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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 29, 2001 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-16611
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GLOBAL SPORTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation of organization)
1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406, (610) 265-3229
(Address of principal executive offices, including zip code, telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of the close of business on March 15, 2002,
was approximately $217,629,828.(/1/) There were 38,060,527 shares of the
registrant's Common Stock outstanding as of the close of business on March 15,
2002.(/2/)
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain information required for Part III of this Form 10-K is incorporated
herein by reference to the Proxy Statement for the 2002 Annual Meeting of our
shareholders.
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(/1/) This amount equals the number of outstanding shares of the registrant's
Common Stock reduced by the number of shares that may be deemed
beneficially owned by the registrant's officers, directors and
shareholders owning in excess of 10% of the registrant's Common Stock,
multiplied by the last reported sale price for the registrant's Common
Stock on March 15, 2002. This information is provided solely for record
keeping purposes of the Securities and Exchange Commission and shall not
be construed as an admission that any officer, director or 10%
shareholder in the registrant is an affiliate of the registrant or is
the beneficial owner of any such shares. Any such inference is hereby
disclaimed.
(/2/) Excludes approximately 430,000 shares of the registrant's common Stock
which are issuable to former shareholders of Ashford.com, Inc. in
connection with the registrant's acquisition of Ashford.com, but which,
as of March 15, 2002, had not yet been issued.
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GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
TABLE OF CONTENTS
Page
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PART I
ITEM 1: BUSINESS..................................................... 1
ITEM 2: PROPERTIES................................................... 25
ITEM 3: LEGAL PROCEEDINGS............................................ 26
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 26
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT......................... 27
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 28
ITEM 6: SELECTED FINANCIAL DATA...................................... 28
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 30
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 39
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 39
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 39
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 40
ITEM 11: EXECUTIVE COMPENSATION....................................... 40
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 40
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 40
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 40
SIGNATURES.............................................................. 43
For all years prior to 1999, our fiscal year ended on December 31. Effective
for 1999, we changed our fiscal year from the last day of December to the
Saturday nearest the last day of December. Accordingly, references to fiscal
1997, fiscal 1998, fiscal 1999, fiscal 2000, fiscal 2001 and fiscal 2002 refer
to the years ended December 31, 1997, December 31, 1998, January 1, 2000,
December 30, 2000, December 29, 2001 and the year ending December 28, 2002.
Although we refer to the retailers, manufacturers, media companies and
professional sports organizations for which we develop and operate e-commerce
businesses as our "partners," we do not act as an agent or legal
representative for any of our partners. We do not have the power or authority
to legally bind any of our partners. Similarly, our partners do not have the
power or authority to legally bind us. In addition, we do not have the types
of liabilities for our partners that a general partner of a partnership would
have.
We intend to change our name from Global Sports, Inc. to GSI Commerce, Inc.
in May 2002, subject to stockholder approval at our 2002 Annual Meeting of
Stockholders. In connection with our name change, we also intend to change our
Nasdaq symbol from "GSPT" to "GSIC".
PART I
ITEM 1: BUSINESS.
Overview
We develop and operate electronic commerce businesses for retailers,
manufacturers, media companies and professional sports organizations. The e-
commerce businesses that we operate include the sale of products through
online retail stores over the Internet and direct response television
campaigns. Our scalable solution encompasses Web site design and development,
e-commerce technology, customer service, fulfillment, buying and
merchandising, content development and management, on-line and database
marketing and product development and sourcing. Based on these capabilities,
we can quickly and cost-effectively implement customized e-commerce businesses
for a broad range of partners.
We enable our partners to remain focused on their core businesses and avoid
substantial investments and operating expenses relating to e-commerce.
Depending on the specific needs of a partner, we can undertake either a
complete outsourcing of the partner's e-commerce activities or a more
customized solution that uses portions of our platform. We benefit from the
traffic generated by our partners' established brand franchises and extensive
advertising and promotions to achieve operational efficiencies, lower customer
acquisition costs and economies of scale. We offer our partners the following:
. design, development and maintenance of customized Web sites and
coordination of the development and production of direct response
television campaigns under our partners' banners;
. extensive technology that operates and manages all aspects of multiple
e-commerce businesses including online retail stores and direct response
television campaigns;
. customer service through our 24 hours a day, seven days a week, call
center;
. fulfillment capabilities through our 300,000 square foot general
merchandise fulfillment center in Louisville, Kentucky and our 44,000
square foot specialized high value fulfillment center in Houston, Texas
that we acquired in connection with our acquisition of Ashford.com,
Inc., as well as management of a network of drop-ship vendors that ship
directly to customers;
. access to our centralized database of product descriptions and images,
as well as performance data from vendors and independent sources;
. marketing of Web sites through arrangements with online portals, an
extensive affiliate program and database email marketing programs; and
. buying, merchandising and sourcing of brand-name and unique merchandise,
access to a broad assortment of inventory from approximately 1,480
brands encompassing more than 188,000 stock keeping units, referred to
as SKUs.
We provide some or all of these services to each of our partners. In fiscal
2001, we derived virtually all of our revenues from sales of goods through our
partners' online stores and direct response television campaigns, toll-free
telephone number sales, business-to-business and group sales and related
outbound shipping charges, net of allowances for returns and discounts, as
well as from fixed and variable fees earned in connection with the development
and operation of partners' e-commerce businesses and the provision of
marketing services.
We believe that our ability to quickly and cost-effectively add new partners
creates advantages for us over our competitors. In addition, we believe our
approach can generate attractive economic returns by allowing us to operate
multiple e-commerce businesses for established brands on a common scalable
infrastructure.
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We currently operate or have agreements to operate either all or a portion
of the e-commerce businesses for 35 partners and for Fogdog, Inc., which we
acquired on December 28, 2000. On March 14, 2002, we acquired all of the
outstanding shares of Ashford.com and have operated the www.ashford.com Web
site since that date.
We are a Delaware corporation organized in 1986. Our executive offices are
located at 1075 First Avenue, King of Prussia, Pennsylvania 19406. Our
telephone number is (610) 265-3229.
Recent Developments
On March 14, 2002, we completed the acquisition of Ashford.com, a leading e-
commerce jewelry, luxury goods and corporate gifts company. Under the terms of
the acquisition, Ashford.com stockholders are receiving 0.0076 of a share of
our common stock and $0.125 in cash for each share of Ashford.com common
stock. Following the acquisition, we intend to extend our e-commerce solution
to retailers in the jewelry and luxury goods category and expand Ashford.com's
e-commerce outsource solution in the corporate gifts category.
Industry Background
Online Retailing. The U.S. market for online retail sales represents a
significant market opportunity. Forrester Research estimates that this market
will be $57.6 billion in 2002. The number of Americans who are making online
purchases is approximately 55.7 million, according to United States Department
of Commerce estimates. The Internet offers a number of advantages to
consumers. Consumers can enjoy the time savings, convenience and flexibility
of shopping online 24 hours a day, seven days a week, with access to a broader
selection of products than is traditionally available in a retail store. In
addition, online retailing allows for personalized shopping experiences
through the delivery of content, purchasing advice, community and electronic
features such as reminder and suggestion services. Consumers also benefit from
greater access to product information and heightened attention to customer
service. As a result, we believe that more U.S. consumers will make online
retail purchases, and, therefore, we expect consumer demand to increase over
time. Accordingly, we believe significant opportunities exist to use the brand
and marketing power of our partners to attract consumers to the online retail
stores we operate.
The Internet has emerged as one of the fastest growing communications,
information and commerce media. Business' and consumers' acceptance of the
Internet as a communication, information and commerce platform has created the
foundation for significant growth in business-to-consumer and business-to-
business commerce.
The Internet is an attractive marketplace for both online retailers and
consumers. Online retailers are able to "display" a larger number and wider
variety of products at a lower cost than physical stores and catalogs, which
have limitations on inventory and shelf and catalog space. In addition, online
retailers do not incur the costs of managing and maintaining a retail store
base or the significant printing and mailing costs of catalogs. Online
retailers also enjoy significant merchandising flexibility with the ability to
easily and frequently adjust their featured selections and editorial content
to better respond to consumers' needs. Finally, online retailers can more
easily obtain demographic and behavioral data about customers. This increases
opportunities for targeted marketing programs and to provide personalized
services to their customers.
Direct Response Television. The U.S. market for direct response television
also represents a significant market opportunity. According to the Direct
Market Association, direct response television was a $126 billion industry in
2001. Direct response television involves programs and advertisements of
various lengths that allow the advertiser to reach a targeted audience, mostly
though cable channels. Direct response television programs and advertisements
range from one-half hour or longer programs that discuss and demonstrate the
products to thirty second advertisements that merely advertise the product.
These programs and advertisements provide a toll-free telephone number and
usually provide a URL for a Web site for consumers to use to purchase
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the advertised product. Direct response television allows networks, cable
channels, manufacturers and other sellers of product to air programs and
advertisements that feature products unique to the networks' or channels'
offerings or that provide an additional distribution channel for manufacturers
and other sellers of products.
Direct response television is quickly becoming more widely accepted by
consumers and advertisers as an effective means of presenting products to
consumers. Advertisers use direct response television to reach a highly
targeted audience thus enabling advertisers to focus on the market most suited
for their products. Television networks and cable channels have established
brands and viewer loyalty. They can capitalize on these brands and create
direct response television programs and advertisements that are consistent
with their programming offered and their brands. Promotional airtime is used
to feature products that are endorsed by the brand or relate specifically to
the programming for the purpose of driving direct response campaign traffic to
the channel's toll-free telephone number and online retail store.
Challenges of E-Commerce. We believe that traditional retailers,
manufacturers, media companies and professional sports organizations which
desire to operate online retail stores or direct response television campaigns
face significant obstacles to compete successfully in e-commerce. These
companies must develop a separate infrastructure for their online retail
stores and direct response television campaigns, including Web site design and
development, development and production of direct response television programs
and advertisements, order processing, fulfillment, customer service and a
digital product database. They must also make significant capital investments
to develop in-house technology systems and incur significant expenses to
operate their e-commerce businesses. Furthermore, we believe that few viable
outsourcing options exist for these retailers to build their e-commerce
businesses.
Companies desiring to establish e-commerce retail businesses confront a
variety of obstacles to establishing cost-efficient operations. Many of them
do not have expertise in Web site development, the day-to-day operations of an
e-commerce business or processing orders. Additionally, many of them do not
have significant expertise in fulfillment of products to customers, the
provision of customer service or the acquisition of e-commerce customers.
We also believe that it is costly for single-brand e-commerce companies to
own inventory and build a sophisticated fulfillment infrastructure while
simultaneously building their brand and driving traffic to their e-commerce
businesses. Because e-commerce companies may rely on a single brand, they find
it more difficult to establish multiple partnerships with traditional
retailers. Online retailers tend to make large investments to build and
maintain their brand awareness, resulting in high customer acquisition costs.
It also is difficult for e-commerce companies to support the cost of
aggregating and maintaining comprehensive inventory in multiple categories.
Our Solution
We believe that our business model allows us to provide a comprehensive
solution to many of the challenges facing retailers, manufacturers, media
companies and professional sports organizations that desire to have e-commerce
businesses. Our platform allows us to rapidly develop and operate customized
online retail stores and direct response television businesses with
characteristics appropriate for each of our partners. Our solution enables our
partners to remain focused on their core businesses and avoid substantial
investments and operating expenses relating to their online retail stores or
direct response television campaigns. We believe that we can generate
attractive economic returns by operating multiple e-commerce businesses on a
common scalable infrastructure and by operating under the established brands
of our partners. In addition, our platform allows us to develop and operate
for partners under their brands most of the components necessary to conduct a
retail catalog business. The following are key features of our solution:
Rapid Deployment of Comprehensive E-Commerce Businesses. We can quickly
develop and implement virtually all aspects of an e-commerce business. These
aspects include Web site design and development, e-commerce technology,
customer service, fulfillment, buying and merchandising, content
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development and management, on-line and database marketing and product
development and sourcing. We customize the design and operation of a partner's
e-commerce businesses with a broad range of characteristics that include
differentiated user interfaces on partners' Web sites, partner-specific
content pages, an extensive digital catalog of product descriptions and
images, partner-specific products for direct response television campaigns and
partner specific customer service and fulfillment. Our solution allows our
partners to avoid the lengthy start-up, the complex integration effort and the
substantial fixed costs required to build and operate online retail stores or
direct response television campaigns.
Creation of Other Channels of Commerce Under Existing Brand Names. We enable
our partners to establish distinct e-commerce businesses that are consistent
with their brands and that are complementary to their existing distribution
channels. We believe that this contributes to the development and value of our
partners' existing brand identities.
Increased Return on Investment Opportunity. We operate multiple e-commerce
businesses on a common infrastructure. This allows us to capitalize on our
core technology platform and centralized inventory, product database, order
processing, fulfillment and customer service. By leveraging our investment in
technology and order fulfillment systems over all of our partners, we can
derive economies of scale and add additional partners with little incremental
spending. In addition, we aggregate demand from all of our partners' e-
commerce businesses and generally fulfill customer orders within the specific
categories that we operate from a common inventory pool or through our network
of drop ship vendors. Although we customize part of the product assortment
sold through each of our partners' online retail stores and direct response
television campaigns, a large quantity of SKUs is common among multiple
businesses. By centralizing inventory management across multiple partner
businesses, we are able to increase the frequency of inventory turns, thus
reducing obsolescence risk and financing costs.
Positive and Convenient Shopping Experience. We offer a compelling shopping
experience by providing a broad or unique selection of merchandise, easy to
use Web sites, in context selling through direct response television campaigns
related to specific programming, competitive prices, value added content and
strong customer service. We believe that our 24 hours a day, seven days a week
customer service and high order accuracy promotes strong brand loyalty for our
partners. In addition, we believe that our ability to effectively respond to
customer inquiries by e-mail and telephone and to provide detailed product
information makes the shopping experience easy and enjoyable and drives repeat
purchases.
Efficient Customer Acquisition. We benefit from the brand assets and
substantial marketing budgets of our partners to reduce customer acquisition
costs. Our partners' existing marketing budgets allow us to generate exposure
and drive traffic to the e-commerce businesses that we operate. For example,
our partners generally are contractually obligated to include their Web site
addresses, referred to as URLs, and the toll-free telephone numbers in their
marketing and communication materials. Our partners' marketing includes
television, radio, print and outdoor advertising, point of purchase displays,
cash register receipts, shopping bags, employee uniforms and promotional
events designed to attract and retain customers. Finally, our partners have
valuable, established brand franchises and existing customer bases. We believe
that this provides us with a competitive advantage because our partners have a
heritage and reputation that lends a degree of comfort to the customer. By
having an established history of purchasing from our partners' retail stores
or watching our partners' television programming or advertisements, we believe
that customers are more inclined to purchase from their online retail stores
and direct response television campaigns.
Benefit from Relationships with Vendors. Many of our partners maintain long-
standing relationships with a wide variety of vendors. We also maintain strong
relationships with many of these vendors and with sources of unique products.
Therefore, unlike many entrants to e-commerce, we are able to obtain direct
access to many major brands. We believe that this provides us with an
extensive, authorized selection of brands and products for sale through our
partners' online retail stores and direct response television campaigns.
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Growth Strategy
Our objective is to generate attractive economic returns by capitalizing on
our unique business model to become the leading outsource solution for e-
commerce. The key elements of our growth strategy are as follows:
Expand Our Partner Base. We intend to increase our market share by adding
new partners that have strong brand franchises within the categories in which
we currently operate and that desire to have an e-commerce business which
includes an online retail store or direct response television campaigns or
both. New partners could include companies with major brand names in retail,
consumer products, media and entertainment, the Internet and professional
sports organizations.
Expand into New Vertical Markets. We intend to selectively expand into
categories outside of those in which we currently operate that offer
attractive characteristics with respect to size and saturation of the category
and average order value and gross margin of products offered within the
category. In this connection, in August 2001, we expanded into several
additional merchandise categories through our agreement to operate the e-
commerce business of Bluelight.com, a subsidiary of Kmart. In 2001, we
established a division to develop and operate e-commerce businesses for media
and entertainment companies, and in March 2002, we expanded into the jewelry,
luxury goods and corporate gifts categories through our acquisition of
Ashford.com.
Promote Brands Online. We intend to build awareness and drive customers to
our partners' e-commerce businesses by capitalizing on the brand assets, large
marketing budgets, customers of our partners' retail stores and viewers for
our partners' television programming and advertisements. Each of our partners
prominently features and promotes the URL and/or the toll-free telephone
number for its online retail store and its direct response television
campaigns in its marketing and communication materials. We also plan to
continue to selectively use a variety of online marketing strategies to reach
customers and viewers, including public relations, affiliate programs and
portal relationships.
Increase Repeat Purchases. We intend to build customer loyalty and drive
repeat purchases by implementing the following strategies:
. continuously enhancing our level of customer service;
. expanding our customer and product databases;
. offering new and unique products and product categories;
. implementing direct e-mail marketing techniques to target customers;
. increasing the level of personalization on our partners' e-commerce
businesses; and
. enhancing our in context product offerings related to specific
television programming.
We believe that these initiatives will drive repeat purchases as consumers
become increasingly satisfied with their online and direct response television
shopping experiences.
Enhance the Shopping Experience. We plan to continuously enhance and expand
the online stores and direct response television campaigns that we operate to
address the evolving needs of customers. We intend to improve the scope and
presentation of our product offerings by taking advantage of the unique
characteristics of the Internet and direct response television as retail media
and our relationships with vendors and sources of unique products. In
addition, we plan to invest in technology and develop features to improve the
functionality, speed, navigation and ease of use of our partners' Web sites
and the customer service we offer to support our partners' online retail
stores and direct response television campaigns.
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Pursue Growth by Acquisitions. From time to time we assess strategic
investments and acquisitions that are aligned with our goals of expanding into
new vertical markets, increasing our partner and customer base and expanding
our product offerings.
Our Operations
Web Site and Content Design, Implementation and Maintenance
We design and develop most of our partners' Web sites. We have in-house
personnel that are responsible for Web site design, management and maintenance
as well as creative and content modifications. We implement all changes to
current Web sites and oversee the creation of new front-end Web sites for most
new partners, ensuring that the look and feel of their Web sites meet all
parties' satisfaction. We also generate content for each of our partners' Web
sites, including product images, product descriptions and buying guides. For
example, we have produced buying guides which help customers with their
merchandise selection and provide information about selected topics. These
guides provide customers with helpful information in selecting various
products and provide tips on use of the products. In addition, we have an in-
house photography studio which generates a large number of our photographic
images. We receive the remainder of our photographic images from our vendors.
Direct Response Television Campaigns and Product Development
We typically consult with our partners on the development and production of
direct response television campaigns. We have in-house personnel that are
responsible for working with our partners to coordinate product selection and
the development and production of direct response television marketing
campaigns. We typically purchase products from third parties or our partners
or outsource the manufacture of products to third parties. These products
usually are related to our partners' television programming or their brands.
Our personnel also work with our partners to develop in context marketing
campaigns relating to our partners' television programming. These campaigns
are either produced by our partners or outsourced to third parties for
production.
Technology.
The three major elements of our technology platform that we use to operate
our partners' e-commerce businesses are The Common Engine(TM), the front-end
and the data center.
The Common Engine(TM). We have created a core technology platform, The
Common Engine(TM), that can operate and manage all of the applications and
functionality across our partners' online retail stores and many of the
applications and functionality for our partners' direct response television
campaigns. This system allows us to add new partners with little incremental
costs. The Common Engine(TM) allows us to operate multiple stores on a common
infrastructure with each store being personalized to fit the brand equity and
identity of our individual partners. We enhance The Common Engine(TM)
continuously to improve our partners' e-commerce businesses and enrich the
overall customer experience.
The Front-End. The front-end represents the overall look and feel of our
partners' Web sites. The front-end is the interface with the e-commerce
customer and includes content development, logo placement, graphic design,
color palette, navigation and links. We use the front-end to communicate
special promotions, content feature and product collections as well as the
merchandising strategy of each of our partners.
The Data Center. The data center is our database management system that
controls all of the information housed within our partners' online retail
stores and direct response television campaigns, including all product images
and descriptions, customer log-in and purchasing data, customer profiles,
verification requirements, brand information and shipping data. Our database
management system was created using Oracle and JDA technologies and runs on
Sun Microsystems and IBM hardware. A third-party provider hosts our data
center. System security is managed both by internal staff as well as by
security staff at our third-party host.
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Our technology infrastructure is supported by a number of fail-over back-up
systems. Much of our technology infrastructure is set up with redundancies so
that our operations can move forward seamlessly in the event of computer
malfunctions. In addition, we continuously strive to improve our partners' e-
commerce businesses by conducting functional testing.
Buying, Merchandising and Vendor Relationships
Buying, Sourcing and Consignment Inventory. In categories in which we own
inventory, we offer for sale a broad assortment of brands and items through
certain of our partners' online retail stores and direct response television
campaigns. In some categories, a partner may provide us with inventory on a
consignment basis, which we offer for sale through that partner's online
retail store and direct response television campaigns. We currently offer
customers over 1,480 brands and more than 188,000 SKUs across our partners' e-
commerce businesses and continue to add additional brands and SKUs. We have
personnel who buy and source products in the following merchandise categories:
sporting goods, branded and unique products for direct response television
campaigns and, with the acquisition of Ashford.com, jewelry, luxury goods and
corporate gifts.
Merchandising. We work with our partners to decide which brands and
merchandise to carry. We typically review with our partners what products they
are offering or plan to offer in their retail stores or their direct response
television campaigns and what television programming and advertisements they
plan to air, and determine with our partners what items we believe will be
successful on our partners' e-commerce businesses. We believe that we are able
to offer a wider variety of merchandise on our retail partners' Web sites than
might be found in most of their retail stores because we are not hindered by
space availability, although not all of our partners' Web sites carry the same
products and brand assortments. In this connection, we currently do not offer
some popular brands of sporting goods, such as Nike, although we are
authorized to sell Fogdog's remaining Nike inventory on the fogdog.com Web
site. In addition, our partners typically have the right to prevent us from
selling products which are not sold in their retail stores. We also are able
to offer our media partners the opportunity to offer to their viewers products
related to their television programming. Our buyers work with partners on
strategies for product offerings, merchandise locations within Web sites and
television campaigns and promotional activities of our partners. After
consulting with a partner on their buying or programming strategy, we then
work to enhance product selection and development.
Vendor Relationships. We believe that we have solid relationships with our
vendors and sources of unique products and we continuously seek to add new
vendors, brands and sources of unique products. During fiscal 2001, we
purchased $12.8 million and $8.7 million of inventory from two separate
vendors. These purchases accounted for 23% and 16% of the total amount of
inventory we purchased during fiscal 2001.
Pricing. We establish the prices for products that we offer for sale through
our partners' e-commerce businesses from inventory that we own. In the case of
consignment inventory, the partner is the seller of the products and
establishes the prices. For our retail partners, to the extent possible, we
strategically price these products to be consistent with the prices in our
partners' retail stores. Accordingly, we may maintain different pricing
structures for the same products across our partners' e-commerce businesses.
Marketing
Web Site Integration. We work with each of our partners to integrate URL,
Web site and toll-free telephone number information into their marketing and
advertising campaigns. Our partners usually are contractually obligated to
incorporate their URLs and toll-free telephone number into the advertising,
marketing, promotion and communication vehicles they create. These marketing
vehicles not only incorporate the URL and toll-free telephone number into the
copy or design, but the message also educates consumers about these e-commerce
businesses and drives traffic and viewers to these businesses. We believe that
our partners embrace this strategy because they realize the value in alerting
their customers and viewers to an additional distribution channel within their
brand.
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Online Marketing and Affiliate Network. We have entered into marketing
agreements, including agreements with AOL, Yahoo! and MSN eShop, through which
various of our partners are featured prominently in the shopping and other
areas of these Internet destinations. We also have agreements with many third
party Web sites, referred to as affiliates, which enable them to link to our
partners' Web sites. When a visitor clicks through an affiliate to one of our
partners' Web sites and the visit generates a sale, we compensate the
affiliate with a portion of the sale proceeds. We have implemented a revenue
share payment structure to affiliates based on actual sales or, in some cases,
clicks through the link. These online marketing and affiliate arrangements are
generally subsidized by the partners that are promoted.
E-mail Campaigns. We are dedicated to managing, strengthening and improving
customer relationships. We have implemented personalized customer e-mail
campaigns, which inform customers about upcoming specials, promotions, new
brands or merchandise in which they might be interested.
Order Processing and Fulfillment
Order Processing. We conduct our own order processing, claims processing
and crediting of customers. Order processing activities include electronically
capturing orders generated through the online retail stores and toll-free
telephone numbers that we operate, processing the payment method, determining
the shipping costs, adding any applicable sales tax, facilitating any coupon
or promotional discounts, sending an order confirmation to the customer and
printing a pick ticket, a packing slip, return labels and a detailed order
list that include the name of the partner through whose online retail store or
toll-free telephone number the order was received. For a typical order, after
an item has been ordered by a customer and we have determined that the order
has been packed and shipped, our computer system automatically sends an e-mail
to that customer informing them that their merchandise has been shipped.
Fulfillment. We currently conduct fulfillment out of our company-operated
fulfillment center located in Louisville, KY and through drop ship
arrangements with certain suppliers. Our fulfillment center, which currently
is leased by us from a third party, has been operational since August 2000.
The fulfillment center is 300,000 square feet and is expandable to 470,000
square feet. We also conduct jewelry, luxury goods and corporate gifts
fulfillment from our company-operated 44,000 square foot fulfillment center
located in Houston, TX. We also have drop ship arrangements with over 100
suppliers, pursuant to which we transmit to the suppliers orders received
through the online retail stores and toll-free telephone numbers that we
operate and the suppliers deliver the items ordered directly to consumers.
Distribution. We currently use UPS, USPS and Federal Express as our primary
shipping carriers for non-LTL, or less-than-truckload, items and use a variety
of trucking companies for our LTL distribution. We generally ship orders for
merchandise in our fulfillment center within two business days of receipt of
the order. Our drop shippers generally ship orders within two to five business
days for in-stock merchandise and up to six weeks for personalized, customized
or made to order merchandise.
Returns. We accept returns through mailing or delivery services. Our
partners that operate retail stores are not required to accept in-store
returns of items purchased on their Web sites. When a customer returns an item
to us, we provide the customer with a credit and then reshelve the item,
return it to the vendor or dispose of it.
Customer Service
General. We are committed to providing a high level of customer service. We
believe that superior customer service is critical to retaining long-term and
repeat customers. We offer customer service 24 hours a day, seven days a week
for most of our partners. We provide customer service for our partners under
their brand names, and our computer systems automatically identify from which
partner a customer needs information or service. Our principal customer
service facility is located within our headquarters in King of Prussia, PA.
8
Category Experts and Service Experts. In our effort to provide customers
with the most thorough and accurate information possible, we have both
category experts and service experts on staff within the customer service
department. Category experts have a particular interest in and detailed
knowledge of particular industry or products. These professionals are able to
answer detailed questions about various categories and products to help
customers select the best merchandise for them. Service experts are trained
and experienced in working with a variety of complex customer service issues.
E-Mail or Telephone. Customers can obtain assistance through e-mail or
telephone. We aim to answer all customer e-mails within 24 hours and often are
able to respond within a shorter period of time.
Our Partners
We operate e-commerce businesses for our partners generally pursuant to
exclusive agreements. In most cases, we select and purchase inventory from
vendors, sell the inventory directly to customers through the online retail
stores and direct response television campaigns that we operate, record
revenues generated from the sale of products through those businesses and pay
a percentage of those revenues to the respective partners in exchange for the
rights to use their brand names and the promotions and advertising that our
partners agree to provide.
In the case of Bluelight.com, LLC, a subsidiary of Kmart Corporation, we
manage certain aspects of Bluelight's overall e-commerce business, including
fulfillment, technology and customer service in exchange for a combination of
fixed fees and a percentage of sales. Bluelight selects the merchandise to be
sold on the site, owns a portion of the inventory and provides in-store
marketing of the e-commerce business at its retail stores and other offline
marketing support, including newspaper circular advertising.
The following table lists our partners with which we have publicly-announced
agreements or for which we operated their e-commerce businesses as of December
29, 2001:
Retailers Professional Sports Organizations
------------------------------------ ---------------------------------
Blades Board & Skate Carolina Panthers
Bluelight (Kmart) Denver Broncos
City Sports Detroit Lions
Dick's Sporting Goods LPGA
Dunham's Sports San Diego Chargers
G.I. Joe's
Gart Sports (including Sportmart and
Oshman's)
MC Sports
Media Companies
Modell's Sporting Goods ---------------------------------
Olympia Sports Comedy Central
Pro Golf International FOXSPORTS
Sport Chalet Nickelodeon
The Athlete's Foot PAX
The Sports Authority QVC (sporting goods store)
The Golf Channel
The Sporting News
Other
------------------------------------ TV Land
Bally Total Fitness
Fitness Quest
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Competition
The market for outsourced solutions for the development and operation of e-
commerce businesses is continuously evolving and intensely competitive. We
compete with companies that can provide all or part of our solution to
companies that wish to operate online retail stores and/or direct response
television campaigns, including Web site developers and third-party
fulfillment and customer service providers. Our primary competitors in this
area currently are Amazon.com and USANetworks. We also compete with third-
party fulfillment and customer service providers, such as Federal Express,
UPS, Newroads and Submitorder.com and third-party providers such as Digital
River.
We believe that we compete with these competitors primarily on the basis of
the following:
. reputation within relevant markets for providing a quality outsourced
solution;
. the comprehensive and flexible nature of the outsourced solution
provided; and
. the quality of Web site design and development, technology, customer
service and fulfillment offered.
In addition, because we sell various products through the e-commerce
businesses that we operate, we compete with both the online and offline
businesses of:
. general merchandise retailers, such as Walmart, Target and Nordstrom;
. specialty retailers, including sporting goods retailers and jewelry and
luxury goods retailers, such as Footlocker, REI.com and Zales;
. catalog retailers, such as L.L. Bean and Eastbay; and
. manufacturers, such as Nike.
We believe that we compete with these competitors primarily on the basis of
the following:
. recognition of and trust in our partners' brands;
. the broad and unique selection of merchandise that we offer through the
online retail stores and direct response television campaigns that we
operate;
. convenience of the shopping experience;
. price;
. the amount of product information provided to customers;
. visibility and performance of the online retail stores and direct
response television campaigns that we operate; and
. quality of fulfillment and customer service.
Intellectual Property
We use our partners' names, URLs, logos and other marks in connection with
the operation and promotion of their e-commerce businesses. The agreements
with our partners generally provide us with licenses to use this intellectual
property in connection with the operation of their e-commerce businesses.
These licenses generally are co-terminous with the agreements.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable
terms in the future. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which could materially
adversely affect our business, results of operations and financial condition.
10
In order to protect our proprietary rights in services and technology, we
rely on various intellectual property laws and contractual restrictions. These
include confidentiality, invention assignment and nondisclosure agreements
with our partners, employees, contractors and suppliers. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization.
Government Regulation
We generally are not regulated other than pursuant to federal, state and
local laws applicable to businesses in general or to retailing, e-commerce or
television specifically. Certain regulatory authorities have proposed specific
laws and regulations governing the Internet and online retailing. These laws
and regulations may cover taxation, user privacy, pricing, content,
distribution, electronic contracts, characteristics and quality of products
and services, intellectual property rights and information security. Changes
in consumer protection laws also may impose additional burdens on companies
conducting business online. It is not clear how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and online commerce. Unfavorable resolution of these
issues may harm our business.
We currently provide individual personal information regarding users of a
partner's e-commerce business to that partner and to certain third parties
that we use to process credit cards, process and fulfill orders, send emails,
evaluate and maintain the performance of our Web sites. We currently do not
identify registered users by age. However, the adoption of additional privacy
or consumer protection laws could create uncertainty in Web usage and reduce
the demand for our products and services or require us to redesign our
partners' Web sites.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity,
qualification to do business and export or import matters. The vast majority
of these laws were adopted prior to the advent of the Internet. As a result,
they do not contemplate or address the unique issues of the Internet and
related technologies. Changes in laws intended to address these issues could
create uncertainty in the Internet marketplace. This uncertainty could reduce
demand for our services or increase the cost of doing business as a result of
litigation costs or increased service delivery costs.
In addition, because our services are available through the Internet and
toll-free telephone numbers in multiple states, other jurisdictions may claim
that we are required to qualify to do business in those jurisdictions. Our
failure to qualify in a jurisdiction where we are required to do so could
subject us to taxes and penalties. It could also hamper our ability to enforce
contracts in these jurisdictions. The application of laws or regulations from
jurisdictions whose laws do not currently apply to our business could have a
material adverse effect on our business, results of operations and financial
condition.
Employees
As of March 15, 2002, we employed 627 full-time employees, of which
approximately 50% are based at our headquarters in King of Prussia, PA.
Discontinued Operations
Prior to our decision in 1999 to focus exclusively on our e-commerce
business, we operated two sporting goods businesses, our Branded Division and
our Off-Price and Action Sports Division. We sold our Branded Division on
December 29, 1999 and our Off-Price and Action Sports Division on May 26,
2000. We recognized an aggregate loss of approximately $23.2 million on the
sale of these divisions. For a more complete discussion, see Note 18 to our
consolidated financial statements included in this Annual Report on Form 10-K.
Through our Branded Division, we designed, marketed and distributed athletic
and outdoor footwear products under the RYKA brand and the Yukon brand.
Through our Off-Price and Action Sports Division, we purchased manufacturers'
closeout merchandise, overstocks, canceled orders and excess inventories of
athletic, outdoor, casual and specialty footwear, athletic apparel and
athletic equipment from manufacturers and retailers for resale, and designed
and distributed special make-up athletic equipment.
11
Risk Factors
Any investment in our common stock or other securities involves a high
degree of risk. You should carefully consider the following information about
these risks, together with the other information contained in this Annual
Report on Form 10-K. If any of the following risks occur, our business could
be materially harmed. In these circumstances, the market price of our common
stock could decline, and you may lose all or part of the money you paid to buy
our common stock.
All statements made in this Annual Report on Form 10-K, other than
statements of historical fact, are forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan",
"will", "would", "should", "guidance", "potential", "continue", "project",
"forecast" and similar expressions typically are used to identify forward-
looking statements. These forward-looking statements are based on then-current
expectations, beliefs, assumptions, estimates and forecasts about our business
and the industry and markets in which we operate. These statements in this
Annual Report on Form 10-K are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements. Factors which may
affect our business, financial condition and operating results include the
effects of changes in the economy, consumer spending, the stock market and the
industries in which we operate, changes affecting the Internet and e-commerce,
including online retailing and direct response marketing, our ability to
maintain relationships with strategic partners and suppliers, our ability to
timely and successfully develop, maintain and protect our technology and
product and service offerings and execute operationally, our ability to
attract and retain qualified personnel and our ability to successfully
integrate any acquisitions we may make, including our recent acquisition of
Ashford.com. More information about potential factors that could affect us are
described below. We expressly disclaim any intent or obligation to update
these forward-looking statements.
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating our e-
commerce business until the fourth quarter of 1999. Prior to the fourth
quarter of 1999, when we launched the e-commerce businesses we operate for our
partners, 100% of our revenues had been generated by our discontinued
operations. The sale of the discontinued operations was completed in May 2000.
Accordingly, 100% of our revenues are currently generated through our e-
commerce business. In addition, the nature of our e-commerce business has
undergone rapid development and change since we began operating it. Based on
our limited experience with our e-commerce business, it is difficult to
predict whether we will be successful. Thus, our chances of financial and
operational success should be evaluated in light of the risks, uncertainties,
expenses, delays and difficulties associated with operating a business in a
relatively new and unproven market or a new business in an existing market,
many of which may be beyond our control. If we are unable to address these
issues, we may not be financially or operationally successful.
We expect increases in our operating expenses and continuing losses.
We incurred substantial losses in fiscal 1999, fiscal 2000 and fiscal 2001,
and as of December 29, 2001, we had an accumulated deficit of $131.7 million.
Except for the fourth quarter of fiscal 2001, we have not achieved
profitability from our continuing operations. We may not obtain enough
customer traffic or viewers or a high enough volume of purchases from the e-
commerce businesses that we operate to generate sufficient revenues to achieve
profitability. We could continue to incur operating and net losses. There can
be no assurances that we will be able to achieve profitability from our
continuing operations.
We will continue to incur significant operating expenses and capital
expenditures as we:
. enhance our distribution and order fulfillment capabilities;
. further improve our order processing systems and capabilities;
12
. develop enhanced technologies and features to improve our partners' e-
commerce businesses;
. enhance our customer service capabilities to better serve customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. continue our business development, sales and marketing activities.
Because we will incur many of these expenses before we receive any revenues
from our efforts, our losses will be greater than the losses we would incur if
we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which could further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
Prior to the recent expansion of our relationship with Bluelight.com,
establishment of our media and entertainment division and our recent
acquisition of Ashford.com, our business had been limited to the sporting
goods industry. Through the expansion of our Bluelight.com relationship and
the acquisition of Ashford.com, we have expanded or intend to expand our
operations into other categories. We may not be able to successfully expand
our operations into new categories.
Until recently, our business had been limited to the sporting goods
industry. Through the recent expansion of our relationship with Bluelight.com,
we have begun to expand our operations into other categories, including
consumer electronics, home products, jewelry, toys, books and music. Through
the establishment of our media and entertainment division, we have begun to
create and work with third parties to manufacture unique products related to
direct response television programming. Through our acquisition of
Ashford.com, we intend to further expand our business into the jewelry, luxury
goods and corporate gifts categories. In order to successfully expand our
business into these categories, we must develop and maintain relationships
with manufacturers and other sources of product in these categories and hire
and retain skilled personnel to help manage these areas of our business. Our
failure to successfully expand our business into these categories could limit
our ability to increase revenues.
Our success is tied to the success of the retail industry and the partners
for which we operate e-commerce businesses.
Our future success is substantially dependent upon the success of the retail
industry and the partners for which we operate e-commerce businesses. From
time to time, the retail industry has experienced downturns. Any downturn in
the retail industry could adversely affect our revenues. In addition, if our
partners were to have financial difficulties or seek protection from their
creditors, or if we are unable to replace our partners or obtain new partners,
it could adversely affect our ability to grow our business.
We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart,
pursuant to which we operate the Bluelight.com Web site. Kmart's recent
bankruptcy filing may mean that we may not realize all of the economic
benefits of that agreement.
Kmart, as well as Bluelight.com, recently filed for bankruptcy protection.
The bankruptcy court permitted Bluelight.com to pay us all amounts due prior
to the bankruptcy filing and to continue business as usual with us.
Bluelight.com has the ability to reject its agreement with us, thereby,
terminating our relationship with Bluelight.com. If Bluelight.com rejects the
e-commerce agreement or does not emerge from bankruptcy, we will not realize
all of the economic benefits of that agreement.
We enter into contracts with our partners. Some of these partners' online
retail stores account for a significant portion of our revenue. If we do not
maintain good working relationships with our partners or
13
perform as required under these agreements, it could adversely affect our
business. Additionally, if our partners terminate their contracts with us, it
could negatively affect our business.
The contracts with our partners establish new and complex relationships
between us and our partners. We spend a significant amount of time and effort
to maintain our relationships with our partners and address the issues that
from time to time may arise from these new and complex relationships. For
fiscal 2001, sales to customers through one of our partner's e-commerce
business accounted for 25% of our revenue, sales to customers through another
of our partner's e-commerce business accounted for 19% of our revenue and
sales to our top five partners' e-commerce businesses accounted for 62% of our
revenue. For fiscal 2000, sales to customers through one of our partner's e-
commerce business accounted for 45% of our revenue, sales to customers through
another of our partner's e-commerce business accounted for 20% of our revenue
and sales to customers through our top three partners' e-commerce businesses
accounted for 71% of our revenue. If we do not maintain a good working
relationship with our partners or perform as required under these agreements,
our partners could seek to terminate the agreements prior to the end of the
term or they could decide not to renew the contracts at the end of the term.
This could adversely affect our business, financial condition and results of
operations. Moreover, our partners could decide not to renew these contracts
for reasons not related to our performance.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a
good indication of our future performance. In some future quarter, our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock likely will
decline significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
. our inability to retain existing partners or to obtain new partners;
. our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to or viewers of the online retail
stores and direct response television campaigns operated by us or the
inability to convert these visitors and viewers into customers;
. our failure to offer an appealing mix of products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites or the technology and systems we use to process customers'
orders and payments;
. the ability of our competitors to offer new or superior e-commerce
businesses, services or products;
. price competition that results in lower profit margins or losses;
. our inability to obtain or develop specific products or brands or
unwillingness of vendors to sell their products to us;
. unanticipated fluctuations in the amount of consumer spending on various
products that we sell, which tend to be discretionary spending items;
. increases in the cost of advertising;
14
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
. seasonality;
. our inability to manage inventory levels or control inventory theft;
. our inability to manage distribution operations or provide adequate
levels of customer service;
. an increase in the level of our product returns;
. government regulations related to the Internet, online retailing or
direct response marketing, which could increase the costs associated
with operating our businesses; and
. unfavorable economic conditions specific to the Internet, online
retailing, direct response marketing or the industries in which we
operate, which could reduce demand for the products sold through the
businesses operated by us.
Seasonal fluctuations in sales could cause wide fluctuations in our
quarterly results.
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that our fourth fiscal quarter will account for a
disproportionate percentage of our total annual revenues. In anticipation of
increased sales activity during our fourth fiscal quarter, we may hire a
significant number of temporary employees to supplement our permanent staff
and significantly increase our inventory levels. For this reason, if our
revenues were below seasonal expectations during the fourth fiscal quarter,
our operating results could be below the expectations of securities analysts
and investors.
Due to the limited operating history of our e-commerce business, it is
difficult to predict the seasonal pattern of our sales and the impact of this
seasonality on our business and financial results. In the future, our seasonal
sales patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash
generated from our business. If we do not generate cash sufficient to fund our
operations, we may in the future need additional financing to continue our
growth or our growth may be limited.
Because we have not generated sufficient cash from operations to date, we
have funded our e-commerce businesses primarily from the sale of equity
securities. Cash from revenues must increase significantly for us to fund
anticipated operating expenses internally. If our cash flows are insufficient
to fund these expenses, we may in the future need to fund our growth through
additional debt or equity financings or reduce costs. Further, we may not be
able to obtain financing on satisfactory terms. Our inability to finance our
growth, either internally or externally, may limit our growth potential and
our ability to execute our business strategy. If we issue securities to raise
capital, our existing stockholders may experience additional dilution or the
new securities may have rights senior to those of our common stock.
We must develop and maintain relationships with key manufacturers to obtain
a sufficient assortment and quantity of quality merchandise on acceptable
commercial terms. If we are unable to do so, it could adversely affect our
business, results of operations and financial condition.
15
We primarily purchase the products we offer directly from the manufacturers
of the products. If we are unable to develop and maintain relationships with
these manufacturers, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on acceptable
commercial terms and our business could be adversely impacted. We do not have
written contracts with most of our manufacturers. In addition, during fiscal
2001, we purchased 23% and 16% of the total amount of inventory we purchased
during fiscal 2001 from two manufacturers. Manufacturers could stop selling
products to us and may ask us to remove their products or logos from our
partners' Web sites. In some circumstances, our partners purchase products
directly from manufacturers for sale on their Web sites. If we or our partners
are unable to obtain products directly from manufacturers, especially popular
brand manufacturers, we may not be able to obtain the same or comparable
merchandise in a timely manner or on acceptable commercial terms. For example,
we currently are not authorized to offer some popular brands of sporting
goods, such as Nike, although we are authorized to sell the remaining Nike
inventory held by Fogdog on the fogdog.com Web site. There can be no assurance
that we will be able to offer these brands in the future or that we will
continue to be able to offer brands we currently offer. If we are unable to
offer a sufficient assortment and quantity of quality products at acceptable
prices, we may lose sales and market share.
We may not be successful in finding, developing and marketing products that
consumers of the direct response television campaigns we operate will want to
purchase.
For the direct response television campaigns we operate, our success depends
on our ability to select products that consumers will want to purchase. We
promote these products on our partners' Web sites as well as through direct
response television programming. If we do not select products that consumers
want to purchase, this could result in lost opportunities which could reduce
sales.
We may be unable to source product for direct response television campaigns
on favorable terms. Additionally, the products we are able to source may not
be profitable.
For direct response television campaigns, our financial performance depends
on our ability to develop products or acquire the rights to products that will
be appealing to consumers. We select products based on management's retail
experience. We may not be successful in finding, developing and marketing
products that consumers will want to purchase. Any failure to meet consumers'
desires could result in lost opportunities and excess inventory which could
reduce our revenues. Additionally, we may select products that are not
profitable which could result in lower margins.
Capacity constraints or system failures could materially and adversely
affect our business, results of operations and financial condition.
Any system failure, including network, telecommunications, software or
hardware failure, that causes interruption of the availability of our
partners' online retail stores or direct response television campaigns could
result in decreased usage of these stores or access to these campaigns. If
these failures are sustained or repeated, they could reduce the attractiveness
of our partners' online retail stores and direct response television campaigns
to customers, vendors and advertisers. Our operations are subject to damage or
interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
16
. computer viruses; and
. other similar events.
We have been operating e-commerce businesses for our partners for less than
three years. The limited time during which we have been operating these
businesses, as well as the inherent unpredictability of the events described
above, makes it difficult to predict whether the occurrence of any of these
events is likely. If any of these events do occur, they could result in
interruptions, delays or cessations in service to users of our partners'
online retail stores or viewers of our partners' direct response television
campaigns.
In addition, we maintain our computers on which we operate our partners'
online retail stores at the facility of a third-party hosting company. We
cannot control the maintenance and operation of this facility, which is also
susceptible to similar disasters and problems. Our insurance policies may not
adequately compensate us for any losses that we may incur. Any system failure
that causes an interruption in our service or a decrease in responsiveness
could harm our relationships with our customers and result in reduced
revenues.
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use or take appropriate steps to enforce our intellectual property rights. In
addition, our competitors could, without violating our proprietary rights,
develop technologies that are as good as or better than our technology.
Our failure to protect our software and other proprietary intellectual
property rights or to develop technologies that are as good as our
competitors' could put us at a disadvantage to our competitors. In addition,
the failure of our partners to protect their intellectual property rights,
including their trademarks and domain names, could impair our operations.
These failures could have a material adverse effect on our ability to generate
revenues.
If we do not respond to rapid technological changes, our services could
become obsolete and we could lose customers.
Due to costs and management time required to introduce new services,
products and enhancements, we may be unable to respond to rapid technological
changes in a timely enough manner to avoid our services becoming
uncompetitive. If this happens, our customers may forgo the use of our
partners' e-commerce businesses and use those of our competitors. To remain
competitive, we must continue to enhance and improve the functionality and
features of our partners' online retail stores and direct response television
campaigns. The Internet, online retailing and the direct response marketing
are constantly changing. If competitors introduce new products and services
using new technologies or if new industry standards and practices emerge, our
partners' existing online retail stores and direct response television
campaigns and our proprietary technology and systems may become uncompetitive.
Developing our partners' e-commerce businesses and other proprietary
technology entails significant technical and business risks. We may use new
technologies ineffectively or we may fail to adapt our partners' online retail
stores and direct response television campaigns, our order processing systems
and our computer and telecommunications network to meet customer requirements
or emerging industry standards.
We may be subject to intellectual property claims or competition or trade
practices claims that could be costly and could disrupt our business.
17
Third parties may assert that our business or technologies infringe their
intellectual property rights. From time to time, we may receive notices from
third parties questioning our right to present specific images or logos on our
partners' online retail stores or direct response television campaigns, or
stating that we have infringed their trademarks or copyrights. We may in the
future receive claims that we are engaging in unfair competition or other
illegal trade practices. We may be unsuccessful in defending against these
claims, which could result in substantial damages, fines or other penalties.
The resolution of a claim could also require us to change how we do business,
redesign our partners' e-commerce businesses or enter into burdensome royalty
or licensing agreements. These license or royalty agreements, if required, may
not be available on acceptable terms, if at all, in the event of a successful
claim of infringement. Our insurance coverage may not be adequate to cover
every claim that third parties could assert against us. Even unsuccessful
claims could result in significant legal fees and other expenses, diversion of
management's time and disruptions in our business. Any of these claims could
also harm our reputation.
We rely on our ability to enter into marketing and promotion agreements with
online services, search engines, directories and other Web sites to drive
traffic to the e-commerce businesses we operate. If we are unable to enter
into or properly develop these marketing and promotional agreements, our
ability to generate revenue could be adversely affected.
We have entered into marketing and promotion agreements with online
services, search engines, directories and other Web sites to provide content,
advertising banners and other links that link to our partners' online retail
stores. We expect to rely on these agreements as significant sources of
traffic to our partners' online retail stores and to generate new customers.
If we are unable to enter into satisfactory agreements on acceptable terms,
our ability to attract new customers could be harmed. Further, many of the
parties with which we may have online advertising arrangements could provide
advertising services for other marketers of goods. As a result, these parties
may be reluctant to enter into or maintain relationships with us. Failure to
achieve sufficient traffic or generate sufficient revenue from purchases
originating from third parties may result in termination of these types of
agreements. Without these relationships, we may not be able to sufficiently
increase our market share.
Our success is dependent upon our executive officers and other key
personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman, President and Chief Executive Officer. We have employment agreements
with some of our executive officers and key personnel. Due to the costs
associated with compensating executive officers and key personnel and the
competition for highly qualified personnel, we cannot be sure that we will be
able to retain or attract executive, managerial and other key personnel. We
have obtained key person life insurance for Mr. Rubin in the amount of $8.0
million. We have not obtained key person life insurance for any of our other
executive officers or key personnel.
We may be unable to hire and retain the skilled personnel necessary to
develop our business.
We intend to continue to hire a number of skilled personnel. Due to intense
competition for these individuals from our competitors and other employers, we
may not be able to attract, assimilate or retain highly qualified personnel in
the future. Our failure to attract and retain the highly trained personnel
that are integral to our business may limit our growth rate.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
Online retailing and direct response marketing are constantly evolving and
are extremely competitive. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of
18
which could seriously harm our business, financial condition and results of
operations. We compete with companies that may be able to provide solutions to
companies that wish to establish e-commerce businesses, including:
. third party providers, such as Amazon.com, USA Networks and Digital
River; and
. third-party fulfillment and customer services providers, such as Federal
Express, UPS, Newroads and Submitorder.com.
We also compete with the online and offline businesses of a variety of
companies, including:
. specialty retailers, including sporting goods and jewelry and luxury
goods retailers, such as Footlocker, REI.com and Zales;
. general merchandise retailers, such as Target, WalMart and Nordstrom;
. catalog retailers, such as L.L. Bean and Eastbay; and
. manufacturers, such as Nike.
If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
Although we operate our own fulfillment center, we rely upon multiple third
parties for the shipment of our products. We also rely upon certain vendors to
ship products directly to our customers. As a result, we are subject to the
risks associated with the ability of these vendors to successfully and timely
fulfill and ship customer orders and to successfully handle our inventory
delivery services to meet our shipping needs. The failure of these vendors to
provide these services, or the termination or interruption of these services,
could adversely affect the satisfaction of our customers, which could result
in reduced sales.
Sporting goods and apparel and jewelry and luxury goods are subject to
changing consumer preferences. If we fail to anticipate these changes, we
could experience lower sales, higher inventory markdowns and lower margins.
Our success depends, in part, upon our ability to anticipate and respond to
trends in sporting goods and jewelry and luxury goods merchandise and
consumers' participation in sports and fashion. Consumers' tastes in sporting
goods equipment, apparel, jewelry and luxury goods are subject to frequent and
significant changes, due in part to manufacturers' efforts to influence
purchases. In addition, the level of consumer interest in a given sport or
type of fashion can fluctuate dramatically. If we fail to identify and respond
to changes in merchandising and consumer preferences, our sales could suffer
and we could be required to mark down unsold inventory. This would depress our
profit margins. In addition, any failure to keep pace with changes in
consumers' tastes could result in lost opportunities which could reduce sales.
High merchandise returns could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is generally
consistent with the policies of each of our partners for which we operate e-
commerce or direct response television businesses. If merchandise returns are
significant, our revenues could be adversely affected.
We may be subject to product liability claims that could be costly and time-
consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be
19
asserted. Similarly, we could be subject to claims that users of our partners'
online retail stores or viewers of our partners' direct response television
campaigns were harmed due to their reliance on our product information,
product selection guides, advice or instructions. If a successful claim were
brought against us in excess of our insurance coverage, it could adversely
affect our business. Even unsuccessful claims could result in the expenditure
of funds and management time and could have a negative impact on our business.
We may be liable if third parties misappropriate our customers' personal
information.
If third parties are able to penetrate our network or telecommunications
security or otherwise misappropriate our customers' personal information or
credit card information or if we give third parties improper access to our
customers' personal information or credit card information, we could be
subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. They could also include claims for other misuses of personal
information, including unauthorized marketing purposes. These claims could
result in litigation. Liability for misappropriation of this information could
be significant. In addition, the Federal Trade Commission and state agencies
have been investigating various companies regarding their use of customers'
personal information. We could incur additional expenses if new regulations
regarding the use of personal information are introduced or if government
agencies investigate our privacy practices.
We are controlled by certain principal stockholders.
As of March 15, 2002, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 19.1%, funds affiliated with SOFTBANK
America Inc., or SOFTBANK, beneficially owned 25.2% and Interactive Technology
Holdings, LLC, or ITH, a joint venture company of Comcast Corporation and QVC,
Inc., beneficially owned 32.2% of our outstanding common stock, including
currently exercisable warrants and options to purchase common stock. Should
they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a
position to exercise control over most matters requiring stockholder approval,
including the election or removal of directors, approval of significant
corporate transactions and the ability generally to direct our affairs.
Furthermore, the stock purchase agreements pursuant to which SOFTBANK and ITH
acquired their shares of our common stock provide that SOFTBANK and ITH each
have the right to designate up to two members of our board of directors. This
concentration of ownership and SOFTBANK's and ITH's right to designate members
to our board of directors may have the effect of delaying or preventing a
change in control of us, including transactions in which stockholders might
otherwise receive a premium over current market prices for their shares.
From time to time, we may acquire or invest in other companies. There are
risks associated with potential acquisitions and investments. As a result, we
may not achieve the expected benefits of potential acquisitions.
If we are presented with appropriate opportunities, we may make investments
in complementary companies, products or technologies or we may purchase other
companies. On March 14, 2002, we acquired all of the outstanding shares of
Ashford.com, an online jewelry, luxury goods and corporate gifts retailer. We
may not realize the anticipated benefits of the acquisition of Ashford or any
other investment or acquisition. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology or products into our
business. Any acquisition, including the acquisition of Ashford.com, may
further strain our existing financial and managerial controls and reporting
systems and procedures. If we do not successfully integrate the business of
Ashford.com, the expenditures on integration efforts will reduce our cash
position without us being able to realize the expected benefits of the merger.
In addition, key personnel of an acquired company may decide not to work for
us. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Further, the physical
expansion in facilities that would occur as a result of the acquisition of
Ashford.com and any other acquisition may result in disruptions that seriously
impair our business. Finally, we may have to incur debt or issue additional
equity securities to pay for other acquisitions or investments, the issuance
of which could be dilutive to our stockholders.
20
There are certain risks associated with our acquisition of Ashford.com as a
result of litigation pending or threatened against Ashford.com at the time of
the acquisition.
The staff of the Securities and Exchange Commission has been conducting an
investigation concerning Ashford.com's accounting and disclosures relating to
its marketing agreement with Amazon.com during its fiscal years 2000 and 2001
for the purpose of determining whether the Commission should commence
enforcement proceedings in federal district court. Ashford.com has made a
submission to the staff of the Commission explaining why such a proceeding
should not be initiated. The staff has advised Ashford.com that it plans to
recommend that the Commission commence such enforcement proceedings, although
no final decision has been made. Ashford.com's audit committee completed an
internal review of certain matters relating to the staff's review prior to the
acquisition. Ashford.com has maintained that none of the accounting issues
raised by the Commission would have a material adverse effect on its financial
statements. Based on our review of the matter, we have no reason to disagree
with Ashford.com's assessment, although there can be no assurance as to the
ultimate outcome of this matter.
Since July 11, 2001, several stockholder class action complaints have been
filed in the United States District Court of the Southern District of New York
against Ashford.com, several of Ashford.com's officers and directors, and
various underwriters of Ashford.com's initial public offering. The purported
class actions have all been brought on behalf of purchasers of Ashford.com
common stock during various periods beginning on September 22, 1999, the date
of Ashford.com's initial public offering. The plaintiffs allege that
Ashford.com's prospectus, included in Ashford.com's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, was materially
false and misleading because it failed to disclose, among other things,
certain fees and commissions collected by the underwriters or arrangements
designed to inflate the price of the common stock. The plaintiffs further
allege that because of these purchases, Ashford.com's post-initial public
offering stock price was artificially inflated. As a result of the alleged
omissions in the prospectus and the purported inflation of the stock price,
the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934. The complaints
have been consolidated into a single action. Ashford.com has maintained that
it has meritorious defenses against these actions and intends to vigorously
defend them. Ashford.com is also subject to various other claims and legal
actions arising in the ordinary course of business. Ashford.com also has
maintained that the ultimate disposition of these matters would not have a
material effect on Ashford.com's business, financial condition or results of
operations. Based on our review of these matters, we have no reason to
disagree with Ashford.com's assessment, although there can be no assurances as
to the ultimate outcomes of these matters.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to consider pursuing international expansion. In the future, we may expand
into international markets. International sales are subject to inherent risks
and challenges that could adversely affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major manufacturers may require that our
international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
21
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any negative
impact on our international business could negatively impact our business,
operating results and financial condition as a whole. In particular, gains and
losses on the conversion of foreign payments into United States dollars may
contribute to fluctuations in our results of operations and fluctuating
exchange rates could cause reduced revenues and/or gross margins from non-
dollar-denominated international sales.
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users and advertisers on the Internet may
not increase and commerce over the Internet may not become more accepted and
widespread for a number of reasons, including:
.actual or perceived lack of security of information or privacy protection;
.lack of access and ease of use;
.congestion of traffic on the Internet;
.inconsistent quality of service and lack of availability of cost-
effective, high-speed service;
.possible disruptions, computer viruses or other damage to the Internet
servers or to users' computers;
.excessive governmental regulation;
.uncertainty regarding intellectual property ownership; and
.lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an
increase in the number or requirements of users. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The amount of traffic on our partners' Web sites could be
materially affected if there are outages or delays in the future. The use of
the Internet may also decline if there are delays in the development or
adoption of modifications by third parties that are required to support
increased levels of activity on the Internet. If any of the foregoing occurs,
or if the Internet does not become a viable commercial medium, the number of
our customers could decrease. In addition, we may be required to spend
significant capital to adapt our operations to any new or emerging
technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the
online retail stores which we operate obsolete.
The technology of the Internet and online retailing is evolving rapidly for
many reasons, including:
. customers frequently changing their requirements and preferences;
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
22
If the costs associated with the changing technology of the Internet
prevents us from enhancing the online retail stores that we operate, those
stores could become less effective, which would reduce our competitive
advantage and put our ability to attract and retain customers at risk. While
we sell products through the direct response television campaigns, the primary
channel through which we sell products is the online retail stores that we
operate. Therefore, the potential negative impact of these stores becoming
less effective would affect us to a greater extent than it would affect a
company that has other significant channels for the sale or distribution of
its products.
In order to keep the Web sites that we operate from becoming obsolete, and
maintain our ability to attract and retain customers, we must accomplish the
following tasks:
. continuously enhance and improve our partners' Web sites;
. identify, select and obtain leading technologies useful in our business;
and
. respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
Customers may be unwilling to use the Internet to purchase goods.
Our long-term future depends heavily upon the general public's willingness
to use the Internet as a means to purchase goods. The failure of the Internet
to develop into an effective commercial tool would seriously damage our future
operations. Online retailing is a relatively new concept, and large numbers of
customers may not begin or continue to use the Internet to purchase goods. The
demand for and acceptance of products sold over the Internet are highly
uncertain, and most online retailers have a short track record. If consumers
are unwilling to use the Internet to conduct business, our business may not
develop profitably. The Internet may not succeed as a medium of commerce
because of delays in developing elements of the needed Internet
infrastructure, such as a reliable network, high-speed modems, high-speed
communicationlines and other enabling technologies.
The security risks of online retailing may discourage customers from
purchasing goods from us.
In order for online retailing to develop successfully, we and other market
participants must be able to transmit confidential information securely over
public networks. Third parties may have the technology or know-how to breach
the security of customer transaction data. Any breach could cause customers to
lose confidence in the security of our partners' online retail stores and
choose not to purchase from those stores. If someone is able to circumvent our
security measures, he or she could destroy or steal valuable information or
disrupt the operation of our partners' online retail stores. Concerns about
the security and privacy of transactions over the Internet could inhibit the
growth of the Internet and online retailing. Our security measures may not
effectively prohibit others from obtaining improper access to the information
on our partners' online retail stores. Any security breach could expose us to
risks of loss, litigation and liability and could seriously disrupt our
operations.
We need to continuously acquire and effectively use media space to market
and sell our direct response television campaign products.
We generally enter into exclusive agreements with media companies,
manufacturers and other sellers of products to run the direct response
television portion of their e-commerce businesses. In those agreements, the
media companies, manufacturers and other sellers of products generally agree
to certain marketing, advertising and air-time commitments for the promotion
of products sold through direct response television as well as promotion of
their online retail stores. Air-time is very valuable and is essential for the
success of direct response
23
television campaigns. If we are unable to negotiate favorable marketing,
advertising and air-time commitments in our agreements with our partners or if
our partners do not fulfill their commitments, the amount of products we could
sell likely would be lower which would cause our revenues to be lower.
Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the
failure to adequately control fraudulent credit card transactions could
increase our general and administrative expenses. We have put in place
technology and processes to help us detect the fraudulent use of credit card
information. To date, we have not suffered material losses related to credit
card fraud. However, we may in the future suffer losses as a result of orders
placed with fraudulent credit card data even though the associated financial
institution approved payment of the orders. Under current credit card
practices, we are liable for fraudulent credit card transactions because we do
not obtain a cardholder's signature.
If one or more states successfully assert that we should collect sales or
other taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for goods sold by
us and shipped into states other than Kentucky, Pennsylvania and Texas in
which we collect and remit applicable sales taxes. One or more local, state or
foreign jurisdictions may seek to impose sales tax collection obligations on
us and other out-of-state companies that engage in e-commerce. Our business
could be adversely affected if one or more states or any foreign country
successfully asserts that we should collect sales or other taxes on the sale
of our merchandise.
Existing or future government regulation could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting e-commerce and direct response television businesses. Today there
are relatively few laws specifically directed towards conducting these types
of businesses. However, due to the increasing growth and popularity of the
Internet, online retailing and direct response television, many laws and
regulations relating to these businesses, particularly the Internet, are
proposed and considered at the state and federal levels. These laws and
regulations could cover issues such as user privacy, freedom of expression,
pricing, fraud, quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability of
existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy could also harm our business. For example, United States and foreign
laws regulate our ability to use customer information and to develop, buy and
sell mailing lists. Many of these laws may not contemplate or address the
unique issues raised by the Internet, online retailing or direct response
marketing. Some laws that do contemplate or address those unique issues, such
as the Digital Millennium Copyright Act, are only beginning to be interpreted
by the courts and their applicability and reach are therefore uncertain. These
current and future laws and regulations could reduce our ability to operate
efficiently.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal and state levels
relating to privacy and the use of personal user information. Several states
have proposed legislation that would limit the uses of personal user
information online or require collectors of information to establish privacy
policies. The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under 13. In addition, bills pending in Congress would extend online privacy
protections
24
to adults. Laws and regulations of this kind may include requirements that we
establish procedures to disclose and notify users of privacy and security
policies, obtain consent from users for collection and use of information, or
provide users with the ability to access, correct and delete personal
information stored by us. Even in the absence of those regulations, the
Federal Trade Commission has settled several proceedings resulting in consent
decrees in which Internet companies have been required to establish programs
regarding the manner in which personal information is collected from users and
provided to third parties. We could become a party to a similar enforcement
proceeding. These regulatory and enforcement efforts could also harm our
ability to collect demographic and personal information from users, which
could be costly or adversely affect our marketing efforts.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate
that any cash dividends will be declared or paid in the foreseeable future. As
a result, holders of our common stock will not receive a return, if any, on
their investment unless they sell their shares of our common stock.
It may be difficult for a third party to acquire us and this could depress
our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 5,000,000 shares of preferred stock, which our board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the terms,
rights, preferences and designations set by our board, may delay, deter or
prevent a change in control of us. In addition, issuing additional shares of
common stock could result in dilution of the voting power of the current
holders of our common stock. Moreover, "anti-takeover" provisions of Delaware
law may restrict the ability of the stockholders to approve a merger or
business combination or obtain control of us. As many investors consider a
change of control as a desirable path to liquidity, delaying or preventing a
change in control of our company may reduce the number of investors interested
in our common stock, which could depress our stock price.
There are limitations on the liabilities of our directors.
Pursuant to our amended and restated certificate of incorporation and under
Delaware law, our directors are not liable to us or our stockholders for
monetary damages for breach of fiduciary duty, except for liability for breach
of a director's duty of loyalty, acts or omissions by a director not in good
faith or which involve intentional misconduct or a knowing violation of law,
dividend payments or stock repurchases that are unlawful under Delaware law or
any transaction in which a director has derived an improper personal benefit.
In addition, we have entered into indemnification agreements with each of our
directors. These agreements, among other things, require us to indemnify each
director for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us or in our right, arising out of the person's
services as one of our directors. Our directors are not currently subject to
legal action that would require us to indemnify them; however, if any such
actions were brought, the costs associated with such actions could be harmful
to our business.
ITEM 2: PROPERTIES.
Our principal executive offices are located in a 56,000 square foot facility
purchased by us in August 1999 and located in King of Prussia, Pennsylvania.
We operate our fulfillment center from a 300,000 square foot leased facility
located in Louisville, Kentucky. We intend to purchase our Kentucky
fulfillment center. We lease 32,000 square feet in Houston, Texas where most
of our jewelry and luxury goods operations are based and 44,000 square feet in
Houston, Texas where our jewelry and luxury goods fulfillment center is based.
25
We believe that our properties are adequate for our present needs and that
suitable additional or replacement space will be available as required.
ITEM 3: LEGAL PROCEEDINGS.
We are involved in various routine litigation incidental to our current and
discontinued businesses. We believe that the disposition of these matters will
not have a material adverse effect on our financial position or results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during the fiscal
quarter ended December 29, 2001.
26
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding each of our executive
officers and key employees (information regarding each of our directors is
incorporated by reference to the section of our 2002 Proxy Statement entitled
"Proposal 1--Election of Directors"):
Name Age(/1/) Title
---- -------- -----
Michael G. Rubin........ 29 Chairman, President and Chief Executive Officer
Jordan M. Copland....... 39 Executive Vice President and Chief Financial Officer
Robert W. Liewald....... 53 Executive Vice President, Merchandising
Arthur H. Miller........ 48 Executive Vice President and General Counsel
Mark Reese.............. 39 Executive Vice President and Chief Operating Officer
Michael R. Conn......... 31 Senior Vice President, Business Development
Steven C. Davis......... 31 Senior Vice President, Marketing
Glenn Walls............. 38 Senior Vice President, Merchandising
- --------
(1) As of March 1, 2002
Michael G. Rubin has served as our Chairman of the Board and Chief Executive
Officer since July 1995 and as our President since June 2000. Mr. Rubin was
named Entrepreneur of the Year in 1994 and 2000 at the Greater Philadelphia
Entrepreneur of the Year Awards sponsored by Ernst & Young. Mr. Rubin attended
Villanova University, Villanova, Pennsylvania.
Jordan M. Copland has served as our Executive Vice President and Chief
Financial Officer since February 2000. From March 1999 to February 2000, Mr.
Copland served as Senior Vice President and Chief Financial Officer of Virgin
Entertainment Group, Inc.'s United States-based Megastore and global e-
commerce businesses. While at Virgin, Mr. Copland oversaw financial
administration and technology. From October 1990 to March 1999, Mr. Copland
held a variety of positions with increasing responsibility within The Walt
Disney Company, a worldwide entertainment company. Most recently Mr. Copland
was Vice President of Finance and Planning for the Disney Consumer Products
division. He has also held various leadership and management positions within
several other divisions of Disney, including the Disney Publishing Group,
Disney Consumer Products Europe, the Middle East and Africa and Walt Disney
Records.
Robert W. Liewald has served as our Executive Vice President, Merchandising
since July 1999 and worked as a consultant to us and to other companies in the
sporting goods industry from June 1998 to July 1999. From January 1995 to June
1998, Mr. Liewald served as Senior Executive Vice President of FILA USA, an
athletic footwear and apparel manufacturer. From June 1972 to January 1995,
Mr. Liewald held a variety of positions at Foot Locker, Inc. (formerly Venator
Group), an athletic footwear and apparel retailer based in New York, New York,
most recently as Senior Vice President, Corporate Merchandiser, with
merchandising responsibility for all of Foot Locker's specialty athletic
divisions. Also while at Foot Locker, Mr. Liewald served as Vice President,
General Merchandise Manager for Champs Sports and Vice President, Merchandise
Manager at Foot Locker and Lady Foot Locker.
Arthur H. Miller has served as our Executive Vice President and General
Counsel since September 1999. From January 1988 to September 1999, Mr. Miller
was a partner in the corporate department of Blank Rome Comisky & McCauley
LLP, a law firm based in Philadelphia, Pennsylvania. Mr. Miller joined Blank
Rome in April 1983.
Mark S. Reese has served as our Executive Vice President and Chief Operating
Officer since May 2000. From February 1999 to May 2000, Mr. Reese served as
Chief eCommerce Officer of Toysmart.com, an e-tailer of family products. While
at Toysmart.com, Mr. Reese was responsible for the leadership and management
of the Internet production, merchandising, fulfillment, customer care,
research, and online content groups. From December 1997 to February 1999, Mr.
Reese was a Senior Manager with Andersen Consulting's Strategic Services
practice group, where he led strategic e-commerce initiatives for Fortune 50
companies. From December 1993 to December 1997, Mr. Reese was a Managing
Associate at CSC Index, a consulting company.
27
Michael R. Conn has served as our Senior Vice President, Business
Development since February 1999. From June 1993 to February 1999, Mr. Conn
served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank
based in New York, New York. Mr. Conn worked as a sell-side securities analyst
specializing in footwear, apparel, retail and leisure products. While at
Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst
Team.
Steven C. Davis has served as our Senior Vice President, Marketing since
January 2000. From June 1996 to January 2000, Mr. Davis held a number of
management positions at Just for Feet, Inc., a specialty sporting goods
retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice
President of Marketing and previously he served as Director of Marketing and
Director of Special Projects. From September 1994 to June 1996, Mr. Davis was
enrolled at the University of Pennsylvania's Wharton School of Business where
he received an MBA.
Glenn P. Walls has served as our Senior Vice President, Merchandising since
September 2000. From June 1995 to August 2000, Mr. Walls was Divisional
Merchandise Manager for Dick's Sporting Goods, a 95-store sporting goods
retailer based in Pittsburgh, Pennsylvania. From August 1992 to June 1995, he
was Director of Sales for Lillis Agency, where he represented athletic
footwear and sporting goods sales for 10 leading sporting goods manufacturers.
From June 1990 to August 1992, Mr. Walls was Senior Buyer, Athletics for
Endicott Johnson Retail, overseeing buying for the 210 Endicott Johnson Family
stores and the 160 Father & Son shoe stores. From January 1986 to April 1990,
Mr. Walls was an executive at Dick's Sporting Goods, serving as Men's Apparel
Buyer and Team Sports/Exercise Buyer.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Price of and Dividends on Common Stock
The following table sets forth the high and low sales prices as reported on
the Nasdaq National Market. The prices shown do not include retail markups,
markdowns or commissions. As of March 9, 2002, we had approximately 2,070
shareholders of record. In connection with our anticipated name change, we
also intend to change our Nasdaq symbol from "GSPT" to "GSIC".
Prices
-------------
High Low
------ ------
Fiscal Year Ended December 30, 2000
First Quarter.................................................. $23.88 $12.25
Second Quarter................................................. $18.25 $ 4.31
Third Quarter.................................................. $ 9.63 $ 6.25
Fourth Quarter................................................. $11.13 $ 3.53
Fiscal Year Ended December 29, 2001
First Quarter.................................................. $ 6.38 $ 2.38
Second Quarter................................................. $ 8.45 $ 3.00
Third Quarter.................................................. $19.88 $ 7.45
Fourth Quarter................................................. $21.72 $10.85
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate declaring or paying any cash dividends on our
common stock for the foreseeable future.
ITEM 6: SELECTED FINANCIAL DATA.
The following tables present portions of our financial statements and are
not complete. You should read the following selected consolidated financial
data together with our consolidated financial statements and related notes to
our financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected statement of
operations data for the years ended January 1, 2000, December 30, 2000 and
December 29, 2001 and the balance sheet data as of December 30, 2000 and
December 29, 2001 are derived from our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The selected
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statement of operations data for the years ended December 31, 1997 and 1998
and the balance sheet data as of December 31, 1997 and 1998 and January 1,
2000 are derived from our audited consolidated financial statements that are
not included in this Annual Report on Form 10-K.
On April 20, 1999, we formalized a plan to sell our Branded Division and our
Off-Price and Action Sports Division in order to focus exclusively on our 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 as
discontinued operations. The following selected consolidated financial data
and our consolidated financial statements included in this Annual Report on
Form 10-K have been reclassified to reflect this presentation.
Fiscal Year Ended
------------------------------------
Year Ended
December 31, January 1, December 30, December 29,
---------------- ---------- ------------ ------------
1997 1998 2000 2000 2001
------- ------- ---------- ------------ ------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ -- $ -- $ 5,511 $ 42,808 $102,610
Cost of revenues........ -- -- 3,817 29,567 67,586