<PAGE>
IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-Q IS BEING
FILED IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934.
For the period ended September 30, 1995
------------------
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934.
For the transition period from to
--------------- --------------
Commission File Number 0-16611
-------
RYKA INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2958132
- - -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
555 S. Henderson Road, Suite B, King of Prussia, PA 19406
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-337-2200
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of November 9, 1995:
Common Stock $.01 par value 41,535,326
- - --------------------------- ------------------
(Title of each class) (Number of Shares)
- - -------------------------------------------------------------------------------
<PAGE>
RYKA Inc. and Subsidiary
Form 10-Q for the Three-Month Period Ended September 30, 1995
Table of Contents
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<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance
Sheets as of September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations for the
three-month and nine-month periods ended September 30, 1995
and September 30, 1994 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1995 and September 30, 1994 5
Notes to Condensed Consolidated Financial Statements 6 to 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 to 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults on Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index and Exhibits 23
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RYKA Inc. and Subsidiary
Condensed Consolidated Balance Sheets
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 40,380 $ 296,226
Accounts receivable, net of allowance for doubtful
accounts of $213,186 in 1995 and $518,875 in 1994 1,029,221 2,933,994
Inventory 1,116,996 3,763,835
Prepaid expenses and other current assets 82,188 166,946
------------ ------------
Total current assets
2,268,785 7,161,001
Property and equipment, at cost, net of accumulated
depreciation 218,197 173,118
Security deposits and other assets -- 15,753
------------ ------------
Total assets $ 2,486,982 $ 7,349,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank $ 322,000 $ --
Accounts payable and accrued expenses 641,735 856,069
Payable to lender -- 2,783,464
Payable to factories 136,613 390,113
Payable to factor -- 1,286,237
Due to affiliate 25,640 --
------------ ------------
Total current liabilities 1,125,988 5,315,883
------------ ------------
Subordinated note payable, affiliate 851,440 --
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000
shares authorized; none issued or outstanding
Common Stock; $0.01 par value, 45,000,000 shares authorized; 41,535,326
and 26,474,326 shares issued and outstanding at September 30, 1995 and
December 31, 1994, respectively (pro-forma subject to stockholder
approval 70,000,000 shares authorized;
46,615,326 shares issued and outstanding - Notes B and G) 415,353 264,743
Additional paid-in capital 17,295,755 15,988,253
Accumulated deficit (17,201,554) (14,219,007)
------------ ------------
Total stockholders' equity 509,554 2,033,989
------------ ------------
Total liabilities and stockholders' equity $ 2,486,982 $ 7,349,872
============ ============
</TABLE>
Please refer to the notes to condensed consolidated financial statements.
-3-
<PAGE>
RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Operations
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------------- ----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 1,299,603 $ 4,731,725 $ 6,917,866 $ 12,861,030
Other revenues 53,838 22,676 83,773 123,812
------------ ------------ ------------ ------------
1,353,441 4,754,401 7,001,639 12,984,842
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 927,108 3,489,955 6,116,792 9,062,721
Inventory write-down to lower
of cost or market -- -- 586,000 --
General and administrative
expenses 353,738 316,994 1,649,843 1,078,687
Sales and marketing expenses 235,238 687,801 1,629,385 1,940,387
Research and development expenses 38,582 68,737 288,018 144,492
Special charges 279,012 -- 279,012 --
------------ ------------ ------------ ------------
1,833,678 4,563,487 10,549,050 12,226,287
------------ ------------ ------------ ------------
Operating income (loss) ( 80,237) 190,914 ( 3,547,411) 758,555
------------ ------------ ------------ ------------
Other (income) expense:
Interest expense 17,488 243,598 319,213 645,299
Interest income ( 4,171) ( 1,141) ( 6,328) (3,762)
Gain on disposition of property
and equipment ( 10,782) -- ( 10,782) --
Merger related costs -- -- 783,289 --
------------ ------------ ------------ ------------
2,535 242,457 1,085,392 641,537
------------ ------------ ------------ ------------
Income (loss) before taxes ( 482,772) ( 51,543) ( 4,632,803) 117,018
Provision for income taxes -- 8,116 -- 21,316
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain ( 482,772) ( 59,659) ( 4,632,803) 95,702
Extraordinary gain:
Forgiveness of debt 1,650,256 -- 1,650,256 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,167,484 ($ 59,659) ($ 2,982,547) $ 95,702
============ ============ ============ ============
Net income (loss) per share:
Loss before extraordinary gain ($ .01) $ -- ($ .16) $ --
Extraordinary gain .04 -- .06 --
------------ ------------ ------------ ------------
Net income (loss) per share $ .03 $ -- ($ .10) $ --
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 43,375,492 23,940,406 30,830,241 24,371,375
============ ============ ============ ============
</TABLE>
Please refer to the notes to condensed consolidated financial statements.
-4-
<PAGE>
RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,982,547) $ 95,702
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Extraordinary item - forgiveness of debt ( 1,650,256) --
Depreciation and amortization 36,572 39,149
Provision for allowance for doubtful accounts 367,030 100,000
Gain on disposition of property and equipment ( 10,782) --
Changes in operating assets and liabilities:
Accounts receivable 1,537,743 (1,300,345)
Inventory 2,646,839 280,254
Prepaid expenses and other current assets 84,758 ( 233,596)
Accounts payable and accrued expenses 856,188 ( 987,380)
Payable to factories ( 253,500) --
Due to affiliate 25,640 --
----------- -----------
Net cash provided by (used in) operating activities 657,685 (2,006,216)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ( 85,988) ( 71,614)
Proceeds from sale of equipment 15,120 --
Security deposits and other assets 15,753 12,500
----------- -----------
Net cash (used in) investing activities ( 55,115) ( 59,114)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in payable to lender, net ( 2,203,730) 967,699
Advances from (repayment to) factor, net ( 1,286,237) 998,384
Proceeds from note payable, bank 322,000 --
Proceeds from short-term note -- 300,000
Repayment of short-term note -- ( 300,000)
Proceeds from subordinated note payable 851,440 --
Repayment of notes payable to stockholder -- ( 125,000)
Repayment of capital lease obligations -- ( 14,858)
Proceeds from exercise of warrants and stock options 305,248 69,409
Proceeds from sale of Common Stock, net of issuance costs 1,152,863 361,336
----------- -----------
Net cash provided by (used in) financing activities ( 858,416) 2,256,970
----------- -----------
Net increase (decrease) in cash ( 255,846) 191,640
Cash, beginning of period 296,226 83,753
----------- -----------
Cash, end of period $ 40,380 $ 275,393
=========== ===========
</TABLE>
Please refer to the notes to condensed consolidated financial statements.
-5-
<PAGE>
RYKA Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RYKA Inc.
("RYKA,"(R) the "Company," or the "Registrant") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The accompanying financial information is unaudited; however, in the opinion of
Management, all adjustments (consisting solely of normal recurring accruals)
necessary for a fair presentation of the operating results of this period have
been included. The results of operations for the periods reported are not
necessarily indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Audited
Consolidated Financial Statements as of December 31, 1994 as presented in the
Company's Annual Report on Form 10-K.
Net income (loss) per share is based on the weighted average number of Common
Stock and dilutive Common Stock equivalents outstanding during the period.
Common stock equivalents comprise stock options and Common Stock warrants. Also
see Note G.
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C.
On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of
the Agreement and Plan of Merger (the "Merger Agreement") with L.A. Gear, Inc.
and Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On
April 27, 1995 L.A. Gear, Inc. notified the Company that it was terminating the
Merger Agreement. On May 17, 1995 the Company received notice of termination of
its financing agreement with Pro-Specs America Corporation ("Pro-Specs")
effective June 16, 1995. Pro Specs provided the principal source of financing
for the production activities of the Company. Subsequently the Company reviewed
several financing proposals from possible strategic partners or financing
sources and in June 1995, MR Acquisitions, Inc. and the Company entered into a
Securities Purchase Agreement (the "Agreement") to provide the Company with up
to $8,000,000 of new financing. The Agreement was subsequently assigned to MR
Acquisitions, L.L.C. ("MR"). Without this financing or other strategic
arrangement, Management believed there was substantial doubt that the Company
would be able to remain in business. The Agreement was consummated on July 31,
1995 (the "Closing") and the Company received cash proceeds from the sale of
stock and the ability to obtain funds through a new financing facility. In
addition, the Company negotiated substantial debt forgiveness with both secured
and unsecured creditors and established a new management team to operate the
restructured Company.
Following are the significant provisions of the Agreement and financing facility
(the "Transaction") between MR and the Company as set forth in the Agreement
dated June 21, 1995, as amended, the Loan Agreement and Security Agreement (the
"Loan Agreement") dated July 31, 1995 and the settlement of obligations due to
various creditors:
1. Transactions with MR:
MR purchased for consideration of $148,560 a total of 14,800,000 shares
of Common Stock of the Company (10,800,000 shares were delivered at
closing and the balance of 4,000,000 shares will be delivered upon
approval by the stockholders of an amendment to the Certificate of
Incorporation increasing the number of authorized shares) and a warrant
to purchase an additional 5,100,000 shares of Common Stock for $.01 per
share. Further, MR loaned $851,440 to the Company in the form of a
secured subordinated loan with interest at prime plus one percent and
with repayment terms coincident with the revolving credit facility with
the principal lender.
-6-
<PAGE>
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
1. Transactions with MR - continued:
In connection with the bank loan described below, MR is responsible for
making future subordinated loans or capital infusions, or causing the same
to occur, in amounts substantially equal to any losses incurred by the
Company subsequent to the date of the Transaction such that by August 30,
1995 capital funds is maintained at a minimum of $2,000,000, as defined.
See Note B(2) below for information regarding waiver of default related to
these provisions.
As part of the Transaction, the Company issued a contingent stock purchase
warrant (the "Contingent Warrant"), to MR to purchase up to an additional
4,000,000 shares of Common Stock for an exercise price of $.01 per share,
of which 461,444 shares are vested. Pursuant to the warrant terms, if at
any time within one year from the date of issuance of the Contingent
Warrant, the Company issues a number of shares of Common Stock which
results in the Company having in excess of 50,000,000 shares of Common
Stock issued and outstanding, provided, that any such shares above such
50,000,000 were issued solely for the purpose of a) inducing a lender to
make a loan or loans to the Company, or b) in connection with an infusion
of capital to the Company, or c) a settlement of debts with the Company's
creditors, or (d) a combination thereof, then upon the occurrence of such
stock issuance, for every ten (10) additional shares of Common Stock which
are issued, four (4) of such shares shall vest under the Contingent Warrant
to MR, who upon exercise shall pay an additional one cent ($.01) per share
for the issuance of such additional shares.
MR, through its affiliate, KPR Sports International, Inc. has made
available, to the Company, a letter of credit facility in the amount of
$2,000,000. This facility may be utilized by the Company to, among other
things, enter into purchase transactions for the manufacture of inventory
with overseas vendors.
The Company reimbursed MR approximately $125,000 for its costs in
connection with the Transaction.
2. Transaction with principal lender:
In connection with the Transaction, the Company entered into a Loan and
Security Agreement with its principal lender to establish a $4,000,000
asset based revolving credit facility. The facility makes funds available
to the Company based on a percentage of inventory and accounts receivable,
as defined. Interest on the amounts outstanding will be paid monthly at the
rate of prime plus one percent and the facility is due on demand. As of
September 30, 1995, the Company owed $322,000 under this facility. Interest
expense incurred in connection with this facility was $1,805 for the
three-months ended September 30, 1995.
The Loan and Security Agreement requires the Company to observe certain
covenants and maintain certain minimum levels of tangible net worth and
leverage. Further, as described above, after August 30, 1995, there is a
requirement for additional subordinated loans or equity infusions in the
event that losses occur subsequent to the date of the Transaction which
would cause capital funds to decrease below $2,000,000, as defined. Such
$2,000,000 minimum required the infusion of additional equity or
subordinated loans of approximately $500,000 by August 30, 1995, and, as
described below, such infusion was postponed.
At September 30, 1995, the Company was in default of certain provisions of
the Loan and Security Agreement requiring certain credit and life insurance
to be obtained within prescribed timeframes, losses incurred by the Company
subsequent to the Transaction date to be funded by MR making subordinated
loans or capital infusions, or causing the same to occur (the "Funding
Requirement"), and the covenant requiring establishment and maintenance of
certain minimum tangible net worth. At September 30, 1995 and October 31,
1995, the difference between the actual minimum tangible net worth amount
and the required amount was approximately $450,000 and $600,000,
respectively.
The principal lender has waived the defaults, extended the time for the
insurance to be obtained through December 31, 1995, and postponed the
Funding Requirement and minimum tangible net worth requirements,
through January 30, 1996.
-7-
<PAGE>
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
2. Transaction with principal lender - continued:
The principal lender received a fee of $20,000 upon closing the
Transaction, reimbursement of certain costs and expenses incurred in
connection with the Loan Agreement, and warrants to purchase up to 500,000
shares of the Company's Common Stock for an exercise price of $.57 per
share. The price was based upon the average trading price of the stock for
the five days before and after the Closing. The warrant may be exercised
for a period of up to five years after the Transaction date but may not be
exercised during the first twelve months. The value of the warrants was
$100,000.
3. Equity transaction - Investors:
In connection with the Transaction, the Company offered for sale, through a
private placement, 4,000,000 shares of Common Stock and the results of the
private placement were as follows:
<TABLE>
<CAPTION>
Shares Placed Proceeds Received Shares Subscribed
------------- ----------------- -----------------
<S> <C> <C> <C>
At Closing 3,020,000 $ 755,000 --
========= ========= =========
At September 30, 1995 3,520,000 $ 880,000 --
========= ========= =========
At November 3, 1995 3,520,000 $ 880,000 250,000
========= ========= =========
</TABLE>
From the date of closing of the Transaction until completion of the private
placement, the Company's Chairman and Chief Executive Officer provided a
subordinated bridge loan to the Company. This loan is evidenced by a
promissory note bearing no interest and is due upon receipt by the Company
of the proceeds of the private placement. At September 30, 1995, a total of
$120,000 remained outstanding on such loan. As of November 3, 1995
additional shares were subscribed for or placed and a total of 230,000
shares have yet to be sold to investors. Originally, in the event the
private placement was not completed by August 26, 1995, such bridge loan
was to be converted to equity based on the same terms as the private
placement, with the exception of the provisions causing a contingent
reduction in stock proceeds as described above. The conversion date was
subsequently extended until December 31, 1995. Since the ultimate effect of
this transaction will be to increase the outstanding capital stock of the
Company through the sale of Common Stock to investors or conversion of the
bridge loan into Common Stock, the transaction has been given effect to in
these financial statements as if it had been completed. Included in
Additional Paid-In Capital at September 30, 1995 is $120,000 related to the
bridge loan for shares not sold. Further, such shares, although not
outstanding, have been considered as such in the computation of earnings
(loss) per share.
4. Settlement with secured and unsecured creditors:
As required by the Agreement, the Company negotiated the following
settlement arrangements with secured and unsecured creditors:
o Pro-Specs America Corporation:
The Company entered into a Settlement Agreement with Pro-Specs under
which $1,804,734 of secured indebtedness was settled by payment of
$1,100,000 in cash and the issuance of 500,000 shares of Common Stock.
These shares of Common Stock will be issued upon approval by the
shareholders of an amendment to the Certificate of Incorporation
increasing the number of authorized shares. These shares have been
valued at $.25 each or $125,000 in the aggregate. Pro-Specs was also
obligated to certain vendors pursuant to letters of credit opened on
behalf of the Company for the purchase of approximately $1,000,000 in
merchandise to be received in the future. In connection with the
settlement, as a result of separate negotiations with such vendors,
Pro-Specs was released from any obligations in connection with such
letters of credit.
In connection with the foregoing, the Company recognized a gain on
restructuring of this debt in the amount of $579,734 in the third
quarter of 1995.
-8-
<PAGE>
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
4. Settlement with secured and unsecured creditors - continued:
o Other creditors:
In early July 1995, the Company was obligated to various unsecured
creditors in the aggregate amount of approximately $1,246,000. These
creditors were contacted and, generally, given the opportunity to elect
one of the following methods of settlement of the amounts due to them:
o Option A:
Payment in cash of $.08 during July 1995, or in certain cases at a
later date, in full and complete settlement of each dollar owed to
the creditor.
o Option B:
Payment in cash of $.03 during July 1995, or in certain cases at a
later date, for each dollar owed to such creditor and the issuance
of one warrant for the purchase of a share of Common Stock of the
Company for each $2 due such creditor. The warrants are
exercisable over a 5 year period at an exercise price of $1.50 per
share. The value of each warrant was $.10.
Creditors who were owed approximately $833,000 elected Option A. The
Company made payments to these creditors totaling approximately $71,000 and
recognized a gain of approximately $771,000 in the third quarter of 1995.
Creditors who were owed approximately $98,000 elected Option B. The Company
made payments to these creditors totaling approximately $3,000 and issued
44,903 warrants resulting in a gain recognized of approximately $91,000 in
the third quarter of 1995.
In addition, approximately $315,000 of claims were settled under other
negotiated arrangements requiring the payment of approximately $107,000 in
the aggregate resulting in a gain of approximately $208,000 in the third
quarter of 1995.
Currently the Company is negotiating with creditors who are owed
approximately $105,000.
The settlements with secured and unsecured creditors who were owed
approximately $3,050,000 resulted in a gain of approximately $1,650,000.
5. Other matters:
In connection with the Transaction, various other arrangements were
made including the following:
o The lease for the Company's principal operating facility was
terminated early with the payment of rent through August 15, 1995.
o Certain employment arrangements have been modified or new
arrangements have been entered into involving, among other
things, the granting of approximately 700,000 new options for the
purchase of the Company's Common Stock at a price equal to the
fair market value at the date of issuance.
o The Company incurred approximately $225,000 of professional fees
and other costs in connection with this Transaction. The amount
was paid in cash and by the issuance of 100,000 warrants valued at
$20,000. The warrants are exercisable over 5 years at a price of
$.42 per share.
o A key employment agreement was terminated involving the issuance of
60,000 shares of Common Stock, valued at $.25 per share.
o The Company's Credit and Collection Agreement with Heller Financial
Inc., its factor, was modified so that the credit facility
previously provided to the Company was terminated and only
collection services are currently being provided.
-9-
<PAGE>
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
5. Other matters - continued
o The Company presently has 45,000,000 shares of Common Stock
authorized for issuance. Prior to the Closing, approximately
26,500,000 shares of Common Stock were issued and outstanding and
approximately an additional 3,600,000 shares of Common Stock were
reserved for issuance of stock options and warrants unrelated to
this Transaction. The stockholders of the Company will be requested
to approve an increase in the number of authorized shares of Common
Stock to 70,000,000 at a special meeting on November 15, 1995 in
order to enable the Company to issue shares, options and warrants
as a result of the Transaction and to have shares available for
future financing and stock options.
A summary of shares to be issued and outstanding, pending
stockholders' approval of the amendment to the certificate of
incorporation increasing the number of authorized shares, is as
follows:
<TABLE>
<S> <C>
Shares purchased by MR in connection with Transaction 4,000,000
Shares for professional fees as reimbursement to MR for
Transaction costs 40,000
Remaining shares to be issued pursuant to 4,000,000
shares private placement 480,000
Shares to Pro-Specs in connection with settlement of secured indebtedness 500,000
Shares as termination of employment contract with former employee 60,000
------------
5,080,000
Shares issued and outstanding at September 30, 1995 41,535,326
------------
Shares issued and outstanding at September 30, 1995 on a pro-forma
basis, as if shareholders had Approved the Amendment to the
Certificate of Incorporation 46,615,326
============
</TABLE>
NOTE C - RELATED PARTY TRANSACTIONS
The Company relocated to King of Prussia, Pennsylvania in August 1995 where
it conducts its operations and warehouses inventory in a facility subleased
from an affiliate of MR. Terms of the sublease require rental payments of
approximately $4,000 per month for use of these facilities and the
warehousing services commencing August 1, 1995 through July 31, 1997. Any
other cost related to the use of the joint facility or for other services
provided by MR or its affiliates will be charged to the Company on an arms
length basis and will be subject to approval by a special disinterested
committee of the Board of Directors.
KPR Sports International, Inc., an affiliate of MR and an entity owned by
the Chairman and Chief Executive Officer of the Company, has advanced
certain funds to the Company on a temporary basis. Such amounts are
included in the balance sheet under current liabilities as due to
affiliate.
MR through its affiliate, KPR, has made available to the Company, a letter
of credit facility in the amount of $2,000,000. This facility is used by
the Company to finance the purchase of manufactured inventory with overseas
vendors. At September 30, 1995, letters of credit in the amount of $207,000
were issued by KPR on behalf of the Company. Merchandise inventory received
under the terms of the facility is recorded in the financial statements
upon transfer of title to the Company which, generally, occurs upon payment
to KPR.
As stated in Note B, KPR loaned the Company $851,440 in the form of
subordinated debt.
Included in the statement of operations are sales of $85,254 relating to
footwear sold to KPR yielding a profit of $9,258 to the Company. These
goods were prior season's merchandise which was sold at negotiated terms on
an arms-length basis. KPR did not realize a profit on the ultimate sale of
this merchandise.
-10-
<PAGE>
NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED
The Chairman and Chief Executive Officer of the Company devotes a portion
of his time to the Company's operations and marketing and sales related
activities for which he does not receive any compensation. The value of
these services for the two months ended September 30, 1995 was not
significant.
A summary of all related party transactions for the period July 31, 1995 to
September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Financial Amount Included in Amount Included in
Nature of Statement Transaction Due (To) From Affiliate Subordinated Note
Transactions Classification Amount at September 30, 1995 Payable, Affiliate
------------ -------------- ------------ ------------------------ --------------------
<S> <C> <C> <C> <C>
Purchase of
Inventory Inventory $132,660 ($83,605)
Sale of Fixed Assets Property and
Equipment 15,000 --
Proceeds from
Subordinated Debt Subordinated
Note Payable 851,440 -- $851,440
Sale of Merchandise Net Sales 85,254 85,254
Rent General and
Administrative
Expense 8,000 ( 8,000)
Interest on
Subordinated Debt Interest Expense 14,066 ( 14,066)
Temporary Advances 133,190 ( 5,223)
-------- --------
($25,640) $851,440
======== ========
</TABLE>
NOTE D - CHARITABLE CONTRIBUTIONS
The Company has historically provided financial support to the R.O.S.E.
(Regaining One's Self-Esteem) Fund (formally The RYKA ROSE Foundation), an
independent not for profit foundation. The Company and the R.O.S.E. Fund are
currently discussing the terms of their future relationship which to date have
not been finalized. During the quarter ended September 30, 1995, contributions
in the amount of $2,000 were made.
NOTE E - OTHER
1. Exercise of Underwriters Warrants:
In connection with its third public offering in July 1990, the Company
issued 470,000 warrants (the "Unit Warrants"), each of which entitled the
underwriter to purchase up to one unit at a price of $1.20. Each Unit
Warrant consists of one share of Common Stock and one Common Stock
Purchase Warrant. Each Common Stock Purchase Warrant entitles the
Underwriter to purchase one share of Common Stock at an exercise price of
$1.00 per share. Prior to modification, these Unit Warrants originally
were to expire on July 16, 1995.
-11-
<PAGE>
NOTE E - OTHER - CONTINUED
Prior to the modified expiration date of August 30, 1995, a total of
350,000 Unit Warrants remained outstanding and their terms had been
modified so that the purchase price of each Unit Warrant had been reduced
to $.45. Through further modification, the exercise price of each of the
Unit Warrants and Common Stock Purchase Warrants was reduced to $.40 and
during August, 1995 the Company received proceeds totaling $280,000 as a
result of the full exercise of these warrants.
2. NASDAQ Listing:
On July 19, 1995 the Company received an exception from the NASDAQ capital
and surplus listing requirement so that its Common Stock continued to be
listed on the NASDAQ Small Cap Market. The exception expired on September
15, 1995 and the Company was delisted from NASDAQ. Currently the Common
Stock of the Company is listed on the Over-the-Counter Bulletin Board.
NOTE F - SPECIAL CHARGES
In connection with the Transaction described in Note B, the related closing of
the Massachusetts facility, and relocation of operations to Pennsylvania, the
Company incurred the following special charges:
<TABLE>
<S> <C>
Professional fees and bank fees related to new credit facility, including
value of warrant to bank $205,492
Temporary housing costs for relocated personnel 17,575
Recruitment and relocation costs related to new management and personnel 41,320
Start-up and moving costs related to warehouse and office 14,625
--------
$279,012
========
</TABLE>
NOTE G - PRO-FORMA AUTHORIZED CAPITAL, ISSUED AND OUTSTANDING COMMON STOCK AND
EARNINGS (LOSS) PER SHARE
As discussed in Note B (5), the stockholders of the Company will be requested to
approve an increase in the number of authorized shares of Common Stock to
70,000,000 at a special meeting on November 15, 1995. For purposes of
calculating the weighted average number of common and common equivalent shares
outstanding for the computation of earnings per share, such stockholder approval
has been assumed as of the date of the Transaction.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Overview
The Company has not had a single profitable fiscal year since its inception and
has incurred approximately $4,100,000 in losses during the first six months of
1995. In addition, RYKA had a stockholders' deficiency of approximately
$2,100,000 at June 30, 1995 and was experiencing a critical cash shortage.
During 1995 the Company was in default on several occasions under its agreements
with Pro-Specs America Corporation ("Pro-Specs") to provide production
financing. On May 17, 1995 Pro-Specs notified the Company of its intention to
terminate financing arrangements within 30 days. During 1995, the Company
reviewed several financing proposals and in June 1995 MR Acquisitions L.L.C.
("MR") and the Company entered into a Securities Purchase Agreement (the
"Agreement") to enable the Company to continue in existence. Without this
financing or other strategic arrangement Management believed there was
substantial doubt that the Company would be able to remain in business.
The Agreement was consummated on July 31, 1995 and provided the Company with
cash proceeds from the sale of stock and the ability to obtain funds through a
new financing facility. The Agreement also required substantial debt forgiveness
through negotiated arrangements with both secured and unsecured creditors and
established a new Management team to operate the restructured Company. At
closing, the Company had capital funds comprised of a net worth and subordinated
debt in excess of $1,500,000 as compared to an equity deficiency of $2,100,000
at June 30, 1995. The Agreement also called for certain officers and directors
to tender their resignation, thereby allowing a new management team to operate
the restructured Company.
During the first half of 1995 and until the Agreement with MR was consummated,
there was substantial doubt that the Company would be able to remain in
business. Staff reductions occurred on both a voluntary and involuntary basis
and temporary employees were required to handle daily operations. Further, sales
efforts were limited for a variety of reasons, including the inability to obtain
product from the Company's overseas production sources.
Once the Agreement with MR was consummated, new management directed its internal
efforts to carrying out a repositioning of the Company involving, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training of new employees in key management positions, including a
President and Vice President of Finance, filling of other necessary positions
within the Company, developing new product and the rebuilding of customer and
supplier relationships. These activities reflect a period of rebuilding in
certain areas of the Company's business and had a significant negative impact on
the Company's current sales and operations. Therefore, the Company is unlikely
to generate positive operating results in the near future.
Accordingly, sales and expense levels for the quarter ended September 30, 1995
and nine-months ended September 30, 1995 are not necessarily indicative of
results to be achieved in the future and the new management influences are not
fully reflected in the result of operations for the quarter ended September 30,
1995.
The approximate breakdown of operating expenses during the quarter is as
follows:
<TABLE>
<CAPTION>
(In Thousands) Old Management New Management
One Month Ended Two Months Ended Three Months Ended
July 31, 1995 September 30, 1995 September 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
General and Administrative $143.9 $209.8 $353.7
Sales and Marketing 95.0 140.2 235.2
Research and Development 27.4 11.2 38.6
------ ------ ------
266.3 361.2 627.5
Special Charges -- 279.0 279.0
------ ------ ------
$266.3 $640.2 $906.5
====== ====== ======
</TABLE>
By restructuring the expense base, obtaining working capital and a line of
credit at more favorable interest rates, the Company believes it is now better
positioned to compete in the athletic footwear market.
-13-
<PAGE>
Results of Operations
Three Months Ended September 30, 1995 as Compared to the Three Months Ended
September 30,1994
The following table sets forth, for the periods indicated, a percentage analysis
of items included in the Condensed Consolidated Statements of Operations in
relation to Net Sales:
<TABLE>
<CAPTION>
(In Thousands) THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,299.6 100.0% $4,731.7 100.0%
Other revenues 53.8 22.7
---------- --------
1,353.4 4,754.4
---------- --------
Costs and expenses:
Cost of goods sold 927.1 71.3% 3,490.0
73.7%
General and administrative expenses 353.7 27.2% 317.0 6.7%
Sales and marketing expenses 235.2 18.1% 687.8 14.5%
Research and development expenses 38.6 3.0% 68.7 1.5%
Special charges 279.0 21.5% -- --
----------------------------------------------------------------
1,833.6 141.1% 4,563.5 96.4%
----------------------------------------------------------------
Operating income (loss) ( 480.2) ( 36.9%) 190.9 4.0%
Other expense, net 2.6 .2% 242.5 5.1%
----------------------------------------------------------------
Income (loss) before taxes (482.8) ( 37.1%) ($ 51.6) (1.1%)
Provision for income taxes -- -- 8.1 0.2%
Income (loss) before extraordinary item ( 482.8) ( 37.1%) ( 59.7) (1.3%)
Extraordinary item - forgiveness of debt 1,650.3 127.0% -- --
----------------------------------------------------------------
Net income (loss) $ 1,167.5 89.9% ($ 59.7) (1.3%)
================================================================
</TABLE>
Net sales decreased by $3,432,122 (72.5%) from $4,731,725 for the three months
ended September 30, 1994 to $1,299,603 for the three months ended September 30,
1995. The decrease in net sales of the Company's footwear was due to several
factors which continued to affect sales throughout the third quarter as follows:
o uncertainty as to the Company's future continued despite the likelihood
of and ultimately the consummation of additional financing and the
Agreement with MR;
o many customers delayed or stopped their planned orders for third quarter
fall or "back to school" product. This was due to a combination of customer
apprehension to place orders, and the fact that the fall goods,
traditionally shipped towards the end of June or the beginning of July were
not available for delivery to retailers until the middle of September. Thus,
many customers either canceled their orders or had to be incentified to keep
their orders which adversely impacted margins as additional discounts and
extended terms were granted;
o the Company had a low inventory level. Until September, when the Fall
season production arrived, the inventory consisted of a minimum quantity of
goods from the prior season. During the quarter ended September 30, 1995,
substantially all the prior season's goods were liquidated. In addition,
there was a limited quantity of Fall season goods available to sell in the
third quarter which were purchased as a result of extended negotiations with
factories in the Far East. Management, as part of the settlement of its debt
with the factories, agreed to take only a portion of the original production
of Fall season footwear. Management's decision was based upon a combination
of customers' apprehension and the delays in the factories' release of
product due to the settlement negotiations;
-14-
<PAGE>
Three Months Ended September 30, 1995 as Compared to the Three Months Ended
September 30,1994 - continued
Net sales - continued
o the athletic footwear industry is still experiencing sluggishness and the
volume of off-price product has continued at high levels; and
o the women's athletic footwear category has become increasingly competitive
with larger vendors increasing their focus in this area thereby increasing
the need to sell inventory for less than normal prices.
Cost of goods sold decreased by $2,562,847 (73.4%) from $3,489,955 for the three
month ended September 30, 1994 to $927,108 for the three month ended September
30, 1995. The overall gross margin on net sales increased by 2.5% from 26.2% in
the third quarter of 1994 to 28.7% in the third quarter of 1995. The gross
margin reflect shipments of full price Fall merchandise.
General and administrative expenses increased by $36,744 (11.6%) from $316,994
for the third quarter of 1994 to $353,738 for the quarter ended September 30,
1995. The increase is primarily the result of (i) an increase in insurance
expense due primarily to directors and officers liability insurance for new
directors and coverage for former directors; (ii) travel expenses; (iii) legal
expenses (not related to the Transaction); and (iv) a decrease in factor
commissions due to the termination of the relationship with the factor. As a
percentage of sales, general and administration expenses increased significantly
as many expenses are relatively fixed in nature and sales were extremely low as
a result of the restructuring. The general and administrative expenses incurred
for the three months ended September 30, 1995 include one month of operations
under the prior management at higher expense levels. These expenses which were
incurred in July 1995, account for approximately $144,000 of the total general
and administrative expenses of $353,738 for the quarter.
Sales and marketing expenses decreased by $452,563 (65.8%) from $687,801 for the
quarter ended September 30, 1994 to $235,238 for the quarter ended September 30,
1995. Sales and marketing expenses expressed as a percentage of net sales
increased from 14.5% to 18.1%. The dollar decrease is primarily due to a
reduction in sales commissions of approximately $168,000 or 80%. This decrease
is proportionally greater than the decrease in net sales of 72.5%. Commissions
expressed as a percentage of net sales decreased from 4.3% to 2.8%. This
decrease of 1.5 percentage points is a result of reduced commission rates and a
greater proportion of house accounts sold by Company management at no
commission. Other reasons for the decrease include a reduction in promotional
expenses such as clothing giveaways and promotional allowances granted to
retailers, and a reduction in staff salary and related expenses.
Research and development expense decreased by $30,155 (43.9%) from $68,737 in
the quarter ended September 30, 1994 to $38,582 in the quarter ended September
30, 1995. This decrease is attributed primarily to a reduction in sample costs
and a reduction in payroll related costs.
Special charges were incurred in connection with the Transaction and the related
closing of the Massachusetts facility and relocation of operations to King of
Prussia, Pennsylvania. These expenses, among other things, included transactions
costs, termination of a significant portion of personnel existing prior to the
Transaction, temporary housing for certain relocated personnel, recruitment of
new management and personnel and costs associated with moving, start up of new
operations and winding down of prior operations.
Other (income) expense, net decreased $239,922 (99.0%) from $242,457 for the
quarter ended September 30, 1994 to $2,535 for the quarter ended September 30,
1995. This decrease is due to a reduction in interest expenses of $226,110
(92.8%) from $243,598 for the quarter ended September 30, 1994 to $17,488 for
the same period in 1995, due to the termination and settlement with Pro-Specs
and the capital infusion resulting from the consummation of the Agreement with
MR.
Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the Transaction.
THIS SPACE INTENTIONALLY LEFT BLANK
-15-
<PAGE>
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994
The following table sets forth, for the periods indicated, a percentage analysis
of items included in the Condensed Consolidated Statements of Operations in
relation to Net sales:
<TABLE>
<CAPTION>
(In Thousands) NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 6,917.9 100.0% $ 12,861.0 100.0%
Other revenues 83.7 123.8
----------- -----------
7,001.6 12,984.8
----------- -----------
Costs and expenses:
Cost of goods sold (includes
inventory write-down to lower
of cost or market) 6,702.8 96.9% 9,062.7 70.5%
General and administrative expenses 1,649.8 23.9% 1,078.7 8.4%
Sales and marketing expenses 1,629.4 23.5% 1,940.4 15.1%
Research and development expenses 288.0 4.2% 144.5 1.1%
Special charges 279.0 4.0% -- --
------------------------------------------------------------------
10,549.0 152.5% 12,226.3 95.1%
------------------------------------------------------------------
Operating income (loss) ( 3,547.4) ( 51.3%) 758.5 5.9%
Other (income) expense, net 1,085.4 15.7% 641.5 5.0%
------------------------------------------------------------------
Income (loss) before taxes ( 4,632.8) ( 67.0%) 117.0 0.9%
Provision for income taxes -- -- 21.3 0.2%
------------------------------------------------------------------
Net income (loss) before extraordinary item ( 4,632.8) ( 67.0%) 95.7 0.7%
------------------------------------------------------------------
Extraordinary item - forgiveness of debt 1,650.3 23.9% -- --
------------------------------------------------------------------
Net income (loss) ($ 2,982.5) ( 43.1%) $ 95.7 0.7%
==================================================================
</TABLE>
Net sales decreased by $5,943,164 (46.2%) from $12,861,030 for the nine months
ended September 30, 1994 to $6,917,866 for the nine months ended September 30,
1995. The decrease was due to several factors as follows:
o as a result of the announced and subsequent failed merger with L.A. Gear,
many customers delayed or canceled planned orders pending the future ability
of the Company to operate and fulfill the orders. As a result, sales orders
were not placed or canceled;
o the orders for "futures" business (third quarter shipments) for which
orders would be taken in the first or second quarter did not occur;
o as a result of customer reaction, and a critical cash shortage through the
date of the Transaction, the Company determined that a significant amount of
inventory had to be sold at or below cost in order to raise needed cash from
limited available inventory for sale;
o Fall goods were not available to ship until mid-September, and prior to
that there was a limited amount of prior season inventory to ship;
o the athletic footwear industry is still experiencing sluggishness and the
volume of off-price product has continued at high levels; and
-16-
<PAGE>
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994 - continued
Net sales - continued
o the women's athletic footwear category has become increasingly competitive
with larger vendors increasing their focus in this area thereby increasing
the need to sell inventory for less than normal prices.
Cost of goods sold decreased $2,359,929 (26.0%) from $9,062,721 for the nine
months ended September 30, 1994 to $6,702,792 for the nine months ended
September 30, 1995. The overall gross margin expressed as a percentage of net
sales decreased by 26.4 points, from 29.6% for the nine months ended September
30, 1994 to 3.1% for the comparable period in the current period. The decrease
in gross margin was primarily a result of the Company selling products at
reduced margins (primarily in the first and second quarters) in order to respond
to competitive market conditions and meet critical cash needs and a write down
of inventory to lower of cost or market (in the second quarter of 1995).
General and administrative expenses increased by $571,156 (52.9%) from
$1,078,687 for the nine months ended September 30, 1994 to $1,649,843 for the
same period in the current year. The increase consists primarily of an addition
to the Company's provision for bad debts, additional financial consulting and
accounting services incurred in completing the financial statements and in
filing the 10-K after the resignation of the Company's Chief Financial Officer
in February 1995 and an increase in costs for officers and directors liability
insurance for both current officers and prior officers.
Sales and marketing expenses decreased by $311,002 (16.0%) from $1,940,387 for
the nine months ended September 30, 1994 to $1,629,385 for the same period in
the current year. The decrease was due to (i) lower sales commissions resulting
from the reduced sales level as well as a reduction in the sales commission rate
on certain orders; (ii) an increase in the number of sales to house accounts
where no commission is paid; (iii) an increase in advertising and promotion
expenses; (iv) a decrease in salaries and benefits; and (v) a decrease in
international sales and marketing expenses.
Research and development expenses increased by $143,526 (99.3%) from $144,492
for the three quarters ended September 30, 1994 to $288,018 for the same period
in the current year. The entire increase is attributed to spending in the first
two quarters of 1995 as compared to the first two quarters of 1994. The increase
for the current nine month period compared to the previous year was primarily
due to the recruitment and hiring of a new Director of Design and design
consulting services.
-17-
<PAGE>
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994 - continued
Special charges were incurred in connection with the Transaction and the related
closing of the Massachusetts facility and relocation of operations to King of
Prussia, Pennsylvania. These expenses, among other things, included transactions
costs, termination of a significant portion of personnel existing prior to the
Transaction, temporary housing for certain relocated personnel, recruitment of
new management and personnel and costs associated with moving, start up of new
operations and winding down of prior operations.
Other (income) expense, net increased by $443,855 (69.2%) from $641,537 for the
nine months ended September 30, 1994 to $1,085,392 for the same period in the
current year. The increase is attributable to deal costs associated with the
Agreement and Plan of Merger with L.A. Gear, Inc. and a decrease in interest
expense of $326,086 (50.5%) from $645,299 for the three quarters ended September
30, 1994 to $319,213 for the same period in 1995.
Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the Transaction.
THIS SPACE INTENTIONALLY LEFT BLANK
-18-
<PAGE>
Liquidity and Capital Resources
Through July 31, 1995, RYKA continued to experience a critical shortage of cash.
During this period the Company reviewed several financing proposals and in June
1995, MR and the Company entered into a Securities Purchase Agreement (the
"Agreement") to provide the Company with up to $8,000,000 in new financing.
Prior to consummating the Agreement with MR on July 31, 1995, the Company had a
nominal cash balance and a working capital deficiency of approximately
$2,300,000. Without this financing or other strategic arrangement Management
believed there was substantial doubt that the Company would be able to remain in
business.
The Company was in default at various times during 1993 to 1995, under its
agreement with Pro-Specs America Corporation ("Pro-Specs"). Pro-Specs provided
the principal source of financing for the Company's production activities
through a $4,000,000 letter of credit and bankers acceptance line. On May 17,
1995 the Company received notice of termination of its agreement with Pro-Specs
effective June 16, 1995. Pro-Specs charged the Company substantial commissions
and other fees under its agreement in exchange for making financing available.
The effective annual interest rate including commissions paid was generally in
excess of 20%.
On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of
the Agreement and Plan of Merger ("Merger Agreement") with L.A. Gear, Inc. and
Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On April
27, 1995, L.A. Gear, Inc. terminated the Merger Agreement and its option to
purchase 677,500 shares of Common Stock and waived certain breakup fees. In an
effort to continue operations after the termination of the Merger Agreement, the
Company generated cash by liquidating inventory and accounts receivable and
using the proceeds to fund continuing operating losses and to reduce
liabilities, generally, to the Company's factor and to Pro-Specs.
As a result of consummating the Agreement with MR on July 31, 1995, the Company
received proceeds from the sale of Common Stock and warrants and proceeds from
subordinated notes payable, aggregating approximately $1,750,000 net of
transaction related costs. Additionally, secured and unsecured creditors forgave
certain debt resulting in a gain of approximately $1,650,000. The Company
established a new $4,000,000 asset based revolving credit facility with a bank
and established a $2,000,000 letter of credit facility with an affiliate of MR.
Both the bank facility and the letter of credit facility provide for rates which
are more competitive in today's lending environment. Interest on the bank loans
are at the prime rate plus 1% and letters of credit, prior to draw, are provided
at a rate of 1% of the sum of the face amount plus any underlying bank fees and
opening charges (approximately an additional 1 1/2% to 2% per anum).
The bank credit facility includes certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
capital funds (tangible stockholders' equity and subordinated notes payable) of
$2,000,000 by August 30, 1995. The bank credit facility also requires MR or its
affiliates, to make additional loans or otherwise cause capital funds of the
Company to be maintained at no less than $2,000,000. These provisions
effectively require the Company to raise capital through equity offerings,
proceeds from the exercise of stock options or warrants or through additional
subordinated borrowings or from MR or its affiliates, to finance any operating
losses.
The Agreement and financing resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000. At September 30, 1995 working capital was
approximately $1,100,000. Based on current plans, this available working
capital, along with the funding and support available from the asset-based
revolving credit facility and the letter of credit facility, are expected to
enable the Company to fund its anticipated needs in the near future. These
funding needs generally consist of supporting operating losses anticipated over
the next twelve months while the Company is carrying out its restructuring plan,
as well as supporting additional investments in inventory and accounts
receivable. The Company does not anticipate making significant capital
expenditures during the foreseeable future. In an effort to reduce costs and
increase efficiency, the Company is currently conducting its operations and
warehouse inventory in a facility subleased from an affiliate of MR.
-19-
<PAGE>
Liquidity and Capital Resources - continued
At September 30, 1995, the Company was in default of certain provision of the
Loan and Security Agreement with its principal lender which have been waived
through December 31, 1995 and others through January 30, 1996. In addition, the
Company anticipates operating losses for the remainder of 1995 and for 1996. In
order to avoid a default under its Loan and Security Agreement with its
principal lender, the Company is required to increase its tangible net worth for
borrowings up to $4,000,000 to be available to the Company. The Company must
fulfill this requirement by January 30, 1996. Accordingly, in order to meet this
tangible net worth requirement, it may be necessary to seek additional equity or
debt financing in the near future. In such event, there can be no assurance that
such additional financings will be available when needed or, if available, will
be on terms satisfactory to the Company. Notwithstanding the foregoing and based
on current plans, the Company believes that existing liquid resources, funds
available under its existing revolving credit facility, resources provided under
its letter of credit facility and the requirement of MR or its affiliates to
provide funding will provide sufficient liquidity and enable the Company to meet
its operating and capital requirements and obligations through early 1996.
-20-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES
At September 30, 1995, the Company was in default of certain provision of
the Loan and Security Agreement regarding certain credit insurance and life
insurance to be established within prescribed timeframes, losses incurred by
the Company subsequent to the Transaction date to be funded by subordinated
loans or capital infusions by MR Acquisitions, L.L.C. ("MR"), or by MR
causing the same to occur (the "Funding Requirement"), and the covenant
requiring establishment and maintenance of certain minimum tangible net
worth. With regard to the minimum tangible net worth requirement, the
difference between the established amount and the required amount was
approximately $450,000 at September 30, 1995 and approximately $600,000 at
October 31, 1995. The principal lender has waived the aforementioned
defaults, extended the time for the insurance to be established to December
31, 1995, and postponed the Funding Requirement and minimum tangible net
worth requirements through January 30, 1996.
At September 30, 1995, the Company was in default of certain provisions of a
Loan and Security Agreement with KPR Sports International, Inc. relating to
a minimum tangible net worth requirement which is identical to the covenant
of the Company's principal lender. KPR Sports International, Inc. has waived
the aforementioned default through January 30, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10eeee. Key Employee Agreement dated September 25, 1995 with Dennis F.
DiDominicis
10ffff. Letter from MidLantic Bank date November 14, 1995
10gggg. Letter from KPR Sports International, Inc. dated November 20, 1995
11. Statement regarding computation of per share earnings.
(b) Reports on Form 8-K
(1) The Registrant filed a Form 8-K dated August 8, 1995 to report
the completion of the transactions with MR Acquisitions, L.L.C.
(assignee of MR Acquisitions, Inc.).
(2) The Registrant filed a Form 8-K dated August 23, 1995 to report
a change in independent auditors.
-21-
<PAGE>
RYKA Inc. and Subsidiary
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RYKA INC.
Date: November 20, 1995 By: /s/ Michael G. Rubin
------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
Date: November 20, 1995 By: /s/ Steven A. Wolf
------------------------------
Steven A. Wolf
Vice President of Finance &
Chief Financial Officer
-22-
<PAGE>
RYKA Inc. and Subsidiary
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page No.
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
10eeee. Key Employee Agreement dated
September 25, 1995 with Dennis F. DiDominicis 24
10ffff. Letter from MidLantic Bank dated November 14, 1995 42
10gggg. Letter from KPR Sports International, Inc.
dated November 20, 1995 44
11 Statement regarding computation of
per share earnings 45
-23-
</TABLE>
<PAGE>
EXHIBIT 10EEEE
KEY EMPLOYEE AGREEMENT
To: Dennis F. DiDominicis
21932 Via Del Lago
Trabuco Canyon, CA 92679
The undersigned, RYKA, INC., a Delaware corporation (the
"Company"), with its principal place of business located at 555
S. Henderson Road, King of Prussia, Pennsylvania 19406, hereby
agrees with you as follows:
1. Position and Responsibilities.
1.1 You shall serve as President of the Company, (or in
such other executive capacity as shall be designated by the Board
of Directors or Executive Committee of the Company and reasonably
acceptable to you) and shall perform the duties customarily
associated with such capacity from time to time.
1.2 You will, to the best of your ability, devote your full
time and your best efforts to the performance of your duties
hereunder and the business and affairs of the Company. After
receipt of notice of termination of your employment hereunder,
you shall continue to be available to the Company on a part-time
basis at reasonable and customary hourly rates to assist in any
necessary transition, provided that this will not unreasonably
interfere with your obligations to any new employer.
1.3 You will duly and faithfully perform and observe any
and all rules and regulations which the Company may now or shall
hereafter reasonably establish governing your conduct as an
executive employee and the conduct of its business.
2. Term of Employment.
2.1 The initial term of this Agreement shall be for the
period of years set forth on Exhibit A annexed hereto commencing
with the date hereof. Thereafter, this Agreement shall be
automatically renewed for successive periods of one (1) year,
unless you or the Company shall give the other party not less
than four (4) months prior written notice of non-renewal. Your
employment with the Company may be terminated as provided in
Sections 2.2 or 2.3.
2.2 The Company shall have the right to terminate your
employment at any time under this Agreement prior to the stated
term in any of the following ways:
<PAGE>
(a) on thirty (30) days prior written notice to you upon
your disability (disability shall be defined as your
inability to perform duties under this Agreement for an
aggregate of ninety (90) days out of any one hundred
eighty (180) day period due to mental or physical
disability);
(b) immediately without prior notice to you by the Company
for "Cause", as hereinafter defined, provided, however,
that prior to any such termination for Cause;
(c) immediately without prior notice to you, upon your
death or in the event of the liquidation or
reorganization of the Company under the federal
Bankruptcy Code or any state insolvency or bankruptcy
law;
(d) at any time without Cause, provided the Company shall
be obligated to pay to you upon notice of termination,
as severance pay, a lump sum amount in cash equal to
one-half of your current annual Base Salary less any
amounts you may owe to the Company.
2.3 "Cause" for the purpose of Section 2 of this Agreement
shall mean: (i) the falseness or material inaccuracy of any of
your warranties or representations herein; (ii) your willful
failure or refusal to comply with explicit directives of the
Board of Directors or Executive Committee or to render the
services required herein; (iii) fraud or embezzlement involving
assets of the Company, its customers, suppliers or affiliates or
other misappropriation of the Company's assets or funds; (iv)
your conviction of a criminal felony offense; (v) the willful
breach or habitual neglect of your obligations under this
Agreement or your duties as an employee of the Company; (vi)
habitual use of drugs or alcohol. The existence of Cause for
termination of your employment by the Company shall be subject,
upon the written election by you or the Company, to binding
arbitration as provided in Section 9 hereof. The cost of
arbitration, exclusive of the cost of each party's legal
representation (which, except as hereinafter otherwise provided,
shall be borne by the party incurring the expense), shall be
borne by the instigating party; provided, however, that the
arbitrators' award may require either party to reimburse the
other for the reasonable cost of legal representation in the
arbitration proceedings.
Further, any dispute, controversy, or claim arising out of,
in connection with, or in relation to this definition of "Cause"
shall be settled by arbitration as provided in Section 9 hereof.
Any award or determination shall be final, binding, and
2
<PAGE>
conclusive upon the parties, and a judgment rendered may be
entered in any court having jurisdiction thereof.
If your employment is terminated by the Company for any
other reason, all obligations of the Company (except with respect
to amounts and obligations accrued to you prior to the date of
termination) shall cease.
3. Compensation.
You shall receive the compensation and benefits set forth on
Exhibit A attached hereto ("Compensation") for all services to be
rendered by you hereunder and for your transfer of property
rights, if any, pursuant to an agreement relating to proprietary
information and inventions of even date herewith attached hereto
as Exhibit C between you and the Company (the "Proprietary
Information and Inventions Agreement").
4. Other Activities During Employment.
4.1 Except for any outside employments and directorships
currently held by you as listed on Exhibit B attached hereto, and
except with the prior written consent of a disinterested majority
of the Company's Board of Directors, you will not, during the
term of this Agreement, undertake or engage in any other
employment, occupation or business enterprise other than one in
which you are an inactive investor.
4.2 You hereby agree that, except as disclosed on Exhibit B
attached hereto, during your employment hereunder, you will not,
directly or indirectly, engage (i) individually, (ii) as an
officer, (iii) as a director, (iv) as an employee, (v) as a
consultant, (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a
partner, co-venturer, stockholder, or other proprietor owning
directly or indirectly more than five percent (5%) interest in
any firm, corporation, partnership, trust, association, or other
organization which is engaged in the planning, research,
development, production, manufacture, marketing, sales, or
distribution of athletic footwear, sportswear, related products,
equipment, or services or any other line of business engaged in
or under demonstrable development by the Company (such firm,
corporation, partnership, trust, association, or other
organization being hereinafter referred to as a "Prohibited
Enterprise"). Except as may be shown on Exhibit B attached
hereto, you hereby represent that you are not engaged in any of
the foregoing capacities (i) through (ix) in any Prohibited
Enterprise.
3
<PAGE>
5. Former Employers.
5.1 You represent and warrant that your employment by the
Company will not conflict with and will not be constrained by any
prior or current employment, consulting agreement or relationship
whether oral or written. You represent and warrant that you do
not possess confidential information arising out of any such
employment, consulting agreement or relationship which, in your
best judgment, would be utilized in connection with your
employment by the Company in the absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you
should find that confidential information belonging to any other
person or entity might be usable in connection with the Company's
business, you will not intentionally disclose to the Company or
use on behalf of the Company any confidential information
belonging to any of your former employers; but during your
employment by the Company you will use in the performance of your
duties all information which is generally known and used by
persons with training and experience comparable to your own all
information which is common knowledge in the industry or
otherwise legally in the public domain.
6. Proprietary Information and Inventions.
You agree to execute, deliver and be bound by the provisions
of the Proprietary Information and Inventions Agreement attached
hereto as Exhibit C.
7. Post-Employment Activities.
7.1 For a period of one (1) year after the termination of
your employment with the Company of this Agreement, absent the
Board of Directors' prior written approval, you will not directly
or indirectly engage in activities similar to those described in
Section 4.2, nor render services similar or reasonably related
to those which you shall have rendered hereunder to, any person
or entity whether now existing or hereafter established which
directly competes with (or proposes or plans to compete with) the
Company ("Direct Competitor") in the women's athletic footwear in
the sporting goods category except that you may be employed by an
athletic shoe manufacturer, so long as you are not directly
responsible for the women's athletic footwear line of business.
Nor shall you entice, induce or encourage any of the Company's
other employees to engage in any activity which, were it done by
you, would violate any provision of the Proprietary Information
and nor shall you entice, induce or encourage any of the
Company's other employees to engage in any activity which, were
it done by you, would violate any provision of the Proprietary
4
<PAGE>
Information and Inventions Agreement or this Section 7. As used
in this Agreement, the term "any line of business engaged in or
under demonstrable development by the Company" shall be applied
as at the date of termination of your employment, or, if later,
as at the date of termination of any post-employment
consultation.
7.2 For a period of two (2) years after the termination of
your employment with the Company, the provisions of Section 4.2
shall be applicable to you and you shall comply therewith.
8. Remedies.
Your obligations under the Proprietary Information and
Inventions Agreement and the provisions of Sections 4.2, 7, 8, 9
and 11 of this Agreement (as modified by Section 14, if
applicable) shall survive the expiration or termination of your
employment (whether through your resignation or otherwise) with
the Company. You acknowledge that a remedy at law for any breach
or threatened breach by you of the provisions of the Proprietary
Information and Inventions Agreement or Section 4 or 7 hereof
would be inadequate and you therefore agree that the Company
shall be entitled to such injunctive relief in case of any such
breach or threatened breach.
9. Arbitration.
Any dispute concerning this Agreement including, but not
limited to, its existence, validity, interpretation, performance
or non-performance, arising before or after termination or
expiration of this Agreement, shall be settled by a single
arbitrator in Philadelphia, Pennsylvania, in accordance with the
expedited procedures of the commercial rules then in effect of
the American Arbitration Association. Judgment upon any award
may be entered in the highest court, state or federal, having
jurisdiction. The cost of such arbitration shall be borne
equally between the parties thereto unless otherwise determined
by such arbitration panel.
10. Assignment.
This Agreement and the rights and obligations of the parties
hereto shall bind and inure to the benefit of any successor or
successors of the Company by reorganization, merger or
consolidation and any assignee of all or substantially all of its
business and properties, but, except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may be assigned by the Company or by you,
5
<PAGE>
except by operation of law or by a further written agreement by
the parties hereto.
11. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more
of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect the other provisions of this Agreement, and this
Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any one or more
of the provisions contained in this Agreement is or becomes or is
deemed invalid, illegal or unenforceable or in case any shall for
any reason be held to be excessively broad as to duration,
geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to
applicable laws so as to be valid and enforceable or, if it
cannot be so amended without materially altering the intention of
the parties, it shall be stricken and the remainder of this
Agreement shall remain in full force and effect.
12. Notices.
Any notice which the Company is required to or may desire to
give you shall be given by registered or certified mail, return
receipt requested, addressed to you at your address of record
with the Company, or at such other place as you may from time to
time designate in writing. Any notice which you are required or
may desire to give to the Company hereunder shall be given by
registered or certified mail, return receipt requested, addressed
to the Company at its principal office, or at such other office
as the Company may from time to time designate in writing with a
copy to David S. Mandel, Esquire, Astor Weiss Kaplan & Rosenblum,
The Bellevue, Sixth Floor, 200 South Broad Street, Philadelphia,
Pennsylvania 19102.
13. Waivers.
No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed by the party
charged with such waiver, and no waiver of any right arising from
any reach or failure to perform shall be deemed to be a waiver of
any future such right or of any other right arising under this
Agreement.
6
<PAGE>
14. Complete Agreement; Amendments.
The foregoing, including Exhibits A, B and C attached
hereto, is the entire agreement of the parties with respect to
the subject matter hereof, superseding any previous oral or
written communications, representations, understandings, or
agreements with the Company or any officer or representative
thereof. This Agreement may be amended or modified or certain
provisions waived only by a written instrument signed by the
parties hereto, upon authorization of the Company's Board of
Directors.
15. Headings.
The headings of the Sections contained in this Agreement are
inserted for convenience and reference only and in no way define,
limit, extend or describe the scope of this Agreement, the intent
of any provisions hereof, and shall not be deemed to constitute a
part hereof nor to affect the meaning of this Agreement in any
way.
16. Counterparts.
This Agreement may be signed in two counterparts, each of
which shall be deemed an original and both of which shall
together constitute one agreement.
17. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania. If
you are in agreement with the foregoing, please sign your name
below and also at the bottom of the Proprietary Information and
Inventions Agreement, whereupon both Agreements shall become
binding in accordance with their terms. Please then return this
Agreement to the Company. (You may retain for your records the
accompanying counterpart of this Agreement enclosed herewith).
Very truly yours,
RYKA INC.
By: Michael G. Rubin
------------------------------
Accepted and Agreed:
Dennis R. DiDominicis
- - -----------------------
Dennis F. DiDominicis
7
<PAGE>
EXHIBIT "A"
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
DENNIS F. DiDOMINICIS
PRESIDENT
1. Term.
The term of this Agreement to which this Exhibit "A" is
annexed and incorporated shall be for five (5) years and ninety-
eight (98) days, commencing September 25, 1995 and terminating
December 31, 2000, unless renewed in accordance with Section 2.1
of the agreement or terminated prior thereto in accordance with
Section 2.2 or 2.3 of the Agreement.
2. Compensation.
a. Base Salary. During the Term of this Agreement you
shall receive an annual Base Salary of One Hundred Sixty-
five Thousand ($165,000.00) Dollars; provided however, that
commencing in calendar year 1997, you shall receive annual
increases of five thousand (5,000.00) over your prior year's
base salary.
b. Bonus. Any bonus, if any, shall be determined by the
Board of Directors in its sole and absolute discretion. No
later than December 31, 1995, the Company and you shall
agree upon a performance bonus plan which is acceptable to
both parties.
c. All Base Salary shall be payable twice monthly.
3. Vacation.
You shall be paid for and be entitled to all legal and
religious holidays, and such other vacation in accordance with
Company policy. All vacation time shall be earned on a quarterly
basis. You shall arrange for vacations in advance at such time
or times as shall be mutually agreeable to you and the Company.
You shall be entitled to carry forward into the subsequent year
up to one (1) week of unused vacation time. You may not receive
pay in lieu of vacation.
A - 1
<PAGE>
4. Insurance and Benefits.
You shall be eligible for participation in any health or
other group insurance plan which may be established by the
Company or which the Company is required to maintain by law. You
shall also be entitled to participate in any employee benefit
program which the Company may establish for its key employees or
for its employees generally, including, but in no way limited to,
bonuses and stock purchase or option plans. The Company shall
provide comprehensive health insurance for you and your
dependents as provided to other similar executive employees of
the Company at a cost to the Company not to exceed Five Thousand
($5,000.00) Dollars per year.
5. Expenses.
The Company shall reimburse you promptly for all reasonable
and ordinary business and out-of-pocket expenses incurred by you
in connection with the Company's business and in the scope of
your employment hereunder, as approved by the Company, including,
without limitation, reasonable and necessary travel, lodging,
entertainment and meals incurred by you during the term of this
Agreement, provided the expenses are incurred in furtherance of
the Company's business and at the request of the Company. You
agree to keep and maintain records of the aforesaid expenses as
may be requested by the Company and to account to the Company for
the expenses prior to reimbursement.
6. Stock Options and Incentives.
6.1 Upon execution of this Agreement, you will be granted
five (5) year options to purchase 250,000 shares of the
Company'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 50,000 shares shall vest on
each of the first, second, third, fourth and fifth yearly
anniversaries of the date of your Employment Agreement.
6.2 In addition, upon execution of this Agreement, you will
be granted five (5) year options to purchase a total of
250,000 shares of the Company'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 which shall
vest fully as follows:
(a) Commencing with the twelve (12) month period
ending December 31, 1996 and continuing for each
of the next four (4) twelve (12) month periods
thereafter, options for 50,000 shares shall vest
for each such twelve (12) month period based upon
performance goals ("Goals") determined by the
Company's Board of Directors no later than
December 31, 1995.
A - 2
<PAGE>
6.3 In the event the Goals involve sales or net income, all
determinations as to sales and net income shall be made by
the Company's regularly retained certified public accountant
whose determinations shall be final and binding upon all
parties hereto.
6.4 Notwithstanding anything contained herein to the
contrary, any stock options granted to you shall be subject
to 1) prior Board approval as required; and 2) an amendment
of the Company's certificate of incorporation to permit the
authorization of such additional shares underlying the stock
options. You acknowledge that, at the present time, the
Company does not have the authorized number of shares
necessary to support such stock options.
7. Relocation and Interim Housing Allowance
The Company will reimburse you for the cost of moving from
California to Pennsylvania including moving costs for you and
your family, closing costs on the sale of your existing home and
the acquisition of your new home. The total cost shall not
exceed $45,000.00. In addition, the Company shall pay your
interim housing costs through March 31, 1996, not to exceed one
thousand five hundred (1,500.00) per month.
8. Automobile Allowance
During the term of this Agreement, you shall receive a
monthly automobile allowance of five hundred (500.00).
A - 3
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
DENNIS F. DiDOMINICIS
NONE
B - 1
<PAGE>
EXHIBIT C
- - -------------------------------------------------------------------------------
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
- - -------------------------------------------------------------------------------
To: RYKA, Inc.
555 South Henderson Road
King of Prussia, PA 19406
The undersigned, in consideration of and as a condition of
my employment or continued employment by you and/or by companies
which you own, control, or are affiliated with or their
successors in business (collectively, the "Company"), hereby
agrees as follows:
1. Confidentiality.
I agree to keep confidential, except as the Company may
otherwise consent in writing, and, except for the Company's
benefit, not to disclose or make any use of at any time either
during or subsequent to my employment, any Inventions (as
hereinafter defined), trade secrets and confidential information,
knowledge, data or other information of the Company relating to
products, processes, know-how, techniques, methods, designs,
formulas, test data, customer lists, business plans, marketing
plans and strategies, pricing strategies, or other subject matter
pertaining to any business of the Company or any of its
affiliates, which I may produce, obtain, or otherwise acquire
during the course of my employment, except as herein provided. I
further agree not to deliver, reproduce or in any way allow any
such trade secrets, confidential information, knowledge, data or
other information, or any documentation relating thereto, to be
delivered to or used by any third parties without specific
direction or consent of a duly authorized representative of the
Company.
2. Conflicting Employment; Return of Confidential Material.
I agree that during my employment with the Company I will
not engage in any other employment, occupation, consulting or
other activity relating to the business in which the Company is
now or may hereafter become engaged, or which would otherwise
conflict with my obligations to the Company. In the event my
employment with the Company terminates for any reason whatsoever,
C - 1
<PAGE>
I agree to promptly surrender and deliver to the Company all
records, materials, equipment, drawings, computer disks,
documents and data of which I may obtain or produce during the
course of my employment, and I will not take with me any
description containing or pertaining to any confidential
information, knowledge or data of the Company which I may produce
or obtain during the course of my employment.
3. Assignment of Inventions.
3.1 I hereby acknowledge and agree that the Company is the
owner of all Inventions. In order to protect the Company's
rights to such Inventions, by executing this Agreement I hereby
irrevocably assign to the Company all my right, title and
interest in and to all Inventions to the Company.
3.2 For purposes of this Agreement, "Inventions" shall mean
all discoveries, processes, designs, methods, techniques,
technologies, devices, or improvements in any of the foregoing or
other ideas, whether or not patentable or copyrightable and
whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) during the period of my
employment with the Company which relate in any manner to the
actual or demonstrably anticipated business, work, or research
and development of the Company, or result from or are suggested
by any task assigned to me or any work performed by me for or on
behalf of the Company.
3.3 Any discovery, process, design, method, technique,
technology, device, or improvement in any of the foregoing or
other ideas, whether or not patentable or copyrightable and
whether or not reduced to practice, made or conceived by me
(whether solely or jointly with others) which I develop entirely
on my own time not using any of the Company's equipment,
supplies, facilities, or trade secret information ("Personal
Invention") is excluded from this Agreement provided such
Personal Invention (i) does not relate to the actual or
demonstrably anticipated business, research and development of
the Company, and (ii) does not result, directly or indirectly,
from any work performed by me for or on behalf of the Company.
4. Disclosure of Inventions.
I agree that in connection with any Invention, I will
promptly disclose such Invention to the Board of Directors or the
Executive Committee of the Company in order to permit the Company
to enforce its property rights to such Invention in accordance
with this Agreement. My disclosure shall be received in
confidence by the Company.
C - 2
<PAGE>
5. Patents and Copyrights; Execution of Documents.
5.1 Upon request, I agree to assist the Company or its
nominee (at its expense) during and at any time subsequent to my
employment in every reasonable way to obtain for its own benefit
patents and copyrights for Inventions in any and all countries.
Such patents and copyrights shall be and remain the sole and
exclusive property of the Company or its nominee. I agree to
perform such lawful acts as the Company deems to be necessary to
allow it to exercise all right, title and interest in and to such
patents and copyrights.
5.2 In connection with this Agreement, I agree to execute,
acknowledge and deliver to the Company or its nominee upon
request and at its expense all documents, including assignments
of title, patent or copyright applications, assignments of such
applications, assignments of patents or copyrights upon issuance,
as the Company may determine necessary or desirable to protect
the Company's or its nominee's interest in Inventions, and/or to
use in obtaining patents or copyrights in any and all countries
and to vest title thereto in the Company or its nominee to any of
the foregoing.
6. Maintenance of Records.
I agree to keep and maintain adequate and current written
records of all Inventions made by me (in the form of notes,
sketches, drawings and other records as may be specified by the
Company), which records shall be available to and remain the sole
property of the Company at all times.
7. Prior Inventions.
It is understood that all Personal Inventions, if any,
whether patented or unpatented, which I made prior to my
employment by the Company, are excluded from this Agreement. To
preclude any possible uncertainty, I have set forth on Schedule A
attached hereto a complete list of all of my prior Personal
Inventions, including numbers of all patents and patent
applications and a brief description of all unpatented Personal
Inventions which are not the property of a previous employer. I
represent and covenant that the list is complete and that, if no
items are on the list, I have no such prior Personal Inventions.
I agree to notify the Company in writing before I make any
disclosure or perform any work on behalf of the Company which
appears to threaten or conflict with proprietary rights I claim
in any Personal Invention. In the event of my failure to give
such notice, I agree that I will make no claim against the
Company with respect to any such Personal Invention.
C - 3
<PAGE>
8. Other Obligations.
I acknowledge that the Company from time to time may have
agreements with other persons, companies, entities, the U.S.
Government or agencies thereof, which impose obligations or
restrictions on the Company regarding inventions made during the
course of work thereunder or regarding the confidential nature of
such work. I agree to be bound by all such obligations and
restrictions and to take all action necessary to discharge the
Company's obligations.
9. Trade Secrets of Others.
I represent that my performance of all the terms of this
Agreement and as an employee of the Company does not and will not
breach any agreement to keep confidential proprietary
information, knowledge or data acquired by me in confidence or in
trust prior to my employment with the Company, and I will not
disclose to the Company, or induce the Company to use, any
confidential or proprietary information or material belonging to
any previous employer or others. I agree not to enter into any
agreement either written or oral in conflict herewith.
10. Modification.
I agree that any subsequent change or changes in my
employment duties, salary or compensation or, if applicable, in
any Employment Agreement between the Company and me, shall not
affect the validity or scope of this Agreement.
11. Arbitration.
Any dispute concerning this Agreement including, but not
limited to, its existence, validity, interpretation, performance
or non-performance, arising before or after termination or
expiration of this Agreement, shall be settled by a single
arbitrator in Philadelphia, Pennsylvania, in accordance with the
expedited procedures of the commercial rules then in effect of
the American Arbitration Association. Judgment upon any award
may be entered in the highest court, state or federal, having
jurisdiction. The cost of such arbitration shall be borne
equally between the parties thereto unless otherwise determined
by such arbitration panel.
12. Binding Effect.
This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective legal
representatives and successors.
C - 4
<PAGE>
13. Interpretation.
IT IS THE INTENT OF THE PARTIES THAT in case any one or more
of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect the other provisions of this Agreement, and this
Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision
of this Agreement is or becomes or is deemed invalid, illegal or
unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be
excessively broad as to duration, geographical scope, activity or
subject, such provision shall be construed by amending, limiting
and/or reducing it to conform to applicable laws so as to be
valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be
stricken and the remainder of this Agreement shall remain in full
force and effect.
14. Waivers.
No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed by the party
charged with such waiver, and no waiver of any right arising from
any breach or failure to perform shall be deemed to be a waiver
of any future such right or of any other right arising under this
Agreement.
15. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the
parties and supersedes any prior oral or written communications,
representations, understandings or agreements concerning the
subject matter hereof with the Company or any officer or
representative thereof. This Agreement may be amended, modified,
or certain provisions waived only by a written instrument signed
by the parties hereto, upon authorization of the Company's Board
of Directors.
16. Headings.
The headings of the Sections contained in this Agreement are
inserted for convenience and reference only and in no way define,
limit, extend or describe the scope of this Agreement, the intent
of any provisions hereof, and shall not be deemed to constitute a
part hereof nor to affect the meaning of this Agreement in any
way.
C - 5
<PAGE>
17. Counterparts.
This Agreement may be signed in two counterparts, each of
which shall be deemed an original and both of which shall
together constitute one agreement.
18. Governing Law.
This Agreement shall be governed and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
19. Notices.
All notices, requests, demands and communications which are
or may be required to be given hereunder shall be deemed given if
and when sent by registered or certified mail, return receipt
requested, postage prepaid, to the following addresses:
If to the Company: RYKA, Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: President
With a copy to: David S. Mandel, Esquire
Astor Weiss Kaplan & Rosenblum
The Bellevue, Sixth Floor
200 South Broad Street
Philadelphia, PA 19102
If to Employee: Dennis F. DiDominicis
21932 Via Del Lago
Trabuco Canyon, CA 92679
EMPLOYEE:
Dennis F. DiDominicis
--------------------------
DENNIS F. DiDOMINICIS
Accepted and Agreed:
RYKA, INC.
By: Michael G. Rubin
----------------------
C - 6
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
DENNIS F. DiDOMINICIS
Title Date Identifying Number or
- - ----- ---- Brief Description
---------------------
NONE
C - 7
<PAGE>
EXHIBIT 10FFFF
Midlantic Bank, N.A.
Asset Based Lending Department
1535 Locust Street
MIDLANTIC LOGO Philadelphia, Pennsylvania 18102
215 772-2220 Tel. 215 772-2225 Fax
November 14, 1995
Mr. Michael Rubin, COB
Ryka, Inc.
555 S. Henderson Road
King of Prussia, PA. 19406
RE: Loan and Security Agreement, dated as of July 31, 1995 (herein call the
"Agreement") as entered into between RYKA, INC. ("Borrower"), a Delaware
Corporation, and MIDLANTIC BANK N.A. ("Bank"), a National Banking Company.
Dear Michael,
In response to your recent advisement and request pursuant to the Agreement,
please be advised that the Bank agrees to waive its rights to declare an
event of default as a result of Borrower's violation of the following
covenants, said waiver effective through December 31, 1995 for Section 3.04 (A),
(C), Section 4.05, and Section 6.01 (A)(2) and through January 30, 1996 for
Section 3.03 (C), (D), Section 3.04 (B) and Section 6.01 (M)(1).
SECTION 3.03
(C) Borrower shall have received the cash sum of not less than
$2,000,000, as equity or subordinated indebtedness, which in the case of
subordinated indebtedness shall be fully and unconditionally subordinated in
all respects to Borrower's obligations to Bank.
(D) Bank shall have received a Support Agreement from Rubin and
MR L.L.C. under which they unconditionally agree to provide or cause to be
provided by them or by any other Person a cash infusion to Borrower after
Closing under the terms and conditions set forth therein if Borrower's
Tangible Net Worth is from time to time less than $2,000,000. No such funding
may directly or indirectly be provided by Guarantor unless cash funds in a
like amount are received for such purpose by Guarantor (as equity or
subordinated debt, under agreements acceptable to Bank) from either of Rubin
or MR L.L.C. or any other Person(s) contemporaneously with such funding.
SECTION 3.04. Post-Closing Conditions:
(A) Borrower covenants and agrees that within thirty days
following Closing, Borrower shall obtain credit insurance with respect to all
or a substantial portion of its accounts receivable, a copy of the policy for
which shall, within such period, be delivered to and approved by Bank.
(D) Within thirty days following Closing, Bank shall receive a
current pro forma balance sheet for Borrower prepared as of the date of
submission thereof which shall reflect a Tangible Net Worth, plus Subordinated
Indebtedness for Borrower of not less than $2,000,000 prior to transaction
costs associated with the acquisition by Rubin or his affiliate of stock of
Borrower and all transactions related thereto and evidence satisfactory to
Bank that indebtedness of Borrower existing immediately prior to the Closing
of at least $1,500,000 has been forgiven or waived.
(C) Within ninety days following Closing, Bank shall receive
executed assignments of life insurance policies in accordance with Section 4.05
below.
<PAGE>
SECTION 4.05 Life Insurance. As further security for the prompt and
full satisfaction of all obligations, Borrower will assign to Bank pursuant to
a collateral assignment in form and substance acceptable to Bank policies of
life insurance on the lives of Michael G. Rubin and Sheri Poe, each in an
amount not less than $4,000,000, and issued by a life insurance company
reasonably satisfactory to Bank, and shall pay all premiums on and otherwise
maintain said policy in full force and effect.
SECTION 6.01 (A)(2) Within forty-five (45) days after each calendar month
end, a copy of Borrower's Monthly Financial Statement, certified by Borrower's
chief financial officer,
SECTION 6.01 (M)(1)
Borrower will at all times be in compliance with the following
financial covenants:
Tangible Net Worth of not less than $1,500,000 as of the Closing
and $2,000,000 as of thirty days following Closing and at all
times thereafter; and
This waiver does not apply to any other terms, conditions or covenants.
Furthermore the above waiver should not be construed as a waiver of said
covenants for any other period beyond December 31, 1995 and January 30, 1996,
respectively.
All Other Terms, Conditions And Covenants Remain In Full Force And Effect.
Sincerely,
/s/ Michael R. Geissler
- - ---------------------------
Michael R. Geissler
Vice President
<PAGE>
EXHIBIT 10.GGGG
November 20, 1995
Steve Wolf
Chief Financial Officer
555 South Henderson Road
King of Prussia, PA 19406
Dear Steve:
In connection with Loan and Securities Agreement dated as of July 31, 1995
between RYKA and KPR Sports International, Inc., we hereby waive through
January 30, 1996 the default with the regard to the minimum tangible net worth
requirement.
Sincerely,
/s/ Dennis Rubisch
- - ------------------------------
Dennis Rubisch
CFO
KPR Sports, International
<PAGE>
EXHIBIT 11
Exhibit 11 - Computation of Per Share Earnings
RYKA Inc. and Subsidiary
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
1995 1994 1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of
common shares outstanding 39,541,437 23,940,406 30,830,241 23,877,509
Net effect of dilutive stock
options and warrants (based
on the Treasury Stock
Method using average
market price)
3,834,055 -- -- 493,866
------------ ------------ ----------- -----------
Total 43,375,492 23,940,406 30,830,241 24,371,375
============ ============ =========== ===========
Net income (loss):
Income (loss) before
extraordinary item ($ 482,772) ($ 59,659) ($4,632,803) $ 95,702
Extraordinary item 1,650,256 -- 1,650,256 --
------------ ------------ ----------- -----------
Net income (loss) $ 1,167,484 ($ 59,659) ($2,982,547) $ 95,702
============ ============ =========== ===========
Net income (loss) per share:
Income (loss) before
extraordinary item ($.01) $0.00 ($.16) $0.00
Extraordinary item .04 0.00 .06 0.00
----- ----- ----- -----
Net income (loss) per share $.03 $0.00 ($.10) 0.00
===== ===== ===== =====
FULLY DILUTED:
Weighted average number of
common shares outstanding 39,541,437 23,940,406 30,830,241 23,877,509
Net effect of dilutive stock
options and warrants (based
on the Treasury Stock
Method using the quarter-
end market price, if greater
than the average market
price) 3,834,055 -- -- 525,882
------------ ------------ ----------- -----------
Total 43,375,492 23,940,406 30,830,241 24,403,391
============ ============ =========== ===========
Net income (loss):
Income (loss) before
extraordinary item ($ 482,772) ($ 59,659) ($4,632,803) $ 95,702
Extraordinary item 1,650,256 -- 1,650,256 --
------------ ------------ ----------- -----------
Net income (loss) $ 1,167,484 ($ 59,659) ($2,982,547) $ 95,702
============ ============ =========== ===========
Net income (loss):
Income (loss) before
extraordinary item ($.01) $0.00 ($.16) $0.00
Extraordinary item .04 0.00 .06 0.00
----- ----- ----- -----
Net income (loss) per share $.03 $0.00 ($.10) $0.00
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 40,380
<SECURITIES> 0
<RECEIVABLES> 1,029,221
<ALLOWANCES> 213,186
<INVENTORY> 1,116,996
<CURRENT-ASSETS> 2,486,982
<PP&E> 530,868
<DEPRECIATION> 312,671
<TOTAL-ASSETS> 2,486,982
<CURRENT-LIABILITIES> 1,125,988
<BONDS> 0
<COMMON> 415,353
0
0
<OTHER-SE> 509,554
<TOTAL-LIABILITY-AND-EQUITY> 2,486,982
<SALES> 6,917,866
<TOTAL-REVENUES> 7,001,639
<CGS> 6,116,792
<TOTAL-COSTS> 10,549,050
<OTHER-EXPENSES> 1,085,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319,213
<INCOME-PRETAX> (4,632,803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,632,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,650,256
<CHANGES> 0
<NET-INCOME> (2,982,547)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
