================================================================================ 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, 1999. or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______to _______. Commission File Number 0-16611 ------- GLOBAL SPORTS, INC. ------------------ (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 -------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406 -------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 610-768-0900 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 12, 1999: Common Stock, $.01 par value 18,373,729 ---------------------------- ------------------ (Title of each class) (Number of Shares) - -------------------------------------------------------------------------------- GLOBAL SPORTS, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ------- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the three- and six-month periods ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 - 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults on Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8K 16 SIGNATURES 17 -2- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31, 1999 1998 ----------------------- ------------------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 308 $ 83,169 Prepaid expenses and other current assets 766,823 599,224 Deferred income taxes 4,367,759 -- Net assets of discontinued operations 37,594,624 38,718,921 ----------------------- ------------------------ Total current assets 42,729,514 39,401,314 Property and equipment, net of accumulated depreciation and amortization 4,269,335 2,988,714 Other assets 232,670 253,626 ----------------------- ------------------------ Total assets $ 47,231,519 $ 42,643,654 ======================= ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - notes payable, bank $ 11,325,621 $ -- Current portion - capital lease obligation, related party 133,250 127,966 Accounts payable and accrued expenses 3,024,079 3,652,024 Income taxes payable 1,658,768 1,378,820 Subordinated note payable 1,805,841 1,805,841 ----------------------- ------------------------ Total current liabilities 17,947,559 6,964,651 Notes payable, bank -- 18,812,156 Convertible subordinated note payable 15,000,000 -- Minority interest in subsidiary 1,999 -- Capital lease obligation, related party 2,113,551 2,181,265 Mandatorily redeemable preferred stock 100 100 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized; 10,000 shares issued as mandatorily redeemable preferred stock -- -- Common stock, $0.01 par value, 60,000,000 and 20,000,000 shares authorized in 1999 and 1998, 13,251,697 and 12,994,464 shares issued in 1999 and 1998; 12,182,611 and 11,925,378 shares outstanding in 1999 and 1998 132,457 129,947 Additional paid in capital 18,062,147 14,624,541 Accumulated other comprehensive income -- (47,431) Retained earnings (deficit) (5,812,477) 192,242 ----------------------- ------------------------ 12,382,127 14,899,299 Less: Treasury stock, at cost 213,817 213,817 ----------------------- ------------------------ Total stockholders' equity 12,168,310 14,685,482 ----------------------- ------------------------ Total liabilities and stockholders' equity $ 47,231,519 $ 42,643,654 ======================= ======================== The accompanying notes are an integral part of these condensed financial statements. -3- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------- ------------------------------------------ 1999 1998 1999 1998 ----------------- ----------------- ----------------- ----------------- Net sales $ -- $ -- $ -- $ -- ----------------- ----------------- ----------------- ----------------- Costs and expenses: Cost of goods sold -- -- -- -- General and administrative 644,409 694,841 1,122,553 1,368,363 Equity compensation 1,255,600 -- 1,653,866 -- Web-site development 2,280,211 -- 2,618,933 -- ----------------- ----------------- ----------------- ----------------- 4,180,220 694,841 5,395,352 1,368,363 ----------------- ----------------- ----------------- ----------------- Operating loss (4,180,220) (694,841) (5,395,352) (1,368,363) Other expense: Interest expense, net 99,830 59,519 156,843 118,411 ----------------- ----------------- ----------------- ----------------- 99,830 59,519 156,843 118,411 ----------------- ----------------- ----------------- ----------------- Loss from continuing operations before income taxes (4,280,050) (754,360) (5,552,195) (1,486,774) Benefit from income taxes (1,712,020) (301,744) (2,220,878) (594,710) ----------------- ----------------- ----------------- ----------------- Loss from continuing operations (2,568,030) (452,616) (3,331,317) (892,064) Discontinued operations (Note 2): Income (loss) from discontinued operations (less income taxes in 1999: $406,229 1998: $694,670 1999: $582,804 1998: $1,637,636 for the three- and six-month periods, respectively (602,155) 1,274,534 586,101 3,245,555 Loss on disposition of discontinued operations (less income tax benefit of $559,514 for the three and six month periods, respectively (3,259,503) -- (3,259,503) -- ----------------- ----------------- ----------------- ----------------- Net Income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491 ================= ================= ================= ================= Earnings (losses) per share: Basic - Loss from continuing operations $ (0.21) $ (0.04) $ (0.28) $ (0.08) Income (loss) from discontinued operations (0.05) 0.11 0.05 0.30 Loss on disposition of discontinued operations (0.27) (0.27) ----------------- ----------------- ----------------- ----------------- Net Income (loss) $ (0.53) $ 0.07 $ (0.50) $ 0.22 ================= ================= ================= ================= Diluted Loss from continuing operations $ (0.21) $ (0.04) $ (0.28) $ (0.08) Income (loss) from discontinued operations (0.05) 0.11 0.05 0.29 Loss on disposition of discontinued operations (0.27) (0.27) ----------------- ----------------- ----------------- ----------------- Net Income (loss) $ (0.53) $ 0.07 $ (0.50) $ 0.21 ================= ================= ================= ================= The accompanying notes are an integral part of these condensed financial statements. -4- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ---------------------------------------- 1999 1998 ------------------ ----------------- Cash Flows from Operating Activities: Net income (loss) $ (6,004,719) $ 2,353,491 Deduct: Income from discontinued operations (586,101) (3,245,555) Loss on disposition of discontinued operations 3,259,503 -- ------------------ ----------------- Net loss from continuing operations (3,331,317) (892,064) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 339,338 Equity compensation 1,720,016 Changes in operating assets and liabilities: Prepaid expenses and other current assets 304,018 (76,684) Deferred income taxes (4,367,759) -- Other assets 50,956 (8,755) Accounts payable and accrued expenses (627,945) 498,607 Income taxes payable 279,948 1,378,820 ------------------ ----------------- Net cash provided by (used in) continuing operations (5,632,745) 899,924 Net cash provided by (used in) discontinued operations (1,549,105) 2,301,291 ------------------ ----------------- Net cash provided by (used in) operating activities (7,181,850) 3,201,215 ------------------ ----------------- Cash Flows from Investing Activities: Capital expenditures (1,638,678) (126,439) ------------------ ----------------- Net cash used in investing activities (1,638,678) (126,439) ------------------ ----------------- Cash Flows from Financing Activities: Net repayments under lines of credit (7,486,535) (2,733,160) Repayments of capital lease obligation (62,430) (56,654) Repayments of subordinated-note payable -- (250,000) Borrowing from SOFTBANK 15,000,000 -- Proceeds from issuance of common stock 1,314,633 16,920 Sale of minority interest in subsidiary 1,999 -- Costs of debt issuance (30,000) -- ------------------ ----------------- Net cash provided by (used by) financing activities 8,737,667 (3,022,894) ------------------ ----------------- Effect of exchange rate on cash and cash equivalents -- 1,716 ------------------ ----------------- Net increase (decrease) in cash and cash equivalents (82,861) 53,598 Cash and cash equivalents, beginning of period 83,169 58,019 ------------------ ----------------- Cash and cash equivalents, end of period $ 308 $ 111,617 ================== ================= The accompanying notes are an integral part of these condensed financial statements. -5- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1 - BASIS OF PRESENTATION Global Sports, Inc. ("Global" or "the Company"), a Delaware corporation, is an e-Commerce company that is in the process of developing the internet businesses of several sporting goods retailers through its Global Sports Interactive subsidiary. On April 20, 1999, the Company formalized a plan to sell its other two businesses, the Branded division and the Off-Price and Action Sports division in order to focus exclusively on its e-Commerce business. See Note 2. The accompanying condensed financial statements of Global have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of the Company's management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the operating results of the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. Certain 1998 balances have been reclassified to conform with the 1999 financial statement presentation. This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements as of December 31, 1998 as presented in the Company's Annual Report on Form 10-K. NOTE 2 - DISCONTINUED OPERATIONS On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. Prior year financial statements have been restated to reflect discontinued operations. Interest expense related to the lines of credit and debt to be assumed by the successor businesses of $142,913 and $933,365 for the three- and six-month periods ended June 30, 1999, respectively, has been allocated to the pre-measurement date loss from discontinued operations. Interest expense of $572,612 for the three- and six-month periods ended June 30, 1999, respectively, has been allocated to the post-measurement date loss from discontinued operations. The discontinued operations components of amounts reflected in the income statements and balance sheets are as follows: For The Three Months Ended For The Six Months Ended June 30, June 30, ------------------------------ ------------------------------------ 1999 1998 1999 1998 ----------- -------------- --------------- --------------- Income Statement: Net sales $ 1,457,049 $ 28,320,457 $ 35,180,918 $ 56,468,835 Costs and expenses 2,324,332 25,826,054 34,320,957 50,557,154 ----------- -------------- --------------- --------------- Operating income (loss) (867,283) 2,494,403 859,961 5,911,681 Other expenses 141,101 525,199 856,664 1,028,490 ----------- -------------- --------------- --------------- Income (loss) before income taxes (1,008,384) 1,969,204 3,297 4,883,191 Provision for (benefit from) income taxes (406,229) 694,670 (582,804) 1,637,636 ----------- -------------- --------------- --------------- Income (loss) from discontinued operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555 =========== ============== =============== =============== -6- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ June 30, 1999 December 31, 1998 ---------------------- ----------------------- Balance Sheet: Cash $ 2,950,672 $ 772,916 Accounts receivable 34,057,556 36,782,732 Inventory 16,852,220 20,954,168 Other current assets 1,885,671 836,520 ---------------------- ----------------------- Total current assets 55,746,119 59,346,336 Property and equipment 1,371,047 1,397,189 Goodwill and intangibles 14,669,071 14,176,531 Other assets 23,295 21,397 ---------------------- ----------------------- Total assets 71,809,532 74,941,453 ---------------------- ----------------------- Accounts payable and accrued expenses 20,036,282 16,192,954 Current portion - note payable, banks 10,024,878 14,529,576 Current portion - notes payable, other 711,933 712,815 Subordinated notes payable 971,659 1,999,065 ---------------------- ----------------------- Total current liabilities 31,744,752 33,434,410 Note payable, banks 284,918 294,379 Notes payable, other 2,185,238 2,493,743 ---------------------- ----------------------- Total liabilities 34,214,908 36,222,532 ---------------------- ----------------------- Net assets of discontinued operations $ 37,594,624 $ 38,718,921 ====================== ======================= NOTE 3 - SOFTBANK TRANSACTION On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000, which was entirely outstanding at June 30, 1999. The note bears interest at 4.98% per annum and is classified as a noncurrent liability. At the July 23, 1999 closing, this loan amount was converted into shares of the Company's common stock. Accrued and unpaid interest as of July 23, 1999 of $89,225 was offset against the cash proceeds of the sale. For the three- and six-month periods ending June 30, 1999, interest expense included $43,575 related to this interim loan. NOTE 4 - DEBT Notes Payable, Banks Under its primary loan agreement, as subsequently amended (the "Loan Agreement"), the Company has access to a combined credit facility of $40,000,000, which is comprised of the KPR Companies' credit facility of $35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years expiring on November 19, 2002. The KPR Companies and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under the Loan Agreement, both the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. The Loan Agreement also includes 50% of outstanding import letters of credit as collateral for borrowing. In addition to the revolving lines of credit described above, the lender will over-advance to the Company an additional -7- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ $3,000,000, over the existing collateral, for additional import letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. Among other things, the Loan Agreement, as amended, requires the KPR Companies and RYKA to achieve annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to incur additional indebtedness, make payments on subordinated indebtedness, make capital expenditures, sell assets, and pay dividends. At June 30, 1999, the Company was not in compliance with the EBITDA covenant. The Company obtained a waiver from the bank with respect to this covenant. Because there can be no assurance that the Company will be in compliance with this covenant for any period subsequent to June 30, 1999, the Company has classified the amounts outstanding under this line as a current liability. The Company is currently in negotiations with its lender to modify the terms of the Loan Agreement to return itself to compliance. At June 30, 1999, the aggregate amount outstanding under this line was $11,325,621. At June 30, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $628,317 (including the seasonal over-advance) was available on this line for borrowing. The Company has an additional line of credit of approximately $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering substantially all of the Gen-X Companies' assets. At June 30, 1999, draws of $10,000,000 were committed under this line and, based on a net cash position and available collateral and outstanding import letters of credit commitments, an additional $1,538,000 was available for borrowing. At June 30, 1999, such loan amounts are included in net assets of discontinued operations. Notes payable, banks also includes a mortgage note secured by land and building in Ontario, Canada of $316,939, of which $27,227 is classified as current. The mortgage note bears interest at the bank's cost of funds plus 2.5% and matures on August 15, 2009. At June 30, 1999, such amounts are included in net assets of discontinued operations. Notes Payable, Other Other debt related to the Gen-X Companies includes an outstanding loan payable for $1,500,000, of which $400,000 is classified as current. The original loan of $2,000,000 is payable in equal quarterly installments of $100,000, which commenced on March 31, 1998, and bears interest at the prime lending rate. At June 30, 1999, such amounts are included in net assets of discontinued operations. Notes payable, other also includes $1,000,000 of promissory notes payable to the former shareholders of Lamar. The notes are payable in five equal annual installments and bear interest at 6% per annum. At June 30, 1999, $200,000 of such notes is classified as current. At the time of the acquisition, Lamar also executed a note payable in the principal amount of $553,447, plus $74,954 in accrued interest, for amounts owed to a shareholder. This note, which was assumed by the Company in the acquisition of Lamar, is payable in five equal annual installments and bears interest at 6% per annum. The amount currently outstanding on this note is $559,664, of which $111,933 is classified as current. At June 30, 1999, such amounts are included in net assets of discontinued operations. Subordinated Notes Payable At June 30, 1999, the Company had $1,805,841 in outstanding subordinated note payable held by its Chairman and Chief Executive Officer, plus accrued interest on such notes of $24,145 recorded in accrued expenses. This debt consisted primarily of a note representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies prior to the Reorganization. Interest accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. At June 30, 1999, the interest rate on these notes was 8%. -8- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Based on its Loan Agreement, the Company is permitted to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing subsequent to the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of the Company. During 1998, aggregate principal payments of $250,000 were made. On July 27, 1999, the principal balance of $1,805,841 plus interest accrued to date of $58,987 was repaid in full to the Chairman and Chief Executive Officer. Upon closing the acquisition of the Gen-X Companies, several subordinated notes payable were executed with the former shareholders of the Gen-X Companies for an aggregate of $1,999,065 which is payable in four equal consecutive quarterly payments beginning March 31, 1999. Quarterly payments to date in the aggregate of $1,027,406 have been made through June 30, 1999. These notes bear interest at 7% until December 31, 1998 and the prime lending rate thereafter. At June 30, 1999 such amounts are included in net assets of discontinued operations. 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 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 by the weighted average number of shares outstanding during the year, assuming dilution by outstanding common stock options and warrants. The amounts used in calculating earnings (losses) per share data are as follows: For The Three Months Ended For The Six Months Ended June 30 June 30 ------------------------------------- ------------------------------------ 1999 1998 1999 1998 ------------------ ---------------- ----------------- --------------- Loss from continuing operations $ (2,568,030) $ (452,616) $(3,331,317) $ (892,064) Income (loss) from discontinued operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555 Loss on disposition of discontinued operations (less income tax benefit of $559,514 for the three and six month periods, respectively $ (3,259,503) -- $ (3,259,503) -- ------------------ ---------------- ----------------- --------------- Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491 ================== ================ ================= =============== Weighted average shares outstanding - basic 12,120,085 11,226,403 12,073,780 10,824,533 Dilutive common stock options and warrants -- 311,265 -- 233,168 ------------------ ---------------- ----------------- --------------- Weighted average shares outstanding - diluted 12,120,085 11,537,668 12,073,780 11,057,701 ================== ================ ================= =============== Outstanding common stock options and warrants having no dilutive effect 986,571 460,508 908,369 408,184 ================== ================ ================= =============== NOTE 6 - COMMITMENTS AND CONTINGENCIES Purchase Commitments As of June 30, 1999, outstanding purchase commitments exist totaling $5,951,484, for which commercial import letters of credit have been issued. Employment Agreements At June 30, 1999, the Company has employment agreements with several of its officers for an aggregate annual base salary of $1,847,500 plus bonus and increases in accordance with the terms of the agreements. Terms of such contracts range from three to five years and are subject to automatic annual extensions. -9- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ E-Commerce At June 30, 1999, the Company has contractually committed to develop the internet businesses of several sporting goods retailers. The Company's failure to meet these commitments could result in a forfeiture of the contracts and the exclusive rights to certain future internet business and have a material adverse affect on the future results of operations and financial condition of the Company. NOTE 7 - COMPREHENSIVE INCOME Comprehensive income for the three- and six-month periods ended June 30, 1999 and 1998 were as follows: For The Three Months Ended For The Six Months Ended June 30 June 30 1999 1998 1999 1998 -------------- --------------- --------------- ------------------ Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491 Foreign currency translation adjustment -- (955) -- 1,716 -------------- -------------- --------------- ------------------ Comprehensive income (loss) $ (6,429,688) $ 820,963 $ (6,004,719) $ 2,355,207 ============== ============== =============== ================== NOTE 8 - BUSINESS SEGMENTS The Company currently operates with one reportable segment, the e-Commerce segment. Under the e-Commerce segment, the Company is in the process of developing the internet businesses of several sporting goods retailers. On April 20, 1999, the Company formalized a plan to sell its other two operating segments, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. Prior year financial statements have been restated to reflect discontinued operations. See Note 2. NOTE 9 - EQUITY TRANSACTIONS The Company granted options and warrants to purchase 320,716 and 695,482 shares of the Company's common stock to employees and consultants of the Company during the three- and six-month periods ended June 30, 1999, respectively. The Company also issued warrants to purchase 333,333 shares of the Company's common stock during June 1999 to several retailers in connection with the Company's developing e-Commerce business. The range of exercise prices for all grants issued was from $4.06 to $17.25 for the three-month period ended June 30, 1999 and $0.01 to $17.25 for the six-month period ended June 30, 1999. Upon granting these options and warrants, the Company recorded equity compensation expense of $1,321,750 and $1,720,016 for the three- and six-month periods ended June 30, 1999, respectively, $66,150 of which was included in the net loss from discontinued operations. Options and warrants to purchase 137,349 and 257,233 shares of the Company's common stock were exercised during the three- and six-month periods ended June 30, 1999, respectively. The range of exercise prices was from $3.20 to $6.88 for the three-month period ended June 30, 1999 and $0.01 to $13.20 for the six-month period ended June 30, 1999. These exercises resulted in cash proceeds to the Company of $770,267 and $1,248,483 for the three- and six-month periods ended June 30, 1999, respectively. On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. See Note 3. On July 13, 1999 the shareholders approved on amendment to the Company's Certificate of Incorporation that increased the maximum number of Common Stock by 40,000,000 to authorized shares of 60,000,000. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FORWARD LOOKING STATEMENTS Certain information contained in this Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). STRATEGIC BUSINESS DEVELOPMENTS This discussion summarizes the significant factors that affected the consolidated operating results and financial condition of Global Sports, Inc. during the six months ended June 30, 1999. Over this period, the Company has undergone a significant transformation. On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on the development of new businesses. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. Prior year financial statements have been restated to reflect discontinued operations. On May 10, 1999, the Company announced the formation of a new subsidiary, Global Sports Interactive. Global Sports Interactive is an e-Commerce company that has entered into exclusive agreements to operate the Internet businesses of multiple sporting goods retailers including The Sports Authority through an e-Commerce agreement and The Athlete's Foot, Sport Chalet, MC Sports, Sports & Recreation and one unnamed retailer with annual sales of more than $200 million through e- Commerce outsourcing contracts. The Company has thereby contractually committed to develop the internet businesses of several sporting goods retailers. The Company's failure to meet these commitments could result in a forfeiture of the contracts and the exclusive rights to certain future internet business and have a material adverse affect on the future results of operations and financial condition of the Company. Due to the fact that the Company has not yet launched its initial six e-tailing web sites, results from continuing operations for the second quarter ended June 30, 1999 consist only of the operating expenses incurred during the period for Global Sports Interactive. -11- RESULTS OF CONTINUING OPERATIONS The Three- and Six-Month Periods Ended June 30, 1999 Compared to The Three- and Six-Month Periods Ended June 30, 1998 The following table sets forth, for the periods indicated, the results of continuing operations: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------- Net sales $ -- $ -- $ -- $ -- ------------- ------------ ------------ ------------- Operating expense 4,180,220 694,841 5,395,352 1,368,363 ------------- ------------ ------------ ------------- Operating income (loss) (4,180,220) (694,841) (5,395,352) (1,368,363) Interest expense 99,830 59,519 156,843 118,411 ------------- ------------ ------------ ------------- Income (loss) before income taxes (4,280,050) (754,360) (5,552,195) (1,486,774) Benefit from income taxes (1,712,020) (301,744) (2,220,878) (594,710) ------------- ------------ ------------ ------------- Loss from continuing operations (2,568,030) (452,616) (3,331,317) (892,064) Income (loss) from discontinued operations (602,155) 1,274,534 586,101 3,245,555 Loss on disposition (3,259,503) (3,259,503) ------------- ------------ ------------ ------------- Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491 ============= ============ ============ ============= Operating Expense Operating expense from continuing operations for the three- and six-month periods ending June 30, 1999 were $4,180,220 and $5,395,352, respectively. Operating expenses from continuing operations consisted of expenditures associated with the production of the Company's initial six e-Commerce web-sites and general and administrative expenses related to the day-to-day development and operating activities of the Company. Operating expense from continuing operations also includes charges for equity compensation of $1,255,600 and $1,653,866 for the three- and six-month periods ended June 30, 1999, respectively. RESULTS OF DISCONTINUED OPERATIONS The Three- and Six-Month Periods Ended June 30, 1999 Compared to The Three- and Six-Month Periods Ended June 30, 1998 On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. Prior year financial statements have been restated to reflect discontinued operations. -12- The following table sets forth, for the periods indicated, the results of discontinued operations: For The Three Months Ended For The Six Months Ended June 30, June 30, ---------------------------- ------------------------------ 1999* 1998 1999* 1998 ----------- ------------ ----------- ----------- Net sales $ 1,457,049 $ 28,320,457 $35,180,918 $56,468,835 Costs and expenses 2,324,332 25,826,054 34,320,957 50,557,154 ----------- ------------ ----------- ----------- Operating income (loss) (867,283) 2,494,403 859,961 5,911,681 Other expenses 141,101 525,199 856,664 1,028,490 ----------- ------------ ----------- ----------- Income (loss) before income taxes (1,008,384) 1,969,204 3,297 4,883,191 Provision for (benefit from) income taxes (406,229) 694,670 (582,804) 1,637,636 ------------ ------------ ----------- ----------- Income (loss) from discontinued operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555 ============ ============ ========== =========== * Represents discontinued operations for the period April 1 or January 1 through April 20th. FINANCIAL CONDITION Cash Flows Historically, the operations of the Company have been financed by a combination borrowings, annual increases in the size of the bank credit facility and seasonal over-advances. Increases in the bank credit facilities for the KPR Companies and RYKA were required to fund the Company's increased investment in accounts receivable and inventory necessary to support the increases in revenue. On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim convertible subordinated loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000. This loan amount was converted into shares of the Company's common stock at closing. On July 23, 1999, the Company received the remaining $65,000,050. The Company intends to use the proceeds to repay the balance on one of its lines of credit, to reduce trade payables and to provide working capital for the new e-Commerce business. As of June 30, 1999, the Company had net working capital of $24,781,955. The Company used $5,632,745 in cash flows from operating activities of continuing operations for the six months ended June 30, 1999, whereas in the same period of the prior year the Company generated $899,924 in cash flows from operating activities of continuing operations. Liquidity On June 10, 1999, the Company and SOFTBANK entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to SOFTBANK at a price of $13.00 per share for an aggregate purchase price of $80,000,050. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000. This loan amount was converted into shares of the Company's common stock at closing. On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The sale of these divisions are expected to be completed before the end of 1999. Management expects that these sales will result in substantial proceeds to the Company. Under its current loan agreement, as subsequently amended (the "Loan Agreement"), the Company has access to a combined credit facility of $40,000,000. The term of the Loan Agreement is five years. The loans have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under this credit facility, both -13- the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. The Loan Agreement also includes 50% of outstanding import letters of credit as collateral for borrowing. In addition to the revolving lines of credit described above, the lender will over-advance to the Company an additional $3,000,000, over the existing collateral, for additional import letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. Among other things, the Loan Agreement, as amended, requires the KPR Companies and RYKA to achieve annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to incur additional indebtedness, make payments on subordinated indebtedness, make capital expenditures, sell assets, and pay dividends. At June 30, 1999, the Company was not in compliance with the EBITDA covenant. The Company obtained a waiver from the bank with respect to this covenant. Because there can be no assurance that the Company will be in compliance with this covenant for any period subsequent to June 30, 1999, the Company has classified the amounts outstanding under this line as a current liability. The Company is currently in negotiations with its lender to modify the terms of the Loan Agreement to return itself to compliance. At June 30, 1999, the aggregate amount outstanding under this line was $11,325,621. At June 30, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $628,317 (including the seasonal over-advance) was available on this line for borrowing. The Company has an additional line of credit of approximately $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering certain of the Gen-X Companies' assets. At June 30, 1999, draws of $10,000,000 were committed under this line and, based on a net cash position and available collateral and outstanding import letters of credit commitments, an additional $1,538,000 was available for borrowing. As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin, its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i) a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus accrued and unpaid interest on such loan of $180,517 through October 31, 1997 and (ii) a note in the principal amount of $2,204,401 representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies. No interest accrued on the note representing Subchapter S corporation earnings until December 15, 1997 at which time the interest began to accrue on such note at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The Loan Agreement and the related Subordination Agreement allowed the Company to repay Mr. Rubin $1,000,000 of the subordinated debt principal and the accrued interest of $180,517 at the time of the closing of the Loan Agreement or within five days thereafter, subject to there being $2,000,000 of availability under the KPR Companies' credit line after taking into account such payments. Such payments were made to Mr. Rubin on November 26, 1997. In addition, the Loan Agreement and the Subordination Agreement permit the KPR Companies to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing with the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of both borrowers, reduced by net losses of the borrowers during such period. During 1998, aggregate principal payments of $250,000 were made. On July 27, 1999, the principal balance of $1,805,841 plus interest accrued to date of $58,987 was repaid in full to Mr. Rubin. The Company has made certain commitments with respect to developing the businesses of several sporting goods retailers. The proceeds from the SOFTBANK transactions and the sale of the Branded division and the Off-Price and Action Sports division will result in adequate financing to allow the Company to continue the development of its e-Commerce business and meet its obligations as they mature during the foreseeable future. YEAR 2000 The Company recognizes the importance of advanced computerization in maintaining and improving its level of service, internal and external communication and overall competitive position. The Company maintains a management information system that provides, among other things, comprehensive customer order processing, inventory, production, accounting and management information for the marketing, selling, manufacturing and distribution functions of the Company's business. The Company has created a Year 2000 project team which is coordinating efforts to evaluate, identify, correct or reprogram, and test the Company's existing systems Year 2000 compliance. The Company enhanced its key information systems to improve their functionality and increase performance during the first quarter of 1999. These upgrades also made these applications Year 2000 compliant. The final step of the Company's Year 2000 plan is to update its office networking system software which it expects to finish prior to the end of the third quarter of 1999. The Company does not expect the costs of this step to have a material impact on the Company's results of operations, financial position, liquidity or capital resources. The Company is in the process -14- of developing a contingency plan in the event that the above modifications do not result in Year 2000 compliance. In addition to making its own systems Year 2000 compliant, the Company is in the process of contacting its key suppliers and customers to determine the extent to which the systems of such suppliers and customers are Year 2000 compliant and the extent to which the Company could be effected by the failure of such third parties to become Year 2000 compliant. The Company cannot presently estimate the impact of the failure of such third parties to become Year 2000 Compliant. See "Risk Factors - Risks Relating to Year 2000 Compliance" in the Company's most recent Form 10-K. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the six months ended June 30, 1999. See the information set forth in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. -15- PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Effective July 23, 1999, the Company issued 6,153,850 shares of common stock (par value $.01 per share) to SOFTBANK America Inc. for an aggregate purchase price of $80,000,050. The issuance of the common stock was exempt from registration pursuant to section 4(2) of the Securities Act. The Company granted SOFTBANK certain "demand" and "piggy-back" registration rights with respect to these shares. The Company intends to use the proceeds to repay the balance on one of its lines of credit, to reduce trade payables and to provide working capital for its new e-Commerce business. ITEM 3. DEFAULTS ON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amendment No. 8 to the Loan Documents, Consent and Waiver by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.2 Amendment No. 9 to the Loan Documents and Waiver by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 27.1 Financial data schedule for the six-month period ended June 30, 1999 (electronic filing only). (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on June 21, 1999 related to the announcement of the SOFTBANK transaction on June 10, 1999. -16- 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 13, 1999 By: /s/ Michael G. Rubin ---------------------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer DATE: August 13, 1999 By: /s/ Steven A. Wolf ---------------------------------- Steven A. Wolf Vice President & Chief Financial Officer -17-