue shares were
not significant in fiscal 2000 or fiscal 1999.
Product Development Expenses. We incurred product development expenses from
continuing operations of $7.3 million for fiscal 2000 and $6.9 million for
fiscal 1999. The increase in product development expenses for fiscal 2000
compared to fiscal 1999 was primarily the result of the increased number of
Web sites that we operated and maintained, and increased support costs
associated with our management information systems.
General and Administrative Expenses. We incurred general and administrative
expenses from continuing operations of $8.7 million for fiscal 2000 and $8.9
million for fiscal 1999. The decrease in general and administrative expenses
for fiscal 2000 compared to fiscal 1999 was primarily due to non-recurring
costs incurred in fiscal 1999 that were related to the re-structuring of
operations to focus on our e-commerce business.
Stock-Based Compensation Expense. We recorded stock-based compensation from
continuing operations of $5.0 million for fiscal 2000 and $2.7 million for
fiscal 1999. The increase in stock-based compensation in fiscal 2000 compared
to fiscal 1999 was the result of charges associated with the sales of warrants
to investors, and the issuance of stock options to certain of our employees,
offset by lower charges related to warrants issued to our partners. As of
December 30, 2000, we had an aggregate of $2.6 million of deferred
compensation remaining to be amortized.
30
Depreciation and Amortization Expenses. We incurred depreciation and
amortization expense of $8.1 million for fiscal 2000 and $728,000 for fiscal
1999. The increase in these expenses in fiscal 2000 as compared with fiscal
1999 reflects the depreciation related to our corporate headquarters, our
fulfillment center, and assets purchased to build, manage and operate the e-
commerce business.
Interest (Income) Expense. We had interest income of $1.8 million and
interest expense of $407,000 for fiscal 2000 compared to interest income of
$774,000 and interest expense of $313,000 for fiscal 1999. Interest income in
fiscal 2000 and fiscal 1999 consisted of interest earned on cash, cash
equivalents and short-term investments. Interest expense in fiscal 2000
related primarily to a mortgage note on our corporate headquarters. Interest
expense in fiscal 1999 related primarily to bank borrowings.
Income Taxes. Since the sales of our Branded and Off-Price and Action Sports
Divisions, we have not generated taxable income. Net operating losses
generated have been carried back to offset income taxes paid in prior years.
The remaining net operating losses will be carried forward. Any otherwise
recognizable deferred tax assets have been offset by a valuation allowance for
the net operating loss carryforwards.
Comparison of Fiscal 1999 and 1998
Net Revenues. We had net revenues from continuing operations of $5.5 million
for fiscal 1999 and no net revenues from continuing operations for fiscal
1998. In fiscal 1999, we operated www.dunhamssports.com, www.mcsports.com,
www.sportchalet.com, www.theathletesfoot.com, www.thesportsauthority.com, and
store.webmd.com. We derived $2.8 million of our total net revenues from WebMD
through the sale of product to support the launch of the WebMD Sports &
Fitness Store, store.webmd.com. This product was sold to WebMD in connection
with a one-time promotion in which WebMD distributed the products to its
physician subscribers to promote the launch of the WebMD Sports & Fitness
Store. 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.
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. Partner revenue
shares included in this amount were not significant in fiscal 1999.
Product Development Expenses. We incurred product development expenses from
continuing operations of $6.9 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 third
parties.
General and Administrative Expenses. We incurred general and administrative
expenses from continuing operations of $8.9 million for fiscal 1999 and $2.7
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 Expense. We recorded stock-based compensation
expense from continuing operations of $2.7 million for fiscal 1999 and
$150,000 for fiscal 1998. Of the $2.7 million of stock-based
31
compensation expense for fiscal 1999, $1.9 million related to warrants granted
to our partners, $555,000 related to options or warrants granted to non-
employees and $218,000 related to options granted to employees. The $150,000
of stock-based compensation expense for fiscal 1998 related to warrants
granted to non-employees. As of January 1, 2000, we had an aggregate of
$1.6 million of deferred compensation remaining to be amortized.
Depreciation and Amortization Expenses. We incurred depreciation and
amortization expense of $728,000 for fiscal 1999 and $567,000 for fiscal 1998.
The increase in these expenses in fiscal 1999 as compared with fiscal 1998
reflects the depreciation related to assets purchased to build, manage, and
operate the e-commerce business.
Interest. 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.
Liquidity and Capital Resources
Historically, we financed our discontinued operations through a combination
of internally generated funds, equity financings, subordinated borrowings and
bank credit facilities. We used our bank credit facilities to fund our
investment in accounts receivable and inventory necessary to support our
historical businesses.
In connection with our decision to focus on our e-commerce business, we
raised approximately $80.0 million in gross proceeds through an equity
financing with SOFTBANK in July 1999. We used part of the proceeds from this
financing to repay the balance on our then outstanding lines of credit, reduce
trade payables and provide operating capital related to our historical
businesses. We also used part of the proceeds to acquire property and
equipment and fund the working capital needs of our e-commerce business. As of
December 30, 2000, we had cash and cash equivalents of approximately $92.0
million and working capital of approximately $80.8 million.
On April 20, 2000, we received approximately $5.3 million in gross proceeds
through a mortgage financing of our corporate headquarters.
On April 27, 2000, we raised approximately $25.0 million in gross proceeds
through an equity financing with Softbank and TMCT. On September 13, 2000, we
raised $14.9 million in gross proceeds and on October 5, 2000, we raised $26.4
million in gross proceeds, through an equity financing with ITH. See "Company
Background" section above. We used the proceeds of these financings for
additional working capital needs and general business purposes, including the
acquisition of property and equipment required to operate our e-commerce
business.
We have incurred substantial costs to develop our e-commerce business and to
recruit, train and compensate personnel for our creative, engineering,
marketing, merchandising, customer service, management information systems and
administration departments. As a result, we incurred substantial losses in
fiscal 1999 and fiscal 2000. As of December 30, 2000, we had an accumulated
deficit of $101.1 million. In order to expand our e-commerce business, we
intend to invest in operations, Web site development, merchandising and
additional personnel in certain areas of the business. In addition, during
fiscal 2000, we invested in the required technology, equipment and personnel
to make our Kentucky distribution center fully operational. Based on these
factors, we can expect to continue to incur operating losses for the
foreseeable future.
We used approximately $38.2 million in net cash for operating activities of
continuing operations during fiscal 2000 and approximately $22.2 million in
net cash for operating activities of continuing operations during fiscal 1999.
Net cash used for operating activities of continuing operations during fiscal
2000 was primarily the result of net losses from continuing operations and
changes in accounts receivable, inventory, prepaid expenses and other current
assets, offset, in part, by changes in refundable income taxes, deferred
revenue, accounts payable and accrued expenses, stock based compensation
expense, and depreciation and amortization. Net cash used for operating
activities of continuing operations during fiscal 1999 was primarily the
result of net losses from continuing operations and changes in accounts
receivable, inventory, prepaid expenses and other current
32
assets, refundable income taxes and income taxes payable, partially offset by
accounts payable and accrued expenses, deferred revenue, stock based
compensation expense, and depreciation and amortization.
Our investing activities during fiscal 2000 consisted of purchases of
property and equipment. We made capital expenditures of approximately $13.7
million during fiscal 2000. Also, during fiscal 2000, we received $13.2
million in cash proceeds from the sale our Off-Price and Action Sports
division and $35.7 million in net cash received from the acquisition of
Fogdog. During fiscal 1999, our investing activities consisted of purchases of
property and equipment of $18.4 million. In addition, we received $10.3
million in cash proceeds from the sale of our Branded division during 1999.
As of December 30, 2000, we had commitments of approximately $1.0 million
relating to the implementation of advertising and promotion programs.
To date, we have financed our e-commerce operations primarily from the sale
of equity securities. Management expects that our current cash and the
collection of accounts receivable will be sufficient to meet our anticipated
cash needs for at least the next 12 months. However, our revenues must
increase significantly to internally fund our anticipated operating expenses.
If cash flows are insufficient to fund these expenses, we may need to raise
additional funds in future periods through public or private financings or
other arrangements to fund our operations until we achieve profitability.
Failure to raise future capital when needed could seriously harm our business
and operating results. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences
or privileges senior to our common stock.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not used derivative financial instruments in our investment
portfolio. We invest our excess cash in institutional Money Market accounts,
certificates of deposit and debt instruments of high-quality corporate
issuers. In order to minimize risk and credit exposure, we invest in
institutional Money Market accounts with three financial institutions. We
protect and preserve our invested funds by limiting default, market and
reinvestment risk.
Investments in both fixed rate and floating rate interest earning-
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest rates or it
may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates.
Our long-term debt consists of a $5.3 million mortgage note on our corporate
headquarters. The interest rate on the note is fixed at 8.49% per annum over
the ten year term of the note.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements, supplementary data and related documents that are
included in this Annual Report on Form 10-K are listed in Item 14(a), Part IV,
of this Report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
33
PART III
This Part incorporates certain information from our definitive proxy
statement for our 2001 Annual Meeting of Shareholders (the "2001 Proxy
Statement") to be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year covered by this Annual Report
on Form 10-K. Notwithstanding such incorporation, the sections of our 2001
Proxy Statement entitled "Report of the Compensation Committee" and
"Performance Graph" shall not be deemed to be "filed" as part of this Report.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is incorporated by reference to our
2001 Proxy Statement including but necessarily limited to the sections of the
2001 Proxy Statement entitled "Proposal 1--Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance."
Information concerning our executive officers who are not also directors is
included in Item 4.1, Part I, of this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
This information is incorporated by reference to our 2001 Proxy Statement
including but necessarily limited to the section of the 2001 Proxy Statement
entitled "Executive Compensation."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to our 2001 Proxy Statement
including but necessarily limited to the section of the 2001 Proxy Statement
entitled "Principal Shareholders."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to our 2001 Proxy Statement
including but necessarily limited to the section of the 2001 Proxy Statement
entitled "Certain Relationships and Related Transactions."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors--Deloitte & Touche LLP F-1
Consolidated Balance Sheets as of January 1, 2000 and December 30,
2000 F-2
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 1998, January 1, 2000 and December 30, 2000 F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 1998, January 1, 2000 and December 30, 2000 F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 1998, January 1, 2000 and December 30, 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.
34
3. EXHIBITS
2.1(/1/) 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 the Company.
2.2(/2/) 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(/4/) The Company's Bylaws, as amended.
4.1 Specimen of Common Stock Certificate.
10.1(/5/)* 1987 Stock Option Plan.
10.2(/6/)* 1988 Stock Option Plan.
10.3(/7/)* 1990 Stock Option Plan.
10.4(/8/)* 1992 Stock Option Plan.
10.5(/9/)* 1993 Stock Option Plan.
10.6(/10/)* 1995 Stock Option Plan.
10.7(/11/)* 1995 Non-Employee Directors' Stock Option Plan.
10.8* 1996 Equity Incentive Plan (amended and restated).
10.9(/12/)* Deferred Profit Sharing Plan and Trust.
10.10(/13/)* 2000 Employee Stock Purchase Plan.
10.11(/14/)* Employment Agreement dated September 25, 1996 by and between the
Company and Michael G. Rubin.
10.12(/14/)* First Amendment to the Employment Agreement dated September 25,
1996 by and between the Company and Michael G. Rubin.
10.13(/15/)* Employment Agreement dated February 24, 1999 by and between the
Company and Michael R. Conn.
10.14(/16/)* Employment Agreement dated August 9, 1999 by and between the
Company and Arthur H. Miller.
10.15(/17/)* Employment Agreement dated January 10, 2000 by and between the
Company and Steven Davis.
10.16(/17/)* Employment Agreement dated February 9, 2000 by and between the
Company and Jordan M. Copland.
10.17* Employment Agreement dated May 30, 2000 by and between the
Company and Mark Reese.
10.18(/10/) Registration Rights Agreement by and between the Company and MR
Acquisitions, Inc.
10.19(/16/) 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.
10.20(/18/)+ E-Commerce Venture Agreement dated May 7, 1999 by and between GSI
and The Sports Authority, Inc. ("TSA").
10.21(/18/)+ Amendment No. 1 to the E-Commerce Venture Agreement dated May 14,
1999 by and between GSI and TSA.
10.22(/18/)+ License Agreement dated May 14, 1999 by and among TSA, The Sports
Authority Michigan, Inc. and TheSportsAuthority.com, Inc.
("TSA.com").
10.23(/19/)+ E-Commerce Services Agreement dated May 14, 1999 by and between
GSI and TSA.com.
10.24(/19/)+ E-Commerce Agreement dated May 14, 1999 by and among TSA and
TSA.com.
10.25(/20/) Agreement dated May 14, 1999, by and between TSA and the Company.
10.26(/21/)+ E-Commerce Management Agreement dated December 30, 1999 by and
between GSI and Oshman's Sporting Goods, Inc.-Services.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
- --------
* 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.
35
(/1/) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 13, 2000.
(/2/) 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
(/3/) Incorporated by reference to the Company's Definitive Proxy Materials
filed November 12, 1997.
(/4/) Incorporated by reference to the Company's Registration Statement No.
33-33754.
(/5/) Incorporated by reference to the Company's Registration Statement No.
33-19754-B.
(/6/) Incorporated by reference to the Company's Registration Statement No.
33-27501.
(/7/) Incorporated by reference to the Company's Quarterly Report on Form 10-
Q for the nine-month period ended September 30, 1990.
(/8/) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
(/9/) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on January 3, 1994.
(/10/) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 31, 1995.
(/11/) 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.
(/12/) Incorporated by reference to the Company's Quarterly Report on Form 10-
Q for the three-month period ended March 31, 1998.
(/13/) Incorporated by reference to the Company's Preliminary Proxy Statement
filed on March 22, 2000 in connection with the 2000 Annual Meeting.
(/14/) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
(/15/) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
(/16/) Incorporated by reference to the Company's Quarterly Report on Form 10-
Q for the nine-month period ended September 30, 1999.
(/17/) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 1, 2000 filed March 30, 2000.
(/18/) Incorporated by reference to Amendment No. 1 to the Company's Current
Report on Form 8-K/A filed April 21, 2000.
(/19/) Incorporated by reference to Amendment No. 2 to the Company's Current
Report on Form 8-K/A filed April 26, 2000.
(/20/) Incorporated by reference to Company's Current Report on Form 8-K filed
December 28, 1999.
(/21/) Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the fiscal year ended January 1, 2000 filed April 26, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 31, 2000 reporting
that the Company entered into a merger agreement to acquire all of the
outstanding shares of Fogdog, Inc.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf on the date indicated by the undersigned thereunto duly
authorized.
Date: March 28, 2001 GLOBAL SPORTS, INC.
/s/ Michael G. Rubin
By: _________________________________
Michael G. Rubin,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Michael G. Rubin Chairman, President and March 28, 2001
______________________________________ Chief Executive Officer
Michael G. Rubin (principal executive
officer)
/s/ Jordan M. Copland Executive Vice President March 28, 2001
______________________________________ and Chief Financial
Jordan M. Copland Officer (principal
financial officer and
principal accounting
officer)
/s/ Kenneth J. Adelberg Director March 28, 2001
______________________________________
Kenneth J. Adelberg
/s/ Ronald D. Fisher Director March 28, 2001
______________________________________
Ronald D. Fisher
/s/ Harvey Lamm Director March 28, 2001
______________________________________
Harvey Lamm
/s/ Charles R. Lax Director March 28, 2001
______________________________________
Charles R. Lax
/s/ Mark S. Menell Director March 28, 2001
______________________________________
Mark S. Menell
/s/ Jeffrey F. Rayport Director March 28, 2001
______________________________________
Dr. Jeffrey F. Rayport
37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Global Sports, Inc.
We have audited the accompanying consolidated balance sheets of Global
Sports, Inc. and subsidiaries (the "Company") as of January 1, 2000 and
December 30, 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 30, 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 in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 1,
2000 and December 30, 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 30, 2000 in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 23, 2001
F-1
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 1, December 30,
2000 2000
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 27,345 $ 92,012
Short term investments............................... -- 1,789
Accounts receivable, net of allowance of $82 and
$287, respectively.................................. 2,738 4,440
Inventory............................................ 10,697 19,202
Prepaid expenses and other current assets............ 1,445 1,485
Refundable income taxes.............................. 1,338 --
Net assets of discontinued operations................ 18,381 --
-------- ---------
Total current assets............................... 61,944 118,928
Property and equipment, net............................ 20,682 26,424
Goodwill............................................... -- 14,363
Other assets, net...................................... 110 458
-------- ---------
Total assets....................................... $ 82,736 $ 160,173
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 15,763 $ 20,214
Accrued advertising, promotion and other expenses.... 4,978 16,272
Deferred revenue..................................... 505 1,317
Current portion--note payable........................ -- 35
Current portion--capital lease obligations........... 141 285
-------- ---------
Total current liabilities.......................... 21,387 38,123
Note payable........................................... -- 5,247
Capital lease obligations.............................. 2,040 503
Mandatorily redeemable preferred stock................. -- --
Commitments and contingencies.......................... -- --
Stockholders' equity:
Preferred stock, Series A, $0.01 par value, 1,000,000
shares authorized as of January 1, 2000 and December
30, 2000; 8,000 and 800 shares issued as mandatorily
redeemable preferred stock and outstanding, as of
January 1, 2000 and December 30, 2000,
respectively........................................ -- --
Common stock, $0.01 par value, 60,000,000 shares
authorized as of January 1, 2000 and December 30,
2000; 19,544,249 and 31,925,098 shares issued as of
January 1, 2000 and December 30, 2000, respectively;
18,475,163 and 31,925,098 shares outstanding as of
January 1, 2000 and December 30, 2000,
respectively........................................ 195 319
Additional paid in capital........................... 102,461 217,124
Accumulated deficit.................................. (43,133) (101,143)
-------- ---------
59,523 116,300
Less: Treasury stock, at cost........................ 214 --
-------- ---------
Total stockholders' equity......................... 59,309 116,300
-------- ---------
Total liabilities and stockholders' equity......... $ 82,736 $ 160,173
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended
------------------------------------
December 31, January 1, December 30,
1998 2000 2000
------------ ---------- ------------
Net revenues.............................. $ -- $ 5,511 $ 42,808
Cost of revenues.......................... -- 3,817 29,567
------- -------- --------
Gross profit............................ -- 1,694 13,241
------- -------- --------
Operating expenses:
Sales and marketing..................... -- 11,609 37,730
Product development..................... -- 6,933 7,292
General and administrative.............. 2,736 8,914 8,730
Stock-based compensation................ 150 2,655 4,983
Depreciation and amortization........... 567 728 8,074
------- -------- --------
Total operating expenses.............. 3,453 30,839 66,809
Other (income) expense:
Interest expense........................ 2,367 313 407
Interest income......................... -- (774) (1,815)
Other, net.............................. -- (2) --
------- -------- --------
Total other (income) expense.......... 2,367 (463) (1,408)
Loss from continuing operations before
income taxes............................. (5,820) (28,682) (52,160)
Benefit from income taxes................. 1,979 2,222 --
------- -------- --------
Loss from continuing operations........... (3,841) (26,460) (52,160)
Discontinued operations:
Income from discontinued operations (net
of income tax provision (benefit) of
$3,880, $(583), and $0 in 1998, 1999,
and 2000, respectively)................ 9,665 550 --
Loss on disposition of discontinued
operations (net of income tax provision
of $0, $2,160 and $0 in 1998, 1999 and
2000, respectively).................... -- (17,337) (5,850)
------- -------- --------
Net income (loss)......................... $ 5,824 $(43,247) $(58,010)
======= ======== ========
Earnings (losses) per share:
Basic and diluted--
Loss from continuing operations....... $ (0.34) $ (1.78) $ (2.37)
Income from discontinued operations... 0.85 0.04 --
Loss on disposition of discontinued
operations........................... -- (1.17) (0.27)
------- -------- --------
Net income (loss)..................... $ 0.51 $ (2.91) $ (2.64)
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
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
------ ------- ---------- ------------ ------------- ------------- ------ ------- --------
Consolidated balance at
December 31, 1997...... 11,487 $115 $ 8,001 $ (5,710) $ (35) 1,069 $(214) $ 2,157
Net income.............. 5,824 $ 5,824 5,824
Translation
adjustments............ (12) (12) (12)
--------
Comprehensive income.... $ 5,812
========
Acquisition of the Gen-X
Companies.............. 1,500 15 8,937 8,952
Issuance of warrants to
purchase common stock
in exchange for
services............... 150 150
Issuance of common stock
upon exercise of
options................ 7 -- 23 23
------ ---- -------- --------- ----- ------ ----- --------
Consolidated balance at
December 31, 1998...... 12,994 130 17,111 114 (47) 1,069 (214) 17,094
Net loss................ (43,247) $(43,247) (43,247)
Translation
adjustments............ -- 47 47 47
--------
Comprehensive loss...... $(43,200)
========
Issuance of common stock
to SOFTBANK, net of
costs.................. 6,154 61 79,755 79,816
Issuance of options and
warrants to purchase
common stock in
exchange for services.. 3,771 3,771
Issuance of common stock
upon exercise of
options and warrants... 396 4 1,824 1,828
------ ---- -------- --------- ----- ------ ----- --------
Consolidated balance at
January 1, 2000........ 19,544 195 102,461 (43,133) -- 1,069 (214) 59,309
Net loss................ (58,010) $(58,010) (58,010)
Translation
adjustments............ --
--------
Comprehensive loss...... $(58,010)
========
Issuance of common stock
and warrants to
SOFTBANK and Rustic
Canyon Ventures, LP,
net of costs........... 3,125 31 24,752 24,783
Issuance of common stock
and warrants to ITH,
net of costs........... 5,000 50 41,263 41,313
Issuance of common stock
in acquisition of
Fogdog, Inc............ 5,067 51 42,305 42,356
Issuance of options and
warrants to purchase
common stock in
exchange for services.. 5,573 5,573
Issuance of common stock
upon exercise of
options and warrants... 205 2 724 726
Issuance of common stock
under Employee Stock
Purchase Plan.......... 53 1 249 250
Retirement of treasury
stock.................. (1,069) (11) (203) (1,069) 214 --
------ ---- -------- --------- ----- ------ ----- --------
Consolidated balance at
December 30, 2000...... 31,925 $319 $217,124 $(101,143) $ -- -- $ -- $116,300
====== ==== ======== ========= ===== ====== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
------------------------------------
December 31, January 1, December 30,
1998 2000 2000
------------ ---------- ------------
Cash Flows from Operating Activities:
Net income (loss)....................... $5,824 $(43,247) $(58,010)
Deduct:
Income from discontinued operations... 9,665 550 --
Loss on disposal of discontinued
operations........................... -- (17,337) (5,850)
------ -------- --------
Loss from continuing operations......... (3,841) (26,460) (52,160)
------ -------- --------
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) operating
activities:
Depreciation and amortization......... 567 728 8,074
Loss on disposition of equipment...... 20 -- --
Stock-based compensation expense...... 150 2,655 4,983
Changes in operating assets and
liabilities, net of acquisitions and
discontinued operations:
Accounts receivable................... -- (2,738) (3,660)
Inventory............................. -- (10,697) (7,056)
Prepaid expenses and other current
assets............................... (169) (845) (49)
Refundable income taxes............... -- (1,338) 1,338
Other assets.......................... 34 174 (196)
Income taxes payable.................. -- (1,379) --
Accounts payable and accrued
advertising, promotion and other
expenses............................. 4,293 17,222 10,351
Deferred revenue...................... -- 505 130
------ -------- --------
Net cash provided by (used in)
continuing operations................ 1,054 (22,173) (38,245)
Net cash provided by (used in)
discontinued operations.............. 1,618 (3,241) (670)
------ -------- --------
Net cash provided by (used in)
operating activities................. 2,672 (25,414) (38,915)
------ -------- --------
Cash Flows from Investing Activities:
Acquisition of property and equipment,
net.................................... (399) (18,422) (13,675)
Net cash received from acquisition of
Fogdog, net of acquisition costs....... -- -- 35,692
Proceeds from sale of discontinued
operations............................. -- 10,317 13,200
Purchase of short-term investments...... -- -- (794)
------ -------- --------
Net cash provided by (used in)
investing activities................. (399) (8,105) 34,423
------ -------- --------
Cash Flows from Financing Activities:
Net repayments under line of credit..... (1,854) (18,812) --
Repayments of capital lease obligation.. (116) (128) (1,394)
Proceeds from issuance of mortgage
note................................... -- -- 5,282
Proceeds from subordinated note from
SOFTBANK............................... -- 15,000 --
Proceeds from sale of common stock and
warrants............................... -- 64,727 64,648
Proceeds from exercises of common stock
options and warrants................... 23 1,828 623
Repayment of subordinated notes payable,
related party.......................... (250) (1,806) --
Proceeds from sale of minority interest
in subsidiary.......................... -- 2 --
Costs of debt issuance.................. (80) (30) --
------ -------- --------
Net cash provided by (used in)
financing activities................. (2,277) 60,781 69,159
Effect of exchange rate changes on cash
and cash equivalents..................... (12) -- --
------ -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (16) 27,262 64,667
Cash and cash equivalents, beginning of
year..................................... 99 83 27,345
------ -------- --------
Cash and cash equivalents, end of year.... $ 83 $ 27,345 $ 92,012
====== ======== ========
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
merchandise retailers, Internet companies and media companies under exclusive
agreements. The Company currently derives virtually all of its revenues from
the sale of sporting goods through its partners' Web sites, direct marketing,
business to business group sales, 800-number sales and related outbound
shipping charges. The Company currently does not derive revenues from the
provision of services to its partners' e-commerce sporting goods businesses.
Each of the Company's partners owns the URL address of its Web site. Based
upon the terms of the agreements with its partners, the Company owns certain
components of the Web sites and the partners own other components.
See Note 19 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 19):
Fiscal Year: During 1999, the Company changed its fiscal year end date from
a calendar year end to a year end date representing the Saturday closest to
December 31, beginning with the fiscal year ended January 1, 2000. The fiscal
year is named for the calendar year ending on that December 31. The effects on
results of operations of the additional day in the fiscal year ended January
1, 2000 and the two fewer days in the fiscal year ended December 30, 2000 are
not significant.
Basis of Consolidation: The financial statements presented include the
accounts of the Company and all wholly-owned or controlled subsidiaries. All
significant intercompany balances and transactions among consolidated entities
have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
Fair Values: The estimated fair value amounts presented in these
consolidated financial statements have been determined by the Company using
available market information and appropriate methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Such fair value estimates are based on pertinent information available to
management as of January 1, 2000 and December 30, 2000, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with maturities at date of purchase of three months or less to be
cash equivalents. The carrying value of cash equivalents approximates their
current market value.
Short Term Investments: Short-term investments consist of commercial paper
and a certificate of deposit. The Company has classified these short-term
investments as held-to-maturity, and recorded them at amortized cost.
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. Costs incurred to develop internal-
use computer software during the application development stage generally are
capitalized. Costs of enhancements to internal-use computer software are
capitalized, provided that these enhancements result in additional
functionality. Depreciation or amortization is provided using the straight-
line method over the estimated useful lives of the assets, which are
generally:
. Two to four years for computer hardware and software;
. Three to ten years for furniture, warehouse and office equipment;
. The lesser of fifteen years or lease term for leasehold improvements;
. Fifteen years for building improvements; and
. Thirty years for buildings.
Upon retirement or other disposition of these assets, the cost and related
accumulated depreciation or amortization are removed from the accounts and the
resulting gain or loss, if any, is recognized as a component of depreciation
or amortization expense. Expenditures for maintenance and repairs are expensed
as incurred.
Goodwill: Goodwill represents the excess of the purchase price over the
estimated fair value of net assets acquired in a business combination.
Goodwill will be amortized on a straight-line basis over twenty years.
Long-Lived Assets: The realizability of long-lived assets is evaluated
periodically as events or circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on the existing business. The analyses
necessarily involve significant management judgment. Any impairment loss, if
indicated, is measured as the amount by which the carrying amount of the asset
exceeds the estimated fair value of the asset.
Foreign Currency Translation: In accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation," exchange adjustments resulting from foreign currency
transactions generally are recognized currently in income, whereas adjustments
resulting from translations of financial statements are reflected in
accumulated other comprehensive income (loss). The cumulative currency
translation loss as of December 31, 1998 was $47,000. Gains and losses on
foreign currency transactions for the fiscal years ended December 31, 1998 and
January 1, 2000 resulted in net foreign currency losses of $194,000 and
$104,000, respectively, and are included in discontinued operations. There
were no foreign currency transactions in the fiscal year ended December 30,
2000.
Deferred Revenue: Deferred revenue consists of fees to be earned in future
periods under an agreement existing at the balance sheet date, as well as
amounts received from the sale of gift certificates redeemable on our
partners' Web sites.
Net Revenues: The Company provides various services to its partners,
including the design, development, maintenance and promotion of customized Web
sites. The Company has not derived revenues from the provision of these
services. Net revenues are derived from sales of sporting goods through our
partners' Web sites, direct marketing, business to business group sales and
800-number sales, and related outbound shipping charges, net of allowances for
returns and discounts. Revenues from product sales are recognized upon the
shipment of product to customers. The Company has agreements with certain
suppliers, pursuant to which the suppliers deliver items directly to
consumers, known as drop shipping. The Company acts as principal in those
transactions, as orders
F-7
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are initiated directly on the Company's Web site, the Company takes title to
the goods during shipment, and has the economic risk related to collection,
customer service and returns. Revenues may occasionally be recognized on a
"bill and hold" basis when, at the request of our partners to support specific
unique merchandising needs, title and risks of ownership pass to them prior to
shipment and the Company has substantially met its performance obligations.
Related inventories held for such partners were not significant at December
30, 2000. Net revenues also include fees, recorded as they are earned, related
to certain marketing efforts. Other sources of revenue, including the sale of
gift certificates to the Company's retail partners' land-based stores and the
sale of advertising on the partners' Web sites, were not significant for the
fiscal years ended January 1, 2000 and December 30, 2000.
Cost of Revenues: Cost of revenues includes the cost of products sold and
inbound freight related to these products, as well as outbound shipping and
handling costs, other than those related to promotional free shipping and
handling and subsidized shipping and handling which are included in sales and
marketing expense.
Sales and Marketing: Sales and marketing expenses include advertising,
promotional expenses including subsidized shipping, distribution facility
expenses, order processing fees and payroll and related expenses. Also
included in this amount are partner revenue shares which are payments made to
our partners in exchange for the use of their brand assets, the promotion of
their URLs and Web sites in marketing and communications materials, the
implementation of programs to provide incentives to the in-store customers to
shop online and other programs and services provided to the customers of our
partners' Web sites. Partner revenue shares were not significant for the
fiscal years ended January 1, 2000 and December 30, 2000.
Shipping & Handling Costs: The Company defines shipping and handling costs
as only those costs incurred for a third-party shipper to transport products
to the customer and these costs are included in Cost of Revenues. In some
instances, shipping and handling costs exceed shipping revenues charged to the
customer, and are subsidized by the Company. Additionally, the Company
selectively offers promotional free shipping and ships merchandise to
customers free of all shipping and handling charges. The cost of promotional
free shipping and subsidized shipping and handling was $566,000 and $3.0
million for the fiscal year ended January 1, 2000 and December 30, 2000,
respectively, and was charged to Sales & Marketing expense.
Advertising: The Company expenses the cost of advertising, which includes
media, agency and production expenses, in accordance with the AICPA Accounting
Standards Executive Committee's Statement of Position ("SOP") 93-7, "Reporting
on Advertising Costs." Advertising production costs are expensed the first
time the advertisement is run. Media (television, radio and print) placement
costs are expensed in the month the advertising appears. Agency fees are
expensed as incurred. Advertising expense was $3.9 million, and $11.3 million,
for the fiscal years ended January 1, 2000, and December 30, 2000,
respectively. Advertising expense of discontinued operations was $1.8 million
for the fiscal year ended December 31, 1998.
Product Development: Product development expenses consist primarily of
expenses associated with planning, maintaining and operating the partners' Web
sites; and payroll and related expenses for the engineering, production,
creative and management information systems departments.
Stock-Based Compensation: SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic method prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options issued to
employees is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock. The Company accounts for stock-based compensation issued
to non-employees in accordance with SFAS No. 123 and Emerging Issues Task
Force ("EITF") No. 96-
F-8
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18, "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Income Taxes: The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in tax
rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Reclassifications: Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to those classifications
used in the current year.
New Accounting Pronouncements
Web Site Development Costs: Effective July 2, 2000, the Company adopted EITF
Issue No. 00-2, "Accounting for Web Site Development Costs". This statement
provides guidance on accounting for Web site development costs. Adoption of
this statement did not have a material effect on the Company's financial
position or results of operations.
Shipping and Handling Fees and Costs: In July 2000, the EITF reached a
consensus on EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees
and Costs." This consensus requires that all amounts billed to customers
related to shipping and handling, if any, represent revenue and should be
classified as revenue.
In September 2000, the EITF further refined this consensus and stated that
the classification of shipping and handling costs is an accounting policy
decision that should be disclosed pursuant to APB Opinion No. 22, "Disclosure
of Accounting Policies." The EITF further stated that a company may adopt a
policy of including shipping and handling costs in cost of sales. However, if
shipping or handling costs are significant and are not included in cost of
sales, the company should disclose both the amount(s) of such costs and the
line item(s) on the income statement that include them. EITF Issue No. 00-10
was adopted by the Company in the fourth quarter of fiscal 2000, and did not
have a significant impact on the Company's financial position or results of
operations.
Revenue Recognition in Financial Statements: In December 1999, the
Securities and Exchange Commission staff released Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. This pronouncement was adopted in the fourth quarter of
2000, and did not have a significant impact on the Company's financial
position or results of operations.
Reporting Revenue Gross vs. Net: In September 2000, the EITF reached
consensus on EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." This pronouncement was adopted in the fourth quarter
of 2000, and did not have a significant impact on the Company's financial
position or results of operations.
Derivative Instruments: SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities.") establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for fiscal years beginning after June 15, 2000,
although early adoption is encouraged. The Company has determined that the
adoption of this pronouncement will not have a significant impact on the
Company's financial position or results of operations.
F-9
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--ACQUISITION
On December 28, 2000, the Company completed its acquisition of Fogdog, Inc.
("Fogdog") pursuant to a definitive merger agreement executed on October 24,
2000. As consideration for the purchase, the Company issued to the
stockholders of Fogdog approximately 5.1 million shares of the Company's
common stock valued at $38.7 million based on the stock price as of the
measurement date.
The acquisition has been accounted for under the purchase method and the
acquisition costs of $44.7 million have been allocated to the assets acquired
and the liabilities assumed based upon estimates of their respective fair
values. A total of $14.4 million, representing the excess of the purchase
price over fair value of the net tangible assets acquired, has been allocated
to Goodwill and will be amortized by the straight-line method over twenty
years.
The allocation of the purchase price for the acquisition is preliminary
pending completion of final appraisals.
The Company's consolidated results of operations incorporates Fogdog's
results of operations commencing upon the December 28, 2000 acquisition date.
The effect of incorporating Fogdog's results of operations for the three days
ended December 30, 2000 was not significant.
The unaudited pro forma combined information below presents the combined
results of operations of the Company as if the acquisition had occurred at the
beginning of the respective periods presented. The unaudited pro forma
combined information, based upon the historical consolidated financial
statements of the Company and Fogdog, is based on an acquisition cost of $44.7
million and assumes that an estimated $14.4 million of acquisition cost over
the book value of Fogdog's net tangible assets is allocated to Goodwill with a
useful life of twenty years.
Fiscal Year Ended
-----------------------
January 1, December 30,
2000 2000
---------- ------------
(in thousands, except
per share amounts)
Revenues............................................... $ 12,534 $ 70,413
Net loss............................................... $(69,269) $(102,813)
Net loss per share (1)................................. $ (3.47) $ (4.67)
(/1/Net)loss per share is calculated using the weighted average number of
common shares outstanding, including the issuance of approximately
5,100,000 shares to stockholders of Fogdog as if such event had occurred
on January 1, 1999.
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future results.
F-10
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, as of January 1, 2000
and December 30, 2000 are as follows:
January 1, December 30,
2000 2000
---------- ------------
(in thousands)
Computer hardware and software...................... $10,179 $21,645
Building............................................ 6,438 6,756
Building--under capital lease (see Note 5).......... 2,667 --
Furniture, warehouse and office equipment........... 1,793 3,972
Land................................................ 1,240 1,242
Leasehold improvements.............................. 328 1,016
Construction in progress............................ 34 5
------- -------
22,679 34,636
Less: Accumulated depreciation and amortization..... (1,997) (8,212)
------- -------
Property and equipment, net......................... $20,682 $26,424
======= =======
NOTE 5--LEASES
Capital Leases
In September 1994, the Company entered into a fifteen-year capital lease
with its Chairman, President and Chief Executive Officer for its former
corporate headquarters and warehouse space. Effective December 30, 2000, the
lease was terminated. The Company paid all insurance and maintenance relating
to the leased property. The mortgages on the leased property were
collateralized by guarantees of a subsidiary of the Company and had an
aggregate outstanding principal balance of $1.5 million and $0 as of January
1, 2000 and December 30, 2000, respectively. As of January 1, 2000, and
December 30, 2000, the Company's net investment was $1.8 million, and $0,
respectively, which is included in property and equipment. Interest expense
recorded was $234,000, $223,000, and $124,000 for the fiscal years ended
December 31, 1998, January 1, 2000, and December 30, 2000, respectively.
During the fourth quarter of fiscal 2000, the Company entered into various
capital leases for computer hardware and furniture. As of December 30, 2000,
the leases had an aggregate outstanding principal balance of $788,000, and the
Company's net investment in these capital leases was $833,000, which is
included in property and equipment. Interest expense recorded on the capital
leases for the fiscal year ended December 30, 2000 was $3,000.
Operating Leases
The Company currently leases its Louisville, KY fulfillment center as well
as certain fixed assets under noncancellable operating leases. Rental expense
under operating lease agreements was $316,000, $213,000, and $1.2 million for
the fiscal years ended December 31, 1998, January 1, 2000, and December 30,
2000, respectively.
F-11
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under leases as of December 30, 2000, together
with the present value of those future minimum lease payments, are as follows:
Capital Operating
Leases Leases
------- ---------
(in thousands)
2001...................................................... $400 $1,304
2002...................................................... 425 1,218
2003...................................................... 137 1,127
2004...................................................... -- 1,120
2005...................................................... -- 467
---- ------
Total future minimum lease payments....................... 962 $5,236
======
Less: Interest discount amount............................ 174
----
Total present value of future minimum lease payments...... 788
Less: Current portion..................................... 285
----
Long-term portion......................................... $503
====
NOTE 6--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 Series A preferred
stock. The redemption price of these shares of preferred stock, which
originally was contingent on certain sales and gross profit targets, ranged
from a minimum of $.01 per share to a maximum of $50.00 per share, and the
shares were redeemable over a five year period. During the fiscal year ended
January 1, 2000, 2,000 shares were redeemed for $100,000 (see Note 19).
In connection with the sale of the Company's Off-Price and Action Sports
division (see Note 19), the Company redeemed an additional 7,200 shares on May
26, 2000 for an aggregate redemption price of $360,000. The remaining 800
shares of Series A preferred stock which were outstanding as of December 30,
2000 are redeemable over a four year period for an aggregate redemption price
of $8.00.
Common Stock: The Company is authorized to issue up to 60,000,000 shares of
common stock, $.01 par value.
On September 13, 2000, the Company agreed to sell to Interactive Technology
Holdings, LLC, a joint venture company formed by Comcast Corporation and QVC,
Inc. ("ITH"), 5,000,000 shares of common stock at $8.15 per share in cash, for
an aggregate purchase price of $40.8 million. In addition, ITH agreed to
acquire, for an aggregate purchase price of $563,000, warrants to purchase
2,500,000 shares of the Company's common stock at an exercise price of $10.00
per share and 2,000,000 shares of the Company's common stock at an exercise
price of $8.15 per share. These warrants have terms of five years. This
investment was completed through two separate closings. On September 13, 2000,
ITH invested $14.9 million, and on October 5, 2000, ITH invested $26.4
million. The Company has granted ITH certain "demand" and "piggy-back"
registration rights with respect to the shares of common stock issued to ITH
and issuable to ITH upon exercise of the warrants.
F-12
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 27, 2000, the Company agreed to sell to funds affiliated with
SOFTBANK America Inc. (collectively "SOFTBANK") 2,500,000 shares of common
stock and to Rustic Canyon Ventures, LP (f/k/a TMCT Ventures, LP) ("TMCT")
625,000 shares of common stock at a price of $8.00 per share in cash for an
aggregate purchase price of $25.0 million. The sale of these shares was
completed on May 1, 2000. In addition, as part of this financing, the Company
issued to SOFTBANK warrants to purchase 1,250,000 shares of common stock and
to TMCT warrants to purchase 312,500 shares of common stock. These warrants
have three-year terms and exercise prices of $10.00 per share.
On June 10, 1999, the Company and 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 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
$80,000,000, reduced by transaction costs of $183,000 and accrued interest of
$89,000 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.
Employee Stock Purchase Plan: In March 2000, the Company's board of
directors adopted, and in May 2000, the Company's shareholders approved, the
2000 Employee Stock Purchase Plan (the "ESPP"). A total of 400,000 shares of
common stock are authorized for issuance under the ESPP, plus an annual
increase equal to the lesser of (i) 50,000 shares, or (ii) such smaller number
of shares as determined by the board of directors; provided that the total
aggregate number of shares issuable under the ESPP may not exceed 900,000
shares. The ESPP is implemented by the periodic offerings of rights to all
eligible employees from time to time, as determined by the board of directors.
The maximum period of time for an offering is 27 months. The purchase price
per share at which common stock is sold in an offering is established by the
board of directors prior to the commencement of the offering, but such price
may not be less than the lower of (i) 85% of the fair market value of a share
of common stock on the date the right to purchase such shares was granted
(generally the first day of the offering) or (ii) 85% of the fair market value
of a share of common stock on the applicable purchase date. As of December 30,
2000, 53,290 shares of common stock had been issued under the ESPP.
Treasury Stock: On March 13, 2000, the Company's Board of Directors approved
the retirement of 1,069,086 shares of treasury stock held by the Company.
NOTE 7--STOCK OPTIONS AND WARRANTS
The Company maintains qualified and nonqualified stock option plans for
certain employees, directors and other persons (the "Plans"). Under the terms
of the Plans, the Company may grant qualified and nonqualified options and
warrants to purchase up to 4,762,571 shares of common stock to employees,
directors, and others. 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 market value on the date of grant of the shares
subject to the SAR, although certain other measurements also may be used. A
SAR granted in tandem with a stock option is exercisable only if and to the
extent that the option is exercised. No SAR's have been granted to date under
the Plans.
In connection with the Fogdog acquisition, the Company assumed all of the
outstanding options issued under the Fogdog, Inc. 1999 Stock Incentive Plan
(the "Fogdog Plan"), as well as the outstanding warrant held by Nike USA, Inc.
("NIKE"). Upon closing of the merger, options outstanding under the Fogdog
Plan became options to purchase an aggregate of 381,500 shares of the
Company's common stock, and the warrant
F-13
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding held by Nike became a warrant to purchase 555,437 shares of the
Company's common stock. The terms of the Fogdog options are similar to the
terms of the options issuable under the Company's Plans.
The following table summarizes the stock option activity for the fiscal
years ended December 31, 1998, January 1, 2000, and December 30, 2000:
Weighted
Average
Number of Exercise
Shares Price
-------------- --------
(in thousands)
Outstanding as of December 31, 1997.................. 543 $ 5.45
Granted............................................ 696 5.79
Exercised.......................................... (7) 3.20
Cancelled.......................................... (43) 6.24
-----
Outstanding as of December 31, 1998.................. 1,189 5.71
Granted............................................ 1,308 14.82
Exercised.......................................... (346) 4.84
Cancelled.......................................... (227) 8.03
-----
Outstanding as of January 1, 2000.................... 1,924 11.71
Granted and assumed(/1/)........................... 3,472 8.92
Exercised.......................................... (202) 3.15
Cancelled.......................................... (642) 14.93
-----
Outstanding as of December 30, 2000.................. 4,552 9.29
=====
- --------
(/1/Includes)the assumption of 381,500 outstanding options issued under the
Fogdog, Inc. 1999 Stock Incentive Plan assumed by the Company in
connection with the Fogdog acquisition.
The following table summarizes the warrant activity for the fiscal years
ended December 31, 1998, January 1, 2000, and December 30, 2000:
Weighted
Average
Number of Exercise
Shares Price
-------------- --------
(in thousands)
Outstanding as of December 31, 1997.................. 236 $ 5.37
Granted............................................ 67 6.71
Exercised.......................................... -- --
Cancelled.......................................... (97) 4.27
-----
Outstanding as of December 31, 1998.................. 206 6.35
Granted............................................ 333 14.42
Exercised.......................................... (50) 7.63
Cancelled.......................................... (1) 16.25
-----
Outstanding as of January 1, 2000.................... 488 11.90
Granted and assumed(/1/)........................... 7,045 9.59
Exercised.......................................... (2) 7.35
Cancelled.......................................... (280) 16.22
-----
Outstanding as of December 30, 2000.................. 7,251 9.50
=====
- --------
(/1/Includes)the assumption of the outstanding warrant to purchase 555,437
shares of the Company's common stock held by Nike assumed by the Company
in connection with the Fogdog acquisition.
During the fiscal year ended December 30, 2000, the Company granted to
employees restricted stock awards and options to purchase an aggregate of
2,875,439 shares of the Company's common stock at prices ranging from $0.01 to
$20.75 per share; granted to retailers and consultants options and warrants to
purchase an aggregate
F-14
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of 641,915 shares of the Company's common stock at prices ranging from $0.01
to $18.00 per share; and issued to investors warrants to purchase an aggregate
of 6,062,500 shares of the Company's common stock at prices ranging from $8.15
to $10.00 per share. The value of options, warrants and restricted stock
granted during fiscal 2000 amounted to $6.6 million ($3.4 million relating to
employees and $3.2 million relating to retailers, consultants, and investors).
For the fiscal year ended December 30, 2000, the Company recorded $5.5 million
of stock-based compensation expense. Of this amount, $5.0 million is included
in continuing operations ($1.6 million relating to employees and $3.4 million
relating to retailers, consultants, and investors) and $475,000 is included in
discontinued operations. The balance of the value of options, warrants, and
restricted stock granted during fiscal 2000 will be recognized as services are
provided over terms ranging from one to four years.
During the fiscal year ended December 30, 2000, the Company changed the
vesting schedule or exercise price of 351,405 options and warrants. The
exercise prices were changed to prices ranging from $0.01 to $8.15 per share.
Because these options and warrants were accelerated or repriced, they are
subject to variable plan accounting, and the Company recognized $799,000 of
stock-based compensation expense for the fiscal year ended December 30, 2000,
which is included in the amount of stock-based compensation expense described
above. Of this amount, $465,000 is included in continuing operations and
$334,000 is included in discontinued operations. The amount of stock-based
compensation expense recognized in future years is subject to adjustment based
upon changes in the price of the Company's common stock.
During the fiscal year ended January 1, 2000, the Company granted to
retailers, consultants and employees options, warrants and restricted 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 restricted stock granted during fiscal 1999
amounted to $5.3 million ($406,000 relating to employees and $4.9 million
relating to retailers and consultants). For the fiscal year ended January 1,
2000, the Company recorded $3.8 million of stock-based compensation expense.
Of this amount, $2.7 million is included in continuing operations ($218,000
relating to employees and $2.5 million relating to retailers and consultants)
and $1.1 million is included in discontinued operations. The balance of the
value of options, warrants, and restricted stock granted during fiscal 1999
will be recognized as services are provided over terms ranging from four to
five years.
During the latter part of the fiscal year ended January 1, 2000, the Company
issued options to purchase 123,500 shares of the Company's common stock with a
fair market value at the dates of grant amounting to $1.6 million to non-
employees which are included in the options and warrants described above.
Because these options 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 options as required by
EITF No. 96-18 and recognized $66,000 and $111,000 as compensation expense for
the fiscal years ended January 1, 2000, and December 30, 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 during the
fiscal year ended January 1, 2000, the Company accelerated the vesting of
415,441 options previously granted to employees of the discontinued operations
as an inducement to remain with the businesses for a period of ninety days
following their sale. For accounting purposes, the Company considers this
action a cancellation of a previous award and the grant of a new award. Since
the grantees will not be employees of the Company when the options are vested,
the Company valued the awards in accordance with the provisions of SFAS No.
123 and charged the related expense to discontinued operations for the fiscal
year ended January 1, 2000. As these awards required counterparty performance
conditions, they are subject to variable plan accounting and the ultimate cost
to be recognized for these awards is subject to adjustment in each subsequent
reporting period.
F-15
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 $7.80 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
for the fiscal year ended December 31, 1998 related to these warrants which is
included in stock-based compensation.
The following table summarizes information regarding options and warrants
outstanding and exercisable as of December 30, 2000:
Outstanding Exercisable
------------------------------------------------ -------------------------------
Weighted Average
Range of Number Remaining Number
Exercise Outstanding Contractual Life Weighted Average Exercisable Weighted Average
Prices (in thousands) In Years Exercise Price (in thousands) Exercise Price
-------- -------------- ---------------- ---------------- -------------- ----------------
$ 0.01 - $ 6.88 2,712 8.11 $4.40 980 $ 4.87
$ 6.94 - $ 7.80 569 8.93 7.23 182 7.48
$ 7.94 - $ 9.26 2,627 5.19 8.14 2,242 8.15
$ 9.40 - $ 10.00 4,111 5.45 10.00 4,111 10.00
$10.19 - $ 25.00 1,703 6.34 15.29 1,080 13.77
$25.70 - $103.24 81 4.34 43.53 54 39.72
------ -----
$ 0.01 - $103.24 11,803 6.24 9.26 8,649 9.55
====== =====
As of December 30, 2000, 208,898 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, the
Company's pro forma net income (loss) and earnings (losses) per share for the
fiscal years ended December 31, 1998, January 1, 2000, and December 30, 2000
would have been as follows:
As Reported Pro Forma
----------- ---------
(in thousands)
---------------------
Fiscal Year Ended December 31, 1998
Net income......................................... $ 5,824 $ 4,711
======== ========
Earnings per share--basic and diluted.............. $ 0.51 $ 0.41
======== ========
Fiscal Year Ended January 1, 2000
Net loss........................................... $(43,247) $(46,850)
======== ========
Losses per share--basic and diluted................ $ (2.91) $ (3.15)
======== ========
Fiscal Year Ended December 30, 2000
Net loss........................................... $(58,010) $(64,203)
======== ========
Losses per share--basic and diluted................ $ (2.64) $ (2.91)
======== ========
The weighted average fair value of the stock options granted during the
fiscal years ended December 31, 1998, January 1, 2000, and December 30, 2000
were $3.79, $14.82 and $6.63 per share, respectively.
The fair value of options granted under the Plans during the fiscal years
ended December 31, 1998, January 1, 2000, and December 30, 2000 were estimated
on the date of grant using the Black-Scholes multiple option pricing model,
with the following assumptions:
F-16
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year Ended
---------------------------------------------------
Assumption December 31, 1998 January 1, 2000 December 30, 2000
- ---------- ----------------- --------------- -----------------
Dividend yield............ None None None
Expected volatility....... 77.17% 50.00% 90.00%
Average risk free interest
rate..................... 5.16% 5.57% 5.26%
Average expected lives.... 5.76 years 6.28 years 4.45 years
NOTE 8--STOCK-BASED COMPENSATION
The following table shows the amounts of stock-based compensation, arising
primarily from issuances of stock options and warrants, that would have been
recorded under the following income statement categories had stock-based
compensation not been separately stated in the statements of operations:
Fiscal Year Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
(in thousands)
Sales and marketing....... $-- $ 192 $1,486
Product development....... -- 20 --
General and
administrative........... 150 2,443 3,497
---- ------ ------
$150 $2,655 $4,983
==== ====== ======
NOTE 9--INCOME TAXES
The loss from continuing operations before income taxes and the related
benefit from income taxes were as follows:
Fiscal Year Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
(in thousands)
Loss from continuing
operations before income
taxes:
Domestic................ $5,820 $28,682 $52,160
Foreign................. -- -- --
------ ------- -------
Total................. $5,820 $28,682 $52,160
====== ======= =======
Benefit from income taxes:
Current:
Federal................. $1,979 $ 2,115 $ --
State................... -- -- --
Foreign................. -- -- --
------ ------- -------
Total Current......... $1,979 $ 2,115 $ --
====== ======= =======
Deferred:
Federal................. $ -- $ 107 $ --
State................... -- -- --
Foreign................. -- -- --
------ ------- -------
Total Deferred........ $ -- $ 107 $ --
====== ======= =======
Total:
Federal................. $1,979 $ 2,222 $ --
State................... -- -- --
Foreign................. -- -- --
------ ------- -------
Total................. $1,979 $ 2,222 $ --
====== ======= =======
For the fiscal year ended December 30, 2000, the Company had no provision
for federal and state income taxes.
F-17
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of January 1, 2000, the Company had recorded $1.3 million in refundable
income taxes resulting from the carryback of operating losses incurred during
the fiscal year ended January 1, 2000. This balance was included in current
assets as of January 1, 2000. The Company received the refund in December,
2000.
The significant components of net deferred tax assets and liabilities as of
December 31, 1998, January 1, 2000, and December 30, 2000 consisted of the
following:
Fiscal Year Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
(in thousands)
Deferred tax assets:
Net operating loss
carryforwards.......... $ 8,036 $ 21,509 $71,915
Deferred revenue........ -- 206 258
Employee benefits....... -- 416 1,599
Inventory............... -- 241 1,066
Depreciation............ -- 154 3,295
Provision for doubtful
accounts............... 309 112 347
------- -------- -------
Gross deferred tax
assets............... 8,345 22,638 78,480
Deferred tax liabilities.. -- -- --
------- -------- -------
Net deferred tax assets
and liabilities.......... 8,345 22,638 78,480
Valuation allowance..... (8,345) (22,638) (78,480)
------- -------- -------
Net deferred tax asset.... $ -- $ -- $ --
======= ======== =======
Due to the uncertainty surrounding the realization of the Company's tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of
December 30, 2000, the Company had available net operating loss carryforwards
of approximately $176.5 million which expire in the years 2002 through 2020.
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:
Fiscal Year Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
Statutory federal income
tax rate................. (34.0)% (34.0)% (34.0)%
Increase (decrease) in
taxes resulting from:
Valuation allowance..... -- 30.8% 33.8%
Carryback claim refund.. -- (4.6)% --
Other................... -- 0.1% 0.2%
----- ----- -----
Effective income tax
rate..................... (34.0)% (7.7)% 0.0%
===== ===== =====
NOTE 10--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-18
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 Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
(in thousands)
Loss from continuing
operations............... $(3,841) $(26,460) $(52,160)
Income from discontinued
operations............... 9,665 550 --
Loss on disposition of
discontinued operations.. -- (17,337) (5,850)
------- -------- --------
Net income (loss)......... $ 5,824 $(43,247) $(58,010)
======= ======== ========
Weighted average shares
outstanding--basic and
diluted.................. 11,379 14,874 22,028
======= ======== ========
Outstanding common stock
options having no
dilutive effect.......... 533 1,924 4,552
======= ======== ========
Outstanding common stock
warrants having no
dilutive effect.......... 384 488 7,251
======= ======== ========
NOTE 11--SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK
For the fiscal year ended December 30, 2000, net revenues included $8.4
million from sales of one vendor's products sold primarily through direct
marketing in addition to Web site and other 800-number sales. The resulting
accounts receivable of $2.7 million is due over a weighted average period of
eight months from the date of sale.
For the fiscal year ended January 1, 2000, net revenues included revenues
from WebMD of $2.8 million through the sale of product to support the launch
of the WebMD Sports & Fitness Store. As of January 1, 2000, WebMD represented
substantially all of the balance in accounts receivable. During the fiscal
quarter ended January 1, 2000, the Company also agreed to purchase advertising
from WebMD in the aggregate amount of $3.0 million. Advertising under this
arrangement was completed in the second quarter of the fiscal year ended
December 30, 2000.
Cash equivalents potentially subject the Company to credit risk. As of
December 30, 2000 the Company had $77.6 million invested in Money Market funds
with three financial institutions. The composition of these investments are
regularly monitored by management.
NOTE 12--MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
During the fiscal year ended December 30, 2000, the Company purchased from a
single supplier $6.0 million or 16% of total inventory purchased.
During the fiscal year ended January 1, 2000, the Company purchased
inventory from two suppliers amounting to $2.2 million and $1.8 million or 15%
and 12% of total inventory purchased, respectively.
No other supplier amounted to more than 10% of total inventory purchased for
any period presented.
F-19
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various routine litigation, including litigation
in which the Company is a plaintiff, incidental to its business. The Company
believes that the disposition of such routine litigation will not have a
material adverse effect on the financial position or results of operations of
the Company.
Employment Agreements
As of December 30, 2000, the Company had employment agreements with several
of its officers for an aggregate annual base salary of $2.1 million plus bonus
and increases in accordance with the terms of the agreements. Terms of such
contracts range from one to four years and are subject to automatic annual
extensions.
Advertising and Media Agreements
As of December 30, 2000, the Company was contractually committed for the
purchase of future advertising totaling approximately $1.0 million through the
fiscal year ending December 29, 2001. The expense related to these commitments
will be recognized in accordance with the Company's accounting policy related
to advertising (see Note 2).
Partner Relationships
The Company has three different structures for its alliances. The Company's
agreements with Bally Total Fitness, Dunham's Sports, FOXSPORTS.com, MC
Sports, Oshman's Sporting Goods, Sport Chalet, The Athlete's Foot, and WebMD
are exclusive licensing arrangements whereby the Company records 100% of the
revenues generated through the Company's partners' e-commerce sporting goods
businesses and pays a percentage of those revenues to the partner in exchange
for the right to operate their e-commerce sporting goods businesses under
their brand names, the promotion of their URLs and Web sites and other
programs and services provided to their customers. WebMD and the Company are
generally operating under the terms of a letter of intent which expired on
October 29, 1999.
The Company entered into an exclusive agreement with The Sports Authority,
Inc. (the "TSA Agreement") through the Company's 80.1% owned subsidiary
TheSportsAuthority.com ("TSA.com"). TSA.com pays a royalty to The Sports
Authority, Inc. based on a percentage of sales generated by 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.
The Company entered into agreements with Bluelight.com, buy.com, and iQVC
wherein the Company provides a product information database to each of these
partners which they use to merchandise the sporting goods department of their
flagship Web sites.
NOTE 14--SAVINGS PLAN
The Company sponsors a voluntary defined contribution savings plan covering
all U.S. employees. Company contributions to the plan for each employee may
not exceed 3.0% of the employee's annual salary. Total Company contributions
were $21,000, $28,000 and $132,000 for the fiscal years ended December 31,
1998, January 1, 2000, and December 30, 2000, respectively.
F-20
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Fiscal Year Ended
---------------------------------------------------
December 31, 1998 January 1, 2000 December 30, 2000
----------------- --------------- -----------------
(in thousands)
Cash paid during the year
for interest.............. $3,056 $ 1,994 $ 976
====== ======= ========
Notes payable issued in
acquisitions.............. $6,000 $ -- $ --
====== ======= ========
Issuance of common stock
for acquisition of the
Gen-X Companies........... $8,952 $ -- $ --
====== ======= ========
Issuance of common stock in
satisfaction of accrued
interest on subordinated
note from SOFTBANK........ $ -- $ 89 $ --
====== ======= ========
Issuance of common stock
upon conversion of the
SOFTBANK subordinated
note...................... $ -- $15,000 $ --
====== ======= ========
Acquisition of Fogdog:
Fair value of assets
acquired (including
goodwill)................ $ -- $ -- $ 60,876
Liabilities assumed....... -- -- (16,128)
Stock issued.............. -- -- (42,356)
------ ------- --------
Cash paid................. -- -- 2,392
Cash acquired............. -- -- 38,084
------ ------- --------
Net cash received from
acquisition of Fogdog... $ -- $ -- $ 35,692
====== ======= ========
NOTE 16--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 merchandise retailers, Internet companies and media
companies in domestic markets. The Company currently derives virtually all of
its revenues from the sale of sporting goods through its partners' Web sites,
direct marketing, business to business group sales, 800-number sales and
related outbound shipping charges. All of the Company's net sales, operating
results and identifiable assets are in the United States. See Note 19 for a
discussion of the Company's discontinued operations.
NOTE 17--RELATED PARTY TRANSACTIONS
The Company has entered into strategic alliances to provide procurement and
fulfillment services for certain partners which are affiliates of SOFTBANK (or
its related companies). The Company recognized net revenues of $0 and $2.7
million on sales to these related parties for the fiscal years ended January
1, 2000 and December 30, 2000, respectively. The terms of these sales are
comparable to those given to other partners of the Company and amounts
included in accounts receivable as a result of these sales was $0 and $702,000
as of January 1, 2000 and December 30, 2000, respectively.
The Company leased an office and warehouse facility from the Company's
Chairman, President and Chief Executive Officer (see Note 5). The lease was
terminated effective December 30, 2000, and a $500,000 lease termination fee
was outstanding as of December 30, 2000 and recorded in accrued advertising,
promotion and other expenses.
F-21
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18--NOTE PAYABLE
Mortgage Note
On April 20, 2000, the Company entered into a $5.3 million mortgage note
collateralized by the land, building, and improvements of its corporate
headquarters which have a carrying value of $7.7 million. The mortgage note
has a term of ten years and bears interest at 8.49% per annum. As of December
30, 2000, the mortgage note had an aggregate outstanding principal balance of
$5.3 million, with $35,000 classified as current, and $5.2 million classified
as long term. The Company recorded $318,000 of interest expense related to
this note during the fiscal year ended December 30, 2000.
The fair value of the mortgage note is estimated based on current rates
offered for similar debt with similar terms and maturity using available
market information. At December 30, 2000, the estimated fair value of the
Company's mortgage note approximates its carrying value.
NOTE 19--DISCONTINUED OPERATIONS
On April 20, 1999, the Company formalized a plan to sell two of its
businesses, the Branded division and the Off-Price and Action Sports division,
in order to focus exclusively on its e-commerce business. The Branded division
designed and marketed the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division was a third-party distributor and make-to-order
marketer of off-price footwear, apparel and sporting goods. Accordingly, for
financial statement purposes, the assets, liabilities, results of operations
and cash flows of these divisions have been segregated from those of
continuing operations and are presented in the Company's financial statements
as discontinued operations. The accompanying financial statements have been
reclassified to reflect this presentation.
On September 24, 1999, the Company and a management group led by James J.
Salter and Kenneth J. Finkelstein entered into an acquisition agreement
providing for the sale of the Company's Off-Price and Action Sports division,
including the sale of all of the issued and outstanding capital stock of the
Company's wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment
Inc. (collectively, the "Gen-X Companies"). On March 13, 2000, the acquisition
agreement was amended to, inter alia, (i) extend the date after which either
party could terminate the acquisition agreement, (ii) provide for a larger
portion of the purchase price to be paid in cash instead of a combination of
cash and promissory notes, (iii) reduce the purchase price as a result of more
of the purchase price being paid in cash, (iv) provide the purchaser with a
breakup fee of $1.5 million, if the Company terminated the agreement under
certain circumstances, and (v) to accelerate the vesting of options to
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 $17.2 million, consisting of a cash payment of $6.0
million deposited in an escrow account by the purchaser on March 13, 2000, a
cash payment at closing of $7.2 million and assumption of certain notes
payable by Global in the aggregate principal amount of approximately $4.0
million. For fiscal 1999, the Company recognized a loss of $5.2 million
related to the disposition of this division.
On December 29, 1999, Global sold substantially all of the assets of its
Branded division (other than the accounts receivable which totaled
approximately $6.6 million as of December 29, 1999) to American Sporting Goods
Corporation in exchange for a cash payment of $10.4 million. The Company
recognized a loss of $12.1 million on the sale of the Branded division,
including operating losses of $5.3 million subsequent to the measurement date
of April 20, 1999.
Upon initial adoption of the plan to sell these businesses, management
expected to recognize a gain upon the disposal of its historical businesses.
During the quarter ended June 30, 1999, management revised its
F-22
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimates and recorded a loss on disposal of $5.6 million. During the quarter
ended January 1, 2000, when the Company consummated the sale of its Branded
division, the proceeds from the sale were substantially lower than formerly
anticipated. As a result of this transaction and the renegotiation of the sales
price for the Off-Price and Action Sports division, management made further
revisions to its estimates and recognized additional losses on disposal of
$11.7 million during the quarter ended January 1, 2000.
On May 26, 2000, the Company completed the previously announced sale of its
Off-price and Action Sports division. The Company received $13.2 million in
cash proceeds from the sale. This sale completed the disposition of the
Company's discontinued operations.
During fiscal year ended December 30, 2000, the Company recognized an
additional loss on the disposition of discontinued operations of $5.9 million
resulting from actual expenses and losses differing from estimated amounts,
uncollectable accounts receivable, and goodwill impairment related to these
businesses. Included in accrued expenses at December 30, 2000 is $2.2 million
related to certain remaining obligations of the discontinued operations.
Net sales of discontinued operations for the fiscal years ended December 31,
1998, January 1, 2000 and December 30, 2000 were $131.4 million, $112.8
million, and $36.2 million, respectively. For the period from April 20, 1999,
the measurement date, through January 1, 2000, discontinued operations incurred
net operating losses of $7.6 million, of which $5.3 million was attributable to
the Branded division and $2.3 million was attributable to the Off-Price and
Action Sports division. The income tax provision for discontinued operations
arose as a result of the taxable income of a foreign subsidiary as well as a
tax provision related to gains on the disposal of certain intangibles owned by
a U.S. subsidiary.
The discontinued operations components of the amount reflected in the balance
sheet are as follows:
January 1,
2000
----------
(in thousands)
Balance Sheet Data:
Cash.................................................... $ 591
Accounts receivable..................................... 29,692
Inventory............................................... 3,518
Property and equipment.................................. 1,243
Goodwill and intangibles................................ 11,148
Other assets............................................ 500
Accounts payable and accrued expenses................... (10,360)
Notes payable, banks.................................... (15,520)
Notes payable, other.................................... (2,431)
--------
Net assets of discontinued operations(/1/)............ $ 18,381
========
--------
(/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
F-23
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and contingent consideration in the form of non-interest bearing notes and
10,000 shares of mandatorily redeemable preferred stock. The notes were payable
in and shares were redeemable for a maximum of $1.0 million 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 ($1.0 million of
which was paid in May of 1999), was $9.3 million. This purchase price was 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:
(in thousands)
Fair value of assets acquired................................ $ 13,914
Fair value of liabilities assumed............................ (13,765)
Goodwill..................................................... 9,131
--------
$ 9,280
========
During the one-year period ended April 30, 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 $1.0 million.
Notes Payable of Discontinued Operations
The components of the notes payable, banks balance as of January 1, 2000 are
as follows:
January 1,
2000
--------------
(in thousands)
Revolving credit facility, secured by substantially all
assets of the Gen-X Companies (weighted average interest
rate at January 1, 2000--7.71%)............................. $15,240
Mortgage payable, secured by building due 8/15/09 (interest
rate at January 1, 2000--7.91%)............................. 280
-------
Total...................................................... $15,520
=======
The Company had a line of credit of approximately $20.0 million for use by
the Gen-X Companies, which was available for either direct borrowing or for
import letters of credit. The loan bore interest at prime plus one half percent
and was secured by a general security agreement covering substantially all of
the Gen-X Companies' assets. As of January 1, 2000, draws of $15.2 million were
committed under this line. Based on available collateral and outstanding import
letters of credit commitments an additional $9.2 million 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 $15.2 million.
Notes payable, banks included a mortgage payable secured by land and building
in Ontario, Canada of $280,000 that bore interest at the bank's cost of funds
plus 2.5% and was to mature on August 15, 2009.
F-24
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the notes payable, other balance as of January 1, 2000 are
as follows:
January 1,
2000
--------------
(in thousands)
Note payable to Ride, Inc., due 12/31/02 (interest rate as
of January 1,
2000--8%).................................................. $1,200
Notes payable to former shareholders of Lamar, due 7/27/03
(interest rate as of January 1, 2000--6%).................. $1,231
------
Total..................................................... $2,431
======
Other debt related to the Gen-X Companies included an outstanding loan
payable to Ride Inc. of $1.2 million. The original loan of $2.0 million was
repayable in equal quarterly installments of $100,000 which commenced on March
31, 1998 and bore interest at the prime lending rate.
Notes payable, other also included $1.2 million of promissory notes payable
to the former shareholders of Lamar. The notes were payable in five equal
annual installments and bore interest at 6% per annum.
Upon closing the Gen-X acquisition on May 12, 1998, several subordinated
notes payable were executed with the former shareholders of the Gen-X
Companies for an aggregate of $2.0 million which was payable upon the earlier
of the Company raising certain additional capital or in four equal consecutive
quarterly payments beginning March 31, 1999. This note bore 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 $905,000 and $2.4 million for the fiscal years ended
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 January 1, 2000
are as follows:
January 1,
2000
--------------
(in thousands)
Computers and equipment.................................... $ 693
Building................................................... 679
Leasehold improvement...................................... 14
Land....................................................... 269
------
1,655
Less: Accumulated depreciation and amortization............ (412)
------
Property and equipment, net.............................. $1,243
======
F-25
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 20--QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Statement of Operations
information for each quarter of the fiscal years ended January 1, 2000 and
December 30, 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 Fiscal Year Ended
January 1, 2000
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
(in thousands, except per share
amounts)
Net revenues............................... $ -- $ -- $ -- $ 5,511
====== ======= ======= ========
Gross profit............................... -- -- -- 1,694
====== ======= ======= ========
Loss from continuing operations............ $ (763) $(3,221) $(7,117) $(15,359)
Income (loss) from discontinued
operations................................ 1,157 (607) -- --
Gain (loss) on disposition of discontinued
operations................................ -- (5,632) 98 (11,803)
------ ------- ------- --------
Net income (loss).......................... $ 394 $(9,460) $(7,019) $(27,162)
====== ======= ======= ========
Losses per share--basic and diluted(/1/):
Loss from continuing operations.......... $(0.06) $ (0.27) $ (0.42) $ (0.83)
Income (loss) from discontinued
operations.............................. 0.09 (0.05) -- --
Gain (loss) on disposition of
discontinued operations................. -- (0.46) -- (0.64)
------ ------- ------- --------
Net income (loss)........................ $ 0.03 $ (0.78) $ (0.42) $ (1.47)
====== ======= ======= ========
Weighted average shares outstanding--basic
and diluted............................... 12,019 12,120 16,824 18,425
====== ======= ======= ========
- --------
(/1/) The sum of the quarterly per share amounts may not equal per share
amounts reported for year-to-date periods. This is due to changes in the
number of weighted average shares outstanding and the effects of
rounding for each period.
For the Fiscal Year Ended December
30, 2000
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share
amounts)
Net revenues........................... $ 5,719 $ 7,750 $ 9,014 $ 20,325
======== ======== ======== ========
Gross profit........................... 1,767 2,246 2,728 6,500
======== ======== ======== ========
Loss from continuing operations........ $(14,033) $(15,607) $(12,378) $(10,142)
Income (loss) from discontinued
operations............................ -- -- -- --
Gain (loss) on disposition of
discontinued operations............... -- (4,983) -- (867)
-------- -------- -------- --------
Net income (loss)...................... $(14,033) $(20,590) $(12,378) $(11,009)
======== ======== ======== ========
Losses per share--basic and
diluted(/1/):
Loss from continuing operations...... $ (0.76) $ (0.75) $ (0.57) $ (0.38)
Income (loss) from discontinued
operations.......................... -- -- -- --
Gain (loss) on disposition of
discontinued operations............. -- (0.24) -- (0.03)
-------- -------- -------- --------
Net income (loss).................... $ (0.76) $ (0.99) $ (0.57) $ (0.41)
======== ======== ======== ========
Weighted average shares outstanding--
basic and diluted..................... 18,517 20,780 21,817 26,830
======== ======== ======== ========
- --------
(/1/) The sum of the quarterly per share amounts may not equal per share
amounts reported for year-to-date periods. This is due to changes in the
number of weighted average shares outstanding and the effects of
rounding for each period.
F-26