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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999.
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 of incorporation or organization)
Identification Number)
555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406
(Address of principal executive offices)
(Zip Code)
610-768-0900
(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 14, 1999:
Common Stock, $.01 par value 12,116,253
------------------------------ -------------------
(Title of each class) (Number of Shares)
- --------------------------------------------------------------------------------
GLOBAL SPORTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
-----------
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three-month periods ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three-month periods ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults on Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
SIGNATURES 17
2
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
----------------------- ------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 619,906 $ 856,085
Accounts receivable, net of allowance for doubtful
accounts of $919,222 in 1999 and $928,693 in 1998 40,592,316 36,782,732
Inventory 17,472,869 20,954,168
Prepaid expenses and other current assets 3,510,779 1,435,744
----------------------- ------------------------
Total current assets 62,195,870 60,028,729
Property and equipment, net of accumulated depreciation
and amortization 4,420,670 4,385,906
Goodwill and intangibles, net of accumulated amortization 13,929,700 14,174,127
Other assets 261,252 277,424
----------------------- ------------------------
Total assets $ 80,807,492 $ 78,866,186
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - notes payable, banks $ 34,469,902 $ 14,529,576
Current portion - notes payable, other 711,933 712,815
Current portion - capital lease obligation, related party 131,111 127,966
Accounts payable and accrued expenses 21,132,565 21,223,798
Subordinated notes payable 3,305,143 3,804,906
----------------------- ------------------------
Total current liabilities 59,750,654 40,399,061
Notes payable, banks 289,712 19,106,535
Notes payable, other 2,347,731 2,493,743
Capital lease obligation, related party 2,147,284 2,181,265
Mandatorily redeemable preferred stock 100 100
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; 10,000 shares issued as mandatorily
redeemable preferred stock -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 13,109,348 and 12,994,464 shares issued in
1999 and 1998;
12,040,262 and 11,925,378 shares outstanding in 1999 and 1998 131,093 129,947
Additional paid in capital 15,737,522 14,624,541
Accumulated other comprehensive income -- (47,431)
Retained earnings 617,213 192,242
----------------------- ------------------------
16,485,828 14,899,299
Less: Treasury stock, at cost 213,817 213,817
----------------------- ------------------------
Total stockholders' equity 16,272,011 14,685,482
----------------------- ------------------------
Total liabilities and stockholders' equity $ 80,807,492 $ 78,866,186
======================= ========================
The accompanying notes are an integral part of these
condensed financial statements.
3
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 1998
---------------- -------------------
Net sales $ 33,723,869 $ 28,148,378
33,723,869
---------------- -------------------
Costs and expenses:
Cost of goods sold 24,311,632 20,023,899
Selling, general and administrative expense 8,900,124 5,380,723
---------------- -------------------
33,211,756 25,404,622
---------------- -------------------
Operating income 512,113 2,743,756
Other (income) expense:
Interest expense, net 847,464 619,271
Other, net (74,889) (57,088)
---------------- -------------------
772,575 562,183
---------------- -------------------
Income (loss) before income taxes (260,462) 2,181,573
Provision for (benefit from) income taxes (685,433) 650,000
---------------- -------------------
Net income $ 424,971 $ 1,531,573
================ ===================
Basic earnings per share $ .04 $ .15
================ ===================
Diluted earnings per share $ .03 $ .14
================ ===================
The accompanying notes are an integral part of these condensed financial
statements.
4
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 1998
------------------- ------------------
Cash Flows from Operating Activities:
Net income $ 424,971 $ 1,531,573
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 430,759 272,388
Provision for losses on accounts receivable 60,674 (175,077)
Warrant expense 398,266 --
Changes in operating assets and liabilities:
Accounts receivable (3,870,258) (5,253,350)
Inventory 3,481,299 (919,151)
Prepaid expenses and other current assets (660,768) 214,994
Other assets 46,172 40,293
Accounts payable and accrued expenses (1,220,424) 2,762,827
------------------- -----------------
Net cash used in operating activities (909,309) (1,525,503)
------------------- -----------------
Cash Flows from Investing Activities:
Capital expenditures (221,096) (45,449)
------------------- -----------------
Net cash used in investing activities (221,096) (45,449)
------------------- -----------------
Cash Flows from Financing Activities:
Net borrowings under lines of credit 1,130,519 2,491,044
Repayments of capital lease obligation (30,836) (27,982)
Repayments of notes payable (153,910) --
Proceeds from issuance of common stock 478,216 1,920
Costs of debt issuance (30,000) --
Repayments on subordinated debt (499,763) --
------------------- -----------------
Net cash provided by financing activities 894,226 2,464,982
------------------- -----------------
Effect of exchange rate on cash and cash equivalents -- 2,671
------------------- -----------------
Net increase (decrease) in cash and cash equivalents (236,179) 896,701
Cash and cash equivalents, beginning of period 856,085 98,881
------------------- -----------------
Cash and cash equivalents, end of period $ 619,906 $ 995,582
=================== =================
The accompanying notes are an integral part of these condensed financial
statements.
5
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - BASIS OF PRESENTATION
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, is a
diversified sporting goods company consisting of three divisions: Global Sports
Interactive, the Branded division and the Off-Price and Action Sports division.
Global Sports Interactive is an e-Commerce company that is in the process of
developing the internet businesses of several sporting goods retailers. The
Branded division designs and markets the RYKA and Yukon footwear brands. The
Off-Price and Action Sports division is a leading third-party distributor and
make-to-order marketer of off-price footwear, apparel and sporting goods.
On December 15, 1997, the Company consummated a reorganization (the
"Reorganization") among RYKA Inc. ("RYKA"), KPR Sports International, Inc.
("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three
companies collectively referred to as the "KPR Companies"), and Michael G.
Rubin, the former sole shareholder of the KPR Companies and now the Chairman and
Chief Executive Officer of the Company. Immediately after the Reorganization,
Mr. Rubin then owned approximately 78% of the outstanding voting power of the
Company. Accordingly, the Reorganization was accounted for as a reverse purchase
under generally accepted accounting principles pursuant to which the KPR
Companies were considered to be the acquiring entity and the Company was the
acquired entity for accounting purposes, even though the Company was the
surviving legal entity. As a result of this reverse purchase accounting
treatment, (i) the historical financial statements presented for periods prior
to the date of the Reorganization are no longer the historical financial
statements of RYKA; (ii) the historical financial statements for periods prior
to the date of the Reorganization are those of the KPR Companies, (iii) all
references to the historical financial statements of the Company apply to the
historical financial statements of the KPR Companies prior to and subsequent to
the Reorganization, and (iv) any references to RYKA apply solely to that company
and its financial statements prior to the Reorganization.
Effective May 12, 1998, the Company acquired Gen-X Holdings Inc. and Gen-X
Equipment Inc. (collectively, the "Gen-X Companies"). The Gen-X Companies were
privately-held companies based in Toronto, Ontario specializing in selling
off-price sporting goods and winter sports equipment (including ski and
snowboard equipment), in-line skates, sunglasses, skateboards and specialty
footwear.
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc. ("Lamar"),
a privately-held manufacturer of snowboards, bindings and related products based
in San Diego, California.
The accompanying condensed 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 for a fair presentation of the operating results of 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.
Certain 1998 balances have been reclassified to conform with the 1999 financial
statement presentation.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of December 31, 1998 as presented in the Company's Annual Report
on Form 10-K.
NOTE 2 - DEBT
Notes Payable, Banks
Under its primary loan agreement, as subsequently amended (the "Loan
Agreement"), the Company has access to a combined credit facility of
$40,000,000, which is comprised of the KPR Companies' credit facility of
$35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan
Agreement is five years expiring on November 19, 2002. The KPR Companies and
RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis
6
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
points. Under the Loan Agreement, both the KPR Companies and RYKA may borrow up
to the amount of their revolving line based upon 85% of their eligible accounts
receivable and 65% of their eligible inventory, as those terms are defined in
the Loan Agreement. The Loan Agreement also includes 50% of outstanding import
letters of credit as collateral for borrowing.
In addition to the revolving lines of credit described above, the lender will
over-advance to the Company an additional $3,000,000, over the existing
collateral, for additional import letters of credit needed for seasonal
production of new merchandise for the Spring 1999 and Fall 1999 seasons.
Among other things, the Loan Agreement, as amended, requires the KPR Companies
and RYKA to achieve annual earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to
incur additional indebtedness, make payments on subordinated indebtedness, make
capital expenditures, sell assets, and pay dividends. At March 31, 1999, the
Company was not in compliance with the EBITDA covenant. The Company obtained a
waiver from the bank with respect to this covenant. Because there can be no
assurance that the Company will be in compliance with this covenant for any
period subsequent to March 31, 1999, the Company has classified the amounts
outstanding under this line as a current liability. The Company plans to enter
into negotiations with its lender to modify the terms of the Loan Agreement to
return itself to compliance.
At March 31, 1999, the aggregate amount outstanding under this line was
$24,442,675. At March 31, 1999, based on available collateral and outstanding
import letters of credit commitments, an additional $116,792 (including the
seasonal over-advance) was available on this line for borrowing. The total
interest incurred in connection with this facility was $491,505 for the
three-month period ending March 31, 1999.
The Company has an additional line of credit of approximately $20,000,000 for
use by the Gen-X Companies, which is available for either direct borrowing or
for import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering substantially
all of the Gen-X Companies' assets. At March 31, 1999, draws of $10,000,000 plus
net bank overdrafts of $173,607 were committed under this line and, based on
available collateral and outstanding import letters of credit commitments, an
additional $4,331,613 was available for borrowing. The total interest expense
incurred in connection with this facility was $226,232 for the three-month
period ending March 31, 1999.
Notes payable, banks also includes a mortgage note secured by land and building
in Ontario, Canada of $316,939, of which $27,227 is classified as current. The
mortgage note bears interest at the bank's cost of funds plus 2.5% and matures
on August 15, 2009. For the three-month period ending March 31, 1999, interest
expense included $8,298 related to this mortgage note.
Notes Payable, Other
Other debt related to the Gen-X Companies includes an outstanding loan payable
for $1,500,000, of which $400,000 is classified as current. The original loan of
$2,000,000 is repayable in equal quarterly installments of $100,000, which
commenced on March 31, 1998, and bears interest at the prime lending rate.
Notes payable, other also includes $1,000,000 of promissory notes payable to the
former shareholders of Lamar. The notes are payable in five equal annual
installments and bear interest at 6% per annum. At March 31, 1999, $200,000 of
such notes is classified as current. At the time of the acquisition, Lamar also
executed a note payable in the principal amount of $553,447, plus $74,954 in
accrued interest, for amounts owed to a shareholder. This note, which was
assumed by the Company in the acquisition of Lamar, is payable in five equal
annual installments and bears interest at 6% per annum. The amount currently
outstanding on this note is $559,664, of which $111,933 is classified as
current.
Subordinated Notes Payable
At March 31, 1999, the Company had $1,805,841 in outstanding subordinated notes
payable held by its Chairman and CEO, plus accrued interest on such notes of
$49,389 recorded in accrued expenses. This debt consisted primarily of a note
representing undistributed Subchapter S corporation retained earnings previously
taxed to him as the sole shareholder of the KPR Companies prior to the
Reorganization. Interest accrues on such notes at the Company's choice of prime
plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five
basis points. At March 31, 1999, the interest rate on these notes was 8 1/4% and
7
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
interest recorded during the three-month period ending March 31, 1999 was
$36,735. Based on its Loan Agreement, the Company is permitted to make continued
regular payments of interest on the subordinated debt and to further reduce
principal on a quarterly basis, commencing subsequent to the first quarter of
1998, in an amount up to 50% of the cumulative consolidated net income of the
Company. During 1998, aggregate principal payments of $250,000 were made. No
payments on this subordinated debt have been made to date in 1999.
Upon closing the acquisition of the Gen-X Companies, several subordinated notes
payable were executed with the former shareholders of the Gen-X Companies for an
aggregate of $1,999,065 which is payable upon the earlier of the Company raising
certain additional capital or in four equal consecutive quarterly payments
beginning March 31, 1999. The first quarterly payment of $499,763 was made on
March 31, 1999. This note bears interest at 7% until December 31, 1998 and the
prime lending rate thereafter. For the three-month period ending March 31, 1999,
interest expense included $10,577 related to these notes.
NOTE 3 - RELATED PARTIES
The Company is located in King of Prussia, Pennsylvania where it conducts a
significant portion of its operations and warehouses inventory in a facility
leased from the Company's Chairman and CEO. The lease has been accounted for as
a capital lease, which resulted in $57,013 recorded to interest expense for the
three-month period ended March 31, 1999. At March 31, 1999, the Company's
investment in the capital lease was $1,955,747, which is included in property
and equipment.
The Company also has subordinated notes payable outstanding with its Chairman
and CEO, as referred to in Note 2 above.
NOTE 4 - EARNINGS PER SHARE
Earnings per share for all periods have been computed in accordance with SFAS
No. 128, Earnings Per Share. Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share is computed by dividing the net
income by the weighted average number of shares outstanding during the year,
assuming dilution by outstanding common stock options and warrants.
The amounts used in calculating earnings per share data are as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 1998
---------------- ---------------
Net income $ 424,971 $ 1,531,573
================ ===============
Weighted average shares
outstanding - basic 12,018,517 10,418,198
Dilutive common stock options 584,269 107,060
Dilutive common stock warrants 173,868 49,400
---------------- ---------------
Weighted average shares
outstanding - diluted 12,776,654 10,574,658
================ ===============
Outstanding common stock
options having no
dilutive effect 98,404 205,675
================ ===============
Outstanding common stock
warrants having no
dilutive effect 35,566 203,034
================ ===============
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of March 31, 1999, outstanding purchase commitments exist totaling
$5,278,643, for which commercial import letters of credit have been issued.
8
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
Employment Agreements
At March 31, 1999, the Company has employment agreements with several of its
officers for an aggregate annual base salary of $1,178,000 plus bonus and
increases in accordance with the terms of the agreements. Terms of such
contracts range from three to five years and are subject to automatic annual
extensions.
E-Commerce
At March 31, 1999, the Company has contractually committed to develop the
internet businesses of several sporting goods retailers. The Company's failure
to meet these commitments could result in a forfeiture of the contracts and the
exclusive rights to certain future internet business.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 1999 and 1998
was as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------------ -----------
Net income $ 424,971 $ 1,531,573
Foreign currency translation 47,431 2,671
adjustment
------------------ -----------
Comprehensive income $ 472,402 $ 1,534,244
================== ===========
NOTE 7 - BUSINESS SEGMENTS
The Company's reportable segments include the Branded segment, the Off-Price and
Action Sports segment and the E-Commerce segment. Under the Branded segment, the
Company designs, develops and markets each of its footwear brands to appeal to a
targeted consumer group. Brands offered by the Company include the RYKA and
Yukon brands and are primarily sold to athletic footwear stores, sporting goods
stores, department stores and independent retailers. Under the Off-Price and
Action Sports segment, the Company purchases manufacturers' closeout
merchandise, overstocks and canceled orders, as well as excess inventories of
athletic, outdoor and casual footwear, athletic apparel and sporting goods from
retailers, for resale to retailers principally in the United States and Canada.
The Company resells this merchandise to sporting goods stores, off-price
specialty stores, department stores, family footwear stores, and independent
retailers. The Company also designs and distributes special make-up snowboards
and other sport-related merchandise for selected retailers under its Off-Price
and Action Sports segment. Under the E-Commerce segment, the Company is in the
process of developing the internet businesses of several sporting goods
retailers.
Information by operating segment is as follows:
Branded Off-Price & Consolidated
Action Sports E-Commerce Total
---------------- ----------------- ---------------- ------------------
Three Months Ended March 31, 1999:
Net sales $13,158,203 $ 20,565,666 -- $ 33,723,869
Cost of sales 8,900,764 15,410,868 -- 24,311,632
---------------- ----------------- ---------------- ------------------
Gross margin $ 4,257,439 $ 5,154,798 -- 9,412,237
================ =================
Operating expenses $ 954,078 8,900,124
---------------- ------------------
Operating income $ (954,078) $ 512,113
================ ==================
9
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
Off-Price & Consolidated
Branded Action Sports E-Commerce Total
---------------- ----------------- ---------------- ------------------
Three Months Ended March 31, 1998:
Net sales $ 7,341,646 $ 20,806,733 -- $ 28,148,379
Cost of sales 4,841,975 15,181,924 -- 20,023,899
---------------- ----------------- ---------------- ------------------
Gross margin $ 2,499,671 $ 5,624,809 -- 8,124,480
================ =================
Operating expenses -- 5,380,723
---------------- ------------------
Operating income -- $ 2,743,757
================ ==================
Assets by reportable segment at March 31, 1999 and December 31, 1998 are as
follows:
Segment March 31, 1999 December 31, 1998
------------ ------------------------ ----------------------
Branded $ 23,862,101 $ 20,279,475
Off-Price and Action Sports 48,940,168 52,343,839
E-Commerce -- --
------------------------ ----------------------
Operating segment assets 72,802,269 72,623,314
Assets not attributable to segments 8,005,223 6,242,872
------------------------ ----------------------
Consolidated assets $ 80,807,492 $ 78,866,186
======================== ======================
NOTE 8 - SUBSEQUENT EVENT
On May 10, 1999, the Company announced a new division, Global Sports
Interactive. This e-Commerce division is in the process of developing the
internet businesses of several other major sporting goods retailers.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the
Company's filings with the Securities and Exchange Commission, including its
most recent Form 10-K, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
STRATEGIC BUSINESS DEVELOPMENTS
Effective May 12, 1998, the Company acquired Gen-X Holdings Inc. and Gen-X
Equipment Inc. (collectively, the "Gen-X Companies") in a purchase transaction.
The Company's reported results of operations include those of the Gen-X
Companies only for periods subsequent to the date of acquisition.
On May 10, 1999, the Company announced a new division, Global Sports
Interactive. This e-Commerce division is in the process of developing the
internet businesses of several other major sporting goods retailers.
RESULTS OF OPERATIONS
The Three-Month Period Ended March 31, 1999 Compared to The Three-Month Period
Ended March 31, 1998
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Statements of Operations bear to
net sales:
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
$ % of Sales $ % of Sales
---------------- --------------- ----------------- ---------------
Net sales $ 33,723,869 100.0% $28,148,378 100.0%
---------------- --------------- ----------------- ---------------
Cost & expenses:
Cost of
goods sold 24,311,632 72.1% 20,023,899 71.1%
Operating
expense 8,900,124 26.4% 5,380,723 19.1%
---------------- --------------- ----------------- ---------------
Operating income 512,113 1.5% 2,743,756 9.8%
Other expense,
net 772,575 2.3% 562,183 2.0%
---------------- --------------- ----------------- ---------------
Income (loss) before
income taxes (260,462) (0.8)% 2,181,573 7.8%
Provision for
(benefit from)
income taxes (685,433) (2.0)% 650,000 2.3%
---------------- --------------- ----------------- ---------------
Net income $ 424,971 1.2% $1,531,573 5.5%
================ =============== ================= ===============
Net Sales
Net sales for the first quarter of 1999 increased by $5.6 million, or 20%, to
$33.7 million compared to net sales of $28.1 million in the first quarter of
1998. Net sales for the Branded division, which includes the RYKA and Yukon
brands, were approximately $13.2 million for the first quarter of 1999, a 79%
increase from the prior year's quarter and both brands experienced double-digit
increases over the same quarter in the prior year. Sales for the Off-Price and
Action Sports division were $20.6 million
11
for the first quarter of 1999. This division experienced an unusually large,
high margin sale in the first quarter of 1998 which was the result of a
one-time, opportunistic purchase that management did not expect to repeat in
1999.
Cost of Goods Sold/Gross Margin
Gross margin for the first quarter of 1999 decreased to 27.9% from 28.9% for the
same quarter in the prior year. The Branded and Off-Price and Action Sports
divisions both experienced declines in gross margin over the prior year's
quarter. The Branded division's margins were down as a result of a shift of
revenues to the larger national chains, which is consistent with the trends in
the sporting goods retail sector. These larger chains typically require price
breaks above certain volume levels and have a generally higher discount
structure. The decrease in the Off-Price and Action Sports division margins are
the result of management's continued efforts to reduce off-price inventory
levels, as well as the unusually high margin sale in the first quarter of 1998
referred to above.
Operating Expense
As a percentage of net sales, operating expense for the first quarter of 1999
increased to 26.4% from 19.1% in the prior year's quarter. In absolute dollars,
operating expense increased by $3.5 million, or 65%, to $8.9 million in the
first quarter of 1999 from $5.4 million over the prior year's quarter. A
substantial portion of this increase is attributable to the Company's
expenditures for its new e-Commerce business, Global Sports Interactive.
Included in operating expense for the first quarter of 1999 is approximately
$1.0 million in expenses related to management salaries, web site development
and related travel expenses. The increase in operating expense also shows
management's continued commitment to investing in the Branded division, with a
strengthening of the production and sourcing function and increased marketing
and advertising. First quarter 1999 operating expense was also impacted by
incremental overhead of $1.5 million related to the Gen-X Companies acquired in
May of 1998.
Other Expense, Net
Other expense, net increased by $.2 million, or 37%, to $.8 million in the first
quarter of 1999 from $.6 in the prior year's quarter. Interest charges have
increased due to increases in general business levels and the Company's
assumption of the Gen-X Companies' credit line as part of the acquisition. These
increases were partially offset by substantial reductions in the Company's
average borrowing costs.
Income Taxes
The income tax benefit of $685,433 for the first quarter of 1999 results from a
consolidated loss before income taxes. The consolidated loss before income taxes
is comprised of income before income taxes generated by a foreign subsidiary
which is taxed at a lower rate offset by losses before income taxes generated by
certain other subsidiaries which are taxed at higher rates.
FINANCIAL CONDITION
Cash Flows
Historically, the operations of the Company have been financed by a combination
of internally generated resources, equity transactions, subordinated borrowings,
annual increases in the size of the bank credit facility and seasonal
over-advances. Increases in the bank credit facilities for the KPR Companies and
RYKA were required to fund the Company's increased investment in accounts
receivable and inventory necessary to support the increases in revenue. As of
March 31, 1999, the Company had net working capital of $2,445,216. The Company
used $909,309 in cash flows from operating activities for the three months ended
March 31, 1999, whereas in the same period of the prior year the Company used
$1,525,503 in cash flows from operating activities.
Liquidity
Under its primary loan agreement, as subsequently amended (the "Loan
Agreement"), the Company has access to a combined credit facility of
$40,000,000. The term of the Loan Agreement is five years. The loans have an
interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus
two hundred seventy-five basis points. Under this credit facility, both the KPR
Companies and RYKA may borrow up to the amount of their revolving line based
upon 85% of their eligible accounts receivable and 65% of their eligible
inventory, as those terms are defined in the Loan Agreement. The Loan Agreement
also includes 50% of outstanding import letters of credit as collateral for
borrowing.
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In addition to the revolving lines of credit described above, the lender will
over-advance to the Company an additional $3,000,000, over the existing
collateral, for additional import letters of credit needed for seasonal
production of new merchandise for the Spring 1999 and Fall 1999 seasons.
Among other things, the Loan Agreement, as amended, requires the KPR Companies
and RYKA to achieve annual earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to
incur additional indebtedness, make payments on subordinated indebtedness, make
capital expenditures, sell assets, and pay dividends. At March 31, 1999, the
Company was not in compliance with the EBITDA covenant. The Company obtained a
waiver from the bank with respect to this covenant. Because there can be no
assurance that the Company will be in compliance with this covenant for any
period subsequent to March 31, 1999, the Company has classified the amounts
outstanding under this line as a current liability. The Company plans to enter
into negotiations with its lender to modify the terms of the Loan Agreement to
return itself to compliance.
At March 31, 1999, the aggregate outstanding under this line was $24,442,675. At
March 31, 1999, based on available collateral and outstanding import letters of
credit commitments, an additional $116,792 (including the seasonal over-advance)
was available on this line for borrowing.
The Company has an additional line of credit of approximately $20,000,000 for
use by the Gen-X Companies, which is available for either direct borrowing or
for import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering certain of the
Gen-X Companies' assets. At March 31, 1999, draws of approximately $10,000,000
plus net bank overdrafts of $173,607 were committed under this line and, based
on available collateral and outstanding import letters of credit commitments, an
additional $4,331,613 was available on this line for borrowing.
As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin,
its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i)
a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440,
plus accrued and unpaid interest on such loan of $180,517 through October 31,
1997 and (ii) a note in the principal amount of $2,204,401 representing
undistributed Subchapter S corporation retained earnings previously taxed to him
as the sole shareholder of the KPR Companies. No interest accrued on the note
representing Subchapter S corporation earnings until December 15, 1997 at which
time the interest began to accrue on such note at a choice of prime plus 1/4% or
LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The
Loan Agreement and the related Subordination Agreement allowed the Company to
repay Mr. Rubin $1,000,000 of the subordinated debt principal and the accrued
interest of $180,517 at the time of the closing of the Loan Agreement or within
five days thereafter, subject to there being $2,000,000 of availability under
the KPR Companies' credit line after taking into account such payments. Such
payments were made to Mr. Rubin on November 26, 1997. In addition, the Loan
Agreement and the Subordination Agreement permit the KPR Companies to make
continued regular payments of interest on the subordinated debt and to further
reduce principal on a quarterly basis, commencing with the first quarter of
1998, in an amount up to 50% of the cumulative consolidated net income of both
borrowers, reduced by net losses of the borrowers during such period. During
1998, aggregate principal payments of $250,000 were made. No payments on this
subordinated debt have been made to date in 1999.
The Company has made certain commitments with respect to developing the internet
businesses of several sporting goods retailers. The Company is going to have to
raise significant capital to meet these commitments and to continue to support
its existing Branded and Off-Price and Action Sports divisions. The Company is
currently evaluating several proposals to raise additional capital and expects
to raise such capital by the end of the second quarter of 1999. There are,
however, no assurances that the Company will be able to raise such capital.
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YEAR 2000
The Company recognizes the importance of advanced computerization in maintaining
and improving its level of service, internal and external communication and
overall competitive position. The Company maintains a management information
system that provides, among other things, comprehensive customer order
processing, inventory, production, accounting and management information for the
marketing, selling, manufacturing and distribution functions of the Company's
business. The Company has created a Year 2000 project team which is coordinating
efforts to evaluate, identify, correct or reprogram, and test the Company's
existing systems Year 2000 compliance. The Company is currently enhancing its
key information systems to improve their functionality and increase performance.
These upgrades will also make these applications Year 2000 compliant. The
Company expects to finish this upgrade prior to the end of the second quarter of
1999 and does not expect the costs of such steps to have a material impact on
the Company's results of operations, financial position, liquidity or capital
resources. The Company is in the process of developing a contingency plan in the
event that the above modifications do not result in Year 2000 compliance. In
addition to making its own systems Year 2000 compliant, the Company is in the
process of contacting its key suppliers and customers to determine the extent to
which the systems of such suppliers and customers are Year 2000 compliant and
the extent to which the Company could be effected by the failure of such third
parties to become Year 2000 compliant. The Company cannot presently estimate the
impact of the failure of such third parties to become Year 2000 Compliant. See
"Risk Factors - Risks Relating to Year 2000 Compliance" in the Company's most
recent Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information set forth in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.19 Employment Agreement dated March 28, 1999 by and
between the Registrant and Michael
Golden.
10.40-G Consent and Amendment No. 7 to the Loan Documents by
and among KPR Sports International,
Inc., RYKA Inc. and Foothill Capital Corporation.
27.1 Financial data schedule for the three-month
period ended March 31, 1999 (electronic
filing only).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A (Amendment to
Form 8-K dated May 12, 1998) on February 8, 1999 containing the
Gen-X Companies historical financial statements and Company pro
forma financial information.
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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 14, 1999 By: /s/ Michael G. Rubin
----------------------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
DATE: May 14, 1999 By: /s/ Steven A. Wolf
----------------------------------------------
Steven A. Wolf
Vice President &
Chief Financial Officer
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