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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarterly period
ended SEPTEMBER 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
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GLOBAL SPORTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406
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(Address of principal executive offices) (Zip Code)
610-768-0900
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(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 November 12, 1999:
Common Stock, $.01 par value 18,445,813
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(Title of each class) (Number of Shares)
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GLOBAL SPORTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three- and nine-month periods ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine-month periods ended September 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 upon 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 8-K 16
SIGNATURES 18
-2-
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 39,467,680 $ 83,169
Inventory........................................................ 4,669,217 --
Prepaid expenses and other current assets........................ 621,442 599,224
Refundable income taxes.......................................... 2,220,878 --
Net assets of discontinued operations............................ 43,012,442 38,718,921
------------- -----------
Total current assets............................................ 89,991,659 39,401,314
Property and equipment, net of accumulated depreciation
and amortization................................................ 16,219,279 2,988,714
Other assets..................................................... 219,511 253,626
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Total assets.................................................... $106,430,449 $42,643,654
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - notes payable, bank............................ $ 3,699,207 $ --
Current portion - capital lease obligation, related party........ 136,524 127,966
Accounts payable and accrued expenses............................ 15,487,521 3,652,024
Income taxes payable............................................. -- 1,378,820
Subordinated notes payable, related party........................ -- 1,805,841
------------- -----------
Total current liabilities....................................... 19,323,252 6,964,651
Notes payable, bank.............................................. -- 18,812,156
Capital lease obligation, related party.......................... 2,077,906 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, 19,476,265 and 12,994,464 shares
issued in 1999 and 1998; 18,407,179 and 11,925,378 shares
outstanding in 1999 and 1998................................... 194,766 129,947
Additional paid in capital....................................... 98,693,234 14,624,541
Accumulated other comprehensive income........................... -- (47,431)
Retained earnings (deficit)...................................... (13,644,992) 192,242
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85,243,008 14,899,299
Less: Treasury stock, at cost.................................... 213,817 213,817
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Total stockholders' equity...................................... 85,029,191 14,685,482
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Total liabilities and stockholders' equity...................... $106,430,449 $42,643,654
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
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Costs and expenses:
General and administrative................ $ 1,800,699 $ 1,134,169 $ 2,923,252 $ 2,502,532
Equity compensation....................... 1,071,620 -- 2,725,486 --
Web-site development...................... 5,360,956 -- 7,979,889 --
Interest expense (income), net............ (302,809) 57,938 (145,966) 176,349
----------- ----------- ------------ -----------
Total costs and expenses................ 7,930,466 1,192,107 13,482,661 2,678,881
----------- ----------- ------------ -----------
Loss from continuing operations
before income taxes..................... (7,930,466) (1,192,107) (13,482,661) (2,678,881)
Benefit from income taxes.................... -- (316,109) (2,220,878) (910,819)
----------- ----------- ------------ -----------
Loss from continuing operations.............. (7,930,466) (875,998) (11,261,783) (1,768,062)
Discontinued operations (Note 3):
Income from discontinued
operations (less income taxes in
1999: $ -- 1998: $1,156,127
1999: $(582,804) 1998: $2,793,763
for the three- and nine-month
periods, respectively)................... -- 3,345,711 586,101 6,591,266
Gain (loss) on disposition of
discontinued operations (less income
taxes of $1,390,289 and $830,775
for the three- and nine-month
periods, respectively)................... 97,951 -- (3,161,552) --
----------- ----------- ------------ -----------
Net income (loss)............................ $(7,832,515) $ 2,469,713 $(13,837,234) $ 4,823,204
=========== =========== ============ ===========
Earnings (losses) per share--
basic and diluted:
Loss from continuing operations........... $ (.47) $ (.07) $ (.93) $ (.16)
Income from discontinued
operations............................. -- .28 .05 .59
Gain (loss) on disposition of
discontinued operations................ .01 -- (.26) --
----------- ----------- ------------ -----------
Net income (loss)......................... $ (.46) $ .21 $ (1.14) $ .43
=========== =========== ============ ===========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 1998
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Cash Flows from Operating Activities:
Net income (loss)......................................................... $(13,837,234) $ 4,823,204
Deduct:
Income from discontinued operations......................... 586,101 6,591,266
Loss on disposal of discontinued operations................. (3,161,552) --
--------------- --------------
Net loss from continuing operations....................................... (11,261,783) (1,768,062)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization...................................... 530,533 444,800
Equity compensation................................................ 2,791,636 --
Changes in operating assets and liabilities:
Inventory....................................................... (4,669,217) --
Prepaid expenses and other current assets....................... (22,218) (179,114)
Deferred income taxes........................................... (2,220,878) --
Other assets.................................................... 64,115 256,333
Accounts payable and accrued expenses........................... 11,880,929 1,326,178
Income taxes payable............................................ (1,378,820) 1,636,068
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Net cash provided by (used in) continuing operations............ (4,285,703) 1,716,203
Net cash used in discontinued operations........................ (6,868,972) (3,971,287)
--------------- --------------
Net cash used in operating activities........................... (11,154,675) (2,255,084)
--------------- --------------
Cash Flows from Investing Activities:
Capital expenditures................................................... (13,761,098) (443,922)
--------------- --------------
Net cash used in investing activities........................... (13,761,098) (443,922)
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Cash Flows from Financing Activities:
Net borrowings (repayments) under lines of credit...................... (15,112,949) 3,260,711
Repayments of capital lease obligation................................. (94,801) (86,027)
Repayments of subordinated note payable................................ (1,805,841) (250,000)
Proceeds from SOFTBANK transaction..................................... 80,000,050 --
Proceeds from exercise of common stock options and warrants............ 1,341,826 23,253
Sale of minority interest in subsidiary................................ 1,999 --
Costs of debt issuance................................................. (30,000) --
--------------- --------------
Net cash provided by financing activities.......................... 64,300,284 2,947,937
--------------- --------------
Effect of exchange rate on cash and cash equivalents...................... -- (11,910)
--------------- --------------
Net increase in cash and cash equivalents................................. 39,384,511 237,021
Cash and cash equivalents, beginning of period............................ 83,169 98,881
--------------- --------------
Cash and cash equivalents, end of period.................................. $ 39,467,680 $ 335,902
=============== ==============
The accompanying notes are an integral part of these condensed financial statements.
-5-
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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 3.
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, 1998 as presented in the Company's Annual Report
on Form 10-K.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: At September 30, 1999, the Company had $39,455,852
of excess cash invested in a money market fund with a major financial
institution, which is included in cash and cash equivalents. The Company
considers all highly liquid investments with maturities at date of purchase of
three months or less to be cash equivalents. Interest income for the three- and
nine-month periods ended September 30, 1999 includes $403,938 related to this
investment.
New Accounting Pronouncements
Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
Computer Costs: In March 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). This
statement provides guidance on accounting for the costs of computer software
developed or obtained for internal use and identifies the characteristics of
internal-use software. The statement was adopted on January 1, 1999 and did not
have a material effect on the Company's results of operations, cash flows or
financial position.
Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position 98-5, Reporting of Costs of Start-Up
Activities, ("SOP 98-5"). The statement requires that costs of start-up
activities, including organization costs, be expensed as incurred. This
statement was adopted on January 1, 1999 and did not have a material effect on
the Company's results of operations, cash flows or financial position.
NOTE 3 - 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
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GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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reclassified to reflect these discontinued operations. Net interest expense
related to the lines of credit and debt to be assumed by the successor
businesses of $933,365 for the nine-month period ended September 30, 1999 has
been allocated to the pre-measurement date loss from discontinued operations.
Net interest expense of $101,129 and $257,972 for the three- and nine-month
periods ended September 30, 1999, respectively, has been allocated to the post-
measurement date gain (loss) from the disposition of discontinued operations.
On September 24, 1999, the Company and a management group led by James J. Salter
and Kenneth J. Finkelstein entered into an acquisition agreement for the sale of
all of the issued and outstanding capital stock of the Company's wholly-owned
subsidiaries Gen-X Holdings Inc. and Gen-X Equipment Inc. (the "Gen-X
Companies"), through which the Company operates its Off-Price and Action Sports
Division. The aggregate purchase price for the sale is approximately $20
million, of which approximately $6 million is to be paid at closing,
approximately $4 million is the assumption of contingent notes payable, and $10
million is to be paid over a seven and one half year period pursuant to the
terms of two notes to be delivered at closing. The closing of this sale is
subject to customary closing conditions, including approval by the Company's
shareholders and expiration or termination of any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Upon closing, the gain on this sale, if any, will be deferred and recognized on
an installment-sale basis over the term of the two notes.
The discontinued operations components of amounts reflected in the income
statements and balance sheets are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- -------------
Income Statement Data:
Net sales..................................... $38,411,650 $43,626,641 $92,461,398 $100,095,476
=============== =============== ============== ============
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------- ---------------------
BALANCE SHEET DATA:
Cash $ 231,328 $ 772,916
Accounts receivable............................ 37,763,325 36,782,732
Inventory...................................... 15,227,482 20,954,168
Other current assets........................... 1,677,104 836,520
---------------------- ---------------------
Total current assets........................ 54,899,239 59,346,336
Property and equipment......................... 1,304,772 1,397,189
Goodwill and intangibles....................... 14,295,421 14,176,531
Other assets................................... 26,439 21,397
---------------------- ---------------------
Total assets................................ 70,525,871 74,941,453
---------------------- ---------------------
Accounts payable and accrued expenses.......... 12,581,475 16,192,954
Current portion - notes payable, banks......... 12,124,878 14,529,576
Current portion - notes payable, other......... 782,613 712,815
Subordinated notes payable..................... -- 1,999,065
---------------------- ---------------------
Total current liabilities................... 25,488,966 33,434,410
Notes payable, banks........................... 277,855 294,379
Notes payable, other........................... 1,746,608 2,493,743
---------------------- ---------------------
Total liabilities............................ 27,513,429 36,222,532
---------------------- ---------------------
Net assets of discontinued operations............. $43,012,442 $38,718,921
====================== =====================
-7-
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Notes Payable of Discontinued Operations
Included in Notes Payable, Banks of discontinued operations are amounts
outstanding under a line of credit of approximately $20,000,000 for use by the
Gen-X Companies, which is available for either direct borrowing or for import
letters of credit. The loan bears interest at prime plus one half percent and
is secured by a general security agreement covering substantially all of the
Gen-X Companies' assets. At September 30, 1999, draws of $12,100,000 were
committed under this line and, based on a net cash position and available
collateral and outstanding import letters of credit commitments, an additional
$3,200,000 was available for borrowing. For the three- and nine-month periods
ending September 30, 1999, interest expense of discontinued operations included
$148,338 and $556,736, respectively, related to this line of credit.
Notes Payable, Banks also includes a mortgage note secured by land and building
in Ontario, Canada of $302,733, of which $24,878 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. For the three- and nine-month periods ending September 30,
1999, interest expense of discontinued operations included $2,652 and $16,645,
respectively, related to this mortgage.
Notes Payable, Other includes an outstanding loan payable for $1,300,000, 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. For the three- and nine-
month periods ending September 30, 1999, interest expense of discontinued
operations included $28,518 and $87,967, respectively, related to this loan.
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, the first payment of which was
made in July 1999. At September 30, 1999, $726,500 remains outstanding related
to these notes, of which $270,680 is classified as current. For the three- and
nine-month periods ending September 30, 1999, interest expense of discontinued
operations included $14,020 and $97,558, respectively, related to these notes.
At the time of the acquisition, Lamar also executed a note payable in the
principal amount of $553,447, plus $74,954 in accrued interest, for amounts owed
to a shareholder. This note, which was assumed by the Company in the
acquisition of Lamar, is payable in five equal annual installments and bears
interest at 6% per annum. The amount currently outstanding on this note is
$502,721, of which $111,933 is classified as current. For the three- and nine-
month periods ending September 30, 1999, interest expense of discontinued
operations included $8,426 and $27,278, respectively, related to this note.
Upon closing the acquisition of the Gen-X Companies, the Company executed
several subordinated notes payable with the former shareholders of the Gen-X
Companies for in the aggregate principal amount of $1,999,065 which is payable
in four equal consecutive quarterly payments beginning March 31, 1999 or
earlier. This amount has been repaid in full as of September 30, 1999. These
notes bear interest at 7% until December 31, 1998 and the prime lending rate
thereafter. For the nine-month period ending September 30, 1999, interest
expense of discontinued operations included $68,257 related to these notes.
Employment Agreements of Discontinued Operations
The Company has employment agreements with several of its officers of
discontinued operations for an aggregate annual base salary of $925,000 plus
bonuses and increases in accordance with the terms of the agreements. Terms of
the agreements range from three to five years and are subject to automatic
annual extensions.
Purchase Commitments of Discontinued Operations
As of September 30, 1999, outstanding purchase commitments of discontinued
operations existed totaling $8,775,760, for which commercial import letters of
credit have been issued.
NOTE 4 - 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 (the closing price on May 26, 1999, the day prior to the day the Company
and SOFTBANK agreed in principle to the
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GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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transaction) 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. The
note bore interest at 4.98% per annum. 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 at closing. For the three- and nine-month periods ending
September 30, 1999, interest expense included $45,650 and $89,225, respectively,
related to this interim loan.
NOTE 5 - DEBT
NOTES PAYABLE, BANK
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 KPR Sports International, Inc.'s ("KPR")
credit facility of $35,000,000 and RYKA Inc.'s credit facility of $5,000,000.
The term of the Loan Agreement is five years expiring on November 19, 2002. The
KPR and RYKA facilities 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 KPR 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.
Among other things, the Loan Agreement, as amended, requires KPR 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 September 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 September 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 and more closely reflect its new e-commerce business
structure.
At September 30, 1999, the aggregate amount outstanding under this line was
$3,699,207. At September 30, 1999, based on available collateral and
outstanding import letters of credit commitments, an additional $1,671,828 was
available on this line for borrowing. For the three- and nine-month periods
ending September 30, 1999, interest expense included $124,583 and $958,841,
respectively, related to this line of credit.
SUBORDINATED NOTES PAYABLE
Prior to July 27, 1999, the Company had $1,805,841 in outstanding subordinated
notes payable held by its Chairman and Chief Executive Officer. This debt
consisted primarily of a note representing undistributed Subchapter S
corporation retained earnings previously taxed to him as the sole shareholder of
KPR Sports International, Inc., Apex Sports International, Inc. and MR
Management, Inc. (collectively the "KPR Companies") prior to the Company's
reorganization in December 1997. 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.
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, for
which a waiver was obtained from the Company's primary lender. For the three-
and nine-month periods ending September 30, 1999, interest expense included
$11,020 and $82,661, respectively, related to these notes.
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 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
-9-
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- ----------------- ----------------
Loss from continuing operations............. $(7,930,466) $ (875,998) $(11,261,783) $(1,768,062)
Income from discontinued operations......... -- 3,345,711 586,101 6,591,266
Gain (loss) on disposition of
discontinued operations................ 97,951 -- (3,161,552) --
--------------- --------------- ----------------- ----------------
Net income (loss)........................... $(7,832,515) $ 2,469,713 $(13,837,234) $ 4,823,204
=============== =============== ================= ================
Weighted average shares
outstanding - basic and diluted....... 16,824,139 11,922,515 12,118,980 11,194,549
=============== =============== ================= ================
Weighted average common stock
options and warrants outstanding
having no dilutive effect............ 2,183,588 595,504 1,625,188 540,164
=============== =============== ================= ================
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with several of its officers for an
aggregate annual base salary of $1,187,500 plus bonuses and increases in
accordance with the terms of the agreements. Terms of the agreements range from
three to five years and are subject to automatic annual extensions.
E-Commerce
As of September 30, 1999, the Company had contractually committed to developing
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 could have a
material adverse affect on the future results of operations and financial
condition of the Company.
Yahoo! Advertising and Promotion Agreement
On October 4, 1999, the Company announced the execution of an advertising and
promotion agreement with Yahoo! Inc., a global Internet media company (the
"Yahoo! Agreement"). Under the Yahoo! Agreement, the web-sites operated by the
Company will be featured in certain sections of Yahoo!'s network of Internet
properties and will allow Yahoo! users to easily access these web-sites. The
Yahoo! Agreement requires the Company to pay various fees, which are substantial
in the aggregate, to Yahoo! over the twelve-month period following execution of
the Agreement. These fees are payable at various intervals and certain are
contingent upon certain performance criteria of Yahoo!.
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive income for the three- and nine-month periods ended September 30,
1999 and 1998 were as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1999 1998 1999 1998
--------------- ------------- ------------- ---------------
Net income (loss)........................ $(7,832,515) $2,469,713 $(13,837,234) $4,823,204
Foreign currency translation adjustment.. -- (13,626) 47,431 (11,910)
--------------- ------------- ------------- ---------------
Comprehensive income (loss).............. $(7,832,515) $2,456,087 $(13,789,803) $4,811,294
=============== ============= ============= ===============
-10-
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - BUSINESS SEGMENTS
As a result of the discontinued operations described in Note 3 to the financial
statements, the Company considers itself to have one operating segment which is
the development of the internet businesses of several sporting goods retailers.
NOTE 10 - EQUITY TRANSACTIONS
The Company granted options and warrants to purchase 447,300 and 1,142,782
shares of the Company's common stock to employees and consultants of the Company
during the three- and nine-month periods ended September 30, 1999, respectively.
The Company also issued warrants to purchase 303,320 shares of the Company's
common stock during June 1999 to several retailers in connection with the
Company's developing e-Commerce business. The range of exercise prices for all
options and warrants granted was from $15.00 to $24.69 for the three-month
period ended September 30, 1999 and $0.01 to $24.69 for the nine-month period
ended September 30, 1999. Upon granting these options and warrants, the Company
recorded equity compensation expense of $1,071,620 and $2,791,636 for the three-
and nine-month periods ended September 30, 1999, respectively, primarily as a
result of non-employee grants. For the nine-month period ended September
30,1999, $66,150 was included in the net loss from discontinued operations
during the second quarter of 1999.
Options and warrants to purchase 73,804 and 331,037 shares of the Company's
common stock were exercised during the three-and nine-month periods ended
September 30, 1999, respectively. The range of exercise prices was from $3.20
to $13.00 for the three-month period ended September 30, 1999 and $0.01 to
$13.20 for the nine-month period ended September 30, 1999. These exercises
resulted in cash proceeds to the Company of $93,343 and $1,341,826 for the
three- and nine-month periods ended September 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 4.
On July 13, 1999, the shareholders approved an amendment to the Company's
Certificate of Incorporation that increased the maximum number of authorized
shares of common stock by 40,000,000 to 60,000,000.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
Certain information contained in this quarterly report on 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 Global's
consolidated operating results and financial condition during the nine months
ended September 30, 1999. Over this period, the Company has undergone a
significant transformation.
Discontinued Operations
On April 20, 1999, the Company formalized a plan to sell two of its businesses,
the Branded division and the Off-Price and Action Sports division, in order to
focus exclusively on the development of new businesses. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division is a third-party distributor and make-to-order marketer
of off-price footwear, apparel and sporting goods. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of these divisions have been segregated from that of continuing operations
and are presented in the Company's consolidated financial statements as
discontinued operations. Prior year financial statements have been reclassified
to reflect discontinued operations.
Global Sports Interactive
On May 10, 1999, the Company announced the formation of a new subsidiary, Global
Sports Interactive. Global Sports Interactive is an e-Commerce company that has
entered into exclusive agreements to operate the internet businesses of multiple
sporting goods retailers. 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 had not, as of September 30, 1999, launched its
initial five e-tailing web sites, results from continuing operations for the
three- and nine-month periods ended September 30, 1999 consist only of the
operating expenses incurred during the period related to the e-commerce
business.
Acquisition of the Gen-X Companies
Effective May 12, 1998, the Company acquired all of the outstanding and issued
common stock of the Gen-X Companies in a purchase transaction. The Company's
reported results of operations for 1998 include those of the Gen-X Companies
only from the date of acquisition through the end of the year.
-12-
RESULTS OF CONTINUING OPERATIONS
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998
The following table sets forth, for the periods indicated, the results of
continuing operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
1999 1998 1999 1998
-------------- ------------ ------------- ----------------
Costs and expenses:
General and administrative............. $ 1,800,699 $ 1,134,169 $ 2,923,252 $ 2,502,532
Equity compensation.................... 1,071,620 -- 2,725,486 --
Web-site development................... 5,360,956 -- 7,979,889 --
Interest expense (income), net......... (302,809) 57,938 (145,966) 176,349
-------------- ------------ ------------- ----------------
Total costs and expenses........... 7,930,466 1,192,107 13,482,661 2,678,881
-------------- ------------ ------------- ----------------
Loss from continuing
operations before income taxes...... (7,930,466) (1,192,107) (13,482,661) (2,678,881)
Benefit from income taxes............. -- (316,109) (2,220,878) (910,819)
-------------- ------------ ------------- ----------------
Loss from continuing
operations.......................... (7,930,466) (875,998) (11,261,783) (1,768,062)
Income from discontinued
operations.......................... -- 3,345,711 586,101 6,591,266
Loss on disposition of discontinued
operations............................. 97,951 -- (3,161,552) --
-------------- ------------ ------------- ----------------
Net income (loss)...................... $(7,832,515) $ 2,469,713 $(13,837,234) $ 4,823,204
============== ============ ============= ================
COSTS AND EXPENSES
Costs and expenses of continuing operations for the three- and nine-month
periods ending September 30, 1999 were $7,930,466 and $13,482,661, respectively.
Operating expenses from continuing operations consisted of expenditures
associated with the production of the Company's initial five e-Commerce web-
sites and general and administrative expenses related to the day-to-day
development and operating activities of the Company. Costs and expenses of
continuing operations also includes charges for equity compensation of
$1,071,620 and $2,725,486 for the three- and nine-month periods ended September
30, 1999, respectively, primarily as a result of non-employee stock option
grants.
FINANCIAL CONDITION
CASH FLOWS
Historically, the operations of the Company have been financed by a combination
of internally generated resources, equity transactions, subordinated borrowings,
annual increases in the size of its bank credit facility and seasonal over-
advances. Increases in the bank credit facilities 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
(the closing price on May 26, 1999, the day prior to the day the Company and
SOFTBANK agreed in principle to the transaction) 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 September 30, 1999, the Company had net working capital of $70,668,407
which includes $43,012,442 of net assets of discontinued operations. The Company
used $11,154,675 in cash flows from operating activities of continuing
operations for the nine months ended September 30, 1999, whereas in the same
period of the prior year the Company used $2,255,084 in cash flows from
operating activities of continuing operations.
-13-
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. 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
KPR Sports International, Inc. ("KPR") and RYKA Inc. 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.
Among other things, the Loan Agreement, as amended, requires KPR 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 September 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 September 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 and more closely reflect its new e-commerce business
structure.
At September 30, 1999, the aggregate amount outstanding under this line was
$3,699,207. At September 30, 1999, based on available collateral and
outstanding import letters of credit commitments, an additional $1,671,828 was
available on this line for borrowing.
As of the closing of the Loan Agreement, KPR Sports International, Inc., Apex
Sports International, Inc. and MR Management, Inc. (collectively the "KPR
Companies") owed Michael Rubin, its Chairman and CEO, subordinated debt of
$3,055,841 which is comprised of (i) a loan from Mr. Rubin to the KPR Companies
in the principal amount of $851,440, plus accrued and unpaid interest on such
loan of $180,517 through October 31, 1997 and (ii) a note in the principal
amount of $2,204,401 representing undistributed Subchapter S corporation
retained earnings previously taxed to him as the sole shareholder of the KPR
Companies. No interest accrued on the note representing Subchapter S corporation
earnings until December 15, 1997 at which time the interest began to accrue on
such note at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate)
plus two hundred seventy-five basis points. The Loan Agreement and the related
Subordination Agreement allowed the Company to repay Mr. Rubin $1,000,000 of the
subordinated debt principal and the accrued interest of $180,517 at the time of
the closing of the Loan Agreement or within five days thereafter, subject to
there being $2,000,000 of availability under the KPR Companies' credit line
after taking into account such payments. Such payments were made to Mr. Rubin on
November 26, 1997. In addition, the Loan Agreement and the Subordination
Agreement permit the KPR Companies to make continued regular payments of
interest on the subordinated debt and to further reduce principal on a quarterly
basis, commencing with the first quarter of 1998, in an amount up to 50% of the
cumulative consolidated net income of both borrowers, reduced by net losses of
the borrowers during such period. During 1998, aggregate principal payments of
$250,000 were made. On July 27, 1999, the principal balance of $1,805,841 plus
interest accrued to date of $58,987 was repaid in full to Mr. Rubin.
The Company has made certain commitments with respect to developing the internet
businesses of several sporting goods retailers. Management expects that the
proceeds from the SOFTBANK transactions and the sale of the Branded division and
the Off-Price and Action Sports division will result in adequate financing to
allow the Company to continue the development of its e-Commerce business and
meet its obligations as they mature during the foreseeable future.
-14-
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 shortly
after the end of the third quarter of 1999. The Company does not expect the
costs of this step to have a material impact on the Company's results of
operations, financial position, liquidity or capital resources. The Company is
in the process of developing a contingency plan in the event that the above
modifications do not result in Year 2000 compliance. In addition to making its
own systems Year 2000 compliant, the Company is in the process of contacting its
key suppliers and customers to determine the extent to which the systems of such
suppliers and customers are Year 2000 compliant and the extent to which the
Company could be 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 nine months ended
September 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. ("SOFTBANK")
for an aggregate purchase price of $80,000,050. The issuance of the
common stock was exempt from registration pursuant to section 4(2) of
the Securities Act. The Company granted SOFTBANK certain "demand" and
"piggy-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 UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 13, 1999, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). Proxies were solicited for the Annual
Meeting pursuant to Regulation 14 of the Securities Exchange Act of
1934. At the Annual Meeting the following matters were voted on:
(i) Michael G. Rubin, Kenneth J. Adelberg, Harvey Lamm and Jeffrey F.
Rayport were elected to serve on the Board of Directors of the
Company for one-year terms and until their respective successors
are duly elected and qualified. Michael G. Rubin and Kenneth J.
Adelberg received 8,040,459 votes for their election with 311
votes withheld. Harvey Lamm and Jeffrey F. Rayport received
8,040,449 votes for their election with 321 votes withheld.
(ii) An amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock by
40,000,000 shares from 20,000,000 shares to 60,000,000 shares was
approved by a vote of 8,038,886 for the amendment and 1,550 votes
against the amendment (with 334 broker non-votes and
abstentions).
(iii) An amendment to the Company's 1996 Equity Incentive Plan (the
"Plan") to increase the number of shares of Common Stock issuable
pursuant to the Plan from 1,000,000 shares to 3,000,000 was
approved by a vote of 8,038,017 for the amendment and 2,466 votes
against the amendment (with 287 broker non-votes and
abstentions).
(iv) The issuance of approximately 30% of the Company's issued and
outstanding shares of Common Stock to SOFTBANK America Inc., a
Delaware corporation ("SOFTBANK"), in a private placement was
approved by a vote of 8,039,091 for the issuance and 657 votes
against the issuance (with 1,022 broker non-votes and
abstentions).
ITEM 5. OTHER INFORMATION
Not applicable.
-16-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1* Employment Agreement dated August 9, 1999 by and between the
Registrant and Arthur Miller.
10.2+ Omnibus Services Agreement dated April 1, 1999 by and between
the Registrant and Organic, Inc.
10.3+ Amendment No. 1 to the Omnibus Services Agreement dated April
1, 1999 by and between the Registrant and Organic, Inc.
10.4 Independent Contractor Services Agreement dated June 29, 1999
by and between the Registrant and Foundry, Inc.
10.5 Addendum No. 1 to the Independent Contractor Services Agreement
dated June 29, 1999 by and between the Registrant and Foundry,
Inc.
10.6 Agreement of Sale dated July 27, 1999 by and between the
Registrant and IL First Avenue Associates L.P. for acquisition
of property at 1075 First Avenue, King of Prussia, PA.
10.7+ Advertising and Promotion Agreement dated October 3, 1999 by
and between the Registrant and Yahoo! Inc.
10.8 Transaction Management Services Agreement dated June 10, 1999
by and between the Registrant and Priority Fulfillment
Services, Inc.
27.1 Financial data schedule for the nine-month period ended
September 30, 1999 (electronic filing only).
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been requested as to certain
portions of this exhibit. The omitted portions have been
separately filed with the Securities and Exchange
Commission.
(B) REPORTS ON FORM 8-K
None.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
GLOBAL SPORTS, INC.
DATE: November 15, 1999 By: /s/ Michael G. Rubin
-------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
DATE: November 15, 1999 By: /s/ Steven A. Wolf
-------------------------------
Steven A. Wolf
Vice President &
Chief Financial Officer
-18-