10-Q 1 d10q.txt 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 March 31, 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, 19406 PA (Zip Code) (Address of principal executive 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 May 3, 2001: Common Stock, $.01 par value 31,624,554(/1/) ------------------------------ ------------------- (Title of each class) (Number of Shares)
(/1/Excludes)approximately 358,600 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 May 3, 2001, had not yet been issued. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS
Page ---- PART I--FINANCIAL INFORMATION Item 1.Financial Statements: Condensed Consolidated Balance Sheets as of December 30, 2000 and March 31, 2001 (Unaudited)........................................... 3 Condensed Consolidated Statements of Operations for the three-month periods ended April 1, 2000 and March 31, 2001 (Unaudited)......................... 4 Condensed Consolidated Statements of Cash Flows for the three-month periods ended April 1, 2000 and March 31, 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.................................................... 10 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 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 traditional sporting goods retailers, general merchandise retailers, Internet companies and media companies for which we develop and operate e-commerce sporting goods businesses as our "partners," we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have. 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, March 31 2000 2001 ------------ --------- ASSETS Current assets: Cash and cash equivalents............................ $ 92,012 $ 70,884 Short term investments............................... 1,789 807 Accounts receivable, net of allowance of $287 and $162, respectively.................................. 4,440 2,570 Inventory............................................ 19,202 17,448 Prepaid expenses and other current assets............ 1,485 1,834 --------- --------- Total current assets............................... 118,928 93,543 Property and equipment, net............................ 26,424 26,140 Goodwill, net.......................................... 14,363 13,872 Other assets, net...................................... 458 517 --------- --------- Total assets....................................... $ 160,173 $ 134,072 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, accrued expenses, and other........ $ 37,803 $ 19,674 Current portion--long-term debt...................... 320 378 --------- --------- Total current liabilities.......................... 38,123 20,052 Long-term debt......................................... 5,750 5,656 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized; 800 shares issued as mandatorily redeemable preferred stock as of December 30, 2000 and March 31, 2001 respectively..................... -- -- Common stock, $0.01 par value, 60,000,000 shares authorized; 31,925,098 and 31,927,359 shares issued and outstanding as of December 30, 2000 and March 31, 2001, respectively.............................. 319 319 Additional paid in capital........................... 217,124 217,584 Accumulated deficit.................................. (101,143) (109,539) --------- --------- Total stockholders' equity......................... 116,300 108,364 --------- --------- Total liabilities and stockholders' equity......... $ 160,173 $ 134,072 ========= =========
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 ------------------- April 1, March 31, 2000 2001 -------- --------- Net revenues............................................... $ 5,719 $16,215 Cost of revenues........................................... 3,952 11,149 -------- ------- Gross profit........................................... 1,767 5,066 -------- ------- Operating expenses: Sales and marketing...................................... 9,815 7,441 Product development...................................... 1,594 2,370 General and administrative............................... 1,906 2,540 Stock-based compensation................................. 1,266 453 Depreciation and amortization............................ 1,449 1,627 -------- ------- Total operating expenses............................... 16,030 14,431 Interest income, net....................................... (230) (969) -------- ------- Loss from continuing operations............................ (14,033) (8,396) Discontinued operations: Loss on disposition of discontinued operations........... -- -- -------- ------- Net loss................................................... $(14,033) $(8,396) ======== ======= Losses per share--basic and diluted: Loss from continuing operations.......................... $ (0.76) $ (0.26) Loss on disposition of discontinued operations........... -- -- -------- ------- Net loss................................................. $ (0.76) $ (0.26) ======== ======= Weighted average shares outstanding--basic and diluted..... 18,517 31,926 ======== =======
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)
Three Months Ended ------------------ April 1, March 2000 31, 2001 -------- -------- Cash Flows from Operating Activities: Net loss.................................................. $(14,033) $ (8,396) Deduct: Loss on disposition of discontinued operations.......... -- -- -------- -------- Loss from continuing operations........................... (14,033) (8,396) -------- -------- Adjustments to reconcile loss from continuing operations to net cash used in operating activities: Depreciation and amortization........................... 1,449 1,627 Stock-based compensation................................ 1,266 453 Changes in operating assets and liabilities, net of discontinued operations: Accounts receivable, net................................ 465 1,870 Inventory............................................... (2,434) 1,754 Prepaid expenses and other current assets............... (626) (349) Accounts payable, accrued expenses, and other........... (6,659) (18,129) -------- -------- Net cash used in continuing operations.................. (20,572) (21,170) Net cash provided by discontinued operations............ 2,901 -- -------- -------- Net cash used in operating activities................... (17,671) (21,170) -------- -------- Cash Flows from Investing Activities: Acquisition of property and equipment, net................ (2,004) (1,162) (Additions) reductions to goodwill and other assets, net.. (180) 253 Sales of short-term investments........................... -- 983 -------- -------- Net cash provided by (used in) investing activities..... (2,184) 74 -------- -------- Cash Flows from Financing Activities: Repayments of capital lease obligations................... (34) (25) Repayments of mortgage note............................... -- (10) Proceeds from exercises of common stock options and warrants................................................. 435 3 -------- -------- Net cash provided by (used in) financing activities..... 401 (32) -------- -------- Net decrease in cash and cash equivalents.................. (19,454) (21,128) Cash and cash equivalents, beginning of period............. 27,345 92,012 -------- -------- Cash and cash equivalents, end of period................... $ 7,891 $ 70,884 ======== ========
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 merchandise retailers, Internet companies and media companies under exclusive agreements. The Company currently derives virtually all of its revenues from the sale of sporting goods through its partners' Web sites, direct marketing, business to business group sales, 800-number sales and related outbound shipping charges. 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-month period ended March 31, 2001 by $1.4 million or $0.04 per share. 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 $685,000 and $558,000 for the three-month periods ended April 1, 2000 and March 31, 2001, respectively, and was charged to sales and marketing expense. New Accounting Pronouncements Derivative Instruments: Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities.") establishes 6 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000, although early adoption is encouraged. This pronouncement was adopted in the first quarter of 2001, and did not have a significant impact on the Company's financial position or results of operations. NOTE 3--EQUITY TRANSACTIONS During the three-month period ended March 31, 2001, the Company granted options to purchase 1,722,875 shares of the Company's common stock to employees, partners, and consultants. The range of exercise prices for all options granted was from $0.01 to $6.94 for the three-month period ended March 31, 2001. As a result of the grant of these options and the amortization of deferred compensation from prior grants, the Company recorded stock-based compensation expense of $453,000 for the three-month period ended March 31, 2001, primarily as a result of non-employee grants. As of March 31, 2001, the Company had an aggregate of $2.8 million of deferred compensation remaining to be amortized over the next four years. Options to purchase 2,261 shares of the Company's common stock were exercised during the three-month period ended March 31, 2001. The range of exercise prices was from $0.59 to $2.44 for the three-month period ended March 31, 2001. These exercises resulted in cash proceeds to the Company of $3,000 for the three-month period ended March 31, 2001. 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 ---------------------------- April 1, 2000 March 31, 2001 ------------- -------------- (in thousands) Sales and marketing............................. $ 733 $ 63 Product development............................. -- -- General and administrative...................... 533 390 ------ ---- $1,266 $453 ====== ====
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. 7 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amounts used in calculating losses per share data are as follows:
Three Months Ended ---------------------------- April 1, 2000 March 31, 2001 ------------- -------------- (in thousands) Loss from continuing operations............... $(14,033) $(8,396) Loss on disposition of discontinued operations................................... -- -- -------- ------- Net loss...................................... $(14,033) $(8,396) ======== ======= Weighted average shares outstanding--basic and diluted...................................... 18,517 31,926 ======== ======= Outstanding common stock options having no dilutive effect.............................. 2,265 6,045 ======== ======= Outstanding common stock warrants having no dilutive effect.............................. 560 7,252 ======== =======
NOTE 6--CONCENTRATIONS OF CREDIT RISK As of March 31, 2001, the Company had $1.2 million included in accounts receivable related to sales of one vendor's products through direct marketing, 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 March 31, 2001 the Company had $68.8 million invested in money market funds with three financial institutions. The composition of these investments are regularly monitored by management. 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 March 31, 2001, the Company had employment agreements with several of its employees for an aggregate annual base salary of $1.9 million plus bonuses and increases in accordance with the terms of the agreements. Terms of such contracts range from one to four years and are subject to automatic annual extensions. Advertising and Media Agreements As of March 31, 2001, the Company was contractually committed for the purchase of future advertising totaling approximately $650,000 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. NOTE 8--RELATED PARTY TRANSACTIONS The Company has entered into strategic alliances to provide procurement and fulfillment services for certain partners which may be considered affiliates of SOFTBANK America Inc. (or its related companies). The Company recognized net revenues of $0 and $977,000 on sales to these related parties for the three-month periods ended April 1, 2000 and March 31, 2001, respectively. The terms of these sales are comparable to those 8 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) given to other partners of the Company, and the amount included in accounts receivable as a result of these sales was $251,000 as of March 31, 2001. NOTE 9--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 March 31, 2001 was $1.7 million related to certain remaining obligations of the discontinued operations. Net sales of discontinued operations for the three-month periods ended April 1, 2000 and March 31, 2001 were $18.4 million and $0, respectively. NOTE 10--SUBSEQUENT EVENT On April 5, 2001, the Company entered into an exclusive licensing agreement with Dick's Sporting Goods, Inc. ("Dick's"). The agreement provides Global with the exclusive right to operate Dick's e-commerce sporting goods business. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The following discussion and analysis contains forward-looking statements relating to our operations. These forward-looking statements are based on the current expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. The statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, the stock market and the sporting goods industry generally, changes affecting the Internet and e-commerce, our ability to maintain relationships with strategic partners and suppliers, our ability to timely and successfully develop, maintain and protect our technology and product and service offerings and execute operationally, our ability to attract and retain qualified personnel, and our ability to successfully integrate our recent acquisition of Fogdog, Inc. More information about potential factors that could affect us are described under the heading "Risk Factors." We expressly disclaim any intent or obligation to update these forward-looking statements, except as we otherwise specifically state. Overview We develop and operate e-commerce sporting goods businesses for traditional sporting goods retailers, general merchandise retailers, Internet companies and media companies generally under exclusive agreements. We enable our partners to capitalize on their existing brand assets to exploit online opportunities in the sporting goods retail industry. We customize the design of a partner's Web site with a broad range of characteristics that includes a differentiated user interface, partner-specific content pages, an extensive electronic catalog of product descriptions and images, a searchable database and interactive communication tools. We currently derive virtually all of our revenues from the sale of sporting goods through our partners' Web sites, direct marketing, business to business group sales, 800-number sales and related outbound shipping charges. Financial Presentation Our financial statements present: . net revenues, which are derived from sales of sporting goods through our partners' Web sites, direct marketing, business to business group sales and 800-number sales, and related outbound shipping charges, net of allowances for returns and discounts. Net revenues are also derived from fees earned in connection with marketing. Net revenues are recorded as these fees are earned. . cost of revenues, which include the cost of products sold and inbound freight related to these products, as well as outbound shipping and handling costs, other than those related to promotional free shipping and subsidized shipping and handling which are included in sales and marketing expense. . sales and marketing expenses, which include advertising and promotional expenses, including promotional free shipping and subsidized shipping and handling costs, distribution facility expenses, customer service costs, merchandising costs and payroll and related expenses. These expenses also include partner revenue shares, which are payments made to our partners in exchange for the use of their brands, the promotion of the URLs and partners' Web sites in their marketing and communication materials, the implementation of programs to provide incentives to our partners' in- store customers to shop online and other programs and services provided to the customers of our partners' Web sites. . product development expenses, which consist primarily of expenses associated with planning, maintaining and operating our partners' Web sites and payroll and related expenses for engineering, production, creative and management information systems. 10 . 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. . interest, which consists of interest income earned on cash, cash equivalents and short term investments, net of interest expense paid primarily in connection with the mortgage on our corporate headquarters and interest expense on capital leases. Results of Operations Comparison of the three-month periods ended March 31, 2001 and April 1, 2000 Net Revenues. Net revenues from continuing operations increased $10.5 million from $5.7 million for the three-month period ended April 1, 2000 to $16.2 million for the three-month period ended March 31, 2001. This increase is attributable to a $6.0 million increase in sales due to the addition of new Web sites during the last three quarters of fiscal 2000 and in the first quarter of fiscal 2001, and a $4.5 million increase in sales from Web sites operated in both periods. Cost of Revenues. We incurred cost of revenues from continuing operations of $11.1 million and $4.0 million for the three-month periods ended March 31, 2001 and April 1, 2000, respectively. As a percentage of net revenues, cost of revenues from continuing operations was 68.8% and 69.1% for the three-month periods ended March 31, 2001 and April 1, 2000, respectively. Gross Profit. We had gross profit from continuing operations of $5.1 million and $1.8 million for the three-month periods ended March 31, 2001 and April 1, 2000, respectively. As a percentage of net revenues, gross profit from continuing operations was 31.2% and 30.9% for the three-month periods ended March 31, 2001 and April 1, 2000, respectively. Sales and Marketing Expenses. Sales and marketing expenses from continuing operations decreased $2.4 million from $9.8 million for the three-month period ended April 1, 2000 to $7.4 million for the three-month period ended March 31, 2001. This decrease was primarily due to a $4.0 million decrease in advertising costs, offset, in part, by a $1.7 million increase in personnel and occupancy costs associated with our fulfillment operations. Product Development Expenses. Product development expenses from continuing operations increased $800,000 from $1.6 million for the three-month period ended April 1, 2000 to $2.4 million for the three-month period ended March 31, 2001. This increase was primarily due to a $496,000 increase in personnel costs and a $342,000 increase in equipment and software maintenance costs associated with the increased number of Web sites that we operated and maintained, as well as a $224,000 increase in support costs related to our management information systems, offset, in part, by a $286,000 decrease in costs associated with our use of professional consultants. General and Administrative Expenses. General and administrative expenses from continuing operations increased $600,000 from $1.9 million for the three- month period ended April 1, 2000 to $2.5 million for the three-month period ended March 31, 2001. This increase was primarily due to a $264,000 increase in credit card chargeback activity due principally to increased sales volume and a $219,000 increase in personnel costs and insurance related expenses to support our e-commerce business. 11 Stock-Based Compensation Expense. Stock-based compensation expense from continuing operations decreased $813,000 from $1.3 million for the three-month period ended April 1, 2000 to $453,000 for the three-month period ended March 31, 2001. This decrease was the result of lower charges associated with the issuance of warrants and stock options to our partners, offset, in part, by charges related to the issuance of warrants and stock options to consultants, and certain of our employees. As of March 31, 2001, we had an aggregate of $2.8 million of deferred compensation remaining to be amortized. Depreciation and Amortization Expenses. Depreciation and amortization expense increased $200,000 from $1.4 million for the three-month period ended April 1, 2000 to $1.6 million for the three-month period ended March 31, 2001. This increase was due to a $1.6 million increase in depreciation related to our corporate headquarters, our fulfillment center, and the assets purchased to build, manage and operate our e-commerce business, and a $173,000 increase in amortization of goodwill associated with the Fogdog acquisition, offset, in part, by a $1.4 million decrease in depreciation related to the change in our estimate of the useful lives of our computer hardware and software from two years to four years. Interest Income. We had interest income of $1.1 million, net of interest expense of $147,000, and $230,000, net of interest expense of $0, for the three-month periods ended March 31, 2001 and April 1, 2000, respectively. The increase in interest income, net of interest expense, for the three-month period ended March 31, 2001 compared to the comparable period in fiscal 2000 was due to a higher average balance of cash and cash equivalents and short term investments during the three-month period ended March 31, 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 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. 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 March 31, 2001, we had cash and cash equivalents of $70.9 million, working capital of $73.5 million, and an accumulated deficit of $109.5 million. We used $21.2 million in net cash for operating activities of continuing operations during the three-month period ended March 31, 2001 and $20.6 million in net cash for operating activities of continuing operations during the three-month period ended April 1, 2000. Net cash used for operating activities of continuing operations during the three-month period ended March 31, 2001 was primarily the result of net losses from continuing operations and changes in prepaid expenses and other current assets, accounts payable, accrued expenses, and other liabilities offset, in part, by changes in accounts receivable, inventory, stock-based compensation, and depreciation and amortization. Net cash used for operating activities of continuing operations during the three-month period ended April 1, 2000 was primarily the result of net losses from continuing operations and changes in inventory, prepaid expenses and other current assets, accounts payable, accrued 12 expenses, and other liabilities partially offset by changes in accounts receivable, stock-based compensation, and depreciation and amortization. Our investing activities during the three-month period ended March 31, 2001 consisted primarily of purchases of property and equipment. We made capital expenditures of $1.2 million during the three-month period ended March 31, 2001. Also, during the three-month period ended March 31, 2001, we received $983,000 in cash proceeds from sales of short-term investments. During the three-month period ended April 1, 2000, our investing activities consisted primarily of purchases of property and equipment of $2.0 million. As of March 31, 2001, we had commitments of approximately $650,000 for advertising and promotion programs. 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. However, our revenues must increase significantly to internally fund our anticipated operating expenses. If cash flows are insufficient to fund these expenses, we may need to raise additional funds in future periods through public or private financings or other arrangements to fund our operations until we achieve profitability. Failure to raise future capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. 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. 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. Risks Particular to Our Business Our future success cannot be predicted based upon our limited e-commerce operating history. Although we commenced operations in 1987, we did not initiate our e- commerce business until the first quarter of 1999 and did not begin operating our e-commerce business until the fourth quarter of 1999. Prior to the fourth quarter of 1999, when we launched the e-commerce sporting goods businesses we operate for our partners, 100% of our revenues had been generated by our discontinued operations. The sale of the discontinued operations was completed in May 2000. Accordingly, 100% of our revenues are generated through our e- commerce business. Based on our limited experience with our e-commerce business, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a 13 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 we may incur continuing losses. We incurred substantial losses in fiscal 1999, fiscal 2000 and during the first quarter of fiscal 2001, and as of March 31, 2001, we had an accumulated deficit of $109.5 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 could continue to incur operating and net losses for the foreseeable future. There can be no assurances that we will be able to achieve profitability from our continuing operations. We will continue to incur significant operating expenses and capital expenditures as we: . enhance our distribution and order fulfillment capabilities; . further improve our order processing systems and capabilities; . develop enhanced technologies and features to improve our partners' e- commerce sporting goods business; . expand our customer service capabilities to better serve our customers' needs; . increase our general and administrative functions to support our growing operations; and . increase our sales and marketing activities. Because we will incur many of these expenses before we receive any revenues from our efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results. Our success is tied to the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. Our future success is substantially dependent upon the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. From time to time, the sporting goods industry has experienced downturns. Any downturn in the sporting goods industry could adversely affect our business. In addition, if our partners were to have financial difficulties or seek protection from their creditors, or if we are unable to replace our partners or obtain new partners, it could adversely affect our business, financial condition and results of operations. 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. 14 Our operating results are difficult to predict. If we fail to meet the expectations of public market analysts and investors, the market price of our common stock may decline significantly. Our annual and quarterly operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to predict, quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. In some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may decline significantly. Factors that may harm our business or cause our operating results to fluctuate include the following: . our inability to retain existing partners or to obtain new partners; . our inability to obtain new customers at a reasonable cost, retain existing customers or encourage repeat purchases; . decreases in the number of visitors to the e-commerce sporting goods businesses operated by us or the inability to convert these visitors into customers; . our failure to offer an appealing mix of sporting goods, apparel, footwear and other products; . our inability to adequately maintain, upgrade and develop our partners' Web sites, the systems used to process customers' orders and payments or our computer network; . the ability of our competitors to offer new or superior e-commerce sporting goods businesses, services or products; . price competition that results in lower profit margins or losses; . our inability to obtain specific products and brands or unwillingness of vendors to sell their products to us; . unanticipated fluctuations in the amount of consumer spending on sporting goods and related products, which tend to be discretionary spending items; . increases in the cost of advertising; . increases in the amount and timing of operating costs and capital expenditures relating to expansion of our operations; . unexpected increases in shipping costs or delivery times, particularly during the holiday season; . technical difficulties, system security breaches, system downtime or Internet slowdowns; . seasonality; . our inability to manage inventory levels or control inventory theft; . our inability to manage distribution operations or provide adequate levels of customer service; . an increase in the level of our product returns; . government regulations related to use of the Internet for commerce; and . unfavorable economic conditions specific to the Internet, e-commerce or the sporting goods industry. Seasonal fluctuations in the sales of sporting goods could cause wide fluctuations in our quarterly results. We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that our fourth fiscal quarter will account for a 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 15 and significantly increase our inventory levels. For this reason, if our revenues were below seasonal expectations during the fourth fiscal quarter, our annual operating results could be below the expectations of securities analysts and investors. Due to the limited operating history of our e-commerce business, it is difficult to predict the seasonal pattern of our sales and the impact of this seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, product distribution and shipment activities and may cause a shortfall in revenues as compared to expenses in a given period. We have been unable to fund our e-commerce operations with the cash generated from our business. If we do not generate cash sufficient to fund our operations, we may need additional financing to continue our growth or our growth may be limited. Because we have not generated sufficient cash from operations to date, we have funded our e-commerce operations primarily from the sale of equity securities. Cash from revenues must increase significantly for us to fund anticipated operating expenses internally. If our cash flows are insufficient to fund these expenses, we may need to fund our growth through additional debt or equity financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience additional dilution or the new securities may have rights senior to those of our common stock. We must develop and maintain relationships with key brand manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we are unable to do so, it could adversely affect our business, results of operations and financial condition. We primarily purchase the products we offer directly from the manufacturers of the products. If we are unable to develop and maintain relationships with these manufacturers, we may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our business could be adversely impacted. We do not have written contracts with most of our manufacturers. Manufacturers could stop selling products to us and may ask us to remove their products or logos from our partners' Web sites. In some circumstances, our partners purchase products directly from manufacturers for sale on their Web sites. If we or our partners are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms. We currently are not authorized to offer some popular brands of sporting goods, such as Nike, although we are authorized to sell Fogdog's remaining Nike inventory on the fogdog.com Web site. There can be no assurance that we will be able to offer these brands in the future. If we are unable to offer a sufficient assortment and quantity of quality products at acceptable prices, we may lose sales and market share. Capacity constraints or system failures could materially and adversely affect our business, results of operations and financial condition. Any system failure, including network, software or hardware failure, that causes interruption of the availability of our partners' Web sites could result in decreased usage of these Web sites. If these failures are sustained or repeated, they could reduce the attractiveness of our partners' Web sites to customers, vendors and advertisers. Our operations are subject to damage or interruption from: . fire, flood, earthquake or other natural disasters; . power losses, interruptions or brown-outs; . Internet, telecommunications or data network failures; . physical and electronic break-ins or security breaches; 16 . computer viruses; and . other similar events. We launched our first partners' e-commerce sporting goods businesses in the fourth quarter of fiscal 1999. The limited time during which we have been operating these businesses, as well as the inherent unpredictability of the events described above, makes it difficult to predict whether the occurrence of any of these events is likely. If any of these events do occur, they could result in interruptions, delays or cessations in service to users of our partners' Web sites, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we maintain our computers on which we operate our partners' Web sites at the facility of a third-party hosting company. We cannot control the maintenance and operation of this facility, which is also susceptible to similar disasters and problems. Our insurance policies may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption in our service or a decrease in responsiveness could harm our relationships with our customers and result in reduced revenues. We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors' could put us at a disadvantage to our competitors. In addition, the failure of our partners to protect their intellectual property rights, including their domain names, could impair our operations. These failures could have a material adverse effect on our business, results of operations and financial condition. If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. We may face material delays in introducing new services, products and enhancements. If this happens, our customers may forgo the use of our partners' e-commerce sporting goods businesses and use those of our competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our partners' e-commerce sporting goods businesses. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our partners' existing Web sites and our proprietary technology and systems may become obsolete. Developing our partners' e-commerce sporting goods businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our partners' Web sites, our order processing systems and our computer network to meet customer requirements or emerging industry standards. We may be subject to intellectual property claims or competition or trade practices claims that could be costly and could disrupt our business. Third parties may assert that our business or technologies infringe their intellectual property rights. From time to time, we may receive notices from third parties questioning our right to present specific images or logos on our partners' Web sites, or stating that we have infringed their trademarks or copyrights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be unsuccessful 17 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 sporting goods businesses we operate. If we are unable to develop or maintain these relationships, our business, financial condition and results of operations could be adversely affected. We have relationships with online services, search engines, directories and other Web sites and e-commerce businesses to provide content, advertising banners and other links that link to our partners' Web sites. We expect to rely on these relationships as significant sources of traffic to our partners' Web sites and to generate new customers. If we are unable to develop satisfactory relationships on acceptable terms, our ability to attract new customers could be harmed. Further, many of the parties with which we may have online advertising arrangements could provide advertising services for other marketers of sporting goods. As a result, these parties may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third- parties may result in termination of these types of relationships. Without these relationships, we may not be able to sufficiently increase our market share and our business, financial condition and results of operations could be adversely affected. Our success is dependent upon our executive officers and other key personnel. Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, Chairman, President and Chief Executive Officer. We have employment agreements with some of our executive officers and key personnel. We cannot be sure, however, that we will be able to retain or attract executive, managerial and other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $7.25 million. We have not obtained key person life insurance on any of our other executive officers or key personnel. We may be unable to hire and retain the skilled personnel necessary to develop our business. We intend to continue to hire a number of skilled personnel. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our failure to attract and retain the highly trained personnel that are integral to our business may limit our growth rate, which would harm our business. We may not be able to compete successfully against current and future competitors, which could harm our margins and our business. The e-commerce market is rapidly evolving and extremely competitive. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We compete with a variety of companies, including: . e-commerce businesses that are associated with full-line sporting goods stores such as Shopsports.com, associated with Copeland's Sports; . e-commerce businesses of specialty sporting goods retailers and catalogs such as Footlocker.com and REI.com; 18 . e-commerce businesses of traditional general merchandise retailers such as Target.com and WalMart.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. Although we operate our own fulfillment center, we rely upon multiple third parties for the shipment of our products. We also rely upon certain vendors to ship products directly to our customers, especially LTL items. As a result, we are subject to the risks associated with the ability of these vendors to successfully and timely fulfill and ship customer orders and to successfully handle our inventory delivery services to meet our shipping needs. The failure of these vendors to provide these services, or the termination or interruption of these services, could adversely affect our business, results of operations and financial condition. Sporting goods and apparel are subject to changing consumer preferences. If we fail to anticipate these changes, we could experience lower sales, higher inventory markdowns and lower margins. Our success depends upon our ability to anticipate and respond to trends in sporting goods merchandise and consumers' participation in sports. Consumers' tastes in apparel and sporting goods equipment are subject to frequent and significant changes, due in part to manufacturers' efforts to incorporate advanced technologies into some types of sporting goods. In addition, the level of consumer interest in a given sport can fluctuate dramatically. Prior to commencing our e-commerce business, our businesses were primarily concentrated in athletic footwear and apparel. Accordingly, we do not have significant experience in the full range of sporting goods. If we fail to identify and respond to changes in sporting goods merchandising and recreational sports participation, our sales could suffer and we could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers' recreational sports habits could allow our competitors to gain market share which could have an adverse effect on our business, results of operations and financial condition. High merchandise returns could adversely affect our business, financial condition and results of operations. Our policy for allowing our customers to return products is generally consistent with the policies of each of our partners for which we operate e- commerce sporting goods businesses. Our ability to handle a large volume of returns is unproven. If merchandise returns are significant, our business, financial condition and results of operations could be adversely affected. We may be subject to product liability claims that could be costly and time-consuming. We sell products manufactured by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that users of our partners' Web sites were harmed due to their 19 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 May 3, 2001, Michael G. Rubin, our Chairman, President and Chief Executive Officer, beneficially owned 25.5%, funds affiliated with SOFTBANK America Inc., or SOFTBANK, beneficially owned 27.4% and Interactive Technology Holdings, LLC, or ITH, a joint venture company formed by Comcast Corporation and QVC, Inc., beneficially owned 15.8% of our outstanding common stock. Should they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a position to exercise control over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability generally to direct our affairs. Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH acquired their shares of our common stock provide that SOFTBANK has the right to designate up to three members of our board and ITH has the right to designate up to two members of our board. This concentration of ownership and SOFTBANK's and ITH's right to designate members to our board may have the effect of delaying or preventing a change in control of us, including transactions in which stockholders might otherwise receive a premium over current market prices for their shares. From time to time, we may acquire or invest in other companies. There are risks associated with potential acquisitions and investments. As a result, we may not achieve the expected benefits of potential acquisitions. If we are presented with appropriate opportunities, we may make investments in complementary companies, products or technologies or we may purchase other companies. We may not realize the anticipated benefits of any investment or acquisition. We may not be able to successfully assimilate the additional personnel, operations, acquired technology and products into our business. Any acquisition may further strain our existing financial and managerial controls and reporting systems and procedures. In addition, key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees or increase our expenses. Further, the physical expansion in facilities that would occur as a result of any acquisition may result in disruptions that seriously impair our business. Finally, we may have to incur debt or issue equity securities to pay for any acquisitions or investments, the issuance of which could be dilutive to our stockholders. We may expand our business internationally, causing our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability. We believe that the current globalization of the economy requires businesses to consider pursuing international expansion. In the future, we may expand into international markets. International sales are subject to inherent risks and challenges that could adversely affect our profitability, including: 20 . the need to develop new supplier and manufacturer relationships, particularly because major sporting good manufacturers may require that our international operations deal with local distributors; . unexpected changes in international regulatory requirements and tariffs; . difficulties in staffing and managing foreign operations; . longer payment cycles from credit card companies; . greater difficulty in accounts receivable collection; . potential adverse tax consequences; . price controls or other restrictions on foreign currency; and . difficulties in obtaining export and import licenses. To the extent we generate international sales in the future, any negative impact on our international business could negatively impact our business, operating results and financial condition as a whole. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross margins from non-dollar-denominated international sales. We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. It may be difficult for a third party to acquire us and this could depress our stock price. Pursuant to our amended and restated certificate of incorporation, we have authorized a class of 1,000,000 shares of preferred stock, which the board of directors may issue with terms, rights, preferences and designations as the board may determine and without any vote of the stockholders, unless otherwise required by law. Issuing the preferred stock, depending upon the terms, rights, preferences and designations set by the board, may delay, deter or prevent a change in control of us. Issuing additional shares of common stock could result in dilution of the voting power of the current holders of our common stock. In addition, "anti-takeover" provisions of Delaware law may restrict the ability of the stockholders to approve a merger or business combination or obtain control of us. There are limitations on the liabilities of our directors. Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director's duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, we have entered into indemnification agreements with each of our directors. These agreements, among other things, require us to indemnify each director for certain expenses including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person's services as one of our directors. Risks Related to the Internet Industry Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure. 21 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 none of the foregoing changes occur, or if the Internet does not become a viable commercial medium, our business, results of operations and financial condition could be materially adversely affected. In addition, even if those changes occur, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet. The technology of the Internet is changing rapidly and could render the Web sites which we operate obsolete. The technology of the Internet and e-commerce is evolving rapidly for many reasons, including: . customers frequently changing their requirements and preferences; . competitors frequently introducing new products and services; and . industry associations and others creating new industry standards and practices. These changes could render the Web sites that we operate obsolete. Our ability to attract customers could be seriously impaired if we do not accomplish the following tasks: . continually enhance and improve our partners' Web sites; . identify, select and obtain leading technologies useful in our business; and . respond to technological advances and emerging industry standards in a cost-effective and timely manner. Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends heavily upon the general public's willingness to use the Internet as a means to purchase goods. The failure of the Internet to develop into an effective commercial tool would seriously damage our future operations. E-commerce is a relatively new concept, and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain, and most e-commerce businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably. The Internet may not succeed as a medium of commerce because of delays in developing elements of the needed Internet 22 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 reduce our net revenues and our gross margin. We have put in place technology to help us detect the fraudulent use of credit card information. To date, we have not suffered material losses related to credit card fraud. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder's signature. If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise, our business could be harmed. We do not currently collect sales or other similar taxes for physical shipments of goods into states other than Kentucky and Pennsylvania. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies that engage in online commerce. Our business could be adversely affected if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our merchandise. Existing or future government regulation could harm our business. We are subject to the same federal, state and local laws as other companies conducting business on the Internet. Today there are relatively few laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our business. For example, United States and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. The vast majority of these laws were adopted prior to the advent of the Internet, and do not contemplate or address the unique issues raised thereby. Those laws that do reference the Internet, such as the Digital Millennium Copyright Act, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could adversely affect our future business, results of operation and financial condition. Laws or regulations relating to user information and online privacy may adversely affect the growth of our Internet business or our marketing efforts. We are subject to increasing regulation at the federal and state levels relating to online privacy and the use of personal user information. Several states have proposed legislation that would limit the uses of personal user 23 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the quarter ended March 31, 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. 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 None. (b) Reports on Form 8-K On, January 12, 2001, we filed a Form 8-K with the Securities and Exchange Commission regarding the completion of the acquisition of Fogdog, Inc. in a stock-for-stock transaction. 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. By: _________________________________ Michael G. Rubin Chairman of the Board, President Date: May 10, 2001 and Chief Executive Officer By: _________________________________ Jordan M. Copland Executive Vice President & Date: May 10, 2001 Chief Financial Officer 26