10-Q 1 d10q.txt FORM 10-Q FOR THE QUARTER ENDED 09/29/2001 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q (Mark One) [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 29, 2001. or [_]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 0-16611 GLOBAL SPORTS, INC. (Exact name of registrant as specified in its charter) Delaware 04-2958132 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1075 First Avenue, King of Prussia, PA 19406 (Address of principal executive (Zip Code) offices) 610-265-3229 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 29, 2001: Common Stock, $.01 par value 37,193,091(/1/) ------------------------------ ------------------- (Title of each class) (Number of Shares)
(/1/Excludes)approximately 37,000 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 October 29, 2001, had not yet been issued. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 2001 TABLE OF CONTENTS
Page ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of December 30, 2000 and September 29, 2001 (Unaudited)........................................ 3 Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2000 and September 29, 2001 (Unaudited)........................................................... 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2000 and September 29, 2001 (Unaudited)... 5 Notes to Unaudited Condensed Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 26 PART II--OTHER INFORMATION Item 1. Legal Proceedings.................................................. 27 Item 2. Changes in Securities and Use of Proceeds.......................... 27 Item 3. Defaults Upon Senior Securities.................................... 27 Item 4. Submission of Matters to a Vote of Security Holders................ 27 Item 5. Other Information.................................................. 27 Item 6. Exhibits and Reports on Form 8-K................................... 27 SIGNATURE.................................................................. 29
For all years prior to 1999 our fiscal year ended on December 31. Effective for fiscal 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 1999, fiscal 2000 and fiscal 2001 refer to the years ended January 1, 2000, December 30, 2000 and the year ending December 29, 2001. Although we refer to the retailers, media companies and professional sports organizations for which we develop and operate e-commerce businesses as our "partners," we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have. 2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
December 30, September 29, 2000 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents......................... $ 92,012 $ 92,244 Short-term investments............................ 1,789 829 Accounts receivable, net of allowance of $287 and $83, respectively................................ 4,440 4,804 Inventory......................................... 19,202 17,580 Prepaid expenses and other current assets......... 1,485 4,063 -------- -------- Total current assets............................ 118,928 119,520 Property and equipment, net......................... 26,424 27,205 Goodwill, net....................................... 14,363 13,838 Other assets, net................................... 458 12,301 -------- -------- Total assets.................................... $160,173 $172,864 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, accrued expenses, and other..... $ 36,486 $ 19,125 Deferred revenue.................................. 1,317 5,418 Current portion--note payable..................... 35 38 Current portion--capital lease obligations........ 285 383 -------- -------- Total current liabilities....................... 38,123 24,964 Note payable........................................ 5,247 5,219 Capital lease obligations........................... 503 217 Commitments and contingencies Stockholders' equity: Preferred stock, Series A, $0.01 par value, 5,000,000 shares authorized; 800 and 400 shares issued as mandatorily redeemable preferred stock and outstanding as of December 30, 2000 and September 29, 2001, respectively................. -- -- Common stock, $0.01 par value, 90,000,000 shares authorized; 31,925,098 and 37,213,780 shares issued as of December 30, 2000 and September 29, 2001, respectively; 31,925,098 and 37,212,570 shares outstanding as of December 30, 2000 and September 29, 2001, respectively................. 319 372 Additional paid in capital........................ 217,124 274,090 Accumulated deficit............................... (101,143) (131,998) -------- -------- 116,300 142,464 Less: Treasury stock, at par...................... -- -- -------- -------- Total stockholders' equity...................... 116,300 142,464 -------- -------- Total liabilities and stockholders' equity...... $160,173 $172,864 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended --------------------------- --------------------------- September 30, September 29, September 30, September 29, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- Net revenues............ $ 9,014 $ 18,051 $ 22,483 $ 51,219 Cost of revenues........ 6,286 11,900 15,742 34,746 -------- -------- -------- -------- Gross profit........ 2,728 6,151 6,741 16,473 -------- -------- -------- -------- Operating expenses: Sales and marketing... 8,625 7,364 27,937 21,598 Product development... 1,920 2,259 5,422 6,713 General and administrative....... 2,224 2,388 6,462 7,505 Stock-based compensation......... 510 7,597 4,297 8,967 Depreciation and amortization......... 2,135 1,792 5,467 4,962 -------- -------- -------- -------- Total operating expenses........... 15,414 21,400 49,585 49,745 Other (income) expense: Other income.......... -- (100) -- (400) Interest income, net.. (308) (508) (826) (2,017) -------- -------- -------- -------- Total other (income) expense............ (308) (608) (826) (2,417) -------- -------- -------- -------- Loss from continuing operations............. (12,378) (14,641) (42,018) (30,855) Discontinued operations: Loss on disposition of discontinued operations........... -- -- (4,983) -- -------- -------- -------- -------- Net loss................ $(12,378) $(14,641) $(47,001) $(30,855) ======== ======== ======== ======== Losses per share--basic and diluted: Loss from continuing operations........... $ (0.57) $ (0.42) $ (2.06) $ (0.94) Loss on disposition of discontinued operations........... -- -- (0.24) -- -------- -------- -------- -------- Net loss.............. $ (0.57) $ (0.42) $ (2.30) $ (0.94) ======== ======== ======== ======== Weighted average shares outstanding--basic and diluted................ 21,817 34,747 20,446 32,892 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended --------------------------- September 30, September 29, 2000 2001 ------------- ------------- Cash Flows from Operating Activities: Net loss.......................................... $(47,001) $(30,855) Deduct: Loss on disposition of discontinued operations.. (4,983) -- -------- -------- Loss from continuing operations................... (42,018) (30,855) -------- -------- Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation and amortization................... 5,467 4,962 Stock-based compensation........................ 4,297 8,967 Changes in operating assets and liabilities, net of discontinued operations: Accounts receivable, net........................ (4,881) (364) Inventory....................................... (4,226) 1,622 Prepaid expenses and other current assets....... 800 (444) Accounts payable, accrued expenses, and other... (4,062) (17,361) Deferred revenue................................ 307 4,101 -------- -------- Net cash used in continuing operations.......... (44,316) (29,372) Net cash provided by discontinued operations.... 256 -- -------- -------- Net cash used in operating activities........... (44,060) (29,372) -------- -------- Cash Flows from Investing Activities: Acquisition of property and equipment, net........ (9,804) (5,082) (Additions) reductions to goodwill and other assets, net...................................... (427) 299 Proceeds from sale of discontinued operations..... 13,200 -- (Purchases) sales of short-term investments....... (799) 960 -------- -------- Net cash provided by (used in) investing activities..................................... 2,170 (3,823) -------- -------- Cash Flows from Financing Activities: Repayments of capital lease obligations........... (71) (188) Proceeds from (repayments of) mortgage note....... 5,300 (25) Purchases of treasury stock....................... -- (4) Proceeds from the sale of common stock............ 39,873 30,256 Proceeds from exercises of common stock options and warrants..................................... 541 3,388 -------- -------- Net cash provided by financing activities....... 45,643 33,427 -------- -------- Net increase in cash and cash equivalents.......... 3,753 232 Cash and cash equivalents, beginning of period..... 27,345 92,012 -------- -------- Cash and cash equivalents, end of period........... $ 31,098 $ 92,244 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, develops and operates the electronic commerce ("e-commerce") businesses of retailers, media companies, and professional sports organizations. The Company currently derives virtually all of its revenues from the sale of goods through its partners' Web sites, business to business group sales, 800-number sales, outbound shipping charges, and Web site development and operating fees. Each of the Company's partners owns the URL address of its Web site. Based upon the terms of the agreements with its partners, the Company owns certain components of the Web sites and the partners own other components. The accompanying condensed consolidated financial statements of Global have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of the Company's management, all adjustments (consisting solely of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows for the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements presented in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2001. Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to those used in the current period. NOTE 2--ACCOUNTING POLICIES Change in Useful Life of Property and Equipment: During the three-month period ended March 31, 2001, the Company increased its estimate of the useful lives of its computer hardware and software from two years to four years. This change had the effect of decreasing the loss from continuing operations for the three- and nine-month periods ended September 29, 2001 by $1.4 million and $4.3 million, or $0.04 and $0.13 per share, respectively. Other assets, net: Other assets, net consists primarily of deferred revenue share charges. This asset will be amortized as the revenue share expense is incurred. 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 whereby it ships merchandise to customers free of all shipping and handling charges. The cost of promotional free shipping and subsidized shipping and handling was $606,000 and $2.1 million for the three- and nine-month periods ended September 30, 2000, respectively, and $99,000 and $933,000 for the three- and nine-month periods ended September 29, 2001, respectively, and was charged to sales and marketing expense. New Accounting Pronouncements Business Combinations, Goodwill and Other Intangible Assets: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business 6 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under an impairment-only approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. Any impairment loss resulting from the transition impairment test would be recorded as a cumulative effect of a change in accounting principle. The Company is evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its financial position and results of operations. Impairment or Disposal of Long-Lived Assets: In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principals Board ("APB") Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 retains the requirement in APB No. 30 to report separately discontinued operations, and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations. NOTE 3--EQUITY TRANSACTIONS On August 23, 2001, the Company issued to Interactive Technology Holdings, LLC ("ITH") 3,000,000 shares of its common stock at a price of $10.00 per share, for an aggregate purchase price of $30.0 million. At the same time, ITH acquired 1,000,000 shares of the Company's common stock from Michael G. Rubin, Chairman, President and Chief Executive Officer of the Company, at a price of $10.00 per share, for an aggregate purchase price of $10.0 million. On July 20, 2001, a right to receive 1,600,000 shares of the Company's common stock was exercised in lieu of future cash revenue share payments. On the day immediately preceding the exercise of the right, the closing price of a share of the Company's common stock was $9.00. During the three- and nine-month periods ended September 29, 2001, the Company granted options and warrants to purchase 1,281,970 and 3,665,620 shares of the Company's common stock to employees, directors, partners, consultants, and others, respectively. The range of exercise prices for all options and warrants granted was from $1.00 to $17.15 for the three-month period ended September 29, 2001, and from $0.01 to $17.15 for the nine-month period ended September 29, 2001. As a result of the grant of these options and warrants and the amortization of deferred compensation from prior grants, the Company recorded stock-based compensation expense of $7.6 million and $9.0 million for the three- and nine-month periods ended September 29, 2001, respectively, primarily as a result of non-employee grants. As of September 29, 2001, the Company had an aggregate of $1.8 million of deferred stock-based compensation remaining to be amortized over the next four years. Options and warrants to purchase 519,824 and 622,337 shares of the Company's common stock were exercised during the three- and nine-month periods ended September 29, 2001, respectively. The range of exercise prices was from $0.01 to $15.00 for the three- and nine-month periods ended September 29, 2001, respectively. These exercises resulted in cash proceeds to the Company of $3.2 million and $3.4 million for the three- and nine-month periods ended September 29, 2001, respectively. 7 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--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:
Three Months Ended Nine Months Ended --------------------------- --------------------------- September 30, September 29, September 30, September 29, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- (in thousands) (in thousands) Sales and marketing..... $ 1 $ 90 $1,082 $ 184 Product development..... -- 386 -- 386 General and administrative......... 509 7,121 3,215 8,397 ----- ------ ------ ------ $ 510 $7,597 $4,297 $8,967 ===== ====== ====== ======
NOTE 5--LOSSES PER SHARE Losses per share for all periods have been computed in accordance with SFAS No. 128, "Earnings Per Share". Basic and diluted losses per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Outstanding common stock options and warrants have been excluded from the calculation of diluted losses per share because their effect would be antidilutive. The amounts used in calculating losses per share data are as follows:
Three Months Ended Nine Months Ended --------------------------- --------------------------- September 30, September 29, September 30, September 29, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- (in thousands) (in thousands) Loss from continuing operations............. $(12,378) $(14,641) $(42,018) $(30,855) Loss on disposition of discontinued operations............. -- -- (4,983) -- -------- -------- -------- -------- Net loss................ $(12,378) $(14,641) $(47,001) $(30,855) ======== ======== ======== ======== Weighted average shares outstanding--basic and diluted................ 21,817 34,747 20,446 32,892 ======== ======== ======== ======== Outstanding common stock options having no dilutive effect........ 3,102 5,623 3,102 5,623 ======== ======== ======== ======== Outstanding common stock warrants having no dilutive effect........ 3,709 8,073 3,709 8,073 ======== ======== ======== ========
NOTE 6--CONCENTRATIONS OF CREDIT RISK As of September 29, 2001, the Company had $2.2 million included in accounts receivable related to sales of one vendor's products through Web site and other 800-number sales, which are due over a weighted average period of four months. Cash equivalents potentially subject the Company to credit risk. As of September 29, 2001 the Company had $86.3 million invested with three financial institutions. The composition of these investments are regularly monitored by management. 8 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--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 September 29, 2001, the Company had employment agreements with several of its employees for an aggregate annual base salary $2.3 million plus bonuses and increases in accordance with the terms of the agreements. Remaining terms of such contracts range from two to three years. Advertising and Media Agreements As of September 29, 2001, the Company was contractually committed for the purchase of future advertising totaling approximately $50,000 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. Revenue Share Payments As of September 29, 2001, the Company was contractually committed to minimum cash revenue share payments of $375,000 per fiscal quarter through July, 2011. Pending Acquisition On September 13, 2001, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of Ashford.com, Inc. ("Ashford"), an online luxury goods retailer. Under the terms of the agreement, upon consummation of the merger, Ashford stockholders will receive $0.125 and 0.0076 of a share of Global's common stock for each share of Ashford common stock. Global expects to pay approximately $7.1 million in cash and to issue approximately 430,000 shares of common stock in exchange for all issued and outstanding shares of Ashford common stock. All outstanding options to purchase shares of Ashford common stock will terminate immediately prior to the effective time of the merger, and any outstanding warrants to purchase Ashford common stock that do not by their terms terminate as a result of the merger will be assumed by the Company and exchanged for warrants entitling the holder to the merger consideration described above. The transaction, which will be accounted for as a purchase, is expected to close in late 2001 or early 2002. NOTE 8--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Noncash Investing and Financing Activities On July 20, 2001, a right to receive 1,600,000 shares of the Company's common stock was exercised in lieu of future cash revenue share payments. The Company has valued these deferred revenue share charges at $14.4 million and has included them in prepaid expenses and other current assets and other assets, net. NOTE 9--RELATED PARTY TRANSACTIONS The Company has entered into strategic alliances to provide procurement and fulfillment services for QVC, Inc., and a partner which may be considered an affiliate of SOFTBANK America Inc. (or its related companies). The Company recognized net revenues of $768,000 on sales to these related parties for the three- and nine-month 9 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) periods ended September 30, 2000, respectively, and $186,000 and $1.4 million for the three- and nine-month periods ended September 29, 2001, respectively. The terms of these sales are comparable to those given to other partners of the Company, and the amount included in accounts receivable as a result of these sales was $55,000 as of September 29, 2001. NOTE 10--DISCONTINUED OPERATIONS On May 26, 2000, the Company completed the previously announced sale of its Off-Price and Action Sports division. The Company received $13.2 million in cash proceeds from the sale. This sale completed the disposition of the Company's discontinued operations. Included in accounts payable, accrued expenses, and other as of September 29, 2001 was $804,000 related to certain remaining obligations of the discontinued operations. Net sales of discontinued operations were $0 and $36.2 million for the three- and nine-month periods ended September 30, 2000, respectively, and $0 for the three- and nine-month periods ended September 29, 2001. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements All statements made in this Quarterly Report on Form 10-Q other than statements of historical fact are forward-looking statements. The words "anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "will", "would", "should", "guidance", "potential", "continue", "confident", "prospects" and similar expressions typically are used to identify forward- looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. Those statements are not guarantees of future performance and involve risks, uncertainties and assumptions which will be difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by those forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the stock market and the industries in which we operate, changes affecting the Internet and e-commerce, 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 acquisitions of other businesses, including our proposed acquisition of Ashford.com. 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 those forward-looking statements except as otherwise specifically stated by us. Overview We develop and operate e-commerce businesses for retailers, media companies, and professional sports organizations. We enable our partners to capitalize on their existing brands to exploit online commerce opportunities. 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 goods through our partners' Web sites, business to business group sales, 800- number sales, outbound shipping charges, and Web site development and operating fees. Recent Developments In August 2001, we announced our intention to expand our business to include developing and operating e-commerce businesses beyond the sporting goods merchandise category. Concurrent with that announcement, we announced that we had entered into an e-commerce agreement with Kmart Corporation and Bluelight.com LLC, a subsidiary of Kmart. Under that agreement, we manage certain aspects of Kmart's overall e-commerce business, including fulfillment, technology and customer service in exchange for a combination of fixed fees and a guaranteed percentage of sales. Kmart selects the merchandise to be sold on the site, owns a portion of the inventory and provides in-store marketing of the e-commerce business at its retail outlets and other offline marketing support, including newspaper circular advertising. In addition to our agreement with Kmart and Bluelight.com, we intend to selectively pursue additional opportunities outside of sporting goods, while continuing to grow our existing sporting goods business. On September 13, 2001, we entered into a definitive merger agreement to acquire all of the outstanding shares of Ashford.com, Inc., an online luxury goods retailer. Under the terms of the agreement, upon consummation of the merger, Ashford stockholders will receive $0.125 and 0.0076 of a share of our common stock for each share of Ashford common stock. We expect to pay approximately $7.1 million in cash and to issue approximately 430,000 shares of common stock in exchange for all issued and outstanding shares of Ashford common stock. All outstanding options to purchase shares of Ashford common stock will terminate immediately prior to the effective time of the merger, and any outstanding warrants to purchase Ashford common stock that do not by their terms terminate as a result of the merger will be assumed by us and exchanged for warrants entitling the holder to the merger consideration described above. The transaction, which will be accounted for as a purchase, is expected to close in late 2001 or early 2002. 11 Financial Presentation Our financial statements present: . net revenues, which are derived from sales of goods through our partners' Web sites, business to business group sales, 800-number sales, and related outbound shipping charges, net of allowances for returns and discounts. Net revenues are also derived from fees earned in connection with marketing and Web site development and operation. . 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 our partners' URLs and 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. . depreciation and amortization expenses, which relate primarily to the depreciation of our corporate headquarters, the depreciation and amortization of the capitalized costs for our technology, hardware and software, and the depreciation of improvements, furniture and fixtures at our corporate headquarters and our fulfillment center. . other income, which consists primarily of income earned pursuant to the terms of an early lease termination agreement. . interest income, net, which consists primarily 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 the three- and nine-month periods ended September 29, 2001 and September 30, 2000 Net Revenues. Net revenues from continuing operations increased $9.1 million from $9.0 million for the three-month period ended September 30, 2000 to $18.1 million for the three-month period ended September 29, 2001. This increase was primarily attributable to a $5.5 million increase in sales due to the net addition of new Web sites and 800-number sales during the last quarter of fiscal 2000 and in the first three quarters of fiscal 2001, a $2.6 million increase in sales from Web sites operated in both periods, and a $1.0 million increase in fixed and variable service fee revenue. Net revenues from continuing operations increased $28.7 million from $22.5 million for the nine- month period ended September 30, 2000 to $51.2 million for the nine-month period ended September 29, 2001. This increase was primarily attributable to a $16.7 million increase in sales due to the net addition of new Web sites and 800-number sales during the last quarter of fiscal 2000 and in the first three quarters of fiscal 2001, an $11.0 million increase in sales from Web sites operated in both periods, and a $1.0 million increase in fixed and variable service fee revenue. 12 Cost of Revenues. We incurred cost of revenues from continuing operations of $11.9 million and $34.7 million for the three- and nine-month periods ended September 29, 2001 and $6.3 million and $15.7 million for the three-and nine- month periods ended September 30, 2000, respectively. As a percentage of net revenues, cost of revenues from continuing operations was 65.9% and 67.8% for the three- and nine-month periods ended September 29, 2001, and 69.7% and 70.0% for the three- and nine-month periods ended September 30, 2000, respectively. Gross Profit. We had gross profit from continuing operations of $6.2 million and $16.5 million for the three- and nine-month periods ended September 29, 2001, and $2.7 million and $6.7 million for the three- and nine- month periods ended September 30, 2000, respectively. As a percentage of net revenues, gross profit from continuing operations was 34.1% and 32.2% for the three- and nine-month periods ended September 29, 2001, and 30.3% and 30.0% for the three- and nine-month periods ended September 30, 2000, respectively. Sales and Marketing Expenses. Sales and marketing expenses from continuing operations decreased $1.2 million from $8.6 million for the three-month period ended September 30, 2000 to $7.4 million for the three-month period ended September 29, 2001. This decrease was primarily due to a $1.1 million decrease in third-party warehouse and fulfillment services costs, a $507,000 decrease in subsidized shipping and handling costs, a $378,000 decrease in professional fees and a $345,000 decrease in advertising costs, offset, in part, by a $1.2 million increase in personnel and occupancy costs associated with our fulfillment operations. Sales and marketing expenses from continuing operations decreased $6.3 million from $27.9 million for the nine-month period ended September 30, 2000 to $21.6 million for the nine-month period ended September 29, 2001. This decrease was primarily due to a $7.1 million decrease in advertising costs and a $3.7 million decrease in third-party warehouse and fulfillment services costs, offset, in part, by a $4.3 million increase in personnel and occupancy costs associated with our fulfillment operations and a $1.0 million increase in personnel costs associated with our merchandising and customer service departments. Product Development Expenses. Product development expenses from continuing operations increased $339,000 from $1.9 million for the three-month period ended September 30, 2000 to $2.3 million for the three-month period ended September 29, 2001. This increase was primarily due to a $385,000 increase in personnel costs and a $162,000 increase in equipment and software maintenance costs associated with the increased number of Web sites that we operated and maintained, offset, in part, by a $254,000 decrease in costs associated with our use of professional consultants. Product development expenses from continuing operations increased $1.3 million from $5.4 million for the nine- month period ended September 30, 2000 to $6.7 million for the nine-month period ended September 29, 2001. This increase was primarily due to a $1.2 million increase in personnel costs, and a $702,000 increase in equipment and software maintenance costs associated with the increased number of Web sites that we operated and maintained, offset, in part, by an $822,000 decrease in costs associated with our use of professional consultants. General and Administrative Expenses. General and administrative expenses from continuing operations increased $164,000 from $2.2 million for the three- month period ended September 30, 2000 to $2.4 million for the three-month period ended September 29, 2001. This increase was primarily due to a $269,000 increase in insurance related expenses and other administrative costs to support our e-commerce business and an $86,000 increase in credit card chargeback activity due principally to increased sales volume, offset, in part, by a $193,000 decrease in personnel costs. General and administrative expenses from continuing operations increased $1.0 million from $6.5 million for the nine-month period ended September 30, 2000 to $7.5 million for the nine-month period ended September 29, 2001. This increase was primarily due to a $678,000 increase in insurance related expenses and other administrative costs to support our e-commerce business and a $431,000 increase in credit card chargeback activity due principally to increased sales volume, offset, in part, by a $152,000 decrease in professional fees. Stock-Based Compensation Expense. Stock-based compensation expense from continuing operations increased $ 7.1 million from $510,000 for the three- month period ended September 30, 2000 to $7.6 million for the three-month period ended September 29, 2001. Stock-based compensation expense from continuing operations increased $4.7 million from $ 4.3 million for the nine- month period ended September 30, 2000 to 13 $9.0 million for the nine-month period ended September 29, 2001. These increases were the result of higher charges associated with the issuance of warrants and stock options to our partners, consultants, employees and others. As of September 29, 2001, we had an aggregate of $1.8 million of deferred stock-based compensation remaining to be amortized. Depreciation and Amortization Expenses. Depreciation and amortization expense decreased $343,000 from $2.1 million for the three-month period ended September 30, 2000 to $1.8 million for the three-month period ended September 29, 2001. This decrease was due to a $1.4 million decrease in depreciation expense related to the change in our estimate of the useful lives of our computer hardware and software from two years to four years, offset, in part, by an $805,000 increase in depreciation expense related to our corporate headquarters, our fulfillment center and the assets purchased to build, manage and operate our e-commerce business and a $178,000 increase in amortization of goodwill associated with the Fogdog acquisition. Depreciation and amortization expense decreased $505,000 from $5.5 million for the nine-month period ended September 30, 2000 to $5.0 million for the nine-month period ended September 29, 2001. This decrease was due to a $4.3 million decrease in depreciation expense related to the change in our estimate of the useful lives of our computer hardware and software from two years to four years, offset, in part, by a $3.4 million increase in depreciation expense related to our corporate headquarters, our fulfillment center and the assets purchased to build, manage and operate our e-commerce business and a $529,000 increase in amortization of goodwill associated with the Fogdog acquisition. Other income. We had other income of $100,000 and $400,000 for the three- and nine-month periods ended September 29, 2001, and $0 for the three- and nine-month periods ended September 30, 2000, respectively. These increases related to fees earned pursuant to the terms of an early lease termination agreement. Interest income, net. We had interest income of $508,000, net of interest expense of $140,000, and interest income of $308,000, net of interest expense of $87,000, for the three-month periods ended September 29, 2001 and September 30, 2000, respectively. We had interest income of $2.0 million, net of interest expense of $470,000, and interest income of $826,000, net of interest expense of $177,000, for the nine-month periods ended September 29, 2001 and September 30, 2000, respectively. The increases in interest income, net of interest expense, for the three- and nine-month periods ended September 29, 2001 compared to the comparable periods in fiscal 2000 were due to higher average balances of cash and cash equivalents and short-term investments during the three- and nine-month periods ended September 29, 2001. Income Taxes. Since the sales of our discontinued operations, we have not generated taxable income. Net operating losses generated have been carried back to offset income taxes paid in prior years. The remaining net operating losses will be carried forward. Any otherwise recognizable deferred tax assets have been offset by a valuation allowance for the net operating loss carryforwards. Liquidity and Capital Resources On August 23, 2001, we issued to ITH 3,000,000 shares of our common stock at a price of $10.00 per share, for an aggregate purchase price of $30.0 million. At the same time, ITH acquired 1,000,000 shares of our common stock from Michael G. Rubin, our Chairman, President and Chief Executive Officer, at a price of $10.00 per share, for an aggregate purchase price of $10.0 million. On July 20, 2001, a right to receive 1,600,000 shares of our common stock was exercised in lieu of future cash revenue share payments. On the day immediately preceding the exercise of the right, the closing price of a share of our common stock was $9.00. We raised an aggregate of $146.3 million in gross proceeds through equity financings in fiscal 1999 and fiscal 2000, as well as $5.3 million in gross proceeds through a mortgage financing in fiscal 2000, to finance our e- commerce business. We received an aggregate of $23.5 million in proceeds from the sales of our discontinued operations in fiscal 1999 and fiscal 2000, as well as $35.7 million in net cash from the acquisition of Fogdog in fiscal 2000. 14 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 administrative departments. We invested in the required technology, equipment and personnel to make our customer service center and Kentucky distribution center fully operational. As of September 29, 2001, we had cash and cash equivalents of $92.2 million, working capital of $94.6 million, and an accumulated deficit of $132.0 million. We used $29.4 million in net cash for operating activities of continuing operations during the nine-month period ended September 29, 2001 and $44.3 million in net cash for operating activities of continuing operations during the nine-month period ended September 30, 2000. Net cash used for operating activities of continuing operations during the nine-month period ended September 29, 2001 was primarily the result of net losses from continuing operations and changes in accounts receivable, prepaid expenses and other current assets, and accounts payable, accrued expenses and other liabilities, offset, in part, by changes in inventory, deferred revenue, stock-based compensation and depreciation and amortization. Net cash used for operating activities of continuing operations during the nine-month period ended September 30, 2000 was primarily the result of net losses from continuing operations and changes in accounts receivable, inventory, and accounts payable, accrued expenses and other liabilities, partially offset by changes in prepaid expenses and other current assets, deferred revenue, stock-based compensation, and depreciation and amortization. Our investing activities during the nine-month period ended September 29, 2001 consisted primarily of purchases of property and equipment. We made capital expenditures of $5.1 million during the nine-month period ended September 29, 2001. Also, during the nine-month period ended September 29, 2001, we received $960,000 in cash proceeds from sales of short-term investments. During the nine-month period ended September 30, 2000, our investing activities consisted primarily of purchases of property and equipment of $9.8 million. In addition, we received $13.2 million in cash proceeds from the sale of our Off-Price and Action Sports division. As of September 29, 2001, we had commitments of approximately $50,000 for advertising and promotion programs, as well as $375,000 per fiscal quarter for revenue share payments. In connection with the planned acquisition of Ashford.com, we anticipate that approximately $7.1 million in cash will be payable in exchange for outstanding shares of Ashford.com common stock. We also expect to incur acquisition related expenses of approximately $1.4 million. To date, we have financed our e-commerce operations primarily from the sale of equity securities. We expect that our current cash and the collection of accounts receivable will be sufficient to meet our anticipated cash needs for the foreseeable future. In addition, we expect that we will realize income from our continuing operations, excluding non-cash charges for stock-based compensation and depreciation and amortization, in the fourth quarter of fiscal 2001 and for fiscal year 2002. However, in order to internally fund our anticipated operating expenses and realize income from continuing operations, including non-cash charges, our revenues must increase significantly. If cash flows are insufficient to fund these expenses, we may in the future need to raise additional funds in future periods through public or private financings or other arrangements to fund our operations until we achieve profitability. Failure to raise future capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. Seasonality We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that the fourth fiscal quarter will account for a disproportionate percentage of our total annual sales. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. 15 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 Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2001. 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. Our future success cannot be predicted based upon our limited e-commerce operating history. Although we commenced operations in 1987, we did not initiate our e- commerce business until the first quarter of 1999 and did not begin operating our e-commerce business until the fourth quarter of 1999. Prior to the fourth quarter of 1999, when we launched the e-commerce businesses we operate for our partners, 100% of our revenues had been generated by our discontinued operations. The sale of the discontinued operations was completed in May 2000. Accordingly, 100% of our revenues are currently generated through our e- commerce business. 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 in fiscal 1999, fiscal 2000 and during the first nine months of fiscal 2001, and as of September 29, 2001, we had an accumulated deficit of $132.0 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 businesses to generate sufficient revenues to achieve profitability. We could continue to incur operating and net losses. There can be no assurances that we will be able to achieve profitability from our continuing operations. We will continue to incur significant operating expenses and capital expenditures as we: . enhance our distribution and order fulfillment capabilities; . further improve our order processing systems and capabilities; . develop enhanced technologies and features to improve our partners' e- commerce businesses; . enhance our customer service capabilities to better serve our customers' needs; . increase our general and administrative functions to support our growing operations; and . continue 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. Prior to the recent expansion of our relationship with Bluelight.com, our business had been limited to the sporting goods industry. Through the proposed acquisition of Ashford, we intend to expand our operations into the luxury goods industry. We may not be able to successfully expand our operations into new industries. Until recently, our business had been limited to the sporting goods industry. Through the recent expansion of our relationship with Bluelight.com, we have begun to expand our operations into other industries, including electronics and home products. Through the proposed acquisition of Ashford.com, Inc., we intend to further expand our business into the luxury goods industry. In order to successfully expand our business into these industries, we must develop and maintain relationships with manufacturers in these industries and hire and retain skilled personnel to help manage these areas of our business. Our failure to successfully expand our business into these industries could adversely affect our business, results of operations and financial condition. 16 Our success is tied to the success of the retail industry and our partners for which we operate e-commerce businesses. Our future success is substantially dependent upon the success of the retail industry and our partners for which we operate e-commerce businesses. From time to time, the retail industry has experienced downturns. Any downturn in the retail industry could adversely affect our business. In addition, if our partners were to have financial difficulties or seek protection from their creditors, or if we are unable to replace our partners or obtain new partners, it could adversely affect our business, financial condition and results of operations. We enter into 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 businesses operated by us or the inability to convert these visitors into customers; . our failure to offer an appealing mix of products, including sporting goods, apparel and footwear; . 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 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 various products that we sell, 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; 17 . 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 industries in which we operate. Seasonal fluctuations in sales could cause wide fluctuations in our quarterly results. We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that our fourth fiscal quarter will account for a disproportionate percentage of our total annual revenues. In anticipation of increased sales activity during our fourth fiscal quarter, we may hire a significant number of temporary employees to 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 in the future need additional financing to continue our growth or our growth may be limited. Because we have not generated sufficient cash from operations to date, we have funded our e-commerce 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 in the future need to fund our growth through additional debt or equity financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience additional dilution or the new securities may have rights senior to those of our common stock. We must develop and maintain relationships with key 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. For example, we currently are not authorized to offer some popular brands of sporting goods, such as Nike, although we are authorized to sell the remaining Nike inventory held by Fogdog, Inc. on the fogdog.com Web site. There can be no assurance that we will be able to offer these brands in the future or that we will continue to be able to offer brands we currently offer. If we are unable to offer a sufficient assortment and quantity of quality products at acceptable prices, we may lose sales and market share. 18 Capacity constraints or system failures could materially and adversely affect our business, results of operations and financial condition. Any system failure, including network, software or hardware failure, that causes interruption of the availability of our partners' Web sites could result in decreased usage of these Web sites. If these failures are sustained or repeated, they could reduce the attractiveness of our partners' Web sites to customers, vendors and advertisers. Our operations are subject to damage or interruption from: . fire, flood, earthquake or other natural disasters; . power losses, interruptions or brown-outs; . Internet, telecommunications or data network failures; . physical and electronic break-ins or security breaches; . computer viruses; and . other similar events. We launched our first partners' e-commerce 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 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 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. 19 Developing our partners' e-commerce businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our partners' 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 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 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 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 $9.0 million. We have not obtained key person life insurance for any of our other executive officers or key personnel. We may be unable to hire and retain the skilled personnel necessary to develop our business. We intend to continue to hire a number of skilled personnel. 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. 20 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 of specialty 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; . e-commerce businesses of specialty manufacturers such as adidas.com and Nike.com; and . e-commerce businesses that are associated with full-line sporting goods stores such as Shopsports.com. In addition, we compete with companies that may be able to provide solutions to companies that wish to establish e-commerce businesses, including: . third party providers, such as Amazon.com and USA Networks; 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 our specialty goods, including full-line retailers, specialty 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. 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, in part, 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. 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 result in lost opportunities 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 businesses. 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 21 as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that users of our partners' Web sites were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. We may be liable if third parties misappropriate our customers' personal information. If third parties are able to penetrate our network security or otherwise misappropriate our customers' personal information or credit card information 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 October 29, 2001, Michael G. Rubin, our Chairman, President and Chief Executive Officer, beneficially owned 19.0%, funds affiliated with SOFTBANK America Inc., or SOFTBANK, beneficially owned 23.3% and Interactive Technology Holdings, LLC, or ITH, a joint venture company formed by Comcast Corporation and QVC, Inc., beneficially owned 24.2% 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 and ITH each have the right to designate up to two members of our board of directors. This concentration of ownership and SOFTBANK's and ITH's right to designate members to our board of directors may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders might otherwise receive a premium over current market prices for their shares. From time to time, we may acquire or invest in other companies. There are risks associated with potential acquisitions and investments. As a result, we may not achieve the expected benefits of potential acquisitions. If we are presented with appropriate opportunities, we may make investments in complementary companies, products or technologies or we may purchase other companies. On September 13, 2001, we entered into a definitive merger agreement to acquire all of the outstanding shares of Ashford.com, Inc., an online luxury goods retailer. We may not realize the anticipated benefits of the acquisition of Ashford or any other investment or acquisition. We may not be able to successfully assimilate the additional personnel, operations, acquired technology and products into our business. Any acquisition, including the acquisition of Ashford, may further strain our existing financial and managerial controls and reporting systems and procedures. In addition, key personnel of an acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees or increase our expenses. Further, the physical expansion in facilities that would occur as a result of the acquisition of Ashford and any other acquisition may result in disruptions that seriously impair our business. Finally, we will be issuing equity securities as part of the purchase price for the shares of Ashford and we may have to incur debt or issue additional equity securities to pay for other acquisitions or investments, the issuance of which could be dilutive to our stockholders. 22 We may expand our business internationally, causing our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability. We believe that the current globalization of the economy requires businesses to consider pursuing international expansion. In the future, we may expand into international markets. International sales are subject to inherent risks and challenges that could adversely affect our profitability, including: . the need to develop new supplier and manufacturer relationships, particularly because major manufacturers may require that our international operations deal with local distributors; . unexpected changes in international regulatory requirements and tariffs; . difficulties in staffing and managing foreign operations; . longer payment cycles from credit card companies; . greater difficulty in accounts receivable collection; . 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. Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure. Our future success is substantially dependent upon continued growth in the use of the Internet. The number of users and advertisers on the Internet may not increase and commerce over the Internet may not become more accepted and widespread for a number of reasons, including: . actual or perceived lack of security of information or privacy protection; . lack of access and ease of use; . congestion of traffic on the Internet; . inconsistent quality of service and lack of availability of cost- effective, high-speed service; . possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; . excessive governmental regulation; . uncertainty regarding intellectual property ownership; and . lack of high-speed modems and other communications equipment. Published reports have also indicated that growth in the use of the Internet has resulted in users experiencing delays, transmission errors and other difficulties. As currently configured, the Internet may not support an increase in the number or requirements of users. In addition, there have been outages and delays on the Internet as a result of damage to the current infrastructure. The amount of traffic on our partners' Web sites could be materially affected if there are outages or delays in the future. The use of the Internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the Internet. If any of the foregoing occurs, or if the Internet does not become a viable commercial medium, our business, results of operations and financial condition could be materially adversely affected. In addition, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet. 23 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 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 increase our general and administrative expenses. 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. 24 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 absence of those regulations, the Federal Trade Commission has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts. We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. It may be difficult for a third party to acquire us and this could depress our stock price. Pursuant to our amended and restated certificate of incorporation, we have authorized a class of 5,000,000 shares of preferred stock, which our board of directors may issue with terms, rights, preferences and designations as the board may determine and without any vote of the stockholders, unless otherwise required by law. Issuing 25 the preferred stock, depending upon the terms, rights, preferences and designations set by our board, may delay, deter or prevent a change in control of us. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the quarter ended September 29, 2001. See the information set forth in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 filed with the Securities and Exchange Commission on March 30, 2001. 26 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are involved in various routine litigation incidental to our current and discontinued businesses. We believe that the disposition of these matters will not have a material adverse effect on our financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On July 20, 2001, a right to receive 1,600,000 shares of the Company's common stock was exercised in lieu of future cash revenue share payments. On the day immediately preceding the exercise of the right, the closing price of a share of the Company's common stock was $9.00. On July 20, 2001, the Company issued to ITH a five-year warrant to purchase an aggregate of 300,000 shares of the Company's common stock at an exercise price of $6.00 per share in consideration for certain corporate development services performed by ITH on behalf of the Company. On August 23, 2001, the Company issued to ITH 3,000,000 shares of its common stock at a price of $10.00 per share, for an aggregate purchase price of $30.0 million. At the same time, ITH acquired 1,000,000 shares of the Company's common stock from Michael G. Rubin, Chairman, President and Chief Executive Officer of the Company, at a price of $10.00 per share, for an aggregate purchase price of $10.0 million. From July 6, 2001 through August 17, 2001, in connection with the execution of agreements to operate the e-commerce businesses of certain partners, the Company issued to those partners five-year warrants to purchase up to an aggregate of 476,620 shares of the Company's common stock at a weighted average exercise price of $12.74 per share. No underwriter was involved in any of the above sales of securities. All of the above securities were issued in reliance upon the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), on the basis that they were issued under circumstances not involving a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1(/1/) Agreement and Plan of Merger and Reorganization, dated as of September 13, 2001, among Global Sports, Inc., a Delaware corporation, Ruby Acquisition Corp., a Delaware corporation, and Ashford.com, Inc., a Delaware corporation. 2.2(/1/) Form of Voting Agreement, dated as of September 13, 2001, entered into between Global Sports, Inc., a Delaware corporation, and certain stockholders of Ashford.com, Inc., a Delaware corporation.
27 4.1 Form of Investor Warrant. 4.2 Form of Partner Warrant. 10.1(/2/) Stock Purchase Agreement, dated as of July 20, 2001, by and among Global Sports, Inc., Michael G. Rubin and Interactive Technology Holdings, LLC. 10.2+ License and E-Commerce Agreement, dated July 6, 2001, by and among Global Sports Interactive, Inc., The Sports Authority, Inc. and The Sports Authority Michigan, Inc. 10.3+ E-Commerce Agreement, dated as of August 10, 2001, by and between Global Sports Interactive, Inc., Bluelight.com LLC and Kmart Corporation. 99.1(/2/) Letter Agreement, dated as of July 20, 2001, among Global Sports, Inc., Interactive Technology Holdings, LLC, SOFTBANK Capital Partners LP and SOFTBANK Capital Advisors Fund LP.
-------- (/1/Incorporated)by reference to the Company's Current Report on Form 8-K dated September 13, 2001. (/2/Incorporated)by reference to the Company's Current Report on Form 8-K dated July 13, 2001. + Confidential treatment has been requested as to certain portions of this exhibit. The omitted portions have been separately filed with the Securities and Exchange Commission. (b) Reports on Form 8-K The Company completed the acquisition of Fogdog, Inc. on December 28, 2000. On July 24, 2001, the Company filed a Current Report on Form 8-K to include the consent of PricewaterhouseCoopers LLP ("PWC"), Fogdog's accountants, to the incorporation by reference into certain of the Company's registration statements of PWC's report dated January 31, 2000 on the financial statements of Fogdog contained in the Company's Current Report on Form 8-K filed on January 12, 2001. The Company filed a Current Report on Form 8-K on August 27, 2001 reporting that the Company completed the sale of 3,000,000 shares of its common stock to Interactive Technology Holdings, LLC ("ITH") at a purchase price of $10.00 per share for an aggregate purchase price of $30,000,000 and that Michael G. Rubin, Chairman of the Board, President and Chief Executive Officer of the Company, sold 1,000,000 shares of the Company's common stock to ITH at a purchase price of $10.00 per share for an aggregate purchase price of $10,000,000. The Company filed a Current Report on Form 8-K on September 18, 2001 reporting that the Company entered into a merger agreement to acquire all of the outstanding shares of Ashford.com, Inc. 28 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. Global Sports, Inc. /s/ Jordan M. Copland By: _________________________________ Jordan M. Copland Executive Vice President & Chief Financial Officer Date: November 9, 2001 29