-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B4YN10msrH6aESKpF/lDVehPscPlAIHqPf8Q6erp6JFTvuTnm0hg5xEY21zdexe+ Zc+aymjlS3rAhFRmjrRSxQ== 0001036050-00-000971.txt : 20000517 0001036050-00-000971.hdr.sgml : 20000517 ACCESSION NUMBER: 0001036050-00-000971 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBAL SPORTS INC CENTRAL INDEX KEY: 0000828750 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042958132 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16611 FILM NUMBER: 637561 BUSINESS ADDRESS: STREET 1: 1075 FIRST AVE STREET 2: RTE 3 INDUSTRIAL PARK CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6102653229 MAIL ADDRESS: STREET 1: 1075 FIRST AVE CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 10-Q 1 FORM 10-Q 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 April 1, 2000. or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______to _______. Commission File Number 0-16611 -------------------------- GLOBAL SPORTS, INC. ------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 ------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. employer identification no.) of incorporation or organization) 1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 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 May 11, 2000: Common Stock, $0.01 par value 21,702,080 ----------------------------- --------------------------- (Title of each class) (Number of Shares) GLOBAL SPORTS, INC. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED APRIL 1, 2000 TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of January 1, 2000 and April 1, 2000 (Unaudited)................ 3 Condensed Consolidated Statements of Operations for the quarters ended March 31, 1999 and April 1, 2000 (Unaudited)............................................. 4 Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and April 1, 2000 (Unaudited).. 5 Notes to Unaudited Condensed Consolidated Financial Statements................................................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................. 25 Item 2. Changes in Securities and Use of Proceeds...................... 25 Item 3. Defaults upon Senior Securities................................ 25 Item 4. Submission of Matters to a Vote of Security Holders............ 25 Item 5. Other Information.............................................. 25 Item 6. Exhibits and Reports on Form 8-K............................... 25 SIGNATURES.............................................................. 26
- -------------------------------------------------------------------------------- For all years prior to 1999 our fiscal year ended on December 31. Effective for 1999, we changed our fiscal year from the last day of December to the Saturday nearest the last day of December. Accordingly, fiscal 1999 ended on January 1, 2000. References to fiscal 1997, fiscal 1998, fiscal 1999 and fiscal 2000 refer to the years ended December 31, 1997 and 1998, the year ended January 1, 2000 and the year ending December 30, 2000. Although we refer to the traditional sporting goods retailers, general merchandisers, Internet and media companies for which we develop and operate e- commerce sporting goods businesses as our "partners," we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have. 2 PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Data) (Unaudited)
January 1, April 1, 2000 2000 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.................................... $ 27,345 $ 7,891 Accounts receivable, net..................................... 2,738 2,273 Inventory.................................................... 10,697 13,131 Prepaid expenses and other current assets.................... 2,782 3,408 Net assets of discontinued operations........................ 18,382 15,595 ----------- ----------- Total current assets....................................... 61,944 42,298 Property and equipment, net of accumulated depreciation and amortization................................................ 20,682 21,237 Other assets, net................................................. 110 290 ----------- ----------- Total assets............................................... $ 82,736 $ 63,825 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........................ $ 21,245 $ 14,586 Current portion - capital lease obligation, related party.... 141 144 ----------- ----------- Total current liabilities.................................. 21,386 14,730 Capital lease obligation, related party........................... 2,040 2,003 Commitments and contingencies..................................... Stockholders' equity: Preferred stock, $0.01 par value, 1,000 shares authorized; 8 shares issued as mandatorily redeemable preferred stock.............................................. - - Common stock, $0.01 par value, 60,000 shares authorized; 19,544 and 18,475 shares issued and outstanding, respectively, as of January 1, 2000; 18,566 shares issued and outstanding as of April 1, 2000.......................................... 195 186 Additional paid-in capital..................................... 102,462 104,072 Accumulated deficit............................................ (43,133) (57,166) ----------- ----------- 59,524 47,092 Less: Treasury stock, at cost..................................... 214 - ----------- ----------- Total stockholders' equity................................... 59,310 47,092 ----------- ----------- Total liabilities and stockholders' equity................... $ 82,736 $ 63,825 =========== ===========
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)
For the Quarter Ended ------------------------------------- March 31, April 1, 1999 2000 --------------- -------------- Net revenues................................................ $ - $ 5,719 Cost of revenues............................................ - 3,952 --------------- -------------- Gross profit................................. - 1,767 Operating expenses: Sales and marketing.................................. - 9,815 Product development.................................. - 2,667 General and administrative........................... 817 2,282 Stock-based compensation............................. 398 1,266 --------------- -------------- Total operating expenses..................... 1,215 16,030 --------------- -------------- Operating loss.............................................. (1,215) (14,263) Other (income) expenses: Interest (income) expense, net....................... 57 (230) --------------- -------------- Loss from continuing operations before income taxes........................................... (1,272) (14,033) Benefit from income taxes................................... (509) - --------------- -------------- Loss from continuing operations............................. (763) (14,033) Discontinued operations: Income from discontinued operations (net of benefit from income taxes of $177)................. 1,157 - --------------- -------------- Net income (loss)........................................... $ 394 $(14,033) =============== ============== Earnings (losses) per share--basic and diluted: Loss from continuing operations...................... $ (.06) $ (.76) Income from discontinued operations.................. .09 - --------------- -------------- Net income (loss).................................... $ .03 $ (.76) =============== ============== Weighted average shares outstanding - basic and diluted..... 12,019 18,517 =============== ==============
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)
For the Quarter Ended ---------------------------------- March 31, April 1, 1999 2000 --------------- ------------- Cash Flows from Operating Activities: Net income (loss)........................................................ $ 394 $(14,033) Deduct: Income from discontinued operations............................... 1,157 - --------------- ------------- Loss from continuing operations................................... (763) (14,033) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation and amortization..................................... 138 1,449 Stock-based compensation.......................................... 398 1,266 Changes in operating assets and liabilities: Accounts receivable........................................... - 465 Inventory..................................................... - (2,434) Prepaid expenses and other current assets..................... 69 (626) Other assets.................................................. 43 (180) Accounts payable and accrued expenses......................... (2,191) (6,659) --------------- ------------- Net cash used in continuing operations............................ (2,306) (20,752) Net cash (used in) provided by discontinued operations............ (2,715) 2,901 --------------- ------------- Net cash used in operating activities............................. (5,021) (17,851) --------------- ------------- Cash Flows from Investing Activities: Acquisition of property and equipment.................................... (144) (2,004) --------------- ------------- Cash Flows from Financing Activities: Net borrowings under lines of credit..................................... 5,631 - Repayments of capital lease obligation................................... (31) (34) Proceeds from exercises of common stock options and warrants............. 478 435 Costs of debt issuance................................................... (30) - --------------- ------------- Net cash provided by financing activities......................... 6,048 401 --------------- ------------- Net increase (decrease) in cash and cash equivalents..................... 883 (19,454) Cash and cash equivalents, beginning of period........................... 83 27,345 --------------- ------------- Cash and cash equivalents, end of period................................. $ 966 $ 7,891 =============== =============
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") sporting goods businesses of several traditional sporting goods retailers, general merchandisers, internet companies and media companies under exclusive long-term agreements. The Company currently derives virtually all of its revenues from the sale of sporting goods over the Internet and other electronic media. The Company currently does not derive revenues from the provision of services to its partners' e-commerce sporting goods businesses. Each of the Company's partners' owns the URL address of its Web site. Based upon the terms of the agreements with its partners, the Company owns certain components of the Web sites and the partners own other components. 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 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/A filed on May 2, 2000. NOTE 2 - EARNINGS (LOSSES) PER SHARE Earnings (losses) per share for all periods have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic and diluted earnings (losses) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Outstanding common stock options and warrants have been excluded from the calculation of diluted earnings (losses) per share because their effect would be antidilutive. The amounts used in calculating earnings per share data are as follows:
For the Quarter Ended ------------------------------- March 31, April 1, 1999 2000 ------------- ------------ (In Thousands) Loss from continuing operations.................................... $ (763) $(14,033) Income from discontinued operations................................ 1,157 -- ------------- ------------ Net income......................................................... $ 394 $(14,033) ============= ============ Weighted average shares outstanding - basic and diluted............ 12,019 18,517 ============= ============ Outstanding common stock options having no dilutive effect................................................ 1,411 2,265 ============= ============ Outstanding common stock warrants having no dilutive effect................................................ 209 560 ============= ============
6 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - COMMITMENTS AND CONTINGENCIES Employment Agreements As of April 1, 2000, the Company had employment agreements with several of its officers for an aggregate annual base salary of $1,753,000 plus bonuses and increases in accordance with the terms of the agreements. Terms of such contracts range from three to five years and are subject to automatic annual extensions. Advertising and Media Agreements As of April 1, 2000, the Company was contractually committed for the purchase of future advertising totaling approximately $3,123,000 for the remainder of the fiscal year ending December 30, 2000. One such agreement requires the Company to pay an additional fee based upon revenues generated from the advertising. In addition, the Company was contractually committed to provide barter media with a value of no less than $5,000,000 for fiscal 2000. The barter media consists of participation by a third party in joint advertising which the Company is entitled to receive in one of its partner's retail stores and newspaper promotions. The Company has no history of similar advertising arrangements for cash. Accordingly, no revenue or expense will be recorded for this arrangement. Minimum required joint advertising with the third party includes specific quantities for combined traffic in the partner's retail stores and copies of joint newspaper promotions. NOTE 4 - COMPREHENSIVE INCOME Comprehensive income for the quarters ended March 31, 1999 and April 1, 2000 was as follows:
For the Quarter Ended --------------------------------- March 31, April 1, 1999 2000 ------------ ------------- (In Thousands) Net income (loss)........................... $ 394 $(14,033) Foreign currency translation adjustments.... 47 -- ------------ ------------- Comprehensive income (loss)................. $ 441 $(14,033) ============ =============
NOTE 5 - EQUITY TRANSACTIONS During the quarter ended April 1, 2000, the Company granted options and warrants to purchase 612,700 shares of the Company's common stock to employees, consultants and a partner of the Company. The range of exercise prices for all options and warrants granted was from $3.00 to $20.75 for the quarter ended April 1, 2000. 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 $1,266,000 for the quarter ended April 1, 2000, primarily as a result of non-employee grants. As of April 1, 2000, the Company had an aggregate of $2,584,000 of deferred compensation remaining to be amortized over the next five years. Options and warrants to purchase 90,617 shares of the Company's common stock were exercised during the quarter ended April 1, 2000. The range of exercise prices was from $3.20 to $15.63 for the quarter ended April 1, 2000. These exercises resulted in cash proceeds to the Company of $435,000 for the quarter ended April 1, 2000. 7 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On March 13, 2000, the Company's Board of Directors approved the retirement of 1,069,086 shares of treasury stock held by the Company. NOTE 6 - BUSINESS SEGMENTS The Company operates in one principal business segment which develops and operates the e-commerce sporting goods businesses of traditional sporting goods retailers, general merchandisers, internet companies and media companies in domestic markets. All of the Company's net sales, operating results and identifiable assets are in the United States. See Note 7 for a discussion of the Company's discontinued operations. NOTE 7 - DISCONTINUED OPERATIONS Net sales of discontinued operations for the quarters ended March 31, 1999, and April 1, 2000 were $33,700,000 and $18,400,000, respectively. The discontinued operations components of amounts reflected in the balance sheets are as follows: January 1, April 1, 2000 2000 -------------- --------------- (In Thousands) Cash.................................................... $ 591 $ 1,000 Accounts receivable..................................... 29,692 22,748 Inventory............................................... 3,518 7,629 Property and equipment.................................. 1,243 1,250 Goodwill and intangibles................................ 11,148 10,949 Other assets............................................ 500 635 Accounts payable and accrued expenses................... (10,360) (12,327) Notes payable, other.................................... (17,950) (16,289) -------------- --------------- Net assets of discontinued operations (1)............ $ 18,382 $ 15,595 ============== ===============
(1) Included in current assets. Interest Expense of Discontinued Operations Net interest expense incurred related to notes payable of discontinued operations amounting to $265,000 and $347,000 for the quarters ended March 31, 1999 and April 1, 2000, respectively, has been allocated to discontinued operations. Employment Agreements of Discontinued Operations As of April 1, 2000, the Company had employment agreements with several of its officers of discontinued operations for an aggregate annual base salary of $567,000 plus bonuses and increases in accordance with the terms of the agreements. Terms of the agreements range from three to five years and are subject to automatic annual extensions. The agreements will be terminated upon consummation of the sale of the Company's Off-Price and Action Sports division. 8 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Purchase Commitments of Discontinued Operations As of April 1, 2000, outstanding purchase commitments of discontinued operations existed totaling $4,738,000, for which commercial import letters of credit have been issued. NOTE 8 - SIGNIFICANT TRANSACTIONS For the quarter ended April 1, 2000, net revenues included approximately $1,900,000 of sales of one vendor's fitness equipment product sold primarily through direct marketing, in addition to Web site and other 800-number sales. The resulting accounts receivable are due over a weighted average period of nine months. NOTE 9 - SUBSEQUENT EVENTS Mortgage Note On April 20, 2000, the Company executed a $5,300,000 mortgage note collateralized by the land, building, improvements, furniture and equipment of its corporate headquarters. The mortgage note has a term of ten years and bears interest at 8.49% per annum. Private Placement On April 27, 2000, the Company agreed to sell to funds affiliated with SOFTBANK America Inc. ("SOFTBANK") 2,500,000 shares of common stock and to TMCT Ventures, L.P. ("TMCT") 625,000 shares of common stock at a price of $8.00 per share for an aggregate purchase price of $25,000,000. The sale of these shares was completed on May 1, 2000. In addition, as part of this financing, the Company issued to SOFTBANK three-year warrants to purchase 1,250,000 shares of common stock and to TMCT three-year warrants to purchase 312,500 shares of common stock at an exercise price of $10.00 per share. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements relating to our operations that are based on management's current expectations, estimates and projections about our company and the online commerce industry. Words such as "expects," "intends," "plans," "projects," "believes," "estimates," "anticipates" and variations of these words and similar expressions are used to identify the forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Further, we may make forward-looking statements that are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what we express or forecast in these forward-looking statements. We undertake no obligation, and do not intend, to update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. A number of important factors could cause actual results to differ materially from those indicated in our forward-looking statements. These factors include those set forth under the heading "Risk Factors." Overview We develop and operate e-commerce sporting goods businesses for traditional sporting goods retailers, general merchandisers, Internet companies and media companies under exclusive long-term agreements. We enable our partners to capitalize on their existing brand assets to exploit online opportunities in the sporting goods retail industry. We customize the design of a partner's Web site with a broad range of characteristics that includes a differentiated user interface, partner-specific content pages, an extensive electronic catalog of product descriptions and images, a searchable database and interactive communication tools. We currently derive virtually all of our revenues from the sale of sporting goods over the Internet and other electronic media. It is possible, however, that in the future we may derive revenues from providing services in connection with the design, development, operation and promotion of our partners' e-commerce sporting goods businesses. Company Background Prior to our decision to initiate our e-commerce sporting goods business, we operated two primary businesses, our Branded division and our Off-Price and Action Sports division. From inception in 1986 through December 1999, we designed, marketed and distributed high performance athletic footwear exclusively for women under the RYKA brand name. From December 1997 through December 1999, as part of our Branded division, we also designed, marketed and distributed outdoor footwear under the Yukon brand name. During the same period, as part of our Off-Price and Action Sports division, we purchased closeouts, overstocks, canceled orders and excess inventories of athletic, outdoor, casual and specialty footwear, athletic apparel and athletic equipment from manufacturers and retailers for resale, and designed and distributed special make-up athletic equipment. In April 1999, we formalized our plan to divest these divisions in order to focus exclusively on the development of our e-commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented as discontinued operations. On June 10, 1999, in order to finance our e-commerce business, we agreed to sell to funds affiliated with SOFTBANK America, Inc. (collectively "SOFTBANK") 6,153,850 shares of common stock at a price of $13.00 per share for an aggregate purchase price of approximately $80.0 million. The purchase price reflected the closing price of our common stock on May 26, 1999, the day prior to the day we and SOFTBANK agreed in principle to the transaction. The sale of these shares was completed on July 23, 1999. On September 24, 1999, in furtherance of our plan to sell our historical businesses, we entered into an agreement, as amended on March 13, 2000, to sell our Off-Price and Action Sports division for a cash payment at closing of $13.2 million and the assumption by the purchaser of $4.0 million in indebtedness. We are seeking 10 stockholder approval of this sale at our annual stockholders meeting to be held on May 25, 2000. Michael G. Rubin, our Chairman and Chief Executive Officer, who as of the record date for the annual meeting beneficially owned approximately 43.2% of our outstanding shares, and SOFTBANK, who as of the record date for the annual meeting beneficially owned approximately 33.2% of our outstanding shares, have indicated that they intend to vote for approval of the sale. We expect the sale to close soon after our annual stockholders meeting. On April 27, 2000, in order to continue financing our e-commerce operations, we agreed to sell to funds affiliated with SOFTBANK 2,500,000 shares of common stock and to TMCT Ventures, L.P. ("TMCT") 625,000 shares of common stock at a price of $8.00 per share for an aggregate purchase price of $25.0 million. The sale of these shares was completed on May 1, 2000. In addition, as part of this financing, we issued to SOFTBANK three-year warrants to purchase 1,250,000 shares of common stock and to TMCT three-year warrants to purchase 312,500 shares of common stock at an exercise price of $10.00 per share. Results of Operations The Quarter Ended April 1, 2000 Compared to the Quarter Ended March 31, 1999 Net Revenues. We had net revenues from continuing operations of $5.7 million for the first quarter of fiscal 2000 and no net revenues from continuing operations for the first quarter of fiscal 1999. We derived $3.6 million of our net revenues from the sale of indoor sports and fitness equipment. Fitness equipment sales included $1.9 million of sales of one of our vendor's products sold primarily through direct marketing, in addition to Web site and other 800-number sales. We derived $1.8 million of our net revenues from sales of sporting goods products from other categories. Other sources of revenue during the quarter, including sales of gift certificates to our partners' retail stores, the sale of advertising on a partner's Web site and outbound shipping charges to consumers, accounted for the remaining $300,000 of our net revenues. Cost of Revenues. We incurred cost of revenues from continuing operations of $4.0 million for the first quarter of fiscal 2000 and no cost of revenues from continuing operations for the first quarter of fiscal 1999. As a percentage of net revenues, cost of revenues was 69.1% for the first quarter of fiscal 2000. These costs included the cost of the products sold and inbound freight costs related to these products, as well as outbound shipping costs other than those related to our temporary free shipping promotions which are included in sales and marketing expenses. Gross Profit. We had gross profit from continuing operations of $1.8 million for the first quarter of fiscal 2000 and no gross profit from continuing operations for the first quarter of fiscal 1999. As a percentage of net revenues, gross profit from continuing operations was 30.9% for the first quarter of fiscal 2000. Sales and Marketing Expenses. We incurred sales and marketing expenses from continuing operations of $9.8 million for the first quarter of fiscal 2000 and no sales and marketing expenses from continuing operations for the first quarter of fiscal 1999. These expenses included advertising and promotional expenses, including temporary free shipping, distribution facility expenses, order processing fees and payroll and related expenses. Also included in this amount are partner revenue shares, which are payments made to our partners in exchange for the use of their brand assets, the promotion of their URL's in marketing and communication materials, the implementation of programs to provide incentives to in-store customers to shop online and other programs and services provided to the customers of our partners' Web sites. Partner revenue shares were not significant in the first quarter of fiscal 2000. Product Development Expenses. We incurred product development expenses from continuing operations of $2.7 million for the first quarter of fiscal 2000 and no product development expenses from continuing operations for the first quarter of fiscal 1999. Product development expenses consisted primarily of expenses associated with content development; building, developing and operating our partners' Web sites; payroll and related expenses for engineering, production, creative and management information systems; and depreciation expense related to capitalized hardware and software. 11 General and Administrative Expenses. We incurred general and administrative expenses from continuing operations of $2.3 million for the first quarter of fiscal 2000 and $800,000 for the first quarter of fiscal 1999. While our continuing operations were not in existence in the first quarter of fiscal 1999, the recorded expenses reflect costs for personnel, facilities and professional fees that are currently associated with our continuing operations. Stock-Based Compensation Expense. We recorded stock-based compensation expense from continuing operations of $1.3 million for the first quarter of fiscal 2000 and $400,000 for the first quarter of fiscal 1999. The expense for the first quarter of fiscal 2000 related to the amortization of deferred compensation expense for options granted to employees and certain non-employees and to the value of the options or warrants granted to certain other non- employees. As of April 1, 2000, we had an aggregate of $2.6 million of deferred compensation remaining to be amortized over the next five years. Interest (Income) Expense. Interest income consists of interest earned on cash and short-term investments. In the first quarter of fiscal 2000, we had interest income of $200,000, net of a small amount of interest expense. In first quarter of fiscal 1999, we had $100,000 of interest expense, net of small amount of interest income, related primarily to bank borrowings. Liquidity and Capital Resources Historically, we financed our operations through a combination of internally generated funds, equity financings, subordinated borrowings and bank credit facilities. We used our bank credit facilities to fund our investment in accounts receivable and inventory necessary to support our historical businesses. In connection with our decision to focus exclusively on our e-commerce business, we raised approximately $80.0 million in gross proceeds through our equity financing with SOFTBANK in July 1999. We used part of the proceeds from this financing to repay the balance on our then outstanding lines of credit, reduce trade payables and provide operating capital related to our historical businesses. We also used part of the proceeds to acquire property and equipment and fund working capital for our partners' e-commerce businesses. As of April 1, 2000, we had cash and cash equivalents of approximately $7.9 million and working capital of approximately $27.6 million, which included approximately $15.6 million of net assets of discontinued operations. We have incurred substantial costs to develop our e-commerce business and to recruit, train and compensate personnel for our creative, engineering, marketing, advertising, merchandising, customer service and administration departments. As a result, we incurred substantial losses in fiscal 1999 and the first quarter of fiscal 2000 and, as of April 1, 2000, had an accumulated deficit of $57.2 million. In order to expand our e-commerce business, we intend to invest heavily in operations, Web site development, marketing, merchandising and additional personnel. We therefore expect to continue to incur substantial operating losses for the foreseeable future. We used approximately $20.8 million in net cash for operating activities of continuing operations in the first quarter of fiscal 2000 and approximately $2.3 million in net cash for operating activities of continuing operations in the first quarter of fiscal 1999. Net cash used for operating activities of continuing operations in the first quarter of fiscal 2000 was primarily the result of net losses from continuing operations and changes in inventory and accounts payable and accrued expenses, partially offset by changes in accounts receivable, depreciation expense and stock-based compensation expense. Net cash used for operating activities of continuing operations in the first quarter of fiscal 1999 was primarily the result of net losses from continuing operations and changes in accounts payable and accrued expenses, partially offset by stock- based compensation expense. Our investing activities in the first quarter of fiscal 2000 consisted of purchases of property and equipment. We made capital expenditures of approximately $2.0 million in the first quarter of fiscal 2000. 12 As of April 1, 2000, we had commitments of $3.1 million relating to the implementation of advertising and promotion programs. In addition, we have agreed to provide Yahoo! with not less than $5.0 million of barter media during the term of our agreement with Yahoo!. The barter media consists of including the Yahoo! logo on mutually agreed upon advertising in a partners' retail stores and newspaper promotions. To date, we have financed our e-commerce operation primarily from the sale of equity securities. Management expects that our current cash position combined with the proceeds from the sale of our Off-Price and Action Sports division, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our revenues must increase significantly to internally fund our anticipated operating expenses. If cash flows are insufficient to fund these expenses, we may need to raise additional funds in future periods through public or private financings or other arrangements to fund our operations until we achieve profitability. On April 20, 2000, we received approximately $5.3 million in gross proceeds through the mortgage financing of our corporate headquarters. On May 1, 2000, we received approximately $25.0 million in gross proceeds from a private placement of our common stock with SOFTBANK and TMCT. In addition, as part of this financing, SOFTBANK and TMCT have the right to acquire up to an additional $15.6 million of our common stock at $10.00 per share. 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 large percentage of our total annual sales. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. Inflation Management believes that inflation has not had a material effect on our operations. 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/A filed on May 2, 2000. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. This Quarterly Report of Form 10-Q and our Annual Report on Form 10-K/A filed on May 2, 2000 contain forward-looking statements that involve risks and uncertainties. Many factors, including those described below, may cause actual results to differ materially from anticipated results. Risks Particular to Our Business Our future success cannot be predicted based upon our limited e-commerce operating history. Although we commenced operations in 1987, we did not initiate our e-commerce business until the first quarter of 1999 and did not begin operating the e- commerce sporting goods businesses of our partners until the fourth 13 quarter of 1999. Prior to the fourth quarter of 1999, when we launched the e- commerce sporting goods business we operate for our partners, 100% of our revenues had been generated by our discontinued operations. Upon completion of the sale of discontinued operations, 100% of our revenues will be generated through our e-commerce business. Based on our limited experience with our e- commerce business, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a relatively new and unproven market, many of which may be beyond our control. Our failure to address these issues could have a material adverse effect on our business, results of operations and financial condition. We expect significant increases in our operating expenses and continuing losses. We incurred substantial losses for fiscal 1999 and, as of April 1, 2000, we had an accumulated deficit of $57.2 million. We have not achieved profitability from our continuing operations. We may not obtain enough customer traffic or a high enough volume of purchases from our partners' e-commerce sporting goods businesses to generate sufficient revenues to achieve profitability. We believe that we will continue to incur operating and net losses for the next few years. We believe that our losses in fiscal 2000 will be significantly greater than our losses in fiscal 1999. There can be no assurances that we will be able to reverse these accelerating losses. We intend to increase our operating expenses substantially as we: . enhance and expand our third-party distribution and order fulfillment capabilities or develop our own; . improve our order processing systems and capabilities by transitioning order processing from our current third-party provider to in-house; . develop enhanced technologies and features to improve our partners' e- commerce sporting goods businesses; . expand our customer service capabilities to better serve our customers' needs; . increase our general and administrative functions to support our growing operations; and . increase our sales and marketing activities. Because we will incur many of these expenses before we receive any revenues from our efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results. Our success is tied to the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. Our future success is substantially dependent upon the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. From time to time, the sporting goods industry has experienced downturns. Any downturn in the sporting goods industry could adversely affect our business. In addition, if our partners were to have financial difficulties or seek protection from their creditors, or if we are unable to replace our partners or obtain new partners, it could adversely affect our business, financial condition and results of operations. We enter into long-term contracts with our partners. If we do not maintain good working relationships with our partners or perform as required under these agreements it could adversely affect our business. We enter into contracts with our partners with terms ranging from five to fifteen years. These agreements establish new and complex relationships between our partners and us. We spend a significant amount of time and effort to maintain our relationships with our partners and address the issues that from time to time may arise from 14 these new and complex relationships. If we do not maintain a good working relationship with our partners or perform as required under these agreements, our partners could seek to terminate the agreements prior to the end of the term or they could decide not to renew the contracts at the end of the term. This could adversely affect our business, financial condition and results of operations. Moreover, our partners could decide not to renew these contracts for reasons not related to our performance. Our operating results are difficult to predict. If we fail to meet the expectations of public market analysts and investors, the market price of our common stock may decline significantly. Our annual and quarterly operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to predict, quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. In some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may decline significantly. Factors that may harm our business or cause our operating results to fluctuate include the following: . our inability to retain existing partners or to obtain new partners; . our inability to obtain new customers at a reasonable cost, retain existing customers or encourage repeat purchases; . decreases in the number of visitors to the e-commerce sporting goods businesses operated by us or the inability to convert these visitors into customers; . our failure to offer an appealing mix of sporting goods, apparel, footwear and other products; . our inability to adequately maintain, upgrade and develop our partners' Web sites, the systems used to process customers' orders and payments or our computer network; . the ability of our competitors to offer new or superior e-commerce sporting goods businesses, services or products; . price competition that results in lower profit margins or losses; . our inability to obtain specific products and brands or unwillingness of vendors to sell their products to us; . unanticipated fluctuations in the amount of consumer spending on sporting goods and related products, which tend to be discretionary spending items; . increases in the cost of Internet or other advertising; . increases in the amount and timing of operating costs and capital expenditures relating to expansion of our operations; . unexpected increases in shipping costs or delivery times, particularly during the holiday season; . technical difficulties, system security breaches, system downtime or Internet slowdowns; . seasonality; . our inability to manage inventory levels or control inventory theft; 15 . our inability to manage distribution operations or provide adequate levels of customer service; . an increase in the level of our product returns; . government regulations related to use of the Internet for commerce; and . unfavorable economic conditions specific to the Internet, e-commerce or the sporting goods industry. Seasonal fluctuations in the sales of sporting goods could cause wide fluctuations in our quarterly results. We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that our fourth fiscal quarter will account for a large percentage of our total annual sales. In anticipation of increased sales activity during our fourth fiscal quarter, we may hire a significant number of temporary employees to bolster our permanent staff and significantly increase our inventory levels. For this reason, if our revenues were below seasonal expectations during the fourth fiscal quarter, our annual operating results could be below the expectations of securities analysts and investors. Due to the limited operating history of our e-commerce business, it is difficult to predict the seasonal pattern of our sales and the impact of this seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, product distribution and shipment activities and may cause a shortfall in revenues as compared to expenses in a given period. We have been unable to fund our e-commerce operations with the cash generated from our business. If we do not generate cash sufficient to fund our operations, we may need additional financing to continue our growth or our growth may be limited. Because we have not generated sufficient cash from operations to date, we have funded our e-commerce operations primarily from the sale of equity securities. Cash from revenues must increase significantly for us to fund anticipated operating expenses internally. If our cash flows are insufficient to fund these expenses, we may need to fund our growth through additional debt or equity financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience additional dilution or the new securities may have rights senior to those of our common stock. We must develop and maintain relationships with key brand manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we are unable to do so, it could adversely affect our business, results of operation and financial condition. We primarily purchase the products we offer directly from the manufacturers of the products. If we are unable to develop and maintain relationships with these manufacturers, we may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our business could be adversely impacted. We do not have written contracts with most of our manufacturers. Manufacturers could stop selling products to us and may ask us to remove their products or logos from our partners' Web sites. In some circumstances, our partners purchase products directly from manufacturers for sale on their Web sites. If we or our partners are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms. We currently do not offer some popular brands of sporting goods, such as Nike. There can be no assurance that we will be able to offer these brands in the future. If we are unable to offer a sufficient assortment and quantity of quality products at acceptable prices, we may lose sales and market share. 16 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 six partners' e-commerce sporting goods businesses in the fourth quarter of fiscal 1999. The limited time during which we have been operating these businesses, as well as the inherent unpredictability of the events described above, makes it difficult to predict whether the occurrence of any of these events is likely. If any of these events do occur, they could result in interruptions, delays or cessations in service to users of our partners' Web sites, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we maintain our computers on which we operate our partners' Web sites at the site of a third-party provider. We cannot control the maintenance and operation of this site, which is also susceptible to similar disasters and problems. We have no formal disaster recovery plan, and our insurance policies may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption in our service or a decrease in responsiveness could harm our relationships with our customers and result in reduced revenues. We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors' could put us at a disadvantage to our competitors. In addition, the failure of our partners to protect their intellectual property rights, including their domain names, could impair our operations. These failures could have a material adverse effect on our business, results of operations and financial condition. If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. We may face material delays in introducing new services, products and enhancements. If this happens, our customers may forego the use of our partners' e-commerce sporting goods businesses and use those of our competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our partners' e-commerce sporting goods businesses. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our partners' existing Web sites and our proprietary technology and systems may become obsolete. 17 Developing our partners' e-commerce sporting goods businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our partners' Web sites, our order processing systems and our computer network to meet customer requirements or emerging industry standards. We may be subject to intellectual property claims that could be costly and could disrupt our business. Third parties may assert that our business or technologies infringe their intellectual property rights. From time to time, we may receive notices from third parties questioning our right to present specific images or logos on our partners' Web sites, or stating that we have infringed their trademarks or copyrights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be unsuccessful in defending against any of these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require us to change how we do business, redesign our partners' Web sites and other systems or enter into burdensome royalty or licensing agreements. These license or royalty agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. Our insurance coverage may not be adequate to cover every claim that third parties could assert against us. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management's time and disruptions in our business. Any of these claims could also harm our reputation. We rely on our developing relationships with online services, search engines and directories to drive traffic to the e-commerce sporting goods businesses we operate. If we are unable to develop or maintain these relationships, our business, financial condition and results of operations could be adversely affected. We are developing relationships with online services, search engines and directories to provide content and advertising banners that link to our partners' Web sites. We expect to rely on these relationships as significant sources of traffic to our partners' Web sites and to generate new customers. If we are unable to develop satisfactory relationships with high-traffic Web sites on acceptable terms, our ability to attract new customers could be harmed. Further, many of the Web sites with which we may have online advertising arrangements could provide advertising services for other marketers of sporting goods. As a result, these Web sites may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third-party Web sites may result in termination of these types of relationships. Without these relationships, we may not be able to sufficiently increase market share and our business, financial condition and results of operations could be adversely affected. Our success is dependent upon our executive officers and other key personnel. Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, Chairman and Chief Executive Officer. We have employment agreements with some of our executive officers and key personnel. We cannot be sure, however, that we will be able to retain or attract executive, managerial and other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $7.25 million. We have not obtained key person life insurance on any of our other executive officers or key personnel. We may be unable to hire and retain the skilled personnel necessary to develop our business. We intend to hire a significant number of skilled personnel in fiscal 2000 and beyond. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our failure to attract and retain the highly trained personnel that are integral to our business may limit our growth rate, which would harm our business. 18 We may not be able to compete successfully against current and future competitors, which could harm our margins and our business. The e-commerce market is new, rapidly evolving and extremely competitive. In addition, there is a significant amount of capital currently available to fund existing and potential competitors. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We compete with a variety of companies, including: . online sporting goods retailers such as Chipshot.com, Fogdog.com and Gear.com; . general merchandise e-commerce companies such as Mercata.com, Onsale.com, and uBid.com; . full-line electronic retailers that are associated with full-line sporting goods stores such as Dsports.com associated with Dick's Sporting Goods, MVP.com, associated with Galyans, and Shopsports.com associated with Copeland's . e-commerce businesses of specialty sporting goods retailers and catalogs such as Footaction.com, Footlocker.com and REI.com; . e-commerce businesses of traditional general merchandise retailers such as Target.com and Wal-Mart.com; and . e-commerce businesses of sporting goods manufacturers such as adidas.com and Nike.com. In addition, we compete with companies that can provide part of our solutions to companies that wish to establish e-commerce sporting goods businesses, including: . Web site developers, such as Sapient, Scient and Viant; and . third-party fulfillment and customer services providers, such as Fingerhut, Keystone Internet Services and ClientLogic. Finally, we compete with traditional channels of distribution for sporting goods, including full-line sporting goods retailers, specialty sporting goods retailers, general merchandise retailers, catalogs and manufacturers' direct stores. If we experience problems in our fulfillment, warehouse and distribution operations, we could lose customers. We currently rely upon a third-party to handle the fulfillment of our customer orders and the warehousing of our inventory. We also rely upon multiple third parties to handle the shipment of our products. As a result, we are subject to the risks associated with the ability of these third parties to successfully and timely fulfill and ship customer orders and to successfully handle our inventory delivery services to meet our shipping needs. The failure of these third parties to provide these services, or the termination or interruption of these services, could adversely affect our business, results of operations and financial condition. We currently plan to assume responsibility for the fulfillment of large and oversized product orders during fiscal 2000 and may assume responsibility for the fulfillment of other product orders in fiscal 2000. We could experience problems during the transition of control from third-party to us. If transition problems arise, it could result in additional expenses and could divert management's attention from other aspects of our business. If we are unable to successfully, timely and cost efficiently effect this transition and perform these fulfillment services, our business, results of operations and financial condition could be adversely affected. 19 Sporting goods and apparel are subject to changing consumer preferences. If we fail to anticipate these changes, we could experience lower sales, higher inventory markdowns and lower margins. Our success depends upon our ability to anticipate and respond to trends in sporting goods merchandise and consumers' participation in sports. Consumers' tastes in apparel and sporting goods equipment are subject to frequent and significant changes, due in part to manufacturers' efforts to incorporate advanced technologies into some types of sporting goods. In addition, the level of consumer interest in a given sport can fluctuate dramatically. Prior to commencing our e-commerce business, our businesses were primarily concentrated in athletic footwear and apparel. Accordingly, we do not have experience in the full range of sporting goods. If we fail to identify and respond to changes in sporting goods merchandising and recreational sports participation, our sales could suffer and we could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers' recreational sports habits could allow our competitors to gain market share which could have an adverse effect on our business, results of operations and financial condition. High merchandise returns could adversely affect our business, financial condition and results of operations. Our policy for allowing our customers to return products is consistent with the policies of each of our partners for which we operate e-commerce sporting goods businesses. Our ability to handle a large volume of returns is unproven. If merchandise returns are significant, our business, financial condition and results of operations could be adversely affected. We may be subject to product liability claims that could be costly and time consuming. We sell products manufactured by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that users of our partners' Web sites were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. We may be liable if third parties misappropriate our customers' personal information. If third parties are able to penetrate our network security or otherwise misappropriate our customers' personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could adversely affect our business. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices. We are controlled by certain principal stockholders. As of May 1, 2000, Michael G. Rubin, our Chairman and Chief Executive Officer, beneficially owned 37.0% and SOFTBANK beneficially owned 39.9% of our outstanding common stock. Mr. Rubin and SOFTBANK are in a position to exercise control over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions, and the ability generally to direct our affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK acquired its shares of our common stock provide that SOFTBANK has the right to designate up to three members of our board, depending on the number of shares of our common stock held by SOFTBANK. This concentration of ownership and SOFTBANK's right to designate members to our board may have the effect of delaying or preventing a change in control of us, including transactions where stockholders might otherwise receive a premium over current market prices for their shares. 20 There are risks associated with potential acquisitions. As a result, we may not achieve the expected benefits of potential acquisitions. If we are presented with appropriate opportunities, we may make investments in complementary companies, products or technologies or we may purchase other companies. We may not realize the anticipated benefits of any investment or acquisition. We may not be able to successfully assimilate the additional personnel, operations, acquired technology and products into our business. The proposed acquisition may further strain our existing financial and managerial controls and reporting systems and procedures. In addition, key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees or increase our expenses. Further, the physical expansion in facilities that would occur as a result of any acquisition may result in disruptions that seriously impair our business. Finally, we may have to incur debt or issue equity securities to pay for any acquisitions or investments, the issuance of which could be dilutive to our stockholders. We may expand our business internationally, causing our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability. We believe that the current globalization of the economy requires businesses to consider pursuing international expansion. In the future, we may expand into international markets. International sales are subject to inherent risks and challenges that could adversely affect our profitability, including: . the need to develop new supplier and manufacturer relationships, particularly because major sporting goods manufacturers may require that our international operations deal with local distributors; . unexpected changes in international regulatory requirements and tariffs; . difficulties in staffing and managing foreign operations; . longer payment cycles from credit card companies; . greater difficulty in accounts receivable collection; . potential adverse tax consequences; . price controls or other restrictions on foreign currency; and . difficulties in obtaining export and import licenses. To the extent we generate international sales in the future, any negative aspects on our international business could negatively impact our business, operating results and financial condition as a whole. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross margins from dollar- denominated international sales. We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. 21 There are risks relating to our Year 2000 compliance. Many existing computer software programs and operating systems were designed such that the year 1999 is the maximum date that many computer systems will be able to process. We addressed the potential problems posed by this limitation in our systems software to assure that it was prepared for the Year 2000. We did not incur any Year 2000 problem as a result of the passage of January 1, 2000. However, it is possible that problems may occur even after arrival of the Year 2000. If we or third parties with which we conduct material business experience problems caused by Year 2000 problems, there may be a material adverse effect on our results of operations. It may be difficult for a third-party to acquire our company and this could depress our stock price. Pursuant to our amended and restated certificate of incorporation, we have authorized a class of 1,000,000 shares of preferred stock, which the board of directors may issue with terms, rights, preferences and designations as the board may determine and without any vote of the stockholders, unless otherwise required by law. Issuing the preferred stock, depending upon the rights, preferences and designations set by the board, may delay, deter or prevent a change in control of our company. Issuing additional shares of common stock could result in dilution of the voting power of the current holders of our common stock. In addition, "anti-takeover" provisions of Delaware law may restrict the ability of the stockholders to approve a merger or business combination or obtain control of our company. There are limitations on the liabilities of our directors. Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director's duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. Risks Related to the Internet Industry Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure. Our future success is substantially dependent upon continued growth in the use of the Internet. The number of users and advertisers on the Internet may not increase and commerce over the Internet may not become more accepted and widespread for a number of reasons, including: . actual or perceived lack of security of information, including credit card numbers; . lack of access and ease of use; . congestion of traffic on the Internet; . inconsistent quality of service and lack of availability of cost- effective, high-speed service; . possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; . excessive governmental regulation; . uncertainty regarding intellectual property ownership; and . lack of high-speed modems and other communications equipment. Published reports have also indicated that growth in the use of the Internet has resulted in users experiencing delays, transmission errors and other difficulties. As currently configured, the Internet may not support an increase 22 in the number or requirements of users. In addition, there have been outages and delays on the Internet as a result of damage to the current infrastructure. The amount of traffic on our partners' Web sites could be materially affected if there are outages or delays in the future. The use of the Internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the Internet. If none of the foregoing changes occur, or if the Internet does not become a viable commercial medium, our business, results of operations and financial condition could be materially adversely affected. In addition, even if those changes occur, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet. The technology of the Internet is changing rapidly and could render the Web sites which we operate obsolete. The technology of the Internet and e-commerce is evolving rapidly for many reasons, including: . customers frequently changing their requirements and preferences; . competitors frequently introducing new products and services; and . industry associations and others creating new industry standards and practices. These changes could render the Web sites which we operate obsolete. Our ability to attract customers could be seriously impaired if we do not accomplish the following tasks: . continually enhance and improve our partners' Web sites; . identify, select and obtain leading technologies useful in our business; and . respond to technological advances and emerging industry standards in a cost-effective manner and timely manner. Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends heavily upon the general public's willingness to use the Internet as a means to purchase goods. The failure of the Internet to develop into an effective commercial tool would seriously damage our future operations. E-commerce is a new concept, and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain, and most e- commerce businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably. The Internet may not succeed as a medium of commerce because of delays in developing elements of the needed Internet infrastructure, such as a reliable network, high-speed modems, high-speed communication lines and other enabling technologies. The security risks of e-commerce may discourage customers from purchasing goods from us. In order for the e-commerce market to develop successfully, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could cause customers to lose confidence in the security of our partners' Web sites and choose not to purchase from those Web sites. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt the operation of our partners' Web sites. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to the information on our partners' Web sites. Any security breach could expose us to risks of loss, litigation and liability and could seriously disrupt our operations. 23 Our business is subject to United States and foreign governmental regulation of the Internet and taxation. Congress and various state and local governments have recently passed legislation that regulates various aspects of the Internet, including online content, copyright infringement, user privacy, sales and advertising of certain products and services and taxation. In addition, federal, state, local and foreign governmental organizations are also considering legislative and regulatory proposals that would regulate the Internet. Areas of potential regulation include libel, pricing, quality of products and services and intellectual property ownership. A number of proposals have been made at the state and local level that would impose taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce and could adversely affect our future business, results of operation and financial condition. In addition, United States and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. New restrictions in this area could limit our ability to operate as planned and result in significant compliance costs. Regulations imposed by the Federal Trade Commission may adversely affect the growth of our Internet business or its marketing efforts. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13. In addition, bills pending in Congress would extend online privacy protections to adults. Laws and regulations of this kind may include requirements that we establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. These regulations may also include enforcement and remedial provisions. Even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above. We could become a party to a similar investigation or enforcement proceeding, or the Federal Trade Commission's regulatory and enforcement efforts may harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the quarter ended April 1, 2000. See the information set forth in Item 7A of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 1, 2000 filed on May 2, 2000. 24 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 None. 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 27.1 Financial data schedule for the quarter ended April 1, 2000 (electronic filing only). (b) Reports on Form 8-K We filed a Current Report on Form 8-K on January 13, 2000 regarding the disposition of certain assets of the Branded division. We filed a Current Report on Form 8-K on March 23, 2000 regarding the change in its fiscal year. 25 SIGNATURES 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. DATE: May 15, 2000 By: /s/ Michael G. Rubin --------------------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer DATE: May 15, 2000 By: /s/ Jordan M. Copland --------------------------------- Jordan M. Copland Executive Vice President & Chief Financial Officer 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF APRIL 1, 2000 AND THE RELATED STATEMENT OF INCOME FOR THE QUARTER ENDED APRIL 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-30-2000 JAN-02-2000 APR-01-2000 7,891 0 2,273 0 13,131 42,298 24,797 3,560 63,825 14,730 0 0 0 186 46,906 63,825 5,719 5,719 3,952 19,982 0 0 (230) (14,033) 0 (14,033) 0 0 0 (14,033) (0.76) (0.76) INCLUDES NET ASSETS OF DISCONTINUED OPERATIONS OF $15,595.
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