UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ================================================================================ FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended JUNE 30, 1998. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______to _______. Commission File Number 0-16611 ------- GLOBAL SPORTS, INC. ------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. Employer 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 [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 10, 1998: Common Stock, $.01 par value 11,923,711 ---------------------------- ----------------------------- (Title of each class) (Number of Shares) - -------------------------------------------------------------------------------- GLOBAL SPORTS, INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Condensed Statements of Operations for the three-and six-month periods ended June 30, 1998 and 1997 4 Condensed Statements of Cash Flows for the six-month periods ended June 30, 1998 and 1997 5 Notes to Condensed Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 - 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults on Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 -2- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31, 1998 1997 -------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 179,725 $ 98,881 Accounts receivable, net of allowance for doubtful accounts of $1,030,969 in 1998 and $743,223 in 1997 30,492,475 16,060,911 Inventory 21,820,077 16,906,171 Prepaid expenses and other current assets 1,067,960 933,548 -------------- ------------- Total current assets 53,560,237 33,999,511 Property and equipment, net of accumulated depreciation and amortization 4,448,507 3,282,712 Goodwill and intangibles, net 12,521,917 6,147,282 Other assets 26,473 2,404 -------------- ------------- Total assets $70,557,134 $43,431,909 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - notes payable, bank $10,670,455 $ 2,000,000 Current portion - note payable, other 400,000 - Current portion - capital lease obligation, related party 121,901 116,124 Accounts payable and accrued expenses 25,516,769 16,114,305 Subordinated notes payable 3,821,085 2,068,652 -------------- ------------- Total current liabilities 40,530,210 20,299,081 Notes payable, bank 15,400,423 18,666,248 Note payable, other 1,400,000 - Capital lease obligation, related party 2,246,800 2,309,231 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, 12,987,797 and 11,487,197 shares issued in 1998 and 1997; 11,918,711 and 10,418,111 shares outstanding in 1998 and 1997 129,881 114,875 Additional paid in capital 14,453,271 8,001,132 Cumulative translation adjustment (33,804) (35,520) Accumulated deficit (3,355,830) (5,709,321) -------------- ------------- 11,193,518 2,371,166 Less: Treasury stock, at cost 213,817 213,817 -------------- ------------- Total stockholders' equity 10,979,701 2,157,349 -------------- ------------- Total liabilities and stockholders' equity $70,557,134 $43,431,909 ============== ============= The accompanying notes are an integral part of these condensed financial statements. -3- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net sales $28,320,457 $13,612,837 $56,468,835 $25,133,737 ------------- ------------- ------------- ------------- Costs and expenses: Cost of goods sold 21,006,045 10,364,277 41,029,944 19,965,114 Selling, general and administrative expense 5,514,850 3,032,732 10,895,573 6,269,386 ------------- ------------- ------------- ------------- 26,520,895 13,397,009 51,925,517 26,234,500 ------------- ------------- ------------- ------------- Operating income (loss) 1,799,562 215,828 4,543,318 (1,100,763) Other (income) expense: Interest expense, net 714,241 441,739 1,333,512 773,191 Other, net (129,523) (40,815) (186,611) (88,230) ------------- ------------- ------------- ------------- 584,718 400,924 1,146,901 684,961 ------------- ------------- ------------- ------------- Income (loss) before equity in net loss of RYKA Inc. 1,214,844 (185,096) 3,396,417 (1,785,724) Equity in net loss of RYKA Inc. - (20,407) - (87,129) ------------- ------------- ------------- ------------- Income (loss) before income taxes 1,214,844 (205,503) 3,396,417 (1,872,853) Provision for income taxes 392,926 - 1,042,926 - ------------- ------------- ------------- ------------- Net income (loss) $ 821,918 $ (205,503) $ 2,353,491 $(1,872,853) ============= ============= ============= ============= Basic earnings per share $.07 $.22 ============= ============= Diluted earnings per share $.07 $.21 ============= ============= Pro Forma Data: (See Note 5) Loss before income taxes $ (205,503) $(1,872,853) Pro forma provision for income taxes - - ------------- ------------- Pro forma net loss $ (205,503) $(1,872,853) ============= ============= Pro forma basic losses per share $(.07) $(.64) ============= ============= Pro forma diluted losses per share $(.07) $(.64) ============= ============= The accompanying notes are an integral part of these condensed financial statements. -4- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ----------- ----------- (Consolidated) (Combined) Cash Flows from Operating Activities: Net income (loss) $ 2,353,491 $(1,872,853) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 589,316 79,337 Provision for losses on accounts receivable (53,784) (28,499) Equity in undistributed net loss of RYKA Inc. - 87,129 Warrant expense - 152,000 Changes in operating assets and liabilities: Accounts receivable (6,718,703) (1,936,300) Inventory (1,406,872) 1,303,129 Prepaid expenses and other current assets 720,038 787,971 Other assets (153,754) 21,246 Accounts payable and accrued expenses 3,974,419 239,536 ----------- ----------- Net cash used in operating activities (695,849) (1,167,304) ----------- ----------- Cash flows from investing activities: Capital expenditures (163,170) (29,546) Businesses acquired, net of cash 357,773 - Investment in RYKA Inc. - 448,943 ----------- ----------- Net cash provided by investing activities 194,603 419,397 ----------- ----------- Cash flows from financing activities: Net borrowings under lines of credit 870,108 1,303,823 Repayments of capital lease obligation (56,654) (55,797) Proceeds from issuance of common stock 16,920 - Repayments on subordinated notes payable (250,000) (376,414) ----------- ----------- Net cash provided by financing activities 580,374 871,612 ----------- ----------- Effect of exchange rate on cash and cash equivalents 1,716 18,087 ----------- ----------- Net increase in cash and cash equivalents 80,844 141,792 Cash and cash equivalents, beginning of period 98,881 275,871 ----------- ----------- Cash and cash equivalents, end of period $ 179,725 $ 417,663 =========== =========== The accompanying notes are an integral part of these condensed financial statements. -5- 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 reorganization (the "Reorganization"), among RYKA Inc. ("RYKA"), KPR Sports International, Inc. ("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three companies collectively referred to as the "KPR Companies"), and Michael G. Rubin, the Chairman and Chief Executive Officer of the Company. After the Reorganization, Mr. Rubin, the former sole shareholder of the KPR Companies, then owned approximately 78.4% of the outstanding voting power of the Company. Accordingly, the Reorganization was accounted for as a reverse purchase under generally accepted accounting principles pursuant to which the KPR Companies were considered to be the acquiring entity and the Company was the acquired entity for accounting purposes, even though the Company was the surviving legal entity. As a result of this reverse purchase accounting treatment, (i) the historical financial statements presented for periods prior to the date of the Reorganization are no longer the historical financial statements of RYKA; (ii) the historical financial statements for periods prior to the date of the Reorganization are those of the KPR Companies, (iii) all references to the historical financial statements of the Company apply to the historical financial statements of the KPR Companies prior to and subsequent to the Reorganization, and (iv) any references to RYKA apply solely to that company and its financial statements prior to the Reorganization. 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. NOTE 2 - ACQUISITION OF THE GEN-X COMPANIES Effective May 12, 1998, the Company acquired Gen-X Holdings, Inc. and Gen-X Equipment, Inc. (collectively, the "Gen-X Companies"). The Gen-X Companies were privately-held companies based in Toronto, Ontario specializing in selling off- price sporting goods and winter sports equipment (including ski and snowboard equipment), in-line skates, sunglasses, skateboards and specialty footwear. For their fiscal 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 the Gen-X Companies, the Company issued 1.5 million shares of its common stock 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 total purchase price, including acquisition expenses of approximately $380,000 but excluding the contingent consideration described above, was $6,793,020. This purchase price is based on the 10-day average market price of the 1.5 million shares discounted by 35% to reflect that these shares represent a large block of the Company's stock. Purchase price allocation has resulted in goodwill of $6,644,083 that will be amortized on a straight line basis over 20 years. If and when the contingent consideration is issued, this goodwill will increase. -6- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information shows the results of the Company's operations for the three- and six-month periods ended June 30, 1997 as if the Reorganization (see Note 1) and acquisition of the Gen-X Companies (see Note 2) 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, and the issuance of 1,500,000 shares of the Company's common stock effected in the acquisition of the Gen-X Companies 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 and acquisition actually occurred on that date nor is it necessarily indicative of future operating results. THREE MONTHS ENDED SIX MONTHS ENDED June 30, June 30, --------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net sales $31,094,399 $26,053,144 $66,070,503 $50,023,390 ----------- ----------- ----------- ----------- Costs and expenses: Cost of goods sold 23,745,090 20,170,938 49,124,004 38,922,162 Selling, general and administrative expense 5,994,117 5,245,969 12,486,546 10,304,975 ----------- ----------- ----------- ----------- 29,739,207 25,416,907 61,610,550 49,227,137 ----------- ----------- ----------- ----------- Operating income 1,355,192 636,237 4,459,953 796,253 Other expense, net 653,400 612,171 1,395,468 1,203,768 ----------- ----------- ----------- ----------- Income (loss) before income taxes 701,792 24,066 3,064,485 (407,515) Provision for income taxes 239,003 133,598 870,451 563,307 ----------- ----------- ----------- ----------- Net income (loss) $ 462,789 $ (109,532) $2,194,034 $ (970,822) =========== =========== =========== =========== Income (losses) per share-basic and diluted $ .04 $ (.01) $ .18 $ (.09) =========== =========== =========== =========== Weighted average common and common equivalent shares outstanding-basic and diluted 11,918,711 11,527,920 11,918,456 11,432,595 =========== =========== =========== =========== NOTE 4 - DEBT NOTES PAYABLE, BANK 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 $40,000,000, which is comprised of the KPR Companies' credit facility of $35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years. 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 June 30, 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. In addition to the revolving lines of credit described above, 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. At June 30, 1998, the aggregate amount outstanding under this line was $17,933,087. The Company has classified $2,840,879 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. Of this amount $840,879 was related to the seasonal overadvance. At June 30, 1998, based on available collateral, an additional $222,164 was available on this line for borrowing. -7- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The total interest incurred in connection with this facility was $496,731 and $961,683 for the three-and six-month periods ending June 30, 1998, respectively. 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. Additional fees of $80,000 were incurred during 1998 related to line increases and over-advance activation have also been capitalized. As of June 30, 1998, the unamortized balance of such fees was $294,402. The Company has an additional line of credit of approximately $14,600,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering all of the Gen- X Companies' assets. At June 30, 1998, approximately $7,800,000 was outstanding under this line and, based on available collateral, an additional $3,111,000 was available for borrowing. Notes payable, bank also includes a mortgage payable secured by land and building in Ontario, Canada of $337,791, of which $29,576 is classified as current, bearing interest at the bank's cost of funds plus 2.5% and maturing on August 15, 2009. NOTES PAYABLE, OTHER Other debt related to the Gen-X Companies includes a loan payable to Ride Inc. for $1,800,000, of which $400,000 is classified as current. This loan is repayable in equal quarterly installments of $100,000 which commenced on March 31, 1998 and bears interest at the prime lending rate. SUBORDINATED NOTES PAYABLE At June 30, 1998, the Company had $1,822,020 in subordinated notes payable held by its Chairman and CEO, which included accrued interest on such notes of $16,178. This debt consisted primarily of a note representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies prior to the Reorganization (see Note 1). Interest accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The interest rate at June 30, 1998 was 8 3/4% and interest recorded during the six-month period was $98,536. 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. Through June 30, 1998, aggregate payments of $250,000 were made to the note holder to reduce principal. Upon closing the Gen-X transaction on May 12, 1998, several subordinated notes payable were executed with the former shareholders of the Gen-X Companies for an aggregate of $1,999,047 which is payable upon the earlier of the Company raising certain additional capital or in four equal consecutive quarterly payments beginning March 31, 1999. This note bears interest at 7% until December 31, 1998 and the prime lending rate thereafter. NOTE 5 - RELATED PARTIES 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 $59,519 and $118,411 recorded to interest expense for the three-and six-month periods ended June 30, 1998. At June 30, 1998, the Company's investment in the capital lease was $2,109,610, which is included in property and equipment. The Company also has subordinated notes payable with its Chairman and CEO, as referred to in Note 4 above. -8- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6 - 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 SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net income.................................... $ 821,918 $ 2,353,491 =========== =========== Pro forma net loss............................ $ (205,503) $(1,872,853) =========== =========== Weighted average shares outstanding - basic........................ 11,226,403 2,880,109 10,824,533 2,927,920 =========== =========== =========== =========== Weighted average shares outstanding - diluted...................... 11,537,668 2,880,109 11,057,701 2,927,920 =========== =========== =========== =========== Outstanding common stock options having no dilutive effect............................ 271,692 199,463 196,736 201,188 =========== =========== =========== =========== Outstanding common stock warrants having no dilutive effect............................ 188,816 106,186 211,448 106,186 =========== =========== =========== =========== 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 7 - CONTINGENCIES As of June 30, 1998, outstanding purchase commitments exist totaling $9,697,169, for which commercial letters of credit have been issued. NOTE 8 - COMPREHENSIVE INCOME Comprehensive income for the three-and six-month periods ended June 30, 1998 and 1997 was as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net income (loss) $ 821,918 $(205,503) $ 2,353,491 $(1,872,853) Foreign currency translation adjustment (955) (1,636) 1,716 23,778 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 820,963 $ (207,139) $ 2,355,207 $(1,849,075) =========== =========== =========== =========== -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FORWARD LOOKING STATEMENTS Certain information contained in this Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). STRATEGIC BUSINESS DEVELOPMENTS AFFECTING COMPARABILITY 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. Effective May 12, 1998, the Company acquired Gen-X Holdings, Inc. and Gen-X Equipment, Inc. (collectively, the "Gen-X Companies") in a purchase transaction (the "Acquisition"). The Company's reported results of operations for 1998 include those of the Gen-X Companies from the date of acquisition through the end of the period. For the period May 12, 1998 through June 30, 1998, the Gen-X Companies reported net sales of $7,668,639 and net income of $534,641. The Reorganization and Acquisition affect comparability of second quarter and year-to-date 1998 results with reported results for the comparable 1997 periods. A more meaningful analysis can be made by comparing 1998 pro forma results with the 1997 pro forma results as if the Reorganization and Acquisition had occurred on January 1, 1997. The 1997 and 1998 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 and 1998 pro forma information does not include the effects of cost savings and sales synergies expected to be realized as a result of the Reorganization and the Acquisition. The following "Results of Operations" discussion describes the comparison of the second quarter and year-to-date periods of 1998 on a pro forma basis to the comparable 1997 periods on a pro forma basis, unless otherwise noted. -10- RESULTS OF OPERATIONS (THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 ON A PRO FORMA BASIS VERSUS COMPARABLE 1997 PERIODS 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 JUNE 30, -------------------------------------------------------------------------------------------------- 1998 1998 1997 1997 ----------------------- ----------------------- ----------------------- ----------------------- $ % OF $ % OF $ % OF $ % OF SALES SALES SALES SALES ------------ --------- ------------ --------- ------------ --------- ------------ --------- (As Reported) (Pro Forma) (As Reported) (Pro Forma) Net sales................... $ 28,320,457 100.0% $ 31,094,399 100.0% $ 13,612,837 100.0% $ 26,053,144 100.0% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Cost & expenses: Cost of goods sold....... 21,006,045 74.2% 23,745,090 76.4% 10,364,277 76.1% 20,170,938 77.4% SG&A expense................ 5,514,850 19.5% 5,994,117 19.3% 3,032,732 22.3% 5,245,969 20.1% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Operating income............ 1,799,562 6.3% 1,355,192 4.3% 215,828 1.6% 636,237 2.5% Other expense, net.......... 584,718 2.0% 653,400 2.0% 421,331 3.0% 612,171 2.4% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Income (loss) before income taxes......... 1,214,844 4.3% 701,792 2.3% (205,503) (1.4%) 24,066 0.1% Provision for income taxes.. 392,926 1.4% 239,003 0.8% - - 133,598 0.5% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Net income (loss)........... $ 821,918 2.9% $ 462,789 1.5% $ (205,503) (1.4%) $ (109,532) (0.4%) ============ ========= ============ ========= ============ ========= ============ ========= SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------------------------------- 1998 1998 1997 1997 ----------------------- ----------------------- ----------------------- ----------------------- $ % OF $ % OF $ % OF $ % OF SALES SALES SALES SALES ------------ --------- ------------ --------- ------------ --------- ------------ --------- (As Reported) (Pro Forma) (As Reported) (Pro Forma) Net sales $ 56,468,835 100.0% $ 66,070,503 100.0% $ 25,133,737 100.0% $ 50,023,390 100.0% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Cost & expenses: Cost of goods sold....... 41,029,944 72.7% 49,124,004 74.4% 19,965,114 79.4% 38,922,162 77.8% SG&A expense................ 10,895,573 19.3% 12,486,546 18.9% 6,269,386 24.9% 10,304,975 20.6% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Operating income............ 4,543,318 8.0% 4,459,953 6.7% (1,100,763) (4.3%) 796,253 1.6% Other expense, net.......... 1,146,901 2.0% 1,395,468 2.1% 772,090 3.1% 1,203,768 2.4% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Income (loss) before income taxes......... 3,396,417 6.0% 3,064,485 4.6% (1,872,853) (7.4%) (407,515) (0.8%) Provision for income taxes.. 1,042,926 1.8% 870,451 1.3% - - 563,307 1.1% ------------ --------- ------------ --------- ------------ --------- ------------ --------- Net income (loss)........... $ 2,353,491 4.2% $ 2,194,034 3.3% $ (1,872,853) (7.4%) $ (970,822) (1.9%) ============ ========= ============ ========= ============ ========= ============ ========= -11- NET SALES Net sales for the second quarter of 1998 on a pro forma basis increased $5,041,255, or 19.3%, over the same period in 1997 on a pro forma basis. Net sales for the six month period ended June 30, 1998 on a pro forma basis increased $16,047,114, or 32.1%, over the same period in 1997 on a pro forma basis. These increases were primarily attributable to the on-going expansion of the Company's off-price business, reflecting the continued excess availability of off-price merchandise in the marketplace. COST OF GOODS SOLD/GROSS MARGIN Cost of goods sold for the second quarter of 1998 on a pro forma basis increased $3,574,152, or 17.7%, over the same period in 1997 on a pro forma basis. Cost of goods sold for the six month period ended June 30, 1998 on a pro forma basis increased $10,201,842, or 26.2%, over the same period in 1997 on a pro forma basis. Gross margin (as a percentage of sales) increased in the second quarter of 1998 on a pro forma basis to 23.6% from 22.5% in the same period in 1997 on a pro forma basis. For the six months ended June 30, 1998 on a pro forma basis, gross margin increased to 25.7% from 22.2% in the same period in 1997 on a pro forma basis. 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. This trend did not continue into the second quarter of 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative ("SG&A") expense for the second quarter of 1998 on a pro forma basis increased $748,148, or 14.3%, over the same period in 1997 on a pro forma basis. SG&A expense for the six month period ending June 30, 1998 on a pro forma basis increased $2,181,571, or 21.2%, over the same period in 1997 on a pro forma basis. Exclusive of the Gen-X Companies, the Company's SG&A expenses were relatively flat across the three-month periods ended June 30, 1998 and 1997 on a pro forma basis. Of the increase for the six-month period, approximately $1,046,000 relates to the base Global Sports business exclusive of the Gen-X Companies. This reflects the Company's increased warehousing cost in support of the higher sales volumes in the off-price business and greater promotional and advertising expenditures in support of the Company's commitment to market and develop the products of the branded business. These increases were partially offset by a decrease in the legal and other professional fees related to the 1997 Reorganization and debt refinancing. The remaining increase from 1997 to 1998 for the three- and six-month periods ended June 30 of approximately $731,000 and $1,172,000 represent increases in the SG&A expenditures of the Gen-X Companies due to a relatively substantial growth in business experienced in the latter half of 1997 and throughout 1998. Large headcount increases resulted in increased salary expenses from period to period and selling and marketing expenses grew as the sales force grew and migrated the customer base from primarily house accounts to commissioned sales agent accounts. In addition, the Gen-X Companies increased their attendance at industry trade shows in order to increase the new company's exposure. OTHER EXPENSE, NET Other expense, net for the second quarter of 1998 on a pro forma basis increased $41,229, or 6.7%, over the same period on a pro forma basis in 1997. Other expense, net for the six-month period on a pro forma basis ending June 30, 1998 increased $191,700, or 15.9%, over the same period on a pro forma basis in 1997. The increase for the six-month period reflects greater interest expense as a result of increased borrowing to support the growth in inventories. -12- FINANCIAL CONDITION CASH FLOWS 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. 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 June 30, 1998, the Company had working capital of $13,030,027. The Company used $695,849 in cash flows from operating activities for the six months ended June 30, 1998, whereas in the same period of the prior year the Company used $1,167,304 in cash flows from operating activities. LIQUIDITY 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 aggregate credit facility was subsequently increased to $30,000,000 on February 20, 1998 and to $40,000,000 on June 3, 1998 by increasing the line of credit available to the KPR Companies to $35,000,000. 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, 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. The aggregate outstanding under this line at June 30, 1998 was $17,933,087, of which $840,879 was related to the seasonal overadvance. At June 30, 1998, based on available collateral, an additional $222,164 was available on this line for borrowing. The Company has an additional line of credit of $14,600,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering all of the Gen-X Companies' assets. At June 30, 1998, approximately $7,800,000 was outstanding under this line and based on available collateral an additional $3,111,000 was available for borrowing. As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin, its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i) a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus accrued and unpaid interest on such loan of $180,517 through October 31, 1997 and (ii) a note in the principal amount of $2,204,401 representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies. No interest accrued on the note representing Subchapter S corporation earnings until December 15, 1997, 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 on November 26, 1997. In addition, the Loan Agreement and the Subordination Agreement permit the KPR Companies to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing with the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of both borrowers, reduced by net losses of the borrowers during such period. Through June 30, 1998, aggregate payments of $250,000 were made to the note holder to reduce principal. Management believes that they have adequate financing to allow the Company to continue its operations and meet its obligations as they mature, during the foreseeable future. In addition, the Company is currently exploring various alternatives for raising additional capital. -13- YEAR 2000 The Company is currently enhancing its current information systems to make them Year 2000 compliant. The Company has created a Year 2000 project team which will coordinate efforts to evaluate, identify, correct or reprogram, and test the Company's existing systems for Year 2000 compliance. The Company will take the required steps to make its existing systems Year 2000 compliant prior to the end of 1998 and does not expect the costs of such steps to have a material impact on the Company's results of operations, financial position, liquidity or capital resources. However, if such efforts are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. -14- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Effective May 12, 1998, the Company issued 1,500,000 shares of common stock (par value $.01 per share) and 10,000 shares of preferred stock in addition to other contingent consideration, to DMJ Financial, Inc., James J. Selter, Kenneth J. Finkelstein and various other entities and individuals in exchange for all of the issued and outstanding shares of capital stock of Gen-X Equipment Inc. and Gen-X Holdings Inc. The issuance of the common stock and preferred stock was exempt from registration pursuant to section 4(2) of the Securities Act. ITEM 3. DEFAULTS ON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Consent and Amendment No. 3 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.2 Amendment No. 4 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 27.1 Financial data schedule for the six-month period ended June 30, 1998 (electronic filing only). (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on May 27, 1998 related to the acquisition of Gen-X Holdings, Inc. and Gen-X Equipment, Inc. -15- 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: August 14, 1998 By: /s/ Michael G. Rubin ---------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer DATE: August 14, 1998 By: /s/ Steven A. Wolf ---------------------- Steven A. Wolf Chief Financial Officer -16-