<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, 1999.
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the transition period
from _______to _______.
Commission File Number 0-16611
-------
GLOBAL SPORTS, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
--------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-768-0900
------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 12, 1999:
Common Stock, $.01 par value 18,373,729
---------------------------- ------------------
(Title of each class) (Number of Shares)
<PAGE>
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GLOBAL SPORTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three- and six-month periods ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the six-month periods ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults on Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8K 16
SIGNATURES 17
</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,
1999 1998
----------------------- ------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 308 $ 83,169
Prepaid expenses and other current assets 766,823 599,224
Deferred income taxes 4,367,759 --
Net assets of discontinued operations 37,594,624 38,718,921
----------------------- ------------------------
Total current assets 42,729,514 39,401,314
Property and equipment, net of accumulated depreciation
and amortization 4,269,335 2,988,714
Other assets 232,670 253,626
----------------------- ------------------------
Total assets $ 47,231,519 $ 42,643,654
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - notes payable, bank $ 11,325,621 $ --
Current portion - capital lease obligation, related party 133,250 127,966
Accounts payable and accrued expenses 3,024,079 3,652,024
Income taxes payable 1,658,768 1,378,820
Subordinated note payable 1,805,841 1,805,841
----------------------- ------------------------
Total current liabilities 17,947,559 6,964,651
Notes payable, bank -- 18,812,156
Convertible subordinated note payable 15,000,000 --
Minority interest in subsidiary 1,999 --
Capital lease obligation, related party 2,113,551 2,181,265
Mandatorily redeemable preferred stock 100 100
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; 10,000 shares issued as mandatorily
redeemable preferred stock -- --
Common stock, $0.01 par value, 60,000,000 and 20,000,000 shares
authorized in 1999 and 1998, 13,251,697 and 12,994,464 shares
issued in 1999 and 1998; 12,182,611 and 11,925,378 shares
outstanding in 1999 and 1998 132,457 129,947
Additional paid in capital 18,062,147 14,624,541
Accumulated other comprehensive income -- (47,431)
Retained earnings (deficit) (5,812,477) 192,242
----------------------- ------------------------
12,382,127 14,899,299
Less: Treasury stock, at cost 213,817 213,817
----------------------- ------------------------
Total stockholders' equity 12,168,310 14,685,482
----------------------- ------------------------
Total liabilities and stockholders' equity $ 47,231,519 $ 42,643,654
======================= ========================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
-3-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------- ------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ --
----------------- ----------------- ----------------- -----------------
Costs and expenses:
Cost of goods sold -- -- -- --
General and administrative 644,409 694,841 1,122,553 1,368,363
Equity compensation 1,255,600 -- 1,653,866 --
Web-site development 2,280,211 -- 2,618,933 --
----------------- ----------------- ----------------- -----------------
4,180,220 694,841 5,395,352 1,368,363
----------------- ----------------- ----------------- -----------------
Operating loss (4,180,220) (694,841) (5,395,352) (1,368,363)
Other expense:
Interest expense, net 99,830 59,519 156,843 118,411
----------------- ----------------- ----------------- -----------------
99,830 59,519 156,843 118,411
----------------- ----------------- ----------------- -----------------
Loss from continuing
operations before income taxes (4,280,050) (754,360) (5,552,195) (1,486,774)
Benefit from income
taxes (1,712,020) (301,744) (2,220,878) (594,710)
----------------- ----------------- ----------------- -----------------
Loss from continuing
operations (2,568,030) (452,616) (3,331,317) (892,064)
Discontinued operations (Note 2):
Income (loss) from discontinued
operations (less income taxes in
1999: $406,229 1998: $694,670
1999: $582,804 1998: $1,637,636
for the three- and six-month
periods, respectively (602,155) 1,274,534 586,101 3,245,555
Loss on disposition of discontinued
operations (less income tax benefit
of $559,514 for the three and six
month periods, respectively (3,259,503) -- (3,259,503) --
----------------- ----------------- ----------------- -----------------
Net Income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491
================= ================= ================= =================
Earnings (losses) per share:
Basic -
Loss from continuing operations $ (0.21) $ (0.04) $ (0.28) $ (0.08)
Income (loss) from discontinued
operations (0.05) 0.11 0.05 0.30
Loss on disposition of
discontinued operations (0.27) (0.27)
----------------- ----------------- ----------------- -----------------
Net Income (loss) $ (0.53) $ 0.07 $ (0.50) $ 0.22
================= ================= ================= =================
Diluted
Loss from continuing operations $ (0.21) $ (0.04) $ (0.28) $ (0.08)
Income (loss) from discontinued
operations (0.05) 0.11 0.05 0.29
Loss on disposition of
discontinued operations (0.27) (0.27)
----------------- ----------------- ----------------- -----------------
Net Income (loss) $ (0.53) $ 0.07 $ (0.50) $ 0.21
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
-4-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (6,004,719) $ 2,353,491
Deduct:
Income from discontinued operations (586,101) (3,245,555)
Loss on disposition of discontinued
operations 3,259,503 --
------------------ -----------------
Net loss from continuing operations (3,331,317) (892,064)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 339,338
Equity compensation 1,720,016
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 304,018 (76,684)
Deferred income taxes (4,367,759) --
Other assets 50,956 (8,755)
Accounts payable and accrued expenses (627,945) 498,607
Income taxes payable 279,948 1,378,820
------------------ -----------------
Net cash provided by (used in) continuing operations (5,632,745) 899,924
Net cash provided by (used in) discontinued operations (1,549,105) 2,301,291
------------------ -----------------
Net cash provided by (used in) operating activities (7,181,850) 3,201,215
------------------ -----------------
Cash Flows from Investing Activities:
Capital expenditures (1,638,678) (126,439)
------------------ -----------------
Net cash used in investing activities (1,638,678) (126,439)
------------------ -----------------
Cash Flows from Financing Activities:
Net repayments under lines of credit (7,486,535) (2,733,160)
Repayments of capital lease obligation (62,430) (56,654)
Repayments of subordinated-note payable -- (250,000)
Borrowing from SOFTBANK 15,000,000 --
Proceeds from issuance of common stock 1,314,633 16,920
Sale of minority interest in subsidiary 1,999 --
Costs of debt issuance (30,000) --
------------------ -----------------
Net cash provided by (used by) financing activities 8,737,667 (3,022,894)
------------------ -----------------
Effect of exchange rate on cash and cash equivalents -- 1,716
------------------ -----------------
Net increase (decrease) in cash and cash equivalents (82,861) 53,598
Cash and cash equivalents, beginning of period 83,169 58,019
------------------ -----------------
Cash and cash equivalents, end of period $ 308 $ 111,617
================== =================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
-5-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - BASIS OF PRESENTATION
Global Sports, Inc. ("Global" or "the Company"), a Delaware corporation, is an
e-Commerce company that is in the process of developing the internet businesses
of several sporting goods retailers through its Global Sports Interactive
subsidiary. On April 20, 1999, the Company formalized a plan to sell its other
two businesses, the Branded division and the Off-Price and Action Sports
division in order to focus exclusively on its e-Commerce business. See Note 2.
The accompanying condensed financial statements of Global have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying financial information is unaudited; however, in the opinion of
the Company's management, all adjustments (consisting solely of normal recurring
accruals) necessary for a fair presentation of the operating results of the
periods reported have been included. The results of operations for the periods
reported are not necessarily indicative of those that may be expected for a full
year.
Certain 1998 balances have been reclassified to conform with the 1999 financial
statement presentation.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of December 31, 1998 as presented in the Company's Annual Report
on Form 10-K.
NOTE 2 - DISCONTINUED OPERATIONS
On April 20, 1999, the Company formalized a plan to sell two of its businesses,
the Branded division and the Off-Price and Action Sports division, in order to
focus exclusively on its e-Commerce business. The Branded division designs and
markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports
division is a third-party distributor and make-to-order marketer of off-price
footwear, apparel and sporting goods. Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of these
divisions have been segregated from that of continuing operations and are
presented in the Company's consolidated financial statements as discontinued
operations. Prior year financial statements have been restated to reflect
discontinued operations. Interest expense related to the lines of credit and
debt to be assumed by the successor businesses of $142,913 and $933,365 for the
three- and six-month periods ended June 30, 1999, respectively, has been
allocated to the pre-measurement date loss from discontinued operations.
Interest expense of $572,612 for the three- and six-month periods ended June 30,
1999, respectively, has been allocated to the post-measurement date loss from
discontinued operations.
The discontinued operations components of amounts reflected in the income
statements and balance sheets are as follows:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
------------------------------ ------------------------------------
1999 1998 1999 1998
----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income Statement:
Net sales $ 1,457,049 $ 28,320,457 $ 35,180,918 $ 56,468,835
Costs and expenses 2,324,332 25,826,054 34,320,957 50,557,154
----------- -------------- --------------- ---------------
Operating income (loss) (867,283) 2,494,403 859,961 5,911,681
Other expenses 141,101 525,199 856,664 1,028,490
----------- -------------- --------------- ---------------
Income (loss) before income taxes (1,008,384) 1,969,204 3,297 4,883,191
Provision for (benefit from) income taxes (406,229) 694,670 (582,804) 1,637,636
----------- -------------- --------------- ---------------
Income (loss) from discontinued operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555
=========== ============== =============== ===============
</TABLE>
-6-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------- -----------------------
<S> <C> <C>
Balance Sheet:
Cash $ 2,950,672 $ 772,916
Accounts receivable 34,057,556 36,782,732
Inventory 16,852,220 20,954,168
Other current assets 1,885,671 836,520
---------------------- -----------------------
Total current assets 55,746,119 59,346,336
Property and equipment 1,371,047 1,397,189
Goodwill and intangibles 14,669,071 14,176,531
Other assets 23,295 21,397
---------------------- -----------------------
Total assets 71,809,532 74,941,453
---------------------- -----------------------
Accounts payable and accrued expenses 20,036,282 16,192,954
Current portion - note payable, banks 10,024,878 14,529,576
Current portion - notes payable, other 711,933 712,815
Subordinated notes payable 971,659 1,999,065
---------------------- -----------------------
Total current liabilities 31,744,752 33,434,410
Note payable, banks 284,918 294,379
Notes payable, other 2,185,238 2,493,743
---------------------- -----------------------
Total liabilities 34,214,908 36,222,532
---------------------- -----------------------
Net assets of discontinued operations $ 37,594,624 $ 38,718,921
====================== =======================
</TABLE>
NOTE 3 - SOFTBANK TRANSACTION
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered
into a stock purchase agreement and related agreements for the sale of 6,153,850
shares of the Company's common stock to SOFTBANK at a price of $13.00 per share
for an aggregate purchase price of $80,000,050. In order to provide capital to
the Company until closing, which occurred on July 23, 1999, the Company and
SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999
pursuant to which SOFTBANK loaned the Company $15,000,000, which was entirely
outstanding at June 30, 1999. The note bears interest at 4.98% per annum and is
classified as a noncurrent liability. At the July 23, 1999 closing, this loan
amount was converted into shares of the Company's common stock. Accrued and
unpaid interest as of July 23, 1999 of $89,225 was offset against the cash
proceeds of the sale. For the three- and six-month periods ending June 30, 1999,
interest expense included $43,575 related to this interim loan.
NOTE 4 - DEBT
Notes Payable, Banks
Under its primary loan agreement, as subsequently amended (the "Loan
Agreement"), the Company has access to a combined credit facility of
$40,000,000, which is comprised of the KPR Companies' credit facility of
$35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan
Agreement is five years expiring on November 19, 2002. The KPR Companies and
RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis points. Under the Loan
Agreement, both the KPR Companies and RYKA may borrow up to the amount of their
revolving line based upon 85% of their eligible accounts receivable and 65% of
their eligible inventory, as those terms are defined in the Loan Agreement. The
Loan Agreement also includes 50% of outstanding import letters of credit as
collateral for borrowing.
In addition to the revolving lines of credit described above, the lender will
over-advance to the Company an additional
-7-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
$3,000,000, over the existing collateral, for additional import letters of
credit needed for seasonal production of new merchandise for the Spring 1999 and
Fall 1999 seasons.
Among other things, the Loan Agreement, as amended, requires the KPR Companies
and RYKA to achieve annual earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to
incur additional indebtedness, make payments on subordinated indebtedness, make
capital expenditures, sell assets, and pay dividends. At June 30, 1999, the
Company was not in compliance with the EBITDA covenant. The Company obtained a
waiver from the bank with respect to this covenant. Because there can be no
assurance that the Company will be in compliance with this covenant for any
period subsequent to June 30, 1999, the Company has classified the amounts
outstanding under this line as a current liability. The Company is currently in
negotiations with its lender to modify the terms of the Loan Agreement to return
itself to compliance.
At June 30, 1999, the aggregate amount outstanding under this line was
$11,325,621. At June 30, 1999, based on available collateral and outstanding
import letters of credit commitments, an additional $628,317 (including the
seasonal over-advance) was available on this line for borrowing.
The Company has an additional line of credit of approximately $20,000,000 for
use by the Gen-X Companies, which is available for either direct borrowing or
for import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering substantially
all of the Gen-X Companies' assets. At June 30, 1999, draws of $10,000,000 were
committed under this line and, based on a net cash position and available
collateral and outstanding import letters of credit commitments, an additional
$1,538,000 was available for borrowing. At June 30, 1999, such loan amounts are
included in net assets of discontinued operations.
Notes payable, banks also includes a mortgage note secured by land and building
in Ontario, Canada of $316,939, of which $27,227 is classified as current. The
mortgage note bears interest at the bank's cost of funds plus 2.5% and matures
on August 15, 2009. At June 30, 1999, such amounts are included in net assets of
discontinued operations.
Notes Payable, Other
Other debt related to the Gen-X Companies includes an outstanding loan payable
for $1,500,000, of which $400,000 is classified as current. The original loan of
$2,000,000 is payable in equal quarterly installments of $100,000, which
commenced on March 31, 1998, and bears interest at the prime lending rate. At
June 30, 1999, such amounts are included in net assets of discontinued
operations.
Notes payable, other also includes $1,000,000 of promissory notes payable to the
former shareholders of Lamar. The notes are payable in five equal annual
installments and bear interest at 6% per annum. At June 30, 1999, $200,000 of
such notes is classified as current. At the time of the acquisition, Lamar also
executed a note payable in the principal amount of $553,447, plus $74,954 in
accrued interest, for amounts owed to a shareholder. This note, which was
assumed by the Company in the acquisition of Lamar, is payable in five equal
annual installments and bears interest at 6% per annum. The amount currently
outstanding on this note is $559,664, of which $111,933 is classified as
current. At June 30, 1999, such amounts are included in net assets of
discontinued operations.
Subordinated Notes Payable
At June 30, 1999, the Company had $1,805,841 in outstanding subordinated note
payable held by its Chairman and Chief Executive Officer, plus accrued interest
on such notes of $24,145 recorded in accrued expenses. This debt consisted
primarily of a note representing undistributed Subchapter S corporation retained
earnings previously taxed to him as the sole shareholder of the KPR Companies
prior to the Reorganization. Interest accrues on such notes at the Company's
choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred
seventy-five basis points. At June 30, 1999, the interest rate on these notes
was 8%.
-8-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Based on its Loan Agreement, the Company is permitted to make continued regular
payments of interest on the subordinated debt and to further reduce principal on
a quarterly basis, commencing subsequent to the first quarter of 1998, in an
amount up to 50% of the cumulative consolidated net income of the Company.
During 1998, aggregate principal payments of $250,000 were made. On July 27,
1999, the principal balance of $1,805,841 plus interest accrued to date of
$58,987 was repaid in full to the Chairman and Chief Executive Officer.
Upon closing the acquisition of the Gen-X Companies, several subordinated notes
payable were executed with the former shareholders of the Gen-X Companies for an
aggregate of $1,999,065 which is payable in four equal consecutive quarterly
payments beginning March 31, 1999. Quarterly payments to date in the aggregate
of $1,027,406 have been made through June 30, 1999. These notes bear interest at
7% until December 31, 1998 and the prime lending rate thereafter. At June 30,
1999 such amounts are included in net assets of discontinued operations.
NOTE 5 - EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share for all periods have been computed in accordance
with SFAS No. 128, Earnings Per Share. Basic earnings (losses) per share is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings (losses) per share is
computed by dividing the net income by the weighted average number of shares
outstanding during the year, assuming dilution by outstanding common stock
options and warrants.
The amounts used in calculating earnings (losses) per share data are as follows:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30 June 30
------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (2,568,030) $ (452,616) $(3,331,317) $ (892,064)
Income (loss) from discontinued
operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555
Loss on disposition of discontinued
operations (less income tax benefit
of $559,514 for the three and six
month periods, respectively $ (3,259,503) -- $ (3,259,503) --
------------------ ---------------- ----------------- ---------------
Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491
================== ================ ================= ===============
Weighted average shares
outstanding - basic 12,120,085 11,226,403 12,073,780 10,824,533
Dilutive common stock options and
warrants -- 311,265 -- 233,168
------------------ ---------------- ----------------- ---------------
Weighted average shares
outstanding - diluted 12,120,085 11,537,668 12,073,780 11,057,701
================== ================ ================= ===============
Outstanding common stock options and
warrants having no dilutive effect 986,571 460,508 908,369 408,184
================== ================ ================= ===============
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of June 30, 1999, outstanding purchase commitments exist totaling $5,951,484,
for which commercial import letters of credit have been issued.
Employment Agreements
At June 30, 1999, the Company has employment agreements with several of its
officers for an aggregate annual base salary of $1,847,500 plus bonus and
increases in accordance with the terms of the agreements. Terms of such
contracts range from three to five years and are subject to automatic annual
extensions.
-9-
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
E-Commerce
At June 30, 1999, the Company has contractually committed to develop the
internet businesses of several sporting goods retailers. The Company's failure
to meet these commitments could result in a forfeiture of the contracts and the
exclusive rights to certain future internet business and have a material adverse
affect on the future results of operations and financial condition of the
Company.
NOTE 7 - COMPREHENSIVE INCOME
Comprehensive income for the three- and six-month periods ended June 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30 June 30
1999 1998 1999 1998
-------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491
Foreign currency translation
adjustment -- (955) -- 1,716
-------------- -------------- --------------- ------------------
Comprehensive income
(loss) $ (6,429,688) $ 820,963 $ (6,004,719) $ 2,355,207
============== ============== =============== ==================
</TABLE>
NOTE 8 - BUSINESS SEGMENTS
The Company currently operates with one reportable segment, the e-Commerce
segment. Under the e-Commerce segment, the Company is in the process of
developing the internet businesses of several sporting goods retailers.
On April 20, 1999, the Company formalized a plan to sell its other two operating
segments, the Branded division and the Off-Price and Action Sports division, in
order to focus exclusively on its e-Commerce business. Accordingly, for
financial statement purposes, the assets, liabilities, results of operations and
cash flows of these divisions have been segregated from that of continuing
operations and are presented in the Company's consolidated financial statements
as discontinued operations. Prior year financial statements have been restated
to reflect discontinued operations. See Note 2.
NOTE 9 - EQUITY TRANSACTIONS
The Company granted options and warrants to purchase 320,716 and 695,482 shares
of the Company's common stock to employees and consultants of the Company during
the three- and six-month periods ended June 30, 1999, respectively. The Company
also issued warrants to purchase 333,333 shares of the Company's common stock
during June 1999 to several retailers in connection with the Company's
developing e-Commerce business. The range of exercise prices for all grants
issued was from $4.06 to $17.25 for the three-month period ended June 30, 1999
and $0.01 to $17.25 for the six-month period ended June 30, 1999. Upon granting
these options and warrants, the Company recorded equity compensation expense of
$1,321,750 and $1,720,016 for the three- and six-month periods ended June 30,
1999, respectively, $66,150 of which was included in the net loss from
discontinued operations.
Options and warrants to purchase 137,349 and 257,233 shares of the Company's
common stock were exercised during the three- and six-month periods ended June
30, 1999, respectively. The range of exercise prices was from $3.20 to $6.88 for
the three-month period ended June 30, 1999 and $0.01 to $13.20 for the six-month
period ended June 30, 1999. These exercises resulted in cash proceeds to the
Company of $770,267 and $1,248,483 for the three- and six-month periods ended
June 30, 1999, respectively.
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered
into a stock purchase agreement and related agreements for the sale of 6,153,850
shares of the Company's common stock to SOFTBANK at a price of $13.00 per share
for an aggregate purchase price of $80,000,050. See Note 3.
On July 13, 1999 the shareholders approved on amendment to the Company's
Certificate of Incorporation that increased the maximum number of Common Stock
by 40,000,000 to authorized shares of 60,000,000.
-10-
<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, as
amended, and the regulations promulgated thereunder), including without
limitation, statements as to the Company's financial condition, results of
operations and liquidity and capital resources and statements as to management's
beliefs, expectations or options. Such forward looking statements are subject to
risks and uncertainties and may be affected by various factors which may cause
actual results to differ materially from those in the forward looking
statements. Certain of these risks, uncertainties and other factors, as and when
applicable, are discussed in the Company's filings with the Securities and
Exchange Commission, including its most recent Form 10-K, a copy of which may be
obtained from the Company upon request and without charge (except for the
exhibits thereto).
STRATEGIC BUSINESS DEVELOPMENTS
This discussion summarizes the significant factors that affected the
consolidated operating results and financial condition of Global Sports, Inc.
during the six months ended June 30, 1999. Over this period, the Company has
undergone a significant transformation.
On April 20, 1999, the Company formalized a plan to sell two of its businesses,
the Branded division and the Off-Price and Action Sports division, in order to
focus exclusively on the development of new businesses. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action
Sports division is a third-party distributor and make-to-order marketer of
off-price footwear, apparel and sporting goods. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of these divisions have been segregated from that of continuing operations
and are presented in the Company's consolidated financial statements as
discontinued operations. Prior year financial statements have been restated to
reflect discontinued operations.
On May 10, 1999, the Company announced the formation of a new subsidiary, Global
Sports Interactive. Global Sports Interactive is an e-Commerce company that has
entered into exclusive agreements to operate the Internet businesses of multiple
sporting goods retailers including The Sports Authority through an e-Commerce
agreement and The Athlete's Foot, Sport Chalet, MC Sports, Sports & Recreation
and one unnamed retailer with annual sales of more than $200 million through e-
Commerce outsourcing contracts. The Company has thereby contractually committed
to develop the internet businesses of several sporting goods retailers. The
Company's failure to meet these commitments could result in a forfeiture of the
contracts and the exclusive rights to certain future internet business and have
a material adverse affect on the future results of operations and financial
condition of the Company.
Due to the fact that the Company has not yet launched its initial six e-tailing
web sites, results from continuing operations for the second quarter ended June
30, 1999 consist only of the operating expenses incurred during the period for
Global Sports Interactive.
-11-
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The Three- and Six-Month Periods Ended June 30, 1999 Compared to The Three- and
Six-Month Periods Ended June 30, 1998
The following table sets forth, for the periods indicated, the results of
continuing operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ --
------------- ------------ ------------ -------------
Operating expense 4,180,220 694,841 5,395,352 1,368,363
------------- ------------ ------------ -------------
Operating income (loss) (4,180,220) (694,841) (5,395,352) (1,368,363)
Interest expense 99,830 59,519 156,843 118,411
------------- ------------ ------------ -------------
Income (loss) before
income taxes (4,280,050) (754,360) (5,552,195) (1,486,774)
Benefit from income
taxes (1,712,020) (301,744) (2,220,878) (594,710)
------------- ------------ ------------ -------------
Loss from continuing
operations (2,568,030) (452,616) (3,331,317) (892,064)
Income (loss) from
discontinued operations (602,155) 1,274,534 586,101 3,245,555
Loss on disposition (3,259,503) (3,259,503)
------------- ------------ ------------ -------------
Net income (loss) $ (6,429,688) $ 821,918 $ (6,004,719) $ 2,353,491
============= ============ ============ =============
</TABLE>
Operating Expense
Operating expense from continuing operations for the three- and six-month
periods ending June 30, 1999 were $4,180,220 and $5,395,352, respectively.
Operating expenses from continuing operations consisted of expenditures
associated with the production of the Company's initial six e-Commerce web-sites
and general and administrative expenses related to the day-to-day development
and operating activities of the Company. Operating expense from continuing
operations also includes charges for equity compensation of $1,255,600 and
$1,653,866 for the three- and six-month periods ended June 30, 1999,
respectively.
RESULTS OF DISCONTINUED OPERATIONS
The Three- and Six-Month Periods Ended June 30, 1999 Compared to The Three- and
Six-Month Periods Ended June 30, 1998
On April 20, 1999, the Company formalized a plan to sell two of its businesses,
the Branded division and the Off-Price and Action Sports division, in order to
focus exclusively on its e-Commerce business. The Branded division designs and
markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports
division is a third-party distributor and make-to-order marketer of off-price
footwear, apparel and sporting goods. Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of these
divisions have been segregated from that of continuing operations and are
presented in the Company's consolidated financial statements as discontinued
operations. Prior year financial statements have been restated to reflect
discontinued operations.
-12-
<PAGE>
The following table sets forth, for the periods indicated, the results of
discontinued operations:
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
1999* 1998 1999* 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,457,049 $ 28,320,457 $35,180,918 $56,468,835
Costs and expenses 2,324,332 25,826,054 34,320,957 50,557,154
----------- ------------ ----------- -----------
Operating income (loss) (867,283) 2,494,403 859,961 5,911,681
Other expenses 141,101 525,199 856,664 1,028,490
----------- ------------ ----------- -----------
Income (loss) before
income taxes (1,008,384) 1,969,204 3,297 4,883,191
Provision for (benefit
from) income taxes (406,229) 694,670 (582,804) 1,637,636
------------ ------------ ----------- -----------
Income (loss) from
discontinued
operations $ (602,155) $ 1,274,534 $ 586,101 $ 3,245,555
============ ============ ========== ===========
</TABLE>
* Represents discontinued operations for the period April 1 or January 1 through
April 20th.
FINANCIAL CONDITION
Cash Flows
Historically, the operations of the Company have been financed by a combination
borrowings, annual increases in the size of the bank credit facility and
seasonal over-advances. Increases in the bank credit facilities for the KPR
Companies and RYKA were required to fund the Company's increased investment in
accounts receivable and inventory necessary to support the increases in revenue.
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered
into a stock purchase agreement and related agreements for the sale of 6,153,850
shares of the Company's common stock to SOFTBANK at a price of $13.00 per share
for an aggregate purchase price of $80,000,050. In order to provide capital to
the Company until closing, which occurred on July 23, 1999, the Company and
SOFTBANK entered into an interim convertible subordinated loan agreement on June
10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000. This loan
amount was converted into shares of the Company's common stock at closing. On
July 23, 1999, the Company received the remaining $65,000,050. The Company
intends to use the proceeds to repay the balance on one of its lines of credit,
to reduce trade payables and to provide working capital for the new e-Commerce
business.
As of June 30, 1999, the Company had net working capital of $24,781,955. The
Company used $5,632,745 in cash flows from operating activities of continuing
operations for the six months ended June 30, 1999, whereas in the same period of
the prior year the Company generated $899,924 in cash flows from operating
activities of continuing operations.
Liquidity
On June 10, 1999, the Company and SOFTBANK entered into a stock purchase
agreement and related agreements for the sale of 6,153,850 shares of the
Company's common stock to SOFTBANK at a price of $13.00 per share for an
aggregate purchase price of $80,000,050. In order to provide capital to the
Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK
entered into an interim loan agreement on June 10, 1999 pursuant to which
SOFTBANK loaned the Company $15,000,000. This loan amount was converted
into shares of the Company's common stock at closing.
On April 20, 1999, the Company formalized a plan to sell two of its businesses,
the Branded division and the Off-Price and Action Sports division, in order to
focus exclusively on its e-Commerce business. The sale of these divisions are
expected to be completed before the end of 1999. Management expects that these
sales will result in substantial proceeds to the Company.
Under its current loan agreement, as subsequently amended (the "Loan
Agreement"), the Company has access to a combined credit facility of
$40,000,000. The term of the Loan Agreement is five years. The loans have an
interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus
two hundred seventy-five basis points. Under this credit facility, both
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<PAGE>
the KPR Companies and RYKA may borrow up to the amount of their revolving line
based upon 85% of their eligible accounts receivable and 65% of their eligible
inventory, as those terms are defined in the Loan Agreement. The Loan Agreement
also includes 50% of outstanding import letters of credit as collateral for
borrowing. In addition to the revolving lines of credit described above, the
lender will over-advance to the Company an additional $3,000,000, over the
existing collateral, for additional import letters of credit needed for seasonal
production of new merchandise for the Spring 1999 and Fall 1999 seasons.
Among other things, the Loan Agreement, as amended, requires the KPR Companies
and RYKA to achieve annual earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to
incur additional indebtedness, make payments on subordinated indebtedness, make
capital expenditures, sell assets, and pay dividends. At June 30, 1999, the
Company was not in compliance with the EBITDA covenant. The Company obtained a
waiver from the bank with respect to this covenant. Because there can be no
assurance that the Company will be in compliance with this covenant for any
period subsequent to June 30, 1999, the Company has classified the amounts
outstanding under this line as a current liability. The Company is currently in
negotiations with its lender to modify the terms of the Loan Agreement to return
itself to compliance.
At June 30, 1999, the aggregate amount outstanding under this line was
$11,325,621. At June 30, 1999, based on available collateral and outstanding
import letters of credit commitments, an additional $628,317 (including the
seasonal over-advance) was available on this line for borrowing.
The Company has an additional line of credit of approximately $20,000,000 for
use by the Gen-X Companies, which is available for either direct borrowing or
for import letters of credit. The loan bears interest at prime plus one half
percent and is secured by a general security agreement covering certain of the
Gen-X Companies' assets. At June 30, 1999, draws of $10,000,000 were committed
under this line and, based on a net cash position and available collateral and
outstanding import letters of credit commitments, an additional $1,538,000 was
available for borrowing.
As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin,
its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i)
a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440,
plus accrued and unpaid interest on such loan of $180,517 through October 31,
1997 and (ii) a note in the principal amount of $2,204,401 representing
undistributed Subchapter S corporation retained earnings previously taxed to him
as the sole shareholder of the KPR Companies. No interest accrued on the note
representing Subchapter S corporation earnings until December 15, 1997 at which
time the interest began to accrue on such note at a choice of prime plus 1/4% or
LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The
Loan Agreement and the related Subordination Agreement allowed the Company to
repay Mr. Rubin $1,000,000 of the subordinated debt principal and the accrued
interest of $180,517 at the time of the closing of the Loan Agreement or within
five days thereafter, subject to there being $2,000,000 of availability under
the KPR Companies' credit line after taking into account such payments. Such
payments were made to Mr. Rubin on November 26, 1997. In addition, the Loan
Agreement and the Subordination Agreement permit the KPR Companies to make
continued regular payments of interest on the subordinated debt and to further
reduce principal on a quarterly basis, commencing with the first quarter of
1998, in an amount up to 50% of the cumulative consolidated net income of both
borrowers, reduced by net losses of the borrowers during such period. During
1998, aggregate principal payments of $250,000 were made. On July 27, 1999, the
principal balance of $1,805,841 plus interest accrued to date of $58,987 was
repaid in full to Mr. Rubin.
The Company has made certain commitments with respect to developing the
businesses of several sporting goods retailers. The proceeds from the SOFTBANK
transactions and the sale of the Branded division and the Off-Price and Action
Sports division will result in adequate financing to allow the Company to
continue the development of its e-Commerce business and meet its obligations as
they mature during the foreseeable future.
YEAR 2000
The Company recognizes the importance of advanced computerization in maintaining
and improving its level of service, internal and external communication and
overall competitive position. The Company maintains a management information
system that provides, among other things, comprehensive customer order
processing, inventory, production, accounting and management information for the
marketing, selling, manufacturing and distribution functions of the Company's
business. The Company has created a Year 2000 project team which is coordinating
efforts to evaluate, identify, correct or reprogram, and test the Company's
existing systems Year 2000 compliance. The Company enhanced its key information
systems to improve their functionality and increase performance during the first
quarter of 1999. These upgrades also made these applications Year 2000
compliant. The final step of the Company's Year 2000 plan is to update its
office networking system software which it expects to finish prior to the end of
the third quarter of 1999. The Company does not expect the costs of this step to
have a material impact on the Company's results of operations, financial
position, liquidity or capital resources. The Company is in the process
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<PAGE>
of developing a contingency plan in the event that the above modifications do
not result in Year 2000 compliance. In addition to making its own systems Year
2000 compliant, the Company is in the process of contacting its key suppliers
and customers to determine the extent to which the systems of such suppliers and
customers are Year 2000 compliant and the extent to which the Company could be
effected by the failure of such third parties to become Year 2000 compliant. The
Company cannot presently estimate the impact of the failure of such third
parties to become Year 2000 Compliant. See "Risk Factors - Risks Relating to
Year 2000 Compliance" in the Company's most recent Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk for the six months ended
June 30, 1999. See the information set forth in Item 7A of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
-15-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective July 23, 1999, the Company issued 6,153,850 shares of
common stock (par value $.01 per share) to SOFTBANK America Inc. for
an aggregate purchase price of $80,000,050. The issuance of the
common stock was exempt from registration pursuant to section 4(2) of
the Securities Act. The Company granted SOFTBANK certain "demand" and
"piggy-back" registration rights with respect to these shares. The
Company intends to use the proceeds to repay the balance on one of
its lines of credit, to reduce trade payables and to provide working
capital for its new e-Commerce business.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 8 to the Loan Documents, Consent and Waiver by
and among KPR Sports International, Inc., RYKA Inc. and
Foothill Capital Corporation.
10.2 Amendment No. 9 to the Loan Documents and Waiver by and among
KPR Sports International, Inc., RYKA Inc. and Foothill Capital
Corporation.
27.1 Financial data schedule for the six-month period ended June
30, 1999 (electronic filing only).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 21,
1999 related to the announcement of the SOFTBANK transaction
on June 10, 1999.
-16-
<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 13, 1999 By: /s/ Michael G. Rubin
----------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
DATE: August 13, 1999 By: /s/ Steven A. Wolf
----------------------------------
Steven A. Wolf
Vice President &
Chief Financial Officer
-17-
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 8 TO LOAN DOCUMENTS, CONSENT AND WAIVER
-----------------------------------------------------
June 10, 1999
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,
Consent and Amendment No. 3 to Loan Documents, dated as of May 12, 1998
("Amendment No. 3"), Amendment No. 4 to Loan Documents and Waiver, executed on
or about July 21, 1998, Amendment No. 5 to Loan Documents, dated December 3,
1998 ("Amendment No. 5"), Consent and Amendment No. 6 to Loan Documents, dated
January 29, 1999 and Consent and Amendment No. 7 to Loan Documents, dated March
19, 1999 (as so amended, the "Loan Agreement") and all other Loan Documents at
any time executed and/or delivered in connection therewith or related thereto,
including, without limitation, the General Security Agreement, dated as of
December 15, 1997, executed by Holding company in favor of Foothill (the
"Holding Company GSA"). All capitalized terms used herein shall have the meaning
assigned thereto in the Loan Agreement, unless otherwise defined herein.
Global Sports, Inc., a Delaware corporation ("Holding Company") and
Borrowers have requested that Foothill (a) consent to
<PAGE>
Holding Company entering into and executing with SOFTBANK America Inc., a
Delaware corporation ("SOFTBANK") (i) a certain Stock Purchase Agreement, dated
on or about the date hereof (the "SOFTBANK Stock Purchase Agreement"), pursuant
to which Holding Company intends to issue and sell and SOFTBANK intends to
acquire 6,153,850 shares of Holding Company's common stock, par value $.001 per
share and (ii) a Loan Agreement, dated on or about the date hereof, pursuant to
which SOFTBANK shall make to Holding Company an unsecured subordinate
convertible loan in the principal amount of $15,000,000, (b) amend certain
provisions of the Loan Agreement in connection with the foregoing transactions
and (c) 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. 8 to Loan Documents and Consent
(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:
1. 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) "SOFTBANK Agreements" shall mean, collectively, the SOFTBANK
-------------------
Stock Purchase Agreement, the SOFTBANK Loan Agreement, and the Registration
Rights Agreement entered into on or about the date hereof between SOFTBANK and
Holding Company, all as in effect on the date hereof.
(ii) "SOFTBANK Subordinated Loan" shall mean the loan in the principal
--------------------------
amount of $15,000,000 made on or about the date hereof by SOFTBANK to Holding
Company pursuant to the SOFTBANK Loan Agreement, as evidenced by, and due and
payable in accordance with, the SOFTBANK Subordinated Note.
(iii) "SOFTBANK Subordinated Note" shall mean that certain Global
---------------------------
Sports, Inc. Convertible Subordinated Note, dated on or about the date hereof,
made by Holding Company in favor of
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<PAGE>
SOFTBANK in the principal amount of $15,000,000, evidencing the SOFTBANK
Subordinated Loan, as in effect on the date hereof.
(iv) "SOFTBANK Shares" shall mean the 6,153,850 shares of Holding
---------------
Company common stock that shall be purchased by SOFTBANK from Holding Company
pursuant to the SOFTBANK Stock Purchase Agreement.
(v) "SOFTBANK Stock Purchase Agreement" shall mean the Stock
---------------------------------
Purchase Agreement, dated on or about the date hereof, entered into and executed
between Holding Company and SOFTBANK, as in effect as of the date hereof,
pursuant to which Holding Company has agreed to issue and sell to SOFTBANK, and
SOFTBANK has agreed to purchase from Holding Company, the SOFTBANK Shares.
(vi) "SOFTBANK Subordination Agreement" shall mean the Subordination
--------------------------------
Agreement, dated on or about the date hereof, executed by and among Holding
Company, Borrowers, Foothill and SOFTBANK.
(vii) "SOFTBANK Transactions" shall mean, collectively, the making of
---------------------
the SOFTBANK Subordinated Loan by SOFTBANK to Holding Company and the sale and
issuance of the SOFTBANK Shares by Holding Company to SOFTBANK.
2. Consent.
-------
(a) Foothill hereby consents to the execution and delivery of the
SOFTBANK Agreements, as in effect on the date hereof, and to the consummation of
the SOFTBANK Transactions contemplated thereunder, including, without
limitation, the making of the SOFTBANK Subordinated Loan by SOFTBANK to Holding
Company, the issuance of the SOFTBANK Subordinated Note and the sale and
issuance of the SOFTBANK Shares by Holding Company to SOFTBANK pursuant to the
SOFTBANK Stock Purchase Agreement, subject, however, to the satisfaction in full
of each of the conditions precedent set forth in paragraph 9 of this Amendment;
and Foothill hereby waives the application of any applicable Section of the
Holding Company GSA and of the Loan Agreement, including, without limitation,
Sections 7.1 (Indebtedness) and 7.4 (Disposal of Assets) thereof, that would
otherwise prohibit Holding Company from consummating the SOFTBANK Transactions.
-3-
<PAGE>
3. Amendment of Section 7.1. Section 7.1 of the Loan Agreement is hereby
------------------------
amended by deleting the word "and" at the end of subsection (h) thereof, by
deleting the period at the end of subsection (i) thereof and substituting ";
and" therefor, and by adding a new subsection (j) thereto as follows:
"(j) unsecured Indebtedness of Holding Company to SOFTBANK evidenced
by the SOFTBANK Note, 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 and conditions set
forth in the SOFTBANK Subordination Agreement."
4. Amendment of Section 7.9. Section 7.9 of the Loan Agreement is hereby
-----------------------
deleted in its entirety and the following is hereby substituted therefor:
"7.9 Change of Control. Cause, permit, or suffer, directly or
Indirectly any Change of Control, other than a Change of Control that
results from the sale and issuance of the SOFTBANK Shares by Holding
Company to SOFTBANK or its affiliate, SOFTBANK Capital Partners, L.P.,
pursuant to the SOFTBANK Stock Purchase Agreement and any transfer of
the SOFTBANK Shares, or any portion thereof, by SOFTBANK or by
SOFTBANK Capital Partners, L.P. to any affiliate of SOFTBANK Corp., a
Japanese corporation, including, without limitation, any partnership
or other entity of which any direct or indirect subsidiary of SOFTBANK
Corp. is a general partner or has investment discretion, or to any
employees of any of the foregoing."
5. Amendment of Section 2.6(a)(i). Section 2.6(a)(i) of the Loan
------------------------------
Agreement is hereby amended by deleting in its entirety the proviso set forth at
-------
the conclusion of such Section (such proviso having been added to such Section
-------
pursuant to paragraph 2(c) of Amendment No. 3).
6. Amendment of Section 2.6(a)(ii). Section 2.6(a)(ii) of the Loan
-------------------------------
Agreement is hereby amended by deleting in its entirety the proviso set forth at
-------
the conclusion of such Section (such
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<PAGE>
proviso having been added to such Section pursuant to paragraph 2(d) of
- -------
Amendment No. 3).
7. Proceeds of SOFTBANK Transactions. Holding Company and Borrowers
---------------------------------
covenant and agree that, notwithstanding anything to the contrary contained in
the SOFTBANK Agreements, Holding Company shall, contemporaneously herewith,
irrevocably authorize and direct SOFTBANK, in a writing delivered to SOFTBANK,
to remit, and shall cause to be remitted, directly to the Foothill Account all
net proceeds of the SOFTBANK Transactions that would otherwise be remitted to
Holding Company in accordance with the SOFTBANK Agreements, for application by
Foothill to the Obligations then outstanding, in such order and manner as
Foothill shall determine in its sole discretion. Failure by Holding Company to
cause such net proceeds of the SOFTBANK Transactions to be so remitted to
Foothill shall constitute an additional Event of Default under the Loan
Agreement.
8. 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 Holding Company 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):
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 Holding Company contained
herein constitute their legal, valid and binding obligations enforceable against
them in accordance with their respective terms.
9. 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;
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<PAGE>
(b) the receipt by Foothill of a fully executed copy of the SOFTBANK
Loan Agreement, SOFTBANK Subordinated Note and SOFTBANK Stock Purchase
Agreement; and
(C) the receipt by Foothill of an original of the SOFTBANK
Subordination Agreement, executed by SOFTBANK, Holding Company and Borrowers.
(d) other than the Events of Default being waived pursuant to
paragraph 10 below, as of the date on which this Amendment would otherwise
become effective in accordance with this paragraph 9, 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.
10. Waiver of Events of Default. At the request of Holding Company and
---------------------------
Borrowers, Foothill hereby waives the following Events of Default that have
occurred and are continuing as a result of: (a) Borrowers' failure to comply
with the provisions of the financial covenant set forth in Section 7.20(a)(ii)
of the Loan Agreement as of the last day of the month of April, 1999, (b)
Borrowers and Guarantors contributing capital to Global Sports Interactive, Inc.
in excess of the $1,000,000 aggregate contribution limitation set forth in
Consent and Amendment No. 7 to Loan Documents, dated March 19, 1999, executed
among Borrowers, Guarantors and Foothill, (C) the making by Holding Company of
the "Non-permitted Payments", as defined and described in that certain letter
re: Waiver and Consent executed, or to be executed, by and among Foothill,
Borrowers and Guarantors with respect to matters relating to the Gen-X
Subordinated Notes, and (d) the failure of Borrowers to pay and satisfy in full
on March 30, 1999 all Overadvances made by Foothill to Borrowers pursuant to
Amendment No. 5.
11. 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 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
-6-
<PAGE>
other Loan Documents amended hereby and this Amendment shall be read and be
construed as one agreement.
12. 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.
13. 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).
14. 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.
-7-
<PAGE>
15. 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: CEO
----------------
RYKA, INC.
By: /s/ Michael Rubin
------------------
Title: CEO
----------------
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
-----------------
Title: CEO
---------------
AGREED:
FOOTHILL CAPITAL CORPORATION
By: /s/ Erik Sawyer
---------------------
Title: Vice President
------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
ACKNOWLEDGED AND CONSENTED TO IN ALL RESPECTS:
APEX SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
-----------------
Title: CEO
----------------
GLOBAL SPORTS INTERACTIVE, INC.
By: /s/ Michael Rubin
-----------------
Title: CEO
---------------
MR MANAGEMENT, INC.
By: /s/ Michael Rubin
-----------------
Title: CEO
---------------
/s/ Michael Rubin
- -----------------
MICHAEL RUBIN
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 9 TO LOAN DOCUMENTS AND WAIVER
--------------------------------------------
As of June 17, 1999
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,
Consent and Amendment No. 3 to Loan Documents, dated as of May 12, 1998,
Amendment No. 4 to Loan Documents and Waiver, executed on or about July 21,
1998, Amendment No. 5 to Loan Documents, dated December 3, 1998, Consent and
Amendment No. 6 to Loan Documents, dated January 29, 1999, Consent and Amendment
No. 7 to Loan Documents, dated March 19, 1999 and Amendment No. 8 to Loan
Documents, Consent and Waiver dated June 10, 1998 (as so amended, the "Loan
Agreement") and all other Loan Documents at any time executed and/or delivered
in connection therewith. 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) amend certain provisions
relating to the issuance of Letters of Credit for the account of Ryka, for a
limited period of time, and (b) amend certain other provisions of the Loan
Agreement, and Foothill is willing to agree to the foregoing, on and subject to
the terms and conditions contained in 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. Temporary Increase in Ryka Letters of Credit Sublimit. Section
-----------------------------------------------------
2.2(a)(ii)(y)(B) is hereby deleted in its entirety and the following is hereby
substituted therefor:
"(B) (x) during the period from the date of this
Agreement through and including June 16, 1999,
$3,000,000, (y) during the period from and after June
17, 1999 through and including August 31, 1999,
$4,000,000, and (z) at all times from and after
September 1, 1999, $3,000,000 ."
2. Amendments to Schedules. Borrowers have established additional
-----------------------
locations at which they from time to time store Inventory pursuant to warehouse
arrangements with each of (a) Faro Services, Inc., Whittier, California (b)
Jam'n Warehouse, Renton, Washington and (c) TCB Warehouse, Merrimack, New
Hampshire (collectively, the "New Warehouse Locations"). In connection with the
establishment of the New Warehouse Locations:
(i) Amendment of Schedule E. Schedule E-1 to the Loan Agreement is hereby
-----------------------
deleted in its entirety and "Schedule E-1" attached hereto is hereby substituted
therefor; and
(ii) Amendment of Schedule 6.12. Schedule 6.12 to the Loan Agreement is
--------------------------
hereby deleted in its entirety and "Schedule 6.12" attached hereto is hereby
substituted therefor.
3. 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 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
(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 Borrowers contained herein constitute their
legal, valid and binding obligations enforceable against them in accordance with
their respective terms.
4. Conditions Precedent. The effectiveness of the amendments contained
--------------------
herein shall be subject to the following:
-2-
<PAGE>
(a) the receipt by Foothill of an original of this Amendment, duly
authorized, executed and delivered by each Borrower and each Guarantor; and
(b) 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.
5. 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 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.
6. Further Assurances. The parties hereto shall execute and/or deliver
------------------
such additional documents and take such additional actions as may be necessary
or desirable to effectuate the provisions and purposes of this Amendment,
including, without limitation, a Warehouse Notification and Acknowledgment of
Security Interest executed by each respective owner of the New Warehouse
Locations, in form and substance satisfactory to Foothill.
7. 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).
8. 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.
9. 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
-3-
<PAGE>
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/ Steven A. Wolf
---------------------------------
Title: VP & CFO
------------------------------
RYKA, INC.
By: /s/ Steven A. Wolf
--------------------------------
Title: VP & CFO
------------------------------
AGREED:
FOOTHILL CAPITAL CORPORATION
By: Erik R. Sawyer
------------------------
Title: VP
---------------------
ACKNOWLEDGED AND CONSENTED
TO IN ALL RESPECTS:
GLOBAL SPORTS, INC.
By: /s/ Steven A. Wolf
------------------------
Title: VP & CFO
---------------------
APEX SPORTS INTERNATIONAL, INC.
By: /s/ Steven A. Wolf
------------------------
Title: VP & CFO
---------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
-4-
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
GLOBAL SPORTS INTERACTIVE, INC.
By: /s/ Steven A. Wolf
---------------------------
Title: VP & CFO
------------------------
MR MANAGEMENT, INC.
By: /s/ Michael G. Rubin
---------------------------
Title: CEO
------------------------
/s/ Michael G. Rubin
- -------------------------------
MICHAEL RUBIN
-5-
<PAGE>
SCHEDULE 6.12
-------------
1. KPR SPORTS INTERNATIONAL, INC.
555 South Henderson Road
King of Prussia, PA 19406
RYKA INC.
555 South Henderson Road
King of Prussia, PA 19406
2. COURIER SYSTEMS
45 Rosenhayn Avenue
Bridgeton, NJ 08302
(609) 455-3600
Contact: Tori Morris
3. TCB WAREHOUSE
33 Elm Street
Merrimack, NH 03054
(603) 424-1809
Contact: Paul Lusky
4. FARO SERVICES, INC.
8190 Byron Road
Whittier, CA 90606
(562) 945-0054
Contact: Toby Booth
5. UNIVERSAL WAREHOUSE
2850 East Del Amo Blvd.
Long Beach, CA 90810
(310) 631-0800
(310) 632-9325
Contact: Virginia Watson
6. JAM'N WAREHOUSE
2501 East Valley Road
Renton, WA 98055
(425) 254-2500
Contact: Ted
7. JAM'N CALIFORNIA
7301 Telegraph Road
Unit B
Montibello, CA 90640-6513
(323) 838-6709
Contact: Brian Rock
<PAGE>
SCHEDULE E.1
------------
1. KPR SPORTS INTERNATIONAL, INC.
555 South Henderson Road
King of Prussia, PA 19406
RYKA INC.
555 South Henderson Road
King of Prussia, PA 19406
2. COURIER SYSTEMS
45 Rosenhayn Avenue
Bridgeton, NJ 08302
(609) 455-3600
Contact: Tori Morris
3. TCB WAREHOUSE
33 Elm Street
Merrimack, NH 03054
(603) 424-1809
Contact: Paul Lusky
4. FARO SERVICES, INC.
8190 Byron Road
Whittier, CA 90606
(562) 945-0054
Contact: Toby Booth
5. UNIVERSAL WAREHOUSE
2850 East Del Amo Blvd.
Long beach, CA 90810
(310) 631-0800
(310) 632-9325
Contact: Virginia Watson
6. JAM'N WAREHOUSE
2501 East Valley Road
Renton, WA 98055
(425) 254-2500
Contact: Ted
7. JAM'N CALIFORNIA
7301 Telegraph Road
Unit B
Montibello, CA 90640-6513
(323) 838-6709
Contact: Brian Rock
<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,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 308
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,729,514<F1>
<PP&E> 6,185,981
<DEPRECIATION> 1,916,646
<TOTAL-ASSETS> 47,231,519
<CURRENT-LIABILITIES> 17,947,559
<BONDS> 0
100
0
<COMMON> 132,457
<OTHER-SE> 12,035,853
<TOTAL-LIABILITY-AND-EQUITY> 47,231,519
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 5,395,352
<OTHER-EXPENSES> 156,843
<LOSS-PROVISION> 797,947
<INTEREST-EXPENSE> 156,843
<INCOME-PRETAX> (5,552,195)
<INCOME-TAX> (2,220,878)
<INCOME-CONTINUING> (3,331,317)
<DISCONTINUED> 586,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,064,719)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
<FN>
<F1>INCLUDES NET ASSETS OF DISCONTINUED OPERATIONS $37,594,624.
</FN>
</TABLE>
