<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended JUNE 30, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _______to _______.
Commission File Number 0-16611
-------
GLOBAL SPORTS, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406
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(Address of principal executive offices) (Zip Code)
610-878-8600
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 10, 1998:
Common Stock, $.01 par value 11,923,711
---------------------------- -----------------------------
(Title of each class) (Number of Shares)
<PAGE>
- --------------------------------------------------------------------------------
GLOBAL SPORTS, INC.
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 3
Condensed Statements of Operations
for the three-and six-month periods ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows
for the six-month periods ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 10 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults on Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
-2-
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 179,725 $ 98,881
Accounts receivable, net of allowance for doubtful
accounts of $1,030,969 in 1998 and $743,223 in 1997 30,492,475 16,060,911
Inventory 21,820,077 16,906,171
Prepaid expenses and other current assets 1,067,960 933,548
-------------- -------------
Total current assets 53,560,237 33,999,511
Property and equipment, net of accumulated depreciation
and amortization 4,448,507 3,282,712
Goodwill and intangibles, net 12,521,917 6,147,282
Other assets 26,473 2,404
-------------- -------------
Total assets $70,557,134 $43,431,909
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - notes payable, bank $10,670,455 $ 2,000,000
Current portion - note payable, other 400,000 -
Current portion - capital lease obligation, related party 121,901 116,124
Accounts payable and accrued expenses 25,516,769 16,114,305
Subordinated notes payable 3,821,085 2,068,652
-------------- -------------
Total current liabilities 40,530,210 20,299,081
Notes payable, bank 15,400,423 18,666,248
Note payable, other 1,400,000 -
Capital lease obligation, related party 2,246,800 2,309,231
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued
Common stock, $0.01 par value, 20,000,000 shares
authorized, 12,987,797 and 11,487,197 shares issued in 1998 and 1997;
11,918,711 and 10,418,111 shares outstanding in 1998 and 1997 129,881 114,875
Additional paid in capital 14,453,271 8,001,132
Cumulative translation adjustment (33,804) (35,520)
Accumulated deficit (3,355,830) (5,709,321)
-------------- -------------
11,193,518 2,371,166
Less: Treasury stock, at cost 213,817 213,817
-------------- -------------
Total stockholders' equity 10,979,701 2,157,349
-------------- -------------
Total liabilities and stockholders' equity $70,557,134 $43,431,909
============== =============
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
-3-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $28,320,457 $13,612,837 $56,468,835 $25,133,737
------------- ------------- ------------- -------------
Costs and expenses:
Cost of goods sold 21,006,045 10,364,277 41,029,944 19,965,114
Selling, general and administrative expense 5,514,850 3,032,732 10,895,573 6,269,386
------------- ------------- ------------- -------------
26,520,895 13,397,009 51,925,517 26,234,500
------------- ------------- ------------- -------------
Operating income (loss) 1,799,562 215,828 4,543,318 (1,100,763)
Other (income) expense:
Interest expense, net 714,241 441,739 1,333,512 773,191
Other, net (129,523) (40,815) (186,611) (88,230)
------------- ------------- ------------- -------------
584,718 400,924 1,146,901 684,961
------------- ------------- ------------- -------------
Income (loss) before equity in net loss of RYKA Inc. 1,214,844 (185,096) 3,396,417 (1,785,724)
Equity in net loss of RYKA Inc. - (20,407) - (87,129)
------------- ------------- ------------- -------------
Income (loss) before income taxes 1,214,844 (205,503) 3,396,417 (1,872,853)
Provision for income taxes 392,926 - 1,042,926 -
------------- ------------- ------------- -------------
Net income (loss) $ 821,918 $ (205,503) $ 2,353,491 $(1,872,853)
============= ============= ============= =============
Basic earnings per share $.07 $.22
============= =============
Diluted earnings per share $.07 $.21
============= =============
Pro Forma Data: (See Note 5)
Loss before income taxes $ (205,503) $(1,872,853)
Pro forma provision for income taxes - -
------------- -------------
Pro forma net loss $ (205,503) $(1,872,853)
============= =============
Pro forma basic losses per share $(.07) $(.64)
============= =============
Pro forma diluted losses per share $(.07) $(.64)
============= =============
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
-4-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
(Consolidated) (Combined)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 2,353,491 $(1,872,853)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 589,316 79,337
Provision for losses on accounts receivable (53,784) (28,499)
Equity in undistributed net loss of RYKA Inc. - 87,129
Warrant expense - 152,000
Changes in operating assets and liabilities:
Accounts receivable (6,718,703) (1,936,300)
Inventory (1,406,872) 1,303,129
Prepaid expenses and other current assets 720,038 787,971
Other assets (153,754) 21,246
Accounts payable and accrued expenses 3,974,419 239,536
----------- -----------
Net cash used in operating activities (695,849) (1,167,304)
----------- -----------
Cash flows from investing activities:
Capital expenditures (163,170) (29,546)
Businesses acquired, net of cash 357,773 -
Investment in RYKA Inc. - 448,943
----------- -----------
Net cash provided by investing activities 194,603 419,397
----------- -----------
Cash flows from financing activities:
Net borrowings under lines of credit 870,108 1,303,823
Repayments of capital lease obligation (56,654) (55,797)
Proceeds from issuance of common stock 16,920 -
Repayments on subordinated notes payable (250,000) (376,414)
----------- -----------
Net cash provided by financing activities 580,374 871,612
----------- -----------
Effect of exchange rate on cash and cash equivalents 1,716 18,087
----------- -----------
Net increase in cash and cash equivalents 80,844 141,792
Cash and cash equivalents, beginning of period 98,881 275,871
----------- -----------
Cash and cash equivalents, end of period $ 179,725 $ 417,663
=========== ===========
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
-5-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation,
designs, develops and markets branded footwear under the RYKA, YUKON and APEX
brand names as well as distributes off-price athletic footwear, apparel and
sporting goods worldwide, with primary distribution in the United States.
On December 15, 1997, the Company consummated a reorganization (the
"Reorganization"), among RYKA Inc. ("RYKA"), KPR Sports International, Inc.
("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three
companies collectively referred to as the "KPR Companies"), and Michael G.
Rubin, the Chairman and Chief Executive Officer of the Company. After the
Reorganization, Mr. Rubin, the former sole shareholder of the KPR Companies,
then owned approximately 78.4% of the outstanding voting power of the Company.
Accordingly, the Reorganization was accounted for as a reverse purchase under
generally accepted accounting principles pursuant to which the KPR Companies
were considered to be the acquiring entity and the Company was the acquired
entity for accounting purposes, even though the Company was the surviving legal
entity. As a result of this reverse purchase accounting treatment, (i) the
historical financial statements presented for periods prior to the date of the
Reorganization are no longer the historical financial statements of RYKA; (ii)
the historical financial statements for periods prior to the date of the
Reorganization are those of the KPR Companies, (iii) all references to the
historical financial statements of the Company apply to the historical financial
statements of the KPR Companies prior to and subsequent to the Reorganization,
and (iv) any references to RYKA apply solely to that company and its financial
statements prior to the Reorganization.
The accompanying condensed financial statements of Global have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying financial information is unaudited; however, in the opinion of
the Company's management, all adjustments (consisting solely of normal recurring
accruals) necessary for a fair presentation of the operating results of the
periods reported have been included. The results of operations for the periods
reported are not necessarily indicative of those that may be expected for a full
year.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of December 31, 1997 as presented in the Company's Annual Report
on Form 10-K.
NOTE 2 - ACQUISITION OF THE GEN-X COMPANIES
Effective May 12, 1998, the Company acquired Gen-X Holdings, Inc. and Gen-X
Equipment, Inc. (collectively, the "Gen-X Companies"). The Gen-X Companies were
privately-held companies based in Toronto, Ontario specializing in selling off-
price sporting goods and winter sports equipment (including ski and snowboard
equipment), in-line skates, sunglasses, skateboards and specialty footwear. For
their fiscal year ended September 30, 1997, the Gen-X Companies had revenues of
approximately $31 million and net income of $2 million. In consideration for
acquiring the stock of the Gen-X Companies, the Company issued 1.5 million
shares of its common stock and contingent consideration in the form of
noninterest-bearing notes and shares of mandatorily redeemable preferred stock
in the aggregate amount of $5 million. The notes and shares are payable or
redeemable at $1 million per year over a five-year period upon achieving certain
sales and gross profit targets. The total purchase price, including acquisition
expenses of approximately $380,000 but excluding the contingent consideration
described above, was $6,793,020. This purchase price is based on the 10-day
average market price of the 1.5 million shares discounted by 35% to reflect that
these shares represent a large block of the Company's stock. Purchase price
allocation has resulted in goodwill of $6,644,083 that will be amortized on a
straight line basis over 20 years. If and when the contingent consideration is
issued, this goodwill will increase.
-6-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information shows the results of the
Company's operations for the three- and six-month periods ended June 30, 1997 as
if the Reorganization (see Note 1) and acquisition of the Gen-X Companies (see
Note 2) had occurred on January 1, 1997. Adjustments have been made to record
the amortization of goodwill and intangibles, to eliminate intercompany rental
charges, to record interest expense on the post-Reorganization subordinated debt
and to eliminate the KPR Companies' equity in the net losses of RYKA recorded
prior to the Reorganization. All share and per share information has been
adjusted as if the 1-for-20 reverse stock split and the issuance of 7,100,000
shares of the Company's common stock, both of which were effected at the
Reorganization, and the issuance of 1,500,000 shares of the Company's common
stock effected in the acquisition of the Gen-X Companies had also occurred on
January 1, 1997. The pro forma information does not purport to be indicative of
the Company's results of operations had the Reorganization and acquisition
actually occurred on that date nor is it necessarily indicative of future
operating results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $31,094,399 $26,053,144 $66,070,503 $50,023,390
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 23,745,090 20,170,938 49,124,004 38,922,162
Selling, general and administrative expense 5,994,117 5,245,969 12,486,546 10,304,975
----------- ----------- ----------- -----------
29,739,207 25,416,907 61,610,550 49,227,137
----------- ----------- ----------- -----------
Operating income 1,355,192 636,237 4,459,953 796,253
Other expense, net 653,400 612,171 1,395,468 1,203,768
----------- ----------- ----------- -----------
Income (loss) before income taxes 701,792 24,066 3,064,485 (407,515)
Provision for income taxes 239,003 133,598 870,451 563,307
----------- ----------- ----------- -----------
Net income (loss) $ 462,789 $ (109,532) $2,194,034 $ (970,822)
=========== =========== =========== ===========
Income (losses) per share-basic and diluted $ .04 $ (.01) $ .18 $ (.09)
=========== =========== =========== ===========
Weighted average common and common equivalent
shares outstanding-basic and diluted 11,918,711 11,527,920 11,918,456 11,432,595
=========== =========== =========== ===========
</TABLE>
NOTE 4 - DEBT
NOTES PAYABLE, BANK
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and
Security Agreement (the "Loan Agreement") with a new lender pursuant to which
their prior lender was repaid in full on November 21, 1997. Under the Loan
Agreement, as amended, the Company has access to a combined credit facility of
$40,000,000, which is comprised of the KPR Companies' credit facility of
$35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan
Agreement is five years. The KPR Companies and RYKA have an interest rate choice
of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-
five basis points (8 3/4% at December 31, 1997 and June 30, 1998). Under the
Loan Agreement, both the KPR Companies and RYKA may borrow up to the amount of
their revolving line based upon 85% of their eligible accounts receivable and
65% of their eligible inventory, as those terms are defined in the Loan
Agreement. The Loan Agreement also includes 50% of outstanding letters of
credit as collateral for borrowing. In addition to the revolving lines of
credit described above, the new lender will over-advance to the Company a
combined additional total of $3,000,000, comprised of the KPR Companies'
additional $2,000,000 and RYKA's additional $1,000,000, over the collateral for
additional letters of credit needed for seasonal production of new merchandise
for the Fall 1998, Spring 1999 and Fall 1999 seasons. At June 30, 1998, the
aggregate amount outstanding under this line was $17,933,087. The Company has
classified $2,840,879 of the amount outstanding as a current liability based on
the Company's expectation of the amounts which will be satisfied within the next
year. Of this amount $840,879 was related to the seasonal overadvance. At June
30, 1998, based on available collateral, an additional $222,164 was available on
this line for borrowing.
-7-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The total interest incurred in connection with this facility was $496,731 and
$961,683 for the three-and six-month periods ending June 30, 1998, respectively.
Closing and other fees incurred at the inception of the new facilities in the
amount of approximately $266,000 have been included on the balance sheet and are
being amortized over the term of the Loan Agreement. Additional fees of $80,000
were incurred during 1998 related to line increases and over-advance activation
have also been capitalized. As of June 30, 1998, the unamortized balance of
such fees was $294,402.
The Company has an additional line of credit of approximately $14,600,000 for
use by the Gen-X Companies, which is available for either direct borrowing or
for import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering all of the Gen-
X Companies' assets. At June 30, 1998, approximately $7,800,000 was outstanding
under this line and, based on available collateral, an additional $3,111,000 was
available for borrowing.
Notes payable, bank also includes a mortgage payable secured by land and
building in Ontario, Canada of $337,791, of which $29,576 is classified as
current, bearing interest at the bank's cost of funds plus 2.5% and maturing on
August 15, 2009.
NOTES PAYABLE, OTHER
Other debt related to the Gen-X Companies includes a loan payable to Ride Inc.
for $1,800,000, of which $400,000 is classified as current. This loan is
repayable in equal quarterly installments of $100,000 which commenced on March
31, 1998 and bears interest at the prime lending rate.
SUBORDINATED NOTES PAYABLE
At June 30, 1998, the Company had $1,822,020 in subordinated notes payable held
by its Chairman and CEO, which included accrued interest on such notes of
$16,178. This debt consisted primarily of a note representing undistributed
Subchapter S corporation retained earnings previously taxed to him as the sole
shareholder of the KPR Companies prior to the Reorganization (see Note 1).
Interest accrues on such notes at the Company's choice of prime plus 1/4% or
LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points.
The interest rate at June 30, 1998 was 8 3/4% and interest recorded during the
six-month period was $98,536. Based on its Loan Agreement (see Note 3), the
Company is permitted to make continued regular payments of interest on the
subordinated debt and to further reduce principal on a quarterly basis,
commencing subsequent to the first quarter of 1998, in an amount up to 50% of
the cumulative consolidated net income of the Company. Through June 30, 1998,
aggregate payments of $250,000 were made to the note holder to reduce principal.
Upon closing the Gen-X transaction on May 12, 1998, several subordinated notes
payable were executed with the former shareholders of the Gen-X Companies for an
aggregate of $1,999,047 which is payable upon the earlier of the Company raising
certain additional capital or in four equal consecutive quarterly payments
beginning March 31, 1999. This note bears interest at 7% until December 31,
1998 and the prime lending rate thereafter.
NOTE 5 - RELATED PARTIES
The Company is located in King of Prussia, Pennsylvania where it conducts its
operations and warehouses inventory in a facility leased from the Company's
Chairman and CEO. The lease has been accounted for as a capital lease, which
resulted in $59,519 and $118,411 recorded to interest expense for the three-and
six-month periods ended June 30, 1998. At June 30, 1998, the Company's
investment in the capital lease was $2,109,610, which is included in property
and equipment.
The Company also has subordinated notes payable with its Chairman and CEO, as
referred to in Note 4 above.
-8-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share for all periods have been computed in accordance
with SFAS No. 128, Earnings Per Share. Basic earnings (losses) per share is
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the year. Diluted earnings (losses) per share
is computed by dividing the net income (loss) by the weighted average number of
shares outstanding during the year, assuming dilution by outstanding common
stock options and warrants.
Pro forma basic earnings (losses) per share represents pro forma net income
(loss) (after a pro forma provision for income taxes in 1997 as if the Company
had been subject to federal and state income taxation as a C corporation since
inception) divided by the weighted average number of common shares outstanding
during the period. Pro forma diluted earnings (losses) per share is computed by
dividing pro forma net income (loss) by the weighted average number of common
shares outstanding during the period, assuming dilution by outstanding common
stock options and warrants.
The amounts used in calculating earnings (losses) per share data are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income.................................... $ 821,918 $ 2,353,491
=========== ===========
Pro forma net loss............................ $ (205,503) $(1,872,853)
=========== ===========
Weighted average shares
outstanding - basic........................ 11,226,403 2,880,109 10,824,533 2,927,920
=========== =========== =========== ===========
Weighted average shares
outstanding - diluted...................... 11,537,668 2,880,109 11,057,701 2,927,920
=========== =========== =========== ===========
Outstanding common stock options having no
dilutive effect............................ 271,692 199,463 196,736 201,188
=========== =========== =========== ===========
Outstanding common stock warrants having no
dilutive effect............................ 188,816 106,186 211,448 106,186
=========== =========== =========== ===========
</TABLE>
The Company's pro forma net loss in 1997 results in an antidilutive effect in
the calculation of pro forma diluted earnings (losses) per share.
NOTE 7 - CONTINGENCIES
As of June 30, 1998, outstanding purchase commitments exist totaling $9,697,169,
for which commercial letters of credit have been issued.
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive income for the three-and six-month periods ended June 30, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 821,918 $(205,503) $ 2,353,491 $(1,872,853)
Foreign currency translation adjustment (955) (1,636) 1,716 23,778
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 820,963 $ (207,139) $ 2,355,207 $(1,849,075)
=========== =========== =========== ===========
</TABLE>
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the
Company's filings with the Securities and Exchange Commission, including its
most recent Form 10-K, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
STRATEGIC BUSINESS DEVELOPMENTS AFFECTING COMPARABILITY
On December 15, 1997, the Company consummated the Reorganization. As a result,
Mr. Rubin, as sole shareholder of the KPR Companies, received RYKA shares which
gave him voting control over the combined companies. Accordingly, for accounting
purposes, the KPR Companies are considered the continuing entity and the
transaction has been accounted for as a Reorganization of the KPR Companies
followed by the issuance of new shares of common stock of the KPR Companies for
the net assets of RYKA.
Effective May 12, 1998, the Company acquired Gen-X Holdings, Inc. and Gen-X
Equipment, Inc. (collectively, the "Gen-X Companies") in a purchase transaction
(the "Acquisition"). The Company's reported results of operations for 1998
include those of the Gen-X Companies from the date of acquisition through the
end of the period. For the period May 12, 1998 through June 30, 1998, the Gen-X
Companies reported net sales of $7,668,639 and net income of $534,641.
The Reorganization and Acquisition affect comparability of second quarter and
year-to-date 1998 results with reported results for the comparable 1997 periods.
A more meaningful analysis can be made by comparing 1998 pro forma results with
the 1997 pro forma results as if the Reorganization and Acquisition had occurred
on January 1, 1997. The 1997 and 1998 pro forma information does not purport to
be indicative of the Company's results of operations had the transactions
described above actually occurred on the dates presented nor is it necessarily
indicative of future operating results. The 1997 and 1998 pro forma information
does not include the effects of cost savings and sales synergies expected to be
realized as a result of the Reorganization and the Acquisition. The following
"Results of Operations" discussion describes the comparison of the second
quarter and year-to-date periods of 1998 on a pro forma basis to the comparable
1997 periods on a pro forma basis, unless otherwise noted.
-10-
<PAGE>
RESULTS OF OPERATIONS (THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 ON A
PRO FORMA BASIS VERSUS COMPARABLE 1997 PERIODS ON A
PRO FORMA BASIS)
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Statements of Operations bear to
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------------------
1998 1998 1997 1997
----------------------- ----------------------- ----------------------- -----------------------
$ % OF $ % OF $ % OF $ % OF
SALES SALES SALES SALES
------------ --------- ------------ --------- ------------ --------- ------------ ---------
(As Reported) (Pro Forma) (As Reported) (Pro Forma)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 28,320,457 100.0% $ 31,094,399 100.0% $ 13,612,837 100.0% $ 26,053,144 100.0%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Cost & expenses:
Cost of goods sold....... 21,006,045 74.2% 23,745,090 76.4% 10,364,277 76.1% 20,170,938 77.4%
SG&A expense................ 5,514,850 19.5% 5,994,117 19.3% 3,032,732 22.3% 5,245,969 20.1%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Operating income............ 1,799,562 6.3% 1,355,192 4.3% 215,828 1.6% 636,237 2.5%
Other expense, net.......... 584,718 2.0% 653,400 2.0% 421,331 3.0% 612,171 2.4%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Income (loss)
before income taxes......... 1,214,844 4.3% 701,792 2.3% (205,503) (1.4%) 24,066 0.1%
Provision for income taxes.. 392,926 1.4% 239,003 0.8% - - 133,598 0.5%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Net income (loss)........... $ 821,918 2.9% $ 462,789 1.5% $ (205,503) (1.4%) $ (109,532) (0.4%)
============ ========= ============ ========= ============ ========= ============ =========
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------------------
1998 1998 1997 1997
----------------------- ----------------------- ----------------------- -----------------------
$ % OF $ % OF $ % OF $ % OF
SALES SALES SALES SALES
------------ --------- ------------ --------- ------------ --------- ------------ ---------
(As Reported) (Pro Forma) (As Reported) (Pro Forma)
Net sales $ 56,468,835 100.0% $ 66,070,503 100.0% $ 25,133,737 100.0% $ 50,023,390 100.0%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Cost & expenses:
Cost of goods sold....... 41,029,944 72.7% 49,124,004 74.4% 19,965,114 79.4% 38,922,162 77.8%
SG&A expense................ 10,895,573 19.3% 12,486,546 18.9% 6,269,386 24.9% 10,304,975 20.6%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Operating income............ 4,543,318 8.0% 4,459,953 6.7% (1,100,763) (4.3%) 796,253 1.6%
Other expense, net.......... 1,146,901 2.0% 1,395,468 2.1% 772,090 3.1% 1,203,768 2.4%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Income (loss)
before income taxes......... 3,396,417 6.0% 3,064,485 4.6% (1,872,853) (7.4%) (407,515) (0.8%)
Provision for income taxes.. 1,042,926 1.8% 870,451 1.3% - - 563,307 1.1%
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Net income (loss)........... $ 2,353,491 4.2% $ 2,194,034 3.3% $ (1,872,853) (7.4%) $ (970,822) (1.9%)
============ ========= ============ ========= ============ ========= ============ =========
</TABLE>
-11-
<PAGE>
NET SALES
Net sales for the second quarter of 1998 on a pro forma basis increased
$5,041,255, or 19.3%, over the same period in 1997 on a pro forma basis. Net
sales for the six month period ended June 30, 1998 on a pro forma basis
increased $16,047,114, or 32.1%, over the same period in 1997 on a pro forma
basis. These increases were primarily attributable to the on-going expansion of
the Company's off-price business, reflecting the continued excess availability
of off-price merchandise in the marketplace.
COST OF GOODS SOLD/GROSS MARGIN
Cost of goods sold for the second quarter of 1998 on a pro forma basis increased
$3,574,152, or 17.7%, over the same period in 1997 on a pro forma basis. Cost
of goods sold for the six month period ended June 30, 1998 on a pro forma basis
increased $10,201,842, or 26.2%, over the same period in 1997 on a pro forma
basis. Gross margin (as a percentage of sales) increased in the second quarter
of 1998 on a pro forma basis to 23.6% from 22.5% in the same period in 1997 on a
pro forma basis. For the six months ended June 30, 1998 on a pro forma basis,
gross margin increased to 25.7% from 22.2% in the same period in 1997 on a pro
forma basis. The first quarter of 1997 on a pro forma basis experienced
unusually low gross margins as a result of the lack of substantial off-price
purchases and management's desire to reduce off-price inventories. This trend
did not continue into the second quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expense for the second quarter of
1998 on a pro forma basis increased $748,148, or 14.3%, over the same period in
1997 on a pro forma basis. SG&A expense for the six month period ending June 30,
1998 on a pro forma basis increased $2,181,571, or 21.2%, over the same period
in 1997 on a pro forma basis. Exclusive of the Gen-X Companies, the Company's
SG&A expenses were relatively flat across the three-month periods ended June 30,
1998 and 1997 on a pro forma basis. Of the increase for the six-month period,
approximately $1,046,000 relates to the base Global Sports business exclusive of
the Gen-X Companies. This reflects the Company's increased warehousing cost in
support of the higher sales volumes in the off-price business and greater
promotional and advertising expenditures in support of the Company's commitment
to market and develop the products of the branded business. These increases
were partially offset by a decrease in the legal and other professional fees
related to the 1997 Reorganization and debt refinancing. The remaining increase
from 1997 to 1998 for the three- and six-month periods ended June 30 of
approximately $731,000 and $1,172,000 represent increases in the SG&A
expenditures of the Gen-X Companies due to a relatively substantial growth in
business experienced in the latter half of 1997 and throughout 1998. Large
headcount increases resulted in increased salary expenses from period to period
and selling and marketing expenses grew as the sales force grew and migrated the
customer base from primarily house accounts to commissioned sales agent
accounts. In addition, the Gen-X Companies increased their attendance at
industry trade shows in order to increase the new company's exposure.
OTHER EXPENSE, NET
Other expense, net for the second quarter of 1998 on a pro forma basis increased
$41,229, or 6.7%, over the same period on a pro forma basis in 1997. Other
expense, net for the six-month period on a pro forma basis ending June 30, 1998
increased $191,700, or 15.9%, over the same period on a pro forma basis in 1997.
The increase for the six-month period reflects greater interest expense as a
result of increased borrowing to support the growth in inventories.
-12-
<PAGE>
FINANCIAL CONDITION
CASH FLOWS
Prior to the Reorganization, the operations of the KPR Companies had been
financed by a combination of internally generated resources and annual increases
in the size of the bank credit facility. The operations of RYKA were financed by
equity transactions, subordinated borrowings and annual increases in the size of
RYKA's bank credit facility. Increases in the bank credit facilities for the KPR
Companies and RYKA were required to fund the Company's increased investment in
accounts receivable and inventory necessary to support the increases in revenue.
As of June 30, 1998, the Company had working capital of $13,030,027. The
Company used $695,849 in cash flows from operating activities for the six months
ended June 30, 1998, whereas in the same period of the prior year the Company
used $1,167,304 in cash flows from operating activities.
LIQUIDITY
On November 20, 1997, the KPR Companies and RYKA entered into the Loan Agreement
with a new lender pursuant to which their prior lender was repaid in full on
November 21, 1997. Under the Loan Agreement, the Company has access to a
combined credit facility of $25,000,000, which is comprised of the KPR
Companies' credit facility of $20,000,000 and RYKA's credit facility of
$5,000,000. The term of the Loan Agreement is five years. The KPR Companies
and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis points. The Company's
aggregate credit facility was subsequently increased to $30,000,000 on February
20, 1998 and to $40,000,000 on June 3, 1998 by increasing the line of credit
available to the KPR Companies to $35,000,000. Under this new credit facility,
both the KPR Companies and RYKA may borrow up to the amount of their revolving
line based upon 85% of their eligible accounts receivable and 65% of their
eligible inventory, as those terms are defined in the Loan Agreement. In
addition to the revolving lines of credit described above, the new lender will
over-advance to the Company a combined additional total of $3,000,000, comprised
of the KPR Company's additional $2,000,000 and RYKA's additional $1,000,000 over
the collateral for additional letters of credit needed for seasonal production
of new merchandise for the Fall 1998, Spring 1999 and Fall 1999 seasons. The
aggregate outstanding under this line at June 30, 1998 was $17,933,087, of which
$840,879 was related to the seasonal overadvance. At June 30, 1998, based on
available collateral, an additional $222,164 was available on this line for
borrowing.
The Company has an additional line of credit of $14,600,000 for use by the Gen-X
Companies, which is available for either direct borrowing or for import letters
of credit. The loan bears interest at prime plus one half percent and is secured
by a general security agreement covering all of the Gen-X Companies' assets. At
June 30, 1998, approximately $7,800,000 was outstanding under this line and
based on available collateral an additional $3,111,000 was available for
borrowing.
As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin,
its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i)
a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440,
plus accrued and unpaid interest on such loan of $180,517 through October 31,
1997 and (ii) a note in the principal amount of $2,204,401 representing
undistributed Subchapter S corporation retained earnings previously taxed to him
as the sole shareholder of the KPR Companies. No interest accrued on the note
representing Subchapter S corporation earnings until December 15, 1997, the
effective date of the Reorganization, at which time the interest began to accrue
on such note at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate)
plus two hundred seventy-five basis points. The Loan Agreement and the related
Subordination Agreement allowed the Company to repay Mr. Rubin $1,000,000 of the
subordinated debt principal and the accrued interest of $180,517 at the time of
the closing of the Loan Agreement or within five days thereafter, subject to
there being $2,000,000 of availability under the KPR Companies' credit line
after taking into account such payments. Such payments were made to Mr. Rubin on
November 26, 1997. In addition, the Loan Agreement and the Subordination
Agreement permit the KPR Companies to make continued regular payments of
interest on the subordinated debt and to further reduce principal on a quarterly
basis, commencing with the first quarter of 1998, in an amount up to 50% of the
cumulative consolidated net income of both borrowers, reduced by net losses of
the borrowers during such period. Through June 30, 1998, aggregate payments of
$250,000 were made to the note holder to reduce principal.
Management believes that they have adequate financing to allow the Company to
continue its operations and meet its obligations as they mature, during the
foreseeable future. In addition, the Company is currently exploring various
alternatives for raising additional capital.
-13-
<PAGE>
YEAR 2000
The Company is currently enhancing its current information systems to make them
Year 2000 compliant. The Company has created a Year 2000 project team which
will coordinate efforts to evaluate, identify, correct or reprogram, and test
the Company's existing systems for Year 2000 compliance. The Company will take
the required steps to make its existing systems Year 2000 compliant prior to the
end of 1998 and does not expect the costs of such steps to have a material
impact on the Company's results of operations, financial position, liquidity or
capital resources. However, if such efforts are not completed on a timely
basis, the Year 2000 issue could have a material adverse impact on the
operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Effective May 12, 1998, the Company issued 1,500,000 shares of
common stock (par value $.01 per share) and 10,000 shares of
preferred stock in addition to other contingent consideration, to DMJ
Financial, Inc., James J. Selter, Kenneth J. Finkelstein and various
other entities and individuals in exchange for all of the issued and
outstanding shares of capital stock of Gen-X Equipment Inc. and Gen-X
Holdings Inc. The issuance of the common stock and preferred stock
was exempt from registration pursuant to section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Consent and Amendment No. 3 to the Loan Documents by and among KPR
Sports International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.2 Amendment No. 4 to the Loan Documents by and among KPR Sports
International, Inc., RYKA Inc. and Foothill Capital Corporation.
27.1 Financial data schedule for the six-month period ended
June 30, 1998 (electronic filing only).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 27, 1998
related to the acquisition of Gen-X Holdings, Inc. and Gen-X
Equipment, Inc.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
GLOBAL SPORTS, INC.
DATE: August 14, 1998 By: /s/ Michael G. Rubin
----------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
DATE: August 14, 1998 By: /s/ Steven A. Wolf
----------------------
Steven A. Wolf
Chief Financial Officer
-16-
<PAGE>
EXHIBIT 10.1
CONSENT AND AMENDMENT NO. 3 TO LOAN DOCUMENTS
---------------------------------------------
as of May 12, 1998
Foothill Capital Corporation
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
Foothill Capital Corporation ("Foothill") and KPR Sports International,
Inc. ("KPR") and RYKA Inc. ("Ryka", and together with KPR, individually,
"Borrower" and collectively, "Borrowers") have entered into certain financing
arrangements pursuant to the Amended and Restated Loan and Security Agreement
dated as of December 15, 1997 by and among Foothill and Borrowers as amended by
Consent, Amendment No. 1 to Loan Documents and Subordination Agreement, dated as
of January 28, 1998, Amendment No. 1 to Amended and Restated Loan and Security
Agreement dated as of February 20, 1998 and Consent, Amendment No. 2 to Loan
Documents and Waiver as to Certain Events of Default, dated March 25, 1998, (the
"Loan Agreement") and all agreements, documents and instruments at any time
executed and/or delivered in connection therewith or related thereto, including,
without limitation, the Continuing Guaranty and the General Security Agreement,
each dated as of December 15, 1997, executed by Holding Company in favor of
Foothill (the "Holding Company Guaranty" and the "Holding Company GSA",
respectively) (all of the foregoing, together with the Loan Agreement, as the
same are amended hereby, and as the same may be amended, modified, supplemented,
extended, renewed, restated or replaced are hereinafter collectively referred to
as the "Loan Documents"). All capitalized terms used herein shall have the
meaning assigned thereto in the Loan Agreement, unless otherwise defined herein.
Borrowers have requested that Foothill (a) consent to Holding Company
entering into and executing a Stock Purchase Agreement among DMJ Financial,
Inc., a Barbados limited liability company, James J. Salter, Kenneth J.
Finkelstein, and the "Minority Shareholders" party thereto and as defined
therein (the "Stock Purchase Agreement") and to the consummation of the
transactions contemplated by the Stock Purchase Agreement, including (i) the
purchase by Holding Company of all of the issued and outstanding shares of
capital stock of each of Gen-X Equipment Inc., an Ontario corporation ("Gen-X
Equipment") and Gen-X Holdings Inc., a Washington corporation ("Gen-X Holdings";
<PAGE>
and together with Gen-X Equipment, collectively, the "Gen-X Companies") on the
terms and conditions set forth in the Stock Purchase Agreement, (ii the issuance
and delivery by Holding Company to the current shareholders of the Gen-X
Companies (the "Owners"), in full payment of the purchase price for the issued
and outstanding shares of Gen-X Holdings stock ("Gen-X Holdings Stock") of (x)
1,500,000 unregistered shares of Holding Company common stock, (y) two (2)
certain non-negotiable subordinated contingent promissory notes in the principal
amount of $3,076,200 payable to DMJ Financial Inc. ("DMJ") and $1,423,800
payable to the Gen-X Shareholders Agent (as defined below), acting as agent for
certain other former shareholders of the Gen-X Companies (collectively, the
"Global/Gen-X Holdings Notes") and (z) 10,000 unregistered shares of Holding
Company preferred stock having a maximum aggregate redemption price of $500,000
(the "Gen-X Acquisition Preferred Stock") and, (ii in full payment of the
purchase price for the issued and outstanding shares of Gen-X Equipment stock
("Gen-X Equipment Stock"; and together with the Gen-X Holdings Stock,
collectively, the "Gen-X Stock"), two (2) certain non-negotiable subordinated
contingent promissory notes in the principal amount of $718,951.63 payable to
DMJ and $631,048.37 payable to the Gen-X Shareholders Agent (collectively, the
"Global/Gen-X Equipment Notes" and together with the Global/Gen-X Holdings
Notes, collectively, the "Gen-X Subordinated Notes"), and (b) amend the Loan
Agreement including, without limitation, increase the Maximum Revolving Amount
and decrease the applicable interest rates.
Foothill is willing to consent to the foregoing and to amend the Loan
Agreement, all on and subject to the terms and conditions contained in this
Consent and Amendment No. 3 to Loan Documents (this "Amendment"). By this
Amendment, Foothill and Borrowers desire and intend to evidence such consent and
amendments.
In consideration of the foregoing, the parties hereto agree as follows:
1. Consent.
-------
(a) Pursuant to Section 5.7(c) of the Holding Company GSA and Sections
7.1, 7.4, 7.9 and 7.13 of the Loan Agreement and any other agreement between
Foothill and Holding Company or between Foothill and any Borrower requiring the
consent or approval by Foothill, Foothill hereby consents to the execution and
delivery of the Stock Purchase Agreement, the purchase of the Gen-X Stock by
Holding Company in accordance with the Stock Purchase Agreement as in effect on
the date hereof
-2-
<PAGE>
and, in connection therewith, (i) the issuance and delivery to the Owners of the
Gen-X Holdings Stock of the Global/Gen-X Holdings Notes and the shares of Gen-X
Preferred Stock, and (ii the issuance and delivery to the Owners of the Gen-X
Equipment Stock of the Global/Gen-X Equipment Notes, subject, however, to the
satisfaction in full of each of the conditions precedent set forth in paragraph
7 of this Amendment.
(b) Notwithstanding anything to the contrary contained in paragraph
1(a) hereof, Foothill does not consent to either (i) the payment of principal or
interest or any other sums at any time owing under the Gen-X Subordinated Notes,
except as permitted in paragraph 4 below and in the Gen-X Subordination
Agreement (defined below), or (ii the redemption of any of the Preferred Stock,
except as permitted in Section 7.11 of the Loan Agreement, as amended pursuant
to this Amendment.
2. Amendments to Loan Agreement.
----------------------------
(a) Maximum Revolving Amount. The definition of "Maximum Revolving
------------------------
Amount" set forth in Section 1.1 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"'Maximum Revolving Amount'" means $40,000,000."
------------------------
(b) Addition of Defined Terms. The following defined terms are hereby
-------------------------
added in appropriate alphabetical order to Section 1.1 of the Loan Agreement:
"'Gen-X Companies' shall mean, collectively, Gen-X Holdings Inc., a
---------------
Washington corporation, and Gen-X Equipment Inc., an Ontario
corporation."
"'Gen-X Shareholders Agent' shall mean Gary Glassman, duly authorized
------------------------
agent acting on behalf of the former shareholders (exclusive of DMJ
Financial, Inc.) of the Gen-X Companies, and any successor agent of
which Foothill receives notice in accordance with the Gen-X
Subordination Agreement."
"'Gen-X Subordinated Notes'" shall mean, collectively, (a) the non-
------------------------
negotiable contingent subordinated promissory notes payable to DMJ
Financial, Inc. ("DMJ"), a former shareholder of each of the Gen-X
Companies, in the principal amount of $3,076,200 and $718,951.63,
respectively, and (b) the non-negotiable contingent subordinated
promissory notes payable to the
-3-
<PAGE>
Gen-X Shareholders Agent in the principal amount of $1,423,800 and
$631,048.37, respectively."
"'Gen-X Subordinated Note Payments'" shall mean payments of principal,
--------------------------------
interest and any other sums made by Holding Company with respect to
its Indebtedness owing under the Gen-X Subordinated Notes as permitted
in accordance with and subject to this Agreement and the Gen-X
Subordination Agreement."
"'Gen-X Subordination Agreement'" shall mean the Subordination
-----------------------------
Agreement, dated as of May 12, 1998, executed by and among Holding
Company, Foothill, DMJ and Gary Glassman, as duly authorized Agent
acting on behalf of the payees of the Gen-X Subordinated Notes."
"'Gen-X Acquisition Preferred Stock'" shall mean the 10,000 shares of
---------------------------------
preferred stock issued by Holding Company to the former shareholders
of Gen-X Equipment Inc. in connection with and as partial
consideration for the purchase by Holding Company of all of the issued
and outstanding capital stock of said corporation."
"'Gen-X Acquisition Preferred Stock Redemption Payments' shall mean
-----------------------------------------------------
redemption payments actually made by Holding Company with respect to
the redemption of Gen-X Acquisition Preferred Stock, as permitted by
Section 7.11 of this Agreement."
"Secondary Offering" shall mean the sale and issuance by Holding
------------------
Company of additional shares of its capital stock in connection with
any secondary offering thereof pursuant to the Securities Act of 1933,
as amended."
(c) Amendment to Section 2.6(a)(i). Section 2.6(a)(i) of the Loan
------------------------------
Agreement is hereby amended by adding the following to the conclusion of such
Section:
"provided, however, that in the event Foothill consents in writing,
-------- -------
which consent has not been granted as of the date hereof, to a
proposed Secondary Offering in accordance with this Agreement and
Holding Company thereafter completes such Secondary Offering at any
time from and after May 8, 1998 and receives net proceeds therefrom in
the aggregate amount of at least $20,000,000, then all Obligations
(except for undrawn Letters of Credit) shall bear interest at a per
annum
-4-
<PAGE>
rate of one-quarter of one (.25%) percentage point below the Reference
Rate."
(d) Amendment to Section 2.6(a)(ii). Section 2.6(a)(ii) of the Loan
-------------------------------
Agreement is hereby amended by adding the following at the conclusion of the
second sentence of such Section:
", provided, however, that in the event Holding Company completes a
-------- -------
Secondary Offering at any time from and after May 8, 1998 and receives
net proceeds therefrom in the aggregate amount of at least
$20,000,000, then interest "based on the Adjusted Eurodollar Rate"
shall mean interest at the Adjusted Eurodollar Rate plus two-and-one-
----
quarter (2.25%) percentage points per annum."
(e) Amendment to Section 6.3 - Financial Statements, Reports,
---------------------------------------------------------
Certificates. Section 6.3 of the Loan Agreement is hereby deleted in its
- ------------
entirety and the following substituted therefor:
"FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Foothill:
(a) as soon as available, but in any event within 30 days after the
end of (x) each month during each of Holding Company's fiscal years, a
company prepared consolidated and, solely as to the Gen-X Companies,
consolidating balance sheet and income statement of Holding Company,
and (y) each fiscal quarter during each of Holding Company's fiscal
years, a company prepared consolidated and, solely as to the Gen-X
Companies, consolidating statement of cash flow, covering Holding
Company's consolidated operations during such period; and (b) as soon
as available, but in any event within 90 days after the end of each of
Holding Company's fiscal years, consolidated and, solely as to the
Gen-X Companies, consolidating financial statements of Holding Company
for each such fiscal year, audited by independent certified public
accountants reasonably acceptable to Foothill and certified, without
any qualifications (except that the certification of the financial
statements for the fiscal year ended December 31, 1997 only shall be
permitted to contain a "going concern" emphasis and no other factor,
event or condition), by such accountants to have been prepared in
accordance with GAAP, together with a certificate of such accountants
addressed to Foothill stating that such accountants do not have
knowledge of the existence of any Default or Event of
-5-
<PAGE>
Default. Such audited financial statements shall include a balance
sheet, profit and loss statement, and statement of cash flow, each
prepared on a consolidated and, solely as to the Gen-X Companies,
consolidating basis, and, if prepared, such accountants' letter to
management.
Together with the above, Borrowers also shall deliver to Foothill
Holding Company's Form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other filings made by
Holding Company with the Securities and Exchange Commission, if any,
as soon as the same are filed, or any other information that is
provided by Holding Company to its shareholders, and each Borrower
shall deliver to Foothill any other report reasonably requested by
Foothill relating to the financial condition of Holding Company.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrowers shall deliver to Foothill a
--------------
certificate signed by Holding Company's chief financial officer to the
effect that: (i) all financial statements delivered or caused to be
delivered to Foothill hereunder have been prepared in accordance with
GAAP (except, in the case of unaudited financial statements, for the
lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Holding Company, on a
consolidated and, solely as to the Gen-X Companies, consolidating
basis, (ii) the representations and warranties of each Borrower
contained in this Agreement and the other Loan Documents are true and
correct in all material respects on and as of the date of such
certificate, as though made on and as of such date (except to the
extent that such representations and warranties relate solely to an
earlier date), (iii) for each month that also is the date on which a
financial covenant in Section 7.20 is to be tested, a Compliance
------------
Certificate demonstrating in reasonable detail compliance at the end
of such period with the applicable financial covenants contained in
Section 7.20, and (iv) on the date of delivery of such certificate to
------------
Foothill there does not exist any condition or event that constitutes
a Default or Event of Default (or, in the case of clauses (i), (ii),
or (iii), to the extent of any non-compliance, describing such non-
compliance as to which he or she may have
-6-
<PAGE>
knowledge and what action such Borrower has taken, is taking, or
proposes to take with respect thereto).
Borrowers shall have caused Holding Company to issue written
instructions to its independent certified public accountants
authorizing them to communicate with Foothill and to release to
Foothill whatever financial information concerning Borrowers, Holding
Company and the Gen-X Companies that Foothill may request. Each
Borrower hereby irrevocably authorizes and directs, and Holding
Company, by its execution and delivery of Consent and Amendment No. 3
to Loan Documents, dated as of May 12, 1998 among Foothill, Holding
Company and Borrowers, irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Foothill,
at Borrowers' expense, copies of Holding Company's financial
statements, papers related thereto, and other accounting records of
any nature in their possession, and to disclose to Foothill any
information they may have regarding Holding Company's, each Borrower's
and each of the Gen-X Companies' business affairs and financial
condition."
(f) Amendment to Section 7.1. Section 7.1 of the Loan Agreement is
------------------------
hereby amended by deleting the word "and" at the end of subsection (g) thereof,
deleting the period "." at the end of subsection (h) thereof and substituting
therefor a semicolon ";" and the word "and", and by adding a new subsection (i)
thereto as follows:
"(i) unsecured Indebtedness of Holding Company to DMJ Financial, Inc.
and the Gen-X Shareholders Agent in the respective amounts evidenced
by the Gen-X Subordinated Notes, provided, that, such Indebtedness is
-------- ----
subject and subordinate to Foothill's right to receive the prior
indefeasible payment in full of the Obligations on the terms set forth
in both the Consent and Amendment No. 3 to Loan Documents dated as of
May 12, 1998, among Borrowers, Guarantors and Foothill and the Gen-X
Subordination Agreement."
(g) Amendment of Section 7.11. Section 7.11 of the Loan Agreement is
-------------------------
hereby amended by adding to the fourth line of such Section immediately after
the word, "that", and immediately prior to the word, "KPR", the subparagraph
designation, "(a)", and, further, by adding at the conclusion of such section
the following:
-7-
<PAGE>
"and (b) Holding Company may redeem shares of its Gen-X Acquisition
Preferred Stock issued to the former shareholders of Gen-X Equipment
Inc., an Ontario corporation, in an aggregate amount for all such
redemptions during the term of the Loan Agreement not to exceed
$500,000, provided, that, (i) no Event of Default shall have occurred
-------- ----
and be continuing on the proposed redemption payment date ("Redemption
Payment Date") set forth in a notice of each such proposed redemption
to be delivered by Holding Company to Foothill at least thirty (30)
days prior to the Redemption Payment Date and (ii after giving effect
to any proposed redemption payment, Excess Availability shall be at
least $500,000."
(h) Amendment of Section 7.14. Section 7.14 of the Loan Agreement is
-------------------------
hereby amended by deleting in its entirety the last sentence of such Section and
substituting the following therefor:
"The foregoing shall not be deemed to prohibit KPR's Indebtedness to
Rubin permitted under Section 7.1(h) hereof or Holding Company's
Indebtedness to the former shareholders of Gen-X Equipment, Inc. and
Gen-X Holdings Inc. permitted under Section 7.1(i) hereof."
(i) Amendment of Section 7.20 Financial Covenants. Sections 7.20(a)(i)
---------------------------------------------
and (ii) are each hereby amended by deleting in its entirety that portion of
each subsection following the number, "$5,000,000", through the conclusion of
each of such subsections and substituting the following therefor in each such
subsection:
", plus an amount equal to the sum of (A) the Periodic Rubin Interest
Payments, (B) the Gen-X Subordinated Note Payments and (C) the Gen-X
Acquisition Preferred Stock Redemption Payments."
3. Collateral Assignment of Indemnification Rights and Remedies. (a) In
------------------------------------------------------------
addition to, and not in limitation of, the security interests in and liens upon
the Collateral previously granted by Holding Company to Foothill pursuant to the
Holding Company GSA, in order to induce Foothill to enter into and execute this
Amendment, and as collateral security for the payment and performance of all of
its Guaranteed Obligations under, and as defined in, the Holding Company
Guaranty, Holding Company hereby confirms its assignment and grant to Foothill
of a
-8-
<PAGE>
security interest in all of its now existing or hereafter arising: (i)
indemnification rights and remedies and claims for damages or other relief
pursuant to or in respect of the Stock Purchase Agreement, including, without
limitation, those set forth in Sections 13.1 and 13.3 of the Stock Purchase
Agreement (collectively, "Indemnification Rights"), (ii Indemnification Rights
under or in respect of the documents and instruments referred to in the Stock
Purchase Agreement or related thereto and (ii all proceeds, collections,
recoveries and rights with respect to the foregoing, which assignment is subject
however to the terms and conditions set forth in paragraph 3(b) below.
(b) Unless and until an Event of Default shall occur and be
continuing, Foothill will not exercise its remedies pursuant to the assignment
set forth in paragraph 3(a) above, provided that Holding Company: (i) promptly
notifies Foothill of each and every claim against any person or entity for which
Holding Company has or may have an Indemnification Right under the Stock
Purchase Agreement or otherwise, (ii promptly provides Foothill with copies of
all notices, demands, requests and other communications sent or received by
Holding Company relating to any such Indemnification Right, as well as prior
written notice of Holding Company's intention to exercise any power, right or
remedy pursuant relating to an Indemnification Right. In no event shall Holding
Company, without the prior written consent of Foothill, waive, release or
discharge any person or entity with respect to any such Indemnification Right.
(c) Unless and until an Event of Default shall occur and be
continuing, all payments made by any person or entity in connection with such
Indemnification Right may be paid directly to Holding Company.
4. Subordination of Indebtedness to Owners.
---------------------------------------
(a) Subordination. The Borrowers and Guarantors acknowledge, confirm
-------------
and agree that, notwithstanding anything to the contrary contained in the Stock
Purchase Agreement, the Gen-X Subordinated Notes, or any document, instrument or
agreement executed in connection therewith, except as set forth in paragraph
4(b) below, payment of any Indebtedness due and payable under the Gen-X
Subordinated Notes (such Indebtedness, including, principal, interest, fees and
any other amount in respect thereof is referred to in this paragraph 4 as the
"Junior Debt") is subordinated and deferred to the prior indefeasible payment
and satisfaction in full of all of the Obligations.
-9-
<PAGE>
(b) Permitted Payments. Foothill hereby agrees that, notwithstanding
------------------
anything to the contrary contained in paragraph 4(a) above, Holding Company may
make and the payees of the Gen-X Subordinated Notes may receive and retain
regularly scheduled payments in respect of the Junior Debt in accordance with
the terms of the Gen-X Subordinated Notes, as in effect on the date hereof,
provided, that:
- -------- ----
(i) after giving effect to any proposed payment of the Junior
Debt, Excess Availability shall be at least $500,000;
(ii) at the time of any proposed payment and after giving effect
thereto, no Event of Default, or act, condition or event which with notice or
passage of time or both would constitute an Event of Default, shall have
occurred or exist under the Loan Documents; and
(iii) the Borrowers and Guarantors shall have given Foothill written
notice of such proposed payment, including information as to the proposed date
and the amount of such proposed payment, not later than fourteen (14) days prior
to such proposed payment date.
5. Fee.
---
As partial consideration for Foothill's entering into this Amendment
and increasing the Maximum Revolving Amount, as well as Foothill's other
agreements hereunder, Borrowers shall pay to Foothill a fee in the amount of
$50,000, which shall be fully earned and payable as of the date hereof, and may
be charged by Foothill directly to Borrowers' Revolving Loan account maintained
by Foothill.
6. Representations and Warranties. In addition to, and not in limitation
------------------------------
of, the continuing representations, warranties and covenants heretofore or
hereafter made by Borrowers to Foothill pursuant to the Loan Documents, each
Borrower and each Guarantor hereby represents, warrants and covenants with and
to Foothill as follows (which representations, warranties and covenants are
continuing and shall survive the execution and delivery hereof and shall be
incorporated into and made a part of the Loan Documents):
(a) This Amendment has been duly executed and delivered by each
Borrower and each Guarantor and is in full force and effect as of the date
hereof, and the agreements and obligations of each Borrower and each Guarantor
contained herein constitute legal, valid and binding obligations of each
Borrower and each Guarantor enforceable against each Borrower
-10-
<PAGE>
and each Guarantor in accordance with their respective terms.
(b) Neither the execution and delivery of the Stock Purchase
Agreement, nor any of the instruments and documents to be delivered pursuant
thereto, nor the consummation of the transactions contemplated by the Stock
Purchase Agreement, has violated or will violate any law, including, without
limitation, any applicable fraudulent transfer laws and judicial interpretations
thereof, or any regulation, order, writ, injunction or decree of any court or
governmental instrumentality in any respect.
(c) No action of, or filing with, or consent of any governmental or
public body or authority and no approval or consent of any other party, is
required to authorize, or is otherwise required in connection with, the
execution, delivery and performance of the Stock Purchase Agreement or any of
the instruments or documents to be delivered pursuant thereto.
(d) All of the representations and warranties set forth in the Loan
Agreement and the other Loan Documents are true and correct in all material
respects on and as of the date hereof as if made on the date hereof, after
giving effect to the consent set forth in paragraph 1 hereof and the
consummation of the transactions contemplated by the Stock Purchase Agreement,
except to the extent any such representation or warranty is made as of a
specified date, in which case such representation or warranty shall have been
true and correct as of such date.
(e) As of the date hereof, and after giving effect to the consents set
forth in paragraph 1 hereof, there exists no Event of Default and no condition
or event or other state of facts which, with the giving of notice or lapse of
time, or both, would constitute an Event of Default.
(f) Holding Company has delivered to Foothill true, complete and
correct executed or execution copies (to the extent a fully executed copy has
not been delivered to Holding Company) of the Stock Purchase Agreement,
including all Schedules and Exhibits thereto, and all documents, instruments and
agreements executed, or to be executed, and delivered in connection therewith.
7. Conditions Precedent. The consent and amendments provided for in this
--------------------
Amendment shall not be effective until each of the following conditions
precedent has been satisfied in full, as determined by Foothill:
-11-
<PAGE>
(a) Foothill shall have received a counterpart of this Amendment duly
authorized, executed and delivered by Borrowers and Guarantors;
(b) Foothill shall have received evidence reasonably satisfactory to
it that all of the transactions contemplated by the Stock Purchase Agreement
have been consummated in accordance with the Stock Purchase Agreement, as in
effect as of the date hereof;
(c) Holding Company, DMJ Financial Inc. and the Gen-X Shareholders'
Agent shall have executed and delivered the Gen-X Subordination Agreement with
respect to the Gen-X Subordinated Notes, in form and substance satisfactory to
Foothill, providing for, among other things, and without limitation, the
subordination of the payment of the Gen-X Subordinated Notes to the prior
indefeasible payment in full of all Obligations on the terms and conditions set
forth in paragraph 4 above; and
(d) Holding Company shall have delivered to Foothill a Stock Pledge
Agreement with respect to the Gen-X Stock, in form and substance satisfactory to
Foothill, together with all certificates evidencing the shares of Gen-X Stock
purchased by Holding Company pursuant to the Stock Purchase Agreement.
8. Effect of this Amendment. (a) Except as modified pursuant hereto, no
------------------------
other changes or modifications to the Loan Documents are intended or implied and
in all other respects the Loan Documents are hereby specifically ratified,
restated and confirmed by all parties hereto as of the effective date hereof. To
the extent of conflict between the terms hereof and the other Loan Documents,
the terms hereof shall control.
(b) In addition to, and not in limitation of, any term or provision
contained in the Loan Agreement, the Holding Company GSA or any other Loan
Document that prohibits the making of loans, advances, capital contributions, or
transfers of property to a Person, including, without limitation, Section 7.13
of the Loan Agreement, none of Borrowers or Guarantors shall, without the prior
written consent of Foothill in each instance, make any loans, advances or
capital contributions or transfer any property to either of the Gen-X Companies.
9. Further Assurances. The Borrowers and Guarantors shall execute and
------------------
deliver such additional documents and take such additional action as may be
necessary or desirable to effectuate the provisions and purposes of this
Amendment.
-12-
<PAGE>
10. Governing Law. The rights and obligations hereunder of each of the
-------------
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
11. Binding Effect. This Amendment shall be binding upon and inure to the
--------------
benefit of each of the parties hereto and their respective successors and
assigns.
12. Counterparts. This Amendment may be executed in any number of
------------
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereof.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Foothill, shall
become a binding agreement among Borrowers, Guarantors and Foothill.
Very truly yours,
KPR SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
---------------------------
Title: CEO
------------------------
RYKA, INC.
By: /s/ Michael Rubin
---------------------------
Title: CEO
------------------------
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
---------------------------
Title: CEO
------------------------
AGREED:
FOOTHILL CAPITAL CORPORATION
By: /s/ Bruce Rivers
---------------------------
Title: AVP
------------------------
-13-
<PAGE>
ACKNOWLEDGED AND AGREED TO
IN ALL RESPECTS:
APEX SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
---------------------------
Title: CEO
------------------------
MR MANAGEMENT INC.
By: /s/ Michael Rubin
---------------------------
Title: CEO
------------------------
/s/ Michael Rubin
- ---------------------------------
MICHAEL RUBIN
-14-
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 4 TO LOAN DOCUMENTS AND WAIVER
--------------------------------------------
July __, 1998
Foothill Capital Corporation
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
Ladies and Gentlemen:
Foothill Capital Corporation ("Foothill") and KPR Sports International,
Inc. ("KPR") and RYKA INC. ("RYKA"; and together with KPR, individually,
"Borrower" and collectively, "Borrowers") have entered into certain financing
arrangements pursuant to the Amended and Restated Loan and Security Agreement
dated as of December 15, 1997 by and among Foothill and Borrowers, as amended by
Consent, Amendment No. 1 to Loan Documents and Subordination Agreement, dated as
of January 28, 1998, Amendment No. 1 to Amended and Restated Loan and Security
Agreement, dated as of February 20, 1998, Consent, Amendment No. 2 to Loan
Documents and Waiver as to Certain Events of Default, dated March 25, 1998, and
Consent and Amendment No. 3 to Loan Documents, dated as of May 12, 1998 (as so
amended, the "Loan Agreement") and all agreements, documents and instruments at
any time executed and/or delivered in connection therewith or related thereto,
including, without limitation, the Continuing Limited Guaranty, dated as of
December 15, 1997, executed and delivered by Michael Rubin in favor of Foothill
in respect of the Obligations of Borrowers to Foothill (the "Rubin Guaranty")
and the Rubin Subordination Agreement (as defined in the Loan Agreement. All
capitalized terms used herein shall have the meaning assigned thereto in the
Loan Agreement, unless otherwise defined herein.
Borrowers have requested that Foothill (a) make certain Advances to
Borrowers, for a limited period of time, in excess of the Borrowing Base, amend
certain other provisions of the Loan Agreement and waive certain Events of
Default that have occurred and are continuing, and Foothill is willing to agree
to the foregoing, on and subject to the terms and conditions contained in this
Amendment No. 4 to Loan Documents and Waiver (this "Amendment").
In consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the parties hereto hereby agree as follows:
<PAGE>
1. Definitions.
-----------
a. Additional Definitions. As used herein, the following terms shall
----------------------
have the respective meanings given to them below and the Loan
Agreement shall be deemed and is hereby amended to include, in
addition and not in limitation, each of the following definitions:
i. "Overadvance Limit" shall mean $3,000,000 for the period from
and after the effective date of this Amendment through and
including September 16, 1998, $2,000,000 commencing with the
opening of business on Thursday, September 17, 1998, through and
including September 23, 1998, $1,000,000 on the opening of
business on Thursday, September 24, 1998 through and including
September 30, 1998, and zero on the opening of business on
Friday, October 1, 1998 and at all times thereafter.
ii. "Overadvances" shall mean the Advances hereafter made by
Foothill to or for the benefit of each Borrower on a revolving
basis (consisting of advances, repayments and readvances) as set
forth in Section 2 hereof.
iii "Overadvances Termination Date" shall mean September 30, 1998.
b. Amendment to Definition. All references to the term "Advances" in the
-----------------------
Loan Agreement shall be deemed and each such reference is hereby
amended to include, in addition and not in limitation, the
Overadvances.
2. Overadvances.
------------
a. In addition to the Advances which may be made by Foothill to each
Borrower pursuant to Section 2.1 of the Loan Agreement, upon the
request of a Borrower, made at any time and from time to time prior to
the Overadvance Termination Date, subject to the terms and conditions
contained herein, in the Loan Agreement and in the other Loan
Documents, Foothill shall make Overadvances to such Borrower in
amounts in excess of the amounts otherwise available to such Borrower
under Section 2.1 of the Loan Agreement (as calculated by Foothill,
and subject to the sublimits provided for in the Loan Agreement and
reserves established by Foothill, if any, pursuant to Section 2.1(b)
of the Loan Agreement) up to the aggregate amount for both Borrowers
not to exceed the Overadvance Limit as then in effect.
b. Without limiting any of the rights of Foothill pursuant to Section
2(d) below or otherwise, on each date when any reduction to the
Overadvance Limit becomes effective, Borrowers agree absolutely and
unconditionally to automatically and without demand make a payment to
Foothill in respect of the Overadvances in an amount equal to the
excess, if any, of the aggregate unpaid
-2-
<PAGE>
principal amount of the Overadvances (including, without limitation,
any Letters of Credit issued as part of the Overadvances) over the
amount of Overadvance Limit as so reduced.
c. Except in Foothill's discretion, Borrowers shall have no right to
receive, and Foothill shall not make, any Overadvances in excess of
the Overadvance Limit as then in effect or at any time after the
Overadvance Termination Date. The Overadvances shall be secured by
all Collateral.
d. Unless sooner demanded by Foothill in accordance with the terms of the
Loan Agreement or the other Loan Documents, or otherwise due as
provided above, all outstanding and unpaid Obligations arising
pursuant to the Overadvances (including, but not limited to,
principal, interest, fees, costs, expenses and other charges in
respect thereof payable by Borrowers to Foothill) shall automatically,
without notice or demand, be absolutely and unconditionally due and
payable and Borrowers shall pay to Foothill in cash or other
immediately available funds all such Obligations on the Overadvance
Termination Date.
e. Each Borrower acknowledges and agrees that, notwithstanding anything
to the contrary contained in the Loan Agreement or the other Financing
Agreements, the failure of Borrowers to pay such Obligations arising
pursuant to the Overadvances in accordance with the terms of Sections
2(b) and 2(d) above shall constitute an Event of Default.
f. In the event that any Letters of Credit shall have been issued
pursuant hereto which are permitted to be issued only as part of the
Overadvances, then all such Letters of Credit shall have expired or
been drawn upon in full no later than the Overadvance Termination
Date. In the event that, at the close of business on the Overadvance
Termination Date, the aggregate amount of Advances under Section
2.1(a) of the Loan Agreement would exceed the amount permitted to be
outstanding thereunder as to a Borrower, as a result of any Letters of
Credit issued for the account of such Borrower as part of the
Overadvances, then, not later than the close of business on such day,
such Borrower shall repay that portion of the Overadvances in an
amount equal to the aggregate amount of such excess amount.
g. Notwithstanding anything to the contrary contained in the Loan
Agreement or in the Rubin Subordination Agreement, from and after the
effective date of this Amendment through and including the Overadvance
Termination Date and until such time as all Obligations of Borrowers
under and in respect of the Overadvances have been paid in full (such
date, the "Overadvances Payment Date"), KPR shall not make any
payments of principal whatsoever in respect of the Junior Debt (as
defined in the Rubin Subordination Agreement) otherwise permitted
pursuant to the Rubin Subordination Agreement to be made by KPR to
Rubin during such
-3-
<PAGE>
period (collectively, the "Suspended Permitted Payments") and KPR may
make and Rubin may receive the Suspended Permitted Payments at any
time after the Overadvances Payment Date and prior to December 31,
1998.
h. Notwithstanding anything to the contrary contained in the Loan
Agreement or any of the other Loan Documents, during the period from
and after the effective date of this Amendment through and including
the Overadvance Termination Date, and unless and until all
Overadvances are paid in full, the Borrowing Base as to each Borrower
shall not include the Seasonal Supplemental Credit, and Borrowers
shall have no right to receive, and Foothill shall have no obligation
to make, Advances to Borrowers in respect of the Seasonal Supplemental
Credit.
3. Rubin Guaranty of Overadvances. By his signature hereinbelow, Rubin hereby
------------------------------
acknowledges, confirms and agrees with and in favor of Foothill that:
a. Notwithstanding anything to the contrary contained in the Rubin
Guaranty, the Guaranteed Obligations (as defined in the Rubin
Guaranty) include, without limitation, all obligations and
indebtedness of the Borrowers to Foothill arising under and in respect
of the Overadvances, and in accordance with the Rubin Guaranty, Rubin
irrevocably and unconditionally guarantees to Foothill the full, final
and indefeasible payment of, without limitation, all of the
Overadvances, each reference in the Rubin Guaranty to Guaranteed
Obligations is hereby amended to mean and include in addition, and not
in limitation, the Overadvances, and the Overadvances shall be
secured by all of the Real Property Collateral;
b. Section 2(b) of the Rubin Guaranty is hereby amended and restated in
its entirety as follows:
"(b) Notwithstanding anything to the contrary contained in this
Guaranty, the liability of Guarantor hereunder for the Guaranteed
Obligations shall not exceed an amount equal to the unpaid principal
balance of either the Overadvances or the Seasonal Supplemental Credit
(as such terms are defined in the Loan Agreement) outstanding at any
time Foothill seeks to exercise its rights hereunder, plus interest
thereon, and all fees, costs and charges related thereto."
c. Section 2(c)(ii) of the Rubin Guaranty is hereby amended and restated
in its entirety as follows:
"(ii) Foothill shall have received indefeasible payment in full, in
immediately
-4-
<PAGE>
available funds, of all Overadvances and of all amounts
outstanding under the Seasonal Supplemental Credit (including
principal, interest, unreimbursed amounts in respect of Letter of
Credit drawings, fees, costs and other charges) and all Letters of
Credit which were issued or outstanding as part of the Overadvances or
under a Seasonal Supplemental Credit shall have expired or been
terminated;"
4. Amendment to Account Concentration Limit. Solely during the period
----------------------------------------
commencing as the effective date of this Amendment through and including
December 31, 1998, Subsection (h) of the definition of Eligible Accounts
set forth in Section 1.1 of the Loan Agreement shall be amended with
respect to Just For Feet, Inc. by deleting the reference to "25%" set forth
opposite such Account Debtor and substituting "35%" therefor. From and
after January 1, 1999, such percentage limit for Just for Feet, Inc. shall
again be "25%"; provided, however, that in the event that Foothill receives
-------- -------
on or before December 31, 1998 a written non-offset agreement executed and
delivered in favor of Foothill by Just for Feet, Inc., in form and
substance satisfactory to Foothill, pursuant to which, among other things,
such Account Debtor agrees that it will at all times pay and remit to
Foothill (as assignee of and secured party with respect to all Accounts at
any time owing by such Account Debtor to either Borrower) the amount of
each invoice evidencing each such Account, in accordance with its terms,
without asserting against Foothill any offset, claim, counterclaim or
deduction which such Account Debtor may have against either Borrower, and
Foothill acknowledges in writing that such non-offset letter is in fact
satisfactory to Foothill, then such relevant percentage shall thereupon be
increased to "35%".
5. Waiver of Event of Default. Borrowers and Rubin acknowledge, confirm and
--------------------------
agree with and in favor of Foothill that an Event of Default has occurred
and is continuing as a result of KPR's making to Rubin, on or about July 1,
1998, a $250,000 principal payment on account of the Junior Debt (as
defined in the Rubin Subordination Agreement), notwithstanding that KPR and
Rubin had at the time of such payment failed to satisfy the conditions
precedent relating to the making of such principal payment set forth in
Section 2.2(b)(ii)(z) and (xx) of the Rubin Subordination Agreement (such
Event of Default is hereinafter referred to as the "Existing Default"). At
the request of Borrowers and Rubin, Foothill hereby waives the Existing
Default, provided, however, that nothing contained herein shall constitute
a waiver of any other existing Event of Default or any future noncompliance
with the Rubin Subordination Agreement and, further, nothing contained
herein shall limit, impair, waive or otherwise affect any other term or
condition of the Rubin Subordination Agreement, the Loan Agreement or any
other Loan Document, all of which remain in full
-5-
<PAGE>
force and effect in accordance with all of their respective existing terms
and conditions.
6. Amendment Fee. In consideration of the amendments set forth herein,
-------------
including, without limitation, Foothill's agreement to make Overadvances to
Borrowers as set forth in this Amendment, Borrowers shall on the date
hereof pay to Foothill or Foothill, at its option, may charge the
account(s) of Borrowers maintained by Foothill, an amendment fee in the
amount of $25,000, which fee is fully earned as of the date hereof and
shall constitute part of the Obligations.
7. Representations, Warranties and Covenants. In addition to the continuing
-----------------------------------------
representations, warranties and covenants heretofore or hereafter made by
Borrowers to Foothill pursuant to the Loan Agreement and the other Loan
Documents, each Borrower and Rubin hereby represents, warrants and
covenants with and to Foothill as follows (which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof and shall be incorporated into and made a part of the
Financing Agreements):
a. No Event of Default exists on the date of this Amendment (after giving
effect to the amendments to the Loan Agreement and waiver of the
Existing Default made by this Amendment); and
b. This Amendment has been duly executed and delivered by each Borrower
and each Guarantor and is in full force and effect as of the date
hereof, and the agreements and obligations of Borrower(s) and Rubin
contained herein constitute their legal, valid and binding obligations
enforceable against them in accordance with their respective terms.
8. Conditions Precedent. The effectiveness of the amendments contained herein
--------------------
shall be subject to the following:
a. the receipt by Foothill of an original of this Amendment, duly
authorized, executed and delivered by each Borrower and each
Guarantor; and
b. other than the Existing Default, no Event of Default shall have
occurred and be continuing and no event shall have occurred or
condition be existing and continuing which, with notice or passage of
time or both, would constitute an Event of Default.
9. Effect of this Amendment.
------------------------
Except as modified pursuant hereto, no other changes or modifications
to the Loan Agreement and the other Loan Documents are intended or implied and
in all other respects the Loan Agreement and the other Loan Documents are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
-6-
<PAGE>
effective date hereof. To the extent of any conflict between the terms of this
Amendment and any of the Loan Documents, the terms of this Amendment shall
control. The Loan Agreement, the other Loan Documents amended hereby and this
Amendment shall be read and be construed as one agreement.
10. Further Assurances. The parties hereto shall execute and deliver such
------------------
additional documents and take such additional actions as may be necessary
or desirable to effectuate the provisions and purposes of this Amendment.
11. Governing Law. The validity, interpretation and enforcement of this
-------------
Amendment and any dispute arising out of the relationship between the
parties hereto, whether in contract, tort, equity or otherwise, shall be
governed by the internal laws of the State of New York (without giving
effect to principles of conflicts of law).
12. Binding Effect. This Amendment shall be binding upon and inure to the
--------------
benefit of each of the parties hereto and their respective successors and
assigns.
13. Counterparts. This Amendment may be executed in any number of
------------
counterparts, but all of such counterparts when executed shall together
constitute but one and the same agreement. In making proof of this
Amendment, it shall not be necessary to produce or account for more than
one counterpart thereof signed by each of the parties hereto.
Very truly yours,
KPR SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
-------------------------------
Title: President
----------------------------
RYKA, INC.
By: /s/ Michael Rubin
-------------------------------
Title: CEO
----------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
-7-
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AGREED:
FOOTHILL CAPITAL CORPORATION
By: /s/ Bruce Rivers
-------------------------
Title: AVP
----------------------
ACKNOWLEDGED AND AGREED TO
IN ALL RESPECTS:
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
-------------------------
Title: CEO
----------------------
APEX SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
-------------------------
Title: President
----------------------
MR MANAGEMENT, INC.
By: /s/ Michael Rubin
-------------------------
Title: President
----------------------
/s/ Michael Rubin
- ----------------------------
MICHAEL RUBIN
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE RELATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 179,725
<SECURITIES> 0
<RECEIVABLES> 31,523,444
<ALLOWANCES> 1,030,969
<INVENTORY> 21,820,077
<CURRENT-ASSETS> 53,560,237
<PP&E> 5,852,914
<DEPRECIATION> 1,404,407
<TOTAL-ASSETS> 70,557,134
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0
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