================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ================================================================================ FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. For the period ended MARCH 31, 1998 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. For the transition period from ______________ to ______________ Commission File Number 0-16611 ------- GLOBAL SPORTS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 610-878-8600 - -------------------------------------------------------------------------------- (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 13, 1998: Common Stock, $.01 par value 10,418,711 - --------------------------------------- ----------------------- (Title of each class) (Number of Shares) ================================================================================ GLOBAL SPORTS, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Independent Accountants' Report 3 Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 4 Condensed Statements of Operations for the three-month periods ended March 31, 1998 and 1997 5 Condensed Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1997 6 Notes to Condensed Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults on Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 - 2 - INDEPENDENT ACCOUNTANTS' REPORT To the Shareholders and Board of Directors of Global Sports, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Global Sports, Inc. and subsidiaries as of March 31, 1998, and the related condensed consolidated statements of income and of cash flows for the three-month period then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Global Sports Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 27, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Philadelphia, Pennsylvania May 18, 1998 -3- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 1998 1997 --------------- --------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents................................................. $ 995,582 $ 98,881 Accounts receivable, net of allowance for doubtful accounts of $652,819 in 1998 and $743,223 in 1997...................... 21,489,338 16,060,911 Inventory................................................................. 17,825,322 16,906,171 Prepaid expenses and other current assets................................. 718,554 933,548 --------------- --------------- Total current assets................................................... 41,028,796 33,999,511 Property and equipment, net of accumulated depreciation and amortization.......................................................... 3,211,271 3,282,712 Goodwill and intangibles, net.............................................. 5,991,784 6,147,282 Other assets............................................................... 8,257 2,404 --------------- --------------- Total assets........................................................... $ 50,240,108 $ 43,431,909 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - notes payable........................................... $ 2,000,000 $ 2,000,000 Current portion - capital lease obligation, related party................. 118,978 116,124 Accounts payable and accrued expenses..................................... 18,877,132 16,114,305 Subordinated note payable, related party.................................. 2,114,798 2,068,652 --------------- --------------- Total current liabilities.............................................. 23,110,908 20,299,081 Capital lease obligation, related party and other liabilities.............. 2,278,395 2,309,231 Notes payable.............................................................. 21,157,292 18,666,248 Commitments and contingencies.............................................. Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued................................................ --- --- Common stock, $0.01 par value, 20,000,000 shares authorized, 11,487,797 and 11,487,197 shares issued in 1998 and 1997; 10,418,711 and 10,418,111 shares outstanding in 1998 and 1997.......... 114,881 114,875 Additional paid in capital................................................ 8,003,046 8,001,132 Cumulative translation adjustment......................................... (32,849) (35,520) Accumulated deficit....................................................... (4,177,748) (5,709,321) --------------- --------------- 3,907,330 2,371,166 Less: Treasury stock, at cost............................................. 213,817 213,817 --------------- --------------- Total stockholders' equity............................................. 3,693,513 2,157,349 --------------- --------------- Total liabilities and stockholders' equity............................. $ 50,240,108 $ 43,431,909 =============== =============== The accompanying notes are an integral part of these condensed financial statements. - 4 - GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 31, ----------------------------------- 1998 1997 ---------------- ---------------- (Consolidated) (Combined) Net sales........................................................... $ 28,148,378 $ 11,520,900 ---------------- ---------------- Costs and expenses: Cost of goods sold................................................ 20,023,899 9,600,837 Selling, general and administrative expense....................... 5,380,723 3,236,654 ---------------- ---------------- Operating income (loss)............................................. 2,743,756 (1,316,591) Other (income) expense: Interest expense, net............................................. 619,271 331,452 Other, net........................................................ (57,088) (47,415) ---------------- ---------------- 562,183 284,037 ---------------- ---------------- Income (loss) before equity in net loss of RYKA and income taxes.... 2,181,573 (1,600,628) Equity in net loss of RYKA Inc...................................... -- 66,722 ---------------- ---------------- Income (loss) before income taxes................................... 2,181,573 (1,667,350) Provision for income taxes.......................................... 650,000 -- ---------------- ---------------- Net income (loss)................................................... $ 1,531,573 $ (1,667,350) ================ ================ Basic earnings per share............................................ $ .15 ================ Diluted earnings per share.......................................... $ .14 ================ Pro Forma Data: (See Note 5) Loss before income taxes............................................ $ (1,667,350) Pro forma provision for income taxes................................ -- ---------------- Pro forma net loss.................................................. $ (1,667,350) ================ Pro forma basic losses per share.................................... $ (.59) ================ Pro forma diluted losses per share.................................. $ (.59) ================ The accompanying notes are an integral part of these condensed financial statements. - 5 - GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------------- 1998 1997 --------------- --------------- CONSOLIDATED COMBINED Cash Flows from Operating Activities: Net income (loss)............................................... $ 1,531,573 (1,667,350) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization............................. 272,388 108,346 Provision for losses on accounts receivable............... (175,077) 58,490 Equity in undistributed net loss of RYKA Inc.............. -- 66,721 Changes in operating assets and liabilities: Accounts receivable................................... (5,253,350) 187,679 Inventory............................................. (919,151) 1,830,672 Prepaid expenses and other current assets............. 214,994 116,221 Other assets.......................................... 40,293 (127,365) Accounts payable and accrued expenses................. 2,762,827 (2,513,274) --------------- --------------- Net cash used in operating activities................. (1,525,503) (1,939,860) --------------- --------------- Cash Flows from Investing Activities: Capital expenditures......................................... (45,449) (207,808) --------------- --------------- Net cash used in investing activities................. (45,449) (207,808) --------------- --------------- Cash Flows from Financing Activities: Net borrowings under line of credit.......................... 2,491,044 1,787,376 Repayment of capital lease obligation........................ (27,982) (27,127) Proceeds from issuance of common stock....................... 1,920 -- Proceeds from issuance of subordinated debt.................. -- 90,000 --------------- --------------- Net cash provided by financing activities............. 2,464,982 1,850,249 --------------- --------------- Effect of exchange rate on cash and cash equivalents.............. 2,671 25,414 --------------- --------------- Net increase (decrease) in cash and cash equivalents.............. 896,701 (272,005) Cash and cash equivalents, beginning of period.................... 98,881 275,871 --------------- --------------- Cash and cash equivalents, end of period.......................... $ 995,582 3,866 =============== =============== The accompanying notes are an integral part of these condensed financial statements. - 6 - GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, designs, develops and markets branded footwear under the RYKA, Yukon and Apex brand names as well as distributes off price athletic footwear, apparel and sporting goods worldwide, with primary distribution in the United States. On December 15, 1997, the Company consummated a Second Amended and Restated Agreement and Plan of Reorganization, as amended, among RYKA Inc. ("RYKA"), KPR Sports International, Inc. ("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three companies collectively referred to as the "KPR Companies"), and Michael G. Rubin, the Chairman and Chief Executive Officer of the Company, which provided for, among other things, the reorganization (the "Reorganization") of RYKA and the KPR Companies, primarily as follows: (i) RYKA was renamed Global Sports, Inc. (ii) the transfer by RYKA to RYKA Sub, Inc. ("RYKA Sub"), of all of the assets and liabilities of RYKA in exchange for all of the issued and outstanding capital stock of RYKA Sub, (iii) the merger of KPR Acquisitions, Inc., with and into KPR, with KPR surviving the merger as a wholly-owned subsidiary of the Company, (iv) the acquisition by the Company of all of the issued and outstanding shares of capital stock of Apex and Management and (v) the issuance to Michael G. Rubin, the sole stockholder of the KPR Companies, of an aggregate of 8,169,086 new shares of common stock (after giving effect to the 1-for-20 reverse stock split) in exchange for his shares of common stock of the KPR Companies and the KPR Companies' holdings of the common stock of RYKA. RYKA Sub subsequently changed its name to RYKA Inc. after the Reorganization. After the Reorganization, Mr. Rubin, the former sole shareholder of the KPR Companies, now owns approximately 78.4% of the outstanding voting power of the Company. Accordingly, the Reorganization has been accounted for as a reverse purchase under generally accepted accounting principles pursuant to which the KPR Companies are considered to be the acquiring entity and the Company is the acquired entity for accounting purposes, even though the Company is the surviving legal entity. As a result of this reverse purchase accounting treatment, (i) the historical financial statements of the Company for periods prior to the date of the Reorganization are no longer the historical financial statements of the Company, and therefore, are no longer presented; (ii) the historical financial statements of the Company for periods prior to the date of the Reorganization are those of the KPR Companies, (iii) all references to the financial statements of the Company apply to the historical financial statements of the KPR Companies prior to and subsequent to the Reorganization, and (iv) any references to RYKA apply solely to that company and its financial statements prior to the Reorganization. The accompanying condensed financial statements of Global have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of the Company's management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the operating results of the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. 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, 1997 as presented in the Company's Annual Report on Form 10-K. - 7 - GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information shows the results of the Company's operations for the three month period ended March 31, 1997 as if the Reorganization (see Note 1) had occurred on January 1, 1997. Adjustments have been made to record the amortization of goodwill and intangibles, to eliminate intercompany rental charges, to record interest expense on the post- Reorganization subordinated debt and to eliminate the KPR Companies' equity in the net losses of RYKA recorded prior to the Reorganization. All share and per share information has been adjusted as if the 1-for-20 reverse stock split and the issuance of 7,100,000 shares of the Company's common stock, both of which were effected at the Reorganization, had also occurred on January, 1, 1997. The pro forma information does not purport to be indicative of the Company's results of operations had the Reorganization actually occurred on that date nor is it necessarily indicative of future operating results. Three Months Ended March 31, 1997 ---------------- Net sales.......................................... $ 14,104,998 ---------------- Costs and expenses: Cost of goods sold................................ 11,310,632 Selling, general and administrative expense....... 4,388,173 ---------------- Operating loss..................................... (1,593,807) Other expense, net................................. 573,001 ---------------- Loss before income taxes........................... (2,166,808) Provision for income taxes......................... --- ---------------- Net loss........................................... $ (2,166,808) ================ Losses per share-basic and diluted................. $ (.22) ================ Weighted average common and common equivalent shares outstanding-basic and diluted.............. 9,852,877 ================ NOTE 3 - NOTE PAYABLE On November 20, 1997, the KPR Companies and RYKA entered into a Loan and Security Agreement (the "Loan Agreement") with a new lender pursuant to which their prior lender was repaid in full on November 21, 1997. Under the Loan Agreement, as amended, the Company has access to a combined credit facility of $30,000,000, which is comprised of the KPR Companies' credit facility of $25,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years. At March 31, 1998, the Company has classified $2,000,000 of the amount outstanding as a current liability based on the Company's expectation of the amounts which will be satisfied within the next year. 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 (8 3/4% at December 31, 1997 and March 31, 1998). 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 letters of credit as collateral for borrowing. - 8 - GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In addition to the revolving lines of credit described above, provided that 80% of their orders are pre-sold, the new lender will over-advance to the Company a combined additional total of $3,000,000, comprised of the KPR Companies' additional $2,000,000 and RYKA's additional $1,000,000, over the collateral for additional letters of credit needed for seasonal production of new merchandise for the Fall 1998, Spring 1999 and Fall 1999 seasons. The total interest incurred in connection with this facility in 1998 was $496,731. Closing and other fees incurred at the inception of the new facilities in the amount of approximately $266,000 have been included on the balance sheet and are being amortized over the term of the Loan Agreement. As of March 31, 1998, the unamortized balance of such fees was $248,550. The total available credit under the combined facilities was $891,117 at March 31, 1998. NOTE 4 - RELATED PARTY The Company is located in King of Prussia, Pennsylvania where it conducts its operations and warehouses inventory in a facility leased from the Company's Chairman and CEO. The lease has been accounted for as a capital lease, which resulted in $58,892 recorded to interest expense for the three months ended March 31, 1998. At March 31, 1998, the Company's investment in the capital lease was $2,397,372, which is included in property and equipment. At March 31, 1998, the Company had $2,114,798 in subordinated notes payable held by its Chairman and CEO, which included accrued interest on such notes of $58,957. This debt consisted primarily of a note representing undistributed sub chapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies prior to the Reorganization (see Note 1). Interest accrues on such notes at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The interest rate at March 31, 1998 was 8 3/4%. Based on its Loan Agreement (see Note 3), 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. - 9 - GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 earnings (losses) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (losses) per share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during the year, assuming dilution by outstanding common stock options and warrants. Pro forma basic earnings (losses) per share represents pro forma net income (loss) (after a pro forma provision for income taxes in 1997 as if the Company had been subject to federal and state income taxation as a C corporation since inception) divided by the weighted average number of common shares outstanding during the period. Pro forma diluted earnings (losses) per share is computed by dividing pro forma net income (loss) by the weighted average number of common shares outstanding during the period, assuming dilution by outstanding common stock options and warrants. The amounts used in calculating earnings (losses) per share data are as follows: THREE MONTHS ENDED MARCH 31, -------------------------------- 1998 1997 --------------- --------------- Net income................................. $ 1,531,573 =============== Pro forma net loss......................... $ (1,667,350) =============== Weighted average shares outstanding - basic..................... 10,418,198 2,831,766 =============== =============== Weighted average shares outstanding - diluted................... 10,574,658 2,831,766 =============== =============== Outstanding common stock options having no dilutive effect.......................... 205,675 225,113 =============== =============== Outstanding common stock warrants having no dilutive effect.......................... 203,034 106,186 =============== =============== The Company's pro forma net loss in 1997 results in an antidilutive effect in the calculation of pro forma diluted earnings (losses) per share. NOTE 6 - CONTINGENCIES As of March 31, 1998, outstanding purchase commitments exist totaling $3,466,456, for which commercial letters of credit have been issued. NOTE 7 - COMPREHENSIVE INCOME Comprehensive income for the three month periods ended March 31, 1998 and 1997 was as follows: 1998 1997 ---- ---- Net income (loss) $1,531,573 $(1,667,350) Foreign currency translation adjustment 2,671 25,414 --------- ---------- Comprehensive income (loss) $1,534,244 $(1,641,936) ========= ========== NOTE 8 - ACQUISITION Effective May 12, 1998, the Company acquired Gen-X Holdings, Inc. and Gen-X Equipment, Inc. (collectively, the "Gen-X Companies"). The Gen-X Companies are privately-held companies based in Toronto, Ontario specializing in selling off- price sporting goods and winter sports equipment (including ski and snowboard equipment), in-line skates, sunglasses, skateboards and specialty footwear. For the year ended September 30, 1997, the Gen-X Companies had revenues of approximately $31 million and net income of $2 million. In consideration for acquiring the stock of Gen-X Holdings, Inc and its wholly-owned subsidiaries, the Company issued 1.5 million shares of its common stock (valued at approximately $10.5 million based on the current market price at May 12, 1998) and contingent consideration in the form of noninterest-bearing notes and shares of mandatorily redeemable preferred stock in the aggregate amount of $5 million. The notes and shares are payable or redeemable at $1 million per year over a five-year period upon achieving certain sales and gross profit targets. The acquisition will be accounted for as a purchase and the Company is currently analyzing the purchase price allocation. - 10 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain information contained in this Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). GENERAL OVERVIEW On December 15, 1997, the Company consummated the Reorganization. As a result, Mr. Rubin, as sole shareholder of the KPR Companies, received RYKA shares which gave him voting control over the combined companies. Accordingly, for accounting purposes, the KPR Companies are considered the continuing entity and the transaction has been accounted for as a Reorganization of the KPR Companies followed by the issuance of new shares of common stock of the KPR Companies for the net assets of RYKA. The Reorganization affects comparability of first quarter 1998 results with reported results for the comparable 1997 periods. A more meaningful analysis can be made by comparing 1998 results with the 1997 pro forma results appearing in Note 2, "Pro Forma Financial Information" on page 7 in the Notes to Financial Statements. The 1997 pro forma information does not purport to be indicative of the Company's results of operations had the transactions described above actually occurred on the dates presented nor is it necessarily indicative of future operating results. The 1997 pro forma information does not include the effects of cost savings and sales synergies expected to be realized as a result of the Reorganization. The following "Results of Operations" discussion describes the comparison of the first quarter period of 1998 to the comparable 1997 period on a pro forma basis, unless otherwise noted. RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 1998 VERSUS COMPARABLE 1997 PERIOD ON A PRO FORMA BASIS) The following table sets forth, for the periods indicated, the relative percentages that certain items in the Company's Statements of Operations bear to net sales: THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------------------------- 1998 1997 1997 ---------------------------------------------------------------------------- (Pro Forma) (Actual) Net sales....................................... $28,148,378 100.0% $14,104,998 100.0% $11,520,900 100.0% ---------- ---------- ---------- ---------- ---------- ---------- Cost and expenses: Cost of goods sold........................... 20,023,899 71.1 11,310,632 80.2 9,600,837 83.3 Selling, general and administrative expense.................................... 5,380,723 19.1 4,388,173 31.1 3,236,654 28.1 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)......................... 2,743,756 9.8 (1,593,807) (11.3) (1,316,591) (11.4) Other expense, net.............................. 562,183 2.0 573,001 4.1 350,759 3.1 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) before income taxes........... 2,181,573 7.8 (2,166,808) (15.4) (1,667,350) (14.5) Provision for income taxes...................... 650,000 2.3 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)............................... $ 1,531,573 5.5% $(2,166,808) (15.4)% $(1,667,350) (14.5)% ========== ========== ========== ========== ========== ========== - 11 - Net Sales Net sales for the first quarter of 1998 increased by $14,043,381, or 99.6%, over the same period on a pro forma basis in 1997. This sales increase was primarily attributable to certain opportunistic purchases by the Company's Off-Price Division during the first quarter of 1998. There is no assurance that such opportunities will reoccur in the future. Cost of Goods Sold/Gross Margin Cost of goods sold for the first quarter of 1998 increased by $8,713,267, or 77.0%, over the same period on a pro forma basis in 1997. Overall gross margin (as a percentage of net sales) increased in the first quarter of 1998 to 28.9% from 19.8% in the same period on a pro forma basis in 1997. The first quarter of 1997 on a pro forma basis experienced unusually low gross margins as a result of the lack of substantial off-price purchases and management's desire to reduce off-price inventories. Selling, General and Administrative Expense Selling, general and administrative expense for the first quarter of 1998 increased by $992,550, or 22.6%, over the same period on a pro forma basis in 1997. This increase was primarily due to (1) an increase in direct, point-of- purchase and retailer cooperative advertising expense of approximately $585,000 for new programs developed to promote the Yukon and RYKA brands, and (2) an increase in third-party warehousing and distribution costs of approximately $476,000 to support higher inventory levels. The Company is currently analyzing the cost and distribution efficiency of its warehousing structure and plans on reducing the number of third-party warehousing facilities in the first half of 1998, which will result in storage cost savings. Other Expense, Net Other expense, net for the first quarter of 1998 decreased by $10,818, or 1.9%, over the same period on a pro forma basis in 1997 primarily as a result of decreased costs related to the Reorganization and prior year financing issues offset almost entirely by increased interest expense related to higher debt levels. Net Income (Loss) Net income (loss) for the first quarter of 1998 increased $3,698,381 over the same period on a pro forma basis in 1997. This increase was partially offset by a $650,000 provision for income taxes recorded in the first quarter of 1998. The Company's effective income tax rate for the current quarter is approximately 30%, which includes the effect of approximately $500,000 of net operating loss carryforwards from prior years as a result of RYKA's operating losses incurred prior to the Reorganization. - 12 - LIQUIDITY AND CAPITAL RESOURCES Prior to the Reorganization, the operations of the KPR Companies had been financed by a combination of internally generated resources and annual increases in the size of the bank credit facility and the operations of RYKA were financed by equity transactions, subordinated borrowings and annual increases in the size of RYKA's bank credit facility. Increases in the bank credit facilities for the KPR Companies and RYKA were required to fund the Company's increased investment in accounts receivable and inventory necessary to support the increases in revenue. As of March 31, 1998, the Company had a working capital of $17,917,888. The Company used $1,525,503 in cash flows from operating activities for the quarter ended March 31, 1998, whereas in the same period of the prior year the Company used $1,939,860 in cash flows from operating activities. On November 20, 1997, the KPR Companies and RYKA entered into the Loan Agreement with a new lender pursuant to which their prior lender was repaid in full on November 21, 1997. Under the Loan Agreement, the Company has access to a combined credit facility of $25,000,000, which is comprised of the KPR Companies' credit facility of $20,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years. 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. The Company's credit facility was subsequently increased to $30,000,000 on February 20, 1998 by increasing the line of credit available to the KPR Companies to $25,000,000. Under this new 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. In addition to the revolving lines of credit described above, provided that 80% of their orders are pre-sold, the new lender will over-advance to the Company a combined additional total of $3,000,000, comprised of the KPR Company's additional $2,000,000 and RYKA's additional $1,000,000 over the collateral for additional letters of credit needed for seasonal production of new merchandise for the Fall 1998, Spring 1999 and Fall 1999 seasons. As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin 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 sub chapter S corporation retained earnings previously taxed to Mr. Rubin as the sole shareholder of the KPR Companies. No interest accrued on the note representing sub chapter S corporation earnings until December 15, 1997, the effective date of the Reorganization, 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 in 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. Management believes that they have adequate financing to allow the Company to continue its operations, meet its obligations as they mature, and comply with its debt covenants (as amended March 27, 1998) during the foreseeable future. In addition, the Company is currently exploring various alternatives to raising additional equity. - 13 - PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS ON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.40 Amended and Restated Loan and Security Agreement dated December 15, 1997 by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-A Amendment No. 1 to the Amended and Restated Loan and Security Agreement dated December 15, 1997 by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-B Consent, Amendment No. 2 to the Loan Documents and waiver as to certain events of default by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.41 Continuing Guaranty dated December 15, 1997 in favor of Foothill Capital Corporation. 10.42 General Security Agreement dated December 15, 1997 in favor of Foothill Capital Corporation. 10.50 Deferred Profit-Sharing Plan and Trust. 15.1 Letter in Lieu of Consent Regarding Review Report of Unaudited Interim Financial Information. 27.1 Restated financial data schedule for the quarter ended March 31, 1995 (electronic filing only). 27.2 Restated financial data schedule for the quarter ended June 30, 1995 (electronic filing only). 27.3 Restated financial data schedule for the quarter ending September 30, 1995 (electronic filing only). 27.4 Restated financial data schedule for the year ended December 31, 1995 (electronic filing only). 27.5 Restated financial data schedule for the quarter ended March 31, 1996 (electronic filing only). 27.6 Restated financial data schedule for the quarter ended June 30, 1996 (electronic filing only). 27.7 Restated financial data schedule for the quarter ended September 30, 1996 (electronic filing only). 27.8 Restated financial data schedule for the year ended December 31, 1996 (electronic filing only). 27.9 Restated financial data schedule for the quarter ended March 31, 1997 (electronic filing only). 27.10 Restated financial data schedule for the quarter ended June 30, 1997 (electronic filing only). 27.11 Restated financial data schedule for the quarter ended September 30, 1997 (electronic filing only). 27.12 Financial data schedule for the quarter ended March 31, 1998 (electronic filing only). (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K/A (Amendment to Form 8-K dated December 15, 1997) on February 13, 1998 containing KPR Sports International, Inc. and Affiliates historical financial statements and Company pro forma financial information. - 14 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. GLOBAL SPORTS, INC. DATE: May 20, 1998 By: /s/ Michael G. Rubin ------------------------------------ Michael G. Rubin Chairman of the Board & Chief Executive Officer DATE: May 20, 1998 By: /s/ Steven A. Wolf ------------------------------------ Steven A. Wolf Chief Financial Officer - 15 -