================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ================================================================================ FORM 10-Q/A AMENDMENT NO. 1 TO THE QUARTERLY REPORT (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended JUNE 30, 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) 1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) 610-265-3229 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 12, 1999: Common Stock, $.01 par value 18,373,729 ---------------------------- ------------------ (Title of each class) (Number of Shares) - -------------------------------------------------------------------------------- GLOBAL SPORTS, INC. FORM 10-Q/A AMENDMENT NO.1 TO THE QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the three- and six-month periods ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 - 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults on Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 -2- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 1999 (AS RESTATED - DECEMBER 31, SEE NOTE 10) 1998 ----------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 308 $ 83,169 Prepaid expenses and other current assets 766,823 599,224 Deferred income taxes 4,367,759 -- Net assets of discontinued operations 37,594,624 41,127,839 ----------------- ------------- Total current assets 42,729,514 41,810,232 Property and equipment, net of accumulated depreciation and amortization 4,269,335 2,988,714 Other assets 232,670 253,626 ----------------- ------------- Total assets $47,231,519 $45,052,572 ================= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - notes payable, bank $11,325,621 $ -- Current portion - capital lease obligation, related party 133,250 127,966 Accounts payable and accrued expenses 2,916,877 3,652,024 Income taxes payable 1,765,970 1,378,820 Subordinated notes payable 1,805,841 1,805,841 ----------------- ------------- Total current liabilities 17,947,559 6,964,651 Notes payable, bank -- 18,812,156 Convertible subordinated note payable 15,000,000 -- Minority interest in subsidiary 1,999 -- Capital lease obligation, related party 2,113,551 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, 60,000,000 and 20,000,000 shares authorized in 1999 and 1998, 13,251,697 and 12,994,464 shares issued in 1999 and 1998; 12,182,611 and 11,925,378 shares outstanding in 1999 and 1998 132,457 129,947 Additional paid in capital 21,201,763 17,111,166 Accumulated other comprehensive loss -- (47,431) Retained earnings (accumulated deficit) (8,952,093) 114,535 ----------------- ------------- 12,382,127 17,308,217 Less: Treasury stock, at cost 213,817 213,817 ----------------- ------------- Total stockholders' equity 12,168,310 17,094,400 ----------------- ------------- Total liabilities and stockholders' equity $47,231,519 $45,052,572 ================= ============= 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------ ---------------------------------- 1999 1998 1999 1998 (AS RESTATED - (AS RESTATED - (AS RESTATED - (AS RESTATED - SEE NOTE 10) SEE NOTE 10) SEE NOTE 10) SEE NOTE 10) ---------------- ---------------- -------------- ---------------- Costs and expenses: General and administrative $ 644,409 $ 694,841 $ 1,122,553 $ 1,368,363 Stock-based compensation 1,908,591 -- 2,306,857 -- Product development 2,280,211 -- 2,618,933 -- Interest expense, net 99,830 59,519 156,843 118,411 ---------------- ---------------- -------------- ---------------- Total costs and expenses 4,933,041 754,360 6,205,186 1,486,774 ---------------- ---------------- -------------- ---------------- Loss from continuing operations before income taxes (4,933,041) (754,360) (6,205,186) (1,486,774) Benefit from income taxes (1,712,020) (301,744) (2,220,878) (594,710) ---------------- ----------------- ---------------- ---------------- Loss from continuing operations (3,221,021) (452,616) (3,984,308) (892,064) Discontinued operations (Note 2): Income (loss) from discontinued operations (less income taxes in 1999: $406,229 1998: $694,670 1999: $582,804 1998: $1,637,636 for the three- and six-month periods, respectively) (607,335) 1,258,993 549,838 3,230,014 Loss on disposition of discontinued operations (less income tax benefit of $559,514 for the three- and six- month periods, respectively) (5,632,158) -- (5,632,158) -- ---------------- ---------------- -------------- ---------------- Net income (loss) $(9,460,514) $ 806,377 $(9,066,628) $ 2,337,950 ================ ================ ============== ================ Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (0.27) $ (0.04) $ (0.33) $ (0.08) Income (loss) from discontinued operations (0.05) 0.11 0.05 0.30 Loss on disposition of discontinued operations (0.46) -- (0.47) -- ---------------- ---------------- -------------- ---------------- Net income (loss) $ (0.78) $ 0.07 $ (0.75) $ 0.22 ================ ================= ================ ================ 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) SIX MONTHS ENDED JUNE 30, ------------------------------------ 1999 1998 (AS RESTATED - (AS RESTATED - SEE NOTE 10) SEE NOTE 10) ---------------- ---------------- Cash Flows from Operating Activities: Net income (loss) $(9,066,628) $ 2,337,950 Deduct: Income from discontinued operations (549,838) (3,230,014) Loss on disposal of discontinued operations 5,632,158 -- ---------------- ---------------- Net loss from continuing operations (3,984,308) (892,064) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 339,338 -- Stock-based compensation 2,306,857 -- Changes in operating assets and liabilities: Prepaid expenses and other current assets 304,018 (76,684) Deferred income taxes (4,367,759) -- Other assets 50,956 (8,755) Accounts payable and accrued expenses (627,945) 498,607 Income taxes payable 279,948 1,378,820 ---------------- ---------------- Net cash provided by (used in) continuing operations (5,698,895) 899,924 Net cash provided by (used in) discontinued operations (1,482,955) 2,301,291 ---------------- ---------------- Net cash provided by (used in) operating activities (7,181,850) 3,201,215 ---------------- ---------------- Cash Flows from Investing Activities: Capital expenditures (1,638,678) (126,439) ---------------- ---------------- Cash Flows from Financing Activities: Net repayments under lines of credit (7,486,535) (2,733,160) Repayments of capital lease obligation (62,430) (56,654) Repayments of subordinated note payable -- (250,000) Borrowing from SOFTBANK 15,000,000 -- Proceeds from issuance of common stock 1,314,633 16,920 Sale of minority interest in subsidiary 1,999 -- Costs of debt issuance (30,000) -- ---------------- ---------------- Net cash provided by (used by) financing activities 8,737,667 (3,022,894) ---------------- ---------------- Effect of exchange rate changes on cash and cash equivalents -- 1,716 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (82,861) 53,598 Cash and cash equivalents, beginning of period 83,169 58,019 ---------------- ---------------- Cash and cash equivalents, end of period $ 308 $ 111,617 ================ ================ The accompanying notes are an integral part of these condensed 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, is an e-Commerce company that is in the process of developing the internet businesses of several sporting goods retailers through its Global Sports Interactive subsidiary. On April 20, 1999, the Company formalized a plan to sell its other two businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. See Note 2. The accompanying condensed consolidated financial statements of Global have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of the Company's management, all adjustments (consisting solely of normal recurring accruals) necessary 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. 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/A. NOTE 2 - DISCONTINUED OPERATIONS On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off- price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. The accompanying financial statements have been restated to reflect this presentation. Interest expense related to the lines of credit and debt to be assumed by the successor businesses of $142,913 and $933,365 for the three- and six-month periods ended June 30, 1999, respectively, has been allocated to the pre-measurement date loss from discontinued operations. Interest expense of $572,612 for the three- and six-month periods ended June 30, 1999, respectively, has been allocated to the post-measurement date loss from discontinued operations. -6- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The discontinued operations components of amounts reflected in the income statements and balance sheets are as follows: FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- INCOME STATEMENT DATA: Net sales $20,325,881 $28,320,457 $54,049,750 $56,468,835 ============= ============= ============= ============= JUNE 30, 1999 DECEMBER 31, 1998 ------------------ -------------------- BALANCE SHEET DATA: Cash $ 2,950,672 $ 772,916 Accounts receivable 34,057,556 36,782,732 Inventory 16,852,220 20,954,168 Property and equipment 1,371,047 1,397,189 Goodwill and intangibles, net 19,362,575 16,507,073 Other assets 1,908,966 936,293 Accounts payable and accrued expenses (24,729,786) (16,192,954) Subordinated notes payable (971,659) (1,999,065) Note payable, banks (10,309,796) (14,823,955) Notes payable, other (2,897,171) (3,206,558) ------------------ -------------------- Net assets of discontinued operations/(1)/ $ 37,594,624 $ 41,127,839 ================== ==================== /(1)/ Included in current assets. Notes Payable of Discontinued Operations Included in Notes Payable, Banks of discontinued operations are amounts outstanding under a 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 June 30, 1999, draws of $10,000,000 were committed under this line and, based on a net cash position, available collateral and outstanding import letters of credit commitments, an additional $1,538,000 was available for borrowing. For the three- and six month periods ended June 30, 1999, interest expense of discontinued operations included $182,166 and $408,398, respectively, related to this line of credit. Notes Payable, Banks of discontinued operations also includes a mortgage note secured by land and building in Ontario, Canada of $316,939. The mortgage note bears interest at the bank's cost of funds plus 2.5% and matures on August 15, 2009. For the three- and six-month periods ended June 30, 1999, interest expense of discontinued operations included $5,695 and $13,993, respectively, related to this mortgage note. Notes Payable, Other of discontinued operations includes an outstanding loan payable for $1,500,000. The original loan of $2,000,000 is payable in equal quarterly installments of $100,000, which commenced on March 31, 1998, and bears interest at the prime lending rate. For the three- and six-month period ended June 30, 1999, interest expense of discontinued operations included $28,873 and $59,449, respectively, related to this loan. Notes Payable, Other of discontinued operations 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, the first payment of which will be made in July 1999. For the three- and six-month periods ended June 30, 1999, interest expense of discontinued operations included $51,019 and $83,538 related to these notes. 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 outstanding on this note at June 30, 1999 is $559,664. For the three- and six-month periods -7- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ended June 30, 1999, interest expense of discontinued operations included $9,759 and $18,852, respectively, related to this note. Upon closing the acquisition of the Gen-X Companies, the Company executed several subordinated notes payable with the former shareholders of the Gen-X Companies for an aggregate principal amount of $1,999,065 which is payable in four equal consecutive quarterly payments beginning March 31, 1999. Quarterly payments to date in the aggregate of $1,027,406 have been made through June 30, 1999. These notes bear interest at 7% until December 31, 1998 and the prime lending rate thereafter. For the three- and six-month periods ended June 30, 1999, interest expense of discontinued operations included $29,028 and $68,257 related to these notes. Employment Agreements of Discontinued Operations The Company has employment agreements with several of its officers of discontinued operations for an aggregate annual base salary of $925,000 plus bonuses and increases in accordance with the terms of the agreements. Terms of the agreements range from three to five years and are subject to automatic annual extensions. Purchase Commitments of Discontinued Operations As of June 30, 1999, outstanding purchase commitments of discontinued operations existed totaling $5,951,484, for which commercial import letters of credit have been issued. NOTE 3 - SOFTBANK TRANSACTION On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000, which was entirely outstanding at June 30, 1999. The note bears interest at 4.98% per annum and is classified as a noncurrent liability. At the July 23, 1999 closing, this loan amount was converted into shares of the Company's common stock at closing. Accrued and unpaid interest as of July 23, 1999 of $89,225 was offset against the cash proceeds of the sale. For the three- and six-month periods ended June 30, 1999, interest expense included $43,575 related to this interim loan. NOTE 4 - 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 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 June 30, 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 -8- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- for any period subsequent to June 30, 1999, the Company has classified the amounts outstanding under this line as a current liability. The Company is currently in negotiations with its lender to modify the terms of the Loan Agreement to return itself to compliance. At June 30, 1999, the aggregate amount outstanding under this line was $11,325,621. At June 30, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $628,317 (including the seasonal over-advance) was available on this line for borrowing. Subordinated Notes Payable At June 30, 1999, the Company had $1,805,841 in outstanding subordinated notes payable held by its Chairman and Chief Executive Officer, plus accrued interest on such notes of $24,145 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 June 30, 1999, the interest rate on these notes was 8%. 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. On July 27, 1999, the principal balance of $1,805,841 plus interest accrued to date of $58,987 was repaid in full to the Chairman and Chief Executive Officer. NOTE 5 - EARNINGS (LOSSES) PER SHARE Earnings (losses) per share for all periods have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic and diluted earnings (losses) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Outstanding common stock options and warrants have been excluded from the calculation of diluted earnings (losses) per share because their effect would be antidilutive. The amounts used in calculating earnings (losses) per share data are as follows: FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- --------------------------- 1999 1998 1999 1998 -------- -------- ------- ------- Loss from continuing operations $(3,221,021) $ (452,616) $(3,984,308) $ (892,064) Income (loss) from discontinued operations (607,335) 1,258,993 549,838 3,230,014 Loss on disposition of discontinued operations (less income tax benefit of $559,514 for the three- and six- month periods, respectively) (5,632,158) -- (5,632,158) -- ------------ ----------- ------------ ------------ Net income (loss) $(9,460,514) $ 806,377 $(9,066,628) $ 2,337,950 ============ =========== ============ ============ Weighted average shares outstanding - basic and diluted 12,120,085 11,226,403 12,073,780 10,824,533 ============= =========== ============ ============ Outstanding common stock options and 986,571 771,773 908,369 641,352 warrants having no dilutive effect ============= =========== ============ ============ -9- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6 - COMMITMENTS AND CONTINGENCIES Employment Agreements At June 30, 1999, the Company has employment agreements with several of its officers for an aggregate annual base salary of $922,500 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 June 30, 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 and have a material adverse affect on the future results of operations and financial condition of the Company. NOTE 7 - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the three- and six-month periods ended June 30, 1999 and 1998 was as follows: FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------- ---------------------------------- 1999 1998 1999 1998 --------------- ---------------- ---------------- -------------- Net income (loss) $(9,460,514) $806,377 $(9,066,628) $2,337,950 Foreign currency translation adjustment -- (955) -- 1,716 --------------- --------------- --------------- ------------- Comprehensive income (loss) $(9,460,514) $805,422 $(9,066,628) $2,339,666 =============== =============== =============== ============= NOTE 8 - BUSINESS SEGMENTS As a result of the discontinued operations described in Note 2 to the financial statements, the Company considers itself to have one operating segment which is the development of the internet businesses of several sporting goods retailers. NOTE 9 - EQUITY TRANSACTIONS The Company granted options and warrants to purchase 330,716 and 705,482 shares of the Company's common stock to employees and consultants of the Company during the three- and six-month periods ended June 30, 1999, respectively. The Company also issued warrants to purchase 293,320 shares of the Company's common stock during June 1999 to several retailers in connection with the Company's developing e-Commerce business. The range of exercise prices for all grants issued was from $4.06 to $17.25 for the three-month period ended June 30, 1999 and $0.01 to $17.25 for the six-month period ended June 30, 1999. Upon granting these options and warrants, the Company recorded equity compensation expense of $1,997,998 and $2,396,264 for the three- and six-month periods ended June 30, 1999, respectively, $89,407 of which was included in the net loss from discontinued operations. Options and warrants to purchase 137,349 and 257,233 shares of the Company's common stock were exercised during the three- and six-month periods ended June 30, 1999, respectively. The range of exercise prices was from $3.20 to $6.88 for the three-month period ended June 30, 1999 and $0.01 to $13.20 for the six- month period ended June 30, 1999. These exercises resulted in cash proceeds to the Company of $770,267 and $1,248,483 for the three- and six-month periods ended June 30, 1999, respectively. On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. See Note 3. -10- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On July 13, 1999, the shareholders approved an amendment to the Company's Certificate of Incorporation that increased the maximum number of authorized shares of common stock by 40,000,000 to 60,000,000 NOTE 10 - RESTATEMENTS Subsequent to the issuance of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 1999, the Company's management determined that the discount applied to the fair value of the Company's common stock issued as consideration for the Gen-X Companies in May 1998 should be decreased from 35% to 10%. As a result, the consolidated financial statements for the three- and six-month periods ended June 30, 1998 were restated to reflect an additional $2,486,625 of consideration paid for the Gen-X Companies and additional amortization of goodwill of $15,541 for the period from May 12, 1998 through June 30, 1998 (the "1998 Restatement"). As a result of the 1998 Restatement, the consolidated financial statements for the three- and six-month periods ended June 30, 1999 have been restated from amounts previously reported to reflect the cumulative effect of the 1998 Restatement through December 31, 1998 and additional amortization of goodwill of $5,180 and $36,263 for the three- and six-month periods ended June 30, 1999, respectively. The effect of these restatements on management's assessment of the anticipated gain or loss on the ultimate disposition of the Off-Price and Action Sports Division result in the accrual of an additional loss on disposition of discontinued operations of $2,372,655 and a corresponding decrease in net assets of discontinued operations. Subsequent to the issuance of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 1999, the Company's management determined that the number of warrants issuable to the retailers in June 1999 should be reduced, additional warrants were issuable to a consultant of the Company, and the discount applied in the valuation of certain stock-based awards to non-employees should be decreased from 25% to 10%. See Note 9 - Equity Transactions. The net effect of these restatements result in additional stock-based compensation expense of continuing operations of $652,991 for the three- and six- month periods ended June 30, 1999. A summary of the significant effects of these restatements is as follows: AS PREVIOUSLY REPORTED AS RESTATED ------------- ------------ AT JUNE 30, 1999: - ----------------- Additional paid in capital $18,062,147 $21,201,763 Retained earnings (accumulated deficit) (5,812,477) (8,952,093) FOR THE THREE MONTHS ENDED JUNE 30, 1999: - ----------------------------------------- Stock-based compensation $ 1,255,600 $ 1,908,591 Loss from discontinued operations (602,155) (607,335) Loss on disposition of discontinued operations (3,259,503) (5,632,158) Net loss (6,429,688) (9,460,514) Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (.21) $ (.27) Loss from discontinued operations (.05) (.05) Loss on disposition of discontinued operations (.27) (.46) ------------- ------------ Net loss $ (.53) $ (.78) ============= ============ -11- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- AS PREVIOUSLY FOR THE SIX MONTHS ENDED JUNE 30, 1999: REPORTED AS RESTATED - --------------------------------------- -------------- ---------------- Stock-based compensation $ 1,653,866 $ 2,306,857 Income from discontinued operations 586,101 549,838 Loss on disposition of discontinued operations (3,259,503) (5,632,158) Net loss (6,004,719) (9,066,628) Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (.28) $ (.33) Income from discontinued operations .05 .05 Loss on disposition of discontinued operations (.27) (.47) -------------- ---------------- Net loss $ (.50) $ (.75) ============== ================ FOR THE THREE MONTHS ENDED JUNE 30, 1998: - ----------------------------------------- Income from discontinued operations $1,274,534 $1,258,993 Net income 821,918 806,377 Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (.04) $ (.04) Income from discontinued operations .11 .11 -------------- ---------------- Net income $ .07 $ .07 ============== ================ FOR THE SIX MONTHS ENDED JUNE 30, 1998: - --------------------------------------- Income from discontinued operations $3,245,555 $3,230,014 Net income 2,353,491 2,337,950 Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (.08) $ (.08) Income from discontinued operations .30 .30 -------------- ---------------- Net income $ .22 $ .22 ============== ================ -12- 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/A contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended, and the regulations promulgated 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, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). STRATEGIC BUSINESS DEVELOPMENTS This discussion summarizes the significant factors that affected the consolidated operating results and financial condition of Global Sports, Inc. during the six months ended June 30, 1999. Over this period, the Company has undergone a significant transformation. Acquisition of the Gen-X Companies Effective May 12, 1998, the Company acquired all of the outstanding and issued common stock of the Gen-X Companies in a purchase transaction. The Company's reported results of operation for 1998 include those of the Gen-X Companies only from the date of acquisition through the end of the year. Discontinued Operations On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on the development of new businesses. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. The accompanying financial statements have been restated to reflect this presentation. Global Sports Interactive On May 10, 1999, the Company announced the formation of a new subsidiary, Global Sports Interactive. Global Sports Interactive is an e-Commerce company that has entered into exclusive agreements to operate the Internet businesses of multiple sporting goods retailers including The Sports Authority through an e- Commerce agreement and The Athlete's Foot, Sport Chalet, MC Sports, Sports & Recreation and one unnamed retailer with annual sales of more than $200 million through e-Commerce outsourcing contracts. The Company has thereby 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 and have a material adverse affect on the future results of operations and financial condition of the Company. Due to the fact that the Company has not yet launched its initial six e- tailing web sites, results from continuing operations for the second quarter ended June 30, 1999 consist only of the operating expenses incurred during the period for Global Sports Interactive. Restatements Subsequent to the issuance of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 1999, the Company's management determined that the discount applied to the fair value of the Company's common stock issued as consideration for the Gen-X Companies in May 1998 should be decreased from 35% to 10%. As a result, the consolidated financial statements for the three- and six-month periods ended June 30, 1998 were restated to reflect an additional $2,486,625 of consideration paid for the Gen-X Companies and additional amortization of goodwill of $15,541 for the period from May 12, 1998 through June 30, 1998 (the "1998 Restatement"). As a result of the 1998 Restatement, the consolidated financial statements for the three- and six month periods ended June 30, 1999 have been restated from amounts previously reported to reflect the cumulative effect of the 1998 Restatement through December 31, 1998 and additional amortization of goodwill of $5,180 and $36,263 for the three- and six-month periods ended June 30, 1999, respectively. The effect of these restatements on management's assessment of the anticipated gain or loss on the ultimate disposition of the Off-Price and Action Sports Division result in the accrual of an additional loss on disposition of discontinued operations of $2,372,655 and a corresponding decrease in net assets of discontinued operations. Subsequent to the issuance of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 1999, the Company's management determined that the number of warrants issuable to the retailers in June 1999 should be reduced, additional warrants were issuable to a consultant of the Company, and the discount applied in the valuation of certain stock-based awards to non-employees should be decreased from 25% to 10%. See Note 9 - Equity Transactions. The net effect of these restatements result in additional stock-based compensation expense of continuing operations of $652,991 for the three- and six-month periods ended June 30, 1999. See Note 10 to the financial statements. -13- RESULTS OF CONTINUING OPERATIONS The Three- and Six-Month Periods Ended June 30, 1999 Compared to The Three- and Six-Month Periods Ended June 30, 1998 The following table sets forth, for the periods indicated, the results of continuing operations: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------------------- 1999 1998 1999 1998 ------------------------------------------------------------- Costs and expenses: General and administrative $ 644,409 $ 694,841 $ 1,122,553 $ 1,368,363 Stock-based compensation 1,908,591 -- 2,306,857 -- Product development 2,280,211 -- 2,618,933 -- Interest expense, net 99,830 59,519 156,843 118,411 ------------------------------------------------------------- Total costs and expenses 4,933,041 754,360 6,205,186 1,486,774 ------------------------------------------------------------- Loss from continuing operations before (4,933,041) (754,360) (6,205,186) (1,486,774) income taxes Benefit from income taxes (1,712,020) (301,744) (2,220,878) (594,710) ------------------------------------------------------------- Income (loss) from continuing operations (3,221,021) (452,616) (3,984,308) (892,064) Income (loss) from discontinued operations (607,335) 1,258,993 549,838 3,230,014 Loss on disposition of discontinued operations (5,632,158) -- (5,632,158) -- ------------------------------------------------------------- Net income (loss) $(9,460,514) $ 806,377 $(9,066,628) $ 2,337,950 ============================================================= Costs and Expenses Operating expenses from continuing operations for the three- and six-month periods ended June 30, 1999 were $4,933,041 and $6,205,186, respectively. Operating expenses from continuing operations consisted of expenditures associated with the production of the Company's initial six e-Commerce web-sites and general and administrative expenses related to the day-to-day development and operating activities of the Company. Operating expense from continuing operations also includes charges for stock-based compensation of $1,908,591 and $2,306,857 for the three- and six-month periods ended June 30, 1999, respectively. 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. On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim convertible subordinated loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000. This loan amount was converted into shares of the Company's common stock at closing. On July 23, 1999, the Company received the remaining $65,000,050. The Company intends to use the proceeds to repay the balance on one of its lines of credit, to reduce trade payables and to provide working capital for the new e-Commerce business. As of June 30, 1999, the Company had net working capital of $24,781,955. The Company used $7,181,850 in cash flows from operating activities of continuing operations for the six months ended June 30, 1999, whereas in the same period of the prior year the Company generated $3,201,215 in cash flows from operating activities of continuing operations. -14- Liquidity On June 10, 1999, the Company and SOFTBANK entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000. This loan amount was converted into shares of the Company's common stock at closing. On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The sale of these divisions are expected to be completed before the end of 1999. Management expects that these sales will result in substantial proceeds to the Company. Under its current 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. 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 June 30, 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 June 30, 1999, the Company has classified the amounts outstanding under this line as a current liability. The Company is currently in negotiations with its lender to modify the terms of the Loan Agreement to return itself to compliance. At June 30, 1999, the aggregate amount outstanding under this line was $11,325,621. At June 30, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $628,317 (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 June 30, 1999, draws of $10,000,000 were committed under this line and, based on a net cash position and available collateral and outstanding import letters of credit commitments, an additional $1,538,000 was available 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. On July 27, 1999, the principal balance of $1,805,841 plus interest accrued to date of $58,987 was repaid in full to Mr. Rubin. The Company has made certain commitments with respect to developing the internet businesses of several sporting goods retailers. The Company believes that the proceeds from the SOFTBANK transactions and the sale of the Branded division and the Off-Price and Action Sports division will result in adequate financing to allow the Company to continue the development of its e-Commerce business -15- and meet its obligations as they mature during the foreseeable future. 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 enhanced its key information systems to improve their functionality and increase performance during the first quarter of 1999. These upgrades also made these applications Year 2000 compliant. The final step of the Company's Year 2000 plan is to update its office networking system software which it expects to finish prior to the end of the third quarter of 1999. The Company does not expect the costs of this step 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 affected 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/A. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the six months ended June 30, 1999. See the information set forth in Item 7A of the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. -16- PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Effective July 23, 1999, the Company issued 6,153,850 shares of common stock (par value $.01 per share) to SOFTBANK America Inc. ("SOFTBANK") for an aggregate purchase price of $80,000,050. The issuance of the common stock was exempt from registration pursuant to section 4(2) of the Securities Act. The Company granted SOFTBANK certain "demand" and "piggy-bank" registration rights with respect to these shares. The Company intends to use the proceeds to repay the balance on one of its lines of credit, to reduce trade payables and to provide working capital for its new e-Commerce business. 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 10.1/(1)/ Amendment No. 8 to the Loan Documents, Consent and Waiver by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.2/(1)/ Amendment No. 9 to the Loan Documents and Waiver by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 27.1 Financial data schedule for the six-month period ended June 30, 1999 (electronic filing only). /(1)/ Previously filed. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on June 21, 1999 related to the announcement of the SOFTBANK transaction on June 10, 1999. -17- 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: March 21, 2000 BY: /s/ Michael G. Rubin ----------------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer DATE: March 21, 2000 BY: /s/ Jordan M. Copland ----------------------------- Jordan M. Copland Executive Vice President & Chief Financial Officer -18-