-----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, EkxTjJxcfrG0LTTEyxe0ckmuw8Qi0byjAKieX4VjXLfzrTrRaesp9lhoiTEgcP14 VgaAOUdMgqTSLoxyMR+lAw== 0001036050-00-000523.txt : 20000331 0001036050-00-000523.hdr.sgml : 20000331 ACCESSION NUMBER: 0001036050-00-000523 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000330 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: 0101 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16611 FILM NUMBER: 589042 BUSINESS ADDRESS: STREET 1: 1075 FIRST AVE STREET 2: RTE 3 INDUSTRIAL PARK CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6102653229 MAIL ADDRESS: STREET 1: 1075 FIRST AVE CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 10-K 1 FORM 10-K GLOBAL SPORTS, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 January 1, 2000 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)
1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406 (610) 265-3229 (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: Common Stock, par value $.01 per share (Title of Class) 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 17, 2000, was approximately $78,248,960.(/1/) There were 18,550,580 shares of the registrant's Common Stock outstanding as of the close of business on March 17, 2000. ---------------- DOCUMENTS INCORPORATED BY REFERENCE (Specific sections incorporated are identified under applicable items herein) Certain information required for Part III of this Form 10-K is incorporated herein by reference to the Proxy Statement for the 2000 Annual Meeting of the Company's shareholders. - -------- (/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 sharheolders owning in excess of 10% of the regsitrant's Common Stock, multiplied by the last reported sale price for the registrant's Common Stock on March 17, 2000. 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 JANUARY 1, 2000 TABLE OF CONTENTS
Page ---- PART I ITEM 1: BUSINESS..................................................... 3 ITEM 2: PROPERTIES................................................... 25 ITEM 3: LEGAL PROCEEDINGS............................................ 25 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 25 ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT......................... 25 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................................... 27 ITEM 6: SELECTED FINANCIAL DATA...................................... 27 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 29 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 33 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 33 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 33 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 34 ITEM 11: EXECUTIVE COMPENSATION....................................... 34 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 34 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 34 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 35 SIGNATURES.............................................................. 38
2 PART I ITEM 1: BUSINESS Overview We develop and operate e-commerce sporting goods businesses for traditional sporting goods retailers, general merchandisers, Internet companies and media companies under exclusive long-term agreements. We enable our partners to capitalize on their existing assets to exploit online opportunities in the sporting goods retailing industry, which is estimated by the National Sporting Goods Association to be $45.8 billion in size. Our scalable business model takes advantage of our proprietary technology and product database, customer service capabilities, fulfillment capabilities, relationships with vendors and centralized inventory management. Based on these capabilities, we can quickly and cost-effectively implement a customized e-commerce sporting goods businesses for a broad range of partners. We enable our partners to remain focused on their core businesses and to avoid making substantial investments in e-commerce infrastructure and personnel. Depending on the specific needs of the partner, we can undertake either a complete outsourcing of its online activities or a more customized "back-end" operation. We benefit from the traffic generated by our partners' established brand franchises, extensive advertising, retail traffic and vendor relationships to achieve operational efficiencies, lower customer acquisition costs and economies of scale. We offer our partners the following: . design, development and maintenance of customized Web sites under our partners' banner; . access to our centralized database of product descriptions and images, as well as performance data from vendors and independent sources; . extensive technology that runs, operates and manages all aspects of multiple Web sites; . access to a broad assortment of brand-name inventory from over 500 brands encompassing more than 60,000 stock keeping units, referred to as SKUs; . customer service, order processing and fulfillment capabilities; and . marketing our partners' Web sites through arrangements with Internet portals such as Yahoo!, as well as incremental online and offline advertising. We believe our ability to quickly and cost-effectively add new partners creates advantages for us over other online competitors. These advantages include lower product costs, broader merchandise availability and greater operating efficiencies. In addition, we believe our approach can generate attractive economic returns by operating multiple Web sites for established brands on a common scalable e-commerce infrastructure. During our first two months in business, we had net revenues of approximately $5.5 million. We launched our initial six e-commerce sporting goods businesses in November 1999 located at the URLs www.dunhamssports.com, www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com, www.thesportsauthority.com and store.webmd.com. Subsequently we announced agreements with BlueLight.com, the exclusive online partner of Kmart, and Oshman's Sporting Goods and we expect to launch e-commerce sporting goods businesses for them in the second quarter of 2000. According to estimates by Sports Trend, a trade publication, our current partners and their affiliates generated over $5.0 billion in combined annual sporting goods revenues through their traditional retail channels in 1998. The combined sales of our partners in 1998 represented 11.1% of the estimated United States retail sporting goods market. Industry Background Sporting Goods Retail Industry. The retail market for sporting goods products, which includes apparel, footwear, equipment and related products such as table games and sports memorabilia, represents a significant market opportunity. The National Sporting Goods Association estimated this market at $45.8 billion at retail in 1999, representing a compound annual growth rate of 3.5% since 1994. The number of people who actively 3 engaged in sports, fitness and outdoor activities grew 19% from 68.5 million in 1987 to 81.6 million in 1996, according to Sporting Goods Manufacturers Association estimates. We believe the sporting goods industry will continue to benefit from growing participation and interest in sports, fitness and outdoor activities and, as a result, we expect consumer demand to increase over time. In addition, retail gross margins in sporting goods typically exceed 30% and tend to be higher than retail gross margins in many other consumer products categories, such as books, toys, computers and electronics. Finally, the ten largest sporting goods retailers in the United States accounted for 36% of all sporting goods sales in 1998, and no single retailer represented more than 10% of the market, according to Sports Trend estimates. As a result, we believe significant opportunities exist to better fulfill customer and manufacturer needs by centralizing inventory and creating a comprehensive product database from among the thousands of vendors and millions of SKUs in the sporting goods industry. We believe that e-commerce will contribute to additional growth in the sporting goods industry. E-commerce revenues are expected to represent approximately 8% of sporting goods sales by 2004, according to Forrester Research estimates. Forrester Research also estimates that online sales of sporting goods reached $165.0 million in 1999 and are projected to exceed $4.2 billion by 2004, a compound annual growth rate of 91%. In addition, we believe that total catalog sales of sporting goods products are sizeable, supporting the notion that customers are willing to purchase sporting goods through direct sales. Advantages of Online Retailing. The Internet has emerged as one of the fastest growing communications, information and commerce mediums. International Data Corporation estimates that there were approximately 142 million Internet users worldwide at the end of 1998 and expects this number to grow to approximately 502 million by the end of 2003. Business' and consumers' acceptance of the Internet as a communication, information and commerce platform has created the foundation for significant growth in business-to- consumer and business-to-business commerce. The number of online purchasers is projected to increase from approximately 31 million at the end of 1998 to approximately 183 million by 2003, according to International Data Corporation. Forrester Research estimates that online purchases by United States consumers will grow from approximately $20.3 billion in 1999 to approximately $184.5 billion in 2004. The Internet is an attractive marketplace for both online retailers and consumers. Online retailers are able to "display" a larger number and wider variety of products at a lower cost than physical stores and catalogs, which have limitations on inventory, shelf and catalog space. In addition, online retailers do not incur the costs of managing and maintaining a retail store base or the significant printing and mailing costs of catalogs. Online retailers also enjoy significant merchandising flexibility with the ability to easily and frequently adjust their featured selections and editorial content to better respond to consumers' needs. Finally, online retailers can more easily obtain demographic and behavioral data about customers. This increases opportunities for targeted marketing programs and to provide personalized services to their customers. The Internet also offers a number of advantages to consumers. Consumers can enjoy the time savings, convenience and flexibility of shopping online 24 hours a day, seven days a week with access to a broader selection of products than is traditionally available in a retail store. In addition, online retailing allows for personalized shopping experiences through the delivery of content, purchasing advice, community and electronic features such as reminder and suggestion services. Consumers also benefit from greater access to product information and heightened attention to customer service. Challenges of Online Retailing. We believe traditional sporting goods retailers face significant obstacles to compete successfully in e-commerce. Traditional retailers must develop a separate infrastructure for their Internet operations, including Web design, order processing, fulfillment, customer service and a descriptive product database. Traditional retailers must also make significant capital investments to develop in-house technology systems as well as to attract and retain personnel to support an online business. Given the smaller size of the leading sporting goods retailers relative to leading retailers in other consumer goods categories, it is particularly difficult for sporting goods retailers to generate levels of e- commerce sales that justify building a separate infrastructure. Furthermore, we believe very few viable outsourcing options exist for sporting goods retailers to build their online business. 4 Online sporting goods retailers confront obstacles to establish cost- efficient operations in the sporting goods business. Due to the lack of master distributors and the multitude of independent vendors in the sporting goods industry, online retailers face the challenge of establishing and maintaining relationships with hundreds of vendors. This makes it difficult for them to access a broad selection of branded sporting goods products. In addition, we believe that it is costly for single-brand online retailers to own inventory and build sophisticated fulfillment infrastructure while simultaneously spending to build their brand and drive traffic. Because most online retailers rely on a single brand, they find it more difficult to establish multiple partnerships with traditional retailers. Online retailers tend to make large investments to build and maintain their brand awareness, resulting in high customer acquisition costs. In addition, online retailers have a disadvantage to traditional retailers in that they do not offer in-store returns and exchanges and can not satisfy customers' desire to touch and feel products, such as athletic footwear and sporting apparel. Also, it is difficult for online retailers to support the cost of aggregating and maintaining comprehensive inventory in each category. This difficulty arises because sporting goods products come in an extensive array of shapes, sizes and weights, ranging from small fishing lures to bulky motorized treadmills. The Global Sports Solution We believe our business model allows us to provide a comprehensive solution to many of the challenges facing traditional and online sporting goods retailers. Our platform allows us to rapidly develop and operate customized e- commerce sporting goods businesses with characteristics appropriate for each of our partners. Our solution enables our partners to remain focused on their core businesses and to avoid making substantial investments in e-commerce infrastructure and personnel. In addition, we believe we can generate attractive economic returns by operating multiple Web sites on a common scalable e-commerce infrastructure. We derive further economic benefit by operating under the established brands of our partners. The following are key features of our solution: Rapid Deployment of a Comprehensive E-Commerce Business. We can quickly develop and implement all aspects of an e-commerce sporting goods business. These aspects include Web site design, buying and merchandising, order processing, fulfillment and customer service. We customize the design of a partner's Web site with a broad range of characteristics that include a differentiated user interface, partner-specific content pages, an extensive electronic catalog of product descriptions and images, a searchable database and interactive communication tools. Our solution allows the partner to avoid the lengthy start-up, the complex integration effort and the substantial fixed cost required to build and operate an e-commerce business. Creation of Distinct Online Identities Under Existing Brand Names. We enable our partners to establish distinct e-commerce businesses. We believe this contributes to the development of their independent online brand, reinforces their existing brand identity and reduces cannibalization from other online competitors. In addition, we seek to increase the value of their entire business by establishing an online image and a shopping experience that is commensurate with their brand. Increased Return on Investment Opportunity. We operate multiple e-commerce sporting goods businesses on a common infrastructure. This allows us to capitalize on our core computer technology, which we refer to as The Common Engine(TM), and centralized inventory, product database, order processing, fulfillment and customer service. Because we focus exclusively on sporting goods e-commerce, we can derive economies of scale and add additional partners with minimal incremental spending. In addition, we aggregate demand from all of our partners' Web sites and fulfill all customer orders from a common inventory pool. Although we customize part of the product assortment on each Web site we operate, a large quantity of SKUs is common among multiple Web sites. By centralizing inventory management across multiple partner Web sites, we are able to increase the frequency of inventory turns, thus reducing obsolescence risk and financing costs. Positive and Convenient Shopping Experience. We offer a compelling online shopping experience by providing a broad selection of merchandise, easy to use Web sites, competitive prices, value added content and strong customer service. We believe our 24 hours a day, seven days a week in-house customer service and high 5 order accuracy promotes strong brand loyalty for our partners. In addition, we believe our ability to respond to customer inquiries by e-mail, telephone and online chat to provide detailed product information makes the shopping experience easy and enjoyable and drives repeat purchases. The customer's online shopping experience is further enhanced by the option to return goods purchased online to most of our partners' respective retail stores. Efficient Customer Acquisition. We benefit from the brand assets and substantial marketing budgets of our partners to reduce our customer acquisition costs. Our partners' existing marketing budgets allow us to generate exposure and drive traffic to the Web sites without expensive incremental investment in customer acquisition. For example, each partner is contractually obligated to include its Web site address, referred to as a URL, in its marketing and communication materials. In addition, during fiscal 1999, our current traditional sporting goods retail partners, Dunham's Sports, MC Sports, Oshman's Sporting Goods, Sport Chalet, The Athletes Foot and The Sports Authority, spent on a combined basis in excess of $100.0 million on marketing. This included television, radio, print and outdoor advertising, point of purchase displays, cash register receipts, shopping bags, employee uniforms and promotional events designed to attract and retain customers. Finally, our retail partners have valuable, established brand franchises and existing customer bases. We believe this provides us with a competitive advantage because our retail partners have a heritage and reputation that lends a degree of comfort to the customer. By having an established history of purchasing from our partners' retail stores, we believe a customer will be more inclined to purchase from their online stores. Benefit from Relationships with Vendors. Our partners maintain long-standing relationships with sporting goods vendors. We also maintain strong relationships with these vendors. Therefore, unlike many entrants to the online sporting goods marketplace, we are able to obtain direct access to most major brands. We believe this provides us with one of the most extensive, authorized selections of sporting goods brands and products available on the Internet today. In addition, we benefit from the buying experience of our partners, which further reduces our costs and improves our margins. Growth Strategy Our objective is to generate attractive economic returns by capitalizing on our unique business model to become the leading e-commerce company in the sporting goods category. The key elements of our growth strategy are as follows: Expand Our Partner Base. We intend to increase our market share by adding new partners with strong brand franchises who are seeking to enter the e- commerce sporting goods business. New partners could include companies with major brand names in specialty and full-line retail, consumer products, Internet and media. For example, in January 2000 we announced a new alliance with Oshman's Sporting Goods and in March 2000, we announced a new alliance with BlueLight.com. We expect to launch these e-commerce sporting goods businesses during the second quarter of fiscal 2000. Promote Our Online Brands. We intend to build awareness and drive traffic to our e-commerce sporting goods businesses by capitalizing on the brand assets, large marketing budgets and retail traffic of our partners. Each of our partners prominently features and promotes its URL in its marketing and communications materials. We have initiated programs with our traditional retail partners to provide incentives, such as coupons, to in-store customers to shop online. We also plan to continue to selectively use a variety of online and offline marketing strategies to reach our customers, including direct marketing, co-branding, co-op advertising, public relations, affiliate programs, portal relationships, traditional print and broadcast media advertising. In addition, we intend to test in-store computer kiosks with direct links to some of our traditional retail partners' online sporting goods businesses to provide customers with access to inventory not available in the retail stores. Increase Repeat Purchases. We intend to build customer loyalty and drive repeat purchases by implementing the following strategies: . continually enhancing our level of customer service; 6 . expanding our customer and product databases; . offering new products and product categories; . implementing direct marketing techniques to target customers; and . increasing the level of personalization on our partners' online sporting goods businesses. We believe these initiatives will drive repeat purchases as consumers become increasingly satisfied with their online shopping experiences. Enhance the Online Shopping Experience. We plan to continually enhance and expand our online stores to address the evolving needs of our customers. We plan to invest in technology to maximize the flexibility and speed to market of our Web site enhancements. We intend to improve the presentation of our product offerings by taking advantage of the unique characteristics of the Internet as a retail medium. Specifically, we plan to develop features that improve the functionality, speed, navigation and ease of use of our partners' Web sites. Another key factor in enhancing the online shopping experience will be to continue building and expanding upon our fulfillment and order processing capabilities. Capitalize on International Market Opportunities. We plan to explore offering our e-commerce solution in international markets to address the global demand to purchase sporting goods products online. We believe our business model is well suited for penetration of these markets by partnering with well-established local companies. Pursue Growth by Acquisitions. From time to time we assess strategic investments and acquisitions that are aligned with our goal of increasing our partner and customer base and expanding our product offerings. Global Sports' Operations Web Site Design, Implementation, and Maintenance We design most of our partners' Web sites. We have dedicated in-house personnel that are responsible for Web site design, management, maintenance, creative and content modifications. We implement all changes to current Web sites and oversee the creation of new front-end Web sites for most new partners, ensuring that the look and feel of their Web sites meet all parties' satisfaction. We also generate content for each of our partners' Web sites, including product images, product descriptions, buying guides, sport-specific information, as well as related sports and informational content. For example, we have produced buying guides which will help customers with their merchandise selection and to provide information about selected sports. These guides provide customers with helpful information in selecting various pieces of sports equipment and provide tips on sports play. In addition, we have an in-house photography studio and generate approximately 70% of our photographic images. We receive the remainder of our photographic images from our vendors. Technology. The three major elements of our Web sites' technology are The Common Engine(TM), the front-end and the data center. The Common Engine(TM). We have created a core computer technology system, The Common Engine(TM), that operates and manages all of the applications and functionality across all of our partners' Web sites. This system allows us to add new front-end Web sites with minimal incremental costs. The Common Engine(TM) is a template that is used to create and personalize each Web site to fit the brand equity and identity of the individual partners. We update The Common Engine(TM) continually to improve our partners' Web sites and enrich the overall customer experience. The Front-End. The front-end represents the overall look and feel of our partners' Web sites. The front-end is the interface with the customer and includes logo placement, graphic design, color palette, navigation and links. We use the front-end to communicate special promotions, content feature and product collections as well as the unique merchandising strategy of each of our partners. 7 The Data Center. The data center is our database management system that controls all of the information housed within our partners' Web sites, including all product images and descriptions, customer log-in data, customer profiles, verification requirements, brand information and tax and shipping data. Our database management system was created utilizing Oracle Technologies and runs on Sun Microsystems hardware. A third-party provider hosts our data center. System security is managed both by internal staff as well as by security staff at our third-party host. Additional Technology Information. Our technology infrastructure is supported by a fully-integrated back-up system. We believe this ensures our operations can move forward seamlessly in the event of computer malfunctions. In addition, we continuously strive to improve our partners' Web sites by conducting functional testing. Buying, Vendor Relationships and Merchandising Buying. We offer a broad assortment of brands and items on each of our partners' Web sites. We currently offer customers over 500 brands and more than 60,000 SKUs across our partners' Web sites and continue to add additional brands and SKUs. We have dedicated buyers for the following merchandise categories: footwear, licensed/team products, men's branded apparel, women's and children's branded apparel, accessories, exercise, indoor recreation, outdoor recreation, golf, racquet sports and team sports. We capitalize on our partners' merchandising experience to offer a wide brand and product assortment for our customers. When deciding which brands and merchandise to carry, we first review what our partners are offering in their retail stores and determine what items we believe will be successful on our partners' Web sites. We can offer a wider variety of merchandise on our Web sites than might be found in one of their retail stores because we are not hindered by space availability, although not all of our partners' Web sites carry the same product and brand assortment. After consulting a partner on their buying strategy, we then work to enhance product selection. We expand product lines, provide brand extensions and look to add significant value to the product selection currently offered in our partners' stores. These types of extensions might include a broader diversity of sizes and styles and a larger range of price points. Vendor Relationships. We believe we have solid relationships with our vendors, and we are working to continuously add new vendors and brands. Our buyers work with merchandisers to streamline the strategies for product offerings, merchandise locations within the Web sites and promotional activities of our partners. Merchandising. Our merchandising strategy allows us to offer a highly customized and flexible product mix. We work with our partners to ensure that our product offerings are consistent with any upcoming in-store promotions or advertising specials. We make changes to the home pages and lead category pages of our partners' Web sites frequently to reflect seasonal or promotional trends and to keep their Web sites fresh. Pricing We establish the prices for all products offered on our partners' Web sites. We strategically price these products to be consistent with the prices in our partners' retail stores. Accordingly, we maintain different pricing structures for products across each of our partners' Web sites. We use our proprietary technology to implement these pricing structures and to make daily updates to our prices, including markdowns and sales. Marketing Web Site Integration. We work with each of our partners to make certain that URL and Web site integration are a mainstay of their marketing and advertising campaigns. Our retail sporting goods partners spend more than $100.0 million per year to build and promote their brands, and BlueLight.com's exclusive retail partner, Kmart, dedicates a meaningful portion of space within its 72 million weekly advertising circulars to promote its sporting goods business. Each of our partners is contractually obligated to incorporate its URL into every type of advertising, marketing, promotion and communication vehicles it creates. These marketing vehicles 8 not only incorporate the URL into the copy or design, but the message also educates people about these e-commerce sporting goods businesses and drives traffic to these Web sites. We believe our partners embrace this strategy because they realize the value in alerting their customers to an additional distribution channel within their brand. Online Marketing Relationships. In 1999, we signed a marketing agreement with Yahoo!, a leading global Internet company, in which our partners' Web sites are featured throughout the Yahoo! Shopping service and other areas of the Yahoo! Network. We also formed a marketing relationship with PeoplePC, in which our partners' Web sites will be featured to PeoplePC members throughout PeoplePC's multiple channels of outreach. We have a marketing relationship with Rodale, the publisher of well-known publications such as Men's Health, Prevention, New Woman, and Runner's World, which provides users of our partners' Web sites with access to sports and fitness content and information from Rodale's range of sports and fitness book titles. We are dedicated to managing, strengthening and improving our customer relationships. We have implemented personalized customer e-mail campaigns, which inform customers about upcoming specials, promotions, new brands, or merchandise in which they might be interested. Offline Marketing Opportunities. We periodically produce advertising or marketing materials to communicate a special event or promotion occurring on one of our partners' Web sites. We produce these materials to augment our partners' own advertising campaigns. Affiliate Network. We have agreements with many outside Web sites, referred to as affiliates, which enable them to link to one of our partners' Web sites. When a visitor clicks through an affiliate to one of our partners' Web sites, and the visit generates a sale, then the affiliate is compensated with a portion of the sale proceeds. We have implemented a sliding scale for revenue payments to affiliates depending on the volume of sales generated from the link. Order Processing and Fulfillment Order Processing. We use Priority Fulfillment Services, referred to as PFS, as our third-party order processing vendor. We use JDA software for our internal order processing technology vendor. During fiscal 2000, we plan to assume the responsibility of all order processing, returns processing, claims processing and crediting of customers. Order processing activities include electronically capturing the order, processing the payment method, determining the shipping costs, adding any applicable sales tax, facilitating any coupon or promotional discounts and printing a pick ticket. The pick ticket includes the name of the partner from whom the order was received, a packing slip, return labels and detailed order list. Fulfillment. We currently use PFS as our third-party fulfillment vendor. During fiscal 2000, we plan to assume responsibility for the fulfillment for all large and oversized items, referred to as Less than Truckload or LTL, sold on our partners' Web sites. These large items will be fulfilled by us within a 90,000 square foot facility to be leased in Memphis, Tennessee. PFS will continue to manage the fulfillment of non-LTL items. We have our own dedicated warehouse and fulfillment space within PFS' facilities. The portion of PFS' facility that we use is completely separated and segregated from all other PFS customers and/or operations. We use approximately 200,000 square feet of PFS' facilities in Memphis, Tennessee for fulfillment of non-LTL items for the forseeable future. After a pick ticket is generated, it either will be forwarded to PFS for fulfillment, in the case of non-LTL items, or will be forwarded to our fulfillment center in Memphis, in the case of LTL items. Fulfillment will be handled in the same way, whether it is managed by us or by PFS. After the pick ticket is reviewed, the ordered items are gathered, the accuracy of items are verified and the items, appropriate receipts and return labels are packed, sealed and shipped. After an item has been ordered by a customer, PFS electronically notifies us when the order has been received, packed and shipped. Our computer system then automatically sends an e-mail to that customer informing them that their merchandise is on its way 9 We also provide value-added fulfillment services, such as at-home assembly of LTL items and racquet stringing. At-home assembly for LTL items can be purchased for an additional charge on some of our partners' Web sites. These Web sites automatically offer the customer the opportunity to purchase at-home assembly at the time of sale. If a customer purchases at-home assembly of an item, information about coordinating their at-home assembly is included in the package during the fulfillment phase. The customer can then call Huffy Corporation, our assembly provider, to coordinate and schedule the at-home assembly of their product. Distribution. We currently use UPS as our shipping carrier for non-LTL items and use Associated Global for our LTL distribution. We ship virtually all of the orders received on our partners' Web sites within one business day. Returns. We accept returns through our partners' respective stores and through mailing or delivery services. All of our retail partners, except Dunham's Sports, accept in-store returns of items purchased on their Web site. If a customer returns an item to a retail store, the store will offer the customer a credit or exchange. If it is an item that the particular store location carries, then the store will reshelve the item. If the specific retail location does not carry that item, the store will return the item to us to reshelve. If a customer returns an item directly to us, we provide the customer with either a credit or exchange from our partners' Web site and then reshelve the item. In the case of BlueLight.com, where we only manage their sporting goods product database and facilitate merchandise procurement and fulfillment, BlueLight.com will process the orders, generate the pick tickets and forward them to us for fulfillment. We will then either fulfill the order or forward it to PFS as appropriate. BlueLight.com has agreed to use commercially reasonable efforts to have Kmart accept in-store returns for merchandise purchased on BlueLight.com. Any returns made to a Kmart store will be forwarded to BlueLight.com's return processing center, from which BlueLight.com will coordinate regular shipments of products back to us to be reshelved. Customer Service General. We are committed to providing the highest level of customer service. We believe that superior customer service is critical to retaining long-term and repeat customers. We offer 24 hours a day, seven days a week live customer service for all of our partners, except BlueLight.com, who will manage their own customer service functions. However, we will be assisting BlueLight.com's representatives with problem-solving and product-oriented issues. We currently have significant excess capacity in our call center. We expect to increase our customer service staff as we increase both the number of our partners and our overall volume. We programmed our computer systems to automatically identify from which partner the customer needs information or service. Our customer service facility is located within our headquarters. Category Experts and Service Experts. In our effort to provide customers with the most thorough and accurate information possible, we have both category experts and service experts on staff within the customer service department. Category experts have a particular interest in and detailed knowledge of particular sports or products. These professionals are able to answer detailed questions about various sports and products to help customers select the best equipment or merchandise for them. Service experts are trained and experienced in working with a variety of complex customer service issues. E-Mail, Telephone or Online Chat. Customers can obtain assistance through e- mail, telephone or online chat. Our online chat capabilities are called LiveRep. We utilize eGain's application process for our LiveRep solution. During LiveRep sessions, customer service representatives can answer simple merchandise questions or help a person navigate the site page-by-page in more complex situations. We aim to answer all customer e-mails within 24 hours, and are often able to respond within a shorter period of time. 10 Company Overview Description of Agreements with our Partners According to Sports Trend, the combined retail sporting goods sales of our partners and their affiliates was $5.1 billion in 1998, accounting for 11.1% of the estimated United States retail sporting goods market. In 1999, our partners and their affiliates had in the aggregate approximately 3,300 stores covering all 50 states. We estimate that Dunham's Sports, MC Sports, Oshman's Sporting Goods, Sport Chalet, The Athlete's Foot and The Sports Authority invested in excess of $100.0 million in marketing their retail stores to consumers in 1999. In addition, a majority of the approximately 72 million weekly newspaper circulars distributed in 1999 by BlueLight.com's retail partner, Kmart, featured sporting goods products. We currently have three different structures for our agreements: . Exclusive Licensing Agreements. These agreements give us the exclusive right to operate a partner's e-commerce sporting goods business. We record all revenues generated on our partners' Web sites and pay a percentage of those revenues to the partners in exchange for the e- commerce rights to their brand names and in-store promotions of the e- commerce sporting goods businesses in the partners' retail stores. . Subsidiary and Exclusive License Agreement. We have formed a subsidiary, The SportsAuthority.com, Inc., which is 80.1% owned by us and 19.9% owned by The Sports Authority. The Sports Authority's ownership position in the subsidiary could increase to 49.9% over time, depending upon the achievement of financial and sales goals or the exercise of options set forth in the agreement. The SportsAuthority.com has the exclusive right to operate The Sports Authority's e-commerce sporting goods business. We pay a nominal royalty to The Sports Authority based on a percentage of sales generated by the subsidiary. . Long-Term Distribution Agreement. We entered into an agreement with BlueLight.com. whereby we will provide a product information database to BlueLight.com that it will use to merchandise the sporting goods department of its flagship Web site. BlueLight.com will process orders for sporting goods on its Web site and deliver the orders to us electronically. We will then sell the products to BlueLight.com at a predetermined discount to their selling price and pick, pack and ship the products to consumers on behalf of BlueLight.com. BlueLight.com will perform all its own customer service. The following table summarizes the different agreements we have with each of our partners.
Partner URL Nature of Agreement Date Operational - ----------------------- -------------------------- -------------------------------- ------------------------- BlueLight.com www.bluelight.com long-term distribution agreement Expected to launch in the second quarter of 2000 Dunham's Sports www.dunhamssports.com exclusive licensing agreement November 1999 Healtheon/WebMD store.webmd.com exclusive licensing agreement November 1999 MC Sports www.mcsports.com exclusive licensing agreement November 1999 Oshman's Sporting Goods www.oshmans.com exclusive licensing agreement Expected to launch in the second quarter of 2000 Sport Chalet www.sportchalet.com exclusive licensing agreement November 1999 The Athlete's Foot www.theathletesfoot.com exclusive licensing agreement November 1999 The Sports Authority www.thesportsauthority.com majority-owned subsidiary and November 1999 exclusive licensing agreement
Our typical agreement gives us the long-term exclusive rights to a partner's e-commerce sporting goods business and the commitment from the partner to promote its Web site. In exchange, we commit to develop and operate a unique and customized Web site for the partner and pay to the partner a percentage of all net sales generated on the Web site. Our various agreements last for five to 15 years. BlueLight.com. The sporting goods inventory on the BlueLight.com sporting goods department will consist of items provided by us, enhanced by a range of current Kmart product offerings. As Kmart's exclusive 11 e-commerce partner, BlueLight.com is uniquely positioned to capture a large portion of their customers that shop online. BlueLight.com's retail partner, Kmart, is the third largest retailer of sporting goods in the United States, with estimated annual sporting goods sales in excess of $2.0 billion according to Sports Trend. BlueLight.com will capitalize on its relationship with Kmart to drive customers to its e-commerce shopping portal. We believe that the nationwide retailer's powerful brand, supported by more than $36.0 billion in annual sales, will be utilized to actively promote BlueLight.com throughout its more than 2,100 retail stores and through its 72 million weekly advertising circulars. Dunham's Sports. Dunham's Sports operates 107 full-line sporting goods stores, located in strip shopping centers, in 11 states, with a focus on the Mid-Atlantic and Great Lakes regions of the country. Its 1998 sales were estimated by Sports Trend to be $225.0 million. Dunham's Sports positioning is, "The big names bring you in, the low prices bring you back." Healtheon/WebMD. We have agreed with The Sports Authority and Healtheon/WebMD to create and operate a sports, medicine and fitness e- commerce sporting goods business. Healtheon/WebMD has committed extensive promotional resources to drive traffic to the Web site, including taking advantage of its strategic relationships with MSN, Lycos, Excite, Readers' Digest and CNN. Through TheSportsAuthority.com, we record 100% of the revenue from the transactions on the Healtheon/WebMD health and fitness e-commerce store, and Healtheon/WebMD receives a percentage revenue share payment on all product sales. Healtheon/WebMD is the first end-to-end Internet healthcare company connecting physicians and consumers to the entire healthcare industry. Healtheon/WebMD was formed in November 1999 as a result of the merger of Healtheon Corporation, WebMD, Inc., MEDE America and Medcast. MC Sports. MC Sports operates 66 full-line sporting goods stores located in shopping malls and strip shopping centers in six states, primarily in the Midwest and Great Lakes areas. Its 1998 sales were estimated by Sports Trend to be $235.0 million. MC Sports is heavily involved in its local communities and is positioned as a "hometown," caring retailer. Oshman's Sporting Goods. Oshman's operates 42 super stores and 16 traditional stores located in strip shopping centers and enclosed malls in 15 states, with concentration in the Southwest and Northwest United States. Its 1999 sales were $306.0 million. Oshman's utilizes an oval racetrack store theme, featuring concept shops and demo areas where customers can try merchandise prior to purchasing. Sport Chalet. Sport Chalet operates 21 big box full-line sporting goods stores located in shopping malls and strip shopping centers in Southern California. Its 1998 sales were $155.0 million. Sport Chalet positions itself as a leading sporting goods retailer in Southern California providing outstanding customer service and the best brands available. The Athlete's Foot. The Athlete's Foot operates 750 specialty athletic footwear stores located in shopping malls and strip shopping centers, in 40 countries around the world. Its 1998 sales were estimated by Sports Trend to be $700.0 million. The Athlete's Foot positions itself as the world's definitive athletic and leisure footwear retailer. The Sports Authority. The Sports Authority operates 196 stores located in strip shopping centers and urban street locations in 32 states, most of which are big box stores. Its 1999 sales were $1.5 billion. The Sports Authority positions itself as "The Authority" on sporting goods with a large assortment of merchandise encompassing a wide range of both team and individual sports. Competition The online market is new, rapidly evolving and intensely competitive. Our primary competitors are currently: . online e-commerce sporting goods retailers such as Chipshot.com, Fogdog.com and Gear.com; 12 . general merchandise e-commerce companies such as Mercata.com, Onsale.com and uBid.com; . full-line electronic retailers that are associated with full-line sporting goods stores such as Shopsports.com, associated with Copeland's, Dsports.com, associated with Dick's Sporting Goods, and MVP.com, associated with Galyans; . e-commerce businesses of specialty sporting goods retailers and catalogs such as Footaction.com, Footlocker.com and REI.com; . e-commerce businesses of traditional general merchandise retailers such as Target.com and Wal-Mart.com; and . e-commerce businesses of sporting goods manufacturers such as adidas.com and Nike.com. In addition, we compete with companies that can provide part of our solutions to companies that wish to establish e-commerce sporting goods business, including: . Web site developers, such as Sapient, Scient and Viant; and . third-party fulfillment and customer service providers, such as Fingerhut, Keystone Internet Services and ClientLogic. Finally, we compete with traditional channels of distribution for sporting goods, including full-line sporting goods retailers, specialty sporting goods retailers, general merchandise retailers, catalogs and manufacturers' direct stores. We believe that we compete primarily on the basis of the following: . recognition of and trust in our partners' brands; . the broad selection of merchandise that we offer on our partners' Web sites; . convenience of the shopping experience; . ability to return products to our partners' respective retail stores; . price; and . the amount of product information provided to customers. Government Regulation We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing or e-commerce. However, as the Internet becomes increasingly popular, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of e-commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties and has adopted regulations restricting the collection and use of information from minors online. We do not currently provide individual personal information regarding our users to third parties other than our partners and we currently do not identify registered users by age. However, the adoption of additional privacy or consumer protection laws could create uncertainty in Web usage and reduce the demand for our products and services or require us to redesign our partners' Web sites. We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet 13 and related technologies. Changes in laws intended to address these issues could create uncertainty in the Internet marketplace. This uncertainty could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs. In addition, because our services are available over the Internet in multiple states and foreign countries, other jurisdictions may claim that we are required to qualify to do business in each state or foreign country. Our failure to qualify in a jurisdiction where we are required to do so could subject us to taxes and penalties. It could also hamper our ability to enforce contracts in these jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could have a material adverse effect on our business, results of operations and financial condition. Employees As of March 20, 2000, we employed 184 full-time employees in our e-commerce business. Our employees are based primarily at our headquarters in King of Prussia, Pennsylvania. Discontinued Operations Prior to our decision to focus exclusively on our e-commerce business, we operated two sporting goods businesses, our Branded Division and our Off-Price and Action Sports Division. We sold our Branded Division on December 29, 1999. We have an agreement to sell our Off-Price and Action Sports Division, which we expect will be completed in the second quarter of fiscal 2000. Through our Off-Price and Action Sports Division, we purchased manufacturers' closeout merchandise, overstocks and canceled orders, as well as excess inventories from manufacturers and retailers, for resale to retailers principally in the United States and Canada. We resold this merchandise to sporting goods stores, off-price specialty stores, department stores, footwear stores and independent retailers. The merchandise that we purchased and distributed included a wide variety of athletic, outdoor, casual and specialty footwear, athletic apparel, ski and snowboard equipment, in-line skates, skateboards and sunglasses. We also designed and distributed snowboards, skateboards and related merchandise for selected retailers. Through our Branded Division, we designed, marketed and distributed athletic and outdoor footwear products under the RYKA brand and the Yukon brand. RYKA is a high performance athletic footwear brand designed exclusively for women. Yukon is a performance outdoor and rugged casual footwear brand designed for men, women and children. We operated our historical business from a 75,000 square-foot office and warehouse facility in King of Prussia, Pennsylvania that we leased from Michael G. Rubin, our Chairman and Chief Executive Officer. In addition, we own a 12,000 square-foot facility in North York, Ontario that we used primarily for our Off-Price and Action Sports Division. This facility is being sold as part of the sale of our Off-Price and Action Sports Division. We also used third-party public warehouses in California and Ontario, Canada for our Branded Division. As of March 20, 2000, we employed 55 full-time employees in our Off-Price and Action Sports Division. Risk Factors Any investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Many factors, including those described below, may cause actual results to differ materially from anticipated results. 14 Risks Particular to Our Business Our future success cannot be predicted based upon our limited e-commerce operating history. Although we commenced operations in 1987, we did not initiate our e-commerce business until the first quarter of 1999 and did not begin operating the e- commerce sporting goods businesses of our partners until the fourth quarter of 1999. Prior to the fourth quarter of 1999, when we launched the e-commerce sporting goods business we operate for our partners, 100% of our revenues had been generated by our discontinued operations. Upon completion of the sale of discontinued operations, 100% of our revenues will be generated through our e-commerce business. Based on our limited experience with our e-commerce business, it is difficult to predict whether we will be successful. Thus, our chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business in a relatively new and unproven market, many of which may be beyond our control. Our failure to address these issues could have a material adverse effect on our business, results of operations and financial condition. We expect significant increases in our operating expenses and continuing losses. We incurred substantial losses for fiscal 1999 and, as of January 1, 2000 we had an accumulated deficit of $43.1 million. We have not achieved profitability from our continuing operations. We may not obtain enough customer traffic or a high enough volume of purchases from our partners' e- commerce sporting goods businesses to generate sufficient revenues to achieve profitability. We believe that we will continue to incur operating and net losses for the next few years. We believe that our losses in fiscal 2000 will be significantly greater than our losses in fiscal 1999. There can be no assurances that we will be able to reverse these accelerating losses. We intend to increase our operating expenses substantially as we: . enhance and expand our third-party distribution and order fulfillment capabilities or develop our own; . improve our order processing systems and capabilities by transitioning order processing from our current third-party provider to in-house; . develop enhanced technologies and features to improve our partners' e- commerce sporting goods businesses; . expand our customer service capabilities to better serve our customers' needs; . increase our general and administrative functions to support our growing operations; and . increase our sales and marketing activities. Because we will incur many of these expenses before we receive any revenues from our efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Also, the timing of these expenses may contribute to fluctuations in our quarterly operating results. Our success is tied to the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. Our future success is substantially dependent upon the success of the sporting goods industry and our partners for which we operate e-commerce sporting goods businesses. From time to time, the sporting goods industry has experienced downturns. Any downturn in the sporting goods industry could adversely affect our business. In addition, if our partners were to have financial difficulties or seek protection from their creditors, or if we are unable to replace our partners or obtain new partners, it could adversely affect our business, financial condition and results of operations. We enter into long-term contracts with our partners. If we do not maintain good working relationships with our partners or perform as required under these agreements it could adversely affect our business. We enter into contracts with our partners with terms ranging from five to 15 years. These agreements establish new and complex relationships between our partners and us. We spend a significant amount of time 15 and effort to maintain our relationships with our partners and address the issues that from time to time may arise from these new and complex relationships. If we do not maintain a good working relationship with our partners or perform as required under these agreements, our partners could seek to terminate the agreements prior to the end of the term or they could decide not to renew the contracts at the end of the term. This could adversely affect our business, financial condition and results of operations. Moreover, our partners could decide not to renew these contracts for reasons not related to our performance. Although we refer to the traditional sporting goods retailers, general merchandisers, Internet companies and media companies for which we develop and operate e-commerce sporting goods businesses as our "partners," we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have. Our current partners include The Athlete's Foot, BlueLight.com, Dunham's Sports, Healtheon/WebMD, MC Sports, Oshman's Sporting Goods, Sport Chalet and The Sports Authority. Our operating results are difficult to predict. If we fail to meet the expectations of public market analysts and investors, the market price of our common stock may decline significantly. Our annual and quarterly operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Because our operating results may be volatile and difficult to predict, quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. In some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may decline significantly. Factors that may harm our business or cause our operating results to fluctuate include the following: . our inability to retain existing partners or to obtain new partners; . our inability to obtain new customers at a reasonable cost, retain existing customers or encourage repeat purchases; . decreases in the number of visitors to the e-commerce sporting goods businesses operated by us or the inability to convert these visitors into customers; . our failure to offer an appealing mix of sporting goods, apparel, footwear and other products; . our inability to adequately maintain, upgrade and develop our partners' Web sites, the systems used to process customers' orders and payments or our computer network; . the ability of our competitors to offer new or superior e-commerce sporting goods businesses, services or products; . price competition that results in lower profit margins or losses; . our inability to obtain specific products and brands or unwillingness of vendors to sell their products to us; . unanticipated fluctuations in the amount of consumer spending on sporting goods and related products, which tend to be discretionary spending items; . increases in the cost of Internet or other advertising; . increases in the amount and timing of operating costs and capital expenditures relating to expansion of our operations; . unexpected increases in shipping costs or delivery times, particularly during the holiday season; . technical difficulties, system security breaches, system downtime or Internet slowdowns; 16 . seasonality; . our inability to manage inventory levels or control inventory theft; . our inability to manage distribution operations or provide adequate levels of customer service; . an increase in the level of our product returns; . government regulations related to use of the Internet for commerce; and . unfavorable economic conditions specific to the Internet, e-commerce or the sporting goods industry. Seasonal fluctuations in the sales of sporting goods could cause wide fluctuations in our quarterly results. We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that our fourth fiscal quarter will account for a large percentage of our total annual sales. In anticipation of increased sales activity during our fourth fiscal quarter, we may hire a significant number of temporary employees to bolster our permanent staff and significantly increase our inventory levels. For this reason, if our revenues were below seasonal expectations during the fourth fiscal quarter, our annual operating results could be below the expectations of securities analysts and investors. Due to the limited operating history of our e-commerce business, it is difficult to predict the seasonal pattern of our sales and the impact of this seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel, product distribution and shipment activities and may cause a shortfall in revenues as compared to expenses in a given period. We have been unable to fund our e-commerce operations with the cash generated from our business. If we do not generate cash sufficient to fund our operations, we may need additional financing to continue our growth or our growth may be limited. Because we have not generated sufficient cash from operations to date, we have funded our e-commerce operations primarily from the sale of equity securities. Cash from revenues must increase significantly for us to fund anticipated operating expenses internally. If our cash flows are insufficient to fund these expenses, we may need to fund our growth through additional debt or equity financings or reduce costs. Further, we may not be able to obtain financing on satisfactory terms. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we issue securities to raise capital, our existing stockholders may experience additional dilution or the new securities may have rights senior to those of our common stock. We must develop and maintain relationships with key brand manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we are unable to do so, it could adversely affect our business, results of operation and financial condition. We primarily purchase the products we offer directly from the manufacturers of the products. If we are unable to develop and maintain relationships with these manufacturers, we may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our business could be adversely impacted. We do not have written contracts with most of our manufacturers. Manufacturers could stop selling products to us and may ask us to remove their products or logos from our partners' Web sites. In some circumstances, our partners purchase products directly from manufacturers for sale on their Web sites. If we or our partners are unable to obtain products directly from manufacturers, especially popular brand manufacturers, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms. We currently do not offer some popular brands of sporting goods, such as Nike. There can be no assurance that we will be able to offer these brands in the future. If we are unable to offer a sufficient assortment and quantity of quality products at acceptable prices, we may lose sales and market share. 17 Capacity constraints or system failures could materially and adversely affect our business, results of operations and financial condition. Any system failure, including network, software or hardware failure, that causes interruption of the availability of our partners' Web sites could result in decreased usage of these Web sites. If these failures are sustained or repeated, they could reduce the attractiveness of our partners' Web sites to customers, vendors and advertisers. Our operations are subject to damage or interruption from: . fire, flood, earthquake or other natural disasters; . power losses, interruptions or brown-outs; . Internet, telecommunications or data network failures; . physical and electronic break-ins or security breaches; . computer viruses; and . other similar events. We launched our first e-commerce sporting goods businesses in the fourth quarter of fiscal 1999. The limited time during which we have been operating these businesses, as well as the inherent unpredictability of the events described above, makes it difficult to predict whether the occurrence of any of these events is likely. If any of these events do occur, they could result in interruptions, delays or cessations in service to users of our partners' Web sites, which could have a material adverse effect on our business, results of operations and financial condition. In addition, we maintain our computers on which we operate our partners' Web sites at the site of a third-party provider. We cannot control the maintenance and operation of this site, which is also susceptible to similar disasters and problems. We have no formal disaster recovery plan, and our insurance policies may not adequately compensate us for any losses that we may incur. Any system failure that causes an interruption in our service or a decrease in responsiveness could harm our relationships with our customers and result in reduced revenues. See "Business--Technology." We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In addition, our competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors' could put us at a disadvantage to our competitors. In addition, the failure of our partners to protect their intellectual property rights, including their domain names, could impair our operations. These failures could have a material adverse effect on our business, results of operations and financial condition. If we do not respond to rapid technological changes, our services could become obsolete and we could lose customers. We may face material delays in introducing new services, products and enhancements. If this happens, our customers may forego the use of our e- commerce sporting goods businesses and use those of our competitors. To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce sporting goods businesses. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our partners' existing Web sites and our proprietary technology and systems may become obsolete. 18 Developing our e-commerce sporting goods businesses and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our partners' Web sites, our order processing systems and our computer network to meet customer requirements or emerging industry standards. We may be subject to intellectual property claims that could be costly and could disrupt our business. Third parties may assert that our business or technologies infringe their intellectual property rights. From time to time, we may receive notices from third parties questioning our right to present specific images or logos on our partners' Web sites, or stating that we have infringed their trademarks or copyrights. We may in the future receive claims that we are engaging in unfair competition or other illegal trade practices. We may be unsuccessful in defending against any of these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require us to change how we do business, redesign our partners' Web sites and other systems or enter into burdensome royalty or licensing agreements. These license or royalty agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. Our insurance coverage may not be adequate to cover every claim that third parties could assert against us. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management's time and disruptions in our business. Any of these claims could also harm our reputation. We rely on our developing relationships with online services, search engines and directories to drive traffic to the e-commerce sporting goods businesses we operate. If we are unable to develop or maintain these relationships, our business, financial condition and results of operations could be adversely affected. We are developing relationships with online services, search engines and directories to provide content and advertising banners that link to our partners' Web sites. We expect to rely on these relationships as significant sources of traffic to our partners' Web sites and to generate new customers. If we are unable to develop satisfactory relationships with high-traffic Web sites on acceptable terms, our ability to attract new customers could be harmed. Further, many of the Web sites with which we may have online advertising arrangements could provide advertising services for other marketers of sporting goods. As a result, these Web sites may be reluctant to enter into or maintain relationships with us. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third- party Web sites may result in termination of these types of relationships. Without these relationships, we may not be able to sufficiently increase market share and our business, financial condition and results of operations could be adversely affected. Our success is dependent upon our executive officers and other key personnel. Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, Chairman and Chief Executive Officer. We have employment agreements with some of our executive officers and key personnel. We cannot be sure, however, that we will be able to retain or attract executive, managerial and other key personnel. We have obtained key person life insurance for Mr. Rubin in the amount of $7.25 million. We have not obtained key person life insurance on any of our other executive officers or key personnel. We may be unable to hire and retain the skilled personnel necessary to develop our business. We intend to hire a significant number of skilled personnel in fiscal 2000 and beyond. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our failure to attract and retain the highly trained personnel that are integral to our business may limit our growth rate, which would harm our business. We may not be able to compete successfully against current and future competitors, which could harm our margins and our business. 19 The e-commerce market is new, rapidly evolving and extremely competitive. In addition, there is a significant amount of capital currently available to fund existing and potential competitors. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. We compete with a variety of companies, including: . online sporting goods retailers such as Chipshot.com, Fogdog.com and Gear.com; . general merchandise e-commerce companies such as Mercata.com, Onsale.com, and uBid.com; . full-line electronic retailers that are associated with full-line sporting goods stores such as Dsports.com associated with Dick's Sporting Goods, MVP.com, associated with Galyans, and Shopsports.com associated with Copeland's . e-commerce businesses of specialty sporting goods retailers and catalogs such as Footaction.com, Footlocker.com and REI.com; . e-commerce businesses of traditional general merchandise retailers such as Target.com and Wal-Mart.com; and . e-commerce businesses of sporting goods manufacturers such as adidas.com and Nike.com. In addition, we compete with companies that can provide part of our solutions to companies that wish to establish e-commerce sporting goods businesses, including: . Web site developers, such as Sapient, Scient and Viant; and . third-party fulfillment and customer services providers, such as Fingerhut, Keystone Internet Services and ClientLogic. Finally, we compete with traditional channels of distribution for sporting goods, including full-line sporting goods retailers, specialty sporting goods retailers, general merchandise retailers, catalogs and manufacturers' direct stores. If we experience problems in our fulfillment, warehouse and distribution operations, we could lose customers. We currently rely upon a third-party to handle the fulfillment of our customer orders and the warehousing of our inventory. We also rely upon multiple third parties to handle the shipment of our products. As a result, we are subject to the risks associated with the ability of these third parties to successfully and timely fulfill and ship customer orders and to successfully handle our inventory delivery services to meet our shipping needs. The failure of these third parties to provide these services, or the termination or interruption of these services, could adversely affect our business, results of operations and financial condition. We currently plan to assume responsibility for the fulfillment of large and oversized product orders during fiscal 2000 and may assume responsibility for the fulfillment of other product orders in fiscal 2000. We could experience problems during the transition of control from third-party to us. If transition problems arise, it could result in additional expenses and could divert management's attention from other aspects of our business. If we are unable to successfully, timely and cost efficiently effect this transition and perform these fulfillment services, our business, results of operations and financial condition could be adversely affected. Sporting goods and apparel are subject to changing consumer preferences. If we fail to anticipate these changes, we could experience lower sales, higher inventory markdowns and lower margins. Our success depends upon our ability to anticipate and respond to trends in sporting goods merchandise and consumers' participation in sports. Consumers' tastes in apparel and sporting goods equipment are subject to frequent and significant changes, due in part to manufacturers' efforts to incorporate advanced technologies into some types of sporting goods. In addition, the level of consumer interest in a given sport can fluctuate 20 dramatically. Prior to commencing our e-commerce business, our businesses were primarily concentrated in athletic footwear and apparel. Accordingly, we do not have experience in the full range of sporting goods. If we fail to identify and respond to changes in sporting goods merchandising and recreational sports participation, our sales could suffer and we could be required to mark down unsold inventory. This would depress our profit margins. In addition, any failure to keep pace with changes in consumers' recreational sports habits could allow our competitors to gain market share which could have an adverse effect on our business, results of operations and financial condition. High merchandise returns could adversely affect our business, financial condition and results of operations. Our policy for allowing our customers to return products is consistent with the policies of each of our partners for which we operate e-commerce sporting goods businesses. Our ability to handle a large volume of returns is unproven. If merchandise returns are significant, our business, financial condition and results of operations could be adversely affected. We may be subject to product liability claims that could be costly and time consuming. We sell products manufactured by third parties, some of which may be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us as the retailer of the product. Our insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, we could be subject to claims that users of our partners' Web sites were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. We may be liable if third parties misappropriate our customers' personal information. If third parties are able to penetrate our network security or otherwise misappropriate our customers' personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could adversely affect our business. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices. We are controlled by certain principal stockholders. As March 17, 2000, Michael G. Rubin, our Chairman and Chief Executive Officer, beneficially owned 43.3% and funds affiliated with SOFTBANK America Inc., referred to as SOFTBANK, beneficially owned 33.2% of our outstanding common stock. Mr. Rubin and SOFTBANK are in a position to exercise control over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions, and the ability generally to direct our affairs. Furthermore, the stock purchase agreement pursuant to which SOFTBANK acquired its shares of our common stock provides that SOFTBANK has the right to designate up to two members of our board, depending on the number of shares of our common stock held by SOFTBANK. This concentration of ownership and SOFTBANK's right to designate members to our board may have the effect of delaying or preventing a change in control of us, including transactions where stockholders might otherwise receive a premium over current market prices for their shares. There are risks associated with potential acquisitions. As a result, we may not achieve the expected benefits of potential acquisitions. 21 If we are presented with appropriate opportunities, we may make investments in complementary companies, products or technologies or we may purchase other companies. We may not realize the anticipated benefits of any investment or acquisition. We may not be able to successfully assimilate the additional personnel, operations, acquired technology and products into our business. The proposed acquisition may further strain our existing financial and managerial controls and reporting systems and procedures. In addition, key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees or increase our expenses. Further, the physical expansion in facilities that would occur as a result of any acquisition may result in disruptions that seriously impair our business. Finally, we may have to incur debt or issue equity securities to pay for any acquisitions or investments, the issuance of which could be dilutive to our stockholders. We may expand our business internationally, causing our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability. We believe that the current globalization of the economy requires businesses to consider pursuing international expansion. In the future, we may expand into international markets. International sales are subject to inherent risks and challenges that could adversely affect our profitability, including: . the need to develop new supplier and manufacturer relationships, particularly because major sporting goods manufacturers may require that our international operations deal with local distributors; . unexpected changes in international regulatory requirements and tariffs; . difficulties in staffing and managing foreign operations; . longer payment cycles from credit card companies; . greater difficulty in accounts receivable collection; . potential adverse tax consequences; . price controls or other restrictions on foreign currency; and . difficulties in obtaining export and import licenses. To the extent we generate international sales in the future, any negative aspects on our international business could negatively impact our business, operating results and financial condition as a whole. In particular, gains and losses on the conversion of foreign payments into United States dollars may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues and/or gross margins from dollar-denominated international sales. We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. There are risks relating to our 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. We addressed the potential problems posed by this limitation in our systems software to assure that it was prepared for the Year 2000. We did not incur any Year 2000 problem as a result of the passage of January 1, 2000. However, it is possible that problems may occur even after arrival of the Year 2000. If we or third parties with which we conduct material business experience problems caused by Year 2000 problems, there may be a material adverse effect on our results of operations. It may be difficult for a third-party to acquire our company and this could depress our stock price. 22 Pursuant to our amended and restated certificate of incorporation, we have authorized a class of 1,000,000 shares of 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 our company. Issuing additional shares of common stock could result in dilution of the voting power of the current holders of our common stock. In addition, "anti-takeover" provisions of Delaware law may restrict the ability of the stockholders to approve a merger or business combination or obtain control of our company. There are limitations on the liabilities of our directors. Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director's duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. Risks Related to the Internet Industry Our success is tied to the continued growth in the use of the Internet and the adequacy of the Internet infrastructure. Our future success is substantially dependent upon continued growth in the use of the Internet. The number of users and advertisers on the Internet may not increase and commerce over the Internet may not become more accepted and widespread for a number of reasons, including: . actual or perceived lack of security of information, including credit card numbers; . lack of access and ease of use; . congestion of traffic on the Internet; . inconsistent quality of service and lack of availability of cost- effective, high-speed service; . possible disruptions, computer viruses or other damage to the Internet servers or to users' computers; . excessive governmental regulation; . uncertainty regarding intellectual property ownership; and . lack of high-speed modems and other communications equipment. Published reports have also indicated that growth in the use of the Internet has resulted in users experiencing delays, transmission errors and other difficulties. As currently configured, the Internet may not support an increase in the number or requirements of users. In addition, there have been outages and delays on the Internet as a result of damage to the current infrastructure. The amount of traffic on our partners' Web sites could be materially affected if there are outages or delays in the future. The use of the Internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the Internet. If none of the foregoing changes occur, or if the Internet does not become a viable commercial medium, our business, results of operations and financial condition could be materially adversely affected. In addition, even if those changes occur, we may be required to spend significant capital to adapt our operations to any new or emerging technologies relating to the Internet. The technology of the Internet is changing rapidly and could render the Web sites which we operate obsolete. The technology of the Internet and e-commerce is evolving rapidly for many reasons, including: . customers frequently changing their requirements and preferences; 23 . competitors frequently introducing new products and services; and . industry associations and others creating new industry standards and practices. These changes could render the Web sites which we operate obsolete. Our ability to attract customers could be seriously impaired if we do not accomplish the following tasks: . continually enhance and improve our partners' Web sites; . identify, select and obtain leading technologies useful in our business; and . respond to technological advances and emerging industry standards in a cost-effective manner and timely manner. Customers may be unwilling to use the Internet to purchase goods. Our long-term future depends heavily upon the general public's willingness to use the Internet as a means to purchase goods. The failure of the Internet to develop into an effective commercial tool would seriously damage our future operations. E-commerce is a new concept, and large numbers of customers may not begin or continue to use the Internet to purchase goods. The demand for and acceptance of products sold over the Internet are highly uncertain, and most e-commerce businesses have a short track record. If consumers are unwilling to use the Internet to conduct business, our business may not develop profitably. The Internet may not succeed as a medium of commerce because of delays in developing elements of the needed Internet infrastructure, such as a reliable network, high-speed modems, high-speed communication lines and other enabling technologies. The security risks of e-commerce may discourage customers from purchasing goods from us. In order for the e-commerce market to develop successfully, we and other market participants must be able to transmit confidential information securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction data. Any breach could cause customers to lose confidence in the security of our partners' Web sites and choose not to purchase from those Web sites. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt the operation of our partners' Web sites. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce. Our security measures may not effectively prohibit others from obtaining improper access to the information on our partners' Web sites. Any security breach could expose us to risks of loss, litigation and liability and could seriously disrupt our operations. Our business is subject to United States and foreign governmental regulation of the Internet and taxation. Congress and various state and local governments have recently passed legislation that regulates various aspects of the Internet, including online content, copyright infringement, user privacy, sales and advertising of certain products and services and taxation. In addition, federal, state, local and foreign governmental organizations are also considering legislative and regulatory proposals that would regulate the Internet. Areas of potential regulation include libel, pricing, quality of products and services and intellectual property ownership. A number of proposals have been made at the state and local level that would impose taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce and could adversely affect our future business, results of operation and financial condition. In addition, United States and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists. New restrictions in this area could limit our ability to operate as planned and result in significant compliance costs. Regulations imposed by the Federal Trade Commission may adversely affect the growth of our Internet business or its marketing efforts. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13. In addition, bills pending in Congress would extend online privacy protections to adults. Laws and regulations of this kind may include requirements that we establish 24 procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by us. These regulations may also include enforcement and remedial provisions. Even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet. One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above. We could become a party to a similar investigation or enforcement proceeding, or the Federal Trade Commission's regulatory and enforcement efforts may harm our ability to collect demographic and personal information from users, which could be costly or adversely affect our marketing efforts. ITEM 2: PROPERTIES Our principal executive offices are located in a newly-renovated 56,000 square foot facility purchased by us on August 20, 1999 and located in King of Prussia, Pennsylvania. In addition, we utilize a third-party warehousing facility in Memphis, Tennessee in connection with the operation of our e- commerce business. We believe that our owned and third-party properties are adequate for our present needs and that suitable additional or replacement space will be available as required. ITEM 3: LEGAL PROCEEDINGS We are involved in various routine litigation incidental to our current and discontinued businesses. We believe that the disposition of these matters will not have a material adverse effect on our financial position or results of operations. 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 fiscal quarter ended January 1, 2000. ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding each of our executive officers and key employees:
Name Age(/1/) Title ---- -------- ----- Jordan M. Copland....... 37 Executive Vice President and Chief Financial Officer Robert W. Liewald....... 51 Executive Vice President, Merchandising Arthur H. Miller........ 46 Executive Vice President and General Counsel Michael R. Conn......... 29 Senior Vice President, Business Development Steven C. Davis......... 29 Senior Vice President, Marketing Michael A. Balik........ 39 Vice President, Management and Information Systems William L. Meisle....... 39 Vice President, Production Donald R. Murphy........ 56 Vice President, Operations Joseph P. Romello....... 49 Vice President, Engineering
- -------- (/1/) As of March 17, 2000 Jordan M. Copland has served as our Executive Vice President and Chief Financial Officer since February 2000. From March 1999 to February 2000, Mr. Copland served as Senior Vice President and Chief Financial Officer of Virgin Entertainment Group, Inc.'s United States-based Megastore and global e- commerce businesses. While at Virgin, Mr. Copland oversaw financial administration and technology. From October 1990 to March 1999, Mr. Copland held a variety of positions with increasing responsibility within The Walt Disney Company, a worldwide entertainment company. Most recently Mr. Copland was Vice President of Finance and Planning for the Disney Consumer Products division. He has also held various leadership and management positions within several other divisions of Disney, including the Disney Publishing Group, Disney Consumer Products Europe, the Middle East and Africa and Walt Disney Records. 25 Robert W. Liewald has served as our Executive Vice President, Merchandising since July 1999 and worked as a consultant to us from December 1998 to July 1999. From January 1995 to June 1998, Mr. Liewald served as Senior Executive Vice President of FILA USA, an athletic footwear and apparel manufacturer. From June 1972 to January 1995, Mr. Liewald held a variety of positions at Venator Group, an athletic footwear and apparel retailer based in New York, New York, most recently as Senior Vice President, Corporate Merchandiser with merchandising responsibility for all of Venator Group's specialty athletic divisions. Also while at Venator, Mr. Liewald served as Vice President, General Merchandise Manager for Champs Sports and Vice President, Merchandise Manager at Foot Locker and Lady Foot Locker. Arthur H. Miller has served as our Executive Vice President and General Counsel since September 1999. From January 1988 to September 1999, Mr. Miller was a partner in the Corporate department of Blank Rome Comisky & McCauley LLP, a law firm based in Philadelphia, Pennsylvania. Mr. Miller joined Blank Rome in April 1983. Michael R. Conn has served as our Senior Vice President, Business Development since February 1999. From June 1993 to February 1999, Mr. Conn served as Vice President, Research at Gruntal & Co. L.L.C., an investment bank based in New York, New York. Mr. Conn worked as a sell-side securities analyst specializing in footwear, apparel, retail and leisure products. While at Gruntal, Mr. Conn was named to the 1998 Wall Street Journal All-Star Analyst Team. Steven C. Davis has served as our Senior Vice President Marketing since January 2000. From June 1996 to January 2000, Mr. Davis held a number of management positions at Just for Feet, Inc., a specialty sporting goods retailer based in Birmingham, Alabama. Most recently, Mr. Davis was Vice President of Marketing and previously he served as Director of Marketing and Director of Special Projects. In the summer of 1995, Mr. Davis served as a marketing consultant for Dell Computer Corporation. From January 1990 until September 1994, Mr. Davis was Manager of Park Operations for Anheuser Busch Theme Parks, Inc. Michael A. Balik has served as our Vice President, Management Information Systems since May 1999. From December 1996 to May 1999, Mr. Balik served as Director of Management Information Systems for Cherrydale Farms, a manufacturer of confectionery products based in Allentown, Pennsylvania. From March 1993 to October 1996 Mr. Balik was Director of Information Systems for I Got It at Gary's, a super-discount drugstore chain based in Eagleville, Pennsylvania. William L. Meisle has served as our Vice President, Production since January 2000. From January 1993 to December 1999, Mr. Meisle held a number of positions of increasing responsibility at Medical Broadcasting Company, a strategic interactive marketing and communications services company based in Philadelphia, Pennsylvania. From December 1997 to December 1999, Mr. Meisle served as Senior Strategic Analyst and Creative Director. Also while at Medical Broadcasting Company, he served as Director, Interactive Services, Project Director and Production Manager. Donald R. Murphy has served as our Vice President, Operations, since April 1999. From October 1997 to April 1999, Mr. Murphy was Vice President/General Manager for the Home Shopping Network based in Roanoke, Virginia. From October 1995 to October 1997, he was Vice President of Operations at an institutional food distribution center owned by PYA/Monarch Food Service in Raleigh, North Carolina. From September 1989 to October 1995 Mr. Murphy served as a Warehouse Supervisor for Kraft Food Service in Salem, Missouri. Joseph P. Romello has served as our Vice President, Engineering since May 1999. From May 1997 to May 1999, Mr. Romello served as an independent engineering consultant to Donaldson, Lufkin and Jenrette, an investment banking firm based in New York, New York. From June 1996 to May 1997, Mr. Romello served an independent engineering consultant to a number of consumer companies, including Netscape, Gap, Inc. and Levi Strauss. From May 1995 to June 1996, Mr. Romello served as Director of Business Development for Persistence, an object relational middle-ware software vendor based in San Mateo, California. 26 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Price of and Dividends on Common Stock From September 18, 1995 through June 15, 1998, the Company's common stock was traded on the NASD Over-the-Counter Bulletin Board. Effective June 16, 1998, the Company was approved for inclusion on the Nasdaq SmallCap Market, and effective May 3, 1999 on the Nasdaq National Market where it is currently included for quotation. As of March 17, 2000, the Company had approximately 1971 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 June 16, 1998 to April 30, 1999, 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. For the periods presented from and after May 3, 1999, the table below sets forth the high and low sales prices as reported on the Nasdaq National Market. The prices shown do not include retail markups, markdowns or commissions.
Prices -------------- High Low ------- ------ Year Ended December 31, 1998 First Quarter................................................. $ 5.69 $ 2.56 Second Quarter (April 1-June 15).............................. $ 7.75 $ 5.19 Second Quarter (June 16-June 30).............................. $ 7.25 $ 5.63 Third Quarter................................................. $ 8.00 $ 4.63 Fourth Quarter................................................ $ 8.06 $ 4.25 Year Ended January 1, 2000 First Quarter................................................. $17.375 $ 7.00 Second Quarter................................................ $36.875 $12.00 Third Quarter................................................. $25.125 $14.50 Fourth Quarter................................................ $ 25.25 $12.00
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. Recent Sales of Unregistered Securities On July 23, 1999, SOFTBANK America Inc., through certain of its affiliates (collectively, "SOFTBANK"), acquired an aggregate of 6,153,850 shares of the Company's common stock at a price of $13.00 per share (the closing price on May 26, 1999, the day prior to the day the Company and SOFTBANK agreed in principle to the transaction) for an aggregate purchase price of approximately $80.0 million. This transaction was not a public offering, nor were any underwriters or underwriting discounts or commissions involved. Based upon information available to the Company as of the date of the above transaction, including certain representations and warranties of SOFTBANK, the Company believes that the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, by reason of Section 4(2) thereof. ITEM 6: SELECTED FINANCIAL DATA The following tables present portions of our financial statements and are not complete. You should read the following selected consolidated financial data together with our consolidated financial statements and related 27 notes to our financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statements of operations data for the years ended December 31, 1997 and 1998 and January 1, 2000 and the balance sheet data as of December 31, 1998 and January 1, 2000 are derived from our consolidated financial statements that have been audited by Deloitte & Touche LLP, independent auditors, included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited consolidated statements that are not included in this Annual Report on Form 10-K. On April 20, 1999, we formalized a plan to sell our Branded Division and our Off-Price and Action Sports Division in order to focus exclusively on our e- commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented as discontinued operations. The following selected consolidated financial data and our consolidated financial statements included in this Annual Report on Form 10-K have been reclassified to reflect this presentation.
Fiscal Year Year Ended December 31, Ended ---------------------------------- January 1, 1995 1996 1997 1998 2000 ------- ------- ------- ------- ----------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Net revenues................... $ -- $ -- $ -- $ -- $ 5,511 Cost of revenues............... -- -- -- -- 3,817 ------- ------- ------- ------- -------- Gross profit.................. -- -- -- -- 1,694 Operating expenses: Sales and marketing........... -- -- -- -- 11,609 Product development........... -- -- -- -- 7,264 General and administrative.... 5,644 2,853 2,389 3,453 9,311 Stock-based compensation, primarily related to sales and marketing................ -- -- -- -- 2,655 ------- ------- ------- ------- -------- Total operating expenses.... 5,644 2,853 2,389 3,453 30,839 ------- ------- ------- ------- -------- Other (income) expenses: Interest expense.............. 796 1,152 2,013 2,367 313 Interest income............... -- -- -- -- (774) Other, net.................... -- -- -- -- (2) ------- ------- ------- ------- -------- Total other (income) expense.................... 796 1,152 2,013 2,367 (463) ------- ------- ------- ------- -------- Loss from continuing operations before income taxes........... (6,440) (4,005) (4,402) (5,820) (28,682) Benefit from income taxes...... -- -- -- 1,979 2,222 ------- ------- ------- ------- -------- Loss from continuing operations.................... (6,440) (4,005) (4,402) (3,841) (26,460) Discontinued operations: Income from discontinued operations................... 6,465 3,261 247 9,665 550 Loss on disposition of discontinued operations...... -- -- -- -- (17,337) ------- ------- ------- ------- -------- Net income (loss).............. $ 25 $ (744) $(4,155) $ 5,824 $(43,247) ------- ------- ------- ------- -------- Earnings (losses) per share-- basic and diluted(/1/): Loss from continuing operations................... $ (3.75) $ (1.56) $ (1.47) $ (.34) $ (1.78) Income from discontinued operations................... 3.76 1.27 .08 .85 .04 Loss on disposition of discontinued operations...... -- -- -- -- (1.17) ------- ------- ------- ------- -------- Net income (loss)........... $ .01 $ (.29) $ (1.39) $ .51 $ (2.91) ======= ======= ======= ======= ======== Weighted average common shares outstanding(/1/): Basic and diluted............. 1,717 2,568 2,996 11,379 14,874 ======= ======= ======= ======= ======== Number of common shares outstanding(/1/).............. 2,307 2,832 10,418 11,925 18,475 ======= ======= ======= ======= ======== BALANCE SHEET DATA: Net assets of discontinued operations.................... $12,673 $11,797 $24,129 $41,128 $ 18,381 Total assets................... 15,030 16,435 28,043 45,053 82,736 Total long-term debt........... 5,001 5,905 20,975 20,993 2,040 Working capital................ 2,839 2,022 19,748 34,846 40,558 Stockholders' equity (deficiency).................. 93 (552) 2,157 17,094 59,310
- -------- (/1/All)share and per share amounts give effect to the December 15, 1997 1- for-20 reverse stock split as if it had occurred for all periods presented. 28 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward- looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors including those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Overview We develop and operate e-commerce sporting goods businesses for traditional sporting goods retailers, general merchandisers, Internet companies and media companies under exclusive long-term agreements. We enable our partners to capitalize on their existing brand assets to exploit online opportunities in the $45.8 billion sporting goods retail industry. We customize the design of a partner's Web site with a broad range of characteristics that includes a differentiated user interface, partner-specific content pages, an extensive electronic catalog of product descriptions and images, a searchable database and interactive communication tools. We launched our initial six e-commerce sporting goods businesses in November 1999: www.dunhamssports.com, www.mcsports.com, www.sportchalet.com, www.theathletesfoot.com, www.thesportsauthority.com and store.webmd.com. We have announced agreements with BlueLight.com and Oshman's Sporting Goods to launch their e-commerce sporting goods businesses in the second quarter of 2000. Company Background Prior to our decision to initiate our e-commerce sporting goods business, we operated two primary businesses, our Branded Division and our Off-Price and Action Sports Division. From inception in 1986 through December 1999, we designed, marketed and distributed high performance athletic footwear exclusively for women under the RYKA brand name. From December 1997 through December 1999, as part of our Branded Division, we also designed, marketed and distributed outdoor footwear under the Yukon brand name. During the same period, as part of our Off-Price and Action Sports Division, we purchased closeouts, overstocks, canceled orders and excess inventories of athletic, outdoor, casual and specialty footwear, athletic apparel and athletic equipment from manufacturers and retailers for resale, and designed and distributed special make-up athletic equipment. In April 1999, we formalized our plan to divest these divisions in order to focus exclusively on the development of our e-commerce business. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from that of continuing operations and are presented as discontinued operations. Our consolidated financial statements included in this Annual Report on Form 10-K have been reclassified to reflect this presentation. On June 10, 1999, in order to finance our e-commerce business, we agreed to sell to funds affiliated with SOFTBANK 6,153,850 shares of common stock at a price of $13.00 per share for an aggregate purchase price of approximately $80.0 million. The purchase price reflected the closing price of our common stock on May 26, 1999, the day prior to the day we and SOFTBANK agreed in principle to the transaction. The sale of these shares was completed on July 23, 1999. On September 24, 1999, in furtherance of our plan to sell our historical businesses, we entered into an agreement, as amended on March 13, 2000, to sell our Off-Price and Action Sports Division for a cash payment at closing of $13.2 million and the assumption by the purchaser of $4.0 million in indebtedness. We are seeking stockholder approval of this sale at our annual stockholders meeting to be held on May 15, 2000. Michael G. Rubin, our Chairman and Chief Executive Officer, who beneficially owns approximately 43.3% of our outstanding shares, and SOFTBANK, who beneficially owns approximately 33.2% of our outstanding shares, have indicated that they intend to vote for approval of the sale. We expect the sale to close soon after our annual stockholders meeting. For fiscal 1999, we have recognized a loss of approximately $5.2 million related to the disposition of this division. 29 On December 29, 1999, we sold substantially all of the assets of our Branded Division, other than accounts receivable of approximately $6.6 million, for a cash payment of approximately $10.4 million. For fiscal 1999, we have recognized a loss of approximately $12.1 million related to the disposition of this division. Financial Presentation We did not launch our partners' e-commerce businesses until the fourth quarter of 1999. As a result, our historical financial statements are of limited use in making an investment decision because they principally reflect our discontinued operations. Our financial statements for the fourth quarter of 1999 and forward will reflect our e-commerce business. These financial statements will present: . revenues, which are derived from the sale of merchandise, net of returns, and are recognized when the merchandise is shipped; . cost of revenues, which consists of the purchase price of the products sold and net freight costs, other than outbound shipping costs related to our temporary free shipping promotions which are included in sales and marketing expenses; . sales and marketing expenses, which consist primarily of partner revenue shares, advertising and promotional expenses, including temporary free- shipping, distribution facility expenses, order processing fees, and payroll and related expenses for personnel engaged in marketing, buying, merchandising, client services, fulfillment and customer service; . product development expenses, which consist primarily of expenses associated with building, developing and operating our partners' Web sites; payroll and related expenses for engineering, production, creative and management information systems; and depreciation expense related to capitalized hardware and software; . general and administrative expenses, which consist primarily of payroll and related expenses for administrative, finance, human resources, legal and executive personnel, and costs associated with the operation and maintenance of our headquarters facility and professional services; and . stock-based compensation expense, which relates to the grant of options, warrants and stock awards considered to be compensatory, because the estimated fair value for accounting purposes of the options and stock awards granted to employees was greater than the stock price on the date of grant or because the options or warrants were granted to non- employees. Results of Operations Fiscal 1999 and Fiscal 1998 Net Revenues. We had net revenues from continuing operations of $5.5 million for fiscal 1999 and no net revenues from continuing operations for fiscal 1998. In fiscal 1999, we operated www.theathletesfoot.com, www.dunhamssports.com, www.mcsports.com, www.sportchalet.com, www.thesportsauthority.com, and store.webmd.com. We derived $2.7 million of our net revenues from the sale of product through our partners' Web sites. We derived $2.8 million of our total net revenues from Healtheon/WebMD through the sale of product to support the launch of the WebMD Sports & Fitness Store, store.webmd.com. Other sources of revenue during the year, including sales of gift certificates to our partners' retail stores, the sale of advertising space on our partner's Web site, auction.thesportsauthority.com and outbound shipping charges to consumers, were not significant during the period. We derived no net revenues from continuing operations for any period prior to November 1999 as we did not operate any Web sites during those periods. Cost of Revenues. We incurred cost of revenues from continuing operations of $3.8 million for fiscal 1999 and no cost of revenues from continuing operations for fiscal 1998. As a percentage of net revenues, cost of revenues was 69.3% for fiscal 1999. 30 Gross Profit. We had gross profit from continuing operations of $1.7 million for fiscal 1999 and no gross profit from continuing operations for fiscal 1998. As a percentage of net revenues, gross profit from continuing operations was 30.7% for fiscal 1999. Sales and Marketing Expenses. We incurred sales and marketing expenses from continuing operations of $11.6 million for fiscal 1999 and no sales and marketing expenses from continuing operations for fiscal 1998. Product Development Expenses. We incurred product development expenses from continuing operations of $7.3 million for fiscal 1999 and no product development expenses from continuing operations for fiscal 1998. A meaningful portion of our product development expenses in fiscal 1999 was paid to a third-party Web site development company. Because we are currently handling more development internally, we do not anticipate that a significant portion of our product development expenses in fiscal 2000 will be for third-party Web site development services. General and Administrative Expenses. We incurred general and administrative expenses from continuing operations of $9.3 million for fiscal 1999 and $3.5 million for fiscal 1998. While our continuing operations were not in existence in fiscal 1998, the recorded expenses reflect costs for personnel, facilities and professional fees that are currently associated with our continuing operations. Stock-Based Compensation, Primarily Related to Sales and Marketing, Expense. We recorded stock-based compensation expense from continuing operations of $2.7 million for fiscal 1999. This expense related to the amortization of deferred compensation expense for options granted to employees and some non-employees and to the value of the options or warrants granted to some other non-employees. Of the $2.7 million of stock-based compensation expense, $1.9 million related to warrants granted to our partners, $555,000 related to options or warrants granted to non-employees and $217,000 related to options granted to employees. As of January 1, 2000, we had an aggregate of $1.6 million of deferred compensation remaining to be amortized. Interest. Interest income consists of interest earned on cash and cash equivalents. Interest expense relates primarily to bank borrowings. In fiscal 1999, we had interest income of $463,000, net of interest expense. In fiscal 1998, we had $2.4 million of interest expense, net of interest income. Fiscal 1998 and Fiscal 1997 Because our continuing operations were not in existence in fiscal 1998 or fiscal 1997, we had no net revenues, cost of sales or operating expenses related to our continuing operations, other than general and administrative expenses of $3.5 million in fiscal 1998 and $2.4 million in fiscal 1997. These general and administrative expenses reflect the costs of personnel, facilities and professional fees that are currently associated with our continuing operations. Accordingly, comparisons of results from continuing operations for fiscal 1998 and fiscal 1997 are not meaningful. Liquidity and Capital Resources Historically, we financed our operations through a combination of internally generated funds, equity financings, subordinated borrowings and bank credit facilities. We used our bank credit facilities to fund our investment in accounts receivable and inventory necessary to support our historical businesses. In connection with our decision to focus exclusively on our e-commerce business, we raised approximately $80.0 million in gross proceeds through our equity financing with SOFTBANK in July 1999. We used part of the proceeds from this financing to repay the balance on our then outstanding lines of credit, reduce trade payables and provide operating capital related to our historical businesses. We also used part of the proceeds to acquire property and equipment and fund working capital for our e-commerce business. As of January 1, 2000, we had cash and cash equivalents of approximately $27.3 million, and working capital of approximately $40.6 million, which included approximately $18.4 million of net assets of discontinued operations. 31 We have incurred substantial costs to develop our e-commerce business and to recruit, train and compensate personnel for our creative, engineering, marketing, advertising, merchandising, customer service and administration departments. As a result, we have incurred substantial losses for fiscal 1999 and, as of January 1, 2000, had an accumulated deficit of $43.1 million. In order to expand our e-commerce business, we intend to invest heavily in operations, Web site development, marketing, merchandising and additional personnel. We therefore expect to continue to incur substantial operating losses for the foreseeable future. We used approximately $22.2 million in net cash for operating activities of continuing operations in fiscal 1999, while we generated approximately $1.1 million in net cash from operating activities of continuing operations in fiscal 1998. Net cash used in operating activities of continuing operations in fiscal 1999 was primarily the result of net losses from continuing operations and changes in inventory and accounts receivable, partially offset by changes in accounts payable and accrued expenses and stock-based compensation expense. Net cash generated from operating activities of continuing operations in fiscal 1998 was primarily the result of net losses from continuing operations and changes in accounts payable and accrued expenses. Our investing activities in fiscal 1999 consisted of purchases of property and equipment. We made capital expenditures of approximately $18.4 million in fiscal 1999, which were partially offset by $10.4 million in proceeds of the sale of our Branded Division. As of January 1, 2000, we had commitments of $6.4 million relating to the implementation of advertising and promotion programs. In the second quarter of fiscal 2000, we expect to receive a cash payment of $13.2 million relating to the sale of our Off-Price and Action Sports Division. Management expects that our current cash position combined with the proceeds from the sale of our Off-Price and Action Sports Division, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to raise additional funds in future periods through public or private financings or other arrangements to fund our operations until we achieve profitability. Failure to raise capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. Seasonality We expect to experience seasonal fluctuations in our revenues. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, we expect that the fourth fiscal quarter will account for a large percentage of our total annual sales. We believe that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. Inflation Management believes that inflation has not had a material effect on our operations. Year 2000 Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products need to accept four digit entries to distinguish 21st century dates from 20th century dates. This could result in system failures or miscalculations causing disruption of operations for any company using computer programs or hardware. With respect to our Branded Division and its Off-Price and Action Sports Division, we maintained a management information system that provided, among other things, comprehensive customer order processing, inventory, production, accounting and management information for the marketing, selling, manufacturing and 32 distribution functions of our business. Subsequent to the sale of the Branded Division on December 29, 1999, we use these systems only for the Off-Price and Action Sports Division and in connection with the collection of the accounts receivable of the Branded Division which it retained. We completed, as of April 1, 1999, a Year 2000 project which evaluated, identified, corrected, reprogrammed, and tested our existing systems for Year 2000 compliance. We enhanced our key information systems to improve our functionality and increase performance during the first quarter of 1999, making these applications Year 2000 compliant. The costs of these upgrades of approximately $150,000 were charged to operations as incurred. Upon consummation of the sale of the Off-Price and Action Sports Division and collection of the accounts receivable of the Branded Division, we will not have any need for these systems. Our e-commerce business is a new enterprise and accordingly, we have purchased or developed most of the software and hardware we use in our e- commerce business during fiscal 1999. While this does not uniformly protect us against Year 2000 exposure, we believe our exposure is limited because the systems we use are not based upon legacy hardware or software systems. We updated our office networking system software to be Year 2000 compliant during the third quarter of fiscal 1999. The costs of the process did not have a material impact on our results of operations, financial position, liquidity or capital resources. In addition to making our own systems Year 2000 compliant, we contacted the customers and key suppliers of our Branded Division and Off-Price and Action Sports Division to determine the extent to which the systems of these customers and suppliers are Year 2000 compliant and the extent to which we could be affected by the failure of these third parties to become Year 2000 compliant. We cannot presently estimate the impact of the failure of these third parties to become Year 2000 compliant, however, subsequent to January 1, 2000, we have not encountered any problems related to Year 2000 issues. There can be no assurance, however, that future Year 2000 issues, if any, will not arise. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in debt instruments of the United States Government and its agencies and in high- quality corporate issuers. We limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning- instruments carries a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company, supplementary data and related documents that are included in this Annual 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 Not applicable. 33 PART III This Part incorporates certain information from the Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders (the "2000 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 Annual Report on Form 10-K. Notwithstanding such incorporation, the sections of the Company's 2000 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 2000 Proxy Statement including but necessarily limited to the sections of the 2000 Proxy Statement entitled "Proposal 1-- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." Information concerning executive officers of the Company who are not also directors is included in Item 4.1, Part I, of this Annual Report on Form 10-K. ITEM 11: EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's 2000 Proxy Statement including but necessarily limited to the section of the 2000 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 2000 Proxy Statement including but necessarily limited to the section of the 2000 Proxy Statement entitled "Principal Shareholders." ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's 2000 Proxy Statement including but necessarily limited to the section of the 2000 Proxy Statement entitled "Certain Relationships and Related Transactions." 34 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors--Deloitte & Touche LLP F-1 Consolidated Balance Sheets as of December 31, 1998 and January 1, 2000 F-2 Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000 F-3 Consolidated Statements of Stockholders' Equity (Deficiency) for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000 F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000 F-5 Notes to Consolidated Financial Statements F-6
2. FINANCIAL STATEMENT SCHEDULES All schedules have been omitted since the required information is included in the financial statements or the notes thereto or is not applicable or required. 3. EXHIBITS 2.1(/1/) Securities Purchase Agreement dated June 21, 1995 by and between the Company and MR Acquisitions, Inc. 2.2(/2/) First Amendment to Securities Purchase Agreement by and between the Company and MR Acquisitions, Inc. dated July 31, 1995. 2.3(/3/) 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(/4/) 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. 2.5(/5/) Asset Purchase Agreement, dated December 29, 1999, among American Sporting Goods Corporation and RYKA Inc., KPR Sports International, Inc., G.S.I., Inc., Apex Sports International, Inc. and Global Sports, Inc. 2.6(/6/) Acquisition Agreement, dated September 24, 1999, as amended, among the Company, Gen-X Acquisition (U.S.), Inc., Gen-X Acquisition (Canada) Inc., DMJ Financial, Inc., James J. Salter and Kenneth J. Finkelstein 3.1(/3/) 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(/7/) The Company's Bylaws, as amended. 4.1(/7/) Specimen of Common Stock Certificate. 10.1(/8/)* 1987 Stock Option Plan. 10.2(/9/)* 1988 Stock Option Plan. 10.3(/10/)* 1990 Stock Option Plan. 10.4(/11/)* 1992 Stock Option Plan. 10.5(/12/)* 1993 Stock Option Plan. 10.6(/2/)* 1995 Stock Option Plan. 10.7(/13/)* 1995 Non-Employee Directors' Stock Option Plan. 10.8* 1996 Equity Incentive Plan (amended and restated as of November 16, 1999).
35 10.9(/14/)* Deferred Profit Sharing Plan and Trust. 10.10(/15/)* 2000 Employee Stock Purchase Plan 10.11(/2/)* Employment Agreement dated July 31, 1995 by and between the Company and Steven A. Wolf. 10.12(/16/)* Employment Agreement dated September 25, 1996 by and between the Company and Michael G. Rubin. 10.13(/16/)* First Amendment to the Employment Agreement dated September 25, 1996 by and between the Company and Michael G. Rubin. 10.14(/17/)* Employment Agreement dated May 12, 1998 by and between the Company and James J. Salter. 10.15(/17/)* Employment Agreement dated January 1, 1999 by and between the Company and Arthur I. Carver. 10.16(/17/) Employment Agreement dated February 24, 1999 by and between the Company and Michael R. Conn. 10.17(/18/)* Employment Agreement dated March 28, 1999 by and between the Company and Michael Golden. 10.18(/19/)* Employment Agreement dated August 9, 1999 by and between the Company and Arthur H. Miller. 10.19* Employment Agreement dated January 10, 2000 by and between the Company and Steven Davis. 10.20* Employment Agreement dated February 9, 2000 by and between the Company and Jordan M. Copland. 10.21(/2/) Registration Rights Agreement by and between the Company and MR Acquisitions, Inc. 10.22(/19/) Omnibus Services Agreement dated April 1, 1999 by and between the Company and Organic, Inc. 10.23(/19/) Amendment No. 1 to the Omnibus Services Agreement dated April 1, 1999 by and between the Company and Organic, Inc. 10.24(/19/) Independent Contractor Services Agreement dated June 29, 1999 by and between the Company and Foundry, Inc. 10.25(/19/) Addendum No. 1 to the Independent Contractor Services Agreement dated June 29, 1999 by and between the Company and Foundry, Inc. 10.26(/19/) Agreement of Sale dated July 27, 1999 by and between the Company and IL First Avenue Associates L.P. for acquisition of property at 1075 First Avenue, King of Prussia, PA. 10.27(/19/) Advertising and Promotion Agreement dated October 3, 1999 by and between the Company and Yahoo! Inc. ("Yahoo"). 10.28+ Amendment No. 1 to Advertising and Promotion Agreement dated February 15, 2000 by and between the Company and Yahoo. 10.29(/19/) Transaction Management Services Agreement dated June 10, 1999 by and between the Company and Priority Fulfillment Services, Inc. 10.30(/19/) E-Commerce Agreement dated February 1, 1999 by and between Global Sports Interactive, Inc. ("GSI") and Michigan Sporting Goods Distributors, Inc. ("MC Sports") 10.31 First Amendment to E-Commerce Agreement dated June 17, 1999 by and between GSI and MC Sports. 10.32(/20/) E-Commerce Management Agreement dated March 10, 1999 by and between GSI and The Athlete's Foot Stores, Inc. 10.33(/20/) E-Commerce Agreement dated March 23, 1999 by and between GSI and Dunham's Athleisure Corporation ("Dunham's"). 10.34 Amendment to E-Commerce Agreement dated May 25, 1999 by and between GSI and Dunham's. 10.35 Amendment to E-Commerce Agreement dated December 5, 1999 by and between GSI and Dunham's. 10.36(/20/) E-Commerce Management Agreement dated March 31, 1999 by and between GSI and Sport Chalet, Inc. 10.37(/20/) E-Commerce Venture Agreement dated May 7, 1999 by and between GSI and The Sports Authority, Inc. ("TSA"). 10.38(/20/) Amendment No. 1 to the E-Commerce Venture Agreement dated May 14, 1999 by and between GSI and TSA. 10.39(/20/) License Agreement dated May 14, 1999 by and among TSA, The Sports Authority Michigan, Inc. and TheSportsAuthority.com, Inc. ("TSA.com"). 10.40(/20/) E-Commerce Services Agreement dated May 14, 1999 by and between GSI and TSA.com.
36 10.41(/20/) E-Commerce Agreement dated May 14, 1999 by and among TSA and TSA.com. 10.42(/20/) Agreement dated May 14, 1999, by and between TSA and the Company. 10.43+ E-Commerce Management Agreement dated December 30, 1999 by and between GSI and Oshman's Sporting Goods, Inc.-Services. 10.44+ Strategic Alliance Agreement dated February 28, 2000 by and among GSI and Bluelight.Com LLC. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule (electronic filing only).
- -------- *Management contract or compensatory plan or arrangement + Confidential treatment has been requested as to certain portions of this exhibit. The omitted portions have been separately filed with the Securities and Exchange Commission. (/1/) Incorporated by reference to the Company's Current Report on Form 8-K dated June 21, 1995. (/2/) Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 1995. (/3/) Incorporated by reference to the Company's Definitive Proxy Materials filed November 12, 1997. (/4/) Incorporated by reference to the Company's Current Report on Form 8-K dated May 27, 1998. (/5/) Incorporated by reference to the Company's Current Report on Form 8-K dated January 13, 2000. (/6/) Incorporated by reference to the Company's Quarterly Report on Form 10- Q/A for the nine-month period ended September 30, 1999, filed March 21, 2000. (/7/) Incorporated by reference to the Company's Registration Statement No. 33- 33754. (/8/) Incorporated by reference to the Company's Registration Statement No. 33- 19754-B. (/9/) Incorporated by reference to the Company's Registration Statement No. 33- 27501. (/10/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the nine-month period ended September 30, 1990. (/11/) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (/12/) Incorporated by reference to the Company's Form S-8 Registration Statement filed on January 3, 1994. (/13/) 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. (/14/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 1998. (/15/) Incorporated by reference to the Company's Preliminary Proxy Statement filed on March 22, 2000 in connection with the 2000 Annual Meeting. (/16/) Incorporated)by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (/17/) Incorporated)by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. (/18/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 1999. (/19/) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the nine-month period ended September 30, 1999. (/20/) Incorporated by reference to the Company's Current Report on Form 8-K dated December 28, 1999. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the quarter ended January 1, 2000. 37 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. Date: March 30, 2000 GLOBAL SPORTS, INC. /s/ Michael G. Rubin By: _________________________________ Michael G. Rubin, Chairman and Chief Executive Officer POWER OF ATTORNEY 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 Title Date --------- ----- ---- /s/ Michael G. Rubin Chairman and Chief March 30, 2000 ______________________________________ Executive Officer Michael G. Rubin (principal executive officer) /s/ Jordan M. Copland Executive Vice President March 30, 2000 ______________________________________ and Chief Financial Jordan M. Copland Officer (principal financial officer and principal accounting officer) /s/ Kenneth J. Adelberg Director March 30, 2000 ______________________________________ Kenneth J. Adelberg /s/ Harvey Lamm Director March 30, 2000 ______________________________________ Harvey Lamm /s/ Charles R. Lax Director March 30, 2000 ______________________________________ Charles R. Lax /s/ Jeffrey F. Rayport Director March 30, 2000 ______________________________________ Dr. Jeffrey F. Rayport /s/ Ronald D. Fisher Director March 30, 2000 ______________________________________ Ronald D. Fisher
38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page --------- Independent Auditors' Report--Deloitte & Touche LLP................. F-1 Consolidated Balance Sheets as of December 31, 1998 and January 1, 2000............................................................... F-2 Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000........... F-3 Consolidated Statements of Stockholders' Equity (Deficiency) for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000............................................................ F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1997, December 31, 1998 and January 1, 2000........... F-5 Notes to Consolidated Financial Statements.......................... F-6--F-27
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 January 1, 2000 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended January 1, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 January 1, 2000 and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP _____________________________________ Deloitte & Touche LLP Philadelphia, Pennsylvania March 22, 2000 F-1 GLOBAL SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, January 1, 1998 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents......................... $ 83,169 $ 27,345,263 Accounts receivable, net.......................... -- 2,738,201 Inventory......................................... -- 10,697,438 Prepaid expenses and other current assets......... 599,224 1,444,634 Refundable income taxes........................... -- 1,337,584 Net assets of discontinued operations............. 41,127,839 18,380,806 ----------- ------------ Total current assets............................ 41,810,232 61,943,926 Property and equipment, net of accumulated deprecia- tion and amortization.............................. 2,988,714 20,681,724 Other assets, net................................... 253,626 109,887 ----------- ------------ Total assets.................................... $45,052,572 $ 82,735,537 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 3,595,996 $ 15,761,340 Accrued advertising, promotion and other ex- penses........................................... 56,028 5,483,300 Income taxes payable.............................. 1,378,820 -- Current portion--capital lease obligation, related party............................................ 127,966 141,016 Subordinated notes payable, related party......... 1,805,841 -- ----------- ------------ Total current liabilities....................... 6,964,651 21,385,656 Notes payable, bank................................. 18,812,156 -- Capital lease obligation, related party............. 2,181,265 2,040,249 Mandatorily redeemable preferred stock.............. 100 80 Commitments and contingencies....................... Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized in 1998 and 1999; 10,000 and 8,000 shares issued as mandatorily redeemable preferred stock in 1998 and 1999, respectively............. -- -- Common stock, $0.01 par value, 20,000,000 and 60,000,000 shares authorized in 1998 and 1999; 12,994,464 and 19,544,249 shares issued in 1998 and 1999, respectively; 11,925,378 and 18,475,163 shares outstanding in 1998 and 1999, respectively..................................... 129,947 195,442 Additional paid in capital........................ 17,111,166 102,460,622 Accumulated other comprehensive loss.............. (47,431) -- Retained earnings (accumulated deficit)........... 114,535 (43,132,695) ----------- ------------ 17,308,217 59,523,369 Less: Treasury stock, at cost..................... 213,817 213,817 ----------- ------------ Total stockholders' equity...................... 17,094,400 59,309,552 ----------- ------------ Total liabilities and stockholders' equity...... $45,052,572 $ 82,735,537 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 GLOBAL SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------ Fiscal Year Ended 1997 1998 January 1, 2000 ----------- ----------- ----------------- Net revenues....................... $ -- $ -- $ 5,510,576 Cost of revenues................... -- -- 3,816,767 ----------- ----------- ------------ Gross profit..................... -- -- 1,693,809 Operating expenses: Sales and marketing.............. -- -- 11,608,556 Product development.............. -- -- 7,264,425 General and administrative....... 2,389,223 3,452,914 9,310,744 Stock-based compensation, primarily related to sales and marketing....................... -- -- 2,654,834 ----------- ----------- ------------ Total operating expenses....... 2,389,223 3,452,914 30,838,559 ----------- ----------- ------------ Other (income) expenses: Interest expense................. 2,013,028 2,366,935 312,655 Interest income.................. -- -- (774,139) Other, net....................... -- -- (1,999) ----------- ----------- ------------ Total other (income) expenses.. 2,013,028 2,366,935 (463,483) ----------- ----------- ------------ Loss from continuing operations before income taxes............... (4,402,251) (5,819,849) (28,681,267) Benefit from income taxes.......... -- 1,978,749 2,220,878 ----------- ----------- ------------ Loss from continuing operations.... (4,402,251) (3,841,100) (26,460,389) Discontinued operations: Income from discontinued operations (net of income tax provisions (benefits) of $--, $3,879,567, and $(582,804) in 1997, 1998 and 1999, respectively)................... 246,956 9,664,956 549,838 Loss on disposition of discontinued operations (net of income tax provision of $2,159,916)..................... -- -- (17,336,679) ----------- ----------- ------------ Net income (loss).................. $(4,155,295) $ 5,823,856 $(43,247,230) =========== =========== ============ Earnings (losses) per share: Basic and diluted-- Loss from continuing opera- tions......................... $ (1.47) $ (.34) $ (1.78) Income from discontinued opera- tions......................... .08 .85 .04 Loss on disposition of discon- tinued operations............. -- -- (1.17) ----------- ----------- ------------ Net income (loss).............. $ (1.39) $ .51 $ (2.91) =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 GLOBAL SPORTS, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock Treasury Stock ------------------- -------------------- Retained Accumulated Additional Earnings Other Paid in (Accumulated Comprehensive Comprehensive Shares Dollars Capital Deficit) Income (Loss) Income (Loss) Shares Dollars Total ---------- -------- ------------ ------------ ------------- ------------- --------- --------- ------------ Combined balance at December 31, 1996........... 2,000 $ 2,000 $ 1,066,758 $ (1,554,026) $(41,865) 100 $ 25,000 $ (502,133) Net loss........ (4,155,295) $ (4,155,295) (4,155,295) Translation adjustments.... 6,345 6,345 6,345 ------------ Comprehensive loss........... $ (4,148,950) ============ Warrant compensation related to former officer........ 152,333 152,333 Equity in stock issuances of RYKA Inc....... 356,534 356,534 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) 6,299,565 ---------- -------- ------------ ------------ -------- --------- --------- ------------ Consolidated balance at December 31, 1997........... 11,487,197 114,875 8,001,132 (5,709,321) (35,520) 1,069,086 (213,817) 2,157,349 Net income...... 5,823,856 $ 5,823,856 5,823,856 Translation adjustments.... (11,911) (11,911) (11,911) ------------ Comprehensive income......... $ 5,811,945 ============ Acquisition of the Gen-X Companies...... 1,500,000 15,000 8,936,850 8,951,850 Issuance of warrants to purchase common stock in exchange for services....... 150,000 150,000 Issuance of common stock upon exercise of options..... 7,267 72 23,184 23,256 ---------- -------- ------------ ------------ -------- --------- --------- ------------ Consolidated balance at December 31, 1998........... 12,994,464 129,947 17,111,166 114,535 (47,431) 1,069,086 (213,817) 17,094,400 Net loss........ (43,247,230) $(43,247,230) (43,247,230) Translation adjustments.... 47,431 47,431 47,431 ------------ Comprehensive loss........... $(43,199,799) ============ Issuance of common stock to SOFTBANK, net of costs....... 6,153,850 61,538 79,755,065 79,816,603 Issuance of options and warrants to purchase common stock in exchange for services....... 3,770,778 3,770,778 Issuance of common stock upon exercise of options and warrants....... 395,935 3,957 1,823,613 1,827,570 ---------- -------- ------------ ------------ -------- --------- --------- ------------ Consolidated balance at January 1, 2000........... 19,544,249 $195,442 $102,460,622 $(43,132,695) $ -- 1,069,086 $(213,817) $ 59,309,552 ========== ======== ============ ============ ======== ========= ========= ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 GLOBAL SPORTS, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------ Fiscal Year Ended January 1, 1997 1998 2000 ----------- ----------- ------------ Cash Flows from Operating Activities: Net income (loss).................... $(4,155,295) $ 5,823,856 $(43,247,230) Deduct: Income from discontinued operations........................ 246,956 9,664,956 549,838 Loss on disposal of discontinued operations........................ -- -- (17,336,679) ----------- ----------- ------------ Loss from continuing operations...... (4,402,251) (3,841,100) (26,460,389) Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization...... 368,227 567,310 728,000 Loss on disposition of equipment... -- 19,819 -- Stock-based compensation expense... 152,333 150,000 2,654,834 Changes in operating assets and liabilities, net of acquisitions and discontinued operations: Accounts receivable................ -- -- (2,738,201) Inventory.......................... -- -- (10,697,438) Prepaid expenses and other current assets............................ (3,551,074) (168,945) (845,410) Refundable income taxes............ -- -- (1,337,584) Other assets....................... (576,542) 33,571 173,739 Accounts payable and accrued expenses.......................... 491,169 4,292,548 17,727,273 Income taxes payable............... -- -- (1,378,820) ----------- ----------- ------------ Net cash provided by (used in) continuing operations............. (7,518,138) 1,053,203 (22,173,996) Net cash provided by (used in) discontinued operations........... (1,629,605) 1,617,846 (3,241,206) ----------- ----------- ------------ Net cash provided by (used in) operating activities.............. (9,147,743) 2,671,049 (25,415,202) ----------- ----------- ------------ Cash Flows from Investing Activities: Proceeds from sale of discontinued operations.......................... -- -- 10,317,322 Acquisition of property and equipment........................... (231,987) (397,990) (18,421,010) ----------- ----------- ------------ Net cash used in investing activities........................ (231,987) (397,990) (8,103,688) ----------- ----------- ------------ Cash Flows from Financing Activities: Net borrowings (repayments) under line of credit...................... 9,984,077 (1,853,992) (18,812,156) Costs of debt issuance............... (266,304) (80,000) (30,000) Repayments of capital lease obligation.......................... (105,378) (116,124) (127,966) Proceeds from subordinated note from SOFTBANK............................ -- -- 15,000,000 Proceeds from issuance of common stock to SOFTBANK................... -- -- 64,727,378 Proceeds from exercises of common stock options and warrants.......... -- 23,256 1,827,570 Proceeds from sale of minority interest in subsidiary.............. -- -- 1,999 Repayment of subordinated notes payable, related party.............. (416,000) (250,000) (1,805,841) ----------- ----------- ------------ Net cash provided by (used in) financing activities.............. 9,196,395 (2,276,860) 60,780,984 ----------- ----------- ------------ Effect of exchange rate changes on cash and cash equivalents.................. 6,345 (11,911) -- ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents...................... (176,990) (15,712) 27,262,094 Cash and cash equivalents, beginning of year.................................. 275,871 98,881 83,169 ----------- ----------- ------------ Cash and cash equivalents, end of year.................................. $ 98,881 $ 83,169 $ 27,345,263 =========== =========== ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest............................ $ 1,882,198 $ 3,056,160 $ 1,993,647 =========== =========== ============ Supplemental disclosure of non-cash investing and financing activities: Notes payable issued in acquisitions........................ $ -- $ 6,000,000 $ -- =========== =========== ============ Issuance of common stock of affiliate at a price per share in excess of the Company's carrying amount....... $ 356,534 $ -- $ -- =========== =========== ============ Refinancing of revolving credit agreement........................... $16,718,420 $ -- $ -- =========== =========== ============ Issuance of common stock for acquisition of the Gen-X Companies.. $ -- $ 8,951,850 $ -- =========== =========== ============ Issuance of mandatorily redeemable preferred stock..................... $ -- $ 100 $ -- =========== =========== ============ Issuance of common stock in satisfaction of accrued interest on subordinated note from SOFTBANK..... $ -- $ -- $ 89,225 =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF BUSINESS Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, develops and operates the electronic commerce ("e-commerce") sporting goods businesses of several traditional sporting goods retailers, general merchandisers, internet and media companies under exclusive long-term agreements. The Company's partners include The Sports Authority, Oshman's Sporting Goods, The Athlete's Foot, Sport Chalet, MC Sports, Dunham's Sports, BlueLight.com and Healtheon/WebMD. See Note 18 for a description of discontinued operations. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES The following summarize the Company's significant accounting policies, some of which apply only to discontinued operations (see Note 18): Fiscal Year: During 1999, the Company changed its fiscal year end date from a calendar year end to a year end date representing the Saturday closest to December 31, beginning with the fiscal year ended January 1, 2000. The fiscal year is named for the calendar year ending on that December 31. The effect on results of operations of the extra day in the fiscal year ended January 1, 2000 is not significant. Principles of Consolidation: The financial statements presented include the accounts of Global Sports, Inc., a Delaware corporation, and the following wholly-owned or controlled subsidiaries: Global Sports Interactive, Inc. (PA) TheSportsAuthority.com, Inc. (PA) APEX Sports International, Inc. (PA) KPR Sports International, Inc. (PA) MR Management, Inc. (PA) 1075 First Global Associates, LLC (PA) RYKA Inc. (PA) G.S.I., Inc. (DE) Gen-X Holdings, Inc. (WA) Gen-X Equipment Inc. (Ontario) Lamar Snowboards, Inc. (MO) All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates: The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 and assumptions. Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. At January 1, 2000, the Company had $26,749,053 of excess cash invested in a money market fund with a major financial institution, which is included in cash and cash equivalents. Interest income related to this investment for the fiscal year ended January 1, 2000 was $774,139. Inventory: Inventory, primarily consisting of sporting goods, athletic equipment, footwear and apparel, is valued at the lower of cost (determined using the first-in, first-out method) or market. F-6 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, which are generally: . Two years for computer hardware and software and capitalized software development costs; . Three to seven years for furniture and office equipment; . The lesser of fifteen years or lease term for leasehold improvements; . Fifteen years for building improvements; and . Thirty years for buildings. 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. Expenditures for maintenance and repairs are expensed as incurred. 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 $777,376 in 1998. Intangibles, which principally represent the cost of acquiring licenses, patents and trademarks, are reported net of accumulated amortization of $270,124 in 1998. Amortization of goodwill and intangibles is included in discontinued operations. As a result of the disposition of the Branded division on December 29, 1999 (see Note 18), goodwill and intangibles were fully amortized and the related charge is included in the loss on disposition of discontinued operations. 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 15). As a result of the disposition of the Branded division on December 29, 1999 (see Note 18), the Company accelerated the amortization of the balance of all such loan fees and the related charge is included in the loss on disposition of discontinued operations. As of December 31, 1998, the unamortized balance of all such loan fees was $247,772. The realizability of goodwill, intangibles and other assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow and profitability projections that incorporate, as applicable, the impact on existing company businesses. The analyses necessarily involve significant management judgment. Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the goodwill or intangible assets exceeds its estimated fair value. 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. Sale of Stock by an Equity Method Investee: Prior to the 1997 reorganization (see Note 16), 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, $356,534 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 F-7 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) currency transactions generally are recognized currently in income, whereas adjustments resulting from translations of financial statements are reflected in accumulated other comprehensive income (loss). The cumulative currency translation loss as of December 31, 1998 was $47,431. Gains and losses on foreign currency transactions for the fiscal years ended December 31, 1998 and January 1, 2000 resulted in net foreign currency losses of $194,064 and $103,955, respectively, and are included in discontinued operations. There were no foreign currency transactions in 1997. 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 and notes payable are a reasonable estimate of their fair values at December 31, 1998 and January 1, 2000, based on the short maturity of these instruments. Net Revenues: Net revenues include primarily revenues generated from the sale of product through the Company's Web sites. Revenues from product sales, net of discounts and allowances for returns, are recognized upon the shipment of product to customers. Other sources of revenues, including the sale of gift certificates to the Company's retail partners' land-based stores, the sale of advertising on the Company's Web sites and outbound shipping charges, were not significant for the fiscal year ended January 1, 2000. Promotional Shipping Costs: During 1999, as part of a promotion in connection with the launch of the Company's Web sites, the Company offered free shipping on certain orders. The expense related to this temporary promotion for the year ended January 1, 2000 was $566,091 and has been included in selling and marketing expense. Advertising: The Company expenses the cost of advertising in accordance with the AICPA Accounting Standards Executive Committee's Statement of Position ("SOP") 93-7, Reporting on Advertising Costs. Advertising expense was $2,471,731 for the fiscal year ended January 1, 2000. Advertising expense of discontinued operations was $431,753 and $1,774,753 for the fiscal years ended December 31, 1997 and December 31, 1998, respectively. Product Development: Product development expenses consist primarily of expenses associated with building, developing and operating the partners' Web sites; payroll and related expenses for engineering, production, creative and management information systems; and depreciation expense related to capitalized hardware and software. 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 issued to employees 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. The Company accounts for stock-based compensation issued to non- employees in accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Income Taxes: Prior to December 15, 1997, the KPR Companies (see Note 16) had elected to be taxed as S Corporations, under provisions of the Internal Revenue Code and various state income tax regulations. As such, F-8 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) current taxable income had been included on the income tax returns of the then sole shareholder for federal and state income tax purposes and no provision had been made for federal income taxes. On December 15, 1997, the KPR Companies effected a merger with RYKA Inc. 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. New Accounting Pronouncements Computer Costs: In March 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal-use software. This statement was adopted on January 1, 1999 and did not have a material effect on the Company's results of operations, cash flows or financial position. Start-Up Costs: In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities. The statement requires that costs of start-up activities, including organization costs, be expensed as incurred. This statement was adopted on January 1, 1999 and did not have a material effect on the Company's results of operations, cash flows or financial position. Derivative Instruments: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133) establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000, although early adoption is encouraged. The Company has not yet assessed what the impact of this statement will be on the Company's future earnings or financial position. F-9 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--PROPERTY AND EQUIPMENT The major classes of property and equipment, at cost, as of December 31, 1998 and January 1, 2000 are as follows:
December 31, January 1, 1998 2000 ------------ ----------- Computer hardware and software.................... $ 957,654 $10,178,971 Building.......................................... -- 6,437,916 Building--under capital lease (see Note 4)........ 2,666,958 2,666,958 Furniture and office equipment.................... 232,414 1,793,037 Land.............................................. -- 1,240,000 Leasehold improvements............................ 336,926 328,042 Construction in progress.......................... 17,392 33,725 ---------- ----------- 4,211,344 22,678,649 Less: Accumulated depreciation and amortization... (1,222,630) (1,996,925) ---------- ----------- Property and equipment, net....................... $2,988,714 $20,681,724 ========== ===========
NOTE 4--CAPITAL LEASE In September 1994, the Company entered into a fifteen-year capital lease with its Chairman and Chief Executive Officer, for its former corporate headquarters and warehouse space. The rental amount is subject to annual increases based on the Consumer Price Index and is currently $351,396 per annum. The Company pays all insurance and maintenance relating to the leased property. The mortgages on the leased property are collateralized by guarantees of a subsidiary of the Company and have an aggregate outstanding principal balance of $1,525,169 and $1,456,101 as of December 31, 1998 and January 1, 2000, respectively. As of December 31, 1998 and January 1, 2000, the Company's net investment in this capital lease was $2,007,035, and $1,801,884, respectively, which were included in property and equipment. Interest recorded on this capital lease for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000 was $242,120, $234,345, $223,430, respectively. Future minimum lease payments under this capital lease at January 1, 2000, together with the present value of those future minimum lease payments, are as follows: 2000........................................................... $ 351,396 2001........................................................... 351,396 2002........................................................... 351,396 2003........................................................... 351,396 2004........................................................... 351,396 Thereafter..................................................... 1,669,136 ---------- Total future minimum lease payments............................ 3,426,116 Less: Interest discount amount................................. 1,244,851 ---------- Total present value of future minimum lease payments........... 2,181,265 Less: Current portion.......................................... 141,016 ---------- Long-term portion.............................................. $2,040,249 ==========
In November 1999, the Company relocated its corporate headquarters to a Company-owned facility and is currently negotiating the termination of the lease on its former corporate headquarters. Management expects that this lease termination will not have a material effect on future results of operations, cash flows or financial position. F-10 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 5--STOCKHOLDERS' EQUITY Preferred Stock The Company 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 on May 12, 1998, the Company issued 10,000 shares of mandatorily redeemable preferred stock. The redemption price of these preferred shares is contingent on certain sales and gross profit targets, ranging from a minimum of $.01 per share to a maximum of $50.00 per share, and are redeemable over a five year period. During the fiscal year ended January 1, 2000, 2,000 shares were redeemed for $100,000 (see Note 18). Common Stock On July 13, 1999, the shareholders approved an amendment to the Company's Certificate of Incorporation that increased the maximum number of authorized shares of common stock by 40,000,000 to 60,000,000. On June 10, 1999, the Company and SOFTBANK America Inc. ("SOFTBANK") entered into a stock purchase agreement and related agreements for the sale of 6,153,850 shares of the Company's common stock to certain affiliates of SOFTBANK at a price of $13.00 per share (the closing price on May 26, 1999, the day prior to the day the Company and SOFTBANK agreed in principle to the transaction) for an aggregate purchase price of $80,000,050, reduced by transaction costs of $183,447 and accrued interest of $89,225 and principal related to an interim loan from SOFTBANK. In order to provide capital to the Company until closing, which occurred on July 23, 1999, the Company and SOFTBANK entered into an interim subordinated loan agreement on June 10, 1999 pursuant to which SOFTBANK loaned the Company $15,000,000 at an interest rate of 4.98% per annum until closing. At the July 23, 1999 closing, this loan amount was converted into shares of the Company's common stock. 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 the investment in RYKA Inc. in 1995, MR Acquisitions, L.L.C. ("MR Acquisitions"), a company wholly-owned by the Company's Chairman and Chief Executive Officer, 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 certain contingencies were not fully satisfied. NOTE 6--STOCK OPTIONS AND WARRANTS As part of the 1997 reorganization (see Note 16), on December 15, 1997 the Company assumed eight separate stock option plans (the "Plans"). Under the terms of the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990 Stock Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the 1995 Stock Option Plan, the 1995 Non-Employee Directors' Stock Option Plan and the 1996 Equity Incentive Plan (as amended), the Company may grant qualified and nonqualified options and warrants to purchase up to 31,321; F-11 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17,500; 37,500; 43,750; 45,000; 75,000; 12,500 and 3,000,000 shares of common stock, respectively, to employees, directors and consultants of the Company. The options and warrants vest at various times over periods ranging up to five years. The options and warrants, 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. Pursuant to option grant letters issued by RYKA prior to the 1997 reorganization (see Note 16), 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 following table summarizes the stock option activity for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000:
Weighted Average Number of Exercise Shares Price --------- -------- Assumed as of December 15, 1997.......................... 219,547 $10.90 Granted................................................ 441,850 3.69 Exercised ............................................. -- -- Canceled............................................... (118,716) 8.95 --------- Outstanding as of December 31, 1997...................... 542,681 5.45 Granted................................................ 695,750 5.79 Exercised.............................................. (7,267) 3.20 Canceled............................................... (42,583) 6.24 --------- Outstanding as of December 31, 1998...................... 1,188,581 5.71 Granted................................................ 1,307,907 14.82 Exercised.............................................. (345,937) 4.84 Canceled............................................... (226,934) 8.03 --------- Outstanding as of January 1, 2000........................ 1,923,617 11.71 =========
F-12 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the stock warrant activity for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000:
Weighted Number Average of Exercise Shares Price ------- -------- Assumed as of December 15, 1997.......................... 236,486 $5.37 Granted................................................ -- -- Exercised.............................................. -- -- Canceled............................................... -- -- ------- Outstanding as of December 31, 1997...................... 236,486 5.37 Granted................................................ 67,000 6.71 Exercised.............................................. -- -- Canceled............................................... (96,552) 4.27 ------- Outstanding as of December 31, 1998...................... 206,934 6.35 Granted................................................ 333,320 14.42 Exercised.............................................. (49,998) 7.63 Canceled............................................... (923) 16.25 ------- Outstanding as of January 1, 2000........................ 489,333 11.90 =======
During the fiscal year ended January 1, 2000, the Company granted to retailers, consultants, and employees options, warrants, and discounted stock awards to purchase an aggregate of 1,641,227 shares (1,105,741 shares relating to employees and 535,486 shares relating to retailers and consultants) of the Company's common stock at prices ranging from $0.01 to $24.69 per share. The value of options, warrants and discounted stock options granted during 1999 amounted to $5,341,195 ($406,069 relating to employees and $4,935,126 relating to retailers and consultants) of which the Company reflected $3,770,778 as expense in the fiscal year ended January 1, 2000. The balance will be recognized as services are provided over terms ranging from four to five years. Of the amount recognized as expense during the fiscal year ended January 1, 2000, $2,654,834 is included in continuing operations ($217,476 relating to employees and $2,437,358 relating to retailers and consultants) and $1,115,945 is included in discontinued operations. During the latter part of the fiscal year ended January 1, 2000, the Company issued warrants to purchase 123,500 shares of the Company's common stock with a fair value at the dates of grant amounting to $1,579,495 to non-employees which are included in the options and warrants described above. Because these warrants require certain counterparty performance conditions, they are subject to variable plan accounting. The Company is recording compensation expense over the five-year term of the warrants as required by EITF No. 98-16 and recognized $66,170 as compensation expense for the fiscal year ended January 1, 2000. The amount of compensation expense recognized in future years is subject to adjustment based upon changes in the price of the Company's common stock. In connection with the disposition of its historical businesses in fiscal 1999, the Company accelerated the vesting of 415,441 options previously granted to employees of the discontinued operations as an inducement to remain with the businesses for a period of ninety days following their sale. For accounting purposes, the Company considers this action a cancellation of a previous award and the grant of a new award. Since the grantees will not be employees of the Company when the options are vested, the Company valued the awards in accordance with the provisions of SFAS No. 123 and charged the related expense to discontinued operations in fiscal 1999. As these awards require counterparty performance conditions, they are subject to variable plan accounting and the ultimate cost to be recognized for these awards is subject to adjustment based upon changes in both the number of employees and the price of the Company's common stock through the ninetieth day after the businesses are sold. F-13 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the year ended December 31, 1998, the Company issued options and warrants to purchase 695,750 shares of common stock to various employees at a range of prices from $2.86 to $7.81 and with terms of five to ten years. The Company also 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 and with terms of five to ten years. The Company recorded a charge of $150,000 in 1998 related to these warrants which is included in stock-based compensation. The following table summarizes information about options and warrants outstanding and exercisable as of January 1, 2000:
Outstanding Exercisable --------------------------------------------- ---------------------------- Range of Weighted Average Exercise Number Remaining Weighted Average Number Weighted Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - -------- ----------- ---------------- ---------------- ----------- ---------------- $ .01 - $ 6.13 525,333 7.32 years $3.95 414,168 $ 3.89 $ 6.25 - $11.00 493,033 6.00 7.38 171,700 8.18 $11.20 - $13.00 204,511 7.97 12.14 56,011 12.45 $13.13 - $15.00 514,120 4.23 14.89 339,620 14.97 $15.13 - $30.00 675,953 9.39 18.49 75,553 17.89 --------- --------- $ .01 - $30.00 2,412,950 7.02 11.75 1,057,052 9.60 ========= =========
As of January 1, 2000, 927,918 shares of common stock were available for future grants under the Plans. The Company accounts for the Plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for those incentive stock option awards granted to employees. Had compensation cost for such awards 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 the fiscal years ended January 1, 2000, December 31, 1998 and December 31, 1997 would have been as follows:
As Reported Pro Forma ------------ ------------ Year Ended December 31, 1997 Net loss...................................... $ (4,155,295) $ (4,805,295) ============ ============ Losses per share--basic and diluted........... $ (1.39) $ (1.60) ============ ============ Year Ended December 31, 1998 Net income.................................... $ 5,823,856 $ 4,711,383 ============ ============ Earnings per share--basic and diluted......... $ .51 $ .41 ============ ============ Fiscal Year Ended January 1, 2000 Net loss...................................... $(43,247,230) $(46,850,325) ============ ============ Losses per share--basic and diluted........... $ (2.91) $ (3.15) ============ ============
The weighted average fair value of the stock options granted during the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000 were $1.49, $3.79 and $14.82 per share, respectively. F-14 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of options granted under the Plans during the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000 were estimated on the date of grant using the Black-Scholes multiple option pricing model, with the following assumptions:
Fiscal Year Year Ended Year Ended Ended Assumption December 31, 1997 December 31, 1998 January 1, 2000 ---------- ----------------- ----------------- --------------- Dividend yield.......... None None None Expected volatility..... 50.00% 77.17% 50.00% Average risk free interest rate.......... 6.10% 5.16% 5.57% Average expected lives.. 5.00 years 5.76 years 6.28 years
NOTE 7--INCOME TAXES The loss from continuing operations before income taxes and the related benefit from income taxes were as follows:
For the Fiscal Years Ended --------------------------------- December 31, 1998 January 1, 2000 ----------------- --------------- Loss from continuing operations before income taxes: Domestic............................... $5,819,849 $28,681,267 Foreign................................ -- -- ---------- ----------- Total................................. $5,819,849 $28,681,267 ========== =========== Benefit from income taxes: Current: Federal................................ $1,978,749 $ 2,114,352 State.................................. -- -- Foreign................................ -- -- ---------- ----------- Total Current......................... $1,978,749 $ 2,114,352 ========== =========== Deferred: Federal................................ $ -- $ 106,526 State.................................. -- -- Foreign................................ -- -- ---------- ----------- Total Deferred........................ $ -- $ 106,526 ========== =========== Total: Federal................................ $1,978,749 $ 2,220,878 State.................................. -- -- Foreign................................ -- -- ---------- ----------- Total................................. $1,978,749 $ 2,220,878 ========== ===========
For the year ended December 31, 1997, the Company had no provision for federal and state income taxes. F-15 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The significant components of net deferred tax assets and liabilities as of December 31, 1998 and January 1, 2000 consisted of the following:
December 31, 1998 January 1, 2000 ----------------- --------------- Deferred tax assets: Net operating loss carryforwards..... $ 8,035,764 $ 21,508,643 Deferred revenue..................... -- 205,549 Employee benefits.................... -- 416,473 Inventory............................ -- 241,308 Depreciation......................... -- 154,408 Provision for doubtful accounts...... 308,600 111,925 ----------- ------------ Gross deferred tax assets.......... 8,344,364 22,638,306 Deferred tax liabilities............... -- -- ----------- ------------ Net deferred tax assets and liabilities........................... 8,344,364 22,638,306 Valuation allowance.................. (8,344,364) (22,638,306) ----------- ------------ Net deferred tax asset................. $ -- $ -- =========== ============
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 January 1, 2000, the Company had available net operating loss carryforwards of approximately $54,759,299 which expire in the years 2002 through 2018. The use of certain 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. The differences between the statutory federal income tax rate and the effective income tax rate are provided in the following reconciliation:
December 31, January 1, 1998 2000 ------------ ---------- Statutory federal income tax rate.................. 34.0% (34.0)% Increase (decrease) in taxes resulting from: Valuation allowance.............................. -- 30.8 Carryback claim refund........................... -- (4.6) Other............................................ -- .1 ---- ----- Effective income tax rate.......................... 34.0% (7.7)% ==== =====
NOTE 8--EARNINGS (LOSSES) PER SHARE Earnings (losses) per share have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic and diluted 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. Outstanding common stock options and warrants have been excluded from the calculation of diluted earnings (losses) per share because their effect would be antidilutive. F-16 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amounts used in calculating earnings (losses) per share data are as follows:
Fiscal Year Year Ended Year Ended Ended December 31, 1997 December 31, 1998 January 1, 2000 ----------------- ----------------- --------------- Loss from continuing operations............... $(4,402,251) $(3,841,100) $(26,460,389) Income from discontinued operations............... 246,956 9,664,956 549,838 Loss on disposition of discontinued operations.. -- -- (17,336,679) ----------- ----------- ------------ Net income (loss)......... $(4,155,295) $ 5,823,856 $(43,247,230) =========== =========== ============ Weighted average shares outstanding-- basic and diluted........ 2,996,027 11,378,918 14,874,018 =========== =========== ============ Outstanding common stock options having no dilutive effect.......... 542,681 533,132 1,923,617 =========== =========== ============ Outstanding common stock warrants having no dilutive effect.......... 236,486 384,117 489,333 =========== =========== ============
NOTE 9--SIGNIFICANT CUSTOMER/CONCENTRATIONS OF CREDIT RISK For the fiscal year ended January 1, 2000, net revenues include revenues from Healtheon/WebMD of $2,792,350 through the sale of product to support the launch of the WebMD Sports & Fitness Store. As of January 1, 2000, Healtheon/WebMD represented substantially all of the balance in accounts receivable. During 1999, the Company also agreed to purchase advertising from Healtheon/WebMD in the aggregate amount of $3,000,000 to occur in 1999 through the second quarter of 2000. NOTE 10--MAJOR SUPPLIERS/ECONOMIC DEPENDENCY The Company purchased inventory from two suppliers during the fiscal year ended January 1, 2000 amounting to $2,206,882 and $1,764,021 or 15% and 12% of total inventory purchased, respectively. As of January 1, 2000, the Company had $1,624,321 and $1,737,666, respectively, in amounts owed to these suppliers included in accounts payable. No other supplier amounted to more than of 10% of total inventory purchased for any period presented. NOTE 11--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 As of January 1, 2000, the Company had employment agreements with several of its officers for an aggregate annual base salary of $1,543,300 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. Advertising and Media Agreements As of January 1, 2000, the Company was contractually committed for the purchase of future advertising totaling approximately $6,447,000 (including the remaining commitment referred to in Note 9 with a significant F-17 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) customer) and to provide barter media of no less than $5,000,000 for the fiscal year ending December 30, 2000. One such agreement requires the Company to pay an additional fee based upon revenues generated from the advertising. Retailer Relationships The Company's retailer alliances are separated into two different structures. The Company's arrangement with The Athlete's Foot, Oshman's Sporting Goods, MC Sports, Dunham's Sporting Goods, Sport Chalet and Healtheon/WebMD are exclusive licensing arrangements ranging in term from five to ten years, whereby the Company records 100% of all revenues generated on the electronic storefronts and pays a percentage of those revenues to the partner in exchange for the electronic rights to their brand name and the promotion of the electronic storefront in the partner's stores, Web site and/or marketing and communications materials. Healtheon/WebMD, The Sports Authority, Inc. and the Company are presently operating in accordance with a binding letter of intent, which expired on October 29, 1999, and the parties are in the process of negotiating a formal contract. The Company entered into a fifteen-year exclusive agreement with The Sports Authority, Inc. (the "TSA Agreement"), via the Company's 80.1%-owned subsidiary TheSportsAuthority.com ("TSA.com"). TSA.com pays a royalty to The Sports Authority, Inc. based on a percentage of sales generated by the TSA.com's electronic storefront. On or after February 1, 2002, The Sports Authority, Inc. has the right to receive (for no consideration) up to an additional 30% interest in TSA.com if certain performance targets are met. The Sports Authority, Inc. has an option to purchase, on the earlier to occur of May 9, 2002 or an initial public offering of shares of TSA.com common stock, up to a total ownership interest of 49.9% in TSA.com at a price determined by a formula defined in the TSA Agreement. NOTE 12--SAVINGS PLAN The Company sponsors a voluntary defined contribution savings plan covering all U.S. employees. Company contributions to the plan for each employee may not exceed 1.5% of the employee's annual salary. Total Company contributions were $18,594, $21,431 and $28,147 for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000, respectively. NOTE 13--BUSINESS SEGMENTS The Company operates in one principal business segment which develops and operates the e-commerce sporting goods businesses of traditional sporting goods retailers, general merchandisers, internet and media companies in domestic markets. All of the domestic net sales, operating results and identifiable assets are in the United States. See Note 18 for a discussion of the Company's discontinued operations. NOTE 14--RELATED PARTY TRANSACTIONS The Company leases an office and warehouse facility from the Company's Chairman and Chief Executive Officer (see Note 4). A summary of the KPR Companies' related party transactions with RYKA Inc. (prior to the 1997 reorganization--see Note 16) for the year ended December 31, 1997 is as follows:
Financial Statement Nature of Transaction Classification 1997 --------------------- ---------------------------- ------- Rent................................... Other (income) expenses $45,521 Interest on subordinated debt.......... Interest expense $56,854
F-18 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 15--NOTES PAYABLE Notes Payable, Bank The components of the notes payable, bank balances as of December 31, 1998 and January 1, 2000 are as follows:
December 31, 1998 January 1, 2000 ----------------- --------------- Revolving credit facility, secured by substantially all assets of KPR and RYKA (weighted average interest rate at December 31, 1998--8.15%).......... $18,812,156 $ -- =========== =====
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and Security Agreement (the "Loan Agreement"). Under the Loan Agreement, as amended, the Company had access to a combined credit facility of $40,000,000 which was 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 was five years expiring on November 19, 2002. The KPR Companies and RYKA had 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 have borrowed 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 included 50% of outstanding letters of credit as collateral for borrowing. All borrowings under this line were repaid in full as of January 1, 2000 and the credit facility is in the process of being terminated. The total interest incurred in connection with this facility was $1,088,554 for the fiscal year ending January 1, 2000. The maximum amount outstanding on this line during the fiscal year ended January 1, 2000 was $25,459,189. Subordinated Notes Payable, Related Party The components of the subordinated notes payable balances as of December 31, 1998 and January 1, 2000 are as follows:
December 31, 1998 January 1, 2000 ----------------- --------------- Subordinated notes payable to shareholder (interest rate at December 31, 1998--8.25%)............. $1,805,841 $ -- ========== =====
At December 31, 1998, the Company had $1,805,841 in outstanding subordinated notes payable held by its Chairman and Chief Executive Officer, plus accrued interest on such notes of $24,094 which was 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 1997 reorganization (see Note 16). Interest accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Based on its Loan Agreement, the Company is permitted to make regular payments of interest on the subordinated notes and to further reduce principal on a quarterly basis, commencing subsequent to the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of the Company. During 1998, aggregate principal payments of $250,000 were made. On July 27, 1999, the principal balance of $1,805,841 plus interest accrued to date of $58,987 was repaid in full, for which a waiver was obtained from the Company's primary lender. F-19 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--REORGANIZATION 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. Accordingly, references to the Company's financial statements refer to the financial statements of the KPR Companies prior to the Reorganization and to the financial statements of the KPR Companies, including RYKA, Inc., after the Reorganization. NOTE 17--INVESTMENT IN RYKA INC. A summary of activity relating to the Company's investment in RYKA Inc. for the year ended December 31, 1997 follows: 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 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 16), the Company had a 33% equity interest in the net assets of RYKA. NOTE 18--DISCONTINUED OPERATIONS On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-commerce business. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented in the Company's financial F-20 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) statements as discontinued operations. The accompanying financial statements have been reclassified to reflect this presentation. On September 24, 1999, the Company and a management group led by James J. Salter and Kenneth J. Finkelstein entered into an acquisition agreement providing for the sale of the Company's Off-Price and Action Sports division, including the sale of all of the issued and outstanding capital stock of the Company's wholly-owned subsidiaries Gen-X Holdings Inc. and Gen-X Equipment Inc. (collectively, the "Gen-X Companies"). On March 13, 2000, the acquisition agreement was amended to, inter alia, (i) extend the date after which either party could terminate the acquisition agreement, (ii) provide for a larger portion of the purchase price to be paid in cash instead of a combination of cash and promissory notes, (iii) to reduce the purchase price as a result of more of the purchase price being paid in cash, (iv) to provide the purchaser with a breakup fee of $1,500,000, and (v) to accelerate the vesting of options to purchase an aggregate of 281,930 shares of Global Common Stock held by certain employees of Global. Pursuant to the terms of the acquisition agreement, as amended, the aggregate purchase price for the Off-Price and Action Sports division is approximately $17,200,000, consisting of a cash payment of $6,000,000 deposited in an escrow account by the purchaser on March 13, 2000, a cash payment at closing of $7,200,000 and assumption of certain notes payable by Global in the aggregate principal amount of approximately $4,000,000. On December 29, 1999, Global sold substantially all of the assets of its Branded division (other than the accounts receivable which totaled approximately $6,600,000 as of December 29, 1999) to American Sporting Goods Corporation in exchange for a cash payment of $10,447,409. The Company recognized a loss of $12,102,841 on the sale of the Branded division, including operating losses of $5,289,344 subsequent to the measurement date of April 20, 1999. Upon initial adoption of the plan to sell these businesses, management expected to recognize a gain upon the disposal of its historical businesses. During the second quarter of fiscal 1999, management revised its estimates and recorded a loss on disposal of $5,632,158. During the fourth quarter of fiscal 1999, when the Company consummated the sale of its Branded division, the proceeds from the sale were substantially lower than formerly anticipated. As a result of this transaction and the renegotiation of the sales price for the Off-Price and Action Sports division, management made further revisions to its estimates and recognized additional losses on disposal of $11,704,521 during the fourth quarter of fiscal 1999. Net sales of discontinued operations for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000 were $60,671,407, $131,434,971 and $112,823,357, respectively. For the period subsequent to April 20, 1999, the measurement date, discontinued operations incurred net operating losses of $7,575,861, of which $5,289,344 was attributable to the Branded division and $2,286,517 was attributable to the Off-Price and Action Sports division. The income tax provision for discontinued operations arose as a result of the taxable income of a foreign subsidiary as well as a tax provision related to gains on the disposal of certain intangibles owned by a U.S. subsidiary. F-21 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The discontinued operations components of amounts reflected in the balance sheets are as follows:
December 31, January 1, 1998 2000 ------------ ------------ Balance Sheet Data: Cash........................................ $ 772,916 $ 590,952 Accounts receivable......................... 36,782,732 29,692,418 Inventory................................... 20,954,168 3,518,312 Property and equipment...................... 1,397,189 1,242,526 Goodwill and intangibles.................... 16,507,073 11,148,024 Other assets................................ 936,293 499,650 Accounts payable and accrued expenses....... (16,192,954) (10,360,404) Subordinated notes payable.................. (1,999,065) -- Note payable, banks......................... (14,823,955) (15,520,167) Notes payable, other........................ (3,206,558) (2,430,505) ------------ ------------ Net assets of discontinued operations(/1/).......................... $ 41,127,839 $ 18,380,806 ============ ============
-------- (/1/) Included in current assets. Acquisition of Discontinued Operations Prior to its decision to focus exclusively on its e-commerce business, the Company acquired Gen-X Holdings Inc. and Gen-X Equipment Inc. on May 12, 1998. The Gen-X Companies were privately-held companies based in Toronto, Ontario specializing in selling off-price sporting goods and winter sports equipment (including ski and snowboard equipment), in-line skates, sunglasses, skateboards and specialty footwear. In consideration for the stock of the Gen- X Companies, the Company issued 1,500,000 shares of its common stock and contingent consideration in the form of non-interest bearing notes and 10,000 shares of mandatorily redeemable preferred stock in the aggregate amount of $5,000,000. The notes are payable and shares are redeemable at an aggregate of $1,000,000 per year over a five-year period upon achieving certain sales and gross profit targets. The total purchase price, including acquisition expenses of approximately $330,000 but excluding the contingent consideration described above ($1,000,000 of which was paid in May of 1999), was $9,279,645. This purchase price is based on the 5-day average market price of the 1,500,000 shares discounted by 10% 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...................................................... 9,130,708 ----------- $ 9,279,645 ===========
During fiscal 1999, the Gen-X Companies achieved the first of their sales and gross profit targets, and accordingly, in May 1999, the Company redeemed 2,000 shares of the mandatorily redeemable preferred stock for $100,000 and paid $900,000 against the contingent notes payable, resulting in a corresponding increase to goodwill of $1,000,000. 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 F-22 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Notes Payable of Discontinued Operations The components of the notes payable, banks balances as of December 31, 1998 and January 1, 2000 are as follows:
December 31, January 1, 1998 2000 ----------- ----------- Revolving credit facility, secured by substantially all assets of the Gen-X Companies (weighted average interest rate at January 1, 2000--7.71%)........... $14,500,000 $15,240,000 Mortgage payable, secured by building due 8/15/09 (interest rate at January 1, 2000--7.91%).......... 323,955 280,167 ----------- ----------- Total............................................. $14,823,955 $15,520,167 =========== ===========
The Company has a line of credit of approximately $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering substantially all of the Gen-X Companies' assets. As of January 1, 2000, draws of $15,240,000 were committed under this line. Based on available collateral and outstanding import letters of credit commitments an additional $9,184,000 was available for borrowing as of January 1, 2000. The maximum amount outstanding on this line during the fiscal year ended January 1, 2000 was $15,240,000. Notes payable, banks includes a mortgage payable secured by land and building in Ontario, Canada of $280,167 bearing interest at the bank's cost of funds plus 2.5% and maturing on August 15, 2009. The components of the notes payable, other balances as of December 31, 1998 and January 1, 2000 are as follows:
December 31, January 1, 1998 2000 ---------- ---------- Note payable to Ride, Inc., due 12/31/02 (interest rate as of January 1, 2000--8%)...................... $1,600,000 $1,200,000 Notes payable to former shareholders of Lamar, due 7/27/03 (interest rate as of January 1, 2000--6%).... 1,606,558 1,230,505 ---------- ---------- Total.............................................. $3,206,558 $2,430,505 ========== ==========
Other debt related to the Gen-X Companies includes an outstanding loan payable to Ride Inc. of $1,200,000. 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. Notes payable, other also includes $1,230,505 of promissory notes payable to the former shareholders of Lamar. The notes are payable in five equal annual installments and bear interest at 6% per annum. F-23 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of the subordinated notes payable balances as of December 31, 1998 and January 1, 2000 are as follows:
December 31, January 1, 1998 2000 ------------ ---------- Subordinated notes payable to former shareholders of the Gen-X Companies, due January 1, 2000...... $1,999,065 $-- ========== ====
Upon closing the Gen-X transaction on May 12, 1998, several subordinated notes payable were executed with the former shareholders of the Gen-X Companies for an aggregate of $1,999,065 which is payable upon the earlier of the Company raising certain additional capital or in four equal consecutive quarterly payments beginning March 31, 1999. This note bears interest at 7% per annum until December 31, 1998 and the prime lending rate thereafter. Net interest expense incurred related to notes payable of discontinued operations amounting to $-- , $905,197 and $2,430,151 for the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000, respectively, has been allocated to discontinued operations. Property and Equipment of Discontinued Operations The major classes of property and equipment, at cost, as of December 31, 1998 and January 1, 2000 are as follows:
December 31, January 1, 1998 2000 ------------ ---------- Computers and equipment........................ $ 574,040 $ 693,100 Building....................................... 686,365 678,375 Leasehold improvement.......................... 21,846 14,247 Land........................................... 268,800 268,800 ---------- ---------- 1,551,051 1,654,522 Less: Accumulated depreciation and amortization.................................. (153,862) (411,996) ---------- ---------- Property and equipment, net................. $1,397,189 $1,242,526 ========== ==========
Purchase Commitments of Discontinued Operations As of January 1, 2000, outstanding purchase commitments exist totaling $2,412,167. Related Party Transactions of Discontinued Operations For the year ended December 31, 1997, the KPR Companies' purchased $196,274 of inventory from RYKA Inc. (prior to the Reorganization). Financial Instruments of Discontinued Operations The Company uses derivative financial instruments to manage the impact of foreign exchange rate changes on earnings and cash flows. The Company does not enter into financial instruments for trading or speculative purposes. The counterparties to these contracts are major financial institutions with high credit ratings and the Company does not have significant exposure to any one counterparty. Management believes the risk of loss is remote and in any event would be immaterial. F-24 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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 and 1999, 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 no amounts outstanding related to these contracts as of January 1, 2000. Significant Customers/Concentrations of Credit Risk of Discontinued Operations The Company's sales and accounts receivable of discontinued operations were 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. For the fiscal years ended December 31, 1997, December 31, 1998 and January 1, 2000, net sales to key customers each amounting to in excess of 10% of net sales are as follows:
Fiscal Year Ended ----------------------------------- December 31, December 31 January 1, 1997 1998 2000 ------------ ----------- ---------- Customer A............................ N/A 27% N/A Customer B............................ 22% 13% 13% Customer C............................ 13% N/A N/A
As of 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. As of January 1, 2000, accounts receivable for Customer B amounted to $1,957,882, or 5% of total accounts receivable outstanding in discontinued operations. Major Suppliers/Economic Dependency of Discontinued Operations Inventory purchased for the fiscal years ended December 31, 1997 and December 31 1998 from a supplier amounted to 26% and 11%, respectively, of total inventory purchased. As of December 31, 1997, the amount owed to this supplier was $11,261,105, or 70% of total accounts payable outstanding. As of December 31, 1998 and January 1, 2000, the Company had no amounts owed to this supplier. No other supplier amounted to in excess of 10% of total inventory purchased for each of the years then ended. F-25 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 19--QUARTERLY RESULTS (UNAUDITED) The following tables contain selected unaudited Statement of Operations information for each quarter of the fiscal years ended December 31, 1998 and January 1, 2000. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
For the Year Ended December 31, 1998 ----------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ---------- ---------- ----------- Net revenues................. $ -- $ -- $ -- $ -- ========== ========== ========== =========== Gross profit................. -- -- -- -- ========== ========== ========== =========== Loss from continuing operations.................. $ (439,448) $ (452,616) $ (875,998) $(2,073,038) Income from discontinued operations.................. 1,971,021 1,258,993 3,314,628 3,120,314 ---------- ---------- ---------- ----------- Net income................... $1,531,573 $ 806,377 $2,438,630 $ 1,047,276 ========== ========== ========== =========== Losses per share--basic and diluted(/1/): Loss from continuing operations................ $ (.04) $ (.04) $ (.07) $ (.17) Income from discontinued operations................ .19 .11 .27 .26 ---------- ---------- ---------- ----------- Net income................. $ .15 $ .07 $ .20 $ .09 ========== ========== ========== =========== Weighted average shares outstanding--basic and diluted..................... 10,418,198 11,226,403 11,922,515 11,925,378 ========== ========== ========== ===========
- -------- /(1)/Thesum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period.
For the Fiscal Year Ended January 1, 2000 -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------- ----------- ----------- ------------ Net revenues............... $ -- $ -- $ -- $ 5,510,576 ========== =========== =========== ============ Gross profit............... -- -- -- 1,693,809 ========== =========== =========== ============ Loss from continuing operations................ $ (763,287) $(3,221,021) $(7,116,645) $(15,359,436) Income (loss) from discontinued operations... 1,157,175 (607,335) -- -- Gain (loss) on disposition of discontinued operations................ -- (5,632,158) 97,951 (11,802,472) ---------- ----------- ----------- ------------ Net income (loss).......... $ 393,888 $(9,460,514) $(7,018,694) $(27,161,908) ========== =========== =========== ============ Losses per share--basic and diluted(/1/): Loss from continuing operations.............. $ (.06) $ (.27) $ (.42) $ (.83) Income (loss) from discontinued operations.............. .09 (.05) -- -- Gain (loss) on disposition of discontinued operations.............. -- (.46) -- (.64) ---------- ----------- ----------- ------------ Net income (loss)........ $ .03 $ (.78) $ (.42) $ (1.47) ========== =========== =========== ============ Weighted average shares outstanding--basic and diluted................... 12,018,517 12,120,085 16,824,139 18,424,942 ========== =========== =========== ============
- -------- /(1)/The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period. F-26 GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) NOTE 20--SUBSEQUENT EVENT On February 29, 2000, the Company entered into a long-term agreement with BlueLight.com, an independent company formed to operate the e-commerce businesses of Kmart Corporation, to manage the merchandising, warehousing and fulfillment of BlueLight.com's sporting goods category. F-27 EX-10.8 2 1996 EQUITY INCENTIVE PLAN Exhibit 10.8 GLOBAL SPORTS, INC. 1996 EQUITY INCENTIVE PLAN (amended and restated as of November 16, 1999) - -------------------------------------------------------------------------------- 1. PURPOSE The purpose of the Global Sports, Inc. Equity Incentive Plan (the "Plan") is to promote the long-term retention of key employees of Global Sports, Inc., ("Global") and its current and future subsidiaries (collectively, the "Company") and other persons who are in a position to make significant contributions to the success of the Company, to further reward these employees and other persons for their contributions to the Company's growth and expansion, to provide additional incentive to these employees and other persons to continue to make similar contributions in the future, and to further align the interests of these employees and other persons with those of Global's stockholders. These purposes will be achieved by granting to such employees and other persons, in accordance with the provisions of this Plan, Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards or Performance Awards, for shares of Global's common stock, $0.01 par value per share ("Common Stock"), or Loans or Supplemental Grants, or combinations thereof ("Awards"). 2. AGGREGATE NUMBER OF SHARES 2.1 The aggregate number of shares of Common Stock for which Awards may be granted under the Plan will be 3,000,000 shares. Notwithstanding the foregoing, if there is any change in the capitalization of Global, such as by stock dividend, stock split, combination of shares, exchange of securities, recapitalization or other event which the Board of Directors (the "Board") of Global deems, in its sole discretion, to be similar circumstances, the aggregate number and/or kind of shares for which Awards may be granted under the Plan shall be appropriately adjusted in a manner determined by the Board. No fractional shares of Common Stock will be delivered under the Plan. 2.2 Treasury shares, reacquired shares and unissued shares of Common Stock may be used for purposes of the Plan, at Global's sole discretion. 2.3 Shares of Common Stock that were issuable pursuant to an Award that has terminated but with respect to which such Award had not been exercised, shares of Common Stock that are issued pursuant to an Award but that are subsequently forfeited and shares of Common Stock that were issuable pursuant to an Award that was payable in Common Stock or cash but that was satisfied in cash, shall be available for future Awards under the Plan. 3. ELIGIBLE EMPLOYEES AND PARTICIPANTS 1 3.1 All current and future key employees of the Company, including officers and directors who are employed by the Company, ("Employees") and all other persons, including directors of the Company who are not Employees, who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company, shall be eligible to receive Awards under the Plan. Members of the Board shall not be eligible to receive Awards. No eligible Employee or other person (a "Participant") shall have any right to receive an Award except as expressly provided in the Plan. 3.2 The Participants who shall actually receive Awards under the Plan shall be determined by the Board in its sole discretion. In making such determinations, the Board shall consider the positions and responsibilities of eligible Employees and other persons, their past performance and contributions to the Company's growth and expansion, the value of their services to the Company, the difficulty of finding qualified replacements, and such other factors as the Board deems pertinent in its sole discretion. 4. ADMINISTRATION 4.1 The Plan shall be administered by the Board. The Board may delegate all or any portion of its authority hereunder to one or more committees, each consisting of one or more members of the Board. Once appointed, such committees shall continue to serve until otherwise directed by the Board. Any Awards granted to officers who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act") shall be made by a committee of two or more members of the Board, each of whom is a Non-Employee Director (as defined or interpreted for purposes of Rule 16b-3 (including amendments and successor provisions) as promulgated by the Securities and Exchange Commission pursuant to its authority under the 1934 Act ("Rule 16b-3")) or as otherwise permitted by Rule 16b-3 and other applicable regulations. Any Awards granted to officers who are subject to Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") shall be made by a committee of two or more members of the Board, each of whom is an Outside Director (as defined or interpreted for purposes of Section 162(m) of the Code) or as otherwise permitted by Section 162(m) of the Code and other applicable regulations. 4.2 In addition to its other authority but subject to the provisions of the Plan, the Board shall have the authority to determine, in its sole discretion, the Participants who shall be eligible to receive Awards, the Participants who shall actually receive Awards, the size of each Award, including the number of shares of Common Stock subject to the Award, the type or types of each Award, the date on which each Award shall be granted, the terms and conditions of each Award, whether to waive compliance by a Participant with any obligations to be performed by the Participant under an Award or waive any term or condition of an Award, whether to amend or cancel an existing Award in whole or in part (except that the Board may not, without the consent of the holder of an Award or unless specifically authorized by the terms of an Award, take any action under this clause with respect to such Award if such action would adversely 2 affect the rights of such holder), and the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants. 4.3 The Board may adopt such rules for the administration of the Plan as it deems necessary or advisable, in its sole discretion. For all purposes of the Plan, a majority of the members of the Board shall constitute a quorum, and the vote or written consent of a majority of the members of the Board on a particular matter shall constitute the act of the Board on that matter. The Board shall have the exclusive right to construe the Plan and any Award, to settle all controversies regarding the Plan or any Award, to correct defects and omissions in the Plan and in any Award, and to take such further actions as the Board deems necessary or advisable, in its sole discretion, to carry out the purpose and intent of the Plan. Such actions shall be final, binding and conclusive upon all parties concerned. 4.4 No member of the Board shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the good faith exercise of any authority or discretion granted in the Plan to the Board, or for any act or omission of any other member of the Board. 4.5 All costs incurred in connection with the administration and operation of the Plan shall be paid by the Company. Except for the express obligations of the Company under the Plan and under Awards granted in accordance with the provisions of the Plan, the Company shall have no liability with respect to any Award, or to any Participant or any transferee of shares of Common Stock from any Participant, including, but not limited to, any tax liabilities, capital losses, or other costs or losses incurred by any Participant or any such transferee. 5. TYPES OF AWARDS 5.1. Options. (a) An Option is an Award entitling the recipient on exercise thereof to purchase Common Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Code (any Option intended to qualify as an incentive stock option is hereinafter referred to as an "ISO"), and Options that are not incentive stock options ("non-ISO"), may be granted under the Plan. ISOs shall be awarded only to Employees. (b) The exercise price of an Option will be determined by the Board subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten percent shareholder) of the fair market value of the Common Stock subject to the ISO, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason 3 of the attribution rules of Section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) The exercise price of a non-ISO shall not be less than 100% of the fair market value of the Common Stock subject to the non-ISO, determined as of the time the non-ISO is granted, except that: (A) the exercise price of a non-ISO may be equal to or greater than 85% of the fair market value of the Common Stock subject to the non-ISO, if the discount is granted in lieu of a reasonable amount of cash compensation; or (B) the exercise price of a non-ISO granted pursuant to a Performance Award may be (i) 100% of the fair market value of the Common Stock subject to the non-ISO, determined either as of the time the Performance Award is granted or as of the time the non-ISO is granted pursuant to the Performance Award; or (ii) an amount less than such fair market value if the discount is granted in lieu of a reasonable amount of cash compensation as consideration for exceeding the goal(s) set forth in the Performance Award. (3) In no case may the exercise price paid for Common Stock which is part of an original issue of authorized Common Stock be less than the par value per share of the Common Stock. (4) The Board may reduce the exercise price of an option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) The period during which an Option may be exercised will be determined by the Board, except that the period during which an ISO may be exercised will not exceed ten years (five years, in the case of an ISO granted to a ten-percent shareholder) from the day immediately preceding the date the Option was granted. (d) An Option will become exercisable at such time or times, and on such terms and conditions, as the Board may determine. The Board may at any time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (i) any documents required by the Board and (ii) payment in full in accordance with Section 5.1(e) below for the number of shares for which the Option is exercised. (e) Stock purchased on exercise of an Option must be paid for as follows: (i) in cash or by check (acceptable to Global in accordance with guidelines established for this purpose), bank draft or money order payable to the order of Global or (ii) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Board at or after grant of the Option), (A) through the delivery of shares of Common Stock which have been 4 outstanding for at least six months (unless the Board expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise at least equal to the exercise price, or (B) by delivery of a promissory note of the Option holder to Global, payable on such terms and conditions as the Board may determine, or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to Global sufficient funds to pay the exercise price, or (D) by any combination of the permissible forms of payment; provided, that if the Common Stock delivered upon exercise of the Option is an original issue of authorized Common Stock, at least so much of the exercise price as represents the par value of such Common Stock must be paid other than by the Option holder's promissory note. (f) If the market price of shares of Common Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Board may cancel the Option and cause Global to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Common Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. The Board may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Board. 5.2. Stock Appreciation Rights. (a) A Stock Appreciation Right is an Award entitling the recipient on its exercise to receive an amount, in cash or Common Stock or a combination thereof (such form to be determined by the Board), determined in whole or in part by reference to appreciation in Common Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Common Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Board may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Board to take into account the performance of the Common Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Board may also grant Stock Appreciation Rights that provide that following a Change in Control of the Company (as defined in Section 6.3(b)) the holder of such Right will be entitled to receive, with respect to each share of Common Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Common Stock during a period preceding such Change in Control over the fair market value of a share of Common Stock on the date the Right was granted. (b) Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option that is not an ISO may be granted either at or after the time the Option is granted. A Stock 5 Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) When Stock Appreciation Rights are granted in tandem with Options, the following rules will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (4) The Stock Appreciation Right will be transferable only with the related Option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise Price of such option. (d) A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such terms and conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to Global, accompanied by any other documents required by the Board. 5.3. Restricted and Unrestricted Stock. (a) A Restricted Stock Award entitles the recipient to acquire, for a purchase price not less than the par value, shares of Common Stock subject to the restrictions described in Section 5.3 (d) ("Restricted Stock"). (b) A Participant who is granted a Restricted Stock Award shall have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to Global accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument 6 acceptable to the Board. (c) A Participant who receives Restricted Stock shall have all the rights of a stockholder with respect to such stock, including voting and dividend rights, subject to the restrictions described in 5.3(d) and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) Except as otherwise specifically provided by the Plan or the Award, Restricted Stock may not be sold, assigned, exchanged, pledged, gifted or otherwise disposed of, or transferred, and if a Participant suffers a Status Change (as defined in Section 6.1) for any reason, must be offered to Global for purchase for the amount of cash paid for such stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such terms and conditions, as the Board may determine. The Board may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) Any Participant making, or required by an Award to make, an election under Section 83(b) of the Code with respect to Restricted Stock shall deliver to Global, within ten days of the filing of such election with the Internal Revenue Service, a copy of such election. (f) The Board may, at the time any Award described in this Section 5 is granted, provide that any or all the Common Stock delivered pursuant to the Award will be Restricted Stock. (g) The Board may, in its sole discretion, approve the sale to any Participant of shares of Common Stock free of restrictions under the Plan for a price which is not less than the par value of the Common Stock. 5.4. Deferred Stock. A Deferred Stock Award entitles the recipient to receive shares of Common Stock to be delivered in the future. Delivery of the Common Stock will take place at such time or times, and on such terms and conditions, as the Board may determine. The Board may at any time accelerate the time at which delivery of all or any part of the Common Stock will take place. At the time any Award described in this Section 5 is granted, the Board may provide that, at the time Common Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 5.5. Performance Awards. A Performance Award entitles the recipient to receive, without payment, an Award or Awards described in this Section 5 (such form to be determined by the Board) following the attainment of such performance goals, during such measurement period or periods, and on such other terms and conditions, all as the Board may determine. Performance goals may be related to personal performance, corporate performance, group or departmental performance or any such other category of performance as the Board may 7 determine. The Board shall have the authority to determine the performance goals, the period or period during which performance is to be measured and all other terms and conditions applicable to the Award. 5.6. Loans and Supplemental Grants. (a) The Company may make a loan to a Participant ("Loan"), either in connection with the purchase of Common Stock under the Award or the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Board shall have the authority, in its sole discretion, to determine whether to make a Loan, the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the terms and conditions, if any, under which the Loan may be forgiven. In no event shall any Loan have a term (including extensions) in excess of ten years. (b) In connection with any Award, the Board may, grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (i) the amount of any Federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (ii) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 5. Any payments under this Section 5(b) shall be made at the time the Participant incurs Federal income tax liability with respect to the Award. 6. EVENTS AFFECTING OUTSTANDING AWARDS 6.1. Termination of Service by Death or Disability. If a Participant who is an Employee ceases to be an Employee, or if there is a termination of the consulting, service or other relationship in respect of which a non-Employee Participant was granted an Award under the Plan (such termination of employment or other relationship referred to as a "Status Change") by reason of death or permanent disability (as determined by the Board), the following rules shall apply, unless otherwise determined by the Board: (a) All Options and Stock Appreciation Rights held by the Participant at the time of such Status Change, to the extent then exercisable, will continue to be exercisable by the Participant's heirs, executor, administrator or other legal representative, for a period of one year after the Participant's Status Change. After the expiration of such one-year period, all such Options and Stock Appreciation Rights shall terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 6. All Options and Stock Appreciation Rights held by a Participant at the time of such Status Change that are not then exercisable shall terminate upon such Status Change. 8 (b) All Restricted Stock held by the Participant at the time of such Status Change shall immediately become free of all restrictions and conditions. (c) Any payment or benefit under a Deferred Stock Award, Performance Award or Supplemental Grant to which the Participant was not irrevocably entitled at the time of such Status Change shall be forfeited and the Award canceled as of the time of such Status Change. 6.2. Termination of Service Other Than by Death or Disability. If a Participant suffers a Status Change other than by reason of death or permanent disability (as determined by the Board), the following rules shall apply, unless otherwise determined by the Board at the time of grant of an Award: (a) All Options and Stock Appreciation Rights held by the Participant at the time of such Status Change, to the extent then exercisable, will continue to be exercisable by the Participant for a period of three months after the Participant's Status Change. After the expiration of such three-month period, all such Options and Stock Appreciation Rights shall terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 6. All Options and Stock Appreciation Rights held by a Participant at the time of such Status Change that are not then exercisable shall terminate upon such Status Change. (b) All Restricted Stock held by the Participant at the time of such Status Change shall immediately become free of all restrictions and conditions, unless such Status Change results from a voluntary resignation or termination for Cause (as defined in Section 6.2(d)), in which event all Restricted Stock held by the Participant at the time of the Status Change shall be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock shall be so transferred without any further action by the Participant) in accordance with Section 5.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled at the time of such Status Change shall be forfeited and the Award canceled as of the date of such Status Change. (d) A termination by the Company of a Participant's employment with or service to the Company shall be for "Cause" only if: (i) at least 75% of the members of the Board determined that the Participant (A) was guilty of gross negligence or willful misconduct in the performance of his or her duties for the Company, or (B) breached or violated, in a material respect, any agreement between the Participant and the Company or any of the Company's policy statements regarding conflicts-of-interest, insider trading or confidentiality, or (C) committed a material act of dishonesty or breach of trust; and (ii) in the case of a Participant who is an Employee, (A) such determination was made at a duly convened meeting of the Board with respect to which the Participant received at least ten days prior written notice, had a reasonable opportunity to make a statement and answer the allegations against him or her; and (B) either (I) 9 the Participant was given a reasonable opportunity to take remedial action but failed or refused to do so, or (II) at least 75% of the members of the Board also determined, at such meeting, that an opportunity to take remedial action would not have been meaningful under the circumstances. (e) For all purposes of this Section 6.2 and Section 6.3, (i) if a Participant is an Employee of a subsidiary of Global and such subsidiary ceases to be a subsidiary of Global, then the Participant's employment with the Company will be deemed to have been terminated by the Company without Cause, unless the Participant is transferred to Global or another subsidiary of Global; (ii) the employment with the Company of a Participant who is an Employee will not be deemed to have been terminated if the Participant is transferred from Global to a subsidiary of Global, or vice versa, or from one subsidiary of Global to another; and (iii) if a Participant who is an Employee terminates his or her employment with the Company following a reduction in his or her rate of compensation, then the Participant's employment with the Company will be deemed to have been terminated by the Company without Cause. 6.3. Change in Control (a) In the event of a Change in Control (as defined in Section 6.3(b)), the following rules will apply, unless otherwise expressly provided by the Board at the time of the grant of an Award: (1) Each outstanding Option and Stock Appreciation Right shall automatically become exercisable in full six months after the occurrence of such Change in Control or, if sooner, upon a termination by the Company of the Participant's employment with or service to the Company for any reason other than for Cause (as defined in Section 6.2(d)). This provision shall not prevent an Option or Stock Appreciation Right from becoming exercisable sooner as to Common Stock or cash that would otherwise have become available under such Option or Right during such period. (2) Each outstanding share of Restricted Stock shall automatically become free of all restrictions and conditions six months after the occurrence of such Change in Control or, if sooner, upon a termination by the Company of the Participant's employment with or service to the Company for any reason other than for Cause (as defined in Section 6.2(d)). This provision shall not prevent the earlier lapse of any restrictions or conditions on Restricted Stock that would otherwise have lapsed during such period. (3) Conditions on Deferred Stock Awards, Performance Awards and Supplemental Grants which relate only to the passage of time and continued employment shall automatically terminate six months after the occurrence of such Change in Control or, if sooner, upon a termination by the Company of the Participant's employment with or service to the Company for any reason other than for Cause (as defined in Section 6.2(d)). This provision shall not prevent the earlier lapse of any conditions relating to the passage of time and continued employment that would otherwise have lapsed during such period. Performance or other 10 conditions (other than conditions relating only to the passage of time and continued employment) shall continue to apply unless otherwise provided in the instrument evidencing the Awards or in any other agreement between the Participant and the Company or unless otherwise agreed to by the Board. (b) A "Change in Control" means: (i) the occurrence of an event that would, if known to the Company's management, be required to be reported by the Company under Item 1(a) of Form 8-K pursuant to the 1934 Act; or (ii) the acquisition or receipt, in any manner, by any person (as defined for purposes of the 1934 Act) or any group of persons acting in concert, of direct or indirect beneficial ownership (as defined for purposes of the 1934 Act) of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company; or (iii) a change in the constituency of the Board with the result that individuals (the "Incumbent Directors") who are members of the Board on the Effective Date (as specified in Section 9) cease for any reason to constitute at least a majority of the Board, provided that any individual who is elected to the Board after the Effective Date and whose nomination for election was unanimously approved by the Incumbent Directors shall be considered an Incumbent Director beginning on the date of his or her election to the Board; or (iv) the sale, exchange or other disposition of all or a significant portion of the Company's business or assets, or the execution by the Company of a binding agreement providing for such a transaction; unless in any such case, at least a majority of the Incumbent Directors determine, prior to the occurrence of such Change in Control, that no Change in Control has or will have occurred. 7. GRANT AND ACCEPTANCE OF AWARDS 7.1. The Board's approval of a grant of an Award under the Plan, including the names of Participants and the size of the Award, including the number of shares of Common Stock subject to the Award, shall be reflected in minutes of meetings held by the Board or the Board or in written consents signed by members of the Board. Once approved by the Board, each Award shall be evidenced by such written instrument, containing such terms as are required by the Plan and such other terms, consistent with the provisions of the Plan, as may be approved from time to time by the Board. 7.2 Each instrument may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which shall evidence agreement to the terms thereof. The receipt of an Award shall not impose any obligation on the Participant to accept the Award. 7.3. Except as specifically provided by the Plan or the instrument evidencing an Award, a Participant shall not become a stockholder of Global until (a) the Participant makes any required payments in respect of the Common Stock issued or issuable pursuant to the Award, (b) the Participant furnishes Global with any required agreements, certificates, letters or other instruments, and (c) the Participant actually receives the shares of Common Stock. Subject to 11 any terms and conditions imposed by the Plan or the instrument evidencing an Award, upon the occurrence of all of the conditions set forth in the immediately preceding sentence, a Participant shall have all rights of a stockholder with respect to shares of Common Stock, including, but not limited to, the right to vote such shares and to receive dividends and other distributions paid with respect to such shares. The Board may, upon such terms and conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any and all Common Stock subject to the Participant's Award, had such Common Stock been outstanding. Without limitation, the Board may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 7.4. Notwithstanding any other provision of the Plan, the Company shall not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove any restriction from shares of Common Stock previously delivered under the Plan (a) until all conditions to the Award have been satisfied or removed, (b) until, in the opinion of counsel to the Company, all applicable Federal and state laws and regulations have been complied with, (c) if the outstanding Common Stock is at the time listed on any stock exchange or included for quotation on an inter-dealer system, until the shares to be delivered have been listed or included or authorized to be listed or included on such exchange or system upon official notice of notice of issuance, (d) if it might cause the Company to issue or sell more shares of Common Stock that the Company is then legally entitled to issue or sell, and (e) until all other legal matters in connection with the issuance and delivery of such shares have been approved by counsel to the Company. If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of an Award, such representations or agreements as counsel to the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company shall be under no obligation to deliver Common Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8. TAX WITHHOLDING The Company shall withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all Federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Common Stock may be delivered, the Board shall have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Common Stock. If and to the extent that such withholding is required, the Board may permit a Participant or such other person or entity to elect at such time and in such manner as the Board may determine to have the Company hold back from the shares of Common Stock to be delivered, or to deliver to the Company, Common Stock having a value calculated to satisfy the withholding requirement. If at the time an ISO is exercised, the Board determines that the 12 Company could be liable for withholding requirements with respect to a disposition of the Common Stock received upon exercise, the Board may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of Section 424(c) of the Code) of Common Stock received upon exercise, and (b) to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security. 9. STOCKHOLDER APPROVAL, EFFECTIVE DATE AND TERM OF PLAN The Plan was adopted by the Board on March 20, 1996, subject to the approval of Global's stockholders. The Plan was approved by Global's stockholders at Global's 1996 annual meeting of stockholders on July 8, 1996. The effective date of this Plan ("Effective Date") is July 8, 1996, the date on which the Plan was approved by the affirmative vote of the holders of a majority of the outstanding shares of Global's Common Stock. No Award shall be granted more than ten years after the Effective Date. The Plan has been amended as follows:
Date Amended by Date Approved by Nature of Amendment Board of Directors Shareholders - -------------------------------------------------------------------------- To increase the aggregate September 24, 1996 December 4, 1997 number of shares of Common Stock issuable under the Plan from 100,000 to 1,000,000 To increase the aggregate January 5, 1999 July 13, 1999 number of shares of Common Stock issuable under the Plan from 1,000,000 to 3,000,000 To provide that the Plan shall November 16, 1999 N/A be administered by the Board and that the Board may delegate all or any portion of its authority under the Plan to one or more committees
10. EFFECT, AMENDMENT, SUSPENSION AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Common Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Common Stock may be issued to Employees or other persons or entities. The Board reserves the right, at any time and from time to time, to amend the Plan in any way, or to suspend or terminate the Plan, effective as of the date specified by the Board when it takes such action, which date may be before or after the date the Board takes such action; provided that any such 13 action shall not affect any Awards granted before the actual date on which such action is taken by the Board; and further provided that the approval of Global's stockholders shall be required whenever necessary for the Plan to continue to satisfy the conditions of Rule 16b-3 under the 1934 Act, Section 422 of the Code with respect to the award of ISOs (unless the Board determines that ISOs shall no longer be granted under the Plan), any bylaw, rule or regulation of the market system or stock exchange on which Global's Common Stock is then listed or admitted to trading, or any other applicable law, rule or regulation. 11. OTHER PROVISIONS 11.1 Nothing contained in the Plan or any Award shall confer upon any Employee or other Participant the right to continue in the employ of, or to continue to provide service to, the Company or any affiliated person, or interfere in any way with the right of the Company or any affiliated person to terminate the employment or service of any Employee or other Participant for any reason. 11.2 Corporate action constituting an offer by Global of Common Stock to any Participant under the terms of an Award shall be deemed completed as of the date of grant of the Award, regardless of when the instrument, certificate, or letter evidencing the Award is actually received or accepted by the Participant. 11.3 None of a Participant's rights under any Award or under the Plan may be assigned or transferred in any manner other than by will or under the laws of descent and distribution. The foregoing shall not, however, restrict a Participant's rights with respect to Unrestricted Stock or the outright transfer of cash, nor shall it restrict the ability of a Participant's heirs, estate, beneficiaries, or personal or legal representatives to enforce the terms of the Plan with respect to Awards granted to the Participant. 11.4 The Plan, and all Awards granted hereunder, shall be governed by and construed in accordance with the laws of the State of Delaware. The headings of the Sections of the Plan are for convenience of reference only and shall not affect the interpretation of the Plan. All pronouns and similar references in the Plan shall be construed to be of such number and gender as the context requires or permits. If any provision of the Plan is determined to be unenforceable for any reason, then that provision shall be deemed to have been deleted or modified to the extent necessary to make it enforceable, and the remaining provisions of the Plan shall be unaffected. 11.5 All notices with respect to the Plan shall be in writing and shall be hand delivered or sent by certified mail or reputable overnight delivery service, expenses prepaid. Notices to the Company or the Board shall be delivered or sent to Global's headquarters to the attention of its Chief Executive Officer. Notices to any Participant or holder of shares of Common Stock issued pursuant to an Award shall be sufficient if delivered or sent to such person's address as it appears in the regular records of the Company or its transfer agent. 14 11.6. If there is any change in the capitalization of the Company, such as by stock dividend, stock split, combination of shares, exchange of securities, recapitalization or other event which the Board deems, in its sole discretion, to be similar circumstances, the Board may make such adjustments to the number and/or kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to such Awards and any other provision of such Awards affected by such change, as the Board may determine in its sole discretion. The Board may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, as the Board may determine in its sole discretion. 11.7. The Board may agree at any time, upon request of a Participant, to defer the date on which any payment under an Award shall be made. 11.8. In any case that a Participant purchases Common Stock under an Award for a price equal to the par value of the Common Stock, the Board may determine, in its sole discretion, that such price has been satisfied by past services rendered by the Participant. 11.9. For the purposes of the Plan and any Award granted hereunder, unless otherwise determined by the Board, the term "fair market value" of Common Stock on a specified date shall mean the last sale price for one share of Common Stock on the last trading day on or before the specified date, as reported on the Nasdaq Stock Market, or on such other market system or stock exchange on which Global's Common Stock is then listed or admitted to trading, or, if the foregoing does not apply, the market value determined by the Board. 11.10 Except as otherwise indicated, the term "person," as used in the Plan shall include individuals, corporations, partnerships, trusts, estates, limited liability companies and partnerships and any other type of entity. THE UNDERSIGNED CERTIFIES THAT THE AMENDMENT AND RESTATEMENT OF THIS PLAN WAS DULY APPROVED AND ADOPTED BY THE BOARD OF DIRECTORS OF GLOBAL SPORTS, INC. PURSUANT TO RESOLUTIONS ADOPTED AT A MEETING OF THE BOARD OF DIRECTORS ON THE 16/TH/ DAY OF NOVEMBER, 1999. By: ------------------------ Arthur H. Miller Secretary 15 EX-10.19 3 STEVEN DAVIS EMPLOYMENT AGREEMENT Exhibit 10.19 EMPLOYMENT AGREEMENT Parties: Global Sports, Inc., - ------- a Delaware corporation ("Employer") 1075 First Avenue King of Prussia, PA 19406 Steven C. Davis ("Executive") 111 Arabian Road Schwenksville, PA 19473 Date: January 10, 2000 - ---- Background: Employer and its subsidiaries are in the business of selling - ---------- sporting goods over the Internet (the "Business"). Employer desires to employ Executive, and Executive desires to accept such employment, on the terms and conditions stated below. intending to be legally bound, and in consideration of the mutual agreements stated below, Executive and Employer agree as follows: 1. Employment and Term. Employer hereby employs Executive, and ------------------- Executive accepts such employment, subject to all of the terms and conditions of this Agreement, for a term of five (5) years beginning on January 10, 1999 and ending on December 31, 2004, unless sooner terminated in accordance with other provisions hereof. 2. Position and Duties. Executive shall serve as Senior Vice President ------------------- Marketing and in such capacity shall have supervision and control over, and responsibility for, formulating and directing Employer's overall marketing strategy and overseeing the execution of all marketing programs. Executive shall report to, and be subject to the direction of, Employer's Executive Vice President of E-Commerce. Executive shall also have such other responsibilities and duties consistent with his present duties and current position with Employer, as may from time to time be prescribed by Employer's Executive Vice President of E-Commerce, Chief Executive Officer or Board of Directors. Executive shall devote all of his working time, energy, skill and best efforts to the performance of his duties hereunder in a manner which will faithfully and diligently further the business and interests of Employer. 3. Place of Employment. Executive's principal place of employment will ------------------- be at the Employer's principal executive office located at 1075 First Avenue, King of Prussia, PA, or at such other location as the Employer shall specify. 4. Compensation, Benefits and Expenses. ----------------------------------- 1 4.1 Compensation. Employer shall pay to Executive a minimum annual ------------ base salary ("Base Salary") in the amount of One Hundred Fifty Thousand Dollars ($150,000), payable in accordance with Employer's normal payroll practices. The Base Salary shall be reviewed annually by Employer and shall be subject to annual increases of at least five (5%) percent and otherwise in accordance with Employer's annual performance review procedures. 4.2 Bonuses. In addition to his Base Salary, for each year of this ------- Agreement, Executive shall be eligible to receive an incentive bonus in an amount not greater than 20% of the Base Salary, as determined by Employer's Executive Vice President of E-Commerce or Chief Executive Officer. 4.3 Option Award. Executive shall be granted an option award (the ------------ "Option Award") under Employer's 1996 Equity Incentive Plan (the "Plan") to purchase up to Forty Thousand (40,000) shares of Employer's common stock at an exercise price equal to the fair market value (determined by the closing sale price) of the underlying common stock on the later of: (i) the date that Executive commences employment with Employer, and (ii) the date on which the grant of the Option Award is approved by Employer's Board of Directors. The Option Award shall vest as follows: Ten Thousand (10,000) shares on each of January 10, 2001, January 10, 2002, January 10, 2003 and January 10, 2004. The complete terms and conditions of the Option Award shall be set forth in an Option Grant Letter (the "Option Grant Letter"). 4.4 Benefits. Executive shall be entitled to participate and shall -------- be included in all equity incentive, stock option, stock purchase, profit sharing, savings, bonus, health insurance, life insurance, group insurance, disability insurance, pension, retirement and other benefit plans or programs of Employer now existing, or established hereafter, and offered to its senior management, subject to the terms and provisions thereof. In addition, Employer shall provide Executive with the following other benefits at Employer's expense: (i) automobile allowance not the exceed $500 per month, which includes automobile insurance, and (ii) cell phone and cell phone account. 4.5 Vacation. Executive shall be paid for and be entitled to all -------- holidays as are generally permitted to employees of Employer and three (3) weeks paid vacation per annum, commencing the first year of the Agreement; provided, however, commencing the second year of the Agreement, Executive may not take more than one week of vacation at a time. 4.6 Expenses. Employer shall reimburse Executive for all actual, -------- ordinary, necessary and reasonable expenses incurred by Executive in the course of his performance of services hereunder. Executive shall properly account for all such expenses. 4.7 Relocation and Interim Housing Allowance. Executive agrees to ---------------------------------------- relocate to the King of Prussia, Pennsylvania area and, provided that Executive does so, Employer shall, upon presentation of acceptable proof of payment, reimburse Executive for the following costs 2 incurred by Executive in connection with Executive's relocation, not to exceed a total of $45,000.00: (i) interim housing expenses incurred prior to Executive's relocation; (ii) moving expenses; (iii) interim personal travel for Executive and Executive's fiancee between Executive's present home in Alabama and King of Prussia, Pennsylvania prior to Executive's relocation to the King of Prussia, Pennsylvania area; (iv) real estate commissions and transfer taxes on the sale of Executive's present home in Alabama and the purchase of a new home; (v) interim storage; and (vi) mortgage points. 5. Termination. ----------- 5.1 Termination by Death. If Executive dies, then this Agreement -------------------- shall terminate immediately, and Executive's rights to compensation and benefits hereunder shall terminate as of the date of death, except that Executive's heirs, personal representatives or estate shall be entitled to any unpaid portion of Executive's salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. 5.2 Termination by Disability. If Executive becomes totally ------------------------- disabled, Executive shall continue to receive all of his compensation and benefits in accordance with Section 3 for a period of six (6) months following the Onset of Disability (as defined in this Section 5.2). Any amounts due to Executive under this Section 5.2 shall be reduced, dollar-for-dollar, by any amounts received by Executive under any disability insurance policy or plan provided to Executive by Employer. "Onset of Disability" means the first day on which Executive shall be unable to attend to the regular affairs of Employer on a full time basis by reason of physical or mental incapacity, sickness or infirmity. If Executive's disability continues for more than six (6) consecutive months after the Onset of Disability or for periods aggregating more than six (6) months during any twenty-four (24) month period, then Employer may, upon thirty (30) days prior written notice, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, except that Executive shall be entitled to any unpaid portion of his salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. 5.3 Termination for Cause. Employer may, upon written notice to --------------------- Executive, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, for Cause (as defined in this Section 5.3), except that Executive shall be entitled to any unpaid portion of his salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. "Cause" shall exist if Executive in any material respect neglects Executive's duties under this Agreement after written notice by Employer to Employee, commits an act of dishonesty or breach of trust, acts in a manner which is inimical or injurious to the business or interest of Employer in any material respect, breaches this Agreement in any material respect or is convicted of a felony. 3 5.4 Termination Without Cause. Employer may, upon thirty (30) days ------------------------- prior written notice to Executive, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, for any reason Employer deems appropriate, in which case Employer shall pay Executive, in accordance with Employer's normal payroll practices, six (6) months of Executive's Base Salary for the year in which such termination occurred. 5.5 Termination Upon Relocation: Executive may, upon thirty (30) days --------------------------- prior written notice to Employer, resign his employment if Executive's principal place of employment is moved more than fifty (50) miles from King of Prussia, PA, in which case Employer shall pay Executive, in accordance with Employer's normal payroll practices, six (6) months of Executive's Base Salary for the year in which such resignation occurs. 5.6 Procedure Upon Termination. Upon termination of his employment, -------------------------- Executive shall promptly return to Employer all documents (including copies) and other materials and property of Employer, or pertaining to its business, including without limitation customer and prospect lists, contracts, files, manuals, letters, reports and records in his possession or control, no matter from whom or in what manner acquired. 6. Discoveries. Executive shall communicate to Employer, in writing ----------- when requested, and preserve as confidential information of Employer, all inventions, marketing concepts, software ideas and other ideas or designs relating to the business of the Employer which are conceived, developed or made by Executive, whether alone or jointly with others, at any time during the term of Executive's employment with Employer, which relate to the business or operations of Employer or which relate to methods, designs, products or systems sold, leased, licensed or under development by Employer (such concepts, ideas and designs are referred to as "Executive's Discoveries"). All of Executive's Discoveries shall be Employer's exclusive property, and Executive shall, at Employer's expense, sign all documents and take such other actions as Employer may reasonably request to confirm its ownership thereof. 7. Nondisclosure. At all times after the date of this Agreement, except ------------- with Employer's express prior written consent or in connection with the proper performance of services under this Agreement, Executive shall not, directly or indirectly, communicate, disclose or divulge to any Person, or use for the benefit of any Person, any confidential or proprietary knowledge or information, no matter when or how acquired, concerning the conduct or details of the business of Employer, including, but not limited to, (i) marketing methods and strategies, pricing policies, product strategies and methods of operation, (ii) software source code, software design concepts (including visual expressions and system architecture), technical documentation and technical know-how, (iii) budget and other non-public financial information, and (iv) expansion plans, management policies and other business strategies and policies. For purposes of this Section 7, confidential information shall not include any information which is now known by the general public, which becomes known by the general public other than as a result of a breach of this Agreement by Executive or which is independently acquired by Executive. 4 8. Non-Competition. Executive acknowledges that Employer's business is --------------- highly competitive. Accordingly, for a period of one (1) year after the date of such termination, or, if Executive is terminated without Cause or Executive terminates his employment because Executive's principal place of employment is moved more than fifty (50) miles from King of Prussia, PA, for a period of six (6) months after the date of such termination, except with Employer's express prior written consent, Executive shall not, directly or indirectly, in any capacity, for the benefit of any Person: (a) Communicate with or solicit any Person who is or during such period becomes an employee, consultant, agent or representative of Employer or any of its subsidiaries in any manner which interferes or might interfere with such Person's relationship with Employer or any such subsidiary, or in an effort to obtain any such employee, consultant, agent or representative as an employee, consultant, agent or representative of any other Person. (b) Establish, own, manage, operate or control, or participate in the establishment, ownership, management, operation or control of, or be a director, officer, employee, agent or representative of, or be a consultant to, any Person which conducts a business competitive with all or any material part of the Business. 9. Consideration and Enforcement of Covenants. Executive expressly ------------------------------------------ acknowledges that the covenants contained in Sections 6, 7 and 8 of this Agreement ("Covenants") are a material part of the consideration bargained for by Employer and, without the agreement of Executive to be bound by the Covenants, Employer would not have agreed to enter into this Agreement. Executive acknowledges that any breach by Executive of any of the Covenants will result in irreparable injury to Employer for which money damages could not adequately compensate. If there is such a breach, Employer shall be entitled, in addition to all other rights and remedies which Employer may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining Executive and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action which Executive or any such other Person may have against Employer shall not constitute a defense or bar to the enforcement of any of the Covenants. If Employer must resort to litigation to enforce any of the Covenants which has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a material breach occurred or, if later, the last day of the original fixed term of such Covenant. If any portion of any Covenant or its application is construed to be invalid, illegal or unenforceable, then the other portions and their application shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or similar factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. The provisions of Sections 6, 7 and 8 shall survive the termination of this Agreement. 5 10. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the substantive laws (and not the choice of laws rules) of the Commonwealth of Pennsylvania applicable to contracts made and to be performed entirely therein. Each of the parties irrevocably consents to service of process by certified mail, return receipt requested, postage prepaid, to the address at which such party is to receive notice in accordance herewith. Each of the parties irrevocably consents to the jurisdiction of the state courts in Montgomery County, Pennsylvania and the federal courts in the Eastern District of Pennsylvania in any and all actions between the parties arising hereunder. 11. Notices. All notices, consents or other communications required or ------- permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three (3) business days after being mailed by first class certified mail, return receipt requested, postage prepaid, or (iii) one (1) business day after being sent by a nationally recognized express courier service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the first page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within twenty-four (24) hours thereafter by a signed original sent in the manner provided in the preceding sentence. Either party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other party in accordance with this Section 11, provided that any such change of address notice shall not be effective unless and until received. 12. Prior Agreements. Executive represents to Employer (i) that there are ---------------- no restrictions, agreements or understandings whatsoever to which Executive is a party which would prevent or make unlawful his execution of this Agreement or his employment hereunder, (ii) that Executive's execution of this Agreement and Executive's employment hereunder do not constitute a breach of any contract, agreement or understanding, oral or written, to which Executive is a party or which Executive is bound, and (iii) that Executive has full legal right and capacity to execute this Agreement and to enter into employment by Employer. All prior employment agreements between Executive and Employer are hereby terminated as of the date hereof as fully performed on both sides. 13. Parties in Interest. This Agreement is for the personal services of ------------------- Executive and shall not be assignable by either party without the express prior written consent of the other party; provided, however, Employer shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Employer to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform if no such succession had taken place; provided, further, that no such assumption or agreement to such successor shall relieve Employer of any of its obligations under this Agreement. Subject to the provisions of Section 5 and this Section 13, this Agreement shall inure to the benefit of and bind each of the parties hereto and the successors and assigns of Employer and the personal representatives, estate and heirs of 6 Executive. 14. Entire Understanding. This Agreement sets forth the entire -------------------- understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous, oral or written, express or implied, agreements and understandings. 15. Amendment and Waiver. This Agreement shall not be amended, modified -------------------- or terminated unless in writing and signed by Executive and a duly authorized representative of Employer other than Executive. No waiver with respect to this Agreement shall be enforceable unless in writing and signed by the parties against which enforcement is sought (which, in the case of the Employer, must be a duly authorized representative of Employer other than Executive). Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. 16. Section Headings. Any headings preceding the text of any of the ---------------- Sections or Subsections of this Agreement are inserted for convenience of reference only, and shall neither constitute a part of this Agreement nor affect its construction, meaning, or effect. 17. Definitions. As used herein, the term "Person" means any individual, ----------- sole proprietorship, joint venture, partnership, corporation, association, cooperative, trust, estate, government body, administrative agency, regulatory authority or other entity of any nature. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first stated above. GLOBAL SPORTS, INC. By: /s/ Michael P. Golden /s/ Steven C. Davis --------------------- ------------------- Name: Michael P. Golden STEVEN C. DAVIS Title: EVP of E-Commerce 7 EX-10.20 4 JORDAN COPLAND EMPLOYMENT AGREEMENT Exhibit 10.20 EMPLOYMENT AGREEMENT Parties: Global Sports, Inc., - ------- a Delaware corporation ("Employer") 1075 First Avenue King of Prussia, PA 19406 Jordan M. Copland ("Executive") 728 Alta Avenue Santa Monica, CA 90402 Date: February 9, 2000 - ---- Background: Employer and its subsidiaries are in the business of selling - ---------- sporting goods over the Internet (the "Business"). Employer desires to employ Executive, and Executive desires to accept such employment, on the terms and conditions stated below. intending to be legally bound, and in consideration of the mutual agreements stated below, Executive and Employer agree as follows: 1. Employment and Term. Employer hereby employs Executive, and ------------------- Executive accepts such employment, subject to all of the terms and conditions of this Agreement, for a term of four (4) years beginning on February 23, 2000 and ending on February 22, 2004, unless sooner terminated in accordance with other provisions hereof. 2. Position and Duties. Executive shall serve as Executive Vice ------------------- President and Chief Financial Officer and in such capacity shall have supervision and control over, and responsibility for, the financial, accounting and human resources functions of Employer. Executive shall report to, and be subject to the direction of, Employer's Chief Executive Officer (the "CEO"), as well as Employer's Board of Directors (the "Board"). Executive shall be an executive officer of the Company and shall be a member of all committees of the Company's executive officer level management. Executive shall also have such other responsibilities and duties consistent with his present duties and current position with Employer, as may from time to time be prescribed by the CEO or the Board. Executive shall devote all of his working time, energy, skill and best efforts to the performance of his duties hereunder in a manner which will faithfully and diligently further the business and interests of Employer. 3. Place of Employment. Executive's principal place of employment will ------------------- be at the Employer's principal executive office located at 1075 First Avenue, King of Prussia, PA, or at such other location as the Employer shall specify, provided that Executive's principal place of 1 employment shall at all times during the term hereof be located within 25 miles of the border of the City of Philadelphia, PA. 4. Compensation, Benefits and Expenses. ----------------------------------- 4.1 Compensation. Employer shall pay to Executive an annual base ------------ salary ("Base Salary") in the amount of $150,000, payable in accordance with Employer's normal payroll practices. The Base Salary shall be reviewed annually by Employer and shall be subject to annual increases in accordance with Employer's annual performance review procedures. 4.2 Bonuses. In addition to his Base Salary, for each year of this ------- Agreement, Executive shall be eligible to receive such incentive bonus and/or option grants as may be determined by the CEO, subject to approval of the Board. Executive shall receive a cash bonus of $25,000 upon commencement of Executive's employment. 4.3 Benefits. Executive shall be entitled to participate and shall -------- be included in all equity incentive, stock option, stock purchase, profit sharing, savings, bonus, health insurance, life insurance, group insurance, disability insurance, pension, retirement and other benefit plans or programs of Employer now existing, or established hereafter, and offered to its executive officers, subject to the terms and provisions thereof. Employer and Executive acknowledge that the employee benefit plans and programs provided by Employer at the commencement date of this Agreement will consist of: (i) fully paid health and dental insurance benefits for Executive and his family members; (ii) long- term disability insurance providing for a monthly benefit equal to 60% of Executive's monthly Base Salary up to a maximum monthly benefit of $10,000 until the earlier of Executive's death or attainment of age 65; (iii) term life insurance providing a death benefit equal to 1 1/2 times Base Salary up to a maximum death benefit of $250,000; and (iv) Employer's 401K Plan providing for a matching contribution by Employer equal to 25% of the amount of Executive's contribution up to a maximum contribution by Executive equal to 6% of Executive's Base Salary. 4.4 Automobile. Employer shall pay to Executive an automobile ---------- allowance of $1,000 per month, which will include the cost of leasing or purchasing an automobile, insurance, operation and maintenance. 4.5 Vacation. Executive shall be entitled to three (3) weeks of -------- vacation during each year, in addition to such paid holidays, personal days and days of paid sick leave as are generally permitted to employees of Employer. 4.6 Expenses. Employer shall reimburse Executive for all actual, -------- ordinary, necessary and reasonable expenses incurred by Executive in the course of his performance of services hereunder. Executive shall properly account for all such expenses. 4.7 Relocation and Interim Housing Allowance. Executive agrees to ---------------------------------------- relocate to the King of Prussia, Pennsylvania area and, provided that Executive does so, Employer shall 2 upon presentation of acceptable proof of payment, reimburse Executive for the following costs incurred by Executive in connection with Executive's relocation, in a total amount not to exceed $30,000: (i) interim housing and automobile expenses incurred prior to Executive's relocation; (ii) moving expenses; and (iii) interim personal travel for Executive between Executive's present home in Los Angeles, California and King of Prussia, Pennsylvania prior to Executive's relocation to the King of Prussia, Pennsylvania area. 5. Termination. ----------- 5.1 Termination by Death. If Executive dies, then this Agreement -------------------- shall terminate immediately, and Executive's rights to compensation and benefits hereunder shall terminate as of the date of death, except that Executive's heirs, personal representatives or estate shall be entitled to any unpaid portion of Executive's Base Salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. 5.2 Termination by Disability. If Executive becomes totally ------------------------- disabled, Executive shall continue to receive all of his compensation and benefits in accordance with Section 3 for a period of six (6) months following the Onset of Disability (as defined in this Section 5.2). Any amounts due to Executive under this Section 5.2 shall be reduced, dollar-for-dollar, by any amounts received by Executive under any disability insurance policy or plan provided to Executive by Employer. "Onset of Disability" means the first day on which Executive shall be unable to attend to the regular affairs of Employer on a full time basis by reason of physical or mental incapacity, sickness or infirmity. If Executive's disability continues for more than six (6) consecutive months after the Onset of Disability or for periods aggregating more than six (6) months during any twenty-four (24) month period, then Employer may, upon thirty (30) days prior written notice, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, except that Executive shall be entitled to any unpaid portion of his Base Salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. 5.3 Termination for Cause. Employer may, upon thirty (30) days --------------------- prior written notice to Executive, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, for Cause (as defined in this Section 5.3), except that Executive shall be entitled to any unpaid portion of his Base Salary, accrued benefits up to the date of termination and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. "Cause" shall exist if (i) Executive is grossly negligent or engages in willful misconduct in the performance of his duties under this Agreement, (ii) Executive is convicted of a crime constituting a felony under the laws of the United States or any state thereof, or (iii) Executive willfully breaches this Agreement in a material respect; but only if, in the case of clause (i) or (iii), Executive is given written notice specifying, in reasonable detail, the nature of the alleged 3 neglect, misconduct, or breach and either (A) Executive had a reasonable opportunity to take remedial action but failed or refused to do so, or (B) an opportunity to take remedial action would not have been meaningful or appropriate under the circumstances. 5.4 Termination Without Cause. Employer may, upon thirty (30) days ------------------------- prior written notice to Executive, terminate Executive's employment, and Executive's rights to compensation and benefits hereunder, for any reason Employer deems appropriate, in which case Employer shall pay Executive upon such termination a lump sum payment in an amount equal to 75% of Executive's annual Base Salary for the year in which such termination occurred, and, for nine months after such termination, Employer shall provide Executive with all benefits (or substantially equivalent benefits) under any benefit plans or programs of Employer applicable to Executive immediately prior to the termination of his employment under this Section 5.4. 5.5 Termination by Executive. Subject to the next sentence of this ------------------------ Section 5.5, Executive may, upon ninety (90) days prior written notice to Employer, resign his employment for any reason, in which case Executive shall be entitled to any unpaid portion of his Base Salary, accrued benefits up to the date of termination, and any benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding benefit plans or programs. Executive may, upon thirty (30) days prior written notice to Employer, resign his employment if Executive is demoted, removed or not re-elected to any of his positions or offices, there is a material diminishment of Executive's title, position, responsibilities, or authorities, Executive no longer reports to the CEO, or Michael G. Rubin is no longer CEO of the Company, in which case Employer shall pay Executive upon such termination a lump sum payment in an amount equal to 75% of Executive's annual Base Salary for the year in which such termination occurred, and, for nine months after such termination, Employer shall provide Executive with all benefits (or substantially equivalent benefits) under any benefit plans or programs of Employer applicable to Executive immediately prior to the termination of Executive's employment under this sentence of Section 5.5; provided, however, that if Executive determines to terminate his employment because Michael G. Rubin is no longer CEO of the Company, Executive must do so within ninety (90) days after Michael G. Rubin ceases to be CEO of the Company. 5.6 Procedure Upon Termination. Upon termination of his employment, -------------------------- Executive shall promptly return to Employer all documents (including copies) and other materials and property of Employer, or pertaining to its business, including without limitation customer and prospect lists, contracts, files, manuals, letters, reports and records in his possession or control, no matter from whom or in what manner acquired. 6. Discoveries. Executive shall communicate to Employer, in writing ----------- when requested, and preserve as confidential information of Employer, all inventions, marketing concepts, software ideas and other ideas or designs relating to the business of the Employer which are conceived, developed or made by Executive, whether alone or jointly with others, at any time during the term of Executive's employment with Employer, which relate to the business 4 or operations of Employer or which relate to methods, designs, products or systems sold, leased, licensed or under development by Employer (such concepts, ideas and designs are referred to as "Executive's Discoveries"). All of Executive's Discoveries shall be Employer's exclusive property, and Executive shall, at Employer's expense, sign all documents and take such other actions as Employer may reasonably request to confirm its ownership thereof. 7. Nondisclosure. At all times after the date of this Agreement, except ------------- with Employer's express prior written consent or in connection with the proper performance of services under this Agreement, Executive shall not, directly or indirectly, communicate, disclose or divulge to any Person, or use for the benefit of any Person, any confidential or proprietary knowledge or information, no matter when or how acquired, concerning the conduct or details of the business of Employer, including, but not limited to, (i) marketing methods and strategies, pricing policies, product strategies and methods of operation, (ii) software source code, software design concepts (including visual expressions and system architecture), technical documentation and technical know-how, (iii) budget and other non-public financial information, and (iv) expansion plans, management policies and other business strategies and policies. For purposes of this Section 7, confidential information shall not include any information which is now known by the general public, which becomes known by the general public other than as a result of a breach of this Agreement by Executive or which is independently acquired by Executive. 8. Non-Competition. Executive acknowledges that Employer's business is --------------- highly competitive. Accordingly, for a period of one (1) year after the date of such termination, except with Employer's express prior written consent, Executive shall not, directly or indirectly, in any capacity, for the benefit of any Person: (a) Communicate with or solicit any Person who is or during such period becomes an employee, consultant, agent or representative of Employer or its subsidiaries in any manner that interferes or might interfere with such Person's relationship with Employer or any such subsidiary or in an effort to obtain such Person as an employee, consultant, agent or representative of any other Person; or (b) Establish, own, manage, operate or control, or participate in the establishment, ownership, management, operation or control of, or be a director, officer, employee, agent or representative of, or be a consultant to, any Person which derives more than 50% of its revenues from the sale of sporting goods and recreational products over the internet, provided, however, that this Section 8(b) shall only be applicable if Employer terminates Executive's employment with Cause or Executive resigns his employment for any reason (other than as set forth in the second sentence of Section 5.5). 9. Consideration and Enforcement of Covenants. Executive expressly ------------------------------------------ acknowledges that the covenants contained in Sections 6, 7 and 8 of this Agreement ("Covenants") are a material part of the consideration bargained for by Employer and, without the agreement of Executive to be bound by the Covenants, Employer would not have agreed to 5 enter into this Agreement. Executive acknowledges that any breach by Executive of any of the Covenants will result in irreparable injury to Employer for which money damages could not adequately compensate. If there is such a breach, Employer shall be entitled, in addition to all other rights and remedies which Employer may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining Executive and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action which Executive or any such other Person may have against Employer shall not constitute a defense or bar to the enforcement of any of the Covenants. If Employer must resort to litigation to enforce any of the Covenants which has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a material breach occurred or, if later, the last day of the original fixed term of such Covenant. If any portion of any Covenant or its application is construed to be invalid, illegal or unenforceable, then the other portions and their application shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or similar factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. The provisions of Sections 6, 7 and 8 shall survive the termination of this Agreement. 10. Indemnification. Executive shall be indemnified by Employer, to the --------------- maximum extent permitted under applicable law and the certificate of incorporation and bylaws of Employer, for all acts of Executive as an officer and/or director of Employer and/or any other company which Executive serves as an officer and/or director at the request of Employer. 11. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the substantive laws (and not the choice of laws rules) of the Commonwealth of Pennsylvania applicable to contracts made and to be performed entirely therein. Each of the parties irrevocably consents to service of process by certified mail, return receipt requested, postage prepaid, to the address at which such party is to receive notice in accordance herewith. Each of the parties irrevocably consents to the jurisdiction of the state courts in Montgomery County, Pennsylvania and the federal courts in the Eastern District of Pennsylvania in any and all actions between the parties arising hereunder. 12. Legal Fees. Employer shall pay the reasonable legal fees and expenses ---------- of Executive in connection with the negotiation and execution of this Agreement up to a maximum amount of $5,000. In connection with the enforcement of any right or remedy, or the obtaining of any benefit, under this Agreement, the non- prevailing party shall pay all reasonable legal fees and expenses of the prevailing party. 13. Notices. All notices, consents or other communications required or ------- permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered personally, (ii) three business days after being mailed by first class certified 6 mail, return receipt requested, postage prepaid, or (iii) one business day after being sent by a nationally recognized express courier service, postage or delivery charges prepaid, to the parties at their respective addresses stated on the first page of this Agreement. Notices may also be given by prepaid telegram or facsimile and shall be effective on the date transmitted if confirmed within 24 hours thereafter by a signed original sent in the manner provided in the preceding sentence. Either party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other party in accordance with this Section 13, provided that any such change of address notice shall not be effective unless and until received. 14. Prior Agreements. Executive represents to Employer (i) that there ---------------- are no restrictions, agreements or understandings whatsoever to which Executive is a party which would prevent or make unlawful his execution of this Agreement or his employment hereunder, (ii) that Executive's execution of this Agreement and Executive's employment hereunder do not constitute a breach of any contract, agreement or understanding, oral or written, to which Executive is a party or which Executive is bound, and (iii) that Executive has full legal right and capacity to execute this Agreement and to enter into employment by Employer. 15. Parties in Interest. This Agreement is for the personal services of ------------------- Executive and shall not be assignable by either party without the express prior written consent of the other party; provided, however, Employer shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Employer to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform if no such succession had taken place; provided, further, that no such assumption or agreement by such successor shall relieve Employer of any of its obligations under this Agreement. Subject to the provisions of Section 5 and this Section 15, this Agreement shall inure to the benefit of and bind each of the parties hereto and the successors and assigns of Employer and the personal representatives, estate and heirs of Executive. 16. Entire Understanding. This Agreement sets forth the entire -------------------- understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous, oral or written, express or implied, agreements and understandings. 17. Amendment and Waiver. This Agreement shall not be amended, modified -------------------- or terminated unless in writing and signed by Executive and a duly authorized representative of Employer other than Executive. No waiver with respect to this Agreement shall be enforceable unless in writing and signed by the parties against which enforcement is sought (which, in the case of the Employer, must be a duly authorized representative of Employer other than Executive). Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence by construed as a waiver of 7 such right, remedy, power or privilege with respect to any other occurrence. 18. Section Headings. Any headings preceding the text of any of the ---------------- Sections or Subsections of this Agreement are inserted for convenience of reference only, and shall neither constitute a part of this Agreement nor affect its construction, meaning, or effect. 19. Definitions. As used herein, the term "Person" means any individual, ----------- sole proprietorship, joint venture, partnership, corporation, association, cooperative, trust, estate, government body, administrative agency, regulatory authority or other entity of any nature. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first stated above. GLOBAL SPORTS, INC. By: /s/ Michael G. Rubin /s/ Jordan M. Copland -------------------- --------------------- Name: Michael G. Rubin Jordan M. Copland Title: President 8 EX-10.28 5 AMEND. #1 ADVERTISING AND PROMOTION AGREEMENT WITH YAHOO! Exhibit 10.28 EXECUTION COPY Confidential Treatment has been requested with respect to portions of the agreement indicated with an asterisk [*]. A complete copy of this agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. AMENDMENT #1 ADVERTISING AND PROMOTION AGREEMENT This Amendment #1 (this "Amendment") is entered into as of February 15, 2000 (the "Amendment Effective Date") by and between Yahoo! Inc., a Delaware corporation ("Yahoo") and Global Sports Interactive, Inc., a Pennsylvania Corporation ("Global Sports") and amends the Advertising and Promotion Agreement entered into between Yahoo and Global Sports as of October 3, 1999 (the "Agreement"). Unless otherwise expressly defined herein, all capitalized terms and Section references used herein shall have the meanings set forth in the Agreement. WHEREAS, as of the Amendment Effective Date, Yahoo and Global Sports desire to limit Global Sports' exclusivity rights under Section 11 of the Agreement; WHEREAS, as of April 1, 2000, Yahoo and Global Sports desire to terminate Yahoo's obligation to promote the Global Sports Links under Sections 2, 3, 4.2, 5, 6, 7 and 8 of the Agreement; WHEREAS, as of April 1, 2000, Yahoo and Global Sports desire that Yahoo promote the Global Sports Sports & Recreation Shopping Links (as defined below); WHEREAS, as of the Amendment Effective Date, Yahoo and Global Sports desire that Yahoo display the Global Sports Banner as set forth below and in Yahoo Insertion Order No. 72687. WHEREAS, Yahoo and Global Sports desire to alter the compensation terms set forth in Section 13 of the Agreement; NOW THEREFORE, in consideration of the mutual promises contained in this Amendment and the Agreement, Yahoo and Global Sports hereby agree to amend the Agreement as follows: 1. In Section 1 of the Agreement, the definition of the word "Term" shall be replaced by the following definition and the word "Amendment Effective Date" shall have the following meaning: "Term" shall mean the period beginning on the Effective Date and continuing ---- through December 31, 2000 or until this Agreement is otherwise terminated pursuant to Section 14. "Amendment Effective Date" shall mean February 15, 2000. ------------------------ 1 EXECUTION COPY 2. In Section 1 of the Agreement, the following definition shall be added: "Global Sports Sports & Recreation Shopping Links" shall mean all of the ------------------------------------------------ Paid Advertising provided in the Sports and Recreation category Pages of Yahoo Shopping (including the Global Sports Charter Shopping Sponsorship) with the following exceptions: (i) only [*] of the Paid Advertising in the Yahoo Shopping Outdoor area; (ii) only [*] of the Paid Advertising in the Yahoo Shopping Golf area; (iii) only [*] of the Paid Advertising in the Yahoo Shopping Sports Supplements area; (iv) only [*] of the Paid Advertising in the Yahoo Shopping Sports Memorabilia area. 3. In Section 1 of the Agreement, the definition of the word "Page View" shall be replaced in its entirety by the following definition: "Page View" shall mean a user's request for a Page as measured by Yahoo's advertising reporting system. Global Sports acknowledges and agrees that multiple Global Sports Links on the same Page requested by a user (e.g., Sports and Recreation category Pages of Yahoo Shopping) could result in multiple Page Views being generated; provided that, Yahoo agrees that multiple Page Views will not be counted for multiple Global Sports Links appearing on Global Sports Banner Pages and Global Sports Button Pages. 4. Section 9 of the Agreement shall be replaced in its entirety with the following: Between the Effective Date and March 31, 2000, Yahoo will deliver [*] Global Sports E-Mails through the Yahoo! Delivers program. In all cases, Global Sports E-Mails shall be delivered only (x) to those registered users of Yahoo's U.S. targeted e-mail service that have indicated during the registration process for such service a willingness to receive promotional solicitations via Yahoo Mail; and (y) in accordance with Yahoo's privacy policy. The text of the Global Sports E-Mail shall be provided by Global Sports, consistent with Yahoo's standard policies and guidelines for such messages as set forth in Exhibit O, and shall be subject to Yahoo's prior --------- approval (which shall not be unreasonably withheld). Yahoo will provide Global Sports with three agreed-upon attributes (e.g., age, gender, occupation) that may be used to target to registered users who receive the Global Sports E-Mails. 5. Section 11 of the Agreement shall be replaced in its entirety with the following: 11.1 Beginning on the Amendment Effective Date and continuing until December 31, 2000, Yahoo shall not [*]. The parties acknowledge and agree that, other than expressly set forth in this Section 11.1, Yahoo shall not be restricted in any manner from promoting any entity (including, but not 2 EXECUTION COPY limited to, Mammoth Golf and professional sports leagues) on the Yahoo Properties. 11.2 Global Sports acknowledges that Yahoo has existing contractual obligations with the merchants set forth on Exhibit H ("Existing --------- Obligations") and that notwithstanding anything to the contrary in this Agreement, Yahoo shall be permitted to fulfill the Existing Obligations without being considered to be in breach of its obligations under this Agreement. Further, under no circumstances shall anything in this Section 11 be deemed to restrict in any manner Yahoo's ability to (i) integrate any editorial content (other than branded content that may be provided by Global Sports Competitors) in any Yahoo Property, or (ii) include links to any entity in any directory, merchant listing or other shopping service or feature on any Yahoo Property. To the extent that it is not contractually obligated to do so, Yahoo agrees that it will not, in a manner inconsistent with Yahoo's obligations under Section 11, (x) extend or renew an Existing Obligation, or (y) consent to the extension or renewal of an Existing Obligation if Yahoo may withhold such consent in its sole discretion. 6. Effective April 1, 2000, Section 12 of the Agreement shall be deleted (and all obligations therein shall be deemed fulfilled) and replaced in its entirety with the following: 12.1 Beginning on April 1, 2000 and continuing through December 31, 2000, Yahoo shall provide Global Sports the Global Sports Sports & Recreation Shopping Links. Yahoo shall guarantee delivery of [*] Page Views of the Global Sports Sports & Recreation Shopping Links. 12.2 Between April 1, 2000, and December 31, 2000, Yahoo shall provide the Global Sports Banner on a rotating basis on the Global Sports Banner Pages. Yahoo shall guarantee delivery of [*] Page Views of such Global Sports Banner. For purposes of this Section 12.2, Global Sports Banner Pages shall mean: (i) those Pages displayed upon a user's searching the Yahoo Main Site for a keyword set forth on Exhibit 1 to Amendment #1 to this Agreement, dated as of February 15, 2000 ("Amendment #1"); and (ii) those Pages within the Yahoo Main Site categories set forth on Exhibit 1 to Amendment #1. 12.3 In the event that Yahoo fails to deliver the minimum number of Page Views as set forth above at the expiration of the Term, Yahoo will "make good" the shortfall [*] after the end of the Term until such Page View obligation is satisfied. If Yahoo is unable to fulfill its Page View obligations through the original promotion during this additional period, Yahoo will then have an additional [*] to deliver the required number of Page Views through a comparable promotion acceptable to Global Sports (such three month period, together with the six month period described in the preceding sentence, being referred to collectively as the "Make Good Period"). The provisions set forth in this Section 12.3 set forth the entire liability of Yahoo, and Global Sports' sole remedy, for Yahoo's breach of its Page View obligations set forth in Sections 12.1 and 12.2 during the Term. For clarity, the parties acknowledge that the exclusivity provisions of Section 11 shall not extend beyond the Term and that the sole remedy set forth above shall not apply to a failure by Yahoo to fulfill its Page View obligations during the Make Good Period. 3 EXECUTION COPY 1.4 During the Term, Yahoo will provide Global Sports access to an electronic database that tracks the delivery of Page Views under this Agreement. Such database will be updated in accordance with Yahoo's standard updating procedures at least once per Quarter. 7. Sections 13.1, 13.2, 13.3, 13.4, and 13.5 of the Agreement shall be deleted (and all obligations therein shall be deemed fulfilled) and replaced in their entirety with the following. The parties expressly acknowledge and agree that Global Sports' obligation to deliver the Barter Media pursuant to Section 13.9 of the Agreement shall remain in full force and effect. 1.1 Within five (5) business days of the Amendment Effective Date, Yahoo shall [*] to Global Sports [*] of the Slotting Fee. 1.2 In consideration of Yahoo's performance and obligations as set forth herein under Section 5 of Amendment #1, Global Sports will compensate Yahoo in an amount equal to [*]. Such fee shall be due and paid to Yahoo as follows: (i) [*] on April 1, 2000; (ii) [*] on May 1, 2000; (iii) [*] on June 1, 2000; (iv) [*] on July 1, 2000; (v) [*] on August 1, 2000; (vi) [*]on September 1, 2000; (vii) [*] on October 1, 2000; (viii) [*] on November 1, 2000; (ix) [*] on December 1, 2000. 1.3 Revenue Share. In addition to the fees set forth in Section 13.2 ------------- above, Global Sports shall pay to Yahoo a non-refundable, non-creditable fee equal to [*] percent ([*]%) of any Global Sports Revenue earned beginning on April 1, 2000, and continuing through the remainder of the Term (the "Revenue Share Fee"). Yahoo acknowledges and agrees that all revenue share fees in connection with Global Sports Revenue earned prior to April 1, 2000 shall be deemed fulfilled. In accordance with the definition of Global Sports Revenue, it is understood that Global Sports Revenue does not include revenue from sales made through the Global Sports Site (as opposed to the Merchant Pages, which are displayed by Yahoo through a proxy server). The Revenue Share Fee shall be paid by Global Sports to Yahoo on a quarterly basis within the later of (i) thirty (30) days following the last day of each calendar quarter of the Term, and (ii) ten (10) days following Global Sports' receipt of a Yahoo's written invoice calculating: (i) the total dollar amount of Global Sports Revenue earned during the applicable period, and (ii) a calculation of the Revenue Share Fee. 8. Effective April 1, 2000, Yahoo's obligations to promote the Global Sports Links under Sections 2, 3, 4.2, 5, 6, 7 and 8 of the Agreement shall cease and all obligations therein and relating thereto shall be deemed fulfilled. 9. Section 14.4(a) of the Agreement shall be deleted and Global Sports shall have no right to terminate the Agreement (as amended by this Amendment) pursuant to such Section. The references to Section 14.4(a) shall be deleted from Sections 13.9 and 14.6. 4 EXECUTION COPY 10. Section 14.5 of the Agreement shall be deleted and Global Sports shall have no right of first presentation pursuant to such Section. 11. Exhibit K of the Agreement shall be replaced in its entirety by Exhibit K --------- --------- attached hereto 12. Global Sports acknowledges and agrees that during the Term, the Global Sports Retailers shall continue to participate in Yahoo's Remote Merchant Integration program in accordance with the terms of the Remote Merchant Integration Program Agreement. 13. In accordance with Yahoo Insertion Order No. 72687, Yahoo shall deliver a minimum of [*] Page Views of the Global Sports Banner. Yahoo will deliver such Page Views as follows: (i) at least [*] Page Views between the Amendment Effective Date and March 31, 2000; and (ii) any remaining Page Views by June 30, 2000. No less than [*] of such Page Views shall be delivered in banner positions rotating throughout the Yahoo Main Site, with the remainder being delivered in banner positions rotating throughout the Yahoo Properties. 14. Except as expressly amended as set forth herein, the Agreement shall remain in full force and effect in accordance with its terms. [signature page follows] 5 EXECUTION COPY This Amendment has been executed by the duly authorized representatives of the parties, effective as of February 15, 2000. YAHOO! INC. GLOBAL SPORTS INTERACTIVE, INC. By: _____________________ By: ________________________ Name: ___________________ Name: ______________________ Title: ___________________ Title: _______________________ 6 EX-10.31 6 1ST AMENDMENT TO E-COMMERCE AGREEMENT WITH OSHMANS Exhibit 10.31 FIRST AMENDMENT TO E-COMMERCE AGREEMENT --------------------------------------- This FIRST AMENDMENT TO E-COMMERCE AGREEMENT made the 17th day of June, 1999 by and between GLOBAL SPORTS INTERACTIVE, INC., a Pennsylvania corporation ("GSI") and MICHIGAN SPORTING GOODS DISTRIBUTORS, INC., a Michigan corporation ("Retailer"). W I T N E S S E T H: WHEREAS, on February 1, 1999, GSI and Retailer entered into an E-Commerce Agreement ("Agreement") pursuant to which GSI agreed to act as the outsourcing company providing the Retailer's on-line customers the complete e-commerce shopping experience; and WHEREAS, GSI and Retailer desire to amend the Agreement, all as hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Agreement is amended to add the following paragraph 32: Upon execution of this First Amendment by Retailer, and acceptance thereof by GSI, prior to the announcement of GSI's e-commerce initiative, GSI will deliver to Retailer a Warrant to Purchase Shares of Global Sports, Inc., the parent corporation of GSI, in accordance with the terms set forth in the Warrant Term Sheet attached hereto as Exhibit "B". 2. Retailer acknowledges that it is aware that GSI is negotiating with The Sports Authority, Inc. ("TSA") pursuant to which GSI and TSA will form a separate joint venture to operate TSA's on-line business. Retailer acknowledges that the joint venture between GSI and TSA is not the type of agreement which would entitle Retailer to invoke the "favored nations" clause contained in the first sentence of Section 3.8 of the Agreement, and Retailer consents to GSI entering into such joint venture with TSA. 3. In all other respects, the Agreement shall remain in full force and affect and unamended. GLOBAL SPORTS INTERACTIVE, INC., a Pennsylvania corporation By: /s/ Michael G. Rubin - ----------------------- -------------------------------------- ATTEST MICHIGAN SPORTING GOODS INC., a Michigan corporation DISTRIBUTORS, /s/ Shelley P. Lewis By: /s/ Bruce A. Ullery - ----------------------- -------------------------------------- ATTEST EX-10.34 7 1ST AMEND. TO E-COMMERCE AGREEMENT WITH MC SPORTS Exhibit 10.34 FIRST AMENDMENT TO E-COMMERCE AGREEMENT This FIRST AMENDMENT TO E-COMMERCE AGREEMENT made the 25th day of May, 1999 by and between GLOBAL SPORTS INTERACTIVE, INC., a Pennsylvania corporation ("GSI") and DUNHAM'S ATHLEISURE CORPORATION ("Retailer"). WITNESSETH: WHEREAS, on April 1, 1999, GSI and Retailer entered into an E-Commerce Agreement ("Agreement") pursuant to which GSI agreed to act as the outsourcing company providing the Retailer's on-line customers the complete e-commerce shopping experience; and WHEREAS, GSI and Retailer desire to amend the Agreement, all as hereinafter set forth. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Agreement is amended to add the following paragraph 32: Upon execution of this First Amendment by Retailer, and acceptance thereof by GSI, prior to the announcement of GSI's e-commerce initiative, GSI will deliver to Retailer a Warrant to Purchase Shares of Global Sports, Inc., the parent corporation of GSI, in accordance with the terms set forth in the Warrant Term Sheet attached hereto as Exhibit "B". 2. Retailer acknowledges that it is aware that GSI is negotiating with The Sports Authority, Inc. ("TSA") pursuant to which GSI and TSA will form a separate joint venture to operate TSA's on-line business. Retailer acknowledges that the joint venture between GSI and TSA is not the type of agreement which would entitle Retailer to invoke the "favored nations" clause contained in the first sentence of Section 3.8 of the Agreement, and Retailer consents to GSI entering into such joint venture with TSA. 3. In all other respects, the Agreement shall remain in full force and affect and unamended. GLOBAL SPORTS INTERACTIVE, INC., a Pennsylvania corporation /s/ Michael G. Rubin _____________________________________ BY: _________________________________ ATTEST DUNHAM'S ATHLEISURE CORPORATION /s/ Marshall Sosna _____________________________________ BY: _________________________________ ATTEST EX-10.35 8 1ST AMEND. TO E-COMMERCE AGREEMENT WITH DUNHAMS Exhibit 10.35 FIRST AMENDMENT TO E-COMMERCE AGREEMENT This First Amendment to E-Commerce Agreement is made as of the 5th day of December, 1999 by and between Global Sports Interactive, Inc., a Pennsylvania corporation ("GSI"), and Dunham's Athleisure Corporation, a corporation ("Retailer"). GSI and Retailer are parties to an E-Commerce Agreement, dated as of March 23, 1999 (the "Agreement"), pursuant to which GSI agreed to act as Retailer's outsourcing company for the on-line sale of sporting goods products through a web site to be created, developed, operated, managed and maintained by GSI (the "Retailer Web Site") in accordance with the terms of the Agreement. GSI and Retailer desire to amend the Agreement as set forth in this Amendment to provide that the image of Retailer's Web Site will be consistent with the image of Retailer's Land Based Stores. All capitalized terms used in this Amendment without definition shall have the meanings given to such terms in the Agreement. The parties, intending to be legally bound, agree as follows: 1. The Agreement is amended to add the following Sections 3.3(f), 3(g), 3(h) and 3(i): f. If, at anytime during the Term, Retailer notifies GSI in writing that the assortment of On Line Merchandise being offered for sale on the Retailer's Web Site is not consistent with the In Line Merchandise being offered for sale in Retailer's Land Based Stores, GSI agrees to offer for sale on the Retailer's Web Site up to 500 styles of such In Line Merchandise that are not being offered on the Retailer's Web Site as selected by Retailer (the "Selected Merchandise"), in accordance with the following terms: 1) Within 14 days after receipt of such notice from Retailer, GSI shall place a purchase order. GSI shall have the option to purchase merchandise from the Retailer, manufacturer or other vendor at its discretion. If GSI elects to purchase the Selected Merchandise from Retailer, GSI shall purchase from Retailer, and Retailer shall sell to Global, the Selected Merchandise in accordance with the terms of the Letter Agreement, dated October 7, 1999 (the "Letter Agreement"), as amended in Section 3 of this Amendment, unless Retailer shall handle the fulfillment for the sale by GSI of Selected Merchandise on Retailer's Web Site, in which case the parties will agree upon appropriate procedures. 2) Within 14 days after GSI receives at its fulfillment center Selected Merchandise purchased by GSI, GSI shall offer for sale on the Retailer's Web Site such Selected Merchandise. 3) Global shall not be required to purchase more than 300 styles in any month and shall not be required to purchase more than 500 styles in any calendar quarter. 1 a. If, at any time during the Term, Retailer notifies GSI in writing that the value message for On Line Merchandising being offered for sale on the Retailer's Web Site is not consistent with the value message that Retailer advertises for In Line Merchandise being offered for sale in Retailer's Land Based Stores, then GSI agrees to place on Retailer's Web Site, within fifteen (15) days after receipt of such notice, the appropriate value message. b. If GSI materially breaches its obligations under Section 3.3(f) or Section 3.3(g), and provided Retailer has complied with its obligations under Section 3.3(i), Retailer shall notify GSI in writing, specifying in reasonable detail the nature of the breach, and GSI shall have 30 days after the receipt of such notice to cure the breach. If GSI shall not cure the breach within the 30-day period, Retailer shall have the right to require GSI to take down the Retailer's Web Site until such time as the breach is cured; provided, however, that if GSI materially breaches its obligations under Section 3.3(f) or Section 3.3(g) more than three times in any six-month period, GSI shall not have the right to cure any further breach of Section 3.3(f) or Section 3.3(g) within such six-month period. The cure periods set forth in this Section 3.3(h) shall be the only cure periods applicable to a breach by GSI of its obligations under Section 3.3(g) or 3.3(h). c. Retailer shall cooperate with GSI in the performance by GSI of its obligations under Section 3.3(f) and Section 3.3(g), including (x) furnishing GSI with copies of weekly specials at least four (4) weeks prior to the publication by Retailer of such weekly specials, and (y) for all Selected Merchandise purchased by GSI, placing GSI's SKU number on Retailer's shipping list next to each item of Selected Merchandise purchased by GSI. To facilitate Retailer's obligations under clause (y), Retailer shall give GSI in electronic form Retailer's SKU number for each item of Selected Merchandise, and GSI shall furnish Retailer purchase orders in electronic form with a cross reference file showing the GSI SKU number that corresponds to Retailer's SKU number for each item of Selected Merchandise purchased by GSI. 1. Except as amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 2. The Letter Agreement is hereby amended as follows: a. The following clause is hereby added to the end of Section 2(c) of the Letter Agreement under GSI: GSI may return any product delivered to its fulfillment center from Dunham's that arrives damaged and/or unsaleable. GSI will notify Dunham's of these claims within 21 days after receiving the shipment of such product. 2 b. Section 5(A) of the Letter Agreement is amended in its entirety to read as follows: A. Payment of invoice due in 10 days upon receipt of merchandise. Invoices not paid within 10 days will be subject to a late fee of 1% per month. c. Section 5(D) of the Letter Agreement is amended to read in its entirety as follows: D. Dunham's is not responsible for concealed shortages so long as such shortages do not exceed 10% of the invoice amount for such shipment, inasmuch as GSI will not generally be ordering case pack quantities. Dunham's will implement control procedures to ensure shipment accuracy. Dunham's will allow GSI to audit any order prior to shipment. Dunham's will supply a packing slip identifying the carton in which each product is packed. d. Section 5(E) of the Letter Agreement (after the first sentence) is amended to read in its entirety as follows: C. GSI and Dunham's will continue to develop a more efficient method of shipping and receiving product between the two parties. Dunham's may, at its sole discretion, choose not to ship any particular item ordered by GSI. However, in this case, Dunham's cannot hold GSI accountable for said unshipped product not appearing on the Dunham's web site. Global Sports Interactive, Inc. Dunham's Athleisure Corporation By: /s/ Michael Golden By: /s/ Marshall Sosna Name: Michael Golden Name: Marshall Sosna Title: EVP Title: CFO 3 EX-10.43 9 E-COMMERCE AGREEMENT WITH OSHMAN'S Exhibit 10.43 Confidential Treatment has been requested with respect to portions of the agreement indicated with an asterisk [*]. A complete copy of this agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. GLOBAL SPORTS INTERACTIVE, INC. ______________________ E-COMMERCE AGREEMENT BETWEEN GLOBAL SPORTS INTERACTIVE, INC., AND OSHMAN'S SPORTING GOODS, INC.-SERVICES 1 2 TABLE OF CONTENTS
Section Page - ------- ---- 1 Definitions 2 2 Term 4 3 Operation of the Web Site 5 3.1 Creation and Maintenance of the Web Site 5 3.1.1 GSI Obligations 5 3.1.2 Scalability, Security, and Redundancy 6 3.1.3 Quality Standard 6 3.1.4 Retailer Approval of Initial Web Site 6 3.1.5 Retailer Approval of Web Site Modifications 6 3.1.6 Web Site Address 6 3.1.7 Retailer Information 6 3.1.8 Retailer Information Updates 7 3.1.9 License of the URL and Retailer's Content 7 3.1.10 Maintenance of the Web Site 7 3.2 [*] 8 3.3 GSI's Supply of Certain Online Merchandise 8 3.3.1 Special Make-Ups 8 3.3.2 Closeout Merchandise and Markdowns 9 3.3.3 Form of Communication 9 3.4 Land Based Stores Gift Certificates 9 3.5 Cooperation 9 3.6 Land Based Store Kiosks 9 3.7 Payment and Accounting of Revenue Share to Retailer 10 3.8 Service of Online Customers 10 3.9 Audit 11 3.10 Return of Online Merchandise 11 3.11 Retailer Personnel Discounts 12 3.12 Promotions 12 3.13 Retailer Project Manager 12 3.14 Government Notices 12 4 Online Data and Databases 12 4.1 [*] 12 4.2 Ownership of Databases 13 4.3 Delivery of Customer Data to Retailer 13 5 Advertising and Marketing 13 6 Advertising Co-op and Discretionary Funds 14 7 Confidentiality 14 8 Press Releases 15 9 Exclusive Web Agreement 16 10 Use of URL, Trademarks, Service Marks, Trade Names, and Logos 17 11 Property Rights and Ownership 17 12 Representations and Warranties 18 13 Disclaimer of Warranties 19 14 Indemnification 19 15 Insurance 20 16 Termination and Other Remedies 20 17 Limitations of Liability 22
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18 Discontinuance or Regulation of the Internet; Termination of Access to the Web Site 23 19 Force Majeure 23 20 Notices 23 21 Assignment 24 22 Independent Contractors 24 23 Waiver 24 24 Governing Law 24 25 Jurisdiction 24 26 Binding Effect 24 27 Severability 25 28 Headings 25 29 Entire Agreement 25 30 Counterparts 26
Schedules --------- Schedule 1: Web Site Development Agreement Schedule 2: URL Integration Schedule 3: Marks Schedule 4: Retailer Facilities Schedule 5: Customer Data Schedule 6: Secondary URLs Schedule 7: GSI Infrastructure and Practices Schedule 8: Database Tools Schedule 9: Consignment Terms 4 E-COMMERCE AGREEMENT This E-Commerce Agreement dated the 30th day of December, 1999, ("Effective Date") by and between Global Sports Interactive, Inc., ("GSI") a Pennsylvania corporation with an address of 1075 First Avenue, King of Prussia, Pennsylvania 19406 and Oshman's Sporting Goods, Inc.-Services (Retailer") a Delaware corporation with an address of 2302 Maxwell Lane, Texas 77023. WHEREAS, GSI is in the business of creating and operating e-commerce enabled Web sites on behalf of retailers, providing for those vendors the technology, expertise, infrastructure, and operational support necessary to offer e-commerce to their customers; WHEREAS, Retailer is in the business of selling sports equipment, apparel, footwear, and other related items to consumers through land-based retail stores; WHEREAS, Retailer has made a substantial investment to establish its trade name among consumers and suppliers so as to create a retail image connoting a specific manner in which merchandise is presented and sold throughout Retailer's network of land based retail stores; WHEREAS, Retailer desires to extend its lines of retail distribution through an e-commerce enabled Web site bearing its trade name and trademarks; WHEREAS, both Retailer and GSI recognize that the protection of Retailer's trade name, trademarks, and goodwill, as well as the overall success of the Web site, depend on consumers' perceiving the Web Site to be an Internet extension of Retailer's land-based stores that is as consistent as possible with those stores with respect to merchandise quality, availability, pricing, terms of sale, and other aspects of the retail purchasing experience; WHEREAS, Retailer and GSI expect that the Web Site will complement Retailer's land-based stores, enhancing Retailer's competitive position relative to other sellers of the same or similar merchandise by offering to Retailer's customer's an Internet alternative to in-store shopping; WHEREAS, Retailer and GSI desire to have GSI provide to Retailer a complete Web site solution that shall be the exclusive means by which Retailer will conduct e-commerce through the Web during the term of this Agreement; and WHEREAS, Retailer desires to obtain e-commerce capability from GSI in a manner that reserves to Retailer ultimate control over merchandising, sales, pricing, and customer service practices, policies, and strategies that may be critical to the protection of Retailer's trade name, trademarks, and goodwill and that will allow the Internet initiative to compliment, and not hinder, Retailer's in-store shopping strategies. NOW, THEREFORE, in reliance upon the recitals above (which are made a part of the Agreement below) and in consideration of the agreements, representations, and warranties in this Agreement, Retailer and GSI (each a "Party" and collectively, the "Parties",) intending to be legally bound, agree as follows. 5 1 DEFINITIONS Capitalized terms have the following meanings in this Agreement. 1.1 "Advertising Co-op and Discretionary Funds" means amounts earned by or ----------------------------------------- allocated to a Party by its vendors, the purpose of which is to support the Party's advertising and promotional programs. 1.2 "Affiliate" means, as to any Person, any other Person controlled by, --------- under common control with or controlling such Person, directly or indirectly (through one or more intermediaries or otherwise). Without limiting the foregoing, as to any Person that is an entity, a Person shall be deemed an affiliate of such entity if (a) such Person beneficially owns or holds, directly or indirectly (through one or more intermediaries or otherwise), more than 10% of the voting or equity securities of such entity or such entity beneficially owns or holds, directly or indirectly (through one or more intermediaries or otherwise), more than 10% of the voting or equity securities of such Person or (b) is currently or becomes an executive officer or director of such Person (provided, however, that a Person shall not be deemed an affiliate solely by reason of this (b) if the Person has not been an officer or director of the entity at anytime on or within one year of the date of determination. The term "beneficial ownership" has the meaning given to it in Rule 13d-3, and the term "officer" has the meaning given to it in Rule 16a-1(f), both promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and both as in effect on the date hereof. 1.3 "Categories" means the various types of product groups offered for ---------- sale in Land Based Stores. 1.4 "Closeout Merchandise" means end-of-season or excess merchandise that -------------------- is priced at a greater than normal discount. 1.5 "Closeout Site Pages" means the those Web pages incorporated into the ------------------- Web Site that offer primarily Closeout Merchandise and Markdowns. 1.6 "Content" means all text, images, pictures, sound, graphics, video and ------- other information or data appearing in or through the pages of the Web Site. 1.7 "Customer" means a Person who accesses the Web Site in any manner, -------- whether or not a purchase is made. 1.8 "Customer Information" means all data and information provided by or -------------------- obtained from Customers through the Web Site and all information generated or obtained by virtue of the use of the Web Site by Customers, including without limitation, all Customer Data. 1.9 "Governmental Authority" means any (a) nation, state, county, city, ---------------------- town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing 6 authority or power of any nature. 1.10 "GSI Content" is defined in Section 1.6 of Schedule 1 attached to this ----------- Agreement. 1.11 "GSI Products" is defined in Section 1.7 of Schedule 1 attached to ------------- this Agreement. 1.12 "In Line Merchandise" means merchandise available to be carried by ------------------- Retailer in its Land Based Stores. 1.13 "Intellectual Property Rights" means any and all now known or ---------------------------- hereafter known tangible and intangible (a) rights associated with works of authorship throughout the universe, including but not limited to copyrights, moral rights, and mask-works, (b) trademark and trade name rights and similar rights, (c) trade secret rights, (d) patents, designs, algorithms and other industrial property rights, (e) all other intellectual and industrial property rights of every kind and nature throughout the universe and however designated (including domain names, logos, "rental" rights and rights to remuneration), whether arising by operation of law, contract, license, or otherwise, and (f) all registrations, initial applications, renewals, extensions, continuations, divisions or reissues hereof now or hereafter in force (including any rights in any of the foregoing). 1.14 "Internet" means the system of computer networks interconnected with -------- routers, worldwide in scope, that facilitates data communication services such as remote login, file transfer, electronic mail, and the Web, and any successor to such system. 1.15 "Land Based Stores" means all sites and all channels other than the ----------------- Web Site, whether a walk-in store or otherwise, from or through which Retailer conducts business. 1.16 "Land Based Stores Gift Certificates" means gift certificates, pre- ----------------------------------- programmed cards, and other forms of credit in fixed denominations redeemable only in Land Based Stores. 1.17 "Launch Date" means the date on which the Web Site is fully ----------- functional, and is first available to the public on the Web. 1.18 "Law" means any federal, state, local, municipal, foreign, --- international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty of any Governmental Authority. 1.19 "Link" means a hypertext link to any Web site from or to the Web Site. ---- 1.20 "Markdowns" means merchandise in Retailer's inventory offered for sale --------- at a price permanently and substantially reduced from its original price. 1.21 "Marks" is defined in Section 10 of this Agreement. ----- 1.22 "Online Merchandise" means merchandise to be sold through the Web ------------------ Site. 1.23 "Other GSI Retailers" means sporting goods retailers (a) that own, ------------------- franchise, or operate land based stores through which sporting goods are sold; and (b) whose Web site is owned and operated by GSI. 7 1.24 "Person" means, whether or not capitalized, any individual, ------ corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or governmental body. 1.25 "Project Manager" means a representative of Retailer whose primary --------------- duties are to supply Retailer Content to GSI and to coordinate with GSI regarding Retailer Content. 1.26 "Retailer Content" is defined in Section 1.10 of Schedule 1 attached ---------------- to this Agreement including without limitation, all information provided by Retailer for the operation of the Web Site. 1.27 "Retailer's Net Cost" means, with respect to Special Make-Ups, the ------------------- aggregate of (i) amount paid by Retailer to manufacturer for such merchandise, plus (ii) Retailer's actual costs incurred in connection with such goods (including without limitation transportation, customs duties, finance and insurance, agent commissions, and freight forwarding costs), plus (iii) an amount for overhead and handling equal to [*] of the sum of the amounts in clauses (i) and (ii), plus (iv) an amount for advertising co-op equal to [*] of the sum of the amounts in clauses (i) and (ii). 1.28 "Revenue Share" is defined in Section 37 of this Agreement. ------------- 1.29 "Secondary URL" means uniform resource locators other than the URL ------------- that include one or more of Retailer's trade names, trademarks, or service marks or any variant of such trade names, trademarks, or service marks or other references to Retailer or Retailer's business. 1.30 "Special Make-Ups" means merchandise manufactured exclusively for ---------------- Retailer and includes without limitation, such merchandise sold under a Retailer's trademark. 1.31 "Specifications" means the prescribed standards, descriptions, and -------------- characteristics (including look and feel requirements) relating to the Web Site set forth in Schedule 1 or otherwise described in this Agreement, as modified from time to time as provided in this Agreement. 1.32 "Term" is defined in Section 21 of this Agreement. ---- 1.33 "URL" means the uniform resource locator of the Web Site. --- 1.34 "Web" means the Internet client-server hypertext distributed --- information retrieval system known as the World Wide Web. 1.35 "Web Site" is defined in Section 1.12 of Schedule 1 attached to this -------- Agreement, and includes without limitation, the Closeout Site Pages. 2 TERM 2.1 Term. The Term of this Agreement shall commence upon the execution of ---- this 8 Agreement and shall expire at 1700 G.M.T. on [*], unless terminated in accordance with Section 16 of this Agreement. GSI shall advise Retailer thirty days prior to the expected Launch Date. The Launch Date shall occur during the period beginning [*], and ending 240 days after the Effective Date ("Commencement Period"). The Commencement Period shall be extended to the extent directly delayed by Retailer's failure to comply with the Milestone Delivery Schedule set forth on Attachment B to Schedule 1 attached to this Agreement and the Production Schedule to be agreed upon by the Parties; provided, however, that, without expanding the foregoing, delays associated with the Retailer's objections (or revisions to the Web Site based on Retailer's objections) pursuant to Section 314 shall not be deemed to be a failure to comply with the Milestone Delivery Schedule. Each Party shall give the other Party prompt notice of any failure to comply with the Milestone Delivery Schedule that occurs or is reasonably likely to occur. 3 OPERATION OF THE WEB SITE 3.1 Creation and Maintenance of the Web Site. ---------------------------------------- 3.1.1 GSI Obligations. GSI, at its own expense, shall create, --------------- maintain, host and operate the Web Site in accordance with this Agreement and Schedule 1 attached to this Agreement. Through the Term, the Web Site shall use GSI's proprietary engine that is used for GSI's other retailer sites and will use other technologies consistent with current e-commerce industry practice. No more frequently than annually, Retailer may request that a mutually acceptable, independent third party be engaged to review retail e-commerce Web sites offering general merchandise to determine the methods of operation, features, and functionality of such Web sites. The cost of each such review shall be shared equally by the Parties. Retailer may suggest to GSI methods of operating the Web Site or that features or functionality be included in the Web Site. GSI shall implement such methods, features, or functionality that are implemented on [*] or more of the [*] retail e-commerce Web sites offering general merchandise ranked highest by Media Metrix or such other mutually acceptable Person during the most recent monthly reporting period. GSI shall implement such methods, features, or functionality that are implemented on [*] or more of the [*] retail e-commerce Web sites offering general merchandise ranked highest by Media Metrix or such other mutually acceptable Person during the most recent monthly reporting period unless such method, feature, or functionality would be inconsistent with GSI's reasonable business needs. Such methods, features or functionality, as the case may be, shall be added no later than six (6) months after GSI's receipt of such suggestion from Retailer in writing; provided that in the event that such methods, features or functionality cannot be implemented reasonably within such six month period, then within nine months from receipt of such notice so long as GSI has commenced and proceeded diligently to said implementation within a reasonable period. Notwithstanding the foregoing, GSI is not required to implement any methods, features, or functionality if the actual cost of adding such feature or functionality would exceed [*]% of the revenues on which the Revenue Share is based for the immediately preceding 12 months or if implementing the method, feature, or functionality would be illegal, would result in the infringement or violation of any third party's rights, would cause a breach of 9 any agreement to which GSI is a party, or would require GSI to enter into a commercially unreasonable license. All upgrades to GSI's proprietary engine shall be implemented for the Web Site when the upgrades are made generally available for GSI's other retailer Web sites. Any upgrade to GSI's proprietary engine that has been in commercial use for an Other GSI Retailer site for pre-release testing for more than 6 months shall be made available for the Web Site. 3.1.2 Scalability, Security, and Redundancy. The Web Site shall be ------------------------------------- scalable, secure, and GSI shall provide redundancy and Customer response times all in accordance with the practices employed by retail e-commerce Web sites offering general merchandise as such practices may change from time to time. Schedule 7 attached to this Agreement sets forth GSI's infrastructure and practices as of the Effective Date that will be implemented to support the Web Site. 3.1.3 Quality Standard. GSI shall operate the Web Site consistent ---------------- with the goodwill, quality, and brand image associated with Retailer and the Marks. 3.1.4 Retailer Approval of Initial Web Site. GSI shall not launch ------------------------------------- the Web Site without Retailer's approval of the appearance and functionality of the proposed Web Site. GSI shall make available to Retailer complete versions of the Web Site for Retailer's review and acceptance. Retailer shall use all commercially reasonable efforts to review and evaluate the Web Site within 5 business days of its obtaining such access to the Web Site but in no event more than 15 business days (the "Acceptance Period"). The design, layout, and look and feel of the Web Site (including without limitation the placement and positioning of Marks, advertising and Links) (the "Template") shall be subject to Retailer's approval in its sole discretion; in all other cases, Retailer's approval shall not be unreasonably withheld. The initial Web Site shall be deemed approved if GSI does not receive Retailer's notice of disapproval within 15 business days of such Web Site's availability to Retailer. Retailer shall not disapprove any aspect of the Web Site if such disapproval would result in the material degradation of the performance of the Web Site. 3.1.5 Retailer Approval of Web Site Modifications No changes to the ------------------------------------------- Marks, Retailer Content or Retailer information provided pursuant to Section 317 and no changes to the approved Template shall be made (including the placement and positioning thereof) without Retailer's prior written approval, which may be withheld in its discretion. Any other material changes to the appearance and functionality of the Web Site's user interface initiated after the Launch Date shall be subject to the prior approval of Retailer, which shall not be unreasonably withheld. Such changes shall be deemed approved if GSI does not receive Retailer's notice of disapproval within 7 business days of such changes' availability to Retailer. Retailer shall not disapprove any changes to the Web Site if such disapproval would result in the material degradation of the performance of the Web Site. 3.1.6 Web Site Address. The URL shall be www.oshmans.com. ---------------- 3.1.7 Retailer Information. GSI shall, at its cost and expense, -------------------- incorporate in the Web 10 Site any or all of the following information (which shall for the purposes of Section 11 be deemed Retailer Content ), as Retailer shall elect: corporate information, store locator, public financial information, press releases, community programs, employment opportunities for store or corporate positions, vendor compliance policy, Women & Sports, grants for girls program information and registration, gift card registration, frequently asked questions and a "contact us" section. Retailer shall provide such information in a format acceptable to GSI and shall have sole and complete control over the such information. The Links on the Web Site to such information shall be on the Template (as defined in Section 314). 3.1.8 Retailer Information Updates. Following the Launch Date, ---------------------------- Retailer shall have the right to update the Content provided pursuant to Section 317 of this Agreement, and GSI shall incorporate such updates at GSI's cost, as follows: (a) Public Financial Information. ---------------------------- (i) Stock Prices. Stock prices will be updated daily through a Link to another Web site offering such information. (ii) SEC Filings and Annual Reports. SEC filings will be provided through a Link to another Web site offering such information. (iii) Stock prices and SEC filings and annual reports will be provided only if available in a format acceptable to GSI. (b) Press Releases and Employment Opportunities. GSI shall ------------------------------------------- permit Retailer directly to upload to the Web Site any Retailer-created revisions to press releases and employment opportunities for store or corporate positions provided pursuant to Section 317 of this Agreement (c) Other Information. GSI shall, at no cost to Retailer, ----------------- upload to the Web Site any Retailer-created revisions to the corporate information, store locator, community programs, vendor compliance policy, Women & Sports, grants for girls program information and registration, gift card registration, frequently asked questions, or the "contact us" Content provided pursuant to Section 317 of this Agreement. Retailer may from time to time provide other information, and GSI shall, at no cost to Retailer, upload to the Web Site such other information unless uploading such information would be inconsistent with GSI's reasonable business needs. 3.1.9 License of the URL and Retailer's Content. Except as ----------------------------------------- specifically provided on Schedule 6, Retailer grants to GSI for the Term a nontransferable (except in connection with the assignment of this Agreement), irrevocable license to use, copy, modify, adapt, translate, create derivative works based upon, sublicense, reproduce, distribute, publicly perform, publicly display, and digitally perform the URL and any Secondary URLs registered in Retailer's name to GSI and designate GSI as the technical and billing contact for the URL and all such Secondary URLs with the registrar. Retailer's representatives shall be designated as the administrative and other contacts with the registrar. GSI shall promptly pay any fees and take all other steps as may be necessary to maintain the URL and such Secondary URLs. Retailer grants to GSI a license to use, copy, modify, adapt, translate, create derivative works based upon Retailer Content, sublicense, reproduce, distribute, publicly perform, publicly display, and digitally perform Retailer 11 Content in connection with GSI's performance of its obligations under and in accordance with this Agreement. 3.1.10 Maintenance of the Web Site. GSI shall maintain the Web Site --------------------------- to keep it consistent with good practice associated with retail e-commerce Web sites offering general merchandise as such practices may change. Retailer shall cooperate with GSI in the maintenance of the Web Site at GSI's cost and expense. 3.2 [*] 3.3 GSI's Supply of Certain Online Merchandise. ------------------------------------------ 3.3.1 Special Make-Ups. Prior to ordering Special Make-Ups, Retailer ---------------- shall provide to GSI a description of such Special Make-Ups and advise GSI of Retailer's price to GSI, quantity, and color selection and size range of such Special Make-Ups. GSI may purchase, and Retailer shall sell to GSI at estimated Retailer's Net Cost, the Special Make-Ups, in quantities, colors and sizes determined by GSI. GSI shall have five business days after GSI's receipt of Retailer's notice of availability to advise Retailer of the quantity of any of the Special Make-Ups that it has elected to purchase. Special Make- Ups purchased by GSI shall not be sold on any Web site other than the Web Site. 3.3.2 Closeout Merchandise and Markdowns. Retailer may at its sole ---------------------------------- discretion offer Closeout Merchandise or Markdowns for sale on consignment through the Web Site. Retailer shall ship such Closeout Merchandise or Markdowns to GSI's fulfillment center. Notwithstanding the foregoing, GSI shall not be required to accept a number of styles of Closeout Merchandise and Markdowns that is greater than [*] in the first two years of the Agreement, and greater than [*] in the remaining years of this Agreement. Retailer shall set the selling prices on the Closeout Merchandise and Markdowns. Retailer shall receive [*]% of the proceeds from the sale of any Closeout Merchandise and Markdowns received by GSI excluding amounts received for taxes, delivery, handling, and net of returns, which shall be calculated as follows: [*]% of the sale price plus Retailer's [*]% Revenue Share. By way of example only, if Retailer consigns an athletic shoe to GSI with an original price of $75.00 and a Closeout Merchandise or Markdown price of $50.00, then when the athletic shoe is sold, Retailer shall receive $[*] ([*]% of $50.00 and [*]% of $50.00). GSI shall hold the inventory of Closeout Merchandise or Markdowns In accordance with Schedule 9 attached to this Agreement and shall account to Retailer and remit to Retailer amounts due under this Agreement, for the sale of any Closeout Merchandise and Markdowns when it accounts to Retailer for and remits the Revenue Share. The proceeds from the sale of Closeout Merchandise and Markdowns shall not be included in calculating Revenue Share. 3.3.3 Form of Communication. Any and all information required or --------------------- permitted to be provided by one Party to the other pursuant to this Section 33 shall be provided in a mutually acceptable form. 12 3.4 Land Based Stores Gift Certificates. Retailer shall furnish Land ----------------------------------- Based Stores Gift Certificates to GSI on consignment in accordance with Schedule 9 attached to this Agreement in quantities and denominations requested by GSI. Any Land Based Store Gift Certificates not returned unsold to Retailer within 180 days after GSI receipt of such Land Based Store Gift Certificates shall be deemed to be sold by GSI and the face value of such Land Based Store Gift Certificates shall be deemed proceeds received from the sale of Land Based Store Gift Certificates. GSI shall remit to Retailer [*]% of all proceeds received from the sale of Land Based Stores Gift Certificates, the balance being retained by GSI as its fee and to cover all costs, including without limitation, credit card fees. GSI shall remit to Retailer all amounts due from, account to Retailer for, all sales of Land Based Store Gift Certificates concurrently with its accounting to Retailer for the Revenue Share. The proceeds from the sale of Land Based Store Gift Certificates shall not be included in calculating Revenue Share. 3.5 Cooperation. The Parties acknowledge and agree that their mutual ----------- cooperation and good faith are important to the success of the Web Site and the implementation of Retailer's strategies. Accordingly, each Party agrees reasonably to cooperate with, and to supply information to, the other Party to facilitate the operation and evaluation of the Web Site and implement Retailer's strategies. 3.6 Land Based Store Kiosks. By December 31, 2001, GSI shall have ----------------------- installed terminals with access to the Web Site and from which purchases can be made through the Web Site in each Land Based Store with annual revenues for 1999 greater than $[*] million. GSI shall install such terminals in other Land Based Stores when their annual revenues exceed $[*] million. GSI shall maintain all such terminals at its own cost and expense. 3.7 Payment and Accounting of Revenue Share to Retailer. All proceeds and --------------------------------------------------- other compensation received through the Web Site other than proceeds from the sales of Closeout Merchandise, Markdowns, and Land Based Stores Gift Certificates shall be revenues of GSI. Retailer shall receive a [*]% share of the revenue received by GSI from the sale of Online Merchandise other than Closeout Merchandise or Markdowns excluding amounts received for taxes, delivery, handling, and net of returns ("Revenue Share"). GSI shall properly remit any taxes due on sales through the Web Site. Within ten (10) days after the end of each GSI fiscal month during the Term (with the exception of December, which period shall be thirty days), GSI shall account to Retailer for the related Revenue Share due under this Agreement and shall remit to Retailer such Revenue Share and shall account to Retailer for any related taxes due and remitted by GSI. Within ninety (90) days after the end of each GSI fiscal year, GSI shall provide Retailer with a statement, certified by its independent auditors, setting forth the Revenue Share earned by Retailer during the prior GSI fiscal year and an accounting of the amounts due under Sections 332 and 34. For a period of three years after Retailer's receipt of such certified statement, Retailer may perform a single audit of the books and records of GSI only with respect to the Revenue Share earned during the related GSI fiscal years. Such audit shall be conducted at GSI's principal office located in the continental United States on two weeks' prior notice to GSI. If the audit reveals that the Revenue Share or other amounts due Retailer under this Agreement were understated, GSI shall within thirty days of completion of the audit, pay to Retailer the unpaid balance for the period audited plus interest at the prime rate of interest reported in The Wall Street Journal on the date of the 13 audit's certification, which interest shall accrue from the date that the related understated amounts were due. If the audit reveals that the accounting by GSI is understated by more than [*] ([*]%) percent for the related GSI fiscal year, GSI shall pay to Retailer (a) the unpaid balance of the Revenue Share or other amounts due Retailer under this Agreement for the period audited plus (b) interest at the rate of 18%, which interest shall accrue from the date that the related understated amounts were due plus (c) Retailer's reasonable costs of the audit. 3.8 Service of Online Customers. GSI shall be responsible for providing --------------------------- all customer service relating to sales through the Web Site in accordance with current e-commerce industry standards. GSI shall provide online order tracking capability and toll-free telephone ordering assistance to Customers. GSI shall use commercially reasonable efforts to ship 98% of orders within 48 hours of GSI's receipt of orders. 3.8.1 Independent Evaluation. No more frequently than annually, ---------------------- Retailer may request that a mutually acceptable, independent third party be engaged to review retail e-commerce Web sites offering general merchandise to determine the customer service provided at such Web sites. The cost of each such review shall be shared equally by the Parties. Upon Retailer's request, GSI shall implement such customer service methods that are implemented on [*] or more of the [*] of such sites that are ranked highest by Media Metrix or such other mutually acceptable Person during the most recent monthly reporting period. Upon Retailer's request, GSI shall implement such methods that are implemented on [*] or more of the [*] of such sites that are ranked highest by Media Metrix or such other mutually acceptable Person during the most recent monthly reporting period unless such methods would be inconsistent with GSI's reasonable business needs. Notwithstanding the foregoing, GSI is not required to implement any method if it would be illegal, would result in the infringement or violation of any third party's rights, would cause a breach of any agreement to which GSI is a party, or would require GSI to enter into a commercially unreasonable license. 3.8.2 Customer Complaints and Surveys. GSI shall contemporaneously ------------------------------- transmit to Retailer by email copies of email correspondence between GSI and Customers that lodge complaints about the customer service related to the Web Site and on a quarterly basis, shall provide copies of all other correspondence from Customers that lodge complaints about the customer service related to the Web Site. GSI shall provide to Retailer the compiled results of any of GSI's surveys of Web Site customer satisfaction with the Web Site. 3.9 Audit. Upon 30 days prior written notice and no more frequently than ----- once per 12 month period, GSI shall provide to Retailer reasonable access during normal business hours to GSI's books, records, and data that document the sales, shipment, and return of merchandise through the Web Site for the limited purpose of Retailer's review of GSI's performance under this Agreement. Retailer may inspect such books, records, and data and all such information (other than Customer Information) shall be Confidential Information of GSI as defined in Section 7 of this Agreement, and subject to Section 7 of this Agreement. Retailer may only make copies of such books, records, and data as are reasonably related to disputed matters and only with prior notice to GSI. 3.10 Return of Online Merchandise. GSI's return policy shall be consistent ---------------------------- with Retailer's 14 return policy. With each shipment of merchandise to a Customer, GSI shall instruct the Customer that the merchandise purchased through the Web Site may be returned to the Land Based Stores or to the Web Site fulfillment center and that such returned merchandise ("Online Return") may only be returned in accordance with the instructions enclosed with the merchandise. 3.10.1 Online Return to GSI. GSI will deduct any Revenue Share -------------------- related to the sale of an Online Return to and accepted by GSI. Such deduction will be made from the next Revenue Share payment and shall be identified in the related accounting. 3.10.2 Online Return to GSI of Markdowns and Closeout Merchandise. ---------------------------------------------------------- GSI will issue a refund to Customers for Online Returns of Markdowns and Closeout Merchandise accepted by GSI. Proceeds paid to Retailer for the sale of such Markdowns and Closeout Merchandise will be credited to GSI in the next payment to Retailer under this Agreement. 3.10.3 Online Returns to Land Based Store. Retailer shall ship, at ---------------------------------- GSI's cost (which may include, without limitation, reasonable fees to third party RTV consolidators or processors), Online Returns to Land Based Stores to GSI's fulfillment center. GSI shall credit to Retailer the amount refunded to the Customer less the related Revenue Share. If such merchandise is Closeout Merchandise or a Markdown, GSI shall credit to Retailer the portion of the sale proceeds retained by GSI pursuant to this Agreement and such merchandise shall be returned to the Closeout Merchandise and Markdown inventory. Any credit for Online Returns to Land Based Stores will be applied to the Revenue Share payment for the month following GSI's receipt of the related merchandise. No credit shall be due for merchandise that is not accompanied by proof of the purchase of the merchandise through the Web Site and proof of refund by Retailer. 3.11 Retailer Personnel Discounts. GSI shall offer to officers, directors, ---------------------------- and employees of Retailer discounts on purchases of services and merchandise through the Web Site identical to the discounts offered by Retailer to such personnel for purchases at Land Based Stores. The discount may not be used in combination with any other discount. Retailer shall promote the discount for such purchases through the Web Site to the same extent that it promotes the discount for such purchases at Land Based Stores. 3.12 Promotions. GSI may use the URL and Retailer's name and logo to ---------- promote the Web Site with other businesses; provided however, GSI shall not promote the Web Site on any other sporting goods retailer's Web site or on any Web site that would generally be considered immoral, pornographic or otherwise offensive. 3.13 Retailer Project Manager. Promptly after the execution of this ------------------------ Agreement, but in no event later than sixty days after such execution, Retailer, at its expense, shall appoint a Project Manager who shall be authorized to act on behalf of Retailer for all purposes under this Agreement and whose primary duties shall be to work with GSI regarding this Agreement and the Web Site. Commencing with the Project Manager's appointment and continuing through the Term, the Project Manager shall be Retailer's contact point with GSI and shall be responsible for supplying GSI with the Retailer Content, notices permitted or required under this Agreement, and such other information as may reasonably be required of Retailer to create, maintain, and operate the Web Site efficiently. 15 3.14 Government Notices. GSI shall comply in all material respects with ------------------ all applicable Laws, including without limitation, all applicable Laws relating to disclosure, advertisement, unfair competition, tax, and consumer matters. GSI shall provide immediate notice to Retailer of all government notices and legal process regarding the Web Site, including without limitation notices of deceptive trade practices, infringement, false advertising, defamation, and Federal Trade Commission notices. All such notices and legal process and the existence of all such notices and legal process shall be Confidential Information of GSI as defined in Section 7 of this Agreement, and subject to Section 7 of this Agreement. 4 ONLINE DATA AND DATABASES 4.1 [*] 4.1.1 Compliance with the Web Site Privacy Policy. During the Term ------------------------------------------- and thereafter, GSI and Retailer shall hold and use Customer Data in strict compliance with the Web Site privacy policy as such policy may be revised by mutual agreement at any time and from time to time. GSI shall provide prompt notice of changes to the Web Site privacy policy and each Party will provide prompt notice to the other Party of changes to the elections under such policy by the individuals to which the Customer Data relates. 4.2 Ownership of Databases. All data structures, data schema, database ---------------------- dictionaries, attributes, validation tests for each element, table sizes and formats, access requirements, data dependencies and other elements involving GSI's storage of data and all refinements, updates, releases, improvements and enhancements thereto, all Intellectual Property Rights therein, and all applications created for use of the data and Retailer Content (collectively "Databases") shall, as between GSI and Retailer, be the sole and exclusive property of GSI. 4.3 Delivery of Customer Data to Retailer. Beginning 30 days after the ------------------------------------- Launch Date and during the Term, GSI shall permit Retailer to access and use Customer Data in the Databases in accordance with this Agreement. GSI shall use commercially reasonable efforts to provide to Retailer for its use solely in accordance with this Agreement, the tools available to GSI to access Customer Data, which tools available as of the Effective Date are identified on Schedule 8. Retailer's use of such tools shall be limited to accessing Customer Data from the Databases during the Term and shall be subject to such other restrictions as may be reasonably required by GSI. GSI shall use commercially reasonable efforts to ensure that the Customer Data accurately and completely reflects the Customer Data collected by GSI, but GSI shall have no obligation to check the accuracy, validity or integrity of such Customer Data and except as set forth in this Section 4, the Customer Data is provided "AS-IS" and without any warranty of any kind, either express or implied, including, without limitation, any implied warranties of title, merchantability, or fitness for a particular purpose, or any warranty against infringement of patents, copyrights, trade secrets, or other Intellectual Property Rights. Customer Data is Confidential Information of GSI and Retailer, as defined in Section 7 of this Agreement, and subject to Section 7 of this Agreement. 16 5 ADVERTISING AND MARKETING 5.1 Retailer's Obligations. Retailer shall, commencing no later than the ---------------------- Launch Date and continuing during the Term, at no cost to GSI integrate the URL into its advertising and marketing in accordance with Schedule 2 attached to this Agreement. 5.2 GSI's Obligations. GSI's marketing and promotion of the Closeout ----------------- Merchandise and Markdowns will be consistent with the number of Closeout Merchandise and Markdown stock keeping units offered for sale through the Web Site relative to the number of other merchandise stock keeping units offered for sale through the Web Site. GSI shall, at its own cost and expense, use commercially reasonable efforts to establish and maintain an affiliate program linking other Web sites to the Web Site for the purpose of referring Customers to the Web Site. GSI shall, through December 31, 2000, provide [*] impressions on the Yahoo! Web site promoting the Web Site and services or merchandise offered through the Web Site or such other promotion through the Web mutually acceptable to the Parties. Such promotion shall be subject to Retailer's prior approval, which approval shall not be unreasonably withheld. Such promotions shall be deemed approved if GSI does not receive Retailer's notice of disapproval within 5 days of such promotions' availability to Retailer. GSI shall use commercially reasonable efforts to advise Retailer on other Web based marketing and promotional opportunities for increasing public awareness of the Web Site, including without limitation, email relationship marketing programs. 5.3 Search Engine Registration. GSI shall register the Web Site with each -------------------------- Web search engine or directory site that does not impose a material charge for such registration with which GSI registers the Web site of any Other GSI Retailer. 6 ADVERTISING CO-OP AND DISCRETIONARY FUNDS During the Term, GSI shall use all Advertising Co-op and Discretionary Funds received by GSI directly from vendors (including without limitation, Retailer in its capacity as vendor of Special Make-Ups) as a result of the purchase of merchandise that was sold through the Web Site solely to promote the Web Site and not to defray any operating or development expenses. GSI shall provide an accounting of all such funds to Retailer upon Retailer's reasonable request. 7 CONFIDENTIALITY 7.1 Confidential Information. Each Party acknowledges that, in connection ------------------------ with the performance of this Agreement, it may receive Confidential Information of the other Party. For the purpose of this Agreement, "Confidential Information" shall mean information or material that is clearly marked "confidential" or that the Party receiving the Confidential Information ("Receiving Party") knows, or has reason to know, is the confidential or proprietary information of the Party disclosing such Confidential Information ("Disclosing Party") either because a) such information is marked or otherwise identified by the Disclosing Party as confidential or proprietary or b) such information has commercial value and is not generally known in the Disclosing Party's trade or industry. Confidential Information shall include, without limitation: (a) concepts and ideas relating to the development and distribution of content in any medium; (b) trade secrets, drawings, 17 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 the Parties. 7.2 Confidentiality. The Receiving Party shall (a) hold and maintain in --------------- strict confidence all Confidential Information of the Disclosing Party and shall not disclose it to any third party and (b) shall not use any Confidential Information of the Disclosing Party except as permitted by this Agreement or as may be necessary for the Receiving Party to perform its obligations under this Agreement. The obligations and restrictions imposed by this Section 7 shall terminate five (5) years after the expiration or termination of this Agreement. Notwithstanding the foregoing, the Receiving Party may disclose Confidential Information to a director, officer, employee, or agent of the Receiving Party provided that (a) the responsibilities of such Person to the Receiving Party reasonably require access to Confidential Information; (b) the Receiving Party advises each such Person before he or she receives access to or possession of Confidential Information of the confidential nature of, and the Receiving Party's obligations regarding, the Confidential Information; and (c) for any Person who is not otherwise obligated by written agreement to comply with this Section 7, as a condition of obtaining access to any Confidential Information, each such Person is bound by written agreement the terms of which regarding Confidential Information are no less restrictive than those of this Agreement. The Receiving Party shall be liable for any duplication, use, or disclosure of any Confidential Information by any Person who obtains access to or possession of Confidential Information through the Receiving Party. 7.3 Exceptions. Notwithstanding the foregoing, the Parties agree that ---------- Confidential Information other than Customer Information will not include any information that: (a) was published or becomes available to the general public other than through a breach of this Agreement; (b) was possessed by the Receiving Party prior to receipt or access pursuant to this Agreement, other than through prior disclosure by the Disclosing Party, as evidenced by the Receiving Party's written records; (c) was obtained by the Receiving Party from a third party with a valid right to disclose such Confidential Information, provided that the Receiving Party did not know and reasonably should not have known that such third party was under a confidentiality obligation to the Disclosing Party; or (d) was independently developed by the Receiving Party without the benefit of disclosure by the Disclosing Party as evidenced by the Receiving Party's written records; or (e) was required to be disclosed by governmental agencies, regulatory authorities, or pursuant to court order to the extent such disclosure is required by law and provided that the Receiving Party provides reasonable prior notice to the Disclosing Party of the disclosure. 7.4 Confidentiality of this Agreement. Retailer and GSI acknowledge that --------------------------------- the terms and conditions of this Agreement constitute Confidential Information of each Party governed by the terms of this Section 7 and each Party shall be deemed to be a Receiving Party with respect to such Confidential Information. 7.5 Remedy. The Receiving Party acknowledges that the Disclosing Party ------ will be irreparably harmed if the Receiving Party's obligations under this Section 7 are not performed, and 18 that the Disclosing Party would not have an adequate remedy at law in the event of a violation by the Receiving Party of such obligations. The Receiving Party agrees and consents that the Disclosing Party shall be entitled, in addition to all other rights and remedies to which the Disclosing Party may be entitled, to have a decree of specific performance or an injunction issued requiring any such violation to be cured and enjoining all Persons involved from continuing the violation. The existence of any claim or cause of action that the Receiving Party or any other Person may have against the Disclosing Party shall not constitute a defense or bar the enforcement of this Section 7. The Receiving Party acknowledges that the restrictions in this Section 7 are reasonable and necessary to protect legitimate business interests of the Disclosing Party. 8 PRESS RELEASES All voluntary public announcements concerning the transactions contemplated by this Agreement shall be mutually acceptable to both GSI and Retailer. Unless required by law, neither GSI nor Retailer shall make any public announcement or issue any press release concerning the transactions contemplated by this Agreement without the prior written consent of the other Party. Each Party may make any public announcement or issue any press release it is required by law to issue provided such Party gives reasonable prior notice of such announcement or press release to the other Party. 9 EXCLUSIVE WEB AGREEMENT 9.1 Exclusive Retailer Web Site. During the Term, other than through the --------------------------- Web Site or other Web site operated by GSI, and except to promote the Web Site or Land Based Stores, neither Retailer nor any Affiliate of Retailer shall, alone or with others, directly or indirectly (a) promote or offer for sale through the Internet any merchandise in a Category or distribute or fulfill orders for any merchandise in a Category sold through the Internet or (b) use or permit any other Person to use its name, logo, or other trademarks, service marks, trade names, or trade dress, whether or not registered, on the Internet; provided, however, that if (a) Retailer develops an alternative business model involving sales of sporting goods under a trade name other than Oshman's Sporting Goods or Oshman's SuperSports USA and having a substantially different product mix than presently carried in the Land Based Stores, and (b) GSI declines to provide a Web site to Retailer for such business on substantially the same terms as this Agreement, the provisions of this Section 91 shall not apply to such business. 9.2 [*] 9.3 Retailer's Existing Web Site. For the period commencing 30 days after ---------------------------- the execution of this Agreement and ending on the Launch Date, GSI shall host Retailer's currently existing Web site and shall use commercially reasonable efforts to make such Web site publicly accessible to users of the Internet at all times except for reasonable periods for 19 system maintenance. GSI may offer for sale and accept and fulfill orders for Land Based Stores Gift Certificates through such site in accordance with this Agreement as if the Land Based Stores Gift Certificates were offered, sold, and fulfilled through the Web Site. 9.3.1 Ownership of Retailer's Existing Web Site. As between Retailer ----------------------------------------- and GSI, Retailer's existing Web site shall remain the sole and exclusive property of Retailer. GSI shall have no rights in such Web site, other than the limited right to use such Web site for the performance of its obligations and exercising its rights under this Agreement. 9.3.2 Retailer Warranty. Retailer represents, warrants, and ----------------- covenants (a) that Retailer has the full legal right to grant to GSI any and all ownership rights and licenses granted to GSI under this Section 93 and (b) that during the term of this Agreement, Retailer shall not distribute through its existing Web site any material that (a) infringes on the Intellectual Property Rights of any Person or any rights of publicity or privacy of any Person; (b) violates any Law (including without limitation, the laws and regulations governing export control, unfair competition, anti-discrimination, or false advertising); (c) is defamatory, trade libelous, unlawfully threatening, or unlawfully harassing; (d) is obscene, child pornographic, or indecent; (e) violates any community or Internet standard; or (f) contains any viruses, Trojan horses, worms, time bombs, cancelbots, or other computer programming routines that are intended to damage, detrimentally interfere with, surreptitiously intercept, or expropriate any system, data or personal information. 9.3.3 Remedy. In addition to any remedies that GSI may have at law ------ or in equity, if GSI reasonably determines that Retailer has breached or is likely to breach its representations, warranties, or covenants of this Section 93, GSI may take any action GSI reasonably deems necessary to cure or avoid the breach, including without limitation, the immediate disabling of the Web site and the removal from or refusal to upload to the Web site the related materials. 10 USE OF URL, TRADEMARKS, SERVICE MARKS, TRADE NAMES, AND LOGOS During the Term, Retailer hereby grants to GSI the exclusive license to use, copy, modify and display in accordance with this Agreement the URL and Retailer's trade names, trademarks, trade dress, service marks, and logos and such other names and logos as are listed on Schedule 3 attached to this Agreement ("Marks"), on the Web Site, and a nonexclusive license to use, copy, modify, and display the Marks on invoices and packing slips, in connection with credit card charges, in connection with a toll free Web Site customer service telephone line, as otherwise permitted by this Agreement, and generally in connection with the operation and promotion of the Web Site; provided however, GSI shall have no right to modify the Marks without Retailer's prior approval. Schedule 3 shall be modified from time to time during the Term to add any new trademarks, service marks, trade names and logos that Retailer uses during the Term, and any such additions to Schedule 3 shall be Marks under this Agreement. GSI recognizes the great value of the publicity and goodwill associated with the Marks and acknowledges that such goodwill belongs exclusively to and shall inure to the benefit of Retailer, and that the Marks have acquired a secondary meaning in the minds of the purchasing public. 20 GSI will not acquire any rights in the Marks as a result of its use and all use of the Marks shall inure to Retailer's benefit. Retailer may terminate the license in this Section 10 to the extent that GSI's use of the Marks does not conform to Retailer's standards and GSI does not cure such failure within 10 days of GSI's receipt of Retailer's notice of such failure. GSI shall use the Marks in the form provided to GSI and as may be modified in accordance with this Agreement and in conformance with any Retailer trademark usage policies. GSI shall (a) not take any action inconsistent with Retailer's ownership of the Marks; (b) not attack or assist any third party in attacking the Marks; (c) use proper symbols indicating the registered status of the Marks; (d) not attempt to register the Marks anywhere; and (e) not adopt or use confusingly similar marks. GSI's obligation under this Section 10 shall survive the termination of this Agreement. GSI shall use the Marks only in a manner that reflects the goodwill and quality reflected by the Marks. Upon notice from Retailer, GSI shall remove from the Web Site any Links to Web sites that in Retailer's reasonable judgment (a) are obscene, child pornographic, or violate any community or Internet standard or (b) would offer competitive merchandise or services or merchandise or services that would place Retailer in an adverse light or tarnish its reputation. The use of the Marks as otherwise permitted by this Agreement are deemed to comply with this Section 10. 11 PROPERTY RIGHTS AND OWNERSHIP The Web Site shall consist of, and shall operate in conjunction with, multiple elements, all of which are subject to certain Intellectual Property Rights. The Parties' respective rights with respect to such elements shall be as set forth below and subject to the terms of this Agreement. For purposes of this Agreement, the term "ownership" shall refer to ownership of all right, title and interest in and to the respective elements, including, but not limited to, all patent, copyright, trade secret, trademark and any other similar Intellectual Property Rights therein, as applicable. 11.1 The Web Site shall be owned solely by GSI. 11.2 GSI Products shall be owned solely by GSI. 11.3 Retailer Content shall be owned solely by Retailer. 11.4 Marks shall be owned solely by Retailer. 12 REPRESENTATIONS AND WARRANTIES 12.1 Retailer represents and warrants that 12.1.1 it has the full right to transfer to or grant to GSI the right to use its URL, Secondary URLs, Marks, and Retailer Content as transferred or granted in this Agreement; 12.1.2 during the Term of this Agreement, as used in accordance with this Agreement, the Retailer information provided pursuant to Section 317 and Retailer Content, as provided by Retailer and as updated, are accurate, complete, and not misleading and (a) do not violate any Law (including without limitation, the laws or 21 regulations governing export control, unfair competition, anti- discrimination, or false advertising); (b) do not breach any contract and has not resulted in and will not result in any consumer fraud, product liability, tort, injury, damage, or harm of any kind to any third party; or (c) do not violate any Person's property rights or rights to publicity, privacy, personality, or other rights, and are not defamatory, libelous, unlawfully threatening, unlawfully harassing, obscene, indecent, or pornographic; 12.1.3 Retailer's use and maintenance of Customer Information shall be in strict compliance with the Web Site privacy policy as such policy may be revised at any time and from time to time without notice; and 12.1.4 Schedule 4 attached to this Agreement is, and shall be promptly revised by Retailer to continue to be, an accurate and complete list of the addresses of every facility owned or operated by Retailer. 12.1.5 Schedule 6 attached to this Agreement is, and shall be maintained by Retailer to continue to be, an accurate and complete list of the Secondary URLs registered in Retailer's name, and Retailer shall give 30 days prior notice to GSI of any and all additions or changes to the Secondary URLs on Schedule 6. 12.2 GSI represents and warrants that during the term of this Agreement, the Web Site, GSI Content, all material available on the Web Site, and all advertising that is not Retailer Information or Retailer Content will not (a) infringe on the Intellectual Property Rights of any Person or any rights of publicity or privacy of any Person; (b) violate any Law (including without limitation, the laws and regulations governing export control, unfair competition, anti- discrimination, or false advertising); (c) be defamatory, trade libelous, unlawfully threatening, or unlawfully harassing; (d) be obscene, child pornographic, or indecent; (e) violate any community or Internet standard; or (f) contain any viruses, Trojan horses, worms, time bombs, cancelbots, or other computer programming routines that are intended to damage, detrimentally interfere with, surreptitiously intercept, or expropriate any system, data or personal information. 12.3 Each Party represents and warrants to the other Party that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and that it has the power and authority to enter into this Agreement and the transactions contemplated herein; (b) the consummation of the transactions described by this Agreement shall not conflict with or result in a breach of any of the terms, provisions or conditions of its Articles of Incorporation or Bylaws, or any statute or administrative regulation or of any order, writ, injunction, judgment or decree of any court, regulatory or Governmental Authority or of any agreement or instrument to which it is a party or by which it is bound or constitute a default thereunder; and (c) this Agreement has been duly authorized, executed and delivered by it and this Agreement is valid, enforceable and binding upon each Party in accordance with its terms. 12.4 In addition to any remedies that either Party may have at law or in equity, if either Party reasonably determines that the other Party has breached or is likely to breach Section 1212 or 122, the non-breaching Party may take any action it reasonably deems necessary to cure or avoid the breach, including without limitation, the immediate removal from or refusal to upload to the Web Site the related materials. 22 13 DISCLAIMER OF WARRANTIES EXCEPT FOR THE EXPRESS WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER RETAILER NOR GSI MAKES ANY, AND BOTH DISCLAIM ALL, REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, ORAL OR WRITTEN, IN FACT OR IN LAW, INCLUDING WITHOUT LIMITATION ALL WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR WARRANTIES THAT ARISE FROM TRADE USAGE OR CUSTOM. EACH PARTY ACKNOWLEDGES AND AGREES THAT THE OTHER PARTY HAS NOT MADE, NOR DOES HEREBY MAKE, ANY OTHER REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND OR CHARACTER, EXPRESSED OR IMPLIED. 14 INDEMNIFICATION 14.1 Retailer, at its own cost and expense, shall defend, indemnify and hold harmless GSI and any of its officers, directors, employees or agents from and against all damages, expenses, liabilities and other costs (including reasonable attorneys fees and court costs) arising from or related to (a) claims that GSI's possession or use in accordance with this Agreement of Retailer Content, the Marks, or other items provided by Retailer pursuant to this Agreement infringes a third party patent, copyright, trademark, trade secret, or other proprietary right; (b) claims by third parties arising from or related to Retailer's breach of any representation or warranty in this Agreement; or (c) Retailer's gross negligence, willful or intentional misconduct. 14.2 GSI, at its own cost and expense, shall defend, indemnify and hold harmless Retailer and any of its officers, directors, employees or agents from and against all damages, expenses, liabilities and other costs (including reasonable attorneys fees and court costs) arising from or related to (a) claims made by third parties to the extent that they are based on information (including Content) on, or transactions through, the Web Site or GSI's services to Retailer provided pursuant to this Agreement other than claims for which GSI is entitled to indemnification pursuant to Section 141 of this Agreement or (b) GSI's gross negligence, willful or intentional misconduct. 14.3 An indemnitor under this Section 14 shall have the right to control the defense and settlement of any claims or actions for which it is obligated to defend, but the indemnitee shall have the right to participate in such claims or actions at its own cost and expense. An indemnitor under this Section 14 shall have no liability under this Section 14 to the extent that the indemnitor is actually prejudiced by the indemnitee's failure to give notice to the indemnitor promptly after the indemnitee learns of such claim so as to not prejudice the indemnitor. 15 INSURANCE 15.1 GSI shall maintain in full force and effect products liability insurance coverage for merchandise sold through the Web Site in an amount not less than $[*] million. Such policy shall name Retailer as an additional insured. 23 15.2 GSI shall deliver to Retailer certificates of insurance that stipulate that no less than ten days notice will be given to Retailer prior to the termination of the related policy. Such certificates shall identify the coverage and state that Retailer is an additional insured under the policy. 16 TERMINATION AND OTHER REMEDIES 16.1 Termination for Cause by Either Party. Except as otherwise provided ------------------------------------- in this Agreement, this Agreement may be terminated by either Party 16.1.1 if a material breach of the terms or conditions of this Agreement by the other Party which breach is not cured within 30 days of the breaching Party's receipt of notice of such breach or such longer period as may be reasonably necessary provided that the Party in breach is diligently pursuing a cure. As used herein, "material breach" shall mean a failure by a Party to perform any of its obligations the effect of which would substantially impair the value of this Agreement to the other Party; 16.1.2 if the other Party fails to pay to the Party within 10 days after Party makes written demand for any past-due amount payable under this Agreement; 16.1.3 if a voluntary petition is commenced by the other Party under the Bankruptcy Code, as amended, 11 U.S.C. (S) 101 et seq; the other Party has an involuntary petition commenced against it under the Bankruptcy Code and such petition is not dismissed within 60 days after filing; the other Party becomes insolvent; or any substantial part of the other Party's property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency; or liquidates or otherwise discontinues all or a significant part of its business operations. 16.1.4 if a Party's non-performance is excused by Section 19 and such non-performance continues for 30 days. 16.2 Termination for Cause by Retailer. --------------------------------- 16.2.1 Retailer may terminate this Agreement upon 180 days' notice if (a) Revenue Share-generating sales do not equal or exceed the following amounts for the related GSI fiscal years and (b) GSI does not pay twice the shortfall in Revenue Share to Retailer by March 31 of the following year. 2001 $[*] million 2002 $[*] million 2003 $[*] million 2004 $[*] million 16.2.2 Retailer may terminate this Agreement immediately upon notice if (a) GSI or any Affiliate of GSI (except for Affiliates of GSI in a business relationship structure substantially similar to that between GSI and The Sports Authority (excluding the 24 economics)) promotes, offers for sale, or distributes any sports equipment, sports apparel, or athletic footwear through the Internet under a trade name, trademark, or service mark owned by GSI or any Affiliate of GSI; (b) GSI does not offer (and is not prohibited by the manufacturer from offering) to Retailer the option to offer on the Web Site all merchandise that is offered on such GSI Web site; and (c) Retailer gives notice of termination within 30 days of Retailer's receipt of GSI's notice refusing to so offer such option. 16. Effect of Termination. --------------------- 16.3.1 Upon the expiration or termination by Retailer of this Agreement, (a) all licenses granted to either Party under this Agreement shall terminate; (b) GSI shall transfer the registration of the URL to Retailer and designate Retailer as the administrative, technical, billing contact, and any other contact for the URL and all Secondary URLs with the registrar; (c) GSI shall return to Retailer or at Retailer's option, destroy Retailer Content in GSI's possession; and (d) upon Retailer's request, GSI shall continue to operate the Web Site in accordance with this Agreement for no more than 180 days and reasonably cooperate with Retailer in closing the Web Site at the end of such period, including without limitation, completing the processing of all orders and requests for customer service. 16.3.2 Upon the expiration or termination by Retailer of this Agreement, GSI shall release to Retailer Customer Identification Data (defined below), which shall remain subject to Section 4 of this Agreement. "Customer Identification Data" means Customer Data that identifies the names, addresses, telephone numbers, email addresses, and purchasing history of Customers who during the Term have placed an order for Online Merchandise. 16.3.3 Upon the expiration or termination by Retailer of this Agreement, GSI grants to Retailer a perpetual, transferable, irrevocable license throughout the universe to use, copy, modify, adapt, translate, create derivative works based upon, sublicense, reproduce, distribute, publicly perform, publicly display, and digitally perform the appearance and operational patterns of the user interface of the Web Site. The foregoing license does not include any rights to any computer software or programming code. 16.3.4 Sections 4, 7, 13, 14, 163, and 17 shall survive any termination by GSI of this Agreement. 16.4 Other Remedies. In addition to any other payment to be made -------------- hereunder, any amounts owed to a Party shall bear interest at the lesser of 18% per annum or the maximum rate allowed by law from the date such amounts were required to be paid until payment. Nothing contained herein shall limit a Party's ability to obtain injunctive or equitable relief with respect to the breach of Sections 9 or 10. 17 LIMITATIONS OF LIABILITY EXCEPT FOR ANY LIABILITY UNDER SECTIONS 7 AND 14 OF THIS AGREEMENT, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY 25 INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES (REGARDLESS OF WHETHER SUCH DAMAGES ARISE OUT OF CONTRACT, NEGLIGENCE OR OTHER LEGAL THEORIES OR OTHERWISE) ARISING FROM OR RELATED TO THIS AGREEMENT OR RETAILER'S OR RETAILER'S CUSTOMERS' USE OF OR INABILITY TO ACCESS ANY PART OF THE INTERNET OR RETAILER'S OR RETAILER'S CUSTOMERS' RELIANCE ON OR USE OF INFORMATION, SERVICES OR MERCHANDISE PROVIDED ON OR THROUGH THE WEB SITE OR THE SERVICES, OR THAT RESULT FROM MISTAKES, OMISSIONS, INTERRUPTIONS, LOSS, THEFT, OR DELETION OF FILES, ERRORS, DEFECTS, DELAYS IN OPERATION, OR TRANSMISSION, OR ANY FAILURE OF PERFORMANCE. EXCEPT FOR ANY LIABILITY UNDER SECTIONS 7 AND 14 OF THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY UNDER THIS AGREEMENT FOR AN AMOUNT THAT EXCEEDS, IN THE AGGREGATE, THE AMOUNTS PAID TO RETAILER DURING THE [*] MONTHS PRECEDING THE LAST ACT OR OMISSION GIVING RISE TO SUCH LIABILITY; PROVIDED, HOWEVER, THAT IF FEWER THAN [*] MONTHS HAVE ELAPSED FROM THE LAUNCH DATE THROUGH THE DATE OF SUCH LAST ACT OR OMISSION, THEN THE LIABILITY CAP SHALL BE EQUAL TO TWELVE TIMES THE AVERAGE MONTHLY PAYMENT TO RETAILER DURING SUCH PERIOD. THE REMEDIES SET FORTH IN THIS SECTION 17 CONSTITUTE THE SOLE AND EXCLUSIVE REMEDIES AVAILABLE TO THE PARTIES UNDER THIS AGREEMENT. THE REMEDIES SPECIFICALLY PROVIDED BY THIS AGREEMENT AND THE PROVISIONS OF THIS SECTION 17 SET FORTH EACH PARTY'S EXCLUSIVE REMEDIES AND ALLOCATE BETWEEN GSI AND RETAILER THE RISKS UNDER THIS AGREEMENT, SOME OF WHICH MAY BE UNKNOWN OR UNDETERMINABLE. SUCH LIMITATIONS WERE A MATERIAL INDUCEMENT FOR GSI AND RETAILER TO ENTER INTO THIS AGREEMENT, AND THE PARTIES HAVE RELIED UPON SUCH LIMITATIONS IN DETERMINING WHETHER TO ENTER INTO THIS AGREEMENT, AND THE PARTIES INTEND THEM TO BE ENFORCEABLE WHETHER OR NOT THE DAMAGES WERE FORESEEABLE OR , EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY OF SUCH DAMAGES AND EVEN IF THE EXCLUSIVE REMEDIES PROVIDED BY THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE. IN NO EVENT SHALL EITHER PARTY BE LIABLE IN ANY RESPECT FOR CLAIMS BROUGHT MORE THAN [*] MONTHS AFTER THE LAST ACT OR OMISSION GIVING RISE TO SUCH LIABILITY. 18 DISCONTINUANCE OR REGULATION OF THE INTERNET; TERMINATION OF ACCESS TO THE WEB SITE 18.1 Discontinuance or Regulation of the Internet. Retailer acknowledges -------------------------------------------- that the Internet (including without limitation the Web) is a network of private and public networks and that GSI has no control over the Internet. GSI shall not be liable for the discontinuance of operation of any portion of the Internet or possible regulation of the Internet, which might restrict or prohibit the operation of the Web Site. 18.2 Termination of Access to the Web Site. GSI may terminate access to ------------------------------------- the Web Site at any time and without notice (a) to prevent damage or degradation to the Web Site; (b) to comply with any Law; or (c) otherwise protect GSI from liability to third parties. GSI will use reasonable commercial efforts to notify Retailer of any such termination of access as soon as reasonably practicable after such termination of access and promptly to restore such access upon the cessation of the condition leading to such termination. 26 19 FORCE MAJEURE Neither Party shall be liable to the other Party for non-performance of this Agreement in whole or in part, if (a) the non-performance is caused by the other Party or events or conditions beyond that Party's reasonable and actual control and for which that Party is not responsible under this Agreement, (b) the Party gives prompt notice under Section 20, and (c) the Party makes all commercially reasonable efforts to perform. 20 NOTICES Any notices or writings to be sent hereunder shall be in writing and shall be by personal delivery, facsimile transmission or by certified or registered mail, return receipt requested, and shall be deemed given upon the earlier of actual receipt, five (5) days after deposit in the mail, or receipt by sender of confirmation of facsimile transmission. Notices shall be sent to the following addresses (or such other address as either Party may specify in writing). If to GSI: Global Sports Interactive, Inc. 1075 First Avenue King of Prussia, PA 19406 Attention: President Copy to: Arthur H. Miller, Esquire Executive Vice President and General Counsel 1075 First Avenue King of Prussia, PA 19406 If to Retailer: Oshman's Sporting Goods, Inc.-Services 2302 Maxwell Lane Houston, TX 77023 Attention: Steven U. Rath Copy to: Legal Department Oshman's Sporting Goods, Inc.-Services 2302 Maxwell Lane Houston, TX 77023 21 ASSIGNMENT Neither GSI nor Retailer may assign this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld, except that either Party may assign this Agreement upon written notice to the other Party to an Affiliate of the assignor or to any Person that acquires or succeeds to all, or substantially all, of assignor's business or assets. 22 INDEPENDENT CONTRACTORS 27 The relationship of the Parties herein shall be that of independent contractors and nothing herein shall be construed to create a joint venture or partnership. 23 WAIVER The waiver or failure of either Party to exercise in any respect any right provided hereunder shall not be deemed a waiver of such right in the future or a waiver of any other rights established under this Agreement. 24 GOVERNING LAW This Agreement, the rights and obligations of the Parties hereto, and any claims or disputes thereto, shall be governed by and construed in accordance with the laws of the State of Delaware (excluding the choice of law rules thereof). 25 JURISDICTION The Parties agree that the exclusive jurisdiction and venue of any dispute that arises hereunder shall be in federal or state courts of competent jurisdiction in the jurisdiction of the defendant's principal place of business. 26 BINDING EFFECT This Agreement shall be binding upon the Parties hereto, their successors and permitted assigns. 27 SEVERABILITY Should any term or provision of this Agreement be held to any extent unenforceable, invalid, or prohibited under law, then such provision shall be deemed restated to reflect the original intention of the Parties as nearly as possible in accordance with applicable law and the remainder of this Agreement, or the application of such term or provision to Persons, property, or circumstances other than those as to which it is invalid, unenforceable, or prohibited, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 28 HEADINGS Section headings contained in this Agreement are inserted for convenience or reference only and shall not be deemed to be a part of this Agreement for any other purpose. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms, but is rather intended to signify that some of many examples follow. The words "hereof," "thereof," "herein" and the like are intended to refer to the Agreement as a 28 whole unless the context clearly and unambiguously indicates otherwise. 29 ENTIRE AGREEMENT This Agreement, including the Schedules attached to this Agreement, represents the entire agreement of the Parties with respect to the subject matter hereof and may not be modified, except in writing, executed by the Parties hereto. This Agreement supersedes all prior writings of the Parties with respect to this subject matter. 30 COUNTERPARTS This Agreement may be signed in several counterparts, each of which shall be deemed an original, and all of which when taken together, shall be deemed a complete instrument. The Parties accept this Agreement and have caused this Agreement to be executed and do each hereby warrant and represent that its respective signatory whose signature appears below has been and is on the date executed duly authorized by all necessary and appropriate corporate action to execute this Agreement on its behalf. GLOBAL SPORTS INTERACTIVE, INC. OSHMAN'S SPORTING GOODS, INC.-SERVICES By: /s/ Michael Rubin By: /s/ Steven U. Rath Name: Michael Rubin Name: Steven U. Rath Title: CEO Title: Exec. Vice Pres. Date: 12/30/99 Date: 12/30/99 29 EX-10.44 10 STRATEGIC ALLIANCE AGREEMENT Exhibit 10.44 Global Sports InteractiveFinancial Printing Group Confidential Treatment has been requested with respect to portions of the agreement indicated with an asterisk [*]. A complete copy of this agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. GLOBAL SPORTS INTERACTIVE, INC. ______________________ STRATEGIC ALLIANCE AGREEMENT AMONG GLOBAL SPORTS INTERACTIVE, INC. AND BLUELIGHT.COM LLC TABLE OF CONTENTS
Section Page - ------- ---- 1 Definitions 1 2 Development and Operation of the Web Site 2 3 Customer Service 3 4 Licensed Materials 3 5 Supply of Merchandise and Warehousing 3 6 Order Processing 4 7 Fulfillment of Accepted Orders and Returns 5 8 Form of Communication 6 9 Payment 6 10 No Merchandise Warranty 7 11 GSI Representations and Warranties 7 12 GSI Indemnification 7 13 Blue Representations and Warranties 8 14 Blue Indemnification 8 15 Customer Data 8 16 Confidentiality 8 17 Limitation of Liability 10 18 Term and Termination 11 19 Force Majeure 12 20 Miscellaneous Provisions 12
Schedules - --------- Schedule A: Designated Web Sites Schedule B: Fulfillment Requirements Structure 2 STRATEGIC ALLIANCE AGREEMENT This Strategic Alliance Agreement is made by and among Global Sports Interactive, Inc., ("GSI") a Pennsylvania corporation with its principal place of business located at 1075 First Avenue, King of Prussia, Pennsylvania, 19406, Bluelight.Com LLC ("Blue") a Delaware limited liability company with its principal place of business located at 150 Post, Suite 670 San Francisco, CA 94105, this 28th day of February, 2000 (the "Effective Date"). RECITALS 1 GSI is in the business of, inter alia, providing retailers with selection ---------- and acquisition of merchandise, warehousing and fulfillment functions in connection with such retailers e-commerce business. 2 Blue is in the business of owning and operating an e-commerce enabled Web site offering a comprehensive selection of goods, including Sporting Goods, through its on-line stores. 3 Blue desires to outsource the selection and acquisition of merchandise, warehousing and fulfillment functions for Sporting Goods in connection with its on-line stores. 4 GSI desires to provide Blue selection and acquisition of merchandise, warehousing and fulfillment services for sales of Sporting Goods through the Blue on-line stores for shipment to customers within the United States. 5 GSI and Blue desire to enter into this Agreement in order to set forth their respective rights and obligations with respect to GSI's selection and acquisition of merchandise, warehousing and fulfillment functions for Sporting Goods in connection with Blue's on-line stores. AGREEMENT GSI and Blue (each a "Party" and collectively, the "Parties"), in consideration of the mutual promises contained herein, and intending to be legally bound, agree as follows. 1 DEFINITIONS. Capitalized terms have the following meanings in this Agreement. 1.1 Agreement means this Strategic Alliance Agreement. --------- 1.2 Blue Light Specials means Merchandise offered for sale on the Web ------------------- Site at a price reduced by at least [ * ] percent from (i) the manufacturers suggested retail price if such price is available, or (ii) if there is no manufacturers suggested price, the Retail Price; or (iii) such other mutually agreed upon price. 1.3 Customer means a person who places an Order. -------- 1.4 Designated Web sites means the Web sites identified on Schedule A -------------------- attached to this Page 3 of 17 Agreement as such schedule may be amended by GSI. 1.5 GSI Content means illustrations, graphics, audio, video, text, ----------- photographs, films, slides, prints, negatives, recordings, drawings, sketches, artwork, digital images, and other renderings and information, depicting, describing, identifying, or otherwise related to Merchandise that (a) is reasonably available to GSI; (b) GSI is not prohibited from licensing as required by this Agreement; and (c) is generally available on Web sites operated by GSI. 1.6 GSI Product Database means the database maintained by GSI, in -------------------- computer-readable format, of information regarding Merchandise which information includes, without limitation, SKU numbers, Merchandise availability, product availability, and pricing. 1.7 Launch Date means the date on which Sporting Goods on the Blue Web ----------- Site are first available to the public and which are supplied by GSI under this Agreement. 1.8 Licensed Materials means GSI Content and the GSI Product Database as ------------------ provided to Blue and as may be modified, revised, or updated in accordance with this Agreement. 1.9 Markdowns means Merchandise offered for sale on the Designated Web --------- sites or to Blue under this Agreement at a price reduced from its original price and available only in limited quantities. 1.10 Merchandise means Sporting Goods merchandise generally offered for ----------- sale through the Designated Web sites and other merchandise that GSI may offer and Blue may, in its sole discretion, accept for sale under this Agreement. Merchandise includes without limitation, Blue Light Specials. Merchandise does not include (a) merchandise acquired by GSI exclusively for, or manufactured exclusively for, or sold under a trademark of, the retailer related to a Designated Web site; (b) except for Blue Light Specials and Markdowns, merchandise offered for sale through such Designated Web sites at a price reduced from its original price and available only in limited quantities, including without limitation end-of-season or excess merchandise; or (c) merchandise that GSI is prohibited from providing to Blue by the related licensee or licensor of licensed merchandise or the related manufacturer. 1.11 Order means an order for Merchandise through the Web Site, through ----- 800 numbers or by any other electronic medium. 1.12 Retail Price means the lowest initial selling price that an item is ------------ originally made available to the public on the Designated Web sites. 1.13 SKU means a stock keeping unit of merchandise. --- 1.14 Sporting Goods means sports equipment, recreational equipment, -------------- sporting apparel, and athletic footwear. 1.15 Web Site means the e-commerce enabled Web site operated by or on -------- behalf of Blue as its online retail store for Sporting Goods. Page 4 of 17 1.16 Web means the Internet client-server hypertext distributed --- information retrieval system known as the World Wide Web. 2 DEVELOPMENT AND OPERATION OF THE WEB SITE. Blue shall develop the Sporting Goods portion of the Web Site and beginning on the Launch Date and throughout the term of this Agreement, shall operate and maintain the Web Site. Except for the services to be provided by GSI hereunder, Blue shall be solely responsible for all operating functions of the Web Site, including, but not limited to, Order processing, second-level customer service (except as provided in Section 3), development, maintenance and hosting of the Web Site. Subject to Section 5 hereof, Blue shall not offer Sporting Goods offered for sale by GSI under this Agreement for sale through any Web site, any kiosks in any Kmart stores or otherwise except through the Web Site unless such Sporting Goods is acquired from GSI. At Blue's discretion, GSI will have the right to operate kiosks in the Sporting Goods departments of Kmart stores. 3 CUSTOMER SERVICE. GSI shall provide to Blue, Merchandise inventory levels and availability, Order and shipping confirmations, Order shipping tracking information as made available to GSI by the common carrier, and such other Merchandise and Order information that is commercially reasonably available to GSI and reasonably necessary for Blue's customer service, in compliance with the standards set forth in Blue's Vendor Packet, a copy of which is attached hereto as Schedule B. GSI shall provide such customer service to Blue as shall be mutually agreed upon by the parties. Additionally, GSI shall use commercially reasonable efforts to satisfy the service level standards with regard to fulfillment and customer services, as set forth on Schedule B. 4 LICENSED MATERIALS 4.1 License to GSI Content and the GSI Product Database. GSI shall --------------------------------------------------- provide to Blue the Licensed Materials subject to, and grants to Blue, a personal, nontransferable (except in accordance with this Agreement), nonexclusive, limited license for the term of this Agreement to use, reproduce, display, transmit, and publicly perform the Licensed Materials solely in connection with the sale of Merchandise through the Web Site. Blue shall not (a) copy (except as reasonably necessary to use the Licensed Materials in accordance with this Agreement); (b) modify, adapt, translate or create derivative works based upon the Licensed Materials; (c) remove, erase, or tamper with any copyright or other proprietary notice printed or stamped on, affixed to, or encoded or recorded in the Licensed Materials, or fail to preserve all copyright and other proprietary notices in any copy of any of the Licensed Materials made by Blue; or (d) sell, market, license, sublicense, distribute, or otherwise grant to any person any right to use the Licensed Materials without the prior consent of GSI. Any and all rights not explicitly granted under this Agreement are expressly reserved by and to GSI. 4.2 Updating the GSI Product Database. GSI shall update the information --------------------------------- in the GSI Product Database no less frequently than once per day. Such updates shall include the addition of SKU numbers and other information for added SKUs, the removal of SKU numbers and other information for unavailable SKUs, revised SKU availability, information, pricing, shipping, and special handling fees, and inventory availability provided throughout each day based upon Blue's reasonable requirements. Page 5 of 17 5 PRICING, SUPPLY OF MERCHANDISE AND WAREHOUSING 5.1 Exclusive Source of Sporting Goods. Subject to the exceptions in ---------------------------------- this Section 5.1, GSI shall be the exclusive source of Sporting Goods for sale through the Web Site. GSI will be responsible for purchasing, directly from manufactures, all Sporting Goods to be sold on the Web Site. GSI will use commercially reasonable efforts to (i) maintain the level of products currently available on the Designated Web sites, and (ii) ensure that the availability of Sporting Goods on the Web Site exceeds the current level of Sporting Goods available at a typical Kmart store. 5.1.1 Unavailable Brand Names. Blue may obtain from third parties ----------------------- for sale through the Web Site brand name Sporting Goods if such brand name is not available through GSI provided that, if such Sporting Goods subsequently become available through GSI, Blue shall obtain such Sporting Goods from GSI under this Agreement after the termination of such replacement third-party vendor contracts, Blue agrees that it shall terminate, without causing a breach, such replacement third- party vendor contract as soon as possible after such Sporting Goods become available through GSI, but, in no event, shall Blue be required to terminate any such contract prior to180 days after such Sporting Goods become available through GSI. 5.1.2 Unavailable Products. Blue may obtain from third parties for -------------------- sale through the Web Site specific products of brand name Sporting Goods if Blue determines that such products are regularly sold in Kmart stores and are not available through GSI; provided that, if such products subsequently become available through GSI Blue shall obtain such products from GSI under this Agreement after the termination of such replacement third-party vendor contracts. Blue agrees that it shall terminate, without causing a breach, such replacement third-party vendor contract as soon as possible after such Sporting Goods become available through GSI, but, in no event, shall Blue be required to terminate any such contract prior to180 days after such Sporting Goods become available through GSI. 5.2 Blue Light Specials. GSI and Blue agree that during each twelve ------------------- (12) month period of this Agreement, GSI and Blue will mutually agree to provide no less than [ * ] Blue Light Specials for sale on the Web Site. All procurement and fulfillment functions for products designated as Blue Light Specials which GSI and Blue have agreed upon shall be performed, at Blue's option, either by Blue or GSI. In the event that Blue and GSI do not agree on any particular Blue Light Special, Blue shall have the right to provide such Blue Light Special for sale on the Web Site; provided, however, GSI shall not have any special or extra obligations (beyond its regular contractual duties hereunder) with respect to such Blue Light Special and Blue shall pay GSI such amount for such Blue Light Special as set forth in Section 9.1 hereof. Nothing herein restricts or otherwise limits Blue's rights and ability to provide Blue Light Specials involving Sporting Goods in conjunction with Kmart Corporation without GSI's involvement. 5.3 Inventory and Warehousing. GSI will arrange for all Merchandise ------------------------- that it procures and makes available to Blue to be delivered, received and stored by GSI. GSI's inventory of Merchandise to be provided for sale on Blue's Web Site shall be maintained at facilities owned, controlled, or under contract to GSI. Page 6 of 17 5.4 Pricing. Blue shall determine the pricing and product selection of -------- Merchandise on the Web Site. 6 ORDER PROCESSING 6.1 Blue Submission of Orders. Blue shall transmit Orders to GSI. Each ------------------------- Order shall include 6.1.1 the Customer's name, 6.1.2 the recipient's name if different from the Customer's name, 6.1.3 the complete shipping address which address shall be a street address and shall not be a post office box or similar address, 6.1.4 the Customer's telephone number, 6.1.5 the Customer's email address, 6.1.6 all shipping instructions, and 6.1.7 the SKU numbers, product descriptions, and prices charged by Blue to the Customer for each SKU. 6.2 GSI's Acceptance or Rejection of Orders. GSI shall accept Orders --------------------------------------- for shipment to addresses worldwide that include the information required by Section 6.1 of this Agreement and for which the related Merchandise is available; provided that such Orders to be shipped outside the United States are shipped on Blue's shipping account. GSI shall reject all other Orders. 6.3 GSI Confirmation. Within 4 hours of GSI's receipt of an Order, GSI ---------------- shall confirm to Blue GSI's receipt of such Orders which confirmation shall state whether the Order was accepted, rejected due to incomplete information, or rejected due to unavailable Merchandise. 7 FULFILLMENT OF ACCEPTED ORDERS AND RETURNS 7.1 Assembly and Packaging. GSI shall assemble and package for shipping ---------------------- all accepted Orders in accordance with Schedule B attached to this Agreement. Orders will be packaged under the Blue name and with no reference to GSI and, whenever practicable, GSI will package and ship SKUs in a single Order together. Blue shall provide initial packing slip schema to GSI, with GSI to bear subsequent reproduction costs consistent with GSI's current proportional costs with regard to the Designated Web sites as such amounts are determined by GSI and demonstrated to Blue. 7.2 Risk of Loss. As between the Parties, title and risk of loss shall ------------ pass to Blue upon GSI's delivery of the Merchandise to the common carrier at the point of shipment. 7.3 Order Priority. All accepted orders, including without limitation, -------------- accepted Orders, shall be processed by GSI in the order that they were received by GSI. Page 7 of 17 7.4 Shipping Methods. GSI shall coordinate the shipping of all accepted ---------------- Orders with United Parcel Service through Blue's account. Blue shall provide for shipping by United Parcel Service standard, United Parcel Service second day, or United Parcel Service next day service or by common carrier. GSI shall comply with the special shipping instructions included with an Order unless the Merchandise does not meet the shipper's requirements for the requested methods. 7.5 Returns. For all Merchandise shipped by GSI on behalf of Blue, GSI ------- shall provide instructions on how to return Merchandise directly to the fulfillment center or other location designated by Blue. GSI shall accept the return of Merchandise sold through the Web Site that is returned by the Customer for any reason. GSI shall accept the return of Merchandise sold through the Web Site that is returned to GSI unused and in a condition suitable for resale as new goods. GSI shall be obligated to accept the return of any Merchandise under this Section 7.5 only if such Merchandise (a) is returned to GSI within 30 days of GSI's issuance of its return authorization and (b) which return authorization was issued by GSI within 30 days of GSI's shipment of the Merchandise. Blue will make commercially reasonable efforts to ensure that, to the extent any merchandise sold by Blue is returnable at Kmart stores, the Merchandise sold hereunder will also be returnable at Kmart stores, whether or not Kmart carries such Merchandise in its stores. GSI shall credit Blue for [ * ] of the amount Blue paid to GSI for such Merchandise returned. 7.6 Reports. GSI shall transmit to Blue the reports identified on and ------- in accordance with Schedule B. 8 FORM OF COMMUNICATION. All Orders transmitted by Blue and all confirmations of Orders and shipments and reports transmitted by GSI pursuant to this Agreement shall be provided in a form reasonably acceptable to the recipient and shall be communicated electronically. 9 PAYMENT 9.1 Price for Merchandise. Blue shall pay to GSI, for each unit of --------------------- Merchandise sold on the Web Site, an amount equal to the [ * ]. 9.2 Markdowns. Blue shall pay to GSI, for Markdowns sold on the Web ---------- Site, an amount equal to [ * ] of the marked down selling price provided by GSI. 9.3 Other Charges. In addition to amounts due GSI for Merchandise, Blue ------------- Light Specials and Markdowns, Blue shall pay to GSI its actual costs in connection with shipping Orders, its actual costs for post- delivery assembly of Merchandise or other similar post-delivery services, any and all other amounts due GSI under this Agreement, and for taxes, if any, assessed on Orders paid by GSI unless such taxes are paid by Blue. 9.4 Invoices. GSI shall submit invoices to Blue for amounts due under -------- this Agreement on the last day of each month. 9.5 Payment. Blue shall pay all amounts due under this Agreement within -------- 15 days of the invoice date. All payments shall be by wire transfer to such account as GSI may designate. Page 8 of 17 9.6 Late Payment. Interest at the rate of one and one-half percent ------------ (1.5%) per month (or, if lower, the maximum rate permitted by applicable law) shall accrue from the date due to the date paid on any amount not paid by when such amount was due. 9.7 Advertising Revenue. ------------------- 9.7.1 Nothing herein limits Blue's right and ability to sell banner and other types of advertisements (the "Advertisements") on the Sporting Goods section of the Web Site at its own cost and expense. 9.7.2 Blue shall pay to GSI [ * ] of all "Net Revenue Received" from the sale of any Advertisements to [ * ]. For purpose of this Agreement, Net Revenue Received shall equal the cash consideration actually received from an advertiser, less any selling expenses incurred by Blue in the sale of such Advertisement; provided, however, such selling expenses cannot exceed [ * ] of the aggregate amounts received for such Advertising. All amounts due from Blue to GSI hereunder shall be due and payable monthly by the 30th day after the end of the calendar month in which Net Revenue Received was received by or on behalf of Blue. 10 NO MERCHANDISE WARRANTY. Blue acknowledges that GSI is not the manufacturer of the Merchandise. GSI agrees to pass on to Blue any and all warranties made to GSI by manufacturers and vendors of the Merchandise, if any such warranties are made and if such warranties can be passed on to Blue. EXCEPT FOR WARRANTIES, IF ANY, FROM MANUFACTURERS OR VENDORS OF THE MERCHANDISE, GSI IS FURNISHING THE MERCHANDISE TO CUSTOMERS "AS IS," WITHOUT ANY, AND DISCLAIMS ALL, WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR ANY WARRANTY AGAINST INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADE SECRETS, OR OTHER INTELLECTUAL PROPERTY RIGHTS. 11 GSI REPRESENTATIONS AND WARRANTIES. GSI represents and warrants that during the term of this Agreement, GSI Content as delivered to Blue shall not (a) infringe any intellectual property rights of any person or any rights of publicity, personality, or privacy of any person; (b) violate any law, statute, ordinance, or regulation (including without limitation, the laws and regulations governing export control, unfair competition, anti- discrimination, consumer protection, or false advertising); (c) be defamatory, libelous or trade libelous, unlawfully threatening, or unlawfully harassing; (d) be obscene, pornographic, or indecent; or (e) violate any community or Internet standard. 12 GSI INDEMNIFICATION. GSI shall defend Blue and its affiliates, and the directors, officers, employees, and agents of Blue and its affiliates ("Indemnitees"), at GSI's sole cost and expense, against any and all third- party claims, actions, suits, or other proceedings against Indemnitees (a) arising from or related to any injuries, including without limitation, death, to persons or any damage to property occurring as a result of the negligence or willful misconduct of GSI (or its employees) or GSI's breach of this Agreement or (b) arising from or related to any breach of any of GSI's representations or warranties in this Agreement, or (c) based on the GSI Content, and GSI shall indemnify and hold Indemnitees harmless from and against any and all judgments, losses, liabilities, damages, costs, and expenses (including without limitation, reasonable attorney's fees and attorney's disbursements) arising out of or incurred in connection with such Page 9 of 17 claims, actions, suits, or other proceedings. GSI shall have the right to control the defense and settlement of any claims or actions that GSI is obligated to defend, but Blue shall have the right to participate in such claims or actions at its own cost and expense. 13 BLUE REPRESENTATIONS AND WARRANTIES. Blue represents and warrants that during the term of this Agreement, it shall have and abide by the terms of its Web site privacy policy, which policy shall be consistent with the then current generally accepted privacy policies of retail e-commerce Web sites. 14 BLUE INDEMNIFICATION. Blue shall defend GSI and its affiliates, and the directors, officers, employees, and agents of GSI and its affiliates ("Indemnitees"), at Blue's sole cost and expense, against any and all third-party claims, actions, suits, or other proceedings against Indemnitees (a) alleging the failure to pay or underpayment of any sales or similar tax arising from the sale of Merchandise through the Web Site; (b) arising from or related to any injuries, including without limitation, death, to persons or any damage to property occurring as a result of the negligence or willful misconduct of Blue or Blue's employees; (c) alleging claims based on the Web Site (exclusive of any GSI Content); (d) by a Customer alleging breach of warranty; or (e) arising from or related to any breach of any of Blue's representations or warranties in this Agreement, and shall indemnify and hold Indemnitees harmless from and against any and all judgments, losses, liabilities, damages, costs, and expenses (including without limitation, reasonable attorney's fees and attorney's disbursements) arising out of or incurred in connection with such claims, actions, suits, or other proceedings. Blue shall have the right to control the defense and settlement of any claims or actions that Blue is obligated to defend, but GSI shall have the right to participate in such claims or actions at its own cost and expense. 15 CUSTOMER DATA. All "User Data" and related information collected from Customers' use of the Web Site and Orders shall be [ * ]. For purposes of this Agreement, "User Data" shall mean all names, mailing addresses, shipping addresses, telephone numbers, e-mail addresses, purchasing data and any other identifying information submitted or disclosed by Customers. 16 CONFIDENTIALITY 16.1 Confidential Information. The term "Confidential Information" means ------------------------ any and all technical and non-technical information including, without limitation, patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future, and proposed products and services of either Party, and includes without limitation, their respective information concerning research, development, design details and specifications, engineering, financial information, procurement requirements, purchasing, manufacturing, key personnel, suppliers, customers, prospective customers, policies or operational methods, Page 10 of 17 plans for future developments, business forecasts, sales and merchandising, and marketing plans and information, in whatever form disclosed. Confidential Information does not include items that were 16.1.1 possessed by the receiving Party prior to receipt or access pursuant to this Agreement other than through prior disclosure by the disclosing Party as evidenced by the receiving Party's written records; 16.1.2 independently developed by the receiving Party without the benefit of disclosure by the disclosing Party as evidenced by the receiving Party's written records; 16.1.3 published or available to the general public other than through a breach of this Agreement or breach by a third party of its confidentiality obligations to the disclosing Party; 16.1.4 obtained by the receiving Party from a third party with a valid right to disclose such Confidential Information, provided that such third party is not under a confidentiality obligation to the disclosing Party; or A combination of features or disclosures shall not be deemed to fall within the foregoing exclusions merely because individual features are published or available to the general public or in the rightful possession of the receiving Party unless the combination is published or is available to the general public or in the rightful possession of the receiving Party. 16.2 Obligation of Confidentiality. Each Party shall permanently hold, ----------------------------- and cause their respective personnel to hold, Confidential Information in strict confidence. The receiving Party may disclose Confidential Information that is required to be disclosed by governmental agencies, regulatory authorities, or pursuant to court order only to the extent such disclosure is required by law and only provided that the receiving Party provides reasonable prior notice to the disclosing Party of the disclosure. Except as specifically permitted by this Agreement, neither Party shall duplicate or use, or permit the duplication or use of, Confidential Information or disclose or permit the disclosure of Confidential Information to any person or entity. Each Party shall limit the duplication and use of Confidential Information to the performance of its obligations under this Agreement and shall limit access to and possession of Confidential Information only to those of its personnel whose responsibilities under this Agreement reasonably require such access or possession. Each Party shall advise all such persons before they receive access to or possession of Confidential Information of the confidential nature of the Confidential Information and require them to abide by the terms of this Agreement. Any duplication, use, disclosure, or other act or omission by any person that obtains access to or possession of Confidential Information through the receiving Party that would be a breach of this Agreement if committed by the receiving Party is deemed a breach of this Agreement by the receiving Party for which the receiving Party shall be responsible. If disclosure of a Party's Confidential Information is sought pursuant to judicial process, the Party receiving such request shall promptly notify the Party whose Confidential Information is so requested and shall cooperate with such Party to maintain the confidentiality of such Confidential Information (e.g., through opposition proceedings or a protective order). Page 11 of 17 16.3 Ownership of Confidential Information and Other Materials. All --------------------------------------------------------- Confidential Information, and any Derivatives (as defined below) thereof whether the Derivative was created by the disclosing or receiving Party, shall remain the property of the disclosing Party and except as specifically provided by this Agreement, no license or other rights to such Confidential Information or Derivatives is granted or implied by this Agreement. For purposes of this Agreement, "Derivatives" shall mean (a) for copyrightable or copyrighted material, any translation, abridgement, revision or other form in which an existing work may be recast, transformed or adapted; (b) for patentable or patented material, any improvement thereon; and (c) for material that is or may be subject to protection as a trade secret, any new material derived from such material, including new material which may be protected by copyright, patent, or trade secret or other proprietary rights. 16.4 Return of Confidential Information. Each Party shall deliver, or at ---------------------------------- the disclosing Party's option destroy, all Confidential Information and deliver, or at the disclosing Party's option destroy, all copies to the disclosing Party upon the expiration or termination of this Agreement or at the disclosing Party's request. Notwithstanding the foregoing, with Blue's prior written consent, GSI may retain such Confidential Information of Blue as may be reasonably necessary to document its performance under this Agreement but such Confidential Information shall remain subject to this Section 16. 16.5 Remedy. The Parties each acknowledge that the disclosing Party will ------ be irreparably harmed if the receiving Party's obligations under this Section 16 are not performed, and that the disclosing Party would not have an adequate remedy at law in the event of a violation by the receiving Party of such obligations. The receiving Party agrees and consents that the disclosing Party shall be entitled, in addition to all other rights and remedies to which the disclosing Party may be entitled, to have a decree of specific performance or an injunction issued requiring any such violation to be cured and enjoining all persons involved from continuing the violation. The existence of any claim or cause of action that the receiving Party or any other person may have against the disclosing Party shall not constitute a defense or bar the enforcement of this Section 16. The receiving Party acknowledges that the restrictions in this Section 16 are reasonable and necessary to protect legitimate business interests of the disclosing Party. 17 LIMITATION OF LIABILITY. Except for (i) the parties' indemnification obligations pursuant to sections 12 and 14, (ii) [ * ], and (iii) any liability for money owed by Blue to GSI for the purchase of Merchandise hereunder, the total liability of either party under this Agreement shall under no circumstances exceed the amounts actually paid by Blue to GSI during the immediately preceding 12 months under this Agreement. Under no circumstances shall either party be liable to the other or to any other person for lost revenues, lost profits, loss of business, or any indirect, incidental, special, punitive, or consequential damages of any nature, regardless of legal theory and whether or not foreseeable, even if the exclusive remedies provided by this agreement fail of their essential purpose and even if either Party has been advised of the possibility or probability of such damages. The remedies specifically provided by this Agreement and the provisions of this Section 17 set forth the parties' exclusive remedies and allocate between the parties the risks under this Agreement, some of which may be unknown or indeterminable. Such limitations were a material inducement for each party to enter into this Agreement, and the Parties have relied upon such limitations in determining whether to enter into this Agreement. Page 12 of 17 18 TERM AND TERMINATION 18.1 Term. The term of this Agreement shall commence on the Effective ---- Date and continue until 11:59 p.m. Philadelphia time on the [ * ] anniversary date of the Launch Date unless earlier terminated in accordance with Section 18.2 or 18.3 below; provided, however, that if at least 30 days, but not more than 60 days, prior to the [ * ] anniversary date of the Launch Date, [ * ]. 18.2 Termination by Blue. Blue may terminate this Agreement immediately ------------------- by giving notice of termination to GSI and without prejudice to any other rights or remedies Blue may have, upon the occurrence of any of the following events: (1) GSI breaches any of its material obligations under this Agreement and does not cure the breach within 30 days after GSI's receipt of Blue's notice of the breach; or (2) a voluntary petition is commenced by GSI under the Bankruptcy Code, as amended, 11 U.S.C. ' 101 et seq; GSI has an involuntary petition commenced against it under the Bankruptcy Code and such petition is not dismissed within 60 days after filing; GSI becomes insolvent; or any substantial part of GSI's property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency; or liquidates or otherwise discontinues all or a significant part of its business operations. 18.3 Termination by GSI. GSI may terminate this Agreement immediately ------------------ by giving notice of termination to Blue and without prejudice to any other rights or remedies GSI may have, upon the occurrence of any of the following events: (1) Blue breaches any of its material obligations under this Agreement and does not cure the breach within 30 days after Blue's receipt of GSI's notice of the breach; or (2) a voluntary petition is commenced by Blue under the Bankruptcy Code, as amended, 11 U.S.C. ' 101 et seq; Blue has an involuntary petition commenced against it under the Bankruptcy Code and such petition is not dismissed within 60 days after filing; Blue becomes insolvent; or any substantial part of Blue's property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency; or liquidates or otherwise discontinues all or a significant part of its business operations. 18.4 Effect of Expiration or Termination. Upon the expiration or ----------------------------------- termination of this Agreement, whether under this Section 18 or otherwise, each Party shall return or destroy all Confidential Information of the other Party pursuant to Section 16, Blue shall discontinue all use of the Licensed Materials, and Blue shall promptly return to GSI all copies of Licensed Materials in Blue's possession. Blue shall remain liable for all payments due Page 13 of 17 GSI, and GSI for all refund credits, with respect to the period ending on the date of termination. 18.5 Survival. Sections 1, 10, 11, 12, 13, 14, 15, 16, 17, 18.4, 18.5, -------- 19, and 20 of this Agreement survive any expiration or termination of this Agreement. 19 FORCE MAJEURE. Except for the obligation to pay money, neither Party shall be liable to the other Party for non-performance of this Agreement in whole or in part, if (a) the non-performance is caused by the other Party or events or conditions beyond that Party's reasonable and actual control and for which that Party is not responsible under this Agreement, (b) the Party gives prompt notice under Section 20.1, and (c) the Party makes all commercially reasonable efforts to perform. 20 MISCELLANEOUS PROVISIONS 20.1 Notice. All notices, consents, and other communications under or ------ regarding this Agreement shall be in writing and shall be deemed to have been received on the earlier of the date of actual receipt, the third business day after being mailed by certified mail, or the first business day after being sent by a reputable overnight delivery service. Any notice may be given by facsimile, provided that a signed written original is sent by one of the foregoing methods within 24 hours thereafter. Blue's address for notices is Bluelight.Com, Inc. 150 Post Street San Francisco, CA 94105 Attention: CEO Facsimile: [ * ] with a copy to Cooley Godward LLP Five Palo Alto Square Palo Alto CA 94306 Attention: [ * ] Facsimile: [ * ] GSI's address for notices is Global Sports Interactive, Inc. 1075 First Avenue King of Prussia, PA 19406 Attention: Chief Executive Officer Facsimile: (610) 265-2866 with a copy to: Global Sports Interactive, Inc. 1075 First Avenue King of Prussia, PA 19406 Attention: General Counsel Facsimile: (610) 265-2866 Either Party may change its address for notices by giving written notice of the new Page 14 of 17 address to the other Party in accordance with this Section 20.1. 20.2 Competitor Restrictions. GSI agrees that during the calendar year ------------------------ ending December 31, 2000, GSI shall not operate an e-commerce Sporting Goods business for [ * ] any entity operating under the same brand name as any of the foregoing, or any subsidiary or affiliate of any of the foregoing. 20.3 Assignment. This Agreement may not be assigned by either Party ---------- without the prior written consent of the other Party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, (a) either Party may assign this Agreement upon notice to, and without the consent of, the other Party to any person or entity that acquires the assignor's business or substantially all of the assignor's assets by merger, stock sale, or other means provided that the assignee is capable of performing assignor's obligations under this Agreement and (b) GSI may assign this agreement upon notice to Blue to a subsidiary of GSI or to any subsidiary of Global Sports, Inc., again provided that the assignee is capable of performing assignor's obligations under this Agreement. Any attempted assignment in violation of this Section 20.3 shall be void. 20.4 No Third-Party Beneficiaries. The Parties do not intend, nor shall ---------------------------- any clause be interpreted, to create under this Agreement any obligations or benefits to, or rights in, any third party from either Blue or GSI. 20.5 Independent Contractor. GSI and Blue are each independent ---------------------- contractors and neither Party shall be, nor represent itself to be, the franchiser, partner, broker, employee, servant, agent, or legal representative of the other Party for any purpose whatsoever. Neither Party is granted any right or authority to assume or create any obligation or responsibility, express or implied, in behalf of, or in the name of, the other Party, or to bind the other Party in any matter or thing whatsoever. The Parties do not intend to form a partnership or joint venture as a result of this Agreement. 20.6 Publicity. Neither Party shall issue any press release regarding --------- this Agreement or otherwise disclose the existence or terms of this Agreement without the prior written consent of the other Party except to the extent such disclosure is required by law, including, but not limited to, required disclosure to the Securities and Exchange Commission, and only if the disclosing Party provides reasonable prior notice to other Party of the disclosure. If GSI determines that it is required to disclose the terms hereof to the Securities and Exchange Commission, GSI agrees to seek confidential treatment of any such disclosure of financial terms. 20.7 Cumulative Remedies. All remedies available to either Party for ------------------- breach of this Agreement are cumulative and may be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed an election of such remedy to the exclusion of other remedies. 20.8 Waiver. The waiver or failure of either Party to exercise in any ------ respect any right provided hereunder shall not be deemed a waiver of such right in the future or a waiver of any other rights established under this Agreement. 20.9 Enforceability. This Agreement shall be enforceable notwithstanding -------------- the existence of any Page 15 of 17 claim or cause of action one Party may have against the other Party. 20.10 Severability. Should any term or provision of this Agreement be held ------------ to any extent unenforceable, invalid, or prohibited under law, then such provision shall be deemed restated to reflect the original intention of the Parties as nearly as possible in accordance with applicable law and the remainder of this Agreement. The application of such term or provision to persons, property, or circumstances other than those as to which it is invalid, unenforceable, or prohibited, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 20.21 Headings. Section headings are for reference only and shall not -------- affect the interpretation of this Agreement. 20.32 Successors in Interest. This Agreement and all of the provisions in ---------------------- this Agreement shall be binding upon and inure to the benefit of the successors in interest and assigns of the Parties, subject to the provisions of Section 20.3 of this Agreement. 20.43 Applicable Law. This Agreement shall be governed in all respects by -------------- the laws of the State of Delaware without giving effect to its rules relating to conflict of laws. In any action between the parties arising out of or relating to this Agreement, the prevailing party shall be entitled to an award of its reasonable legal fees and expenses in connection therewith. 20.54 Order of Precedence. Any and all ambiguities or inconsistencies ------------------- between a Schedule and this document shall be resolved by giving precedence to the Schedule over this document. Silence on any matter in a Schedule will not negate the provision in this document as to that matter. 20.65 Entire Agreement. This Agreement and the attached Schedules ---------------- constitute the complete and exclusive statement of the agreement between the Parties with respect to the subject matter of this Agreement, and this Agreement supersedes any and all prior oral or written communications, proposals, representations, and agreements. It may be amended only by mutual agreement expressed in writing and signed by both Parties. 20.76 Counterparts. This Agreement may be executed in any number of ------------ separate counterparts each of which when executed by and delivered to the other Party shall be an original as against the Party whose signature appears thereon, but all such counterparts shall together constitute one and the same instrument. Page 16 of 17 The Parties accept this Agreement and have caused this Agreement to be executed and do each hereby represent and warrant that its respective signatory whose signature appears below has been and is on the date executed duly authorized by all necessary and appropriate corporate action to execute this Agreement on its behalf. GLOBAL SPORTS INTERACTIVE, INC. BLUELIGHT.COM LLC By: ________________________ By: ________________________ Name: Michael R. Rubin Name: Mark H. Goldstein Title: Chief Executive Officer Title: Chief Executive Officer Date: February 28, 2000 Date: February 28, 2000________________ Page 17 of 17 EX-23.1 11 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-49363 of Global Sports, Inc. on Form S-8 of our report dated March 22, 2000, appearing in this Annual Report on Form 10-K of Global Sports, Inc. for the year ended January 1, 2000. /s/ Deloitte & Touche LLP - ----------------------- Deloitte & Touche LLP Philadelphia, Pennsylvania March 29, 2000 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JANUARY 1, 2000 AND THE RELATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-01-2000 JAN-01-1999 JAN-01-2000 27,345,263 0 2,738,201 0 10,697,438 61,943,926 22,678,649 1,996,925 82,735,537 21,385,656 0 80 0 195,442 59,114,110 82,735,537 5,510,576 5,510,576 3,816,767 34,655,326 (463,483) 0 312,655 (28,681,267) (2,220,878) (26,460,389) (16,786,841) 0 0 (43,247,230) (2.91) (2.91) INCLUDES NET ASSETS OF DISCONTINUED OPERATIONS OF $18,380,806.
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