<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 no.)
of incorporation of organization)
555 SOUTH HENDERSON ROAD, KING OF PRUSSIA, PA 19406 (610) 768-0900
(Address of principal executive offices, including zip code, telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
- -----------------------------------------------------------------------------------------
<S> <C>
Common Stock, par value $.01 per share.........................
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of the close of business on March 15, 1999,
was approximately $49,758,283.(/1/) There were 12,039,753 shares of the
registrant's Common Stock outstanding as of the close of business on March 15,
1999.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits from the registrant's prior filings under the Securities
Exchange Act of 1934 and registration statements under the Securities Act of
1933 are incorporated by reference as Exhibits in Part IV of this report on
pages 28-30.
- --------
(/1/)This equals the number of outstanding shares of the registrant's Common
Stock reduced by the number of shares that may be deemed beneficially owned
by the registrant's officers, directors and shareholders owning in excess
of 10% of the registrant's Common Stock, multiplied by the last reported
sale price for the registrant's Common Stock on March 15, 1999. This
information is provided solely for record keeping purposes of the
Securities and Exchange Commission and shall not be construed as an
admission that any officer, director or 10% shareholder in the registrant
is an affiliate of the registrant or is the beneficial owner of any such
shares. Any such inference is hereby disclaimed.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<C> <S> <C>
ITEM 1: BUSINESS .................................................... 3
Overview .................................................... 3
History ..................................................... 3
Recent Acquisitions ......................................... 4
Branded Division ............................................ 4
Off-Price and Action Sports Division ........................ 7
Industry Overview ........................................... 9
Competition ................................................. 9
Manufacturing ............................................... 10
Distribution ................................................ 10
Management Information Systems .............................. 11
Employees ................................................... 11
Risk Factors ................................................ 11
ITEM 2: PROPERTIES .................................................. 16
ITEM 3: LEGAL PROCEEDINGS ........................................... 16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 17
ITEM 4.1: CERTAIN EXECUTIVE OFFICERS OF THE REGISTRANT ................ 17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS .................................................... 19
ITEM 6: SELECTED FINANCIAL DATA ..................................... 20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................. 21
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 26
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 26
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 26
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 27
ITEM 11: EXECUTIVE COMPENSATION ...................................... 27
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................. 27
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 27
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 28
</TABLE>
2
<PAGE>
PART I
ITEM 1: BUSINESS
Overview
Global Sports, Inc. ("Global" or the "Company") is a diversified sporting
goods company that operates two distinct divisions: the "Branded Division" and
the "Off-Price and Action Sports Division".
Through its Branded Division, the Company designs, markets and distributes
two footwear products, the "RYKA" brand and the "Yukon" brand. Each brand is
designed to appeal to a targeted consumer group with a broad selection of
product categories and styles. RYKA is a high performance athletic footwear
brand designed exclusively for women. A complete line of RYKA footwear is
offered each season at suggested retail prices of between $45 and $80 in five
categories: aerobic fitness, cross-training, running, walking and aqua
aerobics. Yukon is a high performance outdoor footwear brand designed for men,
women and children. A complete line of Yukon's performance-outdoor and rugged
casual footwear is offered each season at suggested retail prices of between
$35 and $130.
Through its Off-Price and Action Sports Division, the Company purchases
manufacturers' closeout merchandise, overstocks and canceled orders, as well
as excess inventories from retailers, for resale to retailers. The Company
purchases and distributes a wide array of athletic, outdoor, casual and
specialty footwear, athletic apparel, winter sports equipment (including ski
and snowboard equipment), in-line skates, skateboards, and sunglasses. The
Company also designs and distributes special make-up snowboards and other
sports-related merchandise for selected retailers.
The Company's executive offices and warehouse are located at 555 South
Henderson Road, King of Prussia, Pennsylvania 19406, and its telephone number
is (610) 768-0900. Unless the context requires otherwise, all references
herein to Global or the Company refer to Global Sports, Inc. and its
subsidiaries.
History
In July 1995, the Company consummated a financing arrangement with MR
Acquisitions, L.L.C. ("MR Acquisitions"), a company that was indirectly owned
by Michael G. Rubin, Chairman of the Board and Chief Executive Officer of the
Company. Pursuant to the financing arrangement, MR Acquisitions acquired a
significant interest, though less than a majority interest, in the Company and
provided and/or arranged to provide the Company with up to $8,000,000 of new
financing. Mr. Rubin became Chairman of the Board and Chief Executive Officer
of the Company in connection with the Company's transactions with MR
Acquisitions.
On December 15, 1997, the Company (then named RYKA Inc.) consummated a
reorganization (the "Reorganization") among the Company, certain companies
controlled by Mr. Rubin (the "KPR Companies"), and Mr. Rubin. As part of the
Reorganization, (i) the KPR Companies became wholly-owned subsidiaries of the
Company, and (ii) the Company issued to Mr. Rubin an aggregate of 8,169,086 of
its common stock in exchange for all of the issued and outstanding shares of
capital stock of the KPR Companies and certain shares of the Company that were
held by the KPR Companies.
After the Reorganization, Mr. Rubin 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 the Company, (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
3
<PAGE>
historical financial statements of the KPR Companies prior to and subsequent
to the Reorganization, and (iv) any references to RYKA Inc. apply solely to
that company and its financial statements prior to the Reorganization.
Recent Acquisitions
Effective May 12, 1998, the Company acquired all of the issued and
outstanding stock of Gen-X Holdings Inc. and Gen-X Equipment Inc.
(collectively, the "Gen-X Companies") from James J. Salter, Kenneth J.
Finkelstein and certain other individuals and entities. The Gen-X Companies
were privately held companies headquartered 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 athletic footwear. In consideration for acquiring all of the capital
stock of the Gen-X Companies, the Company issued 1,500,000 shares of its
common stock and contingent consideration in the form of noninterest-bearing
notes payable in the maximum aggregate amount of $4,500,000 and 10,000 shares
of preferred stock mandatorily redeemable in the maximum aggregate amount of
500,000. The goodwill recorded in this transaction of $6,644,083 is being
amortized over twenty years.
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc., a
privately held manufacturer of snowboards, bindings and related products based
in San Diego, California. In consideration for acquiring the stock of Lamar,
the Company paid $250,000 in cash and issued notes in the aggregate principal
amount of $1,000,000, payable over five years. The goodwill recorded in this
transaction of $2,203,992 is being amortized over twenty years.
Branded Division
The Company designs, develops and markets each of its branded product lines
to appeal to a targeted consumer group. Within each line, the Company offers a
broad selection of product categories and styles. For the year ended December
31, 1998, the net sales of the Branded Division were $41,080,143 or 31% of the
Company's total net sales.
RYKA. RYKA is the only performance athletic footwear brand designed
exclusively for active women, specifically women between the ages of 25 and 45
years. RYKA includes the following categories: aerobic fitness, cross-
training, running, walking and aqua aerobics. All RYKA footwear is made on
women's lasts. As a result, RYKA footwear is designed and manufactured with
the anatomical features and foot morphology unique to women's feet (typically
narrow in the heel and wide in the forefoot). All RYKA footwear incorporates
RYKA's Nitrogen/ES System, which is designed to provide enhanced shock
absorption, resiliency and durability. The Nitrogen/ES System in higher priced
models consists of visible and non-visible nitrogen pads and slabs which are
placed in the heel, the mid-sole and the forefoot of the shoe. In standard
models, non-visible nitrogen pads are placed in the mid-sole only. In Fall
1998, the Company introduced the RYKA Elemental Technology System(TM)
("ETS(TM)"). ETS(TM) is a holistic approach to footwear, which employs
patented technologies to address the four aspects of athletic footwear that
are most important to women: fit, comfort, cushioning and control. RYKA
footwear is sold principally through athletic footwear stores, sporting goods
stores and department stores.
RYKA's Spring 1999 line consists of 19 footwear styles in five categories
and RYKA's Fall 1999 line will consist of 25 footwear styles in five
categories. As part of the Spring 1999 line, the Company is introducing 11 new
styles in four categories and as part of the Fall 1999 line, will introduce 12
new styles in four categories. The Company generally offers its RYKA styles in
two to three different colors and material variations and 10 to 15 different
sizes. The following table sets forth certain information about the RYKA
Spring 1999 line.
<TABLE>
<CAPTION>
Categories Number of Styles Suggested Retail Price Range
---------- ---------------- ----------------------------
<S> <C> <C>
Aerobic Fitness 5 $55.00- 80.00
Cross-training 3 $55.00- 70.00
Running 4 $65.00- 80.00
Walking 5 $45.00- 70.00
Aqua Aerobics 2 $55.00- 65.00
</TABLE>
4
<PAGE>
Yukon. Yukon is a performance-outdoor and rugged casual brand of footwear
that provides functional performance, classic styling and durability. Yukon is
designed primarily for men, but also for women and children, and includes
hiking boots, cross-terrain boots, trail walking shoes, rugged casual shoes
and work boots. Yukon performance footwear is designed for all ability levels
from the avid outdoor enthusiast to the weekend adventurer. Performance
features found on various Yukon styles include ThinsulateTM insulation,
Weather ProofTM Leather and support shank systems such as Engineered Torsional
StabilityTM. Yukon rugged outdoor and casual footwear is generally designed
with an EVA footbed for comfort and equipped with rubber outsoles to provide
cushioning and traction. All of the Company's Yukon footwear is designed with
premium leather products. Yukon is sold principally through sporting goods
stores, footwear stores and department stores.
Yukon's new Spring 1999 line consists of 29 men's footwear styles in five
categories and a full complement of women's and children's styles. The Fall
1999 line, which consist of 29 footwear styles in 5 categories, is designed
specifically for the fall and winter seasons and includes different
performance features than the Spring line. The Company generally offers its
Yukon styles in two to three different colors and material variations and 10
to 15 different sizes. The following table sets forth certain information
about the products within the Yukon lines.
<TABLE>
<CAPTION>
Categories Number of Styles Suggested Retail Price Range
---------- ---------------- ----------------------------
<S> <C> <C>
SPRING
Ascent (Hiking) 9 $55.00- 80.00
Ascent (Trail Walking) 6 $50.00- 75.00
Adrenaline (Approach) 4 $35.00- 70.00
Adrenaline (River Rock) 5 $55.00- 70.00
Traverse (Rugged Casual) 5 $35.00- 50.00
FALL
Ascent (Hiking) 6 $55.00- 85.00
Adrenaline (Cross-Terrain) 7 $35.00- 60.00
Traverse (Rugged Casual) 6 $35.00- 50.00
Excursion (Walking) 5 $40.00- 65.00
Extreme Weather 5 $70.00-130.00
</TABLE>
Marketing and Advertising. The Company's marketing focus is to continue to
build the recognition of the Company's brand names as the footwear of choice
for their targeted consumer groups and as brands that stand for quality,
performance, comfort, design innovation and value. Senior management is
directly involved in shaping the Company's image and its advertising and
promotional activities. Mr. Rubin and the executives in charge of the
Company's Branded Division oversee the conception, development, and
implementation of most aspects of the Company's branded footwear marketing
efforts.
Because of its limited resources, the Company historically has concentrated
its marketing efforts on less costly, grass-roots approaches such as point-of-
purchase and other retailer promotions. The Company recently has begun to
advertise in targeted consumer publications, such as Self, Fitness and Cooking
Light for RYKA and Outside, Sierra and Backpacker for Yukon. Outside
advertising agencies, together with the Company's in-house marketing
personnel, have developed a program to promote the Company's brand names
through lifestyle and image advertising. While all advertisements feature the
Company's footwear, advertising generally seeks to build and increase brand
awareness by linking the brand to its targeted consumer group rather than to
market a particular footwear product.
The Company also participates with certain of its retail customers in
cooperative advertising programs intended to take the brand awareness created
by the Company's print advertising and channel it to local retailers where
consumers can buy the Company's products. This advertising typically includes
local newspaper advertising. The Company's co-op efforts are intended to
maximize advertising resources by having its retailers share in the cost of
promoting the Company's brands. Also, the Company believes that co-op
advertising encourages the retailer to merchandise the brands properly and
sell them aggressively on the sales floor.
5
<PAGE>
The Company also supports retailers by developing marketing to further
promote its products in stores and to leverage the brand recognition at the
retail level. The Company's independent sales representatives and Company
personnel communicate with and visit the Company's customers on a regular
basis to aid in the proper visual presentation of the Company's merchandise
and to distribute point-of-purchase items such as signage, packaging,
displays, counter cards, and banners. The Company believes these efforts help
stimulate impulse sales and repeat purchases. Certain of the Company's retail
accounts feature "in-store shop" formats in which the Company provides
fixtures, signage and visual merchandise assistance in a dedicated floor space
within the store. The design of the shops uses the Company's distinctive brand
advertising to promote brand recognition and differentiate the Company's
products in the store from that of its competition.
The Company has also developed a variety of promotional programs, such as
the "RYKA Instructor and Trainer Alliance" (an incentive program for fitness
instructors), "Team Yukon" (a series of field product tests in conjunction
with key retailers) and the "Yukon Preservation Alliance" (a series of events
designed to promote environmental awareness and resource preservation). RYKA
is the official and exclusive footwear sponsor for Jazzercise, the world's
largest fitness program with over 4,700 instructors and 450,000 students. In
Spring 1999, RYKA launched the RALLY program in all 500 non-urban Lady Foot
Locker Stores in the United States. RALLY is a marketing program which
includes (i) displays that advertise and feature eight RYKA styles (ii) the
Another Chance Foundation, a charitable institution jointly established by the
Company and Lady Foot Locker, that is funded with a percentage of the proceeds
from RYKA sales at Lady Foot Locker stores, (iii) a referral program with
local fitness instructors and (iv) an educational program about RYKA. To
showcase the Company's products to footwear buyers, the Company exhibits at
industry trade shows.
Sales. The Company focuses on those retailers which it believes will
effectively promote and display the Company's products. By so doing, the
Company believes that it is better able to protect and enhance its brand names
and service customers' accounts. Senior management of the Company is directly
involved in maintaining relationships with key customer accounts as well as
developing relationships with new customers. The Company relies principally on
11 independent sales organizations, which collectively employ 38 sales
representatives, to sell RYKA and Yukon footwear to its customer accounts.
Three of the 11 sales organizations have been added recently to cover customer
accounts in Canada. The independent sales organizations cover all 50 states
and Canada and report to the Vice President of Sales for the Branded Division.
Each of the independent sales organizations is compensated on a commission
basis. While the Company's independent sales organizations handle products
from other brands, none of the representatives sell products directly
competitive with RYKA and Yukon. The Company also has eight in-house customer
service employees.
Customers. The Company's primary customers are athletic footwear stores,
sporting goods stores, department stores and independent retailers. In 1998,
RYKA and Yukon footwear was sold by over 1,000 retail accounts, principally in
the United States and Canada, including The Venator Group, Finish Line,
Athlete's Foot, Just for Feet, Modell's, Michigan Sporting Goods (d/b/a MC
Sporting Goods), Gart Sports/Sportmart, Oshman's, and United Merchandising
(d/b/a Big 5). The majority of the Company's customer accounts carry both RYKA
and Yukon. The following table demonstrates the Company's penetration of
selected large customer accounts.
<TABLE>
<CAPTION>
Customer Account Products Carried
---------------- ----------------
<S> <C>
Athlete's Foot 5 RYKA styles in all stores
Finish Line 5 RYKA styles in 90 stores, 2 Yukon styles in all stores
Gart Sports/Sportmart 5 RYKA styles and 5 Yukon styles in all stores
Just for Feet 20 RYKA styles and 40 Yukon styles in all stores
Lady Foot Locker 8 RYKA styles in all non-urban stores
The Sports Authority 7 RYKA styles and 6 Yukon styles in all stores
</TABLE>
Two retail accounts each represented approximately 19%, or 38% in the
aggregate, of the total net sales of the Company's Branded Division for the
year ended December 31, 1998. Other than the foregoing, no one customer
accounted for 10% or more of the total net sales of the Branded Division for
the year ended December 31, 1998.
6
<PAGE>
The Company is committed to achieving customer satisfaction and to building
a loyal customer base by providing a high level of knowledgeable, attentive
and personalized customer service. The Company's independent sales
representatives and the Company's sales and customer service personnel
coordinate with retail customers to determine the inventory level and product
mix that should be carried in each store in an effort to help retail sell-
through and enhance the customer's product margin. Such information is used as
a basis for developing sales projections and product needs for such customers.
These representatives and Company personnel work with retailers to ensure that
the Company's products are appropriately displayed. The Company believes that
by strategically selecting the appropriate accounts and closely working with
those accounts, it is better able to reduce inventory markdowns and customer
returns and allowances, while maintaining the proper showcase for the
Company's brand names and products.
To protect itself from the possibility of insolvency of its customer
accounts, the Company maintains policies of credit insurance specific to
certain customer accounts.
Product Design and Development. The Company designs most new styles to
appeal to their targeted consumer group, although the Company's footwear often
appeals to a broader spectrum of consumers resulting in improved brand
recognition. The Company generally positions RYKA and Yukon as performance
oriented brands at a value price with features comparable to those found on
other leading footwear brands.
The Company offers primary lines of both RYKA and Yukon in the Spring and
Fall seasons. The Company's products are designed and developed in-house,
although the Company periodically utilizes outside design firms to supplement
its design efforts. Separate design teams focus on each of the Company's
brands and report to the Company's executive in charge of the particular
brand. The design process is collaborative with members of the design staff
meeting regularly to further refine the Company's products in order to meet
the particular needs of the Company's markets.
The Company believes that its product success is related in large part to
its ability to recognize trends in its footwear markets and to design products
that anticipate and accommodate consumers' evolving preferences. The Company
strives to analyze, interpret and translate current and emerging lifestyle
trends affecting its targeted consumer groups. Lifestyle trend information is
compiled by the Company's designers through various methods designed to
monitor changes in culture and society, including (i) review and analysis of
music, television, movies, clothing, sports and other trend-setting media,
(ii) travel to various markets to identify and confirm current trends, (iii)
consultation with the Company's retail customers for information on current
retail selling trends, (iv) participation in major footwear trade shows to
stay abreast of popular brands and styles and (v) subscription to various
fashion and color information services.
After the design team arrives at a consensus regarding the themes for the
coming season, the group then translates these themes into the Company's
products. These interpretations include variations in product color, material
structure and decoration. Prototype blueprints and specifications are created
and forwarded to the Company's prototype manufacturers located in China, which
then forward design prototypes back to the Company's domestic design team
approximately four to six weeks after initial receipt. All new design concepts
are subject to review by the Company's major retail customers. This customer
input not only allows the Company to measure consumer reaction to the
Company's latest designs, but also affords the Company an opportunity to
foster deeper and more collaborative relationships with these customers. The
Company's design team can modify and refine designs based on this development
input.
Off-Price and Action Sports Division
General. The Company purchases manufacturers' closeout merchandise,
overstocks and canceled orders, as well as excess inventories from retailers,
for resale to retailers principally in the United States and Canada. The
Company is a leading third-party wholesaler of off-price athletic, outdoor and
casual footwear, athletic apparel and sporting goods. The Company resells
merchandise to sporting goods stores, off-price specialty stores, department
stores, family footwear stores, and independent retailers. Due to the large
quantities of merchandise
7
<PAGE>
that the division purchases and warehouses in its distribution facilities, the
Company is able to pass along its value pricing to the retailer. The Company
also designs and distributes special make-up snowboards and other sports-
related merchandise for selected retailers.
For the year ended December 31, 1998, the net sales of the Off-Price and
Action Sports Division were $90,354,828 or 69% of the Company's total net
sales. Net sales for the Off-Price and Action Sports Division reflect the
acquisition of the Gen-X Companies as of May 12, 1998.
The off-price business relies on the availability of merchandise from
manufacturers and retailers in the footwear, athletic apparel and sporting
goods industries. The Company has developed strong working relationships with
and has purchased significant quantities of merchandise from major well-known
brands. By affiliating with multiple brands, the Company is able to offer a
diverse product mix from a variety of brands to the customers of its Off-Price
and Action Sports Division. The Company's goal is to purchase quality goods
with greater selectivity from a number of sources. Towards this goal, the
Company has established arrangements with several large, well-known
manufacturers under which the Company may purchase off-price merchandise. The
Company has also established a "store stock" program with a key retailer to
purchase, at the Company's option, all closeout or overstocked inventory. The
Company intends to establish additional arrangements with manufacturers and
retailers to increase the predictability of the business. The Company
estimates that more than 75% of merchandise in a given year is purchased from
manufacturers with which the Company has a long-standing relationship.
Products. The following table sets forth certain information about the
products that are sold by the Company's Off-Price and Action Sports Division.
<TABLE>
<CAPTION>
Category Products
-------- --------
<C> <S>
Athletic Footwear Cross-training, running, basketball, tennis,
aerobic, walking, baseball/softball and soccer
Outdoor and Casual Footwear Rugged casual, cross-terrain, hiking, work
boots, sandals
Athletic Apparel Professional and college team jackets, jerseys
and hats
Ski Equipment Skis, ski bindings, ski poles, ski accessories
Snowboard Equipment Snowboards, snowboard bindings, snowboard boots
Sporting Equipment Skateboards, in-line skates
Other Sunglasses, backpacks, fitness accessories
</TABLE>
Special Make-up Business. On a special make-up basis, the Company designs
and distributes product orders specifically designed for selected retailers.
The Off-Price and Action Sports Division, like a branded goods business,
receives orders four to six months prior to the expected shipment date. The
Company accepts orders for snowboards and other sports-related merchandise
that vary dramatically in size and fulfills product orders for nationwide
store chains as well as for single location specialty shops. The Company
designs products according to customer specifications and produces only the
quantity of merchandise requested by the customer.
The Company's special make-up products consist primarily of snowboard
equipment, but also include athletic footwear and skateboard equipment. The
Company believes that the sale of snowboard and skateboard equipment, in
particular, is well suited to the custom order process, which increases
predictability and minimizes risk. The Company's special make-up lines include
Apex, Lamar, Vision, Rage, and Dukes Shoes. The Lamar, Vision and Rage lines
consist of snowboard equipment and accessories and are each sold at a
different price point. The Lamar and Rage lines also include skateboard
equipment and accessories, which are also sold at different price points. The
Apex lines consist of athletic footwear for men and boys of all ages in the
following categories: cross-training, basketball, running, tennis,
baseball/softball and soccer. Dukes Shoes is a skateboard footwear line.
Sales. The sales force for the Company's Off-Price and Action Sports
Division merchandise consists of 15 sales executives of which nine have been
with the Gen-X Companies since their formation in 1996. These
8
<PAGE>
sales executives deal exclusively with off-price and special make-up
merchandise and have established strong relationships with a wide range of
major retailers. Each of the sales executives is compensated on a commission
basis.
Customers. During the year ended December 31, 1998, the Company sold its
off-price merchandise to approximately 1,250 retail accounts. Two retail
accounts each represented approximately 30% and 10%, or 40% in the aggregate,
of the total net sales of the Company's Off-Price and Action Sports Division
for the year ended December 31, 1998. Other than the foregoing, no one
customer accounted for 10% or more of the total net sales of the Off-Price and
Action Sports Division for the year ended December 31, 1998.
Industry Overview
According to Sporting Goods Intelligence ("SGI"), wholesale sales of branded
athletic footwear in the United States were approximately $7.5 billion in
1998, down approximately 7% from $8.0 billion in 1997. According to Footwear
Market Insights, athletic footwear designed specifically for women accounted
for approximately 40% of all athletic footwear sales in the U.S. in 1997. Nike
and Reebok accounted for approximately 43% and 14%, respectively, of sales in
1998 and 47% and 15%, respectively, of sales in 1997. After these market
leaders, the remainder of the branded athletic footwear market is highly
fragmented with the third largest brand, adidas, accounting for approximately
13% of athletic footwear sales in 1998. Only five brands of athletic footwear,
including the three aforementioned brands, had domestic sales in excess of
$200 million in 1998. A number of smaller companies compete with the industry
leaders and among themselves for specialty niches based on various factors,
including product quality, design, pricing, fashion appeal, performance and
brand awareness and positioning. Also, many companies have capitalized on the
strong name recognition associated with their footwear to produce or market
related apparel and accessories with the brand's logo.
According to SGI, wholesale sales of branded rugged outdoor footwear in the
United States were approximately $2.0 billion in 1997, up 25% from $1.6
billion in 1996. Timberland, the industry leader, accounted for approximately
22% of sales in 1997 and 24% of sales in 1996. Reebok (through its Rockport
division) and Nike (through its Nike ACG division), which focus primarily on
branded athletic footwear, accounted for an additional 20% and 10% of sales,
respectively, in 1997. The remainder of the branded rugged outdoor footwear
market is highly fragmented with only seven other brands with sales in excess
of $50 million, of which none accounted for more than 10% of sales in 1997.
The Company estimates that between 5% and 10%, or between $2.2 and $4.4
billion, of the approximately $44.1 billion wholesale market for athletic
footwear, athletic apparel and sporting goods (as estimated by the Sporting
Goods Manufacturing Association) is sold as off-price merchandise. The Company
further estimates that approximately 10%, or between $200 to $400 million, of
off-price wholesale merchandise is available to third party resellers. In
addition, the Company believes that approximately $150 to $200 million of off-
price merchandise is available from retailers. The third-party off-price
market is extremely fragmented and primarily consists of relatively small
independent operations without the financial resources necessary to purchase
large quantities of merchandise from manufacturers or retailers.
Competition
Competition in the branded footwear industry is intense. Although the
Company believes that its Branded Division does not compete directly with any
single company with respect to its entire range of products, the Company's
products compete with other branded products within their product category as
well as with private label products sold by retailers, including some of the
Company's customers. RYKA competes with many brands of athletic footwear
including Nike, Reebok, adidas, Avia, Asics, New Balance and Saucony. Yukon
competes with a number of other brands of rugged outdoor and casual footwear,
including Timberland, Rockport (a division of Reebok), Nike ACG, Columbia, Hi-
Tec, Merrell, Vasque, and Wolverine. In varying degrees, depending on the
product category involved, the Company competes on the basis of style, price,
quality, comfort and brand name prestige and recognition, among other
considerations. The Company also competes with
9
<PAGE>
numerous manufacturers, importers and distributors of footwear for the limited
shelf space available for the display of such products to the consumer. Also,
the general availability of contract manufacturing capacity allows ease of
access by new market entrants. Many of the Company's competitors are larger,
have achieved greater recognition for their brand names, have captured greater
market share and/or have substantially greater financial, distribution,
marketing and other resources than the Company.
The Off-Price and Action Sports Division competes with a number of large
retailers who purchase off-price merchandise on a direct basis. A number of
footwear manufacturers also dispose of their excess merchandise through their
own retail outlet operations. There are several independent resellers of
footwear, athletic apparel and sporting goods that also compete with the
Company's Off-Price and Action Sports Division.
Manufacturing
Products of the Company's Branded Division are produced by independent
contract manufacturers located in Asia. For the year ended December 31, 1998,
substantially all of the Company's branded products were manufactured in
China. The Company does not own or operate any manufacturing facilities. The
Company believes the use of independent manufacturers increases its production
flexibility and capacity while at the same time substantially reducing capital
expenditures and avoiding the costs of managing a large production work force.
The Company's contracts with these manufacturers generally specify pricing,
purchasing of raw materials and minimum quality/delivery standards, as well as
address certain confidentiality issues.
The Company oversees the key phases of production from initial prototype
manufacture through initial production runs to final manufacture.
Manufacturers are selected in large part on the basis of the Company's prior
experience with the manufacturer and the availability of production capacity.
The Company seeks to use, whenever possible, manufacturers that have
previously produced the Company's footwear, which the Company believes
enhances continuity and quality while controlling production costs. For the
year ended December 31, 1998, the top three manufacturers each accounted for
32%, 18% and 11% of the Company's manufactured branded footwear products, or
61% in the aggregate. Other than the foregoing, no one manufacturer accounted
for 10% or more of the Company's total production of the Branded Division. To
date, the Company has not experienced difficulty in obtaining manufacturing
services.
To safeguard product quality and consistency, the Company employs quality
control assurance personnel based in Asia to oversee the key aspects of the
production process. The Company's quality control program is designed to
ensure that finished goods not only meet with Company established design
specifications, but also that all goods bearing its trademarks meet the
Company's standards for quality. The Company's personnel perform an array of
quality control inspection procedures at various stages of the production
process, including examination and testing of (i) prototypes of key products
prior to manufacture, (ii) samples and materials prior to production and (iii)
final products prior to shipment.
The Company's arrangements with its manufacturers generally are U.S. dollar
denominated. Substantially all of the Company's footwear products are
manufactured overseas and subject to U.S. customs duties. Under the fixed duty
structure in effect since July 1981, duties on the footwear products imported
by the Company to date approximate 8.5% to 10% of cost for leather products
and 20% for synthetic products, depending on gender, plus administrative
charges. If the Company were to significantly increase the amount of synthetic
raw material, as opposed to leather, in its footwear, total duties would
increase substantially.
Distribution
The Company believes that strong distribution capabilities are critical to
support the operations of both the Branded Division and the Off-Price and
Action Sports Division. The Company utilizes third-party public warehouses in
several locations across the U.S. and Canada, as well as a Company-leased
warehousing facility in King of Prussia, Pennsylvania. The Company currently
is in the process of analyzing its distribution needs and the costs and
efficiency of its distribution system, with a view toward expanding and
rationalizing its
10
<PAGE>
distribution system. Under the Company's current system, following
manufacture, the Company's branded products are generally shipped to the
public warehousing facilities in California. Upon receipt at a facility,
merchandise is inspected and recorded in the Company's management information
system and packaged according to customers' orders for delivery. Merchandise
is shipped to the customer by whatever means the customer requests, which is
usually by common carrier. The Company has an Electronic Data Interchange (or
EDI) system to which some of the Company's larger customers are linked. This
system allows these customers to automatically place orders with the Company,
thereby eliminating the time involved in transmitting and inputting orders,
and includes direct billing and shipping information. The Company has recently
implemented a Quick Response inventory system with Lady Foot Locker, which
allows the Company to most efficiently track and maintain inventories at each
store location.
Management Information Systems
The Company recognizes the importance of advanced MIS systems in maintaining
and improving its level of service, internal and external communication and
overall competitive position. The Company has a computerized management
information system that relies upon an IBM AS/400 computer system, together
with an Ethernet PC network. These computers are integrated by a bridge
application and are connected via modem to the Company's distribution
facilities. The Company's system 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 is currently conducting
several upgrades and conversions of its core business applications to improve
functionality and increase performance. These upgrades, which are expected to
be completed during the second quarter of 1999, will also achieve Year 2000
compliance.
Employees
As of March 15, 1999, the Company employed 160 people on a full-time basis.
Of these employees, 49 are employed in the Branded Division, 73 are employed
in the Off-Price and Action Sports Division, and 38 are employed in the main
executive offices or provide services on behalf of both divisions. The
Company's employees are based primarily at the Company's headquarters in King
of Prussia, Pennsylvania (91 employees), Toronto, Ontario (46 employees) and
Portland, Oregon (11 employees). Twelve additional employees are based in
Mainland China. The Company also relies on 11 independent sales organizations,
which collectively employ 38 sales representatives, to sell RYKA and Yukon
footwear to its customer accounts.
Risk Factors
In analyzing whether to make or to continue an investment in the Company,
investors should consider carefully all the information contained or
incorporated by reference in this Annual Report on Form 10-K and, in
particular, the following:
Forward Looking Statements. Certain information contained in this Form 10-K
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.
Leverage. As of December 31, 1998, the Company's consolidated long-term
debt, including current maturities, was $43.0 million, and the Company had a
total consolidated stockholders' equity of $14.7 million. The Company's
leveraged financial position poses substantial risks to stockholders,
including the risks that (i) a substantial portion of its cash flow from
operations will be dedicated to the payment of interest on indebtedness; (ii)
its leveraged position may impede its ability to obtain financing in the
future; and (iii) its leveraged financial position may make it more vulnerable
to economic downturns and may limit its ability to withstand competitive
pressures.
11
<PAGE>
Competition. Although the Company believes that it does not compete directly
with any single company with respect to its entire range of products, the
Company's products compete with other branded products within their product
category and with private label products sold by retailers. The Company's
Yukon brand footwear competes with footwear offered by companies such as The
Timberland Company, Skechers USA, Inc., Dr. Martens, Kenneth Cole, Frey Boot
and Wolverine World Wide, Inc. The Company's RYKA brand footwear competes with
brands of athletic footwear offered by companies such as Nike, Inc., Reebok
International Ltd., Fila Ltd. and Converse, Inc. In varying degrees, depending
on the product category involved, the Company competes on the basis of style,
price, quality, comfort and brand name prestige and recognition, among other
considerations. These and other competitors pose challenges to the Company's
market share in its major domestic and other international regions. The
Company also competes with numerous manufacturers, importers and distributors
of footwear for the limited shelf space available for the display of such
products to the consumer. Moreover, the general availability of contract
manufacturing capacity allows ease of access by new market entrants. Many of
the Company's competitors are larger, have achieved greater recognition for
their brand names, have captured greater market share and/or have
substantially greater financial, distribution, marketing and other resources
than the Company. There can be no assurance that the Company will be able to
compete successfully against present or future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Foreign Production. Virtually all of the Company's branded footwear is
manufactured to its specifications by independent producers located in the Far
East, particularly China. As a result of the Company's continuing use of
foreign manufacturing facilities, its operations are subject to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, import and export duties and trade barriers (including quotas),
restrictions on the transfer of funds, work stoppage and, in certain parts of
the world, political instability. To date, these factors have not had an
adverse impact on the Company's operations. The Company continues to monitor
the political and economic stability of the Asian countries with which it
conducts business. A substantial portion of the Company's footwear is
manufactured in China. In June 1998, President Clinton announced that he
intends to extend "most favored nation" ("MFN") non-discriminatory status to
China. Under U.S. law, MFN status for China is reviewed annually. The United
States has extended MFN status to China each year since 1980, however, there
can be no assurance that China will continue to enjoy MFN status in the
future. If goods manufactured in China enter the United States without the
benefit of MFN treatment, such goods will be subject to significantly higher
duty rates, ranging between 20% and 66% of customs value. A revocation of MFN
status would result in a substantial increase in tariff rates on goods
imported from China and therefore could adversely affect the Company's
business, financial condition and results of operations.
Risks Associated With International Sales. The Company expects its
international business to become a material part of its revenues.
International sales are subject to many risks, including political and
economic instability in foreign markets, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or
governments, imposition of product tariffs and other burdens and costs of
complying with a wide variety of international and U.S. export laws and
regulatory requirements. The Company cannot be sure that it will be able to
compete successfully in international markets or that its international sales
will be profitable. The Company expects that virtually all of its sales will
be denominated in U.S. dollars. Accordingly, the Company believes that it will
not have significant exposure to fluctuations in currency. However,
fluctuations in currency could adversely affect potential customers. Also, the
Company may be subjected to additional duties, significant monetary penalties,
the seizure and the forfeiture of the products the Company is attempting to
import or the loss of its import privileges if the Company or its suppliers
are found to be in violation of U.S. laws and regulations applicable to the
importation of the Company's products. Such violations may include (i)
inadequate record keeping of its imported products, (ii) misstatements or
errors as to the origin, quota category, classification, marketing or
valuation of its imported products, (iii) fraudulent visas or (iv) labor
violations under U.S. or foreign laws. There can be no assurance that the
Company will not incur significant penalties (monetary or otherwise) if the
United States Customs Service determines that these laws or regulations have
been violated or that the Company failed to exercise reasonable care in its
obligations to comply with these laws or regulations on an informed basis.
Such factors could render the conduct of business in a particular country
undesirable or
12
<PAGE>
impractical, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Changes in Consumer Preferences. The Company's success depends in part on
its ability to anticipate and respond to changing merchandise trends and
consumer preferences and demands in a timely manner. Accordingly, any failure
to anticipate and respond to changing merchandise trends and consumer
preferences and demands could materially adversely affect consumer acceptance
of the Company's brand names and product lines, which in turn could materially
adversely affect the Company's business, financial condition or results of
operations. Decisions with respect to product designs often need to be made
several months in advance of the time when consumer acceptance can be
determined. As a result, the Company's failure to anticipate, identify or
react appropriately to changes in styles and features could lead to, among
other things, lower sales, excess inventories, higher inventory markdowns,
impairment of the Company's brand image and lower gross margins as a result of
allowances and discounts provided to retailers. On the other hand, the failure
by the Company to anticipate consumer demand could result in inventory
shortages, which in turn could adversely affect the timing of shipments to
customers, negatively impacting retailer and distributor relationships, and
diminish brand loyalty. There can be no assurance that the Company will
successfully adapt to changing consumer demands, and any such failure to adapt
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company intends to market additional lines of footwear in the future
and, as is typical with new products, demand and market acceptance will be
subject to uncertainty. Failure to regularly develop and introduce new
products successfully could have a material adverse effect on the Company's
future growth and profitability. Achieving market acceptance for new products
may require substantial marketing efforts. There can be no assurance that the
Company's marketing efforts will be successful or that the Company will have
the funds necessary to undertake sufficient efforts.
Reliance on Merchandise Vendors. The Company's Off-Price and Action Sports
Division is entirely dependent upon vendors to supply it with merchandise for
sale and the availability of such merchandise is unpredictable. During the
year ended December 31, 1998, approximately 28% of the Off-Price and Action
Sports Division's purchases were derived from two vendors (16% and 12%,
individually). No other vendors individually accounted for more than 10% of
the Division's purchases. The Company has no long-term contracts or
arrangements with its vendors that guarantee the availability of merchandise.
There can be no assurance that the Company's current vendors will continue to
sell merchandise to the Company or that the Company will be able to establish
new vendor relationships. If the Company is unable to develop and maintain
satisfactory relationships with vendors on acceptable commercial terms, if the
Company is unable to obtain sufficient quantities of merchandise, if the
quality of service provided by such vendors falls below a satisfactory
standard or if the Company's level of returns exceeds its expectations, the
Company's business, results of operations and financial condition could be
materially adversely affected.
Risks Relating to Category Concentration in the Branded Division. If any one
category or group of similar categories of the Company's branded footwear were
to represent a substantial portion of the Company's net sales, the Company
could be exposed to risk if consumer demand for that category or group of
categories decreases in subsequent periods. The Company attempts to hedge this
risk by offering a broad range of products, and no category or group of
similar categories comprised over 10% of the Company's sales, net of
discounts, for the year ended December 31, 1998. There can be no assurance
that the Company's sales will not become concentrated in one category or a
group of similar categories and that consumer demand for such category or
group of categories will not decrease in the future and have a material
adverse effect on the Company's business, financial condition and results of
operations.
Ability to Sustain Prior Rate of Growth or Increase Net Sales or
Earnings. From 1997 to 1998, the Company experienced an increase in net sales
from $73.7 million (on a pro forma basis) to $131.4 million and an increase in
income from operations from a loss of $6.2 million (on a pro forma basis) to
income of $5.9
13
<PAGE>
million. The Company's current growth rates may not be indicative of growth
rates for an entire year. In the future, the Company's rate of growth will be
dependent upon, among other things, the continued success of its efforts to
expand both its branded footwear and off-price operations. There can be no
assurance that the Company's rate of growth will not decline or that it will
continue to be profitable. In addition, the Company may have more difficulty
maintaining its prior rate of growth to the extent it becomes larger.
Risks Associated with International Growth. As part of its growth strategy,
the Company seeks to increase its international operations, including in
countries and territories where the Company has little distribution experience
and where the Company's brand name is not yet well known. There can be no
assurance that these and the Company's other growth strategies will be
successful. Success will depend on various factors, including the strength of
the Company's brand name, market success of current and new products,
competitive conditions and the ability of the Company to manage increased net
sales. The Company's business also depends on general economic conditions and
levels of consumer spending, and a decline in the economy or a recession could
adversely impact the Company's business, financial condition and results of
operation since consumers often reduce spending on footwear and apparel in
such times.
Risks Associated with Acquisitions. In the normal course of its business,
the Company evaluates potential acquisitions that would complement or expand
its business. The Company cannot be sure that it will not incur disruptions or
unexpected expenses in integrating such acquisitions. In attempting to make
acquisitions, the Company often competes with other potential acquirers, many
of which have greater financial and operational resources than the Company.
Also, the process of evaluating, negotiating, financing and integrating
acquisitions may divert management's time and resources. Finally, the Company
cannot be sure that any acquisition, when consummated, will not materially
adversely affect its business, results of operations or financial condition.
Economic Conditions. The footwear industry in general is dependent on the
economic environment and levels of consumer spending which affect not only the
ultimate consumer, but also retailers, who are the Company's primary direct
customers. As a result, the Company's results may be adversely affected by
downward trends in the economy or the occurrence of events that adversely
affect the economy in general. The Company cannot be sure that any prolonged
economic downturn would not have a material adverse effect on it.
Seasonality. Sales of the Company's footwear products are somewhat seasonal
in nature with the strongest sales generally occurring in the first and third
quarters.
Reliance on Small Number of Large Customers. A significant portion of the
Company's revenues are generated from a small number of large customers.
Accordingly, the loss of any of these customers could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's two largest customers accounted for approximately
27% and 13% of the Company's total revenues for the year ended December 31,
1998. Accounts receivable from these two customers in the represented
approximately 24% and 11% of the Company's total accounts receivable at
December 31, 1998.
Lack of Long-Term Contractual Arrangements. The Company does not have
contractual arrangements with many of its customers, rather these
relationships are based upon course of dealing and can be terminated at any
time. The agreements which the Company does have with some of its customers
may generally be terminated by the customer on short notice. The Company
cannot be sure that any of its customers will continue to do business with it
which would have a material adverse effect on its business, financial
condition and results of operations.
Dependence on Manufacturers. The Company's branded footwear products are
currently manufactured by independent contract manufacturers. For the year
ended December 31, 1998, the top three manufacturers of the Company's
manufactured products accounted for 32%, 18% and 11% of the Company's total
manufactured products. The Company has no long-term contracts with its
manufacturers and competes with other footwear companies for production
facilities. Although the Company has established close working relationships
with its principal manufacturers, the Company's future success will depend, in
large part, on maintaining such relationships and developing new
relationships. There can be no assurance that the Company will not experience
14
<PAGE>
difficulties with such manufacturers, including reduction in the availability
of production capacity, failure to meet the Company's quality control
standards, failure to meet production deadlines or increase in manufacturing
costs. This could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that the Company's current manufacturers
were for any reason to cease doing business with the Company, the Company
could experience an interruption in the manufacture of its products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company believes that it
could find alternative sources to manufacture its products, establishment of
new manufacturing relationships involves various uncertainties, including
payment terms, costs of manufacturing, adequacy of manufacturing capacity,
quality control and timeliness of delivery. The Company cannot predict whether
it will be able to establish new manufacturing relationships, either in the
countries in which it currently does business or in other countries in which
it does not currently do business, that will be as favorable as those that now
exist. Any significant delay in manufacture of the Company's footwear products
or the inability to provide products consistent with the Company's standards,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Risk of Obsolete Inventory. In order to minimize purchasing costs, the
Company places a significant portion of its footwear orders with its
manufacturers well in advance of receiving customers' orders. In addition, an
order may be canceled by the customer up until the time the customer accepts
delivery of the merchandise. Therefore, the Company has no assurance that it
will be able to sell footwear ordered from its manufacturers or the inventory
it has on hand. As of March 15, 1999, the Company had $4.8 million of open
purchase orders at cost, for which import letters of credit have been issued,
with its manufacturers and $18.3 million of inventory at cost.
Accumulated Deficit. The Company had an accumulated deficit of $5.7 million
at December 31, 1997. Although the Company generated operating profits of
$11.1 million in 1998, the Company cannot be sure that it will be able to
maintain its recent profitability.
Management of Growth. The Company is currently experiencing a period of
rapid growth in the volume of its business. In addition, the Company believes
that continued growth will be required to maintain its competitive position.
The Company's rapid growth is likely to continue to place significant strains
on its management, administrative, operating and financial resources, as well
as increased demands on its internal systems, procedures and controls. The
Company's ability to manage recent and future growth will require it to
continue to improve its financial and management controls, reporting systems
and procedures on a timely basis, to implement new systems as necessary and to
expand, train, motivate and manage its sales and technical personnel. The
Company cannot be sure that it will be able to manage its growth successfully
and its failure to do so could have a material adverse effect on its business,
operating results and financial condition.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the contribution of its executive officers and other key
personnel, including Michael G. Rubin, Chief Executive Officer, Arthur I.
Carver, Executive Vice President of Operations, James J. Salter, Chief
Executive Officer of the Company's Off-Price and Action Sports Division and
Steven A. Wolf, Chief Financial Officer. All of these executive officers have
employment agreements with the Company. However, the Company cannot be sure
that it will be able to retain its managerial and other key personnel or
attract additional managerial and other key personnel if required.
Control by Principal Stockholder. Michael G. Rubin beneficially owns 67% of
the outstanding common stock of the Company. As a result, Mr. Rubin is in a
position to exercise control over most matters requiring stockholder approval,
including the election or removal of directors and approval of significant
corporate transactions, and the ability generally to direct the Company's
affairs. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, including transactions where
stockholders might otherwise receive a premium over current market prices for
their shares.
15
<PAGE>
No Dividends. The Company has never paid cash dividends on its common stock
and does not anticipate that any cash dividends will be declared or paid in
the foreseeable future. In addition, the Company's credit facility with its
bank prohibits the payment of dividends on its common stock.
Risks Relating to Year 2000 Compliance. Many existing computer software
programs and operating systems were designed such that the year 1999 is the
maximum date that many computer systems will be able to process. The Company
is addressing the potential problems posed by this limitation in its systems
software to assure that it is prepared for the Year 2000. The Company also
intends to seek verification from third parties with which it conducts
material business that they will be Year 2000 compliant. If the Company does
not complete the modifications and conversions necessary to deal with Year
2000 on a timely basis, there may be a material adverse effect on the
Company's results of operations.
Issuance of Preferred Stock and Common Stock; Anti-Takeover
Provisions. Pursuant to its Amended and Restated Certificate of Incorporation,
the Company has an authorized class of 1,000,000 shares of preferred stock,
$0.01 par value per share ("Preferred Stock") which the Board of Directors may
issue with terms, rights, preferences and designations as the Board may
determine and without any vote of the stockholders, unless otherwise required
by law. Issuing the Preferred Stock, depending upon the rights, preferences
and designations set by the Board, may delay, deter or prevent a change in
control of the Company. Issuing additional shares of common stock could result
in dilution of the voting power of the current holders of the Company's common
stock. In addition, certain "anti-takeover" provisions of the Delaware General
Corporation Law among other things, may restrict the ability of the
stockholders to approve a merger or business combination or obtain control of
the Company.
Limitation on Directors' Liabilities. Pursuant to its Amended and Restated
Certificate of Incorporation and under Delaware law, the Company's directors
are not liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
ITEM 2: PROPERTIES
The Company's main executive offices and warehouse are located in King of
Prussia, Pennsylvania in a 75,000 square foot facility leased from Mr. Rubin.
Pursuant to the lease, the Company pays approximately $29,000 per month, plus
maintenance and utilities, for use of these facilities. The lease expires on
September 30, 2009. In addition, the Company owns a 12,000 square foot
facility located in North York, Ontario used primarily in the Off-Price and
Action Sports Division and leases a limited amount of office space in
Portland, Oregon for its Branded Division. The Company also uses the services
of thirteen third-party public warehousing facilities located in Ontario,
Canada (4), California (3), Washington (2), and one in each of the following
states: New Hampshire, Minnesota, New York and New Jersey. See "Business--
Distribution."
The Company believes that its owned, leased and third-party properties are
adequate for its present needs and that suitable additional or replacement
space will be available as required.
ITEM 3: LEGAL PROCEEDINGS
The Company is involved in various routine litigation, including litigation
in which the Company is a plaintiff, incidental to its business. The Company
believes that the disposition of such routine litigation will not have a
material adverse effect on the financial position or results of operations of
the Company.
16
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1998.
ITEM 4.1: CERTAIN EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company who are not also directors of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Arthur I.
Carver 48 Executive Vice President of Operations
Michael
R. Conn 28 Senior Vice President of Strategic Development
Guy A.
Grubel 44 Vice President/General Manager of Yukon
Melvin E.
Lewis 51 Vice President/General Manager of International Sales
David B.
Newcombe 35 Vice President of Sales
James J.
Salter 35 Chief Executive Officer--Off-Price and Action Sports Division
Mary D.
Taylor 40 President--RYKA
Steven A.
Wolf 40 Chief Financial Officer
</TABLE>
Arthur I. Carver joined the Company as Executive Vice President of
Operations in January 1999. Prior to joining the Company, Mr. Carver worked at
Reebok International, Ltd. where he served as Senior Vice President, Worldwide
Sourcing and Logistics for approximately four years. Prior to that, Mr. Carver
served as the Vice President, Operations Development, Worldwide and Vice
President, North American Operations as well as other positions, for a total
of nine years with Reebok. Mr. Carver received a degree in Industrial
Management from Clarkson University.
Michael R. Conn joined the Company in February 1999 as Senior Vice President
of Strategic Development. Mr. Conn is responsible for developing growth
opportunities for the Company and overseeing its investor relations and
corporate communications. Prior to joining the Company, Mr. Conn served as a
Vice President of Research at Gruntal & Co. L.L.C., an investment bank, where
he was employed since 1993. Mr. Conn received a degree in Finance from Boston
University.
Guy A. Grubel joined the Company in September 1997 and currently serves as
Vice President/General Manager of Yukon. Prior to joining the Company, he
served as Executive Vice President and General Manager of the Head footwear
and apparel division of HTM from 1990 to 1996. Mr. Grubel attended the
University of Michigan and Kutztown University.
Melvin E. Lewis joined the Company in June 1998 as Vice President/General
Manager of the International division of the Branded Division. Prior to
joining the Company, Mr. Lewis worked in the international divisions of Jack
Schwartz Shoes, Inc., Reebok International Inc. and Converse, Inc. Mr. Lewis
holds a degree from the International Marketing Institute.
David B. Newcombe joined the Company in January 1998 as National Sales
Manager and became the Vice President of Sales in June 1998. Prior to joining
the Company, Mr. Newcombe served as one of the Company's independent sales
representatives from 1996 through January 1998. He also worked at Avia in
several sales capacities from 1986 to 1996, most recently as the Northeast
Sales Manager. Mr. Newcombe received a degree in Sports Management from
Rutgers University.
James J. Salter has served as Chief Executive Officer of the Off-Price and
Action Sports Division since joining the Company upon the acquisition of the
Gen-X Companies in May 1998. Since establishing the Gen-X Companies in 1996,
Mr. Salter served as its Chief Executive Officer. Prior to establishing the
Gen-X Companies, Mr. Salter was Chief Executive Officer of Ride, Inc., a
publicly traded Canadian corporation he helped establish in 1991. Mr. Salter
attended Long Beach State University.
17
<PAGE>
Mary D. Taylor has served as President of RYKA since January 1999. Prior to
joining the Company, Ms. Taylor served as Senior Director of Global Marketing
for Athletic Originals at Converse Inc. since March 1997. Prior to that, she
served as Vice President, Product and Engineering at Keds/Stride-Rite and held
several brand manager positions at Reebok International Inc. Ms. Taylor
received a degree in English and Communications from the University of
Connecticut.
Steven A. Wolf is a certified public accountant who joined the Company in
August 1995 as its Vice President of Finance and Chief Financial Officer. From
1990 to 1995, Mr. Wolf was the Controller and Chief Financial Officer of
Ellessee USA, Inc., a footwear and sportswear company that, through September
1993, was a wholly owned subsidiary of Reebok International. Mr. Wolf received
a B.S. degree in Accounting in 1980 from the State University of New York at
Binghamton and is a member of the American Institute of Certified Public
Accountants and the New York State Society of CPA's.
18
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock Prices
From September 18, 1995 through June 15, 1998, the Company's common stock
was traded on the NASD Over-the-Counter Bulletin Board. On December 15, 1997,
concurrent with the Reorganization, the Company changed its name from RYKA
Inc. to Global Sports, Inc. and the Company changed its trading symbol from
"RYKA" to "GSPT". Effective June 16, 1998, the Company was approved for
inclusion on the Nasdaq SmallCap Market where it is currently included for
quotation. As of March 15, 1999, the Company had approximately 2,083
shareholders of record.
The following table sets forth the high and low bid prices per share of the
Company's common stock as reported on the Nasdaq Over-the-Counter Bulletin
Board for the periods presented prior to and including June 15, 1998. For the
periods presented from and after June 16, 1998, the following table sets forth
the high and low sales prices per share of the Company's common stock as
reported on the Nasdaq SmallCap Market. On December 15, 1997, the Company
effected a 1-for-20 reverse stock split. The information shown below reflects
the split as if it had occurred for all periods presented. The prices shown do
not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Sales Prices
------------
High Low
------ -----
<S> <C> <C>
1998
Fourth Quarter............................................... $ 8.06 $4.25
Third Quarter................................................ $ 8.00 $4.63
Second Quarter (June 16-June 30)............................. $ 7.25 $5.63
Second Quarter (April 1-June 15)............................. $ 7.75 $5.19
First Quarter................................................ $ 5.69 $2.56
1997
Fourth Quarter............................................... $ 5.31 $2.50
Third Quarter................................................ $ 5.31 $3.13
Second Quarter............................................... $ 8.75 $4.38
First Quarter................................................ $10.00 $5.31
</TABLE>
The Company has never declared or paid a cash dividend on its common stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate declaring or paying any cash dividends on
its common stock for the foreseeable future. In addition, the Company's credit
facility with its bank restricts the payment of dividends on the Company's
common stock.
Recent Stock Activity
On May 12, 1998, the Company issued an aggregate of 1.5 million shares of
common stock and 10,000 shares of Series A mandatorily redeemable preferred
stock to Messrs. Salter and Finkelstein and certain other individuals and
entities as partial consideration for all of the issued and outstanding stock
of the Gen-X Companies. The 10,000 shares of Series A mandatorily redeemable
preferred stock have a maximum aggregate redemption price of $500,000, but are
not convertible or exchangeable into any other equity securities.
On April 21, 1997, the Company issued an aggregate of 125,000 shares of
common stock to certain private investors at a purchase price of $6.00 per
share for an aggregate purchase price of $750,000.
Neither of the above transactions were public offerings, nor were any
underwriters or underwriting discounts or commissions involved. The Company
believes that these transactions were exempt from registration requirements of
the Securities Act of 1933, as amended, by reason of Section 4(2) thereof.
19
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
As a result of reverse purchase accounting applied in the Reorganization,
the following Selected Financial Data for the year ended December 31, 1998 are
derived from the consolidated financial statements of the Company, which
include RYKA for periods subsequent to December 15, 1997, the Reorganization
date, and the Selected Financial Data for the four years ended December 31,
1997 are derived from the combined financial statements of the KPR Companies,
all of which have been audited. This table should be read in conjunction with
the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $131,434,971 $60,671,407 $47,340,450 $43,272,594 $26,593,465
Costs and expenses:
Cost of goods sold..... 95,528,412 48,376,966 37,857,455 32,853,181 21,406,070
Operating expenses..... 24,832,046 13,857,361 8,600,191 9,400,603 4,647,346
------------ ----------- ----------- ----------- -----------
Operating income
(loss)................. 11,074,513 (1,562,920) 882,804 1,018,810 540,049
Other expenses, net..... 3,272,132 2,000,282 1,027,143 732,669 185,785
Equity in net loss of
RYKA, Inc.............. -- 592,093 518,491 261,331 --
------------ ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 7,802,381 (4,155,295) (662,830) 24,810 354,264
Provision for income
taxes.................. 1,900,818 -- 81,483 -- --
------------ ----------- ----------- ----------- -----------
Net income (loss)....... $ 5,901,563 $(4,155,295) $ (744,313) $ 24,810 $ 354,264
============ =========== =========== =========== ===========
Basic earnings (losses)
per common share....... $ .52
============
Diluted earnings
(losses) per common
share.................. $ .51
============
Weighted average common
shares outstanding--
Basic.................. 11,378,918
============
Diluted................ 11,640,154
============
Number of common shares
outstanding............ 11,925,378
============
Unaudited Pro Forma
Data:(/1/)
Income (loss) before
foreign taxes.......... $(4,155,295) $ (662,830) $ 24,810 $ 354,264
Provision for income
taxes.................. -- 21,000 144,000 164,000
----------- ----------- ----------- -----------
Pro forma net income
(loss)................. $(4,155,295) $ (683,830) $ (119,190) $ 190,264
=========== =========== =========== ===========
Basic earnings (losses)
per common share....... $ (1.39) $(.27) $ (.07) $.16
=========== =========== =========== ===========
Diluted earnings
(losses) per common
share.................. $ (1.39) $(.27) $(.07) $.16
=========== =========== =========== ===========
Weighted average common
shares outstanding--
Basic.................. 2,996,027 2,568,431 1,717,033 1,210,504
=========== =========== =========== ===========
Diluted................ 2,996,027 2,568,431 1,717,033 1,210,504
=========== =========== =========== ===========
Number of common shares
outstanding............ 10,418,111 2,831,766 2,306,766 1,323,716
=========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets............ $78,866,186 $43,431,909 $26,678,544 $22,369,130 $11,688,810
Total long-term
debt..................... 23,781,543 20,975,479 5,905,225 5,000,725 2,415,955
Net working capital.........19,629,668..13,438,564......558,241....2,002,733... 1,200,094
Stockholders' equity
(deficiency)........... 14,685,482 2,157,349 (552,133) 92,787 748,220
</TABLE>
- --------
(/1/)Pro forma data represents net income (loss) after pro forma adjustments
for income taxes as if the KPR Companies had been subject to federal and
state income taxation as a C Corporation since its inception.
20
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The Reorganization affects comparability of 1998 results with reported
results for 1997. A more meaningful analysis can be made by comparing 1998
results with the 1997 pro forma results as if the Reorganization had occurred
on January 1, 1997 (the "Reorganization Pro Forma"). The 1997 Reorganization
Pro Forma information does not purport to be indicative of the Company's
results of operations had the transaction described above actually occurred on
the date presented nor is it necessarily indicative of future operating
results. The 1997 Reorganization Pro Forma information does not include the
effects of cost savings and sales synergies expected to be realized as a
result of the Reorganization. The following "Results of Operations" discussion
describes the comparison of 1998 to 1997 on a Reorganization Pro Forma basis,
unless otherwise noted.
Effective May 12, 1998, the Company acquired all of the outstanding and
issued common stock of 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 only from the date of acquisition through the end
of the year.
Results of Operations
1998 (as Reported) Compared to 1997 (on a Reorganization Pro Forma Basis)
The following table sets forth, for the periods indicated, the Company's
results of operations for the years ended December 31, 1998 and 1997 as
reported and for the year ended December 31, 1997 on a Reorganization Pro
Forma basis as well as the relative percentages that certain items bear to net
sales:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------
1997 (Reorganization
1998 1997 (As Reported) Pro Forma)
----------------------- ----------------------- -----------------------
$ % of Sales $ % of Sales $ % of Sales
------------ ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $131,434,971 100.0% $60,671,407 100.0% $73,728,395 100.0%
------------ ----- ----------- ----- ----------- -----
Cost & expenses:
Cost of goods sold.... 95,528,412 72.7% 48,376,966 79.7% 57,920,340 78.6%
SG&A expense.......... 24,832,046 18.9% 13,857,361 22.8% 19,342,320 26.2%
------------ ----- ----------- ----- ----------- -----
Operating income
(loss)................. 11,074,513 8.4% (1,562,920) (2.5)% (3,534,265) (4.8)%
Other expense, net...... 3,272,132 2.5% 2,592,375 4.3% 2,630,538 3.6%
------------ ----- ----------- ----- ----------- -----
Income (loss) before
income taxes........... 7,802,381 5.9% (4,155,295) (6.8)% (6,164,803) (8.4)%
Provision for income
taxes.................. 1,900,818 1.4% -- -- -- --
------------ ----- ----------- ----- ----------- -----
Net income (loss)....... $ 5,901,563 4.5% $(4,155,295) (6.8)% $(6,164,803) (8.4)%
============ ===== =========== ===== =========== =====
</TABLE>
Net Sales. Net sales for 1998 increased by $57.7 million, or 78%, to $131.4
million, compared to net sales of $73.7 million in 1997 on a Reorganization
Pro Forma basis. Net sales for the Branded Division were approximately $41.1
million for 1998, a 33% increase from the prior year on a Reorganization Pro
Forma basis. Both the RYKA and Yukon brands experienced growth consistent with
the overall divisional gains. Net sales for
21
<PAGE>
the Off-Price and Action Sports Division were $90.3 million for 1998, a 111%
increase from the prior year on a Reorganization Pro Forma basis, primarily as
a result of higher volume transactions. The Gen-X Companies, acquired in May
1998, also contributed to the sales increase of the division. This division's
special make-up snowboard business, under the Vision, Rage and Lamar product
lines, also represented meaningful incremental volume.
Gross Margin. Gross margin for 1998 increased to 27.3% from 21.4% for 1997
on a Reorganization Pro Forma basis. The increase was offset, in part, by a
change in business mix, as the volume of the lower-margin Off-Price and Action
Sports Division was greater than the volume of the higher-margined Branded
Division. The Branded Division experienced a substantial increase in gross
margin percentages in 1998 over 1997 on a Reorganization Pro Forma basis,
primarily as a result of more full priced business and virtually no close out
business within the RYKA and Yukon brands. Better inventory management and
better quality of distribution also contributed to the substantial improvement
in margins in 1998. The margins in the Off-Price and Action Sports Division
also increased substantially in 1998 over 1997 on a Reorganization Pro Forma
basis as a result of a more current merchandise mix and inventory turns.
Selling, General and Administrative Expense. As a percentage of net sales,
selling, general & administrative ("SG&A") expense for 1998 decreased to 18.9%
from 26.2% in 1997 on a Reorganization Pro Forma basis. In dollars, however,
SG&A expense increased to $24.6 million in 1998 from $19.3 million in 1997 on
a Reorganization Pro Forma basis. The dollar volume increase is indicative of
management's continued commitment to investing in the Branded Division. The
Company has continued the expansion of the RYKA team in Portland and the Yukon
design, development and marketing team in King of Prussia and China. The
Company substantially increased its investment in marketing in 1998 by
launching the first Yukon consumer print advertising campaign and expanding
the existing RYKA print campaign. The Company also invested in visual
merchandising with certain key retailers. SG&A expense also reflects an
increase in sales commissions as a result of higher sales volumes. These
increases were partially offset by a reduction in bank, legal and accounting
fees related to the Company's debt refinancing and the Reorganization both of
which occurred in 1997.
Other Expense, Net. Other expense, net increased by $.6 million, or 24%, to
$3.3 million in 1998 from $2.6 million in 1997 on a Reorganization Pro Forma
basis. Interest charges have increased due to increases in general business
levels and the Company's assumption of the Gen-X Companies' credit line as
part of the Acquisition. These increases were partially offset by substantial
reductions in the Company's average borrowing costs.
Income Taxes. The Company's overall effective tax rate was approximately 24%
for 1998. This rate benefited from the volume of business generated by a
foreign subsidiary which is taxed at a lower rate and certain net operating
loss carry forwards. In 1997, the Company recorded no provision for income
taxes due to net losses.
22
<PAGE>
1997 (as Reported) Compared to 1996 (as Reported)
The following table sets forth, for the periods indicated, the Company's
results of operations for the years ended December 31, 1997 and 1996 as
reported as well as the relative percentages that certain items bear to net
sales:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------
1997 1996
----------------------- -----------------------
$ % of Sales $ % of Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales................. $60,671,407 100.0% $47,340,450 100.0%
----------- ----- ----------- -----
Cost & expenses:
Cost of goods sold...... 48,376,966 79.7% 37,857,455 80.0%
SG&A expense............ 13,857,361 22.8% 8,600,191 18.2%
----------- ----- ----------- -----
Operating income (loss)... (1,562,920) (2.5)% 882,804 1.8%
Other expense, net........ 2,592,375 4.3% 1,545,634 3.2%
----------- ----- ----------- -----
Loss before income taxes.. (4,155,295) (6.8)% (662,830) (1.4)%
Provision for income
taxes.................... -- -- 81,483 .2%
----------- ----- ----------- -----
Net loss.................. $(4,155,295) (6.8)% $ (744,313) (1.2)%
=========== ===== =========== =====
</TABLE>
Net Sales. Net sales in 1997 increased by $13.3 million, or 28%, to $60.6
million compared to $47.3 million in 1996 as reported. Net sales in 1997
included sales of RYKA products of $1.1 million during the 15-day period ended
December 31, 1997. Without these RYKA sales, the net sales increase in 1997
would have been $12.2 million, or 26%. This sales increase was primarily
related to increases in volume for the Branded Division of $10.3 million, or
87%, to $22.1 million in 1997 (excluding RYKA) from $11.8 million in 1996. The
Off-Price and Action Sports Division increased sales volumes marginally by
$1.9 million, or 6%, to $37.4 million in 1997 from $35.5 million in 1996.
Cost of Goods Sold/Gross Margin. Cost of goods sold in 1997 increased by
$10.5 million, or 28%, to $48.4 million compared to $37.9 million in 1996.
Cost of goods sold in 1997 included the cost of goods sold related to sales of
RYKA products of $664,000 during the 15-day period ended December 31, 1997.
Without these RYKA sales, cost of goods sold would have increased $9.8
million, or 26%, over 1996. Overall gross margin (as a percentage of sales,
excluding RYKA) remained relatively the same from year to year at
approximately 20%. The Branded Division (excluding RYKA) had gross margins of
25.9% in 1997 compared to 22.4% in 1996, while the Off-Price and Action Sports
Division experienced gross margins of 16.4% in 1997 compared to 19.2% in 1996.
Cost of goods sold for 1997 and 1996 included charges of $1.4 million and $1.2
million, respectively, for inventory write downs based on a reassessment of
net realizable values, primarily related to Off-Price and Action Sports
Division inventories.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense in 1997 increased by $5.3 million, or 61%, to
$13.9 million compared to $8.6 million in 1996. This increase was due to (1)
an increase in professional fees and bank service charges related to the
financing issues the Company had with its former lender and other costs
incurred as a result of the Reorganization, (2) an increase of approximately
$835,000 in salaries for sales and marketing staff to support higher sales
volumes and facilitate marketing efforts to better establish the Yukon brand,
(3) an overall increase in salaries and bonuses of approximately $1.0 million
in all other departments as a result of headcount increases to support the
growth of the business, (4) an increase in third-party warehousing and
distribution costs of approximately $795,000 to support higher inventory
levels, (5) an increase in advertising and promotion costs of approximately
$745,000 for point-of-purchase and cooperative advertising, (6) an increase in
trade show costs of approximately $530,000 resulting from the Company's
decision to maintain a major presence amongst retailers through industry
exhibitions (7) the cost of contingent warrants ($347,000 in 1997) granted to
an athlete representing the Company's branded footwear, (8) an increase in bad
debts of $488,000, and (9) an increase in sales commissions
23
<PAGE>
of approximately $366,000 as a result of sales volume increases and broadening
of the independent sales agency network. Additionally, in 1997 the Company
recorded $152,333 of compensation expense for warrants granted to a former
officer. The above increases were partially offset by a $264,000 decrease in
Mr. Rubin's salary and commissions for 1997 over 1996.
Other Expense, Net. Other expense, net in 1997 increased by $1.0 million, or
95%, to $2.6 million compared to $1.6 million in 1996 primarily as a result of
increased interest expense related to higher debt levels maintained to support
higher production and inventory levels necessary to support 1997 sales growth
as well as higher interest rates as a result of the Company's 1997 financing
issues.
LIQUIDITY AND CAPITAL RESOURCES
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 accounts receivable and investment in inventories necessary to
support the increases in revenue. As of December 31, 1998, the Company had
working capital of $19,629,668. The Company used $6,402,039 in cash flows from
operating activities for the year ended December 31, 1998, whereas in the
prior year the Company used $7,707,708 in cash flows from operating
activities.
Liquidity
On November 20, 1997, the KPR Companies and RYKA entered into a loan
agreement with a lender (the "Loan Agreement") pursuant to which a 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 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 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 Spring 1999 and Fall 1999
seasons. The aggregate amount outstanding under this line at December 31, 1998
was $18,812,156. At December 31, 1998, based on available collateral and
outstanding import letters of credit commitments, an additional $2,403,332
(including the seasonal over-advance) was available on this line for
borrowing.
The Company has an additional line of credit of $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 December 31, 1998, draws of approximately $14,500,000
were committed under this line. At December 31, 1998, based on available
collateral and outstanding import letters of credit commitments, an additional
$4,701,700 was available on this line 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
24
<PAGE>
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. During 1998, aggregate principal payments of $250,000 were made to Mr.
Rubin.
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. However, the Company will be required to raise additional
equity and/or debt financing to support the Company's planned expansion. While
the Company is currently exploring various alternatives for raising additional
capital, there is no assurance that the Company will be able to raise such
additional capital on acceptable terms.
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 has a computerized
management information system that relies upon an IBM AS/400 computer system,
together with an Ethernet PC network. These computers are integrated by a
bridge application and are connected via modem to the Company's distribution
facilities. The Company's system 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 is currently enhancing its
information systems to improve their functionality and increase performance.
These upgrades will also make these applications 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 Year 2000 compliance. The Company will take the required steps to make
its existing systems Year 2000 compliant prior to the end of the second
quarter of 1999 and does not expect that the costs of such steps will 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 Company's business, results of operations and financial position. 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.
New Accounting Pronouncements
Derivative Instruments. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
25
<PAGE>
Start-Up Costs. In April 1998, the AICPA Accounting Standards Executive
Council issued Statement of Procedure 98-5, Reporting of Costs of Start-Up
Activities, ("SOP 98-5"). The statement requires that costs of start-up
activities, including organization costs, be expensed as incurred. This
statement is required to be adopted January 1, 1999. Adoption of SOP 98-5 is
not expected to have a material effect on the Company's results of operations,
cash flows or financial position.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations and
interest rate changes due to its international sales, production requirements
and variable rate debt. In the normal course of business, the Company employs
established policies and procedures to manage its exposure to fluctuations in
the value of foreign currencies and interest rates using a variety of
financial instruments. It is the Company's policy to utilize financial
instruments to reduce risks where other strategies cannot be effectively
employed. Foreign currency transactions are used only to the extent considered
necessary to meet the Company's objectives and the Company does not enter into
foreign currency transactions for speculative purposes.
In addition to product sales and costs, the Company has foreign currency
risk related to receivables and payables that are denominated in currencies
other than the U.S. dollar. The Company's foreign currency risk management
objective is to protect cash flows resulting from sales, purchase and other
costs from the adverse impact of exchange rate movements. Foreign exchange
risk is managed by using forward exchange contracts and purchased options to
hedge certain firm commitments and the related receivables and payables,
primarily third party transactions. Hedged transactions are denominated
primarily in European currencies and Canadian dollars.
The Company is exposed to changes in interest rates primarily as a result of
its long-term debt used to maintain liquidity and fund its expansion. The
Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. A portion of the Company's long-term debt
is issued at a choice of LIBOR plus certain basis points or the prime rate
less certain basis points, which gives the Company a certain degree of
flexibility to manage interest rate risk. Note 5 to the Financial Statements
outlines the principal amounts, weighted average interest rates, fair values
and other terms required to evaluate the expected cash flows and sensitivity
to interest rate changes.
Foreign exchange risk, and related derivatives use, and interest rate risk
are monitored using a variety of techniques including a review of market
values and various sensitivity analyses. These models are risk analysis tools
and do not purport to represent actual losses in fair value that will be
incurred by the Company, nor do they consider the potential effect of
favorable changes in market rates. They also do not represent the maximum
possible loss that may occur. Actual future gains and losses will differ from
those estimated because of changes or differences in market rates and
interrelationships, hedging instruments and hedge percentages, timing and
other factors.
The estimated maximum one-day loss in fair value on the Company's foreign
currency sensitive financial instruments was negligible at December 31, 1998
due to the nature of the contracts outstanding and year end currency exchange
rates.
The estimated potential reduction in earnings from a one-point increase in
long-term debt borrowing rates for the year ended December 31, 1998 would have
been approximately $370,000.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, supplementary data and related
documents that are included in this Report on Form 10-K are listed in Item
14(a), Part IV, of this Report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
This Part incorporates certain information from the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders ("1999 Proxy
Statement") filed with the Securities and Exchange Commission not later than
120 days after the end of the Company's fiscal year covered by this Report on
Form 10-K. Notwithstanding such incorporation, the sections of the Company's
1999 Proxy Statement entitled "Report of the Compensation Committee" and
"Performance Graph" shall not be deemed to be "filed" as part of this Report.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is incorporated by
reference to the Company's 1999 Proxy Statement including but necessarily
limited to the section of the 1999 Proxy Statement entitled "Election of
Directors."
Information concerning executive officers of the Company who are not also
directors is included in Item 4.1, Part I, of this Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's 1999 Proxy
Statement including but necessarily limited to the section of the 1999 Proxy
Statement entitled "Executive Compensation."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's 1999 Proxy
Statement including but necessarily limited to the section of the 1999 Proxy
Statement entitled "Beneficial Ownership of Common Stock."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's 1999 Proxy
Statement including but necessarily limited to the section of the 1999 Proxy
Statement entitled "Executive Compensation," "Beneficial Ownership of Common
Stock" and "Election of Directors."
27
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
---------
<C> <S> <C>
14(a)(1) FINANCIAL STATEMENTS
Report of Independent Auditors--Deloitte & Touche LLP.... F-1
Balance Sheets as of December 31, 1998 and 1997.......... F-2
Statements of Operations for the years ended December 31,
1998, 1997 and 1996..................................... F-3
Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 1998, 1997 and 1996............ F-4
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996..................................... F-5
Notes to Financial Statements............................ F-6--F-24
14(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for the
years ended 1998, 1997 and 1996......................... S-1
All other schedules not listed have been omitted since
the required information is included in the financial
statements or the notes thereto or is not applicable or
required.
14(a)(3) EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S>
2.1(/1/) Securities Purchase Agreement dated June 21, 1995 by and between
the Registrant and MR Acquisitions, Inc.
2.2(/2/) First Amendment to Securities Purchase Agreement by and between the
Registrant and MR Acquisitions, Inc. dated July 31, 1995.
2.3(/12/) Second Amended and Restated Agreement and Plan of Reorganization,
as amended, among RYKA Inc., a Delaware corporation, KPR Sports
International, Inc., a Pennsylvania corporation, Apex Sports
International, Inc., a Pennsylvania corporation, MR Management,
Inc., a Pennsylvania corporation, and Michael G. Rubin.
2.4(/16/) Stock Purchase Agreement dated as of May 12, 1998 by and among
Global Sports, Inc., DMJ Financial Inc., James J. Salter, Kenneth
J. Finkelstein and certain other individuals and entities.
3.1(/12/) Amended and Restated Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware on
December 15, 1997.
3.2(/3/) The Company's Bylaws as amended.
4.1(/3/) Specimen of Common Stock Certificate.
10.1(/2/) Loan and Security Agreement by and between the Registrant and KPR
Sports International, Inc
10.2(/2/) Promissory Note in the principal amount of $851,440 by and between
Registrant as maker and KPR Sports International, Inc. as payee.
10.3(/2/) Demand Promissory Note in the principal amount of $2,000,000 by and
between Registrant as borrower and KPR Sports International, Inc.
as lender.
10.4(/2/) Letter of Credit Financing Agreement by and between Registrant and
KPR Sports International, Inc.
10.5(/2/) Warrant to Purchase 5,100,000 shares of the Registrant's common
stock issued to MR Acquisitions, L.L.C.
10.6(/2/) Warrant to purchase 4,000,000 shares of the Registrant's common
stock issued to MR Acquisitions, L.L.C.
10.7(/2/) Registration Rights Agreement by and between the Registrant and MR
Acquisitions, Inc.
10.8(/2/) Promissory Note in the principal amount of $500,000 by and between
the Registrant and Michael Rubin.
10.9(/2/) Sublease Agreement dated July 31, 1995 by and between KPR Sports
International, Inc. as sublessor and Registrant as sublessee.
10.10(/2/) Settlement Agreement by and between Registrant and Pro-Specs
America Corporation.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S>
10.12(/11/) Key Employee Termination Agreement dated August 3, 1996 by and
between the Registrant and Sheri Poe.
10.13(/2/)* Employment Agreement dated July 31, 1995 by and between the
Registrant and Steven A. Wolf.
10.15(/15/)* Employment Agreement dated September 25, 1996 by and between
the Registrant and Michael G. Rubin.
10.15-A(/15/)* First Amendment to the Employment Agreement dated September 25,
1996 by and between the Registrant and Michael G. Rubin.
10.16* Employment Agreement dated May 12, 1998 by and between the
Registrant and James J. Salter.
10.17* Employment Agreement dated January 1, 1999 by and between the
Registrant and Arthur I. Carver.
10.18* Employment Agreement dated February 24, 1999 by and between the
Registrant and Michael R. Conn.
10.20(/5/)* 1987 Stock Option Plan.
10.21(/6/)* 1988 Stock Option Plan.
10.22(/7/)* 1990 Stock Option Plan.
10.23(/8/)* 1992 Stock Option Plan.
10.24(/9/)* 1993 Stock Option Plan.
10.25(/2/)* 1995 Stock Option Plan.
10.26(/10/)* 1995 Non-Employee Directors' Stock Option Plan.
10.27(/11/)* 1996 Equity Incentive Plan.
10.27-A(/15/)* Amendment to 1996 Equity Incentive Plan.
10.30(/11/) Revolving Credit Agreement dated August 15, 1996 by and between
the Registrant and CoreStates Bank, N.A.
10.31(/11/) Security Agreement dated August 15, 1996 by and between the
Registrant and CoreStates Bank, N.A.
10.32(/11/) Memorandum of Security Agreement dated August 15, 1996 by and
between the Registrant and CoreStates Bank, N.A.
10.33(/11/) Limited Guaranty of Michael Rubin dated August 15, 1996 in
favor of CoreStates Bank, N.A.
10.34(/11/) Letter Agreement dated February 7, 1997 by and among the
Registrant, CoreStates Bank, N.A. and Michael Rubin.
10.35(/11/) Second Amended Forbearance Agreement dated June 4, 1997 by and
among the Registrant, CoreStates Bank, N.A. and Michael Rubin.
10.36(/11/) Letter Agreement dated June 4, 1997 by and among the
Registrant, CoreStates Bank, N.A. and Michael Rubin.
10.40(/13/) Amended and Restated Loan and Security Agreement dated December
15, 1997 by and among KPR Sports International, Inc., RYKA
Inc. and Foothill Capital Corporation.
10.40-A(/13/) Amendment No. 1 to the Loan Documents by and among KPR Sports
International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.40-B(/13/) Consent, Amendment No. 2 to the Loan Documents and waiver as to
certain events of default by and among KPR Sports
International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.40-C(/14/) Consent and Amendment No. 3 to the Loan Documents by and among
KPR Sports International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.40-D(/14/) Amendment No. 4 to the Loan Documents by and among KPR Sports
International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.40-E Amendment No. 5 to the Loan Documents by and among KPR Sports
International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.40-F Consent and Amendment No. 6 to the Loan Documents by and among
KPR Sports International, Inc., RYKA Inc. and Foothill Capital
Corporation.
10.41(/13/) Continuing Guaranty dated December 15, 1997 in favor of
Foothill Capital Corporation.
10.42(/13/) General Security Agreement dated December 15, 1997 in favor of
Foothill Capital Corporation.
10.50(/13/)* Deferred Profit Sharing Plan and Trust.
27.1 Financial Data Schedule (electronic filing only).
</TABLE>
29
<PAGE>
- --------
* Management contract or compensatory plan or arrangement
(/1/)Incorporated by reference to Form 8-K dated June 21, 1995.
(/2/)Incorporated by reference to Form 8-K dated July 31, 1995.
(/3/)Incorporated by reference to the Company's Registration Statement No. 33-
33754.
(/4/)Incorporated by reference to the Company's Registration Quarterly Report
on Form 10-Q for the nine-month period ended September 30, 1995.
(/5/)Incorporated by reference to the Company's Registration Statement No. 33-
19754-B.
(/6/)Incorporated by reference to the Company's Registration Statement No. 33-
27501.
(/7/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine-month period ended September 30, 1990.
(/8/)Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(/9/)Incorporated by reference to the Company's Form S-8 Registration Statement
filed on January 3, 1994.
(/10/)Incorporated by reference to the Company's Proxy Statement filed on
October 13, 1995 in connection with the 1995 Special Meeting in lieu of
Annual Meeting held on November 15, 1995.
(/11/)Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(/12/)Incorporated by reference to the Company's Definitive Proxy Materials
filed November 12, 1997.
(/13/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three-month period ended March 31, 1998.
(/14/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the six-month period ended June 30, 1998.
(/15/)Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(/16/)Incorporated by reference to Form 8-K dated May 27, 1998.
(b)REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998.
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Global Sports, Inc.
We have audited the accompanying consolidated balance sheets of Global
Sports, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years then ended and the related combined
statements of operations, stockholders' equity (deficiency) and cash flows for
the year ended December 31, 1996 (see Note 2). Our audits also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 16, 1999
F-1
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 856,085 $ 98,881
Accounts receivable, net of allowance for doubtful
accounts of $928,693 in 1998 and $743,223 in
1997.............................................. 36,782,732 16,060,911
Inventory.......................................... 20,954,168 16,906,171
Prepaid expenses and other current assets.......... 1,435,744 671,682
----------- -----------
Total current assets............................. 60,028,729 33,737,645
Property and equipment, net of accumulated
depreciation and amortization..................... 4,385,906 3,282,712
Goodwill, net of accumulated amortization.......... 12,223,150 4,057,768
Intangibles, net of accumulated amortization....... 1,950,977 2,089,514
Other assets....................................... 277,424 264,270
----------- -----------
Total assets..................................... $78,866,186 $43,431,909
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--notes payable, banks.............. $14,529,576 $ 2,000,000
Current portion--notes payable, other.............. 712,815 --
Current portion--capital lease..................... 127,966 116,124
Accounts payable................................... 18,480,640 14,453,226
Accrued expenses................................... 2,743,158 1,661,079
Subordinated note payable.......................... 1,999,065 --
Subordinated note payable--shareholder............. 1,805,841 2,068,652
----------- -----------
Total current liabilities........................ 40,399,061 20,299,081
Capital lease........................................ 2,181,265 2,309,231
Notes payable, banks................................. 19,106,535 18,666,248
Notes payable, other................................. 2,493,743 --
Mandatorily redeemable preferred stock............... 100 --
Commitments and contingencies........................
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized in
1998 and 1997; 10,000 shares issued as mandatorily
redeemable
preferred stock in 1998........................... -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized;
12,994,464 and 11,487,197 shares issued in 1998
and 1997, respectively; 11,925,378 and 10,418,111
shares outstanding in 1998 and 1997,
respectively...................................... 129,947 114,875
Additional paid in capital......................... 14,624,541 8,001,132
Accumulated other comprehensive income............. (47,431) (35,520)
Retained earnings (accumulated deficit)............ 192,242 (5,709,321)
----------- -----------
14,899,299 2,371,166
Less: Treasury stock, at cost...................... 213,817 213,817
----------- -----------
Total stockholders' equity....................... 14,685,482 2,157,349
----------- -----------
Total liabilities and stockholders' equity....... $78,866,186 $43,431,909
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
Consolidated Consolidated Combined
<S> <C> <C> <C>
Net sales............................ $131,434,971 $60,671,407 $47,340,450
------------ ----------- -----------
Costs and expenses:
Cost of goods sold................. 95,528,412 48,376,966 37,857,455
General and administrative
expense........................... 8,435,949 6,314,769 5,123,358
Selling and marketing expense...... 13,389,766 7,031,519 3,116,013
Design and development expenses.... 3,006,331 511,073 360,820
------------ ----------- -----------
Total costs and expenses......... 120,360,458 62,234,327 46,457,646
------------ ----------- -----------
Operating income (loss).............. 11,074,513 (1,562,920) 882,804
Other (income) expenses:
Interest expense................... 3,073,270 2,013,028 1,152,473
Interest income.................... (4,980) (58,732) (87,629)
Other, net......................... 203,842 45,986 (37,701)
------------ ----------- -----------
Total other (income) expenses,
net............................. 3,272,132 2,000,282 1,027,143
------------ ----------- -----------
Income (loss) before equity in net
loss of RYKA Inc.................... 7,802,381 (3,563,202) (144,339)
Equity in net loss of RYKA Inc....... -- (592,093) (518,491)
------------ ----------- -----------
Income (loss) before income taxes.... 7,802,381 (4,155,295) (662,830)
Provision for income taxes........... 1,900,818 -- 81,483
------------ ----------- -----------
Net income (loss).................... $ 5,901,563 $(4,155,295) $ (744,313)
============ =========== ===========
Earnings per basic share............. $ .52
============
Earnings per diluted share........... $ .51
============
Unaudited Pro Forma Data: (See Note
2)
Loss before income taxes............. $(4,155,295) $ (662,830)
Provision for income taxes........... -- 21,000
----------- -----------
Pro forma net loss................... $(4,155,295) $ (683,830)
=========== ===========
Pro forma losses per basic share..... $ (1.39) $ (.27)
=========== ===========
Pro forma losses per diluted share... $ (1.39) $ (.27)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock
------------------- Paid in Retained Comprehensive Comprehensive --------------------
Shares Dollars Capital Earnings Income Income Shares Dollars
---------- -------- ----------- ----------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Combined balance at
December 31, 1995...... 2,000 $ 2,000 $ 155,430 $ (27,513) $(12,130) 100 $ 25,000
Distributions to
stockholder............ (782,200)
Equity in stock
issuances of
RYKA Inc. ............. 911,328
Net loss................ (744,313) $ (744,313)
Translation
adjustments............ (29,735) (29,735)
-----------
Comprehensive income.... $ (774,048)
---------- -------- ----------- ----------- =========== -------- --------- ---------
Combined balance at
December 31, 1996...... 2,000 2,000 1,066,758 (1,554,026) (41,865) 100 25,000
Warrant compensation
related to former
officer................ 152,333
Equity in stock
issuances of RYKA
Inc. .................. 356,534
Adjustments arising from
reorganization,
1,608.06-for-1 stock
split and change from
no par value to $.01
per share.............. 3,316,111 31,184 (6,184) (100) (25,000)
Common stock issued in
acquisition of RYKA
Inc. and acquisition of
treasury Stock......... 8,169,086 81,691 6,431,691 1,069,086 (213,817)
Net loss................ (4,155,295) $(4,155,295)
Translation
adjustments............ 6,345 6,345
-----------
Comprehensive income.... $(4,148,950)
---------- -------- ----------- ----------- =========== -------- --------- ---------
Consolidated balance at
December 31, 1997...... 11,487,197 114,875 8,001,132 (5,709,321) (35,520) 1,069,086 (213,817)
Net income.............. 5,901,563 $5,901,563
Translation
adjustments............ (11,911) (11,911)
-----------
Comprehensive income.... $5,889,652
===========
Acquisition of the Gen-X
Companies.............. 1,500,000 15,000 6,450,225
Issuance of warrants to
purchase common stock.. 150,000
Issuance of common stock
upon exercise of
options................ 7,267 72 23,184
---------- -------- ----------- ----------- -------- --------- ---------
Consolidated balance at
December 31, 1998...... 12,994,464 $129,947 $14,624,541 $ 192,242 $(47,431) 1,069,086 $(213,817)
========== ======== =========== =========== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
Consolidated Consolidated Combined
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................... $ 5,901,563 $(4,155,295) $ (744,313)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization...... 1,464,514 417,020 302,314
Provision for losses on accounts
receivable........................ 104,452 507,146 250,845
Equity in net loss of RYKA Inc. ... -- 592,093 518,491
Loss on disposition of equipment... 19,819 46,163 31,772
Warrants expense................... 150,000 152,333 --
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................ (13,097,883) (4,902,102) (897,553)
Inventory.......................... 139,279 (3,770,153) (754,856)
Prepaid expenses and other current
assets............................ 142,776 810,573 (1,067,382)
Other assets....................... 96,027 (1,206,817) (204,473)
Accounts payable and accrued
expenses.......................... (1,322,586) 3,801,331 3,029,033
------------ ----------- -----------
Net cash provided by (used for)
operating activities.............. (6,402,039) (7,707,708) 463,878
------------ ----------- -----------
Cash Flows from Investing Activities:
Businesses acquired net of cash...... (202,647) -- --
Proceeds from sale of equipment...... -- 85,000 2,000
Acquisition of property and
equipment........................... (397,990) (231,987) (508,850)
Cash acquired in Reorganization...... -- 66,806 --
Investment in RYKA Inc. ............. -- 473,589 --
Advances to RYKA Inc. ............... -- 12,311 (17,040)
------------ ----------- -----------
Net cash provided by (used for)
investing activities.............. (600,637) 405,719 (523,890)
------------ ----------- -----------
Cash Flows from Financing Activities:
Net borrowings under line of credit.. 8,194,659 7,906,336 970,441
Costs of debt issuance............... (80,000) (266,304) --
Repayment of capital lease........... (116,124) (105,378) (86,251)
Stockholder's advances............... -- -- 244,153
Proceeds from exercises of common
stock options....................... 23,256 -- --
Repayment of subordinated debt....... (250,000) (416,000) --
Distributions to stockholder......... -- -- (782,200)
------------ ----------- -----------
Net cash provided by financing
activities........................ 7,771,791 7,118,654 346,143
------------ ----------- -----------
Effect of exchange rate on cash........ (11,911) 6,345 (29,735)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... 757,204 (176,990) 256,396
Cash and cash equivalents, beginning of
year.................................. 98,881 275,871 19,475
------------ ----------- -----------
Cash and cash equivalents, end of
year.................................. $ 856,085 $ 98,881 $ 275,871
============ =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest............................ $ 3,056,160 $ 1,882,198 $ 1,026,499
============ =========== ===========
Supplemental disclosure of non-cash
investing and financing activities:
Notes payable issued in
acquisitions........................ $ 6,000,000 -- --
============ =========== ===========
Modification of existing capital
lease............................... -- -- $ 916,960
============ =========== ===========
Issuance of common stock of affiliate
at a price per share in excess of
the Company's carrying amount....... -- $ 356,534 $ 911,328
============ =========== ===========
Refinancing of revolving credit
agreement........................... -- $16,718,420 --
============ =========== ===========
Issuance of common stock for
acquisition of the Gen-X Companies.. $ 6,465,225 -- --
============ =========== ===========
Issuance of mandatorily redeemable
preferred stock..................... $ 100 -- --
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION AND ORGANIZATION
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation,
designs, develops and markets branded footwear primarily under the RYKA and
YUKON brand names as well as distributes off-price athletic footwear, apparel
and sporting goods worldwide, with primary distribution in the United States
and Canada.
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 former sole shareholder of the KPR Companies and now the Chairman
and Chief Executive Officer of the Company. As part of the Reorganization, (i)
RYKA was renamed Global Sports, Inc., (ii) the Company transferred all of its
assets and liabilities to RYKA in exchange for all of the issued and
outstanding shares of capital stock of RYKA, (iii) a subsidiary of the Company
merged with and into KPR, with KPR surviving the merger as a wholly-owned
subsidiary of the Company, (iv) the Company acquired all of the issued and
outstanding shares of capital stock of Apex and MR Management, and (v) the
Company issued to Mr. Rubin an aggregate of 8,169,086 of its common stock in
exchange for all of the issued and outstanding shares of capital stock of the
KPR Companies.
Immediately after the Reorganization, Mr. Rubin, the former sole shareholder
of the KPR Companies, then owned approximately 78% 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.
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.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements presented
include the accounts of Global Sports, Inc. (a Delaware corporation) and the
following wholly-owned subsidiaries:
APEX Sports International, Inc. (PA)
KPR Sports International, Inc. (PA)
MR Management, Inc. (PA)
RYKA Inc. (PA)
G.S.I., Inc. (DE)
Gen-X Holdings, Inc. (WA)
Gen-X Equipment Inc. (Ontario)
Lamar Snowboards, Inc. (MO)
F-6
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The combined financial statements presented for 1996 include the accounts of
KPR Sports International, Inc. and Affiliates, MR management, Inc., KPR Sports
International BVBA (an entity organized pursuant to the laws of Belgium and
owned 79% by the Company and 21% by MR Management, Inc.), KPR Sports
International Europe B.V. (an entity organized pursuant to the laws of the
Netherlands Ministry of Justice and owned 79% by the Company and 21% by MR
Management, Inc.), MR Acquisitions, LLC (an entity owned 99% by the Company
and 1% by MR Management, Inc.), Abington Ski, Inc., Delmar Ski, Inc.,
Lancaster Ski, Inc. and Apex Sports International, Inc. all of which are
affiliated through the common ownership of an individual shareholder and are a
part of Global after the Reorganization (see Note 1). All intercompany
accounts and transactions have been eliminated in consolidation and
combination.
Cash Equivalents: The Company considers highly liquid investments with
maturities at date of purchase of less than three months to be cash
equivalents.
Inventory: Inventory, primarily consisting of athletic footwear, sporting
goods and apparel, is valued at the lower of cost, determined using the first-
in, first-out method or market.
Property and Equipment: Property and equipment are stated at cost net of
accumulated depreciation or amortization. Depreciation or amortization is
provided using the straight-line method over the estimated useful lives of the
assets, generally as follows:
. Three years for computer hardware and software;
. Five to seven years for equipment;
. The lesser of the useful life or lease term for leasehold improvements;
and
. Thirty years for buildings.
Expenditures for maintenance and repairs are expensed as incurred. Upon
retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain
or loss, if any, is reflected in results of operations.
Sale of Stock by an Equity Method Investee: Prior to the Reorganization,
changes in the KPR Companies' proportionate share of the underlying equity of
RYKA, an equity method investee, which result from the issuance of additional
securities by such investee, were credited directly to additional paid-in
capital. In 1997 and 1996, $356,534, and $911,328, respectively, of such gains
were credited to additional paid-in capital (see Note 17).
Foreign Currency Translation: In accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency
Translation, exchange adjustments resulting from foreign currency transactions
generally are recognized currently in income, whereas adjustments resulting
from translations of financial statements are reflected as a separate
component of shareholders' equity. The cumulative currency translation loss as
of December 31, 1998, 1997 and 1996 were $47,431, $35,520, and $41,865,
respectively. Gains and losses on foreign currency transactions for the year
ended December 31, 1998 resulted in a net foreign currency loss of $194,064.
No gains or losses on foreign currency transactions were realized in 1997 or
1996.
Goodwill, Intangibles and Other Assets. The cost of goodwill and intangibles
is amortized on a straight-line basis over ten to twenty years. Goodwill is
reported net of accumulated amortization of $699,669 and $16,978 in 1998 and
1997, respectively. Intangibles, which principally represent the cost of
acquiring licenses, patents and trademarks, are reported net of accumulated
amortization of $270,124 and $55,611 in 1998 and 1997, respectively. Closing
and other fees incurred at the inception of loan facilities are deferred and
are amortized over the term of the loan agreement (see Note 5). As of December
31, 1998, the unamortized balance of all such loan fees was $247,772.
F-7
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets. The realizability of long-lived assets is evaluated
periodically as events or circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on various analyses,
including undiscounted cash flow and profitability projections that
incorporate, as applicable, the impact on existing company businesses. The
analyses necessarily involve significant management judgment. Any impairment
loss, if indicated, is measured as the amount by which the carrying amount of
the asset exceeds the estimated fair value of the asset.
Income Taxes: Prior to December 15, 1997, the KPR Companies had elected to
be taxed as S Corporations, under provisions of the Internal Revenue Code and
various state income tax regulations. As such, current taxable income had been
included on the income tax returns of the then sole shareholder for federal
and state income tax purposes and no provision had been made for federal
income taxes (see unaudited pro forma presentation in the 1997 and 1996
statements of operations). On December 15, 1997, the KPR Companies effected a
merger with RYKA Inc. (see Note 1). As a result of the merger, the KPR
Companies' S election was terminated. The Company, now renamed Global Sports,
Inc., is considered a C corporation and is subject to federal and state income
taxes. As such, taxes on income are provided based upon SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed for differences between the financial
statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future. Such deferred income tax asset and
liability computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Unaudited Pro Forma Data: Pro forma net loss represents net loss after pro
forma adjustments for income taxes as if the KPR Companies had been subject to
federal and state income taxation as a C Corporation since its inception.
Revenue Recognition: Sales, net of discounts, are recognized upon the
shipment of product.
Advertising: The Company expenses the cost of advertising upon the first
time the advertising takes place. Advertising expense was $1,774,753,
$431,753, and $206,842 for 1998, 1997, and 1996 respectively.
Reclassifications: Certain 1997 and 1996 balances have been reclassified to
conform with the 1998 financial statement presentation.
Use of Estimates: The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Financial Instruments: Gains and losses on foreign currency hedges of
existing assets or liabilities are included in the carrying amounts of those
assets or liabilities and recognized in income as part of the related
transaction. Unrealized gains and losses related to qualifying hedges of firm
commitments are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs.
Fair Value of Financial Instruments: The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, notes payable, bank and
notes payable, other are a reasonable estimate of their fair
F-8
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
values at December 31, 1998 and 1997, based on either the short maturity of
these instruments or current rates offered to the Company for debt of a
similar nature. The fair value of the subordinated notes payable is not
practicable to determine because of the lack of quoted market prices for such
debt and the Company's lack of offers to provide comparable subordinated debt.
The fair value of foreign currency forward contracts is based on quoted market
prices.
Stock-Based Compensation: SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
New Accounting Pronouncements
Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive
Council issued Statement of Position 98-5, Reporting of Costs of Start-Up
Activities, ("SOP 98-5"). The statement requires that costs of start-up
activities, including organization costs, be expensed as incurred. This
statement is required to be adopted January 1, 1999. Adoption of SOP 98-5 in
1999 is not expected it to have a material effect on the Company's results of
operations, cash flows or financial position.
NOTE 3--ACQUISITIONS
In consideration for 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 10,000 shares of mandatorily redeemable
preferred stock in the aggregate amount of $5 million. The notes are payable
and shares are redeemable at an aggregate of $1 million per year over a five-
year period upon achieving certain sales and gross profit targets. The
redemption price of the preferred shares is contingent on the same targets, up
to a maximum of $500,000. The total purchase price, including acquisition
expenses of approximately $330,000 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
restrictions on the transferability of these shares. The following table
details the allocation of the total consideration:
<TABLE>
<S> <C>
Fair value of assets acquired........ $13,913,937
Fair value of liabilities assumed.... (13,765,000)
Goodwill............................. 6,644,083
-----------
$ 6,793,020
===========
</TABLE>
Goodwill is being amortized on a straight line basis over twenty years. If
and when the contingent consideration is issued, goodwill will increase.
F-9
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma information is presented as if the
acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net sales....................................... $141,036,638 $92,091,786
============ ===========
Net income (loss)............................... $ 5,808,522 $(1,844,147)
============ ===========
Earnings (losses) per share--basic.............. $ .49 $ (.16)
============ ===========
Earnings (losses) per share--diluted............ $ .48 $ (.16)
============ ===========
</TABLE>
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc.
("Lamar"), a privately-held manufacturer of snowboards, bindings and related
products based in San Diego, California. In consideration for the stock of
Lamar, the Company paid $250,000 in cash and issued notes in the aggregate
principal amount of $1,000,000, payable over five years. The fair value of the
assets acquired was $927,124 and the fair value of the liabilities assumed was
$1,881,116, resulting in goodwill of $2,203,992. Goodwill is being amortized
on a straight line basis over twenty years. Pro forma financial information
related to this transaction would not be materially different from reported
results.
NOTE 4--PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Equipment.......................................... $ 1,764,111 $1,090,148
Building--under capital lease (see Note 6)......... 2,666,958 2,666,958
Building........................................... 686,365 --
Leasehold improvements............................. 358,772 353,767
Land............................................... 268,800 --
Construction in progress........................... 17,392 --
----------- ----------
5,762,398 4,110,873
Less: Accumulated depreciation and amortization.... (1,376,492) (828,161)
----------- ----------
$ 4,385,906 $3,282,712
=========== ==========
</TABLE>
F-10
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--NOTES PAYABLE
Notes Payable, Banks
The components of the notes payable, banks balances as of December 31, 1998
and 1997 are comprised as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revolving credit facility, secured by substantially
all assets of KPR and RYKA (weighted average
interest rates at December 31, 1998--8.15%;
1997--8.25%)....................................... $ 18,812,156 $20,666,248
Revolving credit facility, secured by substantially
all assets of the Gen-X Companies (weighted average
interest rate at December 31, 1998--7.93%)......... 14,500,000 --
Mortgage payable, secured by building, due 8/15/09
(interest rate at December 31, 1998--8.07%)........ 323,955 --
------------ -----------
Total............................................. 33,636,111 20,666,248
Less: Current portion............................. (14,529,576) (2,000,000)
------------ -----------
Long-term portion................................. $ 19,106,535 $18,666,248
============ ===========
</TABLE>
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and
Security Agreement (the "Loan Agreement") with a lender pursuant to which a
prior lender was repaid in full on November 21, 1997. The total interest
incurred in connection with the former lender in 1997 was $1,289,537. 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 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
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 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 import letters of credit needed
for seasonal production of new merchandise for the Spring 1999 and Fall 1999
seasons. The Loan Agreement requires that the merchandise underlying the over-
advance is at least 80% supported by customer orders.
Among other things, the Loan Agreement requires the KPR Companies and RYKA
to achieve annual earnings before interest, taxes, depreciation and
amortization of $5 million, 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 December 31, 1997, the Company was not in compliance with a financial
covenant of its Loan Agreement, namely the financial covenant requiring
$2,500,000 of consolidated net income plus depreciation, amortization and
other non-cash charges plus interest and income taxes ("EBITDA") on an
annualized basis for
F-11
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
the period July 1, 1997 through December 31, 1997. A waiver was obtained from
the bank to remedy its violation of the financial covenant. In March 1998, the
Company renegotiated the terms of and executed an amendment to the Loan
Agreement such that the financial covenant would require the Company to
maintain EBITDA of $5,000,000 on an annualized basis for periods subsequent to
December 31, 1997. As of December 31, 1998, the Company is in compliance with
all financial covenants of the Loan Agreement.
At December 31, 1998, the aggregate amount outstanding under this line was
$18,812,156, all of which is classified as a long term liability. At December
31, 1998, based on available collateral and outstanding import letters of
credit commitments, an additional $2,403,332 (including the seasonal over-
advance) was available on this line for borrowing. The total interest incurred
in connection with this facility was $1,970,466 for the year ending December
31, 1998. The maximum amount outstanding on this line during 1998 was
$24,926,959.
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 December 31, 1998, draws
of $14,500,000 (included in current liabilities) were committed under this
line. Based on available collateral and outstanding import letters of credit
commitments an additional $4,701,700 was available for borrowing. The total
interest expense incurred in connection with this facility was $453,485 for
the year ending December 31, 1998. The maximum amount outstanding on this line
during 1998 was $14,500,000.
Notes payable, banks also includes a mortgage payable secured by land and
building in Ontario, Canada of $323,955 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. For the year ending December 31, 1998, interest expense
included $15,794 related to this mortgage.
Notes Payable, Other
The components of the notes payable, other balances as of December 31, 1998
and 1997 are comprised as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---------- -----
<S> <C> <C>
Note payable to Ride, Inc., due 12/31/02 (interest rate at
December 31, 1998--8%)..................................... $1,600,000 $ --
Notes payable to former shareholders of Lamar, due 7/27/03
(interest rate at December 31, 1998--6%)................... 1,606,558 --
---------- -----
Total..................................................... 3,206,558 --
Less: Current portion..................................... (712,815) --
---------- -----
Long-term portion......................................... $2,493,743 $ --
========== =====
</TABLE>
Other debt related to the Gen-X Companies includes an outstanding loan
payable to Ride Inc. for $1,600,000, of which $400,000 is classified as
current. The original loan of $2,000,000 is repayable in equal quarterly
installments of $100,000 which commenced on March 31, 1998 and bears interest
at the prime lending rate. For the year ending December 31, 1998, interest
expense included $88,150 related to this note.
Notes payable, other also includes $1,606,558 of promissory notes payable to
the former shareholders of Lamar (see Note 3). The notes are payable in five
equal annual installments and bear interest at 6% per annum. At December 31,
1998, $312,815 of such notes is classified as current.
F-12
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Subordinated Notes Payable
The components of the subordinated notes payable balances as of December 31,
1998 and 1997 are comprised as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Subordinated notes payable to shareholder (interest
rate at December 31, 1998--8.25%; 1997--8.75%)...... $ 1,805,841 $ 2,068,652
Subordinated notes payable to former shareholders of
the Gen-X Companies, due 12/31/99 (interest rate at
December 31, 1998--7%).............................. 1,999,065 --
----------- -----------
Total.............................................. 3,804,906 2,068,652
Less: Current portion.............................. (3,804,906) (2,068,652)
----------- -----------
Long-term portion.................................. $ -- $ --
=========== ===========
</TABLE>
At December 31, 1998, the Company had $1,805,841 in outstanding subordinated
notes payable held by its Chairman and CEO, plus accrued interest on such
notes of $24,094 recorded in accrued expenses. This debt consists 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 December 31, 1998
was 8 3/4% and interest recorded during the year ending December 31, 1998 was
$162,124. 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.
Upon closing the Gen-X transaction on May 12, 1998 (see Note 3), 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 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% per annum until December 31, 1998 and the prime lending rate
thereafter. For the year ending December 31, 1998, interest expense included
$54,572 related to these notes.
Subject to the Loan Agreement limitations on the repayment of subordinated
indebtedness, aggregate contractual maturities of long-term debt for each of
the next five years commencing in 1999 are:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$4,554,218 $749,312 $749,312 $749,312 $349,310
========== ======== ======== ======== ========
</TABLE>
NOTE 6--CAPITAL LEASE
In September 1994, a subsidiary of the Company entered into a fifteen-year
capital lease with its CEO and Chairman, for warehouse and office space for
its corporate headquarters. On October 1, 1996, the lease was amended from an
annual rental amount of $193,056 to an annual rental amount of $347,498. Such
amended rental amount more closely reflected the market value of the lease at
the time it was amended. The rental amount is subject to annual increases
based on the Consumer Price Index and is currently $351,396. The Company pays
all insurance and maintenance relating to the leased property. The mortgages
on the leased property are
F-13
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
collateralized by guarantees of a subsidiary of the Company and have an
aggregate outstanding principal balance of $1,525,169 at December 31, 1998. At
December 31, 1998 and 1997, the Company's investment in this capital lease was
$2,007,035 and $2,212,185 which were included in property and equipment.
Interest recorded on this capital lease for the years ended December 31, 1998,
1997 and 1996 was $234,345, $242,120, $160,003, respectively.
Future minimum lease payments under above capital lease at December 31,
1998, together with the present value of the future minimum lease payments,
are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 351,396
2000........................................................... 351,396
2001........................................................... 351,396
2002........................................................... 351,396
2003........................................................... 351,396
Thereafter..................................................... 2,020,532
----------
Total future minimum lease payments............................ 3,777,512
Less interest discount amount.................................. 1,468,281
----------
Total present value of future minimum lease payments........... 2,309,231
Less: current portion.......................................... 127,966
----------
Total non-current portion...................................... $2,181,265
==========
</TABLE>
NOTE 7--EQUITY
The Company, after the Reorganization, is authorized to issue up to
1,000,000 shares of preferred stock, $.01 par value. The preferred stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights shares.
In connection with the acquisition of the Gen-X Companies (see Note 3), the
Company issued 10,000 shares of mandatorily redeemable preferred stock (see
Note 12).
On April 21, 1997, RYKA sold 125,000 shares of its common stock for $750,000
to certain private investors. The proceeds from this sale were used to repay
$385,000 of the Subordinated Note Payable owed to the KPR Companies from RYKA
and to enable the Company to open $810,000 in letter of credit agreements for
the benefit of KPR.
In connection with MR Acquisitions' investment in RYKA Inc. in 1995, MR
Acquisitions was granted contingent warrants to purchase 455,000 shares of
common stock. As of December 31, 1997, MR Acquisitions had exercised warrants
to purchase 361,587 of the 455,000 shares of RYKA common stock for which it
paid an aggregate exercise price of $72,317. These 361,587 shares represent
the full number of warrants that MR Acquisitions was entitled to exercise
under the terms of the warrants. MR Acquisitions was not entitled to exercise
the remaining warrants for 93,413 shares because Mr. Rubin did not fully
satisfy the contingency under the warrants in that he did not raise the
required amount of capital for RYKA through equity offerings by the date
specified in the warrants.
F-14
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--STOCK OPTIONS
As part of the Reorganization (see Note 1), the following stock options and
stock option plans were assumed by the Company effective December 15, 1997.
Pursuant to option grant letters, but not pursuant to any formal plan ("Non-
Plan Grants"), the Company assumed options issued to certain individuals to
purchase shares of the company's common stock at prices which approximated
fair market value at the date of grant. The options vest at various times over
periods ranging up to five years and, if not exercised, expire up to ten years
after the date of grant.
The Company assumed eight separate stock option plans (the "Plans"). Under
the terms of the 1987 Stock Option Plan, 1988 Stock Option Plan, 1990 Stock
Option Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option
Plan, 1996 Stock Option Plan and 1995 Non-employee Directors Plan, the Company
may grant qualified and nonqualified options to purchase up to 31,321; 17,500;
37,500; 43,750; 45,000; 75,000; 1,000,000; and 12,500 shares of common stock,
respectively, to employees, directors and consultants of the Company. The
options vest at various times over periods ranging up to five years. All
options have been granted at not less than fair market value of the common
stock as of the date of grant. The options, if not exercised, expire up to ten
years after the date of grant. Stock appreciation rights ("SAR's") may be
granted under the Plans either alone or in tandem with stock options.
Generally, recipients of SAR's are entitled to receive, upon exercise, cash or
shares of common stock (valued at the then fair market value of the company's
common stock) equal to such fair market value on the date of exercise minus
such fair value on the date of grant of the shares subject to the SAR,
although certain other measurements also may be used. A SAR granted in tandem
with a stock option is exercisable only if and to the extent that the option
is exercised. No SAR's have been granted to date under the Plans.
The following table summarizes the stock option activity for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
--------- --------
<S> <C> <C>
Assumed at December 15, 1997........................... 219,547 $10.90
Granted.............................................. 441,850 3.69
Exercised............................................ -- --
Canceled............................................. (118,716) 8.95
--------- ------
Outstanding at December 31, 1997....................... 542,681 5.45
Granted.............................................. 695,750 5.79
Exercised............................................ (7,267) 3.20
Canceled............................................. (42,583) 6.24
--------- ------
Outstanding at December 31, 1998....................... 1,188,581 $ 5.71
========= ======
</TABLE>
F-15
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Range of Remaining
Exercise Number Contractual Life Weighted Average Number Weighted Average
Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.88 - $ 3.20 393,250 7.62 $ 3.18 171,643 $ 3.20
$ 4.00 - $ 5.94 301,400 6.53 4.89 158,150 4.83
$ 6.00 - $ 6.88 346,000 9.41 6.78 -- --
$ 7.03 - $10.60 63,167 8.90 7.84 32,667 8.34
$11.00 - $25.00 84,764 3.77 14.42 84,764 14.42
--------- ---- ------ ------- ------
$ 2.88 - $25.00 1,188,581 7.66 $ 5.71 447,224 $ 6.28
========= ==== ====== ======= ======
</TABLE>
The Company accounts for the Plans in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the Plans been determined
consistent with SFAS No. 123, Accounting for Stock Based Compensation, the
Company's pro forma net income (loss) and earnings (losses) per share for 1998
and 1997 would have been as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- -----------
<S> <C> <C>
1998
Net income...................................... $ 5,901,563 $ 4,789,090
=========== ===========
Earnings per share--basic....................... $ .52 $ .42
=========== ===========
Earnings per share--diluted..................... $ .51 $ .41
=========== ===========
1997
Net loss........................................ $(4,155,295) $(4,805,295)
=========== ===========
Losses per share--basic......................... $ (1.39) $ (1.60)
=========== ===========
Losses per share--diluted....................... $ (1.39) $ (1.60)
=========== ===========
</TABLE>
The weighted average fair value of the stock options granted during the year
ended December 31, 1998 and 1997 were $3.79 and $1.49 per share, respectively.
The fair value of options granted under the Plans during 1998 and 1997 was
estimated on the date of grant using the Black-Scholes multiple option pricing
model, with the following assumptions:
<TABLE>
<CAPTION>
Assumption 1998 1997
---------- ---------- ----------
<S> <C> <C>
Dividend yield....................................... None None
Expected volatility.................................. 77.17% 50.00%
Average risk free interest rate...................... 5.16% 6.10%
Average expected lives............................... 5.76 years 5.00 years
</TABLE>
F-16
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 9--COMMON STOCK PURCHASE WARRANTS
Prior to the Reorganization (see Note 1), RYKA issued various common stock
warrants in connection with financings and other activities. As part of the
Reorganization, the following common stock purchase warrants were assumed by
the Company, effective December 15, 1997.
<TABLE>
<CAPTION>
Number of Range of Range of
Issue Date Shares Exercise Prices Terms (Years)
---------- --------- --------------- -------------
<S> <C> <C> <C>
1994............................ 10,026 $12.00 - $20.00 3 - 10
1995............................ 27,660 $ 8.40 - $30.00 5
1996............................ 43,500 $ 5.30 - $ 8.40 5 - 10
1997............................ 155,300 $ 3.20 - $ 5.60 5
-------
Total........................ 236,486
=======
</TABLE>
In addition, during the year ended December 31, 1998, the Company issued
warrants to purchase 67,000 shares of common stock to various consultants and
sales agents at a range of prices from $5.11 to $7.94 (weighted average price
of $6.71) and with terms of five to ten years. The Company recorded a charge
of $150,000 in 1998 related to these warrants.
NOTE 10--INCOME TAXES
Earnings before income taxes and the related provision for income taxes,
were as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Earnings before income taxes:
Domestic.................................................... $4,196,377
Foreign..................................................... 3,606,004
----------
Total...................................................... $7,802,381
==========
Provision for income taxes:
Current:
Federal..................................................... $1,358,722
State....................................................... 128,478
Foreign..................................................... 387,111
----------
Total current.............................................. 1,874,311
----------
Deferred:
Federal..................................................... 83,770
State....................................................... 48,382
Foreign..................................................... (105,645)
----------
Total deferred............................................. 26,507
----------
Total:
Federal..................................................... 1,442,492
State....................................................... 176,860
Foreign..................................................... 281,466
----------
Total...................................................... $1,900,818
==========
</TABLE>
F-17
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The significant components of net deferred tax assets and liabilities at
December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventory...................................... $ 200,254 $ 596,592
Provision for doubtful accounts................ 453,159 458,914
Other assets................................... 58,144 --
Net operating loss carryforwards............... 8,035,764 7,750,306
----------- -----------
Gross deferred tax assets.................... 8,747,321 8,805,812
Deferred tax liabilities:
Depreciation................................... (23,306) --
Intangibles.................................... (673,274) (684,000)
----------- -----------
Gross deferred tax liabilities............... (696,580) (684,000)
----------- -----------
Net deferred tax assets and liabilities.......... 8,050,741 8,121,812
Valuation allowance............................ (8,050,741) (8,121,812)
----------- -----------
Net deferred tax asset........................... $ -- $ --
=========== ===========
</TABLE>
The Company has not provided for United States deferred income taxes or
foreign withholding taxes on the $5,320,759 of unremitted earnings of its non-
United States subsidiary Gen-X Equipment AG, as of December 31, 1998, since
these earnings are deemed to be permanently invested.
Due to the uncertainty surrounding the realization of the company's tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of
December 31, 1998, the Company had available net operating loss carryforwards,
attributable to RYKA, of approximately $19,744,000 which expire in the years
2002 through 2012. The use of net operating loss carryforwards may be subject
to annual limitations based on ownership changes of the Company's stock, as
defined by Section 382 of the Internal Revenue Code. To the extent that such
net operating loss carryforwards are realized in the future, they will reduce
the carrying value of goodwill.
The differences between the statutory federal income tax rate and the
effective income tax rate are provided in the following reconciliation:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Statutory federal income tax rate............................. 34.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit.............. 1.5
Nondeductible amortization.................................. 3.8
Undistributed foreign earnings.............................. (12.6)
Utilization of net operating loss carryforwards............. (2.2)
Other....................................................... (.2)
-----
Effective income tax rate..................................... 24.3%
=====
</TABLE>
For the years ended December 31, 1997 and 1996 the Company had no provision
for federal and state income taxes. In 1996, the Company had a provision for
foreign taxes of $81,000.
F-18
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 11--EARNINGS (LOSSES) PER SHARE
Earnings (losses) per share 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.
The amounts used in calculating earnings (losses) per share data are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net income............................... $ 5,901,563
===========
Pro forma net loss (see Note 2).......... $(4,155,295) $ (683,830)
=========== ==========
Weighted average shares outstanding--
basic................................... 11,378,918 2,996,027 2,568,431
Dilutive common stock options.......... 182,171 -- --
Dilutive common stock warrants......... 79,682 -- --
----------- ----------- ----------
Weighted average shares outstanding--
diluted................................. 11,640,771 2,996,027 2,568,431
=========== =========== ==========
Outstanding common stock options having
no dilutive effect...................... 350,961 542,681 241,250
=========== =========== ==========
Outstanding common stock warrants having
no dilutive effect...................... 304,435 236,486 81,186
=========== =========== ==========
</TABLE>
The Company's pro forma net loss in 1997 and 1996 result in an anti-dilutive
effect in the calculation of pro forma diluted earnings losses per share.
NOTE 12--MANDATORILY REDEEMABLE PREFERRED STOCK
In connection with the acquisition of the Gen-X Companies on May 12, 1998
(see Note 3), the Company issued 10,000 shares of mandatorily redeemable
preferred stock. The redemption price of these preferred shares is contingent
on certain sales and gross profit targets, ranging from a minimum of $.01 per
share to a maximum of $50.00 per share, and are redeemable over a five year
period.
NOTE 13--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various routine litigation, including litigation
in which the Company is a plaintiff, incidental to its business. The Company
believes that the disposition of such routine litigation will not have a
material adverse effect on the financial position or results of operations of
the Company.
Employment Agreements
At December 31, 1998, the Company has employment agreements with several of
its officers for an aggregate annual base salary of $1,177,500 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.
Purchase Commitments
As of December 31, 1998, outstanding purchase commitments exist totaling
$5,745,974, for which commercial import letters of credit have been issued.
F-19
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 14--SIGNIFICANT CUSTOMERS / CONCENTRATIONS OF CREDIT RISK
The Company's sales and accounts receivable are primarily with major national
retail stores. If the financial condition or operations of these customers
deteriorate substantially, the Company's operating results could be adversely
affected. Credit risk with respect to other trade accounts receivable is
generally diversified due to the large number of entities comprising the
Company's customer base and mitigated in part by credit insurance. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally the Company does not require collateral.
Net sales for the years ended December 31, 1998, 1997 and 1996 to key
customers each amounting to in excess of 10% is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. 27% N/A N/A
Customer B.................................................. 13% 22% 14%
Customer C.................................................. N/A 13% 17%
</TABLE>
At December 31, 1998, accounts receivable for Customer A and Customer B
amounted to $8,881,106 and $4,080,369, respectively, or 24% and 11%,
respectively, of total accounts receivable outstanding. At December 31, 1997,
accounts receivable for Customer B and Customer C amounted to $5,045,038 and
$1,491,833, respectively or 30% and 9%, respectively, of total accounts
receivable outstanding.
NOTE 15--MAJOR SUPPLIERS / ECONOMIC DEPENDENCY
Inventory purchased for the years ended December 31, 1998, 1997 and 1996 from
a key supplier amounted to 11%, 26% and 17% of total inventory purchased. At
December 31, 1998, the Company had no amounts owed to this supplier. At
December 31, 1997, the amount owed to this supplier was $11,261,105 or 70% of
total accounts payable outstanding. No other supplier amounted to in excess of
10% of total inventory purchased for each of the years then ended.
NOTE 16--SAVINGS PLAN
The Company sponsors a voluntary defined contribution savings plan covering
all U.S. employees. Company contributions to the plan may not exceed $2,500 per
employee. Total Company contributions were $21,431, $18,594, and $12,394 in
1998, 1997, and 1996 respectively, related to the Company's contribution to the
plan.
F-20
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 17--INVESTMENT IN RYKA INC.
A summary of activity relating to the Company's investment in RYKA Inc. for
the two years ended December 31, 1997 follows:
<TABLE>
<S> <C>
Investment in RYKA, January 1, 1996............................ $ 746,122
Equity in net loss of RYKA................................... (518,491)
Equity in stock issuance of RYKA............................. 911,328
Additional advances.......................................... 16,040
Amortization of negative goodwill............................ 12,987
----------
Investment in RYKA, December 31, 1996.......................... 1,167,986
Equity in net loss of RYKA................................... (592,093)
Equity in stock issuances of RYKA............................ 356,534
Additional advances.......................................... 12,311
Amortization of negative goodwill............................ 12,446
RYKA partial repayment of initial advance.................... (385,000)
----------
Investment in RYKA, December 14, 1997.......................... $ 572,184
==========
</TABLE>
During 1996, RYKA issued for cash 525,000 shares of common stock for $5.00
per share which was in excess of the Company's per share carrying amount. The
Company accounted for the change in its proportionate share of RYKA equity as
an increase in both its investment and additional paid-in capital.
During 1997, RYKA issued for cash 125,000 shares of common stock for $6.00
per share which was in excess of the Company's per share carrying amount. Also
in 1997, MR Acquisitions exercised its warrants to purchase an additional
361,587 RYKA shares. The Company accounted for these transactions as an
increase in both its investment and additional paid-in capital. As of December
14, 1997, just prior to the Reorganization (See Note 1), the Company had a 33%
equity interest in the net assets of RYKA.
NOTE 18--BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement established standards for
the reporting of information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial reports issued to shareholders. It also established
standards for related disclosures about products and services, and geographic
areas. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision making group is the Senior Management Group, which is
comprised of the Chief Executive Officer, Executive Vice President of
Operations, Senior Vice President of Strategic Development and Chief Financial
Officer as well as the senior executives of each of the Company's operating
segments.
The Company's reportable operating segments include the Branded segment and
the Off-Price and Action Sports segment. Under the Branded segment, the
Company designs, develops and markets each of its brands to appeal to a
targeted consumer group. Brands offered by the Company include the RYKA and
Yukon brands and are primarily sold to athletic footwear stores, sporting
goods stores, department stores and independent retailers. Under the Off-Price
and Action Sports segment, the Company purchases manufacturers' closeout
merchandise, overstocks and canceled orders, as well as excess inventories of
athletic, outdoor and casual footwear, athletic apparel and sporting goods
from retailers, for resale to retailers principally in the United States and
Canada. The Company resells merchandise to sporting goods stores, off-price
specialty stores, department stores, family
F-21
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
footwear stores, and independent retailers. The Company also designs and
distributes special make-up snowboards and other sports-related merchandise
for selected retailers under its Off-Price and Action Sports segment.
The Company evaluates performance based on stand-alone operating segment
gross margins. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies (see Note
2). Information by operating segment is as follows:
<TABLE>
<CAPTION>
Off-Price & Consolidated
Branded Action Sports Total
----------- ------------- ------------
<S> <C> <C> <C>
1998:
Net sales...................... $41,080,143 $90,354,828 $131,434,971
Cost of sales.................. 27,550,956 67,977,456 95,528,412
----------- ----------- ------------
Gross margin................... $13,529,187 $22,377,372 35,906,559
=========== ===========
Operating expenses............. 24,832,046
------------
Operating income............... $ 11,074,513
============
Revenues from significant
customers:
Customer A..................... 19% 30%
=========== ===========
Customer B..................... 19% 10%
=========== ===========
Customer C..................... N/A N/A
=========== ===========
1997:
Net sales...................... $17,930,924 $42,740,483 $ 60,671,407
Cost of sales.................. 13,172,587 35,204,379 48,376,966
----------- ----------- ------------
Gross margin................... $ 4,758,337 $ 7,536,104 $ 12,294,441
=========== ===========
Operating expenses............. 13,857,361
------------
Operating loss................. $(1,562,920)
============
Revenues from significant
customers:
Customer A..................... N/A N/A
=========== ===========
Customer B..................... 32% 18%
=========== ===========
Customer C..................... N/A 14%
=========== ===========
1996:
Net sales...................... $10,486,832 $36,853,618 $ 47,340,450
Cost of sales.................. 8,191,815 29,665,640 37,857,455
----------- ----------- ------------
Gross margin................... $ 2,295,017 $ 7,187,978 9,482,995
=========== ===========
Operating expenses............. 8,600,191
------------
Operating income............... $ 882,804
============
Revenues from significant
customers:
Customer A..................... N/A N/A
=========== ===========
Customer B..................... N/A 14%
=========== ===========
Customer C..................... N/A 17%
=========== ===========
</TABLE>
F-22
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Assets by reportable segment at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Segment 1998 1997 1996
------- ----------- ----------- -----------
<S> <C> <C> <C>
Branded............................... $20,279,475 $13,171,700 $ 1,506,970
Off-Price and Action Sports........... 52,343,839 24,286,090 19,178,904
----------- ----------- -----------
Operating segment assets.............. 72,623,314 37,457,790 20,685,874
Assets not attributable to segments... 6,242,872 5,974,119 5,992,670
----------- ----------- -----------
Consolidated assets................. $78,866,186 $43,431,909 $26,678,544
=========== =========== ===========
</TABLE>
Geographic Information
Gographic information, based upon the country of origin, as of and for the
years ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------- ----------------------
Long-Lived Long-Lived Long-Lived
Net Sales Assets Net Sales Assets Net Sales Assets
------------ ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States........... $ 96,624,709 $13,042,596 $57,266,891 $9,413,823 $39,899,399 $3,477,882
Canada.................. 34,810,262 5,547,089 -- -- -- --
Europe.................. -- -- 3,404,516 18,575 7,441,051 148,983
------------ ----------- ----------- ---------- ----------- ----------
Total................. $131,434,971 $18,589,685 $60,671,407 $9,432,398 $47,340,450 $3,626,865
============ =========== =========== ========== =========== ==========
</TABLE>
Long-lived assets primarily represent property and equipment, goodwill,
intangibles and other assets.
NOTE 19--RELATED PARTY TRANSACTIONS
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 (see Note 6).
At December 31, 1998, the Company also has subordinated notes payable
outstanding with its Chairman and CEO (see Note 5).
A summary of the KPR Companies' related party transactions with RYKA Inc.
(prior to the Reorganization) for the years ended December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------
Nature of Transactions Financial Statement Classification 1997 1996
---------------------- ---------------------------------- -------- --------
<S> <C> <C> <C>
Purchase of inventory... Cost of goods sold/Inventory $196,274 $151,985
Rent.................... Other (income) expenses $ 45,521 $ 47,500
Interest on subordinated
debt................... Interest income $ 56,854 $ 80,723
</TABLE>
NOTE 20--FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage the impact of
foreign exchange rate changes on earnings and cash flows. The Company does not
enter into financial instruments for trading or speculative purposes. The
counterparties to these contracts are major financial institutions with high
credit ratings and the Company does not have significant exposure to any one
counterparty. Management believes the risk of loss is remote and in any event
would be immaterial.
F-23
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
As part of its foreign exchange risk management strategy, the Company uses
forward exchange contracts to minimize currency risk on anticipated inventory
purchases and cash flows from collections of accounts receivable. The terms of
these contracts are typically from one to three months. From time to time
during 1998, the Company entered into several forward currency exchange
contracts with one of its main lending banks, accounted for as direct hedges on
certain of its accounts payable exposures in Swiss Francs, German Marks and
British Pounds. All gains and losses from such contracts are recognized in cost
of sales as the related inventories are sold. The Company had the following
amounts outstanding, which approximate fair market values, related to these
contracts as of December 31, 1998:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
U.S. Dollars/British Pounds................................ $ 822,793
U.S. Dollars/German Marks.................................. 234,949
U.S. Dollars/Swiss Francs.................................. 23,625
----------
Total.................................................... $1,081,367
==========
</TABLE>
These contracts mature in January through March of 1999.
During November 1998, the Company also entered into a series of forward
currency contracts for in the aggregate approximately 7,000,000 Canadian
Dollars with one of its main lending banks, accounted for as direct hedges on
certain U.S. Dollar denominated accounts receivable collection exposures. The
Company had $2,689,384 of these contracts outstanding at December 31, 1998,
which approximates fair market value. These contracts mature in January and
February of 1999. The deferred gains or losses on these contracts at
December 31, 1998 were not material.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf on the date indicated by the undersigned thereunto duly
authorized.
Global Sports, Inc.
Date: March 30, 1999
/s/ Michael G. Rubin
By: ----------------------------------
Michael G. Rubin
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Michael G. Rubin Chairman and Chief March 30, 1999
- -------------------------------------- Executive Officer
Michael G. Rubin
/s/ Steven A. Wolf Chief Financial Officer March 30, 1999
- --------------------------------------
Steven A. Wolf
/s/ Kenneth J. Adelberg Director March 30, 1999
- --------------------------------------
Kenneth J. Adelberg
/s/ Harvey Lamm Director March 30, 1999
- --------------------------------------
Harvey Lamm
</TABLE>
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------
Balances at Charged to Charged to Balances at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Allowance for doubtful
accounts............. $743,223 104,452 413,877(/2/) (332,859)(/1/) $928,693
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $279,682 507,146 121,315(/3/) (164,920)(/1/) $743,223
Year ended December 31,
1996:
Allowance for doubtful
accounts............. $122,887 250,845 -- (94,050)(/1/) $279,682
</TABLE>
- --------
(/1/)Accounts written off against the allowance.
(/2/)Transfers from other reserves.
(/3/)Balances acquired from RYKA, Inc.
S-1
<PAGE>
EXHIBIT 10.16
KEY EMPLOYEE AGREEMENT
To: James J. Salter
277 Glencairn Avenue
Toronto, Ontario, M5N1T8
The undersigned, Global Sports, Inc., a Delaware corporation (the
"Company"), with its principal place of business located at 555 S. Henderson
Road, King of Prussia, Pennsylvania 19406, hereby agrees with you as follows:
1. Position and Responsibilities.
1.1 You shall serve as chief executive officer of the Company's wholly
owned subsidiary, Gen-X Holdings, Inc., a Washington corporation ("Gen-X"), and
any of Gen-X's wholly owned subsidiaries and of the off price division of one of
the Company's other subsidiaries, KPR Sports International, Inc. (or in such
other executive capacity as shall be designated by the Board of Directors or
Executive Committee of the Company and acceptable to you) and shall perform the
duties customarily associated with such capacity from time to time. You shall
report to the Chief Executive Officer and Chairman of the Board of the Company.
1.2 You will devote your full time and your best efforts to the performance
of your duties hereunder and the business and affairs of the Company. You agree
to perform such executive duties as may be assigned to you by or on authority of
the Company's Board of Directors or Executive Committee from time to time.
1.3 You will duly, punctually, and faithfully perform and observe any and
all rules and regulations which the Company may or shall hereafter reasonably
establish governing your conduct as an employee and the conduct of its business.
<PAGE>
2. Term of Employment.
2.1 The initial term of this Agreement shall be for the period of years set
forth on Exhibit A annexed hereto commencing with the date hereof. Thereafter,
this Agreement shall be automatically renewed for successive periods of one (1)
year, unless you or the Company shall give the other party not less than four
(4) months prior written notice of non-renewal. Your employment with the Company
may be terminated as provided in Sections 2.2 or 2.3.
2.2 The Company shall have the right to terminate your employment at any
time under this Agreement prior to the stated term in any of the following ways:
(a) on thirty (30) days prior written notice to you upon your disability
(disability shall be defined as your inability to perform duties under
this Agreement for an aggregate of ninety (90) days out of any one
hundred eighty (180) day period due to mental or physical disability);
(b) immediately without prior notice to you by the Company for "Cause", as
hereinafter defined;
(c) immediately without prior notice to you, upon your death or in the
event of the liquidation or reorganization of the Company under the
federal Bankruptcy Code or any state insolvency or bankruptcy law;
(d) at any time without Cause, provided the Company shall be obligated to
pay to you, as severance pay, a lump sum amount equal to six months of
your then current annual Base Salary, such sum to be payable monthly
over a six month period from the date of termination. In addition, the
Company will continue to pay your medical insurance premiums for that
six month period and pay your automobile allowance specified in
Article 7.1 of Exhibit "A" hereto. (the "Severance Payments").
2.3 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i)
the falseness or material inaccuracy of any of your warranties or
representations herein; (ii) your willful failure or refusal to comply with
explicit directives of the Board of Directors or Executive Committee or to
render the
2
<PAGE>
services required herein; (iii) fraud or embezzlement involving assets of the
Company, its customers, suppliers or affiliates or other misappropriation of the
Company's assets or funds; (iv) your conviction of a criminal felony offense;
(v) the willful breach or habitual neglect of your obligations under this
Agreement or your duties as an employee of the Company; (vi) habitual use of
drugs.
2.4 If your employment is terminated because of your death all obligations
of the Company hereunder shall cease, except with respect to amounts and
obligations accrued to you through the thirtieth day after which your death has
occurred.
2.5 If your employment is terminated by the Company for any other reason,
or you resign, all obligations of the Company (except with respect to amounts
and obligations accrued to you prior to the date of termination, and obligations
under Section 2.2(d)) shall cease immediately.
2.6 Notwithstanding anything in this Agreement, the termination of your
employment shall not affect any other agreements between you and the Company,
unless in accordance with the terms of those agreements.
3. Compensation.
You shall receive the compensation and benefits set forth on Exhibit A
attached hereto ("Compensation") for all services to be rendered by you
hereunder and for your transfer of property rights, if any, pursuant to an
agreement relating to proprietary information and inventions of even date
herewith attached hereto as Exhibit C between you and the Company (the
"Proprietary Information and Inventions Agreement").
4. Other Activities During Employment.
4.1 Except for any outside directorships currently held by you as listed on
Exhibit B attached hereto, and except with the prior written consent of a
disinterested majority of the Company's Board of Directors, you will not, during
the term of this Agreement, undertake or engage in any other employment,
occupation or business enterprise other than one in which you are an inactive
investor.
4.2 You hereby agree that, except as disclosed on Exhibit B attached
hereto, during your employment hereunder, you will not, directly or indirectly,
engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an
employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a partner,
co-venturer, stockholder, or other proprietor owning
3
<PAGE>
directly or indirectly more than five percent (5%) interest in any firm,
corporation, partnership, trust, association, or other organization which is
engaged in the planning, research, development, production, manufacture,
marketing, sales, or distribution of athletic footwear, rugged outdoor footwear,
sportswear, licensed products, sporting goods, skis, snowboards, related
products, equipment, or services or any other line of business engaged in or
under demonstrable development by the Company or any of its subsidiaries,
whether off price or not whether now or at any time during the term of this
Agreement (such firm, corporation, partnership, trust, association, or other
organization being hereinafter referred to as a "Prohibited Enterprise"). Except
as may be shown on Exhibit B attached hereto, you hereby represent that you are
not engaged in any of the foregoing capacities (i) through (ix) in any
Prohibited Enterprise.
5. Former Employers.
5.1 You represent and warrant that your employment by the Company will not
conflict with and will not be constrained by any prior or current employment,
consulting agreement or relationship whether oral or written. You represent and
warrant that you do not possess confidential information arising out of any such
employment, consulting agreement or relationship which, in your best judgment,
would be utilized in connection with your employment by the Company in the
absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you should find
that confidential information belonging to any other person or entity might be
usable in connection with the Company's business, you will not intentionally
disclose to the Company or use on behalf of the Company any confidential
information belonging to any of your former employers; but during your
employment by the Company you will use in the performance of your duties all
information which is generally known and used by persons with training and
experience comparable to your own all information which is common knowledge in
the industry or otherwise legally in the public domain.
6. Proprietary Information and Inventions.
You agree to execute, deliver and be bound by the provisions of the
Proprietary Information and Inventions Agreement attached hereto as Exhibit C.
7. Post-Employment Activities.
7.1 For a period of three (3) years after the termination or expiration,
for any reason, of your employment with the
4
<PAGE>
Company hereunder, absent the Board of Directors' prior written approval, you
will not directly or indirectly engage in activities similar to those described
in Section 4.2, nor render services similar or reasonably related to those which
you shall have rendered hereunder to, any person or entity whether now existing
or hereafter established which directly or indirectly competes with (or proposes
or plans to compete with) the Company or its subsidiaries ("Direct Competitor").
Nor shall you entice, induce or encourage any of the Company's or its
subsidiaries other employees to engage in any activity which, were it done by
you, would violate any provision of the Proprietary Information and nor shall
you entice, induce or encourage any of the Company's or its subsidiaries other
employees to engage in any activity which, were it done by you, would violate
any provision of the Proprietary Information and Inventions Agreement or this
Section 7. As used in this Agreement, the term "any line of business engaged in
or under demonstrable development by the Company" shall be applied as at the
date of termination of your employment, or, if later, as at the date of
termination of any post-employment consultation.
7.2 For a period of three (3) years after the termination of your
employment with the Company, the provisions of Section 4.2 shall be applicable
to you and you shall comply therewith.
7.3 No provision of this Agreement shall be construed to preclude you from
performing the same services which the Company hereby retains you to perform for
any person or entity which is not a Direct Competitor of the Company upon the
expiration or termination of your employment (or any post-employment
consultation) so long as you do not thereby violate any term of this Agreement
or the Proprietary Information and Inventions Agreement. Additionally, no
provision of this agreement shall be construed to preclude you from practicing
in a professional capacity, as a Chartered Public Accountant, providing services
to members of the public generally.
7.4 You acknowledge that this employment agreement is being entered into in
connection with the purchase by the Company of stock owned directly or
indirectly by you and that such restrictions contained in Sections four and
seven of this Agreement are fair and reasonable under the circumstances and
necessary to protect the legitimate business interests of the Company.
8. Remedies.
Your obligations under the Proprietary Information and Inventions Agreement
and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement (as
modified by Section 14, if applicable) shall survive the expiration or
termination of your
5
<PAGE>
employment (whether through your resignation or otherwise) with the Company. You
acknowledge that a remedy at law for any reach or threatened breach by you of
the provisions of the Proprietary Information and Inventions Agreement or
Section 4 or 7 hereof would be inadequate and you therefore agree that the
Company shall be entitled to such injunctive relief in case of any such breach
or threatened breach.
9. Dispute Resolution.
Any dispute concerning this Agreement or any of the exhibits hereto
including, but not limited to, its existence, validity, interpretation,
performance or non-performance, arising before or after termination or
expiration of this Agreement, shall be settled by a non-jury trial in the Court
of Common Pleas of Montgomery County or the United States District Court for the
Eastern District of Pennsylvania. The parties hereto consent to such venue and
the exclusive jurisdiction of such courts and knowingly waive their right to a
trial by jury.
10. Assignment.
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of any successor or successors of the Company by
reorganization, merger or consolidation and any assignee of all or substantially
all of its business and properties, but, except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or benefits
hereunder may be assigned by the Company or by you, except by operation of law
or by a further written agreement by the parties hereto. Notwithstanding
anything contained herein to the contrary, the Company shall have the right to
assign this agreement to any of its subsidiaries with your consent.
11. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any one or more of the provisions contained in this Agreement is
or becomes or is deemed invalid, illegal or unenforceable or in case any shall
for any reason be held to be excessively broad as to duration, geographical
scope, activity or subject, such provision shall be
6
<PAGE>
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
12. Notices.
Any notice which the Company is required to or may desire to give you shall
be given by registered or certified mail, return receipt requested, addressed to
you at your address of record with the Company, or at such other place as you
may from time to time designate in writing. Any notice which you are required or
may desire to give to the Company hereunder shall be given by registered or
certified mail, return receipt requested, or by recognized overnight courier,
addressed to the Company at its principal office, or at such other office as the
Company may from time to time designate in writing with a copy to David S.
Mandel, Esquire, Astor Weiss Kaplan & Rosenblum, LLP, The Bellevue, 6th Floor,
200 South Broad Street, Philadelphia, Pennsylvania, 19102.
13. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any reach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
14. Complete Agreement; Amendments.
The foregoing, including Exhibits A, B and C attached hereto, is the entire
agreement of the parties with respect only to the subject matter hereof,
superseding any previous oral or written communications, representations,
understandings, or agreements with the Company or any officer or representative
thereof. This Agreement may be amended or modified or certain provisions waived
only by a written instrument signed by the parties hereto, upon authorization of
the Company's Board of Directors.
15. Headings.
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a
7
<PAGE>
part hereof nor to affect the meaning of this Agreement in any way.
16. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
17. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.
If you are in agreement with the foregoing, please sign your name below and
also at the bottom of the Proprietary Information and Inventions Agreement,
whereupon both Agreements shall become binding in accordance with their terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
--------------------------------
Name: Michael Rubin
Title: C.E.O.
Accepted and Agreed:
/s/ James Salter
- -----------------
James J. Salter
May 12, 1998 DATE
- -----------------
<PAGE>
EXHIBIT "A"
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
JAMES J. SALTER
CHIEF EXECUTIVE OFFICER - GEN-X HOLDINGS,
INC. AND OFF PRICE DIVISION OF KPR
SPORTS INTERNATIONAL,INC.
1. Term.
The term of this Agreement to which this Exhibit "A" is annexed and
incorporated shall be for four years, commencing May 12, 1998 ("Effective
Date"), unless renewed in accordance with Section 2.1 of the agreement or
terminated prior thereto in accordance with Section 2.2 or 2.3 of the
Agreement.
2. Compensation.
a. Base Salary. Your annual Base Salary shall be three hundred fifteen
thousand ($315,000.00) dollars. On each anniversary of this contract, the
base salary will increase by a minimum of five percent (5%) over the
previous year's base salary.
b. Bonus. The Company's board of directors shall award you an annual bonus
of one hundred thousand dollars ($100,000.00)in each of 1998 (reduced
proportionately for 1998 based upon the percentage of the year remaining as
of the Effective Date of this agreement) and 1999 if and only if the
following goals are satisfied:
1) 1998 Bonus - If a) the gross sales for KPR Sports International,
Inc.'s off price division for the entire year 1998 and the gross sales for
all of the Gen-X Holdings, Inc.'s subsidiaries for the period from the date
of this Agreement through December 31, 1998, exceed $74,000,000.00 and b)
the gross profit on such gross sales equals or exceeds $17,760,000.00 then
you shall be entitled to receive your 1998 bonus of a proportionate share
of $100,000.00 (reduced proportionately as described above), payable on or
before April 15, 1999;
2) 1999 Bonus. If a) the gross sales for KPR Sports International,
Inc.'s off price division for the entire year 1999 and the gross sales for
all of the Gen-X Holdings, Inc.'s subsidiaries for the exceed
A - 1
<PAGE>
$80,000,000.00 and b) the gross profit on such gross sales equals or
exceeds $19,200,000.00, then you shall be entitled to receive your 1999
bonus of $100,000.00, payable on or before April 15, 2000;
3) Bonuses in Subsequent Years. During the remainder of the term of
this Agreement, the Board of Directors shall determine the annual goals of
gross sales with gross profit margins that must be achieved in order for
you to earn a bonus in subsequent years.
4) Determination of "Gross Sales" and "Gross Profit" Margin. The
determination of gross sales and gross profit margin shall be made by the
Company's regularly retained certified public accountant whose decision
shall be binding upon all parties, final and not subject to any further
appeal.
c. All Base Salary shall be payable in accordance with the Company's
payroll policies.
3. Vacation.
You shall be paid for and be entitled to all legal and religious holidays,
and three (3) weeks paid vacation per annum commencing in the first year of
this Agreement. All vacation time shall be earned on a quarterly basis. You
shall arrange for vacations in advance at such time or times as shall be
mutually agreeable to you and the Company. You shall be entitled to carry
forward into the subsequent year up to one (1) week of unused vacation
time. You may not receive pay in lieu of vacation except in the event of
termination without Cause.
4. Insurance and Benefits.
You shall be eligible for participation in any health or other group
insurance plan which may be established by the Company or which the Company
is required to maintain by law. You shall also be entitled to participate
in any employee benefit program which the Company may establish for its key
employees or for its employees generally, including, but in no way limited
to, bonuses and stock purchase or option plans. The Company shall provide
comprehensive health insurance for you and your dependents as provided to
other similar executive employees of the Company.
5. Expenses
The Company shall reimburse you promptly for all reasonable and ordinary
business and out-of-pocket expenses incurred by
A - 2
<PAGE>
you in connection with the Company's business and in the scope of your
employment hereunder, as approved by the Company, including, without
limitation, reasonable and necessary travel, lodging, entertainment and
meals incurred by you during the term of this Agreement, provided the
expenses are incurred in furtherance of the Company's business and at the
request of the Company. You agree to keep and maintain records of the
aforesaid expenses as may be requested by the Company and to account to the
Company for the expenses prior to reimbursement.
In addition, the Company shall reimburse you for the cost of all gas,
repairs and insurance associated with the operation of your vehicle.
6. Stock Options
6.1 You will be granted five year options to purchase one hundred thousand
(100,000) shares of the Company's common stock at an exercise price equal
to the fair market value of the underlying common stock on the Effective
Date, of which twenty thousand (20,000) shares shall vest on each of the
first, second, third fourth, and fifth anniversary dates of this Agreement.
6.2 Should your employment be terminated a) for cause, b) your resignation
prior to the end of the term of this Agreement, c) your death or d) your
disability pursuant to Section 2.2(a) of your employment agreement you
shall retain your vested options and forfeit any unvested options. You may
exercise your vested options for a period of one year from the date of the
termination of your employment for cause or the date of your resignation,
as applicable.
7. Automobile Allowance
7.1 The Company shall reimburse you for the rental cost of your automobile,
up to one thousand five hundred ($1500.00) per month.
8. Place of Employment
8.1 Your office shall be at Gen-X Equipment, Inc.'s office in Toronto,
Canada; however, you will be required to spend a certain amount of time at
the company's corporate office in King of Prussia, Pennsylvania, not to
exceed five days per month.
A - 3
<PAGE>
A - 4
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
JAMES J. SALTER
NONE
B - 1
<PAGE>
EXHIBIT C
- --------------------------------------------------------------------------------
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
- --------------------------------------------------------------------------------
To: Global Sports, Inc.
555 South Henderson Road
King of Prussia, PA 19406
The undersigned, in consideration of and as a condition of my employment or
continued employment by you and/or by companies which you own, control, or are
affiliated with or their successors in business (collectively, the "Company"),
hereby agrees as follows:
1. Confidentiality.
I agree to keep confidential, except as the Company may otherwise consent
in writing, and, except for the Company's benefit, not to disclose or make any
use of at any time either during or subsequent to my employment, any Inventions
(as hereinafter defined), trade secrets and confidential information, knowledge,
data or other information of the Company relating to products, processes,
know-how, techniques, methods, designs, formulas, test data, customer lists,
business plans, marketing plans and strategies, pricing strategies, or other
subject matter pertaining to any business of the Company or any of its
affiliates, which I may produce, obtain, or otherwise acquire during the course
of my employment, except as herein provided. I further agree not to deliver,
reproduce or in any way allow any such trade secrets, confidential information,
knowledge, data or other information, or any documentation relating thereto, to
be delivered to or used by any third parties without specific direction or
consent of a duly authorized representative of the Company.
2. Conflicting Employment; Return of Confidential Material.
I agree that during my employment with the Company I will not engage in any
other employment, occupation, consulting or other activity relating to the
business in which the Company is now or may hereafter become engaged, or which
would otherwise conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever,
C - 1
<PAGE>
I agree to promptly surrender and deliver to the Company all records, materials,
equipment, drawings, computer disks, documents and data of which I may obtain or
produce during the course of my employment, and I will not take with me any
description containing or pertaining to any confidential information, knowledge
or data of the Company which I may produce or obtain during the course of my
employment.
3. Assignment of Inventions.
3.1 I hereby acknowledge and agree that the Company is the owner of all
Inventions. In order to protect the Company's rights to such Inventions, by
executing this Agreement I hereby irrevocably assign to the Company all my
right, title and interest in and to all Inventions to the Company.
3.2 For purposes of this Agreement, "Inventions" shall mean all
discoveries, processes, designs, methods, techniques, technologies, devices, or
improvements in any of the foregoing or other ideas, whether or not patentable
or copyrightable and whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) during the period of my employment with
the Company which relate in any manner to the actual or demonstrably anticipated
business, work, or research and development of the Company, or result from or
are suggested by any task assigned to me or any work performed by me for or on
behalf of the Company.
3.3 Any discovery, process, design, method, technique, technology, device,
or improvement in any of the foregoing or other ideas, whether or not patentable
or copyrightable and whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) which I develop entirely on my own time
not using any of the Company's equipment, supplies, facilities, or trade secret
information ("Personal Invention") is excluded from this Agreement provided such
Personal Invention (i) does not relate to the actual or demonstrably anticipated
business, research and development of the Company, and (ii) does not result,
directly or indirectly, from any work performed by me for or on behalf of the
Company.
4. Disclosure of Inventions.
I agree that in connection with any Invention, I will promptly disclose
such Invention to the Board of Directors or the Executive Committee of the
Company in order to permit the Company to enforce its property rights to such
Invention in accordance with this Agreement. My disclosure shall be received in
confidence by the Company.
C - 2
<PAGE>
5. Patents and Copyrights; Execution of Documents.
5.1 Upon request, I agree to assist the Company or its nominee (at its
expense) during and at any time subsequent to my employment in every reasonable
way to obtain for its own benefit patents and copyrights for Inventions in any
and all countries. Such patents and copyrights shall be and remain the sole and
exclusive property of the Company or its nominee. I agree to perform such lawful
acts as the Company deems to be necessary to allow it to exercise all right,
title and interest in and to such patents and copyrights.
5.2 In connection with this Agreement, I agree to execute, acknowledge and
deliver to the Company or its nominee upon request and at its expense all
documents, including assignments of title, patent or copyright applications,
assignments of such applications, assignments of patents or copyrights upon
issuance, as the Company may determine necessary or desirable to protect the
Company's or its nominee's interest in Inventions, and/or to use in obtaining
patents or copyrights in any and all countries and to vest title thereto in the
Company or its nominee to any of the foregoing.
6. Maintenance of Records.
I agree to keep and maintain adequate and current written records of all
Inventions made by me (in the form of notes, sketches, drawings and other
records as may be specified by the Company), which records shall be available to
and remain the sole property of the Company at all times.
7. Prior Inventions.
It is understood that all Personal Inventions, if any, whether patented or
unpatented, which I made prior to my employment by the Company, are excluded
from this Agreement. To preclude any possible uncertainty, I have set forth on
Schedule A attached hereto a complete list of all of my prior Personal
Inventions, including numbers of all patents and patent applications and a brief
description of all unpatented Personal Inventions which are not the property of
a previous employer. I represent and covenant that the list is complete and
that, if no items are on the list, I have no such prior Personal Inventions. I
agree to notify the Company in writing before I make any disclosure or perform
any work on behalf of the Company which appears to threaten or conflict with
proprietary rights I claim in any Personal Invention. In the event of my failure
to give such notice, I agree that I will make no claim against the Company with
respect to any such Personal Invention.
C - 3
<PAGE>
8. Other Obligations.
I acknowledge that the Company from time to time may have agreements with
other persons, companies, entities, the U.S. Government or agencies thereof,
which impose obligations or restrictions on the Company regarding inventions
made during the course of work thereunder or regarding the confidential nature
of such work. I agree to be bound by all such obligations and restrictions and
to take all action necessary to discharge the Company's obligations.
9. Remedies.
Your obligations under the Proprietary Information and Inventions Agreement
and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement (as
modified by Section 14, if applicable) shall survive the expiration or
termination of your employment (whether through your resignation or otherwise)
with the Company. You acknowledge that a remedy at law for any reach or
threatened breach by you of the provisions of the Proprietary Information and
Inventions Agreement or Section 4 or 7 hereof would be inadequate and you
therefore agree that the Company shall be entitled to such injunctive relief in
case of any such breach or threatened breach.
10. Trade Secrets of Others.
I represent that my performance of all the terms of this Agreement and as
an employee of the Company does not and will not breach any agreement to keep
confidential proprietary information, knowledge or data acquired by me in
confidence or in trust prior to my employment with the Company, and I will not
disclose to the Company, or induce the Company to use, any confidential or
proprietary information or material belonging to any previous employer or
others. I agree not to enter into any agreement either written or oral in
conflict herewith.
11. Modification.
I agree that any subsequent change or changes in my employment duties,
salary or compensation or, if applicable, in any Employment Agreement between
the Company and me, shall not affect the validity or scope of this Agreement.
12. Binding Effect.
This Agreement shall be binding upon and inure to the
C - 4
<PAGE>
benefit of the parties hereto and their respective legal representatives and
successors.
13. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any provision of this Agreement is or becomes or is deemed
invalid, illegal or unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
14. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any breach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
15. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the parties and
supersedes any prior oral or written communications, representations,
understandings or agreements concerning the subject matter hereof with the
Company or any officer or representative thereof. This Agreement may be amended,
modified, or certain provisions waived only by a written instrument signed by
the parties hereto, upon authorization of the Company's Board of Directors.
16. Headings.
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a
C - 5
<PAGE>
part hereof nor to affect the meaning of this Agreement in any way.
17. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
18. Governing Law.
This Agreement shall be governed and construed in accordance with the laws
of the Commonwealth of Pennsylvania.
19. Notices.
All notices, requests, demands and communications which are or may be
required to be given hereunder shall be deemed given if and when sent by
registered or certified mail, return receipt requested, postage prepaid, to the
following addresses:
If to the Company: GLOBAL SPORTS, INC.
555 South Henderson Road
King of Prussia, PA 19406
Attention: President
With a copy to:
David S. Mandel, Esquire
Astor Weiss Kaplan & Rosenblum, LLP
The Bellevue
200 South Broad Street
6th Floor
Philadelphia, Pennsylvania, 19102
If to Employee: JAMES J. SALTER
277 Glencairn Avenue
Toronto, Ontario, M5N1T8
EMPLOYEE:
May 12, 1998 /s/ James J. Salter
- ------------------------------- -------------------------------------
DATE JAMES J. SALTER
Accepted and Agreed:
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin May 12, 1998
- ------------------------------- -------------------------------------
Name: Michael Rubin Date
Title: C.E.O.
C - 6
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
JAMES J. SALTER
Identifying Number or
Title Date Brief Description
- ----- ---- -----------------
NONE
C - 7
<PAGE>
C - 8
<PAGE>
EXHIBIT 10.17
KEY EMPLOYEE AGREEMENT
To: Arthur Carver
29 Magnolia Road
Sharon, Mass., 02067
The undersigned, Global Sports, Inc., a Delaware corporation (the
"Company"), with its principal place of business located at 555 S. Henderson
Road, King of Prussia, Pennsylvania 19406, hereby agrees with you as follows:
1. Position and Responsibilities.
1.1 You shall serve as Executive Vice President (or in such other executive
capacity as shall be designated by the Board of Directors or Executive Committee
of the Company and reasonably acceptable to you) and shall perform the duties
customarily associated with such capacity from time to time. In such capacity,
you will have direct responsibility for the sourcing, development, and
production of branded footwear merchandise produced under any trademarks owned
or licensed to the Company or any of its subsidiaries, as well as direct
responsibility for the Company's and its subsidiaries' distribution, operations
and customer service relating to branded footwear manufactured or licensed by
the Company or any of its subsidiaries.
1.2 You will devote your full time and your best efforts to the performance
of your duties hereunder and the business and affairs of the Company. You agree
to perform such executive duties as may be assigned to you by or on authority of
the Company's Board of Directors or Executive Committee from time to time. You
will report directly to the Company's Chief Executive Officer.
1.3 You will duly, punctually, and faithfully perform and observe any and
all rules and regulations which the Company may
<PAGE>
or shall hereafter reasonably establish governing your conduct as an employee
and the conduct of its business.
2. Term of Employment.
2.1 The initial term of this Agreement shall be for the period of years set
forth on Exhibit A annexed hereto commencing with the date hereof. Thereafter,
this Agreement shall be automatically renewed for successive periods of one (1)
year, unless you or the Company shall give the other party not less than three
(3) months prior written notice of non-renewal. Your employment with the Company
may be terminated as provided in Sections 2.2 or 2.3.
2.2 The Company shall have the right to terminate your employment at any
time under this Agreement prior to the stated term in any of the following ways:
(a) on thirty (30) days prior written notice to you upon your disability
(disability shall be defined as your inability to perform duties under
this Agreement for an aggregate of ninety (90) days out of any one
hundred eighty (180) day period due to mental or physical disability);
(b) immediately without prior notice to you by the Company for "Cause", as
hereinafter defined;
(c) immediately without prior notice to you, upon your death or in the
event of the liquidation or reorganization of the Company under the
federal Bankruptcy Code or any state insolvency or bankruptcy law;
(d) at any time, without Cause, through December 31, 1999, provided the
Company shall be obligated to continue to pay you as severance pay for
six months after the effective date of your termination, a monthly
amount equal to your monthly Base Salary (the "Severance Payments").
For each year of employment after December 31, 1999, you shall be
entitled to an additional month of Severance Payments.
2.3 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i)
the falseness or material inaccuracy of any of your warranties or
representations herein; (ii) your willful failure or refusal to comply with
explicit directives of the Board of Directors or Executive Committee or to
render the
2
<PAGE>
services required herein; (iii) fraud or embezzlement involving assets of the
Company, its customers, suppliers or affiliates or other misappropriation of the
Company's assets or funds; (iv) your conviction of a criminal felony offense;
(v) the willful breach or habitual neglect of your obligations under this
Agreement or your duties as an employee of the Company; (vi) habitual use of
drugs. The existence of Cause for termination of your employment by the Company
shall be subject, upon the written election by you or the Company, to binding
arbitration as provided in Section 9 hereof. The cost of arbitration, exclusive
of the cost of each party's legal representation (which, except as hereinafter
otherwise provided, shall be borne by the party incurring the expense), shall be
borne by the instigating party; provided, however, that the arbitrators' award
may require either party to reimburse the other for the reasonable cost of legal
representation in the arbitration proceedings.
Further, any dispute, controversy, or claim arising out of, in connection
with, or in relation to this definition of "Cause" shall be settled by
arbitration as provided in Section 9 hereof. Any award or determination shall be
final, binding, and conclusive upon the parties, and a judgment rendered may be
entered in any court having jurisdiction thereof.
2.4 If your employment is terminated because of your death, all obligations
of the Company hereunder shall cease, except with respect to amounts and
obligations accrued to you through the thirtieth day after which your death has
occurred.
If your employment is terminated by the Company for any other reason, all
obligations of the Company (except with respect to amounts and obligations
accrued to you prior to the date of termination) shall cease.
3. Compensation.
You shall receive the compensation and benefits set forth on Exhibit "A"
attached hereto ("Compensation") for all services to be rendered by you
hereunder and for your transfer of property rights, if any, pursuant to an
agreement relating to proprietary information and inventions of even date
herewith attached hereto as Exhibit "C" between you and the Company (the
"Proprietary Information Agreement").
4. Other Activities During Employment.
4.1 Except for any outside directorships currently held by you as listed on
Exhibit "B" attached hereto, and except with the prior written consent of a
disinterested majority of the Company's Board of Directors, which consent will
not be unreasonably withheld, you will not, during the term of this Agreement,
undertake or engage in any other employment,
3
<PAGE>
occupation or business enterprise other than one in which you are an inactive
investor.
4.2 You hereby agree that, except as disclosed on Exhibit "B" attached
hereto, during your employment hereunder, you will not, directly or indirectly,
engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an
employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a partner,
co-venturer, stockholder, or other proprietor owning directly or indirectly more
than five percent (5%) interest in any firm, corporation, partnership, trust,
association, or other organization which is engaged in the planning, research,
development, production, manufacture, marketing, sales, or distribution of
athletic footwear, rugged outdoor footwear, sportswear, licensed products,
related products, equipment, or services or any other line of business engaged
in or under demonstrable development by the Company (such firm, corporation,
partnership, trust, association, or other organization being hereinafter
referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit "B"
attached hereto, you hereby represent that you are not engaged in any of the
foregoing capacities (i) through (ix) in any Prohibited Enterprise.
5. Former Employers.
5.1 You represent and warrant that your employment by the Company will not
conflict with and will not be constrained by any prior or current employment,
consulting agreement or relationship whether oral or written. You represent and
warrant that you do not possess confidential information arising out of any such
employment, consulting agreement or relationship which, in your best judgment,
would be utilized in connection with your employment by the Company in the
absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you should find
that confidential information belonging to any other person or entity might be
usable in connection with the Company's business, you will not intentionally
disclose to the Company or use on behalf of the Company any confidential
information belonging to any of your former employers; but during your
employment by the Company you will use in the performance of your duties all
information which is generally known and used by persons with training and
experience comparable to your own all information which is common knowledge in
the industry or otherwise legally in the public domain.
6. Proprietary Information.
You agree to execute, deliver and be bound by the provisions of the
Proprietary Information Agreement attached hereto as Exhibit "C".
4
<PAGE>
7. Post-Employment Activities.
7.1 For a period of six (6) months after the termination or expiration, for
any reason, of your employment with the Company hereunder, absent the Board of
Directors' prior written approval, you will not directly or indirectly engage in
activities similar to those described in Section 4.2, nor render services
similar or reasonably related to those which you shall have rendered hereunder
to, any person or entity whether now existing or hereafter established which
directly or indirectly competes with (or proposes or plans to compete with) the
Company ("Direct Competitor") in the sale of athletic footwear, rugged outdoor
footwear, sportswear, licensed products, and related products and services,
whether with respect to merchandise manufactured by the Company for resale or
purchased by the Company as "closeout" merchandise for resale. Nor shall you
entice, induce or encourage any of the Company's other employees to engage in
any activity which, were it done by you, would violate any provision of the
Proprietary Information Agreement and nor shall you entice, induce or encourage
any of the Company's other employees to engage in any activity which, were it
done by you, would violate any provision of the Proprietary Information
Agreement or this Section 7. As used in this Agreement, the term "any line of
business engaged in or under demonstrable development by the Company" shall be
applied as at the date of termination of your employment, or, if later, as at
the date of termination of any post-employment consultation.
7.2 For a period of six (6) months after the termination of your employment
with the Company, the provisions of Section 4.2 shall be applicable to you and
you shall comply therewith.
7.3 No provision of this Agreement shall be construed to preclude you from
performing the same services which the Company hereby retains you to perform for
any person or entity which is not a Direct Competitor of the Company upon the
expiration or termination of your employment (or any post-employment
consultation) so long as you do not thereby violate any term of this Agreement
or the Proprietary Information Agreement.
8. Remedies.
Your obligations under the Proprietary Information Agreement and the
provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement shall survive the
expiration or termination of your employment (whether through your resignation
or otherwise) with the Company. You acknowledge that a remedy at law for any
reach or threatened breach by you of the provisions of the Proprietary
5
<PAGE>
Information Agreement or Section 4 or 7 hereof would be inadequate and you
therefore agree that the Company shall be entitled to such injunctive relief in
case of any such breach or threatened breach.
9. Arbitration.
Any dispute concerning this Agreement including, but not limited to, its
existence, validity, interpretation, performance or non-performance, arising
before or after termination or expiration of this Agreement, shall be settled by
a single arbitrator in Philadelphia, Pennsylvania, in accordance with the
expedited procedures of the commercial rules then in effect of the American
Arbitration Association. Judgment upon any award may be entered in the highest
court, state or federal, having jurisdiction. The cost of such arbitration shall
be borne equally between the parties thereto unless otherwise determined by such
arbitration panel.
10. Assignment.
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of any successor or successors of the Company by
reorganization, merger or consolidation and any assignee of all or substantially
all of its business and properties, but, except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or benefits
hereunder may be assigned by the Company or by you, except by operation of law
or by a further written agreement by the parties hereto.
11. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any one or more of the provisions contained in this Agreement is
or becomes or is deemed invalid, illegal or unenforceable or in case any shall
for any reason be held to be excessively broad as to duration, geographical
scope, activity or subject, such provision shall be construed by amending,
limiting and/or reducing it to conform to applicable laws so as to be valid and
enforceable or, if it cannot be so amended without materially altering the
intention of the parties, it shall be stricken and the remainder of this
Agreement shall remain in full force and effect.
6
<PAGE>
12. Notices.
Any notice which the Company is required to or may desire to give you shall
be given by registered or certified mail, return receipt requested, addressed to
you at your address of record with the Company, or at such other place as you
may from time to time designate in writing. Any notice which you are required or
may desire to give to the Company hereunder shall be given by registered or
certified mail, return receipt requested, addressed to the Company at its
principal office, or at such other office as the Company may from time to time
designate in writing with a copy to David S. Mandel, Esquire, Astor Weiss Kaplan
& Rosenblum, The Bellevue, Sixth Floor, 200 South Broad Street, Philadelphia,
Pennsylvania 19102.
13. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any reach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
14. Complete Agreement; Amendments.
The foregoing, including Exhibits "A", "B", "C" and "D" attached hereto, is
the entire agreement of the parties with respect to the subject matter hereof,
superseding any previous oral or written communications, representations,
understandings, or agreements with the Company or any officer or representative
thereof. This Agreement may be amended or modified or certain provisions waived
only by a written instrument signed by the parties hereto, upon authorization of
the Company's Board of Directors.
15. Headings.
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a part hereof nor to affect the meaning of this
Agreement in any way.
16. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
7
<PAGE>
17. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.
If you are in agreement with the foregoing, please sign your name below and also
at the bottom of the Proprietary Information Agreement, whereupon both
Agreements shall become binding in accordance with their terms. Please then
return this Agreement to the Company. (You may retain for your records the
accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
--------------------------------
Michael Rubin
Accepted and Agreed:
/s/ Arthur Carver
- -----------------------
Arthur Carver
January 1, 1999 - DATE
8
<PAGE>
EXHIBIT "A"
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
ARTHUR CARVER, EXECUTIVE VICE PRESIDENT
1. Term.
The term of this Agreement to which this Exhibit "A" is annexed and
incorporated shall commence on January 4, 1999 and terminate on December 31,
2003, unless renewed in accordance with Section 2.1 of the agreement or
terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement.
2. Compensation.
a. Base Salary. During the term of this Agreement you will be paid an
annual Base Salary based upon the following schedule:
<TABLE>
<CAPTION>
PERIOD ANNUAL BASE SALARY
------ ------------------
Execution of Agreement through
<S> <C>
December 31, 1999 $200,000.00*
January 1, 2000 through
December 31, 2000 $250,000.00
January 1, 2001 through
December 31, 2001 $250,000.00
January 1, 2002 through
December 31, 2002 $250,000.00
January 1, 2003 through
December 31, 2003 $250,000.00
</TABLE>
b. Bonuses.
1) Execution Bonus- In consideration for your entering into this
agreement and commencing work hereunder, the Company shall pay
you a bonus during 1999 of fifty thousand dollars ($50,000.00).
This bonus shall be earned upon your commencement of employment
hereunder and shall be paid to you bi-weekly in equal
installments in 1999.
A - 1
<PAGE>
2) Additional Bonus- Commencing with the Company's performance in
the year 2000, and continuing through the remaining term of this
Agreement, you will have an opportunity to earn bonuses through
each of the following programs:
a) Up to 15% of your Base Salary through the Company achieving
predetermined goals; and
b) up to an additional 15% of your Base Salary through you,
individually, achieving predetermined mutually agreed upon
objective goals.
Both the Company goals and your personal goals will be established by the
Company's Compensation Committee three months prior to the commencement of the
applicable bonus period.
3) Bonus Based Upon Acquisition - If the Company in 1999 acquires an
existing business which adds at least $50,000,000.00 to the
Company's 1999 annual revenues, you will have an opportunity to
earn an additional bonus based upon achievement of the following
objectives:
a) Up to 15% of your 1999 Base Salary & Executive bonus total
based upon (1) the Company meeting or exceeding its internal
finalized business plan for the year, and (2) meeting or
exceeding analysts' consensus quarterly and annual estimates
for the Company's 1999 sales and net profits; and
b) Up to 15% of your 1999 Base Salary & Executive bonus total
based upon personal objectives for you as determined by the
Company's chief executive officer predicated on the creation
and functionality of the total product development, sourcing
and production area as well as all other contributions to
the Company and its senior management. Such additional
objectives will be established by the Company's chief
A - 2
<PAGE>
executive officer within thirty days after completion of
such an acquisition.
All determinations as to meeting objective standards for bonuses shall be
made solely by the Company's regularly retained certified public accountants
whose determinations shall be final, binding upon all parties and not subject to
any appeal.
c. All Base Salary shall be payable in accordance with the Company's
payroll policies provided that upon execution of this Agreement.
3. Vacation.
You shall be paid for and be entitled to all legal and religious holidays,
and two (2) weeks paid vacation per annum commencing in the first year of this
Agreement; provided however, you shall not take two weeks vacation
consecutively. All vacation time shall be earned on a quarterly basis. You shall
arrange for vacations in advance at such time or times as shall be mutually
agreeable to you and the Company. You shall be entitled to carry forward into
the subsequent year up to one (1) week of unused vacation time. You may not
receive pay in lieu of vacation.
4. Insurance and Benefits.
The Company, at its expense, shall provide you with the following benefits
in the same amounts and manner as provided to the members of the Company's
senior management:
- health insurance for you and your dependents
- long term disability insurance
- term life insurance
- participation in the Company's 401K Plan
In addition, the Company shall provide you with the following other
benefits at the Company's expense:
- $1000.00 monthly automobile allowance which includes your
automobile insurance and maintenance/repair expenses
- cell phone and cell phone account
- standard health club membership
- travel to the Far East in business class
- memberships, publications and conferences directly related to
your expertise
A - 3
<PAGE>
5. Expenses
The Company shall reimburse you promptly for all reasonable and ordinary
business and out-of-pocket expenses incurred by you in connection with the
Company's business and in the scope of your employment hereunder, as approved by
the Company, including, without limitation, reasonable and necessary travel,
lodging, entertainment and meals incurred by you during the term of this
Agreement, provided the expenses are incurred in furtherance of the Company's
business and at the request of the Company. You agree to keep and maintain
records of the aforesaid expenses as may be requested by the Company and to
account to the Company for the expenses prior to reimbursement.
6. Stock Options and Stock Awards
Pursuant to the terms of the Company's 1996 Equity Incentive Plan ("Plan"),
you will be granted the following awards:
6.1 You will be granted five year options (such options are intended to be
"incentive stock options" as defined in Section 422 of the Internal Revenue Code
of 1986, as amended) to purchase eighty thousand (80,000) shares of the
Company's common stock at an exercise price equal to the fair market value of
the underlying common stock on the date of the commencement of your employment,
of which sixteen thousand (16,000) shares shall vest on each of December 31,
1999, December 31, 2000, December 31, 2001, December 31, 2002 and December 31,
2003.
6.2 Simultaneous herewith, the Company shall issue to you a Restricted
Stock Award to purchase ten thousand (10,000) shares of the Company's common
stock at a price of one cent per share ($.01). Such stock shall be issued
pursuant to Rule 144 and may only be sold or transferred by you in accordance
therewith and in no event prior to two years from the date hereof. In addition,
should your employment be terminated, voluntarily prior to January 4, 2001, then
you shall resell the stock to the Company at the price paid by you therefor.
6.3 Simultaneous herewith, the Company also grants to you a Deferred Stock
Award to purchase an additional ten thousand (10,000) shares of the Company's
common stock, at a price of $3.58 per share for a period of thirty days after
the complete execution of this Agreement by both parties. Such stock shall also
be subject to Rule 144 and may only be sold or transferred in accordance
therewith. If you shall exercise this option, such stock shall not be subject to
any repurchase rights by the Company.
The complete terms and conditions of these Awards shall be set forth in an
Option Grant Letter ("Option Grant Letter") to be
A - 4
<PAGE>
delivered to you simultaneous herewith. Any conflict between the terms of the
Option Grant Letter and this Agreement, shall be governed by the Option Grant
Letter.
In the event of the termination of your employment caused by your resignation,
your dismissal for cause or without cause, your disability or your death, or in
the event of a change in control as defined in Section 6.3 (b) of the Plan, your
rights in the options, Restricted Stock Award and Deferred Stock Award shall be
as set forth in Article 6 of the Plan.
7. Relocation and Interim Housing Allowance
You agree to establish your residency in the metropolitan Philadelphia,
Pennsylvania area within six months of the date hereof. Upon presentation of
acceptable proof of payment, the Company will reimburse you for the following
costs associated with your relocation, not to exceed $60,000.00 ("Relocation
Allowance"):
a) interim housing; and
b) commission on the sale of your present home in
Massachusetts; and
c) moving expenses; and
d) interim personal travel to and from Massachusetts, including
your wife's travel to look for housing;and
e) transfer tax on the sale of your present home and
acquisition of your new home.
If you are required by the Internal Revenue Code to report any portion of the
Relocation Allocation as income, the Company will, prior to the date on which
any such tax must be paid or withheld, make an additional lump-sum payment (the
"gross-up payment") to you. The gross-up payment will be sufficient, after
giving effect to all federal, state and other taxes and charges (including
interest and penalties, if any) due as a result of the gross-up payment, to make
Employee whole for all taxes (including withholding taxes) and any associated
interest and penalties imposed.
8. Change of Control Agreement
Simultaneous herewith, the parties shall enter into the Change of Control
Agreement in the form attached hereto as Exhibit "D".
(THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK)
A - 5
<PAGE>
EXHIBIT"B"
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
ARTHUR CARVER
B - 1
<PAGE>
EXHIBIT "C"
- --------------------------------------------------------------------------------
PROPRIETARY INFORMATION AGREEMENT
- --------------------------------------------------------------------------------
To: Global Sports, Inc.
555 South Henderson Road
King of Prussia, PA 19406
The undersigned, in consideration of and as a condition of my employment or
continued employment by you and/or by companies which you own, control, or are
affiliated with or their successors in business (collectively, the "Company"),
hereby agrees as follows:
1. Confidentiality.
I agree to keep confidential, except as the Company may otherwise consent
in writing, and, except for the Company's benefit, not to disclose or make any
use of at any time either during or subsequent to my employment, trade secrets
and confidential information, knowledge, data or other information of the
Company relating to products, processes, know-how, techniques, methods, designs,
formulas, test data, customer lists, business plans, marketing plans and
strategies, pricing strategies, or other subject matter pertaining to any
business of the Company or any of its affiliates, which I may produce, obtain,
or otherwise acquire during the course of my employment, except as herein
provided. I further agree not to deliver, reproduce or in any way allow any such
trade secrets, confidential information, knowledge, data or other information,
or any documentation relating thereto, to be delivered to or used by any third
parties without specific direction or consent of a duly authorized
representative of the Company.
2. Conflicting Employment; Return of Confidential Material.
I agree that during my employment with the Company I will not engage in any
other employment, occupation, consulting or other activity relating to the
business in which the Company is now or may hereafter become engaged, or which
would otherwise conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever, I agree to
promptly surrender and deliver to the Company all records, materials, equipment,
drawings, computer disks,
C - 1
<PAGE>
documents and data of which I may obtain or produce during the course of my
employment, and I will not take with me any description containing or pertaining
to any confidential information, knowledge or data of the Company which I may
produce or obtain during the course of my employment.
3. Trade Secrets of Others.
I represent that my performance of all the terms of this Agreement and as
an employee of the Company does not and will not breach any agreement to keep
confidential proprietary information, knowledge or data acquired by me in
confidence or in trust prior to my employment with the Company, and I will not
disclose to the Company, or induce the Company to use, any confidential or
proprietary information or material belonging to any previous employer or
others. I agree not to enter into any agreement either written or oral in
conflict herewith.
4. Modification.
I agree that any subsequent change or changes in my employment duties,
salary or compensation or, if applicable, in any Employment Agreement between
the Company and me, shall not affect the validity or scope of this Agreement.
5. Arbitration.
Any dispute concerning this Agreement including, but not limited to, its
existence, validity, interpretation, performance or non-performance, arising
before or after termination or expiration of this Agreement, shall be settled by
a single arbitrator in Philadelphia, Pennsylvania, in accordance with the
expedited procedures of the commercial rules then in effect of the American
Arbitration Association. Judgment upon any award may be entered in the highest
court, state or federal, having jurisdiction. The cost of such arbitration shall
be borne equally between the parties thereto unless otherwise determined by such
arbitration panel.
6. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives and successors.
C - 2
<PAGE>
7. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any provision of this Agreement is or becomes or is deemed
invalid, illegal or unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
8. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any breach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
9. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the parties and
supersedes any prior oral or written communications, representations,
understandings or agreements concerning the subject matter hereof with the
Company or any officer or representative thereof. This Agreement may be amended,
modified, or certain provisions waived only by a written instrument signed by
the parties hereto, upon authorization of the Company's Board of Directors.
10. Headings.
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a part hereof nor to affect the meaning of this
Agreement in any way.
C - 3
<PAGE>
11. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
12. Governing Law.
This Agreement shall be governed and construed in accordance with the laws
of the Commonwealth of Pennsylvania.
13. Notices.
All notices, requests, demands and communications which are or may be
required to be given hereunder shall be deemed given if and when sent by
registered or certified mail, return receipt requested, postage prepaid, to the
following addresses:
If to the Company: GLOBAL SPORTS, INC.
555 South Henderson Road
King of Prussia, PA 19406
Attention: President
With a copy to: David S. Mandel, Esquire
Astor Weiss Kaplan & Rosenblum
The Bellevue, Sixth Floor
200 South Broad Street
Philadelphia, PA 19102
If to Employee: Arthur Carver
29 Magnolia Road
Sharon, Mass.,02067
EMPLOYEE:
January 1, 1999 /s/ Arthur Carver
- ----------------------- ------------------------------
DATE Arthur Carver
Accepted and Agreed:
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin 1/9/99
------------------------------ -----------------------
Michael Rubin DATE
C - 4
<PAGE>
EXHIBIT"D"
CHANGE OF CONTROL AGREEMENT
AGREEMENT, made this 1st day of January, 1999, by and between Arthur Carver
("Executive") and Global Sports, Inc. (the "Company").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders for the
Company to agree to provide benefits under circumstances described below to
Executive; and
WHEREAS, the Board recognizes that the possibility of a change of control
of the Company, followed by a termination of the Executive's employment or a
reduction in his responsibility or compensation, is unsettling to the Executive
and wishes to make arrangements at this time to help assure his continuing
dedication to his duties to the Company and its shareholders notwithstanding any
attempts by outside parties to gain control of the Company; and
WHEREAS, the Board believes it important, should the Company receive
proposals from outside parties, to enable the Executive, without being
distracted by the uncertainties of his own employment situation, to perform his
regular duties.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
1. In the event that any individual, corporation, partnership, company, or
other entity (a "Person"), which term shall include a "group" (within the
meaning of section 13(d) of the Securities Exchange Act of 1934 (the
"Act")), begins a tender or exchange offer, circulates a proxy to the
Company's shareholders, or takes other steps to effect a "Change of
Control" (as defined in paragraph 3 below), Executive agrees that he will
not voluntarily leave the employ of the Company and will render the
services contemplated in the recitals to this Agreement until such Person
has terminated the efforts to effect a Change of Control or until a Change
of Control has occurred.
2. If, within twenty-four (24) months following a Change of Control,
Executive's employment with the Company terminates
D - 1
<PAGE>
other than as a result of the death, total disability or retirement of the
Executive at or after his normal retirement date, (i) by the Company other
than the "Cause" (as defined in paragraph 4 below), or (ii) by Executive
for "Good Reason" (as defined in paragraph 4 below), then:
a. The Company will pay to Executive within thirty (30) days of such
termination of employment a lump-sum cash payment equal to 300% of the
aggregate of (i) his then-current annual base salary (or, if his base
salary has been reduced at any time after the Change of Control, his
base salary in effect prior to the reduction), (ii) his target bonus
for the then-current year or, if higher, his bonus for the most recent
calendar year ended before the Change of Control, (iii) the amount of
his then-current annual automobile allowance and (iv) the annual cost
of life insurance then furnished to him by the Company.
b. All of Executive's outstanding stock options, restricted shares and
other similar incentive interests and rights will become immediately
and fully vested and exercisable.
c. Executive will be treated for purposes of the Company's Supplemental
Executive Retirement Plan (the "SERP"), but only if a SERP should
exist at the time of the termination of the Executive's employment, as
having three additional Years of Continuous Service. The Company will,
within thirty (30) days of his termination, pay to him, in a single
lump-sum cash payment, the present value of his benefit under the
SERP. Present value will be determined by applying the "applicable
mortality table" and "applicable interest rate" then in effect for
purposes of section 417(e)(3)(A) of the Internal Revenue Code or any
successor provision.
d. If, at the time of the termination of the Company's employment, the
Company then has in existence a Profit-Sharing and Retirement Plan and
an Excess Benefits Plan, the Company will pay to Executive, in a
single lump-sum cash payment, an amount equal to the difference, if
any, between (i) the total distribution that he receives following his
termination under the Company's Profit-Sharing and Retirement Plan and
its Excess Benefits Plan and (ii) the total distribution that he would
have received under such plans had he accumulated three (3) additional
Years of Service for Vesting prior to termination. The payment will be
made at the same time that he receives his distribution from those
plans.
D - 2
<PAGE>
e. Executive, together with his dependents, will continue following such
termination of employment to participate fully, with no contribution
to the cost required of him or them, in all accident and health plans
maintained or sponsored by the Company immediately prior to the Change
of Control, or receive substantially the equivalent coverage (or the
full value thereof in cash) from the Company, until the third
anniversary of such termination.
f. The Company will promptly reimburse Executive for any and all legal
fees and expenses incurred by him as a result of such termination of
employment, including without limitation, all fees and expenses
incurred in connection with efforts to enforce the provisions of this
Agreement (provided such efforts result in Executive's recovery of any
sum from the Company, whether through court award or settlement).
3. A Change of Control will occur for purposes of this Agreement if (i) any
Person who does not currently own directly or indirectly ten (10%) percent
or more of the combined voting power of the Company's outstanding
securities becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Act) of securities of the Company representing more than thirty (30%)
percent (or, if higher, the aggregate percentage of the combined voting
power of the Company's then-outstanding securities held by or for the
benefit of Michael Rubin and his family) of the combined voting power of
the Company's then-outstanding securities, (ii) there is a change of
control of the Company of a kind which would be required to be reported
under Item 6(e) of Schedule 14 of Regulation 14 promulgated under the Act
(or a similar item in a similar schedule or form), whether or not the
Company is then subject to such reporting requirement, (iii) the Company is
a party to a merger, consolidation, sale of assets or other reorganization,
or a proxy contest, as a consequence of which members of the Board in
office immediately prior to such transaction or event constitute less than
a majority of the Board thereafter, or (iv) individuals who, at the date
hereof, constitute the Board (the "Continuing Directors") cease for any
reason to constitute a majority thereof, provided, however, that any
director who is not in office at the date hereof but whose election by the
Board or whose nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the date hereof or whose election or
nomination for election was previously so approved shall be deemed to be a
Continuing Director for purposes of this Agreement.
D - 3
<PAGE>
Notwithstanding the foregoing provisions of this paragraph 3, a "Change of
Control" will not be deemed to have occurred solely because of (i) the
acquisition of securities of the Company (or any reporting requirement
under the Act relating thereto) by an employment benefit plan maintained by
the Company for its employees or (ii) the occurrence of a leveraged buy-out
or recapitalization of the Company in which Executive participates as an
equity investor.
4. a. "Cause" means only: conviction of the Executive for a felony or a
crime involving moral turpitude.
b. "Good Reason" means any one or more of the following:
i. Failure by the Company to maintain Executive in the
positions, with the titles, that he held immediately prior
or the Change of Control or downgrading of his
responsibilities or authority. If, following the Change of
Control, the Company is part of a controlled group of
entities, Executive's responsibilities and authority will be
deemed for this purpose to have been reduced unless he is
given and retains the same responsibilities and authority
with the entity that controls the group as he held with the
Company immediately prior to the Change of Control.
ii. Reduction of Executive's base salary or failure in any year
to pay to him a bonus at least equal to his target bonus for
the year in which the Change of Control occurs.
iii. Material reduction in the health, disability or life
insurance benefits that the Company was providing Executive
immediately prior to the Change of Control.
iv. Failure by the Company to provide Executive with the
opportunity to participate in any executive compensation or
benefit plan or program that is then generally available to
other senior executives of the Company.
v. Relocation of Executive's principal place of business more
than 30 miles from its location immediately prior to the
Change of Control.
5. In the event that it is determined that any payment or benefit provided by
the Company to or for the benefit of
D - 4
<PAGE>
Executive, either under this Agreement or otherwise, will be subject to the
excise tax imposed by section 4999 of the Internal Revenue Code or any
successor provision ("Section 4999"), the Company will, prior to the date
on which any amount of the excise tax must be paid or withheld, make an
additional lump-sum payment (the "gross-up payment") to Executive. The
gross-up payment will be sufficient, after giving effect to all federal,
state and other taxes and charges (including interest and penalties, if
any) with respect to the gross-up payment, to make Executive whole for all
taxes (including withholding taxes) and any associated interest and
penalties, imposed under or as a result of Section 4999.
Determinations under this Section 5 will be made by the Company's auditors
unless Executive has reasonable objections to the use of that firm, in
which case the determinations will be made by a comparable firm chosen by
Executive after consultation with the Company (the firm making the
determinations to be referred to as the "Firm"). The determinations of the
Firm will be binding upon the Company and Executive except as the
determinations are established in resolution (including by settlement) of a
controversy with the Internal Revenue Service to have been incorrect. All
fees and expenses of the Firm will be paid by the Company.
If the Internal Revenue Service asserts a claim that, if successful, would
require the Company to make a gross-up payment or an additional gross-up
payment, the Company and Executive will cooperate fully in resolving the
controversy with the Internal Revenue Service. The Company will make or
advance such gross-up payments as are necessary to prevent Executive from
having to bear the cost of payments made to the Internal Revenue Service in
the course of, or as a result of, the controversy. The Firm will determine
the amount of such gross-up payments or advances and will determine after
final resolution of the controversy whether any advances must be returned
by Executive to the Company. The Company will bear all expenses of the
controversy and will gross Executive up for any additional taxes that may
be imposed upon Executive as a result of its payment of such expenses.
6. If the Company is at any time before or after a Change of Control merged or
consolidated into or with any other corporation or other entity (whether or
not the Company is the surviving entity), or if substantially all of the
assets thereof are transferred to another corporation or other entity, the
provisions of this Agreement will be binding upon and inure to the benefit
of the corporation or other entity resulting from such merger or
consolidation or the
D - 5
<PAGE>
acquirer of such assets, and this paragraph 6 will apply in the event of
any subsequent merger or consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets described
above, nothing contained in this Agreement will detract from or otherwise
limit Executive's right to participate or privilege of participation in any
stock option or purchase plan or any bonus, profit sharing, pension, group
insurance, hospitalization, or other incentive or benefit plan or
arrangement which may be or become applicable to executives of the
corporation resulting from such merger or consolidation or the corporation
acquiring such assets of the Company.
In the event of any merger, consolidation or sale of assets described
above, references to the Company in this Agreement shall unless the context
suggests otherwise be deemed to include the entity resulting from such
merger or consolidation or the acquirer of such assets of the Company.
7. All payments required to be made by the Company hereunder to Executive or
his dependents, beneficiaries, or estate will be subject to the withholding
of such amounts relating to tax and/or other payroll deductions as may be
required by law.
8. There shall be no requirement on the part of the Executive to seek other
employment or otherwise mitigate damages in order to be entitled to the
full amount of any payments and benefits to which Executive is entitled
under this Agreement, and the amount of such payments and benefits shall
not be reduced by any compensation or benefits received by Executive from
other employment.
9. Nothing contained in this Agreement shall be construed as a contract of
employment between the Company and the Executive, or as a right of the
Executive to continue in the employ of the Company, or as a limitation of
the right of the Company to discharge the Executive with or without Cause;
the Executive may, subject to the terms and conditions of this Agreement,
have the right to receive upon termination of his employment the payments
and benefits provided in this Agreement and shall not be deemed to have
waived any rights he may have either at law or in equity in respect of such
discharge.
10. No amendment, change, or modification of this Agreement may be made except
in writing, signed by both parties. Payments made by the Company pursuant
to this Agreement shall be in lieu of payments and other benefits, if any,
to
D - 6
<PAGE>
which Executive may be entitled under any other severance agreement or
severance plan of the Company.
The provisions of this Agreement shall be binding upon and shall inure to
the benefit of Executive, his executors, administrators, legal
representatives and assigns, and the Company and its successors.
The validity, interpretation, and effect of this Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania.
The Company shall have no right of set-off or counterclaims, in respect of
any claim, debt, or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement.
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement, which shall remain in full force and effect.
No right or interest to or in any payments or benefits hereunder shall be
assignable by the Executive; provided, however, that this provision shall
no preclude him from designating one or more beneficiaries to receive any
amount that may be payable after his death and shall not preclude the legal
representative of his estate from assigning any right hereunder to the
person or persons entitled thereto under his will or, in the case of
intestacy, to the person or persons entitled thereto under the laws of
intestacy applicable to his estate. The term "beneficiaries" as used in
this Agreement shall mean a beneficiary or beneficiaries so designated to
receive any such amount, or if no beneficiary has been so designated, the
legal representative of the Executive's estate.
No right, benefit, or interest hereunder, shall be subject to anticipation,
alienation, sale, assignment, encumbrance, charge, pledge, hypothecation,
or set-off in respect of any claim, debt, or obligation, or to execution,
attachment, levy, or similar process, or assignment by operation of law.
Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to
(REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK)
D - 7
<PAGE>
the full extent permitted by law, be null, void, and of no effect.
IN WITNESS WHEREOF, Global Sports, Inc. and Executive have each caused this
Agreement to be duly executed and delivered as of the date set forth above.
GLOBAL SPORTS, INC.
BY: /s/ Michael Rubin
------------------------------------
Agreed: Michael Rubin
/s/ Arthur Carver
- ----------------------------
ARTHUR CARVER
D - 8
<PAGE>
EXHIBIT 10.18
KEY EMPLOYEE AGREEMENT
To: Michael Conn
157 East 57th Street, Apt. 17C
New York, NY 10022
The undersigned, Global Sports, Inc., a Delaware corporation with its
principal place of business located at 555 S. Henderson Road, King of Prussia,
Pennsylvania 19406 (the "Company"), hereby agrees with you as follows:
1. Position and Responsibilities.
1.1 You shall serve as Senior Vice President, Strategic Development of the
Company (or in such other executive capacity as shall be designated by the Board
of Directors or Executive Committee of the Company and is reasonably acceptable
to you) and shall perform the duties customarily associated with such position
from time to time. In such capacity, you will be responsible for the overall
strategic evaluation of mergers and acquisitions, handling investors and
analysts, and overall strategic planning for the Company and its subsidiaries.
1.2 You will devote your full time and your best efforts to the performance
of your duties hereunder and the business and affairs of the Company. You agree
to perform such executive duties as may be assigned to you by or on authority of
the Company's Board of Directors or Executive Committee from time to time. You
will report directly to the Chief Executive Officer.
1.3 You will duly, punctually, and faithfully perform and observe any and
all rules and regulations which the Company may or shall hereafter reasonably
establish governing your conduct as an employee and the conduct of its business.
2. Term of Employment.
2.1 The initial term of this Agreement shall be for the period set forth in
Exhibit "A" annexed hereto. Thereafter, the term of this Agreement shall be
automatically renewed for successive periods of one (1) year each unless you or
the Company shall give the other not less than three (3) months prior written
notice of non-renewal. Notwithstanding anything contained herein to the
contrary, your employment by the Company may be terminated as provided in the
following Sections 2.2 and 2.3.
2.2 The Company shall have the right to terminate your employment at any
time under this Agreement prior to the expiration of the stated term in any of
the following ways:
<PAGE>
(a) on thirty (30) days prior written notice to you in the event of your
disability (disability shall be defined as your inability to perform
duties under this Agreement for an aggregate of ninety (90) days out
of any one hundred eighty (180) day period due to mental or physical
disability);
(b) immediately, without prior notice to you by the Company, for "Cause",
as defined in Section 2.3 of this Agreement;
(c) immediately, without prior notice to you, upon your death or in the
event of the liquidation or reorganization of the Company under the
federal Bankruptcy Code or any state insolvency or bankruptcy law; or
(d) at any time, without Cause (as defined herein); provided, however,
that if the Company terminates your employment without Cause (as
defined herein) prior to the expiration of the stated term, the
Company shall continue to pay you your Base Salary, as severance pay,
and provide you with your benefits that you are entitled to under
paragraph 4 (a), (b) and (c) of the attached Exhibit "A", for a period
of six (6) months after the effective date of your termination (the
"Severance Period").
2.3 For purposes of this Agreement, "Cause" shall mean: (i) the falseness
or material inaccuracy of any of your warranties or representations contained
herein; (ii) your willful failure or refusal to comply with explicit directives
of the Board of Directors or Executive Committee or to render the services
required herein after notice thereof from the Company and your failure to cure
such failure or refusal within ten days of receipt of such notice; (iii) a
determination by the Company acting in good faith that you are responsible for
fraud or embezzlement involving assets of the Company, its customers, suppliers
or affiliates or other misappropriation of the Company's assets or funds; (iv)
your conviction of a criminal felony offense; (v) the willful breach or habitual
neglect of your obligations under this Agreement or your duties as an employee
of the Company and your failure to cure such breach or neglect after notice fron
the Company and your failure to cure such notice or neglect within ten days of
receipt of such notice; and/or (vi) habitual use of drugs. The existence of
Cause (as defined herein) for termination of your employment by the Company
shall be subject, upon the written election by you or the Company, to binding
arbitration as provided in Section 9 hereof.
2
<PAGE>
Further, any dispute, controversy or claim arising out of, in connection
with, or in relation to, the definition of Cause as set forth in Section 2.3 of
this Agreement shall be settled by arbitration as provided in Section 9 hereof.
Any award or determination shall be final, binding and conclusive upon the
parties, and a judgment rendered may be entered in any court having jurisdiction
thereof.
2.4 If your employment is terminated because of your death, all obligations
of the Company hereunder shall cease, except with respect to amounts and
obligations accrued to you through the thirtieth day after the date on which
your death has occurred. Except as specifically provided in Section 2.2(d), if
your employment is terminated by the Company for any other reason, all
obligations of the Company (except with respect to amounts and obligations
accrued to you prior to the date of termination) shall cease immediately as of
the date of termination.
2.5 In addition to the Company's termination rights set forth above, you
shall have the right to terminate this Agreement for "Good Cause", as
hereinafter defined. As used herein, the term "Good Cause" shall mean the
failure of the Company to employ you in the capacity and with the
responsibilities for which you were hired as described in paragraph 1 above, and
the Company's failure to correct such failure within thirty days of notice from
you of the Company's alleged failure. Should the Company not correct the
situation, then you may again notify the Company of your election to terminate
this Agreement, effective in thirty days from the date of the second notice.
Such termination by you shall be treated as a termination without Cause by the
Company and you shall be entitled to the benefits set forth in paragraph 2.2(d)
above.
3. Compensation.
You shall receive the compensation and benefits set forth in Exhibit "A"
attached hereto ("Compensation") for all services to be rendered by you
hereunder and for your transfer of property rights, if any, pursuant to an
agreement between you and the Company relating to proprietary information and
inventions dated of even date herewith, a copy of which is attached hereto as
Exhibit "C" (the "Proprietary Information Agreement").
4. Other Activities During Employment.
4.1 Except for any outside directorships currently held by you, as listed
on Exhibit "B" attached hereto, and except with the prior written consent of a
disinterested majority of the Company's Board of Directors, which consent will
not be unreasonably withheld, you will not, during the term of this Agreement,
undertake or engage in any other employment,
3
<PAGE>
occupation or business enterprise other than one in which you are an inactive
investor.
4.2 You hereby agree that, except as disclosed on Exhibit "B" attached
hereto, you will not, during your employment hereunder, directly or indirectly,
engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an
employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a partner,
co-venturer, stockholder or other proprietor owning directly or indirectly more
than five percent (5%) interest in any firm, corporation, partnership, trust,
association or other organization which is engaged in the planning, research,
development, production, manufacture, marketing, sales or distribution of
athletic footwear, rugged outdoor footwear, sportswear, licensed products,
related products, equipment or services or any other line of business engaged in
or under demonstrable development by the Company, or any of its subsidiary
corporations, or their successors and assigns (such firm, corporation,
partnership, trust, association, or other organization being hereinafter
referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit "B"
attached hereto, you hereby represent that you are not presently engaged, in any
of the foregoing capacities (i) through (ix), in any Prohibited Enterprise.
5. Former Employment.
5.1 You represent and warrant that your employment by the Company will not
conflict with and will not be constrained or restricted by any prior or current
employment, consulting agreement or relationship, whether oral or written. You
further represent and warrant that you do not possess confidential information
arising out of any such employment, consulting agreement or relationship which,
in your best judgment, would be utilized in connection with your employment by
the Company in the absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you should find
that confidential information belonging to any other person or entity might be
usable in connection with the Company's business, you will not intentionally
disclose to the Company or use on behalf of the Company any confidential
information belonging to any of your former employers; but during your
employment by the Company you will use in the performance of your duties only
information which is generally known and used by persons with training and
experience comparable to your own and information which is common knowledge in
the industry or otherwise legally in the public domain.
4
<PAGE>
6. Proprietary Information .
You agree to execute, deliver and be bound by the provisions of the
Proprietary Information Agreement attached hereto as Exhibit "C".
7. Post-Employment Activities.
7.1 For a period of one (1) year after the termination of your employment
with the Company or its successors and assigns, for any reason whatsoever, the
provisions of Section 4.2 shall remain applicable to you and you shall comply
therewith.
7.2 For a period of one (1) year after the termination or expiration of
your employment with the Company or its successors and assigns, for any reason
whatsoever, you will not, absent the Board of Directors' prior written approval,
directly or indirectly, engage in activities similar to those described in
Section 4.2, nor render services similar or reasonably related to those which
you shall have rendered hereunder, to any person or entity whether now existing
or hereafter established which directly or indirectly competes with (or proposes
or plans to compete with) the Company or any of its subsidiaries or their
successors and assigns ("Direct Competitor") in the sale, either traditionally
or through the Internet, of sporting goods, athletic footwear, rugged outdoor
footwear, sportswear, licensed products and related products and services,
whether with respect to merchandise manufactured by the Company or any of its
subsidiaries or their successors and assigns for resale or purchased by the
Company or any of its subsidiaries or their successors and assigns as "closeout"
merchandise for resale. Nor shall you entice, induce or encourage any other
employees of the Company or any of its subsidiaries or their successors or
assigns to engage in any activity which, were it done by you, would violate any
provision of the Proprietary Information Agreement or this Section 7. As used in
this Agreement, the term "any line of business engaged in or under demonstrable
development by the Company or any of its subsidiaries or their successors and
assigns" shall be applied as of the date of termination of your employment
hereunder or as of the date of termination of any post-employment consultation,
whichever occurs later.
7.3 Notwithstanding anything contained in Section 7.1 or 7.2 of this
Agreement to the contrary, if your employment by the Company is terminated by
the Company without Cause (as defined herein), then you will be bound by the
provisions of Sections 7.1 and 7.2 only for the duration of the Severance
Period.
7.4 No provision of this Agreement shall be construed to preclude you from
performing, upon the expiration or termination
5
<PAGE>
of your employment (or any post-employment consultation), the same services
which the Company hereby retains you to perform for any person or entity which
is not a Direct Competitor of the Company or its subsidiaries or their
successors and assigns, so long as you do not thereby violate any term of this
Agreement or the Proprietary Information Agreement.
8. Remedies.
Your obligations under the Proprietary Information Agreement and the
provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement shall survive the
expiration or termination of your employment with the Company or its successors
and assigns (whether through your resignation or otherwise). You acknowledge
that a remedy at law for any breach or threatened breach by you of the
provisions of the Proprietary Information Agreement or Sections 4 or 7 hereof
would be inadequate and you therefore agree that the Company shall be entitled
to injunctive relief in case of any such breach or threatened breach.
9. Arbitration.
Any dispute concerning this Agreement, including, but not limited to, its
existence, validity, interpretation, performance or non-performance, arising
before or after termination or expiration of this Agreement, shall be settled by
a single arbitrator in Philadelphia, Pennsylvania, in accordance with the
expedited procedures of the commercial rules then in effect of the American
Arbitration Association. Judgment upon any award may be entered in the highest
court, state or federal, having jurisdiction. The cost of such arbitration shall
be borne equally between the parties thereto unless the arbitrator elects to
award costs and reasonable attorneys fees as part of the award which the
arbitrator shall have the authority to do.
10. Assignment.
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of any successor or successors of the Company by
reorganization, merger or consolidation and any assignee of all or substantially
all of its business and properties, but, except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or benefits
hereunder may be assigned by the Company or by you, except by operation of law
or by a further written agreement by the parties hereto.
11. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT, in case any one or more of the
provisions contained in this Agreement shall, for any
6
<PAGE>
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect the other provisions
of this Agreement and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. MOREOVER, IT
IS THE INTENT OF THE PARTIES THAT, if any one or more of the provisions
contained in this Agreement is or becomes or is deemed invalid, illegal or
unenforceable or in case any provision of this Agreement shall for any reason be
held to be excessively broad as to duration, geographical scope, activity or
subject, such provision shall be construed by amending, limiting and/or reducing
it to conform to applicable laws so as to be valid and enforceable or, if it
cannot be so amended without materially altering the intention of the parties,
it shall be stricken and the remainder of this Agreement shall remain in full
force and effect.
12. Notices.
Any notice which the Company is required to or may desire to give you shall
be given by registered or certified mail, return receipt requested, addressed to
you at your address of record with the Company, or at such other place as you
may from time to time designate in writing, with a copy to Ephraim Sobol,
Esquire, 164 Madison Avenue, 3rd Floor, New York, New York, 10016. Any notice
which you are required or may desire to give to the Company hereunder shall be
given by registered or certified mail, return receipt requested, addressed to
the Company at its principal office, or at such other office as the Company may
from time to time designate in writing with a copy to David S. Mandel, Esquire,
Astor Weiss Kaplan & Rosenblum, LLP, The Bellevue, Sixth Floor, 200 South Broad
Street, Philadelphia, Pennsylvania 19102.
13. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any breach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
14. Complete Agreement; Amendments.
The foregoing, including Exhibits "A", "B" and "C" attached hereto, is the
entire agreement of the parties with respect to the subject matter hereof,
superseding any previous oral or written communications, representations,
understandings, or agreements with the Company or any officer or representative
thereof. This Agreement may be amended or modified or certain provisions waived
7
<PAGE>
only by a written instrument signed by the parties hereto, upon authorization of
the Company's Board of Directors.
15. Headings.
The headings of the sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a part hereof nor to affect the meaning of this
Agreement in any way.
16. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
17. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.
If you are in agreement with the foregoing, please sign your name below and
at the bottom of the Proprietary Information Agreement attached hereto,
whereupon both Agreements shall become binding in accordance with their terms,
and return this Agreement to the Company. (You may retain the accompanying
counterpart of this Agreement enclosed herewith for your records).
Very truly yours,
GLOBAL SPORTS, INC.
By: /s/ Michael G. Rubin
-----------------------------------
Michael G. Rubin
Title: Chairman and
Chief Executive Officer
ACCEPTED AND AGREED:
/s/ Michael Conn
- -------------------------
MICHAEL CONN
Date: February 24, 1999
8
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
MICHAEL CONN, SENIOR VICE PRESIDENT STRATEGIC DEVELOPMENT
1. Term.
The term of the Agreement to which this Exhibit "A" is annexed and
incorporated (the "Agreement") shall commence on February 24, 1999 and shall
terminate on December 31, 2003, unless renewed in accordance with Section 2.1 of
the Agreement or terminated prior thereto in accordance with Sections 2.2 or 2.3
of the Agreement.
2. Compensation.
a. Base Salary. During the term of the Agreement you will be paid an
annual Base Salary based upon the following schedule:
PERIOD ANNUAL BASE SALARY
------ ------------------
Execution of the Agreement through
December 31, 1999 $150,000.00
January 1, 2000 through
December 31, 2000 $162,500.00
January 1, 2001 through
December 31, 2001 $175,000.00
Your annual Base Salary for the period January 1, 2002 through December 31,
2003 shall be as negotiated by you and the Company; provided; however, that your
annual Base Salary for each year during this period shall be at least $12,500.00
in excess of your annual Base Salary for the prior year.
b. Bonuses. You will receive an annual bonus in the amount of 15% of your
Base Salary and have the opportunity to earn bonuses totalling up to
an additional 15% of your Base Salary each year through the following
programs:
<PAGE>
7.5% of your Base Salary, based upon an adequate number of analysts
(as determined by the Company's Chief Executive Officer, in his
discretion) picking up coverage of the Company in 1999 and/or the
Company completing a secondary offering in 1999; and/or
7.5% of your Base Salary, based upon the Company meeting or exceeding
its revenue and net income projections as detailed in the Company's
internal business plan; provided, however, that if an acquisition or
any significant change in the corporate structure occurs, the business
plan will be adjusted and the thresholds for this component of your
bonus will be adjusted to reflect the acquisition or change
All determinations as to meeting objective standards for bonuses shall be
made solely by the Company's regularly retained certified public accountants,
whose determinations shall be final and binding upon the parties and shall not
be subject to any appeal.
c. Payment of Base Salary. Base Salary and Bonuses shall be payable in
accordance with the Company's payroll policies.
3. Vacation.
You shall be paid for and be entitled to all legal and religious holidays
and three (3) weeks paid vacation per annum, commencing the first year of the
Agreement; provided, however, you may not take more than one week of vacation at
a time. All vacation time shall be earned on a quarterly basis. You shall
arrange for vacations in advance at such time or times as shall be mutually
agreeable to you and the Company. You shall be entitled to carry forward into
the subsequent year up to one (1) week of unused vacation time. You do not have
the right to receive pay in lieu of vacation.
4. Insurance and Benefits.
The Company, at its expense, shall provide you with the following benefits
in the same amounts and manner as provided to the members of the Company's
senior management:
(a) health insurance
(b) long term disability insurance
(c) term life insurance
(d) participation in the Company's 401K Plan
A - 2
<PAGE>
In addition, the Company shall provide you with the following other
benefits at the Company's expense:
(a) automobile allowance not the exceed $500 per month, which includes
automobile insurance
(b) cell phone and cell phone account
(c) lap top computer
5. Expenses.
The Company shall reimburse you promptly for all reasonable and ordinary
business and out-of-pocket expenses incurred by you in connection with the
Company's business and in the scope of your employment hereunder, as approved by
the Company, including, without limitation, reasonable and necessary travel,
lodging, entertainment and meals incurred by you during the term of the
Agreement, provided the expenses are incurred in furtherance of the Company's
business and at the request of the Company. You agree to keep and maintain
records of the aforesaid expenses as may be requested by the Company and to
account to the Company for the expenses prior to reimbursement.
6. Stock Options and Stock Awards.
Pursuant to the terms of the Company's 1996 Equity Incentive Plan (the
"Plan"), you will be granted the following awards:
6.1 Upon the execution of the Agreement, the Company shall issue to you a
Restricted Stock Award to purchase fifteen hundred (1,500) shares of the
Company's common stock at a price of one cent per share ($.01). Such stock shall
be issued pursuant to Rule 144 and may only be sold or transferred by you in
accordance with Rule 144 and in no event prior to two years from the date of the
Agreement. Further, if you terminate your employment with the Company, for any
reason whatsoever, at any time within the first two (2) years of your employment
by the Company, the Company shall have the right to purchase such stock back
from you, and you shall resell these shares to the Company, for the price that
you paid to the Company for said stock.
6.2 You will also be granted five year options (such options are intended
to be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, but are subject to the requirements set forth
therein) to purchase up to fifty thousand (50,000) shares of the Company's
common stock at an exercise price equal to the fair market value (determined by
the trading price) of the underlying common stock on the date that you commence
your employment pursuant to the Agreement, of which the options for ten thousand
(10,000) shares shall vest on each of December 31, 1999, December 31, 2000,
December 31, 2001, December 31, 2002 and December 31, 2003.
A - 3
<PAGE>
The complete terms and conditions of this award shall be set forth in the
Option Grant Letter (the "Option Grant Letter") delivered to you simultaneous
herewith. Any conflict between the terms of the Option Grant Letter and the
Agreement shall be governed by the Option Grant Letter.
In the event of the termination of your employment caused by your
resignation, your dismissal with or without Cause (as defined herein), your
disability or your death, or in the event of a change in control as defined in
Section 6.3(b) of the Plan, your rights in the options shall be as set forth in
Article 6 of the Plan.
7. Relocation and Interim Housing Allowance.
You agree to establish your residency in the King of Prussia, Pennsylvania
area within (3) months from the date of the Agreement and, provided that you do
so, the Company will, upon presentation of acceptable proof of payment,
reimburse you for the following costs associated with your relocation, not to
exceed a total of $10,000.00:
a) interim housing expenses incurred prior to your relocation;
b) moving expenses; and
c) interim personal travel between your present home in New York and
King of Prussia, Pennsylvania prior to your relocation to the
King of Prussia, Pennsylvania area
Further, in the event that your employment by the Company is terminated by
the Company without Cause (as defined herein) at any time during the first two
(2) years of your employment by the Company and you relocate outside of the King
of Prussia, Pennsylvania area within (3) months thereafter, the Company will,
upon presentation of acceptable proof of payment, reimburse you for the costs
associated with such relocation, not to exceed a total of $10,000.00.
INITIALS:
Employee: /s/MC
Company: /s/MR
A - 4
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
MICHAEL CONN
NONE
B - 1
<PAGE>
EXHIBIT C
- --------------------------------------------------------------------------------
PROPRIETARY INFORMATION AGREEMENT
- --------------------------------------------------------------------------------
To: GLOBAL SPORTS, INC.
555 South Henderson Road
King of Prussia, PA 19406
The undersigned ("Employee"), in consideration of and as a condition of my
employment or continued employment by you and/or by companies which you own,
control, or are affiliated with or their successors in business (collectively,
the "Company"), hereby agrees as follows:
1. Confidentiality.
I agree to keep confidential, except as the Company may otherwise consent
in writing, and, except for the Company's benefit, not to disclose or make any
use of at any time either during or subsequent to my employment, trade secrets
and Confidential Information (as hereinafter defined), knowledge, data or other
information of the Company or any of its subsidiaries relating to products,
processes, know-how, techniques, methods, designs, formulas, test data, customer
lists, business plans, marketing plans and strategies, pricing strategies, or
other subject matter pertaining to any business of the Company or any of its
affiliates or subsidiaries, which I may produce, obtain, or otherwise acquire
during the course of my employment, except as herein provided. I further agree
not to deliver, reproduce or in any way allow any such trade secrets,
Confidential Information, knowledge, data or other information, or any
documentation relating thereto, to be delivered to or used by any third parties
without specific direction or consent of a duly authorized representative of the
Company.
As used herein, "Confidential Information" shall mean information or
materials that I know or have reason to know is the confidential or proprietary
information of the Company, either because such information is marked or
otherwise identified by the Company as confidential or proprietary, has
commercial value, or is not generally known in the Company's trade or industry.
Confidential Information shall include, without limitation: (a) concepts and
ideas relating to the development
C - 1
<PAGE>
and distribution of content in any medium; (b) trade secrets, drawings,
inventions, know-how, software programs, and software source documents; (c)
information regarding plans for research, development, new service offerings or
products, marketing and selling, business plans, business forecasts, budgets and
unpublished financial statements, licenses and distribution arrangements, prices
and costs, suppliers and customers; and (d) existence of any business
discussions, negotiations or agreements between parties.
2. Conflicting Employment; Return of Confidential Information.
I agree that during my employment with the Company I will not engage in any
other employment, occupation, consulting or other activity relating to the
business in which the Company is now or may hereafter become engaged, or which
would otherwise conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever, I agree to
promptly surrender and deliver to the Company all records, materials, equipment,
drawings, computer disks, documents and data of which I may obtain or produce
during the course of my employment, and I will not take with me any description
containing or pertaining to any confidential information, knowledge or data of
the Company which I may produce or obtain during the course of my employment.
3. Trade Secrets of Others.
I represent that my performance of all the terms of this Agreement and as
an employee of the Company does not and will not breach any agreement to keep
confidential proprietary information, knowledge or data acquired by me in
confidence or in trust prior to my employment with the Company, and I will not
disclose to the Company, or induce the Company to use, any confidential or
proprietary information or material belonging to any previous employer or
others. I agree not to enter into any agreement either written or oral in
conflict herewith.
4. Modification.
I agree that any subsequent change or changes in my employment duties,
salary or compensation or, if applicable, in any Employment Agreement between
the Company and me, shall not affect the validity or scope of this Agreement.
5. Arbitration.
Any dispute concerning this Agreement including, but not limited to, its
existence, validity, interpretation, performance or non-performance, arising
before or after termination or expiration of this Agreement, shall be settled by
a single
C - 2
<PAGE>
arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited
procedures of the commercial rules then in effect of the American Arbitration
Association. Judgment upon any award may be entered in the highest court, state
or federal, having jurisdiction. The cost of such arbitration shall be borne
equally between the parties thereto unless the arbitrator elects to award costs
and reasonable attorneys fees as part of the award which the arbitrator shall
have the authority to do.
6. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives and successors.
7. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any provision of this Agreement is or becomes or is deemed
invalid, illegal or unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
8. Waivers.
No waiver of any right under this Agreement shall be deemed effective
unless contained in a writing signed by the party charged with such waiver, and
no waiver of any right arising from any breach or failure to perform shall be
deemed to be a waiver of any future such right or of any other right arising
under this Agreement.
9. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the parties and
supersedes any prior oral or written communications, representations,
understandings or agreements concerning the subject matter hereof with the
Company or any officer or
C - 3
<PAGE>
representative thereof. This Agreement may be amended, modified, or certain
provisions waived only by a written instrument signed by the parties hereto,
upon authorization of the Company's Board of Directors.
10. Headings.
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a part hereof nor to affect the meaning of this
Agreement in any way.
11. Counterparts.
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
12. Governing Law.
This Agreement shall be governed and construed in accordance with the laws
of the Commonwealth of Pennsylvania.
13. Notices.
All notices, requests, demands and communications which are or may be
required to be given hereunder shall be deemed given if and when sent by
registered or certified mail, return receipt requested, postage prepaid, to the
following addresses (or, by written notice to the other party, to such other
address as may be specified by either party):
If to the Company: GLOBAL SPORTS, INC.
555 South Henderson Road
King of Prussia, PA 19406
Attention: President
With a copy to: David S. Mandel, Esquire
Astor Weiss Kaplan & Rosenblum, LLP
The Bellevue, Sixth Floor
200 South Broad Street
Philadelphia, PA 19102
If to Employee: Michael Conn
157 East 57th Street, Apt 17C
New York, NY 10022
C - 4
<PAGE>
With a copy to: Ephraim Sobol, Esquire
164 Madison Avenue, 3rd Floor
New York, New York, 10016
In Witness Whereof, the undersigned Employee has placed his hand and seal
hereto and the Undersigned Employer has caused this Agreement to be executed
with intent to be legally bound hereby, the day and year first above written.
EMPLOYEE:
Date: February 24, 1999 /s/ Michael Conn
------------------------------
MICHAEL CONN
ACCEPTED AND AGREED:
GLOBAL SPORTS, INC.
By: /s/ Michael G. Rubin
-------------------------------
Michael G. Rubin
Title: Chairman and Chief Executive Officer
Date: February 24, 1999
C - 5
<PAGE>
EXHIBIT 10.40-E
AMENDMENT NO. 5 TO LOAN DOCUMENTS
December 3, 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,
Consent and Amendment No. 3 to Loan Documents, dated as of May 12, 1998, and
Amendment No. 4 to Loan Documents and Waiver, executed on or about July 21, 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, 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 No. 5 to Loan Documents (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 (A) $3,000,000 for the period from
and after the effective date of this Amendment through and including March
5, 1999, (B) $2,250,000 commencing with the opening of business on Monday,
March 8, 1999, through and including March 12, 1999, (C) $1,500,000 on the
opening of business on Monday, March 19, 1998 through and including March
23, 1999 (D) $750,000 on the opening of business on Monday, March 26, 1999,
through and including March 30, 1999 and (E) zero on the opening of
business on Monday, April 2, 1999, 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 March 30, 1999.
(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) Making of Overadvances. 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) Payments on Overadvance Limit Reduction Dates. 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
- 2 -
<PAGE>
to Foothill in respect of the Overadvances in an amount equal to the excess, if
any, of the aggregate unpaid 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) Overadvance Limit; Collateral. 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) Payment in Full on Overadvance Termination Date. 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) Additional Event of Default. 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) Letters of Credit. 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 outstanding 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) Amendment of Rubin Subordination Agreement. 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"), (i) KPR
- 3 -
<PAGE>
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 period (collectively, the "Suspended Permitted Payments") and (ii) KPR may
make and Rubin may receive the Suspended Permitted Payments at any time after
the Overadvances Payment Date and prior to April 30, 1999.
(h) Elimination of Second Seasonal Supplemental Credit Period.
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 Overadvances Payment Date, (i) the
Borrowing Base as to each Borrower shall not include the Seasonal Supplemental
Credit, and (ii) 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.
(i) Weekly Operating Reports. In addition to, and not in limitation of, the
reports and other documents that Borrowers are required to deliver to Foothill
pursuant to Sections 6.2 and 6.3 of the Loan Agreement, during the period
commencing on the effective date of this Amendment through and including the
Overadvance Termination Date, Borrowers shall deliver to Foothill on a weekly
basis during such period, no later than Wednesday of each week, a Weekly
Operating Report for Borrowers, including a report as to then outstanding
customer orders and sales backlog, in form and substance satisfactory to
Foothill.
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 (i) 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, (ii) 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 (iii) 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
- 4 -
<PAGE>
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 available funds, of all
Overadvances and of all amounts outstanding under the
Seasonal Supplemental Credit (including in the case of
both the Overadvances and the Seasonal Supplemental
Credit, all 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. (a) Solely during the period
commencing as the effective date of this Amendment through and including
December 15, 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 "35%" set forth opposite such
Account Debtor and substituting "45%" therefor; (b) solely during the period
commencing December 16, 1998 through and including December 31, 1998, such
percentage limit set forth opposite Just For Feet, Inc. shall again be "35%";
and (c) from and after January 1, 1999, such percentage limit set forth opposite
Just for Feet, Inc. shall be "25%"; provided, however, that in the event that
(i) 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 from and after
January 1, 1999 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 (ii) Foothill acknowledges in writing that such non-offset letter
is in fact satisfactory to Foothill, then such percentage limit set forth
- 5 -
<PAGE>
opposite Just For Feet, Inc. shall be "35%" from and after January 1, 1999.
5. 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 $30,000, which fee is
fully earned as of the date hereof and shall constitute part of the Obligations.
6. 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
(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.
7. 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;
(b) the receipt by Foothill of Borrowers' weekly cash flow projections for
the period commencing on the effective date hereof and terminating on the
Overadvance Termination Date, in form and substance satisfactory to Foothill;
(c) the receipt by Foothill of a copy of a check drawn by Just For Feet,
Inc. payable to KPR in the amount of $5,000,000, post-dated to December 15,
1998; and,
(d) 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.
- 6 -
<PAGE>
8. 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.
9. 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.
10. 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).
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 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: President
[SIGNATURES CONTINUED ON NEXT PAGE]
- 7 -
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AGREED:
FOOTHILL CAPITAL CORPORATION
By: /s/ Erik Sawyer
- ------------------------------------
Title: Vice President
ACKNOWLEDGED AND CONSENTED
TO IN ALL RESPECTS:
GLOBAL SPORTS, INC.
By: /s/ Steven Wolf
- ------------------------------------
Title: Chief Financial Officer
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 -
<PAGE>
EXHIBIT 10.40-F
CONSENT AND AMENDMENT NO. 6 TO LOAN DOCUMENTS
---------------------------------------------
January 29, 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 ("Restated Loan Agreement") by and among Foothill
and Borrowers as amended by Consent, Amendment No. 1 to Loan Documents and
Subordination Agreement, dated January 28, 1998, Amendment No. 1 to Amended and
Restated Loan and Security Agreement dated 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 and Amendment No. 4 to Loan Documents and Waiver, dated July __, 1998,
Amendment No. 5 to Loan Documents, dated December 3, 1998 (collectively, the
"Loan Agreement") and all agreements, documents and instruments at any time
executed and/or delivered in connection therewith or related thereto (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,
collectively, the "Loan Documents"). All capitalized terms used herein shall
have the meanings assigned thereto in the Restated Loan Agreement, unless
otherwise defined herein.
Borrowers have requested that Foothill consent to (a) the formation of a
new indirectly wholly-owned subsidiary of Global Sports, Inc. (the "Holding
Company"), namely, G.S.I., Inc., a Delaware corporation (the "IP Subsidiary"),
which will, subject to the conditions hereof, acquire from the Borrowers and
Apex (i) all of the registered and unregistered trademarks, trade names, trade
styles, logos, service marks and artwork related thereto listed on the Schedule
annexed hereto as Exhibit "A", together with all translations, adaptations,
derivations and combinations thereof and including all goodwill associated
therewith and all applications, registrations and renewals in connection
therewith (collectively, the "Assigned Trademarks"), and (ii) all of the patents
listed on the Schedule annexed hereto as "Exhibit B", together with all
translations, adaptations, derivations and combinations thereof and including
all goodwill associated therewith and all applications, registrations and
renewals in connection therewith (collectively, the "Assigned Patents"), subject
to the assignments, liens and security interests granted by Borrowers and Apex
in favor of Lender pursuant to and in accordance with the Loan Documents, and
(b) amend the Loan Agreement in connection with the foregoing.
Foothill is willing to consent to the foregoing subject to the terms and
conditions contained herein, including, without limitation, the execution and
delivery of a Continuing Guaranty by the IP Subsidiary in favor of Foothill,
together with other security agreements and
<PAGE>
instruments as required by Foothill. By this Consent and 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. Restated Loan Agreement Definitions.
-----------------------------------
(a) The Restated Loan Agreement's definition of "Corporate Guarantors"
in Section 1.1 thereof is hereby deleted in its entirety and the following
substituted therefor:
"Corporate Guarantors" means Apex, MR Management, Holding Company
--------------------
and G.S.I., Inc.
(b) The following definition is hereby added to Section 1.1 of the
Restated Loan Agreement:
"G.S.I., Inc." means G.S.I., Inc., a Delaware corporation.
------------
(c) The Restated Loan Agreement's definition of "Guarantors" set forth
in Section 1.1 thereof is hereby deleted in its entirety and the following
substituted therefor:
"Guarantors" means Apex, MR Management, Holding Company, G.S.I.,
----------
Inc. and Rubin.
2. Schedule 5.8. Schedule 5.8 of the Restated Loan Agreement is hereby
------------
amended by adding the following to the end thereof:
- G.S.I., INC.
- DELAWARE CORPORATION
- 100 SHARES OF COMMON STOCK AUTHORIZED
- 10 SHARES OWNED BY KPR WHICH IS 33 1/3% OF THE ISSUED
AND OUTSTANDING STOCK
- 10 SHARES OWNED BY RYKA WHICH IS 33 1/3% OF THE ISSUED
AND OUTSTANDING STOCK
- 10 SHARES OWNED BY APEX WHICH IS 33 1/3% OF THE ISSUED
AND OUTSTANDING STOCK
3. Consent to Formation of Subsidiary. Pursuant to Section 7.13 of the
----------------------------------
Restated Loan Agreement and any other applicable provision of the Loan
Documents, Borrowers and Apex hereby request and Lender hereby consents to the
formation of G.S.I., Inc., a Delaware corporation, to be owned by the Borrowers
and Apex as set forth on Schedule 5.8 of the Restated Loan Agreement.
4. Section 7.1 of the Restated Loan Agreement. Section 7.1 of the
------------------------------------------
Restated Loan Agreement is hereby amended to include the following additional
clause (h):
-2-
<PAGE>
(h) Indebtedness to G.S.I., Inc., provided, that, such Indebtedness
-------- ----
shall at all times be subject to a Subordination Agreement between
G.S.I., Inc. and Lender in form and substance satisfactory to Lender.
5. Consent to Transfer of Assigned Trademarks and Assigned Patents to IP
---------------------------------------------------------------------
Subsidiary. Pursuant to Sections 7.3, 7.4 and 7.14 of the Restated Loan
- ----------
Agreement and any other applicable provisions of the Loan Documents requiring
the consent or approval by Lender, Lender hereby further consents to the
transfer by Borrowers and Apex to IP Subsidiary of all of the Assigned
Trademarks and Assigned Patents and the licensing of such Assigned Trademarks
and Assigned Patents by IP Subsidiary to the Borrowers and Apex, respectively,
in accordance with the License Agreements (as such term is defined below),
provided, that:
- -------- ----
(a) Lender shall have received, in form and substance satisfactory to
Lender, an absolute and unconditional Continuing Guaranty by IP Subsidiary of
payment and performance of all of the Obligations of Borrowers, secured by first
and only security interests in favor of Lender granted by IP Subsidiary on all
of its existing and future assets, including, but not limited to, all existing
and future trademarks and patents, including all of the Assigned Trademarks and
Assigned Patents and other intellectual property;
(b) Lender shall have received, in form and substance satisfactory to
Lender, a written agreement from IP Subsidiary granting Lender the right to use
any of the Assigned Trademarks and Assigned Patents and any of the other
intellectual property owned by IP Subsidiary, in order that Lender shall have
the right to exercise its rights and remedies and otherwise deal with the
Assigned Trademarks and Assigned Patents including, without limitation, the
right to complete all work-in-process and other inventory and sell the Inventory
of Borrowers and Apex with the Assigned Trademarks and Assigned Patents affixed
to such Inventory;
(c) Borrowers and Apex shall have delivered, or cause to be delivered,
to Lender, true, correct and complete copies of the documents, agreements and
instruments executed and/or delivered by Borrowers, Apex and IP Subsidiary in
connection with the transfer of the Assigned Trademarks and Assigned Patents by
Borrowers and Apex to IP Subsidiary and the licensing arrangements entered into
among Borrowers, Apex and IP Subsidiary;
(d) Borrowers shall have delivered, or cause to be delivered, to
Lender, a copy of the Certificate of Incorporation of IP Subsidiary certified to
by the Secretary of State of Delaware and any amendments thereto together with a
Good Standing Certificate certified by the Secretary of State of Delaware on the
date hereof;
(e) Borrowers shall have delivered, or cause to be delivered, a true
and complete copy of the By-Laws of IP Subsidiary certified by the corporate
secretary of IP Subsidiary;
(f) Borrowers shall have delivered, or cause to be delivered, to
Lender, a true
-3-
<PAGE>
and complete copy of the resolutions of the Board of Directors of IP Subsidiary,
with shareholders' consent, certified by the corporate secretary, authorizing
the execution of the guarantee and security agreements delivered in favor of
Lender hereunder, in form and substance satisfactory to Lender;
(g) Borrowers shall have delivered, or cause to be delivered, to
Lender, UCC, tax lien and judgments reports from a search company acceptable to
Lender for each of the jurisdictions in which IP Subsidiary maintains assets and
has its chief executive office evidencing that no UCC financing statements have
been filed by any Person against IP Subsidiary, except Lender, and that there
are no tax liens or judgments filed or entered against IP Subsidiary;
(h) Each of the Borrowers and Apex shall have delivered, or cause to
be delivered, to Lender a true and complete copy of the resolutions of each
Board of Directors with shareholder's consent, certified by the corporate
secretary, authorizing the formation of IP Subsidiary, the assignment of the
Assigned Trademarks and Assigned Patents to IP Subsidiary and the license of IP
Subsidiary to Borrowers and Apex, respectively, of the right to use the Assigned
Trademarks and the Assigned Patents;
(i) Borrowers shall have delivered, or cause to be delivered, to
Lender, in form and substance satisfactory to Lender, such opinions of counsel
to Borrowers, Apex and IP Subsidiary with respect to the transactions
contemplated among Borrowers, Apex and IP Subsidiary and other matters as Lender
may request.
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 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) As of the date hereof, and after giving effect to the consents set
forth in paragraphs 3, 4 and 5 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.
(b) This Consent and 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 and each Guarantor
in accordance with their respective terms.
(c) 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 consents set forth in paragraphs 3, 4 and 5 hereof and the
consummation of the formation of the IP Subsidiary and the transactions
-4-
<PAGE>
contemplated by the transfer of the Assigned Trademarks and Assigned Patents to
the IP Subsidiary, except to the extent any such representation or warrant is
made as of a specified date, in which case such representation or warranty shall
have been true and correct as of such date.
(d) Borrowers have delivered to Foothill true, complete and correct
executed or execution copies (to the extent a fully executed copy has not be
delivered to either Borrower) of the (i) Purchase Agreement between Ryka and the
IP Subsidiary, (ii) the Purchase Agreement between KPR and the IP Subsidiary,
(iii) the Purchase Agreement between Apex and the IP Subsidiary, (iv) the
Assignment between Ryka and the IP Subsidiary, (v) the Assignment between KPR
and the IP Subsidiary, (vi) the Assignment between Apex and the IP Subsidiary,
(vii) the License Agreement between Ryka and the IP Subsidiary, (viii) the
License Agreement between KPR and the IP Subsidiary, and (ix) the License
Agreement between Apex and the IP Subsidiary, including all Schedules and
Exhibits thereto (the agreements referred to in clauses (vii) through (ix)
hereof are collectively referred to herein as the "License Agreements"), and all
documents, instruments and agreements executed, or to be executed, and delivered
in connection therewith.
7. Conditions Precedent. The consent and amendments herein shall be
--------------------
effective upon the receipt by Foothill of a counterpart of this Consent and
Amendment, duly authorized, executed and delivered by Borrowers and Guarantors
and the receipt by Foothill of all documents described in Paragraph 5 hereof,
duly authorized, executed and delivered by Borrowers, Apex and/or IP Subsidiary
as the case may be.
8. Effect of this Consent and 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 any 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 or any other Loan Document that prohibits the
disposal of assets of any Borrower or Guarantor, including, without limitation,
Section 7.4 of the Restated Loan Agreement, none of Borrowers or Guarantors
shall, without the prior written consent of Foothill in each instance, dispose
of any assets of any Borrower or Guarantor to any Person.
9. Further Assurances. The parties hereto 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 Consent and
Amendment.
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 Consent and Amendment shall be binding upon and
--------------
inure to
-5-
<PAGE>
the benefit of each of the parties hereto and their respective successors and
assigns.
12. Counterparts. This Consent and 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 Consent and 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 Consent and Amendment in the
space provided below, whereupon this Consent and Amendment, as so accepted by
Foothill, shall become a binding agreement among Borrowers and Foothill.
Very truly yours,
KPR SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
--------------------------------
Title: President
-----------------------------
RYKA, INC.
By: /s/ Michael Rubin
--------------------------------
Title: C.E.O
-----------------------------
AGREED:
FOOTHILL CAPITAL CORPORATION
By: /s/ Erik R. Sawyer
--------------------------
Title: Vice President
-----------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-6-
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
ACKNOWLEDGED AND AGREED TO
IN ALL RESPECTS:
APEX SPORTS INTERNATIONAL, INC.
By: /s/ Michael Rubin
--------------------------
Title: President
-----------------------
MR MANAGEMENT INC.
By: /s/ Michael Rubin
--------------------------
Title: President
-----------------------
GLOBAL SPORTS, INC.
By: /s/ Michael Rubin
--------------------------
Title: C.E.O.
-----------------------
G.S.I., INC.
By: /s/ Dennis R. Rubisch
--------------------------
Title: Vice President
-----------------------
/s/ Michael Rubin
- -----------------------------
MICHAEL RUBIN
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND RELATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 856,085
<SECURITIES> 0
<RECEIVABLES> 37,711,425
<ALLOWANCES> 928,693
<INVENTORY> 20,954,168
<CURRENT-ASSETS> 60,028,729
<PP&E> 4,385,906
<DEPRECIATION> 1,549,638
<TOTAL-ASSETS> 78,716,186
<CURRENT-LIABILITIES> 40,399,061
<BONDS> 0
100
0
<COMMON> 129,947
<OTHER-SE> 14,555,535
<TOTAL-LIABILITY-AND-EQUITY> 78,716,186
<SALES> 131,454,971
<TOTAL-REVENUES> 131,454,971
<CGS> 95,528,412
<TOTAL-COSTS> 120,360,458
<OTHER-EXPENSES> 3,272,132
<LOSS-PROVISION> 104,453
<INTEREST-EXPENSE> 3,073,270
<INCOME-PRETAX> 7,802,381
<INCOME-TAX> 1,900,818
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,901,563
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
</TABLE>
