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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-16611
GLOBAL SPORTS, INC. (FORMERLY RYKA INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 04-2958132
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
555 S. HENDERSON ROAD, KING OF PRUSSIA, PA 19406 (610) 878-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, par value $.01 per share................
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 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. [_]
Indicate by check mark whether the registrant (i) 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, and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of the close of business on March 16, 1998, the aggregate market value of
the voting stock held by non affiliates of the registrant was approximately
$11,065,000/(1)/ and common shares outstanding were 10,418,111, not including
1,069,086 shares of treasury stock.
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits from the Company's prior filings under the Securities
Exchange Act of 1934 and registration statements under the Securities Act of
1933 are incorporated by reference as Exhibits in Part IV of this report on
pages 29-31.
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/(1)/ The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Company's common stock outstanding, reduced by
treasury shares held by the Company and the amount of common stock held by
officers, directors and shareholders owning in excess of 10% of the
Company's common stock, multiplied by the last reported sale price for the
Company's common stock on March 16, 1998. The information provided shall
in no way be construed as an admission that any officer, director or 10%
shareholder in the Company may or may not be deemed an affiliate of the
Company or that he/it is the beneficial owner of the shares reported as
being held by him/it and any such inference is hereby disclaimed. The
information provided herein is included solely for record keeping purposes
of the United States Securities and Exchange Commission.
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GLOBAL SPORTS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX
PAGE
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PART I
ITEM 1: BUSINESS...................................................... 1
Recent Developments........................................... 1
Products...................................................... 3
Marketing and Sales........................................... 4
Advertising and Promotion..................................... 5
Manufacturing and Distribution................................ 5
Competition................................................... 6
Patents, Trademarks and Other Proprietary Rights.............. 6
Employees..................................................... 6
Governmental Regulation....................................... 6
ITEM 2: PROPERTIES.................................................... 7
ITEM 3: LEGAL PROCEEDINGS............................................. 7
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 8
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 9
ITEM 6: SELECTED FINANCIAL DATA....................................... 10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 11
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 18
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 18
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 19
ITEM 11: EXECUTIVE COMPENSATION........................................ 20
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 27
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 27
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K............................................................ 29
EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS ANNUAL REPORT
REFLECTS THE 1-FOR-20 REVERSE STOCK SPLIT AS IF SUCH SPLIT HAD OCCURRED FOR
ALL PERIODS PRESENTED.
PART I
ITEM 1: BUSINESS
RECENT DEVELOPMENTS
REORGANIZATION
On December 15, 1997, Global Sports, Inc. ("Global" or the "Company"),
formerly known as RYKA Inc. ("RYKA"), consummated a Second Amended and
Restated Agreement and Plan of Reorganization, as amended (the "Reorganization
Agreement"), among RYKA, KPR Sports International, Inc., a Pennsylvania
corporation ("KPR"), Apex Sports International, Inc., a Pennsylvania
corporation ("Apex"), MR Management, Inc., a Pennsylvania corporation
("Management"), and Michael G. Rubin, the Chairman and Chief Executive Officer
of the Company, which provided for, among other things, the reorganization
(the "Reorganization") of RYKA and the KPR Companies (as defined below) as
follows: (i) the transfer by the Company to RYKA Sub, Inc. ("RYKA Sub"), a
Pennsylvania corporation, of all of the assets and liabilities of the Company
in exchange for all of the issued and outstanding capital stock of RYKA Sub,
(ii) the Reorganization of KPR Acquisitions, Inc., a Pennsylvania corporation
that is wholly-owned by the Company, with and into KPR, with KPR surviving the
Reorganization as a wholly-owned subsidiary of the Company, (iii) the
acquisition by the Company of all of the issued and outstanding shares of
capital stock of Apex and Management (KPR, Apex and Management are
collectively referred to as the "KPR Companies"), and (iv) the issuance to
Michael G. Rubin, the sole stockholder of the KPR Companies, of an aggregate
of 8,169,086 new shares of common stock (after giving effect to the 1-for-20
reverse stock split) in exchange for his shares of common stock of the KPR
Companies and the KPR Companies' holdings of common stock of the Company. RYKA
Sub subsequently changed its name to RYKA Inc. after the Reorganization.
Global Sports, Inc. designs, develops and markets branded footwear under the
RYKA, Yukon and Apex brand names as well as distributes off price athletic
footwear, apparel and sporting goods worldwide with primary distribution in
the United States. RYKA designs, develops and markets high performance
athletic footwear specifically for women. RYKA's product line currently
consists of five categories: Aerobic Fitness, Cross-Training, Running, Walking
and Aqua Conditioning. RYKA was organized in Delaware in 1986. RYKA commenced
operations and introduced its first two styles of high performance athletic
footwear in 1987 and began shipping its first products in 1988. The KPR
Companies design, develop and market performance athletic and outdoor footwear
under the brand names Yukon and Apex which are distributed by athletic
footwear specialty retailers, department stores and sporting goods stores, as
well as family shoe stores and independent retailers. In addition, the KPR
Companies distribute off price athletic footwear, apparel and sporting goods
worldwide with primary distribution in the United States. KPR was founded in
1990 by Michael G. Rubin. Global maintains its principal executive offices and
warehouse at 555 S. Henderson Road, King of Prussia, PA and its telephone
number is (610) 878-8600. Unless the context requires otherwise, all
references herein to Global or the Company refer to Global Sports, Inc. and
its subsidiaries.
FINANCING ISSUES
During the latter part of 1996 and for most of 1997, the KPR Companies had a
number of financing issues with its then lending bank which also impacted
RYKA. For a more detailed discussion of these issues see RYKA's 1996 Annual
Report on Form 10-K or Definitive Proxy Materials filed November 12, 1997. As
a result of these financing issues, the completion of RYKA's audited financial
statements for the year ended December 31, 1996 was delayed, and RYKA was
unable to file timely its Annual Report on Form 10-K for the year ended
December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997. RYKA filed such Form 10-K and Form 10-Q on June 30, 1997 and
July 17, 1997, respectively.
At the same time the KPR Companies were experiencing financing issues with
its then lending bank, RYKA and the KPR Companies were in discussions with
certain other financial institutions to obtain a new credit facility and with
certain investors to obtain equity and/or subordinated debt. On April 21,
1997, RYKA sold to
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certain investors 125,000 shares of common stock for an aggregate purchase
price of $750,000. The proceeds of this sale were used by RYKA to repay
$385,000 of the $851,000 subordinated loan from the KPR Companies. The
remaining proceeds were used to open $810,000 letters of credit for the
benefit of the KPR Companies.
On November 20, 1997, the KPR Companies and RYKA entered into a Loan and
Security Agreement (the "Loan Agreement") with a new lender pursuant to which
their prior lender was repaid in full on November 21, 1997. Under the Loan
Agreement, the Company has access to a combined credit facility of $25,000,000
which is comprised of the KPR Companies' credit facility of $20,000,000 and
RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five
years. The KPR Companies and RYKA have an interest rate choice of prime plus
1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis
points. The Company's combined credit facility was subsequently increased to
$30,000,000 on February 20, 1998 by increasing the line of credit available to
the KPR Companies to $25,000,000.
Under the Loan Agreement, both the KPR Companies and RYKA may borrow up to
the amount of their revolving line based upon 85% of their eligible accounts
receivable and 65% of their eligible inventory, as those terms are defined in
the Loan Agreement.
In addition to the revolving lines of credit described above, provided that
80% of their orders are pre-sold, the new lender will over-advance to the
Company a combined additional total of $3,000,000, comprised of the KPR
Companies' additional $2,000,000 and RYKA's additional $1,000,000 over the
collateral for additional letters of credit needed for seasonal production of
new merchandise for the Fall 1998, Spring 1999 and Fall 1999 seasons.
As of the closing of the Loan Agreement, the KPR Companies owed Michael
Rubin subordinated debt of $3,055,841 which was comprised of (i) a loan from
Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus
accrued and unpaid interest on such loan of $180,517 through October 31, 1997
and (ii) a note in the principal amount of $2,204,401 representing
undistributed sub chapter S corporation retained earnings previously taxed to
Mr. Rubin as the sole shareholder of the KPR Companies. No interest accrued on
the note representing sub chapter S corporation earnings until December 15,
1997, the effective date of the Reorganization, at which time interest began
to accrue on such note at a choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis points.
The Loan Agreement and a related Subordination Agreement (the "Subordination
Agreement") by and among the KPR Companies, Mr. Rubin and the lender entered
into at the same time as the Loan Agreement allowed a subsidiary of the
Company to repay Mr. Rubin $1,000,000 of the subordinated debt principal and
the accrued interest of $180,517 at the time of the closing of the Loan
Agreement or within five days thereafter, subject to there being $2,000,000 of
availability under the KPR Companies' credit line after taking into account
such payments. Such payments were made to Mr. Rubin on November 26, 1997.
In addition, the Loan Agreement and the Subordination Agreement permit the
Company to make continued regular payments of interest on the subordinated
debt and to further reduce principal on a quarterly basis, commencing with the
first quarter of 1998, in an amount up to 50% of the cumulative consolidated
net income of both borrowers, reduced by net losses of the borrowers during
such period.
At December 31, 1997, the Company was not in compliance with a financial
covenant of its Loan Agreement, namely the financial covenant requiring
$2,500,000 of consolidated net income plus depreciation, amortization and
other non-cash charges plus interest and income taxes ("EBITDA") on an
annualized basis for the period July 1, 1997 through December 31, 1997. A
waiver was obtained from the bank to remedy its violation of the financial
covenant. In March 1998, the Company renegotiated the terms of and executed an
amendment to the Loan Agreement such that the financial covenant will require
the Company to maintain EBITDA of $5,000,000 on an annualized basis for
periods subsequent to December 31, 1997.
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PRODUCTS
GENERAL OVERVIEW
Global Sports, Inc. designs, develops and markets branded footwear under the
RYKA, Yukon and Apex brand names as well as distributes off price athletic
footwear, apparel and sporting goods worldwide with primary distribution in
the United States.
Industry
Sales for the branded athletic footwear market in the United States
increased approximately 11% in 1997 from $7.2 billion in 1996 to $8.0 billion
in 1997 with Nike and Reebok accounting for 62% collectively in both 1996 and
1997. After these market leaders, the remainder of the market is highly
fragmented with the third largest producer accounting for almost 6% of
industry footwear sales each year. A number of smaller companies compete with
the industry leaders or amongst themselves for specialty niches based on
various factors including product quality, design, pricing, fashion appeal,
performance and brand awareness and positioning. Many companies have
capitalized on the strong name recognition associated with their footwear to
produce or market related apparel and accessories with the brand's logo.
Although much of the footwear produced is primarily designed for athletic use,
a large percentage of the products are worn for casual or leisure purposes.
Basketball, fitness, running, walking and children's shoes are the top selling
product categories followed by more specialized footwear for tennis, golf,
soccer, baseball, football, bicycling, volleyball, aquatic activities and
other athletic and recreational uses. Newly designed products are introduced
each year for the fall and spring seasons and to a lesser degree for the year
end holiday season.
The retail price for many of the brands which feature design, fashion
appeal, performance or technology tend to be higher than those which
concentrate on basic quality, functionality and pricing. The amount which a
brand spends on research, design and development as well as marketing,
advertising, endorsements and promotional activities may have a significant
impact in the determination of the retail price of the product which may be in
excess of $100 for many models of branded athletic footwear.
Branded Division
RYKA. Global believes it is the only company to make performance athletic
footwear exclusively for women. All of RYKA's footwear are made on women's
lasts, which results in shoes that are designed and manufactured with the
anatomical features and foot morphology unique to women's feet (typically
narrow in the heel and wide in the forefoot). The product line is targeted at
the following categories: aerobics, running, cross training, walking and aqua
conditioning. RYKA's models incorporate Nitrogen/ES (R) System, which is
designed to provide enhanced shock absorption, resiliency and durability. The
Nitrogen/ES (R) System in higher priced models consists of visible and non-
visible nitrogen pads and slabs which are placed in the heel, the mid-sole and
the forefoot of the shoe. In standard models, non-visible nitrogen pads are
placed in the mid-sole only. During 1994, RYKA introduced what it believes to
be the first women's shoe designed specifically for the growing activity of
aqua fitness, the Aqueous (TM) 9H20. In Fall 1998 RYKA introduces its new
Elemental Technology System (TM) ("E.T.S. (TM)"). E.T.S. (TM) delivers the
four most important benefits concerning women and their athletic footwear: fit
(unique RYKA last), comfort (Nitracel), cushioning (Nitrogen ES (R)), and
control.
Yukon. The Company introduced Yukon, a rugged outdoors and casual line of
footwear for men, women and children in 1995 which was originally presented as
a quality value priced alternative to higher priced brands. Yukon has
experienced excellent sell through results at the retail level with
distribution through moderate priced department stores, sporting goods stores
and footwear stores domestically and internationally. The Yukon line was
expanded significantly in 1996 with updated styling and designs to include
sandals and work boots in addition to the popular existing models in the
walking, rugged casual, cross terrain and hiker categories. The Company plans
to continue this rapid growth to an even broader line in Fall of 1998. The
Company also expects to launch an apparel line in Fall of 1999.
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Apex. The Company purchased the Apex trademark in Spring 1996, a brand well
known in the sporting goods industry for its licensed product apparel and
footwear lines. The product line is marketed as a quality and value priced
alternative to higher priced athletic footwear brands, while maintaining
performance features. The Company first manufactured an athletic footwear line
under the Apex brand for cross training, basketball and running categories for
delivery to retailers in the fourth quarter of 1996. An expanded product line
was presented for Spring 1997 with a number of models for men and boys in the
cross training, tennis, basketball, running, baseball/softball and soccer
footwear categories. The Apex line is targeted to sporting good stores,
moderately priced department stores and independent retailers. The Company is
currently targeting key accounts with special makeup product to enhance the
retailers' margins and mitigate the Company's inventory risk.
Off Price Division
The Off Price Division purchases manufacturers' closeout merchandise,
overstocks and canceled orders and offers that merchandise to retailers
worldwide. Global is one of the leading wholesalers of athletic and casual
footwear worldwide with the distribution network to purchase large quantities
of excess and slow moving merchandise from the top footwear manufacturers, as
well as excess inventories from many retailers. The merchandise is then sold
to sporting goods stores, off price specialty stores, family footwear stores
and independent retailers. Due to the large quantities of merchandise that the
division purchases and warehouses in its distribution centers, the Company is
able to pass along its value pricing to the retailer. In an effort to
diversify its product line and expand its overall business, Global has
expanded its purchases and sales of off price athletic apparel and accessories
in 1997 and intends on continuing this expansion into 1998.
MARKETING AND SALES
The branded footwear division largely relies on independent representative
organizations covering territories throughout the United States to promote and
sell its products to retailers. These representative organizations dedicate
the majority of their time to Global's brands and, although they handle
products of other sporting goods companies, they do not sell brands that
compete with Global's brands. The Company's customer base consists primarily
of moderately priced department stores, sporting goods stores and footwear
stores. Public relations advertising strategies will be utilized to continue
to build brand identity within the trade community, as well as introduce the
brand directly to its potential customer base by targeting mainstream consumer
media, including print and television retail networks. The Company also
participates in industry trade shows with major exhibits to present the coming
season's product line to a large group of existing and potential retail
customers including many major national retail customers. Sales executives
also attend various regional footwear trade shows serving independent and
small regional retailers. Global's slow moving and discontinued branded
products are sold through selected off price distribution.
Global's sales force for off price merchandise consists of a small group of
experienced commissioned sales executives. These sales executives deal
exclusively with off price merchandise and have established strong working
relationships with a wide range of major retailers.
At December 31, 1997, the Company's backlog of orders was approximately
$25,600,000, which was comprised of $11,700,000 for the Branded Division and
$13,900,000 for the Off Price Division. Of such orders, approximately
$20,600,000 ($8,600,000 and $12,000,000 for Branded and Off Price,
respectively) are scheduled for delivery through the end of the First Quarter
of 1998, with the remainder scheduled for delivery during the Second Quarter
of 1998 and later.
At March 20, 1998, the Company's backlog of orders was approximately
$30,900,000, which was comprised of $17,600,000 for the Branded Division and
$13,300,000 for the Off Price Division. Of such orders, approximately
$21,600,000 ($8,700,000 and $12,900,000 for Branded and Off Price,
respectively) are scheduled for delivery through the end of the Second Quarter
of 1998, with the remainder scheduled for delivery during the Third Quarter of
1998 and later.
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The Company expects that most of these backlog orders will be filled,
although certain of such orders are cancelable.
ADVERTISING AND PROMOTION
The competitive nature of the athletic footwear business makes advertising
and promotion critical to the creation of brand preference in consumers.
Accordingly, Global has employed and will continue to employ both conventional
and innovative advertising and promotional techniques to build brand identity.
Because of Global's limited resources for advertising, it has historically
concentrated its efforts on relatively less costly, grass-roots approaches
designed to build brand awareness and demand at the retail level including
point-of-purchase and other retailer promotions. Recently, RYKA has begun to
advertise in consumer publications which target active women. Such
publications include Self, Fitness and Cooking Light. The Yukon brand began
print advertising in 1997, but still relied heavily on point-of-purchase
promotion and cooperative advertising at the retail level. The 1998 marketing
program for Yukon will include a stronger advertising program in targeted
consumer publications such as Outside, Sierra and Backpacker magazines during
the Fall season the message is further enforced through exciting in-store
concept shops, unique point-of-purchase displays and direct mail campaigns.
RYKA has also developed a variety of creative promotional programs, such as a
marketing program with Jazzercise and the "RYKA Instructor and Trainer
Alliance" (RITA) program. In 1998, Yukon will be implementing two new
marketing programs, "Team Yukon" and the "Yukon Preservation Alliance". "Team
Yukon" will involve a series of field product tests in conjunction with key
retailers. The "Yukon Preservation Alliance" will promote environmental
awareness and resource preservation through certain events throughout the
year. The Company also will continue to utilize its endorsement contract with
Karl Malone, a professional athlete currently with the Utah Jazz and former
NBA MVP, to position its Apex and Yukon brands with sporting goods' largest
retailers.
MANUFACTURING AND DISTRIBUTION
As is common in the athletic footwear industry, Global contracts for the
manufacture of its footwear products to its specifications through independent
manufacturers in the Far East. The Company negotiates directly with these
manufacturers to execute open-ended manufacturing contracts which specify
pricing, purchasing of raw materials and minimum quality/delivery standards,
as well as certain confidentiality and human rights issues. The Company's
production executives conduct regular visits of these facilities to monitor
the status of production. The Company also utilizes several independent
consultants based within key factories as inspectors of product during
production.
The principal materials used in Global's footwear are leather, nylon,
rubber, ethyl vinyl acetate, polyurethane, cambrelle and hytrel. Most of these
materials are available in the countries where manufacturing takes place and
from a number of sources within the United States and abroad, although a loss
of supply could temporarily disrupt operations and increase the costs to
manufacture Global's products.
Global's supply arrangements are U.S. dollar denominated. The importing of
footwear, however, could be adversely affected by fluctuations in currency
exchange rates, as well as the adoption of bilateral trade agreements between
the United States and countries in which Global's suppliers are located, work
stoppages or the imposition of unilateral restrictions on trade, including
quotas or additional duties, by either the United States or any supplier
country.
Global has expanded its production alternatives and currently manufactures
substantially all of its product in China. If, however, Global is prevented
from acquiring products from overseas manufacturers, Global's operations could
be materially and adversely affected until alternative suppliers are found.
See "Business--Governmental Regulation".
Global imports its footwear from independent manufacturers in the Far East,
primarily to third-party public warehousing facilities in California with
which Global contracts on an as-needed basis. Global also utilizes third-
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party public warehouses, in California, primarily for branded inventories, and
in Maryland and New Jersey, primarily for off price inventories, as well as a
warehousing facility in King of Prussia, Pennsylvania which the Company leases
from Mr. Rubin. From these warehousing facilities, Global distributes its
footwear throughout the United States, usually by common carrier. Global
believes that by utilizing such warehousing facilities, it both reduces
inbound transportation costs and the amount of time required to import its
products from the Far East. The Company is currently analyzing the cost and
distribution efficiency of its warehousing structure and plans on reducing the
number of third-party public warehousing facilities in 1998.
COMPETITION
The footwear industry is highly competitive. Global's competitors include
specialized athletic and outdoor shoe companies as well as companies with
diversified product lines. Global believes that its unique niche, combined
with effective advertising and marketing, fashionable styling, high quality
and technological advances are the most important competitive factors.
However, 1997 saw substantial growth and interest in the women's segment of
the high performance athletic footwear market as well as the casual hiking, or
"brown shoe," market. Global is therefore well positioned for growth with its
RYKA and Yukon brands. There has been increased competition from established
companies that have developed advertising and promotional programs directed to
these segments of the market. Most of these competitors, including Adidas,
Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony in
athletic footwear or Timberland and Wolverine in casual hiking footwear, have
significantly greater financial and other resources and more extensive
marketing staffs than Global.
Additionally, Global may be unable to remain price competitive at the retail
level as competitors with larger volume production capabilities achieve better
economies of scale and, therefore, better cost pricing for products offering
similar or more advanced technology.
PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company's principal trademarks are Apex, RYKA (stylized), Nitrogen/ES,
Yukon and the Yukon Design. The Company applies its trademarks to all of its
footwear and apparel products. The Company has registered or in the process of
registering these and other marks in the United States and certain other
countries where significant markets or potential markets for its products
exist. The Company believes that its trademarks, technologies and designs are
valuable to its ability to market footwear and apparel products and the loss
of the right to use any of these marks or patents could have a material
adverse effect on the Company's business. The Company intends to defend these
trademarks or patents vigorously against infringements by third parties should
any arise.
RYKA was granted a patent in November, 1990, which expires in 2007, covering
certain uses of its Nitrogen/ES(R) System in athletic footwear. There can be
no assurance that the patent granted will be enforceable or will provide RYKA
with meaningful protection from competitors.
EMPLOYEES
At December 31, 1997, Global employed 77 people on a full-time basis. Global
is not a party to any collective bargaining agreements with its employees. In
general, the Company considers relations with its employees to be
satisfactory.
GOVERNMENTAL REGULATION
Substantially all of Global's footwear products are manufactured overseas
and subject to U.S. customs duties. Under the fixed duty structure in effect
since July 1981, duties on the footwear products imported by Global to date
approximate 8 1/2-10% of cost, depending on gender, plus administrative
charges. If Global were to significantly increase the amount of synthetic raw
material, as opposed to leather, in its footwear, these duties would increase
substantially.
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Global is unable to predict whether additional customs duties, quotas or
other restrictions may be imposed on the importation of its products in the
future. Any such action could result in increases in the cost of footwear in
general and, accordingly, might adversely affect the sales or profitability of
Global and the imported footwear industry as a whole. Global, however,
believes that the higher priced end of the footwear market, in which it
participates, would be better able to adjust its pricing in response to any
such increases.
From time to time, the United States enters into trade legislation with
other countries, including China, which may impact on the duty rates on
footwear imported into the United States and Global's ability to access
foreign markets. Any such legislation that would substantially increase duty
rates on footwear imported into the United States or limit Global's ability to
access foreign markets could adversely affect Global's operations.
ITEM 2: PROPERTIES
The Company's main executive offices and warehouse are located in King of
Prussia, Pennsylvania in a 70,000 square foot facility leased from Mr. Rubin.
Pursuant to the lease, the Company pays approximately $29,000 per month, plus
maintenance and utilities, for use of these facilities and the lease expires
on September 30, 2009.
Additionally, the Company uses the services of five third-party public
warehousing facilities in California (2), Maryland (2) and New Jersey (1). See
"Business--Manufacturing and Distribution."
Management believes that the Company's leased and third-party properties are
adequate for its present needs and that suitable additional or replacement
space will be available as required.
ITEM 3: LEGAL PROCEEDINGS
On March 21, 1997, Big Smith Brands, Inc. ("Big Smith") commenced an action
against the Company in the United States District Court for the Eastern
District of Pennsylvania. The complaint seeks damages in the amount of
$954,342, which Big Smith alleges is owed to it under the contract with the
Company. The contract at issue was for the purchase of Caterpillar brand,
first quality apparel that Big Smith offered to sell in connection with its
liquidation of its Caterpillar inventory. The Company paid Big Smith
$1,000,000 prior to shipment, with the balance to have been paid seventy-five
(75) days thereafter. Big Smith contends that the Company breached the
contract by failing to pay the amount owed thereunder. Alternatively, Big
Smith alleges that the Company converted the Caterpillar apparel for its own
use and benefit, and therefore, Big Smith contends that it is entitled to
compensatory damages.
The Company has filed its Answer and its Counterclaim. The Counterclaim
seeks damages arising from Big Smith's breaches of the parties' contract.
Specifically, the Company discovered that the goods were not first quality in
accordance with Big Smith's warranties. Moreover, Big Smith had fraudulently
misrepresented that there were not any restrictions on the Company's right to
sell the merchandise to its contact/distributor in England. The Company
alleges in its Counterclaim that Caterpillar had terminated Big Smith's
license to sell Caterpillar apparel before Big Smith's sale to the Company. As
a result of Big Smith's misrepresentations and defects in some of the apparel,
the Company has not been able to sell all of the merchandise and/or has sold
it for much lesser amounts than it had reasonably anticipated. In addition,
the Company has been forced to provide a credit to its distributor in England
who cannot sell the apparel there due to pressure being exerted by Caterpillar
and local authorities. The Company, therefore, has demanded that Big Smith
compensate it for its losses.
The case settled pre-court, resulting in an agreement whereby the Company
was required to pay Big Smith $600,000, payable in six equal monthly
installments of $100,000 commencing on November 1, 1997. The Company had
approximately $818,000 recorded in accounts payable to Big Smith relating to
this matter at December 31, 1996 and had recorded a charge to operations in
1996 to account for the impairment in the inventory that management believes
existed due to the above facts and circumstances.
7
The Company is involved in other 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 1997, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). Proxies were solicited for the Annual Meeting pursuant
to Regulation 14 of the Securities Exchange Act of 1934. At the Annual Meeting
the following matters were voted on:
(i) Michael G. Rubin and Kenneth J. Adelberg were elected to serve on the
Board of Directors of the Company for one-year term and until their
respective successors are duly elected and qualified, each receiving
57,583,557 votes for their election and 362,188 votes withheld;
(ii) an Amended and Restated Certificate of Incorporation to effect,
among other things, a 1-for-20 reverse stock split, was approved by a vote
of 36,187,063 for the amendment and restatement and 763,483 votes against
the amendment and restatement (with 20,995,199 broker non-votes and
abstentions);
(iii) the Second Amended and Restated Agreement and Plan of
Reorganization pursuant to which RYKA became a holding company by
transferring all of its assets and liabilities to a wholly-owned subsidiary
and acquired certain companies owned by Michael G. Rubin in exchange for
8,169,086 shares of RYKA (after giving effect to the 1-for-20 reverse stock
split) was approved by a vote of 35,129,408 for the Reorganization and
768,863 votes against the Reorganization (with 22,047,474 broker non-votes
and abstentions); and
(iv) an increase in the number of shares issuable pursuant to RYKA's 1996
Equity Incentive Plan was approved by a vote of 35,470,499 for the increase
and 1,767,940 votes against the increase (with 20,707,306 broker non-votes
and abstentions).
The above voting information is presented on a basis prior to the 1-for-20
reverse stock split effected on December 15, 1997.
8
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICES
As of December 31, 1997, the common stock was held by approximately 2,219
holders of record. From March 28, 1988 until September 15, 1995, the common
stock was included for quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") Small Cap Market under the
symbol "RYKA". Subsequent to its delisting on the NASDAQ Small Cap Market, the
common stock has traded on the NASD Over-the-Counter ("NASD-OTC") Bulletin
Board. On March 16, 1998, the Company submitted an application to NASDAQ for
relisting on the Small Cap Market. The Company believes it has now met the
requirements of the NASDAQ's Small Cap Market and anticipates being relisted
by the end of the Second Quarter of 1998, although there can be no assurances.
The following table sets forth the high and low sales prices per share of
the common stock of the Company as reported by the NASD-OTC. On December 15,
1997, concurrent with the Reorganization of RYKA and the KPR Companies, RYKA
changed its name to Global Sports, Inc. As a result, the Company changed its
trading symbol to "GSPT". On the same date, Global effected a 1-for-20 reverse
stock split. The information shown below reflects the split as if it had
occurred for all periods presented. The prices shown do not include retail
markups, markdowns or commissions.
SALES PRICES
------------
HIGH LOW
------ -----
1997
First Quarter................................................ $10.00 $5.31
Second Quarter............................................... $ 8.75 $4.38
Third Quarter................................................ $ 5.31 $3.13
Fourth Quarter............................................... $ 5.31 $2.50
1996
First Quarter................................................ $17.00 $4.00
Second Quarter............................................... $11.60 $5.40
Third Quarter................................................ $11.00 $6.00
Fourth Quarter............................................... $11.20 $5.60
The Company has never declared or paid a cash dividend on its common stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate declaring or paying any cash dividends on
its common stock for the foreseeable future. In addition, the Company's credit
facility with its bank restricts the payment of dividends on the Company's
common stock.
RECENT STOCK ACTIVITY
On April 21, 1997, the Company issued an aggregate of 125,000 shares of
common stock to certain private investors at a purchase price of $6.00 per
share for an aggregate purchase price of $750,000. No underwriters or
underwriting discounts or commissions were involved. There was no public
offering in this transaction, and the Company believes that this transaction
was exempt from registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), by reason of Section 4(2) thereof.
In connection with MR Acquisitions' acquisition of RYKA, Inc. in 1995, MR
Acquisitions was granted contingent warrants to purchase 455,000 shares of
common stock. In November 1997, MR Acquisitions had exercised warrants to
purchase 361,587 of the 455,000 shares of common stock for which it paid an
aggregate exercise price of $72,317. These 361,587 shares represents 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 93,413 warrants because Mr. Rubin did not fully satisfy the
contingency under the warrants in that he did not raise the required amount of
capital for RYKA through equity offerings by the date specified in the
warrants.
9
ITEM 6: SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
As a result of reverse purchase accounting applied in the Reorganization,
the following Selected Financial Data for the year ended December 31, 1997 are
derived from the consolidated financial statements of the Company, which
include RYKA for periods subsequent to December 15, 1997, the Reorganization
date, and the Selected Financial Data for the four years ended December 31,
1996 are derived from the combined financial statements of the KPR Companies,
all of which have been audited. This table should be read in conjunction with
the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $ 60,671,407 $47,340,450 $43,272,594 $26,593,465 $17,151,170
Costs and expenses:
Cost of goods sold...... 48,376,966 37,857,455 32,853,181 21,406,070 14,550,126
Operating expenses...... 13,857,361 8,600,191 9,400,603 4,647,346 1,784,870
------------ ----------- ----------- ----------- -----------
Operating income
(loss)................. (1,562,920) 882,804 1,018,810 540,049 816,174
Other expenses, net..... 2,000,282 1,027,143 732,669 185,785 129,247
Equity in net loss of
RYKA Inc. ............. 592,093 518,491 261,331 -- --
------------ ----------- ----------- ----------- -----------
Income (loss) before
foreign taxes.......... (4,155,295) (662,830) 24,810 354,264 686,927
Foreign income taxes.... -- 81,483 -- -- --
------------ ----------- ----------- ----------- -----------
Net income (loss)....... $ (4,155,295) $ (744,313) $ 24,810 $ 354,264 $ 686,927
============ =========== =========== =========== ===========
Unaudited Pro Forma
Data:
Income (loss) before
foreign taxes.......... $ (4,155,295) $ (662,830) $ 24,810 $ 354,264 $ 686,927
Provision for income
taxes.................. -- 21,000 144,000 164,000 302,000
------------ ----------- ----------- ----------- -----------
Pro forma net income
(loss)................. $ (4,155,295) $ (683,830) $ (119,190) $ 190,264 $ 384,927
============ =========== =========== =========== ===========
Basic earnings (losses)
per common
share/(1)//(2)/........ $ (1.39) $ ( .27) $ (.07) $ .16 $ .33
============ =========== =========== =========== ===========
Diluted earnings
(losses) per common
share/(1)//(2)/........ $ (1.39) $ (.27) $ (.07) $ .16 $ .33
============ =========== =========== =========== ===========
Weighted average number
of common shares
outstanding--basic and
diluted/(1)/........... 2,996,027 2,568,431 1,717,033 1,210,504 1,178,666
Number of common shares
outstanding/(1)/....... 10,418,111 2,831,766 2,306,766 1,323,716 1,186,068
BALANCE SHEET DATA:
Total assets............ 43,431,909 26,678,544 22,369,130 11,688,810 3,603,942
Total long-term debt.... 20,975,479 5,905,225 5,000,725 2,415,955 48,893
Net working capital .... 13,700,430 558,241 2,002,733 1,200,094 440,862
Stockholders' equity
(deficiency)........... 2,157,349 (552,133) 92,787 748,220 694,956
- --------
/(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.
/(2)/Basic and diluted earnings (losses) per share reflect the adoption of
Statement of Financial Accounting Standard No. 128, Earnings Per Share,
(see Note 2 to the financial statements).
10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Company's Financial Statements and Notes thereto.
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-K contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to
the Company's financial condition, results of operations and liquidity and
capital resources and statements as to management's beliefs, expectations or
options. Such forward looking statements are subject to risks and
uncertainties and may be affected by various factors which may cause actual
results to differ materially from those in the forward looking statements.
Certain of these risks, uncertainties and other factors, as and when
applicable, are discussed in the Company's filings with the Securities and
Exchange Commission. Factors that could cause actual results to differ
naturally include, but are not limited to, those discussed herein under "Risk
Factors".
GENERAL OVERVIEW
On December 15, 1997, the Company consummated the Reorganization. As a
result, Mr. Rubin, as sole shareholder of the KPR Companies, received RYKA
shares which gave him voting control over the combined companies. Accordingly,
for accounting purposes, the KPR Companies are considered the continuing
entity, and the transaction has been accounted for as a Reorganization of the
KPR Companies followed by the issuance of new shares of common stock of the
KPR Companies for the net assets of RYKA. The financial discussions which
follow are based on comparisons of the results of operations for 1997, defined
as (1) the results of operations for the former KPR Companies for the period
January 1, 1997 through December 14, 1997 plus (2) the results of operations
of RYKA and the KPR Companies for the period December 15, 1997 through
December 31, 1997. For all years prior to 1997, the results of operations
represent that of the KPR Companies as they existed prior to the
Reorganization. As a result, comparisons of the results of operations
presented in this report with the results of operations discussed in RYKA's
public filings would not be meaningful.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Statements of Operations bear
to net sales and the percentage change in those items from period to period:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
PERIOD TO PERIOD
PERCENTAGE
PERCENTAGE OF NET SALES INCREASE (DECREASE)
-------------------------- -----------------------
1997 VS 1996 VS
1997 1996 1995 1996 1995
------- ------- ------- ---------- ---------
Net sales................ 100.0% 100.0% 100.0% 28.2% 9.4%
Costs and expenses:
Cost of goods sold..... 79.7% 80.0% 75.9% 27.8% 15.2%
Operating expenses:
General and
administrative
expenses............ 10.4% 9.6% 17.0% 38.6% (38.1%)
Sales and marketing
expenses............ 11.6% 7.8% 4.1% 90.9% 107.1%
Research and
development
expenses............ 0.8% 0.8% 0.6% 41.6% 37.6%
Operating income (loss).. (2.6%) 1.9% 2.4% (277.0%) (13.3%)
Other expenses, net...... 3.3% 2.2% 1.7% 94.7% 40.2%
11
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
Net Sales
Net sales in 1997 increased by $13,330,957, or 28.2%, over 1996. Net Sales
included sales of RYKA products of $1,076,027 during the 15 day period ended
December 31, 1997. Without these RYKA sales, the net sales increase would have
been $12,254,930, or 25.9%. This sales increase was primarily related to
increases in volume for the Branded Division of $10,292,000, or 86.8%, to
$22,148,000 in 1997 (excluding RYKA) from $11,856,000 in 1996. The Off Price
Division increased sales volumes marginally by $1,963,000, or 5.5%, to
$37,447,000 in 1997 from $35,484,000 in 1996.
Cost of Goods Sold/Gross Margin
Cost of goods sold in 1997 increased by $10,519,511, or 27.8%, over 1996.
Cost of goods sold included the cost of goods sold related to sales of RYKA
products of $664,277 during the 15 day period ended December 31, 1997. Without
these RYKA sales, cost of goods sold would have increased $9,855,234, or
26.0%, over 1996. Overall gross margin (as a percentage of sales, excluding
RYKA) remained relatively the same from year to year at approximately 20%. The
Branded Division (excluding RYKA) experienced gross margins of 25.9% in 1997
compared to 22.4% in 1996, while the Off Price Division experienced gross
margins of 16.4% in 1997 compared to 19.2% in 1996. Cost of goods sold for
1997 and 1996 include charges of $1,365,000 and $1,200,000, respectively, for
inventory write downs based on a reassessment of net realizable values,
primarily related to Off Price inventories.
General and Administrative Expenses
General and administrative expenses in 1997 increased by $1,758,411, or
38.6%, over 1996. This increase was due to (1) an increase in professional
fees and bank service charges of approximately $621,000 and $357,000,
respectively, related to the financing issues the Company had with its former
lender and other costs incurred as a result of the Reorganization, (2) an
increase in bad debts of $488,000 and (3) an increase in salaries and bonuses
of $179,000 as a result of headcount increases to support the growth of the
business. Additionally, in 1997 the Company recorded $152,333 of compensation
expense for warrants granted to a former officer. These increases are
partially offset by a $264,000 decrease in Mr. Rubin's salary and commissions
for the current year.
Sales and Marketing Expenses
Sales and marketing expenses in 1997 increased by $3,348,506, or 90.9%, over
1996. This increase was due to (1) an increase of approximately $835,000 in
salaries for sales and marketing staff to support higher sales volumes and
facilitate marketing efforts to better establish the Yukon brand, (2) an
increase in third-party warehousing and distribution costs of approximately
$795,000 to support higher inventory levels, (3) an increase in advertising
and promotion costs of approximately $745,000 for point-of-purchase and
cooperative advertising and the cost of contingent warrants ($347,000 in 1997)
granted to an athlete representing the Company's branded footwear, (4) an
increase in trade show costs of approximately $530,000 resulting from the
Company's decision to maintain a major presence amongst retailers through
industry exhibitions, and (5) an increase in sales commissions of
approximately $366,000 as a result of sales volume increases and broadening of
the independent sales agency network. The Company is currently analyzing the
cost and distribution efficiency of its warehousing structure and plans on
reducing the number of third-party warehousing facilities in 1998, which will
result in storage cost savings.
Research and Development Expenses
Research and development expenses in 1997 increased by $150,253, or 41.6%,
over 1996. This increase was primarily due to an increase in salary and
related expenses associated with continued Branded Division development and
expansion.
Other (Income) Expense
Other (income) expense in 1997 increased by $973,139, or 94.7%, over 1996
primarily as a result of increased interest expense related to higher debt
levels maintained to support higher production and inventory
12
levels necessary to support 1997 sales growth as well as higher interest rates
as a result of the financing issues discussed in "Liquidity and Capital
Resources."
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
Net Sales
Net sales in 1996 increased by $4,067,856, or 9.4%, over 1995. The increase
in sales was primarily due to an increase of approximately $9,800,000 from the
Company's Branded Division. The increase in sales was offset in part by a
decrease in sales of approximately $5,700,000 in the Company's Off Price
Division due to the tentative financial condition of the Company during 1996
and the corresponding unavailability of off price goods to purchase on terms
satisfactory to the Company.
Cost of Goods Sold/Gross Margin
Cost of goods sold increased $5,004,274, or 15.2%, over 1995. Overall gross
margin decreased from 24% in 1995 to 20% in 1996. This decline in gross margin
was primarily due to declining margins from the Off Price Division.
Specifically, off price inventory write downs were taken in 1996 of
approximately $1,200,000, a majority of which related to off price inventory
purchased from one vendor which turned out to be less marketable than the
Company was led to believe at the time of purchase. These writedowns were
taken to mark the inventory down to its net realizable value and accounted for
2.6% of the decline in gross profit between 1995 and 1996.
General and Administrative Expenses
Excluding salary and bonus paid to Michael Rubin of $390,192 and $3,007,643
in 1996 and 1995, respectively, general and administrative expenses increased
by $381,169, or 8.8%, over 1995. This increase was due to (1) an increase in
professional fees of $187,000, (2) an increase in travel and entertainment
expenses of $90,000 and (3) an increase in general administrative expenses of
$97,000. The decrease in salary and bonus paid to Mr. Rubin in 1996 as
compared to 1995 was due to the fact that the Company restructured Mr. Rubin's
compensation package in 1996 to conform to the terms of his then proposed
employment agreement.
Sales and Marketing Expenses
Excluding commissions paid to Michael Rubin of $176,808 and $642,726 in 1996
and 1995, respectively, sales and marketing expenses increased by $1,803,222,
or 158.7%, over 1995. This increase was primarily due to (1) an increase in
advertising of $171,000 primarily attributable to the growth of the Company's
Branded Division, (2) an increase in trade show expenses of $181,000
attributable to establishing a presence in the Branded Division during 1996,
(3) an increase in salaries and related expenses of $93,000 primarily
attributable to growth of the Company's Branded Division, (4) an increase in
sample freight of $175,000 also attributable to growth of the Company's
Branded Division, (5) an increase in sales and marketing expenses from the
Company's European operations of $312,000 primarily attributable to the 80%
increase in sales for 1996 over 1995 and (6) an increase in sales commissions
of $265,000.
Research and Development Expenses
Research and development expenses increased $98,566, or 37.6%, over 1995.
This increase was primarily due to an increase in salary and related expenses
associated with supporting two brands in 1996 versus one brand in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Prior to Reorganization, the operations of the KPR Companies have been
financed by a combination of internally generated resources and annual
increases in the size of the bank credit facility and the operations of
13
RYKA were financed by equity transactions, subordinated borrowings and annual
increases in the size of RYKA's bank credit facility. Increases in the bank
credit facilities for the KPR Companies and RYKA were required to fund the
Company's increased investment in accounts receivable and inventory necessary
to support the increases in revenue. As of December 31, 1997, the Company had
working capital of $13,700,430. The Company used $7,974,012 in cash flow from
operating activities for the year ended December 31, 1997, whereas in the same
period of the prior year the Company provided $463,878 in cash flow from
operating activities.
On February 7, 1997, due to defaults in its credit facility with its then
lender, the KPR Companies entered into a forbearance agreement which provided
for a termination date of April 18, 1997. As of June 4, 1997, the bank agreed
to extend the KPR Companies credit facility to November 30, 1997 or on event
of default (as defined) whichever was earlier. The amended credit facility
included certain financial covenants, including maintenance of prescribed
amounts of net worth and leverage ratios. The amended credit facility was
personally guaranteed by Mr. Rubin and by related entities owned by Mr. Rubin.
During the first week of November, 1997, it was determined that the KPR
Companies had violated certain covenants of the forbearance agreement with
their lender relating to the total amount of allowable closeout inventory and
in-transit inventory. The lender had agreed to forbear on these covenant
violations provided that the KPR Companies reduce the amount of the over-
advances relating to these violations by November 14, 1997, reduce the amount
of its closeout inventory to a level acceptable to the lender by November 19,
1997 and make certain payments to the lender if the credit facility is not
repaid by November 22, 1997 or November 30, 1997. Though RYKA's credit
facility was cross-defaulted with the KPR Companies' credit facility, RYKA's
lender did not declare RYKA's credit facility in default.
On November 20, 1997, the KPR Companies and RYKA entered into the Loan
Agreement with a new lender pursuant to which their prior lender was repaid in
full on November 21, 1997. Under the Loan Agreement, the Company has access to
a combined credit facility of $25,000,000, which is comprised of the KPR
Companies' credit facility of $20,000,000 and RYKA's credit facility of
$5,000,000. The term of the Loan Agreement is five years. The KPR Companies
and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis points. The Company's
credit facility was subsequently increased to $30,000,000 on February 20, 1998
by increasing the line of credit available to the KPR Companies to
$25,000,000.
Under this new credit facility, both the KPR Companies and RYKA may borrow
up to the amount of their revolving line based upon 85% of their eligible
accounts receivable and 65% of their eligible inventory, as those terms are
defined in the Loan Agreement.
In addition to the revolving lines of credit described above, provided that
80% of their orders are pre-sold, the new lender will over-advance to the
Company a combined additional total of $3,000,000, comprised of the KPR
Company's additional $2,000,000 and RYKA's additional $1,000,000 over the
collateral for additional letters of credit needed for seasonal production of
new merchandise for the Fall 1998, Spring 1999 and Fall 1999 seasons.
As of the closing of the Loan Agreement, the KPR Companies owed Michael
Rubin subordinated debt of $3,055,841 which was comprised of (i) a loan from
Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus
accrued and unpaid interest on such loan of $180,517 through October 31, 1997
and (ii) a note in the principal amount of $2,204,401 representing
undistributed sub chapter S corporation retained earnings previously taxed to
Mr. Rubin as the sole shareholder of the KPR Companies. No interest accrued on
the note representing sub chapter S corporation earnings until December 15,
1997, the effective date of the Reorganization, at which time the interest
began to accrue on such note at a choice of prime plus 1/4% or LIBOR (Adjusted
Eurodollar Rate) plus two hundred seventy-five basis points.
The Loan Agreement and the related Subordination Agreement allowed a
Subsidiary of the Company to repay Mr. Rubin $1,000,000 of the subordinated
debt principal and the accrued interest of $180,517 at the time
14
of the closing of the Loan Agreement or within five days thereafter, subject
to there being $2,000,000 of availability under the KPR Companies' credit line
after taking into account such payments. Such payments were made to Mr. Rubin
on November 26, 1997.
In addition, the Loan Agreement and the Subordination Agreement permit the
KPR Companies to make continued regular payments of interest on the
subordinated debt and to further reduce principal on a quarterly basis,
commencing with the first quarter of 1998, in an amount up to 50% of the
cumulative consolidated net income of both borrowers, reduced by net losses of
the borrowers during such period.
At December 31, 1997 the Company was not in compliance with a financial
covenant of its Loan Agreement requiring $2,500,000 of consolidated net income
plus depreciation, amortization and other non-cash charges plus interest and
income taxes ("EBITDA") on an annualized basis for the period July 1, 1997
through December 31, 1997. A waiver was obtained from the bank to remedy its
violation of the financial covenant. In March 1998, the Company renegotiated
the terms of and executed an amendment to the Loan Agreement such that the
financial covenant would require the Company to maintain EBITDA of $5,000,000
on an annualized basis for periods subsequent to December 31, 1997.
Management believes that they have adequate financing to allow the Company
to continue its operations, meet its obligations as they mature, and comply
with its debt covenants (as amended March 27, 1998) during the forseeable
future. Ultimately, the Company must generate sufficient revenues from sales
of its products to attain profitability. In addition, the Company is
contemplating raising additional equity financing through a private or
secondary public offering.
SEASONALITY
The Company's business continues to be seasonal. The first and third quarter
sales are typically the strongest, which correspond to the spring and back-to-
school seasons.
INFLATION
The Company does not believe that inflation has had a material effect on
operating results in past years. Although increases in operating costs could
adversely affect the Company's operations, the Company generally has been able
to modify its operating procedures or to increase prices to offset increases
in operating costs.
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered by investors in evaluating the
Company and its business. The risk factors reflected below are not intended to
be an exhaustive list of all risks involved, but merely a representative
listing of those risks currently contemplated by the Company.
Competition. The athletic footwear industry in which Global markets and
sells its products is highly competitive. Global's competitors include
specialized athletic shoe companies as well as companies with diversified
product lines. The Company believes that its unique niche, combined with
effective advertising and marketing, fashionable styling, high quality and
technological advances are the most important competitive factors. However,
due to substantial growth and interest in the women's segment of the high
performance athletic footwear market, there has been increased competition
from established companies, especially Nike and Reebok, which have developed
advertising and promotional programs directed to this segment of the market.
The brown shoe market, in which Yukon actively competes, has also experienced
this substantial growth recently. The Company's competitors have significantly
greater financial and other resources and more extensive marketing staffs than
the Company. Accordingly, there is no assurance that the Company will be able
to compete successfully with any of these companies or achieve any meaningful
market share without significant additional resources.
Substantially All Assets Pledged. In connection with its financing
arrangements with the Company's current bank, the Company has pledged
substantially all of its assets as security for the performance of its
obligations. In the event that the Company were to default on the payment of
any amounts owed under the agreements, the Company's lenders would have the
ability to satisfy the Company's obligations to them by selling or causing the
sale of some or all assets of the Company.
15
Dependence Upon Key Personnel. The Company's ability to market its products
and to achieve profitability will depend, in large part, on its ability to
attract and retain qualified personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to attract
and retain such personnel. In particular, Global is dependent upon the
services of Michael G. Rubin, its Chairman and Chief Executive Officer. Global
has entered into a five-year employment agreement with Mr. Rubin which became
effective upon the completion of the Reorganization. Global maintains key
person life insurance policies on Mr. Rubin with coverage in the amount of
$1,000,000. This policy is pledged as collateral to the Company's primary
lender at December 31, 1997. The loss of Mr. Rubin could have a materially
adverse effect on the Company.
Reliance on Foreign Manufacturers. As is customary in the footwear industry,
all of the footwear marketed by the Company is manufactured to its
specifications by independent factories in the Far East. The Company's
importing of footwear may be adversely affected by fluctuations in currency
exchange rates, the adoption of bilateral trade agreements between the United
States and countries in which the Company's suppliers are located, work
stoppages or the imposition of unilateral restrictions on trade, including
quotas or additional duties, by either the United States or any supplier
country. In addition, the current political climate in the Far East is not
always stable and may cause delays in the Company's ability to deliver
products to its customers in a timely manner or, depending upon the severity
of the situation, may limit or restrict the Company's ability to have its
products manufactured at all. Although the Company does not believe that these
factors have had a material impact on operations to date, such factors could
ultimately increase the Company's cost of goods, resulting in higher product
prices and lower gross profits unless alternative manufacturing arrangements
could be implemented.
Customer Preferences and Competition. The athletic footwear industry is
intensely competitive and subject to rapid changes in consumer preferences, as
well as technological innovations. A major technological breakthrough or
unusual marketing or promotional success by one of the Company's competitors
could adversely affect the Company's competitive position. Competition in the
markets for the Company's products occurs in a variety of ways, including
price, quality, brand image and ability to meet delivery commitments to
retailers. The intensity of the competition faced by the Company and the rapid
changes in the consumer preference and technology that can occur in the
footwear market constitute significant risk factors in the Company's
operations.
Sales Concentration. During 1997, the largest single customer accounted for
approximately $12,800,000 or 22% of total net sales and the second largest
customer accounted for approximately $7,500,000 or 13% of total net sales. In
the aggregate, these customers accounted for approximately 34% of net sales
during 1997. The loss of these two customers could have a material adverse
impact on the Company's future financial results.
Dividends. The Company has paid no dividends to its stockholders since its
inception and does not plan to pay dividends in the foreseeable future. The
Company currently intends to retain any earnings to finance the growth of the
Company. In addition, the Company's credit facility with its bank restricts
the amount of dividends which may be paid on the common stock.
Limitation on Directors' Liabilities under Delaware Law. Pursuant to the
Company's Certificate of Incorporation and under Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with
a breach of duty of loyalty for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchasing illegal under Delaware law or any transaction
in which a director has derived an improper personal benefit.
Securities Market Factors. There have been periods of extreme volatility in
the stock markets, which in many cases were unrelated to the operating
performance of, or announcements concerning, the issuers of the affected
stock. During such periods, the price of the affected stock, including the
Company's common stock, has fluctuated substantially. General market price
declines or market volatility in the future could adversely affect the price
of the Company's common stock.
16
NASDAQ Delisting. Previously, the Company did not meet the listing standards
for inclusion on the NASDAQ Small Cap Market and was delisted on September 15,
1995. The Company's common stock is currently listed on the NASDAQ Over-the-
Counter Bulletin Board. Such delisting may have decreased the liquidity and
transferability of the Company's common stock. On March 16, 1998, the Company
submitted an application to NASDAQ for relisting on the Small Cap Market
Board. The Company believes it has now met NASDAQ's requirements and
anticipates being relisted by the end of the Second Quarter of 1998. However,
there can be no assurance that NASDAQ will accept the Company's application.
Possible Adverse Effect of Penny Stock Rules. As a result of the delisting
of the Company's common stock from the NASDAQ Small Cap Market, the Company's
common stock is subject to Rule 15g-9 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which imposes additional sales practice
requirements for broker-dealers which sell such securities to persons other
than established customers and accredited investors as defined in Regulation D
under the Securities Act. For transactions covered by this rule, a broker-
dealer must make a special suitability determination for the purchaser and
have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of broker-
dealers to sell the Company's common stock and may adversely affect the
ability of persons acquiring shares in this offering to sell any of the shares
acquired in the secondary market.
The Commission regulations define a "penny stock" as any equity security not
registered on a national securities exchange or for which quotation
information is not disseminated on NASDAQ and has a market price (as therein
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to a transaction
in a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's common stock if such securities are included for quotation on NASDAQ
and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average
revenue criteria. There can be no assurance that the Company's common stock
will qualify for exemption from these restrictions. In any event, even if the
Company's common stock were exempt from such restrictions, it would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the Commission
the authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. The
market liquidity for the Company's common stock could be severely adversely
affected by these rules.
Year 2000. The Company is currently enhancing its current information
systems to make them Year 2000 compliant. The Company has created a Year 2000
project team which will coordinate efforts to evaluate, identify, correct or
reprogram, and test the Company's existing systems for Year 2000 compliance.
The Company will take the required steps to make its existing systems Year
2000 compliant prior to the end of 1998 and does not expect the costs of such
steps to have a material impact on the Company's results of operations,
financial position, liquidity or capital resources. However, if such efforts
are not completed on a timely basis, the Year 2000 issue could have a material
adverse impact on the operations of the Company.
In addition to making its own systems Year 2000 compliant, the Company also
will contact its key suppliers and customers to determine the extent to which
the systems of such suppliers and customers are Year 2000 compliant and the
extent to which the Company could be affected by the failure of such third
parties to become Year 2000 compliant. The Company cannot presently estimate
the impact of the failure of such third parties to become Year 2000 compliant.
17
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement, which established standards for reporting and
disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption is
permitted. Reclassification of financial information for earlier periods
presented for comparative purposes is required under this standard. As this
statement only requires additional disclosures in the Company's financial
statements, its adoption will not have any impact on the Company's financial
position or results of operations. The Company will adopt SFAS No. 130 in its
1998 fiscal year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement, which establishes
standards for the reporting of information by operating segments and requires
the reporting of selected information about operating segments in interim
financial statements, is effective for periods beginning after December 15,
1997, although earlier adoption is permitted. SFAS No. 131 is not required to
be applied to interim financial statements in the initial year of application,
but comparative information for interim periods in the initial year of
application is to be reported in the financial statements for interim periods
in the second year of application. Reclassification of segment information for
earlier periods presented for comparative purposes is required under SFAS No.
131. As this statement only requires additional disclosures in the Company's
consolidated financial statements, its adoption will not have any impact on
the Company's consolidated financial position, results of operations or cash
flows. The Company will adopt SFAS No. 131 in its 1998 fiscal year.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-19 for consolidated financial statements and page S-
1 for Schedule VIII "Valuation and Qualifying Accounts" attached hereto.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information regarding the executive officers and
directors of the Company at December 31, 1997:
NAME AGE POSITION
---- --- --------
Michael G. Rubin...... 25 Chief Executive Officer and Chairman of the Board
Kathyrn N. Bednarski.. 38 President--RYKA Inc.
Dennis F.
DiDominicis.......... 53 Senior Vice President--Branded Division
Steven A. Wolf........ 39 Chief Financial Officer
Kenneth J. Adelberg... 45 Director
Michael G. Rubin has served as Chairman of the Board and Chief Executive
Officer of the Company since July 31, 1995. Since establishing KPR Sports
International, Inc., a privately-held footwear distribution company, in 1990,
Mr. Rubin has served as its President and Director. Mr. Rubin received the
1995 Entrepreneur of the Year Award for the Delaware Valley Region which is
sponsored by Inc. magazine and Ernst & Young. Mr. Rubin attended Villanova
University, Villanova, Pennsylvania.
Kathryn N. Bednarski has served as President of RYKA Inc. since April 1,
1997. Ms. Bednarski has over fifteen years of experience in the marketing of
women's athletic footwear and apparel. From 1995 to 1996, Ms. Bednarski was
Vice President of Global Marketing for Avia, a manufacturer of athletic
footwear. Prior to Avia, from 1994 to 1995, she served as Vice President of
Product and Marketing for the Keds Division of Stride Rite Corporation and
Divisional Global Marketing Director of Nike Inc's Women's Division from 1990
through 1993. Ms. Bednarski holds a BS degree in Microbiology from Penn State
University and a MS degree in Biomechanics from Northeastern University.
Dennis F. DiDominicis became the Company's President on September 25, 1995.
Currently, Mr. DiDominicis serves as the Company's Senior Vice President--
Branded Divisions. Mr. DiDominicis has over 25 years of sales, marketing,
product development and sourcing experience. From November 1988 to September
1995, Mr. DiDominicis worked for Asics Tiger Corporation, a Japanese footwear
and apparel manufacturer and distributor, as a Senior Director of its footwear
division and then as a Vice President of its North American sales and
operations. Prior to Asics, Mr. DiDominicis worked at American Sporting Goods
Corporation, Laconia Shoe Company, Hyde Athletic Industries, Colgate-Kendall
Division and Proctor and Gamble.
Steven A. Wolf is a certified public accountant who joined the Company on
August 1, 1995 as its Vice President of Finance and Chief Financial Officer.
From November 1990 to August 1995, Mr. Wolf was the Controller/Chief Financial
Officer of Ellessee USA, Inc., a $50 million footwear and sportswear company
which, through September 1993, was a wholly-owned subsidiary of Reebok
International. Mr. Wolf received a B.S. degree in accounting in 1980 from the
State University of New York at Binghamton and is a member of the American
Institute of Certified Public Accountants and the New York State Society of
CPA's.
Kenneth J. Adelberg has served as a Director of the Company since July 31,
1995. Since 1987, he has been President and Chief Executive Officer of HiFi
House Group of Companies, a privately-held company based in Broomall,
Pennsylvania. Mr. Adelberg was a director and founding stockholder of US Wats,
Inc., a publicly-traded company specializing in business telecommunications
services, located in Bala Cynwyd, Pennsylvania, which was established in 1989.
Mr. Adelberg is a founding stockholder and director of First Republic Bank,
Philadelphia, Pennsylvania, a publicly-traded bank which has been in operation
since 1989. He is also a director of America Digital Communications, Inc., a
publicly-traded company engaged in the wireless communications business in
Englewood, Colorado, since 1993. Mr. Adelberg holds Bachelor of Science
degrees in Biophysics and Physiological Psychology from Pennsylvania State
University and attended the MBA program at Drexel University, Philadelphia,
Pennsylvania.
19
On March 11, 1998, the Company announced the nomination for appointment of
Harvey Lamm to its Board of Directors. Mr. Lamm and his partner founded Subaru
of America and served as its Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer since 1967. Sales of Subaru peaked to
nearly $2 billion with a net income of $94 million before Subaru was purchased
by their long term manufacturing partner, Fuji Heavy Industries, Ltd. On March
24, 1998, the Board of Directors adopted a resolution to increase the size of
the Company's existing board from two members to three members.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Officers, directors
and greater than 10% shareholders are required by the Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with, except
that Messrs. Rubin, Adelberg, DiDominicis and Wolf each failed to file a Form
5.
ITEM 11: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid to the Chief Executive Officer of Global and to each of the three other
most highly compensated executive officers of Global for services rendered in
all capacities to Global during the three years ended December 31, 1997.
LONG TERM
ANNUAL COMPENSATION SECURITIES
FISCAL -------------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
--------------------------- ------ ---------- ---------- ------------ ----------
Michael G. Rubin/(1)/....... 1997 $ 297,115/(5)/ -- $17,191/(5)/ --
Chief Executive Officer 1996 $ 593,942 -- $17,191 --
and Chairman of the Board 1995 $1,082,406 $2,750,000 $22,224 --
Kathryn N. Bednarski/(2)/... 1997 $ 112,119 -- -- 30,000
President--RYKA Inc. 1996 -- -- -- --
1995 -- -- -- --
Dennis F. DiDominicis/(3)/.. 1997 $ 179,423 $ 1,000 $ 6,000 --
Senior Vice President-- 1996 $ 165,000 -- $ 6,000 --
Branded Divisions 1995 $ 45,688 $ 1,500 $ 6,000 25,000
Steven A. Wolf/(4)/......... 1997 $ 112,178 $ 25,000 -- 32,500
Chief Financial Officer 1996 $ 101,563 -- -- 7,500
1995 $ 44,687 $ 1,500 -- 10,000
- ---------------------
/(1)/ Mr. Rubin joined RYKA on July 31, 1995 and is serving as Global's Chief
Executive Officer and Chairman of the Board.
/(2)/ Ms. Bednarski joined RYKA on April 1, 1997 as the President of RYKA Inc.
and subsequent to the reorganization currently serves as the President of
RYKA Inc.
/(3)/ Mr. DiDominicis joined RYKA on September 25, 1995 as its President.
Currently, Mr. DiDominicis serves as the Company's Senior Vice
President--Branded Divisions.
/(4)/ Mr. Wolf joined RYKA on August 1, 1995.
/(5)/ Includes amounts paid by the KPR Companies up to the Reorganization and
paid by the Company for the period from December 15, 1997 through
December 31, 1997.
20
EMPLOYMENT AGREEMENTS
Michael G. Rubin. On September 25, 1996, the Company entered into an
agreement with Michael Rubin for an initial term of five years commencing on
the effective date of the Reorganization, subject to automatic annual
extensions, to serve as the Company's Chairman and Chief Executive Officer.
Pursuant to the terms of the employment agreement, Mr. Rubin is entitled to
receive (i) an annual base salary of $350,000 for the period January 1997 to
December 1997 increasing $50,000 each year commencing in January 1, 1998 and
January 1, 1999, and increasing $50,800 effective January 1, 2000 and $49,280
effective January 1, 2001, (ii) an annual bonus based upon the achievements of
Mr. Rubin and the results of operations of the Company, (iii) the rental cost
of one luxury automobile and one sports utility vehicle inclusive of
insurance, gasoline and maintenance costs. This agreement was entered into in
anticipation of the reorganization occurring on or about January 1, 1997. The
terms of the agreement specified that in the event that the Reorganization did
not occur prior to June 30, 1997, the agreement would become null and void. On
December 15, 1997, subsequent to the consummation of the Reorganization, the
employment agreement was amended such that the terms of the original agreement
were adopted.
Mr. Rubin's employment agreement may be terminated by Global with cause,
which is defined to include, among other things, the willful failure or
refusal by Mr. Rubin to comply with explicit directions of the Board of
Directors or Executive Committee or to render the services required by the
employment agreement, willful breach or habitual neglect in the performance of
his duties, conviction of a felony or fraud or embezzlement involving assets
of Global. In the event of termination by Global for any other reason, Mr.
Rubin will be entitled to receive any unpaid salary and benefits through the
date of termination. Under the employment agreement, for a period of one year,
Mr. Rubin is prohibited from engaging in the planning, research, development,
production, manufacturing, marketing, sales or distribution of athletic
footwear, rugged outdoor footwear, sportswear, licensed products, related
products, equipment or services or any other line of business engaged in or
under demonstrable development by the Company. In addition, Mr. Rubin is
prohibited from enticing, inducing or encouraging other employees of the
Company to engage in any other activity which done by them would violate any
provision of the contract.
Kathryn N. Bednarski. On April 1, 1997, RYKA entered into an employment
agreement with Kathryn N. Bednarski, President of RYKA Inc., for an initial
term of five years, subject to automatic annual extensions. Pursuant to the
terms of Ms. Bednarski's employment agreement, Ms. Bednarski is entitled to
receive (i) an annual base salary of $150,000, subject to annual increases at
the discretion of the Board of Directors, (ii) an annual bonus equal to one
half of one percent of gross annual sales of the RYKA Inc. in excess of
$25,000,000 provided that the gross profit on such sales exceed 30%, (iii) an
annual bonus base on Ms. Bednarski's participation in the Company's executive
bonus. Pursuant to the employment agreement, Ms. Bednarski is also entitled to
a car allowance of $400 per month and has been granted a five year option to
purchase 30,000 shares of Global's common stock at an exercise price per share
equal to the fair market value of the stock on the date of the grant of which
6,000 shares automatically vest on each of the first, second, third, fourth
and fifth anniversary dates of the agreement. Subsequently on September 5,
1997, the Company amended Ms. Bednarski's contract to (i) increase her car
allowance to $600 per month and (ii) guarantees Ms. Bednarski a bonus of
$15,000 in 1998 in lieu of the original provision requiring a threshold of
$25,000,000 in sales of RYKA product.
Ms. Bednarski's employment agreement may be terminated by Global with cause,
which is defined identically to Mr. DiDominicis' employment agreement
described below. In the event of termination without cause Ms. Bednarski will
be entitled to receive an amount in cash equal to six months of her then
current annual base salary, payable monthly over a six month period from the
date of termination. Under this employment agreement Ms. Bednarski, for a
period of one year after termination or expiration of the agreement, is
prohibited from engaging or participating in any Company which competes with
the company in the womens' athletic footwear and apparel business.
Dennis F. DiDominicis. On September 25, 1995, the Company entered into an
employment agreement with Dennis F. DiDominicis, Senior Vice President-Branded
Divisions, for an initial term of five years, subject
21
to automatic annual extensions. Pursuant to the terms of Mr. DiDominicis'
employment agreement, Mr. DiDominicis is entitled to receive (i) an annual
base salary of $165,000 which will be increased $5,000 each year commencing in
calendar year 1997, (ii) an annual bonus based on Mr. DiDominicis' achievement
of specific performance goals as determined by Global's Board of Directors,
and (iii) other benefits similar to those provided to Global's other officers.
Pursuant to the employment agreement, Mr. DiDominicis is also entitled to
receive a car allowance of $6,000 per year and has been granted a five year
option to purchase 25,000 shares of Global's common stock at an exercise price
per share equal to the fair market value of the underlying common stock on the
date of the grant, of which (i) 2,500 shares shall automatically vest on each
of the first, second, third, fourth, and fifth yearly anniversaries of
September 25, 1995, and (ii) 2,500 shares shall vest on each of the first,
second, third, fourth, and fifth yearly anniversaries of December 31, 1995
based on the achievement by Mr. DiDominicis of performance goals to be
established by RYKA's Board of Directors. Subsequently, on February 1997, the
Company amended Mr. DiDominicis' contract so that the 12,500 shares which were
to vest pursuant clause (ii) would vest at 2,500 shares per year on the first,
second, third, fourth, and fifth anniversaries of September 25, 1995. On
December 15, 1997, the effective date of the reorganization, the Company's
Board of Directors and Compensation Committee elected to cancel and regrant
these options to Mr. DiDominicis. The original grant was made with an exercise
price of $8.00, the fair market value at the date of grant. These options were
canceled and regranted at an exercise price which equaled the fair market
value at the date of Reorganization or $3.20 per share. The vesting schedule
remains the same as in the original grant.
Mr. DiDominicis' employment agreement may be terminated by Global with or
without cause which is defined to include, among other things, the willful
failure or refusal by Mr. DiDominicis to comply with explicit directions of
the Board of Directors or to render the services required by the employment
agreement, willful breach or habitual neglect in the performance of his
duties, conviction of a felony or fraud or embezzlement involving assets of
Global. In the event of termination without cause by Global, Mr. DiDominicis
will be entitled to receive a lump sum amount in cash equal to one-half of his
then current annual base salary less any amounts owed to Global. In the event
of termination by Global for any other reason, Mr DiDominicis will be entitled
to receive any unpaid salary and benefits through the date of termination.
Under the employment agreement, Mr. DiDominicis is prohibited from disclosing
confidential information during and after the term of the agreement. In
addition, Mr. DiDominicis is prohibited from soliciting employees of Global or
engaging or participating in any business which competes with Global while he
is employed by Global and for one year thereafter.
Steven A. Wolf. On August 1, 1995, the Company entered into an employment
agreement with Steven A. Wolf, Chief Financial Officer of Global, for an
initial term of three years, subject to automatic annual extensions. Pursuant
to the terms of Mr. Wolf's employment agreement, Mr. Wolf is entitled to
receive (i) an annual base salary of $97,500, subject to annual adjustments
determined by Global's Board of Directors, (ii) incentive compensation up to
35% of his base salary based on sales and/or profit projections for Global and
based on his performance as determined by the Board of Directors, and (iii)
other benefits similar to those provided to Global's other officers. Pursuant
to the employment agreement, Mr. Wolf has been granted a five-year option to
purchase 10,000 shares of Global's common stock at an exercise price per share
equal to the fair market value of the underlying common stock on the date of
the grant, of which 2,500 shares shall vest on the date of grant and 2,500
shares on each of the first, second, and third yearly anniversaries of August
1, 1995. On January 2, 1996, Mr. Wolf was granted a ten-year option to
purchase an additional 7,500 shares of Global's common stock at an exercise
price equal to the fair market value of the underlying common stock on the
date of the grant, of which 2,500 shares shall vest on the date of grant and
2,500 shares on each of the first and second yearly anniversaries of January
1, 1996.
On December 15, 1997, in connection with the consummation of the
reorganization, Mr. Wolf was granted a ten-year option to purchase an
additional 32,500 shares of Global's common shares at a price equal to the
fair market value of the underlying common stock on the date of grant. These
shares shall vest on each of the first, second, third, fourth and fifth
anniversaries of December 15, 1997. Also on that date, the Company's Board of
Directors and Compensation Committee elected to cancel and regrant the 17,500
options referred to above. The original grants were made with exercise prices
ranging from $4.00 to $9.375, the fair market values at the dates
22
of grant. These options were canceled and regranted at an exercise price which
equaled the fair market value at the date of Reorganization or $3.20 per
share. The vesting schedules remain the same as in the original grants.
Mr. Wolf's employment agreement may be terminated by Global with cause,
which is defined identically to Mr. DiDominicis' employment agreement
described above. In the event of termination without cause by Global, Mr. Wolf
will be entitled to receive a lump sum amount in cash equal to five-twelfths
of his then current annual base salary less any amounts owed to Global and to
have any unvested stock options accelerate and become fully exercisable. In
the event of termination by Global for any other reason, Mr. Wolf will be
entitled to receive any unpaid salary and benefits through the date of
termination. Under the employment agreement, Mr. Wolf is prohibited from
disclosing confidential information during and after the term of the
agreement. In addition, Mr. Wolf is prohibited from soliciting employees of
Global or engaging or participating in the technical women's athletic footwear
business while he is employed by Global and for one year thereafter.
OPTION GRANTS
The following table sets forth certain information concerning options
granted during 1997 to the executive officers named in the Summary
Compensation Table. The following table also sets forth the potential
realizable value over the term of the options (the period from the grant date
to the expiration date), based on assumed rates of stock appreciation of 5%
and 10%, compounded annually. These amounts do not represent Global's estimate
of future stock price. Actual realizable values, if any, of stock options will
depend on the future performance of the common stock.
OPTION GRANTS IN FISCAL 1997
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM/(1)/
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- -----------
Michael G. Rubin........ -- -- -- -- -- --
Kathryn N. Bednarski.... 30,000 6.74% $3.20 12/14/02 $ 13,888 $ 42,665
Dennis F. DiDominicis... 25,000 5.62% $3.20 12/14/02 $ 11,573 $ 35,554
Steven A. Wolf.......... 50,000 11.24% $3.20 Various/(2)/ $ 63,626 $ 183,983
- --------
/(1)/ Represents the difference between the market value of the common stock
for which the option may be exercised, assuming that the market value of
the common stock appreciates in value from the date of grant to the end
of the option term at annualized rates of 5% and 10%, respectively, and
the exercise price of the option.
/(2)/ Expiration dates range from 12/14/02 through 12/14/07.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
No options were exercised in 1997 by any of the executive officers named in
the Summary Compensation Table above. The following table sets forth, for each
of such executive officers, the number and value of options held at December
31, 1997.
23
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997/(1)/
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael G. Rubin........ -- -- -- -- -- --
Kathryn N. Bednarski.... -- -- -- 30,000 -- $ 9,750
Dennis F. DiDominicis... -- -- 10,000 15,000 $3,250 $ 4,875
Steven A. Wolf.......... -- -- 12,500 37,500 $4,063 $12,188
- --------
/(1)/ Calculated by determining the difference between the deemed fair value of
the securities underlying the options on December 31, 1997 and the
exercise price.
STOCK OPTION PLANS
1996 Equity Incentive Plan
In March 1996, the Board of Directors adopted and in July 1996 the Company's
Stockholders approved the Company's 1996 Equity Incentive Plan (the "Incentive
Plan"). The purposes of the Incentive Plan are to attract and retain key
employees and certain other persons who are in a position to make significant
contributions to the success of the Company, to reward these employees and
other persons for their contributions, to provide additional incentive to
these employees and other persons to continue making similar contributions and
to further align the interests of these employees and other persons with those
of the Company's stockholders. To achieve these purposes, the Incentive Plan
permits grants of incentive stock options ("ISO's"), options not intended to
qualify as incentive stock options ("Non-ISO's"), stock appreciation rights
("SAR's"), restricted and unrestricted stock awards, performance awards,
loans, and supplemental cash awards and combinations of the foregoing (all
referred to as "Awards").
The Incentive Plan originally permitted Awards to be granted for a total of
100,000 shares of the Company's common stock. On September 24, 1996, the Board
of Directors approved an amendment to the Incentive Plan that increased the
maximum number of shares issuable under the Incentive Plan to 1,000,000
shares. This amendment was approved by the shareholders at a vote held in
connection with the Company's annual shareholders meeting on December 4, 1997.
Shares issuable under Awards that terminate unexercised, shares issuable under
Awards that are payable in stock or cash but are paid in cash and shares
issued but later forfeited will be available for future Awards under the
Incentive Plan.
All current and future employees of the Company, and other persons who, in
the opinion of the Board of Directors, are in a position to make significant
contributions to the success of the Company, such as consultants and non-
employee directors, are eligible to receive Awards under the Incentive Plan.
The Incentive Plan is administered by the Board of Directors, which
determines, among other things and subject to certain conditions, the persons
eligible to receive Awards, the persons who actually receive Awards, the type
of each Award, the number of shares of common stock subject to each Award, the
date of grant, exercise schedule, vesting schedule and other terms and
conditions of each Award, whether to accelerate the exercise or vesting
schedule or waive any other terms or conditions of each Award, whether to
amend or cancel an Award and the form of any instrument used under the
Incentive Plan. The Board of Directors has the right to adopt rules for the
administration of the Incentive Plan, settle all controversies regarding the
Incentive Plan or any Award, and construe and correct defects and omissions in
the Incentive Plan or any Award. The Incentive Plan may be amended, suspended
or terminated by the Board of Directors, subject to certain conditions,
provided that stockholder approval will be required whenever necessary for the
Incentive Plan to continue to satisfy the requirements of certain securities
and tax laws, rules and regulations.
24
Recipients of stock options under the Incentive Plan will have the right to
purchase shares of common stock at an exercise price, during a period of time
and on such other terms and conditions as are determined by the Board of
Directors. For ISO's, the recipient must be an employee, the exercise price
must be at least 100% (110% if issued to a 10% or greater stockholder of the
Company) of the fair market value of the Company's common stock on the date of
grant and the term cannot exceed ten years (five years if issued to a 10% or
greater stockholder of the Company) from date of grant. If permitted by the
Board of Directors and subject to certain conditions, an option exercise price
may be paid by delivery of shares of the Company's common stock that have been
outstanding, a promissory note, a broker's undertaking to promptly deliver the
necessary funds or by a combination of those methods. If permitted by the
Board of Directors, options (other than those granted in tandem with SAR's)
may be settled by the Company paying to the recipient, in cash or shares of
common stock (valued at the then fair market value of the Company's common
stock), an amount equal to such fair market value minus the exercise price of
the option shares.
SAR's may be granted under the Incentive Plan 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 market 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.
The Incentive Plan provides for restricted and unrestricted stock awards.
Stock awards allow the recipient to acquire shares of the Company's common
stock for their par value or any higher price determined by the Board of
Directors. In the case of restricted stock awards, the shares acquired are
subject to a vesting schedule and other possible conditions determined by the
Board of Directors.
The Incentive Plan provides for performance awards entitling the recipient
to receive stock options, stock awards or other types of Awards conditional
upon achieving performance goals determined by the Board of Directors.
Performance goals may involve overall corporate performance, operating group
or business unit performance, personal performance or any other category of
performance determined by the Board of Directors. Financial performance may be
measured by revenue, operating income, net income, earnings per share, common
stock price, price-earnings multiple or other financial factors determined by
the Board of Directors.
Under the Incentive Plan, loans or supplemental cash awards may be granted
to recipients of Awards to help defray taxes due as a result of the Awards.
The terms and conditions of loans and supplemental cash awards, including the
interest rate, which may be zero, and whether any loan will be forgiven, are
determined by the Board of Directors.
Generally, upon termination of a recipient's employment or other
relationship with the Company, stock options and SAR's remain exercisable for
a period of three months (one year if termination is due to death or
disability) to the extent that they were exercisable at the time of
termination, except as otherwise agreed between the employee and the Company,
unvested shares under outstanding restricted stock awards vest immediately
except in the case of a voluntary resignation or termination for cause (as
defined in the Incentive Plan). Stock options, SAR's and other Awards that are
not exercisable at the time of termination automatically terminate, and
payments or benefits under deferred stock awards, performance awards and
supplemental cash awards that are not irrevocably due at the time of
termination are forfeited.
In addition to the 1996 Equity Incentive Plan, which is discussed above, the
Company has adopted the following seven separate stock option plans (the
"Plans"): 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, and the 1995 Non-Employee Directors' Stock Option
Plan. The following terms and conditions are virtually identical for each of
the Plans, except for the 1995 Non-Employee Directors' Stock Option Plan which
is separately summarized below. Pursuant to the Plans, options may be granted
with respect to 31,321; 17,500; 37,500; 43,750; 45,000; 75,000 and 12,500
shares of common stock, respectively.
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Options under the Plans may be granted as incentive stock options intended
to qualify under Section 422 of the Code or as options not intended to so
qualify. In the case of both incentive stock options and non-qualified stock
options, the option price must be equal to at least 100% of the fair market
value of the Company's common stock on the date of grant. There is no limit on
the number of shares for which options may be granted to any single employee
under a Plan, except that incentive stock options first exercisable by a
recipient in any one year under a Plan may not exceed $100,000 in value
(determined at the time of grant). In addition, an incentive option granted to
any person who owns 10% or more of the shares of voting stock of Global must
have had an option price of not less than 110% of the fair market value of the
shares at the time of grant and the option must expire not more than five
years after its grant.
Payment of the option exercise price may be made in cash, shares of common
stock or a combination of cash and common stock. Except with respect to the
1995 Stock Option Plan, all officers, directors and key employees of the
Company or any current or future parent or subsidiary of the Company are
eligible to receive options under the Plans. Under the 1995 Stock Option Plan,
non-employee members of the Board of Directors of the Company are not eligible
to receive options. The Plans are administered by the Board of Directors which
selects the optionee, determines the number of shares subject to each option
and prescribes other terms and conditions of each option.
1995 Directors' Plan
On September 19, 1995, the Board of Directors adopted, and on November 15,
1995, the shareholders approved, the 1995 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan"). Pursuant to the Directors' Plan, options may be
granted with respect to an aggregate of 12,500 shares of common stock.
Options granted under the Directors' Plan are nonstatutory stock options
which do not qualify under Section 422 of the Code. Only non-employee
directors of Global or any subsidiary of Global ("Non-Employee Director") are
eligible to participate in the Directors' Plan. Mr. Adelberg qualified as a
Non-Employee Director.
While grants of stock options under the Directors' Plan are automatic and
non-discretionary, all questions of interpretation of the Directors' Plan are
determined by the Executive Committee of the Board of Directors. The
Directors' Plan provides that commencing January 1, 1996 and annually on
January 1 of each year thereafter, an option to purchase 1,250 shares of
Global common stock will be granted to each Non-Employee Director. The option
exercise price for each option granted under the Directors' Plan is the fair
market value on the date the option is granted. All options granted under the
Directors' Plan vest at the rate of 25% per calendar quarter after the date of
grant (or earlier in event of the death or disability of the Non-Employee
Director or sale of Global). Upon departure from the Board of Directors by
reason of death or disability, all options held by a Non-Employee Director may
be exercised by him or her or by his or her executor or administrator, or by
the person or persons to whom the option is transferred by will or the
applicable laws of descent and distribution, only during the one-year period
after such departure. If a Non-Employee Directors' service with Global
terminates for any other reason, all options held by the Non-Employee Director
that are not then exercisable will terminate and options that are exercisable
on the date of termination will continue to be exercisable for the original
option exercise period. Upon sale of Global, all options held by Non-Employee
Directors will terminate. In all other events, options granted under the
Directors' Plan remain exercisable until the fifth anniversary of the date of
grant. No option may be transferred other than by will or by the laws of
descent and distribution.
DIRECTOR COMPENSATION
Each Director who is not an employee of Global received an option to
purchase 1,250 shares of Global's common stock upon joining the Board of
Directors and annual stock option grants to purchase 1,250 shares. The
Directors do not receive any cash compensation for their services on behalf of
Global but are reimbursed for reasonable travel and lodging expenses incurred
in attending meetings of the Board of Directors and any Committee. Those
Directors who are employees of Global do not receive any compensation for
their services as Directors.
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On December 15, 1997, in conjunction with the consummation of the
reorganization, the Company made a one-time discretionary grant to Mr.
Adelberg of a five year option to purchase 50,000 shares of Global's common
stock at an exercise price per share equal to the fair market value of the
stock on the date of grant. The shares vest twenty percent per year on each
anniversary retroactive back to the date of Mr. Adelberg's appointment to the
Board, July 31, 1995. As such, 20,000 of Mr. Adelberg's shares vested upon
grant, with an additional 10,000 shares vesting July 31, 1998, 1999 and 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE TRANSACTIONS
During 1997, Global had no compensation committee "interlocks", meaning that
it was not the case that an executive officer of Global served as a director
or member of the compensation committee of another entity and an executive
officer of the other entity served as a director or member of the Compensation
Committee or the Board of Directors of Global.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
Global