-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OiunuPfe8DKSj5UqGIBsXuyg2vsJyEox+TmevB2HW+66Sr/vk4lBrCMRdRDyUmRk p+Pi0IyS22KeHTzGboMqeg== 0001036050-99-000670.txt : 19990402 0001036050-99-000670.hdr.sgml : 19990402 ACCESSION NUMBER: 0001036050-99-000670 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLOBAL SPORTS INC CENTRAL INDEX KEY: 0000828750 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042958132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16611 FILM NUMBER: 99580356 BUSINESS ADDRESS: STREET 1: 555 S HENDERSON ROAD SUITE B STREET 2: RTE 3 INDUSTRIAL PARK CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6103372200 MAIL ADDRESS: STREET 1: 555 S HENDERSON RD CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-16611 GLOBAL SPORTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 (State or other jurisdiction (I.R.S. employer identification no.) of incorporation of organization) 555 SOUTH HENDERSON ROAD, KING OF PRUSSIA, PA 19406 (610) 768-0900 (Address of principal executive offices, including zip code, telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on Title of Each Class Which Registered - ----------------------------------------------------------------------------------------- Common Stock, par value $.01 per share.........................
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the registrant's voting stock held by non- affiliates of the registrant as of the close of business on March 15, 1999, was approximately $49,758,283.(/1/) There were 12,039,753 shares of the registrant's Common Stock outstanding as of the close of business on March 15, 1999. ---------------- DOCUMENTS INCORPORATED BY REFERENCE (Specific sections incorporated are identified under applicable items herein) Certain exhibits from the registrant's prior filings under the Securities Exchange Act of 1934 and registration statements under the Securities Act of 1933 are incorporated by reference as Exhibits in Part IV of this report on pages 28-30. - -------- (/1/)This equals the number of outstanding shares of the registrant's Common Stock reduced by the number of shares that may be deemed beneficially owned by the registrant's officers, directors and shareholders owning in excess of 10% of the registrant's Common Stock, multiplied by the last reported sale price for the registrant's Common Stock on March 15, 1999. This information is provided solely for record keeping purposes of the Securities and Exchange Commission and shall not be construed as an admission that any officer, director or 10% shareholder in the registrant is an affiliate of the registrant or is the beneficial owner of any such shares. Any such inference is hereby disclaimed. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GLOBAL SPORTS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
Page ---- PART I ITEM 1: BUSINESS .................................................... 3 Overview .................................................... 3 History ..................................................... 3 Recent Acquisitions ......................................... 4 Branded Division ............................................ 4 Off-Price and Action Sports Division ........................ 7 Industry Overview ........................................... 9 Competition ................................................. 9 Manufacturing ............................................... 10 Distribution ................................................ 10 Management Information Systems .............................. 11 Employees ................................................... 11 Risk Factors ................................................ 11 ITEM 2: PROPERTIES .................................................. 16 ITEM 3: LEGAL PROCEEDINGS ........................................... 16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 17 ITEM 4.1: CERTAIN EXECUTIVE OFFICERS OF THE REGISTRANT ................ 17 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................................................... 19 ITEM 6: SELECTED FINANCIAL DATA ..................................... 20 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................................. 21 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .. 26 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 26 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 26 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 27 ITEM 11: EXECUTIVE COMPENSATION ...................................... 27 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................................. 27 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 27 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................................... 28
2 PART I ITEM 1: BUSINESS Overview Global Sports, Inc. ("Global" or the "Company") is a diversified sporting goods company that operates two distinct divisions: the "Branded Division" and the "Off-Price and Action Sports Division". Through its Branded Division, the Company designs, markets and distributes two footwear products, the "RYKA" brand and the "Yukon" brand. Each brand is designed to appeal to a targeted consumer group with a broad selection of product categories and styles. RYKA is a high performance athletic footwear brand designed exclusively for women. A complete line of RYKA footwear is offered each season at suggested retail prices of between $45 and $80 in five categories: aerobic fitness, cross-training, running, walking and aqua aerobics. Yukon is a high performance outdoor footwear brand designed for men, women and children. A complete line of Yukon's performance-outdoor and rugged casual footwear is offered each season at suggested retail prices of between $35 and $130. Through its Off-Price and Action Sports Division, the Company purchases manufacturers' closeout merchandise, overstocks and canceled orders, as well as excess inventories from retailers, for resale to retailers. The Company purchases and distributes a wide array of athletic, outdoor, casual and specialty footwear, athletic apparel, winter sports equipment (including ski and snowboard equipment), in-line skates, skateboards, and sunglasses. The Company also designs and distributes special make-up snowboards and other sports-related merchandise for selected retailers. The Company's executive offices and warehouse are located at 555 South Henderson Road, King of Prussia, Pennsylvania 19406, and its telephone number is (610) 768-0900. Unless the context requires otherwise, all references herein to Global or the Company refer to Global Sports, Inc. and its subsidiaries. History In July 1995, the Company consummated a financing arrangement with MR Acquisitions, L.L.C. ("MR Acquisitions"), a company that was indirectly owned by Michael G. Rubin, Chairman of the Board and Chief Executive Officer of the Company. Pursuant to the financing arrangement, MR Acquisitions acquired a significant interest, though less than a majority interest, in the Company and provided and/or arranged to provide the Company with up to $8,000,000 of new financing. Mr. Rubin became Chairman of the Board and Chief Executive Officer of the Company in connection with the Company's transactions with MR Acquisitions. On December 15, 1997, the Company (then named RYKA Inc.) consummated a reorganization (the "Reorganization") among the Company, certain companies controlled by Mr. Rubin (the "KPR Companies"), and Mr. Rubin. As part of the Reorganization, (i) the KPR Companies became wholly-owned subsidiaries of the Company, and (ii) the Company issued to Mr. Rubin an aggregate of 8,169,086 of its common stock in exchange for all of the issued and outstanding shares of capital stock of the KPR Companies and certain shares of the Company that were held by the KPR Companies. After the Reorganization, Mr. Rubin owned approximately 78.4% of the outstanding voting power of the Company. Accordingly, the Reorganization was accounted for as a reverse purchase under generally accepted accounting principles pursuant to which the KPR Companies were considered to be the acquiring entity and the Company was the acquired entity for accounting purposes, even though the Company was the surviving legal entity. As a result of this reverse purchase accounting treatment, (i) the historical financial statements presented for periods prior to the date of the Reorganization are no longer the historical financial statements of the Company, (ii) the historical financial statements for periods prior to the date of the Reorganization are those of the KPR Companies, (iii) all references to the historical financial statements of the Company apply to the 3 historical financial statements of the KPR Companies prior to and subsequent to the Reorganization, and (iv) any references to RYKA Inc. apply solely to that company and its financial statements prior to the Reorganization. Recent Acquisitions Effective May 12, 1998, the Company acquired all of the issued and outstanding stock of Gen-X Holdings Inc. and Gen-X Equipment Inc. (collectively, the "Gen-X Companies") from James J. Salter, Kenneth J. Finkelstein and certain other individuals and entities. The Gen-X Companies were privately held companies headquartered in Toronto, Ontario specializing in selling off-price sporting goods and winter sports equipment (including ski and snowboard equipment), in-line skates, sunglasses, skateboards and specialty athletic footwear. In consideration for acquiring all of the capital stock of the Gen-X Companies, the Company issued 1,500,000 shares of its common stock and contingent consideration in the form of noninterest-bearing notes payable in the maximum aggregate amount of $4,500,000 and 10,000 shares of preferred stock mandatorily redeemable in the maximum aggregate amount of 500,000. The goodwill recorded in this transaction of $6,644,083 is being amortized over twenty years. Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc., a privately held manufacturer of snowboards, bindings and related products based in San Diego, California. In consideration for acquiring the stock of Lamar, the Company paid $250,000 in cash and issued notes in the aggregate principal amount of $1,000,000, payable over five years. The goodwill recorded in this transaction of $2,203,992 is being amortized over twenty years. Branded Division The Company designs, develops and markets each of its branded product lines to appeal to a targeted consumer group. Within each line, the Company offers a broad selection of product categories and styles. For the year ended December 31, 1998, the net sales of the Branded Division were $41,080,143 or 31% of the Company's total net sales. RYKA. RYKA is the only performance athletic footwear brand designed exclusively for active women, specifically women between the ages of 25 and 45 years. RYKA includes the following categories: aerobic fitness, cross- training, running, walking and aqua aerobics. All RYKA footwear is made on women's lasts. As a result, RYKA footwear is designed and manufactured with the anatomical features and foot morphology unique to women's feet (typically narrow in the heel and wide in the forefoot). All RYKA footwear incorporates RYKA's Nitrogen/ES System, which is designed to provide enhanced shock absorption, resiliency and durability. The Nitrogen/ES System in higher priced models consists of visible and non-visible nitrogen pads and slabs which are placed in the heel, the mid-sole and the forefoot of the shoe. In standard models, non-visible nitrogen pads are placed in the mid-sole only. In Fall 1998, the Company introduced the RYKA Elemental Technology System(TM) ("ETS(TM)"). ETS(TM) is a holistic approach to footwear, which employs patented technologies to address the four aspects of athletic footwear that are most important to women: fit, comfort, cushioning and control. RYKA footwear is sold principally through athletic footwear stores, sporting goods stores and department stores. RYKA's Spring 1999 line consists of 19 footwear styles in five categories and RYKA's Fall 1999 line will consist of 25 footwear styles in five categories. As part of the Spring 1999 line, the Company is introducing 11 new styles in four categories and as part of the Fall 1999 line, will introduce 12 new styles in four categories. The Company generally offers its RYKA styles in two to three different colors and material variations and 10 to 15 different sizes. The following table sets forth certain information about the RYKA Spring 1999 line.
Categories Number of Styles Suggested Retail Price Range ---------- ---------------- ---------------------------- Aerobic Fitness 5 $55.00- 80.00 Cross-training 3 $55.00- 70.00 Running 4 $65.00- 80.00 Walking 5 $45.00- 70.00 Aqua Aerobics 2 $55.00- 65.00
4 Yukon. Yukon is a performance-outdoor and rugged casual brand of footwear that provides functional performance, classic styling and durability. Yukon is designed primarily for men, but also for women and children, and includes hiking boots, cross-terrain boots, trail walking shoes, rugged casual shoes and work boots. Yukon performance footwear is designed for all ability levels from the avid outdoor enthusiast to the weekend adventurer. Performance features found on various Yukon styles include ThinsulateTM insulation, Weather ProofTM Leather and support shank systems such as Engineered Torsional StabilityTM. Yukon rugged outdoor and casual footwear is generally designed with an EVA footbed for comfort and equipped with rubber outsoles to provide cushioning and traction. All of the Company's Yukon footwear is designed with premium leather products. Yukon is sold principally through sporting goods stores, footwear stores and department stores. Yukon's new Spring 1999 line consists of 29 men's footwear styles in five categories and a full complement of women's and children's styles. The Fall 1999 line, which consist of 29 footwear styles in 5 categories, is designed specifically for the fall and winter seasons and includes different performance features than the Spring line. The Company generally offers its Yukon styles in two to three different colors and material variations and 10 to 15 different sizes. The following table sets forth certain information about the products within the Yukon lines.
Categories Number of Styles Suggested Retail Price Range ---------- ---------------- ---------------------------- SPRING Ascent (Hiking) 9 $55.00- 80.00 Ascent (Trail Walking) 6 $50.00- 75.00 Adrenaline (Approach) 4 $35.00- 70.00 Adrenaline (River Rock) 5 $55.00- 70.00 Traverse (Rugged Casual) 5 $35.00- 50.00 FALL Ascent (Hiking) 6 $55.00- 85.00 Adrenaline (Cross-Terrain) 7 $35.00- 60.00 Traverse (Rugged Casual) 6 $35.00- 50.00 Excursion (Walking) 5 $40.00- 65.00 Extreme Weather 5 $70.00-130.00
Marketing and Advertising. The Company's marketing focus is to continue to build the recognition of the Company's brand names as the footwear of choice for their targeted consumer groups and as brands that stand for quality, performance, comfort, design innovation and value. Senior management is directly involved in shaping the Company's image and its advertising and promotional activities. Mr. Rubin and the executives in charge of the Company's Branded Division oversee the conception, development, and implementation of most aspects of the Company's branded footwear marketing efforts. Because of its limited resources, the Company historically has concentrated its marketing efforts on less costly, grass-roots approaches such as point-of- purchase and other retailer promotions. The Company recently has begun to advertise in targeted consumer publications, such as Self, Fitness and Cooking Light for RYKA and Outside, Sierra and Backpacker for Yukon. Outside advertising agencies, together with the Company's in-house marketing personnel, have developed a program to promote the Company's brand names through lifestyle and image advertising. While all advertisements feature the Company's footwear, advertising generally seeks to build and increase brand awareness by linking the brand to its targeted consumer group rather than to market a particular footwear product. The Company also participates with certain of its retail customers in cooperative advertising programs intended to take the brand awareness created by the Company's print advertising and channel it to local retailers where consumers can buy the Company's products. This advertising typically includes local newspaper advertising. The Company's co-op efforts are intended to maximize advertising resources by having its retailers share in the cost of promoting the Company's brands. Also, the Company believes that co-op advertising encourages the retailer to merchandise the brands properly and sell them aggressively on the sales floor. 5 The Company also supports retailers by developing marketing to further promote its products in stores and to leverage the brand recognition at the retail level. The Company's independent sales representatives and Company personnel communicate with and visit the Company's customers on a regular basis to aid in the proper visual presentation of the Company's merchandise and to distribute point-of-purchase items such as signage, packaging, displays, counter cards, and banners. The Company believes these efforts help stimulate impulse sales and repeat purchases. Certain of the Company's retail accounts feature "in-store shop" formats in which the Company provides fixtures, signage and visual merchandise assistance in a dedicated floor space within the store. The design of the shops uses the Company's distinctive brand advertising to promote brand recognition and differentiate the Company's products in the store from that of its competition. The Company has also developed a variety of promotional programs, such as the "RYKA Instructor and Trainer Alliance" (an incentive program for fitness instructors), "Team Yukon" (a series of field product tests in conjunction with key retailers) and the "Yukon Preservation Alliance" (a series of events designed to promote environmental awareness and resource preservation). RYKA is the official and exclusive footwear sponsor for Jazzercise, the world's largest fitness program with over 4,700 instructors and 450,000 students. In Spring 1999, RYKA launched the RALLY program in all 500 non-urban Lady Foot Locker Stores in the United States. RALLY is a marketing program which includes (i) displays that advertise and feature eight RYKA styles (ii) the Another Chance Foundation, a charitable institution jointly established by the Company and Lady Foot Locker, that is funded with a percentage of the proceeds from RYKA sales at Lady Foot Locker stores, (iii) a referral program with local fitness instructors and (iv) an educational program about RYKA. To showcase the Company's products to footwear buyers, the Company exhibits at industry trade shows. Sales. The Company focuses on those retailers which it believes will effectively promote and display the Company's products. By so doing, the Company believes that it is better able to protect and enhance its brand names and service customers' accounts. Senior management of the Company is directly involved in maintaining relationships with key customer accounts as well as developing relationships with new customers. The Company relies principally on 11 independent sales organizations, which collectively employ 38 sales representatives, to sell RYKA and Yukon footwear to its customer accounts. Three of the 11 sales organizations have been added recently to cover customer accounts in Canada. The independent sales organizations cover all 50 states and Canada and report to the Vice President of Sales for the Branded Division. Each of the independent sales organizations is compensated on a commission basis. While the Company's independent sales organizations handle products from other brands, none of the representatives sell products directly competitive with RYKA and Yukon. The Company also has eight in-house customer service employees. Customers. The Company's primary customers are athletic footwear stores, sporting goods stores, department stores and independent retailers. In 1998, RYKA and Yukon footwear was sold by over 1,000 retail accounts, principally in the United States and Canada, including The Venator Group, Finish Line, Athlete's Foot, Just for Feet, Modell's, Michigan Sporting Goods (d/b/a MC Sporting Goods), Gart Sports/Sportmart, Oshman's, and United Merchandising (d/b/a Big 5). The majority of the Company's customer accounts carry both RYKA and Yukon. The following table demonstrates the Company's penetration of selected large customer accounts.
Customer Account Products Carried ---------------- ---------------- Athlete's Foot 5 RYKA styles in all stores Finish Line 5 RYKA styles in 90 stores, 2 Yukon styles in all stores Gart Sports/Sportmart 5 RYKA styles and 5 Yukon styles in all stores Just for Feet 20 RYKA styles and 40 Yukon styles in all stores Lady Foot Locker 8 RYKA styles in all non-urban stores The Sports Authority 7 RYKA styles and 6 Yukon styles in all stores
Two retail accounts each represented approximately 19%, or 38% in the aggregate, of the total net sales of the Company's Branded Division for the year ended December 31, 1998. Other than the foregoing, no one customer accounted for 10% or more of the total net sales of the Branded Division for the year ended December 31, 1998. 6 The Company is committed to achieving customer satisfaction and to building a loyal customer base by providing a high level of knowledgeable, attentive and personalized customer service. The Company's independent sales representatives and the Company's sales and customer service personnel coordinate with retail customers to determine the inventory level and product mix that should be carried in each store in an effort to help retail sell- through and enhance the customer's product margin. Such information is used as a basis for developing sales projections and product needs for such customers. These representatives and Company personnel work with retailers to ensure that the Company's products are appropriately displayed. The Company believes that by strategically selecting the appropriate accounts and closely working with those accounts, it is better able to reduce inventory markdowns and customer returns and allowances, while maintaining the proper showcase for the Company's brand names and products. To protect itself from the possibility of insolvency of its customer accounts, the Company maintains policies of credit insurance specific to certain customer accounts. Product Design and Development. The Company designs most new styles to appeal to their targeted consumer group, although the Company's footwear often appeals to a broader spectrum of consumers resulting in improved brand recognition. The Company generally positions RYKA and Yukon as performance oriented brands at a value price with features comparable to those found on other leading footwear brands. The Company offers primary lines of both RYKA and Yukon in the Spring and Fall seasons. The Company's products are designed and developed in-house, although the Company periodically utilizes outside design firms to supplement its design efforts. Separate design teams focus on each of the Company's brands and report to the Company's executive in charge of the particular brand. The design process is collaborative with members of the design staff meeting regularly to further refine the Company's products in order to meet the particular needs of the Company's markets. The Company believes that its product success is related in large part to its ability to recognize trends in its footwear markets and to design products that anticipate and accommodate consumers' evolving preferences. The Company strives to analyze, interpret and translate current and emerging lifestyle trends affecting its targeted consumer groups. Lifestyle trend information is compiled by the Company's designers through various methods designed to monitor changes in culture and society, including (i) review and analysis of music, television, movies, clothing, sports and other trend-setting media, (ii) travel to various markets to identify and confirm current trends, (iii) consultation with the Company's retail customers for information on current retail selling trends, (iv) participation in major footwear trade shows to stay abreast of popular brands and styles and (v) subscription to various fashion and color information services. After the design team arrives at a consensus regarding the themes for the coming season, the group then translates these themes into the Company's products. These interpretations include variations in product color, material structure and decoration. Prototype blueprints and specifications are created and forwarded to the Company's prototype manufacturers located in China, which then forward design prototypes back to the Company's domestic design team approximately four to six weeks after initial receipt. All new design concepts are subject to review by the Company's major retail customers. This customer input not only allows the Company to measure consumer reaction to the Company's latest designs, but also affords the Company an opportunity to foster deeper and more collaborative relationships with these customers. The Company's design team can modify and refine designs based on this development input. Off-Price and Action Sports Division General. The Company purchases manufacturers' closeout merchandise, overstocks and canceled orders, as well as excess inventories from retailers, for resale to retailers principally in the United States and Canada. The Company is a leading third-party wholesaler of off-price athletic, outdoor and casual footwear, athletic apparel and sporting goods. The Company resells merchandise to sporting goods stores, off-price specialty stores, department stores, family footwear stores, and independent retailers. Due to the large quantities of merchandise 7 that the division purchases and warehouses in its distribution facilities, the Company is able to pass along its value pricing to the retailer. The Company also designs and distributes special make-up snowboards and other sports- related merchandise for selected retailers. For the year ended December 31, 1998, the net sales of the Off-Price and Action Sports Division were $90,354,828 or 69% of the Company's total net sales. Net sales for the Off-Price and Action Sports Division reflect the acquisition of the Gen-X Companies as of May 12, 1998. The off-price business relies on the availability of merchandise from manufacturers and retailers in the footwear, athletic apparel and sporting goods industries. The Company has developed strong working relationships with and has purchased significant quantities of merchandise from major well-known brands. By affiliating with multiple brands, the Company is able to offer a diverse product mix from a variety of brands to the customers of its Off-Price and Action Sports Division. The Company's goal is to purchase quality goods with greater selectivity from a number of sources. Towards this goal, the Company has established arrangements with several large, well-known manufacturers under which the Company may purchase off-price merchandise. The Company has also established a "store stock" program with a key retailer to purchase, at the Company's option, all closeout or overstocked inventory. The Company intends to establish additional arrangements with manufacturers and retailers to increase the predictability of the business. The Company estimates that more than 75% of merchandise in a given year is purchased from manufacturers with which the Company has a long-standing relationship. Products. The following table sets forth certain information about the products that are sold by the Company's Off-Price and Action Sports Division.
Category Products -------- -------- 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
Special Make-up Business. On a special make-up basis, the Company designs and distributes product orders specifically designed for selected retailers. The Off-Price and Action Sports Division, like a branded goods business, receives orders four to six months prior to the expected shipment date. The Company accepts orders for snowboards and other sports-related merchandise that vary dramatically in size and fulfills product orders for nationwide store chains as well as for single location specialty shops. The Company designs products according to customer specifications and produces only the quantity of merchandise requested by the customer. The Company's special make-up products consist primarily of snowboard equipment, but also include athletic footwear and skateboard equipment. The Company believes that the sale of snowboard and skateboard equipment, in particular, is well suited to the custom order process, which increases predictability and minimizes risk. The Company's special make-up lines include Apex, Lamar, Vision, Rage, and Dukes Shoes. The Lamar, Vision and Rage lines consist of snowboard equipment and accessories and are each sold at a different price point. The Lamar and Rage lines also include skateboard equipment and accessories, which are also sold at different price points. The Apex lines consist of athletic footwear for men and boys of all ages in the following categories: cross-training, basketball, running, tennis, baseball/softball and soccer. Dukes Shoes is a skateboard footwear line. Sales. The sales force for the Company's Off-Price and Action Sports Division merchandise consists of 15 sales executives of which nine have been with the Gen-X Companies since their formation in 1996. These 8 sales executives deal exclusively with off-price and special make-up merchandise and have established strong relationships with a wide range of major retailers. Each of the sales executives is compensated on a commission basis. Customers. During the year ended December 31, 1998, the Company sold its off-price merchandise to approximately 1,250 retail accounts. Two retail accounts each represented approximately 30% and 10%, or 40% in the aggregate, of the total net sales of the Company's Off-Price and Action Sports Division for the year ended December 31, 1998. Other than the foregoing, no one customer accounted for 10% or more of the total net sales of the Off-Price and Action Sports Division for the year ended December 31, 1998. Industry Overview According to Sporting Goods Intelligence ("SGI"), wholesale sales of branded athletic footwear in the United States were approximately $7.5 billion in 1998, down approximately 7% from $8.0 billion in 1997. According to Footwear Market Insights, athletic footwear designed specifically for women accounted for approximately 40% of all athletic footwear sales in the U.S. in 1997. Nike and Reebok accounted for approximately 43% and 14%, respectively, of sales in 1998 and 47% and 15%, respectively, of sales in 1997. After these market leaders, the remainder of the branded athletic footwear market is highly fragmented with the third largest brand, adidas, accounting for approximately 13% of athletic footwear sales in 1998. Only five brands of athletic footwear, including the three aforementioned brands, had domestic sales in excess of $200 million in 1998. A number of smaller companies compete with the industry leaders and among themselves for specialty niches based on various factors, including product quality, design, pricing, fashion appeal, performance and brand awareness and positioning. Also, many companies have capitalized on the strong name recognition associated with their footwear to produce or market related apparel and accessories with the brand's logo. According to SGI, wholesale sales of branded rugged outdoor footwear in the United States were approximately $2.0 billion in 1997, up 25% from $1.6 billion in 1996. Timberland, the industry leader, accounted for approximately 22% of sales in 1997 and 24% of sales in 1996. Reebok (through its Rockport division) and Nike (through its Nike ACG division), which focus primarily on branded athletic footwear, accounted for an additional 20% and 10% of sales, respectively, in 1997. The remainder of the branded rugged outdoor footwear market is highly fragmented with only seven other brands with sales in excess of $50 million, of which none accounted for more than 10% of sales in 1997. The Company estimates that between 5% and 10%, or between $2.2 and $4.4 billion, of the approximately $44.1 billion wholesale market for athletic footwear, athletic apparel and sporting goods (as estimated by the Sporting Goods Manufacturing Association) is sold as off-price merchandise. The Company further estimates that approximately 10%, or between $200 to $400 million, of off-price wholesale merchandise is available to third party resellers. In addition, the Company believes that approximately $150 to $200 million of off- price merchandise is available from retailers. The third-party off-price market is extremely fragmented and primarily consists of relatively small independent operations without the financial resources necessary to purchase large quantities of merchandise from manufacturers or retailers. Competition Competition in the branded footwear industry is intense. Although the Company believes that its Branded Division does not compete directly with any single company with respect to its entire range of products, the Company's products compete with other branded products within their product category as well as with private label products sold by retailers, including some of the Company's customers. RYKA competes with many brands of athletic footwear including Nike, Reebok, adidas, Avia, Asics, New Balance and Saucony. Yukon competes with a number of other brands of rugged outdoor and casual footwear, including Timberland, Rockport (a division of Reebok), Nike ACG, Columbia, Hi- Tec, Merrell, Vasque, and Wolverine. In varying degrees, depending on the product category involved, the Company competes on the basis of style, price, quality, comfort and brand name prestige and recognition, among other considerations. The Company also competes with 9 numerous manufacturers, importers and distributors of footwear for the limited shelf space available for the display of such products to the consumer. Also, the general availability of contract manufacturing capacity allows ease of access by new market entrants. Many of the Company's competitors are larger, have achieved greater recognition for their brand names, have captured greater market share and/or have substantially greater financial, distribution, marketing and other resources than the Company. The Off-Price and Action Sports Division competes with a number of large retailers who purchase off-price merchandise on a direct basis. A number of footwear manufacturers also dispose of their excess merchandise through their own retail outlet operations. There are several independent resellers of footwear, athletic apparel and sporting goods that also compete with the Company's Off-Price and Action Sports Division. Manufacturing Products of the Company's Branded Division are produced by independent contract manufacturers located in Asia. For the year ended December 31, 1998, substantially all of the Company's branded products were manufactured in China. The Company does not own or operate any manufacturing facilities. The Company believes the use of independent manufacturers increases its production flexibility and capacity while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. The Company's contracts with these manufacturers generally specify pricing, purchasing of raw materials and minimum quality/delivery standards, as well as address certain confidentiality issues. The Company oversees the key phases of production from initial prototype manufacture through initial production runs to final manufacture. Manufacturers are selected in large part on the basis of the Company's prior experience with the manufacturer and the availability of production capacity. The Company seeks to use, whenever possible, manufacturers that have previously produced the Company's footwear, which the Company believes enhances continuity and quality while controlling production costs. For the year ended December 31, 1998, the top three manufacturers each accounted for 32%, 18% and 11% of the Company's manufactured branded footwear products, or 61% in the aggregate. Other than the foregoing, no one manufacturer accounted for 10% or more of the Company's total production of the Branded Division. To date, the Company has not experienced difficulty in obtaining manufacturing services. To safeguard product quality and consistency, the Company employs quality control assurance personnel based in Asia to oversee the key aspects of the production process. The Company's quality control program is designed to ensure that finished goods not only meet with Company established design specifications, but also that all goods bearing its trademarks meet the Company's standards for quality. The Company's personnel perform an array of quality control inspection procedures at various stages of the production process, including examination and testing of (i) prototypes of key products prior to manufacture, (ii) samples and materials prior to production and (iii) final products prior to shipment. The Company's arrangements with its manufacturers generally are U.S. dollar denominated. Substantially all of the Company's footwear products are manufactured overseas and subject to U.S. customs duties. Under the fixed duty structure in effect since July 1981, duties on the footwear products imported by the Company to date approximate 8.5% to 10% of cost for leather products and 20% for synthetic products, depending on gender, plus administrative charges. If the Company were to significantly increase the amount of synthetic raw material, as opposed to leather, in its footwear, total duties would increase substantially. Distribution The Company believes that strong distribution capabilities are critical to support the operations of both the Branded Division and the Off-Price and Action Sports Division. The Company utilizes third-party public warehouses in several locations across the U.S. and Canada, as well as a Company-leased warehousing facility in King of Prussia, Pennsylvania. The Company currently is in the process of analyzing its distribution needs and the costs and efficiency of its distribution system, with a view toward expanding and rationalizing its 10 distribution system. Under the Company's current system, following manufacture, the Company's branded products are generally shipped to the public warehousing facilities in California. Upon receipt at a facility, merchandise is inspected and recorded in the Company's management information system and packaged according to customers' orders for delivery. Merchandise is shipped to the customer by whatever means the customer requests, which is usually by common carrier. The Company has an Electronic Data Interchange (or EDI) system to which some of the Company's larger customers are linked. This system allows these customers to automatically place orders with the Company, thereby eliminating the time involved in transmitting and inputting orders, and includes direct billing and shipping information. The Company has recently implemented a Quick Response inventory system with Lady Foot Locker, which allows the Company to most efficiently track and maintain inventories at each store location. Management Information Systems The Company recognizes the importance of advanced MIS systems in maintaining and improving its level of service, internal and external communication and overall competitive position. The Company has a computerized management information system that relies upon an IBM AS/400 computer system, together with an Ethernet PC network. These computers are integrated by a bridge application and are connected via modem to the Company's distribution facilities. The Company's system provides, among other things, comprehensive customer order processing, inventory, production, accounting and management information for the marketing, selling, manufacturing and distribution functions of the Company's business. The Company is currently conducting several upgrades and conversions of its core business applications to improve functionality and increase performance. These upgrades, which are expected to be completed during the second quarter of 1999, will also achieve Year 2000 compliance. Employees As of March 15, 1999, the Company employed 160 people on a full-time basis. Of these employees, 49 are employed in the Branded Division, 73 are employed in the Off-Price and Action Sports Division, and 38 are employed in the main executive offices or provide services on behalf of both divisions. The Company's employees are based primarily at the Company's headquarters in King of Prussia, Pennsylvania (91 employees), Toronto, Ontario (46 employees) and Portland, Oregon (11 employees). Twelve additional employees are based in Mainland China. The Company also relies on 11 independent sales organizations, which collectively employ 38 sales representatives, to sell RYKA and Yukon footwear to its customer accounts. Risk Factors In analyzing whether to make or to continue an investment in the Company, investors should consider carefully all the information contained or incorporated by reference in this Annual Report on Form 10-K and, in particular, the following: Forward Looking Statements. Certain information contained in this Form 10-K contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Leverage. As of December 31, 1998, the Company's consolidated long-term debt, including current maturities, was $43.0 million, and the Company had a total consolidated stockholders' equity of $14.7 million. The Company's leveraged financial position poses substantial risks to stockholders, including the risks that (i) a substantial portion of its cash flow from operations will be dedicated to the payment of interest on indebtedness; (ii) its leveraged position may impede its ability to obtain financing in the future; and (iii) its leveraged financial position may make it more vulnerable to economic downturns and may limit its ability to withstand competitive pressures. 11 Competition. Although the Company believes that it does not compete directly with any single company with respect to its entire range of products, the Company's products compete with other branded products within their product category and with private label products sold by retailers. The Company's Yukon brand footwear competes with footwear offered by companies such as The Timberland Company, Skechers USA, Inc., Dr. Martens, Kenneth Cole, Frey Boot and Wolverine World Wide, Inc. The Company's RYKA brand footwear competes with brands of athletic footwear offered by companies such as Nike, Inc., Reebok International Ltd., Fila Ltd. and Converse, Inc. In varying degrees, depending on the product category involved, the Company competes on the basis of style, price, quality, comfort and brand name prestige and recognition, among other considerations. These and other competitors pose challenges to the Company's market share in its major domestic and other international regions. The Company also competes with numerous manufacturers, importers and distributors of footwear for the limited shelf space available for the display of such products to the consumer. Moreover, the general availability of contract manufacturing capacity allows ease of access by new market entrants. Many of the Company's competitors are larger, have achieved greater recognition for their brand names, have captured greater market share and/or have substantially greater financial, distribution, marketing and other resources than the Company. There can be no assurance that the Company will be able to compete successfully against present or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations. Foreign Production. Virtually all of the Company's branded footwear is manufactured to its specifications by independent producers located in the Far East, particularly China. As a result of the Company's continuing use of foreign manufacturing facilities, its operations are subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, import and export duties and trade barriers (including quotas), restrictions on the transfer of funds, work stoppage and, in certain parts of the world, political instability. To date, these factors have not had an adverse impact on the Company's operations. The Company continues to monitor the political and economic stability of the Asian countries with which it conducts business. A substantial portion of the Company's footwear is manufactured in China. In June 1998, President Clinton announced that he intends to extend "most favored nation" ("MFN") non-discriminatory status to China. Under U.S. law, MFN status for China is reviewed annually. The United States has extended MFN status to China each year since 1980, however, there can be no assurance that China will continue to enjoy MFN status in the future. If goods manufactured in China enter the United States without the benefit of MFN treatment, such goods will be subject to significantly higher duty rates, ranging between 20% and 66% of customs value. A revocation of MFN status would result in a substantial increase in tariff rates on goods imported from China and therefore could adversely affect the Company's business, financial condition and results of operations. Risks Associated With International Sales. The Company expects its international business to become a material part of its revenues. International sales are subject to many risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, inconsistent product regulation by foreign agencies or governments, imposition of product tariffs and other burdens and costs of complying with a wide variety of international and U.S. export laws and regulatory requirements. The Company cannot be sure that it will be able to compete successfully in international markets or that its international sales will be profitable. The Company expects that virtually all of its sales will be denominated in U.S. dollars. Accordingly, the Company believes that it will not have significant exposure to fluctuations in currency. However, fluctuations in currency could adversely affect potential customers. Also, the Company may be subjected to additional duties, significant monetary penalties, the seizure and the forfeiture of the products the Company is attempting to import or the loss of its import privileges if the Company or its suppliers are found to be in violation of U.S. laws and regulations applicable to the importation of the Company's products. Such violations may include (i) inadequate record keeping of its imported products, (ii) misstatements or errors as to the origin, quota category, classification, marketing or valuation of its imported products, (iii) fraudulent visas or (iv) labor violations under U.S. or foreign laws. There can be no assurance that the Company will not incur significant penalties (monetary or otherwise) if the United States Customs Service determines that these laws or regulations have been violated or that the Company failed to exercise reasonable care in its obligations to comply with these laws or regulations on an informed basis. Such factors could render the conduct of business in a particular country undesirable or 12 impractical, which could have a material adverse effect on the Company's business, financial condition and results of operations. Changes in Consumer Preferences. The Company's success depends in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences and demands in a timely manner. Accordingly, any failure to anticipate and respond to changing merchandise trends and consumer preferences and demands could materially adversely affect consumer acceptance of the Company's brand names and product lines, which in turn could materially adversely affect the Company's business, financial condition or results of operations. Decisions with respect to product designs often need to be made several months in advance of the time when consumer acceptance can be determined. As a result, the Company's failure to anticipate, identify or react appropriately to changes in styles and features could lead to, among other things, lower sales, excess inventories, higher inventory markdowns, impairment of the Company's brand image and lower gross margins as a result of allowances and discounts provided to retailers. On the other hand, the failure by the Company to anticipate consumer demand could result in inventory shortages, which in turn could adversely affect the timing of shipments to customers, negatively impacting retailer and distributor relationships, and diminish brand loyalty. There can be no assurance that the Company will successfully adapt to changing consumer demands, and any such failure to adapt could have a material adverse effect on the Company's business, financial condition and results of operations. The Company intends to market additional lines of footwear in the future and, as is typical with new products, demand and market acceptance will be subject to uncertainty. Failure to regularly develop and introduce new products successfully could have a material adverse effect on the Company's future growth and profitability. Achieving market acceptance for new products may require substantial marketing efforts. There can be no assurance that the Company's marketing efforts will be successful or that the Company will have the funds necessary to undertake sufficient efforts. Reliance on Merchandise Vendors. The Company's Off-Price and Action Sports Division is entirely dependent upon vendors to supply it with merchandise for sale and the availability of such merchandise is unpredictable. During the year ended December 31, 1998, approximately 28% of the Off-Price and Action Sports Division's purchases were derived from two vendors (16% and 12%, individually). No other vendors individually accounted for more than 10% of the Division's purchases. The Company has no long-term contracts or arrangements with its vendors that guarantee the availability of merchandise. There can be no assurance that the Company's current vendors will continue to sell merchandise to the Company or that the Company will be able to establish new vendor relationships. If the Company is unable to develop and maintain satisfactory relationships with vendors on acceptable commercial terms, if the Company is unable to obtain sufficient quantities of merchandise, if the quality of service provided by such vendors falls below a satisfactory standard or if the Company's level of returns exceeds its expectations, the Company's business, results of operations and financial condition could be materially adversely affected. Risks Relating to Category Concentration in the Branded Division. If any one category or group of similar categories of the Company's branded footwear were to represent a substantial portion of the Company's net sales, the Company could be exposed to risk if consumer demand for that category or group of categories decreases in subsequent periods. The Company attempts to hedge this risk by offering a broad range of products, and no category or group of similar categories comprised over 10% of the Company's sales, net of discounts, for the year ended December 31, 1998. There can be no assurance that the Company's sales will not become concentrated in one category or a group of similar categories and that consumer demand for such category or group of categories will not decrease in the future and have a material adverse effect on the Company's business, financial condition and results of operations. Ability to Sustain Prior Rate of Growth or Increase Net Sales or Earnings. From 1997 to 1998, the Company experienced an increase in net sales from $73.7 million (on a pro forma basis) to $131.4 million and an increase in income from operations from a loss of $6.2 million (on a pro forma basis) to income of $5.9 13 million. The Company's current growth rates may not be indicative of growth rates for an entire year. In the future, the Company's rate of growth will be dependent upon, among other things, the continued success of its efforts to expand both its branded footwear and off-price operations. There can be no assurance that the Company's rate of growth will not decline or that it will continue to be profitable. In addition, the Company may have more difficulty maintaining its prior rate of growth to the extent it becomes larger. Risks Associated with International Growth. As part of its growth strategy, the Company seeks to increase its international operations, including in countries and territories where the Company has little distribution experience and where the Company's brand name is not yet well known. There can be no assurance that these and the Company's other growth strategies will be successful. Success will depend on various factors, including the strength of the Company's brand name, market success of current and new products, competitive conditions and the ability of the Company to manage increased net sales. The Company's business also depends on general economic conditions and levels of consumer spending, and a decline in the economy or a recession could adversely impact the Company's business, financial condition and results of operation since consumers often reduce spending on footwear and apparel in such times. Risks Associated with Acquisitions. In the normal course of its business, the Company evaluates potential acquisitions that would complement or expand its business. The Company cannot be sure that it will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make acquisitions, the Company often competes with other potential acquirers, many of which have greater financial and operational resources than the Company. Also, the process of evaluating, negotiating, financing and integrating acquisitions may divert management's time and resources. Finally, the Company cannot be sure that any acquisition, when consummated, will not materially adversely affect its business, results of operations or financial condition. Economic Conditions. The footwear industry in general is dependent on the economic environment and levels of consumer spending which affect not only the ultimate consumer, but also retailers, who are the Company's primary direct customers. As a result, the Company's results may be adversely affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general. The Company cannot be sure that any prolonged economic downturn would not have a material adverse effect on it. Seasonality. Sales of the Company's footwear products are somewhat seasonal in nature with the strongest sales generally occurring in the first and third quarters. Reliance on Small Number of Large Customers. A significant portion of the Company's revenues are generated from a small number of large customers. Accordingly, the loss of any of these customers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's two largest customers accounted for approximately 27% and 13% of the Company's total revenues for the year ended December 31, 1998. Accounts receivable from these two customers in the represented approximately 24% and 11% of the Company's total accounts receivable at December 31, 1998. Lack of Long-Term Contractual Arrangements. The Company does not have contractual arrangements with many of its customers, rather these relationships are based upon course of dealing and can be terminated at any time. The agreements which the Company does have with some of its customers may generally be terminated by the customer on short notice. The Company cannot be sure that any of its customers will continue to do business with it which would have a material adverse effect on its business, financial condition and results of operations. Dependence on Manufacturers. The Company's branded footwear products are currently manufactured by independent contract manufacturers. For the year ended December 31, 1998, the top three manufacturers of the Company's manufactured products accounted for 32%, 18% and 11% of the Company's total manufactured products. The Company has no long-term contracts with its manufacturers and competes with other footwear companies for production facilities. Although the Company has established close working relationships with its principal manufacturers, the Company's future success will depend, in large part, on maintaining such relationships and developing new relationships. There can be no assurance that the Company will not experience 14 difficulties with such manufacturers, including reduction in the availability of production capacity, failure to meet the Company's quality control standards, failure to meet production deadlines or increase in manufacturing costs. This could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In the event that the Company's current manufacturers were for any reason to cease doing business with the Company, the Company could experience an interruption in the manufacture of its products, which could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company believes that it could find alternative sources to manufacture its products, establishment of new manufacturing relationships involves various uncertainties, including payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery. The Company cannot predict whether it will be able to establish new manufacturing relationships, either in the countries in which it currently does business or in other countries in which it does not currently do business, that will be as favorable as those that now exist. Any significant delay in manufacture of the Company's footwear products or the inability to provide products consistent with the Company's standards, would have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Obsolete Inventory. In order to minimize purchasing costs, the Company places a significant portion of its footwear orders with its manufacturers well in advance of receiving customers' orders. In addition, an order may be canceled by the customer up until the time the customer accepts delivery of the merchandise. Therefore, the Company has no assurance that it will be able to sell footwear ordered from its manufacturers or the inventory it has on hand. As of March 15, 1999, the Company had $4.8 million of open purchase orders at cost, for which import letters of credit have been issued, with its manufacturers and $18.3 million of inventory at cost. Accumulated Deficit. The Company had an accumulated deficit of $5.7 million at December 31, 1997. Although the Company generated operating profits of $11.1 million in 1998, the Company cannot be sure that it will be able to maintain its recent profitability. Management of Growth. The Company is currently experiencing a period of rapid growth in the volume of its business. In addition, the Company believes that continued growth will be required to maintain its competitive position. The Company's rapid growth is likely to continue to place significant strains on its management, administrative, operating and financial resources, as well as increased demands on its internal systems, procedures and controls. The Company's ability to manage recent and future growth will require it to continue to improve its financial and management controls, reporting systems and procedures on a timely basis, to implement new systems as necessary and to expand, train, motivate and manage its sales and technical personnel. The Company cannot be sure that it will be able to manage its growth successfully and its failure to do so could have a material adverse effect on its business, operating results and financial condition. Dependence on Key Personnel. The Company's success depends to a significant degree upon the contribution of its executive officers and other key personnel, including Michael G. Rubin, Chief Executive Officer, Arthur I. Carver, Executive Vice President of Operations, James J. Salter, Chief Executive Officer of the Company's Off-Price and Action Sports Division and Steven A. Wolf, Chief Financial Officer. All of these executive officers have employment agreements with the Company. However, the Company cannot be sure that it will be able to retain its managerial and other key personnel or attract additional managerial and other key personnel if required. Control by Principal Stockholder. Michael G. Rubin beneficially owns 67% of the outstanding common stock of the Company. As a result, Mr. Rubin is in a position to exercise control over most matters requiring stockholder approval, including the election or removal of directors and approval of significant corporate transactions, and the ability generally to direct the Company's affairs. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company, including transactions where stockholders might otherwise receive a premium over current market prices for their shares. 15 No Dividends. The Company has never paid cash dividends on its common stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the Company's credit facility with its bank prohibits the payment of dividends on its common stock. Risks Relating to Year 2000 Compliance. Many existing computer software programs and operating systems were designed such that the year 1999 is the maximum date that many computer systems will be able to process. The Company is addressing the potential problems posed by this limitation in its systems software to assure that it is prepared for the Year 2000. The Company also intends to seek verification from third parties with which it conducts material business that they will be Year 2000 compliant. If the Company does not complete the modifications and conversions necessary to deal with Year 2000 on a timely basis, there may be a material adverse effect on the Company's results of operations. Issuance of Preferred Stock and Common Stock; Anti-Takeover Provisions. Pursuant to its Amended and Restated Certificate of Incorporation, the Company has an authorized class of 1,000,000 shares of preferred stock, $0.01 par value per share ("Preferred Stock") which the Board of Directors may issue with terms, rights, preferences and designations as the Board may determine and without any vote of the stockholders, unless otherwise required by law. Issuing the Preferred Stock, depending upon the rights, preferences and designations set by the Board, may delay, deter or prevent a change in control of the Company. Issuing additional shares of common stock could result in dilution of the voting power of the current holders of the Company's common stock. In addition, certain "anti-takeover" provisions of the Delaware General Corporation Law among other things, may restrict the ability of the stockholders to approve a merger or business combination or obtain control of the Company. Limitation on Directors' Liabilities. Pursuant to its Amended and Restated Certificate of Incorporation and under Delaware law, the Company's directors are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law or any transaction in which a director has derived an improper personal benefit. ITEM 2: PROPERTIES The Company's main executive offices and warehouse are located in King of Prussia, Pennsylvania in a 75,000 square foot facility leased from Mr. Rubin. Pursuant to the lease, the Company pays approximately $29,000 per month, plus maintenance and utilities, for use of these facilities. The lease expires on September 30, 2009. In addition, the Company owns a 12,000 square foot facility located in North York, Ontario used primarily in the Off-Price and Action Sports Division and leases a limited amount of office space in Portland, Oregon for its Branded Division. The Company also uses the services of thirteen third-party public warehousing facilities located in Ontario, Canada (4), California (3), Washington (2), and one in each of the following states: New Hampshire, Minnesota, New York and New Jersey. See "Business-- Distribution." The Company believes that its owned, leased and third-party properties are adequate for its present needs and that suitable additional or replacement space will be available as required. ITEM 3: LEGAL PROCEEDINGS The Company is involved in various routine litigation, including litigation in which the Company is a plaintiff, incidental to its business. The Company believes that the disposition of such routine litigation will not have a material adverse effect on the financial position or results of operations of the Company. 16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the quarter ended December 31, 1998. ITEM 4.1: CERTAIN EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company who are not also directors of the Company are as follows:
Name Age Title ---- --- ----- Arthur I. Carver 48 Executive Vice President of Operations Michael R. Conn 28 Senior Vice President of Strategic Development Guy A. Grubel 44 Vice President/General Manager of Yukon Melvin E. Lewis 51 Vice President/General Manager of International Sales David B. Newcombe 35 Vice President of Sales James J. Salter 35 Chief Executive Officer--Off-Price and Action Sports Division Mary D. Taylor 40 President--RYKA Steven A. Wolf 40 Chief Financial Officer
Arthur I. Carver joined the Company as Executive Vice President of Operations in January 1999. Prior to joining the Company, Mr. Carver worked at Reebok International, Ltd. where he served as Senior Vice President, Worldwide Sourcing and Logistics for approximately four years. Prior to that, Mr. Carver served as the Vice President, Operations Development, Worldwide and Vice President, North American Operations as well as other positions, for a total of nine years with Reebok. Mr. Carver received a degree in Industrial Management from Clarkson University. Michael R. Conn joined the Company in February 1999 as Senior Vice President of Strategic Development. Mr. Conn is responsible for developing growth opportunities for the Company and overseeing its investor relations and corporate communications. Prior to joining the Company, Mr. Conn served as a Vice President of Research at Gruntal & Co. L.L.C., an investment bank, where he was employed since 1993. Mr. Conn received a degree in Finance from Boston University. Guy A. Grubel joined the Company in September 1997 and currently serves as Vice President/General Manager of Yukon. Prior to joining the Company, he served as Executive Vice President and General Manager of the Head footwear and apparel division of HTM from 1990 to 1996. Mr. Grubel attended the University of Michigan and Kutztown University. Melvin E. Lewis joined the Company in June 1998 as Vice President/General Manager of the International division of the Branded Division. Prior to joining the Company, Mr. Lewis worked in the international divisions of Jack Schwartz Shoes, Inc., Reebok International Inc. and Converse, Inc. Mr. Lewis holds a degree from the International Marketing Institute. David B. Newcombe joined the Company in January 1998 as National Sales Manager and became the Vice President of Sales in June 1998. Prior to joining the Company, Mr. Newcombe served as one of the Company's independent sales representatives from 1996 through January 1998. He also worked at Avia in several sales capacities from 1986 to 1996, most recently as the Northeast Sales Manager. Mr. Newcombe received a degree in Sports Management from Rutgers University. James J. Salter has served as Chief Executive Officer of the Off-Price and Action Sports Division since joining the Company upon the acquisition of the Gen-X Companies in May 1998. Since establishing the Gen-X Companies in 1996, Mr. Salter served as its Chief Executive Officer. Prior to establishing the Gen-X Companies, Mr. Salter was Chief Executive Officer of Ride, Inc., a publicly traded Canadian corporation he helped establish in 1991. Mr. Salter attended Long Beach State University. 17 Mary D. Taylor has served as President of RYKA since January 1999. Prior to joining the Company, Ms. Taylor served as Senior Director of Global Marketing for Athletic Originals at Converse Inc. since March 1997. Prior to that, she served as Vice President, Product and Engineering at Keds/Stride-Rite and held several brand manager positions at Reebok International Inc. Ms. Taylor received a degree in English and Communications from the University of Connecticut. Steven A. Wolf is a certified public accountant who joined the Company in August 1995 as its Vice President of Finance and Chief Financial Officer. From 1990 to 1995, Mr. Wolf was the Controller and Chief Financial Officer of Ellessee USA, Inc., a footwear and sportswear company that, through September 1993, was a wholly owned subsidiary of Reebok International. Mr. Wolf received a B.S. degree in Accounting in 1980 from the State University of New York at Binghamton and is a member of the American Institute of Certified Public Accountants and the New York State Society of CPA's. 18 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Stock Prices From September 18, 1995 through June 15, 1998, the Company's common stock was traded on the NASD Over-the-Counter Bulletin Board. On December 15, 1997, concurrent with the Reorganization, the Company changed its name from RYKA Inc. to Global Sports, Inc. and the Company changed its trading symbol from "RYKA" to "GSPT". Effective June 16, 1998, the Company was approved for inclusion on the Nasdaq SmallCap Market where it is currently included for quotation. As of March 15, 1999, the Company had approximately 2,083 shareholders of record. The following table sets forth the high and low bid prices per share of the Company's common stock as reported on the Nasdaq Over-the-Counter Bulletin Board for the periods presented prior to and including June 15, 1998. For the periods presented from and after June 16, 1998, the following table sets forth the high and low sales prices per share of the Company's common stock as reported on the Nasdaq SmallCap Market. On December 15, 1997, the Company effected a 1-for-20 reverse stock split. The information shown below reflects the split as if it had occurred for all periods presented. The prices shown do not include retail markups, markdowns or commissions.
Sales Prices ------------ High Low ------ ----- 1998 Fourth Quarter............................................... $ 8.06 $4.25 Third Quarter................................................ $ 8.00 $4.63 Second Quarter (June 16-June 30)............................. $ 7.25 $5.63 Second Quarter (April 1-June 15)............................. $ 7.75 $5.19 First Quarter................................................ $ 5.69 $2.56 1997 Fourth Quarter............................................... $ 5.31 $2.50 Third Quarter................................................ $ 5.31 $3.13 Second Quarter............................................... $ 8.75 $4.38 First Quarter................................................ $10.00 $5.31
The Company has never declared or paid a cash dividend on its common stock. The Company currently intends to retain any future earnings for funding growth and, therefore, does not anticipate declaring or paying any cash dividends on its common stock for the foreseeable future. In addition, the Company's credit facility with its bank restricts the payment of dividends on the Company's common stock. Recent Stock Activity On May 12, 1998, the Company issued an aggregate of 1.5 million shares of common stock and 10,000 shares of Series A mandatorily redeemable preferred stock to Messrs. Salter and Finkelstein and certain other individuals and entities as partial consideration for all of the issued and outstanding stock of the Gen-X Companies. The 10,000 shares of Series A mandatorily redeemable preferred stock have a maximum aggregate redemption price of $500,000, but are not convertible or exchangeable into any other equity securities. On April 21, 1997, the Company issued an aggregate of 125,000 shares of common stock to certain private investors at a purchase price of $6.00 per share for an aggregate purchase price of $750,000. Neither of the above transactions were public offerings, nor were any underwriters or underwriting discounts or commissions involved. The Company believes that these transactions were exempt from registration requirements of the Securities Act of 1933, as amended, by reason of Section 4(2) thereof. 19 ITEM 6: SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA As a result of reverse purchase accounting applied in the Reorganization, the following Selected Financial Data for the year ended December 31, 1998 are derived from the consolidated financial statements of the Company, which include RYKA for periods subsequent to December 15, 1997, the Reorganization date, and the Selected Financial Data for the four years ended December 31, 1997 are derived from the combined financial statements of the KPR Companies, all of which have been audited. This table should be read in conjunction with the Company's Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ----------- ----------- ----------- ----------- STATEMENTS OF OPERATIONS DATA: Net sales............... $131,434,971 $60,671,407 $47,340,450 $43,272,594 $26,593,465 Costs and expenses: Cost of goods sold..... 95,528,412 48,376,966 37,857,455 32,853,181 21,406,070 Operating expenses..... 24,832,046 13,857,361 8,600,191 9,400,603 4,647,346 ------------ ----------- ----------- ----------- ----------- Operating income (loss)................. 11,074,513 (1,562,920) 882,804 1,018,810 540,049 Other expenses, net..... 3,272,132 2,000,282 1,027,143 732,669 185,785 Equity in net loss of RYKA, Inc.............. -- 592,093 518,491 261,331 -- ------------ ----------- ----------- ----------- ----------- Income (loss) before income taxes........... 7,802,381 (4,155,295) (662,830) 24,810 354,264 Provision for income taxes.................. 1,900,818 -- 81,483 -- -- ------------ ----------- ----------- ----------- ----------- Net income (loss)....... $ 5,901,563 $(4,155,295) $ (744,313) $ 24,810 $ 354,264 ============ =========== =========== =========== =========== Basic earnings (losses) per common share....... $ .52 ============ Diluted earnings (losses) per common share.................. $ .51 ============ Weighted average common shares outstanding-- Basic.................. 11,378,918 ============ Diluted................ 11,640,154 ============ Number of common shares outstanding............ 11,925,378 ============ Unaudited Pro Forma Data:(/1/) Income (loss) before foreign taxes.......... $(4,155,295) $ (662,830) $ 24,810 $ 354,264 Provision for income taxes.................. -- 21,000 144,000 164,000 ----------- ----------- ----------- ----------- Pro forma net income (loss)................. $(4,155,295) $ (683,830) $ (119,190) $ 190,264 =========== =========== =========== =========== Basic earnings (losses) per common share....... $ (1.39) $(.27) $ (.07) $.16 =========== =========== =========== =========== Diluted earnings (losses) per common share.................. $ (1.39) $(.27) $(.07) $.16 =========== =========== =========== =========== Weighted average common shares outstanding-- Basic.................. 2,996,027 2,568,431 1,717,033 1,210,504 =========== =========== =========== =========== Diluted................ 2,996,027 2,568,431 1,717,033 1,210,504 =========== =========== =========== =========== Number of common shares outstanding............ 10,418,111 2,831,766 2,306,766 1,323,716 =========== =========== =========== =========== BALANCE SHEET DATA: Total assets............ $78,866,186 $43,431,909 $26,678,544 $22,369,130 $11,688,810 Total long-term debt..................... 23,781,543 20,975,479 5,905,225 5,000,725 2,415,955 Net working capital.........19,629,668..13,438,564......558,241....2,002,733... 1,200,094 Stockholders' equity (deficiency)........... 14,685,482 2,157,349 (552,133) 92,787 748,220
- -------- (/1/)Pro forma data represents net income (loss) after pro forma adjustments for income taxes as if the KPR Companies had been subject to federal and state income taxation as a C Corporation since its inception. 20 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Strategic Business Developments Affecting Comparability On December 15, 1997, the Company consummated the Reorganization. As a result, Mr. Rubin, as sole shareholder of the KPR Companies, received RYKA shares which gave him voting control over the combined companies. Accordingly, for accounting purposes, the KPR Companies are considered the continuing entity and the transaction has been accounted for as a reorganization of the KPR Companies followed by the issuance of new shares of common stock of the KPR Companies for the net assets of RYKA. The Reorganization affects comparability of 1998 results with reported results for 1997. A more meaningful analysis can be made by comparing 1998 results with the 1997 pro forma results as if the Reorganization had occurred on January 1, 1997 (the "Reorganization Pro Forma"). The 1997 Reorganization Pro Forma information does not purport to be indicative of the Company's results of operations had the transaction described above actually occurred on the date presented nor is it necessarily indicative of future operating results. The 1997 Reorganization Pro Forma information does not include the effects of cost savings and sales synergies expected to be realized as a result of the Reorganization. The following "Results of Operations" discussion describes the comparison of 1998 to 1997 on a Reorganization Pro Forma basis, unless otherwise noted. Effective May 12, 1998, the Company acquired all of the outstanding and issued common stock of Gen-X Holdings Inc. and Gen-X Equipment Inc. (collectively, the "Gen-X Companies") in a purchase transaction (the "Acquisition"). The Company's reported results of operations for 1998 include those of the Gen-X Companies only from the date of acquisition through the end of the year. Results of Operations 1998 (as Reported) Compared to 1997 (on a Reorganization Pro Forma Basis) The following table sets forth, for the periods indicated, the Company's results of operations for the years ended December 31, 1998 and 1997 as reported and for the year ended December 31, 1997 on a Reorganization Pro Forma basis as well as the relative percentages that certain items bear to net sales:
For the Year Ended December 31, ----------------------------------------------------------------------- 1997 (Reorganization 1998 1997 (As Reported) Pro Forma) ----------------------- ----------------------- ----------------------- $ % of Sales $ % of Sales $ % of Sales ------------ ---------- ----------- ---------- ----------- ---------- Net sales............... $131,434,971 100.0% $60,671,407 100.0% $73,728,395 100.0% ------------ ----- ----------- ----- ----------- ----- Cost & expenses: Cost of goods sold.... 95,528,412 72.7% 48,376,966 79.7% 57,920,340 78.6% SG&A expense.......... 24,832,046 18.9% 13,857,361 22.8% 19,342,320 26.2% ------------ ----- ----------- ----- ----------- ----- Operating income (loss)................. 11,074,513 8.4% (1,562,920) (2.5)% (3,534,265) (4.8)% Other expense, net...... 3,272,132 2.5% 2,592,375 4.3% 2,630,538 3.6% ------------ ----- ----------- ----- ----------- ----- Income (loss) before income taxes........... 7,802,381 5.9% (4,155,295) (6.8)% (6,164,803) (8.4)% Provision for income taxes.................. 1,900,818 1.4% -- -- -- -- ------------ ----- ----------- ----- ----------- ----- Net income (loss)....... $ 5,901,563 4.5% $(4,155,295) (6.8)% $(6,164,803) (8.4)% ============ ===== =========== ===== =========== =====
Net Sales. Net sales for 1998 increased by $57.7 million, or 78%, to $131.4 million, compared to net sales of $73.7 million in 1997 on a Reorganization Pro Forma basis. Net sales for the Branded Division were approximately $41.1 million for 1998, a 33% increase from the prior year on a Reorganization Pro Forma basis. Both the RYKA and Yukon brands experienced growth consistent with the overall divisional gains. Net sales for 21 the Off-Price and Action Sports Division were $90.3 million for 1998, a 111% increase from the prior year on a Reorganization Pro Forma basis, primarily as a result of higher volume transactions. The Gen-X Companies, acquired in May 1998, also contributed to the sales increase of the division. This division's special make-up snowboard business, under the Vision, Rage and Lamar product lines, also represented meaningful incremental volume. Gross Margin. Gross margin for 1998 increased to 27.3% from 21.4% for 1997 on a Reorganization Pro Forma basis. The increase was offset, in part, by a change in business mix, as the volume of the lower-margin Off-Price and Action Sports Division was greater than the volume of the higher-margined Branded Division. The Branded Division experienced a substantial increase in gross margin percentages in 1998 over 1997 on a Reorganization Pro Forma basis, primarily as a result of more full priced business and virtually no close out business within the RYKA and Yukon brands. Better inventory management and better quality of distribution also contributed to the substantial improvement in margins in 1998. The margins in the Off-Price and Action Sports Division also increased substantially in 1998 over 1997 on a Reorganization Pro Forma basis as a result of a more current merchandise mix and inventory turns. Selling, General and Administrative Expense. As a percentage of net sales, selling, general & administrative ("SG&A") expense for 1998 decreased to 18.9% from 26.2% in 1997 on a Reorganization Pro Forma basis. In dollars, however, SG&A expense increased to $24.6 million in 1998 from $19.3 million in 1997 on a Reorganization Pro Forma basis. The dollar volume increase is indicative of management's continued commitment to investing in the Branded Division. The Company has continued the expansion of the RYKA team in Portland and the Yukon design, development and marketing team in King of Prussia and China. The Company substantially increased its investment in marketing in 1998 by launching the first Yukon consumer print advertising campaign and expanding the existing RYKA print campaign. The Company also invested in visual merchandising with certain key retailers. SG&A expense also reflects an increase in sales commissions as a result of higher sales volumes. These increases were partially offset by a reduction in bank, legal and accounting fees related to the Company's debt refinancing and the Reorganization both of which occurred in 1997. Other Expense, Net. Other expense, net increased by $.6 million, or 24%, to $3.3 million in 1998 from $2.6 million in 1997 on a Reorganization Pro Forma basis. Interest charges have increased due to increases in general business levels and the Company's assumption of the Gen-X Companies' credit line as part of the Acquisition. These increases were partially offset by substantial reductions in the Company's average borrowing costs. Income Taxes. The Company's overall effective tax rate was approximately 24% for 1998. This rate benefited from the volume of business generated by a foreign subsidiary which is taxed at a lower rate and certain net operating loss carry forwards. In 1997, the Company recorded no provision for income taxes due to net losses. 22 1997 (as Reported) Compared to 1996 (as Reported) The following table sets forth, for the periods indicated, the Company's results of operations for the years ended December 31, 1997 and 1996 as reported as well as the relative percentages that certain items bear to net sales:
For the Year Ended December 31, ----------------------------------------------- 1997 1996 ----------------------- ----------------------- $ % of Sales $ % of Sales ----------- ---------- ----------- ---------- Net sales................. $60,671,407 100.0% $47,340,450 100.0% ----------- ----- ----------- ----- Cost & expenses: Cost of goods sold...... 48,376,966 79.7% 37,857,455 80.0% SG&A expense............ 13,857,361 22.8% 8,600,191 18.2% ----------- ----- ----------- ----- Operating income (loss)... (1,562,920) (2.5)% 882,804 1.8% Other expense, net........ 2,592,375 4.3% 1,545,634 3.2% ----------- ----- ----------- ----- Loss before income taxes.. (4,155,295) (6.8)% (662,830) (1.4)% Provision for income taxes.................... -- -- 81,483 .2% ----------- ----- ----------- ----- Net loss.................. $(4,155,295) (6.8)% $ (744,313) (1.2)% =========== ===== =========== =====
Net Sales. Net sales in 1997 increased by $13.3 million, or 28%, to $60.6 million compared to $47.3 million in 1996 as reported. Net sales in 1997 included sales of RYKA products of $1.1 million during the 15-day period ended December 31, 1997. Without these RYKA sales, the net sales increase in 1997 would have been $12.2 million, or 26%. This sales increase was primarily related to increases in volume for the Branded Division of $10.3 million, or 87%, to $22.1 million in 1997 (excluding RYKA) from $11.8 million in 1996. The Off-Price and Action Sports Division increased sales volumes marginally by $1.9 million, or 6%, to $37.4 million in 1997 from $35.5 million in 1996. Cost of Goods Sold/Gross Margin. Cost of goods sold in 1997 increased by $10.5 million, or 28%, to $48.4 million compared to $37.9 million in 1996. Cost of goods sold in 1997 included the cost of goods sold related to sales of RYKA products of $664,000 during the 15-day period ended December 31, 1997. Without these RYKA sales, cost of goods sold would have increased $9.8 million, or 26%, over 1996. Overall gross margin (as a percentage of sales, excluding RYKA) remained relatively the same from year to year at approximately 20%. The Branded Division (excluding RYKA) had gross margins of 25.9% in 1997 compared to 22.4% in 1996, while the Off-Price and Action Sports Division experienced gross margins of 16.4% in 1997 compared to 19.2% in 1996. Cost of goods sold for 1997 and 1996 included charges of $1.4 million and $1.2 million, respectively, for inventory write downs based on a reassessment of net realizable values, primarily related to Off-Price and Action Sports Division inventories. Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expense in 1997 increased by $5.3 million, or 61%, to $13.9 million compared to $8.6 million in 1996. This increase was due to (1) an increase in professional fees and bank service charges related to the financing issues the Company had with its former lender and other costs incurred as a result of the Reorganization, (2) an increase of approximately $835,000 in salaries for sales and marketing staff to support higher sales volumes and facilitate marketing efforts to better establish the Yukon brand, (3) an overall increase in salaries and bonuses of approximately $1.0 million in all other departments as a result of headcount increases to support the growth of the business, (4) an increase in third-party warehousing and distribution costs of approximately $795,000 to support higher inventory levels, (5) an increase in advertising and promotion costs of approximately $745,000 for point-of-purchase and cooperative advertising, (6) an increase in trade show costs of approximately $530,000 resulting from the Company's decision to maintain a major presence amongst retailers through industry exhibitions (7) the cost of contingent warrants ($347,000 in 1997) granted to an athlete representing the Company's branded footwear, (8) an increase in bad debts of $488,000, and (9) an increase in sales commissions 23 of approximately $366,000 as a result of sales volume increases and broadening of the independent sales agency network. Additionally, in 1997 the Company recorded $152,333 of compensation expense for warrants granted to a former officer. The above increases were partially offset by a $264,000 decrease in Mr. Rubin's salary and commissions for 1997 over 1996. Other Expense, Net. Other expense, net in 1997 increased by $1.0 million, or 95%, to $2.6 million compared to $1.6 million in 1996 primarily as a result of increased interest expense related to higher debt levels maintained to support higher production and inventory levels necessary to support 1997 sales growth as well as higher interest rates as a result of the Company's 1997 financing issues. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Prior to the Reorganization, the operations of the KPR Companies had been financed by a combination of internally generated resources and annual increases in the size of the bank credit facility. The operations of RYKA were financed by equity transactions, subordinated borrowings and annual increases in the size of RYKA's bank credit facility. Increases in the bank credit facilities for the KPR Companies and RYKA were required to fund the Company's increased accounts receivable and investment in inventories necessary to support the increases in revenue. As of December 31, 1998, the Company had working capital of $19,629,668. The Company used $6,402,039 in cash flows from operating activities for the year ended December 31, 1998, whereas in the prior year the Company used $7,707,708 in cash flows from operating activities. Liquidity On November 20, 1997, the KPR Companies and RYKA entered into a loan agreement with a lender (the "Loan Agreement") pursuant to which a prior lender was repaid in full on November 21, 1997. Under the Loan Agreement, as amended, the Company has access to a combined credit facility of $40,000,000, which is comprised of the KPR Companies' credit facility of $35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years expiring on November 19, 2002. The KPR Companies and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under this new credit facility, both the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. In addition to the revolving lines of credit described above, the new lender will over-advance to the Company a combined additional total of $3,000,000, comprised of the KPR Company's additional $2,000,000 and RYKA's additional $1,000,000 over the collateral for additional letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. The aggregate amount outstanding under this line at December 31, 1998 was $18,812,156. At December 31, 1998, based on available collateral and outstanding import letters of credit commitments, an additional $2,403,332 (including the seasonal over-advance) was available on this line for borrowing. The Company has an additional line of credit of $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering certain of the Gen-X Companies' assets. At December 31, 1998, draws of approximately $14,500,000 were committed under this line. At December 31, 1998, based on available collateral and outstanding import letters of credit commitments, an additional $4,701,700 was available on this line for borrowing. As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin, its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i) a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus accrued and unpaid interest on such loan of $180,517 through October 31, 1997 and (ii) a note in the principal amount of $2,204,401 representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies. No interest accrued on 24 the note representing Subchapter S corporation earnings until December 15, 1997, the effective date of the Reorganization, at which time the interest began to accrue on such note at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The Loan Agreement and the related Subordination Agreement allowed the Company to repay Mr. Rubin $1,000,000 of the subordinated debt principal and the accrued interest of $180,517 at the time of the closing of the Loan Agreement or within five days thereafter, subject to there being $2,000,000 of availability under the KPR Companies' credit line after taking into account such payments. Such payments were made to Mr. Rubin on November 26, 1997. In addition, the Loan Agreement and the Subordination Agreement permit the KPR Companies to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing with the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of both borrowers, reduced by net losses of the borrowers during such period. During 1998, aggregate principal payments of $250,000 were made to Mr. Rubin. Management believes that they have adequate financing to allow the Company to continue its operations and meet its obligations as they mature during the foreseeable future. However, the Company will be required to raise additional equity and/or debt financing to support the Company's planned expansion. While the Company is currently exploring various alternatives for raising additional capital, there is no assurance that the Company will be able to raise such additional capital on acceptable terms. Year 2000 The Company recognizes the importance of advanced computerization in maintaining and improving its level of service, internal and external communication and overall competitive position. The Company has a computerized management information system that relies upon an IBM AS/400 computer system, together with an Ethernet PC network. These computers are integrated by a bridge application and are connected via modem to the Company's distribution facilities. The Company's system provides, among other things, comprehensive customer order processing, inventory, production, accounting and management information for the marketing, selling, manufacturing and distribution functions of the Company's business. The Company is currently enhancing its information systems to improve their functionality and increase performance. These upgrades will also make these applications Year 2000 compliant. The Company has created a Year 2000 project team which will coordinate efforts to evaluate, identify, correct or reprogram, and test the Company's existing systems Year 2000 compliance. The Company will take the required steps to make its existing systems Year 2000 compliant prior to the end of the second quarter of 1999 and does not expect that the costs of such steps will have a material impact on the Company's results of operations, financial position, liquidity or capital resources. However, if such efforts are not completed on a timely basis, the Year 2000 issue could have a material adverse impact on the Company's business, results of operations and financial position. In addition to making its own systems Year 2000 compliant, the Company is in the process of contacting its key suppliers and customers to determine the extent to which the systems of such suppliers and customers are Year 2000 compliant and the extent to which the Company could be effected by the failure of such third parties to become Year 2000 compliant. The Company cannot presently estimate the impact of the failure of such third parties to become Year 2000 compliant. New Accounting Pronouncements Derivative Instruments. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company has not yet assessed what the impact of this statement will be on the Company's future earnings or financial position. 25 Start-Up Costs. In April 1998, the AICPA Accounting Standards Executive Council issued Statement of Procedure 98-5, Reporting of Costs of Start-Up Activities, ("SOP 98-5"). The statement requires that costs of start-up activities, including organization costs, be expensed as incurred. This statement is required to be adopted January 1, 1999. Adoption of SOP 98-5 is not expected to have a material effect on the Company's results of operations, cash flows or financial position. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of foreign currency fluctuations and interest rate changes due to its international sales, production requirements and variable rate debt. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in the value of foreign currencies and interest rates using a variety of financial instruments. It is the Company's policy to utilize financial instruments to reduce risks where other strategies cannot be effectively employed. Foreign currency transactions are used only to the extent considered necessary to meet the Company's objectives and the Company does not enter into foreign currency transactions for speculative purposes. In addition to product sales and costs, the Company has foreign currency risk related to receivables and payables that are denominated in currencies other than the U.S. dollar. The Company's foreign currency risk management objective is to protect cash flows resulting from sales, purchase and other costs from the adverse impact of exchange rate movements. Foreign exchange risk is managed by using forward exchange contracts and purchased options to hedge certain firm commitments and the related receivables and payables, primarily third party transactions. Hedged transactions are denominated primarily in European currencies and Canadian dollars. The Company is exposed to changes in interest rates primarily as a result of its long-term debt used to maintain liquidity and fund its expansion. The Company's objective in managing its exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. A portion of the Company's long-term debt is issued at a choice of LIBOR plus certain basis points or the prime rate less certain basis points, which gives the Company a certain degree of flexibility to manage interest rate risk. Note 5 to the Financial Statements outlines the principal amounts, weighted average interest rates, fair values and other terms required to evaluate the expected cash flows and sensitivity to interest rate changes. Foreign exchange risk, and related derivatives use, and interest rate risk are monitored using a variety of techniques including a review of market values and various sensitivity analyses. These models are risk analysis tools and do not purport to represent actual losses in fair value that will be incurred by the Company, nor do they consider the potential effect of favorable changes in market rates. They also do not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. The estimated maximum one-day loss in fair value on the Company's foreign currency sensitive financial instruments was negligible at December 31, 1998 due to the nature of the contracts outstanding and year end currency exchange rates. The estimated potential reduction in earnings from a one-point increase in long-term debt borrowing rates for the year ended December 31, 1998 would have been approximately $370,000. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company, supplementary data and related documents that are included in this Report on Form 10-K are listed in Item 14(a), Part IV, of this Report. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 PART III This Part incorporates certain information from the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders ("1999 Proxy Statement") filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this Report on Form 10-K. Notwithstanding such incorporation, the sections of the Company's 1999 Proxy Statement entitled "Report of the Compensation Committee" and "Performance Graph" shall not be deemed to be "filed" as part of this Report. ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company is incorporated by reference to the Company's 1999 Proxy Statement including but necessarily limited to the section of the 1999 Proxy Statement entitled "Election of Directors." Information concerning executive officers of the Company who are not also directors is included in Item 4.1, Part I, of this Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's 1999 Proxy Statement including but necessarily limited to the section of the 1999 Proxy Statement entitled "Executive Compensation." ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's 1999 Proxy Statement including but necessarily limited to the section of the 1999 Proxy Statement entitled "Beneficial Ownership of Common Stock." ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's 1999 Proxy Statement including but necessarily limited to the section of the 1999 Proxy Statement entitled "Executive Compensation," "Beneficial Ownership of Common Stock" and "Election of Directors." 27 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page --------- 14(a)(1) FINANCIAL STATEMENTS Report of Independent Auditors--Deloitte & Touche LLP.... F-1 Balance Sheets as of December 31, 1998 and 1997.......... F-2 Statements of Operations for the years ended December 31, 1998, 1997 and 1996..................................... F-3 Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1998, 1997 and 1996............ F-4 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..................................... F-5 Notes to Financial Statements............................ F-6--F-24 14(a)(2) FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts for the years ended 1998, 1997 and 1996......................... S-1 All other schedules not listed have been omitted since the required information is included in the financial statements or the notes thereto or is not applicable or required. 14(a)(3) EXHIBITS
No. Description --- ----------- 2.1(/1/) Securities Purchase Agreement dated June 21, 1995 by and between the Registrant and MR Acquisitions, Inc. 2.2(/2/) First Amendment to Securities Purchase Agreement by and between the Registrant and MR Acquisitions, Inc. dated July 31, 1995. 2.3(/12/) Second Amended and Restated Agreement and Plan of Reorganization, as amended, among RYKA Inc., a Delaware corporation, KPR Sports International, Inc., a Pennsylvania corporation, Apex Sports International, Inc., a Pennsylvania corporation, MR Management, Inc., a Pennsylvania corporation, and Michael G. Rubin. 2.4(/16/) Stock Purchase Agreement dated as of May 12, 1998 by and among Global Sports, Inc., DMJ Financial Inc., James J. Salter, Kenneth J. Finkelstein and certain other individuals and entities. 3.1(/12/) Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on December 15, 1997. 3.2(/3/) The Company's Bylaws as amended. 4.1(/3/) Specimen of Common Stock Certificate. 10.1(/2/) Loan and Security Agreement by and between the Registrant and KPR Sports International, Inc 10.2(/2/) Promissory Note in the principal amount of $851,440 by and between Registrant as maker and KPR Sports International, Inc. as payee. 10.3(/2/) Demand Promissory Note in the principal amount of $2,000,000 by and between Registrant as borrower and KPR Sports International, Inc. as lender. 10.4(/2/) Letter of Credit Financing Agreement by and between Registrant and KPR Sports International, Inc. 10.5(/2/) Warrant to Purchase 5,100,000 shares of the Registrant's common stock issued to MR Acquisitions, L.L.C. 10.6(/2/) Warrant to purchase 4,000,000 shares of the Registrant's common stock issued to MR Acquisitions, L.L.C. 10.7(/2/) Registration Rights Agreement by and between the Registrant and MR Acquisitions, Inc. 10.8(/2/) Promissory Note in the principal amount of $500,000 by and between the Registrant and Michael Rubin. 10.9(/2/) Sublease Agreement dated July 31, 1995 by and between KPR Sports International, Inc. as sublessor and Registrant as sublessee. 10.10(/2/) Settlement Agreement by and between Registrant and Pro-Specs America Corporation.
28
No. Description --- ----------- 10.12(/11/) Key Employee Termination Agreement dated August 3, 1996 by and between the Registrant and Sheri Poe. 10.13(/2/)* Employment Agreement dated July 31, 1995 by and between the Registrant and Steven A. Wolf. 10.15(/15/)* Employment Agreement dated September 25, 1996 by and between the Registrant and Michael G. Rubin. 10.15-A(/15/)* First Amendment to the Employment Agreement dated September 25, 1996 by and between the Registrant and Michael G. Rubin. 10.16* Employment Agreement dated May 12, 1998 by and between the Registrant and James J. Salter. 10.17* Employment Agreement dated January 1, 1999 by and between the Registrant and Arthur I. Carver. 10.18* Employment Agreement dated February 24, 1999 by and between the Registrant and Michael R. Conn. 10.20(/5/)* 1987 Stock Option Plan. 10.21(/6/)* 1988 Stock Option Plan. 10.22(/7/)* 1990 Stock Option Plan. 10.23(/8/)* 1992 Stock Option Plan. 10.24(/9/)* 1993 Stock Option Plan. 10.25(/2/)* 1995 Stock Option Plan. 10.26(/10/)* 1995 Non-Employee Directors' Stock Option Plan. 10.27(/11/)* 1996 Equity Incentive Plan. 10.27-A(/15/)* Amendment to 1996 Equity Incentive Plan. 10.30(/11/) Revolving Credit Agreement dated August 15, 1996 by and between the Registrant and CoreStates Bank, N.A. 10.31(/11/) Security Agreement dated August 15, 1996 by and between the Registrant and CoreStates Bank, N.A. 10.32(/11/) Memorandum of Security Agreement dated August 15, 1996 by and between the Registrant and CoreStates Bank, N.A. 10.33(/11/) Limited Guaranty of Michael Rubin dated August 15, 1996 in favor of CoreStates Bank, N.A. 10.34(/11/) Letter Agreement dated February 7, 1997 by and among the Registrant, CoreStates Bank, N.A. and Michael Rubin. 10.35(/11/) Second Amended Forbearance Agreement dated June 4, 1997 by and among the Registrant, CoreStates Bank, N.A. and Michael Rubin. 10.36(/11/) Letter Agreement dated June 4, 1997 by and among the Registrant, CoreStates Bank, N.A. and Michael Rubin. 10.40(/13/) Amended and Restated Loan and Security Agreement dated December 15, 1997 by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-A(/13/) Amendment No. 1 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-B(/13/) Consent, Amendment No. 2 to the Loan Documents and waiver as to certain events of default by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-C(/14/) Consent and Amendment No. 3 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-D(/14/) Amendment No. 4 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-E Amendment No. 5 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.40-F Consent and Amendment No. 6 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 10.41(/13/) Continuing Guaranty dated December 15, 1997 in favor of Foothill Capital Corporation. 10.42(/13/) General Security Agreement dated December 15, 1997 in favor of Foothill Capital Corporation. 10.50(/13/)* Deferred Profit Sharing Plan and Trust. 27.1 Financial Data Schedule (electronic filing only).
29 - -------- * Management contract or compensatory plan or arrangement (/1/)Incorporated by reference to Form 8-K dated June 21, 1995. (/2/)Incorporated by reference to Form 8-K dated July 31, 1995. (/3/)Incorporated by reference to the Company's Registration Statement No. 33- 33754. (/4/)Incorporated by reference to the Company's Registration Quarterly Report on Form 10-Q for the nine-month period ended September 30, 1995. (/5/)Incorporated by reference to the Company's Registration Statement No. 33- 19754-B. (/6/)Incorporated by reference to the Company's Registration Statement No. 33- 27501. (/7/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the nine-month period ended September 30, 1990. (/8/)Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (/9/)Incorporated by reference to the Company's Form S-8 Registration Statement filed on January 3, 1994. (/10/)Incorporated by reference to the Company's Proxy Statement filed on October 13, 1995 in connection with the 1995 Special Meeting in lieu of Annual Meeting held on November 15, 1995. (/11/)Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (/12/)Incorporated by reference to the Company's Definitive Proxy Materials filed November 12, 1997. (/13/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 1998. (/14/)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the six-month period ended June 30, 1998. (/15/)Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (/16/)Incorporated by reference to Form 8-K dated May 27, 1998. (b)REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1998. 30 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Global Sports, Inc. We have audited the accompanying consolidated balance sheets of Global Sports, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the years then ended and the related combined statements of operations, stockholders' equity (deficiency) and cash flows for the year ended December 31, 1996 (see Note 2). Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP _____________________________________ Deloitte & Touche LLP Philadelphia, Pennsylvania March 16, 1999 F-1 GLOBAL SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................... $ 856,085 $ 98,881 Accounts receivable, net of allowance for doubtful accounts of $928,693 in 1998 and $743,223 in 1997.............................................. 36,782,732 16,060,911 Inventory.......................................... 20,954,168 16,906,171 Prepaid expenses and other current assets.......... 1,435,744 671,682 ----------- ----------- Total current assets............................. 60,028,729 33,737,645 Property and equipment, net of accumulated depreciation and amortization..................... 4,385,906 3,282,712 Goodwill, net of accumulated amortization.......... 12,223,150 4,057,768 Intangibles, net of accumulated amortization....... 1,950,977 2,089,514 Other assets....................................... 277,424 264,270 ----------- ----------- Total assets..................................... $78,866,186 $43,431,909 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion--notes payable, banks.............. $14,529,576 $ 2,000,000 Current portion--notes payable, other.............. 712,815 -- Current portion--capital lease..................... 127,966 116,124 Accounts payable................................... 18,480,640 14,453,226 Accrued expenses................................... 2,743,158 1,661,079 Subordinated note payable.......................... 1,999,065 -- Subordinated note payable--shareholder............. 1,805,841 2,068,652 ----------- ----------- Total current liabilities........................ 40,399,061 20,299,081 Capital lease........................................ 2,181,265 2,309,231 Notes payable, banks................................. 19,106,535 18,666,248 Notes payable, other................................. 2,493,743 -- Mandatorily redeemable preferred stock............... 100 -- Commitments and contingencies........................ Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized in 1998 and 1997; 10,000 shares issued as mandatorily redeemable preferred stock in 1998........................... -- -- Common stock, $0.01 par value, 20,000,000 shares authorized; 12,994,464 and 11,487,197 shares issued in 1998 and 1997, respectively; 11,925,378 and 10,418,111 shares outstanding in 1998 and 1997, respectively...................................... 129,947 114,875 Additional paid in capital......................... 14,624,541 8,001,132 Accumulated other comprehensive income............. (47,431) (35,520) Retained earnings (accumulated deficit)............ 192,242 (5,709,321) ----------- ----------- 14,899,299 2,371,166 Less: Treasury stock, at cost...................... 213,817 213,817 ----------- ----------- Total stockholders' equity....................... 14,685,482 2,157,349 ----------- ----------- Total liabilities and stockholders' equity....... $78,866,186 $43,431,909 =========== ===========
The accompanying notes are an integral part of these financial statements. F-2 GLOBAL SPORTS, INC. AND SUBSIDIARIES STATEMENTS OF OPERATIONS
Year Ended December 31, --------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Consolidated Consolidated Combined Net sales............................ $131,434,971 $60,671,407 $47,340,450 ------------ ----------- ----------- Costs and expenses: Cost of goods sold................. 95,528,412 48,376,966 37,857,455 General and administrative expense........................... 8,435,949 6,314,769 5,123,358 Selling and marketing expense...... 13,389,766 7,031,519 3,116,013 Design and development expenses.... 3,006,331 511,073 360,820 ------------ ----------- ----------- Total costs and expenses......... 120,360,458 62,234,327 46,457,646 ------------ ----------- ----------- Operating income (loss).............. 11,074,513 (1,562,920) 882,804 Other (income) expenses: Interest expense................... 3,073,270 2,013,028 1,152,473 Interest income.................... (4,980) (58,732) (87,629) Other, net......................... 203,842 45,986 (37,701) ------------ ----------- ----------- Total other (income) expenses, net............................. 3,272,132 2,000,282 1,027,143 ------------ ----------- ----------- Income (loss) before equity in net loss of RYKA Inc.................... 7,802,381 (3,563,202) (144,339) Equity in net loss of RYKA Inc....... -- (592,093) (518,491) ------------ ----------- ----------- Income (loss) before income taxes.... 7,802,381 (4,155,295) (662,830) Provision for income taxes........... 1,900,818 -- 81,483 ------------ ----------- ----------- Net income (loss).................... $ 5,901,563 $(4,155,295) $ (744,313) ============ =========== =========== Earnings per basic share............. $ .52 ============ Earnings per diluted share........... $ .51 ============ Unaudited Pro Forma Data: (See Note 2) Loss before income taxes............. $(4,155,295) $ (662,830) Provision for income taxes........... -- 21,000 ----------- ----------- Pro forma net loss................... $(4,155,295) $ (683,830) =========== =========== Pro forma losses per basic share..... $ (1.39) $ (.27) =========== =========== Pro forma losses per diluted share... $ (1.39) $ (.27) =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 GLOBAL SPORTS, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Accumulated Common Stock Additional Other Treasury Stock ------------------- Paid in Retained Comprehensive Comprehensive -------------------- Shares Dollars Capital Earnings Income Income Shares Dollars ---------- -------- ----------- ----------- ------------- ------------- --------- --------- 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) ========== ======== =========== =========== ======== ========= =========
The accompanying notes are an integral part of these financial statements. F-4 GLOBAL SPORTS, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Consolidated Consolidated Combined Cash Flows from Operating Activities: Net income (loss).................... $ 5,901,563 $(4,155,295) $ (744,313) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization...... 1,464,514 417,020 302,314 Provision for losses on accounts receivable........................ 104,452 507,146 250,845 Equity in net loss of RYKA Inc. ... -- 592,093 518,491 Loss on disposition of equipment... 19,819 46,163 31,772 Warrants expense................... 150,000 152,333 -- Changes in operating assets and liabilities, net of acquisitions: Accounts receivable................ (13,097,883) (4,902,102) (897,553) Inventory.......................... 139,279 (3,770,153) (754,856) Prepaid expenses and other current assets............................ 142,776 810,573 (1,067,382) Other assets....................... 96,027 (1,206,817) (204,473) Accounts payable and accrued expenses.......................... (1,322,586) 3,801,331 3,029,033 ------------ ----------- ----------- Net cash provided by (used for) operating activities.............. (6,402,039) (7,707,708) 463,878 ------------ ----------- ----------- Cash Flows from Investing Activities: Businesses acquired net of cash...... (202,647) -- -- Proceeds from sale of equipment...... -- 85,000 2,000 Acquisition of property and equipment........................... (397,990) (231,987) (508,850) Cash acquired in Reorganization...... -- 66,806 -- Investment in RYKA Inc. ............. -- 473,589 -- Advances to RYKA Inc. ............... -- 12,311 (17,040) ------------ ----------- ----------- Net cash provided by (used for) investing activities.............. (600,637) 405,719 (523,890) ------------ ----------- ----------- Cash Flows from Financing Activities: Net borrowings under line of credit.. 8,194,659 7,906,336 970,441 Costs of debt issuance............... (80,000) (266,304) -- Repayment of capital lease........... (116,124) (105,378) (86,251) Stockholder's advances............... -- -- 244,153 Proceeds from exercises of common stock options....................... 23,256 -- -- Repayment of subordinated debt....... (250,000) (416,000) -- Distributions to stockholder......... -- -- (782,200) ------------ ----------- ----------- Net cash provided by financing activities........................ 7,771,791 7,118,654 346,143 ------------ ----------- ----------- Effect of exchange rate on cash........ (11,911) 6,345 (29,735) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents...................... 757,204 (176,990) 256,396 Cash and cash equivalents, beginning of year.................................. 98,881 275,871 19,475 ------------ ----------- ----------- Cash and cash equivalents, end of year.................................. $ 856,085 $ 98,881 $ 275,871 ============ =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest............................ $ 3,056,160 $ 1,882,198 $ 1,026,499 ============ =========== =========== Supplemental disclosure of non-cash investing and financing activities: Notes payable issued in acquisitions........................ $ 6,000,000 -- -- ============ =========== =========== Modification of existing capital lease............................... -- -- $ 916,960 ============ =========== =========== Issuance of common stock of affiliate at a price per share in excess of the Company's carrying amount....... -- $ 356,534 $ 911,328 ============ =========== =========== Refinancing of revolving credit agreement........................... -- $16,718,420 -- ============ =========== =========== Issuance of common stock for acquisition of the Gen-X Companies.. $ 6,465,225 -- -- ============ =========== =========== Issuance of mandatorily redeemable preferred stock..................... $ 100 -- -- ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION AND ORGANIZATION Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, designs, develops and markets branded footwear primarily under the RYKA and YUKON brand names as well as distributes off-price athletic footwear, apparel and sporting goods worldwide, with primary distribution in the United States and Canada. On December 15, 1997, the Company consummated a reorganization (the "Reorganization"), among RYKA Inc. ("RYKA"), KPR Sports International, Inc. ("KPR"), Apex Sports International, Inc., MR Management, Inc. (the last three companies collectively referred to as the "KPR Companies"), and Michael G. Rubin, the former sole shareholder of the KPR Companies and now the Chairman and Chief Executive Officer of the Company. As part of the Reorganization, (i) RYKA was renamed Global Sports, Inc., (ii) the Company transferred all of its assets and liabilities to RYKA in exchange for all of the issued and outstanding shares of capital stock of RYKA, (iii) a subsidiary of the Company merged with and into KPR, with KPR surviving the merger as a wholly-owned subsidiary of the Company, (iv) the Company acquired all of the issued and outstanding shares of capital stock of Apex and MR Management, and (v) the Company issued to Mr. Rubin an aggregate of 8,169,086 of its common stock in exchange for all of the issued and outstanding shares of capital stock of the KPR Companies. Immediately after the Reorganization, Mr. Rubin, the former sole shareholder of the KPR Companies, then owned approximately 78% of the outstanding voting power of the Company. Accordingly, the Reorganization was accounted for as a reverse purchase under generally accepted accounting principles pursuant to which the KPR Companies were considered to be the acquiring entity and the Company was the acquired entity for accounting purposes, even though the Company was the surviving legal entity. As a result of this reverse purchase accounting treatment, (i) the historical financial statements presented for periods prior to the date of the Reorganization are no longer the historical financial statements of RYKA; (ii) the historical financial statements for periods prior to the date of the Reorganization are those of the KPR Companies, (iii) all references to the historical financial statements of the Company apply to the historical financial statements of the KPR Companies prior to and subsequent to the Reorganization, and (iv) any references to RYKA apply solely to that company and its financial statements prior to the Reorganization. Effective May 12, 1998, the Company acquired Gen-X Holdings Inc. and Gen-X Equipment Inc. (collectively, the "Gen-X Companies"). The Gen-X Companies were privately-held companies based in Toronto, Ontario specializing in selling off-price sporting goods and winter sports equipment (including ski and snowboard equipment), in-line skates, sunglasses, skateboards and specialty footwear. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements presented include the accounts of Global Sports, Inc. (a Delaware corporation) and the following wholly-owned subsidiaries: APEX Sports International, Inc. (PA) KPR Sports International, Inc. (PA) MR Management, Inc. (PA) RYKA Inc. (PA) G.S.I., Inc. (DE) Gen-X Holdings, Inc. (WA) Gen-X Equipment Inc. (Ontario) Lamar Snowboards, Inc. (MO) F-6 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) The combined financial statements presented for 1996 include the accounts of KPR Sports International, Inc. and Affiliates, MR management, Inc., KPR Sports International BVBA (an entity organized pursuant to the laws of Belgium and owned 79% by the Company and 21% by MR Management, Inc.), KPR Sports International Europe B.V. (an entity organized pursuant to the laws of the Netherlands Ministry of Justice and owned 79% by the Company and 21% by MR Management, Inc.), MR Acquisitions, LLC (an entity owned 99% by the Company and 1% by MR Management, Inc.), Abington Ski, Inc., Delmar Ski, Inc., Lancaster Ski, Inc. and Apex Sports International, Inc. all of which are affiliated through the common ownership of an individual shareholder and are a part of Global after the Reorganization (see Note 1). All intercompany accounts and transactions have been eliminated in consolidation and combination. Cash Equivalents: The Company considers highly liquid investments with maturities at date of purchase of less than three months to be cash equivalents. Inventory: Inventory, primarily consisting of athletic footwear, sporting goods and apparel, is valued at the lower of cost, determined using the first- in, first-out method or market. Property and Equipment: Property and equipment are stated at cost net of accumulated depreciation or amortization. Depreciation or amortization is provided using the straight-line method over the estimated useful lives of the assets, generally as follows: . Three years for computer hardware and software; . Five to seven years for equipment; . The lesser of the useful life or lease term for leasehold improvements; and . Thirty years for buildings. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations. Sale of Stock by an Equity Method Investee: Prior to the Reorganization, changes in the KPR Companies' proportionate share of the underlying equity of RYKA, an equity method investee, which result from the issuance of additional securities by such investee, were credited directly to additional paid-in capital. In 1997 and 1996, $356,534, and $911,328, respectively, of such gains were credited to additional paid-in capital (see Note 17). Foreign Currency Translation: In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translation, exchange adjustments resulting from foreign currency transactions generally are recognized currently in income, whereas adjustments resulting from translations of financial statements are reflected as a separate component of shareholders' equity. The cumulative currency translation loss as of December 31, 1998, 1997 and 1996 were $47,431, $35,520, and $41,865, respectively. Gains and losses on foreign currency transactions for the year ended December 31, 1998 resulted in a net foreign currency loss of $194,064. No gains or losses on foreign currency transactions were realized in 1997 or 1996. Goodwill, Intangibles and Other Assets. The cost of goodwill and intangibles is amortized on a straight-line basis over ten to twenty years. Goodwill is reported net of accumulated amortization of $699,669 and $16,978 in 1998 and 1997, respectively. Intangibles, which principally represent the cost of acquiring licenses, patents and trademarks, are reported net of accumulated amortization of $270,124 and $55,611 in 1998 and 1997, respectively. Closing and other fees incurred at the inception of loan facilities are deferred and are amortized over the term of the loan agreement (see Note 5). As of December 31, 1998, the unamortized balance of all such loan fees was $247,772. F-7 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) Long-Lived Assets. The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on existing company businesses. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Income Taxes: Prior to December 15, 1997, the KPR Companies had elected to be taxed as S Corporations, under provisions of the Internal Revenue Code and various state income tax regulations. As such, current taxable income had been included on the income tax returns of the then sole shareholder for federal and state income tax purposes and no provision had been made for federal income taxes (see unaudited pro forma presentation in the 1997 and 1996 statements of operations). On December 15, 1997, the KPR Companies effected a merger with RYKA Inc. (see Note 1). As a result of the merger, the KPR Companies' S election was terminated. The Company, now renamed Global Sports, Inc., is considered a C corporation and is subject to federal and state income taxes. As such, taxes on income are provided based upon SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Unaudited Pro Forma Data: Pro forma net loss represents net loss after pro forma adjustments for income taxes as if the KPR Companies had been subject to federal and state income taxation as a C Corporation since its inception. Revenue Recognition: Sales, net of discounts, are recognized upon the shipment of product. Advertising: The Company expenses the cost of advertising upon the first time the advertising takes place. Advertising expense was $1,774,753, $431,753, and $206,842 for 1998, 1997, and 1996 respectively. Reclassifications: Certain 1997 and 1996 balances have been reclassified to conform with the 1998 financial statement presentation. Use of Estimates: The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments: Gains and losses on foreign currency hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and recognized in income as part of the related transaction. Unrealized gains and losses related to qualifying hedges of firm commitments are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Fair Value of Financial Instruments: The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, notes payable, bank and notes payable, other are a reasonable estimate of their fair F-8 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) values at December 31, 1998 and 1997, based on either the short maturity of these instruments or current rates offered to the Company for debt of a similar nature. The fair value of the subordinated notes payable is not practicable to determine because of the lack of quoted market prices for such debt and the Company's lack of offers to provide comparable subordinated debt. The fair value of foreign currency forward contracts is based on quoted market prices. Stock-Based Compensation: SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. New Accounting Pronouncements Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company has not yet assessed what the impact of this statement will be on the Company's future earnings or financial position. Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive Council issued Statement of Position 98-5, Reporting of Costs of Start-Up Activities, ("SOP 98-5"). The statement requires that costs of start-up activities, including organization costs, be expensed as incurred. This statement is required to be adopted January 1, 1999. Adoption of SOP 98-5 in 1999 is not expected it to have a material effect on the Company's results of operations, cash flows or financial position. NOTE 3--ACQUISITIONS In consideration for the stock of the Gen-X Companies, the Company issued 1.5 million shares of its common stock and contingent consideration in the form of noninterest-bearing notes and 10,000 shares of mandatorily redeemable preferred stock in the aggregate amount of $5 million. The notes are payable and shares are redeemable at an aggregate of $1 million per year over a five- year period upon achieving certain sales and gross profit targets. The redemption price of the preferred shares is contingent on the same targets, up to a maximum of $500,000. The total purchase price, including acquisition expenses of approximately $330,000 but excluding the contingent consideration described above, was $6,793,020. This purchase price is based on the 10-day average market price of the 1.5 million shares discounted by 35% to reflect restrictions on the transferability of these shares. The following table details the allocation of the total consideration: Fair value of assets acquired........ $13,913,937 Fair value of liabilities assumed.... (13,765,000) Goodwill............................. 6,644,083 ----------- $ 6,793,020 ===========
Goodwill is being amortized on a straight line basis over twenty years. If and when the contingent consideration is issued, goodwill will increase. F-9 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) The following unaudited pro forma information is presented as if the acquisition had occurred on January 1, 1997:
1998 1997 ------------ ----------- Net sales....................................... $141,036,638 $92,091,786 ============ =========== Net income (loss)............................... $ 5,808,522 $(1,844,147) ============ =========== Earnings (losses) per share--basic.............. $ .49 $ (.16) ============ =========== Earnings (losses) per share--diluted............ $ .48 $ (.16) ============ ===========
Effective July 27, 1998, the Company acquired Lamar Snowboards, Inc. ("Lamar"), a privately-held manufacturer of snowboards, bindings and related products based in San Diego, California. In consideration for the stock of Lamar, the Company paid $250,000 in cash and issued notes in the aggregate principal amount of $1,000,000, payable over five years. The fair value of the assets acquired was $927,124 and the fair value of the liabilities assumed was $1,881,116, resulting in goodwill of $2,203,992. Goodwill is being amortized on a straight line basis over twenty years. Pro forma financial information related to this transaction would not be materially different from reported results. NOTE 4--PROPERTY AND EQUIPMENT The major classes of property and equipment, at cost, are as follows:
December 31, ----------------------- 1998 1997 ----------- ---------- Equipment.......................................... $ 1,764,111 $1,090,148 Building--under capital lease (see Note 6)......... 2,666,958 2,666,958 Building........................................... 686,365 -- Leasehold improvements............................. 358,772 353,767 Land............................................... 268,800 -- Construction in progress........................... 17,392 -- ----------- ---------- 5,762,398 4,110,873 Less: Accumulated depreciation and amortization.... (1,376,492) (828,161) ----------- ---------- $ 4,385,906 $3,282,712 =========== ==========
F-10 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 5--NOTES PAYABLE Notes Payable, Banks The components of the notes payable, banks balances as of December 31, 1998 and 1997 are comprised as follows:
December 31, ------------------------- 1998 1997 ------------ ----------- Revolving credit facility, secured by substantially all assets of KPR and RYKA (weighted average interest rates at December 31, 1998--8.15%; 1997--8.25%)....................................... $ 18,812,156 $20,666,248 Revolving credit facility, secured by substantially all assets of the Gen-X Companies (weighted average interest rate at December 31, 1998--7.93%)......... 14,500,000 -- Mortgage payable, secured by building, due 8/15/09 (interest rate at December 31, 1998--8.07%)........ 323,955 -- ------------ ----------- Total............................................. 33,636,111 20,666,248 Less: Current portion............................. (14,529,576) (2,000,000) ------------ ----------- Long-term portion................................. $ 19,106,535 $18,666,248 ============ ===========
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and Security Agreement (the "Loan Agreement") with a lender pursuant to which a prior lender was repaid in full on November 21, 1997. The total interest incurred in connection with the former lender in 1997 was $1,289,537. Under the Loan Agreement, as amended, the Company has access to a combined credit facility of $40,000,000 which is comprised of the KPR Companies' credit facility of $35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years expiring on November 19, 2002. The KPR Companies and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under the Loan Agreement, both the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. The Loan Agreement also includes 50% of outstanding letters of credit as collateral for borrowing. In addition to the revolving lines of credit described above, the lender will over-advance to the Company a combined additional total of $3,000,000, comprised of the KPR Companies' additional $2,000,000 and RYKA's additional $1,000,000, over the collateral for additional import letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. The Loan Agreement requires that the merchandise underlying the over- advance is at least 80% supported by customer orders. Among other things, the Loan Agreement requires the KPR Companies and RYKA to achieve annual earnings before interest, taxes, depreciation and amortization of $5 million, and it limits the Company's ability to incur additional indebtedness, make payments on subordinated indebtedness, make capital expenditures, sell assets, and pay dividends. At December 31, 1997, the Company was not in compliance with a financial covenant of its Loan Agreement, namely the financial covenant requiring $2,500,000 of consolidated net income plus depreciation, amortization and other non-cash charges plus interest and income taxes ("EBITDA") on an annualized basis for F-11 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) the period July 1, 1997 through December 31, 1997. A waiver was obtained from the bank to remedy its violation of the financial covenant. In March 1998, the Company renegotiated the terms of and executed an amendment to the Loan Agreement such that the financial covenant would require the Company to maintain EBITDA of $5,000,000 on an annualized basis for periods subsequent to December 31, 1997. As of December 31, 1998, the Company is in compliance with all financial covenants of the Loan Agreement. At December 31, 1998, the aggregate amount outstanding under this line was $18,812,156, all of which is classified as a long term liability. At December 31, 1998, based on available collateral and outstanding import letters of credit commitments, an additional $2,403,332 (including the seasonal over- advance) was available on this line for borrowing. The total interest incurred in connection with this facility was $1,970,466 for the year ending December 31, 1998. The maximum amount outstanding on this line during 1998 was $24,926,959. The Company has an additional line of credit of approximately $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering substantially all of the Gen-X Companies' assets. At December 31, 1998, draws of $14,500,000 (included in current liabilities) were committed under this line. Based on available collateral and outstanding import letters of credit commitments an additional $4,701,700 was available for borrowing. The total interest expense incurred in connection with this facility was $453,485 for the year ending December 31, 1998. The maximum amount outstanding on this line during 1998 was $14,500,000. Notes payable, banks also includes a mortgage payable secured by land and building in Ontario, Canada of $323,955 of which $29,576 is classified as current, bearing interest at the bank's cost of funds plus 2.5% and maturing on August 15, 2009. For the year ending December 31, 1998, interest expense included $15,794 related to this mortgage. Notes Payable, Other The components of the notes payable, other balances as of December 31, 1998 and 1997 are comprised as follows:
December 31, ----------------- 1998 1997 ---------- ----- 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 $ -- ========== =====
Other debt related to the Gen-X Companies includes an outstanding loan payable to Ride Inc. for $1,600,000, of which $400,000 is classified as current. The original loan of $2,000,000 is repayable in equal quarterly installments of $100,000 which commenced on March 31, 1998 and bears interest at the prime lending rate. For the year ending December 31, 1998, interest expense included $88,150 related to this note. Notes payable, other also includes $1,606,558 of promissory notes payable to the former shareholders of Lamar (see Note 3). The notes are payable in five equal annual installments and bear interest at 6% per annum. At December 31, 1998, $312,815 of such notes is classified as current. F-12 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) Subordinated Notes Payable The components of the subordinated notes payable balances as of December 31, 1998 and 1997 are comprised as follows:
December 31, ------------------------ 1998 1997 ----------- ----------- Subordinated notes payable to shareholder (interest rate at December 31, 1998--8.25%; 1997--8.75%)...... $ 1,805,841 $ 2,068,652 Subordinated notes payable to former shareholders of the Gen-X Companies, due 12/31/99 (interest rate at December 31, 1998--7%).............................. 1,999,065 -- ----------- ----------- Total.............................................. 3,804,906 2,068,652 Less: Current portion.............................. (3,804,906) (2,068,652) ----------- ----------- Long-term portion.................................. $ -- $ -- =========== ===========
At December 31, 1998, the Company had $1,805,841 in outstanding subordinated notes payable held by its Chairman and CEO, plus accrued interest on such notes of $24,094 recorded in accrued expenses. This debt consists primarily of a note representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies prior to the Reorganization (see Note 1). Interest accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. The interest rate at December 31, 1998 was 8 3/4% and interest recorded during the year ending December 31, 1998 was $162,124. Based on its Loan Agreement, the Company is permitted to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing subsequent to the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of the Company. During 1998, aggregate principal payments of $250,000 were made. Upon closing the Gen-X transaction on May 12, 1998 (see Note 3), several subordinated notes payable were executed with the former shareholders of the Gen-X Companies for an aggregate of $1,999,065 which is payable upon the earlier of the Company raising certain additional capital or in four equal consecutive quarterly payments beginning March 31, 1999. This note bears interest at 7% per annum until December 31, 1998 and the prime lending rate thereafter. For the year ending December 31, 1998, interest expense included $54,572 related to these notes. Subject to the Loan Agreement limitations on the repayment of subordinated indebtedness, aggregate contractual maturities of long-term debt for each of the next five years commencing in 1999 are:
1999 2000 2001 2002 2003 ---------- -------- -------- -------- -------- $4,554,218 $749,312 $749,312 $749,312 $349,310 ========== ======== ======== ======== ========
NOTE 6--CAPITAL LEASE In September 1994, a subsidiary of the Company entered into a fifteen-year capital lease with its CEO and Chairman, for warehouse and office space for its corporate headquarters. On October 1, 1996, the lease was amended from an annual rental amount of $193,056 to an annual rental amount of $347,498. Such amended rental amount more closely reflected the market value of the lease at the time it was amended. The rental amount is subject to annual increases based on the Consumer Price Index and is currently $351,396. The Company pays all insurance and maintenance relating to the leased property. The mortgages on the leased property are F-13 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) collateralized by guarantees of a subsidiary of the Company and have an aggregate outstanding principal balance of $1,525,169 at December 31, 1998. At December 31, 1998 and 1997, the Company's investment in this capital lease was $2,007,035 and $2,212,185 which were included in property and equipment. Interest recorded on this capital lease for the years ended December 31, 1998, 1997 and 1996 was $234,345, $242,120, $160,003, respectively. Future minimum lease payments under above capital lease at December 31, 1998, together with the present value of the future minimum lease payments, are as follows: 1999........................................................... $ 351,396 2000........................................................... 351,396 2001........................................................... 351,396 2002........................................................... 351,396 2003........................................................... 351,396 Thereafter..................................................... 2,020,532 ---------- Total future minimum lease payments............................ 3,777,512 Less interest discount amount.................................. 1,468,281 ---------- Total present value of future minimum lease payments........... 2,309,231 Less: current portion.......................................... 127,966 ---------- Total non-current portion...................................... $2,181,265 ==========
NOTE 7--EQUITY The Company, after the Reorganization, is authorized to issue up to 1,000,000 shares of preferred stock, $.01 par value. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights shares. In connection with the acquisition of the Gen-X Companies (see Note 3), the Company issued 10,000 shares of mandatorily redeemable preferred stock (see Note 12). On April 21, 1997, RYKA sold 125,000 shares of its common stock for $750,000 to certain private investors. The proceeds from this sale were used to repay $385,000 of the Subordinated Note Payable owed to the KPR Companies from RYKA and to enable the Company to open $810,000 in letter of credit agreements for the benefit of KPR. In connection with MR Acquisitions' investment in RYKA Inc. in 1995, MR Acquisitions was granted contingent warrants to purchase 455,000 shares of common stock. As of December 31, 1997, MR Acquisitions had exercised warrants to purchase 361,587 of the 455,000 shares of RYKA common stock for which it paid an aggregate exercise price of $72,317. These 361,587 shares represent the full number of warrants that MR Acquisitions was entitled to exercise under the terms of the warrants. MR Acquisitions was not entitled to exercise the remaining warrants for 93,413 shares because Mr. Rubin did not fully satisfy the contingency under the warrants in that he did not raise the required amount of capital for RYKA through equity offerings by the date specified in the warrants. F-14 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 8--STOCK OPTIONS As part of the Reorganization (see Note 1), the following stock options and stock option plans were assumed by the Company effective December 15, 1997. Pursuant to option grant letters, but not pursuant to any formal plan ("Non- Plan Grants"), the Company assumed options issued to certain individuals to purchase shares of the company's common stock at prices which approximated fair market value at the date of grant. The options vest at various times over periods ranging up to five years and, if not exercised, expire up to ten years after the date of grant. The Company assumed eight separate stock option plans (the "Plans"). Under the terms of the 1987 Stock Option Plan, 1988 Stock Option Plan, 1990 Stock Option Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option Plan, 1996 Stock Option Plan and 1995 Non-employee Directors Plan, the Company may grant qualified and nonqualified options to purchase up to 31,321; 17,500; 37,500; 43,750; 45,000; 75,000; 1,000,000; and 12,500 shares of common stock, respectively, to employees, directors and consultants of the Company. The options vest at various times over periods ranging up to five years. All options have been granted at not less than fair market value of the common stock as of the date of grant. The options, if not exercised, expire up to ten years after the date of grant. Stock appreciation rights ("SAR's") may be granted under the Plans either alone or in tandem with stock options. Generally, recipients of SAR's are entitled to receive, upon exercise, cash or shares of common stock (valued at the then fair market value of the company's common stock) equal to such fair market value on the date of exercise minus such fair value on the date of grant of the shares subject to the SAR, although certain other measurements also may be used. A SAR granted in tandem with a stock option is exercisable only if and to the extent that the option is exercised. No SAR's have been granted to date under the Plans. The following table summarizes the stock option activity for the years ended December 31, 1998 and 1997:
Weighted Number Average of Exercise Shares Price --------- -------- 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 ========= ======
F-15 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes information about options outstanding at December 31, 1998:
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 --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 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 ========= ==== ====== ======= ======
The Company accounts for the Plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Plans been determined consistent with SFAS No. 123, Accounting for Stock Based Compensation, the Company's pro forma net income (loss) and earnings (losses) per share for 1998 and 1997 would have been as follows:
As Reported Pro Forma ----------- ----------- 1998 Net income...................................... $ 5,901,563 $ 4,789,090 =========== =========== Earnings per share--basic....................... $ .52 $ .42 =========== =========== Earnings per share--diluted..................... $ .51 $ .41 =========== =========== 1997 Net loss........................................ $(4,155,295) $(4,805,295) =========== =========== Losses per share--basic......................... $ (1.39) $ (1.60) =========== =========== Losses per share--diluted....................... $ (1.39) $ (1.60) =========== ===========
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:
Assumption 1998 1997 ---------- ---------- ---------- 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
F-16 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 9--COMMON STOCK PURCHASE WARRANTS Prior to the Reorganization (see Note 1), RYKA issued various common stock warrants in connection with financings and other activities. As part of the Reorganization, the following common stock purchase warrants were assumed by the Company, effective December 15, 1997.
Number of Range of Range of Issue Date Shares Exercise Prices Terms (Years) ---------- --------- --------------- ------------- 1994............................ 10,026 $12.00 - $20.00 3 - 10 1995............................ 27,660 $ 8.40 - $30.00 5 1996............................ 43,500 $ 5.30 - $ 8.40 5 - 10 1997............................ 155,300 $ 3.20 - $ 5.60 5 ------- Total........................ 236,486 =======
In addition, during the year ended December 31, 1998, the Company issued warrants to purchase 67,000 shares of common stock to various consultants and sales agents at a range of prices from $5.11 to $7.94 (weighted average price of $6.71) and with terms of five to ten years. The Company recorded a charge of $150,000 in 1998 related to these warrants. NOTE 10--INCOME TAXES Earnings before income taxes and the related provision for income taxes, were as follows:
December 31, 1998 ------------ Earnings before income taxes: Domestic.................................................... $4,196,377 Foreign..................................................... 3,606,004 ---------- Total...................................................... $7,802,381 ========== Provision for income taxes: Current: Federal..................................................... $1,358,722 State....................................................... 128,478 Foreign..................................................... 387,111 ---------- Total current.............................................. 1,874,311 ---------- Deferred: Federal..................................................... 83,770 State....................................................... 48,382 Foreign..................................................... (105,645) ---------- Total deferred............................................. 26,507 ---------- Total: Federal..................................................... 1,442,492 State....................................................... 176,860 Foreign..................................................... 281,466 ---------- Total...................................................... $1,900,818 ==========
F-17 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) The significant components of net deferred tax assets and liabilities at December 31, 1998 and 1997 consisted of the following:
December 31, ------------------------ 1998 1997 ----------- ----------- Deferred tax assets: Inventory...................................... $ 200,254 $ 596,592 Provision for doubtful accounts................ 453,159 458,914 Other assets................................... 58,144 -- Net operating loss carryforwards............... 8,035,764 7,750,306 ----------- ----------- Gross deferred tax assets.................... 8,747,321 8,805,812 Deferred tax liabilities: Depreciation................................... (23,306) -- Intangibles.................................... (673,274) (684,000) ----------- ----------- Gross deferred tax liabilities............... (696,580) (684,000) ----------- ----------- Net deferred tax assets and liabilities.......... 8,050,741 8,121,812 Valuation allowance............................ (8,050,741) (8,121,812) ----------- ----------- Net deferred tax asset........................... $ -- $ -- =========== ===========
The Company has not provided for United States deferred income taxes or foreign withholding taxes on the $5,320,759 of unremitted earnings of its non- United States subsidiary Gen-X Equipment AG, as of December 31, 1998, since these earnings are deemed to be permanently invested. Due to the uncertainty surrounding the realization of the company's tax attributes in future income tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. As of December 31, 1998, the Company had available net operating loss carryforwards, attributable to RYKA, of approximately $19,744,000 which expire in the years 2002 through 2012. The use of net operating loss carryforwards may be subject to annual limitations based on ownership changes of the Company's stock, as defined by Section 382 of the Internal Revenue Code. To the extent that such net operating loss carryforwards are realized in the future, they will reduce the carrying value of goodwill. The differences between the statutory federal income tax rate and the effective income tax rate are provided in the following reconciliation:
December 31, 1998 ------------ Statutory federal income tax rate............................. 34.0% Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit.............. 1.5 Nondeductible amortization.................................. 3.8 Undistributed foreign earnings.............................. (12.6) Utilization of net operating loss carryforwards............. (2.2) Other....................................................... (.2) ----- Effective income tax rate..................................... 24.3% =====
For the years ended December 31, 1997 and 1996 the Company had no provision for federal and state income taxes. In 1996, the Company had a provision for foreign taxes of $81,000. F-18 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 11--EARNINGS (LOSSES) PER SHARE Earnings (losses) per share have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings (losses) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (losses) per share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during the year, assuming dilution by outstanding common stock options and warrants. The amounts used in calculating earnings (losses) per share data are as follows:
1998 1997 1996 ----------- ----------- ---------- Net income............................... $ 5,901,563 =========== Pro forma net loss (see Note 2).......... $(4,155,295) $ (683,830) =========== ========== Weighted average shares outstanding-- basic................................... 11,378,918 2,996,027 2,568,431 Dilutive common stock options.......... 182,171 -- -- Dilutive common stock warrants......... 79,682 -- -- ----------- ----------- ---------- Weighted average shares outstanding-- diluted................................. 11,640,771 2,996,027 2,568,431 =========== =========== ========== Outstanding common stock options having no dilutive effect...................... 350,961 542,681 241,250 =========== =========== ========== Outstanding common stock warrants having no dilutive effect...................... 304,435 236,486 81,186 =========== =========== ==========
The Company's pro forma net loss in 1997 and 1996 result in an anti-dilutive effect in the calculation of pro forma diluted earnings losses per share. NOTE 12--MANDATORILY REDEEMABLE PREFERRED STOCK In connection with the acquisition of the Gen-X Companies on May 12, 1998 (see Note 3), the Company issued 10,000 shares of mandatorily redeemable preferred stock. The redemption price of these preferred shares is contingent on certain sales and gross profit targets, ranging from a minimum of $.01 per share to a maximum of $50.00 per share, and are redeemable over a five year period. NOTE 13--COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company is involved in various routine litigation, including litigation in which the Company is a plaintiff, incidental to its business. The Company believes that the disposition of such routine litigation will not have a material adverse effect on the financial position or results of operations of the Company. Employment Agreements At December 31, 1998, the Company has employment agreements with several of its officers for an aggregate annual base salary of $1,177,500 plus bonus and increases in accordance with the terms of the agreements. Terms of such contracts range from three to five years and are subject to automatic annual extensions. Purchase Commitments As of December 31, 1998, outstanding purchase commitments exist totaling $5,745,974, for which commercial import letters of credit have been issued. F-19 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 14--SIGNIFICANT CUSTOMERS / CONCENTRATIONS OF CREDIT RISK The Company's sales and accounts receivable are primarily with major national retail stores. If the financial condition or operations of these customers deteriorate substantially, the Company's operating results could be adversely affected. Credit risk with respect to other trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base and mitigated in part by credit insurance. The Company performs ongoing credit evaluations of its customers' financial condition and generally the Company does not require collateral. Net sales for the years ended December 31, 1998, 1997 and 1996 to key customers each amounting to in excess of 10% is as follows:
1998 1997 1996 ---- ---- ---- Customer A.................................................. 27% N/A N/A Customer B.................................................. 13% 22% 14% Customer C.................................................. N/A 13% 17%
At December 31, 1998, accounts receivable for Customer A and Customer B amounted to $8,881,106 and $4,080,369, respectively, or 24% and 11%, respectively, of total accounts receivable outstanding. At December 31, 1997, accounts receivable for Customer B and Customer C amounted to $5,045,038 and $1,491,833, respectively or 30% and 9%, respectively, of total accounts receivable outstanding. NOTE 15--MAJOR SUPPLIERS / ECONOMIC DEPENDENCY Inventory purchased for the years ended December 31, 1998, 1997 and 1996 from a key supplier amounted to 11%, 26% and 17% of total inventory purchased. At December 31, 1998, the Company had no amounts owed to this supplier. At December 31, 1997, the amount owed to this supplier was $11,261,105 or 70% of total accounts payable outstanding. No other supplier amounted to in excess of 10% of total inventory purchased for each of the years then ended. NOTE 16--SAVINGS PLAN The Company sponsors a voluntary defined contribution savings plan covering all U.S. employees. Company contributions to the plan may not exceed $2,500 per employee. Total Company contributions were $21,431, $18,594, and $12,394 in 1998, 1997, and 1996 respectively, related to the Company's contribution to the plan. F-20 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 17--INVESTMENT IN RYKA INC. A summary of activity relating to the Company's investment in RYKA Inc. for the two years ended December 31, 1997 follows: 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 ==========
During 1996, RYKA issued for cash 525,000 shares of common stock for $5.00 per share which was in excess of the Company's per share carrying amount. The Company accounted for the change in its proportionate share of RYKA equity as an increase in both its investment and additional paid-in capital. During 1997, RYKA issued for cash 125,000 shares of common stock for $6.00 per share which was in excess of the Company's per share carrying amount. Also in 1997, MR Acquisitions exercised its warrants to purchase an additional 361,587 RYKA shares. The Company accounted for these transactions as an increase in both its investment and additional paid-in capital. As of December 14, 1997, just prior to the Reorganization (See Note 1), the Company had a 33% equity interest in the net assets of RYKA. NOTE 18--BUSINESS SEGMENTS In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement established standards for the reporting of information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is the Senior Management Group, which is comprised of the Chief Executive Officer, Executive Vice President of Operations, Senior Vice President of Strategic Development and Chief Financial Officer as well as the senior executives of each of the Company's operating segments. The Company's reportable operating segments include the Branded segment and the Off-Price and Action Sports segment. Under the Branded segment, the Company designs, develops and markets each of its brands to appeal to a targeted consumer group. Brands offered by the Company include the RYKA and Yukon brands and are primarily sold to athletic footwear stores, sporting goods stores, department stores and independent retailers. Under the Off-Price and Action Sports segment, the Company purchases manufacturers' closeout merchandise, overstocks and canceled orders, as well as excess inventories of athletic, outdoor and casual footwear, athletic apparel and sporting goods from retailers, for resale to retailers principally in the United States and Canada. The Company resells merchandise to sporting goods stores, off-price specialty stores, department stores, family F-21 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) footwear stores, and independent retailers. The Company also designs and distributes special make-up snowboards and other sports-related merchandise for selected retailers under its Off-Price and Action Sports segment. The Company evaluates performance based on stand-alone operating segment gross margins. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note 2). Information by operating segment is as follows:
Off-Price & Consolidated Branded Action Sports Total ----------- ------------- ------------ 1998: Net sales...................... $41,080,143 $90,354,828 $131,434,971 Cost of sales.................. 27,550,956 67,977,456 95,528,412 ----------- ----------- ------------ Gross margin................... $13,529,187 $22,377,372 35,906,559 =========== =========== Operating expenses............. 24,832,046 ------------ Operating income............... $ 11,074,513 ============ Revenues from significant customers: Customer A..................... 19% 30% =========== =========== Customer B..................... 19% 10% =========== =========== Customer C..................... N/A N/A =========== =========== 1997: Net sales...................... $17,930,924 $42,740,483 $ 60,671,407 Cost of sales.................. 13,172,587 35,204,379 48,376,966 ----------- ----------- ------------ Gross margin................... $ 4,758,337 $ 7,536,104 $ 12,294,441 =========== =========== Operating expenses............. 13,857,361 ------------ Operating loss................. $(1,562,920) ============ Revenues from significant customers: Customer A..................... N/A N/A =========== =========== Customer B..................... 32% 18% =========== =========== Customer C..................... N/A 14% =========== =========== 1996: Net sales...................... $10,486,832 $36,853,618 $ 47,340,450 Cost of sales.................. 8,191,815 29,665,640 37,857,455 ----------- ----------- ------------ Gross margin................... $ 2,295,017 $ 7,187,978 9,482,995 =========== =========== Operating expenses............. 8,600,191 ------------ Operating income............... $ 882,804 ============ Revenues from significant customers: Customer A..................... N/A N/A =========== =========== Customer B..................... N/A 14% =========== =========== Customer C..................... N/A 17% =========== ===========
F-22 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(Continued) Assets by reportable segment at December 31, 1998 and 1997 are as follows:
Segment 1998 1997 1996 ------- ----------- ----------- ----------- Branded............................... $20,279,475 $13,171,700 $ 1,506,970 Off-Price and Action Sports........... 52,343,839 24,286,090 19,178,904 ----------- ----------- ----------- Operating segment assets.............. 72,623,314 37,457,790 20,685,874 Assets not attributable to segments... 6,242,872 5,974,119 5,992,670 ----------- ----------- ----------- Consolidated assets................. $78,866,186 $43,431,909 $26,678,544 =========== =========== ===========
Geographic Information Gographic information, based upon the country of origin, as of and for the years ended December 31, 1998, 1997 and 1996 was as follows:
1998 1997 1996 ------------------------ ---------------------- ---------------------- Long-Lived Long-Lived Long-Lived Net Sales Assets Net Sales Assets Net Sales Assets ------------ ----------- ----------- ---------- ----------- ---------- United States........... $ 96,624,709 $13,042,596 $57,266,891 $9,413,823 $39,899,399 $3,477,882 Canada.................. 34,810,262 5,547,089 -- -- -- -- Europe.................. -- -- 3,404,516 18,575 7,441,051 148,983 ------------ ----------- ----------- ---------- ----------- ---------- Total................. $131,434,971 $18,589,685 $60,671,407 $9,432,398 $47,340,450 $3,626,865 ============ =========== =========== ========== =========== ==========
Long-lived assets primarily represent property and equipment, goodwill, intangibles and other assets. NOTE 19--RELATED PARTY TRANSACTIONS The Company is located in King of Prussia, Pennsylvania where it conducts its operations and warehouses inventory in a facility leased from the Company's Chairman and CEO (see Note 6). At December 31, 1998, the Company also has subordinated notes payable outstanding with its Chairman and CEO (see Note 5). A summary of the KPR Companies' related party transactions with RYKA Inc. (prior to the Reorganization) for the years ended December 31, 1997 and 1996 are as follows:
Fiscal Year ----------------- Nature of Transactions Financial Statement Classification 1997 1996 ---------------------- ---------------------------------- -------- -------- Purchase of inventory... Cost of goods sold/Inventory $196,274 $151,985 Rent.................... Other (income) expenses $ 45,521 $ 47,500 Interest on subordinated debt................... Interest income $ 56,854 $ 80,723
NOTE 20--FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to manage the impact of foreign exchange rate changes on earnings and cash flows. The Company does not enter into financial instruments for trading or speculative purposes. The counterparties to these contracts are major financial institutions with high credit ratings and the Company does not have significant exposure to any one counterparty. Management believes the risk of loss is remote and in any event would be immaterial. F-23 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:
December 31, 1998 ------------ 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 ==========
These contracts mature in January through March of 1999. During November 1998, the Company also entered into a series of forward currency contracts for in the aggregate approximately 7,000,000 Canadian Dollars with one of its main lending banks, accounted for as direct hedges on certain U.S. Dollar denominated accounts receivable collection exposures. The Company had $2,689,384 of these contracts outstanding at December 31, 1998, which approximates fair market value. These contracts mature in January and February of 1999. The deferred gains or losses on these contracts at December 31, 1998 were not material. F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf on the date indicated by the undersigned thereunto duly authorized. Global Sports, Inc. Date: March 30, 1999 /s/ Michael G. Rubin By: ---------------------------------- Michael G. Rubin Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ Michael G. Rubin Chairman and Chief March 30, 1999 - -------------------------------------- Executive Officer Michael G. Rubin /s/ Steven A. Wolf Chief Financial Officer March 30, 1999 - -------------------------------------- Steven A. Wolf /s/ Kenneth J. Adelberg Director March 30, 1999 - -------------------------------------- Kenneth J. Adelberg /s/ Harvey Lamm Director March 30, 1999 - -------------------------------------- Harvey Lamm
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions --------------------- Balances at Charged to Charged to Balances at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------- ----------- ---------- ---------- ---------- ----------- Year ended December 31, 1998: Allowance for doubtful accounts............. $743,223 104,452 413,877(/2/) (332,859)(/1/) $928,693 Year ended December 31, 1997: Allowance for doubtful accounts............. $279,682 507,146 121,315(/3/) (164,920)(/1/) $743,223 Year ended December 31, 1996: Allowance for doubtful accounts............. $122,887 250,845 -- (94,050)(/1/) $279,682
- -------- (/1/)Accounts written off against the allowance. (/2/)Transfers from other reserves. (/3/)Balances acquired from RYKA, Inc. S-1 EX-10.16 2 KEY EMPLOYEE AGREEMENT FOR JAMES SALTER EXHIBIT 10.16 KEY EMPLOYEE AGREEMENT To: James J. Salter 277 Glencairn Avenue Toronto, Ontario, M5N1T8 The undersigned, Global Sports, Inc., a Delaware corporation (the "Company"), with its principal place of business located at 555 S. Henderson Road, King of Prussia, Pennsylvania 19406, hereby agrees with you as follows: 1. Position and Responsibilities. 1.1 You shall serve as chief executive officer of the Company's wholly owned subsidiary, Gen-X Holdings, Inc., a Washington corporation ("Gen-X"), and any of Gen-X's wholly owned subsidiaries and of the off price division of one of the Company's other subsidiaries, KPR Sports International, Inc. (or in such other executive capacity as shall be designated by the Board of Directors or Executive Committee of the Company and acceptable to you) and shall perform the duties customarily associated with such capacity from time to time. You shall report to the Chief Executive Officer and Chairman of the Board of the Company. 1.2 You will devote your full time and your best efforts to the performance of your duties hereunder and the business and affairs of the Company. You agree to perform such executive duties as may be assigned to you by or on authority of the Company's Board of Directors or Executive Committee from time to time. 1.3 You will duly, punctually, and faithfully perform and observe any and all rules and regulations which the Company may or shall hereafter reasonably establish governing your conduct as an employee and the conduct of its business. 2. Term of Employment. 2.1 The initial term of this Agreement shall be for the period of years set forth on Exhibit A annexed hereto commencing with the date hereof. Thereafter, this Agreement shall be automatically renewed for successive periods of one (1) year, unless you or the Company shall give the other party not less than four (4) months prior written notice of non-renewal. Your employment with the Company may be terminated as provided in Sections 2.2 or 2.3. 2.2 The Company shall have the right to terminate your employment at any time under this Agreement prior to the stated term in any of the following ways: (a) on thirty (30) days prior written notice to you upon your disability (disability shall be defined as your inability to perform duties under this Agreement for an aggregate of ninety (90) days out of any one hundred eighty (180) day period due to mental or physical disability); (b) immediately without prior notice to you by the Company for "Cause", as hereinafter defined; (c) immediately without prior notice to you, upon your death or in the event of the liquidation or reorganization of the Company under the federal Bankruptcy Code or any state insolvency or bankruptcy law; (d) at any time without Cause, provided the Company shall be obligated to pay to you, as severance pay, a lump sum amount equal to six months of your then current annual Base Salary, such sum to be payable monthly over a six month period from the date of termination. In addition, the Company will continue to pay your medical insurance premiums for that six month period and pay your automobile allowance specified in Article 7.1 of Exhibit "A" hereto. (the "Severance Payments"). 2.3 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i) the falseness or material inaccuracy of any of your warranties or representations herein; (ii) your willful failure or refusal to comply with explicit directives of the Board of Directors or Executive Committee or to render the 2 services required herein; (iii) fraud or embezzlement involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds; (iv) your conviction of a criminal felony offense; (v) the willful breach or habitual neglect of your obligations under this Agreement or your duties as an employee of the Company; (vi) habitual use of drugs. 2.4 If your employment is terminated because of your death all obligations of the Company hereunder shall cease, except with respect to amounts and obligations accrued to you through the thirtieth day after which your death has occurred. 2.5 If your employment is terminated by the Company for any other reason, or you resign, all obligations of the Company (except with respect to amounts and obligations accrued to you prior to the date of termination, and obligations under Section 2.2(d)) shall cease immediately. 2.6 Notwithstanding anything in this Agreement, the termination of your employment shall not affect any other agreements between you and the Company, unless in accordance with the terms of those agreements. 3. Compensation. You shall receive the compensation and benefits set forth on Exhibit A attached hereto ("Compensation") for all services to be rendered by you hereunder and for your transfer of property rights, if any, pursuant to an agreement relating to proprietary information and inventions of even date herewith attached hereto as Exhibit C between you and the Company (the "Proprietary Information and Inventions Agreement"). 4. Other Activities During Employment. 4.1 Except for any outside directorships currently held by you as listed on Exhibit B attached hereto, and except with the prior written consent of a disinterested majority of the Company's Board of Directors, you will not, during the term of this Agreement, undertake or engage in any other employment, occupation or business enterprise other than one in which you are an inactive investor. 4.2 You hereby agree that, except as disclosed on Exhibit B attached hereto, during your employment hereunder, you will not, directly or indirectly, engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a salesperson or otherwise), (viii) as a broker, or (ix) as a partner, co-venturer, stockholder, or other proprietor owning 3 directly or indirectly more than five percent (5%) interest in any firm, corporation, partnership, trust, association, or other organization which is engaged in the planning, research, development, production, manufacture, marketing, sales, or distribution of athletic footwear, rugged outdoor footwear, sportswear, licensed products, sporting goods, skis, snowboards, related products, equipment, or services or any other line of business engaged in or under demonstrable development by the Company or any of its subsidiaries, whether off price or not whether now or at any time during the term of this Agreement (such firm, corporation, partnership, trust, association, or other organization being hereinafter referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit B attached hereto, you hereby represent that you are not engaged in any of the foregoing capacities (i) through (ix) in any Prohibited Enterprise. 5. Former Employers. 5.1 You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior or current employment, consulting agreement or relationship whether oral or written. You represent and warrant that you do not possess confidential information arising out of any such employment, consulting agreement or relationship which, in your best judgment, would be utilized in connection with your employment by the Company in the absence of Section 5.2. 5.2 If, in spite of the second sentence of Section 5.1, you should find that confidential information belonging to any other person or entity might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any of your former employers; but during your employment by the Company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own all information which is common knowledge in the industry or otherwise legally in the public domain. 6. Proprietary Information and Inventions. You agree to execute, deliver and be bound by the provisions of the Proprietary Information and Inventions Agreement attached hereto as Exhibit C. 7. Post-Employment Activities. 7.1 For a period of three (3) years after the termination or expiration, for any reason, of your employment with the 4 Company hereunder, absent the Board of Directors' prior written approval, you will not directly or indirectly engage in activities similar to those described in Section 4.2, nor render services similar or reasonably related to those which you shall have rendered hereunder to, any person or entity whether now existing or hereafter established which directly or indirectly competes with (or proposes or plans to compete with) the Company or its subsidiaries ("Direct Competitor"). Nor shall you entice, induce or encourage any of the Company's or its subsidiaries other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information and nor shall you entice, induce or encourage any of the Company's or its subsidiaries other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information and Inventions Agreement or this Section 7. As used in this Agreement, the term "any line of business engaged in or under demonstrable development by the Company" shall be applied as at the date of termination of your employment, or, if later, as at the date of termination of any post-employment consultation. 7.2 For a period of three (3) years after the termination of your employment with the Company, the provisions of Section 4.2 shall be applicable to you and you shall comply therewith. 7.3 No provision of this Agreement shall be construed to preclude you from performing the same services which the Company hereby retains you to perform for any person or entity which is not a Direct Competitor of the Company upon the expiration or termination of your employment (or any post-employment consultation) so long as you do not thereby violate any term of this Agreement or the Proprietary Information and Inventions Agreement. Additionally, no provision of this agreement shall be construed to preclude you from practicing in a professional capacity, as a Chartered Public Accountant, providing services to members of the public generally. 7.4 You acknowledge that this employment agreement is being entered into in connection with the purchase by the Company of stock owned directly or indirectly by you and that such restrictions contained in Sections four and seven of this Agreement are fair and reasonable under the circumstances and necessary to protect the legitimate business interests of the Company. 8. Remedies. Your obligations under the Proprietary Information and Inventions Agreement and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement (as modified by Section 14, if applicable) shall survive the expiration or termination of your 5 employment (whether through your resignation or otherwise) with the Company. You acknowledge that a remedy at law for any reach or threatened breach by you of the provisions of the Proprietary Information and Inventions Agreement or Section 4 or 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to such injunctive relief in case of any such breach or threatened breach. 9. Dispute Resolution. Any dispute concerning this Agreement or any of the exhibits hereto including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a non-jury trial in the Court of Common Pleas of Montgomery County or the United States District Court for the Eastern District of Pennsylvania. The parties hereto consent to such venue and the exclusive jurisdiction of such courts and knowingly waive their right to a trial by jury. 10. Assignment. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation and any assignee of all or substantially all of its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you, except by operation of law or by a further written agreement by the parties hereto. Notwithstanding anything contained herein to the contrary, the Company shall have the right to assign this agreement to any of its subsidiaries with your consent. 11. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any one or more of the provisions contained in this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be 6 construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 12. Notices. Any notice which the Company is required to or may desire to give you shall be given by registered or certified mail, return receipt requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time designate in writing. Any notice which you are required or may desire to give to the Company hereunder shall be given by registered or certified mail, return receipt requested, or by recognized overnight courier, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing with a copy to David S. Mandel, Esquire, Astor Weiss Kaplan & Rosenblum, LLP, The Bellevue, 6th Floor, 200 South Broad Street, Philadelphia, Pennsylvania, 19102. 13. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any reach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 14. Complete Agreement; Amendments. The foregoing, including Exhibits A, B and C attached hereto, is the entire agreement of the parties with respect only to the subject matter hereof, superseding any previous oral or written communications, representations, understandings, or agreements with the Company or any officer or representative thereof. This Agreement may be amended or modified or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 15. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a 7 part hereof nor to affect the meaning of this Agreement in any way. 16. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. If you are in agreement with the foregoing, please sign your name below and also at the bottom of the Proprietary Information and Inventions Agreement, whereupon both Agreements shall become binding in accordance with their terms. Please then return this Agreement to the Company. (You may retain for your records the accompanying counterpart of this Agreement enclosed herewith). Very truly yours, GLOBAL SPORTS, INC. By: /s/ Michael Rubin -------------------------------- Name: Michael Rubin Title: C.E.O. Accepted and Agreed: /s/ James Salter - ----------------- James J. Salter May 12, 1998 DATE - ----------------- EXHIBIT "A" EMPLOYMENT TERM, COMPENSATION AND BENEFITS OF JAMES J. SALTER CHIEF EXECUTIVE OFFICER - GEN-X HOLDINGS, INC. AND OFF PRICE DIVISION OF KPR SPORTS INTERNATIONAL,INC. 1. Term. The term of this Agreement to which this Exhibit "A" is annexed and incorporated shall be for four years, commencing May 12, 1998 ("Effective Date"), unless renewed in accordance with Section 2.1 of the agreement or terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement. 2. Compensation. a. Base Salary. Your annual Base Salary shall be three hundred fifteen thousand ($315,000.00) dollars. On each anniversary of this contract, the base salary will increase by a minimum of five percent (5%) over the previous year's base salary. b. Bonus. The Company's board of directors shall award you an annual bonus of one hundred thousand dollars ($100,000.00)in each of 1998 (reduced proportionately for 1998 based upon the percentage of the year remaining as of the Effective Date of this agreement) and 1999 if and only if the following goals are satisfied: 1) 1998 Bonus - If a) the gross sales for KPR Sports International, Inc.'s off price division for the entire year 1998 and the gross sales for all of the Gen-X Holdings, Inc.'s subsidiaries for the period from the date of this Agreement through December 31, 1998, exceed $74,000,000.00 and b) the gross profit on such gross sales equals or exceeds $17,760,000.00 then you shall be entitled to receive your 1998 bonus of a proportionate share of $100,000.00 (reduced proportionately as described above), payable on or before April 15, 1999; 2) 1999 Bonus. If a) the gross sales for KPR Sports International, Inc.'s off price division for the entire year 1999 and the gross sales for all of the Gen-X Holdings, Inc.'s subsidiaries for the exceed A - 1 $80,000,000.00 and b) the gross profit on such gross sales equals or exceeds $19,200,000.00, then you shall be entitled to receive your 1999 bonus of $100,000.00, payable on or before April 15, 2000; 3) Bonuses in Subsequent Years. During the remainder of the term of this Agreement, the Board of Directors shall determine the annual goals of gross sales with gross profit margins that must be achieved in order for you to earn a bonus in subsequent years. 4) Determination of "Gross Sales" and "Gross Profit" Margin. The determination of gross sales and gross profit margin shall be made by the Company's regularly retained certified public accountant whose decision shall be binding upon all parties, final and not subject to any further appeal. c. All Base Salary shall be payable in accordance with the Company's payroll policies. 3. Vacation. You shall be paid for and be entitled to all legal and religious holidays, and three (3) weeks paid vacation per annum commencing in the first year of this Agreement. All vacation time shall be earned on a quarterly basis. You shall arrange for vacations in advance at such time or times as shall be mutually agreeable to you and the Company. You shall be entitled to carry forward into the subsequent year up to one (1) week of unused vacation time. You may not receive pay in lieu of vacation except in the event of termination without Cause. 4. Insurance and Benefits. You shall be eligible for participation in any health or other group insurance plan which may be established by the Company or which the Company is required to maintain by law. You shall also be entitled to participate in any employee benefit program which the Company may establish for its key employees or for its employees generally, including, but in no way limited to, bonuses and stock purchase or option plans. The Company shall provide comprehensive health insurance for you and your dependents as provided to other similar executive employees of the Company. 5. Expenses The Company shall reimburse you promptly for all reasonable and ordinary business and out-of-pocket expenses incurred by A - 2 you in connection with the Company's business and in the scope of your employment hereunder, as approved by the Company, including, without limitation, reasonable and necessary travel, lodging, entertainment and meals incurred by you during the term of this Agreement, provided the expenses are incurred in furtherance of the Company's business and at the request of the Company. You agree to keep and maintain records of the aforesaid expenses as may be requested by the Company and to account to the Company for the expenses prior to reimbursement. In addition, the Company shall reimburse you for the cost of all gas, repairs and insurance associated with the operation of your vehicle. 6. Stock Options 6.1 You will be granted five year options to purchase one hundred thousand (100,000) shares of the Company's common stock at an exercise price equal to the fair market value of the underlying common stock on the Effective Date, of which twenty thousand (20,000) shares shall vest on each of the first, second, third fourth, and fifth anniversary dates of this Agreement. 6.2 Should your employment be terminated a) for cause, b) your resignation prior to the end of the term of this Agreement, c) your death or d) your disability pursuant to Section 2.2(a) of your employment agreement you shall retain your vested options and forfeit any unvested options. You may exercise your vested options for a period of one year from the date of the termination of your employment for cause or the date of your resignation, as applicable. 7. Automobile Allowance 7.1 The Company shall reimburse you for the rental cost of your automobile, up to one thousand five hundred ($1500.00) per month. 8. Place of Employment 8.1 Your office shall be at Gen-X Equipment, Inc.'s office in Toronto, Canada; however, you will be required to spend a certain amount of time at the company's corporate office in King of Prussia, Pennsylvania, not to exceed five days per month. A - 3 A - 4 EXHIBIT B OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF JAMES J. SALTER NONE B - 1 EXHIBIT C - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT - -------------------------------------------------------------------------------- To: Global Sports, Inc. 555 South Henderson Road King of Prussia, PA 19406 The undersigned, in consideration of and as a condition of my employment or continued employment by you and/or by companies which you own, control, or are affiliated with or their successors in business (collectively, the "Company"), hereby agrees as follows: 1. Confidentiality. I agree to keep confidential, except as the Company may otherwise consent in writing, and, except for the Company's benefit, not to disclose or make any use of at any time either during or subsequent to my employment, any Inventions (as hereinafter defined), trade secrets and confidential information, knowledge, data or other information of the Company relating to products, processes, know-how, techniques, methods, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Company or any of its affiliates, which I may produce, obtain, or otherwise acquire during the course of my employment, except as herein provided. I further agree not to deliver, reproduce or in any way allow any such trade secrets, confidential information, knowledge, data or other information, or any documentation relating thereto, to be delivered to or used by any third parties without specific direction or consent of a duly authorized representative of the Company. 2. Conflicting Employment; Return of Confidential Material. I agree that during my employment with the Company I will not engage in any other employment, occupation, consulting or other activity relating to the business in which the Company is now or may hereafter become engaged, or which would otherwise conflict with my obligations to the Company. In the event my employment with the Company terminates for any reason whatsoever, C - 1 I agree to promptly surrender and deliver to the Company all records, materials, equipment, drawings, computer disks, documents and data of which I may obtain or produce during the course of my employment, and I will not take with me any description containing or pertaining to any confidential information, knowledge or data of the Company which I may produce or obtain during the course of my employment. 3. Assignment of Inventions. 3.1 I hereby acknowledge and agree that the Company is the owner of all Inventions. In order to protect the Company's rights to such Inventions, by executing this Agreement I hereby irrevocably assign to the Company all my right, title and interest in and to all Inventions to the Company. 3.2 For purposes of this Agreement, "Inventions" shall mean all discoveries, processes, designs, methods, techniques, technologies, devices, or improvements in any of the foregoing or other ideas, whether or not patentable or copyrightable and whether or not reduced to practice, made or conceived by me (whether solely or jointly with others) during the period of my employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research and development of the Company, or result from or are suggested by any task assigned to me or any work performed by me for or on behalf of the Company. 3.3 Any discovery, process, design, method, technique, technology, device, or improvement in any of the foregoing or other ideas, whether or not patentable or copyrightable and whether or not reduced to practice, made or conceived by me (whether solely or jointly with others) which I develop entirely on my own time not using any of the Company's equipment, supplies, facilities, or trade secret information ("Personal Invention") is excluded from this Agreement provided such Personal Invention (i) does not relate to the actual or demonstrably anticipated business, research and development of the Company, and (ii) does not result, directly or indirectly, from any work performed by me for or on behalf of the Company. 4. Disclosure of Inventions. I agree that in connection with any Invention, I will promptly disclose such Invention to the Board of Directors or the Executive Committee of the Company in order to permit the Company to enforce its property rights to such Invention in accordance with this Agreement. My disclosure shall be received in confidence by the Company. C - 2 5. Patents and Copyrights; Execution of Documents. 5.1 Upon request, I agree to assist the Company or its nominee (at its expense) during and at any time subsequent to my employment in every reasonable way to obtain for its own benefit patents and copyrights for Inventions in any and all countries. Such patents and copyrights shall be and remain the sole and exclusive property of the Company or its nominee. I agree to perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title and interest in and to such patents and copyrights. 5.2 In connection with this Agreement, I agree to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all documents, including assignments of title, patent or copyright applications, assignments of such applications, assignments of patents or copyrights upon issuance, as the Company may determine necessary or desirable to protect the Company's or its nominee's interest in Inventions, and/or to use in obtaining patents or copyrights in any and all countries and to vest title thereto in the Company or its nominee to any of the foregoing. 6. Maintenance of Records. I agree to keep and maintain adequate and current written records of all Inventions made by me (in the form of notes, sketches, drawings and other records as may be specified by the Company), which records shall be available to and remain the sole property of the Company at all times. 7. Prior Inventions. It is understood that all Personal Inventions, if any, whether patented or unpatented, which I made prior to my employment by the Company, are excluded from this Agreement. To preclude any possible uncertainty, I have set forth on Schedule A attached hereto a complete list of all of my prior Personal Inventions, including numbers of all patents and patent applications and a brief description of all unpatented Personal Inventions which are not the property of a previous employer. I represent and covenant that the list is complete and that, if no items are on the list, I have no such prior Personal Inventions. I agree to notify the Company in writing before I make any disclosure or perform any work on behalf of the Company which appears to threaten or conflict with proprietary rights I claim in any Personal Invention. In the event of my failure to give such notice, I agree that I will make no claim against the Company with respect to any such Personal Invention. C - 3 8. Other Obligations. I acknowledge that the Company from time to time may have agreements with other persons, companies, entities, the U.S. Government or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. I agree to be bound by all such obligations and restrictions and to take all action necessary to discharge the Company's obligations. 9. Remedies. Your obligations under the Proprietary Information and Inventions Agreement and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement (as modified by Section 14, if applicable) shall survive the expiration or termination of your employment (whether through your resignation or otherwise) with the Company. You acknowledge that a remedy at law for any reach or threatened breach by you of the provisions of the Proprietary Information and Inventions Agreement or Section 4 or 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to such injunctive relief in case of any such breach or threatened breach. 10. Trade Secrets of Others. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep confidential proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. I agree not to enter into any agreement either written or oral in conflict herewith. 11. Modification. I agree that any subsequent change or changes in my employment duties, salary or compensation or, if applicable, in any Employment Agreement between the Company and me, shall not affect the validity or scope of this Agreement. 12. Binding Effect. This Agreement shall be binding upon and inure to the C - 4 benefit of the parties hereto and their respective legal representatives and successors. 13. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 14. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 15. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any prior oral or written communications, representations, understandings or agreements concerning the subject matter hereof with the Company or any officer or representative thereof. This Agreement may be amended, modified, or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 16. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a C - 5 part hereof nor to affect the meaning of this Agreement in any way. 17. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 18. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 19. Notices. All notices, requests, demands and communications which are or may be required to be given hereunder shall be deemed given if and when sent by registered or certified mail, return receipt requested, postage prepaid, to the following addresses: If to the Company: GLOBAL SPORTS, INC. 555 South Henderson Road King of Prussia, PA 19406 Attention: President With a copy to: David S. Mandel, Esquire Astor Weiss Kaplan & Rosenblum, LLP The Bellevue 200 South Broad Street 6th Floor Philadelphia, Pennsylvania, 19102 If to Employee: JAMES J. SALTER 277 Glencairn Avenue Toronto, Ontario, M5N1T8 EMPLOYEE: May 12, 1998 /s/ James J. Salter - ------------------------------- ------------------------------------- DATE JAMES J. SALTER Accepted and Agreed: GLOBAL SPORTS, INC. By: /s/ Michael Rubin May 12, 1998 - ------------------------------- ------------------------------------- Name: Michael Rubin Date Title: C.E.O. C - 6 SCHEDULE A LIST OF PRIOR INVENTIONS OF JAMES J. SALTER Identifying Number or Title Date Brief Description - ----- ---- ----------------- NONE C - 7 C - 8 EX-10.17 3 KEY EMPLOYEE AGREEMENT FOR ARTHUR CARVER EXHIBIT 10.17 KEY EMPLOYEE AGREEMENT To: Arthur Carver 29 Magnolia Road Sharon, Mass., 02067 The undersigned, Global Sports, Inc., a Delaware corporation (the "Company"), with its principal place of business located at 555 S. Henderson Road, King of Prussia, Pennsylvania 19406, hereby agrees with you as follows: 1. Position and Responsibilities. 1.1 You shall serve as Executive Vice President (or in such other executive capacity as shall be designated by the Board of Directors or Executive Committee of the Company and reasonably acceptable to you) and shall perform the duties customarily associated with such capacity from time to time. In such capacity, you will have direct responsibility for the sourcing, development, and production of branded footwear merchandise produced under any trademarks owned or licensed to the Company or any of its subsidiaries, as well as direct responsibility for the Company's and its subsidiaries' distribution, operations and customer service relating to branded footwear manufactured or licensed by the Company or any of its subsidiaries. 1.2 You will devote your full time and your best efforts to the performance of your duties hereunder and the business and affairs of the Company. You agree to perform such executive duties as may be assigned to you by or on authority of the Company's Board of Directors or Executive Committee from time to time. You will report directly to the Company's Chief Executive Officer. 1.3 You will duly, punctually, and faithfully perform and observe any and all rules and regulations which the Company may or shall hereafter reasonably establish governing your conduct as an employee and the conduct of its business. 2. Term of Employment. 2.1 The initial term of this Agreement shall be for the period of years set forth on Exhibit A annexed hereto commencing with the date hereof. Thereafter, this Agreement shall be automatically renewed for successive periods of one (1) year, unless you or the Company shall give the other party not less than three (3) months prior written notice of non-renewal. Your employment with the Company may be terminated as provided in Sections 2.2 or 2.3. 2.2 The Company shall have the right to terminate your employment at any time under this Agreement prior to the stated term in any of the following ways: (a) on thirty (30) days prior written notice to you upon your disability (disability shall be defined as your inability to perform duties under this Agreement for an aggregate of ninety (90) days out of any one hundred eighty (180) day period due to mental or physical disability); (b) immediately without prior notice to you by the Company for "Cause", as hereinafter defined; (c) immediately without prior notice to you, upon your death or in the event of the liquidation or reorganization of the Company under the federal Bankruptcy Code or any state insolvency or bankruptcy law; (d) at any time, without Cause, through December 31, 1999, provided the Company shall be obligated to continue to pay you as severance pay for six months after the effective date of your termination, a monthly amount equal to your monthly Base Salary (the "Severance Payments"). For each year of employment after December 31, 1999, you shall be entitled to an additional month of Severance Payments. 2.3 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i) the falseness or material inaccuracy of any of your warranties or representations herein; (ii) your willful failure or refusal to comply with explicit directives of the Board of Directors or Executive Committee or to render the 2 services required herein; (iii) fraud or embezzlement involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds; (iv) your conviction of a criminal felony offense; (v) the willful breach or habitual neglect of your obligations under this Agreement or your duties as an employee of the Company; (vi) habitual use of drugs. The existence of Cause for termination of your employment by the Company shall be subject, upon the written election by you or the Company, to binding arbitration as provided in Section 9 hereof. The cost of arbitration, exclusive of the cost of each party's legal representation (which, except as hereinafter otherwise provided, shall be borne by the party incurring the expense), shall be borne by the instigating party; provided, however, that the arbitrators' award may require either party to reimburse the other for the reasonable cost of legal representation in the arbitration proceedings. Further, any dispute, controversy, or claim arising out of, in connection with, or in relation to this definition of "Cause" shall be settled by arbitration as provided in Section 9 hereof. Any award or determination shall be final, binding, and conclusive upon the parties, and a judgment rendered may be entered in any court having jurisdiction thereof. 2.4 If your employment is terminated because of your death, all obligations of the Company hereunder shall cease, except with respect to amounts and obligations accrued to you through the thirtieth day after which your death has occurred. If your employment is terminated by the Company for any other reason, all obligations of the Company (except with respect to amounts and obligations accrued to you prior to the date of termination) shall cease. 3. Compensation. You shall receive the compensation and benefits set forth on Exhibit "A" attached hereto ("Compensation") for all services to be rendered by you hereunder and for your transfer of property rights, if any, pursuant to an agreement relating to proprietary information and inventions of even date herewith attached hereto as Exhibit "C" between you and the Company (the "Proprietary Information Agreement"). 4. Other Activities During Employment. 4.1 Except for any outside directorships currently held by you as listed on Exhibit "B" attached hereto, and except with the prior written consent of a disinterested majority of the Company's Board of Directors, which consent will not be unreasonably withheld, you will not, during the term of this Agreement, undertake or engage in any other employment, 3 occupation or business enterprise other than one in which you are an inactive investor. 4.2 You hereby agree that, except as disclosed on Exhibit "B" attached hereto, during your employment hereunder, you will not, directly or indirectly, engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a salesperson or otherwise), (viii) as a broker, or (ix) as a partner, co-venturer, stockholder, or other proprietor owning directly or indirectly more than five percent (5%) interest in any firm, corporation, partnership, trust, association, or other organization which is engaged in the planning, research, development, production, manufacture, marketing, sales, or distribution of athletic footwear, rugged outdoor footwear, sportswear, licensed products, related products, equipment, or services or any other line of business engaged in or under demonstrable development by the Company (such firm, corporation, partnership, trust, association, or other organization being hereinafter referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit "B" attached hereto, you hereby represent that you are not engaged in any of the foregoing capacities (i) through (ix) in any Prohibited Enterprise. 5. Former Employers. 5.1 You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior or current employment, consulting agreement or relationship whether oral or written. You represent and warrant that you do not possess confidential information arising out of any such employment, consulting agreement or relationship which, in your best judgment, would be utilized in connection with your employment by the Company in the absence of Section 5.2. 5.2 If, in spite of the second sentence of Section 5.1, you should find that confidential information belonging to any other person or entity might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any of your former employers; but during your employment by the Company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own all information which is common knowledge in the industry or otherwise legally in the public domain. 6. Proprietary Information. You agree to execute, deliver and be bound by the provisions of the Proprietary Information Agreement attached hereto as Exhibit "C". 4 7. Post-Employment Activities. 7.1 For a period of six (6) months after the termination or expiration, for any reason, of your employment with the Company hereunder, absent the Board of Directors' prior written approval, you will not directly or indirectly engage in activities similar to those described in Section 4.2, nor render services similar or reasonably related to those which you shall have rendered hereunder to, any person or entity whether now existing or hereafter established which directly or indirectly competes with (or proposes or plans to compete with) the Company ("Direct Competitor") in the sale of athletic footwear, rugged outdoor footwear, sportswear, licensed products, and related products and services, whether with respect to merchandise manufactured by the Company for resale or purchased by the Company as "closeout" merchandise for resale. Nor shall you entice, induce or encourage any of the Company's other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information Agreement and nor shall you entice, induce or encourage any of the Company's other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information Agreement or this Section 7. As used in this Agreement, the term "any line of business engaged in or under demonstrable development by the Company" shall be applied as at the date of termination of your employment, or, if later, as at the date of termination of any post-employment consultation. 7.2 For a period of six (6) months after the termination of your employment with the Company, the provisions of Section 4.2 shall be applicable to you and you shall comply therewith. 7.3 No provision of this Agreement shall be construed to preclude you from performing the same services which the Company hereby retains you to perform for any person or entity which is not a Direct Competitor of the Company upon the expiration or termination of your employment (or any post-employment consultation) so long as you do not thereby violate any term of this Agreement or the Proprietary Information Agreement. 8. Remedies. Your obligations under the Proprietary Information Agreement and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement shall survive the expiration or termination of your employment (whether through your resignation or otherwise) with the Company. You acknowledge that a remedy at law for any reach or threatened breach by you of the provisions of the Proprietary 5 Information Agreement or Section 4 or 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to such injunctive relief in case of any such breach or threatened breach. 9. Arbitration. Any dispute concerning this Agreement including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless otherwise determined by such arbitration panel. 10. Assignment. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation and any assignee of all or substantially all of its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you, except by operation of law or by a further written agreement by the parties hereto. 11. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any one or more of the provisions contained in this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 6 12. Notices. Any notice which the Company is required to or may desire to give you shall be given by registered or certified mail, return receipt requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time designate in writing. Any notice which you are required or may desire to give to the Company hereunder shall be given by registered or certified mail, return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing with a copy to David S. Mandel, Esquire, Astor Weiss Kaplan & Rosenblum, The Bellevue, Sixth Floor, 200 South Broad Street, Philadelphia, Pennsylvania 19102. 13. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any reach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 14. Complete Agreement; Amendments. The foregoing, including Exhibits "A", "B", "C" and "D" attached hereto, is the entire agreement of the parties with respect to the subject matter hereof, superseding any previous oral or written communications, representations, understandings, or agreements with the Company or any officer or representative thereof. This Agreement may be amended or modified or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 15. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. 16. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 7 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. If you are in agreement with the foregoing, please sign your name below and also at the bottom of the Proprietary Information Agreement, whereupon both Agreements shall become binding in accordance with their terms. Please then return this Agreement to the Company. (You may retain for your records the accompanying counterpart of this Agreement enclosed herewith). Very truly yours, GLOBAL SPORTS, INC. By: /s/ Michael Rubin -------------------------------- Michael Rubin Accepted and Agreed: /s/ Arthur Carver - ----------------------- Arthur Carver January 1, 1999 - DATE 8 EXHIBIT "A" EMPLOYMENT TERM, COMPENSATION AND BENEFITS OF ARTHUR CARVER, EXECUTIVE VICE PRESIDENT 1. Term. The term of this Agreement to which this Exhibit "A" is annexed and incorporated shall commence on January 4, 1999 and terminate on December 31, 2003, unless renewed in accordance with Section 2.1 of the agreement or terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement. 2. Compensation. a. Base Salary. During the term of this Agreement you will be paid an annual Base Salary based upon the following schedule:
PERIOD ANNUAL BASE SALARY ------ ------------------ Execution of Agreement through December 31, 1999 $200,000.00* January 1, 2000 through December 31, 2000 $250,000.00 January 1, 2001 through December 31, 2001 $250,000.00 January 1, 2002 through December 31, 2002 $250,000.00 January 1, 2003 through December 31, 2003 $250,000.00
b. Bonuses. 1) Execution Bonus- In consideration for your entering into this agreement and commencing work hereunder, the Company shall pay you a bonus during 1999 of fifty thousand dollars ($50,000.00). This bonus shall be earned upon your commencement of employment hereunder and shall be paid to you bi-weekly in equal installments in 1999. A - 1 2) Additional Bonus- Commencing with the Company's performance in the year 2000, and continuing through the remaining term of this Agreement, you will have an opportunity to earn bonuses through each of the following programs: a) Up to 15% of your Base Salary through the Company achieving predetermined goals; and b) up to an additional 15% of your Base Salary through you, individually, achieving predetermined mutually agreed upon objective goals. Both the Company goals and your personal goals will be established by the Company's Compensation Committee three months prior to the commencement of the applicable bonus period. 3) Bonus Based Upon Acquisition - If the Company in 1999 acquires an existing business which adds at least $50,000,000.00 to the Company's 1999 annual revenues, you will have an opportunity to earn an additional bonus based upon achievement of the following objectives: a) Up to 15% of your 1999 Base Salary & Executive bonus total based upon (1) the Company meeting or exceeding its internal finalized business plan for the year, and (2) meeting or exceeding analysts' consensus quarterly and annual estimates for the Company's 1999 sales and net profits; and b) Up to 15% of your 1999 Base Salary & Executive bonus total based upon personal objectives for you as determined by the Company's chief executive officer predicated on the creation and functionality of the total product development, sourcing and production area as well as all other contributions to the Company and its senior management. Such additional objectives will be established by the Company's chief A - 2 executive officer within thirty days after completion of such an acquisition. All determinations as to meeting objective standards for bonuses shall be made solely by the Company's regularly retained certified public accountants whose determinations shall be final, binding upon all parties and not subject to any appeal. c. All Base Salary shall be payable in accordance with the Company's payroll policies provided that upon execution of this Agreement. 3. Vacation. You shall be paid for and be entitled to all legal and religious holidays, and two (2) weeks paid vacation per annum commencing in the first year of this Agreement; provided however, you shall not take two weeks vacation consecutively. All vacation time shall be earned on a quarterly basis. You shall arrange for vacations in advance at such time or times as shall be mutually agreeable to you and the Company. You shall be entitled to carry forward into the subsequent year up to one (1) week of unused vacation time. You may not receive pay in lieu of vacation. 4. Insurance and Benefits. The Company, at its expense, shall provide you with the following benefits in the same amounts and manner as provided to the members of the Company's senior management: - health insurance for you and your dependents - long term disability insurance - term life insurance - participation in the Company's 401K Plan In addition, the Company shall provide you with the following other benefits at the Company's expense: - $1000.00 monthly automobile allowance which includes your automobile insurance and maintenance/repair expenses - cell phone and cell phone account - standard health club membership - travel to the Far East in business class - memberships, publications and conferences directly related to your expertise A - 3 5. Expenses The Company shall reimburse you promptly for all reasonable and ordinary business and out-of-pocket expenses incurred by you in connection with the Company's business and in the scope of your employment hereunder, as approved by the Company, including, without limitation, reasonable and necessary travel, lodging, entertainment and meals incurred by you during the term of this Agreement, provided the expenses are incurred in furtherance of the Company's business and at the request of the Company. You agree to keep and maintain records of the aforesaid expenses as may be requested by the Company and to account to the Company for the expenses prior to reimbursement. 6. Stock Options and Stock Awards Pursuant to the terms of the Company's 1996 Equity Incentive Plan ("Plan"), you will be granted the following awards: 6.1 You will be granted five year options (such options are intended to be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended) to purchase eighty thousand (80,000) shares of the Company's common stock at an exercise price equal to the fair market value of the underlying common stock on the date of the commencement of your employment, of which sixteen thousand (16,000) shares shall vest on each of December 31, 1999, December 31, 2000, December 31, 2001, December 31, 2002 and December 31, 2003. 6.2 Simultaneous herewith, the Company shall issue to you a Restricted Stock Award to purchase ten thousand (10,000) shares of the Company's common stock at a price of one cent per share ($.01). Such stock shall be issued pursuant to Rule 144 and may only be sold or transferred by you in accordance therewith and in no event prior to two years from the date hereof. In addition, should your employment be terminated, voluntarily prior to January 4, 2001, then you shall resell the stock to the Company at the price paid by you therefor. 6.3 Simultaneous herewith, the Company also grants to you a Deferred Stock Award to purchase an additional ten thousand (10,000) shares of the Company's common stock, at a price of $3.58 per share for a period of thirty days after the complete execution of this Agreement by both parties. Such stock shall also be subject to Rule 144 and may only be sold or transferred in accordance therewith. If you shall exercise this option, such stock shall not be subject to any repurchase rights by the Company. The complete terms and conditions of these Awards shall be set forth in an Option Grant Letter ("Option Grant Letter") to be A - 4 delivered to you simultaneous herewith. Any conflict between the terms of the Option Grant Letter and this Agreement, shall be governed by the Option Grant Letter. In the event of the termination of your employment caused by your resignation, your dismissal for cause or without cause, your disability or your death, or in the event of a change in control as defined in Section 6.3 (b) of the Plan, your rights in the options, Restricted Stock Award and Deferred Stock Award shall be as set forth in Article 6 of the Plan. 7. Relocation and Interim Housing Allowance You agree to establish your residency in the metropolitan Philadelphia, Pennsylvania area within six months of the date hereof. Upon presentation of acceptable proof of payment, the Company will reimburse you for the following costs associated with your relocation, not to exceed $60,000.00 ("Relocation Allowance"): a) interim housing; and b) commission on the sale of your present home in Massachusetts; and c) moving expenses; and d) interim personal travel to and from Massachusetts, including your wife's travel to look for housing;and e) transfer tax on the sale of your present home and acquisition of your new home. If you are required by the Internal Revenue Code to report any portion of the Relocation Allocation as income, the Company will, prior to the date on which any such tax must be paid or withheld, make an additional lump-sum payment (the "gross-up payment") to you. The gross-up payment will be sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) due as a result of the gross-up payment, to make Employee whole for all taxes (including withholding taxes) and any associated interest and penalties imposed. 8. Change of Control Agreement Simultaneous herewith, the parties shall enter into the Change of Control Agreement in the form attached hereto as Exhibit "D". (THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK) A - 5 EXHIBIT"B" OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF ARTHUR CARVER B - 1 EXHIBIT "C" - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION AGREEMENT - -------------------------------------------------------------------------------- To: Global Sports, Inc. 555 South Henderson Road King of Prussia, PA 19406 The undersigned, in consideration of and as a condition of my employment or continued employment by you and/or by companies which you own, control, or are affiliated with or their successors in business (collectively, the "Company"), hereby agrees as follows: 1. Confidentiality. I agree to keep confidential, except as the Company may otherwise consent in writing, and, except for the Company's benefit, not to disclose or make any use of at any time either during or subsequent to my employment, trade secrets and confidential information, knowledge, data or other information of the Company relating to products, processes, know-how, techniques, methods, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Company or any of its affiliates, which I may produce, obtain, or otherwise acquire during the course of my employment, except as herein provided. I further agree not to deliver, reproduce or in any way allow any such trade secrets, confidential information, knowledge, data or other information, or any documentation relating thereto, to be delivered to or used by any third parties without specific direction or consent of a duly authorized representative of the Company. 2. Conflicting Employment; Return of Confidential Material. I agree that during my employment with the Company I will not engage in any other employment, occupation, consulting or other activity relating to the business in which the Company is now or may hereafter become engaged, or which would otherwise conflict with my obligations to the Company. In the event my employment with the Company terminates for any reason whatsoever, I agree to promptly surrender and deliver to the Company all records, materials, equipment, drawings, computer disks, C - 1 documents and data of which I may obtain or produce during the course of my employment, and I will not take with me any description containing or pertaining to any confidential information, knowledge or data of the Company which I may produce or obtain during the course of my employment. 3. Trade Secrets of Others. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep confidential proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. I agree not to enter into any agreement either written or oral in conflict herewith. 4. Modification. I agree that any subsequent change or changes in my employment duties, salary or compensation or, if applicable, in any Employment Agreement between the Company and me, shall not affect the validity or scope of this Agreement. 5. Arbitration. Any dispute concerning this Agreement including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless otherwise determined by such arbitration panel. 6. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives and successors. C - 2 7. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 8. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 9. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any prior oral or written communications, representations, understandings or agreements concerning the subject matter hereof with the Company or any officer or representative thereof. This Agreement may be amended, modified, or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 10. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. C - 3 11. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 12. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 13. Notices. All notices, requests, demands and communications which are or may be required to be given hereunder shall be deemed given if and when sent by registered or certified mail, return receipt requested, postage prepaid, to the following addresses: If to the Company: GLOBAL SPORTS, INC. 555 South Henderson Road King of Prussia, PA 19406 Attention: President With a copy to: David S. Mandel, Esquire Astor Weiss Kaplan & Rosenblum The Bellevue, Sixth Floor 200 South Broad Street Philadelphia, PA 19102 If to Employee: Arthur Carver 29 Magnolia Road Sharon, Mass.,02067 EMPLOYEE: January 1, 1999 /s/ Arthur Carver - ----------------------- ------------------------------ DATE Arthur Carver Accepted and Agreed: GLOBAL SPORTS, INC. By: /s/ Michael Rubin 1/9/99 ------------------------------ ----------------------- Michael Rubin DATE C - 4 EXHIBIT"D" CHANGE OF CONTROL AGREEMENT AGREEMENT, made this 1st day of January, 1999, by and between Arthur Carver ("Executive") and Global Sports, Inc. (the "Company"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders for the Company to agree to provide benefits under circumstances described below to Executive; and WHEREAS, the Board recognizes that the possibility of a change of control of the Company, followed by a termination of the Executive's employment or a reduction in his responsibility or compensation, is unsettling to the Executive and wishes to make arrangements at this time to help assure his continuing dedication to his duties to the Company and its shareholders notwithstanding any attempts by outside parties to gain control of the Company; and WHEREAS, the Board believes it important, should the Company receive proposals from outside parties, to enable the Executive, without being distracted by the uncertainties of his own employment situation, to perform his regular duties. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: 1. In the event that any individual, corporation, partnership, company, or other entity (a "Person"), which term shall include a "group" (within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Act")), begins a tender or exchange offer, circulates a proxy to the Company's shareholders, or takes other steps to effect a "Change of Control" (as defined in paragraph 3 below), Executive agrees that he will not voluntarily leave the employ of the Company and will render the services contemplated in the recitals to this Agreement until such Person has terminated the efforts to effect a Change of Control or until a Change of Control has occurred. 2. If, within twenty-four (24) months following a Change of Control, Executive's employment with the Company terminates D - 1 other than as a result of the death, total disability or retirement of the Executive at or after his normal retirement date, (i) by the Company other than the "Cause" (as defined in paragraph 4 below), or (ii) by Executive for "Good Reason" (as defined in paragraph 4 below), then: a. The Company will pay to Executive within thirty (30) days of such termination of employment a lump-sum cash payment equal to 300% of the aggregate of (i) his then-current annual base salary (or, if his base salary has been reduced at any time after the Change of Control, his base salary in effect prior to the reduction), (ii) his target bonus for the then-current year or, if higher, his bonus for the most recent calendar year ended before the Change of Control, (iii) the amount of his then-current annual automobile allowance and (iv) the annual cost of life insurance then furnished to him by the Company. b. All of Executive's outstanding stock options, restricted shares and other similar incentive interests and rights will become immediately and fully vested and exercisable. c. Executive will be treated for purposes of the Company's Supplemental Executive Retirement Plan (the "SERP"), but only if a SERP should exist at the time of the termination of the Executive's employment, as having three additional Years of Continuous Service. The Company will, within thirty (30) days of his termination, pay to him, in a single lump-sum cash payment, the present value of his benefit under the SERP. Present value will be determined by applying the "applicable mortality table" and "applicable interest rate" then in effect for purposes of section 417(e)(3)(A) of the Internal Revenue Code or any successor provision. d. If, at the time of the termination of the Company's employment, the Company then has in existence a Profit-Sharing and Retirement Plan and an Excess Benefits Plan, the Company will pay to Executive, in a single lump-sum cash payment, an amount equal to the difference, if any, between (i) the total distribution that he receives following his termination under the Company's Profit-Sharing and Retirement Plan and its Excess Benefits Plan and (ii) the total distribution that he would have received under such plans had he accumulated three (3) additional Years of Service for Vesting prior to termination. The payment will be made at the same time that he receives his distribution from those plans. D - 2 e. Executive, together with his dependents, will continue following such termination of employment to participate fully, with no contribution to the cost required of him or them, in all accident and health plans maintained or sponsored by the Company immediately prior to the Change of Control, or receive substantially the equivalent coverage (or the full value thereof in cash) from the Company, until the third anniversary of such termination. f. The Company will promptly reimburse Executive for any and all legal fees and expenses incurred by him as a result of such termination of employment, including without limitation, all fees and expenses incurred in connection with efforts to enforce the provisions of this Agreement (provided such efforts result in Executive's recovery of any sum from the Company, whether through court award or settlement). 3. A Change of Control will occur for purposes of this Agreement if (i) any Person who does not currently own directly or indirectly ten (10%) percent or more of the combined voting power of the Company's outstanding securities becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act) of securities of the Company representing more than thirty (30%) percent (or, if higher, the aggregate percentage of the combined voting power of the Company's then-outstanding securities held by or for the benefit of Michael Rubin and his family) of the combined voting power of the Company's then-outstanding securities, (ii) there is a change of control of the Company of a kind which would be required to be reported under Item 6(e) of Schedule 14 of Regulation 14 promulgated under the Act (or a similar item in a similar schedule or form), whether or not the Company is then subject to such reporting requirement, (iii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter, or (iv) individuals who, at the date hereof, constitute the Board (the "Continuing Directors") cease for any reason to constitute a majority thereof, provided, however, that any director who is not in office at the date hereof but whose election by the Board or whose nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the date hereof or whose election or nomination for election was previously so approved shall be deemed to be a Continuing Director for purposes of this Agreement. D - 3 Notwithstanding the foregoing provisions of this paragraph 3, a "Change of Control" will not be deemed to have occurred solely because of (i) the acquisition of securities of the Company (or any reporting requirement under the Act relating thereto) by an employment benefit plan maintained by the Company for its employees or (ii) the occurrence of a leveraged buy-out or recapitalization of the Company in which Executive participates as an equity investor. 4. a. "Cause" means only: conviction of the Executive for a felony or a crime involving moral turpitude. b. "Good Reason" means any one or more of the following: i. Failure by the Company to maintain Executive in the positions, with the titles, that he held immediately prior or the Change of Control or downgrading of his responsibilities or authority. If, following the Change of Control, the Company is part of a controlled group of entities, Executive's responsibilities and authority will be deemed for this purpose to have been reduced unless he is given and retains the same responsibilities and authority with the entity that controls the group as he held with the Company immediately prior to the Change of Control. ii. Reduction of Executive's base salary or failure in any year to pay to him a bonus at least equal to his target bonus for the year in which the Change of Control occurs. iii. Material reduction in the health, disability or life insurance benefits that the Company was providing Executive immediately prior to the Change of Control. iv. Failure by the Company to provide Executive with the opportunity to participate in any executive compensation or benefit plan or program that is then generally available to other senior executives of the Company. v. Relocation of Executive's principal place of business more than 30 miles from its location immediately prior to the Change of Control. 5. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of D - 4 Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by section 4999 of the Internal Revenue Code or any successor provision ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "gross-up payment") to Executive. The gross-up payment will be sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 5 will be made by the Company's auditors unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a gross-up payment or an additional gross-up payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such gross-up payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such gross-up payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the D - 5 acquirer of such assets, and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to participate or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. 7. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. 8. There shall be no requirement on the part of the Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment. 9. Nothing contained in this Agreement shall be construed as a contract of employment between the Company and the Executive, or as a right of the Executive to continue in the employ of the Company, or as a limitation of the right of the Company to discharge the Executive with or without Cause; the Executive may, subject to the terms and conditions of this Agreement, have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 10. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. Payments made by the Company pursuant to this Agreement shall be in lieu of payments and other benefits, if any, to D - 6 which Executive may be entitled under any other severance agreement or severance plan of the Company. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. No right or interest to or in any payments or benefits hereunder shall be assignable by the Executive; provided, however, that this provision shall no preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in respect of any claim, debt, or obligation, or to execution, attachment, levy, or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to (REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK) D - 7 the full extent permitted by law, be null, void, and of no effect. IN WITNESS WHEREOF, Global Sports, Inc. and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. GLOBAL SPORTS, INC. BY: /s/ Michael Rubin ------------------------------------ Agreed: Michael Rubin /s/ Arthur Carver - ---------------------------- ARTHUR CARVER D - 8 EX-10.18 4 KEY EMPLOYEE AGREEMENT FOR MICHAEL CONN EXHIBIT 10.18 KEY EMPLOYEE AGREEMENT To: Michael Conn 157 East 57th Street, Apt. 17C New York, NY 10022 The undersigned, Global Sports, Inc., a Delaware corporation with its principal place of business located at 555 S. Henderson Road, King of Prussia, Pennsylvania 19406 (the "Company"), hereby agrees with you as follows: 1. Position and Responsibilities. 1.1 You shall serve as Senior Vice President, Strategic Development of the Company (or in such other executive capacity as shall be designated by the Board of Directors or Executive Committee of the Company and is reasonably acceptable to you) and shall perform the duties customarily associated with such position from time to time. In such capacity, you will be responsible for the overall strategic evaluation of mergers and acquisitions, handling investors and analysts, and overall strategic planning for the Company and its subsidiaries. 1.2 You will devote your full time and your best efforts to the performance of your duties hereunder and the business and affairs of the Company. You agree to perform such executive duties as may be assigned to you by or on authority of the Company's Board of Directors or Executive Committee from time to time. You will report directly to the Chief Executive Officer. 1.3 You will duly, punctually, and faithfully perform and observe any and all rules and regulations which the Company may or shall hereafter reasonably establish governing your conduct as an employee and the conduct of its business. 2. Term of Employment. 2.1 The initial term of this Agreement shall be for the period set forth in Exhibit "A" annexed hereto. Thereafter, the term of this Agreement shall be automatically renewed for successive periods of one (1) year each unless you or the Company shall give the other not less than three (3) months prior written notice of non-renewal. Notwithstanding anything contained herein to the contrary, your employment by the Company may be terminated as provided in the following Sections 2.2 and 2.3. 2.2 The Company shall have the right to terminate your employment at any time under this Agreement prior to the expiration of the stated term in any of the following ways: (a) on thirty (30) days prior written notice to you in the event of your disability (disability shall be defined as your inability to perform duties under this Agreement for an aggregate of ninety (90) days out of any one hundred eighty (180) day period due to mental or physical disability); (b) immediately, without prior notice to you by the Company, for "Cause", as defined in Section 2.3 of this Agreement; (c) immediately, without prior notice to you, upon your death or in the event of the liquidation or reorganization of the Company under the federal Bankruptcy Code or any state insolvency or bankruptcy law; or (d) at any time, without Cause (as defined herein); provided, however, that if the Company terminates your employment without Cause (as defined herein) prior to the expiration of the stated term, the Company shall continue to pay you your Base Salary, as severance pay, and provide you with your benefits that you are entitled to under paragraph 4 (a), (b) and (c) of the attached Exhibit "A", for a period of six (6) months after the effective date of your termination (the "Severance Period"). 2.3 For purposes of this Agreement, "Cause" shall mean: (i) the falseness or material inaccuracy of any of your warranties or representations contained herein; (ii) your willful failure or refusal to comply with explicit directives of the Board of Directors or Executive Committee or to render the services required herein after notice thereof from the Company and your failure to cure such failure or refusal within ten days of receipt of such notice; (iii) a determination by the Company acting in good faith that you are responsible for fraud or embezzlement involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds; (iv) your conviction of a criminal felony offense; (v) the willful breach or habitual neglect of your obligations under this Agreement or your duties as an employee of the Company and your failure to cure such breach or neglect after notice fron the Company and your failure to cure such notice or neglect within ten days of receipt of such notice; and/or (vi) habitual use of drugs. The existence of Cause (as defined herein) for termination of your employment by the Company shall be subject, upon the written election by you or the Company, to binding arbitration as provided in Section 9 hereof. 2 Further, any dispute, controversy or claim arising out of, in connection with, or in relation to, the definition of Cause as set forth in Section 2.3 of this Agreement shall be settled by arbitration as provided in Section 9 hereof. Any award or determination shall be final, binding and conclusive upon the parties, and a judgment rendered may be entered in any court having jurisdiction thereof. 2.4 If your employment is terminated because of your death, all obligations of the Company hereunder shall cease, except with respect to amounts and obligations accrued to you through the thirtieth day after the date on which your death has occurred. Except as specifically provided in Section 2.2(d), if your employment is terminated by the Company for any other reason, all obligations of the Company (except with respect to amounts and obligations accrued to you prior to the date of termination) shall cease immediately as of the date of termination. 2.5 In addition to the Company's termination rights set forth above, you shall have the right to terminate this Agreement for "Good Cause", as hereinafter defined. As used herein, the term "Good Cause" shall mean the failure of the Company to employ you in the capacity and with the responsibilities for which you were hired as described in paragraph 1 above, and the Company's failure to correct such failure within thirty days of notice from you of the Company's alleged failure. Should the Company not correct the situation, then you may again notify the Company of your election to terminate this Agreement, effective in thirty days from the date of the second notice. Such termination by you shall be treated as a termination without Cause by the Company and you shall be entitled to the benefits set forth in paragraph 2.2(d) above. 3. Compensation. You shall receive the compensation and benefits set forth in Exhibit "A" attached hereto ("Compensation") for all services to be rendered by you hereunder and for your transfer of property rights, if any, pursuant to an agreement between you and the Company relating to proprietary information and inventions dated of even date herewith, a copy of which is attached hereto as Exhibit "C" (the "Proprietary Information Agreement"). 4. Other Activities During Employment. 4.1 Except for any outside directorships currently held by you, as listed on Exhibit "B" attached hereto, and except with the prior written consent of a disinterested majority of the Company's Board of Directors, which consent will not be unreasonably withheld, you will not, during the term of this Agreement, undertake or engage in any other employment, 3 occupation or business enterprise other than one in which you are an inactive investor. 4.2 You hereby agree that, except as disclosed on Exhibit "B" attached hereto, you will not, during your employment hereunder, directly or indirectly, engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a salesperson or otherwise), (viii) as a broker, or (ix) as a partner, co-venturer, stockholder or other proprietor owning directly or indirectly more than five percent (5%) interest in any firm, corporation, partnership, trust, association or other organization which is engaged in the planning, research, development, production, manufacture, marketing, sales or distribution of athletic footwear, rugged outdoor footwear, sportswear, licensed products, related products, equipment or services or any other line of business engaged in or under demonstrable development by the Company, or any of its subsidiary corporations, or their successors and assigns (such firm, corporation, partnership, trust, association, or other organization being hereinafter referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit "B" attached hereto, you hereby represent that you are not presently engaged, in any of the foregoing capacities (i) through (ix), in any Prohibited Enterprise. 5. Former Employment. 5.1 You represent and warrant that your employment by the Company will not conflict with and will not be constrained or restricted by any prior or current employment, consulting agreement or relationship, whether oral or written. You further represent and warrant that you do not possess confidential information arising out of any such employment, consulting agreement or relationship which, in your best judgment, would be utilized in connection with your employment by the Company in the absence of Section 5.2. 5.2 If, in spite of the second sentence of Section 5.1, you should find that confidential information belonging to any other person or entity might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any of your former employers; but during your employment by the Company you will use in the performance of your duties only information which is generally known and used by persons with training and experience comparable to your own and information which is common knowledge in the industry or otherwise legally in the public domain. 4 6. Proprietary Information . You agree to execute, deliver and be bound by the provisions of the Proprietary Information Agreement attached hereto as Exhibit "C". 7. Post-Employment Activities. 7.1 For a period of one (1) year after the termination of your employment with the Company or its successors and assigns, for any reason whatsoever, the provisions of Section 4.2 shall remain applicable to you and you shall comply therewith. 7.2 For a period of one (1) year after the termination or expiration of your employment with the Company or its successors and assigns, for any reason whatsoever, you will not, absent the Board of Directors' prior written approval, directly or indirectly, engage in activities similar to those described in Section 4.2, nor render services similar or reasonably related to those which you shall have rendered hereunder, to any person or entity whether now existing or hereafter established which directly or indirectly competes with (or proposes or plans to compete with) the Company or any of its subsidiaries or their successors and assigns ("Direct Competitor") in the sale, either traditionally or through the Internet, of sporting goods, athletic footwear, rugged outdoor footwear, sportswear, licensed products and related products and services, whether with respect to merchandise manufactured by the Company or any of its subsidiaries or their successors and assigns for resale or purchased by the Company or any of its subsidiaries or their successors and assigns as "closeout" merchandise for resale. Nor shall you entice, induce or encourage any other employees of the Company or any of its subsidiaries or their successors or assigns to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information Agreement or this Section 7. As used in this Agreement, the term "any line of business engaged in or under demonstrable development by the Company or any of its subsidiaries or their successors and assigns" shall be applied as of the date of termination of your employment hereunder or as of the date of termination of any post-employment consultation, whichever occurs later. 7.3 Notwithstanding anything contained in Section 7.1 or 7.2 of this Agreement to the contrary, if your employment by the Company is terminated by the Company without Cause (as defined herein), then you will be bound by the provisions of Sections 7.1 and 7.2 only for the duration of the Severance Period. 7.4 No provision of this Agreement shall be construed to preclude you from performing, upon the expiration or termination 5 of your employment (or any post-employment consultation), the same services which the Company hereby retains you to perform for any person or entity which is not a Direct Competitor of the Company or its subsidiaries or their successors and assigns, so long as you do not thereby violate any term of this Agreement or the Proprietary Information Agreement. 8. Remedies. Your obligations under the Proprietary Information Agreement and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement shall survive the expiration or termination of your employment with the Company or its successors and assigns (whether through your resignation or otherwise). You acknowledge that a remedy at law for any breach or threatened breach by you of the provisions of the Proprietary Information Agreement or Sections 4 or 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach. 9. Arbitration. Any dispute concerning this Agreement, including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless the arbitrator elects to award costs and reasonable attorneys fees as part of the award which the arbitrator shall have the authority to do. 10. Assignment. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation and any assignee of all or substantially all of its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you, except by operation of law or by a further written agreement by the parties hereto. 11. Interpretation. IT IS THE INTENT OF THE PARTIES THAT, in case any one or more of the provisions contained in this Agreement shall, for any 6 reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT, if any one or more of the provisions contained in this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any provision of this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 12. Notices. Any notice which the Company is required to or may desire to give you shall be given by registered or certified mail, return receipt requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time designate in writing, with a copy to Ephraim Sobol, Esquire, 164 Madison Avenue, 3rd Floor, New York, New York, 10016. Any notice which you are required or may desire to give to the Company hereunder shall be given by registered or certified mail, return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing with a copy to David S. Mandel, Esquire, Astor Weiss Kaplan & Rosenblum, LLP, The Bellevue, Sixth Floor, 200 South Broad Street, Philadelphia, Pennsylvania 19102. 13. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 14. Complete Agreement; Amendments. The foregoing, including Exhibits "A", "B" and "C" attached hereto, is the entire agreement of the parties with respect to the subject matter hereof, superseding any previous oral or written communications, representations, understandings, or agreements with the Company or any officer or representative thereof. This Agreement may be amended or modified or certain provisions waived 7 only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 15. Headings. The headings of the sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. 16. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. If you are in agreement with the foregoing, please sign your name below and at the bottom of the Proprietary Information Agreement attached hereto, whereupon both Agreements shall become binding in accordance with their terms, and return this Agreement to the Company. (You may retain the accompanying counterpart of this Agreement enclosed herewith for your records). Very truly yours, GLOBAL SPORTS, INC. By: /s/ Michael G. Rubin ----------------------------------- Michael G. Rubin Title: Chairman and Chief Executive Officer ACCEPTED AND AGREED: /s/ Michael Conn - ------------------------- MICHAEL CONN Date: February 24, 1999 8 EXHIBIT A EMPLOYMENT TERM, COMPENSATION AND BENEFITS OF MICHAEL CONN, SENIOR VICE PRESIDENT STRATEGIC DEVELOPMENT 1. Term. The term of the Agreement to which this Exhibit "A" is annexed and incorporated (the "Agreement") shall commence on February 24, 1999 and shall terminate on December 31, 2003, unless renewed in accordance with Section 2.1 of the Agreement or terminated prior thereto in accordance with Sections 2.2 or 2.3 of the Agreement. 2. Compensation. a. Base Salary. During the term of the Agreement you will be paid an annual Base Salary based upon the following schedule: PERIOD ANNUAL BASE SALARY ------ ------------------ Execution of the Agreement through December 31, 1999 $150,000.00 January 1, 2000 through December 31, 2000 $162,500.00 January 1, 2001 through December 31, 2001 $175,000.00 Your annual Base Salary for the period January 1, 2002 through December 31, 2003 shall be as negotiated by you and the Company; provided; however, that your annual Base Salary for each year during this period shall be at least $12,500.00 in excess of your annual Base Salary for the prior year. b. Bonuses. You will receive an annual bonus in the amount of 15% of your Base Salary and have the opportunity to earn bonuses totalling up to an additional 15% of your Base Salary each year through the following programs: 7.5% of your Base Salary, based upon an adequate number of analysts (as determined by the Company's Chief Executive Officer, in his discretion) picking up coverage of the Company in 1999 and/or the Company completing a secondary offering in 1999; and/or 7.5% of your Base Salary, based upon the Company meeting or exceeding its revenue and net income projections as detailed in the Company's internal business plan; provided, however, that if an acquisition or any significant change in the corporate structure occurs, the business plan will be adjusted and the thresholds for this component of your bonus will be adjusted to reflect the acquisition or change All determinations as to meeting objective standards for bonuses shall be made solely by the Company's regularly retained certified public accountants, whose determinations shall be final and binding upon the parties and shall not be subject to any appeal. c. Payment of Base Salary. Base Salary and Bonuses shall be payable in accordance with the Company's payroll policies. 3. Vacation. You shall be paid for and be entitled to all legal and religious holidays and three (3) weeks paid vacation per annum, commencing the first year of the Agreement; provided, however, you may not take more than one week of vacation at a time. All vacation time shall be earned on a quarterly basis. You shall arrange for vacations in advance at such time or times as shall be mutually agreeable to you and the Company. You shall be entitled to carry forward into the subsequent year up to one (1) week of unused vacation time. You do not have the right to receive pay in lieu of vacation. 4. Insurance and Benefits. The Company, at its expense, shall provide you with the following benefits in the same amounts and manner as provided to the members of the Company's senior management: (a) health insurance (b) long term disability insurance (c) term life insurance (d) participation in the Company's 401K Plan A - 2 In addition, the Company shall provide you with the following other benefits at the Company's expense: (a) automobile allowance not the exceed $500 per month, which includes automobile insurance (b) cell phone and cell phone account (c) lap top computer 5. Expenses. The Company shall reimburse you promptly for all reasonable and ordinary business and out-of-pocket expenses incurred by you in connection with the Company's business and in the scope of your employment hereunder, as approved by the Company, including, without limitation, reasonable and necessary travel, lodging, entertainment and meals incurred by you during the term of the Agreement, provided the expenses are incurred in furtherance of the Company's business and at the request of the Company. You agree to keep and maintain records of the aforesaid expenses as may be requested by the Company and to account to the Company for the expenses prior to reimbursement. 6. Stock Options and Stock Awards. Pursuant to the terms of the Company's 1996 Equity Incentive Plan (the "Plan"), you will be granted the following awards: 6.1 Upon the execution of the Agreement, the Company shall issue to you a Restricted Stock Award to purchase fifteen hundred (1,500) shares of the Company's common stock at a price of one cent per share ($.01). Such stock shall be issued pursuant to Rule 144 and may only be sold or transferred by you in accordance with Rule 144 and in no event prior to two years from the date of the Agreement. Further, if you terminate your employment with the Company, for any reason whatsoever, at any time within the first two (2) years of your employment by the Company, the Company shall have the right to purchase such stock back from you, and you shall resell these shares to the Company, for the price that you paid to the Company for said stock. 6.2 You will also be granted five year options (such options are intended to be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended, but are subject to the requirements set forth therein) to purchase up to fifty thousand (50,000) shares of the Company's common stock at an exercise price equal to the fair market value (determined by the trading price) of the underlying common stock on the date that you commence your employment pursuant to the Agreement, of which the options for ten thousand (10,000) shares shall vest on each of December 31, 1999, December 31, 2000, December 31, 2001, December 31, 2002 and December 31, 2003. A - 3 The complete terms and conditions of this award shall be set forth in the Option Grant Letter (the "Option Grant Letter") delivered to you simultaneous herewith. Any conflict between the terms of the Option Grant Letter and the Agreement shall be governed by the Option Grant Letter. In the event of the termination of your employment caused by your resignation, your dismissal with or without Cause (as defined herein), your disability or your death, or in the event of a change in control as defined in Section 6.3(b) of the Plan, your rights in the options shall be as set forth in Article 6 of the Plan. 7. Relocation and Interim Housing Allowance. You agree to establish your residency in the King of Prussia, Pennsylvania area within (3) months from the date of the Agreement and, provided that you do so, the Company will, upon presentation of acceptable proof of payment, reimburse you for the following costs associated with your relocation, not to exceed a total of $10,000.00: a) interim housing expenses incurred prior to your relocation; b) moving expenses; and c) interim personal travel between your present home in New York and King of Prussia, Pennsylvania prior to your relocation to the King of Prussia, Pennsylvania area Further, in the event that your employment by the Company is terminated by the Company without Cause (as defined herein) at any time during the first two (2) years of your employment by the Company and you relocate outside of the King of Prussia, Pennsylvania area within (3) months thereafter, the Company will, upon presentation of acceptable proof of payment, reimburse you for the costs associated with such relocation, not to exceed a total of $10,000.00. INITIALS: Employee: /s/MC Company: /s/MR A - 4 EXHIBIT B OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF MICHAEL CONN NONE B - 1 EXHIBIT C - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION AGREEMENT - -------------------------------------------------------------------------------- To: GLOBAL SPORTS, INC. 555 South Henderson Road King of Prussia, PA 19406 The undersigned ("Employee"), in consideration of and as a condition of my employment or continued employment by you and/or by companies which you own, control, or are affiliated with or their successors in business (collectively, the "Company"), hereby agrees as follows: 1. Confidentiality. I agree to keep confidential, except as the Company may otherwise consent in writing, and, except for the Company's benefit, not to disclose or make any use of at any time either during or subsequent to my employment, trade secrets and Confidential Information (as hereinafter defined), knowledge, data or other information of the Company or any of its subsidiaries relating to products, processes, know-how, techniques, methods, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Company or any of its affiliates or subsidiaries, which I may produce, obtain, or otherwise acquire during the course of my employment, except as herein provided. I further agree not to deliver, reproduce or in any way allow any such trade secrets, Confidential Information, knowledge, data or other information, or any documentation relating thereto, to be delivered to or used by any third parties without specific direction or consent of a duly authorized representative of the Company. As used herein, "Confidential Information" shall mean information or materials that I know or have reason to know is the confidential or proprietary information of the Company, either because such information is marked or otherwise identified by the Company as confidential or proprietary, has commercial value, or is not generally known in the Company's trade or industry. Confidential Information shall include, without limitation: (a) concepts and ideas relating to the development C - 1 and distribution of content in any medium; (b) trade secrets, drawings, inventions, know-how, software programs, and software source documents; (c) information regarding plans for research, development, new service offerings or products, marketing and selling, business plans, business forecasts, budgets and unpublished financial statements, licenses and distribution arrangements, prices and costs, suppliers and customers; and (d) existence of any business discussions, negotiations or agreements between parties. 2. Conflicting Employment; Return of Confidential Information. I agree that during my employment with the Company I will not engage in any other employment, occupation, consulting or other activity relating to the business in which the Company is now or may hereafter become engaged, or which would otherwise conflict with my obligations to the Company. In the event my employment with the Company terminates for any reason whatsoever, I agree to promptly surrender and deliver to the Company all records, materials, equipment, drawings, computer disks, documents and data of which I may obtain or produce during the course of my employment, and I will not take with me any description containing or pertaining to any confidential information, knowledge or data of the Company which I may produce or obtain during the course of my employment. 3. Trade Secrets of Others. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep confidential proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. I agree not to enter into any agreement either written or oral in conflict herewith. 4. Modification. I agree that any subsequent change or changes in my employment duties, salary or compensation or, if applicable, in any Employment Agreement between the Company and me, shall not affect the validity or scope of this Agreement. 5. Arbitration. Any dispute concerning this Agreement including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single C - 2 arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless the arbitrator elects to award costs and reasonable attorneys fees as part of the award which the arbitrator shall have the authority to do. 6. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives and successors. 7. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 8. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 9. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any prior oral or written communications, representations, understandings or agreements concerning the subject matter hereof with the Company or any officer or C - 3 representative thereof. This Agreement may be amended, modified, or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 10. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. 11. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 12. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 13. Notices. All notices, requests, demands and communications which are or may be required to be given hereunder shall be deemed given if and when sent by registered or certified mail, return receipt requested, postage prepaid, to the following addresses (or, by written notice to the other party, to such other address as may be specified by either party): If to the Company: GLOBAL SPORTS, INC. 555 South Henderson Road King of Prussia, PA 19406 Attention: President With a copy to: David S. Mandel, Esquire Astor Weiss Kaplan & Rosenblum, LLP The Bellevue, Sixth Floor 200 South Broad Street Philadelphia, PA 19102 If to Employee: Michael Conn 157 East 57th Street, Apt 17C New York, NY 10022 C - 4 With a copy to: Ephraim Sobol, Esquire 164 Madison Avenue, 3rd Floor New York, New York, 10016 In Witness Whereof, the undersigned Employee has placed his hand and seal hereto and the Undersigned Employer has caused this Agreement to be executed with intent to be legally bound hereby, the day and year first above written. EMPLOYEE: Date: February 24, 1999 /s/ Michael Conn ------------------------------ MICHAEL CONN ACCEPTED AND AGREED: GLOBAL SPORTS, INC. By: /s/ Michael G. Rubin ------------------------------- Michael G. Rubin Title: Chairman and Chief Executive Officer Date: February 24, 1999 C - 5 EX-10.40-E 5 AMENDMENT NO 5 TO LOAN DOCUMENTS EXHIBIT 10.40-E AMENDMENT NO. 5 TO LOAN DOCUMENTS December 3, 1998 Foothill Capital Corporation 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025 Ladies and Gentlemen: Foothill Capital Corporation ("Foothill") and KPR Sports International, Inc. ("KPR") and RYKA INC. ("RYKA"; and together with KPR, individually, "Borrower" and collectively, "Borrowers") have entered into certain financing arrangements pursuant to the Amended and Restated Loan and Security Agreement dated as of December 15, 1997 by and among Foothill and Borrowers, as amended by Consent, Amendment No. 1 to Loan Documents and Subordination Agreement, dated as of January 28, 1998, Amendment No. 1 to Amended and Restated Loan and Security Agreement, dated as of February 20, 1998, Consent, Amendment No. 2 to Loan Documents and Waiver as to Certain Events of Default, dated March 25, 1998, Consent and Amendment No. 3 to Loan Documents, dated as of May 12, 1998, and Amendment No. 4 to Loan Documents and Waiver, executed on or about July 21, 1998 (as so amended, the "Loan Agreement") and all agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, including, without limitation, the Continuing Limited Guaranty, dated as of December 15, 1997, executed and delivered by Michael Rubin in favor of Foothill in respect of the Obligations of Borrowers to Foothill (the "Rubin Guaranty") and the Rubin Subordination Agreement (as defined in the Loan Agreement. All capitalized terms used herein shall have the meaning assigned thereto in the Loan Agreement, unless otherwise defined herein. Borrowers have requested that Foothill (a) make certain Advances to Borrowers, for a limited period of time, in excess of the Borrowing Base, and (b) amend certain other provisions of the Loan Agreement, and Foothill is willing to agree to the foregoing, on and subject to the terms and conditions contained in this Amendment No. 5 to Loan Documents (this "Amendment"). In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. Definitions. (a) Additional Definitions. As used herein, the following terms shall have the respective meanings given to them below and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following definitions: (i) "Overadvance Limit" shall mean (A) $3,000,000 for the period from and after the effective date of this Amendment through and including March 5, 1999, (B) $2,250,000 commencing with the opening of business on Monday, March 8, 1999, through and including March 12, 1999, (C) $1,500,000 on the opening of business on Monday, March 19, 1998 through and including March 23, 1999 (D) $750,000 on the opening of business on Monday, March 26, 1999, through and including March 30, 1999 and (E) zero on the opening of business on Monday, April 2, 1999, and at all times thereafter. (ii) "Overadvances" shall mean the Advances hereafter made by Foothill to or for the benefit of each Borrower on a revolving basis (consisting of advances, repayments and readvances) as set forth in Section 2 hereof. (iii) "Overadvances Termination Date" shall mean March 30, 1999. (b) Amendment to Definition. All references to the term "Advances" in the Loan Agreement shall be deemed and each such reference is hereby amended to include, in addition and not in limitation, the Overadvances. 2. Overadvances. (a) Making of Overadvances. In addition to the Advances which may be made by Foothill to each Borrower pursuant to Section 2.1 of the Loan Agreement, upon the request of a Borrower, made at any time and from time to time prior to the Overadvance Termination Date, subject to the terms and conditions contained herein, in the Loan Agreement and in the other Loan Documents, Foothill shall make Overadvances to such Borrower in amounts in excess of the amounts otherwise available to such Borrower under Section 2.1 of the Loan Agreement (as calculated by Foothill, and subject to the sublimits provided for in the Loan Agreement and reserves established by Foothill, if any, pursuant to Section 2.1(b) of the Loan Agreement) up to the aggregate amount for both Borrowers not to exceed the Overadvance Limit as then in effect. (b) Payments on Overadvance Limit Reduction Dates. Without limiting any of the rights of Foothill pursuant to Section 2(d) below or otherwise, on each date when any reduction to the Overadvance Limit becomes effective, Borrowers agree absolutely and unconditionally to automatically and without demand make a payment - 2 - to Foothill in respect of the Overadvances in an amount equal to the excess, if any, of the aggregate unpaid principal amount of the Overadvances (including, without limitation, any Letters of Credit issued as part of the Overadvances) over the amount of Overadvance Limit as so reduced. (c) Overadvance Limit; Collateral. Except in Foothill's discretion, Borrowers shall have no right to receive, and Foothill shall not make, any Overadvances in excess of the Overadvance Limit as then in effect or at any time after the Overadvance Termination Date. The Overadvances shall be secured by all Collateral. (d) Payment in Full on Overadvance Termination Date. Unless sooner demanded by Foothill in accordance with the terms of the Loan Agreement or the other Loan Documents, or otherwise due as provided above, all outstanding and unpaid Obligations arising pursuant to the Overadvances (including, but not limited to, principal, interest, fees, costs, expenses and other charges in respect thereof payable by Borrowers to Foothill) shall automatically, without notice or demand, be absolutely and unconditionally due and payable and Borrowers shall pay to Foothill in cash or other immediately available funds all such Obligations on the Overadvance Termination Date. (e) Additional Event of Default. Each Borrower acknowledges and agrees that, notwithstanding anything to the contrary contained in the Loan Agreement or the other Financing Agreements, the failure of Borrowers to pay such Obligations arising pursuant to the Overadvances in accordance with the terms of Sections 2(b) and 2(d) above shall constitute an Event of Default. (f) Letters of Credit. In the event that any Letters of Credit shall have been issued pursuant hereto which are permitted to be issued only as part of the Overadvances, then all such Letters of Credit shall have expired or been drawn upon in full no later than the Overadvance Termination Date. In the event that, at the close of business on the Overadvance Termination Date, the aggregate amount of Advances under Section 2.1(a) of the Loan Agreement would exceed the amount permitted to be outstanding thereunder as to a Borrower, as a result of any outstanding Letters of Credit issued for the account of such Borrower as part of the Overadvances, then, not later than the close of business on such day, such Borrower shall repay that portion of the Overadvances in an amount equal to the aggregate amount of such excess amount. (g) Amendment of Rubin Subordination Agreement. Notwithstanding anything to the contrary contained in the Loan Agreement or in the Rubin Subordination Agreement, from and after the effective date of this Amendment through and including the Overadvance Termination Date and until such time as all Obligations of Borrowers under and in respect of the Overadvances have been paid in full (such date, the "Overadvances Payment Date"), (i) KPR - 3 - shall not make any payments of principal whatsoever in respect of the Junior Debt (as defined in the Rubin Subordination Agreement) otherwise permitted pursuant to the Rubin Subordination Agreement to be made by KPR to Rubin during such period (collectively, the "Suspended Permitted Payments") and (ii) KPR may make and Rubin may receive the Suspended Permitted Payments at any time after the Overadvances Payment Date and prior to April 30, 1999. (h) Elimination of Second Seasonal Supplemental Credit Period. Notwithstanding anything to the contrary contained in the Loan Agreement or any of the other Loan Documents, during the period from and after the effective date of this Amendment through and including the Overadvances Payment Date, (i) the Borrowing Base as to each Borrower shall not include the Seasonal Supplemental Credit, and (ii) Borrowers shall have no right to receive, and Foothill shall have no obligation to make, Advances to Borrowers in respect of the Seasonal Supplemental Credit. (i) Weekly Operating Reports. In addition to, and not in limitation of, the reports and other documents that Borrowers are required to deliver to Foothill pursuant to Sections 6.2 and 6.3 of the Loan Agreement, during the period commencing on the effective date of this Amendment through and including the Overadvance Termination Date, Borrowers shall deliver to Foothill on a weekly basis during such period, no later than Wednesday of each week, a Weekly Operating Report for Borrowers, including a report as to then outstanding customer orders and sales backlog, in form and substance satisfactory to Foothill. 3. Rubin Guaranty of Overadvances. By his signature hereinbelow, Rubin hereby acknowledges, confirms and agrees with and in favor of Foothill that: (a) Notwithstanding anything to the contrary contained in the Rubin Guaranty, the (i) Guaranteed Obligations (as defined in the Rubin Guaranty) include, without limitation, all obligations and indebtedness of the Borrowers to Foothill arising under and in respect of the Overadvances, and in accordance with the Rubin Guaranty, Rubin irrevocably and unconditionally guarantees to Foothill the full, final and indefeasible payment of, without limitation, all of the Overadvances, (ii) each reference in the Rubin Guaranty to Guaranteed Obligations is hereby amended to mean and include in addition, and not in limitation, the Overadvances, and (iii) the Overadvances shall be secured by all of the Real Property Collateral; (b) Section 2(b) of the Rubin Guaranty is hereby amended and restated in its entirety as follows: "(b) Notwithstanding anything to the contrary contained in this Guaranty, the liability of Guarantor hereunder for the Guaranteed - 4 - Obligations shall not exceed an amount equal to the unpaid principal balance of either the Overadvances or the Seasonal Supplemental Credit (as such terms are defined in the Loan Agreement) outstanding at any time Foothill seeks to exercise its rights hereunder, plus interest thereon, and all fees, costs and charges related thereto." (c) Section 2(c)(ii) of the Rubin Guaranty is hereby amended and restated in its entirety as follows: "(ii) Foothill shall have received indefeasible payment in full, in immediately available funds, of all Overadvances and of all amounts outstanding under the Seasonal Supplemental Credit (including in the case of both the Overadvances and the Seasonal Supplemental Credit, all principal, interest, unreimbursed amounts in respect of Letter of Credit drawings, fees, costs and other charges) and all Letters of Credit which were issued or outstanding as part of the Overadvances or under a Seasonal Supplemental Credit shall have expired or been terminated;" 4. Amendment to Account Concentration Limit. (a) Solely during the period commencing as the effective date of this Amendment through and including December 15, 1998, Subsection (h) of the definition of Eligible Accounts set forth in Section 1.1 of the Loan Agreement shall be amended with respect to Just For Feet, Inc. by deleting the reference to "35%" set forth opposite such Account Debtor and substituting "45%" therefor; (b) solely during the period commencing December 16, 1998 through and including December 31, 1998, such percentage limit set forth opposite Just For Feet, Inc. shall again be "35%"; and (c) from and after January 1, 1999, such percentage limit set forth opposite Just for Feet, Inc. shall be "25%"; provided, however, that in the event that (i) Foothill receives on or before December 31, 1998 a written non-offset agreement executed and delivered in favor of Foothill by Just for Feet, Inc., in form and substance satisfactory to Foothill, pursuant to which, among other things, such Account Debtor agrees that it will at all times from and after January 1, 1999 pay and remit to Foothill (as assignee of and secured party with respect to all Accounts at any time owing by such Account Debtor to either Borrower) the amount of each invoice evidencing each such Account, in accordance with its terms, without asserting against Foothill any offset, claim, counterclaim or deduction which such Account Debtor may have against either Borrower, and (ii) Foothill acknowledges in writing that such non-offset letter is in fact satisfactory to Foothill, then such percentage limit set forth - 5 - opposite Just For Feet, Inc. shall be "35%" from and after January 1, 1999. 5. Amendment Fee. In consideration of the amendments set forth herein, including, without limitation, Foothill's agreement to make Overadvances to Borrowers as set forth in this Amendment, Borrowers shall on the date hereof pay to Foothill or Foothill, at its option, may charge the account(s) of Borrowers maintained by Foothill, an amendment fee in the amount of $30,000, which fee is fully earned as of the date hereof and shall constitute part of the Obligations. 6. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrowers to Foothill pursuant to the Loan Agreement and the other Loan Documents, each Borrower and Rubin hereby represents, warrants and covenants with and to Foothill as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements): (a) No Event of Default exists on the date of this Amendment (after giving effect to the amendments to the Loan Agreement); and (b) This Amendment has been duly executed and delivered by each Borrower and each Guarantor and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower(s) and Rubin contained herein constitute their legal, valid and binding obligations enforceable against them in accordance with their respective terms. 7. Conditions Precedent. The effectiveness of the amendments contained herein shall be subject to the following: (a) the receipt by Foothill of an original of this Amendment, duly authorized, executed and delivered by each Borrower and each Guarantor; (b) the receipt by Foothill of Borrowers' weekly cash flow projections for the period commencing on the effective date hereof and terminating on the Overadvance Termination Date, in form and substance satisfactory to Foothill; (c) the receipt by Foothill of a copy of a check drawn by Just For Feet, Inc. payable to KPR in the amount of $5,000,000, post-dated to December 15, 1998; and, (d) no Event of Default shall have occurred and be continuing and no event shall have occurred or condition be existing and continuing which, with notice or passage of time or both, would constitute an Event of Default. - 6 - 8. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Loan Agreement and the other Loan Documents are intended or implied and in all other respects the Loan Agreement and the other Loan Documents are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of any conflict between the terms of this Amendment and any of the Loan Documents, the terms of this Amendment shall control. The Loan Agreement, the other Loan Documents amended hereby and this Amendment shall be read and be construed as one agreement. 9. Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional actions as may be necessary or desirable to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The validity, interpretation and enforcement of this Amendment and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of law). 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts when executed shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Very truly yours, KPR SPORTS INTERNATIONAL, INC. By: /s/ Michael Rubin ------------------------------------ Title: President RYKA, INC. By: /s/ Michael Rubin ------------------------------------ Title: President [SIGNATURES CONTINUED ON NEXT PAGE] - 7 - [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AGREED: FOOTHILL CAPITAL CORPORATION By: /s/ Erik Sawyer - ------------------------------------ Title: Vice President ACKNOWLEDGED AND CONSENTED TO IN ALL RESPECTS: GLOBAL SPORTS, INC. By: /s/ Steven Wolf - ------------------------------------ Title: Chief Financial Officer APEX SPORTS INTERNATIONAL, INC. By: /s/ Michael Rubin - ------------------------------------ Title: President MR MANAGEMENT, INC. By: /s/ Michael Rubin - ------------------------------------ Title: President /s/ Michael Rubin - ------------------------------------ MICHAEL RUBIN - 8 - EX-10.40-F 6 CONSENT AND AMENDMENT NO. 6 TO LOAN DOCUMENTS EXHIBIT 10.40-F CONSENT AND AMENDMENT NO. 6 TO LOAN DOCUMENTS --------------------------------------------- January 29, 1999 Foothill Capital Corporation 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025 Ladies and Gentlemen: Foothill Capital Corporation ("Foothill") and KPR Sports International, Inc. ("KPR") and RYKA Inc. ("Ryka", and together with KPR, individually, "Borrower" and collectively, "Borrowers") have entered into certain financing arrangements pursuant to the Amended and Restated Loan and Security Agreement dated as of December 15, 1997 ("Restated Loan Agreement") by and among Foothill and Borrowers as amended by Consent, Amendment No. 1 to Loan Documents and Subordination Agreement, dated January 28, 1998, Amendment No. 1 to Amended and Restated Loan and Security Agreement dated February 20, 1998, Consent, Amendment No. 2 to Loan Documents and Waiver as to Certain Events of Default dated March 25, 1998, and Consent and Amendment No. 3 to Loan Documents dated as of May 12, 1998 and Amendment No. 4 to Loan Documents and Waiver, dated July __, 1998, Amendment No. 5 to Loan Documents, dated December 3, 1998 (collectively, the "Loan Agreement") and all agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto (together with the Loan Agreement as the same are amended hereby, and as the same may be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Loan Documents"). All capitalized terms used herein shall have the meanings assigned thereto in the Restated Loan Agreement, unless otherwise defined herein. Borrowers have requested that Foothill consent to (a) the formation of a new indirectly wholly-owned subsidiary of Global Sports, Inc. (the "Holding Company"), namely, G.S.I., Inc., a Delaware corporation (the "IP Subsidiary"), which will, subject to the conditions hereof, acquire from the Borrowers and Apex (i) all of the registered and unregistered trademarks, trade names, trade styles, logos, service marks and artwork related thereto listed on the Schedule annexed hereto as Exhibit "A", together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith and all applications, registrations and renewals in connection therewith (collectively, the "Assigned Trademarks"), and (ii) all of the patents listed on the Schedule annexed hereto as "Exhibit B", together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith and all applications, registrations and renewals in connection therewith (collectively, the "Assigned Patents"), subject to the assignments, liens and security interests granted by Borrowers and Apex in favor of Lender pursuant to and in accordance with the Loan Documents, and (b) amend the Loan Agreement in connection with the foregoing. Foothill is willing to consent to the foregoing subject to the terms and conditions contained herein, including, without limitation, the execution and delivery of a Continuing Guaranty by the IP Subsidiary in favor of Foothill, together with other security agreements and instruments as required by Foothill. By this Consent and Amendment, Foothill and Borrowers desire and intend to evidence such consent and amendments. In consideration of the foregoing, the parties hereto agree as follows: 1. Restated Loan Agreement Definitions. ----------------------------------- (a) The Restated Loan Agreement's definition of "Corporate Guarantors" in Section 1.1 thereof is hereby deleted in its entirety and the following substituted therefor: "Corporate Guarantors" means Apex, MR Management, Holding Company -------------------- and G.S.I., Inc. (b) The following definition is hereby added to Section 1.1 of the Restated Loan Agreement: "G.S.I., Inc." means G.S.I., Inc., a Delaware corporation. ------------ (c) The Restated Loan Agreement's definition of "Guarantors" set forth in Section 1.1 thereof is hereby deleted in its entirety and the following substituted therefor: "Guarantors" means Apex, MR Management, Holding Company, G.S.I., ---------- Inc. and Rubin. 2. Schedule 5.8. Schedule 5.8 of the Restated Loan Agreement is hereby ------------ amended by adding the following to the end thereof: - G.S.I., INC. - DELAWARE CORPORATION - 100 SHARES OF COMMON STOCK AUTHORIZED - 10 SHARES OWNED BY KPR WHICH IS 33 1/3% OF THE ISSUED AND OUTSTANDING STOCK - 10 SHARES OWNED BY RYKA WHICH IS 33 1/3% OF THE ISSUED AND OUTSTANDING STOCK - 10 SHARES OWNED BY APEX WHICH IS 33 1/3% OF THE ISSUED AND OUTSTANDING STOCK 3. Consent to Formation of Subsidiary. Pursuant to Section 7.13 of the ---------------------------------- Restated Loan Agreement and any other applicable provision of the Loan Documents, Borrowers and Apex hereby request and Lender hereby consents to the formation of G.S.I., Inc., a Delaware corporation, to be owned by the Borrowers and Apex as set forth on Schedule 5.8 of the Restated Loan Agreement. 4. Section 7.1 of the Restated Loan Agreement. Section 7.1 of the ------------------------------------------ Restated Loan Agreement is hereby amended to include the following additional clause (h): -2- (h) Indebtedness to G.S.I., Inc., provided, that, such Indebtedness -------- ---- shall at all times be subject to a Subordination Agreement between G.S.I., Inc. and Lender in form and substance satisfactory to Lender. 5. Consent to Transfer of Assigned Trademarks and Assigned Patents to IP --------------------------------------------------------------------- Subsidiary. Pursuant to Sections 7.3, 7.4 and 7.14 of the Restated Loan - ---------- Agreement and any other applicable provisions of the Loan Documents requiring the consent or approval by Lender, Lender hereby further consents to the transfer by Borrowers and Apex to IP Subsidiary of all of the Assigned Trademarks and Assigned Patents and the licensing of such Assigned Trademarks and Assigned Patents by IP Subsidiary to the Borrowers and Apex, respectively, in accordance with the License Agreements (as such term is defined below), provided, that: - -------- ---- (a) Lender shall have received, in form and substance satisfactory to Lender, an absolute and unconditional Continuing Guaranty by IP Subsidiary of payment and performance of all of the Obligations of Borrowers, secured by first and only security interests in favor of Lender granted by IP Subsidiary on all of its existing and future assets, including, but not limited to, all existing and future trademarks and patents, including all of the Assigned Trademarks and Assigned Patents and other intellectual property; (b) Lender shall have received, in form and substance satisfactory to Lender, a written agreement from IP Subsidiary granting Lender the right to use any of the Assigned Trademarks and Assigned Patents and any of the other intellectual property owned by IP Subsidiary, in order that Lender shall have the right to exercise its rights and remedies and otherwise deal with the Assigned Trademarks and Assigned Patents including, without limitation, the right to complete all work-in-process and other inventory and sell the Inventory of Borrowers and Apex with the Assigned Trademarks and Assigned Patents affixed to such Inventory; (c) Borrowers and Apex shall have delivered, or cause to be delivered, to Lender, true, correct and complete copies of the documents, agreements and instruments executed and/or delivered by Borrowers, Apex and IP Subsidiary in connection with the transfer of the Assigned Trademarks and Assigned Patents by Borrowers and Apex to IP Subsidiary and the licensing arrangements entered into among Borrowers, Apex and IP Subsidiary; (d) Borrowers shall have delivered, or cause to be delivered, to Lender, a copy of the Certificate of Incorporation of IP Subsidiary certified to by the Secretary of State of Delaware and any amendments thereto together with a Good Standing Certificate certified by the Secretary of State of Delaware on the date hereof; (e) Borrowers shall have delivered, or cause to be delivered, a true and complete copy of the By-Laws of IP Subsidiary certified by the corporate secretary of IP Subsidiary; (f) Borrowers shall have delivered, or cause to be delivered, to Lender, a true -3- and complete copy of the resolutions of the Board of Directors of IP Subsidiary, with shareholders' consent, certified by the corporate secretary, authorizing the execution of the guarantee and security agreements delivered in favor of Lender hereunder, in form and substance satisfactory to Lender; (g) Borrowers shall have delivered, or cause to be delivered, to Lender, UCC, tax lien and judgments reports from a search company acceptable to Lender for each of the jurisdictions in which IP Subsidiary maintains assets and has its chief executive office evidencing that no UCC financing statements have been filed by any Person against IP Subsidiary, except Lender, and that there are no tax liens or judgments filed or entered against IP Subsidiary; (h) Each of the Borrowers and Apex shall have delivered, or cause to be delivered, to Lender a true and complete copy of the resolutions of each Board of Directors with shareholder's consent, certified by the corporate secretary, authorizing the formation of IP Subsidiary, the assignment of the Assigned Trademarks and Assigned Patents to IP Subsidiary and the license of IP Subsidiary to Borrowers and Apex, respectively, of the right to use the Assigned Trademarks and the Assigned Patents; (i) Borrowers shall have delivered, or cause to be delivered, to Lender, in form and substance satisfactory to Lender, such opinions of counsel to Borrowers, Apex and IP Subsidiary with respect to the transactions contemplated among Borrowers, Apex and IP Subsidiary and other matters as Lender may request. 6. Representations and Warranties. In addition to, and not in limitation ------------------------------ of, the continuing representations, warranties and covenants heretofore or hereafter made by Borrowers to Foothill pursuant to the Loan Documents, each Borrower hereby represents, warrants and covenants with and to Foothill as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Loan Documents): (a) As of the date hereof, and after giving effect to the consents set forth in paragraphs 3, 4 and 5 hereof, there exists no Event of Default and no condition or event or other state of facts which, with the giving of notice or lapse of time, or both, would constitute an Event of Default. (b) This Consent and Amendment has been duly executed and delivered by each Borrower and each Guarantor and is in full force and effect as of the date hereof, and the agreements and obligations of each Borrower and each Guarantor contained herein constitute legal, valid and binding obligations of each Borrower and each Guarantor enforceable against each Borrower and each Guarantor in accordance with their respective terms. (c) All of the representations and warranties set forth in the Loan Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof as if made on the date hereof, after giving effect to the consents set forth in paragraphs 3, 4 and 5 hereof and the consummation of the formation of the IP Subsidiary and the transactions -4- contemplated by the transfer of the Assigned Trademarks and Assigned Patents to the IP Subsidiary, except to the extent any such representation or warrant is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (d) Borrowers have delivered to Foothill true, complete and correct executed or execution copies (to the extent a fully executed copy has not be delivered to either Borrower) of the (i) Purchase Agreement between Ryka and the IP Subsidiary, (ii) the Purchase Agreement between KPR and the IP Subsidiary, (iii) the Purchase Agreement between Apex and the IP Subsidiary, (iv) the Assignment between Ryka and the IP Subsidiary, (v) the Assignment between KPR and the IP Subsidiary, (vi) the Assignment between Apex and the IP Subsidiary, (vii) the License Agreement between Ryka and the IP Subsidiary, (viii) the License Agreement between KPR and the IP Subsidiary, and (ix) the License Agreement between Apex and the IP Subsidiary, including all Schedules and Exhibits thereto (the agreements referred to in clauses (vii) through (ix) hereof are collectively referred to herein as the "License Agreements"), and all documents, instruments and agreements executed, or to be executed, and delivered in connection therewith. 7. Conditions Precedent. The consent and amendments herein shall be -------------------- effective upon the receipt by Foothill of a counterpart of this Consent and Amendment, duly authorized, executed and delivered by Borrowers and Guarantors and the receipt by Foothill of all documents described in Paragraph 5 hereof, duly authorized, executed and delivered by Borrowers, Apex and/or IP Subsidiary as the case may be. 8. Effect of this Consent and Amendment. ------------------------------------ (a) Except as modified pursuant hereto, no other changes or modifications to the Loan Documents are intended or implied and in all other respects the Loan Documents are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of any conflict between the terms hereof and the other Loan Documents, the terms hereof shall control. (b) In addition to, and not in limitation of, any term or provision contained in the Loan Agreement or any other Loan Document that prohibits the disposal of assets of any Borrower or Guarantor, including, without limitation, Section 7.4 of the Restated Loan Agreement, none of Borrowers or Guarantors shall, without the prior written consent of Foothill in each instance, dispose of any assets of any Borrower or Guarantor to any Person. 9. Further Assurances. The parties hereto shall execute and deliver such ------------------ additional documents and take such additional action as may be necessary or desirable to effectuate the provisions and purposes of this Consent and Amendment. 10. Governing Law. The rights and obligations hereunder of each of the ------------- parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of New York. 11. Binding Effect. This Consent and Amendment shall be binding upon and -------------- inure to -5- the benefit of each of the parties hereto and their respective successors and assigns. 12. Counterparts. This Consent and Amendment may be executed in any ------------ number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Consent and Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereof. Please sign the enclosed counterpart of this Consent and Amendment in the space provided below, whereupon this Consent and Amendment, as so accepted by Foothill, shall become a binding agreement among Borrowers and Foothill. Very truly yours, KPR SPORTS INTERNATIONAL, INC. By: /s/ Michael Rubin -------------------------------- Title: President ----------------------------- RYKA, INC. By: /s/ Michael Rubin -------------------------------- Title: C.E.O ----------------------------- AGREED: FOOTHILL CAPITAL CORPORATION By: /s/ Erik R. Sawyer -------------------------- Title: Vice President ----------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -6- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] ACKNOWLEDGED AND AGREED TO IN ALL RESPECTS: APEX SPORTS INTERNATIONAL, INC. By: /s/ Michael Rubin -------------------------- Title: President ----------------------- MR MANAGEMENT INC. By: /s/ Michael Rubin -------------------------- Title: President ----------------------- GLOBAL SPORTS, INC. By: /s/ Michael Rubin -------------------------- Title: C.E.O. ----------------------- G.S.I., INC. By: /s/ Dennis R. Rubisch -------------------------- Title: Vice President ----------------------- /s/ Michael Rubin - ----------------------------- MICHAEL RUBIN -7- EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND RELATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 856,085 0 37,711,425 928,693 20,954,168 60,028,729 4,385,906 1,549,638 78,716,186 40,399,061 0 100 0 129,947 14,555,535 78,716,186 131,454,971 131,454,971 95,528,412 120,360,458 3,272,132 104,453 3,073,270 7,802,381 1,900,818 0 0 0 0 5,901,563 .52 .51
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