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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, 2001.
or
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number 0-16611
GLOBAL SPORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2958132
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1075 First Avenue, King of Prussia, 19406
PA (Zip Code)
(Address of principal executive
offices)
610-265-3229
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 3, 2001:
Common Stock, $.01 par value 31,624,554(/1/)
------------------------------ -------------------
(Title of each class) (Number of Shares)
(/1/Excludes)approximately 358,600 shares of the registrant's Common Stock
which are issuable to former shareholders of Fogdog, Inc. in connection
with the registrant's acquisition of Fogdog, but which, as of May 3, 2001,
had not yet been issued.
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FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
Page
----
PART I--FINANCIAL INFORMATION
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets as of December 30, 2000 and
March 31, 2001 (Unaudited)........................................... 3
Condensed Consolidated Statements of Operations for the three-month
periods ended
April 1, 2000 and March 31, 2001 (Unaudited)......................... 4
Condensed Consolidated Statements of Cash Flows for the three-month
periods ended
April 1, 2000 and March 31, 2001 (Unaudited)......................... 5
Notes to Unaudited Condensed Consolidated Financial Statements........ 6
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 10
Item 3.Quantitative and Qualitative Disclosures About Market Risk......... 24
PART II--OTHER INFORMATION
Item 1.Legal Proceedings.................................................. 25
Item 2.Changes in Securities and Use of Proceeds.......................... 25
Item 3.Defaults Upon Senior Securities.................................... 25
Item 4.Submission of Matters to a Vote of Security Holders................ 25
Item 5.Other Information.................................................. 25
Item 6.Exhibits and Reports on Form 8-K................................... 25
SIGNATURES................................................................ 26
For all years prior to 1999 our fiscal year ended on December 31. Effective
for fiscal 1999, we changed our fiscal year from the last day of December to
the Saturday nearest the last day of December. Accordingly, fiscal 1999 ended
on January 1, 2000 and fiscal 2000 ended on December 30, 2000. References to
fiscal 1999, fiscal 2000 and fiscal 2001 refer to the years ended January 1,
2000, December 30, 2000 and the year ending December 29, 2001.
Although we refer to the traditional sporting goods retailers, general
merchandise retailers, Internet companies and media companies for which we
develop and operate e-commerce sporting goods businesses as our "partners," we
do not act as an agent or legal representative for any of our partners. We do
not have the power or authority to legally bind any of our partners.
Similarly, our partners do not have the power or authority to legally bind us.
In addition, we do not have the types of liabilities for our partners that a
general partner of a partnership would have.
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 30, March 31
2000 2001
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 92,012 $ 70,884
Short term investments............................... 1,789 807
Accounts receivable, net of allowance of $287 and
$162, respectively.................................. 4,440 2,570
Inventory............................................ 19,202 17,448
Prepaid expenses and other current assets............ 1,485 1,834
--------- ---------
Total current assets............................... 118,928 93,543
Property and equipment, net............................ 26,424 26,140
Goodwill, net.......................................... 14,363 13,872
Other assets, net...................................... 458 517
--------- ---------
Total assets....................................... $ 160,173 $ 134,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses, and other........ $ 37,803 $ 19,674
Current portion--long-term debt...................... 320 378
--------- ---------
Total current liabilities.......................... 38,123 20,052
Long-term debt......................................... 5,750 5,656
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; 800 shares issued as mandatorily
redeemable preferred stock as of December 30, 2000
and March 31, 2001 respectively..................... -- --
Common stock, $0.01 par value, 60,000,000 shares
authorized; 31,925,098 and 31,927,359 shares issued
and outstanding as of December 30, 2000 and March
31, 2001, respectively.............................. 319 319
Additional paid in capital........................... 217,124 217,584
Accumulated deficit.................................. (101,143) (109,539)
--------- ---------
Total stockholders' equity......................... 116,300 108,364
--------- ---------
Total liabilities and stockholders' equity......... $ 160,173 $ 134,072
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
-------------------
April 1, March 31,
2000 2001
-------- ---------
Net revenues............................................... $ 5,719 $16,215
Cost of revenues........................................... 3,952 11,149
-------- -------
Gross profit........................................... 1,767 5,066
-------- -------
Operating expenses:
Sales and marketing...................................... 9,815 7,441
Product development...................................... 1,594 2,370
General and administrative............................... 1,906 2,540
Stock-based compensation................................. 1,266 453
Depreciation and amortization............................ 1,449 1,627
-------- -------
Total operating expenses............................... 16,030 14,431
Interest income, net....................................... (230) (969)
-------- -------
Loss from continuing operations............................ (14,033) (8,396)
Discontinued operations:
Loss on disposition of discontinued operations........... -- --
-------- -------
Net loss................................................... $(14,033) $(8,396)
======== =======
Losses per share--basic and diluted:
Loss from continuing operations.......................... $ (0.76) $ (0.26)
Loss on disposition of discontinued operations........... -- --
-------- -------
Net loss................................................. $ (0.76) $ (0.26)
======== =======
Weighted average shares outstanding--basic and diluted..... 18,517 31,926
======== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended
------------------
April 1, March
2000 31, 2001
-------- --------
Cash Flows from Operating Activities:
Net loss.................................................. $(14,033) $ (8,396)
Deduct:
Loss on disposition of discontinued operations.......... -- --
-------- --------
Loss from continuing operations........................... (14,033) (8,396)
-------- --------
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization........................... 1,449 1,627
Stock-based compensation................................ 1,266 453
Changes in operating assets and liabilities, net of
discontinued operations:
Accounts receivable, net................................ 465 1,870
Inventory............................................... (2,434) 1,754
Prepaid expenses and other current assets............... (626) (349)
Accounts payable, accrued expenses, and other........... (6,659) (18,129)
-------- --------
Net cash used in continuing operations.................. (20,572) (21,170)
Net cash provided by discontinued operations............ 2,901 --
-------- --------
Net cash used in operating activities................... (17,671) (21,170)
-------- --------
Cash Flows from Investing Activities:
Acquisition of property and equipment, net................ (2,004) (1,162)
(Additions) reductions to goodwill and other assets, net.. (180) 253
Sales of short-term investments........................... -- 983
-------- --------
Net cash provided by (used in) investing activities..... (2,184) 74
-------- --------
Cash Flows from Financing Activities:
Repayments of capital lease obligations................... (34) (25)
Repayments of mortgage note............................... -- (10)
Proceeds from exercises of common stock options and
warrants................................................. 435 3
-------- --------
Net cash provided by (used in) financing activities..... 401 (32)
-------- --------
Net decrease in cash and cash equivalents.................. (19,454) (21,128)
Cash and cash equivalents, beginning of period............. 27,345 92,012
-------- --------
Cash and cash equivalents, end of period................... $ 7,891 $ 70,884
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation,
develops and operates the electronic commerce ("e-commerce") sporting goods
businesses of several traditional sporting goods retailers, general
merchandise retailers, Internet companies and media companies under exclusive
agreements. The Company currently derives virtually all of its revenues from
the sale of sporting goods through its partners' Web sites, direct marketing,
business to business group sales, 800-number sales and related outbound
shipping charges. Each of the Company's partners owns the URL address of its
Web site. Based upon the terms of the agreements with its partners, the
Company owns certain components of the Web sites and the partners own other
components.
The accompanying condensed consolidated financial statements of Global have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions for Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements.
The accompanying financial information is unaudited; however, in the
opinion of the Company's management, all adjustments (consisting solely of
normal recurring adjustments and accruals) necessary to present fairly the
financial position, results of operations and cash flows for the periods
reported have been included. The results of operations for the periods
reported are not necessarily indicative of those that may be expected for a
full year.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements presented in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 30, 2001.
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those used in the current
period.
NOTE 2--ACCOUNTING POLICIES
Change in Useful Life of Property and Equipment: During the three-month
period ended March 31, 2001, the Company increased its estimate of the useful
lives of its computer hardware and software from two years to four years. This
change had the effect of decreasing the loss from continuing operations for
the three-month period ended March 31, 2001 by $1.4 million or $0.04 per
share.
Shipping & Handling Costs: The Company defines shipping and handling costs
as only those costs incurred for a third-party shipper to transport products
to the customer and these costs are included in cost of revenues. In some
instances, shipping and handling costs exceed shipping revenues charged to the
customer, and are subsidized by the Company. Additionally, the Company
selectively offers promotional free shipping whereby it ships merchandise to
customers free of all shipping and handling charges. The cost of promotional
free shipping and subsidized shipping and handling was $685,000 and $558,000
for the three-month periods ended April 1, 2000 and March 31, 2001,
respectively, and was charged to sales and marketing expense.
New Accounting Pronouncements
Derivative Instruments: Statement of Financial Accounting Standard ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities.") establishes
6
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for fiscal years beginning after June 15, 2000,
although early adoption is encouraged. This pronouncement was adopted in the
first quarter of 2001, and did not have a significant impact on the Company's
financial position or results of operations.
NOTE 3--EQUITY TRANSACTIONS
During the three-month period ended March 31, 2001, the Company granted
options to purchase 1,722,875 shares of the Company's common stock to
employees, partners, and consultants. The range of exercise prices for all
options granted was from $0.01 to $6.94 for the three-month period ended March
31, 2001. As a result of the grant of these options and the amortization of
deferred compensation from prior grants, the Company recorded stock-based
compensation expense of $453,000 for the three-month period ended March 31,
2001, primarily as a result of non-employee grants. As of March 31, 2001, the
Company had an aggregate of $2.8 million of deferred compensation remaining to
be amortized over the next four years.
Options to purchase 2,261 shares of the Company's common stock were
exercised during the three-month period ended March 31, 2001. The range of
exercise prices was from $0.59 to $2.44 for the three-month period ended March
31, 2001. These exercises resulted in cash proceeds to the Company of $3,000
for the three-month period ended March 31, 2001.
NOTE 4--STOCK-BASED COMPENSATION
The following table shows the amounts of stock-based compensation, arising
primarily from issuances of stock options and warrants, that would have been
recorded under the following income statement categories had stock-based
compensation not been separately stated in the statements of operations:
Three Months Ended
----------------------------
April 1, 2000 March 31, 2001
------------- --------------
(in thousands)
Sales and marketing............................. $ 733 $ 63
Product development............................. -- --
General and administrative...................... 533 390
------ ----
$1,266 $453
====== ====
NOTE 5--LOSSES PER SHARE
Losses per share for all periods have been computed in accordance with SFAS
No. 128, "Earnings Per Share". Basic and diluted losses per share are computed
by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Outstanding common stock options and warrants
have been excluded from the calculation of diluted losses per share because
their effect would be antidilutive.
7
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts used in calculating losses per share data are as follows:
Three Months Ended
----------------------------
April 1, 2000 March 31, 2001
------------- --------------
(in thousands)
Loss from continuing operations............... $(14,033) $(8,396)
Loss on disposition of discontinued
operations................................... -- --
-------- -------
Net loss...................................... $(14,033) $(8,396)
======== =======
Weighted average shares outstanding--basic and
diluted...................................... 18,517 31,926
======== =======
Outstanding common stock options having no
dilutive effect.............................. 2,265 6,045
======== =======
Outstanding common stock warrants having no
dilutive effect.............................. 560 7,252
======== =======
NOTE 6--CONCENTRATIONS OF CREDIT RISK
As of March 31, 2001, the Company had $1.2 million included in accounts
receivable related to sales of one vendor's products through direct marketing,
Web site and other 800-number sales, which are due over a weighted average
period of four months.
Cash equivalents potentially subject the Company to credit risk. As of
March 31, 2001 the Company had $68.8 million invested in money market funds
with three financial institutions. The composition of these investments are
regularly monitored by management.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various routine litigation, including litigation
in which the Company is a plaintiff, incidental to its business. The Company
believes that the disposition of such routine litigation will not have a
material adverse effect on the financial position or results of operations of
the Company.
Employment Agreements
As of March 31, 2001, the Company had employment agreements with several of
its employees for an aggregate annual base salary of $1.9 million plus bonuses
and increases in accordance with the terms of the agreements. Terms of such
contracts range from one to four years and are subject to automatic annual
extensions.
Advertising and Media Agreements
As of March 31, 2001, the Company was contractually committed for the
purchase of future advertising totaling approximately $650,000 through the
fiscal year ending December 29, 2001. The expense related to these commitments
will be recognized in accordance with the Company's accounting policy related
to advertising.
NOTE 8--RELATED PARTY TRANSACTIONS
The Company has entered into strategic alliances to provide procurement and
fulfillment services for certain partners which may be considered affiliates
of SOFTBANK America Inc. (or its related companies). The Company recognized
net revenues of $0 and $977,000 on sales to these related parties for the
three-month periods ended April 1, 2000 and March 31, 2001, respectively. The
terms of these sales are comparable to those
8
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
given to other partners of the Company, and the amount included in accounts
receivable as a result of these sales was $251,000 as of March 31, 2001.
NOTE 9--DISCONTINUED OPERATIONS
On May 26, 2000, the Company completed the previously announced sale of its
Off-Price and Action Sports division. The Company received $13.2 million in
cash proceeds from the sale. This sale completed the disposition of the
Company's discontinued operations.
Included in accounts payable, accrued expenses, and other as of March 31,
2001 was $1.7 million related to certain remaining obligations of the
discontinued operations.
Net sales of discontinued operations for the three-month periods ended
April 1, 2000 and March 31, 2001 were $18.4 million and $0, respectively.
NOTE 10--SUBSEQUENT EVENT
On April 5, 2001, the Company entered into an exclusive licensing agreement
with Dick's Sporting Goods, Inc. ("Dick's"). The agreement provides Global
with the exclusive right to operate Dick's e-commerce sporting goods business.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
The following discussion and analysis contains forward-looking statements
relating to our operations. These forward-looking statements are based on the
current expectations, beliefs, assumptions, estimates and forecasts about our
business and the industry and markets in which we operate. The statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or implied by these
forward-looking statements. Factors which may affect our business, financial
condition and operating results include the effects of changes in the economy,
the stock market and the sporting goods industry generally, changes affecting
the Internet and e-commerce, our ability to maintain relationships with
strategic partners and suppliers, our ability to timely and successfully
develop, maintain and protect our technology and product and service offerings
and execute operationally, our ability to attract and retain qualified
personnel, and our ability to successfully integrate our recent acquisition of
Fogdog, Inc. More information about potential factors that could affect us are
described under the heading "Risk Factors." We expressly disclaim any intent
or obligation to update these forward-looking statements, except as we
otherwise specifically state.
Overview
We develop and operate e-commerce sporting goods businesses for traditional
sporting goods retailers, general merchandise retailers, Internet companies
and media companies generally under exclusive agreements. We enable our
partners to capitalize on their existing brand assets to exploit online
opportunities in the sporting goods retail industry. We customize the design
of a partner's Web site with a broad range of characteristics that includes a
differentiated user interface, partner-specific content pages, an extensive
electronic catalog of product descriptions and images, a searchable database
and interactive communication tools. We currently derive virtually all of our
revenues from the sale of sporting goods through our partners' Web sites,
direct marketing, business to business group sales, 800-number sales and
related outbound shipping charges.
Financial Presentation
Our financial statements present:
. net revenues, which are derived from sales of sporting goods through our
partners' Web sites, direct marketing, business to business group sales
and 800-number sales, and related outbound shipping charges, net of
allowances for returns and discounts. Net revenues are also derived from
fees earned in connection with marketing. Net revenues are recorded as
these fees are earned.
. cost of revenues, which include the cost of products sold and inbound
freight related to these products, as well as outbound shipping and
handling costs, other than those related to promotional free shipping and
subsidized shipping and handling which are included in sales and
marketing expense.
. sales and marketing expenses, which include advertising and promotional
expenses, including promotional free shipping and subsidized shipping and
handling costs, distribution facility expenses, customer service costs,
merchandising costs and payroll and related expenses. These expenses also
include partner revenue shares, which are payments made to our partners
in exchange for the use of their brands, the promotion of the URLs and
partners' Web sites in their marketing and communication materials, the
implementation of programs to provide incentives to our partners' in-
store customers to shop online and other programs and services provided
to the customers of our partners' Web sites.
. product development expenses, which consist primarily of expenses
associated with planning, maintaining and operating our partners' Web
sites and payroll and related expenses for engineering, production,
creative and management information systems.
10
. general and administrative expenses, which consist primarily of payroll
and related expenses associated with executive, finance, human resources,
legal and administrative personnel, as well as occupancy costs for our
headquarters.
. stock-based compensation expense, which consists of the amortization of
deferred compensation expense for options granted to employees and
certain non-employees and the value of the options or warrants granted to
certain partners and investors.
. depreciation and amortization expenses, which relate primarily to the
depreciation of our corporate headquarters, the depreciation and
amortization of the capitalized costs for our technology, hardware and
software, and the depreciation of improvements, furniture and fixtures at
our corporate headquarters and our fulfillment center.
. interest, which consists of interest income earned on cash, cash
equivalents and short term investments, net of interest expense paid
primarily in connection with the mortgage on our corporate headquarters
and interest expense on capital leases.
Results of Operations
Comparison of the three-month periods ended March 31, 2001 and April 1, 2000
Net Revenues. Net revenues from continuing operations increased $10.5
million from $5.7 million for the three-month period ended April 1, 2000 to
$16.2 million for the three-month period ended March 31, 2001. This increase
is attributable to a $6.0 million increase in sales due to the addition of new
Web sites during the last three quarters of fiscal 2000 and in the first
quarter of fiscal 2001, and a $4.5 million increase in sales from Web sites
operated in both periods.
Cost of Revenues. We incurred cost of revenues from continuing operations
of $11.1 million and $4.0 million for the three-month periods ended March 31,
2001 and April 1, 2000, respectively. As a percentage of net revenues, cost of
revenues from continuing operations was 68.8% and 69.1% for the three-month
periods ended March 31, 2001 and April 1, 2000, respectively.
Gross Profit. We had gross profit from continuing operations of $5.1
million and $1.8 million for the three-month periods ended March 31, 2001 and
April 1, 2000, respectively. As a percentage of net revenues, gross profit
from continuing operations was 31.2% and 30.9% for the three-month periods
ended March 31, 2001 and April 1, 2000, respectively.
Sales and Marketing Expenses. Sales and marketing expenses from continuing
operations decreased $2.4 million from $9.8 million for the three-month period
ended April 1, 2000 to $7.4 million for the three-month period ended March 31,
2001. This decrease was primarily due to a $4.0 million decrease in
advertising costs, offset, in part, by a $1.7 million increase in personnel
and occupancy costs associated with our fulfillment operations.
Product Development Expenses. Product development expenses from continuing
operations increased $800,000 from $1.6 million for the three-month period
ended April 1, 2000 to $2.4 million for the three-month period ended March 31,
2001. This increase was primarily due to a $496,000 increase in personnel
costs and a $342,000 increase in equipment and software maintenance costs
associated with the increased number of Web sites that we operated and
maintained, as well as a $224,000 increase in support costs related to our
management information systems, offset, in part, by a $286,000 decrease in
costs associated with our use of professional consultants.
General and Administrative Expenses. General and administrative expenses
from continuing operations increased $600,000 from $1.9 million for the three-
month period ended April 1, 2000 to $2.5 million for the three-month period
ended March 31, 2001. This increase was primarily due to a $264,000 increase
in credit card chargeback activity due principally to increased sales volume
and a $219,000 increase in personnel costs and insurance related expenses to
support our e-commerce business.
11
Stock-Based Compensation Expense. Stock-based compensation expense from
continuing operations decreased $813,000 from $1.3 million for the three-month
period ended April 1, 2000 to $453,000 for the three-month period ended March
31, 2001. This decrease was the result of lower charges associated with the
issuance of warrants and stock options to our partners, offset, in part, by
charges related to the issuance of warrants and stock options to consultants,
and certain of our employees. As of March 31, 2001, we had an aggregate of
$2.8 million of deferred compensation remaining to be amortized.
Depreciation and Amortization Expenses. Depreciation and amortization
expense increased $200,000 from $1.4 million for the three-month period ended
April 1, 2000 to $1.6 million for the three-month period ended March 31, 2001.
This increase was due to a $1.6 million increase in depreciation related to
our corporate headquarters, our fulfillment center, and the assets purchased
to build, manage and operate our e-commerce business, and a $173,000 increase
in amortization of goodwill associated with the Fogdog acquisition, offset, in
part, by a $1.4 million decrease in depreciation related to the change in our
estimate of the useful lives of our computer hardware and software from two
years to four years.
Interest Income. We had interest income of $1.1 million, net of interest
expense of $147,000, and $230,000, net of interest expense of $0, for the
three-month periods ended March 31, 2001 and April 1, 2000, respectively. The
increase in interest income, net of interest expense, for the three-month
period ended March 31, 2001 compared to the comparable period in fiscal 2000
was due to a higher average balance of cash and cash equivalents and short
term investments during the three-month period ended March 31, 2001.
Income Taxes. Since the sales of our discontinued operations, we have not
generated taxable income. Net operating losses generated have been carried
back to offset income taxes paid in prior years. The remaining net operating
losses will be carried forward. Any otherwise recognizable deferred tax assets
have been offset by a valuation allowance for the net operating loss
carryforwards.
Liquidity and Capital Resources
We raised an aggregate of $146.3 million in gross proceeds through equity
financings in fiscal 1999 and fiscal 2000, as well as $5.3 million in gross
proceeds through a mortgage financing in fiscal 2000, to finance our e-
commerce business. We received an aggregate of $23.5 million in proceeds from
the sales of our discontinued operations in fiscal 1999 and fiscal 2000, as
well as $35.7 million in net cash from the acquisition of Fogdog in fiscal
2000. We have incurred substantial costs to develop our e-commerce business
and to recruit, train and compensate personnel for our creative, engineering,
marketing, merchandising, customer service, management information systems and
administrative departments. We invested in the required technology, equipment
and personnel to make our customer service center and Kentucky distribution
center fully operational. As of March 31, 2001, we had cash and cash
equivalents of $70.9 million, working capital of $73.5 million, and an
accumulated deficit of $109.5 million.
We used $21.2 million in net cash for operating activities of continuing
operations during the three-month period ended March 31, 2001 and $20.6
million in net cash for operating activities of continuing operations during
the three-month period ended April 1, 2000. Net cash used for operating
activities of continuing operations during the three-month period ended March
31, 2001 was primarily the result of net losses from continuing operations and
changes in prepaid expenses and other current assets, accounts payable,
accrued expenses, and other liabilities offset, in part, by changes in
accounts receivable, inventory, stock-based compensation, and depreciation and
amortization. Net cash used for operating activities of continuing operations
during the three-month period ended April 1, 2000 was primarily the result of
net losses from continuing operations and changes in inventory, prepaid
expenses and other current assets, accounts payable, accrued
12
expenses, and other liabilities partially offset by changes in accounts
receivable, stock-based compensation, and depreciation and amortization.
Our investing activities during the three-month period ended March 31, 2001
consisted primarily of purchases of property and equipment. We made capital
expenditures of $1.2 million during the three-month period ended March 31,
2001. Also, during the three-month period ended March 31, 2001, we received
$983,000 in cash proceeds from sales of short-term investments. During the
three-month period ended April 1, 2000, our investing activities consisted
primarily of purchases of property and equipment of $2.0 million.
As of March 31, 2001, we had commitments of approximately $650,000 for
advertising and promotion programs.
To date, we have financed our e-commerce operations primarily from the sale
of equity securities. We expect that our current cash and the collection of
accounts receivable will be sufficient to meet our anticipated cash needs for
the foreseeable future. In addition, we expect that we will realize income
from our continuing operations, excluding non-cash charges for stock-based
compensation and depreciation and amortization, in the fourth quarter of
fiscal 2001. However, our revenues must increase significantly to internally
fund our anticipated operating expenses. If cash flows are insufficient to
fund these expenses, we may need to raise additional funds in future periods
through public or private financings or other arrangements to fund our
operations until we achieve profitability. Failure to raise future capital
when needed could seriously harm our business and operating results. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders would be reduced. Furthermore, these
equity securities might have rights, preferences or privileges senior to our
common stock.
Seasonality
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that the fourth fiscal quarter will account for a
disproportionate percentage of our total annual sales. We believe that results
of operations for a quarterly period may not be indicative of the results for
any other quarter or for the full year.
Risk Factors
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these
risks, together with the other information contained in this Quarterly Report
on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2001. If any of the following risks occur,
our business could be materially harmed. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of the
money you paid to buy our common stock.
Risks Particular to Our Business
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-
commerce business until the first quarter of 1999 and did not begin operating
our e-commerce business until the fourth quarter of 1999. Prior to the fourth
quarter of 1999, when we launched the e-commerce sporting goods businesses we
operate for our partners, 100% of our revenues had been generated by our
discontinued operations. The sale of the discontinued operations was completed
in May 2000. Accordingly, 100% of our revenues are generated through our e-
commerce business. Based on our limited experience with our e-commerce
business, it is difficult to predict whether we will be successful. Thus, our
chances of financial and operational success should be evaluated in light of
the risks, uncertainties, expenses, delays and difficulties associated with
operating a business in a
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relatively new and unproven market, many of which may be beyond our control.
Our failure to address these issues could have a material adverse effect on
our business, results of operations and financial condition.
We expect increases in our operating expenses and we may incur continuing
losses.
We incurred substantial losses in fiscal 1999, fiscal 2000 and during the
first quarter of fiscal 2001, and as of March 31, 2001, we had an accumulated
deficit of $109.5 million. We have not achieved profitability from our
continuing operations. We may not obtain enough customer traffic or a high
enough volume of purchases from our partners' e-commerce sporting goods
businesses to generate sufficient revenues to achieve profitability. We could
continue to incur operating and net losses for the foreseeable future. There
can be no assurances that we will be able to achieve profitability from our
continuing operations.
We will continue to incur significant operating expenses and capital
expenditures as we:
. enhance our distribution and order fulfillment capabilities;
. further improve our order processing systems and capabilities;
. develop enhanced technologies and features to improve our partners' e-
commerce sporting goods business;
. expand our customer service capabilities to better serve our customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. increase our sales and marketing activities.
Because we will incur many of these expenses before we receive any revenues
from our efforts, our losses will be greater than the losses we would incur if
we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which would further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
Our success is tied to the success of the sporting goods industry and our
partners for which we operate e-commerce sporting goods businesses.
Our future success is substantially dependent upon the success of the
sporting goods industry and our partners for which we operate e-commerce
sporting goods businesses. From time to time, the sporting goods industry has
experienced downturns. Any downturn in the sporting goods industry could
adversely affect our business. In addition, if our partners were to have
financial difficulties or seek protection from their creditors, or if we are
unable to replace our partners or obtain new partners, it could adversely
affect our business, financial condition and results of operations.
We enter into contracts with our partners. If we do not maintain good
working relationships with our partners or perform as required under these
agreements it could adversely affect our business.
The contracts with our partners establish new and complex relationships
between us and our partners. We spend a significant amount of time and effort
to maintain our relationships with our partners and address the issues that
from time to time may arise from these new and complex relationships. If we do
not maintain a good working relationship with our partners or perform as
required under these agreements, our partners could seek to terminate the
agreements prior to the end of the term or they could decide not to renew the
contracts at the end of the term. This could adversely affect our business,
financial condition and results of operations. Moreover, our partners could
decide not to renew these contracts for reasons not related to our
performance.
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Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a
good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
. our inability to retain existing partners or to obtain new partners;
. our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to the e-commerce sporting goods
businesses operated by us or the inability to convert these visitors into
customers;
. our failure to offer an appealing mix of sporting goods, apparel,
footwear and other products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites, the systems used to process customers' orders and payments or
our computer network;
. the ability of our competitors to offer new or superior e-commerce
sporting goods businesses, services or products;
. price competition that results in lower profit margins or losses;
. our inability to obtain specific products and brands or unwillingness of
vendors to sell their products to us;
. unanticipated fluctuations in the amount of consumer spending on sporting
goods and related products, which tend to be discretionary spending
items;
. increases in the cost of advertising;
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
. seasonality;
. our inability to manage inventory levels or control inventory theft;
. our inability to manage distribution operations or provide adequate
levels of customer service;
. an increase in the level of our product returns;
. government regulations related to use of the Internet for commerce; and
. unfavorable economic conditions specific to the Internet, e-commerce or
the sporting goods industry.
Seasonal fluctuations in the sales of sporting goods could cause wide
fluctuations in our quarterly results.
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that our fourth fiscal quarter will account for a
disproportionate percentage of our total annual revenues. In anticipation of
increased sales activity during our fourth fiscal quarter, we may hire a
significant number of temporary employees to bolster our permanent staff
15
and significantly increase our inventory levels. For this reason, if our
revenues were below seasonal expectations during the fourth fiscal quarter,
our annual operating results could be below the expectations of securities
analysts and investors.
Due to the limited operating history of our e-commerce business, it is
difficult to predict the seasonal pattern of our sales and the impact of this
seasonality on our business and financial results. In the future, our seasonal
sales patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash
generated from our business. If we do not generate cash sufficient to fund our
operations, we may need additional financing to continue our growth or our
growth may be limited.
Because we have not generated sufficient cash from operations to date, we
have funded our e-commerce operations primarily from the sale of equity
securities. Cash from revenues must increase significantly for us to fund
anticipated operating expenses internally. If our cash flows are insufficient
to fund these expenses, we may need to fund our growth through additional debt
or equity financings or reduce costs. Further, we may not be able to obtain
financing on satisfactory terms. Our inability to finance our growth, either
internally or externally, may limit our growth potential and our ability to
execute our business strategy. If we issue securities to raise capital, our
existing stockholders may experience additional dilution or the new securities
may have rights senior to those of our common stock.
We must develop and maintain relationships with key brand manufacturers to
obtain a sufficient assortment and quantity of quality merchandise on
acceptable commercial terms. If we are unable to do so, it could adversely
affect our business, results of operations and financial condition.
We primarily purchase the products we offer directly from the manufacturers
of the products. If we are unable to develop and maintain relationships with
these manufacturers, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on acceptable
commercial terms and our business could be adversely impacted. We do not have
written contracts with most of our manufacturers. Manufacturers could stop
selling products to us and may ask us to remove their products or logos from
our partners' Web sites. In some circumstances, our partners purchase products
directly from manufacturers for sale on their Web sites. If we or our partners
are unable to obtain products directly from manufacturers, especially popular
brand manufacturers, we may not be able to obtain the same or comparable
merchandise in a timely manner or on acceptable commercial terms. We currently
are not authorized to offer some popular brands of sporting goods, such as
Nike, although we are authorized to sell Fogdog's remaining Nike inventory on
the fogdog.com Web site. There can be no assurance that we will be able to
offer these brands in the future. If we are unable to offer a sufficient
assortment and quantity of quality products at acceptable prices, we may lose
sales and market share.
Capacity constraints or system failures could materially and adversely
affect our business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that
causes interruption of the availability of our partners' Web sites could
result in decreased usage of these Web sites. If these failures are sustained
or repeated, they could reduce the attractiveness of our partners' Web sites
to customers, vendors and advertisers. Our operations are subject to damage or
interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
16
. computer viruses; and
. other similar events.
We launched our first partners' e-commerce sporting goods businesses in the
fourth quarter of fiscal 1999. The limited time during which we have been
operating these businesses, as well as the inherent unpredictability of the
events described above, makes it difficult to predict whether the occurrence
of any of these events is likely. If any of these events do occur, they could
result in interruptions, delays or cessations in service to users of our
partners' Web sites, which could have a material adverse effect on our
business, results of operations and financial condition.
In addition, we maintain our computers on which we operate our partners'
Web sites at the facility of a third-party hosting company. We cannot control
the maintenance and operation of this facility, which is also susceptible to
similar disasters and problems. Our insurance policies may not adequately
compensate us for any losses that we may incur. Any system failure that causes
an interruption in our service or a decrease in responsiveness could harm our
relationships with our customers and result in reduced revenues.
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use and take appropriate steps to enforce our intellectual property rights. In
addition, our competitors could, without violating our proprietary rights,
develop technologies that are as good as or better than our technology.
Our failure to protect our software and other proprietary intellectual
property rights or to develop technologies that are as good as our
competitors' could put us at a disadvantage to our competitors. In addition,
the failure of our partners to protect their intellectual property rights,
including their domain names, could impair our operations. These failures
could have a material adverse effect on our business, results of operations
and financial condition.
If we do not respond to rapid technological changes, our services could
become obsolete and we could lose customers.
We may face material delays in introducing new services, products and
enhancements. If this happens, our customers may forgo the use of our
partners' e-commerce sporting goods businesses and use those of our
competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our partners' e-commerce sporting goods
businesses. The Internet and the online commerce industry are rapidly
changing. If competitors introduce new products and services using new
technologies or if new industry standards and practices emerge, our partners'
existing Web sites and our proprietary technology and systems may become
obsolete.
Developing our partners' e-commerce sporting goods businesses and other
proprietary technology entails significant technical and business risks. We
may use new technologies ineffectively or we may fail to adapt our partners'
Web sites, our order processing systems and our computer network to meet
customer requirements or emerging industry standards.
We may be subject to intellectual property claims or competition or trade
practices claims that could be costly and could disrupt our business.
Third parties may assert that our business or technologies infringe their
intellectual property rights. From time to time, we may receive notices from
third parties questioning our right to present specific images or logos on our
partners' Web sites, or stating that we have infringed their trademarks or
copyrights. We may in the future receive claims that we are engaging in unfair
competition or other illegal trade practices. We may be unsuccessful
17
in defending against these claims, which could result in substantial damages,
fines or other penalties. The resolution of a claim could also require us to
change how we do business, redesign our partners' Web sites and other systems
or enter into burdensome royalty or licensing agreements. These license or
royalty agreements, if required, may not be available on acceptable terms, if
at all, in the event of a successful claim of infringement. Our insurance
coverage may not be adequate to cover every claim that third parties could
assert against us. Even unsuccessful claims could result in significant legal
fees and other expenses, diversion of management's time and disruptions in our
business. Any of these claims could also harm our reputation.
We rely on our developing relationships with online services, search
engines, directories and other Web sites and e-commerce businesses to drive
traffic to the e-commerce sporting goods businesses we operate. If we are
unable to develop or maintain these relationships, our business, financial
condition and results of operations could be adversely affected.
We have relationships with online services, search engines, directories and
other Web sites and e-commerce businesses to provide content, advertising
banners and other links that link to our partners' Web sites. We expect to
rely on these relationships as significant sources of traffic to our partners'
Web sites and to generate new customers. If we are unable to develop
satisfactory relationships on acceptable terms, our ability to attract new
customers could be harmed. Further, many of the parties with which we may have
online advertising arrangements could provide advertising services for other
marketers of sporting goods. As a result, these parties may be reluctant to
enter into or maintain relationships with us. Failure to achieve sufficient
traffic or generate sufficient revenue from purchases originating from third-
parties may result in termination of these types of relationships. Without
these relationships, we may not be able to sufficiently increase our market
share and our business, financial condition and results of operations could be
adversely affected.
Our success is dependent upon our executive officers and other key
personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman, President and Chief Executive Officer. We have employment agreements
with some of our executive officers and key personnel. We cannot be sure,
however, that we will be able to retain or attract executive, managerial and
other key personnel. We have obtained key person life insurance for Mr. Rubin
in the amount of $7.25 million. We have not obtained key person life insurance
on any of our other executive officers or key personnel.
We may be unable to hire and retain the skilled personnel necessary to
develop our business.
We intend to continue to hire a number of skilled personnel. Competition
for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel in the future. Our failure to
attract and retain the highly trained personnel that are integral to our
business may limit our growth rate, which would harm our business.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
The e-commerce market is rapidly evolving and extremely competitive.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which could seriously harm our business,
financial condition and results of operations. We compete with a variety of
companies, including:
. e-commerce businesses that are associated with full-line sporting goods
stores such as Shopsports.com, associated with Copeland's Sports;
. e-commerce businesses of specialty sporting goods retailers and catalogs
such as Footlocker.com and REI.com;
18
. e-commerce businesses of traditional general merchandise retailers such
as Target.com and WalMart.com; and
. e-commerce businesses of sporting goods manufacturers such as adidas.com
and Nike.com.
In addition, we compete with companies that can provide part of our
solutions to companies that wish to establish e-commerce sporting goods
businesses, including:
. Web site developers, such as Sapient, Scient and Viant; and
. third-party fulfillment and customer services providers, such as
Fingerhut, Keystone Internet Services and ClientLogic.
Finally, we compete with traditional channels of distribution for sporting
goods, including full-line sporting goods retailers, specialty sporting goods
retailers, general merchandise retailers, catalogs and manufacturers' direct
stores.
If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
Although we operate our own fulfillment center, we rely upon multiple third
parties for the shipment of our products. We also rely upon certain vendors to
ship products directly to our customers, especially LTL items. As a result, we
are subject to the risks associated with the ability of these vendors to
successfully and timely fulfill and ship customer orders and to successfully
handle our inventory delivery services to meet our shipping needs. The failure
of these vendors to provide these services, or the termination or interruption
of these services, could adversely affect our business, results of operations
and financial condition.
Sporting goods and apparel are subject to changing consumer preferences. If
we fail to anticipate these changes, we could experience lower sales, higher
inventory markdowns and lower margins.
Our success depends upon our ability to anticipate and respond to trends in
sporting goods merchandise and consumers' participation in sports. Consumers'
tastes in apparel and sporting goods equipment are subject to frequent and
significant changes, due in part to manufacturers' efforts to incorporate
advanced technologies into some types of sporting goods. In addition, the
level of consumer interest in a given sport can fluctuate dramatically. Prior
to commencing our e-commerce business, our businesses were primarily
concentrated in athletic footwear and apparel. Accordingly, we do not have
significant experience in the full range of sporting goods. If we fail to
identify and respond to changes in sporting goods merchandising and
recreational sports participation, our sales could suffer and we could be
required to mark down unsold inventory. This would depress our profit margins.
In addition, any failure to keep pace with changes in consumers' recreational
sports habits could allow our competitors to gain market share which could
have an adverse effect on our business, results of operations and financial
condition.
High merchandise returns could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is generally
consistent with the policies of each of our partners for which we operate e-
commerce sporting goods businesses. Our ability to handle a large volume of
returns is unproven. If merchandise returns are significant, our business,
financial condition and results of operations could be adversely affected.
We may be subject to product liability claims that could be costly and
time-consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted. Similarly, we could be subject to claims
that users of our partners' Web sites were harmed due to their
19
reliance on our product information, product selection guides, advice or
instructions. If a successful claim were brought against us in excess of our
insurance coverage, it could adversely affect our business. Even unsuccessful
claims could result in the expenditure of funds and management time and could
have a negative impact on our business.
We may be liable if third parties misappropriate our customers' personal
information.
If third parties are able to penetrate our network security or otherwise
misappropriate our customers' personal information or credit card information
or if we give third parties improper access to our customers' personal
information or credit card information, we could be subject to liability. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. They could also
include claims for other misuses of personal information, including
unauthorized marketing purposes. These claims could result in litigation.
Liability for misappropriation of this information could adversely affect our
business. In addition, the Federal Trade Commission and state agencies have
been investigating various Internet companies regarding their use of personal
information. We could incur additional expenses if new regulations regarding
the use of personal information are introduced or if government agencies
investigate our privacy practices.
We are controlled by certain principal stockholders.
As of May 3, 2001, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 25.5%, funds affiliated with SOFTBANK
America Inc., or SOFTBANK, beneficially owned 27.4% and Interactive Technology
Holdings, LLC, or ITH, a joint venture company formed by Comcast Corporation
and QVC, Inc., beneficially owned 15.8% of our outstanding common stock.
Should they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a
position to exercise control over most matters requiring stockholder approval,
including the election or removal of directors, approval of significant
corporate transactions and the ability generally to direct our affairs.
Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH
acquired their shares of our common stock provide that SOFTBANK has the right
to designate up to three members of our board and ITH has the right to
designate up to two members of our board. This concentration of ownership and
SOFTBANK's and ITH's right to designate members to our board may have the
effect of delaying or preventing a change in control of us, including
transactions in which stockholders might otherwise receive a premium over
current market prices for their shares.
From time to time, we may acquire or invest in other companies. There are
risks associated with potential acquisitions and investments. As a result, we
may not achieve the expected benefits of potential acquisitions.
If we are presented with appropriate opportunities, we may make investments
in complementary companies, products or technologies or we may purchase other
companies. We may not realize the anticipated benefits of any investment or
acquisition. We may not be able to successfully assimilate the additional
personnel, operations, acquired technology and products into our business. Any
acquisition may further strain our existing financial and managerial controls
and reporting systems and procedures. In addition, key personnel of the
acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees or
increase our expenses. Further, the physical expansion in facilities that
would occur as a result of any acquisition may result in disruptions that
seriously impair our business. Finally, we may have to incur debt or issue
equity securities to pay for any acquisitions or investments, the issuance of
which could be dilutive to our stockholders.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires
businesses to consider pursuing international expansion. In the future, we may
expand into international markets. International sales are subject to inherent
risks and challenges that could adversely affect our profitability, including:
20
. the need to develop new supplier and manufacturer relationships,
particularly because major sporting good manufacturers may require that
our international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
impact on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into United States dollars may
contribute to fluctuations in our results of operations and fluctuating
exchange rates could cause reduced gross revenues and/or gross margins from
non-dollar-denominated international sales.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate
that any cash dividends will be declared or paid in the foreseeable future.
It may be difficult for a third party to acquire us and this could depress
our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 1,000,000 shares of preferred stock, which the board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the terms,
rights, preferences and designations set by the board, may delay, deter or
prevent a change in control of us. Issuing additional shares of common stock
could result in dilution of the voting power of the current holders of our
common stock. In addition, "anti-takeover" provisions of Delaware law may
restrict the ability of the stockholders to approve a merger or business
combination or obtain control of us.
There are limitations on the liabilities of our directors.
Pursuant to our amended and restated certificate of incorporation and under
Delaware law, our directors are not liable to us or our stockholders for
monetary damages for breach of fiduciary duty, except for liability for breach
of a director's duty of loyalty, acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
for dividend payments or stock repurchases that are unlawful under Delaware
law or any transaction in which a director has derived an improper personal
benefit. In addition, we have entered into indemnification agreements with
each of our directors. These agreements, among other things, require us to
indemnify each director for certain expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by us or in our right, arising out
of the person's services as one of our directors.
Risks Related to the Internet Industry
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
21
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users and advertisers on the Internet may
not increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
. actual or perceived lack of security of information or privacy
protection;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of cost-
effective, high-speed service;
. possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the
Internet has resulted in users experiencing delays, transmission errors and
other difficulties. As currently configured, the Internet may not support an
increase in the number or requirements of users. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The amount of traffic on our partners' Web sites could be
materially affected if there are outages or delays in the future. The use of
the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If none of the foregoing changes
occur, or if the Internet does not become a viable commercial medium, our
business, results of operations and financial condition could be materially
adversely affected. In addition, even if those changes occur, we may be
required to spend significant capital to adapt our operations to any new or
emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the Web
sites which we operate obsolete.
The technology of the Internet and e-commerce is evolving rapidly for many
reasons, including:
. customers frequently changing their requirements and preferences;
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
These changes could render the Web sites that we operate obsolete. Our
ability to attract customers could be seriously impaired if we do not
accomplish the following tasks:
. continually enhance and improve our partners' Web sites;
. identify, select and obtain leading technologies useful in our business;
and
. respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
Customers may be unwilling to use the Internet to purchase goods.
Our long-term future depends heavily upon the general public's willingness
to use the Internet as a means to purchase goods. The failure of the Internet
to develop into an effective commercial tool would seriously damage our future
operations. E-commerce is a relatively new concept, and large numbers of
customers may not begin or continue to use the Internet to purchase goods. The
demand for and acceptance of products sold over the Internet are highly
uncertain, and most e-commerce businesses have a short track record. If
consumers are unwilling to use the Internet to conduct business, our business
may not develop profitably. The Internet may not succeed as a medium of
commerce because of delays in developing elements of the needed Internet
22
infrastructure, such as a reliable network, high-speed modems, high-speed
communication lines and other enabling technologies.
The security risks of e-commerce may discourage customers from purchasing
goods from us.
In order for the e-commerce market to develop successfully, we and other
market participants must be able to transmit confidential information securely
over public networks. Third parties may have the technology or know-how to
breach the security of customer transaction data. Any breach could cause
customers to lose confidence in the security of our partners' Web sites and
choose not to purchase from those Web sites. If someone is able to circumvent
our security measures, he or she could destroy or steal valuable information
or disrupt the operation of our partners' Web sites. Concerns about the
security and privacy of transactions over the Internet could inhibit the
growth of the Internet and e-commerce. Our security measures may not
effectively prohibit others from obtaining improper access to the information
on our partners' Web sites. Any security breach could expose us to risks of
loss, litigation and liability and could seriously disrupt our operations.
Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the
failure to adequately control fraudulent credit card transactions could reduce
our net revenues and our gross margin. We have put in place technology to help
us detect the fraudulent use of credit card information. To date, we have not
suffered material losses related to credit card fraud. However, we may in the
future suffer losses as a result of orders placed with fraudulent credit card
data even though the associated financial institution approved payment of the
orders. Under current credit card practices, we are liable for fraudulent
credit card transactions because we do not obtain a cardholder's signature.
If one or more states successfully assert that we should collect sales or
other taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for physical
shipments of goods into states other than Kentucky and Pennsylvania. One or
more local, state or foreign jurisdictions may seek to impose sales tax
collection obligations on us and other out-of-state companies that engage in
online commerce. Our business could be adversely affected if one or more
states or any foreign country successfully asserts that we should collect
sales or other taxes on the sale of our merchandise.
Existing or future government regulation could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards conducting business on the Internet. However,
due to the increasing popularity and use of the Internet, many laws and
regulations relating to the Internet are being debated at the state and
federal levels. These laws and regulations could cover issues such as user
privacy, freedom of expression, pricing, fraud, quality of products and
services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy could also harm our business.
For example, United States and foreign laws regulate our ability to use
customer information and to develop, buy and sell mailing lists. The vast
majority of these laws were adopted prior to the advent of the Internet, and
do not contemplate or address the unique issues raised thereby. Those laws
that do reference the Internet, such as the Digital Millennium Copyright Act,
are only beginning to be interpreted by the courts and their applicability and
reach are therefore uncertain. These current and future laws and regulations
could adversely affect our future business, results of operation and financial
condition.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal and state levels
relating to online privacy and the use of personal user information. Several
states have proposed legislation that would limit the uses of personal user
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information gathered online or require online services to establish privacy
policies. The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under 13. In addition, bills pending in Congress would extend online privacy
protections to adults. Laws and regulations of this kind may include
requirements that we establish procedures to disclose and notify users of
privacy and security policies, obtain consent from users for collection and
use of information, or provide users with the ability to access, correct and
delete personal information stored by us. Even in the absence of those
regulations, the Federal Trade Commission has settled several proceedings
resulting in consent decrees in which Internet companies have been required to
establish programs regarding the manner in which personal information is
collected from users and provided to third parties. We could become a party to
a similar enforcement proceeding. These regulatory and enforcement efforts
could also harm our ability to collect demographic and personal information
from users, which could be costly or adversely affect our marketing efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk for the quarter ended
March 31, 2001. See the information set forth in Item 7A of the Company's
Annual Report on Form 10-K for the fiscal year ended December 30, 2000 filed
with the Securities and Exchange Commission on March 30, 2001.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various routine litigation incidental to our current and
discontinued businesses. We believe that the disposition of these matters will
not have a material adverse effect on our financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On, January 12, 2001, we filed a Form 8-K with the Securities and Exchange
Commission regarding the completion of the acquisition of Fogdog, Inc. in a
stock-for-stock transaction.
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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.
By: _________________________________
Michael G. Rubin
Chairman of the Board, President
Date: May 10, 2001 and Chief Executive Officer
By: _________________________________
Jordan M. Copland
Executive Vice President &
Date: May 10, 2001 Chief Financial Officer
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