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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 JUNE 30, 1996
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.
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(Exact name of registrant as specified in its charter)
Delaware 04-2958132
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(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
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(Address of principal executive offices) (Zip Code)
610-337-2200
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(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 August 14, 1996:
Common Stock $.01 par value 55,615,326
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(Title of each class) (Number of Shares)
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RYKA Inc. and Subsidiary
Form 10-Q for the Three-Month Period Ended June 30, 1996
Table of Contents
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<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance
Sheets as of June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
three-month and six-month periods ended June 30, 1996
and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6 to 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 to 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults on Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index and Exhibits 20
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RYKA Inc. and Subsidiary
Condensed Consolidated Balance Sheets
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<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 689 $ 77,509
Accounts receivable, net of allowance for doubtful
accounts of $69,921 in 1996 and $57,573 in 1995 1,560,205 533,490
Inventory 297,087 678,319
Prepaid expenses and other current assets 246,531 118,294
Note receivable, officer 20,000 --
------------ ------------
Total current assets 2,124,512 1,407,612
Property and equipment, at cost, net of accumulated
depreciation 180,743 195,083
Deferred registration costs 112,500 --
Other assets 17,202 500
------------ ------------
Total assets $ 2,434,957 $ 1,603,195
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Note payable, bank $ 250,000 $ --
Accounts payable and accrued expenses 767,421 850,614
Due to affiliate 311,961 2,043
------------ ------------
Total current liabilities 1,329,382 852,657
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Subordinated note payable, affiliate 851,440 851,440
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock, $0.01 par value, 1,000,000
shares authorized; none issued or outstanding -- --
Common Stock; $0.01 par value, 70,000,000
shares authorized; 50,775,326 and 46,135,326 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 507,753 461,353
Additional paid-in capital 18,329,829 17,286,229
Accumulated deficit (18,583,447) (17,848,484)
------------ ------------
Total stockholders' equity (deficiency) 254,135 (100,902)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 2,434,957 $ 1,603,195
============ ============
</TABLE>
Please refer to the notes to condensed consolidated financial statements.
3
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RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Operations
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 1,557,981 $ 1,483,613 $ 3,572,314 $ 5,618,263
Other revenues -- 672 -- 29,935
------------ ------------ ------------ ------------
1,557,981 1,484,285 3,572,314 5,648,198
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 1,194,614 1,739,908 2,570,811 5,189,684
Inventory write-down to lower of cost
or market -- 60,000 -- 586,000
General and administrative expenses 323,582 687,167 573,933 1,296,105
Sales and marketing expenses 253,645 598,233 668,237 1,394,147
Research and development expenses 205,435 135,863 413,842 249,436
------------ ------------ ------------ ------------
1,977,276 3,221,171 4,226,823 8,715,372
------------ ------------ ------------ ------------
Operating loss (419,295) (1,736,886) (654,509) (3,067,174)
----------- ------------ ------------ ------------
Other (income) expense:
Interest expense 53,779 73,946 82,533 301,725
Interest income (1,717) (958) (2,079) (2,157)
Merger related costs -- 99,828 -- 783,289
----------- ------------ ------------ ------------
52,062 172,816 80,454 1,082,857
------------ ------------ ------------ ------------
Net loss ($471,357) ($ 1,909,702) ($ 734,963) ($ 4,150,031)
============ ============ ============ ============
Net loss per share ($ .01) ($ .07) ($ .02) ($ .16)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 46,934,007 26,474,959 46,576,864 26,474,673
============ ============ ============ ============
</TABLE>
Please refer to the notes to condensed consolidated financial statements.
4
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RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
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<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
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(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($734,963) ($4,150,031)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 25,362 24,376
Provision for losses on accounts receivable 12,348 367,030
Capital contributed as services 50,000 --
Reserve for inventory writedown to lower of cost or market -- 586,000
Changes in operating assets and liabilities:
Accounts receivable (1,039,063) 1,913,245
Inventory 381,232 2,879,745
Prepaid expenses and other current assets (128,237) 92,862
Accounts payable and accrued expenses (83,193) 734,969
Due to affiliate 309,918 --
Payable to factories -- (390,113)
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Net cash provided by (used in) operating activities (1,206,596) 2,058,083
----------- -----------
Cash flows from investing activities:
Acquisitions of equipment (11,022) (17,507)
Security deposits (35) 15,753
Note receivable, officer (20,000) --
Licensing fees (16,667) --
----------- -----------
Net cash (used in) investing activities (47,724) (1,754)
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Cash flows from financing activities:
Proceeds from note payable, bank 250,000 --
Deferred registration costs (112,500) --
Proceeds from issuance of common stock 1,040,000
Proceeds from exercise of warrants and stock options -- 7,123
Principal payments under payable to lender, net -- (978,730)
Payments to factor, net -- (1,254,035)
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Net cash provided by (used in) financing activities 1,177,500 (2,225,642)
----------- -----------
Net decrease in cash (76,820) (169,313)
Cash, beginning of period 77,509 296,226
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Cash, end of period $ 689 $ 126,913
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</TABLE>
Please refer to the notes to condensed consolidated financial statements.
5
<PAGE>
RYKA Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RYKA Inc.
("RYKA"(R) or the "Company") 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 the periods
reported have been included. The results of operations for the periods reported
are not necessarily indicative of those that may be expected for a full year.
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, 1995 as presented in the
Company's Annual Report on Form 10-K.
The Company's financial statements for the quarter ended June 30, 1996 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred significant recurring losses since its
inception and had an accumulated deficit at June 30, 1996 of $18,583,447. The
Company was involved in several significant transactions during 1995, which
included the sale of securities, a change in key management, the establishment
of a new loan and security agreement with a bank, the settlement of debts with
secured and unsecured creditors and moving the Company's principal offices.
Without the occurrence of these transactions or other strategic arrangements,
there was substantial doubt that the Company would have been able to remain in
business through the third quarter of 1995. Having accomplished such
transactions, management plans to develop and acquire new merchandise, market
and promote the Company's product and expand the workforce in support of the
Company's current plans. To accomplish these goals, the Company will have to
incur substantial expenditures and expects to incur continuing operating losses
during 1996. The Company's working capital at June 30, 1996 will not be
sufficient to meet management's objectives in 1996.
The Company was in violation of certain financial covenants required by the loan
and security agreement with the Company's principal lender at June 30, 1996, and
has entered into a forebearance agreement through October 15, 1996 which
requires, among other things, the immediate reduction of the present credit
facility with the bank from $4,000,000 to $2,500,000 and the further reduction,
in stages during September 1996, to $1,500,000 (See Note B). Accordingly, unless
a new arrangement is negotiated with the lender, the availability of these funds
is uncertain. The Company's goals were to be funded, in part, through the
financing facility provided by the Company's principal lender. Management is
currently in discussions with another lender to pursue other financing on terms
acceptable to the Company. Based on current discussions with another lender the
Company believes it possible for alternate financing to be obtained although 1)
no definitive agreement has been reached to date, 2) additional equity or
subordinated debt funding was required as a prerequisite to such lender
financing and $2,500,000 has been raised by the Company through August 14, 1996
as part of an equity Private Placement which commenced in May 1996 (the "1996
Private Placement"), and 3) although the equity requirement has been met, there
is no assurance that the new loan will be finalized. In connection with the
foregoing, and the Company's requirements from time to time, the Company may
sell additional equity securities in order to generate sufficient capital
resources to assure continuation of the Company's operations. Management
recognizes that the Company must obtain these or similar additional resources or
consider modifications to its operating plans including reductions in operating
costs to enable it to continue operations. However, no assurance can be given
that the Company will be successful in raising sufficient additional capital to
support future operations. Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to utilize its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.
The financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of these
uncertainties.
Net 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 are comprised, when dilutive, of stock options and Common Stock
warrants.
6
<PAGE>
NOTE B - DEBT
The Company has a $4,000,000 asset based revolving credit facility with its
principal lender. The facility makes funds available to the Company based upon a
percentage of inventory and accounts receivable, as defined in the agreement.
Interest on the amounts outstanding is paid monthly at the rate of prime plus
one percent and is due on demand. As of June 30, 1996, the Company owed $250,000
under this facility. Interest expense in connection with this facility was
$38,687 for the six-months ended June 30, 1996.
The loan and security agreement with the Company's principal lender requires the
Company to observe certain covenants and maintain certain minimum levels of
tangible net worth and leverage. Further, there is a requirement for additional
subordinated loans or equity infusions in the event that losses occur subsequent
to July 31, 1995 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 $1,000,000 by June 30, 1996, and, as
described below, such infusion had not been made as of that date. Subsequently,
as a result of the 1996 Private Placement proceeds received between July 1, 1996
and August 14, 1996 an additional $1,460,000 of capital has been raised.
At June 30, 1996, the Company was in default of certain provisions of the loan
and security agreement requiring certain credit insurance to be obtained within
prescribed timeframes, losses incurred by the Company subsequent to July 31,
1995 to be funded by MR Acquisitions L.L.C. ("MR") making subordinated loans or
capital infusions, or causing the same to occur (the "Funding Requirement"), and
the covenants requiring establishment and maintenance of certain minimum
tangible net worth and leverage.
The principal lender has waived the defaults, extended the time for the credit
insurance to be obtained and postponed the Funding Requirement, minimum tangible
net worth and leverage requirements through July 15, 1996 and subsequently as a
result of continuing defaults entered into a forbearance agreement through
October 15, 1996 which requires, among other things, the immediate reduction of
the present credit facility with the bank from $4,000,000 to $2,500,000 and the
further reduction, in stages during September 1996, to $1,500,000, as well as an
increase in the interest rate from prime plus one percent to prime plus one and
one half percent.
NOTE C - RELATED PARTY TRANSACTIONS
The Company 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 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. ("KPR"), an affiliate of MR, 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 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 June 30, 1996,
letters of credit in the amount of $792,204 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.
Included in the statement of operations are sales of $151,299 relating to
footwear sold to KPR yielding a profit of $32,046 to the Company. These goods
were prior season's merchandise which was sold at negotiated terms on an
arms-length basis.
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
six-months ended June 30, 1996, estimated at $50,000, was recorded as
compensation expense and included as part of general and administrative expenses
in the statement of operations and as a contribution to capital and included as
additional paid-in capital in the balance sheet.
In June, 1996, a $20,000 loan was made to an officer of the Company. The loan is
unsecured and is payable on demand. Interest is paid bi-monthly at the rate of
prime plus one quarter percent.
7
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NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED
A summary of all related party transactions with MR or its affiliates for the
six months ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Amount
Financial Amount Included
Nature of Statement Transaction Included in Due in Additional
Transactions Classification Amount To Affiliate Paid-in Capital
- ------------ -------------- ------ ------------ ---------------
<S> <C> <C> <C>
Purchase of
Inventory from
vendors through
letter of credit
arrangement with
affiliate Inventory $1,834,147 $297,144
Sale of Merchandise Net Sales 151,299
Rent General and
Administrative
Expense 23,750 3,958
Interest on
Subordinated Debt Interest Expense 39,242 6,473
Interest on
Letters of Credit
Advances Interest Expense 1,779
Temporary Advances 149,475 4,386
Services Contributed General and
to Capital Administrative
Expense and
Additional Paid-
in Capital 50,000 $50,000
--------- ------
$311,961 $50,000
======== ======
</TABLE>
NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS
Equity transaction - Investors:
The Company offered for sale, through a Private Placement (the "1995 Private
Placement"), 4,000,000 shares of Common Stock during the third quarter of 1995
which was finalized during the first quarter of 1996 and the results of the 1995
Private Placement were as follows:
Cumulative Cumulative
Through Shares Placed Proceeds Received
----------------- ------------- -----------------
July 31, 1995 3,020,000 $ 255,000
========= =========
December 31, 1995 3,520,000 $ 880,000
========= =========
March 31, 1996 4,000,000 $1,000,000
========= =========
As a condition of the 1995 Private Placement, in the event the Company is unable
to register such securities with the Securities and Exchange Commission in a
filing which is effective within 120 days of the actual Closing (by November 28,
1995), the Company is required to remit to the investors $7,500 and warrants to
purchase 5,000 shares for each month such registration statement does not become
effective, up to a maximum reduction in stock proceeds of $150,000 and
additional issuance of 100,000 shares of Common Stock. The registration was not
accomplished within the 120 day period, however, waivers have been received from
the participants in the 1995 Private Placement related to the provisions
requiring a $7,500 per month remittance. Since there is no financial statement
impact at June 30, 1996 and the subsequent impact, if any, would be de minimis,
the entire amount of the proceeds has been recorded as equity in the balance
sheet. With respect to the warrants, pursuant to the specific 1995 Private
Placement terms, through June 30, 1996, warrants are to be issued to investors
with an exercise price of $.25 which are exercisable for up to 10 years after
date of issue.
8
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NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS - CONTINUED
Equity transaction - Investors - continued
From the date of closing on July 31, 1995 until completion of the 1995 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 1995 Private Placement. At December 31, 1995, a total of $120,000
remained outstanding on such loan. As of December 31, 1995, a total of 480,000
shares were yet to be sold to investors. At March 31, 1996, the remaining
480,000 shares had been sold and the bridge loan repaid with the proceeds.
Originally, in the event the 1995 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 1995 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 March 31, 1996. Since the ultimate effect of
this transaction is 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 had been previously given effect to as if it
had been completed. During the quarter ended March 31, 1996 the portion of such
proceeds representing the par value of 480,000 shares amounting to $4,800 was
reclassified to common stock from additional paid-in capital.
In May, 1996 the Company, through a second Private Placement (the "1996 Private
Placement"), authorized the sale of 10,000,000 shares of the Company's Common
Stock during the second and third quarter of 1996. The result of the 1996
Private Placement is as follows:
Cumulative Cumulative
Shares Proceeds
Through Placed Received
------------- ------ --------
June 30, 1996 4,160,000 $1,040,000
========= =========
August 14, 1996 10,000,000 $2,500,000
========= =========
Stock Options:
The Company has issued options to certain employees to purchase shares of the
Company's Common Stock at prices which approximated fair market value at the
date of grant. The options vest at various times over periods ranging up to four
years and generally must be exercised within 10 years from the date of grant. A
summary of such options granted in the first six months of 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
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For
Non-Plan 1987 1988 1990 1992 1993 1995 1996 Employee Price
Grants Plan Plan Plan Plan Plan Plan Plan Directors of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31,
1995 416,321 251,746 129,851 157,000 838,560 861,500 1,200,000 - - $.25 - $1.31
Granted during
six months ended
June 30, 1996 - 13,000 10,500 3,500 10,500 37,500 300,000 20,000 25,000 $.20 - $.47
Cancelled during
the six months ended
June 30, 1996 - - - - - - 50,000 - - $.47
---------------------------------------------------------------------------------------------------------
Outstanding at
June 30, 1996 416,321 264,746 140,351 160,500 849,060 899,000 1,450,000 20,000 25,000 -
=========================================================================================================
</TABLE>
9
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NOTE E - REGISTRATION STATEMENT - EQUITY INCENTIVE PLAN
During January 1996, the Board of Directors of the Company approved the filing
of a registration statement with the Securities and Exchange Commission for the
offering of approximately 4.2 million shares of Common Stock.
The shares were to be issued pursuant to the "Partners Share Success" Equity
Incentive Plan to be adopted by the Comany. The purpose of the Program was to
provide an ownership interest in the Company, through equity incentives, to
retail sales personnel and store managment personnel of the Company's customers,
to educate consumers about the Company's products and to increase the sale of
the Company's products to consumers.
Under the Program, the Company intended to grant retail sales personnel one
share of the Company Common Stock for each pair of Company footwear sold and to
grant store management personnel approximatley 4 shares of Company Common Stock
for every 10 pairs of Company footwear sold by retail sales personnel under
their supervision.
The Program would have been available to retail sales personnel of customers of
the Company who agreed to participate in the Program and to purchase certain
minimum quantities of the Company's products.
The Company anticipated that awards of Common Stock pursuant to the Program
would be accounted for as sales and marketing expense using the fair value of
the equity instrument issued or other consideration, as applicable.
Included in deferred registration cost at June 30, 1996 are $112,500 in
professional fees incurred in conjunction with the contemplated registration
statement. All costs will be charged to sales and marketing expense during the
term of the program.
As a result of the proposed merger transaction, as discussed in Note F, the
Company decided to postpone, and may ultimately terminate the offering in
connection the "Partners Share Success Program". If this offering is not
consummated, the deferred registration cost will be charged to expense.
NOTE F - SUBSEQUENT EVENTS
On July 8, 1996, the Company received a merger proposal from KPR Sports
International, Inc. and certain affiliated companies ("KPR") pursuant to which
KPR would be merged with RYKA. KPR and its affiliates are wholly-owned by the
Chairman and Chief Executive Officer of RYKA. The proposal would require RYKA to
issue approximately 140,000,000 shares of Common Stock to the shareholders of
KPR, in addition to any shares they currently hold or have rights to through
existing warrants. RYKA would be the surviving Company in the merger. The merger
proposal also provides that RYKA would effect a 1 for 20 reverse stock split.
The consummation of the contemplated merger agreement, including the
authorization of additional shares of RYKA's Common Stock and the reverse stock
split, is subject to approal by RYKA's Board of Directors and Shareholders.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
Certain information contained in this Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the
Company's filings with the Securities and Exchange Commission, including its
most recent Form 10-K, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
General Overview
The Company has not had a single profitable fiscal year since its inception and
incurred a loss of approximately $735,000 during the first six months of 1996.
In addition, the Company had an accumulated deficit of approximately $18,583,000
at June 30, 1996.
Through July 31, 1995, the Company was in default on several occasions under its
agreements with Pro-Specs America Corporation ("Pro-Specs") to provide
production financing. In May 1995, Pro-Specs notified the Company of its
intention to terminate financing arrangements. During 1995, the Company reviewed
several financing proposals, and on July 31, 1995 the Company consummated the
financing arrangement with MR Acquisitions L.L.C. ("MR") to enable the Company
to continue in existence. Without this financing arrangement, management
believed there was substantial doubt that the Company would be able to remain in
business.
The financing arrangement (the "Agreement") with MR provided the Company with
cash proceeds from the sale of equity and subordinated debt and the ability to
obtain funds and letters of credit through new financing facilities. As part of
the financing, the Company negotiated substantial debt forgiveness with both
secured and unsecured creditors and established a new management team to operate
the restructured Company. Upon closing of the transaction with MR, 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 over $2,000,000 at June 30, 1995.
Such funds have diminished as a result of continuing operating losses and at
June 30, 1996, prior to giving effect to the $1,040,000 proceeds received
through June 30, 1996 from a $2,500,000 equity Private Placement which commenced
in May 1996 (the "1996 Private Placement"), would have been $65,575. Actual
capital funds at June 30, 1996, considering the $1,040,000 of proceeds from the
1996 Private Placement, were approximately $1,100,000.
During the first half of 1995 and until the financing with MR was consummated,
staff reductions occurred on both a voluntary and involuntary basis and
temporary employees were required to handle daily operations. Sales efforts were
limited for a variety of reasons, including the inability to obtain product from
the Company's overseas production sources. Once the financing with MR was
consummated, new management began to reposition the Company by, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training new employees in key management positions, including a new
President and a new Chief Financial Officer, filling of other necessary
positions within the Company, and beginning to develop new products and build or
rebuild customer and supplier relationships. While management believes that
these activities will have a long-term beneficial impact, they had significant
negative impact on the Company's sales and operations. To accomplish its goals,
to develop and acquire new merchandise, market and promote the Company's product
and expand the workforce in support of the Company's current plans, the Company
will have to incur substantial expenditures and expects to incur continuing
operating losses during 1996.
The Company's working capital at June 30, 1996 will not be sufficient to meet
management's objectives in 1996. Further, the Company has been in default of
certain provisions of it's new financing facilities and has entered into a
forbearance agreement through October 15, 1996 which requires among other
things, the immediate reduction of the present credit facility with the bank
from $4,000,000 to $2,500,000 and the further reduction, in stages during
September 1996, to $1,500,000. Accordingly, the Company will be required, in the
near future, to obtain additional financing from its current lender or from a
new lender and/or raise additional funds through the sale of equity or debt. To
this end, the Company, as described above, has received an additional
$2,500,000 in proceeds from the 1996 Private Placement through August 14, 1996
of which $1,040,000 was received by June 30, 1996. In addition, the Company has
continued its negotiations with a new lender and anticipates the closing of a
new credit facility during August 1996, although there can be no assurance that
such closing will occur. See "Liquidity and Capital Resources" and Notes A and B
to the Company's Condensed Consolidated Financial Statements.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
General Overview - continued
As described in Note F to the Company's condensed consolidated financial
statements, on July 8, 1996 the Company received a merger proposal from KPR
Sports International, Inc. and certain affiliated companies ("KPR") pursuant to
which KPR would be merged with RYKA. KPR is a related party which is wholly
owned by the Chairman and Chief Executive Officer of RYKA and KPR is
substantially larger than RYKA. If such merger were to occur it is believed that
operating benefits would occur, however, there is no assurance that the merger
will occur or the benefits materialize.
Results of Operations
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995
The following table sets forth, for the periods indicated, the relative
percentage that certain items in the Company's Condensed Consolidated Statements
of Operations bear to net sales:
<TABLE>
<CAPTION>
(In Thousands) THREE MONTHS ENDED JUNE 30,
--------------------------------
1996 1995
------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $1,558 100.0% $1,483 100.0%
Other revenues - 1
------- ------
1,558 1,484
------- ------
Costs and expenses:
Cost of goods sold (includes inventory writedown to
lower of cost or market of $60,000 in 1995) 1,195 76.7% 1,800 121.3%
General and administrative expenses 323 20.7% 687 46.3%
Sales and marketing expenses 254 16.3% 598 40.3%
Research and development expenses 205 13.2% 136 9.2%
--------------------- ------------------
1,977 126.9% 3,221 217.1%
--------------------- ------------------
Operating loss ( 419) ( 26.9%) (1,737) (117.1%)
Other expense, net 52 3.3% 173 11.6%
--------------------- -------------------
Net loss ($ 471) ( 30.2%) ($1,910) (128.7%)
===================== =====================
</TABLE>
Net sales increased by $74,368 (5.1%) from $1,483,613 for the three-months ended
June 30, 1995 to $1,557,981 for the three months ended June 30, 1996. The slight
increase in net sales was due primarily to several factors as follows:
o Management's decision to commit the Company's resources towards
developing a more performance based product line with updated cosmetics
to better meet the needs of the fall 1996 marketplace. In order to
focus on the fall 1996 season the Company minimized merchandise
purchases for the spring 1996 season. The Company purchased a limited
quantity of merchandise for the spring season which was designed by a
third party prior to the agreement with MR. Net sales for the three
months ended June 30, 1996 represented shipments of this merchandise
to customers and closeout orders for the spring 1996 season.
o The athletic footwear industry continues to experience sluggishness and
the volume of off-price product has continued at high levels.
12
<PAGE>
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995 - Continued
o The women's athletic footwear category has been increasingly
competitive over the past several years with large vendors with
considerably more resources than the Company increasing their focus in
this segment of the market.
o As a result of a critical cash shortage during the second quarter of
1995; the Company was forced to continue to liquidate a large quantity
of inventory at low profit margins, or even below cost, in an effort to
raise cash to meet operating expenses, while the Company completed
negotiations for a new financing agreement with MR Acquisitions.
Cost of goods sold decreased by $605,294 (33.6%) from $1,739,908 for the three
months ended June 30, 1995 to $1,194,614 for the three months ended June 30,
1996. The overall gross profit expressed as a percentage of net sales increased
from (21.3%) for the quarter ended June 30, 1995 to 23.3% for the quarter ended
June 30, 1996.
The gross profit percentage of 23.3% for the quarter ended June 30, 1996 was a
result of "fill-in" and "close-out" orders of the 1996 spring line. The increase
in gross profit percentage for the three months ended June 30, 1996 as compared
to the three months ended June 30, 1995 was due primarily to the Company's
improved financial position. During the second quarter ended June 30, 1995 the
Company was under extreme financial pressures. As a result of these pressures
the Company was required to sell substantial amounts of inventory at significant
losses or no profit in order to raise cash for operations. This adversely
affected the gross profit for the quarter ended June 30, 1995.
General and administrative expenses decreased by $363,585 (52.9%) from $687,167
for the quarter ended June 30, 1995 to $323,582 for the quarter ended June 30,
1996. The decrease reflects a concerted effort to restructure the Company in an
cost efficient manner with reduced overhead expenses. This decrease was due
primarily to:
o The elimination of approximately $320,000 of credit and collection
expenses incurred in the quarter ended June 30, 1995 of which
approximately $13,000 related to costs associated with collection fees
and commissions with a previously existing factoring agreement and
approximately $288,000 related to bad debt expense.
o Additional legal, consulting and auditing costs aggregating
approximately $34,000 in the quarter ended June 30, 1995, were incurred
in completing the December 31, 1994 financial statements and in filing
the Annual Report and Form 10-K.
o Other general and administrative expenses in the quarter ended June 30,
1995 included approximately $32,000 in trademark and license fees
incurred in connection with the dissolution of RYKA GmbH in Germany.
Sales and marketing expenses decreased by $344,588 (57.6%) from $598,233 in the
quarter ended June 30, 1995 to $253,645 in the quarter ended June 30, 1996. This
decrease was due primarily to:
o Reduction in promotion expense of approximately $70,000 due to a
reduction of point of purchase and promotional materials supplied to
customers.
o Decrease in trade advertising of approximately $118,000 from $156,000
in the quarter ended June 30, 1995 to $38,000 in the quarter ended June
30, 1996. The Company has planned an extensive consumer ad campaign for
the third quarter in conjunction with the introduction of the 1996 fall
line.
o Decrease in salary and related expenses of approximately $37,000
(28.7%) from $129,000 in the quarter ended June 30, 1995 to $92,000 in
the quarter ended June 30, 1996.
o Decrease in trade show related expenses by $36,000 (88%) from
approximately $41,000 in the quarters ended June 30, 1995 to
approximately $5,000 for the quarter ended June 30, 1996, as a result
of the restructuring of the Company in 1995.
13
<PAGE>
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995 - Continued
Research and development expenses increased $69,572 (51.2%) from $135,863 in the
quarter ended June 30, 1995 to $205,435 in the quarter ended June 30, 1996. The
increase reflects a concerted effort by management to further develop and
improve the Company's products. The increase is primarily due to:
o An increase of approximately $51,000 in salaries and consulting fees.
During the quarter ended June 30, 1996, at a cost of approximately
$39,000, the Company engaged the services of two outside design groups to
design and develop the fall 1996 line. In addition, the former VP of
Sourcing and Production and one other person were retained on a consulting
basis to oversee the manufacturing process.
Other expenses, net decreased $120,754 (69.9%) from $172,816 in the quarter
ended June 30, 1995 to $52,062 in the quarter ended June 30, 1996. The decrease
is primarily due to:
o Costs of approximately $100,000 associated with the failed merger with
L.A. Gear, Inc. in the second quarter of 1995.
o A decrease in interest expense of approximately $20,000 (27.3%) from
approximately $74,000 for the three months ended June 30, 1995 to
approximately $54,000 for the quarter ended June 30, 1996. This reduction
in interest expense was due in part to the proceeds of the 1996 Private
Placement beginning in May 1996. As of June 30, 1996, the Company received
proceeds from this Private Placement of $1,040,000 which reduced the
Company's borrowing with the bank.
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995
The following table sets forth the periods indicated, a percentage analysis of
items included in the Condensed Consolidated Statement of Operations in relation
to net sales:
<TABLE>
<CAPTION>
(In Thousands) SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $3,572 100.0% $5,618 100.0%
Other revenues - 30
------- -------
3,572 100.0% 5,648 100.0%
------- -------
Costs and expenses:
Cost of goods sold (includes inventory writedown to
lower of cost or market of $586,000 in 1995) 2,571 72.0% 5,776 102.8%
General and administrative expenses 574 16.1% 1,296 23.1%
Sales and marketing expenses 668 18.7% 1,394 24.8%
Research and development expenses 414 11.6% 249 4.4%
------------------- -----------------------
4,227 118.4% 8,715 155.1%
------------------- -----------------------
Operating (loss) ( 655) 18.3% ( 3,067) ( 54.6%)
Other expense, net 80 2.2% 1,083 19.4%
------------------- -----------------------
Net (loss) ($ 735) ( 20.6%) ($4,150) ( 73.9%)
=================== ========================
</TABLE>
14
<PAGE>
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30,
1995 - Continued
Net sales decreased by $2,045,949 (36.4%) from $5,618,263 for the six months
ended June 30, 1995 to $3,572,314 for the six months ended June 30, 1996. The
decrease in the net sales was due primarily to several factors as follows:
o As previously discussed, management's decision to commit the Company's
resources towards developing a more performance based product line with
updated cosmetics to better meet the needs of the fall 1996
marketplace. In order to focus on the fall 1996 season the Company
minimized merchandise purchases for the spring season which was
designed by a third party prior to the agreement with MR. Net sales for
the six months ended June 30, 1996 represented shipments of this
merchandise to customers and closeout orders for the spring 1996
season.
o The athletic footwear industry is experiencing sluggishness and the
volume of off price product in the market place has increased so that
inventory is being sold at lower margins.
o The women's athletic footwear category has become increasingly
competitive with larger vendors increasing their market focus in this
area, thereby increasing the need to sell inventory for less than
normal prices.
Cost of goods sold before inventory write-down to lower of cost or market in
1995 decreased by $2,618,873 (50.5%), from $5,189,684 for the six months ended
June 30, 1995 to $2,570,811 for the six months ended June 30, 1996. The overall
gross margin on net sales increased by 30.8 percentage points, from -2.8% in
the six months ended June 30, 1995 to (28.0%) for the comparable period in the
current year. The increase in gross profit percentage for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995, as previously
discussed, was due primarily to the Company's improved financial position.
During the six months ended June 30, 1995 the Company was under extreme
financial pressures. As a result of these pressures the Company was required to
sell substantial amounts of inventory at significant losses or no profit in
order to raise cash for operations. This adversely affected the gross profit for
the six months ended June 30, 1995.
General and administrative expenses decreased by $722,172 (55.7%) from
$1,296,105 for the six months ended June 30, 1995 to $573,933 for the six months
ended June 30, 1996. The decrease over the prior year was due primarily to:
o A decrease in the Company's provision for estimated bad debt expenses
of approximately $360,000.
o A decrease in office expense, bank fees and payroll of approximately
$60,000.
o Additional financial consulting and accounting services of
approximately $200,000, incurred in completing the financial statements
and in filing the quarterly report on 10-Q after the resignation of the
Company's Chief Financial Officer in February, 1995. Other general and
administrative expenses in the six months ended June 30, 1995 which
included approximately $40,000 in legal fees incurred in connection
with a failed attempt to raise capital from investors and approximately
$33,000 in trademark and licensing fees incurred in connection with the
dissolution of RYKA GmbH in Germany which formerly held the trademark
of RYKA.
Sales and marketing expenses decreased by $725,910 (52.1%) from $1,394,147 for
the six months ended June 30, 1995 to $668,237 for the six months ended June 30,
1996. The decrease over the prior year was primarily due to:
o Decrease in advertising of approximately $150,000 (73.1%) from
approximately $205,000 for the six months ended June 30, 1995 to
approximately $55,000 for the six months ended June 30, 1996. The
decrease is due to the Company's plan for an extensive consumer ad
campaign during the third quarter for the 1996 fall line.
15
<PAGE>
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30,
1995 - Continued
o Decrease in commissions paid to outside sales representatives of
$111,226 (54.2%) from $205,246 for the six months ended June 30, 1995
to $94,020 for the six months ended June 30, 1996:
Six Months Ended
June 30,
1996 1995
------------------------
Commissions $ 94,020 $205,246
==========================
Net sales $3,572,314 $5,618,263
==========================
Percentage 2.6% 3.7%
==========================
The decrease in commissions is the result of a decrease in sales and a
decrease in the effective commission rate. The decrease in the effective
commission rate reflects a lower commission rate structure and greater
proportion of in-house accounts.
o Decrease in promotion of approximately $273,000 (89.2%) from
approximately $306,000 for the six months ended June 30, 1995 to
approximately $33,000 for the six months ended June 30, 1996.
o Decrease in payroll and payroll related expenses of approximately
$63,000 for the six months ended June 30, 1996 compared with the same
period last year.
o Decrease in freight out of $33,000 for the six months ended June 30,
1996 compared with the same period last year.
Research and development expenses increased by $164,406 (65.9%) from $249,436
for the six months ended June 30, 1995 to $413,842 for the six months ended June
30, 1996.
The increase reflects a continuing concerted effort by management to further
develop and improve the Company's product line. The increase is due to an
increase of approximately $123,000 in salary and consulting fees. During the six
months ended June 30, 1996 the Company engaged the services of two outside
design groups to design and develop the fall 1996 and spring 1997 lines.
Other expenses net, decreased by $1,002,403 (92.6%) from $1,082,857 for the six
months ended June 30, 1995 to $80,454 for the six months ended June 30, 1996.
The decrease is primarily attributed to the write-off of costs associated with
the termination of the merger with L.A. Gear, Inc. of $783,289 and a decrease in
interest expense of $219,192 (72.6%) from $301,725 for the six months ended June
30, 1995 to $82,533 for the six months ended June 30, 1996. This decrease in
interest expense is a result of additional capital funds infused into the
Company on July 31, 1995, as well as in the second quarter of 1996 as a result
of proceeds received to date for the 1996 Private Placement. In connection with
the financing transaction with MR, the Company established a line of credit with
interest at prime plus one percent. Previously, the agreement with Pro-Specs
provided for inventory financing at effective interest rates in excess of 20%.
Liquidity and Capital Resources
Through July 31, 1995, RYKA continued to experience a critical shortage of cash.
On July 31, 1995, the Company consummated a financing agreement with MR,
pursuant to which MR provided or arranged to provide the Company with up to
$8,000,000 of new financing in the form of: (i) a $1,000,000 equity and
subordinated debt investment by MR and KPR, an affiliate of MR; (ii) a
$2,000,000 letter of credit facility from KPR, (iii) a $4,000,000 revolving
credit facility with a bank; and (iv) a $1,000,000 equity investment through the
1995 Private Placement of Common Stock with certain investors. 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, management believed there was a substantial doubt that
the Company would be able to remain in business.
16
<PAGE>
Liquidity and Capital Resources - Continued
As a result of consumating 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 1/4% of the sum of the face amount plus any underlying bank fees
and opening charges (approximately an additional 1-1/2% to 2% per annum).
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 July 31, 1995. At June 30, 1996 the Company's
working capital was approximately $800,000 and will not be sufficient to meet
management's objectives in 1996. The Company does not anticipate making
significant capital expenditures during the foreseeable future. In addition, the
Company plans the sale of additional equity securities and/or the issuance of
subordinated notes, in order to generate sufficient capital resources to assure
continuation of the Company's operations. To this end, the Company, as stated
previously, has received an additional $2,500,000 in proceeds from the 1996
Private Placement through August 14, 1996 of which $1,040,000 was received by
June 30, 1996.
As of June 30, 1996 and as stated previously, the Company was in default of
certain financial covenants required by the loan agreement with its bank and has
entered into a forbearance agreement through October 15, 1996 which requires,
among other things, the immediate reduction of the present credit facility with
the bank from $4,000,000 to $2,500,000 and the further reduction, in stages
during September 1996, to $1,500,000. Further, in connection with production of
the Company's Fall 1996 line, additional financing and letters of credit will be
required during the second and third quarters of 1996. In order for the Company
to fund its operating plans, the Company must either renegotiate the terms of
the financing facility provided by the Company's bank, or arrange a new facility
suitable to the Company's needs with a different lender. The Company has
negotiated a credit facility with a new lender to replace its existing facility,
which new facility requires the Company to raise an additional $2,000,000 in
equity as a condition to obtaining such facility. The Company has raised
$2,500,000 in equity to satisfy this requirement through August 14, 1996.
Although presently, a closing with the new lender is scheduled during August
1996, there can be no assurance that the closing will occur. In addition, the
Company may be required to raise additional funds to support the Company's
operations through the sale of additional equity securities and/or the issuance
of subordinated notes. The Company must obtain these or similar additional
resources or consider modifications to its operating plans, including reductions
in operating costs to enable it to continue operations. However, no assurance
can be given that the Company will be successful in raising additional capital
to support future operations. Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to use its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.
17
<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 June 30, 1996, the Company was in default of certain provisions
of the Loan and Security Agreement with its principal lender
regarding certain credit insurance to be established within
prescribed timeframe, funding requirements for the infusion of
subordinated loans or capital infusions by MR Acquisitions, L.L.C.
("MR"), or by MR causing the same to occur, and the covenant
requiring establishment and maintenance of certain tangible net
worth and leverage. The lender agreed to wait until July 15, 1996 to
demand payment and subsequently entered into an interim forebearance
agreement through July 31, 1996 which reduced the loan limit to
$1,500,000. Further, on July 31, 1996 the Company has entered into a
forebearance agreement through October 15, 1996 which requires,
among other things, the immediate reduction to the present credit
facility with the bank from $4,000,000 to $2,500,000 and the further
reduction, in stages during September 1996, to $1,500,000.
At June 30, 1996, the Company was in default of certain provisions
of the Loan and Security Agreement with KPR Sports International,
Inc. relating to a tangible net worth and leverage requirement which
is identical to the covenant of the Company's principal lender. KPR
Sports International, Inc. has waived the aforementioned default
through October 15, 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
10.1 Waiver letter dated August 15, 1996 between Ryka Inc. and KPR
Sports International.
10.2 Waiver letter dated June 29, 1996 between the Ryka Inc. and
Midlantic Bank.
10.3 Forebearance letter dated July 31, 1996 between Ryka Inc. and
Midlantic Bank.
10.4 Guaranty and Surety Agreement between Michael G. Rubin and
Midlantic Bank.
18
<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: August 14, 1996 By: /s/ Michael G. Rubin
--------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
Date: August 14, 1996 By: /s/Steven A. Wolf
--------------------------
Steven A. Wolf
Vice President of Finance &
Chief Financial Officer
19
<PAGE>
RYKA Inc. and Subsidiary
EXHIBIT INDEX
Exhibit No. Description Sequential Page No.
- -------------------------------------------------------------------------------
10 Waiver letter dated August 15, 1996
between RYKA Inc. and KPR Sports
International Inc. 21
Waiver letter dated June 29, 1996
between RYKA Inc. and Midlantic Bank.
Forebearance letter dated July 31,
1996 between RYKA Inc. and
Midlantic Bank.
Guaranty and Surety Agreement between
Michael G. Rubin and Midlantic Bank.
20
<PAGE>
Exhibit 10.1
August 14, 1996
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
October 15, 1996 the default with the regard to the minimum tangible net worth
and leverage ratio requirements.
Sincerely,
/s/ Zeev Shenkman
- -----------------------
Zeev Shenkman
Executive Vice President
KPR Sports International, Inc.
<TABLE>
K.P.R. SPORTS INTERNATIONAL, INC.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[ ]Corporate Office [ ]European Office [ ]West Coast Office
555 South Henderson Road, Jan de Rooystraat 49, 1221 East Dyer Road, Suite 215,
King of Prussia, PA 19046 5171 DR Kaatsheuvel, Holland Santa Ana, CA 92705
Phone 610-768-0900 800-352-3331 Phone: 31-416-277260 Fax: 31-416-275175 Phone: 714-556-6577 Fax: 714-556-6540
Fax: 610-768-0753
</TABLE>
<PAGE>
Exhibit 10.2
June 26, 1996
Dennis Rubisch, CFO Steven Wolf, CFO
KPR Sports International RYKA, Inc.
555 S. Henderson Road 555 S. Henderson Road
King of Prussia, PA 19406 King of Prussia, PA 19406
Gentlemen:
As you are aware, Midlantic Bank, N.A. ("Bank") has, by letters to you of
June 12, 1996, provided certain waivers through June 30, 1996, with the
intent that the outstanding credit facilities for each of Ryka, Inc. and KPR
Sports International, Inc. will be repaid in full by that date. You have
advised that it is not likely that the subject credit facilities will be
repaid on or before June 30, 1996, but it is intended that the same will occur
on or prior to July 15, 1996.
Accordingly, at your request, the Bank is agreeable to further extend
the subject waivers through July 15, 1996, on the assumption that the
aubject credit facilities will be repaid on or before that date.
In consideration of the subject extension, Ryka, Inc. and KPR Sports
International, Inc., jointly and severely, agree to pay to the Bank on the
earlier of July 9, 1996 or the date on which the subject credit facilities
are repaid in full, an extension fee of $25,000.00, failing which shall
constitute an Event Of Default for all purposes of the subject credit
facilities.
Additionally, by signing below, the parties agree that, effective as of
the date hereof, the Revolving Loan Limit, as defined in the Loan and
Security Agreement dated as of July 31, 1995 betweeb Bank And Ryka, Inc.,
is decreased to $1,500,000.
<PAGE>
Dennis Rubisch, CFO
Steven Wolf, CFO
June 27, 1996
Page - 2 -
Kindly evidence your agreement to the foregoing by siqning below.
MIDLANTIC BANK, N.A.
/S/ XXXXXXXXXXXXXXXXXXXXX
---------------------------------
The undersigned hereby agree to the foregoing:
RYKA, INC. KPR SPORTS INTERNATIONAL, INC.
By: By: Dennis Rubisch
------------------------------- ---------------------------------
<PAGE>
Exhibit 10.3
July 31, 1996
Ryka,. Inc.
555 South Henderson Road
King of Prussia, PA 19406
ATTENTION: Mr. Steven Wolf
Gentlemen:
Reference is made to that certain Loan and Security Agreement dated as of
July 31, 1995 between Ryka, Inc. ("Borrower") and Midlantic Bank, N.A.
("Bank") (as previously amended, the "Loan Agreement"). Capitalized
terms used but not defined herein shall have the respective meanings given to
them in the Loan Agreement.
The Revolving Loan was established on and remains outstanding on a demand
basis. As a result of various forbearance letters, Bank previously agreed to
forbear from exercising any enforcement rights under the Loan Agreement until
July 31, 1996 and the parties further agreed that the Obligations would be due
and payable on July 31, 1996. Borrower acknowledges and agrees that there is
presently outstanding under the Revolving Loan the principal sum of $1,490,000,
together with interest from July 1, 1996 and unpaid expenses, all of which are
owing without defense, offset, deduction or counterclaim.
The parties have agreed to an additional temporary forbearance under and
expressly subject to the following terms and conditions:
1. The Revolving Loan Limit is hereby set at $2,500,000, to be
automatically reduced to $2,000,000 on September 6, 1996 and further
automatically reduced to $1,500,000 on September 16, 1990.
2. Paragraph B (ii) in the definition of Borrowing Base under the
Loan Agreement is deleted and replaced by the following: "(ii)
<PAGE>
Ryka, Inc.
July 31, 1996
Page 2
the lesser of (a) 50% of Eligible Inventory or (b) $1,200,000, reducing
automatically to $960,000 on September 6, 1996 and further reducing
automatically to $720,000 on September 16, 1996." Any inventory remaining from
a prior selling season or which is more than six months old shall not be
considered Eligible Inventory.
3. The first sentence of Section 2.04 of the Loan Agreement is modified, as
of August 1, 1996, to increase the interest rate applicable to cash advances
under the Revolving Loan to a per annum rate equal to the Prime Rate plus one
and one-half percentage points.
4. By its execution and approval of this letter agreement, KPR Sports
International, Inc. ("KPR") hereby (a) reconfirms its outstanding
secured Guaranty and Surety Agreement dated July 31, 1995 ("KPR Guaranty") of
Borrower's existing and future obligations to Bank, (b) agrees that paragraph 11
of the KRP Guaranty is unconditionally deleted from such agreement, and (c)
approves the terms and conditions of this letter agreement which shall not in
any way diminish or impair the KPR Guaranty. Moreover, as further consideration
to Bank for its agreements and undertakings herein, Michael G. Rubin shall,
contemporaneously herewith, execute and deliver to Bank his personal guaranty
("Rubin Guaranty"), unconditionally covering and guaranteeing, as surety, the
Obligations of Borrower to Bank.
5. With respect to the operation of the Revolving Loan, all collections of
accounts receivable and proceeds of other Collateral received by Borrower shall,
upon receipt, be immediately delivered in specie, to Bank for deposit to a
dominion or cash collateral account for application to the outstanding balance
of the Revolving Loan under such procedures as Bank may reasonably establish.
Absent prior notice from Bank, the Borrower shall continue to collect its
accounts receivable subject to its undertaking in the prior sentence hereof.
6. Paragraph 6.01(M)(1) of the Loan Agreement is modified to provide
that as of July 31, 1996 and at all times thereafter,
<PAGE>
Ryka, Inc.
July 31, 1996
Page 3
Borrower shall maintain a minimum Tangible Net Worth plus Subordinated
Indebtedness of $2,200,000.
7. In consideration of the agreements and undertakings set forth in this
letter agreement, the parties hereby agree that the Exercise Price as defined in
that certain Common Stock Purchase Warrant dated July 31, 1995 issued by
Borrower to Bank is hereby reduced to $.52. Borrower further acknowledges and
agrees that if the Obligations of Borrower and the indebtedness of KPR to Bank
are not both satisfied in full on or before August 31, 1996, the Exercise Price
shall be further reduced to $.47 on September 1, 1996. While the foregoing
reductions in the Exercise Price shall be automatically effective in accordance
with the terms hereof without further agreement or document from Borrower,
Borrower agrees that it shall execute and deliver to Bank, if requested by Bank,
any amendment or replacement warrant requested to evidence the foregoing.
Bank agrees that subject to Borrower's acceptance and delivery of this
letter agreement, together with KPR's approval hereof and Bank's receipt of the
executed Rubin Guaranty, Bank will continue the operation of the Revolving Loan
and forbear from enforcing its rights and claims against Borrower to October 15,
1996, on which date such forbearance shall end and all Obligations shall become
immediately due and payable without further notice or demand of any kind. Upon
the occurrence of an Event of Default, or Borrower's breach of any provision of
this letter agreement, Bank shall have the right to terminate the forbearance,
terminate financing and take any and all action it deems necessary or
appropriate to enforce its rights and claims and collect the unpaid Obligations.
Except as expressly set forth above, the terms and conditions of the Loan
Agreement remain in full force and effect. No further modification of the Loan
Agreement shall be binding or enforceable unless in writing and signed by Bank.
Bank's execution of this letter agreement shall not create any duty or
obligation upon Bank to consider or grant any further forbearance.
<PAGE>
Ryka, Inc.
July 31, 1996
Page 4
Please indicate your acceptance of the terms hereof by signing and
returning the enclosed copy of this letter agreement with KPR's acceptance
and the Rubin Guaranty as provided above.
Very truly yours,
Midlantic Bank, N.A.
By: /s/ Jeanne L. Hanson, Vice President
----------------------------------------
Jeanne L. Hanson, Vice President
ACCEPTED AND APPROVED:
RYKA, Inc.
By: _______________________________
KPR SPORTS INTERNATIONAL, INC.
By: _______________________________
____________________________________(SEAL)
MICHAEL G. RUBIN
<PAGE>
Exhibit 10.4
Dated: __________________, 1996
Guaranty and Surety Agreement
To induce Midlantic Bank, N.A. (the "Lender") to make loans, extensions of
credit or other financial accommodations to, and grant temporary forbearance
with respect to existing loans to, RYKA INC. (the "Borrower"), now or in the
future, to secure the observance, payment, and performance of the Liabilities
(as defined below) and with full knowledge that the Lender would not make the
said loans, extensions of credit, or financial accommodations without this
Guaranty and Surety Agreement (together with any amendments or modifications
hereto in effect from time to time, the "Guaranty"), which shall be a contract
of suretyship, the Guarantor (as defined below), intending to be legally bound
hereby, unconditionally agrees as follows:
A. Liabilities Secured. The Guarantor, hereby guarantees the
full, prompt, and unconditional payment of the Liabilities (as
defined below), when and as the same shall become due, whether
at the stated maturity date, by acceleration, or otherwise,
and the full, prompt, and unconditional performance of each
and every term and condition of every transaction to be kept
and performed by the Borrower and any other Obligor under the
Loan Documents (as defined below). This Guaranty is a primary
obligation of the Guarantor and shall be a continuing
inexhaustible Guaranty without limitation as to amount or
duration and may not be revoked.
B. Definitions. As used herein, the following terms shall have
the following meanings:
1. Affiliate. The term "Affiliate" means Midlantic Bank,
N.A., and any of its direct and indirect affiliates and
subsidiaries.
2. Collateral. The term "Collateral" means all property of
the Guarantor and/or any Obligor, now or hereafter in the
possession of the Lender or any Affiliate, in any
capacity whatsoever including, but not limited to, any
balance or share of any deposit, trust or agency account,
and all property and assets of the Guarantor and/or any
Obligor now or hereafter subject to a security agreement,
pledge, mortgage, assignment, or other document or
<PAGE>
agreement granting the Lender a security interest therein
or lien or encumbrance thereon.
3. Guarantor. The term "Guarantor" means each of the
persons and entities who are signatories to this Guaranty
other than the Lender.
4. Liability. The term "Liability" or "Liabilities" means
any and all obligations and indebtedness of every kind
and description of the Borrower or of any Obligor owing
to the Lender under the Loan Documents, including,
without limitation, any increase in and renewals or
extensions of the credit facility established thereby,
and whether such debts or obligations are primary or
secondary, direct or indirect, absolute or contingent,
sole, joint or several, secured or unsecured, due or to
become due, contractual or tortious, arising by operation
of law, by overdraft, or otherwise, or now or hereafter
existing, including, without limitation, principal,
interest, fees, late fees, expenses, and reasonable
attorneys' fees and costs, that have been or may
hereafter be contracted or incurred.
5. Loan Documents. The term "Loan Documents" means this
Guaranty and that certain Loan and Security Agreement,
dated July 31, 1995, between Lender and Borrower,
together with any and all amendments, modifications,
renewals, increases, restatements or extensions thereof
(as heretofore and hereafter amended, the "Loan
Agreement") and Revolving Credit Note in the principal
amount of $4,000,000 bearing even date therewith issued
by Borrower to Lender.
6. Obligor. The term "Obligor" means the Borrower and each
and every maker, endorser, guarantor, or surety,
including, without limitation, the Guarantor, of or for
the Liabilities.
C. Representations and Warranties. The Guarantor represents and
warrants as of the date hereof and at all times hereafter
until the Liabilities are fully paid and performed, and any
commitment to make loans, extensions of credit, or other
financial accommodations to the Borrower have been terminated,
that this Guaranty and any other Loan Document to which the
Guarantor is a party agree authorized by all necessary
corporation action on Guarantor's part, are within the
corporate power and authority of Guarantor, does not violate
or result in a default under Guarantor's Articles of
Incorporation, By-laws or any contract or agreement to which
Guarantor is a party, are the legal, valid, and binding
- 2 -
<PAGE>
obligations of the Guarantor, enforceable against it in
accordance with their terms, except as the same may be limited
by bankruptcy, insolvency, reorganization, or other laws or
equitable principles relating to or affecting the enforcement
of creditors' rights generally. The loans or credit
accommodations made by the Lender to the Borrower and the
assumption by the Guarantor of its obligations hereunder and
under any other Loan Document to which the Guarantor is a
party will result in material benefits to the Guarantor. This
Guaranty was entered into by the Guarantor for commercial
purposes.
D. No Limitation of Liability. Without incurring responsibility
to the Guarantor and without impairing or releasing the
obligations of the Guarantor to the Lender or to any
Affiliate, the Lender may, at any time, and from time to time,
without the consent of, or notice to the Guarantor, upon any
terms or conditions, and in whole or in part:
1. Payment Terms. Change the manner, place, or terms of
payment, and/or change or extend the time for payment, or
renew or alter, any of the Liabilities, any security
therefor or any of the Loan Documents evidencing same,
and the Guaranty herein made shall apply to the
Liabilities and the Loan Documents as so changed,
extended, renewed, or altered;
2. Sale of Property. Sell, exchange, release, surrender,
realize upon, or otherwise deal with in any manner and in
any order, any property including the Collateral, by
whomsoever at any time pledged, mortgaged, or in which a
security interest is given to secure, or howsoever
securing, the Liabilities;
3. Failure to Exercise Rights. Exercise or refrain from
exercising any rights against the Borrower or any other
Obligor (including the Guarantor) or against any
Collateral for the Liabilities or otherwise act or
refrain from acting;
4. Settlement of Liabilities. Settle or compromise any
Liabilities, whether in a proceeding or not, and whether
voluntarily or involuntarily, dispose of any Collateral
therefor, with or without consideration, or settle or
compromise any liability incurred directly or indirectly
in respect thereof or hereof, and/or subordinate the
payment of all or any part thereof to the payment of any
Liabilities, whether due or not;
- 3 -
<PAGE>
5. Application of Funds. Apply any sums by whomsoever paid
or howsoever realized to any Liabilities in any order
deemed appropriate by the Lender;
6. Release of Obligations. Add, release, settle, modify, or
discharge the obligation of any Obligor or any other
party who is in any way obligated for any of the
Liabilities;
7. Additional Security. Accept any additional security for
the Liabilities; and/or
8. Any Other Action. Take any other action which might
constitute a defense available to, or a discharge of, the
Borrower or any other Obligor (including the Guarantor),
in respect of the Liabilities.
The invalidity, irregularity, or unenforceability of all or
any part of the Liabilities or any Loan Document or any
agreement or instrument relating thereto, or the lack of
validity, enforceability, perfection, impairment or loss of
any liens or security interests granted in connection
therewith, whether caused by any action or inaction of the
Lender or any Affiliate, or otherwise, shall not affect,
impair, or be a defense to the Guarantor's obligations under
this Guaranty.
E. Waiver of Subrogation.
(a) The Guarantor irrevocably waives any present or future
claim, right or remedy to which the Guarantor is or
becomes entitled that arises hereunder and/or from the
performance by the Guarantor hereunder to be subrogated
to the Lender's rights against the Borrower or any other
Obligor and/or any present or future claim, right or
remedy to seek contribution, reimbursement, exoneration,
indemnification, payment or the like from the Borrower or
any other Obligor on account of this Guaranty or any
other Loan Document and/or to participate in any security
which the Lender now has or hereafter acquires, whether
or not such claim, right or remedy arises in equity,
under contract, by statute, under common law or
otherwise.
(b) If, notwithstanding the aforesaid waiver, any funds or
property shall be paid or transferred to the Guarantor on
account of such subrogation, reimbursement, exoneration,
indemnification, or contribution at any time when all of
the Liabilities have not been paid in full, the Guarantor
shall hold such funds and/or property in trust for the
- 4 -
<PAGE>
Lender and shall forthwith pay over or deliver to the
Lender such funds and/or property to be applied by the
Lender to the Liabilities.
F. Events of Default. The occurrence of any Event of Default
under the Loan Agreement shall constitute an event of default
("Event of Default") under this Guaranty.
G. Remedies.
1. Acceleration of Liabilities; Rights of Lender. Upon the
occurrence of an Event of Default described in the Loan
Agreement, at the Lender's sole option, all Liabilities
shall immediately become due and payable in full, all
without protest, presentment, demand or further notice of
any kind to the Guarantor or any other Obligor, all of
which are expressly waived. Upon and following an Event
of Default, the Lender may, at its option, exercise any
and all rights and remedies it has under this Guaranty,
any other Loan Document and/or applicable law including,
without limitation, an action for specific performance to
enforce or aid in the enforcement of any provision
contained herein or in any other Loan Document.
2. Right of Set-off. If any of the Liabilities shall be due
and payable and whether or not the Lender shall have made
any demand under this Guaranty, and regardless of the
adequacy of any Collateral for the Liabilities or other
means of obtaining repayment of the Liabilities, the
Lender shall have the right, without notice to the
Guarantor or to any other Obligor, and is specifically
authorized hereby to apply toward and set-off against and
apply to the then unpaid balance of the Liabilities any
items or funds of the Guarantor and/or any Obligor held
by the Lender or any Affiliate, any and all deposits
(whether general or special, time or demand, matured or
unmatured) or any other property of the Guarantor and/or
any Obligor, including, without limitation, securities
and/or certificates of deposit, now or hereafter
maintained by the Guarantor and/or any Obligor for its or
their own account with the Lender, and any other
indebtedness at any time held or owing by the Lender or
any Affiliate to or for the credit or the account of the
Guarantor and/or any Obligor, even if effecting such
set-off results in a loss or reduction of interest or the
imposition of a penalty applicable to the early
withdrawal of time deposits. For such purpose, the
Lender shall have, and the Guarantor hereby grants to the
Lender, a first lien on and security interest in such
deposits, property, funds and accounts and the proceeds
- 5 -
<PAGE>
thereof. The Guarantor further authorizes any Affiliate,
upon and following the occurrence of an Event of Default,
at the request of the Lender, and without notice to the
Guarantor, to turn over to the Lender any property of the
Guarantor held by the Affiliate for the Guarantor's
account and to debit any deposit account maintained by
the Guarantor with such Affiliate (even if such deposit
account is not then due or there results a loss or
reduction of interest or the imposition of a penalty in
accordance with law applicable to the early withdrawal of
time deposits), in the amount requested by the Lender up
to the amount of the Liabilities, and to pay or transfer
such amount or property to the Lender for application to
the Liabilities.
3. Remedies Cumulative; No Waiver. The rights, powers and
remedies of the Lender provided in this Guaranty and the
other Loan Documents are cumulative and concurrent, and
are not exclusive of any right, power or remedy available
to the Lender. No failure or delay on the part of the
Lender in the exercise of any right, power or remedy
shall operate as a waiver thereof, nor shall any single
or partial exercise preclude any other or further
exercise thereof, or the exercise of any other right,
power or remedy.
4. Continuing Enforcement of the Loan Documents. If, after
receipt of any payment of all or any part of the
Liabilities or the obligations of the Guarantor to the
Lender, the Lender is compelled or agrees, for settlement
purposes, to surrender such payment to any person or
entity for any reason, then this Guaranty and the other
Loan Documents shall continue in full force and effect or
be reinstated, as the case may be. The provisions of
this paragraph shall survive the termination of this
Guaranty and the other Loan Documents and shall be and
remain effective notwithstanding the payment of the
Liabilities, the cancellation of the Guaranty or any
other Loan Document, the release of any security
interest, lien or encumbrance securing the Liabilities,
or any other action which the Lender may have taken in
reliance upon its receipt of such payment.
H. Miscellaneous.
1. Notices. Any notices and communications which may be
given under this Guaranty shall be in writing and shall
be given by (i) hand-delivery, (ii) first class mail
(postage prepaid), (iii) reliable overnight commercial
courier (charges prepaid), or (iv) telecopy, in each case
- 6 -
<PAGE>
to the addresses or telecopy numbers set forth in this
Guaranty. Notice by overnight courier shall be deemed to
have been given and received on the date scheduled for
delivery. Notice by mail shall be deemed to have been
given and received three (3) calendar days after the date
first deposited in the United States Mail. Notice by
hand-delivery shall be deemed to have been given and
received upon delivery. Notice by telecopy will be
deemed to have been given upon transmission. A party may
change its address by giving written notice to the other
party as specified herein.
2. Costs and Expenses. Whether or not the transactions
contemplated by the Loan Documents are fully consummated,
the Guarantor shall promptly pay (or reimburse, as the
Lender may elect) all costs and expenses which the Lender
has incurred or may hereafter incur in connection with
the enforcement of this Guaranty and the other Loan
Documents, the collection of all amounts due under this
Guaranty and the other Loan Documents, and all
amendments, modifications, consents or waivers, if any,
to this Guaranty and the other Loan Documents. The
Guarantor's reimbursement obligations under this
paragraph shall survive any termination of the Loan
Documents.
3. Governing Law. This Guaranty shall be construed in
accordance with and governed by the substantive laws of
the Commonwealth of Pennsylvania without reference to
conflict of laws principles.
4. Integration; Amendment; No Third Party Beneficiary. This
Guaranty and the other Loan Documents constitute the sole
agreement of the parties with respect to the subject
matter hereof and thereof and supersede all oral
negotiations and prior writings with respect to the
subject matter hereof and thereof. No amendment of this
Guaranty, and no waiver of any one or more of the
provisions hereof shall be effective unless set forth in
writing and signed by the parties hereto. The Guarantor
and the Lender do not intend any benefits of this
Guaranty to inure to any third party and no third party
(including the Borrower) shall have any status, right or
entitlement under this Guaranty.
5. Successors and Assigns. This Guaranty (i) shall be
binding upon the Guarantor and the Lender and their
respective successors and permitted assigns, and (ii)
shall inure to the benefit of the Guarantor and the
Lender and their respective successors and permitted
- 7 -
<PAGE>
assigns; provided, however, that the Guarantor may not
assign its rights or obligations hereunder or any
interest herein without the prior written consent of the
Lender, and any such assignment or attempted assignment
by the Guarantor shall be void and of no effect with
respect to the Lender. The Lender may from time to time
sell or assign, in whole or in part, or grant
participations in some or all of the Loan Documents
and/or the obligations evidenced thereby. The Guarantor
authorizes the Lender to provide information concerning
the Guarantor to any prospective purchaser, assignee or
participant.
6. Severability and Consistency. The illegality,
unenforceability or inconsistency of any provision of
this Guaranty or any instrument or agreement required
hereunder shall not in any way affect or impair the
legality, enforceability or consistency of the remaining
provisions of this Guaranty or any instrument or
agreement required hereunder. The Loan Documents are
intended to be consistent. However, in the event of any
inconsistencies among any of the Loan Documents, such
inconsistency shall not affect the validity or
enforceability of any Loan Document. The Guarantor
agrees that in the event of any inconsistency or
ambiguity in any of the Loan Documents, the Loan
Documents shall not be construed against any one party
but shall be interpreted consistent with the Lender's
policies and procedures.
7. Consent to Jurisdiction and Service of Process. The
Guarantor hereby consents that (i) any action or
proceeding against it may be commenced and maintained in
any court within the Commonwealth of Pennsylvania or in
the United States District Court for the Eastern District
of Pennsylvania by service of process on such officer;
and (ii) such courts shall have jurisdiction with respect
to the subject matter hereof and the person of the
Guarantor and all Collateral for the Liabilities. The
Guarantor agrees that any action brought by the Guarantor
shall be commenced and maintained only in a court in the
federal judicial district or county in which the Lender
has its principal place of business in Pennsylvania.
8. Joint and Several Liability. In the event that the
Guarantor consists of more than one person or entity, the
Liabilities or obligations of each such person or entity
shall be joint and several and the word "Guarantor" means
each of them, any of them and/or all of them.
- 8 -
<PAGE>
9. Judicial Proceedings; Waivers.
THE GUARANTOR AND THE LENDER ACKNOWLEDGE AND AGREE THAT
(I) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR
COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE LENDER OR THE
GUARANTOR OR ANY SUCCESSOR OR ASSIGN OF THE LENDER OR THE
GUARANTOR, ON OR WITH RESPECT TO THIS GUARANTY OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE DEALINGS OF THE PARTIES
WITH RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY
A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT
TO TRIAL BY JURY; (II) EACH WAIVES ANY RIGHT IT MAY HAVE
TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN
ADDITION TO, ACTUAL DAMAGES; AND (III) THIS SECTION IS
A SPECIFIC AND MATERIAL ASPECT OF THIS GUARANTY AND THE
LENDER WOULD NOT EXTEND CREDIT TO THE BORROWER IF THE
WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS
GUARANTY. THE GUARANTOR HEREBY WAIVES PRESENTMENT, NOTICE
OF DISHONOR AND PROTEST OF ALL INSTRUMENTS INCLUDED IN OR
EVIDENCING THE LIABILITIES OR THE COLLATERAL, IF ANY, AND
ALL OTHER NOTICES AND DEMANDS WHATSOEVER, WHETHER OR NOT
RELATING TO SUCH INSTRUMENTS.
10. WARRANT OF ATTORNEY. THE GUARANTOR HEREBY AUTHORIZES
AND EMPOWERS ANY ATTORNEY OR ATTORNEYS OR THE
PROTHONOTARY OR CLERK OF ANY COURT OF RECORD IN THE
COMMONWEALTH OF PENNSYLVANIA, UPON THE FAILURE BY THE
GUARANTOR TO PAY WHEN DUE ANY SUM PAYABLE BY THE
GUARANTOR PURSUANT TO THIS AGREEMENT, TO APPEAR FOR THE
GUARANTOR IN ANY SUCH COURT, WITH OR WITHOUT DECLARATION
FILED, AS OF ANY TERM OR TIME THERE OR ELSEWHERE TO BE
HELD AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST THE
GUARANTOR IN FAVOR OF THE LENDER FOR ALL SUMS DUE OR TO
BECOME DUE BY THE GUARANTOR TO THE LENDER UNDER THIS
AGREEMENT, WITH COSTS OF SUIT AND RELEASE OF ERRORS AND
WITH THE GREATER OF FIVE PERCENT (5%) OF SUCH SUMS OR
$7,500.00 ADDED AS A REASONABLE ATTORNEYS' FEE; AND FOR
DOING SO THIS AGREEMENT OR A COPY VERIFIED BY AFFIDAVIT
SHALL BE SUFFICIENT WARRANT; SUCH AUTHORITY AND POWER
SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF, AND
JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME
AS OFTEN AS THERE IS OCCASION THEREFOR.
THE GUARANTOR ACKNOWLEDGES THAT HE HAS HAD THE
ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS
AGREEMENT AND FURTHER ACKNOWLEDGES THAT THE MEANING AND
EFFECT OF THE CONFESSION OF JUDGMENT HAVE BEEN FULLY
EXPLAINED TO HIM BY SUCH COUNSEL.
- 9 -
<PAGE>
THE GUARANTOR, BEING FULLY AWARE OF THE RIGHT TO
NOTICE AND A HEARING CONCERNING THE VALIDITY OF ANY AND
ALL CLAIMS THAT MAY BE ASSERTED AGAINST THE GUARANTOR BY
THE LENDER BEFORE A JUDGMENT CAN BE ENTERED HEREUNDER OR
BEFORE EXECUTION MAY BE LEVIED ON SUCH JUDGMENT AGAINST
ANY AND ALL PROPERTY OF THE GUARANTOR, HEREBY WAIVES
THESE RIGHTS AND AGREES AND CONSENTS TO JUDGMENT BEING
ENTERED BY CONFESSION IN ACCORDANCE WITH THE TERMS HEREOF
AND EXECUTION BEING LEVIED ON SUCH JUDGMENT AGAINST ANY
AND ALL PROPERTY OF THE GUARANTOR, IN EACH CASE WITHOUT
FIRST GIVING NOTICE AND THE OPPORTUNITY TO BE HEARD ON
THE VALIDITY OF THE CLAIM OR CLAIMS UPON WHICH SUCH
JUDGMENT IS ENTERED.
/s/ MICHAEL G. RUBIN
-----------------------------------
MICHAEL G. RUBIN
ADDRESS:
---------------------------
---------------------------
TELECOPY #
-------------------------
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 689
<SECURITIES> 0
<RECEIVABLES> 1,630,126
<ALLOWANCES> 69,921
<INVENTORY> 297,087
<CURRENT-ASSETS> 266,531
<PP&E> 383,366
<DEPRECIATION> 202,623
<TOTAL-ASSETS> 2,434,957
<CURRENT-LIABILITIES> 1,329,382
<BONDS> 0
0
0
<COMMON> 507,753
<OTHER-SE> (253,618)
<TOTAL-LIABILITY-AND-EQUITY> 2,434,957
<SALES> 3,572,314
<TOTAL-REVENUES> 3,572,314
<CGS> 2,570,811
<TOTAL-COSTS> 4,226,823
<OTHER-EXPENSES> 80,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (734,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (734,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (734,963)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
