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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Global Sports, Inc.
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(Name of Registrant as Specified In Its Charter)
Not Applicable
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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[LOGO OF GLOBAL SPORTS, INC.]
February [3], 2000
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Global Sports, Inc. which will be held on [Thursday], February [24], 2000 at
10:00 a.m. (Philadelphia Time) at the offices of Global, 1075 First Avenue,
King of Prussia, PA 19406. The official notice of the Special Meeting together
with a proxy statement and proxy card are enclosed. Please give this
information your careful attention.
At the meeting, shareholders of Global are being asked to approve the sale
of Global's Off-Price and Action Sports Division, indemnification agreements
to be entered into with the Company's directors and certain of its officers,
and such other business as may properly come before the meeting.
The Board of Directors has considered and approved the sale of the Off-Price
and Action Sports Division and the Indemnification Agreements and has
determined that they are fair to and in the best interests of the Company and
its shareholders. The Board of Directors unanimously recommends that you vote
for approval of the Acquisition Agreement and the sale of the Off-Price and
Action Sports Division and for approval of the Indemnification Agreements.
Whether or not you expect to attend the meeting in person, it is important
that your shares be voted at the meeting. I urge you to specify your choices
by marking the enclosed proxy and returning it promptly.
Sincerely,
/s/ Michael G. Rubin
Michael G. Rubin
Chairman of the Board and
Chief Executive Officer
1075 First Avenue, King of Prussia, PA 19406 (610) 265-3229
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Global Sports, Inc.
1075 First Avenue
King of Prussia, PA 19406
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
to be held February [24], 2000
----------------
TO OUR SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Global Sports, Inc. ("Global") will be held on [Thursday],
February [24], 2000, at 10:00 a.m. (Philadelphia Time), at the office of
Global, 1075 First Avenue, King of Prussia, PA 19406, for the following
purposes:
1. To approve (i) the Acquisition Agreement, dated September 24, 1999,
among Global, Gen-X Acquisition (U.S.), Inc., Gen-X Acquisition (Canada)
Inc., DMJ Financial, Inc., James J. Salter and Kenneth J. Finkelstein (a
copy of the Acquisition Agreement is attached as Appendix A to the
accompanying Proxy Statement) relating to the sale of Global's Off-Price
and Action Sports Division, including the sale of all of the issued and
outstanding capital stock of Global's wholly-owned subsidiaries Gen-X
Holdings Inc. and Gen-X Equipment Inc., and (ii) the sale of Global's Off-
Price and Action Sports Division.
2. To approve Indemnification Agreements to be entered into with the
Global's directors and certain of its officers (a copy of the form of
Indemnification Agreements is attached as Appendix C to the accompanying
Proxy Statement); and
3. To act upon such other business as may properly come before the
Special Meeting or any postponement or adjournment thereof.
The Board of Directors is not aware of any other business to come before the
Special Meeting.
The Board has fixed January 28, 2000 as the record date for the
determination of shareholders entitled to vote at the Special Meeting. Only
shareholders of record at the close of business on that date will be entitled
to notice of, and to vote at, the Special Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE URGED TO
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED ENVELOPE
IS ENCLOSED FOR YOUR CONVENIENCE; NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
By Order of the Board of Directors,
/s/ Arthur H. Miller
Secretary
King of Prussia, Pennsylvania
February [3], 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PROXY STATEMENT.......................................................... 1
Record Date and Quorum................................................. 1
Voting of Shares....................................................... 1
Revocation of Proxies.................................................. 2
FORWARD-LOOKING STATEMENTS............................................... 2
RISK FACTORS............................................................. 3
Risks Related to the Sale of the Off-Price and Action Sports Division.. 3
Risks Particular to Global............................................. 4
Risks Typical of the Internet Industry................................. 9
PROPOSAL 1--APPROVAL OF THE ACQUISITION AGREEMENT AND THE SALE OF THE
OFF-PRICE AND ACTION SPORTS DIVISION.................................... 11
General................................................................ 11
Background and Reasons for the Sale.................................... 11
Approval by Board of Directors......................................... 12
Terms of the Acquisition Agreement..................................... 13
Opinion of Deutsche Bank Securities Inc................................ 16
Absence of Appraisal Rights............................................ 22
Accounting Treatment................................................... 22
Federal Income Tax Consequences........................................ 22
Government and Regulatory Approvals.................................... 23
Interests of Certain Persons........................................... 23
Recommendation of Board of Directors................................... 24
SELECTED FINANCIAL DATA.................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 27
Overview............................................................... 27
Results of Operations.................................................. 28
For the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997..................................................... 29
For the Year Ended December 31, 1997 Compared to the Year Ended
December 31, 1996..................................................... 29
Liquidity and Capital Resources........................................ 29
Year 2000.............................................................. 30
New Accounting Pronouncements.......................................... 31
Quantitative and Qualitative Disclosures about Market Risk............. 31
BUSINESS................................................................. 32
Overview............................................................... 32
Recent Developments.................................................... 33
Interactive Division................................................... 33
Off-Price and Action Sports Division................................... 37
Branded Division....................................................... 39
Employees.............................................................. 42
Properties............................................................. 42
Geographic Areas....................................................... 43
Intellectual Property.................................................. 43
Legal Proceedings...................................................... 43
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED SHAREHOLDER
MATTERS................................................................. 43
PRINCIPAL SHAREHOLDERS................................................... 44
PROPOSAL 2--APPROVAL OF INDEMNIFICATION AGREEMENTS....................... 47
Director Liability and Indemnification................................. 47
</TABLE>
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Proposed Indemnification Agreements...................................... 47
Interests of Certain Persons............................................. 49
Recommendation of Board of Directors..................................... 49
OTHER MATTERS.............................................................. 50
INDEPENDENT PUBLIC ACCOUNTANTS............................................. 50
ADDITIONAL INFORMATION..................................................... 50
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING................................... 50
</TABLE>
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Global Sports, Inc.
1075 First Avenue
King of Prussia, PA 19406
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PROXY STATEMENT
----------------
The accompanying Proxy is solicited by and on behalf of the Board of
Directors of Global Sports, Inc. ("Global" or the "Company") for the Special
Meeting of Shareholders (the "Special Meeting") to be held on [Thursday],
February [24], 2000, at 10:00 a.m. (Philadelphia Time), for the purposes set
forth in the accompanying Notice of Special Meeting of Shareholders, and at
any postponement or adjournment thereof. The Special Meeting will be held at
the offices of Global, 1075 First Avenue, King of Prussia, PA 19406. Unless
the context requires otherwise, all references herein to Global refer to
Global Sports, Inc. and its subsidiaries. This Proxy Statement, the Notice of
Special Meeting and the Proxy are first being mailed to shareholders on or
about February [3], 2000.
The cost of soliciting proxies will be borne by the Company. In addition to
solicitation by mail, proxies may be solicited in person or by telephone,
telegraph or fax by directors, officers or employees of Global without
additional compensation. Upon request by brokers, dealers, banks or voting
trustees, or their nominees who are record holders of Global's Common Stock,
Global will pay the reasonable expenses incurred by such record holders for
mailing proxy materials to any beneficial owners of the Common Stock.
Record Date and Quorum
Only shareholders of record at the close of business on January 28, 2000
(the "Record Date") will be entitled to notice of, and to vote at, the Special
Meeting. As of the Record Date, the Company had [18,489,463] shares of Common
Stock issued and outstanding and 8,000 shares of Series A Preferred Stock
issued and outstanding. Each share of Common Stock outstanding is entitled to
one vote on each matter which may be brought before the Special Meeting. The
shares of Series A Preferred Stock outstanding have no voting rights with
respect to any matter which may be brought before the Special Meeting.
In order for a quorum to be present at the Special Meeting, a majority of
the outstanding shares of Global's Common Stock as of the close of business on
the Record Date must be present in person or represented by proxy at the
Special Meeting. All such shares that are present in person or represented by
proxy at the Special Meeting including abstentions and broker non-votes will
be counted in determining whether a quorum is present.
Voting of Shares
A Proxy is enclosed. If properly executed and received in time for voting,
and not revoked, the enclosed Proxy will be voted in accordance with the
instructions indicated by the shareholders. If no instructions to the contrary
are indicated, the persons named in the enclosed Proxy will vote all shares of
Common Stock represented by such Proxy:
(i) FOR approval of (A) the Acquisition Agreement (the "Acquisition
Agreement"), dated September 24, 1999, among Gen-X Acquisition (U.S.), Inc.
and Gen-X Acquisition (Canada) Inc. (collectively, the "Purchaser"), DMJ
Financial, Inc. ("DMJ Financial"), James J. Salter, Kenneth J. Finkelstein
and Global, relating to the sale of Global's Off-Price and Action Sports
Division, including the sale of all of the issued and outstanding capital
stock of Global's wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X
Equipment Inc., and (B) the sale of Global's Off-Price and Action Sports
Division;
(ii) FOR approval of the Indemnification Agreements; and
(iii) in the discretion of the persons named in the enclosed Proxy as to
any other matter that may properly come before the Special Meeting.
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The affirmative vote of a majority of the shares of Common Stock outstanding
on the Record Date is required to approve the Acquisition Agreement and the
sale of the Off-Price and Action Sports Division. The affirmative vote of a
majority of the shares of Common Stock present or represented by proxy at the
Special Meeting is required to approve the Indemnification Agreements. An
abstention, withholding of authority to vote or broker non-vote on any
proposal will have the same legal effect as an "against" vote.
As of the Record Date, directors and executive officers of Global, and their
affiliates, owned in the aggregate issued and outstanding shares of Global
Common Stock representing approximately [81.5]% of the shares of Global Common
Stock issued and outstanding as of the Record Date. Michael G. Rubin, Chairman
and Chief Executive Officer of Global, and certain affiliates of SOFTBANK
America Inc. (collectively "SOFTBANK"), who beneficially owned shares of
Global Common Stock representing approximately [43.4]% and [33.3]%,
respectively, of the shares of Global Common Stock issued and outstanding as
of the Record Date, have indicated that they intend to vote for approval of
the Acquisition Agreement and the sale of the Off-Price and Action Sports
Division and for approval of the Indemnification Agreements.
Revocation of Proxies
Sending in a signed Proxy will not affect the shareholder's right to attend
the Special Meeting and vote in person since the Proxy is revocable. Any
shareholder giving a Proxy has the power to revoke it by delivering a later
dated Proxy or giving written notice to the Secretary of Global at any time
before the Proxy is exercised. Attendance at the Special Meeting will not, by
itself, revoke a Proxy.
FORWARD-LOOKING STATEMENTS
This Proxy Statement contains certain "forward-looking" statements,
including, among others, the statements regarding the ability to consummate
the sale of the Off-Price and Action Sports Division, industry conditions and
prospects and Global's future operating results. Without limiting the
foregoing, words such as "anticipates", "believes", "expects", "intends",
"plans" and similar expressions are intended to identify "forward-looking"
statements. All of these "forward-looking" statements are inherently
uncertain, and shareholders must recognize that actual events could cause
actual results to differ materially from management's expectations. Key risk
factors that could, in particular, have an adverse impact on the Company's
ability to effect the sale of the Off-Price and Action Sports Division on a
timely basis include satisfaction or waiver of all closing conditions.
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RISK FACTORS
Risks Related to the Sale of the Off-Price and Action Sports Division
Upon consummation of the sale of the Off-Price and Action Sports Division,
Global will have sold the two divisions which, until the fourth quarter of
1999, accounted for 100% of Global's revenues.
On December 29, 1999, Global consummated the sale of its Branded Division,
through which Global designed, marketed and distributed two footwear products,
the "RYKA" brand and the "Yukon" brand. Until the fourth quarter of 1999, when
Global launched the websites it operates for certain sporting goods retailers,
100% of Global's revenues had been generated by the Branded Division and the
Off-Price and Action Sports Division. Upon consummation of the sale of the
Off-Price and Action Sports Division, 100% of Global's revenues will be
generated through its e-Commerce business. To date, Global's e-Commerce
business has generated limited revenues while incurring substantial expenses
for its development. If Global is not successful implementing and operating
its e-Commerce business, it will have a material adverse effect on Global's
business, results of operations and financial condition.
Certain conditions may prevent the closing of the sale of the Off-Price and
Action Sports Division.
There are several conditions precedent to the closing of the sale of the
Off-Price and Action Sports Division, including, but not limited to the
truthfulness of the parties' representations and warranties, satisfaction of
the parties' obligations to be satisfied on or before the closing and the
absence of proceedings, judgments and laws that prohibit the sale of the Off-
Price and Action Sports Division. Even if the sale is approved by the
shareholders, there can be no assurance that all of the other conditions will
be met or waived by the parties. In such event, the sale of the Off-Price and
Action Sports Division would not be completed and Global would be forced to
either search for another prospective purchaser or to continue to operate the
Off-Price and Action Sports Division. Searching for another prospective
purchaser could be costly and time consuming and there is no guarantee that
Global would find another prospective purchaser to acquire the Off-Price and
Action Sports Division on terms acceptable to Global. If Global is required to
continue to operate the Off-Price and Action Sports Division and Global's
senior management might be prevented from focusing exclusively on its
e-Commerce business, Global's capital resources may not be sufficient to fund
the e-Commerce business while maintaining and growing the Off-Price and Action
Sports Division, which business might create a conflict of interest with
Global's e-Commerce business. For a more complete description of such
conditions and such potential conflict, see "Proposal 1--Approval of the
Acquisition Agreement and the Sale of the Off-Price and Action Sports
Division--Terms of Acquisition Agreement" and "Background and Reasons for the
Sale" and the Acquisition Agreement included with this Proxy Statement as
Appendix A.
The Purchaser is controlled by a group led by the Chief Executive Officer and
the President and Chief Financial Officer of the Off-Price and Action Sports
Division.
The Purchaser of the Off-Price and Action Sports Division is controlled by a
group led by James J. Salter, who is currently the Chief Executive Officer of
the Off-Price and Action Sports Division, and Kenneth J. Finkelstein, who is
the President and Chief Financial Officer of the Off-Price and Action Sports
Division. The duties owed by Messrs. Salter and Finkelstein to Global's
shareholders conflict with their desire to pay Global the lowest possible
purchase price for the Off-Price and Action Sports Division.
Repayment of the notes to be issued pursuant to the Acquisition Agreement is
dependent upon the financial condition and operations of the Purchaser.
A portion of the purchase price under the Acquisition Agreement consists of
subordinated promissory notes in the aggregate principal amount of $10.0
million. These notes represent one-half of the total consideration for the
Off-Price and Action Sports Division and will not be fully paid to Global
until seven and one-half years after consummation of the sale. Payment under
these notes is subordinate in right of payment to the prior payment of senior
indebtedness of the Purchaser in an amount equal to the greater of (i) $40.0
million and (ii) three times
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the earnings of the Purchaser, before interest, taxes, depreciation and
amortization, calculated on a trailing twelve-month basis. Numerous factors
may affect the ability of the Purchaser to repay these notes. These factors
include the failure of the Purchaser to meet its business plan, a downturn in
its industry or negative economic conditions. Furthermore, deterioration in
the Purchaser's financial condition or prospects may be accompanied by a
deterioration in the collateral securing the notes.
Global shareholders are not entitled to appraisal rights in connection with
the sale of the Off-Price and Action Sports Division.
Under Delaware law, Global shareholders are not entitled to appraisal rights
for their shares of the Global stock in connection with the sale of the Off-
Price and Action Sports Division or to any similar rights under Delaware law.
Risks Particular to Global
Global's future success cannot be predicted based upon its limited e-Commerce
operating history.
Although Global commenced operations in 1987, Global did not initiate its e-
Commerce business until the first quarter of 1999 and did not begin operating
the websites of sporting goods retailers until the fourth quarter of 1999.
Accordingly, prior to the fourth quarter of 1999, Global did not generate any
revenues from its e-Commerce business. Based on its limited experience with
its e-Commerce business, it is difficult to predict whether Global will be
successful. Thus, Global's chances of financial and operational success should
be evaluated in light of the risks, uncertainties, expenses, delays and
difficulties associated with operating a business in a relatively new and
unproven market, many of which may be beyond Global's control. Global's
failure to address these issues could have a material adverse effect on its
business, results of operations and financial condition.
Global's success is tied to the success of the retailers for which Global
operates websites.
Global's future success is substantially dependent upon the success of the
retailers for which Global operates websites. Global currently operates the
websites for five sporting goods retailers. The sporting goods industry
currently is experiencing a downturn and many sporting goods retailers,
including some of the retailers for which Global operates websites, are having
financial difficulties. If the retailers for which Global operates websites
continue to have financial difficulties or seek protection from their
creditors, or if Global is unable to replace such retailers, it could
adversely affect Global's business, financial condition and results of
operations.
Global's operating results are difficult to predict and if Global fails to
meet the expectations of public market analysts and investors, the market
price of its Common Stock may decline significantly.
Global's annual and quarterly operating results may fluctuate significantly
in the future due to a variety of factors, many of which are outside of its
control. Because its operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of its operating results may not be a
good indication of its future performance. It is likely that in some future
quarter Global's operating results may fall below the expectations of
securities analysts and investors. In this event, the trading price of
Global's Common Stock may decline significantly. Factors that may harm
Global's business or cause its operating results to fluctuate include the
following:
. the inability to obtain new customers at a reasonable cost, retain
existing customers, or encourage repeat purchases;
. decreases in the number of visitors to the websites operated by Global
or the inability to convert such visitors into customers;
. the mix of sporting goods, apparel, footwear and other products sold by
Global;
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. the inability to adequately maintain, upgrade and develop Global's
websites, the systems used to process customers' orders and payments or
its computer network; the ability of Global's competitors to offer new
or enhanced websites, services or products;
. price competition;
. fluctuations in the amount of consumer spending on sporting goods and
related products, which tend to be discretionary spending items;
. increases in the cost of internet or other advertising;
. the amount and timing of operating costs and capital expenditures
relating to expansion of Global's operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security, system downtime or internet
slowdowns;
. development of relationships with strategic business partners;
. seasonality;
. the inability to manage inventory levels or control inventory theft;
. the inability to manage distribution operations;
. an increase in the level of Global's product returns;
. government regulations related to use of the internet for commerce; and
. economic conditions specific to the internet and the e-Commerce
industry.
Capacity constraints or systems failures could materially and adversely affect
Global's business, results of operations and financial condition.
Any system failure, including network, software or hardware failure, that
causes interruption of Global's websites could result in decreased usage of
such websites. If these failures are sustained or repeated, they could reduce
the attractiveness of Global's websites to customers, vendors and advertisers.
Global's operations are dependent, in part, upon its ability to protect its
operating systems against:
. physical damage from acts of God;
. power loss;
. telecommunications failures;
. physical and electronic break-ins;
. computer viruses; and
. similar events.
The websites operated by Global were launched in the fourth quarter of 1999.
The limited amount of time during which Global has been operating these
websites makes it difficult to predict whether the occurrence of any of these
events is likely. If such events do occur, they could result in interruptions,
delays or cessations in service to users of Global's websites, which could
have a material adverse effect on Global's business, results of operations and
financial condition.
Global may be unable to protect its proprietary technology.
Global's success depends to a significant degree upon the protection of its
software and other proprietary intellectual property rights. Global may be
unable to deter misappropriation of its proprietary information, detect
unauthorized use and take appropriate steps to enforce its intellectual
property rights. In addition, Global's competitors could, without violating
Global's proprietary rights, develop technologies that are as good as or
better than Global's technology. Global's failure to protect its software and
other proprietary intellectual property
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rights or to develop technologies that are as good as its competitors could
put Global at a disadvantage to its competitors which could have a material
adverse effect on Global's business, results of operations and financial
condition.
Global must develop and maintain relationships with its distributors and
manufacturers to obtain sufficient quantities of quality merchandise on
acceptable commercial terms or its sales and profitability could suffer.
Because Global relies primarily on product manufacturers and third-party
distributors to stock the products it offers on the websites it operates for
certain retailers, Global's business would be seriously harmed if it was
unable to develop and maintain relationships with suppliers that allow it to
obtain sufficient quantities of quality merchandise on acceptable terms.
Global does not have written contracts with certain of its suppliers. These
suppliers may not continue to sell products to Global on current terms or at
all, and Global may not be able to establish new supply relationships to
ensure delivery of merchandise in a timely and efficient manner or on
acceptable terms. If Global cannot supply its products to consumers at
acceptable prices, it may lose sales and market share as consumers make
purchases elsewhere.
High merchandise returns could adversely affect Global's business, financial
condition and results of operations.
Global's policy for allowing its customers to return products is consistent
with the policies of each of the retailers for which Global operates websites.
If merchandise returns are significant, Global's business, financial condition
and results of operations could be adversely affected.
Global will rely on its relationships with online services, search engines and
directories to drive traffic to the websites it operates. If Global is unable
to develop or maintain these relationships, Global's business, financial
condition and results of operations could be adversely affected.
Global is developing relationships with online services, search engines and
directories to provide content and advertising banners that link to the
websites it operates for certain retailers. Global will rely on these
relationships as significant sources of traffic to these websites and,
therefore, new customers. If Global is unable to develop satisfactory
relationships with high-traffic websites on acceptable terms, its ability to
attract new customers could be harmed. Further, many of the websites with
which Global has potential online advertising arrangements may also provide
advertising services for other marketers of sporting goods. As a result, these
sites may be reluctant to enter into or maintain relationships with Global.
Failure to achieve sufficient traffic or generate sufficient revenue from
purchases originating from third-party websites may result in termination of
these types of relationships.
Global may not be able to compete successfully against current and future
competitors, which could harm its margins and its business.
The e-Commerce market is new, rapidly evolving and extremely competitive. In
addition, there is a significant amount of capital currently available to fund
existing and potential competitors. Increased competition is likely to result
in price reductions, reduced gross margins and loss of market share, any of
which could seriously harm Global's business, financial condition and results
of operations. Global will potentially compete with a variety of other
companies, including:
. traditional, store-based, national, regional and local athletic footwear
and sporting goods retailers;
. major discount retailers;
. catalog sporting goods retailers;
. online efforts of these traditional retailers such as dsports.com;
. vendors of sporting goods that currently sell some of their products
directly online;
. online sporting goods retailers such as Fogdog;
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. internet portals and online service providers that feature shopping
services, such as AOL, Excite@Home, GO Network and Lycos;
. other online retailers that include sporting goods as part of their
product offerings, such as Onsale and Buy.com; and
. physical and online stores of entertainment entities that sell sporting
goods and fan memorabilia, such as ESPN.com and CBS Sportsline.
There are no assurances that Global will be able to be competitive against
such potential competitors, which could adversely affect Global's financial
condition and results of operations.
If Global experiences problems in its fulfillment, warehouse and distribution
operations, it could lose customers.
Global currently relies upon a third party to handle the fulfillment of its
customer orders, the warehousing of its inventory and the shipment of its
products. As a result, Global is subject to the risks associated with the
ability of such third parties to successfully and timely fulfill and ship
customer orders and to successfully handle Global's inventory delivery
services to meet its shipping needs. The failure of these third parties to
provide such services could adversely affect Global's business, results of
operations and financial condition.
Global may be subject to product liability claims that could be costly and
time consuming.
Global sells products manufactured by third parties, some of which may be
defective. If any product that Global sells were to cause physical injury or
injury to property, the injured party or parties could bring claims against
Global as the retailer of the product. Global's insurance coverage may not be
adequate to cover every claim that could be asserted. If a successful claim
were brought against Global in excess of its insurance coverage, it could
adversely affect Global's business. Even unsuccessful claims could result in
the expenditure of funds and management time and could have a negative impact
on Global's business.
Global may be liable if third parties misappropriate its customers' personal
information.
If third parties are able to penetrate Global's network security or
otherwise misappropriate its customers' personal information or credit card
information, Global could be subject to liability. This liability could
include claims for unauthorized purchases with credit card information,
impersonation or other similar fraud claims. They could also include claims
for other misuses of personal information, including unauthorized marketing
purposes. These claims could result in litigation. Liability for
misappropriation of such information could adversely affect Global's business.
In addition, the Federal Trade Commission and state agencies have been
investigating various internet companies regarding their use of personal
information. Global could incur additional expenses if new regulations
regarding the use of personal information are introduced or if Global's
privacy practices are investigated.
Sporting goods and apparel are subject to changing consumer preferences. If
Global fails to anticipate these changes, it could experience lower sales,
higher inventory markdowns and lower margins.
Global's success depends upon its ability to anticipate and respond to
trends in sporting goods merchandise and consumers' participation in sports.
Consumers' tastes in apparel and sporting goods equipment are subject to
frequent and significant changes, due in part to manufacturers' efforts to
incorporate advanced technologies into some types of sporting goods. In
addition, the level of consumer interest in a given sport can fluctuate
dramatically. Prior to commencing its e-Commerce business, Global's businesses
were primarily concentrated in athletic footwear and apparel. If Global fails
to identify and respond to changes in sporting goods merchandising and
recreational sports participation, its sales could suffer and it could be
required to mark down unsold inventory. This would depress Global's profit
margins. In addition, any failure to keep pace with changes in consumers'
recreational sports habits could allow Global's competitors to gain market
share which could have an adverse effect on Global's business, results of
operations and financial condition.
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Global's success is dependent upon certain key personnel.
Global's success depends to a significant degree upon the contribution of
its executive officers and other key personnel, particularly Michael G. Rubin,
Chief Executive Officer. Global has employment agreements with its executive
officers and certain key personnel. Global cannot be sure, however, that it
will be able to retain its executive, managerial and other key personnel or
attract additional executive, managerial and other key personnel if required.
Global is controlled by certain principal shareholders.
As of the Record Date, Michael G. Rubin beneficially owned [43.4]% and
SOFTBANK beneficially owned [33.3]% of the outstanding Common Stock of Global.
As a result, if Mr. Rubin and SOFTBANK vote together, they will control the
outcome of the two proposals being submitted to the shareholders at the
Special Meeting. Both Mr. Rubin and SOFTBANK have indicated that they intend
to vote for approval of the Acquisition Agreement and the sale of the Off-
Price and Action Sports Division and for approval of the Indemnification
Agreements.
In addition, Mr. Rubin and SOFTBANK are in a position to exercise control
over most other matters requiring shareholder approval, including the election
or removal of directors, approval of significant corporate transactions, and
the ability generally to direct Global's affairs. Furthermore, the stock
purchase agreement pursuant to which SOFTBANK acquired its shares of Global
Common Stock provides that SOFTBANK has the right to designate up to two
members of Global's Board, depending on the number of shares of Global Common
Stock held by SOFTBANK. This concentration of ownership and SOFTBANK's right
to designate members to Global's Board may have the effect of delaying or
preventing a change in control of Global, including transactions where
shareholders might otherwise receive a premium over current market prices for
their shares.
Global has never paid dividends.
Global 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, while Global currently does not have a credit facility in
place, Global intends to enter into a new credit facility. This new facility
may prohibit the payment by Global of dividends on its Common Stock.
There are certain risks relating to Global's 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. Global addressed the potential problems posed by this
limitation in its systems software to assure that it was prepared for the Year
2000. January 1, 2000 passed without the occurrence of any Year 2000 problems
being reported. However, it is possible that problems may occur even after
arrival of the Year 2000. Global continues to seek verification from third
parties with which it conducts material business that they are Year 2000
compliant. If Global or such third parties do experience problems posed by
limitations in their systems software, there may be a material adverse effect
on Global's results of operations.
Issuance of Preferred Stock and Common Stock; Anti-Takeover Provisions.
Pursuant to its Amended and Restated Certificate of Incorporation, Global
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 shareholders, 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 Global. Issuing additional shares of Common Stock could result in dilution
of the voting power of the current holders of Global's Common Stock. In
addition, certain "anti-takeover" provisions of Delaware law may restrict the
ability of the shareholders to approve a merger or business combination or
obtain control of Global.
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There are limitations on the liabilities of Global's directors.
Pursuant to its Amended and Restated Certificate of Incorporation and under
Delaware law, Global's directors are not liable to Global or its shareholders
for monetary damages for breach of fiduciary duty, except for liability for
breach of a director's duty of loyalty, acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, for dividend payments or stock repurchases that are unlawful under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
Risks Typical of the Internet Industry
Global's success is tied to the continued growth in the use of the internet
and the adequacy of the internet infrastructure.
Global's future success is substantially dependent upon continued growth in
the use of the internet. The number of users and advertisers on the internet
may not increase and commerce over the internet may not become more accepted
and widespread for a number of reasons, including:
. actual or perceived lack of security of information, including credit
card numbers;
. lack of access and ease of use;
. congestion of traffic on the internet;
. inconsistent quality of service and lack of availability of cost-
effective, high speed service;
. possible disruptions due to Year 2000 related difficulties, computer
viruses or other damage to the internet servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the internet may not support an
increase in the number or requirements of Global's users. In addition, there
have been outages and delays on the internet as a result of damage to the
current infrastructure. The amount of traffic on the websites operated by
Global could be materially affected if there are outages or delays in the
future. The use of the internet may also decline if there are delays in the
development or adoption of modifications by third parties that are required to
support increased levels of activity on the internet. If none of the foregoing
changes occur, or if the internet does not become a viable commercial medium,
Global's business, results of operations and financial condition could be
materially adversely affected. In addition, even if those changes occur,
Global may be required to spend significant amounts to adapt its operations to
any new or emerging technologies relating to the internet.
The technology of the internet is changing rapidly and could render the
websites which Global operates obsolete.
The technology of the internet and e-Commerce is evolving rapidly for many
reasons, including:
. customers frequently change their requirements and preferences;
. competitors frequently introduce new products and services; and
. industry associations and others create new industry standards and
practices.
These changes could render the websites which Global operates obsolete.
Global's ability to attract customers could be seriously impaired if it does
not accomplish the following tasks:
. continually enhance and improve its websites;
. identify, select and obtain leading technologies useful in its business;
and
. respond to technological advances and emerging industry standards in a
cost-effective manner and on a timely basis.
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Customers may be unwilling to use the internet to purchase goods.
Global's long-term future depends heavily upon the general public's
willingness to use the internet as a means to purchase goods. The failure of
the internet to develop into an effective commercial tool would seriously
damage Global's future operations. E-Commerce is a new concept, and large
numbers of customers may not begin or continue to use the internet to purchase
goods. The demand for and acceptance of products sold over the internet are
highly uncertain, and few e-Commerce businesses have more than a short track
record. If consumers are unwilling to use the internet to conduct business,
Global's business may not develop profitably. The internet may not succeed as
a medium of commerce because of delays in developing elements of the needed
internet infrastructure, such as a reliable network, high-speed modems, high-
speed communication lines and other enabling technologies.
The security risks of e-Commerce may discourage customers from purchasing
goods from Global.
In order for the e-Commerce market to develop successfully, Global and other
market participants must be able to transmit confidential information securely
over public networks. Third parties may have the technology or know-how to
breach the security of customer transaction data. Any such breach could cause
customers to lose confidence in the security of Global's websites and choose
not to purchase from those websites. If someone is able to circumvent Global's
security measures, he or she could destroy or steal valuable information or
disrupt the operation of Global's websites. Concerns about the security and
privacy of transactions over the internet could inhibit the growth of the
internet and e-Commerce. Global's security measures may not effectively
prohibit others from obtaining improper access to the information on Global's
websites. Any security breach could expose Global to risks of loss, litigation
and liability and could seriously disrupt Global's operations.
Global's business is subject to U.S. and foreign governmental regulation of
the internet and taxation.
Congress and various state and local governments have recently passed
legislation that regulates various aspects of the internet, including online
content, copyright infringement, user privacy, taxation, access charges,
liability for third-party activities and jurisdiction. In addition, federal,
state, local and foreign governmental organizations are also considering
legislative and regulatory proposals that would regulate the internet. Areas
of potential regulation include libel, pricing, quality of products and
services and intellectual property ownership. A number of proposals have been
made at the state and local level that would impose taxes on the sale of goods
and services through the internet. Such proposals, if adopted, could
substantially impair the growth of e-Commerce and could adversely affect
Global's future business, results of operation and financial condition.
In addition, U.S. and foreign laws regulate Global's ability to use customer
information and to develop, buy and sell mailing lists. New restrictions in
this area could limit Global's ability to operate as planned and result in
significant compliance costs.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of Global's internet business or its marketing efforts.
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from
individuals when accessing websites, with particular emphasis on access by
minors. These regulations may include requirements that Global establish
procedures to disclose and notify users of privacy and security policies,
obtain consent from users for collection and use of information and provide
users with the ability to access, correct and delete personal information
stored by Global. These regulations may also include enforcement and remedial
provisions. Even in the absence of those regulations, the Federal Trade
Commission has begun investigations into the privacy practices of other
companies that collect information on the internet. One investigation resulted
in a consent decree under which an internet company agreed to establish
programs to implement the principles noted above. Global could become a party
to a similar investigation or enforcement proceeding, or the Federal Trade
Commission's regulatory and enforcement efforts may harm Global's ability to
collect demographic and personal information from users, which could be costly
or adversely affect Global's marketing efforts.
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PROPOSAL 1--APPROVAL OF THE ACQUISITION AGREEMENT
AND THE SALE OF THE OFF-PRICE AND ACTION SPORTS DIVISION
General
On September 24, 1999, the Company entered into the Acquisition Agreement
providing for the sale of the Company's Off-Price and Action Sports Division,
including the sale of all of the issued and outstanding capital stock of the
Company's wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment
Inc. (collectively, the "Gen-X Companies"). The aggregate purchase price for
the sale is $20.0 million, consisting of a cash payment at closing of
approximately $6.0 million, assumption of certain notes payable by Global in
the aggregate principal amount of approximately $4.0 million and delivery of
notes payable to Global in the aggregate principal amount of $10.0 million.
The Off-Price and Action Sports Division accounted for approximately 66% of
the Company's net sales in 1998 and approximately 31.5% of the Company's
assets as of December 31, 1998. As a result, the sale of the Off-Price and
Actions Sports Division may be considered to be a sale of substantially all of
the Company's assets under applicable law. Shareholders are, therefore, being
asked to approve the sale of the Off-Price and Action Sports Division.
Background and Reasons for the Sale
During the fourth quarter of 1998, the Company began to investigate whether
it would be beneficial for the Company to expand its business to include the
sale of athletic footwear and sporting goods through the internet. At that
time, electronic commerce ("e-Commerce") was rapidly growing, and Global
believed the internet provided a unique opportunity for it to leverage its
existing relationships with vendors and sporting goods retailers.
By the end of 1998, the Company had developed a business model in which the
Company would enter into exclusive contracts with land-based sporting goods
retailers to operate their e-Commerce businesses and pay the retailers a share
of sales made through the websites. The business model provided that Global
would develop the retailer's website, maintain the website, buy and warehouse
inventory, ship customer orders and provide customer service. Global believed
that such retailers were well suited to compete in the internet sporting goods
industry due to their established brand names, existing customer traffic and
existing relationships with and access to merchandise from vendors. Global's
business model enabled it to leverage the marketing and advertising budgets of
these retailers by requiring integration of the retailers' website addresses
into their marketing and communications materials.
In January 1999, the Company formed Global Sports Interactive, Inc. ("GSI")
to implement its e-Commerce strategy and began to market its business model to
land-based retailers in the sporting goods industry. During the first quarter
of 1999, Global was successful in signing exclusive agreements to operate the
internet businesses of multiple sporting goods retailers, including The Sports
Authority, Inc., The Athlete's Foot Stores, Inc., Sport Chalet, Inc., Michigan
Sporting Goods Distributors, Inc. (MC Sports) and Dunham's Athleisure
Corporation.
While marketing its business model, Global realized that the amount of
management time necessary to launch and operate its e-Commerce business would
be substantial. As a result, the Company began to recruit a senior management
team from both the e-Commerce and sporting goods industries to develop and
manage its new e-Commerce business. Although Global was successful in
expanding its senior management team, the operation of Global's existing
businesses prevented senior management from focusing exclusively on its
e-Commerce business.
Global also realized that its capital resources would not be sufficient to
fund its rapidly growing e-Commerce business while maintaining and growing its
existing businesses and that its existing businesses might create a conflict
of interest with its e-Commerce business.
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As a result, Global concluded that it should focus exclusively on its e-
Commerce business. On April 20, 1999, Global formalized a plan to divest its
non-internet businesses which consisted of its Off-Price and Action Sports
Division and its Branded Division.
Based on its decision to focus exclusively on its e-Commerce business,
Global began preliminary discussions in early April,1999 with Deutsche Bank
Securities Inc. ("Deutsche Bank") (formerly BT Alex. Brown Incorporated). On
April 17, 1999, Global's Board of Directors engaged Deutsche Bank to
familiarize itself with Global's operations, properties and financial
condition and assist Global in identifying and evaluating prospective
purchasers of the Company's Off-Price and Action Sports Division and the
Company's Branded Division.
Between April 20, 1999 and June 20, 1999, Global worked with Deutsche Bank
to prepare an offering memorandum for the sale of the Off-Price and Action
Sports Division. Twenty-two parties were contacted regarding their interest in
acquiring the Off-Price and Action Sports Division. The offering memorandum
was circulated to 12 prospective purchasers between June 21, 1999 and July 15,
1999. All prospective purchasers were required to execute confidentiality
agreements prior to receiving a copy of the offering memorandum.
Prospective purchasers were also provided with certain publicly available
financial information and confidential information regarding the Off-Price and
Action Sports Division and Global such as data on significant customers and
suppliers and financial projections for the current fiscal year.
Based upon the information contained in the offering memorandum, Global
received one proposal for the Off-Price and Action Sports Division. The
proposal was submitted by a management group led by James J. Salter and
Kenneth J. Finkelstein. Mr. Salter is currently the Chief Executive Officer of
the Off-Price and Action Sports Division and Mr. Finkelstein is the President
and Chief Financial Officer of the Off-Price and Action Sports Division. In
May 1998, Global had acquired the capital stock of the Gen-X Companies, which
comprise part of the Off-Price and Action Sports Division, from Messrs. Salter
and Finkelstein and other shareholders of the Gen-X Companies.
Approval by Board of Directors
Global and Messrs. Salter and Finkelstein negotiated the specific terms of
the sale of the Off-Price and Action Sports Division from June 1999 to
September 15, 1999.
On September 15, 1999, Global and Messrs. Salter and Finkelstein
preliminarily agreed to the terms and conditions of the sale of the Off-Price
and Action Sports Division and the Acquisition Agreement, subject to certain
customary closing conditions, including approval by Global's Board of
Directors, approval by Global's shareholders and a review of the Purchaser's
documents relating to the Purchaser's proposed restructuring of the Off-Price
and Action Sports Division. The Purchaser contemplated a restructuring which
was to occur immediately prior to and immediately following the consummation
of the sale of the Off-Price and Action Sports Division. However, the
documents necessary to effectuate the restructuring had not at that time been
provided to Global or its legal counsel for review.
On September 16, 1999, Global's Board of Directors held a meeting to review
and consider the sale of the Off-Price and Action Sports Division. The meeting
was attended by all of the members of Global's Board of Directors,
representatives of Deutsche Bank, Global's legal counsel, Global's Chief
Financial Officer and Global's Senior Vice President of Strategic Development.
The Board deferred approval of the sale of the Off-Price and Action Sports
Division to the Purchasers until Global and its legal counsel were provided
with and were able to review the Purchaser's proposed restructuring documents.
Global and its legal counsel were provided with copies of the restructuring
documents on September 20, 1999. Between September 20, 1999 and September 23,
1999, Global and its legal counsel reviewed and
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negotiated the restructuring documents of the Purchaser. The restructuring
documents, as executed, provide for the following:
. the redemption by Global of 7,200 of the 8,000 outstanding shares of
Series A Preferred Stock of Global in exchange for a promissory note in
the principal amount of $360,000, which note will be convertible into an
obligation of Gen-X Holdings Inc.;
. the amendment and restatement of the contingent notes with an aggregate
outstanding principal balance of $3.6 million issued by Global in
connection with the acquisition of the Gen-X Companies in May, 1998 to
make such notes convertible into obligations of Gen-X Holdings Inc.;
. conversion of the above notes into a promissory note from Gen-X Holdings
Inc. in the principal amount of approximately $4.0 million;
. cancellation of the note in the approximate amount of $4.0 million in
exchange for Gen-X Holdings Inc. issuing a promissory note convertible
into preferred stock of Gen-X Holdings Inc.;
. Global's issuance of a promissory note in favor of Gen-X Holdings Inc.
in the principal amount of approximately $4.0 million, which note will
be assumed by the Purchaser in connection with the sale of the Off-Price
and Action Sports Division; and
. certain other transactions between the Purchaser and its affiliates
which will occur after the consummation of the sale of the Off-Price and
Action Sports Division and which will not affect Global.
On September 24, 1999, Global's Board of Directors held another meeting to
review and consider the sale of the Off-Price and Action Sports Division to
the Purchaser. The meeting was attended by all of the members of Global's
Board of Directors other than Jeffrey Rayport, representatives of Deutsche
Bank, Global's legal counsel, Global's Chief Financial Officer and Senior Vice
President of Strategic Development. After a review of the terms and conditions
of the Acquisition Agreement and related agreements by Global's legal counsel
and a review of the financial terms of the proposed sale of the Off-Price and
Action Sports Division by a representative of Deutsche Bank, the Board of
Directors unanimously determined that the terms and conditions of the sale of
the Off-Price and Action Sports Division to the Purchaser are fair to, and in
the best interests of, the Company and approved the sale of the Off-Price and
Action Sports Division and the Acquisition Agreement and related agreements.
The Acquisition Agreement was executed on September 24, 1999.
Terms of the Acquisition Agreement
The following is a summary of the material provisions of the Acquisition
Agreement, dated September 24, 1999, between Global, Gen-X Acquisition (U.S.),
Inc., Gen-X Acquisition (Canada) Inc., DMJ Financial, James J. Salter and
Kenneth J. Finkelstein. A copy of the Acquisition Agreement is attached as
Appendix A to this Proxy Statement. The Acquisition Agreement is incorporated
into this Proxy Statement by reference and should be read carefully.
General
The Acquisition Agreement provides for the sale by Global to Gen-X
Acquisition (U.S.), Inc. of all of the issued and outstanding shares of
capital stock of Gen-X Holdings and the sale by Global to Gen-X Acquisition
(Canada), Inc. of all of the issued and outstanding shares of capital stock of
Gen-X Equipment. The sale of the Off-Price and Action Sports Division will be
consummated only if the Acquisition Agreement and the transactions
contemplated by the Acquisition Agreement are approved and adopted by the
affirmative vote of a majority of the shares of Global Common Stock
outstanding on the Record Date. If approved, the closing of the sale of the
Off-Price and Action Sports Division will take place shortly after the Special
Meeting. There can be no assurance, however, that the conditions to the
closing will be satisfied by that time, or at all, or that the Acquisition
Agreement will not be terminated. See "--Conditions to Closing."
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Purchase Price
The purchase price to be paid to Global for the capital stock of Gen-X
Holdings consists of the following: (i) a cash payment of approximately $6.0
million; (ii) a promissory note in the principal amount of $5.0 million; and
(iii) the assumption of certain notes, payable by Global to Gen-X Holdings, in
the aggregate principal amount of approximately $4.0 million, together with
all accrued and unpaid interest thereon. This purchase price is subject to
certain adjustments. The purchase price to be paid to Global for the capital
stock of Gen-X Equipment consists of a promissory note in the principal amount
of $5.0 million.
Subject to certain prepayment provisions, the principal balance of each of
the notes to be delivered to Global as part of the purchase price for the
capital stock of the Gen-X Companies (the "Notes") will be payable in thirty
equal consecutive quarterly installments commencing on the first day of the
quarterly period following the closing of the sale of the Off-Price and Action
Sports Division. Interest will accrue on the Notes at the rate of 5% per year
for the initial five years and at the rate of 7% per year thereafter. Upon the
occurrence of an event of default, interest will accrue on the Notes at the
rate of 12% per year. Payment under the Notes is subordinate in right of
payment to the prior payment of senior indebtedness of the Purchaser in an
amount equal to the greater of (i) $40.0 million and (ii) three times the
earnings of the Purchaser, before interest, taxes, depreciation and
amortization, calculated on a trailing twelve-month basis.
Related Agreements
In connection with the Acquisition Agreement, Global has agreed to enter
into the following related agreements, each effective as of the closing of the
sale of the Off-Price and Action Sports Division: (i) a Shared Facilities
Agreement, (ii) a Right of First Offer Agreement and, (iii) a Non-Competition
Agreement.
Under the Shared Facilities Agreement, Global and Gen-X Equipment will
provide to each other office space and certain office services, without
charge, until the earlier of: (i) the date which is three (3) months from the
date of the Shared Facilities Agreement, and (ii) the closing date of the sale
of the premises previously used by Global at 555 S. Henderson Road, King of
Prussia, PA, unless terminated earlier by written agreement. The Right of
First Offer Agreement provides that Global shall, for a period of five years,
use commercially reasonable efforts to first offer to Gen-X Equipment future
sales of closeout inventory, provided that the manufacturer, vendor or
retailer of such inventory consents to such sale.
Under the Noncompetition Agreement, Global and Michael G. Rubin will not
compete, for a period of five years following the closing of the sale of the
Off-Price and Action Sports Division, in the action sports and off-price
sporting goods business, as currently conducted by the Gen-X Companies. Global
will not be prohibited or restricted under the Noncompetition Agreement from
conducting its e-Commerce business. The Noncompetition Agreement may be
terminated prior to the end of its five year term upon the occurrence of
certain defaults or breaches by the parties to the Acquisition Agreement.
In addition, Global and the other parties to the Acquisition Agreement have
agreed to enter into agreements to terminate, as of the closing of the sale of
the Off-Price and Action Sports Division, the employment agreements of Messrs.
Salter and Finkelstein and the noncompetition agreement entered into by
Merssrs Salter and Finkelstein and DMJ Financial in connection with the
purchase by Global of the Gen-X Companies in May, 1998.
In order to secure the obligations to Global under the Notes, the Purchaser
and its operating subsidiaries have agreed to execute and deliver to Global
guarantees, security agreements, pledge agreements and trademark security
agreements.
Representations and Warranties
The Acquisition Agreement contains certain representations and warranties by
Global relating to, among other things: (i) the due organization, valid
existence and power of the Gen-X Companies, (ii) the capitalization
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and ownership of the Gen-X Companies, (iii) the authorization, execution,
delivery, enforceability and performance of the Acquisition Agreement and
related agreements by Global, (iv) no conflicts under Global's charter or
bylaws or violations of agreements or applicable laws or judgments, (v) the
absence of legal proceedings and judgments, and (vi) brokerage fees.
The Acquisition Agreement also contains certain representations and
warranties by the Purchaser, DMJ Financial and Messrs. Salter and Finkelstein
relating to, among other things: (i) the due organization, valid existence and
power of the Purchaser and DMJ Financial, (ii) the authorization, execution,
delivery, enforceability and performance of the Acquisition Agreement and
related agreements by the Purchaser, DMJ Financial and Messrs. Salter and
Finkelstein, (iii) the absence of any business activities, operations or
obligations of the Purchaser prior to closing of the sale of the Off-Price and
Action Sports Division, (iv) the absence of proceedings and judgments, (v)
brokerage fees, (vi) representations as to investment matters, (vii) the
absence of any obligations incurred by DMJ Financial or Messrs. Salter or
Finkelstein on behalf of Global or any of its subsidiaries other than the Gen-
X Companies, and (viii) the non-applicability of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the
Competition Act (Canada).
Conditions to Closing
Unless otherwise waived, the obligations of Global to be performed at the
closing of the sale of the Off-Price and Action Sports Division are subject to
the satisfaction of certain conditions, including the following: (i) the
representations and warranties of the Purchaser, DMJ Financial and Messrs.
Salter and Finkelstein must have been true in all material respects when made
and must be true in all material respects on and as of the date of the
closing, (ii) all of the obligations to be satisfied or performed by the
Purchaser on or before the closing must have been substantially satisfied or
performed, (iii) any applicable waiting period under the HSR Act must have
expired or been terminated (based on certain representations made by Purchaser
in the Acquisition Agreement that the size of its operations and the size of
its ultimate parents would not trigger the requirements of the HSR Act, Global
does not believe the HSR Act is applicable), (iv) approval of the sale of the
Off-Price and Action Sports Division must have been obtained from the
shareholders of Global, (v) no proceeding, judgment or law has been
instituted, issued or enacted that prohibits the transactions contemplated by
the Acquisition Agreement and related agreements, and (vi) Global has received
the written opinion of its financial advisor that the consideration to be
received by Global is fair, from a financial point of view, to Global.
Unless otherwise waived, the obligations of the Purchaser, DMJ Financial and
Messrs. Salter and Finkelstein to be performed at the closing of the sale of
the Off-Price and Action Sports Division are subject to the satisfaction of
certain conditions, including the following: (i) the representations and
warranties of Global must have been true in all material respects when made
and must be true in all material respects on and as of the date of the
closing, (ii) all of the obligations to be satisfied or performed by Global on
or before the closing must have been substantially satisfied or performed, and
(iii) Global must have accelerated or agreed to accelerate the vesting of
options to purchase an aggregate of 281,930 shares of Global Common Stock held
by certain employees of Global, of which options to acquire 80,000 shares are
held by each of Messrs Salter and Finkelstein.
Nondisclosure and Noncompetition Obligations
In connection with the sale of the Off-Price and Action Sports Division,
Global has agreed not to disclose any confidential information about the Gen-X
Companies and the Purchaser, DMJ Financial and Messrs. Salter and Finkelstein
have agreed not to disclose any confidential information about Global. In
addition, until the Purchaser's obligations under the Notes have been
satisfied, the Purchaser, DMJ Financial and Messrs. Salter and Finkelstein
have agreed not to compete with the Gen-X Companies.
Indemnification
Pursuant to the terms of the Acquisition Agreement, Global has agreed to
indemnify the Purchaser, DMJ Financial and Messrs. Salter and Finkelstein from
and against any damages arising out of or in connection with
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certain matters, including the following: (i) any misrepresentation, breach or
failure of any representation or warranty made by Global in the Acquisition
Agreement or any of the related agreements, and (ii) any failure or refusal by
Global to satisfy or perform any covenant, term, obligation or condition of
the Acquisition Agreement or any of the related agreements required to be
satisfied or performed by it.
The Purchaser, DMJ Financial and Messrs. Salter and Finkelstein, jointly and
severally, have agreed to indemnify Global from and against any damages
arising out of or in connection with certain matters, including the following:
(i) any misrepresentation, breach or failure of any representation or warranty
made by the Purchaser, DMJ Financial or Messrs. Salter or Finkelstein in the
Acquisition Agreement or any of the related agreements, (ii) any failure or
refusal by the Purchaser, DMJ Financial, Salter or Finkelstein to satisfy or
perform any covenant, term, obligation or condition of the Acquisition
Agreement or any of the related agreements required to be satisfied or
performed by them, (iii) any act or omission of the Gen-X Companies or their
representatives at any time after the closing, and (iv) any claim against
Global by Customs Canada.
Termination
The Acquisition Agreement may be terminated under any of the following
circumstances: (i) upon the mutual written consent of Global and the
Purchaser, (ii) by Global or the Purchaser if the closing does not occur on or
before February 28, 2000, (iii) by the Purchaser if it becomes certain that
any of the conditions to the closing obligations of the Purchaser, DMJ
Financial or Messrs. Salter and Finkelstein cannot be satisfied, (iv) by
Global if it becomes certain that any of the conditions to the closing
obligations of Global cannot be satisfied, (v) by the Purchaser if Global
breaches any of its representations, warranties, covenants or agreements
contained in the Acquisition Agreement, (vi) by Global if the Purchaser, DMJ
Financial or Messrs. Salter or Finkelstein breach any of their
representations, warranties, covenants or agreements contained in the
Acquisition Agreement, or (vii) by Global if Global receives an offer from a
third party to acquire the Gen-X Companies and the board of directors of
Global determines, in good faith, that its fiduciary duties require Global to
accept such offer.
Opinion of Deutsche Bank Securities Inc.
Deutsche Bank has acted as financial advisor to Global in connection with
the proposed sale of the Company's Off-Price and Action Sports Division,
including the sale of the Gen-X Companies.
At the September 24, 1999 meeting of Global's Board of Directors, Deutsche
Bank delivered its oral opinion, subsequently confirmed in writing as of the
same date, to the Global Board of Directors to the effect that, as of the date
of such opinion, based upon and subject to the assumptions made, matters
considered and limits of the review undertaken by Deutsche Bank, the
consideration to be received by Global in connection with the sale of the Off-
Price and Action Sports Division is fair, from a financial point of view, to
Global.
The full text of Deutsche Bank's written opinion, dated September 24, 1999
(the "Deutsche Bank Opinion"), which sets forth, among other things, the
assumptions made, matters considered and limits on the review undertaken by
Deutsche Bank in connection with the opinion is attached as Appendix B to this
Proxy Statement and is incorporated herein by reference. Global stockholders
are urged to read the Deutsche Bank Opinion in its entirety. The summary of
the Deutsche Bank Opinion set forth in this Proxy Statement is qualified in
its entirety by reference to the full text of the Deutsche Bank Opinion.
In connection with Deutsche Bank's role as financial advisor to Global, and
in arriving at its opinion, Deutsche Bank has, among other things, reviewed
certain publicly available financial information and other information
concerning the Off-Price and Action Sports Division and certain internal
analyses and other information furnished to it by the Off-Price and Action
Sports Division and Global such as accounts receivable aging reports,
available-to-sell inventory reports, inventory aging reports and data on
significant customers and suppliers. Deutsche Bank also held discussions with
the members of the senior management of the Off-Price and Action Sports
Division and Global regarding the businesses and prospects of the Off-Price
and Action Sports Division. In addition, Deutsche Bank has (i) reviewed the
actual and 1999 forecasted financial performance of
16
<PAGE>
the Off-Price and Action Sports Division, (ii) reviewed the financial terms of
certain recent acquisitions which it deemed comparable in whole or in part,
(iii) reviewed the terms of the Acquisition Agreement and certain related
documents including the Non-competition Agreement, the Promissory Notes and
Intercreditor Agreements, and (iv) performed such other studies and analyses
and considered such other factors as it deemed appropriate. Deutsche Bank
found no publicly-traded companies that are comparable to the Off-Price and
Action Sports Division. Accordingly, Deutsche Bank was unable to value the
Off-Price and Action Sports Division based upon comparable market valuations.
In addition, based upon the nature of the Off-Price and Action Sports
Division's business, management of the Off-Price and Action Sports Division
and Global believe it is impractical to produce financial projections beyond
the current fiscal year; consequently, Deutsche Bank was unable to perform a
discounted cash flow valuation analysis or leveraged buyout valuation
analysis.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning the Off-Price and Action Sports
Division, including, without limitation, any financial information or
forecasts considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, Deutsche Bank has assumed and relied
upon the accuracy and completeness of all such information and Deutsche Bank
has not conducted a physical inspection of any of the properties or assets and
has not prepared or obtained any independent evaluation or appraisal of any of
the assets or liabilities of the Off-Price and Action Sports Division. With
respect to the financial forecasts made available to Deutsche Bank and used in
its analyses, Deutsche Bank has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Off-Price and Action Sports Division and
Global as to the matters covered thereby. In rendering its opinion, Deutsche
Bank expresses no view as to the reasonableness of such forecasts or the
assumptions on which they are based. Deutsche Bank's opinion is necessarily
based upon economic, market and other conditions as in effect on, and the
information made available to it as of, the date of such opinion.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of
the Off-Price and Action Sports Division, Global and the Purchaser contained
in the Acquisition Agreement are true and correct and that Global and the
Purchaser will each perform all of the covenants and agreements to be
performed by it under the Purchase Agreement and all conditions to the
obligations of each of Global and the Purchaser to consummate the sale of the
Off-Price and Action Sports Division will be satisfied without any waiver
thereof. Deutsche Bank has also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the sale of the Off-Price and Action Sports Division will be
obtained and that in connection with obtaining any necessary governmental,
regulatory or other approvals and consents, or any amendments, modifications
or waivers to any agreements, instruments or orders to which Global is a party
or is subject or by which it is bound, no limitations, restrictions or
conditions will be imposed or amendments, modifications or waivers made that
would have a material adverse effect on Global.
Set forth below is a brief summary of all material financial analyses
performed by Deutsche Bank in connection with its opinion and reviewed with
the Global Board of Directors at its meeting on September 24, 1999.
17
<PAGE>
Discussion of the Total Aggregate Consideration for the Off-Price and Action
Sports Division.
Deutsche Bank reviewed the proposed form and terms of financial
consideration to Global by the Purchaser and based on Deutsche Bank's
analysis, valued the proposed total aggregate consideration at $44.4 million.
The total aggregate consideration is comprised of the following:
<TABLE>
<CAPTION>
Consideration Value
------------- ---------------
($ in millions)
<S> <C>
Retention by Global of insured accounts receivable....... $10.5
Cash..................................................... 7.0
$10.0 million in seller notes............................ 8.6(1)
Assumption of Global's contingent liability.............. 3.2(1)
Assumption of long-term debt............................. 2.9
Assumption of short-term debt............................ 12.1
-----
Total.................................................. $44.4
=====
</TABLE>
- --------
(1) Fair market value
The $10.0 million in Notes is to be secured by a second lien on
substantially all of the assets of the Purchaser and its operating
subsidiaries. Based upon prevailing interest rates and the creditworthiness of
the Purchaser, Deutsche Bank priced the Notes to yield 10%. The $4.0 million
face value of contingent consideration liability to be assumed by the
Purchaser has been discounted at 11%.
The "total aggregate consideration" of $44.4 million for the Off-Price and
Action Sports Division differs from the $20.0 million purchase price to be
received by Global for the Gen-X Companies for the following reasons: (i) the
notes to be issued by the Purchaser in the aggregate principal amount of $10.0
million and the contingent notes to be assumed by the Purchaser in the
aggregate principal amount of $4.0 million have been discounted, and (ii) the
amount of cash and the value of accounts receivable held in the Off-Price and
Action Sports Division to be retained by the Company and the amount of the
liabilities held by the Gen-X Companies have been added to the purchase price.
Analysis of Selected Precedent Transactions.
Deutsche Bank reviewed the financial terms, to the extent publicly
available, of five pending or completed merger and acquisition transactions
since January 1994 involving companies in the off-price distribution industry
and action sports industry (the "Selected Transactions"). Deutsche Bank
calculated various financial multiples based on the Transaction Value (the
market value of the equity plus net debt and preferred securities) and certain
publicly available information for each of the Selected Transactions and
compared them to corresponding financial multiples for the proposed sale of
the Off-Price and Action Sports Division. The transactions reviewed and the
multiples were as follows:
. the August 8, 1994 purchase of C.A.S. Sports International by Ride,
Inc.;
. the October 11, 1996 purchase of C.A.S. Sports International, Inc. by
Gen-X Corporation;
. the May 18, 1999 purchase of the Gen-X Companies by Global Sports, Inc.;
. the March 26, 1999 purchase of Morrow Snowboards, Inc. by K2 Inc.; and
. the pending purchase of Ride Inc. by K2 Inc.
<TABLE>
<CAPTION>
Multiples
-----------------------------------
Multiple of Transaction value to: Low Mean High Proposed Transaction
--------------------------------- ---- ---- ---- --------------------
<S> <C> <C> <C> <C>
LTM Revenues............................. 0.1x 0.3x 0.6x 0.6x
LTM EBITDA(1)............................ 1.6x 4.1x 5.4x 5.4x
LTM EBIT(2).............................. 1.9x 4.4x 5.9x 6.1x
Multiple of Equity value to:
Book Value............................. 0.9x 1.8x 3.3x 1.7x
</TABLE>
- --------
(1) Trailing twelve months EBITDA (earnings before interest, taxes,
depreciation and amortization)
(2) Trailing twelve months EBIT (earnings before interest and taxes)
18
<PAGE>
All multiples for the Selected Transactions were based on public information
available at the time of announcement of such transaction, without taking into
account differing market and other conditions during the five-year period
during which the Selected Transactions occurred. The purchase of Morrow
Snowboards, Inc. by K2 Inc. and the pending purchase of Ride Inc. by K2 Inc.
only provided multiples of revenue and book value as neither target generated
positive EBIT or EBITDA during the 12 months prior to the transaction.
In addition to the above analyses, Deutsche Bank considered the following
additional material factors in rendering its opinion to Global's Board of
Directors. First, the Off-Price and Action Sports Division missed its original
net sales budget for the second quarter of 1999 by 16.7%, or $2.7 million,
generating losses of $1.9 million and $1.7 million at the EBIT and EBITDA
levels, respectively. The projected financial performance for this business
had been for EBIT and EBITDA of $1.8 million and $2.0 million, respectively.
In addition, the projected financial results were revised substantially
downward resulting in a $3.0 million, or 36.0% reduction in EBITDA compared to
the original forecast, for the third and fourth quarter of 1999. These
factors, in turn, increased concerns potential buyers expressed during the
marketing process about the future financial performance of the business
without the participation of Michael G. Rubin, the Chief Executive Officer of
Global. Second, the significant contribution Michael Rubin made to the Off-
Price and Action Sports Division. Mr. Rubin played an integral role in the
management of the Off-Price and Action Sports Division until May 1999 when
Global announced a change in strategic focus. Thereafter, Mr. Rubin focused on
the Company's e-commerce initiative and assumed a diminished role in the
management of Global's non-internet businesses. Deutsche Bank partially
attributed the significant decline in the financial performance of the Off-
Price and Action Sports Division to Mr. Rubin's reduced involvement. Third,
management is the primary asset of the off-price sporting goods businesses.
Due to the importance of the industry relationships that existing management
has developed, the current management team is integral to the value of the
Off-Price and Action Sports Division. Furthermore, unlike integrated off-price
retailers, close-out distribution businesses have no captive retail
distribution through which they can sell off-price goods, no franchise value,
no infrastructure and no name recognition.
The foregoing summary describes all analyses and factors that Deutsche Bank
deemed material in its presentation to Global's Board of Directors, but is not
a comprehensive description of all analyses performed and factors considered
by Deutsche Bank in connection with preparing its opinion. The preparation of
a fairness opinion is a complex process involving the application of
subjective business judgment in determining the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, is not readily susceptible to summary
description. Deutsche Bank believes that its analyses must be considered as a
whole and that considering any portion of such analyses and of the factors
considered without considering all analyses and factors could create a
misleading view of the process underlying the opinion.
In conducting its analyses and arriving at its opinion, Deutsche Bank
utilized generally accepted valuation methods. The analyses were prepared
solely for the purpose of enabling Deutsche Bank to provide its opinion to
Global's Board of Directors as to the fairness of the consideration to Global
for the sale of the Off-Price and Action Sports Division and does not purport
to be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold, which are inherently subject to uncertainty.
In connection with its analyses, Deutsche Bank made, and was provided by the
management of the Off-Price and Action Sports Division and Global with,
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the Off-
Price and Action Sports Division's and Global's control. Analyses based on
estimates or forecasts of future results are not necessarily indicative of
actual past or future values or results, which may be significantly more or
less favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the Off-Price and Action Sports Division and Global,
neither Global nor Deutsche Bank nor any other person assumes responsibility
if future results or actual values are materially different from these
forecasts or assumptions.
19
<PAGE>
Projections
Prospective purchasers of Global's Off-Price and Action Sports Division were
provided with the financial projections set forth below. The projections were
excerpted from information provided by Global management. Global does not as a
matter of course publicly disclose projections as to future revenues or
earnings. The projections are included in this Proxy Statement only because
the information was made available to prospective purchasers of Global's Off-
Price and Action Sports Division. The initial projections were prepared in the
second quarter of 1999 and the revised projections were prepared in the third
quarter of 1999 based on management's estimates and assumptions regarding the
Off-Price and Action Sports Division at that time.
The projections set forth below were not prepared with a view to public
disclosure or compliance with the published guidelines of the SEC or the
guidelines established by the American Institute of Certified Public
Accountants regarding projections. The projections do not purport to present
operations in accordance with generally accepted accounting principles.
Neither Global nor any of its financial advisors or any of their respective
directors or officers has verified or provides any assurances with respect to
the accuracy of the projections. Global's independent accountants have not
examined or complied the projections presented herein and, accordingly, assume
no responsibility for them and do not express an opinion or any other form of
assurance with respect thereto. In addition, because the estimates and
assumptions, many of which are not set forth herein, underlying the
projections are inherently subject to significant economic and competitive
uncertainties and contingencies which are difficult or impossible to predict
accurately and are beyond Global's control, there can be no assurance that the
projections will be realized at the times or in the amounts indicated.
The projections and information set forth below are not based on historical
facts and, as such, constitute "forward looking statements" that involve
uncertainties and risk. There can be no assurance that actual results will not
differ materially from Global's projections.
Initial 1999 Projected Quarterly Financial Results for Off-Price & Action
Sports Division
The following table sets forth the projections provided by Global during the
second quarter of 1999 for the year ended December 31, 1999.
<TABLE>
<CAPTION>
For the
For the Quarter Ended Year Ended
-------------------------------------------------- -----------
March 31, June 30, September December December
1999 1999 30, 1999 31, 1999 31, 1999
(actual) (estimated) (estimated) (estimated) (estimated)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales............... $20,565,666 $15,909,334 $34,000,000 $20,000,000 $90,475,000
Cost of Sales........... 15,410,868 11,732,907 25,112,371 14,700,000 66,956,146
----------- ----------- ----------- ----------- -----------
Gross Profit.......... 5,154,798 4,176,427 8,887,629 5,300,000 23,518,854
Margin................ 25.1% 26.3% 26.1% 26.5% 26.0%
G&A..................... 1,366,217 1,366,217 1,366,217 1,366,217 5,464,868
Selling and Marketing... 729,481 565,095 1,236,211 756,583 3,287,370
Distribution............ 519,735 402,615 880,767 539,045 2,342,162
Development and Design.. 21,700 21,700 21,700 21,700 86,800
----------- ----------- ----------- ----------- -----------
Total Operating
Expenses............. 2,637,133 2,355,627 3,504,895 2,683,544 11,181,199
Operating Profit...... 2,517,665 1,820,800 5,382,734 2,616,456 12,337,655
+ Depreciation........ 49,590 49,590 49,590 49,590 198,358
+ Amortization........ 177,506 177,506 177,506 177,506 710,024
EBITDA................ 2,744,761 2,047,896 5,609,830 2,843,552 13,246,037
Ending Inventory...... 12,278,330 15,240,000 12,127,629 12,127,629 12,127,629
Average Inventory..... 13,631,425 13,759,165 13,683,815 12,127,629 13,556,074
Inventory Turnover.... 1.1x 0.9x 1.8x 1.2x 4.9x
Accounts Receivable... $26,818,627 $22,727,961 $32,977,961 $25,977,961 $25,977,961
Receivables Turnover.. 0.8x 0.7x 1.0x 0.8x 3.5x
Receivables Days...... 117.4 128.6 87.3 116.9 104.8
</TABLE>
20
<PAGE>
Revised 1999 Projected Quarterly Financial Results for Off-Price & Action
Sports Division
The following table sets forth the projections provided by Global during the
third quarter of 1999 for the year ended December 31, 1999.
<TABLE>
<CAPTION>
For the
For the Quarter Ended Year Ended
-------------------------------------------------- -----------
March 31, June 30, September December December
1999 1999 30, 1999 31, 1999 31, 1999
(actual) (actual) (estimated) (estimated) (estimated)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales............... $20,565,666 $13,252,045 $25,000,000 $15,000,000 $73,817,711
Cost of Sales........... 15,410,868 12,468,373 19,000,000 11,400,000 58,279,241
----------- ----------- ----------- ----------- -----------
Gross Profit............ 5,154,798 783,672 6,000,000 3,600,000 15,538,470
Margin.................. 25.07% 5.91% 24.00% 24.00% 21.05%
General &
Administrative......... 1,366,217 930,689 1,150,000 1,050,000 4,496,906
Selling and Marketing... 729,481 903,237 900,000 500,000 3,032,718
Distribution............ 519,735 828,746 625,000 375,000 2,348,481
Development & Design.... 21,700 57,346 21,700 21,700 122,446
----------- ----------- ----------- ----------- -----------
Operating Expenses...... 2,637,133 2,720,018 2,696,700 1,946,700 10,000,551
----------- ----------- ----------- ----------- -----------
Operating Profit........ 2,517,665 (1,936,346) 3,303,300 1,653,300 5,537,919
Plus:
Depreciation............ 49,590 50,000 50,000 50,000 199,590
Amortization............ 177,506 175,000 175,000 175,000 702,506
----------- ----------- ----------- ----------- -----------
EBITDA.................. $ 2,744,761 $(1,711,346) $ 3,528,300 $ 1,878,300 $ 6,440,015
=========== =========== =========== =========== ===========
</TABLE>
The terms of the sale of the Off-Price and Action Sports Division were
determined through negotiations between Global and the Purchaser and were
approved by Global's Board of Directors. Although Deutsche Bank provided
advice to Global during the course of these negotiations, the decision to
enter into the sale of the Off-Price and Action Sports Division was solely
that of Global's Board of Directors. As described above, the opinion and
presentation of Deutsche Bank to Global's Board of Directors were only one of
a number of factors taken into consideration by the Global Board of Directors
in making its determination to approve the sale of the Off-Price and Action
Sports Division. Deutsche Bank's opinion was provided to Global's Board of
Directors to assist it in connection with its consideration of the sale of the
Off-Price and Action Sports Division and does not constitute a recommendation
to any holder of Global Common Stock as to how to vote with respect to the
sale of the Off-Price and Action Sports Division.
Global selected Deutsche Bank as financial advisor in connection with the
sale of the Off-Price and Action Sports Division based on Deutsche Bank's
qualifications, expertise, reputation and experience in retailing and mergers
and acquisitions. Global had retained BT Alex. Brown Incorporated pursuant to
a letter agreement dated April 20, 1999 (the "Engagement Letter"). Deutsche
Bank is the successor to the investment banking and client advisory businesses
of BT Alex. Brown and has assumed BT Alex. Brown's rights and responsibilities
under the Engagement Letter. As compensation for Deutsche Bank's services in
connection with the sale of the Off-Price and Action Sports Division, Global
has paid Deutsche Bank a cash fee of $225,000 and has agreed to pay an
additional cash fee of $663,000 if the sale of the Off-Price and Action Sports
Division is consummated. Regardless of whether the sale of the Off-Price and
Action Sports Division is consummated, Global has agreed to reimburse Deutsche
Bank for reasonable fees and disbursements of Deutsche Bank's counsel and all
of Deutsche Bank's reasonable travel and other out-of-pocket expenses incurred
in connection with the sale of the Off-Price and Action Sports Division or
otherwise arising out of the retention of Deutsche Bank under the Engagement
Letter. Global has also agreed to indemnify Deutsche Bank and certain related
persons to the full extent lawful against certain liabilities, including
certain liabilities under the federal securities laws arising out of its
engagement or the sale of the Off-Price and Action Sports Division. Deutsche
Bank is an internationally
21
<PAGE>
recognized investment banking firm experienced in providing advice in
connection with mergers and acquisitions and related transactions. Deutsche
Bank is an affiliate of Deutsche Bank AG (together with its affiliates, the
"DB Group").
One or more members of the DB Group have, from time to time, provided
investment banking and other financial services to Global or its affiliates
for which it has received compensation. During the past two years neither
Deutsche Bank nor its affiliates has had a material relationship with Global
or its affiliates other than Deutsche Bank's services in connection with the
sale of the Off-Price and Action Sports Division described above and Deutsche
Bank's representing Global as exclusive sale agent in the divestiture of its
Branded Division. As compensation for Deutsche Bank's services in connection
with the sale of the Branded Division, Global has paid or agreed to pay
Deutsche Bank a cash fee of $500,000 and has agreed to reimburse Deutsche Bank
for out-of-pocket expenses incurred in connection with the sale of the Branded
Division in the aggregate amount of approximately $20,000.
In the ordinary course of business, members of the DB Group may actively
trade in the securities and other instruments and obligations of Global for
their own accounts and for the accounts of their customers. Accordingly, the
DB Group may at any time hold a long or short position in such securities,
instruments and obligations.
Absence of Appraisal Rights
Under Delaware law, the shareholders of Global are not entitled to appraisal
rights for their shares of Global's capital stock in connection with the
transactions contemplated by the sale of the Off-Price and Action Sports
Division, or to any similar rights under Delaware law.
Accounting Treatment
The sale of the Off-Price and Action Sports Division has been reflected on
Global's financial statements as the disposal of a segment of a business
within the meaning of Accounting Principles Board Opinion No. 30.
Federal Income Tax Consequences
The following is a summary of all material federal income tax consequences
of the sale of the Off-Price and Action Sports Division by Global and is not
intended to be tax advice to any person, nor is it binding upon the Internal
Revenue Service. In addition, no information is provided herein with respect
to the tax consequences of the sale of the Off-Price and Action Sports
Division under applicable foreign, state, local or other laws.
Except as otherwise discussed below, Global will generally recognize taxable
gain on the sale of the Off-Price and Action Sports Division equal to the
excess of (i) the amount realized by Global from each of the sales over (ii)
Global's adjusted tax basis in the capital stock of the Gen-X Companies. The
amount realized will equal the sum of money and other consideration received
by Global for the capital stock of the Gen-X Companies plus the amount of the
liabilities assumed by the Purchaser. The sale of the Off-Price and Action
Sports Division will not result in any federal income tax consequences to
shareholders of Global.
As a portion of the consideration to be paid by the Purchaser for the
capital stock of the Gen-X Companies will be in the form of non-publicly
traded debt obligations, a portion of the gain realized by Global will
generally be deferred under the installment method of tax accounting.
Specifically, under the installment method, a taxpayer generally recognizes as
income a proportionate amount of the total gain realized from the sale as
principal payments are made over the term of the installment obligation. It
should be noted, however, that to the extent that Global holds installment
obligations with an aggregate principal amount of more than $5.0 million at
the close of any tax year (as is anticipated), an interest charge will
generally be payable by Global for federal income tax purposes on the amount
of federal income tax deferred as a result of the use of the installment
method which is attributable to the portion of such installment obligations
that exceed $5.0 million.
22
<PAGE>
In addition, assuming the notes are properly characterized as debt
instruments for federal income tax purposes, they would be treated as issued
with original issue discount to the extent that their "stated redemption
prices at maturity" exceeds their issue price. An instrument's stated
redemption price at maturity generally includes all payments required to be
made over the term of the instrument other than payments of "qualified stated
interest", defined as interest which is required to be paid at least annually,
at a single fixed rate. The interest payments on the Notes should not
constitute qualified stated interest because the interest is not paid at a
single fixed rate over the life of the Notes. Accordingly, the stated
redemption price at maturity of the Notes should equal their stated principal
amount plus the additional interest which is payable over the final two years
of the Notes.
The determination of the "issue price" of the Notes depends on whether the
Notes are publicly traded for purposes of the original issue discount rules.
The Notes will not be publicly traded and, therefore, the issue price of the
Notes would be their stated principal amount.
As a result of the foregoing, Global will be required to include in income
the original issue discount with respect to the Notes for each taxable year in
which the Notes are outstanding as it accrues on an economic accrual basis
over the term of the Notes (based on the yield to maturity of the Notes). In
general, the impact of these original issue discount rules will be to cause
Global to recognize as interest income an amount in excess of the stated
interest payable with respect to such Notes in the first five years that the
Notes are outstanding (without a corresponding payment of cash). The Purchaser
will generally be entitled to a corresponding interest deduction in an amount
equal to the interest income accrued by Global.
EACH HOLDER OF SHARES OF COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF
THE SALE OF THE OFF-PRICE AND ACTION SPORTS DIVISION (INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS).
Government and Regulatory Approvals
Global does not believe any regulatory approvals are required in connection
with the sale of the Off-Price and Action Sports Division. Based on the
representations made by the Purchasers, DMJ Financial and Messrs. Salter and
Finkelstein in the Acquisition Agreement relating to the size of the
Purchasers' operations and the size of the Purchasers' ultimate parents, the
Company does not believe that any filings are required under the HSR Act.
Interests of Certain Persons
No director or executive officer of Global, other than James J. Salter, or
associate of any such director or executive officer, has any substantial
interest in the sale of the Off-Price and Action Sports Division, other than
any interest arising from the ownership of Global's securities (in which case
each such owner receives no extra or special benefit not shared on a pro rata
basis by all other holders of the same class of securities). For a description
of the holdings of Global's securities by the directors and certain of the
executive officers of Global, see "Principal Shareholders".
Mr. Salter, along with Kenneth J. Finkelstein, is leading the group of
investors which is proposing to purchase all of the issued and outstanding
capital stock of the Gen-X Companies from Global. On May 12, 1998, Global
acquired all of the issued and outstanding stock of the Gen-X Companies from
Messrs. Salter and Finkelstein and substantially the same group of investors.
The Gen-X Companies, which are headquartered in Toronto, Ontario, specialize
in (i) selling off-price sporting goods and winter sports equipment (including
ski and snowboard equipment), in-line skates, sunglasses, skateboards and
specialty athletic footwear and (ii) designing and distributing product orders
specifically designed for selected retailers.
23
<PAGE>
The consideration paid by Global for the capital stock of the Gen-X
Companies in May, 1998 consisted of (i) 1,500,000 shares of Global's Common
Stock, (ii) 10,000 shares of Global's preferred stock, mandatorily redeemable
over 5 years in the maximum aggregate amount of $500,000, and (iii)
noninterest-bearing contingent notes payable over 5 years in the maximum
aggregate amount of $4.5 million. The Company valued the Common Stock issued
in the May, 1998 transaction based on the average market price of the Common
Stock during the 10-day period beginning five trading days before and ending
four trading days after May 12, 1998. The redemption price of the preferred
stock and the payment amount of the contingent notes are dependent upon the
Company's Off-Price and Action Sports Division achieving certain sales and
gross profit targets. In June, 1999, the Company redeemed 2,000 shares of the
preferred stock for an aggregate of $100,000 and paid $900,000 of the
principal amount of the contingent notes in accordance with the terms of such
stock and notes.
Subsequent to the purchase of the Gen-X Companies in May, 1998, the Company
has effectively consolidated its Off-Price and Action Sports Division into the
Gen-X Companies. As a result, a comparison of the purchase price of the
capital stock of the Gen-X Companies in May, 1998 and the consideration to be
paid under the Acquisition Agreement for the capital stock of the Gen-X
Companies would not be meaningful.
Recommendation of Board of Directors
Before concluding that Global should divest its Off-Price and Action Sports
Division in order to focus exclusively on its e-Commerce business, the Board
considered the following alternatives: (i) liquidating the Off-Price and
Action Sports Division; and (ii) continuing to operate the Off-Price and
Action Sports Division. The Board decided against liquidation of the Off-Price
and Action Sports Division because a greater value could be obtained by
selling the Off-Price and Action Sports Division as a going concern. The Board
decided against continuing the operation of the Off-Price and Action Sports
Division because: (i) the current operating performance and competitive
position of the Off-Price and Action Sports Division were declining; (ii) the
close-out distribution business is highly dependent upon personal
relationships and Michael Rubin, Global's Chief Executive Officer, had reduced
his involvement in the management of Global's non-internet businesses; and
(iii) close-out distribution businesses have no captive retail distribution
through which they can sell off-price goods, no franchise value, no
infrastructure and no name recognition.
In arriving at the conclusion that the sale of the Off-Price and Action
Sports Division is in the best interest of Global and its shareholders, the
Board considered the following factors: (i) the solicitation process described
above; (ii) the alternatives to the sale of the Off-Price and Action Sports
Division discussed above; (iii) the overall value of the proposal made by the
Purchaser and the opinion of Deutsche Bank that the consideration to be
received by Global under the Acquisition Agreement is fair, from a financial
point of view, to Global; and (iv) the payment terms of the consideration to
be received by Global under the Acquisition Agreement.
Despite the risks associated with the fact that one-half of the total
consideration under the Acquisition Agreement consists of subordinated
promissory notes payable over seven and one-half years, Global's Board of
Directors concluded that the sale of the Off-Price and Action Sports Division
is in the best interests of Global and its shareholders. Accordingly, the
Board of Directors unanimously approved the sale of the Off-Price and Action
Sports Division at a meeting held on September 24, 1999.
THE BOARD OF DIRECTORS OF GLOBAL UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" APPROVAL OF ACQUISITION AGREEMENT AND THE SALE OF THE OFF-PRICE AND
ACTION SPORTS DIVISION.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Global's Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Proxy Statement.
On December 15, 1997, the Company (then named RYKA, Inc.) completed a
reorganization among the Company, certain companies controlled by Michael G.
Rubin (the "KPR Companies"), the Company's Chairman and Chief Executive
Officer, and Mr. Rubin. See "Business--History". The reorganization was
accounted for as a reverse purchase under generally accepted accounting
principles, and the KPR Companies were considered to be the acquired entity
for accounting purposes, even though the Company was the surviving legal
entity. Accordingly, references to the Company's financial statements refer to
the financial statements of the KPR Companies prior to the reorganization and
to the financial statements of the KPR Companies, including RYKA, Inc., after
the reorganization. The following statement of operations data for the years
ended December 31, 1998, 1997 and 1996 and the balance sheet data as of
December 31, 1998 and 1997 are derived from the audited consolidated financial
statements of Global included in this Proxy Statement, and the statement of
operations data for the years ended December 31, 1995 and 1994 and the balance
sheet data as of December 31, 1996, 1995 and 1994 are derived from the audited
financial statements of the Company not included in this Proxy Statement.
The following statement of operations data for the nine months ended
September 30, 1999 and 1998 and the balance sheet data as of September 30,
1999 and 1998 are derived from the Company's unaudited consolidated financial
statements included elsewhere in this Proxy Statement. The unaudited
consolidated financial statements have been prepared on substantially the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that Global considers
necessary for a fair presentation of its financial position and results of
operations for those periods. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
On April 20, 1999, Global formalized a plan to sell its Branded Division and
its Off-Price and Action Sports Division in order to focus exclusively on its
e-Commerce business. See "Business". Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of
these divisions have been segregated from that of continuing operations and
are presented in Global's consolidated financial statements as discontinued
operations. Prior year financial statements have been reclassified to reflect
these discontinued operations.
25
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------------------------- -------------------------
1998 1997 1996 1995 1994 1999 1998
----------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Costs and expenses:
General and
administrative........ $ 3,452,914 $ 2,389,223 $ 2,852,623 $ 5,644,090 $ 2,863,564 $ 2,923,252 $ 2,502,532
Equity compensation.... -- -- -- -- -- 2,725,486 --
Web-site development... -- -- -- -- -- 7,979,889 --
Interest expense
(income).............. 2,366,935 2,013,028 1,152,473 795,849 198,132 (145,966) 176,349
----------- ----------- ----------- ----------- ----------- ------------ -----------
Loss from continuing
operations before
income taxes........... (5,819,849) (4,402,251) (4,005,096) (6,439,939) (3,061,696) (13,482,661) (2,678,881)
Benefit from income
taxes.................. (1,978,749) -- -- -- -- (2,220,878) (910,819)
----------- ----------- ----------- ----------- ----------- ------------ -----------
Loss from continuing
operations............. (3,841,100) (4,402,251) (4,005,096) (6,439,939) (3,061,696) (11,261,783) (1,768,062)
Income from discontinued
operations............. 9,742,663 246,956 3,260,783 6,464,749 3,415,960 586,101 6,591,266
Loss on disposition of
discontinued
operations............. -- -- -- -- -- (3,161,552) --
----------- ----------- ----------- ----------- ----------- ------------ -----------
Net income (loss)....... $ 5,901,563 $(4,155,295) $ (744,313) $ 24,810 $ 354,264 $(13,837,234) $ 4,823,204
=========== =========== =========== =========== =========== ============ ===========
Basic earnings (losses)
per common share(1):
Loss from continuing
operations............ $ (.34) $ (1.47) $ (1.56) $ (3.75) $ (2.53) $ (.93) $ (.16)
Income from
discontinued
operations............ .86 .08 1.27 3.76 2.82 .05 .59
Loss on disposition of
discontinued
operations............ -- -- -- -- -- (.26) --
----------- ----------- ----------- ----------- ----------- ------------ -----------
Net income (loss)...... $ .52 $ (1.39) $ (.29) $ .01 $ .29 $ (1.14) $ .43
=========== =========== =========== =========== =========== ============ ===========
Diluted earnings
(losses) per common
share(1):
Loss from continuing
operations............ $ (.34) $ (1.47) $ (1.56) $ (3.75) $ (2.53) $ (.93) $ (.16)
Income from
discontinued
operations............ .86 .08 1.27 3.76 2.82 .05 .59
Loss on disposition of
discontinued
operations............ -- -- -- -- -- (.26) --
----------- ----------- ----------- ----------- ----------- ------------ -----------
Net income (loss)...... $ .52 $ (1.39) $ (.29) $ .01 $ .29 $ (1.14) $ .43
=========== =========== =========== =========== =========== ============ ===========
Weighted average common
shares outstanding(1)
Basic.................. 11,378,918 2,996,027 2,568,431 1,717,033 1,210,504 12,118,980 11,194,549
=========== =========== =========== =========== =========== ============ ===========
Diluted................ 11,378,918 2,996,027 2,568,431 1,717,033 1,210,504 12,118,980 11,194,549
=========== =========== =========== =========== =========== ============ ===========
Number of common shares
outstanding(1)......... 11,925,378 10,418,111 2,831,766 2,306,766 1,323,716 18,407,179 11,918,711
=========== =========== =========== =========== =========== ============ ===========
BALANCE SHEET DATA:
Net assets of
discontinued
operations............. $38,718,921 $24,128,879 $11,797,458 $12,673,048 $ 3,167,061 $ 43,012,442 $42,156,657
Total assets............ 42,643,654 28,043,089 16,434,931 15,030,008 5,182,722 106,430,449 46,229,791
Total long-term debt.... 20,993,421 20,975,479 5,905,225 5,000,725 2,415,955 2,077,906 27,141,390
Net working capital..... 32,436,663 19,747,778 2,021,552 2,838,705 1,200,094 70,668,407 37,470,672
Stockholders' equity
(deficiency)........... 14,685,482 2,157,349 (552,133) 92,787 748,220 85,029,191 13,457,121
</TABLE>
- --------
(1) All share and per share amounts give effect to the December 15, 1997 1-for-
20 reverse stock split as if it had occurred for all periods presented.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Global is a diversified sporting goods company that historically operated
two distinct divisions: the Branded Division and the Off-Price and Action
Sports Division. Over the past three years, there have been a number of
strategic business developments that have significantly affected Global and
its businesses.
In the first quarter of 1999, the Company established its Interactive
Division to develop its e-Commerce business. Through this division, the
Company has entered into exclusive agreements to develop and operate the
websites of multiple sporting goods retailers. Under these agreements, the
Company sells merchandise to customers of the retailers' websites and pays the
retailers a share of such sales. In addition, the Company and the retailers
have made certain contractual commitments to each other with respect to the
development, operation and promotion of the websites. Due to the fact that the
Company had not, as of September 30, 1999, launched its initial websites,
results from continuing operations for the nine-month period ended September
30, 1999 consist only of the operating expenses incurred by the Company during
the period in connection with its e-Commerce business.
On April 20, 1999, the Company formalized a plan to sell its non-internet
businesses, the Branded Division and the Off-Price and Action Sports Division,
in order to focus exclusively on the development of its e-Commerce business.
Accordingly, for financial statement purposes, the assets, liabilities,
results of operations and cash flows of these divisions have been segregated
from that of continuing operations and are presented in the Company's
consolidated financial statements as discontinued operations. Prior year
financial statements have been reclassified to reflect discontinued
operations.
On June 10, 1999, in order to finance its e-commerce business, the Company
and SOFTBANK entered into a stock purchase agreement and related agreements
for the sale of 6,153,850 shares of the Company's Common Stock to SOFTBANK at
a price of $13.00 per share (the closing price on May 26, 1999, the day prior
to the day the Company and SOFTBANK agreed in principle to the transaction)
for an aggregate purchase price of approximately $80.0 million. The sale of
the shares to SOFTBANK was completed on July 23, 1999.
On September 24, 1999, in furtherance of its plan to sell its non-internet
businesses, the Company entered into an agreement to sell its Off-Price and
Action Sports Division. Approval by the Company's shareholders of the
Acquisition Agreement and the sale of the Off-Price and Action Sports Division
is being sought by the Company at the Special Meeting. See "Proposal 1--
Approval of the Acquisition Agreement and the Sale of the Off-Price and Action
Sports Division".
On December 29, 1999, Global sold substantially all of the assets of its
Branded Division (other than the accounts receivable of the Branded Division
which totaled approximately $7.2 million as of December 29, 1999) to American
Sporting Goods Corporation in exchange for a cash payment of approximately
$10.5 million. The Company recognized a loss of approximately $5.0 million on
the sale of the Branded Division. In addition, the Company anticipates
additional charges relating to the operation and winding down of the Branded
Division.
Prior to its decision to focus exclusively on its e-commerce business,
Global acquired all of the outstanding and issued capital stock of the Gen-X
Companies on May 12, 1998. The consideration paid for the capital stock of the
Gen-X Companies consisted of: (i) 1,500,000 shares of Global's Common Stock,
(ii) 10,000 shares of Global's preferred stock, mandatorily redeemable over 5
years in the maximum aggregate amount of $500,000, and (iii) noninterest-
bearing contingent notes payable over 5 years in the maximum aggregate amount
of $4.5 million. The redemption price of the preferred stock and the payment
amount of the contingent notes are dependent upon the Company's Off-Price and
Action Sports Division achieving certain sales and gross profit targets. For
accounting purposes, the preferred stock and the contingent notes are
recognized if and when the sales and gross profit targets are met. In June,
1999, the Company redeemed 2,000 shares of the preferred stock for an
aggregate of $100,000 and paid $900,000 of the principal amount of the
contingent notes, pursuant to the
27
<PAGE>
provisions thereof. The Company's results of operations for 1998 include those
of the Gen-X Companies only from the date of acquisition through the end of
the year.
On December 15, 1997, the Company (then named RYKA, Inc.) completed a
reorganization among the Company, the KPR Companies and Michael G. Rubin, the
Company's Chairman and Chief Executive Officer. See "Business--History". The
reorganization was accounted for as a reverse purchase under generally
accepted accounting principles, and the KPR Companies were considered to be
the acquiring entity for accounting purposes, even though the Company was the
surviving legal entity. Accordingly, references to the Company's financial
statements refer to the financial statements of the KPR Companies prior to the
reorganization and to the financial statements of the KPR Companies, including
RYKA, Inc., after the reorganization.
Results of Operations
For the Nine-Month Period Ended September 30, 1999 Compared to the Nine-Month
Period Ended September 30, 1998
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
Costs and expenses:
General and administrative..................... $ 2,923,252 $2,502,532
Equity compensation............................ 2,725,486 --
Web-site development........................... 7,979,889 --
Interest expense (income), net................. (145,966) 176,349
------------ ----------
Total costs and expenses..................... 13,482,661 2,678,881
------------ ----------
Loss from continuing operations before income
taxes........................................... (13,482,661) (2,678,881)
Benefit from income taxes........................ (2,220,878) (910,819)
------------ ----------
Loss from continuing operations.................. (11,261,783) (1,768,062)
Income from discontinued operations.............. 586,101 6,591,266
Loss on disposition of discontinued operations... (3,161,552) --
------------ ----------
Net income (loss)................................ $(13,837,234) $4,823,204
============ ==========
</TABLE>
Costs and Expenses. Costs and expenses of continuing operations for the
nine-month period ended September 30, 1999 was $13.5 million. Operating
expenses from continuing operations consisted of expenses resulting from the
development by the Company of the websites for the sporting goods retailers of
its e-Commerce business and general and administrative expenses related to the
day-to-day development and operating activities of the Company. Costs and
expenses of continuing operations also included charges for equity
compensation of $2.7 million for the nine-month period ended September 30,
1999, primarily as a result of the issuance of warrants in connection with the
formation of the Company's e-Commerce business. Costs and expenses for the
nine-month period ended September 30, 1999 were offset, in part, by interest
income on the proceeds of the SOFTBANK financing.
Income (Loss) on Disposition of Discontinued Operations. Loss on disposition
of discontinued operations for the nine-month period ended September 30, 1999
was $3.2 million. This amount represents the expected loss on the disposition
of the Branded Division and the Off-Price and Action Sports Division.
28
<PAGE>
For the Year Ended December 31, 1998 Compared to the Year Ended December 31,
1997
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Costs and expenses:
General and administrative.............. $ 3,452,914 $ 2,389,223
Interest expense........................ 2,366,935 2,013,028
--------------- ---------------
Total costs and expenses.............. 5,819,849 4,402,251
--------------- ---------------
Loss before income taxes.................. (5,819,849) (4,402,251)
Benefit from income taxes................. 1,978,749 --
--------------- ---------------
Loss from continuing operations........... (3,841,100) (4,402,251)
Income from discontinued operations....... 9,742,663 246,956
--------------- ---------------
Net income (loss)......................... $ 5,901,563 $ (4,155,295)
=============== ===============
</TABLE>
Costs and Expenses. General and administrative expenses increased by $1.1
million, or 45%, to $3.5 million in 1998 from $2.4 million in 1997 as a result
of increased expenditures in financial and management information systems to
support the growth of business as well as normal salary increases. Interest
expense increased by approximately $400,000, or 18%, to $2.4 million in 1998
from $2.0 million in 1997 due to increased borrowing to support increases in
business. These increases in interest expense were partially offset by
substantial reductions in Global's average borrowing costs.
Income Taxes. Global's overall effective tax rate was 34% for 1998. In 1997,
Global recorded no provision for income taxes due to net losses.
For the Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cost and expenses:
General and administrative.............. $ 2,389,223 $ 2,852,623
Interest expense........................ 2,013,028 1,152,473
--------------- ---------------
Total costs and expenses.............. 4,402,251 4,005,096
--------------- ---------------
Loss before income taxes.................. (4,402,251) (4,005,096)
Benefit from income taxes................. -- --
--------------- ---------------
Loss from continuing operations........... (4,402,251) (4,005,096)
Income from discontinued operations....... 246,956 3,260,783
--------------- ---------------
Net loss.................................. $ (4,155,295) $ (744,313)
=============== ===============
</TABLE>
Costs and Expenses. General and administrative expenses decreased by
approximately $500,000, or 16%, to $2.4 million in 1998 from $2.9 million in
1997 as a result of a decrease in Mr. Rubin's salary and general cost
containment efforts. Interest expense increased by approximately $900,000, or
75%, to $2.0 million in 1998 from $1.1 million in 1997 due to increased
borrowing to support increases in business and increases in average borrowing
costs.
Income Taxes. In 1997 and 1996, Global recorded no provision for income taxes
due to net losses.
Liquidity and Capital Resources
Historically, the operations of the Company have been financed by a
combination of internally generated resources, equity financings, subordinated
borrowings, annual increases in the size of its bank credit facility and
seasonal over-advances. Increases in the bank credit facilities were required
to fund the Company's increased investment in accounts receivable and inventory
necessary to support the increases in revenue.
29
<PAGE>
On June 10, 1999, Global and SOFTBANK entered into a stock purchase
agreement and related agreements for the sale of 6,153,850 shares of Global's
Common Stock to SOFTBANK at a price of $13.00 per share (the closing price on
May 26, 1999, the day prior to the day Global and SOFTBANK agreed in principle
to the transaction) for an aggregate purchase price of approximately $80.0
million. Of the proceeds of the SOFTBANK financing, approximately $17.0
million was used to repay Global's credit facility with its senior lender,
approximately $1.8 million was used to repay outstanding subordinated notes
held by Michael Rubin, Global's Chairman and Chief Executive Officer,
approximately $5.5 million was used to purchase and renovate Global's new
office facility, approximately $2.0 million was used to pay Global's income
tax liability from 1998 and approximately $3.8 million was used to fund
corporate overhead. Through November 12, 1999, Global used approximately $11.2
million of the proceeds to fund the operations of its Branded Division and
Off-Price and Action Sports Division and approximately $20.0 million of the
proceeds to build, operate and maintain the websites for its e-Commerce
business and to purchase inventory to be sold on these websites. As of
November 12, 1999, the Company had approximately $18.7 million of the proceeds
from the SOFTBANK financing available to fund the operations of its Branded
Division and its Off-Price and Action Sports Division until their sale, and to
fund its e-Commerce business. In addition, the Company received additional
working capital of approximately $10.5 million from the sale of substantially
all the assets comprising its Branded Division on December 29, 1999, and
anticipates future sources of working capital from the collection of the
accounts receivable of the Branded Division which it retained, and which
totaled approximately $7.3 million as of December 29, 1999.
As a result of the sale of the Branded Division, Global repaid approximately
$4.5 million under its credit facility with its senior lender and the credit
facility was terminated. As of September 30, 1999, Global was not in
compliance with one of the covenants under this credit facility. Global
obtained a waiver from the bank with respect to this covenant. Because there
was no assurance that Global would be in compliance with this covenant for any
period subsequent to September 30, 1999, Global classified the amounts
outstanding under this line as a current liability. As of September 30, 1999,
the aggregate amount outstanding under this facility was approximately $3.7
million.
As of September 30, 1999, the Company had net working capital of $70.7
million which included $43.0 million of net assets of discontinued operations.
The Company used $11.2 million in cash flows from operating activities of
continuing operations for the nine months ended September 30, 1999, compared
to $2.3 million in cash flows from operating activities of continuing
operations for the nine months ended September 30, 1998.
Global has entered into certain commitments with respect to development of
the websites for the retailers of its e-Commerce business. The Company
believes that the proceeds from the SOFTBANK financing, together with the
proceeds of the sale of the Branded Division and the Off-Price and Action
Sports Division, will be adequate to allow it to continue to develop its e-
Commerce business and meet its anticipated cash needs for the foreseeable
future.
Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products need to accept four digit entries to distinguish
21st century dates from 20th century dates. This could result in system
failures or miscalculations causing disruption of operations for any company
using computer programs or hardware.
With respect to its Branded Division and its Off-Price and Action Sports
Division, Global maintained a management information system that provided,
among other things, comprehensive customer order processing, inventory,
production, accounting and management information for the marketing, selling,
manufacturing and distribution functions of Global's business. Subsequent to
the sale of the Branded Division on December 29, 1999, Global uses these
systems only for the Off-Price and Action Sports Division and in connection
with the collection of the accounts receivable of the Branded Division which
it retained.
30
<PAGE>
Global completed, as of April 1, 1999, a Year 2000 project which evaluated,
identified, corrected, reprogrammed, and tested Global's existing systems' Year
2000 compliance. Global enhanced its key information systems to improve their
functionality and increase performance during the first quarter of 1999, making
these applications Year 2000 compliant. The costs of these upgrades of
approximately $150,000 were charged to operations as incurred. Upon
consummation of the sale of the Off-Price and Action Sports Division and
collection of the accounts receivable of the Branded Division, Global will not
have any need for these systems.
Global's e-Commerce business is a new enterprise, and, accordingly, the
majority of software and hardware Global uses in its e-Commerce business has
been purchased or developed by Global within the last 12 months. While this
does not uniformly protect Global against Year 2000 exposure, Global believes
its exposure is limited because the systems it uses in its e-Commerce business
is not based upon legacy hardware or software systems.
Regarding its office network, Global updated its office networking system
software to be Year 2000 compliant during the third quarter of 1999. The costs
of the process did not have a material impact on Global's results of
operations, financial position, liquidity or capital resources.
In addition to making its own systems Year 2000 compliant, Global contacted
the customers of its Branded Division and Off-Price Division and its key
suppliers to determine the extent to which the systems of such customers and
suppliers are Year 2000 compliant and the extent to which Global could be
affected by the failure of such third parties to become Year 2000 compliant.
Global cannot presently estimate the impact of the failure of such third
parties to become Year 2000 compliant, however, subsequent to January 1, 2000,
Global has not encountered any problems related to Year 2000 issues. There can
be no assurance, however, that future Year 2000 issues, if any, will not arise.
See "Risk Factors--Risks Relating to Year 2000 Compliance".
New Accounting Pronouncements
Derivative Instruments. Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. Global
has not yet assessed what the impact of this statement, if any, will be on
Global's future earnings or financial position.
Computer Costs. In March 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). This
statement provides guidance on accounting for the costs of computer software
developed or obtained for internal use and identifies the characteristics of
internal-use software. The statement was adopted on January 1, 1999 and did not
have a material effect on the Company's results of operations, cash flows or
financial position.
Start-Up Costs. In April 1998, the AICPA Accounting Standards Executive
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 was adopted January 1, 1999, and did not have a material effect on
Global's results of operations, cash flows or financial position.
Quantitative and Qualitative Disclosures about Market Risk
Global 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, Global 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 Global'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 Global's
objectives and Global does not enter into foreign currency transactions for
speculative purposes.
31
<PAGE>
In addition to product sales and costs, Global has foreign currency risk
related to receivables and payables that are denominated in currencies other
than the U.S. dollar. Global'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.
Global is exposed to changes in interest rates primarily as a result of its
long-term debt used to maintain liquidity and fund its expansion. Global'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 Global'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 Global 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 Global, 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 Global'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 percentage
point increase in long-term debt borrowing rates for the year ended December
31, 1998 would have been approximately $370,000. There have been no
significant changes in market risk for the nine months ended September 30,
1999. Exposure to interest rate fluctuations was reduced significantly due to
the SOFTBANK financing and the repayment of the amounts due under the credit
facilities governed by Global's loan agreement.
32
<PAGE>
BUSINESS
Overview
Global is a diversified sporting goods company that historically operated
two distinct divisions: the Branded Division and the Off-Price and Action
Sports Division. In the first quarter of 1999, Global established its
Interactive Division to develop its e-Commerce business. On April 20, 1999,
Global formalized a plan to divest the Branded Division and the Off-Price and
Action Sports Division in order to focus exclusively on its Interactive
Division.
Through its Interactive Division, Global has entered into exclusive
agreements to operate the e-Commerce businesses of the following sporting
goods retailers: The Sports Authority, Inc., The Athlete's Foot Store, Inc.,
Sport Chalet, Inc., Michigan Sporting Goods Distributors, Inc. (MC Sports),
Athleisure Corporation and Oshman's Sporting Goods Inc. Pursuant to these
agreements, Global develops and operates the websites under the name of the
retailer and offers a wide representation of the products offered by the
retailers in its land-based stores.
Through its Off-Price and Action Sports Division, Global purchases
manufacturers' closeout merchandise, overstocks and canceled orders, as well
as excess inventories from retailers, for resale to retailers. Global
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. Global
also designs and distributes special make-up snowboards and other sports-
related merchandise for selected retailers.
Through its Branded Division, Global designed, marketed and distributed
athletic and outdoor footwear products under the "RYKA" brand and the "Yukon"
brand. RYKA is a high performance athletic footwear brand designed exclusively
for women. Yukon is a high performance outdoor footwear brand designed for
men, women and children. On December 29, 1999, Global sold substantially all
of the assets comprising the Branded Division.
Global's executive offices are located at 1075 First Avenue, King of
Prussia, Pennsylvania 19406, and its telephone number is (610) 265-3229.
Recent Developments
On January 4, 2000, Global announced that it had entered into an exclusive
agreement to develop and operate the website Oshman's Sporting Goods, Inc., a
Houston, Texas based company that operates a chain of retail sporting goods
specialty stores located primarily in medium to large metropolitan areas
across the United States.
On December 29, 1999, Global sold substantially all of the assets of its
Branded Division (other than the accounts receivable of the Branded Division
which totaled approximately $7.2 million as of December 29, 1999) to American
Sporting Goods Corporation in exchange for a cash payment of approximately
$10.5 million. The Company recognized a loss of approximately $5.0 million on
the sale of the Branded Division. In addition, the Company anticipates
additional charges relating to the operation and winding down of the Branded
Division.
On September 28, 1999, Global entered into a binding letter of intent with
WebMD, Inc., The Sports Authority, Inc. and TheSportsAuthority.com to create
and operate the health and fitness store on the WebMD website. Global, through
TheSportsAuthority.com, will operate the store. WebMD will provide both on-
line, television, radio and newspaper marketing and advertising for the store,
and The Sports Authority will provide support for the store in its land-based
stores. WebMD will receive a share of the net sales of all products sold
through the website. Global has agreed to issue to WebMD 250,000 shares of
Global Common Stock as a prepayment of WebMD's share of net sales based on a
per share price of $20.00, the closing price of Global's Common Stock on
September 28, 1999. This represents a prepayment of $5.0 million.
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<PAGE>
Interactive Division
General
Through its Interactive Division, Global has entered into exclusive
agreements to operate the e-Commerce businesses of the following sporting goods
retailers: The Athlete's Foot Stores, Inc., Sport Chalet, Inc., Michigan
Sporting Goods Distributors, Inc., (MC Sports), Dunham's Athleisure Corporation
and Oshman's Sporting Goods Inc. In addition, Global and The Sports Authority
have entered into agreements to establish TheSportsAuthority.com which is 80.1%
owned by Global and 19.9% owned by The Sports Authority and which exclusively
operates the e-Commerce business of The Sports Authority. Pursuant to the terms
of these agreements, The Sports Authority has the option to increase its
ownership of TheSportsAuthority.com to 49.9% over a specified period of time.
Pursuant to these agreements, Global develops and operates the websites under
the name of the retailers and offers a wide representation of the products
offered by the retailer in its land-based stores. Global pays the retailer a
share of the sales of products sold on that retailer's websites, and the
retailer is obligated to integrate its website's address in its marketing and
communication materials.
Global's e-Commerce business model relies, in part, on the current brand
recognition by consumers of the retailers' brand names. Global believes that
leading traditional retailers have significant built-in advantages for e-
Commerce, including well-known brand names, relationships with vendors and
access to merchandise, substantial marketing budgets, established customer
bases and land-based stores. Global also believes that there are significant
barriers for traditional retailers to establish e-Commerce businesses of their
own due to legacy systems and organizations, prohibitive costs, difficulty in
attracting the required talent, the need to focus on their core land-based
businesses and the high fragmentation in the industry.
Global has developed a "Common Engine"(TM) technology and distribution
infrastructure which will enable it to add additional partners with relatively
small incremental investments. Global believes that its business model will
create significant economies of scale by leveraging multiple e-Commerce
websites across a common organizational and technology platform.
Global began its e-Commerce business in the first quarter of 1999 and did not
begin generating revenues from this business until the fourth quarter of 1999.
Global manages and funds all aspects of the operation of the retailers' e-
Commerce businesses, including website development and maintenance,
merchandising, buying, warehousing, shipping, and customer service. Through
November 12, 1999, the Company has used approximately $20.0 million of the
proceeds from the SOFTBANK financing to build, operate and maintain the
websites for its e-Commerce business and to purchase inventory to be sold on
these websites. As of November 12, 1999, the Company had approximately $18.7
million of the proceeds from the SOFTBANK financing available to fund the
operations of its Branded Division and its Off-Price and Action Sports Division
until their sale, and to fund its e-Commerce business.
Products
Global offers a wide representation of the products offered in the land-based
stores of the retailers for which Global operates websites,. Depending on the
products offered at the land-based stores of each particular retailer, the
types of products offered on the websites include apparel, footwear, equipment,
sports memorabilia and gift certificates. The products generally fall into the
following categories: exercise and fitness, camping/hiking, basketball,
football, golf, running, fishing, tennis, games, racquetball, cycling,
hunting/fishing, outdoor recreation and action sports.
Global offers a majority of the brand name products offered in the land-based
stores of the retailers for which it operates websites. These brands include
Asics, Champion, Easton, Converse, Rossignol, Puma, Reebok, Coleman, Columbia,
Huffy, Rawlings, Timberland, Avia, New Balance, adidas, North Face and Proform.
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<PAGE>
Shopping
Customers are able to navigate the websites operated by Global through a
variety of highlighted product or sport categories arranged in a simple, easy-
to-use format. Customers can also search for desired products using a quick
keyword search in order to locate a specific product. Each website provides
detailed information about the products offered on the websites as well as
extensive content about each retailer, including store locators and general
corporate and financial information.
To purchase products, customers simply click on the "add to cart" button to
add products to their shopping cart. Customers can add and subtract products
from their shopping cart as they browse around our store prior to making a
final purchase decision. The websites are updated through the direct uploading
of supply information from Global's third party distributor to remove products
that are out of stock. To execute orders, customers click on the "checkout"
button and supply shipping details.
To pay for orders, customer may use gift certificates or a credit card,
which is authorized during the checkout process, but which is charged when the
product is shipped. The websites use state-of-the-art encryption technology to
protect customers' credit card information.
The customer service area of the websites operated by Global contain
extensive information for first-time and repeat visitors. In this area,
customers are assisted in searching for, shopping for, ordering and returning
products and are provided information on shipping charges and other policies.
In addition, customers are provided with answers to the most frequently asked
questions. Customer service agents are available to answer questions about
products and the shopping process during extended business hours via e-mail or
a toll-free number.
Merchandising
Global has established and continues to establish direct purchasing programs
with a wide range of vendors. Global merchandises a broad assortment of
sporting goods products to customers of the websites it operates. Although
Global does not offer all of the merchandise available in the land-based
stores of the retailers for which Global operates websites, Global does offer
a wide representation of the products offered in these stores. All inventory
sold on the websites operated by Global is purchased and owned by Global.
Global's merchandise buyers analyze current sporting goods trends by
maintaining close relationships with the retailers from which it operates
websites and with manufacturers, monitoring sales, studying specialized data
about traffic to the websites operated by Global and reviewing industry trade
publications. Global has entered into contractual relationships to purchase
merchandise with several vendors, including Asics, Champion, Easton, Converse,
Rossignol, Puma and Reebok.
Marketing and Advertising
The retailers with whom Global has agreements are required to integrate
their website addresses into their marketing and communications materials,
including television, radio, print, online and outdoor advertising, as well as
shopping bags, cash register receipts and direct mailers. Global works with
each of the retailers to create online and in-store promotions, including
incentive programs for in-store personnel, online gift certificates, online
sweepstakes and contests and online consumer-to-consumer auctions.
Global recently signed a marketing agreement with Yahoo! Inc., a leading
global internet media company. This agreement provides for the retailers'
websites to be promoted in numerous sports-related areas of the Yahoo!
network, including fantasy sports, celebrity athlete events, sporting games,
sports clubs and through front-page promotions and local guides.
Global has established affiliate programs for each of the retailers for
which it operates websites. Global's affiliate programs provide a low-cost
means of acquiring customers by providing a sales commission to affiliate
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<PAGE>
partners who drive traffic to the websites operated by Global which result in
sales. Global also sponsors sports-related sweepstakes, awards gift
certificates and engages in other promotions to drive traffic and sales to the
websites it operates.
Distribution
Global currently relies upon a third party to handle the fulfillment of its
customer orders, the warehousing of its inventory and the shipment of its
products. Inventory available for sale on the websites operated by Global are
purchased for Global's account directly from sporting goods vendors. Global
relies on sporting goods vendors to ship their products to a public
warehousing facility in Tennessee, generally via parcel carrier. Merchandise
shipped to customers is shipped in the name of the retailer through whose
website the customer placed the order.
Customers and Customer Service
Global's primary customers are purchasers and users of athletic footwear,
apparel and equipment. Customers utilizing the websites of the retailers
operated by Global are not aware of Global's involvement in such retailers' e-
Commerce businesses.
Global believes that a high level of customer service and support is
critical to retaining and expanding its customer base. Global is responsible
for customer service interaction with its customers. Global provides customer
service representatives 24 hours per day, seven days per week to provide
assistance to the customers of each of the retailers websites. Customers have
the ability to contact customer service personnel via e-mail or a toll-free
telephone number. In addition, customers may "chat" online with customer
service representatives.
Each of the websites operated by Global contains a customer service page
that outlines store policies and provides answers to frequently asked
questions. Global's policy for allowing its customers to return products is
consistent with the policies of each of the retailers for which Global
operates websites.
Competition
Competition in the online sporting goods category is growing. Although
Global is not aware of any other sporting goods retailers currently conducting
an e-Commerce business with a business model similar to Global's business
model, Global does compete with major sporting goods retailers, including
broad category and specialty land-based retailers, broad category and
specialty online retailers and broad category and specialty catalogs. Overall,
Global's competition can be segmented into three key areas: online-only
retailers, land-based retailers and vendors.
Online only retailers include, but are not limited to, fogdog.com,
shopsports.com, gear.com, dsports.com and REI.com. Some of these retailers
offer their goods at a significant discount from land-based retailers.
Although this may initially attract customers, many vendors are unwilling to
sell goods to discount retailers, fearing that it will negatively impact their
brand. In addition, some vendors shy away from selling to internet-only
retailers because they do not want it to negatively impact their relationships
with traditional land-based retailers. Further, because there is no major
distributor in sporting goods, these online retailers must negotiate
individually the prices paid for their goods, which may keep new internet-only
sporting goods retailers from launching and may also prevent current online-
retailers from entering the sporting goods category.
Other competition could come from traditional land-base retailers, such as
Foot Locker, Lady Foot Locker, Dick's Sporting Goods, and United Merchandising
Corp. (Big 5). However, there are significant barriers that may keep these
retailers from entering into the e-Commerce realm directly, such as the need
to focus on their core business, the financial resources needed to build a new
e-Commerce component of their business, legacy systems and bureaucracy, high
fragmentation within the industry, and their inability to attract or afford
the talent necessary to build a successful e-Commerce venture.
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<PAGE>
Global will also face competition directly from the vendors themselves. Many
vendors are offering their products online directly to consumers. Although
certain key vendors (such as Nike) have significant name brand recognition
with consumers, vendors are unable to offer the wide variety of merchandise
found in land-based and online retailers, because these vendors can only sell
their own brand.
Global believes that it competes primarily on the basis of recognition of
the retailers for which it operates websites, the scope of its product
offerings, convenience and price. Particularly with respect to online
retailers, Global competes on the basis of speed and accessibility of the
websites it operates, quality of the content on those websites, customer
service and speed and accuracy of order fulfillment. As Global did not begin
operating the websites of the sporting goods retailers for which it operates
websites until the fourth quarter of 1999, Global is currently unable to
assess its competitive position with respect to its competitors in the e-
Commerce business.
Technology
The Company has developed and implemented a technological infrastructure
consisting of both proprietary and industry specific technology. The
information technology operations and infrastructure are built on the premise
of reliability and scalability. Mission critical applications are hosted at a
third-party data center in New York City, which provides redundant
communications and emergency power backup. Hardware equipment consists of
redundant servers and monitoring equipment to provide for fault tolerance.
The cornerstone of the Company's technology is it's "Common Engine"(TM)
which is a proprietary set of tools and applications used to power the
websites of the retailers for which the Company operates websites, and to tie
into the Company's fulfillment network that allows the Company to add new
retailers. In conjunction with it's "Common Engine"(TM), the company has
developed its own propriety catalog management system which addresses the
unique characteristics of the sporting goods market.
The Company has implemented ERP, data/voice communications and EDI software
applications that allow for integration of its back-end business systems and
processes necessary to manage its customer relationships, distribution network
and supply chain. The Company employs technology from a selected group of
partners such as IBM, SUN, CISCO, ORACLE, DELL, MCI and NORTEL.
Off-Price and Action Sports Division
General
Through its Off-Price and Action Sports Division, Global 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. In addition, Global is a third-party wholesaler
of off-price athletic, outdoor and casual footwear, athletic apparel and
sporting goods. Global resells this merchandise to sporting goods stores, off-
price specialty stores, department stores, family footwear stores, and
independent retailers. Global 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 approximately $90.4 million or 69% of Global'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 of footwear, athletic apparel and sporting goods.
Global has established a "store stock" program with a key retailer to
purchase, at Global's option, all closeout or overstocked inventory. Global
estimates that more than 75% of merchandise purchased by Global in a given
year is purchased from manufacturers with which Global has a long-standing
relationship.
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Products
The following table sets forth certain information about the products that
are sold by Global's Off-Price and Action Sports Division.
<TABLE>
<CAPTION>
Category Products
- -------- --------
<S> <C>
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, Global designs and distributes products
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. Global accepts orders for snowboards and
other sports-related merchandise and fulfills product orders for nationwide
store chains as well as for single location specialty shops. Global designs
products according to customer specifications and produces only the quantity
of merchandise requested by the customer.
Global's special make-up products consist primarily of snowboard equipment,
but also include athletic footwear and skateboard equipment. Global's special
make-up lines include Lamar, Rage, and Dukes Shoes brands. The Lamar, and Rage
lines consist of snowboard equipment and accessories and are sold at different
price points. The Lamar and Rage lines also include skateboard equipment and
accessories, which are also sold at different price points. Dukes Shoes is a
skateboard footwear line.
Sales
The sales force for Global's Off-Price and Action Sports Division
merchandise consists of 17 sales executives of which nine have been with the
Gen-X Companies since their formation in 1996. These 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
Global currently sells its off-price and action sports merchandise to
approximately 2,300 retail accounts. The following customers of the Off-Price
and Action Sports Division together with sales of the same customers in the
Branded Division represented sales in excess of 10% of the net sales of Global
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
Customer Sales % Sales % Sales %
-------- ----------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Just For Feet............. $27,322,311 20.8 N/A N/A N/A N/A
Ross Stores............... N/A N/A $5,483,727 9.0 $8,047,876 17.0
United Merchandising
Corp..................... $ 8,987,628 6.8 $7,239,570 11.9 $6,607,663 14.0
</TABLE>
Other than the foregoing, no one customer of the Off-Price and Action Sports
Division accounted for 10% or more of the total net sales of Global for the
years ended December 31, 1998, 1997 or 1996.
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<PAGE>
Competition
The Off-Price and Action Sports Division competes with a number of large
retailers who purchase off-price and action sports 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 Global's Off-Price and Action Sports Division.
Distribution
Global utilizes third-party public warehouses in several locations across
the U.S. and Canada, as well as a leased warehousing facility in King of
Prussia, Pennsylvania. Upon receipt at a facility, merchandise is inspected
and recorded in Global's information systems and packaged according to
customers' orders for delivery.
Technology
Global maintains a management information system that provides, among other
things, comprehensive customer order processing, inventory, accounting and
management information for the selling and distribution functions of Global's
Off-Price and Action Sports Division.
Branded Division
Prior to the consummation of the sale of the Branded Division, Global
designed, developed and marketed each of its branded product lines to appeal
to a targeted consumer group. Within each line, Global offered a broad
selection of product categories and styles. For the year ended December 31,
1998, the net sales of the Branded Division were approximately $41.1 million
or 31% of Global'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,
Global 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.
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 includes Thinsulate(TM) insulation,
Weather Proof(TM) Leather and support shank systems such as Engineered
Torsional Stability(TM). 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. Yukon is sold principally through sporting
goods stores, footwear stores and department stores.
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<PAGE>
Marketing and Advertising
Global's marketing focus was to continue to build the recognition of
Global's brand names as the footwear of choice for their targeted consumer
groups and as brands that stood for quality, performance, comfort, design
innovation and value. Senior management was directly involved in shaping
Global's image and its advertising and promotional activities. The management
of Global's Branded Division oversaw the conception, development, and
implementation of most aspects of Global's branded footwear marketing efforts.
Prior to selling the Branded Division, Global 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 was 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 was a marketing program which included (i) displays that advertise and
feature eight RYKA styles (ii) the Another Chance Foundation, a charitable
institution jointly established by Global 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.
Because of its limited resources, Global historically concentrated its
marketing efforts on less costly, grass-roots approaches, such as point-of-
purchase and other retailer promotions. Outside advertising agencies, together
with Global's in-house marketing personnel, developed a program to promote
Global's brand names through lifestyle and image advertising. While all
advertisements featured Global's footwear, the advertising generally sought to
build and increase brand awareness by linking the brand to its targeted
consumer group rather than to market a particular footwear product.
Sales
Global focused on those retailers which it believed would effectively
promote and display Global's branded products. By so doing, Global believed
that it was better able to protect and enhance its brand names and service
customers' accounts. Senior management of Global was directly involved in
maintaining relationships with key customer accounts as well as developing
relationships with new customers. Global relied principally on 11 independent
sales organizations, which collectively employed 38 sales representatives, to
sell RYKA and Yukon footwear to its customer accounts. The independent sales
organizations covered all 50 states and Canada and reported to the Vice
President of Sales for the Branded Division. Each of the independent sales
organizations were compensated on a commission basis. While Global's
independent sales organizations handled products from other brands, none of
the representatives sold products directly competitive with RYKA and Yukon.
Global also had eight in-house customer service employees.
Customers
Global's Branded Division's primary customers were athletic footwear stores,
sporting goods stores, department stores and independent retailers. In 1998,
RYKA and Yukon footwear were sold by over 1,000 retail accounts, principally
in the United States and Canada, including The Venator Group (Foot Locker and
Lady Footlocker), Finish Line, The Athlete's Foot Stores, Inc., Just for Feet,
Modell's, Michigan Sporting Goods Distributors, Inc. (MC Sports), Gart
Sports/Sportmart, Oshman's, Sporting Goods, Inc. and United Merchandising
Corp. (Big 5). The majority of Global's customer accounts carried both RYKA
and Yukon.
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The following customers of the Branded Division together with sales to the
same customers in the Off-Price Division represented sales in excess of 10% of
the net sales of Global for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------
Customer Sales % Sales % Sales %
-------- ---------- --- ---------- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Just For Feet...................... $8,057,729 6.1 N/A N/A N/A N/A
United Merchandising Corporation... $7,957,010 6.1 $5,761,339 9.5 N/A N/A
Ross Stores, Inc................... N/A N/A $1,529,260 2.5% N/A N/A
</TABLE>
Other than the foregoing, no one customer of the Branded Division accounted
for 10% or more of the total net sales of Global for the years ended December
31, 1998, 1997 or 1996.
Product Design and Development
Global designed most new styles to appeal to their targeted consumer group,
although Global's footwear often appealed to a broader spectrum of consumers
resulting in improved brand recognition. Global generally positioned RYKA and
Yukon as performance oriented brands at a value price with features comparable
to those found on other leading footwear brands.
Global offered primary lines of both RYKA and Yukon in the Spring and Fall
seasons. Global's products were designed and developed in-house, although
Global periodically used outside design firms to supplement its design
efforts. Separate design teams focused on each of Global's brands and reported
to Global's executive in charge of the particular brand. The design process
was collaborative with members of the design staff meeting regularly to
further refine Global's products in order to meet the particular needs of
Global's markets.
Competition
Competition in the branded footwear industry is intense. Although Global
believed that its Branded Division did not compete directly with any single
company with respect to its entire range of products, Global's products
competed with other branded products within their product category, as well as
with private label products sold by retailers, including some of Global's
customers. RYKA competed with many brands of athletic footwear, including
Nike, Reebok, adidas, Avia, Asics, New Balance and Saucony. Yukon competed
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, Global competed on the basis of style, price, quality,
comfort and brand name prestige and recognition, among other considerations.
Global also competed with numerous manufacturers, importers and distributors
of footwear for the limited shelf space available for the display of such
products to the consumer. In addition, the general availability of contract
manufacturing capacity for footwear products allowed ease of access by new
market entrants. Many of Global's competitors were larger, had achieved
greater recognition for their brand names, had captured greater market share
and/or had substantially greater financial, distribution, marketing and other
resources than Global.
Manufacturing
Products of Global's Branded Division were produced by independent contract
manufacturers located in Asia. For the year ended December 31, 1998,
substantially all of Global's branded products were manufactured in China.
Global did not own or operate any manufacturing facilities. Global's contracts
with these manufacturers generally specified pricing, purchasing of raw
materials and minimum quality/delivery standards, as well as address certain
confidentiality issues.
Global oversaw the key phases of production from initial prototype
manufacture through initial production runs to final manufacture.
Manufacturers were selected in large part on the basis of Global's prior
experience with the manufacturer and the availability of production capacity.
Global sought to use, whenever possible, manufacturers that had previously
produced Global's footwear, which Global believed enhanced continuity and
41
<PAGE>
quality while controlling production costs. For the year ended December 31,
1998, the top three manufacturers accounted for 32%, 18% and 11%,
respectively, of Global's manufactured branded footwear products, or 61% in
the aggregate. Other than the foregoing, no one manufacturer accounted for 10%
or more of Global's total production of the Branded Division.
To safeguard product quality and consistency, Global employed quality
control assurance personnel based in Asia to oversee the key aspects of the
production process. Global's quality control program was designed to ensure
that finished goods not only met with Company established design
specifications, but also that all goods bearing its trademarks met Global's
standards for quality. Global's personnel performed 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.
Global's arrangements with its manufacturers generally were U.S. dollar
denominated. Substantially all of Global's footwear products were 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 Global
approximated 8.5% to 10% of cost for leather products and 20% for synthetic
products, depending on gender, plus administrative charges.
Distribution
Global utilized third-party public warehouses in several locations across
the U.S. and Canada, as well as a leased warehousing facility in King of
Prussia, Pennsylvania. Following manufacture, Global's branded products were
generally shipped to public warehousing facilities in California. Upon receipt
at a facility, merchandise was inspected and recorded in Global's information
system and packaged according to customers' orders for delivery.
Merchandise was shipped to customers by whatever means the customer
requested, which was usually by common carrier. Global had an Electronic Data
Interchange (or EDI) system to which some of Global's larger customers were
linked. This system allowed these customers to automatically place orders with
Global, thereby eliminating the time involved in transmitting and inputting
orders, and included direct billing and shipping information. In January,
1999, Global implemented a Quick Response inventory system with Lady Foot
Locker, which allowed Global to most efficiently track and maintain
inventories at each store location.
Technology
With respect to its Branded Division Global maintained a management
information system that provided, among other things, comprehensive customer
order processing, inventory, production, accounting and management information
for the marketing, selling, manufacturing and distribution functions of
Global's Branded Division. Subsequent to the sale of the Branded Division on
December 29, 1999, Global uses these systems only in connection with the
collection of the accounts receivable of the Branded Division which it
retained.
Employees
As of January 14, 2000, Global employed 220 people on a full-time basis. Of
these employees, 15 were employed in the Branded Division, 47 are employed in
the Off-Price and Action Sports Division and 158 are either employed in the
Interactive Division or in the main executive offices. Global's employees are
based primarily at Global's headquarters in King of Prussia, Pennsylvania (173
employees) and Toronto, Ontario (47 employees).
Properties
Global's principal executive offices are located in a newly-renovated 56,000
square foot facility purchased by Global on July 27, 1999 and located in King
of Prussia, Pennsylvania. In addition, Global utilizes a public warehousing
facility in Tennessee in connection with the operation of its Interactive
Division.
42
<PAGE>
Prior to relocating to its current offices in November, 1999, Global's
offices and warehouse were located in a 75,000 square foot facility leased
from Michael G. Rubin, Global's Chairman and CEO and located in King of
Prussia, Pennsylvania. Pursuant to the lease, Global pays approximately
$29,000 per month, plus maintenance and utilities, for use of these
facilities. This lease expires on September 30, 2009; however, it will be
terminated upon consummation of the sale of the facility by Mr. Rubin, which
is expected to occur in the first quarter of 2000.
Global also owns a 12,000 square foot facility located in North York,
Ontario used primarily in the Off-Price and Action Sports Division. This
facility is included in the assets of the Gen-X Companies which will be sold
in connection with the sale of the Off-Price and Action Sports Division. In
addition, Global used the services of third-party public warehousing
facilities located in Ontario, Canada and California for its Branded Division.
Global 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.
Geographic Areas
The Company's revenues were generated from domestic and foreign sales during
the years end December 31, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Revenues % Revenues % Revenues %
------------ ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Domestic--US............ $125,756,937 95.7 $58,726,462 96.8 $45,553,214 96.2
Foreign................. 5,678,034 4.3 1,944,945 3.2 3,787,326 3.8
------------ ----------- -----------
Total................. $131,434,971 100 $60,671,407 100 $47,340,450 100
============ =========== ===========
</TABLE>
No individual foreign country's revenues were material to the Company's
operations. Substantially all of the Company's long-lived assets are located
in the United States.
Intellectual Property
Global relies on various intellectual property laws and contractual
restrictions to protect its software and other intellectual property rights.
These include confidentiality and nondisclosure agreements with employees,
contractors, suppliers, strategic partners and the retailers for which Global
operates websites. Despite these precautions, Global may be unable to deter
misappropriation of its proprietary information, detect unauthorized use and
take appropriate steps to enforce its intellectual property rights. In
addition, Global's competitors could, without violating Global's proprietary
rights, develop technologies that are as good as or better than Global's
technology. In addition, Global pursues the registration of its trademarks and
service marks in the U.S. and internationally. Global's failure to protect its
software and other proprietary intellectual property rights or to develop
technologies that are as good as its competitors could put Global at a
disadvantage to its competitors which could have a material adverse effect on
Global's business, results of operations and financial condition.
In connection with its operation of the e-Commerce business of The Sports
Authority, Global has entered into a license agreement granting it the right
to use certain trademarks, tradenames, logos, buying power and content owned
or controlled by The Sports Authority. In addition, Global has the exclusive
right to use, copy, modify and display the name, logo and URL, as well as
certain other intellectual property rights, of each retailer for which Global
operates websites during the term of each agreement between Global and such
retailers.
Legal Proceedings
Global is involved in various routine litigation, including litigation in
which Global is a plaintiff, incidental to its business. Global believes that
the disposition of such routine litigation will not have a material adverse
effect on the financial position or results of operations of Global.
43
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
From January 1, 1998 through June 15, 1998, Global's Common Stock was traded
on the NASD Over-the-Counter Bulletin Board. Effective June 16, 1998, Global
was approved for inclusion on the Nasdaq SmallCap Market, and effective May 3,
1999 on the Nasdaq National Market where it is currently included for
quotation. As of the Record Date, Global had approximately [18,489,463]
shareholders of record.
The following table sets forth the high and low bid prices per share of
Global'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 June 16, 1998 to April 30, 1999, the following table
sets forth the high and low sales prices per share of Global's Common Stock as
reported on the Nasdaq SmallCap Market. For the periods presented from and
after May 3, 1999, the table below sets forth the high and low sales prices as
reported on the Nasdaq National Market. The prices shown do not include retail
markups, markdowns or commissions.
<TABLE>
<CAPTION>
Sales Prices
---------------
High Low
------- -------
<S> <C> <C>
2000
First Quarter (through January 14, 2000)................ $20.437 $12.25
1999
Fourth Quarter.......................................... $25.25 $12.375
Third Quarter........................................... $25.125 $14.50
Second Quarter.......................................... $36.875 $12.00
First Quarter........................................... $17.375 $ 7.00
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
</TABLE>
On September 24, 1999, the trading date immediately prior to the public
announcement of the transactions contemplated by the Acquisition Agreement,
the closing sale price of Global's Common Stock was $21.625 per share. The
closing sale price of Global's Common Stock on January 14, 2000, the latest
practicable date before the printing of this Proxy Statement, was $17.8125 per
share. Global has never declared or paid a cash dividend on its Common Stock.
Global 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, Global's credit facility
with its bank restricts the payment of dividends on Global's Common Stock.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of January 14, 2000, the beneficial
ownership of Global's Common Stock: (i) by each person known by Global to be
the beneficial owner of five percent or more of Global's outstanding Common
Stock, (ii) by each director of Global, (iii) by Global's chief executive
officer and three most highly paid executive officers during fiscal 1998 (the
"Named Officers"), and (iv) by the directors and executive officers of Global
as a group. Unless otherwise specified, all persons listed below have sole
voting and investment power with respect to their shares. The business address
of the officers and directors of Global is that of Global.
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
-------------------------- --------------------- ----------
<S> <C> <C>
Michael G. Rubin.............................. 8,025,046 43.4%
Chairman of the Board and
Chief Executive Officer of Global
James J. Salter............................... 656,700(2) 3.6%
Chief Executive Officer of
Off-Price and Action Sports Division
David B. Newcombe............................. 59,925(3) *
Co-President and General Manager
of Branded Division
Steven A. Wolf................................ 22,750(4) *
Vice President and Chief Financial Officer
Kenneth J. Adelberg........................... 101,900(5) *
Director
Harvey Lamm................................... 80,000(6) *
Director
Charles Lax................................... 6,168,850(7) 33.4%
Director
Jeffrey Rayport............................... 15,000(8) *
Director
DMJ Financial(9).............................. 636,700 3.5%
SOFTBANK Affiliates(10)....................... 6,153,850(11) 33.3%
All executive officers and directors as a
group (12 persons)........................... 15,294,171(12) 81.5%
</TABLE>
- --------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the SEC. Accordingly, they may include securities owned by
or for, among others, the wife and/or minor children of the individual
and any other relative who has the same home as such individual, as well
as other securities as to which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock
options within 60 days of the date of this table. Beneficial ownership
may be disclaimed as to certain of the securities.
(2) Includes 636,700 shares of Common Stock owned by DMJ Financial, of which
Mr. Salter is an officer and a 50% shareholder, and includes 20,000
shares of Common Stock issuable pursuant to options awarded to Mr. Salter
under Global's 1996 Equity Incentive Plan, which options are exercisable
within 60 days of the date of this table. Does not include 80,000 shares
of Common Stock issuable pursuant to options awarded to Mr. Salter which
are not exercisable within 60 days of the date of this table.
(3) Includes 38,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Newcombe under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of this table. Does
not include 25,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Newcombe which are not exercisable within 60 days of the
date of this table.
(4) Consists of 22,750 shares of Common Stock issuable pursuant to options
awarded to Mr. Wolf under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of the table.
45
<PAGE>
Does not include 16,250 shares of Common Stock issuable pursuant to
options awarded to Mr. Wolf which are not exercisable within 60 days of
the date of this table.
(5) Includes 56,250 shares of Common Stock issuable pursuant to options
awarded to Mr. Adelberg under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of this table.
(6) Includes 80,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Lamm under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of this table. Does
not include 70,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Lamm which are not exercisable within 60 days of the date
of this table.
(7) Includes 15,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Lax under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of this table,
6,069,542 shares of Common Stock held by SOFTBANK Capital Partners LP and
84,308 shares of Common Stock held by SOFTBANK Capital Advisors Fund LP.
Mr. Lax is a Managing Director of the general partner of each of these
SOFTBANK entities. Mr. Lax disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest. Does not include
15,000 shares of Common Stock issuable pursuant to options awarded to Mr.
Lax which are not exercisable within 60 days of the date of this table.
(8) Includes 15,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Rayport under Global's 1996 Equity Incentive Plan, which
options are exercisable within 60 days of the date of this table. Does
not include 15,000 shares of Common Stock issuable pursuant to options
awarded to Mr. Rayport which are not exercisable within 60 days of the
date of this table.
(9) The business address of DMJ Financial is 25 Vanley Crescent, North York
Ontario M3J2B7 Canada.
(10) The business address of SOFTBANK is 10 Langley Road, Suite 403, Newtown
Center, MA 02159.
(11) Consists of 6,069,542 shares of Common Stock held by SOFTBANK Capital
Partners LP and 84,308 shares of Common Stock held by SOFTBANK Capital
Advisors Fund LP.
(12) Includes an aggregate of 347,000 shares of Common Stock issuable pursuant
to options awarded to Global's executive officers and directors, which
options are exercisable within 60 days of the date of this table. Does
not include an aggregate of 221,250 shares of Common Stock issuable
pursuant to options awarded to Global's executive officers and directors
which are not exercisable within 60 days of the date of this table.
* Less than one percent.
46
<PAGE>
PROPOSAL 2--APPROVAL OF INDEMNIFICATION AGREEMENTS
Director Liability and Indemnification
The potential liability of directors and officers of public companies has
been the subject of substantial publicity and concern. Court decisions, the
vagaries of public policy and conflicting interpretations of ambiguous
statutes have contributed to the publicity and concern about director and
officer liability. Directors and officers may be subject to potential claims
and lawsuits, even when they act in good faith and in the best interests of
the public companies which they serve. These claims and lawsuits can involve
substantial personal expenses, including legal fees, settlements and even
judgments. The amount of damages often bears no reasonable relationship to the
compensation received by directors and officers, and the costs of defending
these suits, whether or not meritorious, are beyond the resources of many
directors and officers. Although the liability and expense of defending claims
and lawsuits may be covered by insurance, there often are significant coverage
exclusions and large deductibles.
Global believes that as a result of these factors, it often is difficult to
attract and retain qualified individuals to serve on corporate boards of
directors. In order to attract and retain qualified directors and officers,
the Company believes that it is in the best interests of Global and its
shareholders that the Company provide to its directors and officers the
maximum protection against the risks and expenses of claims and lawsuits
outlined above.
Global's directors and officers currently are protected by a directors' and
officers' liability insurance policy and certain indemnification rights under
Delaware law and Global's Bylaws. The insurance policy provides for a $75,000
deductible and certain significant exclusions, including, among others,
violations of federal and state securities laws, violations of certain duties
imposed by the Employee Retirement Income Security Act (ERISA), libel and
slander, and claims that a director received a personal profit or advantage to
which he was not legally entitled. Furthermore, the policy limits the
insurer's liability to $5.0 million for all losses incurred during the policy
year. This policy will expire on October 28, 2000, and Global has no assurance
that similar coverage will then be available at a reasonable cost or without
substantial new exclusions.
Claims which exceed the coverage provided under Global's insurance policy or
which are excluded from the policy's coverage would have to be personally paid
by the directors and officers involved. In certain instances, the directors
and officers may be entitled to indemnification from Global under Delaware law
and Global's Bylaws, but Global's existing indemnification obligation will not
necessarily absorb all liabilities and expenses to which directors and
officers may be exposed.
Accordingly, the Board believes that certain measures are appropriate. While
no current director or officer has indicated that he will resign if the
proposal described below is not approved by the shareholders, Global believes
that the adoption of this proposal could be a significant factor in
encouraging existing directors and officers to continue to serve in these
capacities and attracting new directors and officers in the future.
Proposed Indemnification Agreements
The Board of Directors is seeking approval of Indemnification Agreements for
the benefit of members of the Board of Directors and certain officers of
Global, as more fully discussed below. Although the Board believes that
shareholder approval is not required under Delaware law, the Board considers
it appropriate that the Indemnification Agreements be submitted to the
shareholders of Global for their consideration. Because each member of the
Board of Directors will be a party to and, as such, a beneficiary of the
rights contained in the Indemnification Agreements, there is an inherent
conflict of interest in the Board's recommending the Indemnification
Agreements. In addition, because the Indemnification Agreements will result in
greater indemnification protection for directors and officers against the
risks and expenses of litigation, they may result in greater potential
monetary exposure to Global for indemnification claims.
47
<PAGE>
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock represented and entitled to vote at the Special Meeting will
be required to approve the Indemnification Agreements. Although Global intends
to continue to indemnify its directors pursuant to its Bylaws and the Delaware
General Corporation Law to the fullest extent permitted, no determination has
been made as to what other action the Board would take if shareholders do not
approve the proposed Indemnification Agreements. If approved, it is presently
anticipated that Global will enter into Indemnification Agreements with all
current and future directors and with certain current and future officers of
Global, without further submission of these agreements to the shareholders for
approval. If the Indemnification Agreements are approved by the shareholders,
a shareholder may be estopped from asserting at a later date that these
agreements are invalid, whether or not the shareholder voted for or against
this approval or abstained from voting.
Section 145 of the Delaware General Corporation Law contains detailed
provisions governing the indemnification of directors, officers and key
employees, which, among other things, permit the adoption of indemnification
agreements generally to effect the policy of that indemnification. Pursuant to
Section 145 of the Delaware General Corporation Law, Global has adopted Bylaw
provisions which indemnify its directors and officers to the fullest extent
permitted by Delaware law. However, the Board believes that the existing
indemnification protection is inadequate in certain respects, and the
Indemnification Agreements are intended to supplement that protection.
The proposed Indemnification Agreements are intended to provide greater
protection than that currently provided under the Delaware General Corporation
Law and Global's Bylaws. Accordingly, Global's potential monetary exposure to
claims for indemnification will be greater if the Indemnification Agreements
are approved. However, since Michael G. Rubin acquired a controlling interest
in the Company in 1995, there have been no claims for indemnification by
directors against Global, and Global is not aware of any pending or threatened
litigation in which directors may be named as defendants or of any claims by
directors for indemnification which are likely to result from any past,
pending or threatened litigation.
Set forth below is a summary of all the material terms of the
Indemnification Agreements, the proposed form of which is attached as Appendix
C to this Proxy Statement. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY THE DETAILED PROVISIONS OF THE FORM OF
INDEMNIFICATION AGREEMENT WHICH IS INCORPORATED BY REFERENCE HEREIN. PLEASE
READ THE ATTACHED AGREEMENT WHICH IS INCORPORATED BY REFERENCE HEREIN
CAREFULLY BEFORE COMPLETING AND RETURNING YOUR PROXY CARD.
The proposed Indemnification Agreements will (i) confirm the present
indemnity provided by Global's Bylaws and provide that this indemnity will
continue despite future changes in the Company's Bylaws as they will be
contractual obligations of Global, unlike Global's Bylaws which may be amended
by Global's shareholders or its Board, and (ii) provide further
indemnification to the fullest possible extent permitted by law against all
expenses (including attorneys' fees), judgments, fines and settlement amounts
paid or incurred by a director or officer in any action or proceeding,
including any action by or in the right of Global, on account of service as a
director, officer, employee, attorney or agent of Global, or any subsidiary of
Global or any other company or enterprise at the request of Global. The
Indemnification Agreements will cover all such actions and proceedings,
including actions or proceedings resulting from the sale of the Off-Price and
Action Sports Division and the Branded Division, even if they arise from acts
or omissions by a director or officer occurring before the execution of the
agreement. The contractual arrangements will continue in force so long as the
individual continues to serve in such capacity on behalf of Global and will
cover liabilities related to his activities in any such capacity regardless of
future changes to Global's corporate documents. However, the Indemnification
Agreements will not indemnify any director or officer unless such director or
officer acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of Global. In addition, no indemnification
will be provided in respect of any suit in which judgment is rendered against
a director or officer for an accounting of profits from a purchase or sale of
securities of Global in violation of Section 16(b) of the Securities Exchange
Act of 1934, as amended, or of any successor statute or for expenses or
liabilities which have been
48
<PAGE>
paid directly to a director or officer by an insurance carrier under a policy
of directors' and officers' liability insurance.
The Indemnification Agreements provide for payment of expenses in advance of
a final disposition of the action or suit, regardless of the recipient's
ability to make repayments, and all such advances will be unsecured and
interest-free. Management believes that Global should be obligated to advance
expenses because indemnification after the conclusion of an action is
virtually meaningless if a person cannot pay the expenses as they become due,
especially in view of the fact that the expenses of providing a defense and
the length of legal proceedings may be significant.
The Indemnification Agreements also provide directors and officers who are
parties thereto with protection during the determination process in the event
there is a change of control of Global or its Board and grant such directors
and officers certain rights to appeal a denial of indemnification to a court
of competent jurisdiction. Except as discussed above with respect to
violations of Section 16(b) of the Exchange Act and expenses or liabilities
which are covered by insurance, the Indemnification Agreements provide that
directors or officers who rely on the records of Global or upon information
supplied by the officers of Global, legal counsel, outside accountants or
appraisers are deemed to have acted in a manner which would entitle such
directors or officers to indemnification under the Indemnification Agreements.
In addition to the matters described above, the Indemnification Agreements
provide a scheme of indemnification that is broader than that specifically
provided by the Delaware General Corporation Law.
First, the Indemnification Agreements establish the presumption that the
indemnified party has met the applicable standard of conduct required for
indemnification. The Delaware General Corporation Law requires a finding by
the Board of Directors, a committee of the Board of Directors, independent
legal counsel or the shareholders that the applicable standard of conduct has
been met.
Second, the Indemnification Agreements explicitly provide that the
indemnification provisions applicable to a third party suit cover amounts paid
in settlement where the indemnified party meets the applicable standard of
conduct. The Delaware General Corporation Law does not provide for such
indemnification.
Third, in the event Global does not pay a requested indemnification amount,
the Indemnification Agreements allow an indemnified party, among other things,
to contest this determination by petitioning a court to make an independent
determination as to whether such indemnified party is entitled to
indemnification under the Indemnification Agreements. In the event of such
contest, the burden of proving that the indemnified party did not meet the
applicable standard of conduct will be on Global. If Global fails to establish
that the applicable standard of conduct has not been met in such case, the
indemnified party will be entitled to indemnification which will include
reimbursement for the expenses incurred by the indemnified party in such
contest. The Delaware General Corporation Law does not set forth the procedure
for contesting a corporation's determination of an indemnified party's right
to indemnification.
Fourth, the Indemnification Agreements explicitly provide for partial
indemnification of costs and expenses in the event an indemnified party is not
entitled to full indemnification under the terms of the Indemnification
Agreement. The Delaware General Corporation Law does not specifically address
this issue. It does, however, provide that to the extent an indemnified party
has been successful on the merits, he shall be entitled to such
indemnification.
Interests of Certain Persons
Each of the directors and executive officers of Global will be a party to
and, as such, a beneficiary of the rights contained in the Indemnification
Agreements. Approval of the Indemnification Agreements will result in greater
indemnification protection for such directors and executive officers against
the risks and expenses of litigation and may result in greater potential
monetary exposure to Global for indemnification claims.
49
<PAGE>
Recommendation of Board of Directors
The Board of Directors has concluded that it is in the best interests of the
Company and its shareholders to enter into Indemnification Agreements with its
directors and certain officers to provide the maximum protection permitted by
law. Accordingly, the Board unanimously approved the Indemnification
Agreements at a meeting held on November 16, 1999.
THE BOARD OF DIRECTORS OF GLOBAL UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE INDEMNIFICATION AGREEMENTS.
OTHER MATTERS
As of the date of this Proxy Statement, Global knows of no other business
that will be presented for consideration at the Special Meeting (other than
procedural matters). However, the enclosed proxy confers discretionary
authority to vote with respect to any and all of the following matters that
may come before the Special Meeting: (i) matters that Global's Board of
Directors does not know, a reasonable time before proxy solicitation, are to
be presented for approval at the Special Meeting; (ii) approval of the minutes
of a prior meeting of shareholders, if such approval does not constitute
ratification of the action at the meeting; (iii) the election of any person to
any office for which a bona fide nominee is unable to serve or for good cause
will not serve; (iv) any proposal omitted from this Proxy Statement and the
form of proxy pursuant to Rules 14a-8 or 14a-9 under the Exchange Act; and (v)
matters incident to the conduct of the Special Meeting. If any such matters
come before the Special Meeting, the proxy agents named in the accompanying
proxy card will vote in accordance with their judgment.
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of Deloitte & Touche LLP acted as Global's independent
public accountants for the fiscal year ended December 31, 1998. A
representative of Deloitte & Touche LLP is expected to be present at the
Special Meeting and to have the opportunity to make a statement, if he or she
desires to do so, and is expected to be available to respond to appropriate
questions.
ADDITIONAL INFORMATION
Global is subject to the reporting requirements of the Exchange Act, and in
accordance therewith files periodic reports and other information with the
SEC. Such reports, proxy statements and other information concerning Global
may be inspected and copies may be obtained (at prescribed rates) at Public
Reference Room maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at
Northwest Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. In addition, electronically
filed documents, including reports, proxy and information statements and other
information regarding Global, can be obtained from the SEC's website at
http://www.sec.gov.
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING
Pursuant to recent amendments to the proxy rules under the Exchange Act,
Global's shareholders are notified that the deadline for providing Global
timely notice of any shareholder proposal to be submitted outside of the Rule
14a-8 process for consideration at Global's 2000 Annual Meeting of
Shareholders (the "2000 Meeting") will be April 30, 2000. As to all such
matters which Global does not have notice on or prior to March 19, 2000,
discretionary authority shall be granted to the persons designated in Global's
proxy related to the 2000
50
<PAGE>
Meeting to vote on such proposal. This change in procedure does not affect the
Rule 14a-8 requirements applicable to inclusion of shareholder proposals in
Global's proxy materials related to the 2000 Meeting. A shareholder proposal
regarding the 2000 Meeting must be submitted to Global at its office located
at 1075 First Avenue, King of Prussia, Pennsylvania, 19406, by January 3, 2000
to receive consideration for inclusion in Global's 2000 proxy materials. Any
such proposal must also comply with the proxy rules under the Exchange Act,
including Rule 14a-8.
By Order of the Board of Directors,
/s/ Arthur H. Miller
Secretary
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements for the Years Ended December 31, 1998, 1997 and 1996
and Independent Auditors' Report:
Independent Auditors' Report--Deloitte & Touche L.L.P................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997............... F-2
Statements of Operations for the Three Years Ended December 31, 1998,
1997 and 1996.......................................................... F-3
Statements of Stockholders' Equity (Deficiency) for the Three Years
Ended December 31, 1998, 1997 and 1996................................. F-4
Statements of Cash Flows for the Three Years Ended December 31, 1998,
1997 and 1996.......................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Financial Statements for the Nine Months Ended September 30, 1999 and 1998
(Unaudited):
Condensed Consolidated Balance Sheets (Unaudited) at September 30, 1998
and December 31, 1998.................................................. F-24
Condensed Consolidated Statements of Operations (Unaudited) for the Nine
Months Ended September 30, 1999 and 1998............................... F-25
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1999 and 1998............................... F-26
Notes to Condensed Consolidated Financial Statements.................... F-27
</TABLE>
<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). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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.
As discussed in Note 1 to the financial statements, the Company has made
certain reclassifications to its financial statements to reflect discontinued
operations.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 16, 1999
(September 24, 1999 as to Notes 1 and 14)
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.......................... $ 83,169 $ 98,881
Net assets of discontinued operations.............. 38,718,921 24,128,879
Prepaid expenses and other current assets.......... 599,224 430,279
----------- -----------
Total current assets............................. 39,401,314 24,658,039
Property and equipment, net of accumulated
depreciation and amortization..................... 2,988,714 3,123,184
Other assets....................................... 253,626 261,866
----------- -----------
Total assets..................................... $42,643,654 $28,043,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--notes payable, bank............... $ -- $ 2,000,000
Current portion--capital lease obligation, related
party............................................. 127,966 116,124
Accounts payable................................... 3,595,996 91,542
Accrued expenses................................... 1,434,848 633,943
Subordinated note payable, related party........... 1,805,841 2,068,652
----------- -----------
Total current liabilities........................ 6,964,651 4,910,261
Capital lease obligation, related party.............. 2,181,265 2,309,231
Notes payable, bank.................................. 18,812,156 18,666,248
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....... $42,643,654 $28,043,089
=========== ===========
</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>
Costs and expenses:
General and administrative expense.... $ 3,452,914 $ 2,389,223 $ 2,852,623
Interest expense...................... 2,366,935 2,013,028 1,152,473
----------- ----------- -----------
Total costs and expenses............ 5,819,849 4,402,251 4,005,096
----------- ----------- -----------
Loss from continuing operations before
income taxes........................... (5,819,849) (4,402,251) (4,005,096)
Benefit from income taxes............... 1,978,749 -- --
----------- ----------- -----------
Loss from continuing operations......... (3,841,100) (4,402,251) (4,005,096)
Discontinued operations (See Note 1):
Income from discontinued operations
(less income taxes of $3,879,567, $--
and $81,483 in 1998, 1997 and 1996,
respectively)........................ 9,742,663 246,956 3,260,783
----------- ----------- -----------
Net income (loss)....................... $ 5,901,563 $(4,155,295) $ (744,313)
=========== =========== ===========
Earnings (losses) per share:
Basic--
Loss from continuing operations....... $ (.34) $ (1.47) $ (1.56)
Income from discontinued operations... .86 .08 1.27
----------- ----------- -----------
Net income (loss)................... $ .52 $ (1.39) $ (.29)
=========== =========== ===========
Diluted--
Loss from continuing operations....... $ (.34) $ (1.47) $ (1.56)
Income from discontinued operations... .86 .08 1.27
----------- ----------- -----------
Net income (loss)................... $ .52 $ (1.39) $ (.29)
=========== =========== ===========
</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)
Deduct:
Income from discontinued operations.... 9,742,663 246,956 3,260,783
---------- ----------- ----------
Loss from continuing operations......... (3,841,100) (4,402,251) (4,005,096)
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) operating
activities:
Depreciation and amortization.......... 567,310 368,227 332,779
Provision for losses on accounts
receivable............................ 86,903 507,146 250,845
Loss on disposition of equipment....... 19,819 -- --
Warrants expense....................... 150,000 152,333 --
Changes in operating assets and
liabilities, net of acquisitions and
discontinued operations:
Prepaid expenses and other current
assets................................ 1,323,336 (3,551,074) (169,397)
Other assets........................... 33,571 (576,542) (473,830)
Accounts payable and accrued expenses.. 4,292,548 491,169 124,542
---------- ----------- ----------
Net cash provided by (used in)
continuing operations................. 2,632,387 (7,010,992) (3,940,157)
Net cash provided by (used in)
discontinued operations............... 38,662 (2,136,751) 4,629,841
---------- ----------- ----------
Net cash provided by (used in)
operating activities................. 2,671,049 (9,147,743) 689,684
---------- ----------- ----------
Cash Flows from Investing Activities:
Acquisition of property and equipment... (397,990) (231,987) (505,543)
---------- ----------- ----------
Net cash provided by (used in)
investing activities................. (397,990) (231,987) (505,543)
---------- ----------- ----------
Cash Flows from Financing Activities:
Net borrowings under line of credit..... (1,853,992) 9,984,077 970,441
Costs of debt issuance.................. (80,000) (266,304) --
Repayment of capital lease.............. (116,124) (105,378) (86,251)
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........................... (2,276,860) 9,196,395 101,990
---------- ----------- ----------
Effect of exchange rate on cash.......... (11,911) 6,345 (29,735)
---------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents............................. (15,712) (176,990) 256,396
Cash and cash equivalents, beginning of
year.................................... 98,881 275,871 19,475
---------- ----------- ----------
Cash and cash equivalents, end of year... $ 83,169 $ 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 Subsequent Events
Global Sports, Inc. ("Global" or "the Company"), a Delaware corporation, is
an e-Commerce company that is in the process of developing the internet
businesses of several sporting goods retailers through contractual commitments
with its Global Sports Interactive subsidiary. The Company's failure to meet
these commitments could result in a forfeiture of the contracts and the
exclusive rights to certain future internet business and have a material
adverse affect on the future results of operations and financial condition of
the Company.
Discontinued Operations
On April 20, 1999, the Company formalized a plan to sell two of its
businesses, the Branded division and the Off-Price and Action Sports division,
in order to focus exclusively on its e-Commerce business. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division is a third-party distributor and make-to-order marketer
of off-price footwear, apparel and sporting goods. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of these divisions have been segregated from that of continuing
operations and are presented in the Company's financial statements as
discontinued operations. Prior year financial statements have been
reclassified to reflect these discontinued operations.
On September 24, 1999, the Company and a management group led by James J.
Salter and Kenneth J. Finkelstein entered into an acquisition agreement for
the sale of all of the issued and outstanding capital stock of the Company's
wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment Inc. and the
Company's Off-Price and Action Sports Division. The aggregate purchase price
for the sale is approximately $20.0 million, of which approximately $6.0
million is to be paid at closing, approximately $4.0 million is the assumption
of contingent notes payable, and $10.0 million is to be paid over a seven and
one half year period pursuant to the terms of two notes to be delivered at
closing. In connection with the sale, the Company has agreed to accelerate the
vesting of options to acquire an aggregate of 281,930 shares of the Company's
common stock, of which options to acquire 80,000 shares are held by each of
Messrs Salter and Finkelstein. The closing of this sale is subject to
customary closing conditions, including approval by the Company's shareholders
and expiration or termination of any applicable waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended. Upon closing, the
gain on this sale, if any, will be deferred and recognized on an installment-
sale basis over the term of the two notes.
The discontinued operations components of amounts reflected in the income
statements and balance sheets are as follows:
<TABLE>
<CAPTION>
For The Year Ended December 31,
------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Income Statement:
Net sales........................... $131,434,971 $60,671,407 $47,340,450
Costs and expenses.................. 116,907,544 60,424,451 43,998,184
------------ ----------- -----------
Operating income.................... 14,527,427 246,956 3,342,266
Other expenses...................... 905,197 -- --
------------ ----------- -----------
Income before income taxes.......... 13,622,230 246,956 3,342,266
Provision for income taxes.......... 3,879,567 -- 81,483
------------ ----------- -----------
Income from discontinued
operations......................... $ 9,742,663 $ 246,956 $ 3,260,783
============ =========== ===========
</TABLE>
F-6
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance Sheet:
Cash.............................................. $ 772,916 $ --
Accounts receivable............................... 36,782,732 16,060,911
Inventory......................................... 20,954,168 16,906,171
Other current assets.............................. 836,520 241,403
----------- -----------
Total current assets............................ 59,346,336 33,208,485
Property and equipment.............................. 1,397,189 159,528
Goodwill and intangibles............................ 14,098,155 6,147,282
Other assets........................................ 99,773 2,404
----------- -----------
Total assets.................................... 74,941,453 39,517,699
----------- -----------
Accounts payable and accrued expenses............... 16,192,954 15,388,820
Current portion--note payable, banks................ 14,529,576 --
Current portion--notes payable, other............... 712,815 --
Subordinated notes payable.......................... 1,999,065 --
----------- -----------
Total current liabilities....................... 33,434,410 15,388,820
Note payable, banks................................. 294,379 --
Notes payable, other................................ 2,493,743 --
----------- -----------
Total liabilities............................... 36,222,532 15,388,820
----------- -----------
Net assets of discontinued operations............... $38,718,921 $24,128,879
=========== ===========
</TABLE>
Acquisition of Discontinued Operations
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. 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 ($1 million of which was paid in May of 1999),
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-7
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition of the Gen-X Companies on May 12, 1998,
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.
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.
Notes Payable of Discontinued Operations
The components of the notes payable, banks balances as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
------------ -----
<S> <C> <C>
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................................................. 14,823,955 --
Less: Current portion................................... (14,529,576) --
------------ -----
Long-term portion....................................... $ 294,379 $ --
============ =====
</TABLE>
The Company has a line of credit of approximately $20,000,000 for use by the
Gen-X Companies, which is available for either direct borrowing or for import
letters of credit. The loan bears interest at prime plus one half percent and
is secured by a general security agreement covering substantially all of the
Gen-X Companies' assets. At 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 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.
F-8
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the notes payable, other balances as of December 31, 1998
and 1997 are 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. 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.
The components of the subordinated notes payable balances as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
----------- -----
<S> <C> <C>
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 $ --
Less: Current portion.................................... (1,999,065) --
----------- -----
Long-term portion........................................ $ -- $ --
=========== =====
</TABLE>
Upon closing the Gen-X transaction on May 12, 1998, several subordinated
notes payable were executed with the former shareholders of the Gen-X
Companies for an aggregate of $1,999,065 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.
F-9
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment of Discontinued Operations
The major classes of property and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
<S> <C> <C>
Equipment.............................................. $ 574,040 $140,343
Building............................................... 686,365 --
Leasehold improvements................................. 21,846 21,642
Land................................................... 268,800 --
---------- --------
1,551,051 161,985
Less: Accumulated depreciation and amortization........ (153,862) (2,457)
---------- --------
$1,397,189 $159,528
========== ========
</TABLE>
Employment Agreements of Discontinued Operations
At December 31, 1998, the Company has employment agreements with several of
its officers for an aggregate annual base salary of $590,000 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 of Discontinued Operations
As of December 31, 1998, outstanding purchase commitments exist totaling
$5,745,974, for which commercial import letters of credit have been issued.
Related Party Transactions of Discontinued Operations
For the years ended December 31, 1997 and 1996, the KPR Companies' purchased
$196,274 and $151,985 of inventory from RYKA Inc. (prior to the
Reorganization).
Financial Instruments of Discontinued Operations
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-10
<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.
These contracts mature in January and February of 1999. The deferred gains or
losses on these contracts at December 31, 1998 were not material.
Significant Customers/Concentrations of Credit Risk of Discontinued Operations
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% are 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.
Major Suppliers/Economic Dependency of Discontinued Operations
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
F-11
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
SOFTBANK Transaction
On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered
into a stock purchase agreement and related agreements for the sale of
6,153,850 shares of the Company's common stock to certain affiliates of
SOFTBANK at a price of $13.00 per share (the closing price on May 26, 1999,
the day prior to the day the Company and SOFTBANK agreed in principal to the
transaction) for an aggregate purchase price of $80,000,050.
Note 2--Organization
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.
Note 3--Significant Accounting Policies
The following summarize the Company's significant accounting policies, some
of which apply only to discontinued operations.
Principles of Consolidation: The financial statements presented include the
accounts of Global Sports, Inc., a Delaware corporation, and the following
wholly-owned subsidiaries:
APEX Sports International, Inc. (PA) G.S.I., Inc. (DE)
KPR Sports International, Inc. (PA) Gen-X Holdings, Inc. (WA)
MR Management, Inc. (PA) Gen-X Equipment Inc. (Ontario)
RYKA Inc. (PA) Lamar Snowboards, Inc. (MO)
F-12
<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 2). 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 16).
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
F-13
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
loan fees was $247,772. The realizability of goodwill is evaluated
periodically as events or circumstances indicate a possible inability to
recover the 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 goodwill exceeds its estimated fair value.
Deferred Loan Fees: 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 and is included in other assets.
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. On December 15, 1997, the KPR Companies effected a merger with
RYKA Inc. (see Note 2). 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.
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.
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 of 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-14
<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, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective for
fiscal years beginning after June 15, 2000, although early adoption is
encouraged. The Company has not yet assessed what the impact of this statement
will be on the Company's future earnings or financial position.
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 to have a material effect on the Company's results of
operations, cash flows or financial position.
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............................................ $1,190,068 $ 949,805
Building--under capital lease (see Note 6)........... 2,666,958 2,666,958
Leasehold improvements............................... 336,926 332,125
Construction in progress............................. 17,392 --
---------- ----------
4,211,344 3,948,888
Less: Accumulated depreciation and amortization...... (1,222,630) (825,704)
---------- ----------
$2,988,714 $3,123,184
========== ==========
</TABLE>
F-15
<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 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
Less: Current portion.............................. -- (2,000,000)
----------- -----------
Long-term portion.................................. $18,812,156 $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 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
F-16
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Subordinated Notes Payable
The components of the subordinated notes payable balances as of December 31,
1998 and 1997 are 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
Less: Current portion............................. (1,805,841) (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 2). 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.
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>
$1,805,841 $ -- $ -- $ -- $ --
====== ====== ====== ======
</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 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.
F-17
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
----------
Long-term 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, the Company
issued 10,000 shares of mandatorily redeemable preferred stock (see Note 1).
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.
Note 8--Stock Options
As part of the Reorganization (see Note 2), 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.
F-18
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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
F-19
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 and diluted........... $ .52 $ .42
=========== ===========
1997
Net loss........................................ $(4,155,295) $(4,805,295)
=========== ===========
Losses per share--basic and 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>
Note 9--Common Stock Purchase Warrants
Prior to the Reorganization (see Note 2), 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>
Range of
Number of Exercise Range of Terms
Issue Date Shares Price (Years)
---------- --------- --------------- --------------
<S> <C> <C> <C>
1994................................ 10,026 $12.00 - $20.00 3 - 10
1995................................ 27,660 $8.40 - $30.00 5 - 10
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.
F-20
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 10--Income Taxes
Loss before income taxes and the related benefit from income taxes, were as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Earnings before income taxes:
Domestic................................................. $5,819,849
Foreign.................................................. --
----------
Total.................................................... $5,819,849
==========
Provision for income taxes:
Current:
Federal.................................................. $1,978,749
State.................................................... --
Foreign.................................................. --
----------
Total Current............................................ $1,978,749
==========
Deferred:
Federal.................................................. --
State.................................................... --
Foreign.................................................. --
Total Deferred........................................... --
----------
--
==========
Total:
Federal.................................................. 1,978,749
State.................................................... --
Foreign.................................................. --
----------
Total.................................................... $1,978,749
==========
</TABLE>
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:
Provision for doubtful accounts.................. $ 308,600 $ 327,900
Net operating loss carryforwards................. 8,035,764 7,750,306
Gross deferred tax assets...................... 8,344,364 8,078,206
Deferred tax liabilities........................... -- --
Net deferred tax assets and liabilities............ 8,344,364 8,078,206
Valuation allowance.............................. (8,344,364) (8,078,206)
Net deferred tax asset............................. $ -- $ --
</TABLE>
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, the related
income tax benefit will reduce the carrying value of goodwill.
F-21
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997 and 1996 the Company had no provision
for federal and state income taxes.
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>
Loss from continuing operations..... $(3,841,100) $(4,402,251) $(4,005,096)
Income from discontinued
operations......................... 9,742,663 246,956 3,260,783
----------- ----------- -----------
Net income (loss)................... $ 5,901,563 $(4,155,295) $ (744,313)
=========== =========== ===========
Weighted average shares
outstanding--basic................. 11,378,918 2,996,027 2,568,431
Dilutive common stock options...... -- -- --
Dilutive common stock warrants..... -- -- --
----------- ----------- -----------
Weighted average shares
outstanding--diluted............... 11,378,918 2,996,027 2,568,431
=========== =========== ===========
Outstanding common stock options
having no dilutive effect.......... 533,132 542,681 241,250
=========== =========== ===========
Outstanding common stock warrants
having no dilutive effect.......... 384,117 236,486 81,186
=========== =========== ===========
</TABLE>
The Company's net loss in 1997 and 1996 result in an anti-dilutive effect in
the calculation of diluted earnings losses per share.
Note 12--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 $587,500 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.
Note 13--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.
F-22
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 14--Business Segments
As a result of the discontinued operations described in Note 1 to the
financial statements, the Company considers itself to have one operating
segment which is in the process of developing the internet businesses of
several sporting goods retailers.
Note 15--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
Financial Statement ---------------
Nature of Transaction Classification 1997 1996
--------------------- ----------------------- ------- -------
<S> <C> <C> <C>
Rent................................ Other (income) expenses $45,521 $47,500
Interest on subordinated debt....... Interest income $56,854 $80,723
</TABLE>
Note 16--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 2), the Company had a 33%
equity interest in the net assets of RYKA.
F-23
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 39,467,680 $ 83,169
Inventory......................................... 4,669,217 --
Prepaid expenses and other current assets......... 621,442 599,224
Refundable income taxes........................... 2,220,878 --
Net assets of discontinued operations............. 43,012,442 38,718,921
------------ -----------
Total current assets............................ 89,991,659 39,401,314
Property and equipment, net of accumulated
depreciation and amortization...................... 16,219,279 2,988,714
Other assets........................................ 219,511 253,626
------------ -----------
Total assets.................................... $106,430,449 $42,643,654
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--notes payable, bank.............. $ 3,699,207 $ --
Current portion--capital lease obligation, related
party............................................ 136,524 127,966
Accounts payable and accrued expenses............. 15,487,521 3,652,024
Income taxes payable.............................. -- 1,378,820
Subordinated notes payable, related party......... -- 1,805,841
------------ -----------
Total current liabilities....................... 19,323,252 6,964,651
Notes payable, bank................................. -- 18,812,156
Capital lease obligation, related party............. 2,077,906 2,181,265
Mandatorily redeemable preferred stock.............. 100 100
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; 10,000 shares issued as mandatorily
redeemable preferred stock....................... -- --
Common stock, $0.01 par value, 60,000,000 and
20,000,000 shares authorized in 1999 and 1998,
19,476,265 and 12,994,464 shares issued in 1999
and 1998; 18,407,179 and 11,925,378 shares
outstanding in 1999 and 1998..................... 194,766 129,947
Additional paid in capital........................ 98,693,234 14,624,541
Accumulated other comprehensive income............ -- (47,431)
Retained earnings (accumulated deficit)........... (13,644,992) 192,242
------------ -----------
85,243,008 14,899,299
Less: Treasury stock, at cost....................... 213,817 213,817
------------ -----------
Total stockholders' equity...................... 85,029,191 14,685,482
------------ -----------
Total liabilities and stockholders' equity...... $106,430,449 $42,643,654
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-24
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
Costs and expenses:
General and administrative......................... $ 2,923,252 $2,502,532
Equity compensation................................ 2,725,486 --
Web-site development............................... 7,979,889 --
Interest expense (income), net..................... (145,966) 176,349
------------ ----------
Total costs and expenses......................... 13,482,661 2,678,881
------------ ----------
Loss from continuing operations before income taxes.. (13,482,661) (2,678,881)
Benefit from income taxes............................ (2,220,878) (910,819)
------------ ----------
Loss from continuing operations...................... (11,261,783) (1,768,062)
Discontinued operations (Note 3):
Income from discontinued operations (less income
taxes of $(582,804) in 1999 and $2,793,763 in
1998)............................................. 586,101 6,591,266
Loss on disposition of discontinued operations
(less income taxes of $830,775)................... (3,161,552) --
------------ ----------
Net income (loss).................................... $(13,837,234) $4,823,204
============ ==========
Earnings (losses) per share--basic and diluted:
Loss from continuing operations.................... $ (.93) $ (.16)
Income from discontinued operations................ .05 .59
Loss on disposition of discontinued operations..... (.26) --
------------ ----------
Net income (loss).................................. $ (1.14) $ .43
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-25
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................................. $(13,837,234) $ 4,823,204
Deduct:
Income from discontinued operations.............. 586,101 6,591,266
Loss on disposal of discontinued operations...... (3,161,552) --
------------ -----------
Net loss from continuing operations................ (11,261,783) (1,768,062)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 530,533 444,800
Equity compensation.............................. 2,791,636 --
Changes in operating assets and liabilities:
Inventory...................................... (4,669,217) --
Prepaid expenses and other current assets...... (22,218) (179,114)
Deferred income taxes.......................... (2,220,878) --
Other assets................................... 64,115 256,333
Accounts payable and accrued expenses.......... 11,880,929 1,326,178
Income taxes payable........................... (1,378,820) 1,636,068
------------ -----------
Net cash provided by (used in) continuing
operations.................................... (4,285,703) 1,716,203
Net cash used in discontinued operations....... (6,868,972) (3,971,287)
------------ -----------
Net cash used in operating activities.......... (11,154,675) (2,255,084)
------------ -----------
Cash Flows from Investing Activities:
Capital expenditures............................. (13,761,098) (443,922)
------------ -----------
Net cash used in investing activities.......... (13,761,098) (443,922)
------------ -----------
Cash Flows from Financing Activities:
Net borrowings (repayments) under lines of
credit.......................................... (15,112,949) 3,260,711
Repayments of capital lease obligation........... (94,801) (86,027)
Repayments of subordinated note payable.......... (1,805,841) (250,000)
Proceeds from SOFTBANK transaction............... 80,000,050 --
Proceeds from exercise of common stock options
and warrants.................................... 1,341,826 23,253
Sale of minority interest in subsidiary.......... 1,999 --
Costs of debt issuance........................... (30,000) --
------------ -----------
Net cash provided by financing activities...... 64,300,284 2,947,937
------------ -----------
Effect of exchange rate on cash and cash
equivalents....................................... -- (11,910)
------------ -----------
Net increase in cash and cash equivalents.......... 39,384,511 237,021
Cash and cash equivalents, beginning of period..... 83,169 98,881
------------ -----------
Cash and cash equivalents, end of period........... $ 39,467,680 $ 335,902
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-26
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Basis of Presentation
Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, is
an e-Commerce company that is in the process of developing the internet
businesses of several sporting goods retailers through its Global Sports
Interactive subsidiary. On April 20, 1999, the Company formalized a plan to
sell its other two businesses, the Branded division and the Off-Price and
Action Sports division, in order to focus exclusively on its e-Commerce
business. See Note 3.
The accompanying condensed financial statements of Global have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions for Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements.
The accompanying financial information is unaudited; however, in the opinion
of the Company's management, all adjustments (consisting solely of normal
recurring accruals) necessary for a fair presentation of the operating results
of the periods reported have been included. The results of operations for the
periods reported are not necessarily indicative of those that may be expected
for a full year.
Note 2--Significant Accounting Policies
Cash and Cash Equivalents: At September 30, 1999, the Company had
$39,455,852 of excess cash invested in a money market fund with a major
financial institution, which is included in cash and cash equivalents. The
Company considers all highly liquid investments with maturities at date of
purchase of three months or less to be cash equivalents. Interest income for
the nine-month period ended September 30, 1999 includes $403,938 related to
this investment.
New Accounting Pronouncements
Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective for
fiscal years beginning after June 15, 2000, although early adoption is
encouraged. The Company has not yet assessed what the impact of this statement
will be on the Company's future earnings or financial position.
Computer Costs: In March 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). This
statement provides guidance on accounting for the costs of computer software
developed or obtained for internal use and identifies the characteristics of
internal-use software. The statement was adopted on January 1, 1999 and did
not have a material effect on the Company's results of operations, cash flows
or financial position.
Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive
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 was adopted on January 1, 1999 and did not have a material effect on
the Company's results of operations, cash flows or financial position.
F-27
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Discontinued Operations
On April 20, 1999, the Company formalized a plan to sell two of its
businesses, the Branded division and the Off-Price and Action Sports division,
in order to focus exclusively on its e-Commerce business. The Branded division
designs and markets the RYKA and Yukon footwear brands. The Off-Price and
Action Sports division is a third-party distributor and make-to-order marketer
of off-price footwear, apparel and sporting goods. Accordingly, for financial
statement purposes, the assets, liabilities, results of operations and cash
flows of these divisions have been segregated from that of continuing
operations and are presented in the Company's consolidated financial
statements as discontinued operations. Prior year financial statements have
been reclassified to reflect these discontinued operations. Net interest
expense related to the lines of credit and debt to be assumed by the successor
businesses of $933,365 for the nine-month period ended September 30, 1999 has
been allocated to the pre-measurement date loss from discontinued operations.
Net interest expense of $257,972 for the nine-month period ended September 30,
1999 has been allocated to the post-measurement date gain (loss) from the
disposition of discontinued operations.
On September 24, 1999, the Company and a management group led by James J.
Salter and Kenneth J. Finkelstein entered into an acquisition agreement for
the sale of all of the issued and outstanding capital stock of the Company's
wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment Inc. (the
"Gen-X Companies"), through which the Company operates its Off-Price and
Action Sports Division. The aggregate purchase price for the sale is
approximately $20 million, of which approximately $6 million is to be paid at
closing, approximately $4 million is the assumption of contingent notes
payable, and $10 million is to be paid over a seven and one half year period
pursuant to the terms of two notes to be delivered at closing. In connection
with the sale, the Company has agreed to accelerate the vesting of options to
acquire an aggregate of 281,930 shares of the Company's common stock, of which
options to acquire 80,000 shares are held by each of Messrs Salter and
Finkelstein. The closing of this sale is subject to customary closing
conditions, including approval by the Company's shareholders and expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. Upon closing, the gain on this
sale, if any, will be deferred and recognized on an installment-sale basis
over the term of the two notes.
F-28
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The discontinued operations components of amounts reflected in the income
statements and balance sheets are as follows:
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Income Statement Data:
Net sales................. $92,461,398 $100,095,476
=========== ============
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Balance Sheet Data:
Cash...................... $ 231,328 $ 772,916
Accounts receivable....... 37,763,325 36,782,732
Inventory................. 15,227,482 20,954,168
Other current assets...... 1,677,104 836,520
----------- ------------
Total current assets.... 54,899,239 59,346,336
Property and equipment.... 1,304,772 1,397,189
Goodwill and intangibles.. 14,295,421 14,176,531
Other assets.............. 26,439 21,397
----------- ------------
Total assets............ 70,525,871 74,941,453
----------- ------------
Accounts payable and
accrued expenses......... 12,581,475 16,192,954
Current portion--notes
payable, banks........... 12,124,878 14,529,576
Current portion--notes
payable, other........... 782,613 712,815
Subordinated notes
payable.................. -- 1,999,065
----------- ------------
Total current
liabilities............ 25,488,966 33,434,410
Notes payable, banks...... 277,855 294,379
Notes payable, other...... 1,746,608 2,493,743
----------- ------------
Total liabilities....... 27,513,429 36,222,532
----------- ------------
Net assets of discontinued
operations............... $43,012,442 $ 38,718,921
=========== ============
</TABLE>
Notes Payable of Discontinued Operations
Included in Notes Payable, Banks of discontinued operations are amounts
outstanding under a line of credit of approximately $20,000,000 for use by the
Gen-X Companies, which is available for either direct borrowing or for import
letters of credit. The loan bears interest at prime plus one half percent and
is secured by a general security agreement covering substantially all of the
Gen-X Companies' assets. At September 30, 1999, draws of $12,100,000 were
committed under this line and, based on a net cash position and available
collateral and outstanding import letters of credit commitments, an additional
$3,200,000 was available for borrowing. For the nine-month period ending
September 30, 1999, interest expense of discontinued operations included
$556,736 related to this line of credit.
Notes Payable, Banks also includes a mortgage note secured by land and
building in Ontario, Canada of $302,733, of which $24,878 is classified as
current. The mortgage note bears interest at the bank's cost of funds plus
2.5% and matures on August 15, 2009. For the nine-month period ending
September 30, 1999, interest expense of discontinued operations included
$16,645 related to this mortgage.
F-29
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes Payable, Other includes an outstanding loan payable for $1,300,000, of
which $400,000 is classified as current. The original loan of $2,000,000 is
payable in equal quarterly installments of $100,000, which commenced on March
31, 1998, and bears interest at the prime lending rate. For the nine-month
period ending September 30, 1999, interest expense of discontinued operations
included $87,967 related to this loan.
Notes payable, other also includes $1,000,000 of promissory notes payable to
the former shareholders of Lamar. The notes are payable in five equal annual
installments and bear interest at 6% per annum, the first payment of which was
made in July 1999. At September 30, 1999, $726,500 remains outstanding related
to these notes, of which $270,680 is classified as current. For the nine-month
period ending September 30, 1999, interest expense of discontinued operations
included $97,558 related to these notes. At the time of the acquisition, Lamar
also executed a note payable in the principal amount of $553,447, plus $74,954
in accrued interest, for amounts owed to a shareholder. This note, which was
assumed by the Company in the acquisition of Lamar, is payable in five equal
annual installments and bears interest at 6% per annum. The amount currently
outstanding on this note is $502,721, of which $111,933 is classified as
current. For the nine-month period ending September 30, 1999, interest expense
of discontinued operations included $27,278 related to this note.
Upon closing the acquisition of the Gen-X Companies, the Company executed
several subordinated notes payable with the former shareholders of the Gen-X
Companies for in the aggregate principal amount of $1,999,065 which is payable
in four equal consecutive quarterly payments beginning March 31, 1999 or
earlier. This amount has been repaid in full as of September 30, 1999. These
notes bear interest at 7% until December 31, 1998 and the prime lending rate
thereafter. For the nine-month period ending September 30, 1999, interest
expense of discontinued operations included $68,257 related to these notes.
Employment Agreements of Discontinued Operations
The Company has employment agreements with several of its officers of
discontinued operations for an aggregate annual base salary of $925,000 plus
bonuses and increases in accordance with the terms of the agreements. Terms of
the agreements range from three to five years and are subject to automatic
annual extensions.
Purchase Commitments of Discontinued Operations
As of September 30, 1999, outstanding purchase commitments of discontinued
operations existed totaling $8,775,760, for which commercial import letters of
credit have been issued.
Note 4--SOFTBANK Transaction
On June 10, 1999, the Company and SOFTBANK entered into a stock purchase
agreement and related agreements for the sale of 6,153,850 shares of the
Company's common stock to certain affiliates of SOFTBANK at a price of $13.00
per share (the closing price on May 26, 1999, the day prior to the day the
Company and SOFTBANK agreed in principle to the transaction) for an aggregate
purchase price of $80,000,050. In order to provide capital to the Company
until closing, which occurred on July 23, 1999, the Company and SOFTBANK
entered into an interim subordinated loan agreement on June 10, 1999 pursuant
to which SOFTBANK loaned the Company $15,000,000. The note bore interest at
4.98% per annum. At the July 23, 1999 closing, this loan amount was converted
into shares of the Company's common stock. Accrued and unpaid interest as of
July 23, 1999 of $89,225 was offset against the cash proceeds of the sale at
closing. For the nine-month period ending September 30, 1999, interest expense
included $89,225, related to this interim loan.
F-30
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Debt
Notes Payable, Bank
Under its primary loan agreement, as subsequently amended (the "Loan
Agreement"), the Company has access to a combined credit facility of
$40,000,000, which is comprised of KPR Sports International, Inc.'s ("KPR")
credit facility of $35,000,000 and RYKA Inc.'s credit facility of $5,000,000.
The term of the Loan Agreement is five years expiring on November 19, 2002.
The KPR and RYKA facilities have an interest rate choice of prime plus 1/4% or
LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points.
Under the Loan Agreement, both KPR and RYKA may borrow up to the amount of
their revolving line based upon 85% of their eligible accounts receivable and
65% of their eligible inventory, as those terms are defined in the Loan
Agreement. The Loan Agreement also includes 50% of outstanding import letters
of credit as collateral for borrowing.
Among other things, the Loan Agreement, as amended, requires KPR and RYKA to
achieve annual earnings before interest, taxes, depreciation and amortization
("EBITDA") of $5,000,000 and it limits the Company's ability to incur
additional indebtedness, make payments on subordinated indebtedness, make
capital expenditures, sell assets, and pay dividends. At September 30, 1999,
the Company was not in compliance with the EBITDA covenant. The Company
obtained a waiver from the bank with respect to this covenant. Because there
can be no assurance that the Company will be in compliance with this covenant
for any period subsequent to September 30, 1999, the Company has classified
the amounts outstanding under this line as a current liability. The Company is
currently in negotiations with its lender to modify the terms of the Loan
Agreement to return itself to compliance and more closely reflect its new e-
commerce business structure.
At September 30, 1999, the aggregate amount outstanding under this line was
$3,699,207. At September 30, 1999, based on available collateral and
outstanding import letters of credit commitments, an additional $1,671,828 was
available on this line for borrowing. For the nine-month period ending
September 30, 1999, interest expense included $958,841 related to this line of
credit.
Subordinated Notes Payable
Prior to July 27, 1999, the Company had $1,805,841 in outstanding
subordinated notes payable held by its Chairman and Chief Executive Officer.
This debt consisted primarily of a note representing undistributed Subchapter
S corporation retained earnings previously taxed to him as the sole
shareholder of KPR Sports International, Inc., Apex Sports International, Inc.
and MR Management, Inc. (collectively the "KPR Companies") prior to the
Company's reorganization in December 1997. Interest accrues on such notes at
the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate)
plus two hundred seventy-five basis points.
Based on its Loan Agreement, the Company is permitted to make continued
regular payments of interest on the subordinated debt and to further reduce
principal on a quarterly basis, commencing subsequent to the first quarter of
1998, in an amount up to 50% of the cumulative consolidated net income of the
Company. During 1998, aggregate principal payments of $250,000 were made. On
July 27, 1999, the principal balance of $1,805,841 plus interest accrued to
date of $58,987 was repaid in full to the Chairman and Chief Executive
Officer, for which a waiver was obtained from the Company's primary lender.
For the nine-month period ending September 30, 1999, interest expense included
$82,661 related to these notes.
Note 6--Earnings (Losses) per Share
Earnings (losses) per share for all periods have been computed in accordance
with SFAS No. 128, Earnings Per Share. Basic earnings (losses) per share is
computed by dividing net income by the weighted average number
F-31
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of shares of common stock outstanding during the year. Diluted earnings
(losses) per share is computed by dividing the net income by the weighted
average number of shares outstanding during the year, assuming dilution by
outstanding common stock options and warrants.
The amounts used in calculating earnings (losses) per share data are as
follows:
<TABLE>
<CAPTION>
For The Nine Months Ended
September
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Loss from continuing operations............... $ (11,261,783) $ (1,768,062)
Income from discontinued operations........... 586,101 6,591,266
Gain (loss) on disposition of discontinued
operations................................... (3,161,552) --
------------- ------------
Net income (loss)............................. $ (13,837,234) $ 4,823,204
============= ============
Weighted average shares outstanding--basic and
diluted...................................... 12,118,980 11,194,549
============= ============
Weighted average common stock options and
warrants outstanding having no dilutive
effect....................................... 1,625,188 540,164
============= ============
</TABLE>
Note 7--Commitments and Contingencies
Employment Agreements
The Company has employment agreements with several of its officers for an
aggregate annual base salary of $1,187,500 plus bonuses and increases in
accordance with the terms of the agreements. Terms of the agreements range
from three to five years and are subject to automatic annual extensions.
E-Commerce
As of September 30, 1999, the Company had contractually committed to
developing the internet businesses of several sporting goods retailers. The
Company's failure to meet these commitments could result in a forfeiture of
the contracts and the exclusive rights to certain future internet business and
could have a material adverse affect on the future results of operations and
financial condition of the Company.
Yahoo! Advertising and Promotion Agreement
On October 4, 1999, the Company announced the execution of an advertising
and promotion agreement with Yahoo! Inc., a global Internet media company (the
"Yahoo! Agreement"). Under the Yahoo! Agreement, the web-sites operated by the
Company will be featured in certain sections of Yahoo!'s network of Internet
properties and will allow Yahoo! users to easily access these web-sites. The
Yahoo! Agreement requires the Company to pay various fees, which are
substantial in the aggregate, to Yahoo! over the twelve-month period following
execution of the Agreement. These fees are payable at various intervals and
certain are contingent upon certain performance criteria of Yahoo!.
F-32
<PAGE>
GLOBAL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Comprehensive Income
Comprehensive income for the nine-month period ended September 30, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Net income (loss)................................ $ (13,837,234) $ 4,823,204
Foreign currency translation adjustment.......... 47,431 (11,910)
------------- -----------
Comprehensive income (loss)...................... $ (13,789,803) $ 4,811,294
============= ===========
</TABLE>
Note 9--Business Segments
As a result of the discontinued operations described in Note 3 to the
financial statements, the Company considers itself to have one operating
segment which is the development of the internet businesses of several
sporting goods retailers.
Note 10--Equity Transactions
The Company granted options and warrants to purchase 447,300 and 1,142,782
shares of the Company's common stock to employees and consultants of the
Company during the nine-month period ended September 30, 1999. The Company
also issued warrants to purchase 303,320 shares of the Company's common stock
during June 1999 to several retailers in connection with the Company's
developing e-Commerce business. The range of exercise prices for all options
and warrants granted was from $0.01 to $24.69 for the nine-month period ended
September 30, 1999. Upon granting these options and warrants, the Company
recorded equity compensation expense of $2,791,636 for the nine-month period
ended September 30, 1999, primarily as a result of non-employee grants. For
the nine-month period ended September 30, 1999, $66,150 was included in the
net loss from discontinued operations during the second quarter of 1999.
Options and warrants to purchase 331,037 shares of the Company's common
stock were exercised during the nine-month period ended September 30, 1999.
The range of exercise prices was from $0.01 to $13.20 for the nine-month
period ended September 30, 1999. These exercises resulted in cash proceeds to
the Company of $1,341,826 for the nine-month period ended September 30, 1999.
On June 10, 1999, the Company and SOFTBANK entered into a stock purchase
agreement and related agreements for the sale of 6,153,850 shares of the
Company's common stock to certain affiliates of SOFTBANK at a price of $13.00
per share for an aggregate purchase price of $80,000,050. See Note 4.
On July 13, 1999, the shareholders approved an amendment to the Company's
Certificate of Incorporation that increased the maximum number of authorized
shares of common stock by 40,000,000 to 60,000,000.
Note 11--Subsequent Events
On December 29, 1999, the Company sold substantially all of the assets
comprising its Branded Division to American Sporting Goods Corporation. In
addition to receiving proceeds of approximately $10.5 million from the sale of
the Branded Division, Global retained the accounts receivable of the Branded
Division, which totaled approximately $7.3 million as of December 29, 1999.
F-33
<PAGE>
GLOBAL SPORTS, INC.
Special Meeting of Shareholders -- February 24, 2000
SOLICITED ON BEHALF OF THE COMPANY AND APPROVED
BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Steven A. Wolf and Arthur H. Miller to act
as attorneys and proxies for the undersigned, with full powers of
substitution, to appear at the Special Meeting of Shareholders of Global
Sports, Inc. (the "Company") to be held on the 24th day of February, 2000 at
the office of the Company, 1075 First Avenue, King of Prussia, Pennsylvania
19406 and at any postponement or adjournment thereof, and to vote all of the
shares of the Company that the undersigned is entitled to vote, with all the
powers and authority the undersigned would possess if personally present. The
undersigned hereby directs that this proxy be voted as follows:
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED "FOR" APPROVAL OF THE OFF-PRICE AND ACTION SPORTS
SALE AND "FOR" APPROVAL OF THE INDEMNIFICATION AGREEMENTS. A MAJORITY OF THE
PROXY AGENTS PRESENT AND ACTING IN PERSON OR BY THEIR SUBSTITUTES (OR IF ONLY
ONE IS PRESENT AND ACTING, THEN THAT ONE) MAY EXERCISE ALL THE POWERS
CONFERRED HEREBY. DISCRETIONARY AUTHORITY IS CONFERRED HEREBY AS TO CERTAIN
MATTERS DESCRIBED IN THE COMPANY'S PROXY STATEMENT.
Should the undersigned be present and choose to vote at the Meeting or at
any adjournments or postponements thereof, and after notification to the
Secretary of the Company at the Meeting of the shareholder's decision to
terminate this proxy, then the power of such attorneys or proxies shall be
deemed terminated and of no further force and effect. This proxy may also be
revoked by filing a written notice of revocation with the Secretary of the
Company or by duly executing a proxy bearing a later date.
Receipt of the Notice of the Special Meeting and Proxy Statement relating
thereto is hereby acknowledged.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
(Continued and to be SIGNED on Reverse Side)
<PAGE>
[X] Please mark your
votes as in this
example using
dark ink only.
1. To approve (i) the Acquisition Agreement, dated September 24, 1999, among
Global, Gen-X Acquisition (U.S.), Inc., Gen-X Acquisition (Canada) Inc.,
DMJ Financial, Inc., James J. Salter and Kenneth J. Finkelstein (a copy of
the Acquisition Agreement is attached as Appendix A to the accompanying
Proxy Statement) relating to the sale of Global's Off-Price and Action
Sports Division, including the sale of all of the issued and outstanding
capital stock of Global's wholly-owned subsidiaries Gen-X Holdings Inc. and
Gen-X Equipment Inc., and (ii) the sale of Global's Off-Price and Action
Sports Division.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. To approve Indemnification Agreements to be entered into with the Company's
directors and certain of its officers.
FOR AGAINST ABSTAIN
[_] [_] [_]
The Board of Directors recommends a vote "FOR" approval of the Off-Price and
Action Sports Sale and "FOR" approval of the Indemnification Agreements.
Date: , 2000
- ------------------------------------ ------------------------
(Signature(s) of Shareholder(s)) (Please date this Proxy)
Please sign exactly as your name(s) appear(s) to the left. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
<PAGE>
APPENDIX A
ACQUISITION AGREEMENT
PARTIES: GLOBAL SPORTS, INC.,
a Delaware corporation ("Global")
555 S. Henderson Road
King of Prussia, PA 19406
GEN-X ACQUISITION (U.S.), INC.,
a Washington corporation ("U.S. Co.")
701 5th Avenue
Suite 3300
Seattle, Washington
98104-7082
GEN-X ACQUISITION (CANADA) INC.,
an Ontario corporation ("Canadian Co.")
25 Vanley Crescent
North York, Ontario
M3J 2B7
DMJ FINANCIAL, INC.,
a Barbados limited company ("DMJ")
Royal Bank of Canada (Caribbean) Corporation
2/nd/ Floor, Building #2
Chelston Park, Collymore
St. Michael, Barbados
JAMES J. SALTER,
an individual ("Salter")
277 Glencairn Avenue
Toronto, Ontario M5N1T8
KENNETH J. FINKELSTEIN,
an individual ("Finkelstein")
25 Brandy Court
Toronto, Ontario M3B3L3
DATE: September 24, 1999
BACKGROUND: Global owns beneficially and of record all of the issued and
outstanding shares of capital stock of Gen-X Equipment Inc., an Ontario
corporation ("Gen-X Equipment") and Gen-X Holdings Inc., a Washington
corporation ("Gen-X Holdings"). Gen-X Holdings is a Washington corporation also
in the business of distributing excess inventories of sports equipment and
<PAGE>
accessories. Gen-X Equipment and Gen-X Holdings (along with each of their
direct or indirect Subsidiaries (as defined herein)) are collectively referred
to herein as the "Gen-X Companies". Salter and Finkelstein own beneficially and
of record all of the issued and outstanding shares of capital stock of DMJ. DMJ
and the individuals set forth on Schedule A own beneficially and of record all
----------
of the issued and outstanding shares of capital stock of U.S. Co. U.S. Co. owns
beneficially and of record all of the issued and outstanding shares of Canadian
Co. (U.S. Co. and Canadian Co. shall be referred to individually as "Buyer" and
collectively as "Buyers"). The parties desire that Global sell and Buyers
purchase all of the issued and outstanding shares of capital stock of the Gen-X
Holdings and Gen-X Equipment, all on and subject to the terms and conditions of
this Agreement.
INTENDING TO BE LEGALLY BOUND, and in consideration of the mutual
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. DEFINED TERMS
Certain defined terms used in this Agreement and not specifically defined
in context are defined in this Section 1, as follows:
1.1 "ACQUISITION AGREEMENTS" means this Agreement and the Ancillary
----------------------
Agreements (as defined in Section 1.3).
1.2 "AFFILIATE" means any Person (as defined in Section 1.17) which
---------
controls, is controlled by or is under common control with, the designated
party, either directly or indirectly through one or more intermediaries.
1.3 "ANCILLARY AGREEMENTS" means: (a) the U.S. Co. Promissory Note, (b)
--------------------
the Canadian Co. Promissory Note, (c) the Termination Agreements, (d) the Shared
Facilities Agreement, (e) the Right of First Offer Agreement, (f) the Non-
Competition Agreement, (g) the Termination of Non-Competition Agreement, (h)
the Assignment and Assumption Agreement, (i) the Subordinated Note Agreements,
(j) the Guarantees, (k) the Security Agreements, (l) the Pledge Agreements, (m)
the Trademark Security Agreements, (n) the Intercreditor Agreement, (o)
Preferred Stock Purchase Agreement and (p) the Escrow Agreement, each as
hereinafter defined.
1.4 "ASSET" means any real, personal, mixed, tangible or intangible
-----
property of any nature.
1.5 "CONSENT" means any consent, approval, order or authorization of,
-------
or any declaration, filing or registration with, or any application or report
to, or any waiver by, or any other action (whether similar or dissimilar to any
of the foregoing) of, by or with, any Person, which is legally necessary in
order to take a specified action or actions in a specified manner and/or to
achieve a specified result.
-2-
<PAGE>
1.6 "CONTRACT" means any written or oral contract, agreement,
--------
instrument, order, arrangement, commitment or understanding of a legally binding
nature, including, but not limited to, sales orders, purchase orders, leases,
subleases, data processing agreements, maintenance agreements, license
agreements, sublicense agreements, loan agreements, promissory notes, security
agreements, pledge agreements, deeds, mortgages, guaranties, indemnities,
warranties, employment agreements, consulting agreements, sales representative
agreements, joint venture agreements, buy-sell agreements, options or warrants.
1.7 "ENCUMBRANCE" means any lien, security interest, pledge, mortgage,
-----------
easement, covenant, restriction, reservation, conditional sale, prior
assignment, or other encumbrance, claim, burden or charge of any nature.
1.8 "GAAP" means, in respect of a United States entity, generally
----
accepted accounting principles under United States accounting rules and
regulations, as in effect from time to time, consistently applied and, in
respect of a Canadian entity, accounting principles generally accepted in
Canada, including those set out in the Handbook of the Canadian Institute of
Chartered Accountants, at the relevant time, applied on a consistent basis.
1.9 "GEN-X MATERIAL ADVERSE EFFECT" means a material adverse effect on
-----------------------------
the business, results of operations or financial condition of the Gen-X
Companies taken as a whole; provided, however, that the term "Gen-X Material
Adverse Effect" shall not include any effect attributable to changes in the
economy (of the United States or any other country) generally, changes in the
industries in which the Gen-X Companies operate, or seasonality of the
businesses of the Gen-X Companies.
1.10 "GLOBAL MANAGEMENT" means the officers and directors of Global
-----------------
other than Salter, Finkelstein or any employee reporting to Salter or
Finkelstein.
1.11 "INVENTORY" means, with respect to a Person, all inventory,
---------
merchandise, goods, packaging, supplies, boxes and other personal property held
for sale or rental in the business conducted by the Person and its Subsidiaries,
wherever such property is located, and any prepaid deposits for any of the same.
1.12 "JUDGMENT" means any order, writ, injunction, citation, award,
--------
decree or other judgment of any nature of any foreign, federal, state,
provincial or local court, governmental body, administrative agency, regulatory
authority or arbitration tribunal.
1.13 "LAW" means any provision of any foreign, federal, state,
---
provincial or local law, statute, ordinance, charter, constitution, treaty, rule
or regulation.
1.14 "OBLIGATION" means any debt, liability or obligation of any nature,
----------
whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated,
accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown
or otherwise.
-3-
<PAGE>
1.15 "ORIGINAL INVESTOR GROUP" means DMJ and the individuals set forth
-----------------------
on Schedule A.
----------
1.16 "PERMITTED ENCUMBRANCE" means (a) any lien for Taxes which are not
---------------------
yet due or which are being contested in good faith by appropriate proceedings
diligently prosecuted, in either case provided that adequate reserves therefor
have been established in accordance with GAAP; (b) any carrier's,
warehouseman's, mechanic's, materialman's, repairman's, landlord's or similar
statutory or inchoate lien incidental to the ordinary conduct of business which
involves an obligation that is not more than sixty (60) days past due or which
is being contested in good faith by appropriate proceedings diligently
prosecuted, in either case provided that adequate reserves therefor have been
established in accordance with GAAP; or (c) any interest of a governmental
agency in any lawfully made pledge or deposit under workers' compensation,
unemployment insurance or other social security statutes. Notwithstanding the
foregoing, Permitted Encumbrances shall not include any Encumbrance that was
incurred or arose in connection with any Obligation to pay or guarantee the
payment of borrowed funds including, but not limited to, funds obtained as a
result of bank debt, capitalized lease, installment purchase or other financing
activity.
1.17 "PERSON" means any individual, sole proprietorship, joint venture,
------
partnership, corporation, association, cooperative, trust, estate, governmental
body, administrative agency, regulatory authority or other entity of any nature.
1.18 "PRIME RATE" means the prime rate of general application as set
----------
forth in the "Money Rates" section (or such future section as shall replace it)
of The Wall Street Journal (Eastern Edition), as published on a specified date
or dates, or, if no date(s) are specified, as the same shall be published from
time to time.
1.19 "PROCEEDING" means any suit, action, litigation, governmental
----------
investigation, arbitration, administrative hearing or other legal proceeding of
any nature.
1.20 "RESTRUCTURING PLAN" means the restructuring plan set forth on
------------------
Schedule 1.20.
- -------------
1.21 "SUBSIDIARY" means, with respect to any Person, any other Person as
----------
to which such person directly or indirectly owns or has the power to vote, or to
exercise a controlling influence with respect to, 50% or more of the securities
or interests of any class of such other person which are entitled to vote for
the election of directors or others performing similar functions.
1.22 "TAX" means (a) any foreign, federal, provincial, state or local
---
income, earnings, profits, gross receipts, franchise, capital stock, net worth,
sales, use, occupancy, general property, real property, personal property,
intangible property, transfer, fuel, excise, payroll, withholding, unemployment
compensation, social security or other tax of any nature, (b) any foreign,
federal, state, provincial or local organization fee, qualification fee, annual
report fee, filing fee, occupation fee, assessment, sewer rent or other fee or
charge of any nature, or (c) any deficiency, interest or penalty imposed with
respect to any of the foregoing.
-4-
<PAGE>
2. THE TRANSACTION
2.1 SALE OF GEN-X EQUIPMENT AND GEN-X HOLDINGS. On the Closing Date
------------------------------------------
(as defined in Section 10.1), (i) Global shall sell, transfer, assign and convey
to U.S. Co., and U.S. Co. shall purchase, all right, title and interest in and
to all of the issued and outstanding shares of capital stock of Gen-X Holdings,
and (ii) Global shall sell, transfer, assign and convey to Canadian Co, and
Canadian Co. shall purchase, all right, title and interest in and to all of the
issued and outstanding shares of capital stock of Gen-X Equipment (the issued
and outstanding shares of capital stock of Gen-X Holdings and Gen-X Equipment
are collectively referred to herein as the "Gen-X Stock").
3. PURCHASE PRICE AND CLOSING FINANCIAL STATEMENTS
3.1 PURCHASE PRICE. Subject to the adjustments and provisions of
--------------
Sections 3.2 and 3.3, the total purchase price (the "Purchase Price") for the
Gen-X Stock shall consist of the following: (a) U.S. Co. shall, and DMJ, Salter
and Finkelstein shall cause U.S. Co. to, deliver to Global on the Closing Date
as payment for the Gen-X Holdings Stock: (i) a cash payment (the "Closing
Payment") in the amount of Six Million Forty Thousand Dollars ($6,040,000); (ii)
a promissory note ("U.S. Co. Promissory Note") in the form attached hereto as
Exhibit "A" in the principal amount of Five Million Dollars ($5,000,000); and
- -----------
(iii) the assumption of Global's non-negotiable subordinated notes in the
original aggregate principal amount of Three Million Nine Hundred Sixty Thousand
Dollars ($3,960,000) payable to Gen-X Holdings, dated as of the Closing Date
(the "Replacement Notes"), together with all accrued and unpaid interest
thereon, to be assumed by U.S. Co., and (b) Canadian Co. shall, and U.S. Co.,
DMJ, Salter and Finkelstein shall cause Canadian Co. to, deliver to Global on
the Closing Date as payment for the Gen-X Equipment Stock a promissory note
("Canadian Co. Promissory Note") in the form attached hereto as Exhibit "B" in
-----------
the principal amount of Five Million Dollars ($5,000,000).
3.2 PURCHASE PRICE ADJUSTMENT.
-------------------------
(a) If, during the two hundred seventy-three (273) day period
following the Closing Date, either Buyer or any of the Gen-X Companies enter
into an agreement, option or understanding or executes a letter of intent,
agreement in principle or definitive agreement with any of the parties set forth
on Schedule 3.2(a) (a "Sale Transaction Agreement") with respect to or that is
---------------
likely to result in a Sale Transaction (as defined below), then the Purchase
Price shall be increased by an amount (the "Purchase Price Adjustment")
determined as follows:
(1) If the Company enters into or executes a Sale Transaction
Agreement within ninety-one (91) days following the Closing Date, the Purchase
Price Adjustment shall be equal to seventy-five percent (75%) of the amount, if
any, by which (i) the Sale Transaction Consideration (as defined below) exceeds
(ii) Sixteen Million Dollars ($16,000,000);
(2) If the Company enters into or executes a Sale Transaction
Agreement on or after ninety-two (92) days and prior to one hundred eighty-two
(182) days following the Closing Date, the Purchase Price Adjustment shall be
equal to fifty percent (50%) of
-5-
<PAGE>
the amount, if any, by which (i) the Sale Transaction Consideration exceeds (ii)
Sixteen Million Dollars ($16,000,000); and
(3) If the Company enters into or executes a Sale Transaction
Agreement on or after one hundred eighty three (183) days and prior to two
hundred seventy-three (273) days following the Closing Date, the Purchase Price
Adjustment shall be equal to fifteen percent (15%) of the amount, if any, by
which (i) the Sale Transaction Consideration exceeds (ii) Sixteen Million
Dollars ($16,000,000).
(b) For the purposes of this Agreement, a Sale Transaction shall mean
(i) any transaction or series of related transactions in which either Buyer or
any of the Gen-X Companies sells, assigns, transfers, leases or licenses all or
a substantial portion of its Assets, (ii) any transaction or series of related
transactions (including any reorganization, merger, consolidation or other
business combination) in which either Buyer or any of its Subsidiaries sells,
assigns or transfers 50% or more of the outstanding capital stock (or other
outstanding ownership interests) of any of the Gen-X Companies, (iii) any
transaction or series of related transactions (including any reorganization,
merger, consolidation or other business combination, but not including public
offerings of equity securities) in which DMJ, Salter and/or Finkelstein sells,
assigns or transfers 50% or more of the outstanding capital stock (or other
outstanding ownership interests) of either Buyer, (iv) any transaction or series
of related transactions (other than public offerings of equity securities) in
which any Person or group of Persons acquires "beneficial ownership" within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of 50% or more of the capital stock of either Buyer or any of
the Gen-X Companies, (v) any liquidation, dissolution or winding up of either
Buyer or any of the Gen-X Companies, or (vi) any other transaction or series of
related transactions the purpose or effect of which is to sell, assign or
transfer control or a majority of the ownership of either Buyer or any of the
Gen-X Companies or to sell, assign or transfer the business or goodwill of
either Buyer or any of the Gen-X Companies; provided, however, that the
implementation of the Restructuring Plan shall not in and of itself constitute a
Sale Transaction.
(c) For purposes of this Agreement, Sale Transaction Consideration
shall mean the total amount of cash and the fair market value (on the date of
the closing of the Sale Transaction) of all other securities and/or property
paid or payable directly or indirectly to either Buyer and/or any of the Gen-X
Companies or any of its securityholders (or holders of ownership interests) in
connection with the Sale Transaction (including (i) amounts paid to holders of
any warrants or convertible securities of either Buyer and/or any of the Gen-X
Companies or to holders of any options or stock appreciation rights issued by
either Buyer and/or any of the Gen-X Companies, whether or not vested; (ii) the
fair market value of any assets of either Buyer and/or any of the Gen-X
Companies which are retained by or otherwise distributed to their
securityholders (or holders of ownership interests) or Affiliates in
anticipation of or in connection with the Sale Transaction; (iii) amounts
characterized as deferred compensation, consulting fees, non-competition
payments and private pension benefits unless the payments are for actual bona
fide services and are commercially reasonable in amount for such services); and
(iv) assumption of the outstanding amounts due under the U.S. Co. Promissory
Note and/or the Canadian Co. Promissory Note.
-6-
<PAGE>
(d) No adjustment under this Section 3.2 shall result in a decrease to
the Purchase Price. Any amount paid under this Section 3.2 is intended by all
parties to be, and shall be treated by the parties as, an adjustment to the
Purchase Price.
(e) The Purchase Price Adjustment shall be paid in full in cash by
Buyers to Global contemporaneously with the closing of the Sale Transaction;
provided, however, that if the Sale Transaction Consideration is payable in
installments and/or consists of non-cash consideration Global shall have the
right, but not the obligation, to receive the Purchase Price Adjustment as and
when each installment of the Sale Transaction Consideration is payable and/or in
the form of such non-cash consideration.
(f) Buyers, DMJ, Salter and Finkelstein shall notify Global in writing
within three (3) business days after either Buyer, DMJ, Salter, Finkelstein or
any of the Gen-X Companies enter into or execute a Sale Transaction Agreement.
Notwithstanding the immediately preceding sentence, Buyers, DMJ, Salter and
Finkelstein shall notify Global in writing at least thirty (30) days prior to
the consummation of a Sale Transaction.
(g) If the Sale Transaction Consideration shall consist in whole or in
part of non-cash consideration, the fair market value of such consideration
shall be determined by agreement between Global and Buyers. If Global and
Buyers cannot agree upon the fair market value of such consideration within ten
(10) days after the consummation of the Sale Transaction, Global and Buyers
shall each select an appraiser who shall determine within thirty (30) days after
the closing date of the sale the fair market value of such consideration as of
the closing date of the Sale Transaction. If the two appraisers agree upon the
fair market value of such consideration, the agreed upon value shall be the fair
market value of such consideration. If the appraisers do not agree upon the
fair market value of such consideration, the higher of the two appraisals is not
more than 110% of the lower of the appraisals, the fair market value of such
consideration shall be the mean of the two appraisals. If the higher of the two
appraisals is greater than 110% of the lower appraisal, the two appraisers shall
jointly select a third appraiser who independently shall determine within sixty
(60) days after the closing date of the Sale Transaction the fair market value
of such consideration as of the closing date of the Sale Transaction. The fair
market value of such consideration as determined by the third appraiser will be
arithmetically averaged with the two appraisals determined by the prior two
appraisers, and the appraisal farthest from the average of the three appraisals
will be disregarded. The fair market value of such consideration shall be the
average of the two remaining appraisals.
3.3 CURRENCY AND METHOD OF PAYMENT. All dollar amounts stated in this
------------------------------
Agreement are stated in United States currency, and all payments required under
this Agreement shall be paid in United States currency. All payments required
under this Agreement shall be made as follows unless otherwise agreed by both
the payor and the payee: (a) any payment may be made by wire transfer of
immediately available United States federal funds; (b) any payment exceeding
$100,000 shall be made by wire transfer of immediately available United States
federal funds; (c) any payment not exceeding $100,000 may be made by ordinary
check.
-7-
<PAGE>
4. REPRESENTATIONS OF GLOBAL
Knowing that Buyers are relying thereon, Global, represents and warrants
to Buyer as follows:
4.1 ORGANIZATION AND AUTHORITY. Gen-X Equipment is a corporation duly
--------------------------
organized and validly existing under the Laws of Ontario. Gen-X Holdings is a
corporation duly organized, validly existing and in good standing under the Laws
of the state of Washington. Gen-X Equipment and Gen-X Holdings each possess the
full corporate power and authority to own their Assets, conduct their business
as presently conducted and enter into and perform this Agreement and the
transactions contemplated hereby and the Ancillary Agreements to which they are
a party or by which they are bound and the transactions contemplated thereby.
4.2 THE GEN-X EQUIPMENT STOCK. The authorized capital stock of Gen-X
-------------------------
Equipment consists of an unlimited number of common shares and an unlimited
number of preference shares, of which 10,000 common shares are issued and
outstanding (the "Gen-X Equipment Stock") and owned beneficially and of record
by Global, free and clear of all Encumbrances, except as set forth on Schedule
--------
4.2. Subject to obtaining the required consents set forth on Schedule 4.4,
- --- ------------
Global has the full right to sell and transfer all right, title and interest in
and to the Gen-X Equipment Stock, and upon delivery and payment for the Gen-X
Equipment Stock as provided herein, Buyers will acquire good title thereto, free
and clear of all Encumbrances. Except for this Agreement, none of the Global
Management has entered into any outstanding Contract relating to the issuance,
sale, redemption, ownership or disposition of any of the Gen-X Equipment Stock
or other securities of Gen-X Equipment. None of the Global Management has
entered into any contract relating to any stock appreciation rights, phantom
shares, cash performance units or other similar rights issued by Gen-X
Equipment.
4.3 THE GEN-X HOLDINGS STOCK. The authorized capital stock of Gen-X
------------------------
Holdings consists of (i) 1,000,000 shares of Class A common shares, no par
value, and 1,000,000 shares of Class V common shares, no par value, of which
9,650 shares and 350 shares, respectively, are issued and outstanding (the "Gen-
X Holdings Common Stock") and owned beneficially and of record by Global, free
and clear of all Encumbrances, except as set forth on Schedule 4.3, and (ii)
------------
1,000,000 preferred shares, of which 49,975 shares are issued and outstanding
(the "Gen-X Holdings Preferred Stock") and owned beneficially and of record by
Global, free and clear of all Encumbrances (the Gen-X Holdings Common Stock and
the Gen-X Holdings Preferred Stock being collectively referred to as the "Gen-X
Holdings Stock"). Global has the full right to sell and transfer all right,
title and interest in and to the Gen-X Holdings Stock, and upon delivery and
payment for the Gen-X Holdings Stock as provided herein, Buyers will acquire
good title thereto, free and clear of all Encumbrances. Except for this
Agreement, none of the Global Management has entered into any outstanding
Contract relating to the issuance, sale, redemption, ownership or disposition of
any of the Gen-X Holdings Stock or other securities of Gen-X Holdings. None of
the Global Management has entered into any contract relating to any stock
appreciation rights, phantom shares, cash performance units or other similar
rights issued by Gen-X Holdings.
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<PAGE>
4.4 EFFECT OF AGREEMENT. The execution, delivery and performance of
-------------------
the Acquisition Agreements by Global (to the extent it is a party thereto or
bound thereby), and the consummation by it of the transactions contemplated
hereby and thereby, (a) have been duly authorized by all necessary corporate
actions by its board of directors and shareholders, except that Global is
required to obtain the approval of this Agreement and the transactions
contemplated hereto by its shareholders (the "Global Shareholder Approval"),
(b) do not constitute a breach or violation of, or a default under, the
certificate of incorporation, bylaws or other organizational document of Global,
(c) do not constitute a breach or violation of, or a default under, any Contract
to which Global is a party or by which Global is bound or its assets or
business, (d) do not constitute a violation of any Law or Judgment applicable to
Global or its assets or business, (e) do not result in the creation of any
Encumbrance upon, or give to any other Person any interest in, the Gen-X
Equipment Stock or the Gen-X Holdings Stock, and (f) except as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Bylaws of the National Association of Securities Dealers, Inc.
(the "NASD") and for the Global Shareholder Approval and the Consents set forth
on Schedule 4.4 (the "Global Required Consents"), do not require the Consent of
------------
any Person; except in the case of clauses (c), (d), and (f) for breaches,
violations, defaults, interests or Consents which would not have a material
adverse effect on the ability of Global to consummate the transactions
contemplated by this Agreement. This Agreement constitutes, and the Ancillary
Agreements when executed and delivered will constitute, the valid and legally
binding agreements of Global enforceable against it (to the extent it is a party
thereto or bound thereby) in accordance with their respective terms.
4.5 PROCEEDINGS AND JUDGMENTS. Except as described on Schedule 4.5, to
------------------------- ------------
the knowledge of Global, (a) no Proceeding is currently pending or threatened,
to which any of the Gen-X Companies are a party, except any such Proceeding that
would not have a Gen-X Material Adverse Effect, or by which the Gen-X Holdings
Stock or the Gen-X Equipment Stock is affected, and (b) no Judgment is currently
outstanding against any of the Gen-X Companies, except any such Judgment that
would not have a Gen-X Material Adverse Effect, or by which the Gen-X Holdings
Stock or the Gen-X Equipment Common Shares is affected.
4.6 BROKERAGE FEES. Except for Deutsche Bank Alex. Brown, the fees of
--------------
which will be paid by Global, no Person acting on behalf of Global is entitled
to any brokerage, finder's or other similar fee or commission in connection with
the transactions contemplated by this Agreement.
4.7 FULL DISCLOSURE. No representation or warranty made by Global in
---------------
this Agreement or the Ancillary Agreements or pursuant hereto or thereto
contains any untrue statement of any material fact or omits to state any
material fact that is necessary to make the statements made, in the context in
which made, not false or misleading.
5. REPRESENTATIONS OF BUYERS, DMJ, SALTER AND FINKELSTEIN
Knowing that Global is relying thereon, Buyers, DMJ, Salter and
Finkelstein, jointly and severally, represent and warrant to Global as follows:
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<PAGE>
5.1 ORGANIZATION AND AUTHORITY. Each Buyer is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. DMJ is a limited liability company duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Buyers and DMJ each possess the full corporate
power and authority to own their respective Assets, conduct their respective
businesses as presently conducted, and enter into and perform this Agreement and
the transactions contemplated hereby and the Ancillary Agreements to which they
are a party or by which they are bound and the transactions contemplated
thereby. Salter and Finkelstein each have the full capacity, power and
authority to enter into and perform this Agreement and the transactions
contemplated hereby and the Ancillary Agreements to which they are a party and
by which they are bound and the transactions contemplated thereby.
5.2 EFFECT OF AGREEMENT. The execution, delivery and performance of
-------------------
the Acquisition Agreements by Buyers, DMJ, Salter and Finkelstein (to the extent
they are parties thereto or bound thereby), and the consummation by them of the
transactions contemplated hereby and thereby, (a) in the case of Buyers and DMJ,
have been duly authorized by all necessary corporate actions by their boards of
directors and shareholders, (b) in the case of Buyers and DMJ, do not
constitute a breach or violation of, or a default under, the certificate of
incorporation or bylaws (or other organization documents) of Buyers, (c) do not
constitute a breach or violation of, or a default under, any Contract to which
Buyers, DMJ, Salter or Finkelstein are parties or by which Buyers are bound, (d)
do not constitute a violation of any Law or Judgment applicable to Buyers, DMJ,
Salter or Finkelstein (e) do not result in the creation of any Encumbrance upon,
or give to any other Person any interest in, Buyers' capital stock or in the
business or Assets of Buyers, and (f) except as may be required under the HSR
Act, the Exchange Act, and the Bylaws of the NASD and for the Consents set forth
on Schedule 5.2 (the "Buyer Required Consents"), do not require the Consent of
------------
any Person; except in the case of clauses (c), (d) and (f) for breaches,
violations, defaults, Encumbrances, interests or Consents which would not have a
material adverse effect on the ability of Buyers, DMJ, Salter or Finkelstein to
consummate the transactions contemplated by this Agreement. This Agreement
constitutes, and the Ancillary Agreements when executed and delivered will
constitute, the valid and legally binding agreements of Buyers, DMJ, Salter and
Finkelstein enforceable against them (to the extent they are parties thereto or
bound thereby) in accordance with their respective terms.
5.3 GLOBAL PREFERRED STOCK AND CONTINGENT NOTES. DMJ owns, free and
-------------------------------------------
clear of all Encumbrances and has the full right to sell and transfer all right,
title and interest in and to Seven Thousand Two Hundred (7,200) shares of Global
preferred stock, par value $.01 per share (the "Global Preferred Stock")
Global's non-negotiable subordinated contingent notes in the aggregate original
principal amount of Four Million Five Hundred Thousand Dollars ($4,500,000),
dated May 12, 1998 (the "Contingent Notes"), and upon delivery of the Global
Preferred Stock and the Contingent Notes as provided in the Restructuring Plan,
Global will acquire good title thereto, free and clear of all Encumbrances.
5.4 OPERATIONS AND OBLIGATIONS OF BUYER. Except as set forth on
-----------------------------------
Schedule 5.4, Buyers were formed solely for the purpose of engaging in the
- ------------
transactions contemplated by this Agreement and the Ancillary Agreements, and
neither Buyer has other than the transactions,
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<PAGE>
engaged in any business activities, conducted any operations or incurred or
agreed to incur any obligation.
5.5 PROCEEDINGS AND JUDGMENTS. Except as described on Schedule 5.5,
------------------------- ------------
(a) no Proceeding is currently pending, or to the knowledge of DMJ, Salter and
Finkelstein, threatened, to which Buyers DMJ, Salter or Finkelstein are parties,
or by which Buyers' capital stock or the business or Assets of Buyers are
affected, and (b) no Judgment is currently outstanding against Buyers, DMJ,
Salter or Finkelstein or by which Buyers' capital stock or the business or
Assets of Buyers are affected other than the transactions.
5.6 BROKERAGE FEES. No Person acting on behalf of Buyers DMJ, Salter
--------------
or Finkelstein is entitled to any brokerage or finder's fee in connection with
the transactions contemplated by this Agreement.
5.7 INVESTMENT MATTERS. The Gen-X Stock to be received by Buyers
------------------
hereunder is being acquired for investment purposes only and not with a view to,
or for sale in connection with, any resale or distribution in violation of the
Securities Act of 1933, as amended (the "1933 Act"). Buyers have had access to
or been furnished with all information about the Gen-X Companies which they
believe is necessary to evaluate the purchase of the Gen-X Stock. Buyers
believe that they are fully knowledgeable or have been fully apprised of all
facts and circumstances necessary to permit them to make an informed decision
about the Gen-X Stock to be received by Buyers hereunder, that they has
sufficient knowledge and experience in business and financial matters, that they
are capable of evaluating the merits and risks of an investment in such
securities, and that they have the capacity to protect their own interests in
connection with the transactions contemplated hereby. Buyers are "accredited
investors" as defined in Regulation D under the 1933 Act. Buyers have been
advised by Global and understand that (a) the Gen-X Stock to be received by
Buyers hereunder will not be registered under the 1933 Act or any securities Law
of any Governmental Authority, and (b) such securities must be held indefinitely
unless and until they are subsequently registered under the 1933 Act and all
other applicable securities Laws or an exemption from registration becomes
available.
5.8 OBLIGATIONS. Neither of DMJ, Salter or Finkelstein has incurred
-----------
any Obligation on behalf of Global or any of its Subsidiaries other than the
Gen-X Companies.
5.9 NEGOTIATIONS. Neither Salter, Finkelstein nor any of their
------------
Affiliates or representatives have engaged in the past six (6) months in any
discussion with any Person or any Subsidiary, Affiliate, representative or
advisor of any Person listed on Schedule 5.9 regarding (i) the sale, conveyance
------------
or disposition of all or substantially all of the assets of the Gen-X Companies
or any transaction in which more than fifty percent (50%) of the voting power of
the Gen-X Companies is disposed of, or (iii) regarding any other form of
acquisition, liquidation, dissolution or winding up of the Gen-X Companies.
5.10 GLOBAL REPRESENTATIONS. To the knowledge of DMJ, Salter and
----------------------
Finkelstein, no representation or warranty made by Global in any of the
Acquisition Agreements or pursuant thereto contains any untrue statement of any
material fact or omits to state any material fact that is necessary to make the
statements made, in the context in which made, not false or misleading.
-11-
<PAGE>
5.11 COMPETITION ACT. There is no requirement to make any filing, give
---------------
any notice, or obtain any authorization, in connection with the Competition Act
(Canada) as a condition to the lawful completion of the transactions
contemplated by this Agreement.
5.12 FULL DISCLOSURE. No representation or warranty made by Buyers,
---------------
DMJ, Salter or Finkelstein in this Agreement or the Ancillary Agreements or
pursuant hereto or thereto contains any untrue statement of any material fact or
omits to state any material fact that is necessary to make the statements made,
in the context in which made, not false or misleading.
5.13 HART-SCOTT-RODINO. Buyers are their own "ultimate parent entity" as
-----------------
such term is defined pursuant to the HSR Act. Except for Buyers, no other
person or entity is an ultimate parent entity of Buyers. Buyers and all
entities controlled by them, on a consolidated basis, do not (i) hold
$10,000,000 in total assets (as shown on Buyers' most recent regularly prepared
balance sheet) or (ii) have $10,000,000 in annual net sales (as shown on Buyers'
most recent regularly prepared annual statement of income and expense), as such
amounts are determined under HSR. For purposes of this Section 5.7, the terms
"controlled", "annual net sales", "regularly prepared annual statement of income
and expense", "total assets" and "regularly prepared balance sheet" shall have
the meanings ascribed to them pursuant to the HSR Act.
6. CERTAIN OBLIGATIONS OF GLOBAL PENDING CLOSING
6.1 GLOBAL SHAREHOLDERS' MEETING. Promptly after the date of this
----------------------------
Agreement, Global shall prepare and cause to be filed with the SEC a proxy
statement (the "Proxy Statement") to be sent to the shareholders of Global in
connection with the Global Shareholders' Meeting (as defined below). Subject to
the exercise by the board of directors of Global of its fiduciary duties under
applicable Law, Global shall take all action reasonably necessary under all
applicable Law to call, give notice of, convene and hold a meeting of Global's
shareholders (the "Global Shareholders' Meeting") to consider, act upon and vote
upon the approval of this Agreement and the transactions contemplated hereby.
6.2 CONDUCT PENDING CLOSING. During the period from the date of this
-----------------------
Agreement to the Closing Date, except with the express prior written consent of
Buyers, Global shall cause the Gen-X Companies to conduct their respective
businesses in the ordinary course and shall cause the Gen-X Companies not make
any changes in the business of the Gen-X Companies that would have a Gen-X
Material Adverse Effect or to pay any dividend or distribution to Global.
6.3 CONSENTS. Between the date of this Agreement and the Closing Date,
--------
Global shall, and Global shall cause the Gen-X Companies to, in good faith, use
all reasonable efforts to obtain as promptly as practicable the Global Required
Consents, including all required filings under the HSR Act, and cooperate with
Buyers in obtaining the Buyer Required Consents.
6.4 ADVICE OF CHANGES. Between the date of this Agreement and the
-----------------
Closing Date, Global shall promptly advise Buyers in writing of any fact of
which any of them obtains knowledge and which, if existing or known as of the
date of this Agreement, would have been required to be set forth or disclosed in
or pursuant to any of the Acquisition Agreements (it being understood that
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<PAGE>
any such advice shall not be deemed to modify the representations, warranties or
covenants of Global contained in the Acquisition Agreements or any written
statement, document or certificate delivered by Global under or in connection
with the Acquisition Agreements).
6.5 REASONABLE EFFORTS. Global shall, and Global shall cause the Gen-X
------------------
Companies to, use all reasonable efforts to consummate the transactions
contemplated by the Acquisition Agreements as promptly as practicable.
6.6 INVESTMENT CANADA NOTICE. Global, within thirty (30) days after
------------------------
the Closing Date, will make, or cause to be made, together with Buyers, DMJ,
Salter and Finkelstein, the filing of any requisite notice under the Investment
Canada Act.
7. CERTAIN OBLIGATIONS OF BUYERS, DMJ, SALTER AND FINKELSTEIN PENDING CLOSING
7.1 CONSENTS. Between the date of this Agreement and the Closing Date,
--------
Buyers, DMJ, Salter and Finkelstein shall, in good faith, use all reasonable
efforts to obtain as promptly as practicable, the Buyer Required Consents,
including all required filings under the HSR Act, and shall cooperate with
Global in obtaining the Global Required Consents.
7.2 ADVICE OF CHANGES. Between the date of this Agreement and the
-----------------
Closing Date, Buyers, DMJ, Salter and Finkelstein shall promptly advise Global
in writing of any fact of which it obtains knowledge and which, if existing or
known as of the date of this Agreement, would have been required to be set forth
or disclosed in or pursuant to any of the Acquisition Agreements (it being
understood that any such advice shall not be deemed to modify the
representations, warranties or covenants of Buyers contained in any of the
Acquisition Agreements or any written statement, document or certificate
delivered by Buyers under or in connection with any of the Acquisition
Agreements).
7.3 REASONABLE EFFORTS. Buyers, DMJ, Salter and Finkelstein shall use
------------------
all reasonable efforts to consummate the transactions contemplated by the
Acquisition Agreements.
7.4 CONDUCT PENDING CLOSING. During the period from the date of this
-----------------------
Agreement to the Closing Date, except with the express prior written consent of
Global, Salter and Finkelstein shall cause the Gen-X Companies to conduct their
respective businesses in the ordinary course and shall not make any changes in
the business of the Gen-X Companies that would have a Gen-X Material Adverse
Effect.
7.5 INVESTMENT CANADA NOTICE. Each of Buyers, DMJ, Salter and
------------------------
Finkelstein, within thirty (30) days after the Closing Date, will make, or cause
to be made, together with Global, the filing of any requisite notice under the
Investment Canada Act.
7.6 CAPITALIZATION OF U.S. CO. AND CANADIAN CO.. DMJ, Salter and
-------------------------------------------
Finkelstein shall, prior to the Closing Date, cause the Buyers to be, as of the
Closing Date, capitalized with an
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<PAGE>
aggregate of $6,000,000 or more, of which $4,000,000 or more shall be in the
form of capital stock of Buyers.
7.7 CERTAIN OBLIGATIONS. Buyers, DMJ, Salter and Finkelstein shall
-------------------
cause Global and all of its subsidiaries other than the Gen-X Companies to be
released from any and all obligations that Global has to Ride, Inc., RoyNat and
their Affiliates.
8. CONDITIONS PRECEDENT TO CLOSING BY GLOBAL
Each obligation of Global to be performed on the Closing Date shall be
subject to the satisfaction of each of the following conditions, except to the
extent that such satisfaction is waived by Global in writing:
8.1 REPRESENTATIONS OF BUYERS, DMJ, SALTER AND FINKELSTEIN.
------------------------------------------------------
8.1.1 Subject to Section 8.1.2, the representations and warranties
of Buyers, DMJ, Salter and Finkelstein contained in this Agreement shall have
been true in all material respects on and as of the date made and shall be true
in all material respects on and as of the Closing Date, with the same force and
effect as though made on and as of the Closing Date, except that any
representation or warranty made as of a specified date shall be true in all
material respects on and as of such date, in each case without giving effect to
any advice given by Buyers under Section 7.2.
8.1.2 The representations and warranties of Buyers, DMJ, Salter
and Finkelstein contained in this Agreement that are qualified by materiality
shall have been true in all respects on the date of this Agreement and shall be
true in all respects on and as of the Closing Date, except that any such
representation or warranty made as of a specified date shall be true in all
respects on and as of such date, in each case without giving effect to any
advice given by Buyers under Section 7.2.
8.2 PERFORMANCE BY BUYERS, DMJ, SALTER AND FINKELSTEIN. All of the
--------------------------------------------------
covenants, terms, obligations and conditions of this Agreement to be satisfied
or performed by Buyers, DMJ, Salter and Finkelstein on or before the Closing
Date shall have been substantially satisfied or performed.
8.3 HSR ACT. Any applicable waiting period under the HSR Act relating
-------
to the transactions contemplated hereby shall have expired or been terminated.
8.4 GLOBAL SHAREHOLDER APPROVAL. The Global Shareholder Approval shall
---------------------------
have been obtained.
8.5 RESTRUCTURING. The Restructuring shall be in form and substance
-------------
reasonably satisfactory to Global.
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<PAGE>
8.6 REMOVAL FROM OBLIGATIONS. Global and all of its Subsidiaries other
------------------------
than the Gen-X Companies shall have been released from any and all obligations
to Ride, Inc., RoyNat and their Affiliates.
8.7 ABSENCE OF PROCEEDINGS. No Proceeding shall have been instituted
----------------------
on or before the Closing Date by any Person (other than Global and/or any of the
Gen-X Companies), no Judgment shall have been issued, and no new Law shall have
been enacted, that seeks to or does prohibit or restrain, or that seeks material
damages as a result of, the consummation of the transactions contemplated by the
Acquisition Agreements.
8.8 FAIRNESS OPINION. Global shall have received the written opinion
----------------
of its financial advisor to the effect that, as of the date of approval by the
board of directors of Global of the Acquisition Agreements, the consideration to
be received by Global for the Gen-X Stock in connection with the transactions
contemplated by the Acquisition Agreements is fair, from a financial point of
view, to Global, which written opinion shall not have been withdrawn, modified
or changed.
9. CONDITIONS PRECEDENT TO CLOSING BY BUYERS
Each obligation of Buyers to be performed on the Closing Date shall be
subject to the satisfaction of each of the following conditions, except to the
extent that such satisfaction is waived by Buyers in writing:
9.1 REPRESENTATIONS OF GLOBAL.
-------------------------
9.1.1 Subject to Section 9.1.2, the representations and warranties
of Global contained in this Agreement shall have been true in all material
respects on and as of the date made and shall be true in all material respects
on and as of the Closing Date, with the same force and effect as though made on
and as of the Closing Date, except that any representation or warranty made as
of a specified date shall be true in all material respects on and as of such
date, in each case without giving effect to any advice given by Global under
Section 6.4.
9.1.2 The representations and warranties of Global contained in
this Agreement that are qualified by materiality shall have been true in all
respects on the date of this Agreement and shall be true in all respects on and
as of the Closing Date, except that any such representation or warranty made as
of a specified date shall be true in all respects on and as of such date, in
each case without giving effect to any advice given by Global under Section 6.4.
9.2 PERFORMANCE BY GLOBAL. All of the covenants, terms, obligations
---------------------
and conditions of this Agreement to be satisfied or performed by Global on or
before the Closing Date shall have been substantially satisfied or performed.
9.3 ABSENCE OF PROCEEDINGS. No Proceeding shall have been instituted
----------------------
on or before the Closing Date by any Person (other than Buyers, DMJ, Salter or
Finkelstein), no Judgment shall have been issued, and no new Law shall have been
enacted, that seeks to or does prohibit or restrain,
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<PAGE>
or that seeks material damages as a result of, the consummation of the
transactions contemplated by the Acquisition Agreements.
9.4 ACCELERATION OF VESTING OF OPTIONS. Global shall have (a)
----------------------------------
accelerated the vesting of all of the options to purchase shares of Global
common stock, par value $.01 per share ("Global Common Stock"), held as of the
date hereof by Salter and Finkelstein, so that such options shall become
exercisable as of the Closing Date; and (b) agreed to accelerate the vesting of
options granted to the employees set forth on Schedule 9.4 for a maximum
------------
aggregate of 40,100 shares of Global Common Stock on the same vesting terms as
Global previously agreed to with such employees, in addition to the 241,830
shares with respect to which Global had previously agreed to accelerate the
vesting of options held by the employees set forth on Schedule 9.4.
------------
10. CLOSING
10.1. CLOSING. Unless this Agreement is terminated in accordance with
-------
Section 13, the closing of the transactions contemplated by this Agreement
("Closing") shall be held at 10:00 A.M. Philadelphia, Pennsylvania time on such
date and at such time as is agreed upon by Global and Buyers which shall be no
later than the second business day after the satisfaction or waiver of all
conditions set forth in Sections 8 and 9 hereof, unless another date and time is
agreed upon by Global and Buyers ("Closing Date"). The Closing shall be held at
the offices of Blank Rome Comisky & McCauley LLP, One Logan Square,
Philadelphia, PA 19103 or such other location as is agreed upon by Global and
Buyers.
10.2. OBLIGATIONS OF GLOBAL. At the Closing, Global shall deliver or
---------------------
cause to be delivered the following to Buyers:
10.2.1 GEN-X EQUIPMENT STOCK. Stock certificates representing all
---------------------
of the Gen-X Equipment Stock, together with assignments separate from
certificate in blank, dated the Closing Date and duly executed by Global, and
stamps or other proper evidence of the payment of any stock transfer or similar
Taxes due as a result of the transfer of such stock, to transfer all of the Gen-
X Equipment Stock.
10.2.2 GEN-X HOLDINGS STOCK. Stock certificates representing all
--------------------
of the Gen-X Holdings Stock, together with assignments separate from certificate
in blank, dated the Closing Date and duly executed by Global, and stamps or
other proper evidence of the payment of any stock transfer or similar Taxes due
as a result of the transfer of such stock, to transfer all of the Gen-X Holdings
Stock.
10.2.3 PROXY OF GLOBAL. A voting proxy in favor of Buyers in
---------------
connection with the Stock certificates of Gen-X Equipment registered in the name
of Global and held by the pledgeholder pursuant to the Pledge and Security
Agreement to be executed by the Buyers.
10.2.4 CORPORATE RECORDS AND MINUTE BOOKS. All of the original
----------------------------------
minute books and stock books of the Gen-X Companies.
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10.2.5 CERTIFIED RESOLUTIONS. Copies of the resolutions duly
---------------------
adopted by the board of directors, and if necessary the shareholders, of Global,
authorizing Global to execute, deliver and perform this Agreement and to
consummate the transactions contemplated by this Agreement, certified by an
officer of Global as in full force and effect, without modification or
rescission, on and as of the Closing Date.
10.2.6 TERMINATION OF EMPLOYMENT AGREEMENTS. Termination
------------------------------------
Agreements in the forms attached hereto as Exhibit "C" and Exhibit "D", relating
----------- -----------
to the Employment Agreements of Salter and Finkelstein, duly executed by Global
as of the Closing Date.
10.2.7 SHARED FACILITIES AGREEMENTS. Shared Facilities Agreement
----------------------------
in the form attached hereto as Exhibit "E", duly executed by Global as of the
-----------
Closing Date.
10.2.8 RIGHT OF FIRST OFFER AGREEMENT. Right of First Offer
------------------------------
Agreement in the form attached hereto as Exhibit "F", duly executed by Global as
-----------
of the Closing Date.
10.2.9 NON-COMPETITION AGREEMENT. Non-Competition Agreement in the
-------------------------
form attached hereto as Exhibit "G", dated the Closing Date, duly executed by
-----------
Global and Michael G. Rubin.
10.2.10 TERMINATION OF NON-COMPETITION AGREEMENT. Termination of
----------------------------------------
Non-Competition Agreement in the form attached hereto as Exhibit "H", relating
-----------
to the Non-Competition Agreement of DMJ, Salter and Finkelstein duly executed by
Global as of the Closing Date.
10.2.11 CLOSING CERTIFICATE. A certificate dated the Closing Date
-------------------
and duly executed by Global, in which Global represents and warrants to Buyers
that the conditions set forth in Sections 9.1, 9.2, 9.3 and 9.4 have been
satisfied.
10.2.12 LEGAL OPINION. Legal Opinion of Blank Rome Comisky &
-------------
McCauley LLP, counsel to Global in the form attached hereto as Exhibit "I ".
------------
10.2.13 INTERCREDITOR AGREEMENT. Intercreditor Agreement in the
-----------------------
form attached hereto as Exhibit "J", duly executed by Global, as of the Closing
-----------
Date.
10.2.14 CONSENTS. The Global Required Consents.
--------
10.2.15 OTHER DOCUMENTS. All other agreements, certificates,
---------------
instruments, opinions and documents reasonably requested by Buyers in order to
fully consummate the transactions contemplated by the Acquisition Agreements.
10.3. OBLIGATIONS OF BUYERS AT CLOSING. At the Closing, Buyers, DMJ,
--------------------------------
Salter and Finkelstein shall deliver or cause to be delivered the following to
Global:
10.3.1 CLOSING PAYMENT. The Closing Payment in the amount set
---------------
forth in Section 3.1, paid in the manner set forth in Section 3.3.
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10.3.2 PROMISSORY NOTES. The U.S. Co. Promissory Note and the
----------------
Canadian Co. Promissory Note in the forms attached hereto as Exhibit "A" and
-----------
Exhibit "B", duly executed by U.S. Co. and Canadian Co., respectively, as of the
- -----------
Closing Date.
10.3.3 PROXY OF DMJ. A voting proxy in favor of Global in
------------
connection with the 800 shares of Global Preferred Stock registered in the name
of DMJ.
10.3.4 PREFERRED STOCK. Stock certificates representing 7,200
---------------
shares of Global Preferred Stock, together with assignments separate from
certificate duly executed by DMJ to transfer such shares to Global.
10.3.5 ASSIGNMENT AND ASSUMPTION OF REPLACEMENT NOTES. Assignment
----------------------------------------------
and Assumption Agreement in the form attached hereto as Exhibit "K", relating to
-----------
the Replacement Notes, duly executed by DMJ as of the Closing Date.
10.3.6 TERMINATION OF EMPLOYMENT AGREEMENTS. Termination
------------------------------------
Agreements in the forms attached hereto as Exhibit "C" and Exhibit "D", relating
----------- -----------
to the Employment Agreements of Salter and Finkelstein, duly executed by Salter
and Finkelstein, respectively, as of the Closing Date.
10.3.7 SUBORDINATED NOTE AGREEMENTS. Subordinated Note Agreements
----------------------------
in the forms attached hereto as Exhibit "L", duly executed by Buyers as of the
-----------
Closing Date.
10.3.8 GUARANTEES. The Guarantees of the Gen-X Companies in the
----------
form attached hereto as Exhibit "M", duly executed by each of the Gen-X
-----------
Companies as of the Closing Date.
10.3.9 SECURITY AGREEMENTS. Security Agreements in the forms
-------------------
attached hereto as Exhibit "N", duly executed by each of the Gen-X Companies as
-----------
of the Closing Date.
10.3.10 PLEDGE AGREEMENTS. Pledge Agreements in the forms attached
-----------------
hereto as Exhibit "O", duly executed by each of the Gen-X Companies as of the
-----------
Closing Date.
10.3.11 TRADEMARK SECURITY AGREEMENTS. Trademark Security
-----------------------------
Agreements in the forms attached hereto as Exhibit "P", duly executed by each of
-----------
the Gen-X Companies as of the Closing Date.
10.3.12 INTERCREDITOR AGREEMENT. Intercreditor Agreement in the
-----------------------
form attached hereto as Exhibit "J", duly executed by U.S. Co., Canadian Co.,
-----------
Gen-X Holdings, Gen-X Equipment and Hongkong Bank of Canada as of the Closing
Date.
10.3.13 PREFERRED STOCK PURCHASE AGREEMENT. Preferred Stock
----------------------------------
Purchase Agreement in the form attached hereto as Exhibit "Q", duly executed by
-----------
DMJ, Gen-X Holdings and Gen-X Equipment as of the Closing Date.
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10.3.14 GEN-X HOLDINGS STOCK. Stock certificates representing all
--------------------
of the Gen-X Holdings Stock, together with assignments separate from certificate
in blank, dated the Closing Date and duly executed by U.S. Co., to be held by
the pledgeholder under the Pledge and Security Agreement to be executed by U.S.
Co.
10.3.15 UCC-1 FINANCING STATEMENTS. UCC-1 Financing Statements,
--------------------------
duly executed by each of the Gen-X Companies as of the Closing Date.
10.3.16 PPSA FINANCING STATEMENTS. Financing Statements under the
-------------------------
Personal Property Security Act (Ontario), duly executed, as applicable, by each
of the Gen-X Companies and the Buyer, as applicable, as of the Closing Date.
10.3.17 SHARED FACILITIES AGREEMENTS. Shared Facilities Agreement
----------------------------
in the forms attached hereto as Exhibit "E", duly executed by Gen-X Equipment as
-----------
of the Closing Date.
10.3.18 CERTIFIED RESOLUTIONS. Copies of the resolutions duly
---------------------
adopted by the boards of directors of Buyers, authorizing such companies to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated by this Agreement, certified by an officer of such company as in
full force and effect, without modification or rescission, on and as of the
Closing Date.
10.3.19 CLOSING CERTIFICATE. A certificate dated the Closing Date
-------------------
and duly executed by Buyers, DMJ, Salter and Finkelstein, in which they
represent and warrant to Global that the conditions set forth in Sections 8.1,
8.2, 8.3, 8.4, 8.5, 8.6 and 8.7 have been satisfied.
10.3.20 LEGAL OPINION. Legal Opinion of Borden & Elliot, counsel to
-------------
Buyers, DMJ, Salter and Finkelstein, in the form attached hereto as Exhibit "R".
-----------
10.3.21 CONSENTS. The Buyers Required Consents.
--------
10.3.22 OTHER DOCUMENTS. All other agreements, certificates,
---------------
instruments, opinions and documents reasonably requested by Global in order to
fully consummate the transactions contemplated by the Acquisition Agreements.
11. CERTAIN POST-CLOSING OBLIGATIONS
11.1 FURTHER ASSURANCES. At any time and from time to time after the
------------------
Closing Date, at Buyers' request, and without further consideration, Global
shall promptly execute and deliver all such further agreements, certificates,
instruments and documents, and perform such further actions, as Buyers may
reasonably request in order to fully consummate the transactions contemplated by
the Acquisition Agreements and carry out the purposes and intent of the
Acquisition Agreements. At any time and from time to time after the Closing
Date, at Global's request, and without further consideration, Buyers, DMJ,
Salter and/or Finkelstein shall promptly execute and deliver all such further
agreements, certificates, instruments and documents, and perform such further
actions, as
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Global may reasonably request in order to fully consummate the transactions
contemplated by the Acquisition Agreements and carry out the purposes and intent
of the Acquisition Agreements.
11.2. NONDISCLOSURE
-------------
11.2.1 At all times after the Closing Date, except with Buyers'
express prior written consent, Global shall not, directly or indirectly, in any
capacity, communicate, disclose or divulge to any Person, or use for the benefit
of any Person, any confidential or proprietary knowledge or information of the
Gen-X Companies. For purposes of this Section 11.2.1, confidential information
shall not include any information that (i) is now available to the public or
which becomes available to the public other than as a result of disclosure by
Global, (ii) is or becomes available to Global on a non-confidential basis from
a source other than the Gen-X Companies, or (iii) has been independently
acquired or developed by Global without violating any of its obligations under
this Agreement.
11.2.2 At all times after the Closing Date, except with Global's
express prior written consent, neither Buyers, DMJ, Salter nor Finkelstein
shall, directly or indirectly, in any capacity, communicate, disclose or divulge
to any Person, or use for the benefit of any Person, any confidential or
proprietary knowledge or information of Global. For purposes of this Section
11.2.2, confidential information shall not include any information that (i) is
now available to the public or which becomes available to the public other than
as a result of disclosure by Buyers, DMJ, Salter or Finkelstein, (ii) is or
becomes available to Buyers, DMJ, Salter or Finkelstein on a non-confidential
basis from a source other than the Global, or (iii) has been independently
acquired or developed by Buyers, DMJ, Salter or Finkelstein without violating
any of its obligations under this Agreement.
11.2.3 Global, on the one hand, and Buyers, DMJ, Salter nor
Finkelstein on the other, expressly acknowledge that any breach by it of the
covenant contained in Section 11.2.1 or 11.2.2, as the case may be (the
"Covenant"), may result in irreparable injury to the other party for which money
damages could not adequately compensate. If there is such a breach, the
aggrieved party shall be entitled, in addition to all other rights and remedies
it may have at law or in equity, to have an injunction issued by any competent
court enjoining and restraining the breaching party and all other Persons
involved therein, from continuing such breach.
11.2.4 If any portion of the Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any portion of the Covenant is determined to be
unenforceable due to its scope, duration, geographical area or similar factor,
then the court making such determination shall have the power to reduce or limit
such scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.
11.3 NONCOMPETITION
--------------
11.3.1 During the period beginning on the date hereof and ending on
the date when Buyers' obligations under the U.S. Co. Promissory
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Note and the Canadian Co. Promissory Note have been completely and indefeasibly
satisfied (the "Restrictive Period"), except with Global's prior written
consent, none of Buyers, DMJ, Salter or Finkelstein shall, directly or
indirectly, in any capacity, at any location where any of the Gen-X Companies
currently conducts or proposes to conduct business as of the date hereof (the
"Territory"):
(A) Communicate with or solicit any Person who is or during the one-
year period prior to the Closing Date was, or during the Restrictive Period
becomes, a customer, supplier, employee, salesman, agent or representative of,
or a consultant to, any of the Gen-X Companies, in any manner which interferes
or might interfere with such Person's relationship with any of the Gen-X
Companies, or in an effort to obtain any such Person as a customer, employee,
salesman, agent or representative of, or a consultant to, any other Person that
conducts a business competitive with or similar to all or any part of the
business of any of the Gen-X Companies as currently conducted, or
(B) Establish, own, manage, operate, finance or control, or
participate in the establishment, ownership, management, operation, financing or
control of, or be a director, officer, employee, salesman, agent or
representative of, or be a consultant to, any Person that conducts a business
competitive with or similar to all or any part of the business of any of the
Gen-X Companies as currently conducted.
11.3.2 Buyers, DMJ, Salter and Finkelstein expressly acknowledge
that (a) the restrictive covenants of this Section 11.3 (the "Covenants") are a
material part of the consideration bargained for by Global, and (b) without the
agreement of Buyers, DMJ, Salter and Finkelstein to be bound by the Covenants,
Global would not have agreed to enter into this Agreement and consummate the
transactions contemplated hereby.
11.3.3 Buyers, DMJ, Salter and Finkelstein expressly acknowledge
that any breach by any of them of any of the Covenants will result in
irreparable injury to Global for which money damages could not adequately
compensate. If there is such a breach, Global shall be entitled, in addition to
all other rights and remedies it may have at law or equity, to have an
injunction issued by any competent court enjoining and restraining Buyers, DMJ,
Salter, Finkelstein and all other Persons involved therein from continuing such
breach. The existence of any claim or cause of action which any of Buyers, DMJ,
Salter, Finkelstein or any such other Person may have against Global shall not
constitute a defense or bar to the enforcement of any of the Covenants. If
Global must resort to litigation to enforce any of the Covenants that has a
fixed term, then such term shall be extended for a period of time equal to the
period during which a breach of such Covenant was occurring, beginning on the
date of a final court order (without further right of appeal) holding that such
a breach occurred or, if later, the last day of the original fixed term of such
Covenant.
11.3.4 If any portion of any Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any of the Covenants is determined to be unenforceable due
to its scope, duration, geographical area or similar factor, then the court
making such determination shall have the power to reduce or limit such scope,
duration, are or other factor, and such Covenant shall then be enforceable in
its reduced or limited form.
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11.3.5 Buyers, DMJ, Salter and Finkelstein expressly acknowledge
that the provisions of this Section 11.3 of the Agreement are reasonable and
valid in all respects and irrevocably waive (and irrevocably agree not to raise)
as a defense any issue of reasonableness (including the reasonableness of the
noncompetition covenant insofar as it relates to the business of the Gen-X
Companies, the Territory or the duration or scope of the Covenants) in any
proceeding to enforce any provision of this Section 11.3 of the Agreement, the
intention of the parties being to provide for the legitimate and reasonable
protection of the interests of Global and by providing, without limitation, for
the broadest scope, the longest duration and the widest territory allowable by
law.
11.4 REMOVAL OF ASSETS. Buyers shall, at their expense, within ninety
-----------------
(90) days after the Closing Date, remove all of the Assets owned by Gen-X
Holdings and Gen-X Equipment (including any Inventory and warehouse and racking
equipment sold by KPR Sports International, Inc. to Gen-X Holdings, or its
Affiliates, prior to the date hereof) from Global's premises, FOB King of
Prussia, without any disruption of Global's operation, and at such times as
shall be reasonably satisfactory to Global. If not so removed during such time
period, Global may, at its option, have such items shipped to Buyers at Buyers'
expense, or agree to store such items for Buyers, in which case Buyers shall pay
to Global a reasonable storage charge for such period of time that Global stores
such items. In the event Global stores such items for Buyers, Buyers agree that
Global shall have no liability with respect to such items and hereby releases
and holds harmless Global from any such liability.
11.5 INVESTIGATION
-------------
11.5.1 During the period beginning on the date hereof and ending on
the date when Buyers' obligations under the U.S. Co. Promissory Note and the
Canadian Co. Promissory Note shall have been completely and indefeasibly
satisfied:
(A) Buyers shall permit Global and its authorized representatives to
have full access to the Gen-X Companies' facilities during normal business
hours, to observe the Gen-X Companies' business operations, to meet with the
Gen-X Companies' officers and employees engaged in the Gen-X Companies'
business, and to audit, examine and copy all of the Gen-X Companies' files,
books and records, and other documents and papers relating to the Gen-X
Companies' business, and
(B) Buyers shall provide to Global and its authorized representatives
all information concerning the Gen-X Companies and the Gen-X Companies' business
and Assets, and all information concerning the financial condition of the Gen-X
Companies and the Gen-X Companies' business, that is reasonably requested by
Global.
11.5.2 The expense of any investigation by Global pursuant to this
Section 11.5 shall be borne solely by Global; provided, however, that if there
has been: (a) a misrepresentation, breach or failure of any representation or
warranty made by Buyers, DMJ, Salter or Finkelstein in any of the Acquisition
Agreements or (b) a failure or refusal by Buyers, DMJ, Salter or Finkelstein to
satisfy or perform any covenant, term, obligation or condition of any of the
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Acquisition Agreements required to be satisfied or performed by Buyers, DMJ,
Salter or Finkelstein, then Buyers shall reimburse Global for all reasonable
fees and expenses incurred by or on behalf of Global in connection with such
investigation.
12.1 INDEMNIFICATION, SETOFF AND PAYMENT OF ADJUSTMENTS
12.1. INDEMNIFICATION OBLIGATIONS OF GLOBAL. From and after the Closing,
-------------------------------------
Global shall indemnify and hold harmless Buyers and their directors, officers,
employees, Affiliates, successors and assigns, from and against any and all
Proceedings, Judgments, Obligations, losses, damages, deficiencies, settlements,
assessments, charges, costs and expenses (including, but not limited to,
reasonable attorneys' fees, investigation expenses, court costs, interest and
penalties) arising out of or in connection with, or caused by, directly or
indirectly, any or all of the following:
12.1.1 Any misrepresentation, breach or failure of any
representation or warranty made by Global in any of the Acquisition Agreements
or any written statement, document or certificate delivered to Buyers by Global
under or in connection with the Acquisition Agreements.
12.1.2 Any failure or refusal by Global to satisfy or perform any
covenant, term, obligation or condition of this Agreement required to be
satisfied or performed by any of them.
12.1.3 Amounts due to Just for Feet, Inc. resulting from purchases
by Global from Just for Feet, Inc. prior to August 1, 1999.
12.2. INDEMNIFICATION OBLIGATIONS OF BUYERS, DMJ, SALTER AND FINKELSTEIN.
-------------------------------------------------------------------
From and after the Closing, Buyers, DMJ, Salter and Finkelstein, jointly and
severally, shall indemnify and hold harmless Global and its respective
directors, officers, employees, Affiliates, successors and assigns, from and
against any and all Proceedings, Judgments, Obligations, losses, damages,
deficiencies, settlements, assessments, charges, costs and expenses (including,
but not limited to, reasonable attorneys' fees, investigation expenses, court
costs, interest and penalties) arising out of or in connection with, or caused
by, directly or indirectly, any or all of the following:
12.2.1 Any misrepresentation, breach or failure of any
representation or warranty made by Buyers, DMJ, Salter or Finkelstein in any of
the Acquisition Agreements or any written statement, document or certificate
delivered to Global by Buyers, DMJ, Salter or Finkelstein under or in connection
with any of the Acquisition Agreements.
12.2.2 Any failure or refusal by Buyers, DMJ, Salter or Finkelstein
to satisfy or perform any covenant, term, obligation or condition of any of the
Acquisition Agreements required to be satisfied or performed by Buyers, DMJ,
Salter or Finkelstein.
12.2.3 Any action, suit or claim arising out of, caused by or based
in whole or in part upon any act or omission of Gen-X Holdings or Gen-X
Equipment, or any of their respective shareholders, partners, directors,
executives, officers, employees, agents or representatives at any time after the
Closing or any event which occurs after the Closing.
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12.2.4 Any liability of or claim against Global in connection with
any Customs Canada detailed adjustment statement issued against any of the Gen-X
Companies, including, but not limited to the Customs Canada detailed adjustment
statements issued against Gen-X Equipment: (a) dated January 27, 1999, assessing
duties in the amount of Cdn$303,548, GST in the amount of Cdn$233,650 together
with interest in the amount of Cdn$72,416; and (b) dated March 1, 1999,
assessing duties in the amount of Cdn$625,985, GST in the amount of Cdn$526,240
together with interest in the amount of Cdn$60,232.
12.2.5 Any action, suit or claim by any of the Minority
Shareholders (as defined in the Stock Purchase Agreement, dated May 12, 1998, by
and among Global, DMJ, Salter, Finkelstein and certain other individuals and
entities) or any of their respective shareholders, partners, directors,
executives, officers, employees, agents, representatives, heirs, executors,
administrators, personal representatives or assigns arising out of, caused by or
based in whole or in part upon any act or omission of DMJ, Salter, Finkelstein,
Gen-X Holdings or Gen-X Equipment, or any of their respective shareholders,
partners, directors, executives, officers, employees, agents, representatives,
heirs, executors, administrators, personal representatives or assigns.
12.2.6 Amounts due to Just for Feet, Inc. resulting from purchases
by any of the Gen-X Companies from Just for Feet, Inc. on or after August 1,
1999.
12.3 INDEMNIFICATION NOTICE. With respect to each event, occurrence or
----------------------
matter ("Indemnification Matter") and with respect as to which Buyers, DMJ,
Salter or Finkelstein on the one hand, or Global on the other hand (referred to
as the "Indemnitee"), is entitled to indemnification from another party
(referred to as the "Indemnitor") under this Section 12, within ten days after
the Indemnitee receives any written documents underlying the Indemnification
Matter, or, if the Indemnification Matter does not involve a third party action,
suit, claim or demand, promptly after the Indemnitee first has actual knowledge
of the Indemnification Matter, the Indemnitee shall give notice to the
Indemnitor of the nature of the Indemnification Matter and the amount demanded
or claimed in connection therewith ("Indemnification Notice").
12.4 DEFENSE OF INDEMNIFICATION MATTERS. If an Indemnification Matter
----------------------------------
involves a third party action, suit, claim or demand, then, upon receipt of the
Indemnification Notice, the Indemnitor shall, at its expense and through counsel
of its choice, promptly assume and have sole control of the litigation, defense
or settlement of the Indemnification Matter (referred to as the "Defense"),
except that:
12.4.1 The Indemnitee may, at its option and expense and through
counsel of its choice, participate in (but not control) the Defense.
12.4.2 If the Indemnitee reasonably believes that the handling of
the Defense by the Indemnitor may have a material adverse effect on the
Indemnitee's business or its relationship with any customer, supplier, employee,
contractor, salesman, agent or representative, then the Indemnitee may, at its
option and expense and through counsel of its choice, assume control of the
Defense; provided that the Indemnitor shall continue to be obligated to
indemnify the Indemnitee with respect thereto and shall be entitled to
participate in the Defense at its expense and through
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counsel of its choice, provided further that Indemnitee shall not consent to any
Judgment or agree to any settlement without Indemnitor's prior written consent.
12.4.3 The Indemnitor shall not consent to any Judgment or agree to
any settlement without the Indemnitee's prior written consent; provided that if
the Indemnitee withholds its consent to any monetary Judgment or settlement that
is acceptable to the Indemnitor, then (a) the Indemnitor's liability with
respect to such Indemnification Matter shall be limited to such monetary amount,
and (b) the Indemnitee shall be responsible for any additional costs reasonably
incurred by the Indemnitor in connection therewith.
12.4.4 If the Indemnitor does not promptly assume control over the
Defense diligently and in good faith or, after doing so, does not continue to
prosecute the Defense in good faith, the Indemnitee may, at its option and
through counsel of its choice, but at the Indemnitor's expense, assume control
over the Defense; provided that the Indemnitor shall continue to be obligated to
indemnify the Indemnitee with respect thereto, provided further that Indemnitee
shall not consent to any Judgment or agree to any settlement without
Indemnitor's prior written consent.
12.4.5 In any event, the Indemnitor and the Indemnitee shall fully
cooperate with each other in connection with the Defense, including, but not
limited to, furnishing all available documentary or other evidence as is
reasonably requested by the other.
12. LIMITS ON INDEMNIFICATION MATTERS AND GLOBAL'S PAYMENT.
------------------------------------------------------
12.5.1 LIMITS ON GLOBAL'S PAYMENT. The amounts, if any, owed by
--------------------------
Global to Buyers as Indemnitor pursuant to Section 12.1 ("Global's Payment"),
shall be subject to the following:
(A) DEDUCTIBLE. No amount shall be payable by Global to Buyers for
----------
Global's Payment, unless and until the aggregate amount of Global's Payment
exceeds Fifty Thousand Dollars ($50,000), in which event Global shall pay such
aggregate amount and all future amounts payable by Global under this Section 12.
(B) EXCEPTIONS. The limitation in Sections 12.5.1(A) shall not apply
----------
in case of any Indemnification Matter or other adjustment involving fraud,
willful misconduct or criminal matters.
(C) DURATION. With respect to any Indemnification Matter, Global
--------
shall have no liability unless Buyers give an Indemnification Notice in
accordance with Section 12.3 within 12 months after the Closing Date, provided,
however, that the limitation contained in this Section 12.5.1(C) shall not apply
to any Indemnification Matter that arises from any failure or refusal by Global
to satisfy or perform any covenant, term, obligation or condition of any of the
Acquisition Agreements required to be satisfied or performed by Global after the
Closing Date.
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12.5.2 LIMITS ON BUYERS' INDEMNIFICATION. The amount, if any, owed
---------------------------------
by Buyers, DMJ, Salter and Finkelstein to Global as Indemnitor pursuant to
Section 12.2 shall be subject to the following:
(A) DEDUCTIBLE. No amount shall be payable by Buyers, DMJ, Salter and
----------
Finkelstein to Global under this Section 12, unless and until the aggregate
amount otherwise payable by Buyers, DMJ, Salter and Finkelstein under this
Section 12 exceeds Fifty Thousand Dollars ($50,000), in which event Buyers, DMJ,
Salter and Finkelstein shall pay such aggregate amount and all future amounts
payable by Buyers, DMJ, Salter and Finkelstein under this Section 12.
(B) EXCEPTIONS. The limitation in Sections 12.5.2(A) shall not apply
----------
in case of any Indemnification Matter involving fraud, willful misconduct or
criminal matters.
(C) DURATION. With respect to any Indemnification Matter, Buyers
--------
shall have no liability unless Global gives an Indemnification Notice in
accordance with Section 12.3 within 12 months after the Closing Date, provided,
however, that the limitation contained in this Section 12.5.2(C) shall not apply
to any Indemnification Matter that arises from any failure or refusal by Buyers,
DMJ, Salter or Finkelstein to satisfy or perform any covenant, term, obligation
or condition of any of the Acquisition Agreements that is required to be
satisfied or performed after the Closing Date or that arises under Section
12.2.3.
12.5.3 If Global is obligated to pay Buyers any amounts under
Section 12.1 after taking into account the application of the limitations
contained in Section 12.5.1(A), then any such amount payable by Global to Buyers
shall be reduced by any amounts Buyers would have been required to pay to Global
under Section 12.5.2 but for the application of the limitations contained in
Section 12.5.2(A). If Buyers, DMJ, Salter or Finkelstein is obligated to pay
Global any amounts under Section 12.2 after taking into account the limitations
contained in Section 12.5.2(A), then any such amounts payable by Buyers to
Global shall be reduced by any amounts Global would have been required to pay to
Buyers under Sections 12.1 but for the application of the limitations contained
in Section 12.5.1(A).
12.6. INDEMNIFICATION PAYMENT AND BUYERS' PAYMENT. All amounts owed by
-------------------------------------------
the Indemnitor to the Indemnitee (if any) shall be paid in full within twenty
(20) days after a final settlement or agreement as to the amount owed is
reached, or after a final Judgment (without further right of appeal) determining
the amount owed is rendered. Any amount paid under this Section 12 is intended
by all parties and shall be considered to be and treated as an adjustment to the
Purchase Price.
12.7. SETOFF AND HOLDBACK. In addition to all other rights and remedies
-------------------
that the Indemnitee may have, the Indemnitee shall have the right to setoff,
against any monies due to the Indemnitor (whether under this Agreement or
otherwise), any sums for which the Indemnitee is entitled to indemnification
under this Section 12 or any other sums which the Indemnitor may owe to the
Indemnitee (whether under this Agreement or otherwise). The Indemnitee's rights
to indemnification under this Section 12 shall under no circumstances be in any
manner limited by this
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<PAGE>
right of setoff. If any Indemnification Matters are pending at the time the
Indemnitee is required to make any payment to the Indemnitor (whether under this
Agreement or otherwise), then the Indemnitee shall pay the total amount for
which the Indemnitor may become liable as a result thereof, determined by the
Indemnitee reasonably and in good faith, to Borden & Elliot, as escrow agent, to
be held by such escrow agent pursuant to the escrow agreement (the "Escrow
Agreement") attached hereto as Exhibit "S", until final determination
-----------
of such Indemnification Matter, and shall pay the balance, if any, of such
payment to the Indemnitor.
13. TERMINATION
13.1. TERMINATION. This Agreement, and the transactions contemplated
-----------
hereby, may be terminated at any time before Closing in accordance with any of
the following methods:
13.1.1 By the mutual written consent of Global and Buyers.
13.1.2 By written notice from Global to Buyers, or from Buyers to
Global, if the Closing does not occur on or before February 28, 2000 for any
reason other than a breach of this Agreement by the party giving such notice.
13.1.3 By written notice from Buyers to Global, if it becomes
certain, for all practical purposes, that any of the conditions to the Closing
Obligations of Buyers, DMJ, Salter or Finkelstein cannot be satisfied for a
reason other than Buyers', Salter's or Finkelstein's breach of this Agreement,
and Buyers are not willing to waive the satisfaction of such condition.
13.1.4 By written notice from Global to Buyers if it becomes
certain, for all practical purposes, that any of the conditions to the Closing
Obligations of Global cannot be satisfied for a reason other than Global's
breach of this Agreement, and Global is not willing to waive the satisfaction of
such condition.
13.1.5 By written notice from Buyers to Global if Global breaches
any of its representations, warranties, covenants or agreements contained in
this Agreement.
13.1.6 By written notice from Global to Buyers if Buyers, DMJ,
Salter or Finkelstein breaches any of its representations, warranties, covenants
or agreements contained in this Agreement.
13.1.7 By written notice from Global to Buyers if Global receives
an offer from a third party to acquire Gen-X Holdings and Gen-X Equipment and
the board of directors of Global determines, in good faith, that its fiduciary
duties under applicable Law require Global to accept such offer.
13.2. EFFECT OF TERMINATION. Upon termination of this Agreement pursuant
---------------------
to Section 13.1, this Agreement shall forthwith have no further force or effect,
and there shall be no liability on the part of any party hereto, except for the
obligations of the parties under this Section 13.2 and
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<PAGE>
Section 14 (other than Section 14.7), and except that no such termination shall
relieve any party from any breach of this Agreement prior to such termination.
14. OTHER PROVISIONS
14.1. CONFIDENTIALITY. During the period from the date of this Agreement
---------------
to the Closing Date, (a) each of the parties shall maintain the confidentiality
of all confidential information which is disclosed to them in connection with
this Agreement, and (b) none of the parties will discuss the existence or nature
of this Agreement or the transaction contemplated hereby with any of the other
parties' customers, prospects, suppliers, employees, contractors, salesmen,
agents or representatives. If this Agreement is terminated in accordance with
Section 13, then each party shall promptly return all confidential information
and materials of the other parties, and the provisions of the foregoing sentence
shall survive such termination indefinitely.
14.2. PUBLICITY. All voluntary public announcements concerning the
---------
transactions contemplated by this Agreement shall be mutually acceptable to both
Global and Buyers. Unless required by Law, neither Global, on the one hand, nor
Buyers, DMJ, Salter or Finkelstein, on the other hand, shall make any public
announcement or issue any press release concerning the transactions contemplated
by this Agreement without the prior written consent of Global or Buyers,
respectively. With respect to any announcement that any of the parties is
required by Law to issue, such party shall, to the extent possible under the
circumstances, review the necessity for and the contents of the announcement
with the other parties before issuing the announcement.
14.3. EXPENSES. Global shall pay all of the fees and expenses incurred
--------
by it in negotiating and preparing the Acquisition Agreements and in
consummating the transactions contemplated by the Acquisition Agreements. The
Gen-X Companies shall pay all of the fees and expenses incurred by Buyers, DMJ,
Salter and Finkelstein in negotiating and preparing the Acquisition Agreements
and in consummating the transactions contemplated by the Acquisition Agreements.
Notwithstanding the foregoing, Buyers, DMJ, Salter and Finkelstein (and not the
Gen-X Companies) shall pay all of the fees and expenses incurred by Buyers, DMJ,
Salter and Finkelstein in negotiating and preparing the Acquisition Agreements
and in consummating the transactions contemplated by the Acquisition Agreements
if this Agreement, and the transactions contemplated hereby, are terminated
pursuant to Section 13.1.6 of this Agreement.
14.4. NOTICES. All notices, consents or other communications required or
-------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally, (b) three business
days after being mailed by first class certified mail, return receipt requested,
postage prepaid, or (c) one business day after being sent by a reputable
overnight delivery service, postage or delivery charges prepaid, to the parties
at their respective addresses stated on the first page or the signature pages of
this Agreement. Notices may also be given by prepaid telegram or facsimile and
shall be effective on the date transmitted if confirmed within 24 hours
thereafter by a signed original sent in the manner provided in the preceding
sentence. A copy of each notice to Buyers, DMJ, Salter or Finkelstein shall be
simultaneously sent to Borden & Elliot, Scotia Plaza, 40 King Street West,
Toronto, Ontario M5H 3Y4, Canada, Attn:
-28-
<PAGE>
Daniel F. Hirsh. A copy of each notice to Global shall be simultaneously sent
to: Blank Rome Comisky & McCauley LLP, One Logan Square, Philadelphia,
Pennsylvania 19103, Attn: Francis E. Dehel, Esquire. Any party may change its
address for notice and the address to which copies must be sent by giving notice
of the new addresses to the other parties in accordance with this Section 14.4,
except that any such change of address notice shall not be effective unless and
until received.
14.5. AMENDMENT. This Agreement may be amended, modified or supplemented
---------
by the parties hereto, provided that any such amendment, modification or
supplement shall be in writing and signed by Global, and Buyers, DMJ, Salter and
Finkelstein.
14.6. WAIVERS. No waiver with respect to this Agreement shall be
-------
enforceable against Global unless in writing and signed by Global. No waiver
with respect to this Agreement shall be enforceable against Buyers, DMJ, Salter
and/or Finkelstein unless in writing and signed by Buyers, DMJ, Salter and/or
Finkelstein, as the case will be. Except as otherwise expressly provided
herein, no failure to exercise, delay in exercising, or single or partial
exercise of any right, power or remedy by any party, and no course of dealing
between or among any of the parties, shall constitute a waiver of, or shall
preclude any other or further exercise of the same or any other right, power or
remedy.
14.7. SURVIVAL OF REPRESENTATIONS. All representations, warranties and
---------------------------
covenants made in or pursuant to this Agreement shall survive the date hereof,
the Closing Date and the consummation of the transactions contemplated hereby
and thereby.
14.8. ENTIRE UNDERSTANDING. The Acquisition Agreements, together with
--------------------
the Exhibits and Schedules hereto and thereto, state the entire understanding
among the parties with respect to the subject matter hereof and thereof, and
supersede all prior oral and written communications and agreements, and all
contemporaneous oral communications and agreements, with respect to the subject
matter hereof and thereof.
14.9. PARTIES IN INTEREST. This Agreement shall bind, benefit, and be
-------------------
enforceable by and against each party hereto and its successors and assigns.
Global shall not in any manner assign any of its rights or obligations under
this Agreement without the express prior written consent of Buyers, and neither
Buyers, DMJ, Salter nor Finkelstein shall in any manner assign any of its rights
or obligations under this Agreement without the express prior written consent of
Global.
14.10. SEVERABILITY. If any provision of this Agreement is construed to
------------
be invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.
14.11. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof; provided,
however, that if acceptable to Global, Buyers, DMJ, Salter and Finkelstein, the
Closing may be effected by facsimile transmission of executed copies of the
signature pages to this Agreement delivered at the Closing and by sending
original copies of
-29-
<PAGE>
signature pages to this Agreement delivered at the Closing by reputable
overnight delivery service, postage or delivery charges prepaid, for delivery to
the parties at their addresses stated on the first page or signature pages of
this Agreement by the third business day following the Closing Date.
14.12. SECTION HEADINGS. The section and subsection headings in this
----------------
Agreement are for convenience of reference only, do not constitute a part of
this Agreement, and shall not affect its interpretation.
14.13. REFERENCES. All words used in this Agreement shall be construed to
----------
be of such number and gender as the context requires or permits. Unless a
particular context clearly provides otherwise, (i) the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific section or subsection hereof, and (ii) the word "including"
shall mean including but not limited to.
14.14. CONTROLLING LAW. THIS AGREEMENT IS MADE UNDER, AND SHALL BE
---------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
14.15. JURISDICTION AND PROCESS. Each of the parties (a) irrevocably
------------------------
consents to the exclusive jurisdiction of the Courts of Common Pleas of
Montgomery County, Pennsylvania, or the United States District Court for the
Eastern District of Pennsylvania, in any and all actions between or among any of
the parties, whether arising hereunder or otherwise, (b) IRREVOCABLY WAIVES ITS
RIGHT TO TRIAL BY JURY IN ANY SUCH ACTION, and (c) irrevocably consents to
service of process by first class certified mail, return receipt requested,
postage prepaid, to the address at which such party is to receive notice in
accordance with Section 14.4. In any and all actions between or among any of
the parties, whether arising hereunder or otherwise, the prevailing party or
parties shall be entitled to recover their reasonable attorneys' fees and legal
expenses from the other party or parties.
14.16. NO THIRD PARTY BENEFICIARIES. No provision of this Agreement is
----------------------------
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto, including, but not limited to, any customer,
prospect, supplier, employee, contractor, salesman, agent or representative of
any of the parties hereto.
14.17. CONSTRUCTION. The parties agree that any rule of construction to
------------
the effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of the Acquisition
Agreements or any other agreements or documents delivered in connection with the
transactions contemplated by the Acquisition Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed, or have caused this
Agreement to be executed on their behalf by their duly authorized officers, as
of the date first stated above.
GLOBAL SPORTS, INC. DMJ FINANCIAL, INC.
By: /s/ Michael G. Rubin By: /s/ Kenneth J. Finkelstein
---------------------------- ----------------------------
Name: Michael G. Rubin Name:
Title: Chairman and CEO Title:
GEN-X ACQUISITION (U.S.), INC. GEN-X ACQUISITION (CANADA) INC.
By: /s/ James J. Salter By: /s/ James J. Salter
---------------------------- ----------------------------
Name: Name:
Title: Title:
/s/ Kenneth J. Finkelstein /s/ James J. Salter
- ------------------------------- -------------------------------
KENNETH J. FINKELSTEIN JAMES J. SALTER
-31-
<PAGE>
APPENDIX B
[LOGO OF DEUTSCHE
BANK SECURITIES, INC.]
September 24, 1999
Board of Directors
Global Sports, Inc.
555 S. Henderson Road
King of Prussia, PA 19406
Gentlemen:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial advisor
to Global Sports, Inc. ("Global Sports") in connection with the proposed sale of
Gen-X Holdings Inc., Gen-X Equipment Inc. and the off-price division of KPR
Sports International, Inc. (collectively, the "Company") pursuant to an
acquisition agreement dated September 24, 1999 (the "Acquisition Agreement")
between (i) Global Sports and (ii) Gen-X Acquisition (US), Inc. and Gen-X
Acquisition (Canada) Inc., entities controlled by James Salter and Kenneth
Finkelstein, (collectively, the "Buyer"), which provides, among other things,
for the acquisition of the Company by the Buyer (the "Transaction"). As set
forth more fully in the Acquisition Agreement, as a result of the Transaction,
the Buyer will purchase the Company for aggregate consideration (the
"Consideration") of $20 million payable in the form of (i) $6.0 million in cash,
(ii) $10.0 million in subordinated notes and (iii) $4.0 million through the
assumption of certain liabilities owing from Global Sports to DMJ Financial,
Inc., an entity owned by Messrs. Salter and Finkelstein. The terms and
conditions of the Transaction are more fully set forth in the Acquisition
Agreement.
You have requested Deutsche Bank's opinion, as investment bankers, as to the
fairness, from a financial point of view, to Global Sports of the Consideration
to be received by Global Sports for the Company in connection with the
Transaction.
In connection with Deutsche Bank's role as financial advisor to Global Sports,
and in arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning the Company and certain
internal analyses and other information furnished to it by the Company and
Global Sports. Deutsche Bank has also held discussions with members of the
senior managements of the Company and Global Sports regarding the business and
prospects of the Company. In addition, Deutsche Bank has (i) reviewed the
actual and 1999 forecasted financial performance of the Company, (ii) reviewed
the financial terms of certain recent acquisitions which it deemed comparable in
whole or in part, (iii) reviewed the terms of the Acquisition Agreement and
certain related documents, and (iv) performed such other studies and analyses
and considered such other factors as it deemed appropriate. We found no
publicly-traded companies that are comparable to the Company. Accordingly, we
were unable to value the Company based upon comparable market valuations. In
addition, based upon the nature of the Company's business, management of the
Company and Global Sports believes it is impractical to produce financial
projections beyond the current fiscal year; consequently, we were unable to
perform a discounted cash flow valuation analysis or leveraged buyout valuation
analysis.
<PAGE>
Board of Directors
Global Sports, Inc.
September 24, 1999
Page 2
Deutsche Bank has not assumed responsibility for independent verification of,
and has not independently verified, any information, whether publicly available
or furnished to it, concerning the Company, including, without limitation, any
financial information or forecasts considered in connection with the rendering
of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank has
assumed and relied upon the accuracy and completeness of all such information
and Deutsche Bank has not conducted a physical inspection of any of the
properties or assets, and has not prepared or obtained any independent
evaluation or appraisal of any of the assets or liabilities, of the Company.
With respect to the financial forecasts made available to Deutsche Bank and used
in its analyses, Deutsche Bank has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company and Global Sports as to the matters
covered thereby. In rendering its opinion, Deutsche Bank expresses no view as
to the reasonableness of such forecasts or the assumptions on which they are
based. Deutsche Bank's opinion is necessarily based upon economic, market and
other conditions as in effect on, and the information made available to it as
of, the date hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in all
respects material to its analysis, the representations and warranties of Global
Sports, the Company and the Buyer contained in the Acquisition Agreement are
true and correct and that Global Sports, the Company and the Buyer will each
perform all of the covenants and agreements to be performed by it under the
Purchase Agreement and all conditions to the obligations of each of Global
Sports and the Buyer to consummate the Transaction will be satisfied without any
waiver thereof. Deutsche Bank has also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the Transaction will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which Global Sports is a party or is subject or by
which it is bound, no limitations, restrictions or conditions will be imposed or
amendments, modifications or waivers made that would have a material adverse
effect on Global Sports.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Global Sports and is not a recommendation to the stockholders of
Global Sports to approve the Transaction. This opinion is limited to the
fairness, from a financial point of view, to Global Sports of the Consideration
to be received by Global Sports for the Company in connection with the
Transaction, and Deutsche Bank expresses no opinion as to the merits of the
underlying decision by Global Sports to engage in the Transaction.
Deutsche Bank will be paid a fee for its services as financial advisor to Global
Sports in connection with the Transaction, a substantial portion of which is
contingent upon consummation of the Transaction. We are an affiliate of
Deutsche Bank AG (together with its affiliates, the "DB Group"). One or more
members of the DB Group have, from time to time, provided investment banking and
other financial services to Global Sports or its affiliates for which it has
received compensation, including representing Global Sports as exclusive sale
agent in its divestiture of its branded footwear business. In the ordinary
course of business, members of the DB Group may actively trade in the securities
and other instruments and obligations of Global Sports for their own accounts
and for the accounts of their customers.
<PAGE>
Board of Directors
Global Sports, Inc.
September 24, 1999
Page 3
Accordingly, the DB Group may at any time hold a long or short position in such
securities, instruments and obligations.
Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that the Consideration to be received by Global Sports for
the Company in connection with the Transaction is fair, from a financial point
of view, to Global Sports.
Very truly yours,
DEUTSCHE BANK SECURITIES INC.
<PAGE>
INDEMNIFICATION AGREEMENT
APPENDIX C
Parties: GLOBAL SPORTS, INC.,
- -------
a Delaware corporation (the "Company")
555 South Henderson Road
King of Prussia, PA 19406
_____________________ ("Indemnitee")
_____________________
_____________________
Date:
- ----
Background: The Company and Indemnitee recognize that in the present business
- ----------
environment, officers and directors of public companies are subject to the risk
of expensive corporate and other litigation. Indemnitee does not regard the
current protection provided by the Company as adequate given the present
circumstances and Indemnitee and other officers and directors of the Company may
not be willing to serve as officers and directors without adequate protection.
The Company desires to attract and retain the services of highly qualified
individuals, such as Indemnitee to serve as officers and/or directors of the
Company and to indemnify its officers and/or directors so as to provide them
with the maximum protection permitted by law.
INTENDING T0 BE LEGALLY BOUND, and in consideration of the mutual
agreements stated below and other good and valuable consideration, the Company
and Indemnitee agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) (i) by reason of the fact that Indemnitee is or was a
director, officer, employee, attorney, or agent of the Company, or any
subsidiary of the Company, (ii) by reason of any action or inaction on the part
of Indemnitee while an officer, director, employee, attorney or agent, or (iii)
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, in each case against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement (if such settlement is approved pursuant to Section 2(f) hereof)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create
a presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best
<PAGE>
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that Indemnitee's conduct was
unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor (i) by reason of the fact that Indemnitee is or was a director,
officer, employee, attorney or agent of the Company, or any subsidiary of the
Company, (ii) by reason of any action or inaction on the part of Indemnitee
while an officer, director, employee, attorney or agent, or (iii) by reason of
the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee, attorney or agent of another corporation,
partnership, joint venture, trust or other enterprise in each case against
expenses (including attorneys' fees) and amounts paid in settlement (if such
settlement is approved pursuant to Section 2(f) hereof) actually and reasonably
incurred by Indemnitee in connection with the defense or settlement of such
action or suit if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which Indemnitee shall have been adjudged to be liable to
the Company, unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that despite the adjudication of liability but in
view of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery of the State
of Delaware or such other court shall deem proper.
(c) Mandatory Indemnification. To the extent that Indemnitee has been
-------------------------
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1(a) and 1(b) or the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith. For purposes of this Section 1(c), the term "successful on
the merits or otherwise" shall include, but not be limited to, (i) any
termination, withdrawal or dismissal (with or without prejudice) of any claim,
action, suit or proceeding against Indemnitee without any express finding of
liability or guilt against him, or (ii) the expiration of a reasonable period of
time after the making of any claim or threat of an action, suit or proceeding
without the institution of the same and without any promise or payment made to
induce a settlement.
2. Expenses and Indemnification Procedure.
--------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof. For purposes of any advancement hereunder, the
Indemnitee shall be deemed to have acted (i) in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and (ii) with respect to any criminal action or procedure, to have had
no reasonable cause to believe his conduct was unlawful, if under either (i) or
(ii), his action is based on the records or books of account of the Company, or
the records or books of account of another corporation, partnership, joint
venture, trust or another enterprise (collectively, the "other enterprises"),
including financial
2
<PAGE>
statements, or on information supplied to him by the officers of the Company or
other enterprises in the course of their duties, or on the advice of legal
counsel for the Company or other enterprises or on information or records given
or reports made to the Company or other enterprises by an independent certified
public accountant or by an appraiser or other expert selected with reasonable
care by the Company or other enterprises. Indemnitee hereby undertakes to repay
such amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee no later than forty-five (45) days following delivery of a
written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed as provided in Section 14.
In addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 hereof and this Section 2 shall be made no later than forty-five (45)
days after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification is not paid
in full by the Company within forty-five (45) days after written request for
payment thereof has first been received by the Company, Indemnitee may, but need
not, at any time thereafter bring an action against the Company to recover the
unpaid amount of the claim and, subject to Section 13 hereof, Indemnitee shall
also be entitled to be paid for the expenses (including attorneys' fees) of
bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Company to indemnify Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the Company, and Indemnitee shall be
entitled to receive interim payments of expenses pursuant to Section 2(a) hereof
unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 2(b) hereof, the Company has directors' and
officers' liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in
3
<PAGE>
accordance with the procedures set forth in the respective policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. If the Company shall be obligated under
--------------------
Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee,
the Company, if appropriate, shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding; provided that (i) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the reasonable fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
(f) Settlements. The Company shall not be liable to Indemnitee under
-----------
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action
or claim in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor
Indemnitee will unreasonably withhold consent to any proposed settlement.
(g) Change In Control. If, at any time subsequent to the date of this
-----------------
Agreement, continuing directors do not constitute a majority of the members of
the Board of Directors, or there is otherwise a change in control of the Company
(as contemplated by Item 403(c) of Regulation S-K under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended), then
upon the request of Indemnitee, the Company shall cause the determination of
indemnification and advances required by Section 2 hereof to be made by a third-
party (mutually agreed upon by the parties). The fees and expenses incurred by
the third party in making the determination of indemnification and advances
shall be borne solely by the Company. If such third party is unwilling and/or
unable to make the determination of indemnification and advances, then the
Company shall cause the indemnification and advances to be made by a majority
vote or consent of a Board committee consisting solely of continuing directors.
For purposes of this Agreement, a "continuing director" means either a member of
the Board at the date of this Agreement or a person nominated to serve as a
member of the Board by a majority of the then-continuing directors.
3. Additional Indemnification Rights.
---------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company shall indemnify Indemnitee to the fullest extent permitted by law,
whether or not such indemnification is specifically authorized by the other
provisions of this Agreement, the Company's Certificate of Incorporation, the
Company's Bylaws or by statute. In the event of any change, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a
4
<PAGE>
Delaware corporation to indemnify a member of its board of directors or an
officer, such changes shall be, ipso facto, within the purview of Indemnitee's
rights and Company's obligations under this Agreement. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, such changes (to the extent not otherwise required by such law, statute
or rule to be applied to this Agreement) shall have no effect on this Agreement
or the parties' rights and obligations hereunder.
(b) Non-exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation or Bylaws, any
agreement, any vote of stockholders or disinterested directors, the Delaware
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office.
4. Continuation of Indemnity. All agreements and obligations of the
-------------------------
Company contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of the Company (or is or was serving at the
request of the Company as a director, officer, employee or agent of other
enterprises) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company, or
serving in any other capacity referred to herein.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not for the total amount thereof,
the Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that, in certain instances, federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken with the SEC to submit the question
of indemnification to a court in certain circumstances for a determination of
the Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
directors' and officers' liability insurance,
5
<PAGE>
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director, or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer, or one of the Company's key employees, if Indemnitee is not an officer
or director but is a key employee. Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or Indemnitee is covered by similar
insurance maintained by a parent of subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Notwithstanding any other provision herein to the
----------
contrary, the Company shall not be obligated pursuant to the terms of this
Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement, the Company's Certificate of Incorporation or Bylaws, any
agreement, any vote of stockholders or disinterested directors, the Delaware
General Corporation Law or any other statute or law, but such indemnification or
advancement of expenses may be provided by the Company in specified cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or other
enterprises; or
6
<PAGE>
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) Company. For purposes of this Agreement, references to the
-------
"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that if Indemnitee is or was a director, officer, employee,
attorney or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee,
attorney or agent of other enterprises, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) Other Definitions. For purposes of this Agreement, references to
-----------------
"other enterprises"shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to any
employee benefit plan; and references to "serving at the request of the Company"
shall include any service as a director, officer, employee, attorney or agent of
the Company which imposes duties on, or involves services by, Indemnitee with
respect to an employee benefit plan, its participants, or beneficiaries; and, if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Entire Understanding. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous, oral or written, express or
implied, agreements and understandings.
13. Attorneys' Fees. If any action is instituted by Indemnitee under this
---------------
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be
entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as
a part of such action, the court of competent jurisdiction determines that each
of the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous. In the event of an action instituted by or
in the name of the Company under this Agreement or to enforce or interpret any
of the terms of this Agreement, Indemnitee shall be entitled to be paid all
court costs and expenses, including attorneys' fees, incurred by Indemnitee in
defense of such action (including with respect to Indemnitee's counterclaims and
cross-claims made in such action), unless as a part of such action the court
determines that each of Indemnitee's material defenses to such action was made
in bad faith or was frivolous.
7
<PAGE>
14. Notice. All notices, consents or other communications required or
------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (i) when delivered personally, (ii) three
business days after being mailed by first class certified mail, return receipt
requested, postage prepaid, or (iii) one business day after being sent by a
nationally recognized express courier service, postage or delivery charges
prepaid, to the parties at their respective addresses stated on the first page
of this Agreement. Notices may also be given by prepaid telegram or facsimile
and shall be effective on the date transmitted if confirmed within 24 hours
thereafter by a signed original sent in the manner provided in the preceding
sentence. Either party may change its address for notice and the address to
which copies must be sent by giving notice of the new addresses to the other
party in accordance with this Section 14, provided that any such change of
address notice shall not be effective unless and until received.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the substantive laws (and not the choice of laws rules) of the
State of Delaware applicable to contracts made and to be performed entirely
therein. Each of the parties irrevocably consents to service of process by
certified mail, return receipt requested, postage prepaid, to the address at
which such party is to receive notice in accordance herewith. Each of the
parties irrevocably consents to the jurisdiction of the state courts in Delaware
and the federal courts in Delaware in any and all actions between the parties
arising hereunder.
16. Amendment and Waiver. This Agreement shall not be amended, modified
--------------------
or terminated unless in writing and signed by Indemnitee and a duly authorized
representative of Company other than Indemnitee. No waiver with respect to this
Agreement shall be enforceable unless in writing and signed by the parties
against which enforcement is sought (which, in the case of the Company, must be
a duly authorized representative of the Company other than Indemnitee). Neither
the failure nor any delay on the part of either party to exercise any right,
remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege preclude any other or further exercise of the same or of any other
right, remedy, power or privilege, nor shall any waiver of any right, remedy,
power or privilege with respect to any occurrence by construed as a waiver of
such right, remedy, power or privilege with respect to any other occurrence.
17. Section Headings. Any headings preceding the text of any of the
----------------
Sections or Subsections of this Agreement are inserted for convenience of
reference only, and shall neither constitute a part of this Agreement nor affect
its construction, meaning, or effect.
18. Definitions. As used herein, the term "Person" means any individual,
-----------
sole proprietorship, joint venture, partnership, corporation, association,
cooperative, trust, estate, government body, administrative agency, regulatory
authority or other entity of any nature.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GLOBAL SPORTS, INC.
By: ________________________ ________________________
Name: INDEMNITEE
Title:
9
<PAGE>
EXHIBIT (A)
SEPTEMBER 23, 1999
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF REGISTRATION UNDER SAID ACT AND ALL OTHER APPLICABLE SECURITIES LAWS OR
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
$5,000,000 ______________, ____
GEN-X ACQUISITION (U.S.), INC.
NON-NEGOTIABLE SUBORDINATED PROMISSORY NOTE
FOR VALUE RECEIVED, and subject to the terms hereof, Gen-X Acquisition
(U.S.), Inc., a Washington corporation (the "Company"), hereby promises to pay
to the order of Global Sports, Inc. ("Holder"), the principal amount of FIVE
MILLION DOLLARS ($5,000,000). This non-negotiable subordinated promissory note
(the "Note") is being delivered by the Company to Holder as partial
consideration for the purchase by the Company of the capital stock of Gen-X
Holdings Inc. pursuant to the terms of a certain Acquisition Agreement (the
"Acquisition Agreement"), dated as of September 24, 1999, among Holder, the
Company, Canadian Acquisition Co. ("Canadian Co."), DMJ Financial, Inc., James
J. Salter and Kenneth J. Finkelstein.
The principal balance of this Note shall be paid by the Company to
Holder as follows: twenty-nine (29) equal consecutive quarterly installments of
$166,666.66 commencing January 1, 2000, and continuing each April 1, July 1,
October 1 and January 1 thereafter with a final installment of $166,666.86 due
on April 1, 2007.
The Company shall prepay its obligations under this Note as follows:
(a) If, during the period beginning on the date hereof and
ending on the date when the Company has completely and indefeasibly satisfied
its obligations under this Note, the Company and/or any of its Subsidiaries (as
defined in the Acquisition Agreement) issue any debt or equity securities, or
any options, warrants or rights to acquire any debt or equity securities,
resulting in cumulative, aggregate gross proceeds to the Company and/or its
Subsidiaries of $10,000,000 or more, then the Company shall pay to Holder
contemporaneously with each payment of such proceeds to the Company or its
Subsidiaries, the lesser of (A) the aggregate of the outstanding principal of
(and premium, if any, on), interest on and all other amounts due under this
Note, and (B) fifty (50%) percent of such proceeds in excess of $10,000,000. Any
such payment by the Company shall be applied as follows: (A) first, to any and
all fees, costs and expenses that are due under this Note; (B) second, to any
and all interest due under this Note; and (C) third, pro rata to the remaining
installments of principal payable under this Note.
(b) If the Company and/or any of its Subsidiaries or
shareholders consummates a Sale Transaction (as defined in the Acquisition
Agreement), then all amounts due
<PAGE>
under this Note shall automatically become and be due and payable immediately;
provided, however, that such amounts shall not automatically become and be due
and payable immediately if (i) the Sale Transaction Consideration (as defined in
the Acquisition Agreement) consists solely of equity securities of the entity
with whom the Company, its Subsidiaries and/or shareholders, as the case may be,
has entered into such Sale Transaction, (ii) following the consummation of such
Sale Transaction, the payment of this Note shall not be subordinated to more
than the greater of: (A) Forty Million Dollars ($40,000,000) and (B) three times
the consolidated earnings of the Company and its Subsidiaries, before interest,
taxes, depreciation and amortization, calculated on a trailing twelve-month
basis (or, if the Sale Transaction results from a reorganization, merger,
consolidation or other business combination, calculated on a historical basis
for the twelve-month period ending on the date the Sale Transaction is
consummated) and in accordance with GAAP, consistently applied, and (iii)
following the consummation of such Sale Transaction, the Company and its
Subsidiaries are in compliance with the financial covenants set forth in Section
4.4 of that certain Subordinated Note Agreement (the "Note Agreement"), dated as
of the date hereof, among Holder, the Company, Canadian Co., Gen-X Holdings
Inc., Gen-X Equipment Inc., Gen-X Holdings Ltd. and Gen-X Equipment A.G.
(c) Payment of Interest. Except as otherwise provided herein,
-------------------
interest shall accrue on the outstanding principal balance of this Note on a
daily basis at the rate of 5% per annum from the date hereof until the date
which is five (5) years from the date hereof, and at the rate of 7% per annum
thereafter. Upon the occurrence of an Event of Default, interest shall accrue
on the outstanding principal balance of this Note at the rate of 12% per annum
from the occurrence of such Event of Default until the Company has cured such
Event of Default. Interest shall be calculated on the basis of a year of 360
days but charged for the actual number of days elapsed. Interest accrued as of
the date of each payment of principal shall be paid together with each payment
of principal.
All amounts payable by the Company to Holder under this Note shall be made
in immediately available funds by bank certified, treasurer's or cashier's check
and shall be payable at Holder's place of business located at 555 South
Henderson Road, King of Prussia, Pennsylvania 19406 or at such other address of
which Holder shall give written notice to the Company.
If an Event of Default occurs and is continuing under the Note Agreement,
Holder may exercise the rights and remedies set forth in the Note Agreement. The
obligations evidenced by this Note are secured by the real and personal property
Collateral, the Pledged Shares and the Trademarks described in the Note
Agreement.
The Company hereby waives protest, demand, notice of nonpayment and all
other notices in connection with the delivery, acceptance, performance or
enforcement of this Note.
THE COMPANY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY PROTHONOTARY, CLERK OF
COURT OR ANY ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR THE COMPANY IN SUCH
COURT AT ANY TIME AND (1) TO ENTER JUDGMENT AGAINST THE COMPANY, AND/OR (2) TO
SIGN FOR THE COMPANY AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN
AMICABLE ACTION OR
2
<PAGE>
ACTIONS TO CONFESS JUDGMENT AGAINST THE COMPANY, IN EITHER CASE WITHOUT PROCESS,
IN FAVOR OF PAYEE, WITH OR WITHOUT THE FILING OF AN AVERMENT OR DECLARATION OF
DEFAULT, FOR SUCH AMOUNT AS MAY APPEAR TO BE UNPAID HEREUNDER, TOGETHER WITH ALL
REASONABLE COSTS, EXPENSES AND FEES OF SUIT AND COLLECTION (INCLUDING WITHOUT
LIMITATION REASONABLE ATTORNEYS' FEES); THE COMPANY HEREBY CONSENTS TO IMMEDIATE
EXECUTION UPON SUCH JUDGMENT, WITH RELEASE OF ERRORS, WITHOUT ANY STAY OF
EXECUTION OR RIGHT OF APPEAL, AND THE COMPANY HEREBY WAIVES AND RELEASES THE
BENEFIT OF ALL APPRAISEMENT, OR EXEMPTION LAWS OF ANY STATE NOW IN FORCE OR
HEREINAFTER IN EFFECT.
THE COMPANY FURTHER IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF ANY
COURT OF RECORD TO APPEAR FOR AND ENTER JUDGMENT AGAINST THE COMPANY AND IN
FAVOR OF PAYEE IN AN AMICABLE ACTION OF REPLEVIN OR ANY OTHER ACTION TO RECOVER
POSSESSION OF ANY COLLATERAL SECURING THIS NOTE.] RECOVER POSSESSION OF ANY
COLLATERAL SECURING THIS NOTE. IF A COPY OF THIS AGREEMENT, VERIFIED BY
AFFIDAVIT OF AN OFFICER OF GLOBAL SHALL BE FILED IN ANY PROCEEDING OR ACTION
WHEREIN JUDGMENT IS TO BE CONFESSED, IT SHALL NOT BE NECESSARY TO FILE THE
ORIGINAL HEREOF AND SUCH VERIFIED COPY SHALL BE SUFFICIENT WARRANT FOR ANY
ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR AND CONFESS JUDGMENT AGAINST THE
COMPANY AS PROVIDED HEREIN. JUDGMENT MAY BE CONFESSED FROM TIME TO TIME UNDER
THE AFORESAID POWERS WHICH SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF. IT IS
HEREBY ACKNOWLEDGED THAT THE CONFESSION OF JUDGMENT PROVISIONS HEREIN CONTAINED
WHICH AFFECT AND WAIVE CERTAIN LEGAL RIGHTS OF THE COMPANY HAVE BEEN READ,
UNDERSTOOD AND VOLUNTARILY AGREED TO BY THE COMPANY.
THIS NOTE SHALL BE GOVERNED AND CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
This Note and all of the terms and provisions therein shall be binding upon
the Company and its successors and shall inure to the benefit of and be
enforceable by Holder and its successors and assigns; provided, however, that
Holder shall not assign any of its rights, title or interest in this Note to an
entity that conducts a business competitive with the action and off-price
sporting goods business conducted by the Company and its Subsidiaries on the
date hereof, without the express prior written consent of the Company.
The provisions of this Note are severable and the invalidity or
unenforceability of any provision shall not alter or impair the remaining
provisions of this Note.
3
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Company
has caused these presents to be executed the day and year first above written.
ATTEST: GEN-X ACQUISITION (U.S.), INC.
______________________________ By: ______________________________
Name: Name:
Title: Title:
4
<PAGE>
EXHIBIT (B)
September 23, 1999
$5,000,000 ______________, ____
GEN-X ACQUISITION (CANADA) INC.
NON-NEGOTIABLE SUBORDINATED PROMISSORY NOTE
FOR VALUE RECEIVED, and subject to the terms hereof, Gen-X Acquisition
(Canada) Inc., an Ontario corporation (the "Company"), hereby promises to pay to
the order of Global Sports, Inc. ("Holder"), the principal amount of FIVE
MILLION DOLLARS ($5,000,000). This non-negotiable subordinated promissory note
(the "Note") is being delivered by the Company to Holder as partial
consideration for the purchase by the Company of the capital stock of Gen-X
Holdings Inc. pursuant to the terms of a certain Acquisition Agreement (the
"Acquisition Agreement"), dated as of September 24, 1999, among Holder, the
Company, U.S. Acquisition Co. ("U.S. Co."), DMJ Financial, Inc., James J. Salter
and Kenneth J. Finkelstein.
The principal balance of this Note shall be paid by the Company to
Holder as follows: twenty-nine (29) equal consecutive quarterly installments of
$166,666.66 commencing January 1, 2000, and continuing each April 1, July 1,
October 1 and January 1 thereafter with a final installment of $166,666.86 due
on April 1, 2007.
The Company shall prepay its obligations under this Note as follows:
(a) If, during the period beginning on the date hereof and ending
on the date when the Company has completely and indefeasibly satisfied its
obligations under this Note, the Company and/or any of its Subsidiaries (as
defined in the Acquisition Agreement) issue any debt or equity securities, or
any options, warrants or rights to acquire any debt or equity securities,
resulting in cumulative, aggregate gross proceeds to the Company and/or its
Subsidiaries of $10,000,000 or more, then the Company shall pay to Holder
contemporaneously with each payment of such proceeds to the Company or its
Subsidiaries, the lesser of (A) the aggregate of the outstanding principal of
(and premium, if any, on), interest on and all other amounts due under this
Note, and (B) fifty (50%) percent of such proceeds in excess of $10,000,000. Any
such payment by the Company shall be applied as follows: (A) first, to any and
all fees, costs and expenses that are due under this Note; (B) second, to any
and all interest due under this Note; and (C) third, pro rata to the remaining
installments of principal payable under this Note.
(b) If the Company and/or any of its Subsidiaries or shareholders
consummates a Sale Transaction (as defined in the Acquisition Agreement), then
all amounts due under this Note shall automatically become and be due and
payable immediately; provided, however, that such amounts shall not
automatically become and be due and payable immediately if (i) the Sale
Transaction Consideration (as defined in the Acquisition Agreement) consists
solely of equity securities of the entity with whom the Company, its
Subsidiaries and/or shareholders, as the case may be, has entered into such Sale
Transaction, (ii) following the
<PAGE>
consummation of such Sale Transaction, the payment of this Note shall not be
subordinated to more than the greater of: (A) Forty Million Dollars
($40,000,000) and (B) three times the consolidated earnings of the Company and
its Subsidiaries, before interest, taxes, depreciation and amortization,
calculated on a trailing twelve-month basis (or, if the Sale Transaction results
from a reorganization, merger, consolidation or other business combination,
calculated on a historical basis for the twelve-month period ending on the date
the Sale Transaction is consummated) and in accordance with GAAP, consistently
applied, and (iii) following the consummation of such Sale Transaction, the
Company and its Subsidiaries are in compliance with the financial covenants set
forth in Section 4.4 of that certain Subordinated Note Agreement (the "Note
Agreement"), dated as of the date hereof, among Holder, the Company, U.S. Co.,
Gen-X Holdings Inc., Gen-X Equipment Inc., Gen-X Holdings Ltd. and Gen-X
Equipment A.G.
(c) Payment of Interest. Except as otherwise provided herein,
-------------------
interest shall accrue on the outstanding principal balance of this Note on a
daily basis at the rate of 5% per annum from the date hereof until the date
which is five (5) years from the date hereof, and at the rate of 7% per annum
thereafter. Upon the occurrence of an Event of Default, interest shall accrue on
the outstanding principal balance of this Note at the rate of 12% per annum from
the occurrence of such Event of Default until the Company has cured such Event
of Default. Interest shall be calculated on the basis of a year of 360 days but
charged for the actual number of days elapsed. Interest accrued as of the date
of each payment of principal shall be paid together with each payment of
principal. For purposes of the Interest Act (Canada), (i) whenever any interest
under any this Note is calculated using a rate based on a year of 360 days, the
rate determined pursuant to such calculation, when expressed as an annual rate,
is equivalent to (x) the applicable rate based on a year of 360 days, (y)
multiplied by the actual number of days in the calendar year in which the period
for which such interest is payable (or compounded) ends, and (z) divided by 360;
(ii) the principle of deemed reinvestment of interest does not apply to any
interest calculation under this Note; and (iii) the rates of interest stipulated
in this Note are intended to be nominal rates and not effective rates or yields.
All amounts payable by the Company to Holder under this Note shall be made
in immediately available funds by bank certified, treasurer's or cashier's check
and shall be payable at Holder's place of business located at 555 South
Henderson Road, King of Prussia, Pennsylvania 19406 or at such other address of
which Holder shall give written notice to the Company.
If an Event of Default occurs and is continuing under the Note Agreement,
Holder may exercise the rights and remedies set forth in the Note Agreement.
The obligations evidenced by this Note are secured by the real and personal
property Collateral, the Pledged Shares and the Trademarks described in the Note
Agreement.
The Company hereby waives protest, demand, notice of nonpayment and all
other notices in connection with the delivery, acceptance, performance or
enforcement of this Note.
THE COMPANY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY PROTHONOTARY, CLERK
OF COURT OR ANY ATTORNEY OF ANY COURT OF
2
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RECORD TO APPEAR FOR THE COMPANY IN SUCH COURT AT ANY TIME AND (1) TO ENTER
JUDGMENT AGAINST THE COMPANY, AND/OR (2) TO SIGN FOR THE COMPANY AN AGREEMENT
FOR ENTERING IN ANY COMPETENT COURT AN AMICABLE ACTION OR ACTIONS TO CONFESS
JUDGEMENT AGAINST THE COMPANY, IN EITHER CASE WITHOUT PROCESS, IN FAVOR OF
PAYEE, WITH OR WITHOUT THE FILING OF AN AVERMENT OR DECLARATION OF DEFAULT, FOR
SUCH AMOUNT AS MAY APPAER TO BE UNPAID HEREUNDER, TOGETHER WITH ALL REASONABLE
COSTS, EXPENSES AND FEES OF SUIT AND COLLECTION (INCLUDING WITHOUT LIMITATION
REASONABLE ATTORNEY'S FEES); THE COMPANY HEREBY CONSENTS TO IMMEDIATE EXECUTION
UPON SUCH JUDGEMENT, WITH RELEASE OF ERRORS, WITHOUT ANY STAY OF EXECUTION OR
RIGHT OF APPEAL, AND THE COMPANY HEREBY WAIVES AND RELEASES THE BENEFIT OF ALL
APPRAISEMENT, OR EXEMPTION LAWS OF ANY STATE NOW IN FORCE OR HEREINAFTER IN
EFFECT.
THE COMPANY FURTHER IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF ANY
COURT OF RECORD TO APPEAR FOR AND ENTER JUDGEMENT AGAINST THE COMPANY AND IN
FAVOR OF PAYEE IN AN AMICABLE ACTION OF REPLEVIN OR ANY OTHER ACTION TO RECOVER
POSSESSION OF ANY COLLATERAL SECURING THIS NOTE. RECOVER POSSESSION OF ANY
COLLATERAL SECURING THIS NOTE. IF A COPY OF THIS AGREEMENT, VERIFIED BY
AFFIDAVIT OF AN OFFICER OF GLOBAL SHALL BE FILED IN ANY PROCEEDING OR ACTION
WHEREIN JUDGMENT IS TO BE CONFESSED, IT SHALL NOT BE NECESSARY TO FILE THE
ORIGINAL HEREOF AND SUCH VERIFIED COPY SHALL BE SUFFICIENT WARRANT FOR ANY
ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR AND CONFESS JUDGMENT AGAINST THE
COMPANY AS PROVIDED HEREIN. JUDGMENT MAY BE CONFESSED FROM TIME TO TIME UNDER
THE AFORESAID POWERS WHICH SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF. IT IS
HEREBY ACKNOWLEDGED THAT THE CONFESSION OF JUDGMENT PROVISIONS HEREIN CONTAINED
WHICH AFFECT AND WAIVE CERTAIN LEGAL RIGHTS OF THE COMPANY HAVE BEEN READ,
UNDERSTOOD AND VOLUNTARILY AGREED TO BY THE COMPANY.
THIS NOTE SHALL BE GOVERNED AND CONSTRUED UNDER THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
This Note and all of the terms and provisions therein shall be binding upon
the Company and its successors and shall inure to the benefit of and be
enforceable by Holder and its successors and assigns; provided, however, that
Holder shall not assign any of its rights, title or interest in this Note to an
entity that conducts a business competitive with the action and off-price
sporting goods business conducted by the Company and its Subsidiaries on the
date hereof, without the express prior written consent of the Company.
3
<PAGE>
The provisions of this Note are severable and the invalidity or
unenforceability of any provision shall not alter or impair the remaining
provisions of this Note.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Company
has caused these presents to be executed the day and year first above written.
ATTEST: GEN-X ACQUISITION (CANADA) INC.
______________________________ By: ______________________________
Name: Name:
Title: Title:
4
<PAGE>
EXHIBIT (L)
October 8, 1999
SUBORDINATED NOTE AGREEMENT
---------------------------
Parties: GLOBAL SPORTS, INC.,
a Delaware corporation ("Global")
555 S. Henderson Road
King of Prussia, PA 19406
GEN-X ACQUISITION (U.S.), INC.,
a Washington corporation ("Buyer")
701 5th Avenue
Suite 3300
Seattle, Washington 98104-7082
GEN-X ACQUISITION (CANADA) INC.,
an Ontario corporation ("Canadian Co.")
25 Vanley Crescent
North York, Ontario M3J 2B7
Canada
GEN-X HOLDINGS INC.,
a Washington corporation ("Gen-X Holdings")
25 Vanley Crescent
North York, Ontario M3J2B7
Canada
GEN-X EQUIPMENT INC.,
an Ontario corporation ("Gen-X Equipment")
25 Vanley Crescent
North York, Ontario M3J2B7
Canada
GEN-X EQUIPMENT LTD.,
a Washington corporation ("Gen-X Ltd.")
P.O. Box 34936
Seattle, Washington
GEN-X EQUIPMENT A.G.,
a Swiss corporation ("Gen-X A.G.")
Neugasse 29
6301 Zug Switzerland
Date: ______________, _____
<PAGE>
Background. Global, Buyer, Canadian Co., DMJ Financial Inc. ("DMJ"), James J.
Salter ("Salter") and Kenneth J. Finkelstein ("Finkelstein") are parties to an
Acquisition Agreement, dated as of September 24, 1999 (the "Acquisition
Agreement"), pursuant to which (i) Buyer acquired all of the issued and
outstanding shares of capital stock of Gen-X Holdings in exchange for, among
other things: (a) a cash payment in the amount of Six Million Forty Thousand
Dollars ($6,040,000); (b) a promissory note (the "Promissory Note") in the
principal amount of Five Million Dollars ($5,000,000); and (c) the assumption of
Global's non-negotiable subordinated notes in the original aggregate principal
amount of Three Million Nine Hundred Sixty Thousand Dollars ($3,960,000) payable
to Gen-X Holdings, dated as of the Closing Date, together with all accrued and
unpaid interest thereon, and (ii) Canadian Co. acquired all of the issued and
outstanding shares of capital stock of Gen-X Equipment in exchange for, among
other things, a promissory note in the principal amount of Five Million Dollars
($5,000,000).
As an inducement to Global entering into the Acquisition Agreement,
Canadian Co., Gen-X Holdings, Gen-X Equipment, Gen-X Ltd. and Gen-X A.G.
(collectively, "Guarantors" and individually, a "Guarantor") have agreed to
guarantee the obligations of Buyer under the Promissory Note. Buyer and the
Guarantors are collectively referred to as "Obligors" and individually as an
"Obligor". Any capitalized terms not defined herein shall have the meaning
ascribed to such terms in the Acquisition Agreement.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
SECTION 1 - DEFINITIONS
As used in this Agreement, the following terms have the following
respective meanings:
1.1 Adjusted Debt. Indebtedness (as defined in the General Security
-------------
Agreement, dated June 27, 1996, between C.A.S. Sports International Inc.
(predecessor to Gen-X Equipment) and Hongkong Bank of Canada, as amended from
time to time), plus the aggregate redemption price of all issued and outstanding
shares of Buyer's Series A Preferred Stock, plus any and all amounts due under
the Promissory Note, plus any and all amount due under the Promissory Note (the
"Canadian Co. Promissory Note") in the original principal amount of $5,000,000,
executed by Canadian Co. in favor of Global.
1.2 Capitalized Lease Obligations. Any Indebtedness represented by
-----------------------------
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, consistently applied.
1.3 Capital Stock. Any and all shares, interests, participation or other
-------------
equivalents (however designated) of capital stock of a corporation, any and all
other ownership interests in a Person (other than a corporation) and any and all
warrants or options to purchase any of the foregoing.
2
<PAGE>
1.4 Code. Internal Revenue Code of 1986, and any regulations thereunder,
----
all as may be amended from time to time.
1.5 Collateral. All of the Obligors' Property and interests in Property
----------
now owned or hereafter acquired, created or arising upon which a Lien is created
or purported to be created by the Security Agreements.
1.6 Consolidated Current Assets. The aggregate amount, at any date, of
---------------------------
all current assets of the Obligors at such date, computed and consolidated in
accordance with GAAP.
1.7 Consolidated Current Liabilities. The aggregate amount, at any date,
--------------------------------
of all current liabilities of the Obligors at such date, computed and
consolidated in accordance with GAAP.
1.8 Adjusted Debt-to-Tangible Net Worth Ratio. The ratio of Adjusted Debt
-----------------------------------------
to Tangible Net Worth (as hereafter defined).
1.9 Default. Any event, act, condition or occurrence which with notice,
-------
or lapse of time or both, would constitute an Event of Default hereunder.
1.10 Event of Default. As defined in Section 6.1.
----------------
1.11 GAAP. In respect of a United States entity, generally accepted
----
accounting principles under United States accounting rules and regulations, as
in effect from time to time, consistently applied and, in respect of a Canadian
entity, accounting principles generally accepted in Canada, including those set
out in the Handbook of the Canadian Institute of Chartered Accountants, at the
relevant time, applied on a consistent basis.
1.12 Governmental Authority. Any government or political subdivision, or
----------------------
any agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury, or arbitration
(to the extent having jurisdiction over any of the Obligors, whether foreign or
domestic).
1.13 Indebtedness. Of any Person at any date, without duplication, (i) all
------------
obligations of such Person for borrowed money (including, with respect to the
Obligors, the Note Agreement Obligations) or for the deferred purchase price of
property or services (other than current trade liabilities incurred in the
ordinary course of business and payable in accordance with customary practices),
(ii) any other Indebtedness of such Person which is evidenced by a note, bond,
debenture or similar instrument, (iii) all Capitalized Lease Obligations of such
Person, (iv) the face amount of all letters of credit issued for the account of
such Person and all drafts drawn thereunder which have not been reimbursed and
all obligations of such Person with respect to acceptances or similar
obligations issued for the account of such Person, (v) all guarantees of such
Person, and (vi) all liabilities secured by any Lien on any property owned by
such Person even though such Person has not assumed or otherwise become liable
for the payment thereof.
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1.14 Lien. Any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever including, without limitation, any
conditional sale or other title retention agreement and any Capitalized Lease
Obligation having substantially the same economic effect as any of the
foregoing.
1.15 Permitted Liens.
---------------
(a) Liens for taxes not yet due or which are being actively contested
in good faith by appropriate proceedings and for which adequate reserves have
been established in accordance with GAAP.
(b) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other similar Persons and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or being
contested in good faith, if such reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made therefor.
(c) Liens made to secure performance of bids, tenders, contracts
(other than repayment of borrowed money), or leases, or to secure statutory
obligations, surety or appeal bonds, or indemnity, performance or other similar
bonds in the ordinary course of business.
(d) Liens made to secure Senior Debt.
(e) Liens or deposits made to secure payment of workers'
compensation, or in connection with the participation in any fund in connection
with workers' compensation, unemployment insurance, pensions or other social
security programs.
(f) Liens on the Collateral existing on the date hereof and set forth
on Schedule 1.15(f).
----------------
(g) Liens to secure the obligations of Gen-X Holdings and/or Gen-X
Equipment to DMJ in connection with the purchase by Gen-X Holdings and/or Gen-X
Equipment of Buyer's Series A Preferred Stock pursuant to a certain Preferred
Stock Purchase Agreement (the "Preferred Stock Purchase Agreement"), dated as of
the date hereof, among DMJ, Gen-X Holdings and Gen-X Equipment.
1.16 Person. Any individual, sole proprietorship, joint venture,
------
partnership, corporation, association, cooperative, trust, estate, governmental
body, administrative agency, regulatory authority or other entity of any nature.
1.17 Pledged Stock. All of the Capital Stock in the Subsidiaries of the
-------------
Obligors, upon which a Lien is created or purported to be created by the Pledge
Agreement.
1.18 Note Agreement Obligations. All existing and future debts,
--------------------------
liabilities and obligations of every kind or nature at any time owing by
Obligors, or any of them, to Global pursuant to this
4
<PAGE>
Agreement, the Promissory Note or the Guarantees, whether joint or several,
related or unrelated, primary or secondary, matured or contingent, due or to
become due, and whether principal, interest, fees, expenses, indemnification
obligations hereunder (specifically including debts, liabilities and obligations
arising or occurring after the commencement of any bankruptcy, insolvency or
similar proceeding with respect to any Obligor, whether or not a claim for such
post-commencement obligation is allowed), and any extensions, modifications,
substitutions, increases and renewals thereof; the payment of all amounts
advanced by Global to preserve, protect and enforce rights hereunder and in the
Collateral, the Pledged Shares and the Trademarks; and all expenses incurred by
Global.
1.19 Property - Any interest of any Obligor in any kind of property or
--------
asset, whether real, personal or mixed, or tangible or intangible including,
without limitation, real property.
1.20 Restricted Payments. By any Person means (i) any dividend or other
-------------------
distribution on any shares of the Capital Stock (other than dividends or
distributions payable solely in shares of such Capital Stock) of such Person,
(ii) any payment on account of the purchase, redemption, retirement or
acquisition of (a) any shares of the Capital Stock of such Person or (b) any
option, warrant, convertible or exchangeable security or other right to acquire
shares of the Capital Stock of such Person, and (iii) any loans or advances
(other than salaries) to any shareholder(s) of such Person or its Affiliates;
provided, however, Restricted Payments shall not include any such dividends,
distributions, payments, loans or advances by one Obligor to another Obligor.
1.21 Restructuring Plan. The restructuring plan set forth on Schedule
------------------ --------
1.21.
- ----
1.22 Security Documents. Collectively, the Security Agreements, the
------------------
Pledge Agreement, the Trademark Security Agreement and all other security
documents hereafter delivered to Global granting a Lien on any assets or
Property of any Obligor or any other Person in favor of Global to secure the
Note Agreement Obligations or any guarantee of the Note Agreement Obligations,
as the same may be amended, modified, restated or supplemented from time to
time.
1.23 Senior Debt. The principal of, interest on and, if applicable, any
-----------
premium on (i) the aggregate Indebtedness of the Obligors for money borrowed
from a bank, finance company, credit company, savings and loan association,
trust company, insurance company or similar financial institution, (ii)
purchase money secured debt of the Obligors, (iii) the aggregate obligations of
the Obligors as lessees under leases of real or personal property which are
treated as Capital Lease Obligations under GAAP, (iv) any other Indebtedness for
money borrowed by the Obligors which the Obligors and Global from time to time
expressly and specifically agree in writing shall constitute "Senior Debt", and
(v) any deferrals, renewals, refinancings or extensions of any of the foregoing;
provided, however, that Senior Debt shall not at any time exceed the greater of
(the "Priority Limit"): (A) Forty Million Dollars ($40,000,000), less the
aggregate redemption price of all issued and outstanding shares of Buyer's
Series A Preferred Stock and (B) three times the earnings of the Obligors, on a
consolidated basis, before interest, taxes, depreciation and amortization,
calculated on a trailing twelve-month basis in accordance with GAAP, less the
aggregate redemption price of all issued and outstanding shares of Buyer's
Series A Preferred Stock.
5
<PAGE>
1.24 Subordinated Note Documents. This Agreement, the Promissory Note,
---------------------------
the Guarantees, the Security Documents and all agreements, instruments and
documents executed and/or delivered in connection therewith, all as may be
amended, modified, restated or supplemented from time to time.
1.25 Subsidiary. With respect to any Person, any other Person as to which
----------
such person directly or indirectly owns or has the power to vote, or to exercise
a controlling influence with respect to, 50% or more of the securities or
interests of any class of such other person which are entitled to vote for the
election of directors or others performing similar functions.
1.26 Tangible Net Worth. All preferred and common equity, plus funded
------------------
indebtedness ranking junior to the Promissory Note, plus deferred revenues,
including the aggregate redemption price of all issued and outstanding shares of
Buyer's Series A Preferred Stock (which amount shall not exceed $3,960,000),
less any and all intangible assets.
1.27 Tax. (a) Any foreign, federal, provincial, state or local income,
---
earnings, profits, gross receipts, franchise, capital stock, net worth, sales,
use, occupancy, general property, real property, personal property, intangible
property, transfer, fuel, excise, payroll, withholding, unemployment
compensation, social security or other tax of any nature, (b) any foreign,
federal, state, provincial or local organization fee, qualification fee, annual
report fee, filing fee, occupation fee, assessment, sewer rent or other fee or
charge of any nature, or (c) any deficiency, interest or penalty imposed with
respect to any of the foregoing.
1.28 Trademarks. All of the trademarks, servicemarks and tradenames of
----------
the Obligors listed on Schedule 1.27 attached hereto and made a part hereof,
-------------
upon which a Lien is created or purported to be created by the Trademark
Security Agreement.
1.29 Working Capital Ratio. The ratio of Consolidated Current Assets to
---------------------
Consolidated Current Liabilities.
SECTION 2 - OBLIGATIONS
2.1 Promissory Note. In connection with the transactions contemplated by
---------------
the Acquisition Agreement, Buyer hereby delivers to Global, duly executed by
Buyer as of the date hereof, the Promissory Note in the form attached hereto as
Exhibit A.).
- ---------
(a) Payment of Principal. Except as otherwise provided herein, the
--------------------
principal balance of the Promissory Note shall be paid by Buyer to Global as
follows: twenty-nine (29) equal consecutive quarterly installments of
$166,666.66 commencing January 1, 2000, and continuing each April 1, July 1,
October 1 and January 1 thereafter with a final installment of $166,666.86 due
on April 1, 2007.
(b) Mandatory Prepayments. Buyer shall prepay its obligations under
---------------------
the Promissory Note as follows:
6
<PAGE>
(i) If, during the period beginning on the date hereof and ending
on the date when Buyer has completely and indefeasibly satisfied its obligations
under the Promissory Note, Buyer and/or any of its Subsidiaries issue any debt
or equity securities, or any options, warrants or rights to acquire any debt or
equity securities, resulting in cumulative, aggregate gross proceeds to Buyer
and/or its Subsidiaries of $10,000,000 or more, then Buyer shall pay to Global
contemporaneously with each payment of such proceeds to Buyer or its
Subsidiaries, the lesser of (A) the aggregate of the outstanding principal of
(and premium, if any, on), interest on and all other amounts due under the
Promissory Note, and (B) fifty (50%) percent of such proceeds in excess of
$10,000,000. Any such payment by Buyer shall be applied as follows: (A) first,
to any and all fees, costs and expenses that are due under the Promissory Note;
(B) second, to any and all interest due under the Promissory Note; and (C)
third, pro rata to the remaining installments of principal payable under the
Promissory Note.
(ii) If any Obligor and/or any of its shareholders consummates a
Sale Transaction, then all amounts due under the Promissory Note shall
automatically become and be due and payable immediately; provided, however, that
such amounts shall not automatically become and be due and payable immediately
if (i) the Sale Transaction Consideration consists solely of equity securities
of the Person with whom such Obligor and/or shareholder, as the case may be, has
entered into such Sale Transaction, (ii) following the consummation of such Sale
Transaction, the payment of the Promissory Note shall not be subordinated to
more than the greater of: (A) Forty Million Dollars ($40,000,000) and (B) three
times the consolidated earnings of the Obligors, before interest, taxes,
depreciation and amortization, calculated on a trailing twelve-month basis (or,
if the Sale Transaction results from a reorganization, merger, consolidation or
other business combination, calculated on a historical basis for the twelve-
month period ending on the date the Sale Transaction is consummated) and in
accordance with GAAP, consistently applied, and (iii) following the consummation
of such Sale Transaction, Obligors are in compliance with the financial
covenants set forth in Section 4.4.
(c) Payment of Interest. Except as otherwise provided herein, interest
-------------------
shall accrue on the outstanding principal balance of the Promissory Note on a
daily basis at the rate of 5% per annum from the date hereof until the date
which is five (5) years from the date hereof, and at the rate of 7% per annum
thereafter. Upon the occurrence of an Event of Default, interest shall accrue on
the outstanding principal balance of the Promissory Note at the rate of 12% per
annum from the occurrence of such Event of Default until Buyer has cured such
Event of Default. Interest shall be calculated on the basis of a year of 360
days but charged for the actual number of days elapsed. Interest accrued as of
the date of each payment of principal shall be paid together with each payment
of principal.
(d) Place of Payment. All amounts payable by Buyer to Global under the
----------------
Promissory Note shall be made in immediately available funds and shall be
payable at Global's place of business located at 555 South Henderson Road, King
of Prussia, Pennsylvania 19406 or at such other address of which Global shall
give written notice to Buyer.
2.2 Guarantees. Each of the Guarantors hereby guarantees the obligations
----------
of Buyer to Global under the Promissory Note and, in connection therewith,
hereby delivers to Global, duly
7
<PAGE>
executed by such Guarantors as of the date hereof, the Guarantees in the form
attached hereto as Exhibit B. The obligations of the Guarantors with respect to
---------
the Promissory Note are subject to and governed by the terms and provisions of
this Agreement and the Guarantees.
2.3 Security Agreements. In order to secure the Note Agreement
-------------------
Obligations, each of the Obligors hereby assigns and grants to Global a
continuing Lien on and security interest in, upon and to the Collateral and, in
connection therewith, hereby delivers to Global, duly executed by each of the
Obligors as of the date hereof, the security agreements (the "Security
Agreements") in the forms attached hereto as Exhibit C. The assignment and
---------
grant of the Lien on and security interest in, upon and to the Collateral are
subject to and governed by the terms and provisions of this Agreement and the
Security Agreements. Global's rights under the Security Agreements are subject
to the terms and provisions of the Intercreditor Agreement (the "Intercreditor
Agreement"), dated as of the date hereof, by and among HSBC Bank Canada, Ride,
Inc., DMJ, Global, Buyer, Canadian Co., Gen-X Holdings, Gen-X Equipment and Gen-
X Ltd.
2.4 Pledge Agreement. In order to secure the Note Agreement Obligations,
----------------
each of the Obligors set forth on Schedule 2.4 hereby assigns, pledges,
------------
hypothecates, delivers and sets over to Global, the Pledged Shares and grants
to Global a continuing Lien on and security interest in, upon and to the Pledged
Shares and, in connection therewith, hereby delivers to Global, duly executed by
each of such Obligors as of the date hereof, the pledge agreement (the "Pledge
Agreement") in the form attached hereto as Exhibit D. The grant of the Lien on
---------
and security interest in, upon and to the Pledged Shares is subject to and
governed by the terms and provisions of this Agreement and the Pledge Agreement.
Global's rights under the Pledge Agreement are subject to the terms and
provisions of the Intercreditor Agreement.
2.5 Trademark Security Agreement. In order to secure the Note Agreement
----------------------------
Obligations, each of the Obligors set forth on Schedule 2.5 hereby grants to
------------
Global a continuing Lien on and security interest in, upon and to the Trademarks
and, in connection therewith, hereby delivers to Global, duly executed by each
of such Obligors as of the date hereof, the trademark security agreement (the
"Trademark Security Agreement") in the form attached hereto as Exhibit E. The
---------
grant of the Lien on and security interest in, upon and to the Trademarks is
subject to and governed by the terms and provisions of this Agreement and the
Trademark Security Agreement. Global's rights under the Trademark Security
Agreement are subject to the terms and provisions of the Intercreditor
Agreement.
2.6 Subordination.
-------------
(a) Each Obligor hereby agrees, and Global, by its acceptance agrees,
that the payment of the Note Agreement Obligations is hereby expressly made
subordinate and junior in right of payment to the prior payment of Senior Debt
of the Obligors as set forth in the Intercreditor Agreement. The Note Agreement
Obligations shall not be junior or subordinate to any Indebtedness of the
Obligors other than Senior Debt.
8
<PAGE>
(b) The provisions of this Section 2.6 are for the purpose of defining
the relative rights of the holders of Senior Debt and Global against the
Obligors and their Property. Nothing herein shall impair, as between any of the
Obligors and Global, the obligation of the Obligors to pay to Global the Note
Agreement Obligations in accordance with the terms and provisions of the
Subordinated Note Documents, nor shall anything herein prevent Global from
exercising all remedies otherwise permitted by applicable law upon default of
the Note Agreement Obligations.
(c) Upon the payment in full of all Senior Debt, Global shall be
subrogated to the rights of the holders of Senior Debt to receive payments or
distributions of assets of any of the Obligors applicable to Senior Debt until
the Note Agreement Obligations shall have been paid in full. For the purpose of
subrogation, no payments to the holders of Senior Debt of any cash, property or
securities that Global would be entitled to receive and retain but for the
provisions of this Section 2.6 shall, as between the Obligors and their
creditors (other than the holders of Senior Debt), on the one hand, and Global,
on the other, be deemed to be a payment by the Obligors with respect to the
Senior Debt.
(d) Notwithstanding anything in this Section 2.6 to the contrary, in
the event that payment or delivery of any cash, property or securities to Global
is authorized by a final non-appealable order or decree giving effect to the
subordination of the Note Agreement Obligations to Senior Debt, and made by a
court of competent jurisdiction in a liquidation or dissolution of any of the
Obligors or in a bankruptcy, reorganization, insolvency, receivership, or
similar proceedings under any applicable law, no payment or delivery of such
cash, property or securities payable or deliverable with respect to the Note
Agreement Obligations shall be made to Global, nor shall any payment or delivery
be made to holders of Senior Debt of securities that are issued and delivered to
Global pursuant to liquidation or dissolution of any of the Obligors or in a
bankruptcy, reorganization, insolvency, receivership, or similar proceedings, or
upon any merger, consolidation, sale, lease, transfer or other disposal not
prohibited by the provisions of this Agreement, by any of the Obligors, as
reorganized, or by the corporation succeeding to any such Obligors or acquiring
their Properties and assets, if such securities are subordinate and junior at
least to the extent provided in this Section 2.6 to the payment of all Senior
Debt then outstanding and to the payment of any securities that are issued in
exchange or substitution for any Senior Debt then outstanding.
2.7 Joint and Several Liability:
---------------------------
(a) Each of the Obligors shall be jointly and severally liable for all
Note Agreement Obligations.
(b) Each of the other Obligors hereby irrevocably authorizes Buyer to
give notices, make requests, make payments, receive payments and notices, give
receipts and otherwise take action on behalf of such Obligor under and with
respect to this Subordinated Note Agreements.
(c) Without limiting the effect of Section 7.7 hereof, to the extent
that mandatory and non-waivable provisions of applicable law (including but not
limited to any applicable business corporation laws) otherwise would render the
other Subordinated Note Documents invalid or unenforceable, such Obligor's
obligations hereunder and under the other Subordinated Note
9
<PAGE>
Documents shall be limited to the maximum amount which does not result in such
invalidity or unenforceability.
SECTION 3 -REPRESENTATIONS AND WARRANTIES
Knowing that Global is relying thereon, each Obligor, jointly and
severally, represents and warrants to Global as follows:
3.1 Corporate Organization and Validity .
-----------------------------------
(a) Each Obligor (i) is duly organized and validly existing under the
laws of its jurisdiction of organization, (ii) has all power and authority to
operate its business and own its Property and (iii) is duly qualified, is
validly existing and in good standing and has lawful power and authority to
engage in the business it conducts in each jurisdiction where the nature and
extent of its business requires qualification.
(b) The execution, delivery and performance of this Agreements and the
other Subordinated Note Documents by the Obligors (to the extent they are
parties thereto or bound thereby) and the consummation by them of the
transactions contemplated hereby and thereby, (i) do not constitute a breach or
violation of, or a default under, the certificate of incorporation or bylaws (or
other organization documents) of the Obligors, (ii) do not constitute a breach
or violation of, or a default under, any Contract to which the Obligors are
parties or by which the Obligors are bound, and (iii) do not constitute a
violation of any Law or Judgment applicable to the Obligors; except in the case
of clauses (ii) and (iii) for breaches, violations or defaults which would not
have a material adverse effect on the ability of Obligors to consummate the
transactions contemplated by this Agreement and the other Subordinated Note
Documents.
(c) Each Obligor has all requisite power and authority to enter into
and perform this Agreement and to incur the obligations herein provided for, and
has taken all proper and necessary action to authorize the execution, delivery
and performance of this Agreement and the other Subordinated Note Documents, as
applicable.
(d) This Agreement and all of the other Subordinated Note Documents,
when delivered, will be valid and binding upon each Obligor and enforceable in
accordance with their respective terms.
3.2 Places of Business. The only places of business of each Obligor, and
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the places where each keeps and intends to keep its Property, are at the
addresses shown on Schedule 3.2 attached hereto and made part hereof. The
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location of the chief executive office of each Obligor is set forth on Schedule
--------
3.2.
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3.3 Governmental Consent. Neither the nature of any Obligor or of its
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business or Property, nor any relationship between any Obligor and any other
Person, nor any circumstance affecting any Obligor in connection with the
issuance or delivery of this Agreement or any other Subordinated Note Documents
is such as to require a consent, approval or authorization of, or filing,
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registration or qualification with, any Governmental Authority on the part of
any Obligor in connection with the execution, issuance or delivery of this
Agreement or any of the other Subordinated Note Documents.
3.4 Taxes: All Tax returns required to be filed by each of Buyer, Canadian
-----
Co., Gen-X Equipment and Gen-X A.G. in any jurisdiction, have been filed, and
all Taxes, fees and other governmental charges upon each such company, or upon
any of their respective Property, income or franchises, which are shown to be
due and payable on such returns have been paid, except for those Taxes being
contested in good faith with due diligence by appropriate proceedings for which
appropriate reserves have been maintained under GAAP and as to which no Lien has
been entered. No Obligor is aware of any proposed material additional tax
assessment or Tax to be assessed against or applicable to such Obligor.
3.5 Subsidiaries. No Obligor has any Subsidiaries or Affiliates, except
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as shown on Schedule 3.5 attached hereto and made a part hereof.
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3.6 Capital Stock. The authorized and outstanding Capital Stock of each
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Obligor is as shown on Schedule 3.6 attached hereto and made a part hereof. All
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of the Capital Stock of each Obligor has been duly and validly authorized and
issued and is fully paid and non-assessable and has been sold and delivered to
the holders thereof in compliance with, or under valid exemption from, all
federal, provincial and state laws and the rules and regulations of all
Governmental Authorities governing the sale and delivery of securities. Except
for the rights and obligations shown on Schedule 3.6, there are no
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subscriptions, warrants, options, calls, commitments, rights or agreements by
which any Obligor or any of the shareholders or members of such Obligor is bound
relating to the issuance, transfer, voting or redemption of shares of its
Capital Stock or any preemptive rights held by any Person with respect to the
shares of Capital Stock of any Obligor. Except as shown on Schedule 3.6, no
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Obligor has issued any securities convertible into or exchangeable for shares of
its Capital Stock or any options, warrants or other rights to acquire such
shares or securities convertible into or exchangeable for such shares.
SECTION 4 - OBLIGORS' AFFIRMATIVE COVENANTS
Each Obligor covenants that until all of the Note Agreement Obligations are
completely and indefeasibly satisfied in full, that:
4.1 Delivery of Documents. Each Obligor shall, at Obligors' expense,
---------------------
promptly deliver to Global from time to time upon request of Global such stock
powers, instruments, agreements, financing statements and other documents,
satisfactory in form and substance to Global, with respect to the Collateral,
the Pledged Shares and the Trademarks as Global may reasonably request to
preserve and protect, and to enable Global to enforce, its rights and remedies
hereunder.
4.2 Payment of Taxes and Claims. Each Obligor shall promptly pay and
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discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges or levies imposed upon their
respective income, profits, Property or business.
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4.3 Financial Statements and Collateral Reports. Obligors shall deliver
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to Global the following financial information relating to Obligors:
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each of their respective fiscal years, consolidated and
consolidating balance sheets of Obligors as of the end of such fiscal year and
the immediately preceding fiscal year and consolidated and consolidating
statements of income, shareholders' equity and cash flows for such fiscal years,
such annual financial statement to be in reasonable detail, prepared in
accordance with GAAP, and audited and certified by independent public
accountants of nationally recognized standing selected by Obligors and
reasonably acceptable to Global;
(b) as soon as practicable, but in any event within twenty (20) days
of the end of each month, unaudited consolidated and consolidating balance
sheets as of the end of each such month and the same month of the immediately
preceding fiscal year and consolidated and consolidating statements of income,
and cash flows for such fiscal quarters, such quarterly financial statements to
be in reasonable detail, prepared in accordance with GAAP; each Obligor, jointly
and severally represents that such monthly financial statements will be prepared
in accordance with GAAP consistently applied (with the exception of footnotes
that may be required by GAAP) and fairly present the financial condition and
results of operations of the Obligors as of and for the periods specified,
subject to normal year-end audit adjustment; and
(c) such other information relating to the financial condition,
business, prospects or corporate affairs (including press releases and the like)
of Obligors, as Global may from time to time reasonably request.
4.4 Financial Covenants. Obligors shall, on a consolidated basis, comply
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with the following financial covenants:
(a) Tangible Net Worth. Obligors shall have and maintain, at all
------------------
times, a Tangible Net Worth of not less than an amount equal to the tangible net
worth that, as of the Closing Date, HSBC Bank Canada requires Obligors to
maintain (converted to U.S. dollars at the conversion rate in effect on the
Closing Date as set forth in the Currency Trading-Exchange Rates Section of The
Wall Street Journal) less the outstanding principal balance of the Promissory
Note and the Canadian Co. Promissory Note.
(b) Adjusted Debt-to-Tangible Net Worth Ratio. Obligors shall have, at
-----------------------------------------
the end of each fiscal quarter, an Adjusted Debt-to-Tangible Net Worth Ratio of
not more than 8.0 to 1.0 (it being understood that for the purposes of
determining Tangible Net Worth under this Section 4.4(b) only, the outstanding
principal balance of the Promissory Note and the Canadian Co. Promissory Note
shall be included as equity).
(c) Working Capital Ratio. Obligors shall have, at the end of each
---------------------
fiscal quarter, a Working Capital Ratio of not less than 1.0 to 1.0.
4.5 [Intentionally Omitted.]
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4.6 Audits and Inspection. Each Obligor shall permit Global to visit and
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inspect the properties of Obligors to examine their respective books of account
and records and to discuss their respective affairs, finances and accounts with
their respective officers, all at such reasonable times as may be requested by
Global.
4.7 Maintenance of Properties and Corporate Existence:
-------------------------------------------------
(a) Property. Each Obligor shall keep their respective properties
--------
and those of their Subsidiaries in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions and improvements thereto, and
at all times comply with each material provision of all leases to which any of
them is a party or under which any of them occupies property if the breach of
such provision might have a material adverse effect on any of their respective
businesses, financial conditions or results of operations, prospects or affairs.
(b) Property Insurance. Each Obligor shall keep their respective
------------------
assets and those of their Subsidiaries which are of an insurable character
insured by financially sound and reputable insurers against loss or damage by
fire, explosion and other risks customarily insured against by companies in
similar businesses, maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner customary for companies in similar businesses.
(c) Financial Records. Each Obligor shall keep true records and
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books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to their respective businesses and affairs
in accordance with GAAP; except where the failure to do so would not have a
material adverse effect on any of their respective businesses, financial
conditions or results of operations, prospects or affairs.
(d) Corporate Existence and Rights. Each Obligor shall maintain in
------------------------------
full force and effect its corporate existence, rights and franchises and all
licenses and other rights in or to use patents, processes, licenses, trademarks,
trade names or copyrights owned or possessed by any of them or any of their
Subsidiaries; except where the failure to do so would not have a material
adverse effect on any of their respective businesses, financial conditions or
results of operations, prospects or affairs.
(e) Compliance with Laws. Each Obligor shall duly observe and
--------------------
conform to all applicable Laws and other requirements of Governmental
Authorities relating to the conduct of their businesses or to their properties
or assets.
4.8 Payment of Other Indebtedness. Each Obligor shall promptly pay or
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cause to be paid when due, or in conformance with customary trade terms, all
Indebtedness incident to the operations of their respective businesses.
4.9 Places of Business. Obligors shall give thirty (30) days prior
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written notice to Global of any changes in the location of any of its respective
places of business, of the places where records
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concerning its accounts are kept, or the establishment of any new, or the
discontinuance of any existing place of business; provided that no Obligor may
establish any place of business outside of the United States, Canada or
Switzerland without first providing Global with not less than sixty (60) days
prior written notice.
4.10 Notice. Obligors shall give prompt notice to Global within five (5)
------
days after becoming aware of (i) an Event of Default under this Agreement or any
Event of Default under any of the Subordinated Note Documents or any default,
breach or violation by any of them of any of the terms of the Acquisition
Agreement or any of the Ancillary Agreements, (ii) any litigation claiming in
excess of $250,000 from any Obligor, (iii) receipt by any Obligor of a notice of
default, breach or violation, oral or written, given to such Obligor by any
creditor holding Senior Debt or any Indebtedness of such Obligor in excess of
Two Hundred Fifty Thousand Dollars ($250,000.00), or (iv) any event that might
have a material adverse effect on any of their respective businesses, financial
condition, results of operations, prospects or affairs, in each case, together
with a statement setting forth, in reasonable detail, such default, breach,
violation, litigation or event, including their proposed response thereto.
SECTION 5 - OBLIGORS' NEGATIVE COVENANTS:
Obligors covenant that until all of the Note Agreement Obligations are
completely and indefeasibly satisfied in full, that, without the prior express
written consent of Global, which consent shall not be unreasonably withheld:
5.1 Merger, Consolidation, Dissolution or Liquidation. No Obligor shall
-------------------------------------------------
enter into any (a) merger, consolidation, reorganization, recapitalization,
amalgamation or other business combination (other than as set forth in the
Restructuring Plan), (b) liquidation, winding up or dissolution (or suffer any
liquidation or dissolution), (c) conveyance, sale, lease, transfer or other
disposition of, in one transaction or a series of transactions, all or
substantially all of their respective business, property or assets, whether now
owned or hereafter acquired, or (d) acquisition by purchase or otherwise of all
or substantially all the business, property or assets of, or stock or other
evidence of beneficial ownership of, any Person (other than any sales or
transfers by an Obligor to another Obligor), except that Buyer may enter into or
permit a transaction under clause (a) if the business combination is between two
or more wholly owned Subsidiaries of Buyer or between Buyer and one or more
wholly owned Subsidiaries of Buyer and the surviving entity is either the
obligor of the Promissory Note or is a guarantor under the Guarantees and Buyer
may enter into a transaction under clause (d) so long as no Event of Default has
occurred and such transaction will not cause an Event of Default.
5.2 Collateral, Liens and Encumbrances. No Obligor shall:
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(a) sell, assign, exchange, cancel, retire, encumber, or otherwise
dispose of or transfer any of its rights to any of the Collateral, the Pledged
Shares or the Trademarks;
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(b) create, assume, or suffer any security interest, Lien, charge, or
other encumbrance in favor of any individual or entity (other than Global) in,
on, or to any of the Collateral, the Pledged Shares or the Trademarks;
(c) cause or permit the transfer of, or grant any option or right
with respect to, any of the Collateral, the Pledged Shares or the Trademarks;
(d) take or fail to take any action which would in any manner impair
the value or enforceability of Global's security interest in any of the
Collateral, the Pledged Shares or the Trademarks;
(e) make, consent to or allow any amendment or other modification or
waiver with respect to any of the Collateral, the Pledged Shares or the
Trademarks or enter into any agreement or permit to exist any restriction with
respect to any of the Collateral, the Pledged Shares or the Trademarks other
than pursuant hereto (it being understood that this provision shall not prohibit
Obligors from selling Collateral in the ordinary course of business); or
(f) create, assume or suffer to exist any encumbrance upon any of
their respective properties or assets, whether now owned or hereafter acquired,
except for Permitted Liens.
5.3 Transactions With Affiliates. Except for compensation paid to Wally
----------------------------
Kleimer for services rendered to an Obligor in an amount not to exceed $250,000
per year (provided such compensation is based on the standard commission rates
of such Obligor) and rent payable by an Obligor to a company affiliated with
Salter and Finkelstein for the lease of the facility at 25 Vanley Crescent,
North York, Ontario M3J 2B7 in an amount not to exceed the principal and
interest payable by such company to the financial institution holding the
mortgage on such facility, no Obligor shall engage in any loans, leases,
contracts, agreement, arrangements, understandings or other transactions with
any of their respective Affiliates, shareholders, directors or officers, or any
member of any such person's family, including the parents, spouse, children, in-
laws and other relatives of any such person (including the hiring thereof).
5.4 Other Indebtedness. No Obligor shall hereafter incur, create, assume
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or suffer to exist any Indebtedness or prepay any Indebtedness that is junior to
or pari-passu with the Note Agreement Obligations, other than the following: (a)
Senior Debt, (b) Indebtedness represented by the Subordinated Note Documents; or
(c) Indebtedness which by its terms is subordinated to the Note Agreement
Obligations.
5.5 Distributions and Salaries. No Obligor shall:
--------------------------
(a) make any Restricted Payments; provided, however, Obligors shall
be permitted to pay an aggregate of $1,600,000 per annum in the form of
dividends, payments for the redemption of capital stock, principal and/or
interest to holders of capital stock and/or Indebtedness of Obligors; provided
further that no Event of Default shall have occurred under this Agreement and
the payment of any Restricted Payment shall not result in the occurrence of any
such Event of Default, default, breach or violation; or
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(b) except for compensation paid to Wally Kleimer for services
rendered to an Obligor in an amount not to exceed $250,000 per year (provided
such compensation is based on the standard commission rates of such Obligor) and
rent payable by an Obligor to a company affiliated with Salter and Finkelstein
for the lease of the facility at 25 Vanley Crescent, North York, Ontario M3J 2B7
in an amount not to exceed the principal and interest payable by such company to
the financial institution holding the mortgage on such facility, pay salaries,
bonuses or other compensation or payments (other than payments permitted in
Section 5.5(a)) to Salter, Finkelstein or any member of Salter or Finkelstein's
family, including their parents, spouses, children, in-laws and other relatives,
in excess of an aggregate of $1,250,000 per annum; provided further that no
Event of Default shall have occurred under this Agreement, and the payment of
such salaries, bonuses or other compensation or payments shall not result in the
occurrence of any such Event of Default, default, breach or violation.
5.6 Miscellaneous Covenants. Without the prior express written consent
-----------------------
of Global, which consent shall not be unreasonably withheld:
(a) No Obligor shall consent to or allow the issuance of additional
Capital Stock of any of the Obligors, except to another Obligor.
(b) No Obligor shall make or permit to remain outstanding any loan or
advance to, or guarantee, endorse or otherwise be or become contingently liable,
directly or indirectly, in connection with the obligations, stock or dividends
of, or own, purchase or acquire any Capital Stock, obligations or securities of,
or make any equity, debt or other investment in, any Person other than another
Obligor, except that Obligors may: (i) make or permit to remain outstanding
loans or advances to any other Obligor, (ii) endorse negotiable instruments for
collection in the ordinary course of business, make or permit to remain
outstanding travel, moving and other like advances to officers, employees and
consultants in the ordinary course of business or make or permit to remain
outstanding lease, utility and other similar deposits in the ordinary course of
business; and (iii) make investments consisting of advances to customers or
suppliers, in each case, if created, acquired or made in the ordinary course of
business.
(c) No Obligor shall sell or otherwise dispose of, or part with
control of, any shares of Capital Stock or Indebtedness of any Subsidiary,
except to another Obligor.
(d) No Obligor shall amend (i) its articles of incorporation, bylaws
or other organization documents, or (ii) any agreements or instruments to which
it is a party in any manner that impairs any right or privilege of Global
(including, without limitation, enlarging the rights or privileges of any other
Persons at the expense of Global).
SECTION 6 - DEFAULT
6.1 Events of Default. Each of the following events shall constitute an
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event of default ("Event of Default"):
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(a) Payments. If Buyer fails to make any payment of principal (or
--------
premium, if any) or interest on the Promissory Note when such payment becomes
due and payable (whether upon acceleration or otherwise), and such failure
continues for a period of 10 days after Global has given Buyer notice thereof..
(b) Other Charges. If any Obligor fails to pay any other charges,
-------------
fees, expenses or other monetary obligations owing to Global arising out of or
incurred in connection with this Agreement or any of the other Subordinated Note
Documents when due and payable, and such failure continues for a period of 30
days after Global has given such Obligor notice thereof.
(c) Particular Covenant Defaults. If any Obligor fails to perform,
----------------------------
comply with or observe any covenant or undertaking contained in this Agreement
(other than with respect to the covenants contained in Section 4.4 and Section 5
for which no cure period shall exist) or any of the other Subordinated Note
Documents and such failure continues for 60 days after Global has given such
Obligor notice thereof.
(d) Canadian Co. Promissory Note. The occurrence of an Event of
----------------------------
Default under the Subordinated Note Agreement, dated as of the date hereof,
relating to the Canadian Co. Promissory Note.
(e) Liens. If any Lien or security interest in favor of Global
-----
shall, other than as a result of any act, or failure to act when required, by
Global, cease to be valid, enforceable and perfected and prior to all other
Liens, other than Permitted Liens, or if any Obligor or any Governmental
Authority shall assert any of the foregoing.
(f) Financial Information. If any statement, report, financial
---------------------
statement, or certificate made or delivered by any Obligor or any of its
officers, employees or agents, to Global is not true and correct, in all
material respects, when made.
(g) Agreements with Others. If any Obligor (i) defaults in any
----------------------
payment of principal of or interest on any other obligation for money borrowed
(or any Capitalized Lease Obligation, any obligation under a conditional sale or
other title retention agreement, any obligation issued or assumed as full or
partial payment for property whether or not secured by a purchase money security
interest or any obligation under notes payable or drafts accepted representing
extensions of credit) or (ii) fails to perform or observe any other agreement,
term or condition contained in any agreement under which any such obligation is
created (or if any other event thereunder or under any such agreement shall
occur and be continuing) and the effect of such default, failure or other event
is to cause, or to permit the holder or holders of such obligation (or a trustee
on behalf of such holder or holders) to cause, such obligation to become due
prior to any stated maturity; except where such default or failure is in
connection with an obligation not in excess of One Hundred Thousand Dollars
($100,000).
(h) Uninsured Loss. If there shall occur any uninsured damage to or
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loss, theft, or destruction in excess of Five Hundred Thousand Dollars
($500,000) in the aggregate with respect to any portion of any Property of any
Obligor.
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(i) Warranties or Representations. If any representation or warranty
-----------------------------
made by an Obligors in any of the Subordinated Note Documents or in any writing
furnished in connection with or pursuant to the Subordinated Note Documents or
any of the Acquisition Agreements shall be false in any material respect on the
date as of which made.
(j) Guarantees. If any Guarantee shall for any reason, other than as
----------
a result of any act, or failure to act when required, by Global, cease to be, or
shall for any reason be asserted in writing by any Obligor not to be, in full
force and effect and enforceable in accordance with its terms.
(k) Judgments. If any one or more final judgments, orders or decrees
---------
of any court or regulatory or administrative agency for the payment of money in
excess of $500,000, either individually or in the aggregate, shall be rendered
against any Obligor or any of their Property and shall not be discharged or
stayed within 60 days after the entry of such judgment, order or decree, or
within 60 days after the expiration of such stay, such judgment, order or decree
is not discharged; provided, however that judgments, orders or decrees resulting
from the litigation described in Schedule 6.1(k) attached hereto and made a part
---------------
hereof, shall not constitute Events of Default if not for the payment of money
in excess of $1,000,000.
(l) Bankruptcy, Dissolution, etc.
-----------------------------
(i) Entry by a court of competent jurisdiction of (A) a decree
or order for relief in respect of any of the Obligors in an involuntary case or
proceeding under any applicable bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or liquidation or
similar Law, whether now or hereafter in effect ("Bankruptcy Law"), or (B) a
decree or order adjudging any of the Obligors bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of any
of the Obligors under any applicable Law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of any
of the Obligors or of any substantial part of their properties, or ordering the
winding up or liquidation of their affairs, and, in either case, any such decree
or order for relief shall continue to be in effect, or any such other decree or
order shall be unstayed and in effect, for a period of 60 consecutive days; or
(ii) If any Obligor (A) commences a voluntary case or proceeding
under any applicable Bankruptcy Law or any other case or proceeding to be
adjudicated bankrupt or insolvent, (B) consents to the entry of a decree or
order for relief in respect of any of the Obligors in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, (C) files a petition or
answer or consent seeking reorganization or relief under any applicable federal
or state law, (D) consents to the filing of such petition or the appointment of,
or taking possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of any of the Obligors or of any substantial
part of their respective properties, (E) makes an assignment for the benefit of
creditors, (F) admits in writing its inability to pay its debts generally as
they become due, or (G) takes any corporate action in furtherance of any such
actions in this Section 6.1(l)(ii).
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(m) Merger, Consolidation, etc. If any Obligor enters into a merger,
---------------------------
consolidation, reorganization, recapitalization, amalgamation or other business
combination or a liquidation, dissolution, sale of all or substantially all of
its stock or assets, or similar restructuring or reclassification; provided,
however, that the implementation of the Restructuring Plan shall not constitute
an Event of Default.
6.2 Rights and Remedies on Default.
------------------------------
(a) If, but only if, an Event of Default (other than as specified in
Section 6.1(l) shall occur, Global may declare all Note Agreement Obligations to
be due and payable immediately, by a notice in writing to the Obligors, without
presentment, demand, protest or other requirements of any kind, all of which are
hereby expressly waived by the Obligors, and upon any such declaration, such
Note Agreement Obligations shall become due and payable immediately. If, but
only if, an Event of Default specified in Section 6.1(l) occurs, then the Note
Agreement Obligations shall automatically become and be due and payable
immediately.
(b) After a declaration of acceleration, but before a judgment or
decree for payment of the money due has been obtained, Global may rescind and
annul such declaration and its consequences if
(i) the Obligors have paid to Global a sum sufficient to pay
(A) all overdue interest on the Promissory Note, (B) the principal of and
premium, if any, on the Promissory Note which have become due otherwise than by
such declaration of acceleration and interest thereon at the rate borne by the
Promissory Note and (C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Promissory Note,
(ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction; and
(iii) all Events of Default, other than the non-payment of
principal of, premium, if any, and interest on the Promissory Note which have
become due solely by such declaration of acceleration, have been cured or
waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereon.
(c) If any Event of Default shall occur, Global may proceed to
protect and enforce its rights under the Subordinated Note Documents and the
Acquisition Agreements by exercising such remedies as are available to Global in
respect thereof under applicable Law, either by suit in equity or by action at
law, or both, whether for specific performance of any covenant or other
agreement contained in the Subordinated Note Documents or the Acquisition
Agreements or in aid of the exercise of any power granted in the Subordinated
Note Documents or the Acquisition Agreements. No remedy conferred in the
Subordinated Note Documents is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to every
other remedy conferred herein or now or hereafter existing at law or in equity
or by statute or otherwise.
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6.3 Nature of Remedies. All rights and remedies granted Global hereunder
------------------
and under the Subordinated Note Documents, or otherwise available at law or in
equity, shall be deemed concurrent and cumulative, and not alternative remedies,
and Global may proceed with any number of remedies at the same time until all
Note Agreement Obligations are completely and indefeasibly satisfied in full.
The exercise of any one right or remedy shall not be deemed a waiver or release
of any other right or remedy, and Global, upon or at any time after the
occurrence of an Event of Default, may proceed against any Obligor, at any time,
under any agreement, with any available remedy and in any order.
SECTION 7 - MISCELLANEOUS
7.1 Notices. All notices, consents or other communications required or
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permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered personally, (b) three business
days after being mailed by first class certified mail, return receipt requested,
postage prepaid, or (c) one business day after being sent by a reputable
overnight delivery service, postage or delivery charges prepaid, to the parties
at their respective addresses stated on the first page or the signature pages of
this Agreement. Notices may also be given by prepaid telegram or facsimile and
shall be effective on the date transmitted if confirmed within 24 hours
thereafter by a signed original sent in the manner provided in the preceding
sentence. A copy of each notice to Obligors shall be simultaneously sent to
Borden & Elliot, Scotia Plaza, 40 King Street West, Toronto, Ontario M5H 3Y4,
Canada, Attn: Daniel F. Hirsh. A copy of each notice to Global shall be
simultaneously sent to: Blank Rome Comisky & McCauley LLP, One Logan Square,
Philadelphia, Pennsylvania 19103, Attn: Francis E. Dehel, Esquire. Any party
may change its address for notice and the address to which copies must be sent
by giving notice of the new addresses to the other parties in accordance with
this Section 7.1, except that any such change of address notice shall not be
effective unless and until received.
7.2 Amendment. This Agreement may be amended, modified or supplemented
---------
by the parties hereto, provided that any such amendment, modification or
supplement shall be in writing and signed by Global and each of the Obligors.
7.3 Waivers. No waiver with respect to this Agreement shall be
-------
enforceable against Global unless in writing and signed by Global. No waiver
with respect to this Agreement shall be enforceable against an Obligor unless in
writing and signed by such Obligor. Except as otherwise expressly provided
herein, no failure to exercise, delay in exercising, or single or partial
exercise of any right, power or remedy by any party, and no course of dealing
between or among any of the parties, shall constitute a waiver of, or shall
preclude any other or further exercise of the same or any other right, power or
remedy.
7.4 Survival of Representations. All representations, warranties and
---------------------------
covenants made in or pursuant to this Agreement shall survive the date hereof
and the consummation of the transactions contemplated hereby and thereby.
7.5 Entire Understanding. This Agreement, together with the Acquisition
--------------------
Agreement and the Exhibits and Schedules hereto and thereto, state the entire
understanding among the parties with
20
<PAGE>
respect to the subject matter hereof and thereof, and supersede all prior oral
and written communications and agreements, and all contemporaneous oral
communications and agreements, with respect to the subject matter hereof and
thereof.
7.6 Parties in Interest. This Agreement shall bind, benefit, and be
-------------------
enforceable by and against each party hereto and its successors and assigns.
Global shall not in any manner assign any of its rights or obligations under
this Agreement without the express prior written consent of the Obligors, and
none of the Obligors shall in any manner assign any of their rights or
obligations under this Agreement without the express prior written consent of
Global.
7.7 Severability. If any provision of this Agreement or any other
------------
Subordinated Note Document is construed to be invalid, illegal or unenforceable,
then the remaining provisions hereof shall not be affected thereby and shall be
enforceable without regard thereto.
7.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall constitute an
original hereof, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one original counterpart hereof.
7.9 Section Headings. The section and subsection headings in this
----------------
Agreement are for convenience of reference only, do not constitute a part of
this Agreement, and shall not affect its interpretation.
7.10 References. All words used in this Agreement shall be construed to
----------
be of such number and gender as the context requires or permits. Unless a
particular context clearly provides otherwise, (i) the words "hereof" and
"hereunder" and similar references refer to this Agreement in its entirety and
not to any specific section or subsection hereof, and (ii) the word "including"
shall mean including but not limited to.
7.11 CONTROLLING LAW. THIS AGREEMENT IS MADE UNDER, AND SHALL BE
---------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
7.12 Jurisdiction and Process. Each of the parties (a) irrevocably
------------------------
consents to the exclusive jurisdiction of the Courts of Common Pleas of
Montgomery County, Pennsylvania, or the United States District Court for the
Eastern District of Pennsylvania, in any and all actions between or among any of
the parties, whether arising hereunder or otherwise, (b) irrevocably waives its
right to trial by jury in any such action, and (c) irrevocably consents to
service of process by first class certified mail, return receipt requested,
postage prepaid, to the address at which such party is to receive notice in
accordance with Section 7.1. In any and all actions between or among any of the
parties, whether arising hereunder or otherwise, the prevailing party or parties
shall be entitled to recover their reasonable attorneys' fees and legal expenses
from the other party or parties.
21
<PAGE>
7.13 No Third Party Beneficiaries. No provision of this Agreement is
----------------------------
intended to or shall be construed to grant or confer any right to enforce this
Agreement, or any remedy for breach of this Agreement, to or upon any Person
other than the parties hereto, including, but not limited to, any customer,
prospect, supplier, employee, contractor, salesman, agent or representative of
any of the parties hereto.
7.14 Construction. The parties agree that any rule of construction to the
------------
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement or any other
agreements or documents delivered in connection with the transactions
contemplated by this Agreement.
7.15 Currency. All dollar amounts stated in this Agreement and the
--------
Subordinated Note Documents are stated in United States currency, and all
payments required under this Agreement and the Subordinated Note Documents shall
be paid in United States currency.
7.16 Accounting Principles. Where the character or amount of any asset
---------------------
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with GAAP,
consistently applied, to the extent applicable, except as otherwise expressly
provided in this Agreement.
7.17 Indemnity.
---------
(a) Each Obligor releases and shall indemnify, defend and hold
harmless Global, and its officers, employees and agents, of and from any claims,
demands, liabilities, obligations, judgments, injuries, losses, damages and
costs and expenses (including, without limitation, reasonable legal fees)
resulting from (i) acts or conduct of any Obligor or all Obligors under,
pursuant or related to this Agreement and the other Subordinated Note Documents,
(ii) Obligors' breach or violation of any representation, warranty, covenant or
undertaking contained in this Agreement or the other Subordinated Note
Documents, and (iii) Obligors' failure to comply with any or all laws, statutes,
ordinances, governmental rules, regulations or standards, whether federal, state
or local, or court or administrative orders or decrees and all costs, expenses,
fines, penalties or other damages resulting therefrom, unless resulting solely
from acts or conduct of Global constituting wilful misconduct or gross
negligence.
(b) Promptly after receipt by Global under subsection (a) above of
notice of the commencement of any action by a third party, Global shall, if a
claim in respect thereof is to be made against the Obligors under such
subsection, notify the Obligors in writing of the commencement thereof. The
omission so to notify the Obligors shall relieve the Obligors from any liability
which it may have to Global under such subsection only if the Obligors are
unable to defend such actions as a result of such failure to so notify. In case
any such action shall be brought against Global and it shall notify the Obligors
of the commencement thereof, the Obligors shall be entitled to participate
therein and, to the extent that they shall wish, satisfactory to Global (who
shall not, except with the consent of Global, be counsel to Global), and, after
notice from the Obligors to Global of their election so to assume the defense
thereof, the Obligors shall not be liable to Global
22
<PAGE>
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by Global, in connection with the
defense thereof other than reasonable costs of investigation.
7.18 Time. Whenever any Obligor shall be required to make any payment,
----
or perform any act, on a day which is not a business day, such payment may be
made, or such act may be performed, on the next succeeding business day. Time
is of the essence in Obligors' performance under all provisions of this
Agreement and all related agreements and documents.
7.19 Survival. All indemnities, warranties, representations, and
--------
covenants made by Obligors herein, or in any agreement referred to herein or on
any certificate, document or other instrument delivered by it or on its behalf
under this Agreement, shall be considered to have been relied upon by Global.
Except as otherwise expressly provided herein, all covenants made by Obligors
hereunder or under any other agreement or instrument shall be deemed continuing
until all Promissory Obligations are completely and indefeasibly satisfied in
full. All indemnification obligations of Obligors under this Agreement shall
survive payment of the Note Agreement Obligations.
7.20 Taxes.
-----
(a) All payments to Global by the Obligors under any of the
Subordinated Note Documents shall be made free and clear of and without
deduction or withholding for any and all Taxes imposed by Canada or the United
States of America or any other relevant jurisdiction (or any political
subdivision or taxing authority of it), unless such Taxes are required by
applicable law to be deducted or withheld. If the Obligor shall be required by
applicable law to deduct or withhold any such Taxes from or in respect of any
amount payable under any of the Subordinated Note Documents (i) the amount
payable shall be increased (and for greater certainty, in the case of interest,
the amount of interest shall be increased) as may be necessary so that after
making all required deductions or withholdings (including deductions or
withholdings applicable to any additional amounts paid under this Section
7.20(a)), Global receives an amount equal to the amount it would have received
if no such deduction or withholding had been made, (ii) the Obligor shall make
such deductions or withholdings, and (iii) the Obligor shall immediately pay the
full amount deducted or withheld to the relevant Governmental Authority in
accordance with applicable Law.
(b) Each Obligor agrees to immediately pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges,
financial institutions duties, debits taxes or similar levies (all such taxes,
charges, duties and levies being referred to as "Other Taxes") which arise from
any payment made by the Obligor under any of the Subordinated Note Documents or
from the execution, delivery or registration of, or otherwise with respect to,
any of the Subordinated Note Documents.
(c) Each Obligor shall indemnify Global for the full amount of Taxes
or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed
by any jurisdiction on amounts payable by the Obligor under this Section 7.20)
paid by Global and any liability (including penalties, interest and expenses)
arising from or with respect to such Taxes or Other Taxes, whether
23
<PAGE>
or not they were correctly or legally asserted. Payment under this
indemnification shall be made within 30 days from the date Global makes written
demand for it. A certificate as to the amount of such Taxes or Other Taxes
submitted to an Obligor by Global shall be conclusive evidence, absent manifest
error, of the amount due from the Obligor to Global.
(d) The applicable Obligor shall furnish to Global the original or a
certified copy of a receipt evidencing payment of Taxes or Other Taxes made by
the Obligor within 30 days after the date of any payment of Taxes or Other
Taxes.
(e) The provisions of this Section 7.20 shall survive the termination
of this Agreement and the repayment of all Promissory Note Obligations.
7.21 Judgment Currency. If, for the purposes of obtaining judgment in any
-----------------
court, it is necessary to convert a sum due to Global in any currency (the
"Original Currency") into another currency (the "Other Currency"), the parties
agree, to the fullest extent that they may effectively do so, that the rate of
exchange used shall be that at which, in accordance with normal banking
procedures, Global could purchase the Original Currency with the Other Currency
on the business day preceding the day on which final judgment is given or, if
permitted by applicable law, on the day on which the judgment is paid or
satisfied. The obligations of the Obligors in respect of any sum due in the
Original Currency from it to Global under any of the Subordinated Note Documents
shall, notwithstanding any judgment in any Other Currency, be discharged only to
the extent that on the business day following receipt by Global of any sum
adjudged to be so due in the Other Currency, Global may, in accordance with
normal banking procedures, purchase the Original Currency with such Other
Currency. If the amount of the Original Currency so purchased is less than the
sum originally due to Global in the Original Currency, the Obligor agrees, as a
separate obligation and notwithstanding the judgment, to indemnify Global,
against any loss, and, if the amount of the Original Currency so purchased
exceeds the sum originally due to Global in the Original Currency, Global shall
remit such excess to the Obligor.
7.22 Signatories. Each individual signatory hereto represents and
-----------
warrants that he is duly authorized to execute this Agreement on behalf of his
principal and that he executes the Agreement in such capacity and not as a
party.
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed, or have caused this
Agreement to be executed on their behalf by their duly authorized officers, as
of the date first stated above.
GLOBAL SPORTS, INC.
By:____________________________
Name: Michael G. Rubin
Title: Chairman and CEO
GEN-X ACQUISITION (U.S.), INC. GEN-X ACQUISITION (CANADA) INC.
By:____________________________ By:_______________________________
Name: Name:
Title: Title:
GEN-X HOLDINGS INC. GEN-X EQUIPMENT INC.
By:____________________________ By:_______________________________
Name: Name:
Title: Title:
GEN-X EQUIPMENT LTD. GEN-X EQUIPMENT A.G.
By:____________________________ By:_______________________________
Name: Name:
Title: Title:
25
<PAGE>
APPENDIX B
[LOGO OF DEUTSCHE
BANK SECURITIES, INC.]
September 24, 1999
Board of Directors
Global Sports, Inc.
555 S. Henderson Road
King of Prussia, PA 19406
Gentlemen:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial advisor
to Global Sports, Inc. ("Global Sports") in connection with the proposed sale of
Gen-X Holdings Inc., Gen-X Equipment Inc. and the off-price division of KPR
Sports International, Inc. (collectively, the "Company") pursuant to an
acquisition agreement dated September 24, 1999 (the "Acquisition Agreement")
between (i) Global Sports and (ii) Gen-X Acquisition (US), Inc. and Gen-X
Acquisition (Canada) Inc., entities controlled by James Salter and Kenneth
Finkelstein, (collectively, the "Buyer"), which provides, among other things,
for the acquisition of the Company by the Buyer (the "Transaction"). As set
forth more fully in the Acquisition Agreement, as a result of the Transaction,
the Buyer will purchase the Company for aggregate consideration (the
"Consideration") of $20 million payable in the form of (i) $6.0 million in cash,
(ii) $10.0 million in subordinated notes and (iii) $4.0 million through the
assumption of certain liabilities owing from Global Sports to DMJ Financial,
Inc., an entity owned by Messrs. Salter and Finkelstein. The terms and
conditions of the Transaction are more fully set forth in the Acquisition
Agreement.
You have requested Deutsche Bank's opinion, as investment bankers, as to the
fairness, from a financial point of view, to Global Sports of the Consideration
to be received by Global Sports for the Company in connection with the
Transaction.
In connection with Deutsche Bank's role as financial advisor to Global Sports,
and in arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning the Company and certain
internal analyses and other information furnished to it by the Company and
Global Sports. Deutsche Bank has also held discussions with members of the
senior managements of the Company and Global Sports regarding the business and
prospects of the Company. In addition, Deutsche Bank has (i) reviewed the
actual and 1999 forecasted financial performance of the Company, (ii) reviewed
the financial terms of certain recent acquisitions which it deemed comparable in
whole or in part, (iii) reviewed the terms of the Acquisition Agreement and
certain related documents, and (iv) performed such other studies and analyses
and considered such other factors as it deemed appropriate. We found no
publicly-traded companies that are comparable to the Company. Accordingly, we
were unable to value the Company based upon comparable market valuations. In
addition, based upon the nature of the Company's business, management of the
Company and Global Sports believes it is impractical to produce financial
projections beyond the current fiscal year; consequently, we were unable to
perform a discounted cash flow valuation analysis or leveraged buyout valuation
analysis.
<PAGE>
Board of Directors
Global Sports, Inc.
September 24, 1999
Page 2
Deutsche Bank has not assumed responsibility for independent verification of,
and has not independently verified, any information, whether publicly available
or furnished to it, concerning the Company, including, without limitation, any
financial information or forecasts considered in connection with the rendering
of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank has
assumed and relied upon the accuracy and completeness of all such information
and Deutsche Bank has not conducted a physical inspection of any of the
properties or assets, and has not prepared or obtained any independent
evaluation or appraisal of any of the assets or liabilities, of the Company.
With respect to the financial forecasts made available to Deutsche Bank and used
in its analyses, Deutsche Bank has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company and Global Sports as to the matters
covered thereby. In rendering its opinion, Deutsche Bank expresses no view as
to the reasonableness of such forecasts or the assumptions on which they are
based. Deutsche Bank's opinion is necessarily based upon economic, market and
other conditions as in effect on, and the information made available to it as
of, the date hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in all
respects material to its analysis, the representations and warranties of Global
Sports, the Company and the Buyer contained in the Acquisition Agreement are
true and correct and that Global Sports, the Company and the Buyer will each
perform all of the covenants and agreements to be performed by it under the
Purchase Agreement and all conditions to the obligations of each of Global
Sports and the Buyer to consummate the Transaction will be satisfied without any
waiver thereof. Deutsche Bank has also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the Transaction will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which Global Sports is a party or is subject or by
which it is bound, no limitations, restrictions or conditions will be imposed or
amendments, modifications or waivers made that would have a material adverse
effect on Global Sports.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Global Sports and is not a recommendation to the stockholders of
Global Sports to approve the Transaction. This opinion is limited to the
fairness, from a financial point of view, to Global Sports of the Consideration
to be received by Global Sports for the Company in connection with the
Transaction, and Deutsche Bank expresses no opinion as to the merits of the
underlying decision by Global Sports to engage in the Transaction.
Deutsche Bank will be paid a fee for its services as financial advisor to Global
Sports in connection with the Transaction, a substantial portion of which is
contingent upon consummation of the Transaction. We are an affiliate of
Deutsche Bank AG (together with its affiliates, the "DB Group"). One or more
members of the DB Group have, from time to time, provided investment banking and
other financial services to Global Sports or its affiliates for which it has
received compensation, including representing Global Sports as exclusive sale
agent in its divestiture of its branded footwear business. In the ordinary
course of business, members of the DB Group may actively trade in the securities
and other instruments and obligations of Global Sports for their own accounts
and for the accounts of their customers.
<PAGE>
Board of Directors
Global Sports, Inc.
September 24, 1999
Page 3
Accordingly, the DB Group may at any time hold a long or short position in such
securities, instruments and obligations.
Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that the Consideration to be received by Global Sports for
the Company in connection with the Transaction is fair, from a financial point
of view, to Global Sports.
Very truly yours,
DEUTSCHE BANK SECURITIES INC.
<PAGE>
INDEMNIFICATION AGREEMENT
APPENDIX C
Parties: GLOBAL SPORTS, INC.,
- -------
a Delaware corporation (the "Company")
555 South Henderson Road
King of Prussia, PA 19406
_____________________ ("Indemnitee")
_____________________
_____________________
Date:
- ----
Background: The Company and Indemnitee recognize that in the present business
- ----------
environment, officers and directors of public companies are subject to the risk
of expensive corporate and other litigation. Indemnitee does not regard the
current protection provided by the Company as adequate given the present
circumstances and Indemnitee and other officers and directors of the Company may
not be willing to serve as officers and directors without adequate protection.
The Company desires to attract and retain the services of highly qualified
individuals, such as Indemnitee to serve as officers and/or directors of the
Company and to indemnify its officers and/or directors so as to provide them
with the maximum protection permitted by law.
INTENDING T0 BE LEGALLY BOUND, and in consideration of the mutual
agreements stated below and other good and valuable consideration, the Company
and Indemnitee agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) (i) by reason of the fact that Indemnitee is or was a
director, officer, employee, attorney, or agent of the Company, or any
subsidiary of the Company, (ii) by reason of any action or inaction on the part
of Indemnitee while an officer, director, employee, attorney or agent, or (iii)
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, in each case against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement (if such settlement is approved pursuant to Section 2(f) hereof)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create
a presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best
<PAGE>
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that Indemnitee's conduct was
unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor (i) by reason of the fact that Indemnitee is or was a director,
officer, employee, attorney or agent of the Company, or any subsidiary of the
Company, (ii) by reason of any action or inaction on the part of Indemnitee
while an officer, director, employee, attorney or agent, or (iii) by reason of
the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee, attorney or agent of another corporation,
partnership, joint venture, trust or other enterprise in each case against
expenses (including attorneys' fees) and amounts paid in settlement (if such
settlement is approved pursuant to Section 2(f) hereof) actually and reasonably
incurred by Indemnitee in connection with the defense or settlement of such
action or suit if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which Indemnitee shall have been adjudged to be liable to
the Company, unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that despite the adjudication of liability but in
view of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery of the State
of Delaware or such other court shall deem proper.
(c) Mandatory Indemnification. To the extent that Indemnitee has been
-------------------------
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1(a) and 1(b) or the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith. For purposes of this Section 1(c), the term "successful on
the merits or otherwise" shall include, but not be limited to, (i) any
termination, withdrawal or dismissal (with or without prejudice) of any claim,
action, suit or proceeding against Indemnitee without any express finding of
liability or guilt against him, or (ii) the expiration of a reasonable period of
time after the making of any claim or threat of an action, suit or proceeding
without the institution of the same and without any promise or payment made to
induce a settlement.
2. Expenses and Indemnification Procedure.
--------------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof. For purposes of any advancement hereunder, the
Indemnitee shall be deemed to have acted (i) in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and (ii) with respect to any criminal action or procedure, to have had
no reasonable cause to believe his conduct was unlawful, if under either (i) or
(ii), his action is based on the records or books of account of the Company, or
the records or books of account of another corporation, partnership, joint
venture, trust or another enterprise (collectively, the "other enterprises"),
including financial
2
<PAGE>
statements, or on information supplied to him by the officers of the Company or
other enterprises in the course of their duties, or on the advice of legal
counsel for the Company or other enterprises or on information or records given
or reports made to the Company or other enterprises by an independent certified
public accountant or by an appraiser or other expert selected with reasonable
care by the Company or other enterprises. Indemnitee hereby undertakes to repay
such amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee no later than forty-five (45) days following delivery of a
written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed as provided in Section 14.
In addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 hereof and this Section 2 shall be made no later than forty-five (45)
days after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification is not paid
in full by the Company within forty-five (45) days after written request for
payment thereof has first been received by the Company, Indemnitee may, but need
not, at any time thereafter bring an action against the Company to recover the
unpaid amount of the claim and, subject to Section 13 hereof, Indemnitee shall
also be entitled to be paid for the expenses (including attorneys' fees) of
bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Company to indemnify Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the Company, and Indemnitee shall be
entitled to receive interim payments of expenses pursuant to Section 2(a) hereof
unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 2(b) hereof, the Company has directors' and
officers' liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in
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accordance with the procedures set forth in the respective policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. If the Company shall be obligated under
--------------------
Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee,
the Company, if appropriate, shall be entitled to assume the defense of such
proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee
of written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding; provided that (i) Indemnitee shall have the right to employ separate
counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the reasonable fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
(f) Settlements. The Company shall not be liable to Indemnitee under
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this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action
or claim in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Company nor
Indemnitee will unreasonably withhold consent to any proposed settlement.
(g) Change In Control. If, at any time subsequent to the date of this
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Agreement, continuing directors do not constitute a majority of the members of
the Board of Directors, or there is otherwise a change in control of the Company
(as contemplated by Item 403(c) of Regulation S-K under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended), then
upon the request of Indemnitee, the Company shall cause the determination of
indemnification and advances required by Section 2 hereof to be made by a third-
party (mutually agreed upon by the parties). The fees and expenses incurred by
the third party in making the determination of indemnification and advances
shall be borne solely by the Company. If such third party is unwilling and/or
unable to make the determination of indemnification and advances, then the
Company shall cause the indemnification and advances to be made by a majority
vote or consent of a Board committee consisting solely of continuing directors.
For purposes of this Agreement, a "continuing director" means either a member of
the Board at the date of this Agreement or a person nominated to serve as a
member of the Board by a majority of the then-continuing directors.
3. Additional Indemnification Rights.
---------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
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Company shall indemnify Indemnitee to the fullest extent permitted by law,
whether or not such indemnification is specifically authorized by the other
provisions of this Agreement, the Company's Certificate of Incorporation, the
Company's Bylaws or by statute. In the event of any change, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a
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Delaware corporation to indemnify a member of its board of directors or an
officer, such changes shall be, ipso facto, within the purview of Indemnitee's
rights and Company's obligations under this Agreement. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, such changes (to the extent not otherwise required by such law, statute
or rule to be applied to this Agreement) shall have no effect on this Agreement
or the parties' rights and obligations hereunder.
(b) Non-exclusivity. The indemnification provided by this Agreement
---------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation or Bylaws, any
agreement, any vote of stockholders or disinterested directors, the Delaware
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office.
4. Continuation of Indemnity. All agreements and obligations of the
-------------------------
Company contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of the Company (or is or was serving at the
request of the Company as a director, officer, employee or agent of other
enterprises) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company, or
serving in any other capacity referred to herein.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not for the total amount thereof,
the Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that, in certain instances, federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken with the SEC to submit the question
of indemnification to a court in certain circumstances for a determination of
the Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
directors' and officers' liability insurance,
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Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director, or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer, or one of the Company's key employees, if Indemnitee is not an officer
or director but is a key employee. Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or Indemnitee is covered by similar
insurance maintained by a parent of subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Notwithstanding any other provision herein to the
----------
contrary, the Company shall not be obligated pursuant to the terms of this
Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement, the Company's Certificate of Incorporation or Bylaws, any
agreement, any vote of stockholders or disinterested directors, the Delaware
General Corporation Law or any other statute or law, but such indemnification or
advancement of expenses may be provided by the Company in specified cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or other
enterprises; or
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(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) Company. For purposes of this Agreement, references to the
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"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that if Indemnitee is or was a director, officer, employee,
attorney or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee,
attorney or agent of other enterprises, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) Other Definitions. For purposes of this Agreement, references to
-----------------
"other enterprises"shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to any
employee benefit plan; and references to "serving at the request of the Company"
shall include any service as a director, officer, employee, attorney or agent of
the Company which imposes duties on, or involves services by, Indemnitee with
respect to an employee benefit plan, its participants, or beneficiaries; and, if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Entire Understanding. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous, oral or written, express or
implied, agreements and understandings.
13. Attorneys' Fees. If any action is instituted by Indemnitee under this
---------------
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be
entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as
a part of such action, the court of competent jurisdiction determines that each
of the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous. In the event of an action instituted by or
in the name of the Company under this Agreement or to enforce or interpret any
of the terms of this Agreement, Indemnitee shall be entitled to be paid all
court costs and expenses, including attorneys' fees, incurred by Indemnitee in
defense of such action (including with respect to Indemnitee's counterclaims and
cross-claims made in such action), unless as a part of such action the court
determines that each of Indemnitee's material defenses to such action was made
in bad faith or was frivolous.
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14. Notice. All notices, consents or other communications required or
------
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given (i) when delivered personally, (ii) three
business days after being mailed by first class certified mail, return receipt
requested, postage prepaid, or (iii) one business day after being sent by a
nationally recognized express courier service, postage or delivery charges
prepaid, to the parties at their respective addresses stated on the first page
of this Agreement. Notices may also be given by prepaid telegram or facsimile
and shall be effective on the date transmitted if confirmed within 24 hours
thereafter by a signed original sent in the manner provided in the preceding
sentence. Either party may change its address for notice and the address to
which copies must be sent by giving notice of the new addresses to the other
party in accordance with this Section 14, provided that any such change of
address notice shall not be effective unless and until received.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the substantive laws (and not the choice of laws rules) of the
State of Delaware applicable to contracts made and to be performed entirely
therein. Each of the parties irrevocably consents to service of process by
certified mail, return receipt requested, postage prepaid, to the address at
which such party is to receive notice in accordance herewith. Each of the
parties irrevocably consents to the jurisdiction of the state courts in Delaware
and the federal courts in Delaware in any and all actions between the parties
arising hereunder.
16. Amendment and Waiver. This Agreement shall not be amended, modified
--------------------
or terminated unless in writing and signed by Indemnitee and a duly authorized
representative of Company other than Indemnitee. No waiver with respect to this
Agreement shall be enforceable unless in writing and signed by the parties
against which enforcement is sought (which, in the case of the Company, must be
a duly authorized representative of the Company other than Indemnitee). Neither
the failure nor any delay on the part of either party to exercise any right,
remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege preclude any other or further exercise of the same or of any other
right, remedy, power or privilege, nor shall any waiver of any right, remedy,
power or privilege with respect to any occurrence by construed as a waiver of
such right, remedy, power or privilege with respect to any other occurrence.
17. Section Headings. Any headings preceding the text of any of the
----------------
Sections or Subsections of this Agreement are inserted for convenience of
reference only, and shall neither constitute a part of this Agreement nor affect
its construction, meaning, or effect.
18. Definitions. As used herein, the term "Person" means any individual,
-----------
sole proprietorship, joint venture, partnership, corporation, association,
cooperative, trust, estate, government body, administrative agency, regulatory
authority or other entity of any nature.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GLOBAL SPORTS, INC.
By: ________________________ ________________________
Name: INDEMNITEE
Title:
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