<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-16611
RYKA INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 5139 04-2958132
- ---------------------------- ---------------------------- -------------------
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation classification identification no.)
or organization) code number)
555 S. HENDERSON ROAD
SUITE B
KING OF PRUSSIA, PA 19406
(610) 337-2200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $13,236,998./(1)/ As of June 16, 1997, 59,135,326 shares of
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits from the Company's prior filings under the Securities
Exchange Act of 1934 and registration statements under the Securities Act of
1933 are incorporated by reference as Exhibits in Part IV of this Report.
_________________________
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the last
reported sale price for the Company's Common Stock on June 16, 1997. The
information provided shall in no way be construed as an admission that any
officer, director or 10% shareholder in the Company may or may not be
deemed an affiliate of the Company or that he/it is the beneficial owner of
the shares reported as being held by him/it, and any such inference is
hereby disclaimed. The information provided herein is included solely for
record keeping purposes of the Securities and Exchange Commission.
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INDEX
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Page
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PART I................................ 1
ITEM 1: BUSINESS..................................................... 1
General Overview........................................... 1
Products................................................... 2
Marketing and Sales........................................ 3
Advertising and Promotion.................................. 3
Manufacturing and Distribution............................. 5
Competition................................................ 5
Patents, Trademarks and other Proprietary Rights........... 6
Employees.................................................. 6
Governmental Regulation.................................... 6
ITEM 2: PROPERTIES................................................... 7
ITEM 3: LEGAL PROCEEDINGS............................................ 7
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 7
ITEM 4.1: EXECUTIVE OFFICERS........................................... 7
PART II............................... 9
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................. 9
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA......................... 10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 11
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 17
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 17
PART III............................... 18
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 18
ITEM 11: EXECUTIVE COMPENSATION....................................... 18
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................... 18
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 18
PART IV................................ 19
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................. 19
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PART I
ITEM 1: BUSINESS
GENERAL OVERVIEW
RYKA Inc. ("RYKA" or the "Company") designs, develops and markets high
performance athletic footwear specifically for women. RYKA's product line
currently consists of four categories: Aerobic Fitness, Cross-Training, Walking
and Aqua Conditioning. RYKA was organized in Delaware in 1986. RYKA commenced
operations and introduced its first two styles of high performance athletic
footwear in 1987 and began shipping its first products in 1988. RYKA maintains
its principal executive offices and warehouse at 555 S. Henderson Road, Suite B,
King of Prussia, PA 19406 and its telephone number is (610) 337-2200.
In 1995 and 1996, RYKA entered into a series of transactions that
significantly changed the capital structure of RYKA and the manner in which RYKA
operates its business.
TRANSACTIONS WITH MR ACQUISITIONS. On July 31, 1995, RYKA consummated a
financing arrangement with MR Acquisitions, L.L.C. ("MR Acquisitions"), a
company that is indirectly wholly-owned by Michael Rubin, the current Chairman
and Chief Executive Officer of RYKA, pursuant to which MR Acquisitions provided
or arranged to provide RYKA with up to $8,000,000 of financing in the form
of (i) an aggregate of $1,000,000 equity and subordinated debt investment by MR
Acquisitions and KPR Sports International, Inc, ("KPR"), an affiliate of MR
Acquisitions, (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 private placement with certain investors of Common Stock
and a subordinated note which was converted into Common Stock.
SETTLEMENT WITH CREDITORS. In connection with the transactions with MR
Acquisitions, RYKA negotiated settlement arrangements with secured and unsecured
creditors, resulting in the settlement of approximately $3,060,000 of
indebtedness and recognizing a gain of approximately $1,650,000. RYKA entered
into an agreement with a secured lender which had provided inventory financing
to RYKA, pursuant to which $1,804,734 of secured indebtedness was settled for
$1,100,000 in cash and 500,000 shares of Common Stock and the secured creditor
was released from its obligations to certain vendors under letters of credit
opened on behalf of RYKA for the purchase of approximately $1,000,000 in
merchandise to be received in the future. In addition, RYKA entered into
arrangements with other creditors, pursuant to which RYKA settled an aggregate
of approximately $1,250,000 of indebtedness for approximately $180,000 in cash
and warrants to purchase 53,192 shares of Common Stock at $1.50 per share.
RELOCATION OF RYKA'S OFFICES. In August 1995, RYKA terminated the lease
for its principal facility in Norwood, Massachusetts and moved its executive
offices and warehouse to a facility in King of Prussia, Pennsylvania, that it
subleases from KPR.
NEW MANAGEMENT PERSONNEL. On July 31, 1995, Michael Rubin became Chairman
of the Board and Chief Executive Officer. Since that time, Mr. Rubin has taken
an active role in the management of RYKA. Mr. Rubin does not receive any
compensation for his services. In addition, since August 1995, RYKA has hired
additional management personnel, including Dennis DiDominicis, the Company's
current Executive Vice President, Steven Wolf, the Company's Current Vice
President of Finance and Chief Financial Officer and Dan Brown, the Company's
current Vice President of Product Marketing. Effective April 1, 1997, RYKA
hired Kate Bednarski as its President. All of these individuals have substantial
experience in the athletic footwear industry.
NEW SALES, MARKETING AND MANUFACTURING ARRANGEMENTS. Since August 1995,
RYKA has engaged independent design groups to create new designs for RYKA's
footwear. However, in February 1997, in-house
<PAGE>
designers began to work full-time at RYKA headquarters in an effort to bring
most of the design function in-house. In addition, RYKA has entered into
arrangements for the sourcing and manufacture of RYKA's footwear in the Far
East. RYKA has also entered into arrangements with eleven independent sales
representative organizations covering 50 states for the sale of RYKA's footwear.
See "Business -- Marketing and Sales" and "Business -- Manufacturing and
Distribution".
REORGANIZATION. On September 26, 1996, the Company entered into an
Agreement and Plan of Reorganization, as amended and restated (the
"Reorganization Agreement"), with KPR and certain affiliated companies
(collectively, the "KPR Companies") and Michael G. Rubin, Chairman and Chief
Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the stockholders of RYKA and the
Company's current lender, RYKA would become a holding company by transferring
all of its assets and liabilities to a newly-formed, wholly-owned subsidiary and
would acquire the KPR Companies in exchange for 163,250,000 shares of RYKA (the
"Reorganization"). Although the Reorganization was originally scheduled to close
by December 31, 1996, due to recent events, the completion of the Reorganization
has been delayed. See "Business - Recent Events." RYKA expects the
Reorganization to become effective by the end of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
RECENT EVENTS. On August 15, 1996, the Company entered into a new credit
facility with a bank. Concurrently with RYKA, KPR entered into a new credit
facility with the same bank. On November 8, 1996, the bank notified KPR that KPR
was in default of certain financial convenants. RYKA was in compliance with its
financial covenants and was not in default of its loan with the bank. Since
November 1996, RYKA and KPR have been in negotiations with the bank to
extend their credit facilities.
As of June 4, 1997, RYKA entered into an amended agreement, and KPR
entered into a forebearance agreement with its existing bank that, among other
things, extended the credit facilities of RYKA and KPR to the earlier of
November 30, 1997 or an occurrence of an event of default (as defined). Under
its amended agreement, RYKA may borrow under its revolving credit facility up to
the lesser of $4,500,000 or its borrowing base (as defined). Interest on its
borrowings is payable at the bank's prime rate plus 3 1/2%. RYKA is also
required to maintain certain receivables turnover ratios. RYKA's revolving
credit facility is guaranteed by Michael Rubin and MR Acquisitions and is cross-
defaulted with KPR's agreement with the bank. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations --Liquidity and
Capital Resources."
In addition to its negotiations with its existing bank, RYKA and KPR have
been in discussions with certain other banks to obtain a new credit facility and
with certain investors to obtain equity and/or subordinated debt. On April 21,
1997, RYKA entered into an agreement with certain investors to sell 2,500,000
shares of Common Stock for an aggregate purchase price of $750,000. The proceeds
of this sale were used by the Company to repay $325,000 of the $851,000
subordinated loan from KPR. The remaining proceeds were used to open $810,000 of
letters of credit for the benefit of KPR. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
As a result the issues arising in connection with the Company's credit
facility with its existing bank, the completion of the Company's audited
financial statements for the year ended December 31, 1996 was delayed, and the
Company was unable to file timely its Annual Report on Form 10-K for the year
ended December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
PRODUCTS
RYKA believes it is the only company to make performance footwear
exclusively for women. All of RYKA's footwear are made on women's lasts. As a
result, the shoes are designed and manufactured taking into account the
anatomical features unique to women's feet.
RYKA's models incorporate RYKA's Nitrogen/ES(R) System, which is designed
to provide enhanced shock absorption, resiliency and durability. The
Nitrogen/ES(R) System in higher priced models consists of visible and non-
visible nitrogen spheres, grids and/or bridges which are placed in the heel, the
mid-sole and the forefoot of the shoe. In standard models, non-visible nitrogen
spheres are placed in the mid-sole only. During 1994, RYKA introduced what it
believes to be the first women's shoe designed specifically for the growing
activity of aqua fitness, the Aqueous(TM) 9H20. The Company intends to introduce
a new line of shoes based on a new specific technology in Spring 1998.
The following table outlines RYKA's percentage of net sales by category for
the years ended December 31, 1996, 1995 and 1994.
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CATEGORY 1996 1995 1994
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Aerobic Fitness/Aqua Fitness........... 25% 50% 40%
Walking................................ 36% 24% 32%
Cross-Training......................... 38% 25% 27%
Outdoor /(1)/.......................... 1% 1% 1%
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_________________________
(1) RYKA has phased-out its sales of the Outdoor category.
FITNESS. RYKA offers several models of lightweight aerobic footwear in
various color options at suggested retail prices of $45.00 to $75.00. Many
models are available in both mid-cut and low-cut styles. Fashion accents and
other treatments have been added to the footwear to maintain a contemporary
look.
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CROSS TRAINING. As a result of their multi-purpose uses, cross training
shoes represent a growing market. RYKA offers four cross training styles,
available in various colors and at suggested retail prices from $45.00 to
$70.00.
WALKING. RYKA offers walking shoes in two categories: traditional
walking and athletic. The suggested retail prices range from $54.95 to $64.95.
AQUA CONDITIONING. RYKA currently offers two models of aqua conditioning
footwear at a suggested retail prices of $54.95 and $64.95.
RUNNING. In April 1997, RYKA has introduced at retail three models of
running footwear with a fourth model expected to be introduced in Fall 1997 for
Spring 1997. This category was the number one in pre-bookings among the RYKA
product line for Spring 1997. The suggested retail prices range from $54.95 for
an entry level runner to $74.95 for the 10k stability shoe.
MARKETING AND SALES
RYKA's marketing is targeted at physically active women who are interested
in a high-performance athletic shoe incorporating advanced technology, high
quality and fashion. RYKA believes that consumers in its market prefer multi-
purpose, comfort and proper fit and that its footwear addresses these
preferences.
RYKA currently sells its products to sporting goods stores, athletic
footwear specialty stores, catalog businesses and department stores, including
The Athlete's Foot, Foot Locker, Lady Foot Locker, Modell's, Oshman's, Sportmart
and The Sports Authority. RYKA also sells its products in catalogs such as
Premier Sports and Road Runner and through telemarketer QVC. Slow moving and
discontinued products are sold through selected distributors and retailers.
RYKA uses commissioned independent representative organizations throughout
the United States to promote and sell its products to retailers. These
representative organizations also handle products of other sporting goods
manufacturers, but they do not sell athletic shoes that compete with RYKA's
products. RYKA has supported its international marketing efforts by working
directly with its independent foreign distributors in Japan, South Africa and
Israel.
At June 13, 1997, the Company's backlog of orders was approximately
$6,300,000. Approximately $4,800,000 of such orders are scheduled for delivery
through the end of the third quarter of 1997 with the remainder scheduled for
delivery during the fourth quarter of 1997. The Company expects that most of the
backlog orders will be filled, although certain of such orders are cancelable.
Two customers of RYKA, Kinney Corporation (Lady FootLocker, Footquarters,
FootLocker Canada, Kinney Stores and Champs) and Marshalls each accounted for
over 10% of RYKA's revenues in 1996.
ADVERTISING AND PROMOTION
The competitive nature of the athletic footwear business makes advertising
and promotion critical to the creation of brand preference in consumers.
Accordingly, RYKA has employed and will continue to employ both conventional and
innovative advertising and promotional techniques. RYKA has begun to advertise
in consumer publications which target active women. RYKA has also developed a
variety of creative
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promotional programs, such as a marketing program with Lady Foot Locker, the
RYKA Instructor and Trainer Alliance (RITA) and an interactive site on the
Internet's World Wide Web. RYKA's focus on products "exclusively for women"
enables RYKA to promote the particular needs and concerns of women.
Because of RYKA's limited resources for advertising, it has historically
concentrated its efforts on relatively less costly, grass-roots approaches
designed to build brand awareness and demand at the retail level. In the third
quarter of 1996, however, RYKA began advertising its products in consumer
publications which target RYKA's key consumer, the physically active woman.
Such publications include Shape, Fitness Magazine and Women's Sports and
Fitness.
In the second half of 1996, with commitments for 1997, RYKA has
participated in an integrated marketing program with Lady Foot Locker to
generate higher levels of awareness for RYKA's products and to promote Lady Foot
Locker as the foremost destination for RYKA's products. The marketing program
has involved significant national advertising and in-store displays of RYKA's
athletic footwear in approximately 500 Lady Foot Locker stores across the United
States.
RYKA's network of aerobics and fitness instructors, marketed as the RYKA
Training Body(TM), is a network of over several thousand certified aerobics and
fitness instructors who are offered the opportunity to purchase RYKA products at
a discount. RYKA believes that many consumers rely on aerobics and fitness
instructors for advice and recommendations on purchasing appropriate athletic
footwear and apparel and that the network is therefore a cost-effective way for
RYKA to increase brand name awareness and stimulate sales. The program also
functions as a wear-testing forum, as RYKA requests that members submit to RYKA
evaluations of RYKA's products and marketing programs. In 1997, this program
will be housed under the RITA program mentioned above and be marketed more
aggressively.
To complement these public relations initiatives, RYKA launched an
interactive site on the Internet's World Wide Web in early 1996. RYKA plans to
provide information through its website about RYKA, as well as fitness and
safety tips.
RYKA believes that its focus on products "exclusively for women"
differentiates it from the numerous other footwear manufacturers in the
marketplace. Accordingly, RYKA has directed its advertising and promotion
efforts to cause both RYKA's athletic footwear products and RYKA as a whole to
be identified in the market as suited to the particular needs and concerns of
women.
Additionally, RYKA is supportive of organizations which focus on the
particular needs and concerns of women. For instance, RYKA supports LiveSafe, a
non-profit organization which promotes personal safety training. RYKA's support
will help provide tuition assistance to selected women in high-risk areas.
RYKA also is an active participant in fitness programs sponsored by the
Aerobics and Fitness Association of America and the International Dance and
Exercise Association and recently agreed to be the exclusive footwear for
AAA/ISMA. RYKA actively solicits the placement of its products in articles and
photo features in consumer, trade and fitness magazines. Editorials, product
reviews and/or advertisements for RYKA's products appeared in such periodicals
as Fitness Magazine, IDEA Today, Women's Sports and Fitness, Shape, Prevention,
Fortune, News Journal and Footwear News.
RYKA retains the services of an outside agency with expertise in footwear
and premium brands to assist in the implementation of RYKA's public relations
programs.
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MANUFACTURING AND DISTRIBUTION
As is common in the athletic footwear industry, RYKA contracts for the
manufacture of its footwear products to its specifications through independent
overseas manufacturers in the Far East. RYKA uses the services of an
independent buying agent, who acts under the direction of RYKA's management in
the negotiation of favorable pricing, the purchase of raw materials and
selection of component part suppliers, inspection of goods prior to shipment and
shipment of finished products. RYKA pays a commission based on the cost of
product purchased through the buying agent. Management believes that sourcing
of footwear products in this manner minimizes RYKA's investment in fixed assets,
reduces costs and mitigates various risks.
RYKA has no contracts with manufacturers beyond the terms of purchase
orders issued. RYKA places purchase orders on a volume basis through its agent
and generally receives the product within 120 days of the start of production.
Under special circumstances, RYKA reduces the time required to deliver the
footwear from the factory through the use of air transportation.
The principal materials used in RYKA's footwear are leather, nylon, rubber,
ethyl vinyl acetate, polyurethane, cambrelle and hytrel. Most of these
materials are available in the countries where manufacturing takes place and
from a number of sources within the United States and abroad, although a loss of
supply could temporarily disrupt operations and increase the costs to
manufacture RYKA's products.
RYKA's supply arrangements are U.S. dollar denominated. Its importing of
footwear, however, could be adversely affected by fluctuations in currency
exchange rates, as well as the adoption of bilateral trade agreements between
the United States and countries in which RYKA's suppliers are located, work
stoppages or the imposition of unilateral restrictions on trade, including
quotas or additional duties, by either the United States or any supplier
country.
RYKA has expanded its production alternatives and currently manufactures
substantially all of its product in China. If, however, RYKA is prevented from
acquiring products from overseas manufacturers, RYKA's operations could be
materially and adversely affected until alternative suppliers are found. See
"Business -- Governmental Regulation".
RYKA imports its footwear from independent manufacturers in the Far East,
both to public third-party warehousing facilities in Long Beach and Gardena,
California with which RYKA contracts on an as-needed basis, and to a warehousing
facility in King of Prussia, Pennsylvania which is subleased from KPR. From
these warehousing facilities, RYKA distributes its footwear throughout the
United States, usually by common carrier. RYKA believes that by utilizing such
warehousing facilities, it both reduces inbound transportation costs and the
amount of time required to import its products from the Far East.
COMPETITION
The athletic footwear industry is highly competitive. RYKA's competitors
include specialized athletic shoe companies as well as companies with
diversified product lines. RYKA believes that its unique niche, combined with
effective advertising and marketing, fashionable styling, high quality and
technological advances are the most important competitive factors. However, due
to substantial growth and interest in the women's segment of the high
performance athletic footwear market, there has been increased competition from
established companies which have developed advertising and promotional programs
directed to this segment of the market. Most of these competitors including
Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony,
have significantly greater financial and other resources and more extensive
marketing staffs than
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RYKA. There is considerable doubt that RYKA will be able to compete successfully
with any of these companies or to achieve any meaningful market share without
significant additional resources. Additionally, RYKA may be unable to remain
price competitive at the retail level as competitors with larger volume
production capabilities may achieve better economies of scale and, therefore,
better cost pricing for products offering similar or more advanced technology.
PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS
RYKA was granted a patent in November 1990, which expires in 2007, covering
certain uses of its Nitrogen/ES(R) System in athletic footwear. There can be no
assurance that the patent granted will be enforceable or will provide RYKA with
meaningful protection from competitors.
RYKA applies its stylized RYKA trademark and the dual parallelogram design
trademark to all its footwear products. In addition, RYKA applies the
Nitrogen/ES(R) trademark on all of its products. RYKA has filed trademark
applications covering these and other marks in the United States and in a number
of foreign countries.
RYKA believes that the aforementioned trademarks are valuable to its
ability to market footwear products and the loss of the right to use any of
these marks could have a material adverse effect on RYKA's business. RYKA
intends to defend these trademarks vigorously against infringements by third
parties, should any arise.
EMPLOYEES
At December 31, 1996, RYKA employed 13 persons on a full-time basis. RYKA
is not a party to any collective bargaining agreements with its employees.
GOVERNMENTAL REGULATION
Substantially all of RYKA's footwear products are manufactured overseas and
subject to U.S. customs duties. Under the fixed duty structure in effect since
July 1981, duties on the footwear products imported by RYKA to date approximate
10.0% of cost, plus administrative charges. If RYKA were to significantly
increase the amount of synthetic raw material, as opposed to leather, in its
footwear, these duties would increase substantially.
RYKA is unable to predict whether additional customs duties, quotas or
other restrictions may be imposed on the importation of its products in the
future. Any such action could result in increases in the cost of footwear in
general and, accordingly, might adversely affect the sales or profitability of
RYKA and the imported footwear industry as a whole. RYKA, however, believes
that the higher priced end of the footwear market, in which it participates,
would be better able to adjust its pricing in response to any such increases.
From time to time, the United States enters into trade legislation with
other countries, including China, which may impact on the duty rates on footwear
imported into the Untied States and RYKA's ability to access foreign markets.
Any such legislation that would substantially increase duty rates on footwear
imported into the United States or limit RYKA's ability to access foreign
markets could adversely affect RYKA's operations.
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ITEM 2: PROPERTIES
The Company relocated to King of Prussia, Pennsylvania in August 1995 where
it maintains its executive offices in a 5,000 square foot portion of a 70,000
square foot facility subleased from KPR. In addition, under this sublease, the
Company has the right to use warehouse space at this facility. Pursuant to the
sublease, charges are approximately $4,000 per month for use of these facilities
and certain warehousing services, and the remaining term of the sublease is one
and one-half years. Any other costs related to the use of the joint facility or
for other services provided by KPR or its affiliates will be charged to the
Company on an arm's-length basis and will be subject to approval by a special
committee of the Board of Directors comprised of disinterested directors.
Additionally, the Company uses the services of two third-party public
warehousing facilities in California. See "Business--Manufacturing and
Distribution."
Management believes that the Company's subleased properties are adequate
for its present needs and that suitable additional or replacement space will be
available as required.
ITEM 3: LEGAL PROCEEDINGS
While the Company is periodically involved in litigation incidental to its
business, there are no material legal proceedings to which the Company or its
subsidiary is a party or to which any of their properties are subject.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of December 31, 1996, the Common stock was held by approximately 2,320
holders of record. From March 28, 1988 until September 15, 1995, the Common
Stock was included for quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") SmallCap Market under the symbol
RYKA. Subsequent to its delisting on the NASDAQ SmallCap Market, the Common
Stock has traded on the NASD Over-the-Counter Bulletin Board. The following
table sets forth the high and low sales prices per share of the Common Stock of
the Company as reported by NASDAQ for the period prior to September 16, 1995 and
by the NASD thereafter. The prices shown do not include retail markups,
markdowns or commissions.
<TABLE>
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SALES PRICES
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HIGH LOW
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1996
First Quarter.................................. $0.85 $ 0.20
Second Quarter................................. $0.58 $ 0.27
Third Quarter.................................. $0.55 $ 0.30
Fourth Quarter................................. $0.56 $ 0.28
1995
First Quarter.................................. $0.78 $ 0.38
Second Quarter................................. $0.84 $ 0.13
Third Quarter
(July 1 - September 15)...................... $0.69 $ 0.41
(September 16 - September 30)................ $0.50 $ 0.25
Fourth Quarter................................. $0.49 $ 0.19
1994
First Quarter.................................. $0.88 $ 0.47
Second Quarter................................. $1.13 $ 0.50
Third Quarter.................................. $1.09 $ 0.75
Fourth Quarter................................. $1.06 $ 0.53
</TABLE>
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate declaring or paying any cash dividends on
its Common Stock for the foreseeable future. In addition, the Company's credit
facility with its bank restricts the payment of dividends on the Company's
Common Stock.
During the past fiscal year, the Company has issued unregistered securities
to a limited number of persons, as described below. No underwriters or
underwriting discounts or commissions were involved. There was no public
offering in any such transaction, and the Company believes that each transaction
was exempt from registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), by reason of Section 4(2) thereof.
1. Between May and August 1996, the Company issued an aggregate of
10,000,000 shares of Common Stock to approximately 57 investors at a purchase
price of $0.25 per share for an aggregate purchase price of $2,500,000.
2. On April 21, 1997, the Company issued an aggregate of 2,500,000 shares
of Common Stock to Patrick Tang, Ura Tang and Erik Achten at a purchase price of
$0.30 per share for an aggregate purchase price of $750,000.
-9-
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1996 are derived from the Consolidated Financial Statements of the Company,
which have been audited. This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $10,194,675 $ 7,538,354 $16,024,991 $14,300,282 $12,193,643
Other revenues.......................... -- 75,904 228,508 50,000 0
--------------- ---------------- ---------------- ---------------- -----------------
Total revenues..................... 10,194,675 7,614,258 16,253,499 14,350,282 12,193,643
Costs and expenses:
Cost of goods sold................. 7,199,572 7,167,670/(1)/ 11,399,760 11,199,119 8,867,375
Operating expenses................. 4,591,682(3) 4,608,319 4,566,236 5,887,070 3,110,821
--------------- ---------------- ---------------- ---------------- -----------------
Operating income (loss)................. (1,596,579) (4,161,731) 287,503 (2,735,907) 215,447
Other expenses, net..................... 283,178 1,118,002/(2)/ 798,918 692,584 512,260
--------------- ---------------- ---------------- ---------------- -----------------
Net loss before extraordinary gain...... $(1,879,757) $ (5,279,733) $ (511,415) $(3,428,491) $ (296,813)
Extraordinary gain - forgiveness of debt -- 1,650,256 -- -- --
--------------- ---------------- ---------------- ---------------- -----------------
Net loss................................ $(1,879,757) $ (3,629,477) $ (511,415) $(3,428,491) $ (296,813)
=============== ================ ================ ================ =================
Net loss per share:
Loss before extraordinary gain..... $(.04) $(0.15) $(0.02) $(0.15) $(0.01)
Extraordinary gain................. -- 0.05 -- -- --
--------------- ---------------- ---------------- ---------------- -----------------
Net loss per share................. $(.04) $(0.10) $(0.02) $(0.15) $(0.01)
=============== ================ ================ ================ =================
Weighted average number of common
and common equivalent shares
outstanding............................ 51,368,619 34,540,653 24,210,083 23,573,316 19,847,283
Number of common shares outstanding..... 56,635,326 46,135,326 26,474,326 23,721,356 23,101,948
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
<S>..................................... <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $ 5,062,643 $ 1,603,195 $ 7,349,872 $ 6,430,812 $ 8,319,229
Total long-term debt.................... 0 851,440 0 142,878 410,673
Net working capital..................... 920,140 554,955 1,845,118 1,201,820 4,077,404
Stockholders' equity (deficiency)....... 1,149,955 (370,902) 2,033,989 1,310,114 4,166,377
</TABLE>
_______________________
(1) Includes Inventory write-down to lower of cost or market of $586,000 in
1995.
(2) Includes costs of $783,289 related to the termination of the proposed
merger with L.A. Gear.
(3) Includes contingent warrant expense of $511,614.
-10-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-K contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these
risks, uncertainties and other factors, as and when applicable, are discussed in
the Company's filings with the Securities and Exchange Commission. Factors that
could cause actual results to differ naturally include, but are not limited to,
those discussed herein under "Risk Factors".
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered by investors in evaluating the
Company and its business. The risk factors reflected below are not intended to
be an exhaustive list of all risks involved, but merely a representative listing
of those risks currently contemplated by the Company.
Operating Losses; Ability to Continue as Going Concern. RYKA commenced
operations in February 1987 and has incurred substantial losses in each year of
its operations. Net losses amounted to $1,879,757, $3,629,477 and $511,415 for
the years ended 1996, 1995 and 1994, respectively. At December 31, 1996, the
Company had an accumulated deficit of $19,728,241. The report of RYKA's
independent auditors with regard to the financial statements for each of the
fiscal years ended 1987 through 1996 stated that there is substantial doubt
about RYKA's ability to continue as a going concern. Management believes the
Company's ability to continue as going concern is dependent upon securing
adequate financing to fund operations until the Company achieves sustained
profitability. In order for RYKA to achieve sustained profitability, management
believes it must increase sales, improve gross profit margins and reduce
expenses as a percentage of total sales. There can be no assurance that RYKA
will be successful in achieving these goals.
Future Capital Needs. On June 4, 1997, the Company and its bank entered
into an amended forbearance agreement pursuant to which the bank agreed to
extend both the RYKA and KPR credit facilities to November 30, 1997. If the
Company is unable to obtain a new credit facility and/or additional equity
and/or subordinated debt financing, there is no assurance that the Company will
be able to continue operations. Further, there is no assurance that if the
Company is able to obtain such financing, it will be on terms satisfactory for
the Company. Moreover, given the dependence of the Company on certain support
provided by KPR, including, but no limited to, financial support, administrative
support, warehousing and office rental, KPR's ability to obtain continued
financing or additional financing for its operations could significantly
adversely impact the ability of the Company to continue in business independent
of KPR. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Risks Associated with the Reorganization. The consummation of the
Reorganization is subject to a number of conditions, including but not limited
to, declaration of the effectiveness of the 1997 proxy statement relating to the
Reorganization by the Commission, approval by the respective boards of directors
and stockholders of the Company and KPR, and certain required consents,
including the consent of the Company's current bank. Therefore, there can be no
assurance that the Reorganization will be consummated.
Competition. The athletic footwear industry in which RYKA markets and sells
its products is highly competitive. RYKA's competitors include specialized
athletic shoe companies as well as companies with diversified product lines. The
Company believes that its unique niche, combined with effective advertising and
marketing, fashionable styling, high quality and technological advances are the
most important competitive factors. However, due to substantial growth and
interest in the women's segment of the high performance athletic footwear
market, there has been increased competition from established companies,
especially Nike and Reebok, which have developed advertising and promotional
programs directed to this segment of the market. RYKA's competitors include
Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony.
The Company's competitors have significantly greater financial and other
resources and more extensive marketing staffs than the Company. Accordingly,
there is no assurance that the Company will be able to compete successfully with
any of these companies or achieve any meaningful market share without
significant additional resources.
Substantially All Assets Pledged. In connection with its financing
arrangements with the Company's current bank, the Company has pledged
substantially all of its assets as security for the performance of its
obligations. In addition, the Company has also pledged substantially all of its
assets (after satisfying any obligations to its bank) to KPR in connection with
its secured subordinated debt and the letter of credit facility provided by KPR.
In the event that the Company were to default on the payment of any amounts owed
under the agreements, the Company's lenders would have the ability to satisfy
the Company's obligations to them by selling or causing the sale of some or all
assets of the Company.
Dependence Upon Key Personnel. The Company's ability to market its
products and to achieve profitability will depend, in large part, on its ability
to attract and retain qualified personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to attract
and retain such personnel. In particular, RYKA is dependent upon the services of
Michael G. Rubin, its Chairman and Chief Executive Officer. RYKA maintains key
person life insurance policies on Mr. Rubin with coverage in amount of
$4,000,000. The loss of Mr. Rubin could have a material adverse effect on the
Company.
Reliance on Foreign Manufacturers. As is customary in the footwear
industry, all of the footwear marketed by the Company is manufactured to its
specifications by independent factories in the Far East. The Company's importing
of footwear may be adversely affected by fluctuations in currency exchange
rates, the adoption of bilateral trade agreements between the United States and
countries in which the Company's suppliers are located, work stoppages or the
imposition of unilateral restrictions on trade, including quotas or additional
duties, by either the United States or any supplier country. In addition, the
current political climate in the Far East is not always stable and may cause
delays in the Company's ability to deliver products to its customers in a timely
manner or, depending upon the severity of the situation, may limit or restrict
the Company's ability to have its products manufactured at all. Although the
Company does not believe that these factors have had a material impact on
operations to date, such factors could ultimately increase the Company's cost of
goods, resulting in higher product prices and lower gross profits unless
alternative manufacturing arrangements could be implemented.
Customer Preferences. The Company's current product lines are subject to
customer preferences and trends. There can be no assurance that the consumers
will remain loyal to its products or that the Company will be able to adapt
quickly to changing market trends.
No Dividends. The Company has paid no dividends to its stockholders since
its inception and does not plan to pay dividends in the foreseeable future. The
Company currently intends to retain any earnings to finance the growth of the
Company. In addition, the Company's credit facility with its bank restricts the
amount of dividends which may be paid on the Common Stock.
Limitation on Directors' Liabilities under Delaware Law. Pursuant to the
Company's Certificate of Incorporation and under Delaware law, directors of the
Company are not liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty, except for liability in connection with a breach
of duty of loyalty for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchasing illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
Securities Market Factors. There have been periods of extreme volatility
in the stock markets, which in many cases were unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stock.
During such periods, the price of the affected stock, including the Company's
Common Stock, has fluctuated substantially. General market price declines or
market volatility in the future could adversely affect the price of the
Company's Common Stock.
NASDAQ Delisting. The Company did not meet the listing standards for
inclusion on the NASDAQ Small Cap Market and was delisted on September 15, 1995.
The Company's Common Stock are currently listed on the OTC - Bulletin Board.
Possible Adverse Effect of Penny Stock Rules. As a result of the delisting
of the Company's Common Stock from the NASDAQ Small Cap Market, the Company's
Common Stock is subject to Rule 15g-9 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which imposes additional sales practice
requirements for broker-dealers which sell such securities to persons other than
established customers and accredited investors as defined in Regulation D under
the Securities Act. For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
rule may adversely affect the ability of broker-dealers to sell the Company's
Common Stock and may adversely affect the ability of persons acquiring
shares in this offering to sell any of the shares acquired in the secondary
market.
The Commission regulations define a "penny stock" as any equity security
not registered on a national securities exchange or for which quotation
information is not disseminated on NASDAQ and has a market price (as therein
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to a transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's Common Stock if such securities are included for quotation on NASDAQ
and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's Common Stock will qualify
for exemption from these restrictions. In any event, even if the Company's
Common Stock were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. The market liquidity for the
Company's Common Stock could be severely adversely affected by these rules.
GENERAL OVERVIEW
The Company has not had a single profitable fiscal year since its inception
and had approximately $1,880,000 in losses in 1996. In addition, the Company
had an accumulated deficit of approximately $19,728,241 and stockholders' equity
of approximately $1,149,955 as of December 31, 1996.
On July 31, 1995, the Company entered into a financing arrangement with MR
Acquisitions pursuant to which MR Acquisitions provided the Company with equity
and subordinated debt financing 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 Acquisitions, the Company had
stockholders' equity of approximately $580,000 as compared to stockholders'
deficiency of over $2,000,000 as of June 30, 1995. Since July 31, 1995,
operating losses have been incurred, which have diminished stockholders' equity
and an additional $2,500,000 of gross proceeds has been received from an equity
private placement which commenced in May 1996 and was concluded in August 1996
(the "1996 Private Placement"). As a result, stockholders' equity was
approximately $1,149,955 and subordinated debt remained at approximately
$851,440 as of December 31, 1996.
During the first half of 1995 and until the financing with MR Acquisitions
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. After the financing
with MR Acquisitions 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 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 in 1995. 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.
-11-
<PAGE>
As described in Note A to Notes to RYKA's Consolidated Financial
Statements, on September 26, 1996, the Company entered into an Agreement and
Plan of Reorganization (the "Reorganization Agreement") with KPR and certain
affiliated companies (collectively, "the KPR Companies"), all of which are
wholly owned by the Chairman and Chief Executive officer of RYKA. Pursuant to
the Reorganization Agreement, the KPR Companies would be merged with RYKA.
Although the Reorganization was originally scheduled to close by December 31,
1996, due to recent events, the completion of the Reorganization has been
delayed. See "Business - Recent Events." RYKA expects the Reorganization will be
completed by the end of 1997. If such merger were to occur, RYKA believes that
the combined companies would realize certain operating benefits. However, there
is no assurance that the merger will occur or that such benefits will
materialize.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements of
Operations bear to net sales and the percentage change in those items from
period to period:
<TABLE>
<CAPTION>
PERIOD TO PERIOD PERCENTAGE
PERCENTAGE OF NET SALES INCREASE (DECREASE)
---------------------------------- ---------------------------
YEAR ENDED DECEMBER 31,
---------------------------------- ---------------------------
1996 1995 1994 1996 VS 1995 1995 VS 1994
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 35.2% (53.0)%
Other revenues.......................... -- 1.0 1.4 (100.0) (66.8)
---------- ---------- ---------- ------------ -------------
Costs and expenses:
Cost of goods sold /(1)/.............. 70.6% 95.1% 71.1% 0.4% (37.1)%
General and administrative
expenses /(2)/................... 12.2 27.4 10.8 (39.9) 19.0
Sales, marketing and advertising
expenses......................... 19.8 23.9 16.3 11.7 (30.7)
Research and development
expenses......................... 6.6 4.8 1.4 86.6 58.9
Contingent warrant compensation....... 5.0 --- --- N/M ---
Special charges....................... 1.5 5.0 -- (59.8) N/M /(3)/
---------- ---------- ---------- ------------ -------------
Total costs and expenses................ 115.7% 156.2% 99.6% 0.1% (26.2)%
---------- ---------- ---------- ------------ -------------
Operating income (loss)................. (15.7)% (55.2)% 1.8% 61.6% (1547.50)%
Other expense, net...................... 2.8 14.8 5.0 (74.7) 39.9
---------- ---------- ---------- ------------ -------------
Net loss before extraordinary gain...... (18.5) (70.0) (3.2) 64.4 932.40
Extraordinary item - forgiveness
of debt.............................. -- 21.9 -- (100.0) N/M /(3)/
---------- ---------- ---------- ------------ -------------
Net loss................................ (18.5)% (48.1)% (3.2)% 48.2% (609.70)%
========== ========== ========== ============ =============
</TABLE>
____________________________________
(1) Includes Inventory write down in 1995 to lower of cost or market of
$568,000.
(2) Includes provision for losses on doubtful accounts.
(3) N/M means "not meaningful."
Year Ended December 31, 1996 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1995.
- -----
Net Sales. Net sales increased by $2,656,321, or 35.2% , from $7,538,354
for 1995 to $10,194,675 for 1996. This increase in net sales was primarily due
to: (i) increased sales in the third quarter of 1996 as a
-12-
<PAGE>
result of improvements in the design and development of RYKA's fall product
line; (ii) the hiring of manufacturers' representatives, experienced in the
athletic footwear industry, covering the entire United States and (iii) the
re-establishment of relationships with major retailers in the women's athletic
footwear market.
Cost of Goods Sold. During 1995, the Company took a charge of $586,000 to
record inventory at the lower of cost or market. Costs of goods sold before this
inventory write-down increased by $617,902, or 9.4%, from $6,581,670 for 1995 to
$7,199,572 for 1996. The overall gross profit margin, exclusive of this write-
down, expressed as a percentage of net sales increased by 17.2%, from 12.7% for
1995 to 29.4% for 1996. The increase in gross profit for 1996 was primarily due
to (i) the impact of an improved product line sold for Fall 1996 at greatly
improved gross margins; (ii) the more timely delivery schedule of product to
retailers in 1996, thus eliminating certain incentive discounts which were
required to be offered to customers in 1995 and (iii) the improvement of the
financial position of the Company in 1996. During the first seven months of
1995, RYKA was under extreme financial pressures. As a result, the Company was
required to sell substantial amounts of inventory at significant losses or no
profit in order to raise cash for operations. The negative impact on gross
profit for the first two quarters of 1995 adversely affected the overall gross
profit for the year.
General and Administrative Expenses. General and administrative expenses,
including the provision for losses on doubtful accounts, decreased by $823,893,
or 39.9%, from $2,065,553 for 1995 to $1,241,660 for 1996. This decrease was
due primarily to: (i) a decrease in 1996 in the Company's provision for
estimated bad debts of approximately $345,000; (ii) a decrease in factoring
commissions of approximately $65,000; (iii) a decrease in consulting fees
incurred in 1995 in connection with the hiring of interim management; (iv) a
decrease in legal expense of approximately $70,000; and (v) a decrease in other
general and administrative expenses for 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. Sales and marketing expenses increased by
$210,985, or 11.7%, from $1,803,686 for 1995 to $2,014,671 for 1996. This
increase was due to (i) an increase in trade show expenses of approximately
$245,000 related to RYKA's attendance at the NSGA trade show in July 1996, a
show not attended by RYKA in 1995, as well as an increase in expenditures at the
Supershow in February 1996 compared to 1995; and (ii) an increase in
commissions of approximately $50,000 due to the increase in sales from 1995 to
1996, offset, in part, by a decrease in payroll and payroll related expenses of
approximately $40,000 and a decrease in international point of purchase
promotional items of $60,000. For 1996, sales commissions paid to sales
representatives was 2.9% of net sales compared to 3.3% of net sales for 1995.
The effective decrease in the commission rate was the result of lower commission
rates paid in connection with larger, key accounts.
Research and Development Expenses. Research and development expenses
increased by $311,376, or 86.6%, from $359,646 in 1995 to $671,022 in 1996.
This increase reflects a continuing effort by management to improve the
Company's product line. The increase is comprised of (i) an increase in
salaries and consulting fees of approximately $200,000; (ii) an increase in
travel and entertainment of approximately $75,000 related to expenses incurred
in connection with trips by production and development personnel to China to
develop and supervise production; and (iii) an increase in sample costs of
approximately $40,000.
Contingent Warrant Compensation. Contingent warrant compensation of
$511,614 relates to a non-cash charge for the vesting of 2,131,730 shares of
Common Stock issuable pursuant to a contingent stock purchase warrant
("Contingent Warrant") issued to MR Acquisitions. In July 1995, in connection
with the transactions with MR Acquisitions, the Company issued the Contingent
Warrant to purchase up to 4,000,000 shares of Common Stock at an exercise price
of $.01 per share. Pursuant to the terms of the Contingent Warrant, if at any
time within one year of its issuance, July 31, 1996, the Company issued a number
of shares of Common Stock which resulted 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 for the purpose of (i) inducing a
lender to make loans to the Company, (ii) in connection with an infusion of
capital to the Company, (iii) a settlement of debts with the Company's
creditors or (iv) a combination thereof, then upon the occurrence of such stock
issuance, four shares of Common Stock issuable pursuant to the Contingent
Warrant would vest for every ten additional shares issued. Under accounting
rules governing the issuance of warrants, the charge is equal to the difference
between the strike price of $0.01 and the fair market value at the time the
contingency is satisfied.
Special Charges. Special charges decreased by $226,719, or 59.8%, from
$379,434 incurred in 1995 to $152,715 in 1996. The special charges incurred in
1996 related to the "Partners Share Success" Equity
-13-
<PAGE>
Incentive Plan. The purpose of this program was to provide an ownership interest
in the Company through the grant of equity incentives to retail sales personnel
and store management of the Company's customers. As a result of the proposed
Reorganization between RYKA and the KPR Companies, the Company decided to
terminate this plan prior to the issuance of any shares and write off $152,715
of administrative costs related to this program. In 1995, special charges were
incurred in connection with the bank financing portion of the transactions with
MR Acquisitions and the related closing of the Massachusetts facility and
relocation of operations to King of Prussia, Pennsylvania.
Other (Income) Expense, Net. Other (income) expense, net, decreased by
$834,824, or 74.7%, from $1,118,002 for 1995 to $283,178 for 1996. This decrease
was primarily attributable to a write-off of $783,289 associated with the
termination of the proposed merger with L.A. Gear, Inc. in 1995 and a decrease
in interest expense of $126,996, or 36.5%, from $348,169 for 1995 to $221,173
for 1996. The decrease in interest expense was a result of additional capital
funds raised by the Company in July 1995, as well as in the second quarter of
1996. In connection with the financing transaction with MR Acquisitions, the
Company established a line of credit with interest at the prime rate plus one
percent. This line of credit was subsequently refinanced with a new lender at
similar rates. The Company's previous financing arrangement provided for
inventory financing at effective interest rates in excess of 20%.
Year Ended December 31, 1995 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1994.
- ----
Net Sales. Net sales decreased by $8,486,637, or 53.0%, from $16,024,991
for 1994 to $7,538,354 for 1995. The decrease in net sales was due to several
factors which continued to affect sales throughout 1995. First, the uncertainty
as to the Company's future continued operations after the termination of the
proposed L.A. Gear merger adversely affected net sales. Second, many customers,
including the Company's largest customer in 1994, did not place their planned
orders for the Fall or "back to school" product due to a combination of customer
apprehension 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 through the end of the year. Further,
many customers either canceled their orders that had been placed or were given
additional discounts and extended terms, both of which adversely impacted net
sales. Third, during the first seven months of 1995, the Company sold product
at large discounts in order to generate cash to continue to fund the Company's
operations. As a result of the Company's financial condition and the termination
of the Company's production financing arrangements, the Company was unable to
obtain additional product from its suppliers in a timely manner for the Fall
1995 season. Due to the delay of the delivery of the Fall 1995 season product,
the Company would not have been able to sell its product at full margin. As a
result, the Company negotiated reductions in its purchase commitments for the
originally scheduled production for the Fall 1995 season. Fourth, the athletic
footwear
-14-
<PAGE>
industry was still experiencing sluggishness in 1995 and the volume of off-price
product continued at high levels. Fifth, the women's athletic footwear category
was becoming increasingly competitive with larger vendors increasing their focus
in this area thereby increasing the need to provide additional discounts.
Costs of Goods Sold. Cost of goods sold decreased $4,232,090, or 37.1%,
from $11,399,760 for 1994 to $7,167,670 for 1995 principally as a result of the
decrease in sales. The overall gross profit on net sales decreased by 24.0%
from 28.9% in 1994 to 4.9% in 1995. This decrease reflected the inventory mark-
down of $586,000 in 1995 and the Company's need to liquidate inventory in the
first half of 1995. The negative impact on gross profit of the first two
quarters of 1995 adversely affected the overall gross profit for the year. The
following table sets forth certain information relating to the Company's gross
profit (loss) for each quarter of 1995.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
--------------------------------------------------- ------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
----------- --------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Sales...................... $4,135 $ 1,484 $1,300 $ 619 $7,538
Cost of Sales.............. 3,975 1,800 927 466 7,168
Gross Profit............... 160 (316) 373 153 370
Gross Profit Percentage.... 3.9% (21.3)% 28.7% 24.7% 4.9%
</TABLE>
General and Administrative Expenses. General and administrative expenses,
including the provision for losses on doubtful accounts, increased by $329,865,
or 19.0%, from $1,735,688 for 1994 to $2,065,553 for 1995. The increase was
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) an increase in travel expenses; (iii) a significant
increase in bad debts from $130,000 in 1994 to $359,388 in 1995; and (iv) an
increase in consulting fees in connection with the hiring of interim management
until a permanent management team was hired. These increases were offset, in
part, by a decrease in factor commissions due to the termination of the
Company's relationship with its factor. As a percentage of sales, general and
administrative expenses increased significantly as many expenses remained
relatively constant. Provisions for losses on doubtful accounts accounted for
4.7% of sales in 1995 compared with 0.8% of sales in 1994 due, in part, to the
fact that net sales in 1995 were extremely low as a result of the difficulties
that the Company experienced.
Sales and Marketing Expenses. Sales and marketing expenses decreased by
$800,591, or 30.7%, from $2,604,277 for 1994 to $1,803,686 for 1995. However,
sales and marketing expenses expressed as a percentage of net sales increased
from 16.3% for 1994 to 23.9% for 1995. The dollar decrease in sales and
marketing expenses was primarily due to a reduction in sales commissions of
approximately $426,800, or 63.2% from 1994 to 1995. The reduction in sales
commissions was proportionally greater than the decrease in net sales of 53.0%.
Sales commissions expressed as a percentage of net sales decreased from 4.2% for
1994 to 3.3% for 1995. The reduction in sales commissions was the result of
reduced commission rates and a greater proportion of house accounts sold by
Company management at no commission. The decrease in sales and marketing
expenses was also due to a reduction in promotional expenses such as clothing
giveaways and promotional allowances granted to retailers, a reduction in staff
salary and related expenses and a decrease in expenses related to trade shows.
Research and Development Expenses. Research and development expenses
increased by $133,375, or 58.9%, from $226,271 in 1994 to $359,646 in 1995.
This increase was attributable primarily to an increase in payroll and
consultant related costs offset, in part, by a reduction in sample costs. The
consultant-related costs
-15-
<PAGE>
were incurred in connection with the hiring of designers to design and develop
the Fall 1996 line. In addition, the Company engaged the services of the former
Vice President of Production on a consulting basis.
Special Charges. Special charges in 1995 were incurred in connection with
the bank financing portion of the transactions with MR Acquisitions and the
related closing of the Massachusetts facility and relocation of operations to
King of Prussia, Pennsylvania. These expenses included transaction costs,
termination of a significant portion of personnel prior to the financing,
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. Other (income) expense, net, increased
$319,084, or 39.9%, from $798,918 for 1994 to $1,118,002 for 1995. This
increase was due to (i) merger related costs of $783,289 incurred in 1995 in
connection with the failed merger with L.A. Gear, (ii) a reduction in interest
expense of $457,103, or 56.8%, from $805,272 for 1994 to $348,169 for 1995, due
to the termination and settlement with the Company's previous financing source,
and (iii) the capital infusion resulting from the consummation of the financing
with MR Acquisitions.
Extraordinary Item. The extraordinary item of approximately $1,650,256 in
1995 related to gain on settlements with both secured and unsecured creditors in
connection with the financing with MR Acquisitions.
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
Acquisitions, pursuant to which MR Acquisitions 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 Acquisitions and KPR,
an affiliate of MR Acquisitions, (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 private placement of Common Stock with
certain investors. Prior to consummating the financing with MR Acquisitions,
the Company had a nominal cash balance and a working capital deficiency of
approximately $2,300,000.
As a result of consummating the financing with MR Acquisitions, the Company
received proceeds from the sale of Common Stock and warrants and subordinated
notes aggregating approximately $1,750,000 net of transaction related costs.
Additionally, secured and unsecured creditors forgave certain indebtedness
resulting in a gain of approximately $1,650,000. The financing with MR
Acquisitions 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. As of December 31, 1996, the Company's working capital was
approximately $920,140. The increase in working capital, in large part, relates
to the receipt of $2,500,000 in gross proceeds from the 1996 Private Placement
which occurred between May and August of 1996.
On August 15, 1996, the Company entered into a credit facility with a bank
which replaced the Company's prior credit facility. The new credit facility
initially had a term of one year and increased the amount that RYKA could borrow
to $4,500,000 based upon certain advance ratios with interest at prime plus
0.25%. Concurrently with RYKA, KPR closed a new credit facility with the same
bank.
On September 26, 1996, the Company entered into the Reorganization
Agreement with the KPR Companies and Michael Rubin, Chairman and Chief Executive
Officer of RYKA. The Company anticipates that the proposed Reorganization will
be completed by the end of 1997. In order for the Reorganization to become
effective, a majority vote of the stockholders of RYKA and consent by the
Company's bank, among other things, is required.
On November 8, 1996, the Company's and KPR's bank notified KPR that KPR was
in default of certain financial covenants, specifically the debt to net worth
ratio and required tangible net worth, and certain provisions relating to
financial information. RYKA was in compliance with its financial covenants and
was not in default of its loan with the bank.
On February 7, 1997, in conjunction with KPR entering into a forbearance
agreement regarding its credit facility, the Company entered into an amendment
to its credit facility that provided for, among other things, a termination date
of April 18, 1997 (as amended) for the Company's credit facility, the same
termination date as KPR's amended credit facility. As of June 4, 1997, the bank
agreed to extend both the RYKA and KPR credit facilities to November 30, 1997 or
an event of default (as defined). Under its amended agreement, RYKA may borrow
under its revolving credit facility up to the lesser of $4,500,000 or its
borrowing base (as defined). Interest on its borrowings is payable at the bank's
prime rate plus 3 1/2%. RYKA is also required to maintain certain receivables
turnover ratios. RYKA's credit facility is guaranteed by Michael Rubin and MR
Acquisitions and is cross-defaulted with KPR's agreement with the bank.
The Company and KPR are in discussions with lenders to obtain a
new credit facility or facilities to replace their existing credit facilities
upon the expiration of such facilities. During these discussions, certain
lenders have indicated that any credit facility that they would provide to the
Company and KPR would be conditional on, among other things, KPR raising
additional equity and/or subordinated debt. The Company and KPR are seeking to
raise an additional $3.0 - $4.0 million in equity and/or subordinated debt
financing. The Company believes that it is in the best interests of the Company
to resolve the credit facility and equity and/or subordinated debt needs of both
the Company and KPR so that the Company can complete the proposed Reorganization
with the KPR Companies.
On April 21, 1997, RYKA entered into an agreement with certain investors
to sell 2,500,000 shares of Common Stock for an aggregate purchase price of
$750,000. The proceeds of this sale were used by the Company to repay $385,000
of the $851,000 subordinated loan from KPR. The remaining proceeds from this
sale were used by the Company to open $810,000 in letters of credit for the
benefit of KPR. The Company is repaying a portion of the subordinated loan
for KPR and is opening letters of credit on behalf of KPR in order to allow KPR
to obtain sufficient financing for its operations until the proposed
Reorganization between RYKA and the KPR Companies can be completed and a new
credit facility for the combined companies can be negotiated.
Effective April 1, 1997, the Company negotiated 60-day payment terms with
two of its major suppliers for up to an aggregate of $1,500,000 in purchases at
an annual interest rate of 12.0%. Previously, the Company was on a wire
transfer on shipment basis with this supplier.
The Company believes that the extension that the Company and KPR received
from their current bank with respect to their existing credit facilities,
together with the additional cash flow from the payment terms from its
suppliers, will provide the Company with sufficient resources through November
30, 1997. During that period, the Company believes that it will be able to
negotiate a new credit facility or facilities and/or raise additional equity
and/or subordinated debt financing and complete the proposed Reorganization.
If, however, the Company is unable to obtain a new credit facility and/or
additional equity and/or subordinated debt financing, there is no assurance that
the Company will be able to continue operations. Further, there is no assurance
that if the Company is able to obtain such financing, it will be on terms
satisfactory for the Company. Moreover, given the dependence of the Company on
certain support provided by KPR, including, but not limited to, financial
support, administrative support, warehousing and office rental, KPR's ability to
obtain continued financing or additional financing for its operations could
significantly adversely impact the ability of the Company to continue in
business independent of KPR.
Even if the Company were able to obtain the financing discussed above or
obtain alternative financing, RYKA may be required to raise additional equity
and/or subordinated debt. However, no assurance can be given that RYKA will be
successful in raising additional capital, if necessary. Further, there can be
no assurance that RYKA will achieve profitability or a positive cash flow even
with sufficient capital resources.
-16-
<PAGE>
SEASONALITY
The Company's business continues to be seasonal, with the first and third
quarter sales typically being the strongest, corresponding to the spring and
back-to-school seasons.
ITEM 7A: QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-28 and S-1 attached hereto.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Incorporated by reference from the Company's Current Report on Form 8-K
dated November 26, 1996.
-17-
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information regarding the executive officers and
directors of the Company at December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ----- ------------------------------------
<S> <C> <C>
Michael G. Rubin.............. 24 Chief Executive Officer and
Chairman of the Board
Dennis F. DiDominicis......... 52 President
Steven A. Wolf................ 38 Chief Financial Officer and
Secretary
Kenneth J. Adelberg........... 44 Director
</TABLE>
Michael G. Rubin has served as Chairman of the Board and Chief Executive
Officer of the Company since July 31, 1995. Since establishing KPR Sports
International, Inc., a privately-held footwear distribution company in 1991,
Mr. Rubin has served as its President and Director. In 1994, Mr. Rubin received
the 1995 Entrepreneur of the Year Award for the Delaware Valley Region which is
sponsored by Inc. magazine and Ernst & Young. Mr. Rubin is the President of
several privately-held companies based in King of Prussia, Pennsylvania and
serves as the Manager of MR Acquisitions, L.L.C., a Delaware limited liability
company. Mr. Rubin attended Villanova University, Villanova, Pennsylvania.
Dennis F. DiDominicis became the Company's President on September 25, 1995.
Currently, Mr. DiDominicis serves as the Company's Executive Vice President. Mr.
DiDominicis has over 25 years of sales, marketing, product development and
sourcing experience. From November 1988 to September 1995, Mr. DiDominicis
worked for Asics Tiger Corporation, a Japanese footwear and apparel manufacturer
and distributor, as a Senior Director of its footwear division and then as a
Vice President of its North American sales and operations. Prior to Asics, Mr.
DiDominicis worked at American Sporting Goods Corporation, Laconia Shoe Company,
Hyde Athletic Industries, Colgate-Kendall Division, and Proctor and Gamble.
Steven A. Wolf is a certified public accountant who joined the Company on
August 1, 1995 as its Vice President of Finance and Chief Financial Officer.
From November 1990 to August 1995, Mr. Wolf was the Controller/Chief Financial
Officer of Ellessee USA, Inc., a $50 million footwear and sportswear company
which through September 1993 was a wholly-owned subsidiary of Reebok
International. Mr. Wolf received a B.S. degree in accounting in 1980 from the
State University of New York at Binghamton and is a member of the American
Institute of Certified Public Accountants and the New York State Society of
CPAs.
Kenneth J. Adelberg has served as a Director of the Company since July 31,
1995. Since 1977, he has been President and Chief Executive Officer of HiFi
House Group of Companies, a privately-held company based in Broomall,
Pennsylvania. Mr. Adelberg was a director and founding stockholder of US Wats,
Inc., a publicly-traded company specializing in business telecommunications
services, located in Bala Cynwyd, Pennsylvania, which was established in 1989.
Mr. Adelberg is a founding stockholder and director of First Republic Bank,
Philadelphia, Pennsylvania, a publicly-traded bank which has been in operation
since 1989. Mr. Adelberg holds Bachelor of Science degrees in Biophysics and
Physiological Psychology from Pennsylvania State University and attended the MBA
program at Drexel University, Philadelphia, Pennsylvania.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by the Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with, except that
Messrs. Adelberg, DiDominicis and Wolf and Ms. Poe each failed to file a Form 5.
ITEM 11: EXECUTIVE COMPENSATION
Report of the Board of Directors
The Compensation Committee currently consists of Messrs. Rubin and
Adelberg. For 1996, the Board of Directors reviewed the compensation of
executive officers, made decisions regarding executive compensation and
administered the Company's employee stock option plans.
The Company's compensation policies for executive officers are to (i)
provide compensation packages, so as to attract, motivate and retain executives,
(ii) link a significant portion of compensation to financial results, so as to
reward successful performance, and (iii) provide long-term equity based
compensation, so as to further align the interests of executives with those of
the shareholders and further reward success and performance. The principal
components of the Company's executive compensation are base salary, incentive
compensation and stock options.
In determining compensation levels, the Company considers compensation
packages offered by similar sized companies within the athletic footwear
industry. Compensation levels for individual executive officers may be more or
less than those offered by such other companies, depending on a subjective
assessment of individual factors, such as the executive's position, skills,
achievements, tenure with the Company and historical compensation levels.
As of December 31, 1996, the Company had employment agreements with Dennis
F. DiDominicis, the Company's prior President and current Executive Vice
President, and Steven A. Wolf, the Company's current Chief Financial Officer.
Mr. DiDominicis' agreement, which was effective as of September 25, 1995, has an
initial term of five years, subject to automatic annual extensions. Mr. Wolf's
agreement, which was effective as of August 1, 1995, has an initial term of
three years, subject to automatic annual extensions. Pursuant to the agreements,
total compensation is divided into three primary components: base salary, bonus
and stock options. The award of bonuses and stock options serve as incentives
for superior performance and are based upon both the performance of the
executives and the Company. Compensation of the named executive officers for
fiscal 1996 was determined in accordance with the employment agreements as
described herein.
The Company does not have an employment agreement with Michael G. Rubin who
joined the Company on July 31, 1995 and who serves as the Company's Chief
Executive Officer and Chairman of the Board without compensation.
Under the stock option plans established by the Company, stock options are
periodically granted to employees at the discretion of the Board of Directors or
Compensation Committee. It is contemplated that executives of the Company will
be eligible to receive stock option grants subject to individual performance and
the performance of the Company as a whole.
During 1996, the Company's Chief Financial Officer granted a total of
150,000 options to purchase Common Stock at an exercise price of $0.20 per
share, and in connection with her termination, the Company's prior Spokesperson
was granted a total of 500,000 options to purchase Common Stock at an exercise
price of $0.42 per share.
Section 162(m) of the Internal Revenue Code generally denies deduction to
any publicly held company such as the Company for certain compensation exceeding
$1,000,000 paid to the chief executive officer and the four other highest paid
executive officers, excluding among other things certain performance-based
compensation. The Company has been advised that stock options granted before the
adoption of Section 162(m) are not subject to the limit on deductions and that
its general stock option grants will qualify for the performance based
exclusion. The Company has not yet recommended any change to the Company's
executive compensation policies and plans as a result of Section 162(m), but the
Compensation Committee will continue to evaluate the impact of recently
finalized tax regulations to ensure that the Company's executive compensation
plans most effectively serve the interests of the Company and its shareholders.
Michael G. Rubin
Kenneth J. Adelberg
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid to the Chief Executive Officer of RYKA, and to each of the three other most
highly compensated executive officers of RYKA, for services rendered in all
capacities to RYKA during 1996 (collectively, the "named executive officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation
--------------------- --------------
Securities
Underlying
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options #
- ------------------------------------------- ----------- ----------- --------- --------------
<S> <C> <C> <C> C>
Michael G. Rubin/(1)/...................... 1996 -- -- --
Chief Executive Officer and 1995 -- -- --
Chairman of the Board
Dennis F. DiDominicis/(2)/................. 1996 $165,000 -- --
President 1995 $45,688 $1,500 500,000
Steven A. Wolf/(3)/........................ 1996 $101,563 -- 150,000
Chief Financial Officer 1995 $44,687 $1,500 200,000
Sheri Poe/(4)/............................. 1996 $ 83,333 -- 500,000
Founder, Spokesperson 1995 $120,833 $1,000 500,000
1994 $150,000 -- 370,000
</TABLE>
- --------------------------------
(1) Mr. Rubin joined RYKA on July 31, 1995 and is serving as RYKA's Chief
Executive Officer and Chairman of the Board without compensation.
(2) Mr. DiDominicis joined RYKA on September 25, 1995 as its President.
Currently, Mr. DiDominicis serves as the Company's Executive Vice
President.
(3) Mr. Wolf joined RYKA on August 1, 1995.
(4) In August 1996, Ms. Poe resigned as an executive officer and director of
RYKA, although she continues to be consultant to RYKA.
Employment Agreements
Michael G. Rubin. RYKA does not currently have an employment agreement
with Michael G. Rubin who joined RYKA on July 31, 1995 and who serves as RYKA's
Chief Executive Officer and Chairman of the Board without compensation.
However, RYKA has entered into an employment agreement with Mr. Rubin which will
become effective as of the Reorganization Effective Date. See "THE PROPOSED
REORGANIZATION AND RELATED MATTERS -- Management After the Reorganization."
Dennis F. DiDominicis. On September 25, 1995, RYKA entered into an
employment agreement with Dennis F. DiDominicis, President of RYKA, for an
initial term of five years, subject to automatic annual extensions. Pursuant to
the terms of Mr. DiDominicis' employment agreement, Mr. DiDominicis is entitled
to receive (i) an annual base salary of $165,000 which will be increased $5,000
each year commencing in calendar year 1997, (ii) an annual bonus based on Mr.
DiDominicis' achievement of specified performance goals as determined by RYKA's
Board of Directors, and (iii) other benefits similar to those provided to RYKA's
other officers. Pursuant to the employment agreement, Mr. DiDominicis is also
entitled to receive a car allowance of $6,000 per year and has been granted a
five year option to purchase 500,000 shares of RYKA's Common Stock at an
exercise price per share equal to the fair market value of the underlying Common
Stock on the date of the grant, of which (i) 50,000 shares shall automatically
vest on each of the first, second, third, fourth, and fifth yearly anniversaries
of September 25, 1995, and (ii) 50,000 shares shall vest on each of the first,
second, third, fourth, and fifth yearly anniversaries of December 31, 1995 based
on the achievement by Mr. DiDominicis of performance goals to be established by
RYKA's Board of Directors. Subsequently, on [February 1997], the Company amended
Mr. DiDominicis' contract so that the 250,000 shares which were to vest pursuant
clause (ii) would vest at 50,000 shares per year on the first, second, third,
fourth, and fifth anniversaries of September 25, 1995.
Mr. DiDominicis' employment agreement may be terminated by RYKA with or
without cause which is defined to include, among other things, the willful
failure or refusal by Mr. DiDominicis to comply with explicit directions of the
Board of Directors or to render the services required by the employment
agreement, willful breach or habitual neglect in the performance of his duties,
conviction of a felony or fraud or embezzlement involving assets of RYKA. In the
event of termination without cause by RYKA, Mr. DiDominicis will be entitled to
receive a lump sum amount in cash equal to one-half of his then current annual
base salary less any amounts owed to RYKA. In the event of termination by RYKA
for any other reason, Mr DiDominicis will be entitled to receive any unpaid
salary and benefits through the date of termination. Under the employment
agreement, Mr. DiDominicis is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr.
DiDominicis is prohibited from soliciting employees of RYKA or engaging or
participating in any business which competes with RYKA while he is employed by
RYKA and for one year thereafter.
Steven A. Wolf. On August 1, 1995, RYKA entered into an employment
agreement with Steven A. Wolf, Vice President of Finance and Chief Financial
Officer of RYKA, for an initial term of three years, subject to automatic annual
extensions. Pursuant to the terms of Mr. Wolf's employment agreement, Mr. Wolf
is entitled to receive (i) an annual base salary of $107,500, subject to annual
adjustments determined by RYKA's Board of Directors, (ii) incentive compensation
up to 35% of his base salary based on sales and/or profit projections for RYKA
and based on his performance as determined by the Board of Directors, and (iii)
other benefits similar to those provided to RYKA's other officers. Pursuant to
the employment agreement, Mr. Wolf has been granted a five-year option to
purchase 200,000 shares of RYKA'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 the date of grant and 50,000 shares
on each of the first, second, and third yearly anniversaries of August 1, 1995.
On January 2, 1997, Mr. Wolf was granted a ten-year option to purchase an
additional 150,000 shares of RYKA's Common Stock at an exercise price equal to
the fair market value of the underlying Common Stock on the date of the grant,
of which 50,000 shares shall vest on the date of grant and 50,000 shares on
each of the first and second yearly anniversaries of January 1, 1997.
Mr. Wolf's employment agreement may be terminated by RYKA with or without
cause which is defined identically to Mr. DiDominicis' employment agreement
described above. In the event of termination without cause by RYKA, Mr. Wolf
will be entitled to receive a lump sum amount in cash equal to five-twelfths of
his then current annual base salary less any amounts owed to RYKA and to have
any unvested stock options accelerate and become fully exercisable. In the
event of termination by RYKA for any other reason, Mr. Wolf will be entitled to
receive any unpaid salary and benefits through the date of termination. Under
the employment agreement, Mr. Wolf is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr. Wolf
is prohibited from soliciting employees of RYKA or engaging or participating in
the technical women's athletic footwear business while he is employed by RYKA
and for one year thereafter.
Option Grants
The following table sets forth certain information concerning options
granted during 1995 to the executive officers named in the Summary Compensation
Table. The following table also sets forth the potential realizable value over
the term of the options (the period from the grant date to the expiration date),
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These amounts do not represent RYKA's estimate of future stock price. Actual
realizable values, if any, of stock options will depend on the future
performance of the Common Stock.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Appreciation For
Individual Grants Option Term (1)
-------------------------------------------------------------- --------------------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise
Options to Employees In Price Expiration
Name Guaranteed # Fiscal Year ($/share) Date 5% ($) 10% ($)
- ----------------------- -------------- ----------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Rubin....... -- -- -- -- -- --
Dennis F. DiDominicis.. -- -- -- -- -- --
Steven A. Wolf......... 150,000 14.35% $0.20 1/1/06 $18,870 $47,805
Sheri Poe.............. 500,000 47.85% $0.42 8/3/99 $33,100 $69,500
- ---------------------------------------
</TABLE>
(1) Represents the difference between the market value of the Common Stock for
which the option may be exercised, assuming that the market value of the
Common Stock appreciates in value from the date of grant to the end of the
option term at annualized rates of 5% and 10%, respectively, and the
exercise price of the option.
Aggregated Option Exercises and Year-End Option Values
No options were exercised in 1996 by any of the executive officers named
in the Summary Compensation Table above. The following table sets forth, for
each of such executive officers, the number and value of options held at
December 31, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1996 December 31, 1996 (1)
----------------------------- ----------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Rubin.......... -- -- -- -- -- --
Dennis F. DiDominicis..... -- -- 100,000 400,000 -- --
Steven A. Wolf............ -- -- 150,000 200,000 2,500 5,000
Sheri Poe................. -- -- 1,520,000 -- -- --
</TABLE>
- -----------------------
(1) Calculated by determining the difference between the deemed fair value of
the securities underlying the options on December 31, 1996 and the
exercise price.
Stock Option Plans
1996 Equity Incentive Plan. In March 1997, the Board of Directors adopted
and in July 1996 the Company's stockholders approved the Company's 1996 Equity
Incentive Plan (the "Incentive Plan"). The purposes of the Incentive Plan are to
attract and retain key employees and certain other persons who are in a position
to make significant contributions to the success of the Company, to reward these
employees and other persons for their contributions, to provide additional
incentive to these employees and other persons to continue making similar
contributions and to further align the interests of these employees and other
persons with those of the Company's stockholders. To achieve these purposes, the
Incentive Plan permits grants of incentive stock options ("ISOs"), options not
intended to qualify as incentive stock options ("Non-ISOs"), stock appreciation
rights ("SARs"), restricted and unrestricted stock awards, performance awards,
loans, and supplemental cash awards and combinations of the foregoing (all
referred to as "Awards").
The Incentive Plan permits Awards to be granted for a total of 2,000,000
shares of the Company's Common Stock. On September 24, 1996, the Board of
Directors approved an amendment to the Incentive Plan that increased the maximum
number of shares issuable under the Incentive Plan from 2,000,000 by 18,000,000
shares for a total of 20,000,000, subject to approval by the Company's
stockholders. Shares issuable under Awards that terminate unexercised, shares
issuable under Awards that are payable in stock or cash but are paid in cash and
shares issued but later forfeited will be available for future Awards under the
Incentive Plan.
All current and future employees of the Company, and other persons who, in
the opinion of the Board of Directors, are in a position to make significant
contributions to the success of the Company, such as consultants and
non-employee directors, are eligible to receive Awards under the Incentive Plan.
The Incentive Plan is administered by the Board of Directors, which
determines, among other things and subject to certain conditions, the persons
eligible to receive Awards, the persons who actually receive Awards,
the type of each Award, the number of shares of Common Stock subject to each
Award, the date of grant, exercise schedule, vesting schedule and other terms
and conditions of each Award, whether to accelerate the exercise or vesting
schedule or waive any other terms or conditions of each Award, whether to amend
or cancel an Award and the form of any instrument used under the Incentive Plan.
The Board of Directors has the right to adopt rules for the administration of
the Incentive Plan, settle all controversies regarding the Incentive Plan or any
Award, and construe and correct defects and omissions in the Incentive Plan or
any Award. The Incentive Plan may be amended, suspended or terminated by the
Board of Directors, subject to certain conditions, provided that stockholder
approval will be required whenever necessary for the Incentive Plan to continue
to satisfy the requirements of certain securities and tax laws, rules and
regulations.
Recipients of stock options under the Incentive Plan will have the right
to purchase shares of Common Stock at an exercise price, during a period of
time and on such other terms and conditions as are determined by the Board of
Directors. For ISOs, the recipient must be an employee, the exercise price must
be at least 100% (110% if issued to a 10% or greater stockholder of the Company)
of the fair market value of the Company's Common Stock on the date of grant and
the term cannot exceed ten years (five years if issued to a 10% or greater
stockholder of the Company) from date of grant. If permitted by the Board of
Directors and subject to certain conditions, and option exercise price may be
paid by delivery of shares of the Company's Common Stock that have been
outstanding, a promissory note, a broker's undertaking to promptly deliver the
necessary funds or by a combination of those methods. If permitted by the Board
of Directors, options (other than those granted in tandem with SARs) may be
settled by the Company, paying to the recipient, in cash or shares of Common
Stock (valued at the then fair market value of the Company's Common Stock), an
amount equal to such fair market value minus the exercise price of the option
shares.
SARs may be granted under the Incentive Plan either alone or in tandem
with stock options. Generally, recipients of SARs are entitled to receive upon
exercise, cash or shares of Common Stock (valued at the then fair market value
of the Company's Common Stock) equal to such fair market value on the date of
exercise minus such fair market value on the date of grant of the shares subject
to the SAR, although certain other measurements also may be used. A SAR granted
in tandem with a stock option is exercisable only if and to the extent that the
option is exercised.
The Incentive Plan provides for restricted and unrestricted stock
awards. Stock awards allow the recipient to acquire shares of the Company's
Common Stock for their par value or any higher price determined by the Board of
Directors. In the case of restricted stock awards, the shares acquired are
subject to a vesting schedule and other possible conditions determined by the
Board of Directors.
The Incentive Plan provides for performance awards entitling the
recipient to receive stock options, stock awards or other types of Awards
conditional upon achieving performance goals determined by the Board of
Directors. Performance goals may involve overall corporate performance,
operating group or business unit performance, personal performance or any other
category of performance determined by the Board of Directors. Financial
performance may be measured by revenue, operating income, net income, earnings
per share, Common Stock price, price-earnings multiple or other financial
factors determined by the Board of Directors.
Under the Incentive Plan, loans or supplemental cash awards may be
granted to recipients of Awards to help defray taxes due as a result of the
Awards. The terms and conditions of loans and supplemental cash awards,
including the interest rate, which may be zero, and whether any loan will be
forgiven, are determined by the Board of Directors.
Generally, upon termination of a recipient's employment or other
relationship with the Company, stock options and SARs remain exercisable for a
period of three months (one year if termination is due to death or disability)
to the extent that they were exercisable at the time of termination, except as
otherwise agreed between the employee and the Company, unvested shares under
outstanding restricted stock awards vest immediately except in the case of a
voluntary resignation or termination for cause (as defined in the Incentive
Plan). Stock options, SARs and other Awards that are not exercisable at the
time of termination automatically terminate, and payments or benefits under
deferred stock awards, performance awards and supplemental cash awards that are
not irrevocably due at the time of termination are forfeited.
In addition to the 1996 Equity Incentive Plan, which is discussed above,
the Company has adopted the following seven separate stock option plans (the
"Plans"): the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990 Stock
Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the 1995
Stock Option Plan, and the 1995 Non-Employee Directors' Stock Option Plan. The
following terms and conditions are virtually identical for each of the Plans,
except for the 1995 Non-Employee Directors' Stock Option Plan which is
separately summarized below.
Pursuant to the Plans, options may be granted with respect to 626,420,
350,000, 750,000, 875,000, 900,000, 1,500,000 and 250,000 shares of Common
Stock, respectively.
Options under the Plans may be granted as incentive stock options intended
to qualify under Section 422 of the Code or as options not intended to so
qualify. In the case of both incentive stock options and non-qualified stock
options, the option price must be equal to at least 100% of the fair market
value of the Company's Common Stock on the date of grant. There is no limit on
the number of shares for which options may be granted to any single employee
under a Plan, except that incentive stock options first exercisable by a
recipient in any one year under a Plan may not exceed $100,000 in value
(determined at the time of grant). In addition, an incentive option granted to
any person who owns 10% or more of the shares of voting stock of RYKA must have
had an option price of not less than 110% of the fair market value of the shares
at the time of grant and the option must expire not more than five years after
its grant.
Payment of the option exercise price may be made in cash, shares of Common
Stock or a combination of cash and Common Stock. Except with respect to the 1995
Stock Option Plan, all officers, directors and key employees of RYKA or any
current or future parent or subsidiary of RYKA are eligible to receive options
under the Plans. Under the 1995 Stock Option Plan, non-employee members of the
Board of Directors of RYKA are not eligible to receive options. The Plans are
administered by the Board of Directors which selects the optionees, determines
the number of shares subject to each option and prescribes other terms and
conditions of each option.
1995 Directors' Plan. On September 19, 1995, the Board of Directors
adopted, and on November 15, 1995, the shareholders approved, the 1995
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to
the Directors' Plan, options may be granted with respect to an aggregate of
250,000 shares of Common Stock.
Options granted under the Directors' Plan are nonstatutory stock options
which do not qualify under Section 422 of the Code. Only non-employee directors
of RYKA or any subsidiary of RYKA ("Non-Employee Director") are eligible to
participate in the Directors' Plan. Mr. Adelberg qualified as a Non-Employee
Director.
While grants of stock options under the Directors' Plan are automatic and
non-discretionary, all questions of interpretation of the Directors' Plan are
determined by the Executive Committee of the Board of Directors. The Directors'
Plan provides that commencing January 1, 1996 and annually on January 1 of each
year thereafter, an option to purchase 25,000 shares of RYKA's Common Stock will
be granted to each Non-Employee Director. The option exercise price for each
option granted under the Directors' Plan is the fair market value on the date
the option is granted. All options granted under the Directors' Plan vest at the
rate of 25% per calendar quarter after the date of grant (or earlier in event of
the death or disability of the Non-Employee Director or sale of RYKA). Upon
departure from the Board of Directors by reason of death or disability, all
options held by a Non-Employee Director may be exercised by him or her or by his
or her executor or administrator, or by the person or persons to whom the option
is transferred by will or the applicable laws of descent and distribution, only
during the one-year period after such departure. If a Non-Employee Directors'
service with RYKA terminates for any other reason, all options held by the
Non-Employee Director that are not then exercisable will terminate and options
that are exercisable on the date of termination will continue to be exercisable
for the original option exercise period. Upon sale of RYKA, all options held by
Non-Employee Directors will terminate. In all other events, options granted
under the Directors' Plan remain exercisable until the fifth anniversary of the
date of grant. No option may be transferred other than by will or by the laws of
descent and distribution.
Director Compensation
Each Director who is not an employee of RYKA received an option to purchase
25,000 shares of RYKA's Common Stock upon joining the Board of Directors and
annual stock option grants to purchase 25,000 shares. The Directors do not
receive any cash compensation for their services on behalf of RYKA but are
reimbursed for reasonable travel and lodging expenses incurred in attending
meetings of the Board of Directors and any Committee. Those Directors who are
employees of RYKA do not receive any compensation for their services as
Directors.
Compensation Committee Interlocks and Inside Transactions
During 1996, RYKA had no compensation committee "interlocks" -- meaning
that it was not the case that an executive officer of RYKA served as a director
or member of the compensation committee of another entity and an executive
officer of the other entity served as a director or member of the Compensation
Committee or the Board of Directors of RYKA.
Stock Performance Graph
The following graph sets forth the cumulative total shareholder return
(assuming reinvestment of dividends, if any) to Ryka's shareholders during the
five-year period ended December 31, 1996, as well as an overall stock market
index (CRSP Index for NASDAQ Stock Market - U.S. Companies) and a
self-determined peer group consisting of companies that Management believes to
be in a similar business (Timberland Co., Wolverine World Wide Inc., Penobscot
Shoe Co., K-Swiss, Inc. and Hyde Athletic Industries, Inc.
The data points used for the performance graph are listed in the table below.
Comparision of Cumulative Total Return of Company, Peer Group and Broad Market
[PERFORMANCE GRAPH APPEARS HERE. Assumes $100 invested on Jan. 1, 1992
and Assumes Dividend Reinvested until Fiscal Year Ending Dec. 29, 1996]
Performance Graph Data Points
<TABLE>
<CAPTION>
- ------------------------------ FISCAL YEAR ENDING ------------------------------
COMPANY 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
RYKA INC 100 294.10 100.00 105.87 94.11 107.93
PEER GROUP 100 173.42 331.38 225.84 272.91 404.50
BROAD MARKET 100 100.98 121.13 127.17 164.96 204.98
</TABLE>
SOURCE: MEDIA GENERAL FINANCIAL SERVICES
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of RYKA's Common Stock as of June 16, 1997 by (i) by each person known to RYKA
to be the beneficial owner of more than 5% of RYKA's Common Stock, (ii) each of
RYKA's directors, (iii) each of the named executive officers, and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares of
Name and Address of Common Stock Percentage of
Beneficial Owner /(1)/ Beneficially Owned /(2)/ Common Stock
- ----------------------------------------- ----------------------------- --------------------
<S> <C> <C>
Michael G. Rubin......................... 21,381,730/(3)/ 32.2%
Kenneth J. Adelberg...................... 922,500/(4)/ 1.5%
Dennis F. DiDominicis.................... 102,000/(5)/ *
Steven A. Wolf........................... 250,000/(6)/ *
All directors and executive officers
as a group (4 persons)............... 22,656,230/(3)//(7)/ 33.9%
</TABLE>
- ---------------------------
*less than 1.0%
(1) Except as otherwise shown, the address of each person listed above is in
care of RYKA, 555 S. Henderson Road, Suite B, King of Prussia, PA 19406.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or member of a group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person
shown in the table.
(3) Includes 14,150,000 shares of Common Stock held by Mr. Rubin, 5,100,000
shares of Common Stock issuable upon exercise of a warrant held by MR
Acquisitions and 2,131,730 shares of Common Stock issuable upon exercise of
a contingent common stock purchase warrant held by MR Acquisitions, all of
which shares are vested.
(4) Includes 62,500 shares of Common Stock issuable upon exercise of
outstanding options.
(5) Includes 50,000 shares of Common Stock issuable upon exercise of
outstanding options.
(6) Represents 250,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(7) Includes 7,644,230 shares of Common Stock issuable upon exercise of
outstanding options and warrants.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RYKA relocated to King of Prussia, Pennsylvania in August 1995 where it
maintains its executive offices in a 5,000 square foot portion of a 75,000
square foot facility subleased from the KPR Companies. Under this sublease, RYKA
has the right to use warehouse space at this facility. Pursuant to the sublease,
charges are approximately $4,000 per month for use of these facilities and
certain warehousing services, and the remaining term of the sublease is one and
one-half years. Any other costs related to the use of the joint facility or for
other services provided by the KPR Companies will be charged to RYKA on an
arm's-length basis and will be subject to approval by a special committee of the
Board of Directors comprised of disinterested directors.
On July 31, 1995, RYKA borrowed the sum of $851,440 from KPR in the form
of a secured subordinated loan with interest at the prime rate plus one percent
and repayment terms coincident with the revolving credit facility with RYKA's
principal lender. For 1996, RYKA paid $78,944 in interest to KPR.
In 1996, the KPR Companies made available to RYKA a letter of credit
facility in the amount of $2,000,000. This facility was used by RYKA to finance
the purchase of manufactured inventory through the KPR Companies on RYKA's
behalf, at the KPR Companies' cost, from overseas vendors. Through this
facility, during 1995, RYKA purchased inventory from the KPR Companies for
$2,236,758.
During 1996, the KPR Companies advanced a total of $1,148,366 to RYKA
on a temporary basis, all of which, except for $6,431, had been repaid as of
December 31, 1996. During 1996, RYKA sold footwear to the KPR Companies for
$151,185. These goods were prior season's merchandise which were sold at
negotiated terms on an arms-length basis.
-18-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) FINANCIAL STATEMENTS. PAGE
----
<S> <C>
Report of Independent Auditors - Deloitte & Touche, LLP ................ F-2
Report of Independent Accountants - Margolis & Company P.C. ............ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........... F-4
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ..................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 1996, 1995 and 1994 ........................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ................................. F-7 - F-8
Notes to Consolidated Financial Statements .........................F-9 - F-28
(a) (2) SCHEDULES.
Schedule VIII - Valuation and Qualifying Accounts for the years
ended 1996, 1995 and 1994 ................................................ S-1
</TABLE>
All other schedules not listed have been omitted since the required
information is included in the financial statements or the notes thereto, or is
not applicable or required.
(a)(3) EXHIBITS.
No. Description
- ---- -----------
2.1/1/ Securities Purchase Agreement dated June 21, 1995 by and between
the Registrant and MR Acquisitions, Inc.
2.2/2/ First Amendment to Securities Purchase Agreement by and between
the Registrant and MR Acquisitions, Inc. dated July 31, 1995.
3.1-A/11/ The Company's Certificate of Incorporation.
3.1-B Certificate of Amendment dated July 8, 1996 to the Company's
Certificate of Incorporation.
3.2/3/ The Company's Bylaws as amended.
4.1/3/ Specimen of Common Stock Certificate.
10.1/2/ Loan and Security Agreement by and between the Registrant and KPR
Sports International, Inc.
10.2/2/ Promissory Note in the principal amount of $851,440 by and between
Registrant as maker and KPR Sports International, Inc. as payee.
-19-
<PAGE>
10.3/2/ Demand Promissory Note in the principal amount of $2,000,000 by and
between Registrant as borrower and KPR Sports International, Inc. as
lender.
10.4/2/ Letter of Credit Financing Agreement by and between Registrant
and KPR Sports International, Inc.
10.5/2/ Warrant to Purchase 5,100,000 shares of the Registrant's Common
Stock issued to MR Acquisitions, L.L.C.
10.6/2/ Warrant to purchase 4,000,000 shares of the Registrant's Common
Stock issued to MR Acquisitions, L.L.C.
10.7/2/ Registration Rights Agreement by and between the Registrant and
MR Acquisitions, Inc.
10.8/2/ Promissory Note in the principal amount of $500,000 by and
between the Registrant and Michael Rubin.
10.9/2/ Sublease Agreement dated July 31, 1995 by and between KPR Sports
International, Inc. as sublessor and Registrant as sublessee.
10.10/2/ Settlement Agreement by and between Registrant and Pro-Specs
America Corporation.
+10.11/2/ Employment Agreement dated July 31, 1995 by and between the
Registrant and Sheri Poe.
+10.12 Key Employee Termination Agreement dated August 3, 1996 by and
between the Registrant and Sheri Poe.
+10.13/2/ Employment Agreement dated July 31, 1995 by and between the
Registrant and Steven Wolf.
+10.14/4/ Employment Agreement dated September 25, 1995 by and between
the Registrant and Dennis F. DiDominicis.
+10.15/5/ 1987 Stock Option Plan
+10.16/6/ 1988 Stock Option Plan
+10.17/7/ 1990 Stock Option Plan
+10.18/8/ 1992 Stock Option Plan
+10.19/9/ 1993 Stock Option Plan
+10.20/2/ 1995 Stock Option Plan.
+10.21/10/ 1995 Non-Employee Directors' Stock Option Plan.
+10.22 1996 Equity Incentive Plan.
-20-
<PAGE>
10.23 Revolving Credit Agreement dated August 15, 1996 by and between the
Registrant and CoreStates Bank, N.A.
10.24 Security Agreement dated August 15, 1996 by and between the
Registrant and CoreStates Bank, N.A.
10.25 Memorandum of Security Agreement dated August 15, 1996 by and
between the Registrant and CoreStates Bank, N.A.
10.26 Limited Guaranty of Michael Rubin dated August 15, 1996 in favor of
CoreStates Bank, N.A.
10.27 Letter Agreement dated February 7, 1997 by and among the
Registrant, CoreStates Bank, N.A. and Michael Rubin.
10.28 Second Amended Forbearance Agreement dated June 4, 1997 by and
among the Registrant, Corestates Bank, N.A. and Michael Rubin.
10.29 Letter Agreement dated June 4, 1997 by and among the Registrant,
CoreStates Bank, N.A. and Michael Rubin.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
_____________________________
+ Management contract or compensatory plan or arrangement.
1 Incorporated by reference to Form 8-K dated June 21, 1995.
2 Incorporated by reference to Form 8-K dated July 31, 1995.
3 Incorporated by reference to the Company's Registration Statement No. 33-
33754.
4 Incorporated by reference to the Company's Registration Quarterly Report on
Form 10-Q for the nine-month period ended September 30, 1995.
5 Incorporated by reference to the Company's Registration Statement No. 33-
19754-B.
6 Incorporated by reference to the Company's Registration Statement No. 33-
27501.
7 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the nine-month period ended September 30, 1990.
8 Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
9 Incorporated by reference to the Company's Form S-8 Registration Statement
filed on January 3, 1994.
10 Incorporated by reference to the Company's Proxy Statement filed on
October 13, 1995 in connection with the 1995 Special Meeting in lieu of
Annual Meeting held on November 15, 1995.
11 Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(b) REPORTS ON FORM 8-K.
-21-
<PAGE>
The Company filed a Current Report on Form 8-K dated October 16, 1996
on October 16, 1996 and amended on October 23, 1996 filing financial
statements of the Company for each of the fiscal years ended December 31,
1993 and 1994 which were reaudited by Margolis & Company P.C., the
Company's subsequent auditors.
The Company filed a Current Report on Form 8-K dated November 26, 1996
on December 4, 1996 reporting the change in the Company's independent
auditors from Margolis & Company P.C. to Deloitte & Touche, LLP.
The Company filed a Current Report on Form 8-K dated April 15, 1997
reporting that the Company would not be timely filing its Form 10-K for the
year ended December 31, 1996.
(c) EXHIBITS. See Exhibit Volume.
-22-
<PAGE>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCES AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS- BALANCES AT
DESCRIPTION PERIOD EXPENSES - DESCRIBE DESCRIBE END OF PERIOD
- ---------------------------------- ------------- ------------- ----------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994:
Allowance for doubtful accounts......... $665,605 $130,000 -- $(276,730)(1) $518,875
Year Ended December 31, 1995:
Allowance for doubtful accounts......... $518,875 $359,388 -- $(820,690)(1) $ 57,573
Year Ended December 31, 1996
Allowance for doubtful accounts......... $ 57,573 $ 16,000 -- $ (7,632)(1) $ 65,941
</TABLE>
_______________________________________________
(1) Accounts written off against the allowance
-23-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors of Ryka Inc.:
We have audited the accompanying consolidated balance sheet of Ryka Inc. as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the year then ended. Our
audit also included the financial statement schedule for the year ended December
31, 1996 listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statement presents fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and the
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the company has experienced significant net losses since
its inception and has an accumulated deficit at December 31, 1996 of
$19,728,000. In addition, the Company's bank agreement will be terminated on
November 30, 1997. Such conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note A to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche
Deloitte & Touche
Philadelphia, Pennsylvania
April 18, 1997 except for notes A, E
and I as to which the date is June 6, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
RYKA Inc.
King of Prussia, Pennsylvania
We have audited the consolidated balance sheet of RYKA Inc. and Subsidiary as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the two years in
the period ended December 31, 1995. We have also audited the financial statement
schedule listed in Item 14(a)(2) in this Form 10-K for the two years ended
December 31, 1995. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RYKA
Inc. and its Subsidiary at December 31, 1995, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
The accompanying financial statements for the year ended December 31, 1995 have
been prepared assuming that RYKA Inc. will continue as a going concern. As more
fully described in Note A, the Company has incurred significant operating losses
since its inception and has an accumulated deficit at December 31, 1995 of
$17,848,484. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's plans in regard to this
matter are described in Note A. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Margolis & Company P.C.
MARGOLIS & COMPANY P.C.
Bala Cynwyd, Pennsylvania
June 21, 1996
F-3
<PAGE>
RYKA Inc and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $37,469 $77,509
Accounts receivable, net of allowance for doubtful
accounts of $ 65,941 in 1996 and $ 57,573 in 1995 1,947,036 533,490
Inventory 2,644,017 678,319
Prepaid expenses and other current assets 149,306 118,294
Note receivable, officer 20,000 -
-----------------------------------
Total current assets 4,797,828 1,407,612
Fixed assets, net of accumulated depreciation 194,815 195,083
Security deposits and other assets 70,000 500
-----------------------------------
Total assets $5,062,643 $1,603,195
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Note payable, bank $1,592,453 -
Accounts payable and accrued expenses 1,001,577 $437,324
Due to customer 413,290 413,290
Due to affiliate 18,928 2,043
Subordinated note payable 851,440 -
-----------------------------------
Total current liabilities 3,877,688 852,657
Subordinated note payable - 851,440
Bridge loan payable - 120,000
Other liabilities 35,000 150,000
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, 90,000,000 shares and 70,000,000
shares authorized at December 31, 1996 and 1995, respectively;
56,635,326 and 46,135,326 shares issued and outstanding at
December 31, 1996 and 1995, respectively 566,353 461,353
Additional paid in capital 20,311,843 17,016,229
Accumulated deficit (19,728,241) (17,848,484)
-----------------------------------
Total stockholders' equity (deficiency) 1,149,955 (370,902)
-----------------------------------
Total liabilities and stockholders' equity $5,062,643 $1,603,195
===================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RYKA Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Net sales $10,194,675 $7,538,354 $16,024,991
Other revenues - 75,904 228,508
--------------------------------------------
10,194,675 7,614,258 16,253,499
--------------------------------------------
Costs and expenses:
Cost of goods sold 7,199,572 6,581,670 11,399,760
Inventory write-down to lower of cost or market - 586,000 -
General and administrative expense 1,241,660 2,065,553 1,735,688
Selling and marketing expense 2,014,671 1,803,686 2,604,277
Research and development expenses 671,022 359,646 226,271
Contingent warrant compensation 511,614 - -
Special charges 152,715 379,434 -
--------------------------------------------
Total costs and expenses 11,791,254 11,775,989 15,965,996
--------------------------------------------
Operating income (loss) (1,596,579) (4,161,731) 287,503
--------------------------------------------
Other (income) expenses:
Merger costs 67,000 783,289 -
Interest expense 221,173 348,169 805,272
Interest income (1,529) (6,328) (6,354)
Gain on disposition of property and equipment - (7,128) -
Other (3,466) - -
--------------------------------------------
Total other expenses, net 283,178 1,118,002 798,918
--------------------------------------------
Loss before extraordinary gain (1,879,757) (5,279,733) (511,415)
Extraordinary gain -- forgiveness of debt - 1,650,256 -
--------------------------------------------
Net loss ($1,879,757) ($3,629,477) ($511,415)
--------------------------------------------
Loss per share:
Loss before extraordinary gain ($0.04) ($0.15) ($0.02)
Extraordinary gain - $0.05 -
Net loss per share ($0.04) ($0.10) ($0.02)
--------------------------------------------
Weighted average common and common equivalent
shares outstanding 51,368,619 34,340,653 24,210,083
--------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RYKA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 23,721,356 $237,213 $14,780,493 ($13,707,592) $1,310,114
Exercise of stock options 197,175 1,972 58,781 $60,753
Issuance of stock, net of
offering costs 2,555,795 25,558 1,148,979 $1,174,537
Net loss (511,415) ($511,415)
-------------------------------------------------------------------------------
Balance at December 31, 1994 26,474,326 264,743 15,988,253 (14,219,007) $2,033,989
Issuance of stock in connection
with forgiveness of debt 500,000 5,000 120,000 $125,000
Issuance of warrants in connection
with forgiveness of debt 5,319 $5,319
Issuance of stock and warrants,
net of offering costs 18,320,000 183,200 419,153 $602,353
Issuance of stock for services
related to stock offering 40,000 400 9,600 $10,000
Issuance of stock for settlement
of employment contract 60,000 600 14,400 $15,000
Issuance of warrants to lender in
connection with credit facility 100,000 $100,000
Exercise of stock options 41,000 410 9,838 $10,248
Exercise of warrants 700,000 7,000 273,000 $280,000
Contributed services 41,666 $41,666
Warrants issued below market value 35,000 $35,000
Net loss (3,629,477) ($3,629,477)
-------------------------------------------------------------------------------
Balance at December 31, 1995 46,135,326 461,353 17,016,229 (17,848,484) ($370,902)
Issuance of stock, net of
offering costs 10,000,000 100,000 2,395,200 $2,495,200
Issuance of stock and warrants 20,000 200 53,800 $54,000
for license agreements and
services
Contributed services 100,000 $100,000
Conversion of bridge
loan repayment 480,000 4,800 120,000 $124,800
Conversion of other liability as 70,000 $70,000
contributed capital
Issuance of warrants for failure to 45,000 45,000
register shares
Contingent warrant compensation 511,614 $511,614
Net loss (1,879,757) ($1,879,757)
-------------------------------------------------------------------------------
Balance at December 31, 1996 56,635,326 $566,353 $20,311,843 ($19,728,241) $1,149,955
===============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RYKA INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
************* ************* *************
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss ($1,879,757) ($3,629,477) ($511,415)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary item - forgiveness of debt - (1,650,256) -
Depreciation and amortization 59,052 52,640 45,291
Contingent warrant compensation 511,614 - -
Provision for losses on accounts receivable 16,000 359,388 130,000
Capital contributed as services 100,000 41,666 -
Issuance of common stock and warrants
for services 23,000 150,000 -
Loss on disposition of equipment - 504 -
Changes in operating assets and liabilities:
Accounts receivable (1,429,546) 2,041,116 (274,266)
Inventory (1,965,698) 3,085,516 (483,187)
Prepaid expenses and other current assets (31,012) 48,652 (6,030)
Note receivable, officer (20,000) - -
Accounts payable and accrued expenses 525,253 657,096 (604,145)
Due to customer - 413,290 -
Payable to factories - (390,113) -
Due to affiliate 16,885 2,043 -
----------- ------------ ------------
Net cash provided by (used for) operating
activities (4,074,209) 1,182,065 (1,703,752)
----------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (58,784) (90,109) (130,895)
Proceeds from sale of equipment - 15,000 -
Security deposits and other assets 500 15,253 12,500
----------- ------------ ------------
Net cash used for investing activities (58,284) (59,856) (118,395)
----------- ------------ ------------
</TABLE>
CONTINUED ON NEXT PAGE
F-7
<PAGE>
RYKA Inc. and Subsidiary
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
************ ********** *********
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in payable to lender, net 1,592,453 (2,078,730) 155,971
Increase (decrease) in payable to factor, net - (1,286,237) 786,237
Proceeds from sale of common stock 2,500,000 - -
Proceeds from bridge financing - 120,000 300,000
Repayment of bridge financing - - (300,000)
Reduction in other liability - 150,000 -
Repayment of notes payable to stockholder - - (125,000)
Repayments of capital lease obligations - - (17,878)
Proceeds from exercise of stock options and
warrants - 290,248 60,753
Proceeds from issuance of common stock, net of
issuance costs - 612,353 1,174,537
Proceeds from subordinated note payable, affiliate - 851,440 -
------------------------------------
Net cash provided by (used for) financing
activities 4,092,453 (1,340,926) 2,034,620
------------------------------------
Net increase (decrease) in cash and cash
equivalents (40,040) (218,717) 212,473
Cash and cash equivalents, beginning of year 77,509 296,226 83,753
------------------------------------
Cash and cash equivalents, end of year $37,469 $77,509 $296,226
====================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $221,173 $340,715 $303,092
====================================
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock and warrants in partial
settlement of amounts due creditors - $130,319 -
====================================
Conversion of other liability into contributed capital $70,000 - -
====================================
Issuance of common stock and warrants for
services, failure to register 1995 Private $594,000 $145,000 -
Placement shares and license agreement
====================================
Licensing agreement obtained under financing $70,000 - -
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
RYKA Inc. ("RYKA" (R) or the "Company"), a Delaware corporation, designs,
develops and markets high-performance athletic footwear specifically for women
to retail outlets primarily located in North America and Europe. Operations
commenced in February, 1987.
The Company's financial statements for the year ended December 31, 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 December 31, 1996 of $19,728,000.
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.
During 1996 the Company incurred substantial expenditures in order to meet
ongoing needs and fund its operating plans, which included the development and
marketing of new products. The Company negotiated a credit facility with a new
lender which became effective August 15, 1996. As a prerequisite to closing the
new credit facility, the Company was required to raise $2,000,000 in equity.
This requirement was satisfied with the sale of $2,500,000 of equity securities
through a Private Placement which commenced in May 1996 and was completed in
August 1996 (The "1996 Private Placement"). Subsequently, the Company was
informed by the new lender that the new credit facility was to be terminated on
March 31, 1997. As of June 4, 1997, the lender agreed to extend RYKA's credit
facility, as modified (see Note E) to November 30, 1997. If the Company is
unable to obtain alternative financing, there is no assurance that the Company
will be able to continue operations. Further, there is no assurance that the
Company will be able to obtain alternative financing, or, if obtained, such
financing will be on terms satisfactory for the Company.
On September 26, 1996 the Company entered into an Agreement and Plan of
Reorganization, as amended and restated (the "Reorganization Agreement") with
KPR Sports International, Inc. ("KPR") and certain affiliated companies
(collectively the "KPR Companies") and Michael G. Rubin, Chairman and Chief
Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the Stockholders of RYKA and the
Company's lender, RYKA would become a holding company by transferring all of its
assets and liabilities to a wholly owned subsidiary and would acquire the KPR
Companies in exchange for 163,250,000 shares of RYKA. The Company believes that
the proposed transaction will be completed by the end of 1997.
There is no assurance that the reorganization will be consummated or the
replacement financing obtained. In the event that the reorganization is not
consummated, or further delayed, the Company may sell additional equity
securities in order to generate sufficient capital resources to assure
continuation of the operations of the Company. Further, upon completion of the
reorganization, the Company may sell additional equity securities in order to
further support future operations.
Management recognizes that the Company may be required to 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 if required, to support future operations.
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.
F - 9
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
- ---------------------------
accounts of RYKA Inc. and its wholly owned subsidiary, RYKA GmbH, a German
corporation. During 1994 RYKA GmbH was involuntarily dissolved by the Munich
Trade Register. RYKA GmbH's sole business activity consisted of holding title
to the stylized RYKA and dual parallelogram trademarks, which are both key
trademarks of the Company, and licensing them back to the Company. During 1995,
the Company had legal proceedings in Germany and caused full ownership of such
trademarks to be transferred to the Company from RYKA GmbH. All intercompany
accounts and transactions have been eliminated in consolidation. The Company
currently operates without subsidiary.
Cash Equivalents: The Company considers highly liquid investments with
- ----------------
maturities at date of purchase of less than three months to be cash equivalents.
Inventory: Inventory, primarily consisting of women's high-performance athletic
- ---------
footwear, is valued at the lower of cost (determined by the first-in, first-out
method) or market.
Equipment: Equipment is stated at cost. Depreciation is provided over the
- ---------
estimated useful lives of the assets, generally five to seven years, using the
straight-line method. Included in these assets are leasehold improvements which
are amortized over the shorter of the useful life of the improvement or the
remaining term of the lease. Expenditures for maintenance and repairs are
expensed as incurred. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is reflected in results of operations.
Income Taxes: The Company follows the provisions of Statement of Financial
- ------------
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 requires recognition of deferred income taxes for all temporary differences
between the tax and financial reporting basis of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. SFAS
109 also requires a valuation allowance against net deferred assets if, based
upon available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Revenue Recognition: Sales, net of discounts, are recognized upon the shipment
- -------------------
of footwear.
Other Revenues: Prior to July 1995, RYKA's independent foreign distributors
- --------------
primarily purchased footwear directly from the Company's overseas manufacturers,
and the Company received royalty on those purchases. Income from direct
purchases by foreign distributors is included in Other Revenues.
Advertising Expense: The Company expenses the cost of advertising the first time
- -------------------
the advertising takes place. Advertising expense was $229,919 and $212,307 for
1996 and 1995, respectively.
Loss Per Share: Loss per share is based on the weighted average number of shares
- --------------
of common stock and dilutive common stock equivalent shares outstanding during
each year. Stock options and warrants are included as common stock equivalents,
using the treasury stock method, in the computation of weighted average shares
outstanding when dilutive.
Reclassifications: Certain 1994 and 1995 balances have been reclassified to
- -----------------
conform with the 1996 financial statement presentation.
Use of Estimates: The presentation of financial statements in conformity with
- ----------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F - 10
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Fair Value of Financial Instruments: The carrying amounts of cash and cash
- -----------------------------------
equivalents, accounts receivable, accounts payable, note payable bank, due to
affiliate and subordinated note payable, affiliate are a reasonable estimate of
their fair values at December 31, 1996 and 1995.
Stock Option Plans: The Company accounts for employee stock compensation plans
- ------------------
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB
25). Under such method, compensation is measured by the quoted market price of
the stock at the measurement date less the amount, if any, that the employee is
required to pay. The measurement date is the first date on which the number of
shares that any individual employee is entitled to receive and the option or
purchase price, if any, are known.
In October 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 permits companies to choose between a "fair value based
method of accounting" for employee stock options or to continue to measure
compensation cost for employee stock compensation plans using the intrinsic
value based method of accounting prescribed by APB 25. The Company intends to
continue to use the APB 25 method. Entities electing to remain with this method
must make pro-forma disclosures of net income (loss) and earnings (loss) per
share, as if the fair value based method of accounting defined in SFAS 123 had
been applied to all awards granted in fiscal years beginning after December 15,
1994. The Company, as permitted under SFAS 123, has made such disclosures for
1995 awards in its 1996 annual financial statements.
Earnings Per Share: In February 1997, the Financial Accounting Standards Board
- -------------------
issued SFAS No. 128, "Earnings per Share." This new standard requires dual
presentation of basic and diluted earnings per share (EPS) on the face of the
statement of earnings and requires reconciliation of the numerators and
denominators of the basic and diluted EPS calculations. This statement will be
effective for both interim and annual periods ending after December 15, 1997.
The Company anticipates that this statement will not have a material impact on
its financial statements.
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C.
On July 31, 1995, MR Acquisitions LLC ("MR") entered into a Securities Purchase
Agreement (the "Agreement) with the Company. The significant provisions of the
Agreement and related settlement of obligations due to various creditors are as
follows:
. MR purchased for consideration of $148,560 a total of 14,800,000 shares of
Common Stock of the Company and a seven year warrant to purchase an
additional 5,100,000 shares of Common Stock for $.01 per share. Further,
KPR Sports International, Inc. ("KPR"), an affiliate of 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 (see note E).
In connection with the bank loan obtained in 1995 (see note E) which has
been terminated in 1996, MR was 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 are
maintained at a minimum of $2,000,000 as defined.
In addition, the Company issued a seven year 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 $.01 per share.
Pursuant to the warrant terms, if at any time within one year from the date
of issuance for the Contingent Warrant the Company issues a number of
shares of Common Stock which results in the Company having in excess of
50,000,000 shares of Common Stock issued and outstanding, provided, that
any such shares above such 50,000,000 were issued solely for the purpose of
a) inducing a lender to make a loan or loans to the Company, or b) in
connection with an infusion of capital to the Company, or c) a settlement
of debts with the Company's creditors, or d) a combination thereof, then
upon the occurrence of such stock issuance, for every ten (10) additional
shares of Common Stock which are issued, four (4) of such shares shall vest
under the Contingent Warrant to MR, who upon exercise shall pay an
additional one cent ($.01) per share for the issuance of such additional
shares. At December 31, 1996 2,131,730 shares related to this warrant are
vested. In
F - 11
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
connection with the vesting of these warrants in 1996, the Company
recognized a charge to earnings of $511,614 for the difference between the
market value and the exercise price of the warrants.
The Company reimbursed MR approximately $125,000 for its costs in
connection with the Agreement.
. As required by the Agreement, the Company negotiated the following
settlement arrangements with secured and unsecured creditors:
Secured Creditor:
The Company entered into a Settlement Agreement with a secured creditor,
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 have been valued at $.25 each or $125,000 in the aggregate.
This creditor 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,
this creditor was released from any obligations in connection with such
letters of credit.
Unsecured Creditors:
Unsecured creditors who were owed approximately $839,000 elected to receive
payment in cash of $.08 for each dollar they were owed during July 1995, or
in certain cases at a later date, in full and complete elected settlement
of each dollar owed to the creditor. The Company made payments to these
creditors totaling approximately $68,000.
Unsecured creditors who were owed approximately $98,000 elected to receive
payment in cash of $.03 for each dollar they were owed during July 1995, or
in certain cases at a later date, 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. The Company
made payments to these creditors totaling approximately $3,000 and issued
53,192 warrants.
In addition, approximately $315,000 of claims were settled under other
negotiated arrangements requiring the payment of approximately $107,000 in
the aggregate.
The total 1995 settlements with secured and unsecured creditors who were
owed approximately $3,050,000 resulted in a gain of approximately
$1,650,000.
. Other matters:
In connection with the Agreement, various other arrangements were made
including the following:
. The lease for the Company's principal operating facility was
terminated early with the payment of rent through August 15, 1995.
. 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.
. The Company incurred approximately $225,000 of professional fees and
other costs in connection with this Agreement. The amount was paid
in cash and by the issuance of 100,000
F - 12
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
warrants valued at $20,000. The warrants are exercisable over 5 years at a
price of $.42 per share.
. A key employment agreement was terminated involving issuance of 60,000
shares of Common Stock, valued at $.25 per share.
. At the closing of the Agreement ("Closing"), the Company had 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 3,600,000 additional shares of common stock were reserved
for issuance of stock options and warrants unrelated to this Agreement. The
stockholders of the Company were requested to approve and approved an
increase in the number of authorized shares of Common Stock to 70,000,000
at a special meeting on November 15, 1995, and subsequently to 90,000,000
shares at its annual shareholders' meeting in order to enable the Company
to issue shares, options and warrants as a result of the Agreement and to
shares available for future financing and stock options.
NOTE D - RELATED PARTY TRANSACTIONS
1. Affiliates of MR Acquisitions, L.L.C. (MR):
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 were negotiated on an arms
length basis and require rental payments of approximately $4,000 per month
for use of these facilities and warehousing services commencing August 1,
1995 through July 31, 1997. Rent expense related to this lease totaled
$47,500 and $19,792 for the years ended 1996 and 1995, respectively. 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. Rent expense charged to operations in
connection with this lease, as well as other leases, was $47,500, $58,792,
and $117,250 in the years ended December 31, 1996, 1995 and 1994,
respectively.
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
remaining outstanding at December 31, 1996 and 1995 are included in the
balance sheet under current liabilities as due to affiliate.
MR through its affiliate, KPR, made available to the Company, a letter
of credit facility in the amount of $2,000,000. The facility is used by the
Company to finance the purchase of manufactured inventory with overseas
vendors. At December 31, 1995, letters of credit in the amount of $168,652
were issued by KPR on behalf of the Company. This arrangement was replaced
by a bank letter of credit facility in 1996 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.
In connection with the Agreement described in Note C, KPR loaned the
Company $851,440 in the form of subordinated debt.
Included in the statement of operations for 1996 and 1995 are sales of
$151,985 and $85,254, respectively, relating to footwear sold to KPR. 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 year ended December 31, 1996 and the five months
ended December 31, 1995, estimated at $100,000 and $41,666, respectively
was recorded
F - 13
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
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.
Additionally, as described in Note C, the Company recorded a charge in
1996 of $511,614 relating to Contingent Warrants owned by MR.
1. Affiliates of MR Acquisitions, L.L.C. (MR) - continued:
A summary of all related party transactions with MR or its affiliate for
the years ended December 31, 1996 and 1995 are as follows:
--------------------------------- 1996 -------------------------------
<TABLE>
<CAPTION>
Amount Included in
Amount Included Subordinated Note Amount Included
Financial Statement In Due To Payable In Additional
Nature Of Transactions Classification Transaction Amount Affiliate Affiliate Paid-In Capital
- ---------------------- --------------- ------------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Purchase Of
Inventory Inventory 2,236,758
Subordinated Subordinated Note
Debt Payable 851,440 $851,440
Sale Of
Merchandise Net Sales 151,985 (685)
General and
Administrative
Rent Expense 47,500
Interest On Subordinated
Debt Interest Expense 78,944 13,162
Interest On Letters Of
Credit Advances Interest Expense 1,779
Temporary Advances 1,148,366 6,431
Resolution of Contingent Contingent Warrant
Warrant Expense 511,614 $511,614
General and
Administrative
Services to Capital Expense and
Contributed Additional Paid-In
Capital 100,000 100,000
---------- -------- --------
18,908 $851,440 611,614
========== ======== ========
</TABLE>
F-14
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
1. Affiliates of MR Acquisitions, L.L.C. (MR) - continued:
I--------------------------------- 1995 ----------------------------------I
<TABLE>
<CAPTION>
Amount
Amount Included in Amount
Financial Included Subordinated Included In
Nature Of Statement Transaction In Due To Note Payable Additional
Transactions Classification Amount Affiliate Affiliate Paid-In Capital
- ------------ --------------- ----------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Purchase Of
Inventory Inventory $256,892
Sale Of Property Property 15,000
Proceeds From Subordinated
Subordinated Note Payable
Debt 851,440 $851,440
Sale Of
Merchandise Net Sales 85,254
General and
Administrative
Rent Expense 19,792
Interest On
Subordinated Interest
Debt Expense 34,555
Temporary
Advances 172,591 $2,043
General and
Administrative
Services Expense and
Contributed to Additional Paid-
Capital In Capital 41,666 $41,666
---------- ------------ ---------------
$2,043 $851,440 $41,666
========== ============ ===============
</TABLE>
NOTE E - NOTE PAYABLE BANK
In connection with the Agreement, the Company entered into a Loan and Security
Agreement with its principal lender to establish a $4,000,000 revolving credit
facility secured by all assets of the Company. The facility made funds available
to the Company based on a percentage of inventory and accounts receivable, as
defined. Interest on the amounts outstanding were paid monthly at the rate of
prime plus one percent and the facility was due on demand. This facility was
repaid in 1996. As of December 31, 1996 and 1995, the Company owed $ -0- under
the facility. Interest expense incurred in connection with this facility was
$48,141 and $6,907 for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1995 and through August 15, 1996, 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 time frames, losses incurred
by the Company subsequent to the Agreement 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. The principal lender waived the defaults,
extended the time for the credit insurance to be obtained, and postponed the
Funding Requirement and minimum tangible net worth requirements, through August
15, 1996.
F - 15
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE E - NOTE PAYABLE BANK-CONTINUED
In order to meet ongoing needs and fund its operating plans, the Company
negotiated a credit facility "Replacement Loan" with a new lender which became
effective August 15, 1996. As a prerequisite to closing this facility, the
Company was required to raise $2,000,000 in equity. This requirement was
satisfied with the sale of $2,500,000 of equity securities, (during the 1996
Private Placement). Maximum borrowings available under this Replacement Loan,
subject to borrowing base restrictions, are $4,500,000. As of December 31, 1996
the Company owed $1,592,453 under this facility. Interest is accrued at a rate
of prime plus one percent on this lending agreement. The Interest rate in effect
at December 31, 1996 was 8.5%. Interest expenses incurred in connection with the
Replacement Loan was $86,660.
The Replacement Loan Agreement granted the bank a security interest in the
Company's accounts receivable and inventory. In addition, under this agreement
the Company is restricted from paying any dividends to its shareholders.
Concurrently with RYKA, KPR closed a Replacement Loan with the same lender. On
November 8, 1996 the bank notified KPR that it was in default of certain
financial covenants, specifically the debt to net worth ratio and required
tangible net worth, and certain provisions relating to financial information.
RYKA satisfied its financial covenants and is not in default of its loan with
the Replacement Lender.
On February 7, 1997 the Company entered into an agreement to modify the
Replacement Loan dated August 15, 1996 in anticipation of a complete refinancing
of the Company's obligation which was required to occur by March 31, 1997. The
terms of the modification called for an acceleration of the termination date to
March 31, 1997. Coincident with the signing of this agreement, KPR entered into
a Forbearance and Amendment Agreement with its lender. The terms of this
modification place certain additional financial covenants on KPR, and
accelerated the termination of KPR's Facility to March 31, 1997. The complete
refinancing of the Company's obligation was not successfully completed by March
31, 1997. On June 4, 1997, the Company and KPR obtained an extension of their
credit facilities to November 30, 1997 to allow the Company and KPR to continue
to attempt to obtain new financing. The terms of the extension modified the
original replacement loan agreement by increasing the interest rate to prime
plus 3 1/2%. Given the dependance of RYKA on certain support provided
by KPR, KPR's inability to obtain continued funding or additional funding for
its operations could adversely impact the ability of RYKA to continue in
business independent of KPR.
F - 16
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE F - INCOME TAXES
For the years ended December 31, 1996, 1995 and 1994 the Company had no
provision for income taxes. The components of the net deferred tax assets at
December 31, 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred Assets $ 63,050 $ 39,088
Inventory 28,355 23,029
Provision for doubtful accounts 7,261,457 7,042,668
Net operating loss carryforwards (125,985) 39,776
----------- -----------
Gross deferred tax asset 7,226,877 7,144,561
Valuation allowance (7,226,877) (7,144,561)
---------------------------
Net deferred tax asset $ - $ -
============= ===========
</TABLE>
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets. As of December
31, 1996 the Company had available net operating loss carryforwards of
approximately $ 19,235,000 which expire in the years beginning 2002 through
2011. The use of net operating loss carryforwards may be subject to annual
limitations based on ownership changes of the Company's stock, as defined by
Section 382 of the Internal Revenue Code of 1986.
NOTE G - PROPERTY
Major classes of property, at cost, are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Equipment $ 423,171 $ 364,969
Leasehold Improvements $ 7,957 $ 7,407
--------- ---------
$ 431,128 $ 372,376
Less accumulated depreciation and amortization (236,313) (177,293)
--------- ---------
$ 194,815 $ 195,083
========= =========
</TABLE>
The Company relocated in August, 1995. As a result of the relocation the Company
abandoned leasehold improvements which had an original cost of $25,066 and a net
book value of $1,966, and terminated leases for equipment under capital leases
which had an original cost of $85,852 and a net book value of $1,683.
F - 17
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE H - COMMITMENTS AND CONTINGENCIES
. LEGAL PROCEEDINGS
The Company is involved in various routine litigation, including litigation in
which the Company is a plaintiff, incident to its business. The Company believes
that the disposition of the routine litigation will not have a material adverse
effect on the financial position or results of operations of the Company.
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
. LETTERS OF CREDIT
As of December 31, 1996 the Company had $ 157,804, of outstanding letters of
credit.
NOTE I - EQUITY
The Company is authorized to issue up to 1,000,000 shares of preferred Stock,
$.01 par value. The Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights. No preferred
stock has been issued as of December 31, 1996.
During September through November 1994, the Company raised a total of
$1,174,537, net of offering costs of $218,896, through the sale of 2,555,795
shares of Common Stock in an unregistered offering to overseas investors.
During 1995 and 1996, the Company was party to several equity transactions as
more fully described in Note C.
In connection with the Agreement, as described in Note C, the Company offered
for sale, through a private placement, (the 1995 Private Placement), 4,000,000
shares of Common Stock The results of the 1995 private placement were as
follows:
<TABLE>
<CAPTION>
Cumulative Cumulative
Shares Placed Proceeds Received
------------- -----------------
<S> <C> <C>
At closing 3,020,000 $ 255,000
========= ==========
At December 31, 1995 3,520,000 $ 880,000
========= ==========
At December 31, 1996 4,000,000 $1,000,000
========= ==========
</TABLE>
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 Agreement, the Company will be
required to remit to the investors $5,000 and warrants to purchase 40,000 shares
for each month such registration statement does not become effective, up to a
maximum reduction in stock proceeds of $100,000 and additional issuance of
800,000 shares of Common Stock. The registration was not accomplished within the
120 day period, however, at December 31, 1996 and 1995 waivers were received
from some of the participants in the private placement related to the provisions
requiring a $5,000 per month remittance. The remaining participants were issued
warrants. (Refer to Note K for details). Accordingly, at December 31, 1996 and
1995, $35,000 and $150,000, respectively, of the proceeds have been classified
as other liabilities.
From the date of the Agreement until completion of the private placement, the
Company's Chairman and Chief Executive Officer provided a subordinated bridge
loan to the Company.
F - 18
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE I - EQUITY - CONTINUED
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. This
amount has been recorded as Bridge Loan Payable on the Balance Sheet at December
31, 1995. As of December 31, 1995, a total of 480,000 shares were not yet sold
to investors. At March 31, 1996 the remaining 480,000 shares were 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 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.
In May, 1996, the Company's Board of Directors, through the 1996 Private
Placement, authorized the sale of 10,000,000 shares of the Company's Common
Stock which were placed during the second and third quarters of 1996.
On April 21, 1997 the Company sold 2,500,000 shares of the Company's Common
Stock for $750,000 to certain investors. The Proceeds from this sale were used
to repay $385,000 of the Subordinated Note Payable and to enable the Company to
open $810,000 in Letter of Credit agreements for the benefit of KPR.
In October, 1996, the Company filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission to register the shares placed in the 1995
Private Placement, 1996 Private Placement as well as the securities held by
others who were granted piggy-back registration rights. Management believes that
such Registration Statement is expected to become effective in the end of
1997 after the Reorganization Agreement is declared effective.
NOTE J-STOCK OPTIONS
Pursuant to option grant letters, but not pursuant to any formal plan ("Non-Plan
Grants"), the Company has issued options to certain individuals to purchase
shares of the Company's Common Stock at prices which approximated fair market
value at the date of grant. The options vest at various times over periods
ranging up to four years and, if not exercised, expire up to ten years after the
date of grant.
The Company also has eight separate stock option plans (the "Plans"). Under the
terms of the 1987 Stock Option Plan, 1988 Stock Option Plan, 1990 Stock Option
Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option Plan,
1996 Stock Option Plan and 1995 Non-employee Directors Plan, the Company may
grant qualified and nonqualified options to purchase up to 626,421, 350,000,
750,000, 875,000, 900,000, 1,500,000, 2,000,000 and 250,000 shares of Common
Stock, respectively, to employees, Directors and consultants of the Company. The
options vest at various times over periods ranging up to five years. All options
have been granted at not less than fair market value of the Common Stock as of
the date of grant. The options, if not exercised, expire up to 10 years after
the date of grant.
F - 19
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE J- STOCK OPTIONS-CONTINUED
<TABLE>
<CAPTION>
Number of Shares
------------------------------------------------------------------------------------------------------------
Weighted
Non- Average
Non-Plan 1987 1988 1990 1992 1993 1995 1996 employee Price of Exercise
Grants Plan Plan Plan Plan Plan Plan Plan Directors Shares Price
-------- ------- ------- ------- ------- ------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1993 93,321 265,746 142,986 338,500 706,567 532,000 $0.25-$1.31 $0.80
Granted 250,000 67,000 120,000 675,000 350,000 $0.55-$1.06 $0.65
Exercised 7,335 163,000 25,840 1,000 $0.25-$0.65 $0.31
Cancelled 25,000 50,000 3,300 120,000 508,000 7,500 $0.56-$1.25 $1.16
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31, 1994 318,321 282,746 132,351 175,500 847,727 873,500 $0.25-$1.31 $0.66
Granted 100,000 10,000 1,200,000 $0.25-$0.47 $0.45
Exercised 20,000 2,500 18,500 $ 0.25 $0.25
Canceled 2,000 11,000 9,167 22,000 $0.25-$0.84 $0.64
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31, 1995 416,321 251,746 129,851 157,000 838,560 861,500 1,200,000 $0.25-$1.31 $0.60
Granted 13,000 10,500 3,500 10,500 37,500 300,000 670,000 25,000 $0.20-$0.47 $0.36
Exercised
Canceled 100,000 $0.25-$0.84 $0.34
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31, 1996 416,321 264,746 140,351 160,500 849,060 899,000 1,400,000 670,000 25,000 $0.20-$1.31 $0.55
======= ======= ======= ======= ======= ======= ========= ======= ========= =========== =======
</TABLE>
During August 1996, in connection with a termination of employment of an officer
of the company, the Company elected to accelerate the vesting of certain
employee stock options amounting to 625,000 shares, so that these shares became
fully vested at the time of termination. Further in connection with this
termination, the Company granted the former officer stock options vesting
immediately to purchase an additional 500,000 shares of stock at $.47 per share.
As part of the terms of the agreement the former officer was engaged to act as a
consultant for a term of three years. The expense associated with those warrants
was recorded in 1996, and is included in general and Administrative expenses.
The Company accounts for the Plans in accordance with Accounting Principles
Board Opinion No.25, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the Plans been determined
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock - Based Compensation" (SFAS123), the Company's pro forma net loss and
loss per share for 1995 and 1996 would have been as follows:
<TABLE>
<CAPTION> Pro
Reported Forma
------------- ----------
<S> <C> <C>
1996 Net Loss $ 1,879,757 $ 1,929,257
1996 Net Loss per share $.04 $.04
1995 Net Loss $ 3,629,477 $ 3,645,577
1995 Net Loss per share $.10 $.10
</TABLE>
The weighted average fair value of the stock options during
1996 and 1995 were $.09 and $.02 respectively.
The fair value of options granted under the Plans during 1995 and 1996 was
estimated on the date of grant using the Black - Scholes option pricing model
with the following weighted average assumptions used:
. no dividend yield
. expected volatility of 35%
. risk free interest rate of between 5.64% and 7.84%
. expected lives of 7 years
F-20
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE K - COMMON STOCK PURCHASE WARRANTS
In addition to the Common Stock Purchase Warrants mentioned in Notes C and J,
the following warrants were outstanding at December 31, 1996.
In connection with the provisions of an investment banking agreement in 1994,
the Company issued warrants that entitle the investment banking firm to purchase
50,000 shares of Common Stock at a price of $.60 per share. These warrants will
expire on January 3, 2004.
In connection with an unregistered overseas offering of the Company's Common
Stock during 1994, the Company issued warrants to a placement agent to purchase
a total of 150,000 shares of Common Stock at an exercise price of $1.00 per
share. These warrants will expire on September 13, 1997.
In connection with a bridge financing composed of two short term notes of
$150,000 each during July 1994, the Company issued warrants to purchase a total
of 30,000 shares of Common Stock, as adjusted to a total of 38,031 shares based
upon the terms of each of the warrants, at an exercise price of $0.8125 per
share. If not exercised, 19,569 of these warrants will expire on July 14, 1999
and 18,462 will expire on July 25, 1999.
During 1995, the principal lender received 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 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.
On April 30, 1996 and May 15, 1996 in connection with the requirement, and
subsequent failure to register a total of 2,000,000 shares issued in connection
with the 1995 Private Placement, the Company committed to issue to two investors
warrants to purchase 20,000 shares each of RYKA common stock for each month that
the registration of the shares is not accomplished beyond the required 120 day
period. The warrants have an exercise price of $.25 and expire in ten years
from issuance. At December 31, 1996, 520,000 of such warrants had been awarded.
The value of these warrants, which were issued in return for forgiveness of
other liabilities due as a result of the failure to register the shares, has
been recorded as an equity transaction.
On May 22, 1996 RYKA settled a patent infringement with a patent holder in
exchange for warrants to purchase 250,000 shares of Common Stock at $.265 a
share, and $75,000 payable over a three year period. This settlement granted
RYKA and affiliated companies a license to manufacture shoes using the patented
technology. The license agreement releases RYKA and affiliated companies (owned
100% by MR under the YUKON and APEX brands) a release from all past, existing
and future claims. The cost of the license included the value assigned to the
warrants issued to the patent holder.
NOTE L - SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's sales and accounts receivable are primarily with national chain
stores. Sales to key customers each amounting to in excess of 10% are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Customer 1 15% * 16%
Customer 2 12% * *
Customer 3 * 20%
Customer 4 * 10%
Customer 5 * 10%
Customer 6 * * 25%
</TABLE>
* Accounted for less than 10% of total revenues in a given year.
At December 31, 1996 accounts receivable for a significant customer amounted to
approximately $725,000 with the top three customers accounting for $1,039,476.
F-21
<PAGE>
RYKA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE L - SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK-CONTINUED
Accounts receivable for three significant customers at December 31, 1995
amounted to $323,000. Accounts receivable for three significant customers at
December 31, 1994 was $1,600,000 of which $676,000 was secured by letter of
credit and the remaining $924,000 purchased by a Factor without recourse.
NOTE M - ECONOMIC DEPENDENCY - MAJOR SUPPLIER
During 1996 the Company purchased substantially all its finished goods inventory
from one supplier. At December 31, 1996 the amount due to that supplier
included in accounts payable was approximately $407,000.
NOTE N - SPECIAL CHARGES
. EQUITY INCENTIVE PLAN
Included in special charges in 1996 is $152,715 of costs related to a "Partners
Share Success" Equity Incentive Plan implementation. This plan was canceled.
. REORGANIZATION
In connection with the Transaction described in Note C, the related closing of
the Massachusetts facility, and relocation of operations to Pennsylvania, the
Company incurred the following special charges in the year ended December 31,
1995.
<TABLE>
<CAPTION>
<S> <C>
Professional fees and bank fees related to new credit facility,
including value of warrant to bank $233,231
Temporary housing costs for relocated personnel 21,851
Recruitment and relocation costs related to new management and 76,318
personnel
Start-up and moving costs related to King of Prussia, PA warehouse 48,034
and office --------
$379,434
========
</TABLE>
NOTE O - CONTINGENT STOCK OPTIONS AND WARRANTS
The Board of Directors of RYKA on March 9, 1997 authorized the issuance of
options to certain employees of KPR and RYKA and certain warrants to athletes
sponsoring or endorsing the Apex brand for KPR, to purchase shares of the
Company's Common Stock. The issuance of these options is contingent upon the
consummation of the Merger between Ryka and KPR . The exercise price for these
options will be the fair market value of the stock at the time of the Merger. A
summary of such contingent options is as follows:
<TABLE>
<CAPTION>
Options Warrants
--------- ---------
<S> <C> <C>
KPR Employees 530,000 -
RYKA Employees 930,000 -
KPR Athletes N/A 3,200,000
--------- ---------
1,460,000 3,200,000
========= =========
</TABLE>
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf on June 30, 1997 by the undersigned thereunto duly authorized.
RYKA INC.
By: /s/ Michael G. Rubin
--------------------
Michael G. Rubin,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 30, 1997.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ Michael G. Rubin Chairman and Chief Executive Officer June 30, 1997
- -------------------------
Michael G. Rubin
/s/ Steven A. Wolf Chief Financial Officer June 30, 1997
- -------------------------
Steven A. Wolf
/s/ Kenneth J. Adelberg Director June 30, 1997
- -------------------------
Kenneth J. Adelberg
</TABLE>
<PAGE>
EXHIBIT 3.1-B
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF THE COMPANY
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "RYKA INC.", FILED IN THIS OFFICE ON THE EIGHT DAY OF JULY, A.D. 1996, AT
4:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL APPEARS HERE]
/s/ Edward J. Freel
-------------------------------
Edward J. Freel, Secretary of State
2101594 AUTHENTICATION: 8019444
960199378 DATE: 07-09-96
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
RYKA INC.
The undersigned, a corporation duly organized and existing under the laws
of the State of Delaware, in accordance with the provisions of Section 242 of
Title 8 of the Delaware Code, does hereby certify:
1. The name of the Corporation as it appears on the records of the
Secretary of State of Delaware is RYKA INC. (the "Corporation").
2. The date of incorporation of the Corporation is September 15, 1986.
3. Article Four of the Certificate of Incorporation of the Corporation is
hereby amended to read in its entirety as follows:
"The total number of shares of stock which the corporation shall have
authority to issue is ninety-one million (91,000,000), consisting of
ninety million (90,000,000) shares of Common Stock, $.01 par value per
share, and one million (1,000,000) shares of Preferred Stock, $.01 par
value per share.
The designations and powers, rights and preferences and the
qualifications, limitations or restrictions with respect to each class
of stock of the corporation shall be determined by the Board of
Directors from time to time."
4. The amendment has been adopted by the board of directors of the
Corporation and approved by the shareholders of the Corporation in accordance
with the provisions of Section 242(b) (1) of Title 8 of the Delaware Code.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed on its behalf as of this 8th day of July, 1996.
RYKA INC,
By: /s/ Michael G. Rubin
-------------------------------
Michael G. Rubin, President
Attest: /s/ Steven A. Wolf
---------------------------
Steven A. Wolf, Secretary
2
<PAGE>
EXHIBIT 10.12
KEY EMPLOYEE TERMINATION AGREEMENT
FOR SHERI POE
<PAGE>
KEY EMPLOYEE TERMINATION AGREEMENT
----------------------------------
This Key Employee Termination Agreement made as of the 3rd day of August,
1996 by and between RYKA Inc., a Delaware corporation ("RYKA") and Sheri Poe, an
individual resident of the Commonwealth of Massachusetts ("Poe").
W I T N E S S E T H:
WHEREAS, Poe is presently employed by RYKA pursuant to a Key Employee
Agreement ("Employment Agreement") dated on or about August 1, 1995 as a founder
and spokesperson and is a member of RYKA's board of directors ("Board") and the
special committee ("Special Committee") evaluating the proposed merger of RYKA
and KPR Sports International, Inc. ("KPR"); and
WHEREAS, RYKA and Poe have reached an understanding pursuant to which Poe's
employment would be terminated and Poe would become a consultant to RYKA, all
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Termination of Employment - Effective as of August 3, 1996, Poe's
-------------------------
Employment Agreement is hereby terminated and neither party shall have any
further obligation to comply with any of the terms and conditions set forth
in the Employment Agreement, except as hereinafter specifically set forth.
The parties acknowledge that this is a termination pursuant to Section
2.2(d) of the Employment Agreement; provided however, that notwithstanding
anything contained in such section of the Employment Agreement, there shall
be no obligation to pay any of the sums mentioned therein, such obligation
being replaced by the consideration referred to in this Agreement.
2. Resignation as Director - Effective immediately, Poe hereby resigns as a
-----------------------
director of the Board, as a member of the Special Committee and, to the
extent applicable, as an officer of RYKA.
3. Releases - A. For and in consideration of the agreements and covenants
--------
hereinafter set forth, Poe hereby releases and discharges RYKA, its
affiliates, parents, successors, predecessors, subsidiaries, assigns,
employees, officers and directors (hereinafter collectively referred to as
"Company") from all claims and/or causes of action, known or unknown, which
Poe may have or claim to have against the Company arising from or during
her employment or as a result of the
<PAGE>
termination of her employment or arising as a result of her relationship
with the Company pursuant to the Employment Agreement or as a result of the
termination of such Employment Agreement and Poe further agrees not to
institute suit against the Company on any such claim or cause of action.
This release includes but is not limited to the claims arising under
federal, state or local laws prohibiting employment discrimination based
upon age, race, sex, religion, national origin or any other impermissible
characteristic, including, but not limited to, any and all claims arising
under the Age Discrimination and Employment Act and Title VII of the Civil
Rights Act of 1964, on claims growing out of any legal restrictions,
expressed or implied, or the Company's rights to terminate the employment
of its employees. Poe further acknowledges that notwithstanding anything
contained in this agreement to the contrary, Poe shall continue to be bound
by Exhibit "C" (Proprietary Information and Inventions Agreement) to the
Employment Agreement. Notwithstanding anything contained herein to the
contrary, this release shall not be deemed to release RYKA from any claim
for indemnification that Poe have arising from any suit brought against her
by any third party as a result of her acting as an officer, director or
employee of RYKA.
B. For and in consideration of the agreements and covenants
hereinafter set forth, RYKA hereby releases Poe, her heirs, executors,
administrators and assigns from any claims and/or causes of action, known
or unknown, which RYKA may have or claim to have against Poe arising from
or during her employment by RYKA, or otherwise arising from her
relationship with RYKA.
4. Consultant Arrangement
----------------------
A. RYKA hereby engages Poe to act as a consultant and endorser of RYKA
products for a term of three (3) years commencing on August 3, 1996 and
terminating on August 2, 1999. In this capacity, Poe shall be available to
RYKA to perform those functions as RYKA may reasonably request in
connection with the endorsement and the promotion of RYKA products. During
the term of this Agreement,and subject to the last sentence of this
paragraph A, Poe grants to RYKA the right to use her name and likeness in
connection with the promotion of RYKA products. In addition, Poe shall be
available to RYKA 1) twenty (20) days during each year of this agreement
and, 2) in addition thereto, shall appear on RYKA's behalf at the annual
NSGA, SGMA and IDEA shows; provided however, Poe shall not be required to
"be available" to RYKA more than three consecutive business days, nor more
than five business days in any two week period and provided further, RYKA
shall give Poe reasonable notice (for which the parties' agree one week is
reasonable) of any engagements which require
2
<PAGE>
her to travel overnight.
B. In consideration of this Agreement and for the services to be rendered
by Poe hereunder, RYKA shall pay Poe an annual consultant's fee during the
first year of this Agreement of Sixty Thousand ($60,000.00) Dollars and
Fifty Thousand ($50,000.00) Dollars during each of the second and third
years of this agreement. Such compensation shall be paid in twelve (12)
equal monthly installments, in advance, on the first day of each month
during the term of this Agreement.
C. RYKA shall reimburse Poe for all reasonable business expenses incurred
by Poe in connection with the performance of her duties hereunder and for
which Poe submits acceptable supporting documentation. Poe may request RYKA
to book any "major" travel expenses for her such as hotels and airlines.
D. During the term of this agreement, Poe shall make available to RYKA for
promotional purposes her name and picture on RYKA materials, product or
point of purchase display.
E. It is expressly agreed that Poe is an independent contractor in the
performance of her services hereunder and shall be responsible for payment
of all federal, state and local taxes related to the performance of her
services hereunder.
F. Poe shall be permitted to engage in any other business during the time
hereof and to perform services for any third party or for its own benefit;
provided, however, that Poe agrees that during the term of this agreement
she shall not consult with any other parties in the "athletic footwear"
industry or considering entering the athletic footwear industry.
G. Poe acknowledges that the restrictions contained in Exhibit "C" of her
Employment agreement shall remain in full force and effect and continue to
be applicable hereafter. Poe further acknowledges that her obligations
thereunder shall survive the expiration or termination of this agreement.
Poe acknowledges that a remedy of law for any breach or threatened breach
of the provisions of this section would be inadequate and Poe, therefore,
agrees that RYKA shall be entitled to such injunctive relief in case of any
such breach or threatened breach. In addition, RYKA would be entitled to
an award of attorneys fees and court costs in connection with such matter.
H. During the first year of this Agreement, RYKA shall maintain Poe's
health insurance, life insurance and disability insurance as Poe was
receiving as an employee of RYKA immediately prior hereto. Thereafter, RYKA
shall have no
3
<PAGE>
obligation to provide Poe with such benefits.
I. RYKA shall at all times maintain complete and absolute control over the
marketing of its product, the sources of materials and labor, outlets of
distribution, pricing, and any and all aspects , elements or conditions for
the production, sale, marketing or promotion of RYKA. RYKA agrees that
during the term of this Agreement if
1) RYKA should change the name of its women's athletic
shoes and market them under a name other than RYKA; or
2) RYKA should modify its marketing program in such a way
so that it is derogatory or insulting to women in any
way; or
3) RYKA markets its products in mass merchandise outlets
such as K-Mart, Target Stores or similar distributors;
or
4) its marketing program ceases to have as an important
element the encouragement of women's well being; or
5) any promotional material including proposed name,
picture or image represents Poe in unflattering light,
or is inconsistent with Poe's image and beliefs as a
supporter of women's well being, independence and
rights
then and in such event, Poe shall not be required to perform any more
services hereunder and Poe shall receive sixty thousand dollars
($60,000.00) less any payments she has already received pursuant to the
terms of this Agreement in full and final settlement of any amounts owed to
her hereunder.
J. In the event that RYKA shall fail to make the monthly payments due to
Poe pursuant to paragraph 4B hereof, within fifteen days of receipt of
written notice that such payment has not been made, then and in that event,
Poe shall have no further obligation to perform pursuant to paragraph 4A
hereof, however, RYKA shall continue to have the obligation to Poe set
forth in paragraph 4B above.
5. Existing Stock Options - The parties acknowledge that Poe presently has
----------------------
395,000 vested stock options and 625,000 unvested stock options. The
parties agree that those unvested stock options shall immediately vest and
shall be exercisable
4
<PAGE>
through the life of the option and at a strike price as set forth on
Exhibit "A" attached hereto and made a part hereof.
6. Restrictions - The parties confirm that any contractual restrictions on
------------
Poe's ability to sell her stock or exercise her options as contained in
paragraph 7 of the Employment Agreement are hereby terminated and declared
to be null and void and of no effect. This shall not relieve Poe from
complying with any applicable securities laws in the disposition of her
stock. RYKA shall furnish the transfer agent and any broker designated by
Poe with, as soon as reasonably possible, but in no event later than August
19, 1996 provided that the requesting broker submits appropriate
documentation no later than August 15,1996, a letter confirming that all
restrictions appearing on Poe's RYKA stock certificates referencing
contractual restrictions may be removed and opining as to Poe's right to
sell a certain number of shares under Rule 144. As soon as legally
permitted thereafter, RYKA shall provide the transfer agent an opinion
letter of counsel removing legends restricting the resale of shares under
the Securities Act of 1933.
7. Additional Stock Options - In addition to Poe's existing stock options, Poe
------------------------
is hereby granted three year options, which shall vest immediately, to
purchase an additional 500,000 shares of RYKA's common stock at an exercise
price per share of forty two cents ($0.42) per share. The parties
acknowledge that the price and number of shares set forth herein are based
upon the capitalization of RYKA as it exists on the date hereof and should
the capitalization of RYKA be changed (i.e., a split or reverse split), the
price and number of shares shall be adjusted accordingly.
With respect to Poe's existing stock options and the additional stock
options to be issued to Poe hereunder, RYKA shall use its best efforts to
maintain Form S-8 Registration covering such options.
8. 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.
9. Rights and Obligations - This Agreement and the rights and obligations of
----------------------
the parties hereto shall bind and inure to the
5
<PAGE>
benefit of any successor or successors of RYKA 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 RYKA,
neither this Agreement nor any rights or benefits hereunder may be assigned
by RYKA or by Poe except by operation of law or by further written
agreement of the parties hereto.
10. Interpretation - It is the intent of the parties in case of anyone 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 effect 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.
11. Notices - Any notice which RYKA is required to or may desire to give Poe
-------
shall be given by registered or certified mail, return receipt requested,
addressed to Poe at Poe's address of record with RYKA, or at such other
place as Poe may from time to time designate in writing, with a copy to
Joseph F. Mazzella, Esquire, Lane Altman & Owens L.L.P., 101 Federal
Street, Boston, Massachusetts, 02110. Any notice which Poe is required or
may desire to give to RYKA hereunder shall be given by registered or
certified mail, return receipt requested, addressed to RYKA at its
principal office, or at such other office as RYKA 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.
12. 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.
13. Complete Agreement - This Agreement contains the entire agreement of the
------------------
parties and may not be modified, except in writing, executed by all of the
parties hereto.
14. 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.
15. Counterparts - This Agreement may be signed in two (2) counterparts, each
------------
of which shall be deemed an original and both of which shall together
constitute one (1) Agreement.
6
<PAGE>
16. Governing Law - This Agreement shall be governed and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania.
17. Confidentiality - The parties agree to maintain the confidentiality of the
---------------
terms of this Agreement and further agrees that such terms cannot be
disclosed to any third party except to their respective professional
advisors and/or in connection with any litigation arising hereunder or in
connection with any public filing or disclosure required by
law to be made by RYKA.
18. Press Release - The parties agree to issue the press release attached
-------------
hereto as Exhibit "B".
IN WITNESS WHEREOF, RYKA has caused this Agreement to be executed and Poe
has placed her hand and seal hereto the date and year first above written.
RYKA INC.
[SIGNATURE ILLEGIBLE] BY: /s/ Steven A. Wolf
- --------------------------- -------------------------------
ATTEST
DATE: 8/26/96
----------------------
[SIGNATURE ILLEGIBLE] /s/ Sheri Poe
- --------------------------- ----------------------------------
WITNESS SHERI POE
DATE: 8/13/96
----------------------
7
<PAGE>
Sheri Poe
Stock Options
<TABLE>
<CAPTION>
Number of Strike Date
Plan Year Shares Price Granted Expiration
<S> <C> <C> <C> <C>
NP 250,000 $0.66 12/01/94 11/30/99
1993 150,000 $0.65 12/15/93 12/14/03
1993 100,000 $0.65 01/10/94 1/09/04
1993 20,000 $1.06 7/12/94 7/11/99
1993 500,000 $0.47 7/31/95 7/30/00
-----------
1,020,000
===========
</TABLE>
EXHIBIT "A"
<PAGE>
FOR RELEASE AT _________________ CONTACT: STEVEN A. WOLF
, 1996 Vice President
and Chief
Financial Officer
610-337-2200
or
SHERI POE
617-969-9933
RYKA AND SHERI POE ENTER INTO A NEW AGREEMENT
RYKA, INC. AND SHERI POE HAVE ENTERED INTO A NEW THREE YEAR ENDORSEMENT AND
CONSULTING AGREEMENT. UNDER THE NEW AGREEMENT, SHERI POE WILL NO LONGER SERVE AS
A MEMBER OF THE BOARD OF DIRECTORS AND AS A MEMBER OF THE SPECIAL COMMITTEE
EVALUATING THE PROPOSED MERGER BETWEEN RYKA AND KPR SPORTS INTERNATIONAL, INC.,
A CORPORATION WHOLLY-OWNED BY MICHAEL RUBIN, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER OF RYKA. MS. POE WILL CONTINUE TO BE INVOLVED WITH THE COMPANY'S
VARIOUS PROMOTIONAL ACTIVITIES, ATTENDING TRADE SHOWS AND EVENTS AND ENDORSING
RYKA ACTIVITIES, MS. POE WILL ALSO DEVELOP HER OWN BUSINESS ENTERPRISE INVOLVING
THE CONTINUING PROMOTION OF WOMEN'S WELL-BEING.
"IN 1987, AS A COMPANY FOUNDER, SHERI POE WAS A LEADER IN THE SPORTING
GOODS INDUSTRY FOCUSING ATTENTION OF THE WOMEN'S MARKET BY ESTABLISHING THE
FIRST AND ONLY ATHLETIC FOOTWEAR COMPANY EXCLUSIVELY FOR WOMEN. HER CONTINUED
CONTRIBUTION TO OUR COMPANY IS GREATLY VALUED BY OUR MANAGEMENT AND CUSTOMERS,"
STATED MICHAEL RUBIN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER.
ON JULY 8TH RYKA ANNOUNCED A PROPOSED MERGER WITH KPR. SUBJECT TO BOARD OF
DIRECTORS APPROVAL OF THE TRANSACTION BY THE SHAREHOLDERS OF RYKA AT A SPECIAL
MEETING, THE TRANSACTION IS EXPECTED TO BE CONSUMMATED IN DECEMBER, 1996.
RYKA IS A MANUFACTURER OF WOMEN'S HIGH PERFORMANCE ATHLETIC FOOTWEAR. KPR,
IN ADDITION TO SELLING OFF PRICE MERCHANDISE, ALSO MANUFACTURES AND SELLS RUGGED
OUTDOOR FOOTWEAR UNDER THE TRADENAME "YUKON", ATHLETIC FOOTWEAR UNDER THE
TRADENAME "APEX" AND LICENSES PRODUCTS FOR SALE UNDER THE TRADENAME "APEX".
RYKA IS A PUBLIC COMPANY TRADED ON THE OTC BULLETIN BOARD.
EXHIBIT "B"
<PAGE>
EXHIBIT 10.22
1996 EQUITY INCENTIVE PLAN
<PAGE>
RYKA INC.
1996 EQUITY INCENTIVE PLAN
________________________________________________________________________________
1. PURPOSE
The purpose of the RYKA Inc. Equity Incentive Plan (the "Plan") is to
promote the long-term retention of key employees of RYKA Inc., ("RYKA") and its
current and future subsidiaries (collectively, the "Company") and other persons
who are in a position to make significant contributions to the success of the
Company, to further reward these employees and other persons for their
contributions to the Company's growth and expansion, to provide additional
incentive to these employees and other persons to continue to make similar
contributions in the future, and to further align the interests of these
employees and other persons with those of SunGard's stockholders. These purposes
will be achieved by granting to such employees and other person, in accordance
with the provisions of this Plan, Options, Stock Appreciation Rights, Restricted
Stock or Unrestricted Stock Awards, Deferred Stock Awards or Performance Awards,
for shares of RYKA's common stock, $0.01 par value per share ("Common Stock"),
or Loans or Supplemental Grants, or combinations thereof ("Awards").
2. AGGREGATE NUMBER OF SHARES
2.1 The aggregate number of shares of Common Stock for which Awards may be
granted under the Plan will be 2,000,000 shares. Notwithstanding the foregoing,
if there is any change in the capitalization of RYKA, such as by stock dividend,
stock split, combination of shares, exchange of securities, recapitalization or
other event which the Compensation Committee (the "Committee") of the Board of
Directors (the "Board") of RYKA deems, in its sole discretion, to be similar
circumstances, the aggregate number and/or kind of shares for which Awards may
be granted under the Plan shall be appropriately adjusted in a manner determined
by the Committee. No fractional shares of Common Stock will be delivered under
the Plan.
2.2 Treasury shares, reacquired shares and unissued shares of Common Stock
may be used for purposes of the Plan, at RYKA's sole discretion.
2.3 Shares of Common Stock that were issuable pursuant to an Award that
has terminated but with respect to which such Award had not been exercised,
shares of Common Stock that are issued pursuant to an Award but that are
subsequently forfeited and shares of Common Stock that were issuable pursuant to
an Award that was payable in Common Stock or cash but that was satisfied in
cash, shall be available for future Awards under the Plan.
3. ELIGIBLE EMPLOYEES AND PARTICIPANTS
3.1 All current and future key employees of the Company, including
officers and directors who are employed by the Company, ("Employees") and all
other persons, including directors of the Company who are not Employees, who, in
the opinion of the Committee, are in a position to make a significant
contribution to the success of the Company, shall be eligible to receive Awards
under the Plan. Members of the Committee shall not be eligible to receive
Awards. No eligible Employee
<PAGE>
or other person (a "Participant") shall have any right to receive an Award
except as expressly provided in the Plan.
3.2 The Participants who shall actually receive Awards under the Plan
shall be determined by the Committee in its sole discretion. In making such
determinations, the Committee shall consider the positions and responsibilities
of eligible Employees and other persons, their past performance and
contributions to the Company's growth and expansion, the value of their services
to the Company, the difficulty of finding qualified replacements, and such other
factors as the Committee deems pertinent in its sole discretion.
4. ADMINISTRATION
4.1 The Plan shall be administered by the Committee. Each member of the
Committee shall be a "disinterest person" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Committee
may delegate all or any portion of its authority hereunder to a subcommittee
consisting of at least two Committee members. In addition to its other authority
and subject to the provisions of the Plan, the Committee shall have the
authority to determine, in its sole discretion, the Participants who shall be
eligible to receive Awards, the Participants who shall actually receive Awards,
the size of each Award, including the number of shares of Common Stock subject
to the Award, the type or types of each Award, the date on which each Award
shall be granted, the terms and conditions of each Award, whether to waive
compliance by a Participant with any obligations to be performed by the
Participant under an Award or waive any term or condition of an Award, whether
to amend or cancel an existing Award in whole or in part (except that the
Committee may not, without the consent of the holder of an Award or unless
specifically authorized by the terms of an Award, take any action under this
clause with respect to such Award if such action would adversely affect the
rights of such holder), and the form or forms of instruments that are required
or deemed appropriate under the Plan, including any written notices and
elections required of Participants.
4.2 The Committee may adopt such rules for the administration of the Plan
as it deems necessary or advisable, in its sole discretion. For all purposes of
the Plan, a majority of the members of the Committee shall constitute a quorum,
and the vote or written consent of a majority of the members of the Committee on
a particular matter shall constitute the act of the Committee on that matter.
The Committee shall have the exclusive right to construe the Plan and any Award,
to settle all controversies regarding the Plan or any Award, to correct defects
and omissions in the Plan and in any Award, and to take such further actions as
the Committee deems necessary or advisable, in its sole discretion, to carry out
the purpose and intent of the Plan. Such actions shall be final, binding and
conclusive upon all parties concerned.
4.3 No member of the Committee or the Board shall be liable for any act or
omission (whether or not negligent) taken or omitted in good faith, or for the
good faith exercise or any authority or discretion granted in the Plan to the
Committee or the Board, or for any act or omission of any other member of the
Committee or the Board.
4.4 All costs incurred in connection with the administration and operation
of the Plan shall be paid by the Company. Except for the express obligations of
the Company under the Plan and under Awards granted in accordance with the
provisions of the Plan, the Company shall have no liability with respect to any
Award, or to any Participant or any transferee of shares of Common
-2-
<PAGE>
Stock from any Participant, including, but not limited to, any tax liabilities,
capital losses, or other costs or losses incurred by any Participant or any such
transferee.
5. TYPES OF AWARDS
5.1 Options.
(a) An Option is an Award entitling the recipient on exercise thereof to
purchase Common Stock at a specified exercise price. Both "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") (any Option intended to qualify as an incentive stock
option is hereinafter referred to as an "ISO"), and Options that are not
incentive stock options ("non-ISO"), may be granted under the Plan. ISOs shall
be awarded only to Employees.
(b) The exercise price of any Option will be determined by the Committee
subject to the following:
(1) The exercise price of an ISO shall not be less than 100% (110% in
the case of an ISO granted to a ten percent shareholder) of the fair market
value of the Common Stock subject to the ISO, determined as of the time the
Option is granted. A "ten-percent shareholder" is any person who at the time of
grant owns, directly or indirectly, or is deemed to own by reason of the
attribution rules of Section 424(d) of the Code, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company or of
any of its subsidiaries.
(2) The exercise price of a non-ISO shall not be less than 100% of
the fair market value of the Common Stock subject to the non-ISO, determined as
of the time the non-ISO is granted, except that:
(A) the exercise price of a non-ISO may be equal to or greater
than 85% of the fair market value of the Common Stock subject to the non-ISO, if
the discount is granted in lieu of a reasonable amount of cash compensation; or
(B) the exercise price of a non-ISO granted pursuant to a
Performance Award may be (i) 100% of the fair market value of the Common Stock
subject to the non-ISO, determined either as of the time Performance Award is
granted or as of the time the non-ISO is granted pursuant to the Performance
Award; or (ii) an amount less than such fair market value if the discount is
granted in lieu of a reasonable amount of cash compensation as consideration for
exceeding the goals(s) set forth in the Performance Award.
(3) In no case may the exercise price paid for Common Stock which is
part of an original issue of authorized Common Stock be less than the par value
per share of the Common Stock.
(4) The Committee may reduce the exercise price of any option at any
time after the time of grant, but in the case of an Option originally awarded as
an ISO, only with the consent of the Participant.
-3-
<PAGE>
(c) The period during which an Option may be exercised will be determined
by the Committee, except that the period during which an ISO may be exercised
will not exceed ten years (five years, in the case of an ISO granted to a
ten-percent shareholder) from the day immediately preceding the date the Option
was granted.
(d) An Option will become exercisable at such time or times, and on such
terms and conditions, as the Committee may determine. The Committee may at any
time accelerate the time at which all or any part of the Option may be
exercised. Any exercise of an Option must be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (i) any documents
required by the Committee and (ii) payment in full in accordance with Section
5.1(e) below for the number of shares for which the Option is exercised.
(e) Stock purchased on exercise of an Option must be paid for as follows:
(i) in cash or by check (acceptable to RYKA in accordance with guidelines
established for this purpose), bank draft or money order payable to the order of
RYKA or (ii) if so permitted by the instrument evidencing the Option (or in the
case of an Option which is not an ISO, by the Committee at or after grant of the
Option), (A) through the delivery of shares of Common Stock which have been
outstanding for at least six months (unless the Committee expressly approves a
shorter period) and which have a fair market value on the last business day
preceding the date of exercise at least equal to the exercise price, or (B) by
delivery of a promissory note of the Option holder to RYKA, payable on such
terms and conditions as the Committee may determine, or (C) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to
RYKA sufficient funds to pay the exercise price, or (D) by any combination of
the permissible forms of payment; provided, that if the Common Stock delivered
upon exercise of the Option is an original issue of authorized Common Stock, at
least so much of the exercise price as represents the par value of such Common
Stock must be paid other than by the Option holder's promissory note.
(f) If the market price of shares of Common Stock subject to an Option
(other than an Option which is in tandem with a Stock Appreciation Right as
described in Section 6.2 below) exceeds the exercise price of the Option at the
time of its exercise, the Committee may cancel the Option and cause RYKA to pay
in cash or in shares of Common Stock (at a price per share equal to the fair
market value per share) to the person exercising the Option an amount equal to
the difference between the fair market value of the Common Stock which would
have been purchased pursuant to the exercise (determined on the date the Option
is canceled) and the aggregate exercise price which would have been paid. The
Committee may exercise its discretion to take such action only if it has
received a written request from the person exercising the Option, but such a
request will not be binding on the Committee.
5.2 Stock Appreciation Rights.
(a) A Stock Appreciation Right is an Award entitling the recipient on its
exercise to receive an amount, in cash or Common Stock or a combination thereof
(such form to be determined by the Committee), determined in whole or in part by
reference to appreciation in Common Stock value. In general, a Stock
Appreciation Right entitles the Participant to receive, with respect to each
share of Common Stock as to which the Right is exercised, the excess of the
share's fair market value on the date of exercise over its fair market value on
the date the Right was granted. However, the Committee may provide at the time
of grant that the amount the recipient is entitled to receive will be adjusted
upward or downward under rules established by the Committee to take into account
-4-
<PAGE>
the performance of the Common Stock in comparison with the performance of other
stocks or an index or indices of other stocks. The Committee may also grant
Stock Appreciation Rights that provide that following a Change in Control of the
Company (as defined in Section 6.3(b)) the holder of such Right will be entitled
to receive, with respect to each share of Common Stock subject to the Right, an
amount equal to the excess of a specified value (which may include an average of
values) for a share of Common Stock during a period preceding such Change in
Control over the fair market value of a share of Common Stock on the date the
Right was granted.
(b) Stock Appreciation Rights may be granted in tandem with, or
independently of, Options granted under the Plan. A Stock Appreciation Right
granted in tandem with an Option that is not an ISO may be granted either at or
after the time the Option is granted. A Stock Appreciation Right granted in
tandem with an ISO may be granted only at the time the Option is granted.
(c) When Stock Appreciation Rights are granted in tandem with Options, the
following rules will apply:
(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is exercisable and
will be exercisable in accordance with the procedure required for exercise of
the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except that
a Stock Appreciation Right granted with respect to less than the full number of
shares covered by an Option will not be reduced until the number of shares as to
which the related Option has been exercised or has terminated exceeds the number
of shares not covered by the Stock Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only with the
related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the market price of the Stock subject to the Option exceeds
the exercise Price of such option.
(d) A Stock Appreciation Right not granted in tandem with an Option will
become exercisable at such time or times, and on such terms and conditions, as
the Committee may specify. The Committee may at any time accelerate the time at
which all or any part of the Right may be exercised. Any exercise of an
independent Stock Appreciation Right must be in writing, signed by the proper
person and delivered or mailed to RYKA, accompanied by any other documents
required by the Committee.
5.3 Restricted and Unrestricted Stock.
(a) A Restricted Stock Award entitles the recipient to acquire, for a
purchase price not less than the par value, shares of Common Stock subject to
the restrictions described in Section 5.3(d) ("Restricted Stock").
-5-
<PAGE>
(b) A Participant who is granted a Restricted Stock Award shall have no
rights with respect to such Award unless the Participant accepts the Award by
written instrument delivered or mailed to RYKA accompanied by payment in full of
the specified purchase price, if any, of the shares covered by the Award.
Payment may be by certified or bank check or other instrument acceptable to the
Committee.
(c) A Participant who receives Restricted Stock shall have all the rights
of a stockholder with respect to such stock, including voting and dividend
rights, subject to the restrictions described in 5.3(d) and any other conditions
imposed by the Committee at the time of grant. Unless the Committee otherwise
determines, certificates evidencing shares of Restricted Stock will remain in
the possession of the Company until such shares are free of all restrictions
under the Plan.
(d) Except as otherwise specifically provided by the Plan or the Award,
Restricted Stock may not be sold, assigned, exchanged, pledged, gifted or
otherwise disposed of, or transferred, and if a Participant suffers a Status
Change (as defined in Section 6.1) for any reason, must be offered to RYKA for
purchase for the amount of cash paid for such stock, or forfeited to the Company
if no cash was paid. These restrictions will lapse at such time or times, and on
such terms and conditions, as the Committee may determine. The Committee may at
any time accelerate the time at which the restrictions on all or any part of the
shares will lapse.
(e) Any Participant making, or required by an Award to make, an election
under Section 83(b) of the Code with respect to Restricted Stock shall deliver
to RYKA, within ten days of the filing of such election with the Internal
Revenue Service, a copy of such election.
(f) The Committee may, at the time any Award described in this Section 5
is granted, provide that any or all the Common Stock delivered pursuant to the
Award will be Restricted Stock.
(g) The Committee may, in its sole discretion, approve the sale to any
Participant of shares of Common Stock free of restrictions under the Plan for a
price which is not less than the par value of the Common Stock.
5.4. Deferred Stock. A Deferred Stock Award entitles the recipient to
receive shares of Common Stock to be delivered in the future. Delivery of the
Common Stock will take place at such time or times, and on such terms and
conditions, as the Committee may determine. The Committee may at any time
accelerate the time at which delivery of all or any part of the Common Stock
will take place. At the time any Award described in this Section 5 is granted,
the Committee may provide that, at the time Common Stock would otherwise be
delivered pursuant to the Award, the Participant will instead receive an
instrument evidencing the Participant's right to future delivery of Deferred
Stock.
5.5. Performance Awards. A Performance Award entitles the recipient to
receive, without payment, an Award or Awards described in this Section 5 (such
form to be determined by the Committee) following the attainment of such
performance goals, during such measurement period or periods, and on such other
terms and conditions, all as the Committee may determine. Performance goals may
be related to personal performance, corporate performance, group or departmental
performance or any such other category of performance as the Committee may
determine. The Committee shall have the authority to determine the performance
goals, the period
-6-
<PAGE>
or period during which performance is to be measured and all other terms and
conditions applicable to the Award.
5.6. Loans and Supplemental Grants.
(a) The Company may make a loan to a Participant ("Loan"), either in
connection with the purchase of Common Stock under the Award or the payment of
any Federal, state and local income tax with respect to income recognized as a
result of the Award. The Committee shall have the authority, in its sole
discretion, to determine whether to make a Loan, the amount, terms and
conditions of the Loan, including the interest rate (which may be zero), whether
the Loan is to be secured or unsecured or with or without recourse against the
borrower, the terms on which the Loan is to be repaid and the terms and
conditions of the Loan is to be repaid and the terms and conditions, if any,
under which the Loan may be forgiven. In no event shall any Loan have a term
(including extensions) in excess of ten years.
(b) In connection with any Award, the Committee may, grant a cash award
to the Participant ("Supplemental Grant") not to exceed an amount equal to (i)
the amount of any Federal, state and local income tax on ordinary income for
which the Participant may be liable with respect to the Award, determined by
assuming taxation at the highest marginal rate, plus (ii) an additional amount
on a grossed-up basis intended to make the Participant whole on an after-tax
basis after discharging all the Participant's income tax liabilities arising
from all payments under this Section 5. Any payments under this Section 5(b)
shall be made at the time the Participant incurs Federal income tax liability
with respect to the Award.
6. EVENTS AFFECTING OUTSTANDING AWARDS
6.1. Termination of Service by Death or Disability. If a Participant who
is an Employee ceases to be an Employee, or if there is a termination of the
consulting, service or other relationship in respect of which a non-Employee
Participant was granted an Award under the Plan (such termination of employment
or other relationship referred to as a "Status Change") by reason of death or
permanent disability (as determined by the Committee), the following rules shall
apply, unless otherwise determined by the Committee:
(a) All Options and Stock Appreciation Rights held by the Participant at
the time of such Status Change, to the extent then exercisable, will continue to
be exercisable by the Participant's heirs, executor, administrator or other
legal representative, for a period of one year after the Participant's Status
Change. After the expiration of such one-year period, all such Options and Stock
Appreciation Rights shall terminate. In no event, however, shall an Option or
Stock Appreciation Right remain exercisable beyond the latest date on which it
could have been exercised without regard to this Section 6. All Options and
Stock Appreciation Rights held by a Participant at the time of such Status
Change that are not then exercisable shall terminate upon such Status Change.
(b) All Restricted Stock held by the Participant at the time of such
Status Change shall immediately become free of all restrictions and conditions.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award or Supplemental Grant to which the Participant was not irrevocably
entitled at the time of such Status Change shall be forfeited and the Award
canceled as of the time of such Status Change.
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<PAGE>
6.2. Termination of Service Other Than by Death or Disability. If a
Participant suffers a Status Change other than by reason of death or permanent
disability (as determined by the Committee), the following rules shall apply,
unless otherwise determined by the Committee at the time of grant of an Award:
(a) All Options and Stock Appreciation Rights held by the Participant at
the time of such Status Change, to the extent then exercisable, will continue to
be exercisable by the Participant for a period of three months after the
Participant's Status Change. After the expiration of such three-month period,
all such Options and Stock Appreciation Rights shall terminate. In no event,
however, shall an Option or Stock Appreciation Right remain exercisable beyond
the latest date on which it could have been exercised without regard to this
Section 6. All Options and Stock Appreciation Rights held by a Participant at
the time of such Status Change that are not then exercisable shall terminate
upon such Status Change.
(b) All Restricted Stock held by the Participant at the time of such
Status Change shall immediately become free of all restrictions and conditions,
unless such Status Change results from a voluntary resignation or termination
for Cause (as defined in Section 6.2(d)), in which event all Restricted Stock
held by the Participant at the time of the Status Change shall be transferred to
the Company (and, in the event the certificates representing such Restricted
Stock are held by the Company, such Restricted Stock shall be so transferred
without any further action by the Participant) in accordance with Section 5.3
above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled at the time of such Status Change shall be forfeited and the Award
canceled as of the date of such Status Change.
(d) A termination by the Company of a Participant's employment with or
service to the Company shall be for "Cause" only if: (i) at least 75% of the
members of the Board determined that the Participant (A) was guilty of gross
negligence or willful misconduct in the performance of his or her duties for the
Company, or (B) breached or violated, in a material respect, any agreement
between the Participant and the Company or any of the Company's policy
statements regarding conflicts-of-interest, insider trading or confidentiality,
or (C) committed a material act of dishonesty or breach of trust; and (ii) in
the case of a Participant who is an Employee, (A) such determination was made at
a duly convened meeting of the Board with respect to which the Participant
received at least ten days prior written notice, had a reasonable opportunity to
make a statement and answer the allegations against him or her; and (B) either
(I) the Participant was given a reasonable opportunity to take remedial action
but failed or refused to do so, or (II) at least 75% of the members of the Board
also determined, at such meeting, that an opportunity to take remedial action
would not have been meaningful under the circumstances.
(e) For all purposes of this Section 6.2 and Section 6.3, (i) if a
Participant is an Employee of a subsidiary of RYKA and such subsidiary ceases to
be a subsidiary of RYKA, then the Participant's employment with the Company will
be deemed to have been terminated by the Company without Cause, unless the
Participant is transferred to RYKA or another subsidiary of RYKA; (ii) the
employment with the Company of a Participant who is an Employee will not be
deemed to have been terminated if the Participant is transferred from RYKA to a
subsidiary of RYKA, or vice versa, or from one subsidiary of RYKA to another,
and (iii) if a Participant who is an Employee terminates his or her employment
with the Company following a reduction in his or her
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<PAGE>
rate of compensation, then the Participant's employment with the Company will be
deemed to have been terminated by the Company without Cause.
6.3 Change in Control.
(a) In the event of a Change in Control (as defined in Section 6.3(b)),
the following rules will apply, unless otherwise expressly provided by the
Committee at the time of the grant of an Award:
(1) Each outstanding Option and Stock Appreciation Right shall
automatically become exercisable in full six months after the occurrence of such
Change in Control or, if sooner, upon a termination by the Company of the
Participant's employment with or service to the Company for any reason other
than for Cause (as defined in Section 6.2(d)). This provision shall not prevent
an Option or Stock Appreciation Right from becoming exercisable sooner as to
Common Stock or cash that would otherwise have become available under such
Option or Right during such period.
(2) Each outstanding share of Restricted Stock shall automatically
become free of all restrictions and conditions six months after the occurrence
of such Change in Control or, if sooner, upon a termination by the Company of
the Participant's employment with or service to the Company for any reason other
than for Cause (as defined in Section 6.2(d)). This provision shall not prevent
the earlier lapse of any restrictions or conditions on Restricted Stock that
would otherwise have lapsed during such period.
(3) Conditions on Deferred Stock Awards, Performance Awards and
Supplemental Grants which relate only to the passage of time and continued
employment shall automatically terminate six months after the occurrence of such
Change in Control or, if sooner, upon a termination by the Company of the
Participant's employment with or service to the Company for any reason other
than for Cause (as defined in Section 6.2(d)). This provision shall not prevent
the earlier lapse of any conditions relating to the passage of time and
continued employment that would otherwise have lapsed during such period.
Performance or other conditions (other than conditions relating only to the
passage of time and continued employment) shall continue to apply unless
otherwise provided in the instrument evidencing the Awards or in any other
agreement between the Participant and the Company or unless otherwise agreed to
by the Committee.
(b) A "Change in Control" means: (i) the occurrence of an event that
would, if known to the Company's management, be required to be reported by the
Company under Item 1(a) of Form 8-K pursuant to the 1934 Act; or (ii) the
acquisition or receipt, in any manner, by any person (as defined for purposes of
the 1934 Act) or any group of persons acting in concert, of direct or indirect
beneficial ownership (as defined for purposes of the 1934 Act) of 20% or more of
the combined voting securities ordinarily having the right to vote for the
election of directors of the Company; or (iii) a change in the constituency of
the Board with the result that individuals (the "Incumbent Directors") who are
members of the Board on the Effective Date (as specified in Section 9) cease for
any reason to constitute at least a majority of the Board, provided that any
individual who is elected to the Board after the Effective Date and whose
nomination for election was unanimously approved by the Incumbent Directors
shall be considered an Incumbent Director beginning on the date of his or her
election to the Board; or (iv) the sale, exchange or other disposition of all or
a significant portion of the Company's business or assets, or the execution by
the Company of a binding agreement providing for such a transaction; unless in
any such case, at
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<PAGE>
least a majority of the Incumbent Directors determine, prior to the occurrence
of such Change in Control, that no Change has or will have occurred.
7. GRANT AND ACCEPTANCE OF AWARDS
7.1. The Committee's approval of a grant of an Award under the Plan,
including the names of Participants and the size of the Award, including the
number of shares of Common Stock subject to the Award, shall be reflected in
minutes of meetings held by the Committee or the Board or in written consents
signed by members of the Committee or the Board. Once approved by the Committee,
each Award shall be evidenced by such written instrument, containing such terms
as are required by the Plan and such other such terms, consistent with the
provisions of the Plan, as may be approved from time to time by the Committee.
7.2. Each instrument may be in the form of agreements to be executed by
both the Participant and the Company, or certificates, letters or similar
instruments, which need not be executed by the Participant but acceptance of
which shall evidence agreement to the terms thereof. The receipt of an Award
shall not impose any obligation on the Participant to accept the Award.
7.3. Except as specifically provided by the Plan or the instrument
evidencing an Award, a Participant shall not become a stockholder of RYKA until
(a) the Participant makes any required payments in respect of the Common Stock
issued or issuable pursuant to the Award, (b) the Participant furnishes RYKA
with any required agreements, certificates, letters or other instruments, and
(c) the Participant actually receives the shares of Common Stock. Subject to any
terms and conditions imposed by the Plan or the instrument evidencing an Award,
upon the occurrence of all of the conditions set forth in the immediately
preceding sentence, a Participant shall have all rights of a stockholder with
respect Common Stock, including, But not limited to, the right to vote such
shares and to receive dividends and other distributions paid with respect to
such shares. The Committee may, upon such terms and conditions as it deems
appropriate provide that a Participant will receive a benefit in lieu of cash
dividends that would have been payable on any and all Common Stock subject to
the Participant's Award, had such Common Stock been outstanding. Without
limitation, the Committee may provide for payment to the Participant of amounts
representing such dividends, either currently or in the future, or for the
investment of such amounts on behalf of the Participant.
7.4. Notwithstanding any other provision of the Plan, the Company shall
not be obligated to deliver any shares of Common Stock pursuant to the Plan or
to remove any restriction from shares of Common Stock previously delivered under
the Plan (a) until all conditions to the Award have been satisfied or removed,
(b) until, in the opinion of counsel to the Company, all applicable Federal and
state laws and regulations have been complied with, (c) if the outstanding
Common Stock is at the time listed on any stock exchange or included for
quotation on an inter-dealer system, until the shares to be delivered have been
listed or included or authorized to be listed or included on such exchange or
system upon official notice of notice of issuance, (d) if it might cause the
Company to issue or sell more shares of Common Stock that the Company is then
legally entitled to issue or sell, and (e) until all other legal matters in
connection with the issuance and delivery of such shares have approved by
counsel to the Company. If the sale of Common Stock has not been registered
under the Securities Act of 1993, as amended, the Company may require, as a
condition to exercise of an Award, such representations or agreements as counsel
to the Company may consider appropriate to avoid violation of such Act and may
require that the
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<PAGE>
certificates evidencing such Common Stock bear an appropriate legend restricting
transfer. If an Award is exercised by the Participant's legal representative,
the Company shall be under no obligation to deliver Common Stock pursuant to
such exercise until the Company is satisfied as to the authority of such
representative.
8. TAX WITHHOLDING
The Company shall withhold from any cash payment made pursuant to an Award
an amount sufficient to satisfy all Federal, state and local withholding tax
requirements (the "withholding requirements"). In the case of an Award pursuant
to which Common Stock may be delivered, the Committee shall have the right to
require that the Participant or other appropriate person remit to the Company an
amount sufficient to satisfy the withholding requirements, or make other
arrangements satisfactory to the Committee with regard to such requirements,
prior to the delivery of any Common Stock. If and to the extent that such
withholding is required, the Committee may permit a Participant or such other
person or entity to elect at such time and in such manner as the Committee may
determine to have the Company hold back from the shares of Common Stock to be
delivered, or to deliver to the Company, Common Stock having a value calculated
to satisfy the withholding requirement. If at the time a ISO is exercised, the
Committee determines that the Company could be liable for withholding
requirements with respect to a disposition of the Common Stock received upon
exercise, the Committee may require as a condition of exercise that the person
exercising the ISO agree (a) to inform the Company promptly of any disposition
(within the meaning of Section 424(c) of the Code) of Common Stock received upon
exercise, and (b) to give such security as the Committee deems adequate to meet
the potential liability of the Company for the withholding requirements and to
augment such security from time to time in any amount reasonably deemed
necessary by the Committee to preserve the adequacy of such security.
9. STOCKHOLDER APPROVAL, EFFECTIVE DATE AND TERM OF PLAN
The Plan was adopted by the Board on March 20, 1996, subject to the
approval of RYKA's stockholders. The Plan shall be submitted to RYKA's
stockholders for approval at RYKA's 1996 annual meeting of stockholders. If such
approval is not obtained at such meeting (or at any subsequent meeting at which
such approval is sought), then, at the discretion of the Board, this Plan may be
re-submitted to RYKA's stockholders for approval at any subsequent annual
meeting of stockholders or at any special meeting of stockholders (including a
special meeting that may be called solely for that purpose). The Plan shall not
become effective unless and until it is approved by the affirmative vote of the
holders of a majority of the outstanding shares of RYKA's Common Stock
represented and entitled to vote at a duly convened meeting of RYKA's
stockholders. If this Plan is so approved by RYKA's stockholders, then the date
of such approval shall be effective date of this Plan ("Effective Date"). No
Award shall be granted more than ten years after the Effective Date.
10. EFFECT, AMENDMENT, SUSPENSION AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Common Stock as a bonus or
otherwise, or to adopt other plans or arrangements under which Common Stock may
be issued to Employees or other persons or entities. The Board reserves the
right, at any time and from time to time, to amend the Plan in any way, or to
suspend
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<PAGE>
or terminate the Plan, effective as of the date specified by the Board when it
takes such action, which date may be before or after the date the Board takes
such action; provided that any such action shall not affect any Awards granted
before the actual date on which such action is taken by the Board; and further
provided that the approval of RYKA's stockholders shall be required whenever
necessary for the Plan to continue to satisfy the conditions of Rule 16b-3 under
the 1934 Act, Section 422 of the Code with respect to the award of ISOs (unless
the Board determines that ISOs shall no longer be granted under the Plan), any
bylaw, rule or regulation of the market system or stock exchange on which RYKA's
Common Stock is then listed or admitted to trading, or any other applicable law,
rule or regulation.
11. OTHER PROVISIONS
11.1 Nothing contained in the Plan or any Award shall confer upon any
Employee or other Participant the right to continue in the employ of, or to
continue to provide service to, the Company or any affiliated person, or
interfere in any way with the right of the Company or any affiliated person to
terminate the employment or service of any Employee or other Participant for any
reason.
11.2 Corporate action constituting an offer by RYKA of Common Stock to any
Participant under the terms of an Award shall be deemed completed as of the date
of grant of the Award, regardless of when the instrument, certificate, or letter
evidencing the Award is actually received or accepted by the Participant.
11.3 None of a Participant's rights under any Award or under the Plan may
be assigned or transferred in any manner other than by will or under the laws of
descent and distribution. The foregoing shall not, however, restrict a
Participant's rights with respect to Unrestricted Stock or the outright transfer
of cash, nor shall it restrict the ability of a Participant's heirs, estate,
beneficiaries, or personal or legal representatives to enforce the terms of the
Plan with respect to Awards granted to the Participant.
11.4 The Plan, and all Awards granted hereunder, shall be governed by and
construed in accordance with the laws of the State of Delaware. The headings of
the Sections of the Plan are for convenience of reference only and shall not
affect the interpretation of the Plan. All pronouns and similar references in
the Plan shall be construed to be of such number and gender as the context
requires or permits. If any provision of the Plan is determined to be
unenforceable for any reason, then that provision shall be deemed to have been
deleted or modified to the extent necessary to make it enforceable, and the
remaining provisions of the Plan shall be affected.
11.5 All notices with respect to the Plan shall be in writing and shall be
hand delivered or sent by certified mail or reputable overnight delivery
service, expenses prepaid. Notices to the Company or the Committee shall be
delivered or sent to RYKA's headquarters to the attention of its Chief Executive
Officer. Notices to any Participant or holder of shares of Common Stock issued
pursuant to an Award shall be sufficient if delivered or sent to such person's
address as it appears in the regular records of the Company or its transfer
agent.
11.6 If there is any change in the capitalization of the Company, such as
by stock dividend, stock split, combination of shares, exchange of securities,
recapitalization or other event which the Committee deems, in its sole
discretion, to be similar circumstances, the Committee may make such adjustments
to the number and/or kind of shares of stock or securities subject to Awards
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<PAGE>
then outstanding or subsequently granted, any exercise prices relating to such
Awards and any other provision of such Awards affected by such change, as the
Committee may determine in its sole discretion. The Committee may also make such
adjustments to take into account material changes in law or in accounting
practices or principles, mergers, consolidations, acquisitions, dispositions or
similar corporate transactions, or any other event, as the Committee may
determine in its sole discretion.
11.7. The Committee may agree at any time, upon request of a Participant,
to defer the date on which any payment under an Award shall be made.
11.8. In any case that a Participant purchases Common Stock under an Award
for a price equal to the par value of the Common Stock, the Committee may
determine, in its sole discretion, that such price has been satisfied by past
services rendered by the Participant.
11.9. For the purposes of the Plan and any Award granted hereunder, unless
otherwise determined by the Committee, the term "fair market value" of Common
Stock on a specified date shall mean the last sale price for one share of Common
Stock on the last trading day on or before the specified date, as reported on
the Nasdaq Stock Market, or on such other market system or stock exchange on
which RYKA's Common Stock is then listed or admitted to trading, or, if the
foregoing does not apply, the market value determined by the Committee.
11.10 Except as otherwise indicated, the term "person," as used in the
Plan shall include individuals, corporations, partnerships, trusts, estates,
limited liability companies and partnerships and any other type of entity.
THE UNDERSIGNED CERTIFIES THAT THIS PLAN WAS DULY APPROVED AND ADOPTED BY
THE BOARD OF DIRECTORS OF RYKA INC. PURSUANT TO RESOLUTIONS BY UNANIMOUS WRITTEN
CONSENT DATED AS OF THE 20TH DAY OF MARCH, 1996.
/s/ Steven A. Wolf,
-----------------------------
STEVEN A. WOLF, SECRETARY
OF RYKA INC.
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EXHIBIT 10.23
REVOLVING CREDIT AGREEMENT BY AND BETWEEN
THE REGISTRANT AND CORESTATES BANK, N.A.
<PAGE>
REVOLVING CREDIT AGREEMENT
dated as of August 15, 1996
between
RYKA INC.
and
CORESTATES BANK, N.A.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS ................................... 1
--------------------------------
SECTION 1.01. Defined Terms ............................................. 1
SECTION 1.02. Accounting Terms .......................................... 5
ARTICLE II AMOUNT AND TERMS OF THE LOANS; SECURITY FOR THE LOANS ............. 6
-----------------------------------------------------
SECTION 2.01. Revolving Credit .......................................... 6
SECTION 2.02. Termination or Reduction of Commitment .................... 6
SECTION 2.03. Notice and Manner of Borrowing ............................ 6
SECTION 2.04. Interest .................................................. 6
SECTION 2.05. Note ...................................................... 6
SECTION 2.06. Mandatory and Optional Prepayments ........................ 7
SECTION 2.07. Method of Payment; Negative Collected Balance Charge ...... 7
SECTION 2.08. Use of Proceeds ........................................... 8
SECTION 2.09. Letter of Credit .......................................... 8
SECTION 2.10. Security for the Loans .................................... 8
ARTICLE III CONDITIONS PRECEDENT ............................................. 9
--------------------
SECTION 3.01. Condition Precedent to First Loan ......................... 9
SECTION 3.02. Condition Precedent to All Loans ..........................11
ARTICLE IV REPRESENTATION AND WARRANTIES .....................................11
-----------------------------
SECTION 4.01. Incorporation, Good Standing, Due Qualification,
Corporate Power and Authority ........................11
SECTION 4.02. Due Authorization; No Consents or Contravention ...........12
SECTION 4.03. Legally Enforceable Agreement .............................12
SECTION 4.04. Financial Statements; Accuracy of Information .............12
SECTION 4.05. Labor Disputes and Acts of God ............................13
SECTION 4.06. Other Agreements ..........................................13
SECTION 4.07. Litigation ................................................13
SECTION 4.08. No Defaults on Outstanding Judgments or Orders ............13
SECTION 4.09. Ownership and Liens .......................................14
SECTION 4.10. Ownership of Stock; Subsidiaries ..........................14
SECTION 4.11. ERISA .....................................................14
SECTION 4.12. Operation of Business .....................................14
SECTION 4.13. Taxes .....................................................14
SECTION 4.14. Debt ......................................................15
SECTION 4.15. Environmental Matters......................................15
ARTICLE V AFFIRMATIVE COVENANTS ..............................................15
---------------------
SECTION 5.01. Maintenance of Existence ..................................15
SECTION 5.02. Maintenance of Records ....................................15
SECTION 5.03. Maintenance of Properties .................................15
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
SECTION 5.04. Conduct of Business; Permits and Approvals; Compliance
with Laws ..............................................15
SECTION 5.05. Maintenance of Insurance ..................................15
SECTION 5.06. Payment of Debt; Payment of Taxes; Etc.....................16
SECTION 5.07. Right of Inspection .......................................16
SECTION 5.08. Reporting Requirements ....................................16
SECTION 5.09. Lockbox ...................................................19
SECTION 5.10. Principal Deposit Bank ....................................19
SECTION 5.11. Further Assurances ........................................19
ARTICLE VI NEGATIVE COVENANTS ...............................................19
------------------
SECTION 6.01. Liens .....................................................19
SECTION 6.02. Debt ......................................................21
SECTION 6.03. Mergers, Etc. .............................................21
SECTION 6.04. Sales and Leaseback .......................................21
SECTION 6.05. Dividends .................................................21
SECTION 6.06. Sale of Assets ............................................21
SECTION 6.07. Investments ...............................................22
SECTION 6.08. Guaranties, Etc. ..........................................22
SECTION 6.09. Transaction With Affiliate ................................22
SECTION 6.10. Hazardous Materials; Indemnification ......................22
ARTICLE VII FINANCIAL COVENANTS .............................................23
-------------------
SECTION 7.01. Minimum Working Capital ...................................23
SECTION 7.02. Minimum Tangible Net Worth ................................23
SECTION 7.03. Leverage Ratio ............................................23
ARTICLE VIII EVENTS OF DEFAULT ..............................................23
-----------------
SECTION 8.01. Event of Default ..........................................23
ARTICLE IX MISCELLANEOUS ....................................................26
-------------
SECTION 9.01. Amendments, Etc. ..........................................26
SECTION 9.02. Notices, Etc. .............................................26
SECTION 9.03. No Waiver; Remedies .......................................27
SECTION 9.04. Successors and Assigns ....................................27
SECTION 9.05. Costs, Expenses, and Taxes ................................27
SECTION 9.06. Right of Set Off ..........................................27
SECTION 9.07. Governing Law .............................................28
SECTION 9.08. Severability of Provisions ................................28
SECTION 9.09. Survival of Agreement .....................................28
SECTION 9.10. Heading ...................................................28
SECTION 9.11. JURISDICTION AND VENUE ....................................28
SECTION 9.12. WAIVER OF JURY TRIAL ......................................28
</TABLE>
2
<PAGE>
REVOLVING CREDIT AGREEMENT
This REVOLVING CREDIT AGREEMENT, dated as of August 15, 1996, is between
RYKA INC., a Delaware corporation (the "Borrower"), and CORESTATES BANK, N.A., a
national banking association (the "Bank"). The parties hereto agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
"Accounts" has the meaning given to that term in the Security Agreement.
"Account Debtor" has the meaning given to that term in the Security
Agreement.
"Affiliate" meaning any Person (1) which directly or indirectly controls,
or is controlled by, or is under common control with the Borrower or a
Subsidiary (including, but not limited to KPR; (2) which directly or indirectly
beneficially owns or holds five percent (5%) or more of any class of voting
stock of the Borrower or any Subsidiary; or (3) five percent (5%) or more of the
voting stock of which is directly or indirectly beneficially owned or held by
the Borrower or a Subsidiary. The term control means the possession, directly or
indirectly, of the power to direct or cause the directly of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise.
"Agreement" means this Revolving Credit Agreement, as amended,
supplemented, or modified from time to time.
"Application and Agreement" means the Application and Agreement in the
Bank's form to be delivered by the Borrower as a condition to the insurance by
the Bank of a letter of credit for the account of the Borrower under the terms
of this Agreement.
"Assignment of Life Insurance" means the Assignment of Life Insurance in
the Bank's form assigning a policy of life insurance insuring the life of
Micheal G. Rubin to the Bank, to be delivered by Michael G. Rubin under the
terms of this Agreement.
"Borrower's Certificate" means the certificate in the Bank's form to be
furnished by the Borrower to the Bank pursuant to Section 5.08(1).
<PAGE>
"Borrowing Base" means (1) 80% of the Borrower's Qualified Accounts plus
(2) 50% of the Borrower's Eligible Inventory not exceeding the lessor of
$3,500,000 or advances supported by Qualified Accounts for the months of January
through April and August through December, increasing to 55% of the Borrower's
Eligible Inventory not exceeding $3,500,000 for the months of May through July.
"Business Day" means any day other than a Saturday, Sunday, or other day on
which commercial bank in Philadelphia are authorized or required to close under
the laws of the Commonwealth of Pennsylvania.
"Capital Lease" means all leases which have been or should be capitalized
on the books of the lessee in accordance with GAAP.
"Cash Collateral Account" means the deposit account to be established by
the Borrower at the Bank to receive the deposit of payments from the Borrower's
Account Debtor
"Collateral" means all property which is subject or is to be subject to the
Liens granted by the Security Agreement and the Assignment of Life Insurance.
"Commitment" means the Bank obligation to make Loans to the Borrower
pursuant to Section 2.01 in the amount referred to therein.
Debtor" means (1) indebtedness or liability for borrowed money or for the
deferred purchase price of property or services (including trade obligations);
(2) obligations as lessee under Capital Leases; (3) current liabilities in
respect of unfunded vested benefits under any Plan; (4) obligations under
letters of credit issued for the account of any Person; (5) all obligations
arising under acceptance facilities; (6) all guaranties, endorsements (other
than for collection or deposit in the ordinary course of business), and other
contingent obligations to purchase, to provide funds for payment, to supply
funds to invest in any Person, or otherwise to assure a creditor against loss;
and (7) obligations secured by any Lien on property owned by any Person, whether
or not the obligations have been assumed.
Default" means any of the events specified in Section 8.01, whether or not
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Eligible Inventory: means Inventory, as such term is defined in the
Security Agreement, (1) which is not more than nine months from purchase date
and is not off-price inventory, and (2)with respect to Inventory in a warehouse,
said Inventory is located in a warehouse reported to the Bank as one utilized by
the Borrower as required by this Agreement and the Security Agreement.
"Environmental Law" means any presently existing or hereafter enacted or
decided federal, state or local statutory or common laws relating to pollution
or protection of the
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environment, including without limitation, any common law of nuisance or
trespass, and any law or regulation relating to emissions, discharges, releases
or threatened release of pollutants, contaminations or chemicals or industrial,
toxic or hazardous substances or wastes into the environment (including without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or chemicals, or industrial, toxic hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
which together with the Borrower would be treated as a single employer under
Section 4001 of ERISA.
"Event of Default" means any of the events specified in Section 8.01,
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"GAAP" means generally accepted accounting principles in the United States.
"Guarantor" means Michael G. Rubin.
"Guaranty" means the Guaranty in the Bank's form guarantying the
obligations of the Borrower to the Bank, to be delivered by the Guarantor under
the terms of this Agreement.
"Hazardous Material" means any contaminations, hazardous substances,
regulated substances or hazardous wastes which may be the subject of liability
pursuant to any Environmental Law.
"Head Office" means the principal office of the Bank at Board and Chestnut
Streets, Philadelphia, Pennsylvania 19107.
"KPR" means KPR Sports International, Inc., a Pennsylvania corporation.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effects as any of the
foregoing, and the recording of any mortgage or deed of trust or the filing of
any financing statement under the Uniform Commercial Code or comparable law of
any jurisdiction to evidence any of the foregoing).
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"Loan" has the meaning assigned to such term in Section 2.01.
"Loan Documents" means this Agreement, the Note, the Security Agreement,
the Assignment of Life Insurance, the Subordination Agreement, any Application
and Agreement and the Guaranty.
"Multiemployer Plan" means a Plan described in Section 4001(a)(3) of ERISA
which covers employees of the Borrower or any ERISA Affiliate.
"Note" has the meaning assigned to such term in Section 2.05.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority, or other entity of whatever nature.
"Plan" means any plan established, maintained, or to which contributions
have been made by the Borrower or any ERISA Affiliate.
"Prime Rate" means the rate of interest for loans established by the Bank
at its Head Office from time to time as its prime rate.
"Prohibited Transaction" means any transaction set forth in Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended from time
to time.
"Qualified Account" has the meaning assigned to such term in the Security
Agreement with the further addition that in order for any Account of the
Borrower to be a Qualified Account, (1) it shall be aged less than 90 days from
date of invoice; and (2) it shall not be (a) a foreign receivable, unless
supported by credit insurance or a letter of credit or a bank guaranty
acceptable to the Bank, (b) a "contra account" (defined by the Bank as an
Account off set by any claim owning to the Account Debtor), provided, however,
that the ineligible amount for any contra account shall not exceed the amount of
the applicable claim or claims, or (c) a "tainted receivable" (defined by the
Bank as an Account owned by an Account Debtor 50% or more of whose Accounts are
not Qualified Accounts); or (3) it shall be an Account otherwise approved by the
Bank.
"Reportable Event" means any of the events set forth in Section 4043 of
ERISA.
"Security Agreement" means the Security Agreement (Account, Inventory and
Equipment) in the Bank's form granting to the Bank a security interest in the
Borrowers assets,
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<PAGE>
including but not limited to its Accounts, inventory and equipment, to be
delivered by the Borrower under the terms of this Agreement.
"Subordinated Debt" means indebtedness for borrowed money of the Borrower
subordinated to all indebtedness of the Borrower to the Bank on terms
satisfactory to the Bank.
"Subordination Agreement" means the Subordination Agreement in the Bank's
form subordinating the indebtedness of the Borrower to KPR to the indebtedness
of the Borrower to the Bank, to be delivered by the Borrower and KPR under the
terms of this Agreement.
"Subsidiary" means a corporation shares of stock of which having ordinary
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, or the management of which
is otherwise controlled, directly or indirectly through one or more
intermediaries or both, by the Borrower.
"Tangible Net Worth" of any corporation means (1) the aggregate amount of
all assets of such corporation as may be properly classified as such, other than
(a) all assets of such corporation which are properly classified as intangible
assets including, without limiting the generality of the foregoing, franchises,
licenses, permits, patents, patent applications, copyrights, trademarks, trade
names, goodwill, experimental or organizational expense and other like
intangibles, including the excess paid for assets acquired over their respective
book values on the books of the corporation from which acquired, and (b) all
loans to shareholders, officers and employees, less (2) the aggregate amount of
all liabilities of such corporation, all determined in accordance with GAAP,
consistently applied.
"Termination Date" means the earlier of the date which is one year from the
date of this Agreement or the date of the termination in full of the obligations
of the Bank hereunder in accordance with the terms hereof.
"Working Capital" means the excess of current assets (limited to cash,
trade receivables, inventory and prepaid expenses) over current liabilities
(including outstandings under this Agreement, trade payables, accrued expenses,
current maturities of long term debt and Capital Leases) of the Borrower
determined in accordance with GAAP consistently applied.
SECTION 1.02. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP consistent with those
applied in the preparation of the financial statements referred to in Section
4.04, and all financial data submitted pursuant to this Agreement shall be
prepared in accordance with such principles.
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ARTICLE II
AMOUNT AND TERMS OF THE LOANS: SECURITY FOR THE LOANS
-----------------------------------------------------
SECTION 2.01. Revolving Credit. The Bank agrees on the terms and
conditions hereinafter set forth, to make loans (the "Loans") to the Borrower
from time to time during the period from the date of this Agreement up to but
not including the Termination Date in an aggregate amount not to exceed at any
time outstanding the lesser of Four Million Five Hundred Thousand Dollars
($4,500,000), as such amount may be reduced pursuant to Section 2.02, or the
Borrowing Base (the "Commitment"). Within the limits of the Commitment, the
Borrower may reborrow, prepay pursuant to Section 2.06(2), and reborrow under
this Section 2.01.
SECTION 2.02. Termination or Reduction of Commitment. The Borrower shall
have the right, upon at least five (5) Business Days' notice to Bank, to
terminate in whole or reduce in part the unused portion of the Commitment,
provided that each partial reduction shall be in the amount of not less than
Five Hundred Thousand Dollars ($500,000). The Commitment once reduced or
terminated may not be reinstated.
SECTION 2.03. Notice and Manner of Borrowing. The Borrower shall give the
Bank written or telegraphic notice (effective upon receipt) not later than 12:00
noon on the day (which must be a Business Day) of any Loans under this
Agreement, specifying the date and amount thereof. On the date of such Loan and
upon fulfillment of the applicable conditions set forth in Article III, the Bank
will make such Loan available to the Borrower in immediately available funds by
crediting the amount thereof to the Borrower's account with the Bank.
SECTION 2.04. Interest. The Borrower shall pay interest to the Bank on the
outstanding and unpaid principal amount of the Loans made under this Agreement
at a rate per annum equal to one-quarter percent (1/4%) in excess of the Prime
Rate. Any change in the interest rate resulting from a change in the Prime Rate
shall become effective as of the opening of business on the day on which such
change in the Prime Rate shall become effective. Interest shall be calculated on
the basis of a year of 360 days for the actual number of days elapsed. Interest
shall be paid in immediately available funds on the first day of each month and
at maturity at the Head Office. At any time after the occurrence of an Event of
Default hereunder, the Bank may at its option and upon five (5) days written
notice to the Borrower specifying the Event of Default begin to charge and
accrue interest on the unpaid principal balance of the Note, on any other
amounts owing hereunder or thereunder and, to the extent permitted by law, on
any overdue interest thereon, until paid in full, payable on demand, at a rate
per annum which shall be three percent (3%) above the rate which would otherwise
be applicable.
SECTION 2.05. Note. All Revolving Credit Loans made by the Bank under this
Agreement shall be evidenced by, and repaid with interest in accordance with, a
single promissory note of the Borrower in substantially the form of Exhibit A
duly completed, in the principal amount of Four Million Five Hundred Thousand
Dollars ($4,500,000), dated the date of
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this Agreement, payable to the Bank, and maturing as to principal on the
Termination Date (said promissory note, as it may be hereafter amended, renewed
or extended, the "Note"). The amount of each Loan and of each payment of
principal and interest received by the Bank on account of the Loans shall be
evidenced by the Bank's records, which shall, in the absence of error
demonstrated by the Borrower, be conclusive as to the outstanding balance of the
Loans made by the Bank and interest thereon.
SECTION 2.06. Mandatory and Optional Prepayments.
(1) The Borrower shall immediately prepay Loans upon the occurrence
of the following:
(a) If, after a reduction of the Commitment as provided in Section
2.02 or at any other time, the aggregate unpaid principal balance
of the Loans exceeds the Commitment, the Borrower shall
immediately prepay Loans in an amount sufficient to reduce such
aggregate unpaid principal balance to an amount that is not
greater than the Commitment.
(b) If at any time the aggregate unpaid principal balance of the
Loans exceeds the Borrowing Base, the Borrower shall immediately
prepay Loans in an amount sufficient to reduce such aggregate
unpaid principal balance to an amount that is not greater than
the Borrowing Base.
(2) The Borrower may prepay the Note in whole or in part with accrued
interest to the date of such prepayment on the amount prepaid.
(3) Upon any prepayment by the Borrower, the Bank shall advise the
Borrower of, and the Borrower shall immediately pay to the Bank, accrued
and unpaid interest on the amount of each prepayment of each Loan accrued
at the rate applicable to such Loan to the date of such prepayment.
SECTION 2.O7. Method of Payment; Negative Collected Balance Charge. The
Borrower shall make each payment under this Agreement and under the Note in
lawful money of the United States to the Bank at the Head Office in immediately
available funds. The Borrower hereby authorizes the Bank to apply all ledger
balances (uncollected funds) in the Cash Collateral Account at the end of each
Business Day to the payment of Loans outstanding on said day, provided that at
the end of each month the Bank will assess a negative collected balance charge.
Notwithstanding the foregoing, if the Borrower does not handle the Cash
Collateral Account in a satisfactory manner, including by way of example but not
limited to allowing repeated overdrafts thereon, of if the Borrower's financial
condition is deteriorating or if required due to a change in applicable
regulatory policies, the Bank reserve the right upon notice to the Borrower to
apply only balances which are collected balances in the Cash Collateral Account
at the end of each Business Day to the payment of Loans outstanding on said day.
The Borrower hereby authorized
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the Bank to charge from time to time against the Cash Collateral Account or, if
there are insufficient funds in the Cash Collateral Account, against any other
account of the Borrower with the Bank any amount due under this Agreement or the
other Loan Documents when and as due. Whenever any payment to be made under
this Agreement or under the Note shall be stated to be due on a day which is
not a Business Day, such extension of time shall in such case included in the
computation of the payment of interest and the commitment fee, as the case may
be.
SECTION 2.08. Use of Proceeds. The proceeds of the Loans hereunder shall
be used by the Borrower for working capital purposes. The Borrower will not,
directly or indirectly, use any part of such proceeds for the purpose of
purchasing or carrying any margin stock within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System or to extend credit to any
Person for the purpose of purchasing or carrying any such margin stock.
SECTION 2.09. Letters of Credit. On the terms and conditions set forth
herein and upon request of the Borrower, the Bank from time to time prior to the
Termination Date, in lieu of one or more Revolving Credit Loans, will issue
documentary letters of credit for the account of the Borrower, in favor of such
beneficiaries, expiring on such dates and specifying availability on such
terms and conditions as shall be requested by the Borrower and be reasonably
satisfactory to the Bank, provided that in no event shall any such letter of
credit be written with a tenor of more than 120 days or to expire more than
ninety (90) days after the Termination Date. In no event shall any such letter
of credit be issued, if, after giving effect thereto, (1) the aggregate amount
available under all letters of credit issued on behalf of the Borrower and
outstanding (the "Letter of Credit Balance") would exceed $5,000,000 or (2) the
Letter of Credit Balance plus the then outstanding principal balance of all
Revolving Credit Loans would exceed the Commitment. Each letter of credit shall
be supported by Collateral in the same manner and subject to the same advance
ratios as Revolving Credit Loans and shall be shown as part of outstanding loan
balances on the Borrower's Certificates required by Section 5.08(1). Any such
letter of credit shall be issued on the express condition, to which the Borrower
agrees, that the Borrower shall provide to the Bank on its forms an Application
and Agreement for the issuance of such letter of credit providing for the
reimbursement to be made by the Borrower if or when drafts are paid under any
such letter of credit. The Borrower may reimburse the Bank for the payment of
such drafts out of proceeds of a Revolving Credit Loan, if the Borrower is then
otherwise entitled to borrow hereunder, Any provision of Section 2.01 to the
contrary notwithstanding, the Commitment shall at all times be deemed to be
utilized by the amount of the Letter of Credit Balance from time to time for all
purposes of the Agreement.
SECTION 2.10. Security for the Loans. As Security for the Loans and for all
amounts payable hereunder and under the Notes as well as for all other existing
and future liabilities, whether absolute or contingent, due or to become due of
the Borrower to the Bank under any other loans or extensions of credit by the
Bank to the Borrower, the Bank shall have a valid, perfected first lien on and
security interest in the following Collateral:
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(1) all of the property, real or personal, tangible or intangible of
the Borrower, including without limiting the generality of the foregoing,
all of the Borrower's accounts receivable, inventory, machinery, equipment,
fixtures, documents of title, contract rights, general intangibles,
instruments and deposits;
(2) an assignment of life insurance insuring the life of Michael G.
Rubin in the amount of not less than $4,000,000 (subject to finalization
with the related insurance company post-closing);
and in addition the Bank shall have
(3) the unconditional guaranty by the Guarantor of the payment and
performance by the Borrower of the liabilities of the Borrower to the Bank,
limited to $2,000,000; and
(4) the subordination of the Borrower's indebtedness to KPR to the
Borrower's indebtedness to the Bank.
The Borrower shall establish and maintain a lockbox at a Bank location and
shall direct all of its Account Debtors to remit all payments owing to the
Borrower to said lockbox. All said remittances shall be deposited by the Bank
into and processed through the Cash Collateral Account and shall be applied to
pay outstanding Loans on a daily basis pursuant to Section 2.07.
To the foregoing ends, the Borrower will prior to or contemporaneously with
the execution and delivery of this Agreement (A) execute and deliver to the Bank
the Security Agreement, the Assignment of Life Insurance and the Subordination
Agreement; (B) establish the lockbox and the Cash Collateral Account; (C)
procure the execution and delivery of the Guaranty by the Guarantor and (D)
procure the execution and delivery of the Subordination Agreement by KPR.
ARTICLE III
CONDITIONS PRECEDENT
--------------------
SECTION 3.01. Condition Precedent to First Loan. The obligation of the Bank
to make the first Loan to the Borrower is subject to the condition precedent
that the Bank shall have received on or before the day of such Loan each of the
following, in form and substance satisfactory to the Bank and its counsel:
(1) The Note duly executed by the Borrower.
(2) The Security Agreement duly executed by the Borrower, together
with
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(a) such number of Financing Statements (UCC-1) duly executed by the
Borrower, as debtor, for filing under the Uniform Commercial Code of all
jurisdictions necessary or, in the opinion of the Bank, desirable to
perfect the security interests created by the Security Agreement;
(b) evidence satisfactory to the Bank of the rental of warehouse
space, including name, address (including county) and square footage, for
all warehouses utilized by the Borrower for delivery and storage of
Collateral; and
(c) completion of all steps necessary to establish the lockbox and
the Cash Collateral Account.
(3) The Assignment of Life Insurance duly executed by the Michael G. Rubin.
(4) The Guaranty duly executed by the Guarantor.
(5) Landlord's Waiver(s) and or Warehouseman's Waiver(s) as required by the
Security Agreement.
(6) Releases and terminations executed by Midlantic Bank, N.A. of existing
liens, security interests and assignments in favor of Midlantic Bank, N.A.
(7) The Subordination Agreement duly executed by the Borrower and KPR.
(8) Evidence satisfactory to the Bank of infusion into the Borrower of at
least $2,000,000 of additional equity or Subordinated Debt from some source
other than KPR.
(9) A certificate (dated the date of this Agreement) of the Secretary of
the Borrower (a) setting forth and certifying as true and correct all corporate
action taken by the Borrower, including resolutions of its Board of Directors,
authorizing the execution, delivery, and performance of the Loan Documents to
which it is a party and each other document to be delivered pursuant to this
Agreement and (b) certifying the names and true signatures of the officers of
the Borrower authorized to sign the Loan Documents to which it is a party and
the other documents to be delivered by the Borrower under this Agreement;
(10) Insurance policies designating the Bank as loss payee, as required by
the Security Agreement.
(11) A favorable opinion of Astor, Weiss, Kaplan & Rosenblum, counsel for
the Borrower and the Guarantor, in form and substance satisfactory to the Bank.
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SECTION 3.02. Conditions Precedent to All Loans. The obligation of the Bank
to make each Loan (including the first Loan) shall be subject to the further
conditions precedent that on the date of such Loan:
(1) The Bank shall have received a Borrower's Certificate duly
completed and executed by the Borrower evidencing compliance with the
Borrowing Base and availability for the requested Loan; and
(2) The following statements shall be true and the Bank shall have
received a certificate signed by a duly authorized officer of the Borrower dated
the date of such Loan, stating that
(a) The representations and warranties contained in Article IV of
this Agreement are correct on and as of the date of such Loan as
though made on and as of such date; and
(b) No material development not disclosed in writing by the Borrower
to the Bank prior to the date of the last previous Loan
hereunder (or in the case of the initial Loan, prior to the date
of execution and delivery of this Agreement) has occurred in any
litigation (including, without limitation, derivative actions),
arbitration proceedings or governmental proceedings so
disclosed, which in the reasonable opinion of the Bank is likely
to materially adversely affect the financial condition or
business of the Borrower or the Guarantor or impair the ability
of the Borrower or the Guarantor to perform their obligations
under the Loan Documents to which they are a party; and
(c) No Default or Event of Default has occurred and is continuing,
or would result from such Loan; and
(3) The Bank shall have received such other approvals, opinions, or
documents as the Bank may reasonably request.
ARTICLE IV
REPRESENTATION AND WARRANTIES
-----------------------------
The Borrower represents and warrants to the Bank that
SECTION 4.01. Incorporation, Good Standing, Due Qualification, Corporate
Power and Authority. The Borrower is a corporation duly incorporated, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation; is duly qualified as a foreign corporation and in good standing
under the laws of each other jurisdiction in which such
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<PAGE>
qualification is required; and has the corporate power and authority to own its
assets and to transact the business in which it is now engaged or proposed to be
engaged, to enter into this Agreement and the other Loan Documents to which it
is a party and to borrow the Loans and pledge the Collateral as contemplated by
this Agreement;
SECTION 4.02. Due Authorization; No Consents or Contravention. The
execution, delivery, and performance by the Borrower of the Loan Documents to
which it is a party have been duly authorized by all necessary corporate action
and do not and will not (1) require any consent or approval of the shareholders
of such corporation; (2) contravene such corporation's charter or bylaws; and,
with respect to the Borrower and the Guarantor, will not (3) violate any
provision of or cause or result in a breach of or constitute a default under any
law, rule, regulation (including, without limitation, Regulation U of the Board
of Governors of the Federal Reserve System), order writ, judgment, injunction,
decree, determination, or award presently in effect having applicability to the
Borrower or the Guarantor; (4) cause or result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease, or instrument to which the Borrower or the Guarantor is a party or by
which it or its properties may be bound or affected or; (5) cause or result in
or require the creation or imposition of any Lien, upon or with respect to any
of the properties now owned or hereafter acquired by the Borrower or the
Guarantor except as contemplated by this Agreement.
SECTION 4.03. Legally Enforceable Agreement. This Agreement is, and each
of the other Loan Documents when delivered under this Agreement will be, legal,
valid, and binding obligations of the Borrower or the Guarantor, as the case may
be, enforceable against the Borrower or the Guarantor, as the case may be, in
accordance with their respective terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency, and other
similar laws affecting creditors' rights generally.
SECTION 4.04. Financial Statements; Accuracy of Information.
(1) The balance sheet of the Borrower as of December 31, 1995, and
the related statements of income, retained earnings and cash flows of the
Borrower for the fiscal year then ended, and the accompanying footnotes,
together with the opinion thereon, dated January 19, 1996 of Margolis &
Company, P.C., independent certified public accountants, copies of which
have been furnished to the Bank, are complete and correct and fairly
present the financial condition of the Borrower for the periods covered by
such statements, all in accordance with GAAP consistently applied, and
since December 31, 1995, there has been no material adverse change in the
condition (financial or otherwise), business, or operations of the
Borrower. There are no liabilities of the Borrower, fixed or contingent,
which are material but are not reflected in the financial statements or in
the notes thereto, other than liabilities arising in the ordinary course
of business since December 31, 1995.
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(2) The personal financial statement dated as of December 31,
1995 and the tax returns for the years 1994 and 1995 of the Guarantor (or,
if no tax return has been filed by the Guarantor for 1995 as of the
closing, evidence of the Guarantor's request for extension, with copy of
tax return to follow when filed), copies of which have been furnished to
the Bank, are complete and correct and fairly present the financial
condition of the Guarantor for the periods covered thereby.
(3) All information, financial statements, exhibits and reports
furnished by the Borrower and the Guarantor to the Bank in connection with
this Agreement, the other Loan Documents and the borrowings contemplated
hereby are, and all such information, financial statements, exhibits and
reports hereafter furnished by the Borrower or the Guarantor to the Bank
will be true and correct in every material respect on the date furnished to
the Bank, and no such information, financial statements, exhibit or report
contains or will contain any material misstatement of fact or omits or
will omit to state a material fact or any fact necessary to make the
statement contained therein not materially misleading.
SECTION 4.05. Labor Disputes and Acts of God. Neither the business nor the
properties of the Borrower or the Guarantor are affected by any fire, explosion,
accident, strike, lockout or other labor dispute, drought, hail, earthquake,
embargo, act of God or of the public enemy, or other casualty (whether or not
covered by insurance) materially and adversely affecting such business or
properties or the operation of the Borrower or the Guarantor.
SECTION 4.06. Other Agreements. Neither the Borrower nor the Guarantor is
a party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction
which could have a material adverse effect on the business, properties, assets,
operations, or conditions, financial or otherwise, of the Borrower or the
Guarantor, or the ability of the Borrower or the Guarantor to carry out its
obligations under the Loan Documents to which it is a party. Neither the
Borrower nor the Guarantor is in default in any respect in the performance,
observance, or fulfillment of any of the obligations, covenants, or conditions
contained in any agreement or instrument material to its business to which it is
a party.
Section 4.07. Litigation. There is no pending or threatened action or
proceeding against or affecting the Borrower or the Guarantor before any court,
governmental agency, or arbitrator which may, in any one case or in the
aggregate, materially adversely affect the financial condition, operations,
properties, or business of the Borrower or the Guarantor or the ability of the
Borrower or the Guarantor to perform its obligation under the Loan Documents to
which it is a party.
SECTION 4.08. No Defaults on Outstanding Judgments or Orders. The
Borrower and the Guarantor have satisfied all judgments and neither the
Borrower not the Guarantor is in default with respect to any judgment, writ,
injunction decree, rule, or regulation of any court,
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arbitrator, or federal, state, municipal, or other governmental authority,
commission, board, bureau, agency or instrumentality, domestic or foreign.
SECTION 4.09. Ownership and Liens. Each of the Borrower and the Guarantor
has title to, or valid leasehold interests, in all of its properties and assets,
real and personal, including the properties and assets and leasehold interest
reflected in the financial statements referred to in Section 4.04 (other than
any properties or assets disposed of in the ordinary course of business), and
none of the properties and assets owned by the Borrower or the Guarantor and
none of their leasehold interests is subject to any Lien, except such as may be
permitted pursuant to Section 6.01 of this Agreement.
SECTION 4.10 Ownership of Stock; Subsidiaries. At least 30% of the issued
and outstanding capital stock of the Borrower is owned by the Guarantor, free
and clear of all Liens. All of the issued and outstanding capital stock of the
Borrower has been validly issued, is fully paid and nonassessable. The common
stock of the Borrower is publicly traded on the OTC Bulletin Board. The Borrower
has no Subsidiaries.
SECTION 4.11. ERISA. The Borrower is in compliance in all material
respects with all applicable provisions of ERISA. Neither a Reportable Event nor
a Prohibited Transaction has occurred and is continuing with respect to any
Plan; no notice of intent to terminate a Plan has been filed nor has any Plan
been terminated; no circumstances exist which constitute grounds under Section
4042 of ERISA entitling the PBGC to institute proceedings to terminate, or
appoint a trustee to administer, a Plan, nor has the PBGC instituted any such
proceedings; neither the Borrower nor any ERISA Affiliate has completely or
partially withdrawn under Sections 4201 or 4202 of ERISA from a Multiemployer
Plan; the Borrower and each ERISA Affiliate has met its minimum funding
requirements under ERISA with respect to all of its Plans and the present fair
market value of all Plan assets exceeds the present value of all vested benefits
under each Plan, as determined on the most recent valuation date of the Plan and
in accordance with the provisions of ERISA and the regulations thereunder for
calculating the potential liability of the Borrower or any ERISA Affiliate to
the PBGC or the Plan under Title IV of ERISA; and neither the Borrower nor any
ERISA Affiliate has incurred any liability to the PBGC under ERISA.
SECTION 4.12. Operation of Business. The Borrower and the Guarantor
possess all licenses, permits, franchises, patents, copyrights, trademarks, and
trade names, or rights thereto, be conducted, and the Borrower and the Guarantor
are not in violation of any valid rights of others with respect to any of the
foregoing.
SECTION 4.13. Taxes. The Borrower and the Guarantor have filed all tax
returns (federal, state, and local) required to be filed and have paid all
taxes, assessments, and governmental charges and levies thereon to be due,
including interest and penalties, except the filing of tax returns or the
payment of taxes, if any, being contested by the Borrower or the Guarantor as
permitted pursuant to Section 5.06 and disclosed to the Bank on Schedule 4.13.
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SECTION 4.14. Debt. Neither the Borrower nor the Guarantor is indebted
under any credit agreement, indenture, purchase agreement, guaranty, Capital
Lease, or other investment, agreement, or arrangement except as disclosed in the
Borrower's or the guarantor's financial statements referred to in Section 4.04
or as disclosed to the Bank on Schedule 4.14.
SECTION 4.15. Environmental Matters. To the best of the Borrower's
knowledge, no real property owned or leased by the Borrower or the Guarantor is
in violation of any Environmental Laws, no Hazardous Materials are present on
said real property and neither the Borrower nor the Guarantor has been
identified in any litigation, administrative proceedings or investigation as a
responsible party for any liability under any Environmental Laws.
ARTICLE V
AFFIRMATIVE COVENANTS
---------------------
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will (and will cause any
Subsidiary it may create or acquire to):
SECTION 5.01. Maintenance of Existence. Preserve and maintain its
corporate existence and good standing in the jurisdiction of its incorporation,
and qualify and remain qualified as a foreign corporation in each jurisdiction
in which such qualification is required.
SECTION 5.02. Maintenance of Records. Keep accurate records and books of
account in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Borrower and
any Subsidiaries.
SECTION 5.03. Maintenance of Properties. Maintain, keep, and preserve all
of its properties (tangible and intangible) necessary or useful in the proper
conduct of its business in good working order and condition, ordinary wear and
tear expected.
SECTION 5.04. Conduct of Business; Permits and Approvals; Compliance with
Laws. Continue to engage in an efficient and economical manner in a business of
the same general type as conducted by it on the date of this Agreement; maintain
in full force and effect, its franchises, and all licenses, patents, trademarks,
trade names, contracts, permits, approvals and other rights necessary to the
profitable conduct of its business; and comply in all respects with all
applicable laws, rules, regulations, and orders.
SECTION 5.05. Maintenance of Insurance. Maintain insurance with
financially sound and reputable insurance companies or associations in such
amounts and covering such risks as are usually carried by companies engaged in
the same or a similar business and similar situated, which insurance may provide
for reasonable deductibility from coverage thereof.
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SECTION 5.06. Payment of Debt; Payment of Taxes; Etc. Promptly pay and
discharge
(1) all of its Debt in accordance with the terms thereof;
(2) all taxes, assessments, and governmental charges or levies
imposed upon it or upon its income and profits, upon any of its property,
real, personal or mixed, or upon any part thereof, before the same shall
become in default;
(3) all lawful claims for labor, materials and supplies or otherwise,
which, if unpaid, might become a lien or charge upon such property or any
part thereof;
provided, however, that so long as the Borrower first notifies the Bank of its
intention to do so, the Borrower shall not be required to pay and discharge (or
to cause any Subsidiary to pay and discharge) any such Debt, tax, assessment,
charge, levy or claim so long as the failure to so pay or discharge does not
constitute or result in a Default or an Event of Default under Section 8.01(4)
or (6) and so long as no foreclosure or other similar proceedings shall have
been commenced against such property or any part thereof and so long as the
validity thereof shall be contested in good faith by appropriate proceedings
diligently pursued and it shall have set aside on its books adequate reserves
with respect thereto.
SECTION 5.07. Right of Inspection. At any reasonable time and from time
to time, during normal business hours, permit the Bank or any agent or
representative thereof to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the Borrower and
any Subsidiary, and to discuss the affairs, finances, and accounts of the
Borrower and any Subsidiary with any of their respective officers and directors
and the Borrower's independent abilities.
SECTION 5.08. Reporting Requirements. Furnish to the Bank:
(1) At the time of, and as a condition to, each Loan, a Borrower's
Certificate duly completed and executed by the Borrower evidencing
compliance with the Borrowing Base and availability for the requested Loan;
(2) As soon as available and in any event within fifteen (15) days
after the end of each month, (a) a monthly aging of accounts receivable,
indicating those Accounts which are not Qualified Accounts by category as
listed in the definition of Qualified Accounts, (b) an account status
report, (c) a monthly aging of accounts payable, and (d) a monthly
inventory summary report, with subtotals for all categories of inventory
which is not Eligible Inventory, together with any other information which
the Bank may reasonable request;
(3) As soon as available and in any event within forty-five (45) days
after the end of each month, balance sheets of the Borrower as of the end
of such month, statements of
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income and retained earnings of the Borrower for the period commencing at the
end of the previous fiscal year and ending with the end of such month, and a
statement of cash flows of Borrower for the portion of the fiscal year ended
with the last day of such month, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and period in
the previous fiscal year and all prepared in accordance with GAAP consistently
applied and certified by the chief financial officer of the Borrower (subject to
year-end adjustments);
(4) As soon as available and in any event within ninety (90) days after
the end of each fiscal year of the Borrower, audited financial statements of
Borrower, including a balance sheet of the Borrower as of the end of such fiscal
year and a statement of income and retained earnings of the Borrower for such
fiscal year, and a statement of cash flows of the Borrower for such fiscal year,
all in reasonable detail and stating in comparative from the respective figures
for the corresponding date and period in the prior fiscal year and all prepared
in accordance with GAAP consistently applied and as to the consolidated
statements accompanied by an opinion thereon acceptable to the Bank by Margolis
& Company, P.C. or other independent certified public accountants selected by
the Borrower and acceptable to the Bank;
(5) As soon as available and in any event at the end of each fiscal year
of the Borrower, Borrower's projections for the upcoming fiscal year;
(6) As soon as available, and in any event within ninety (90) days after
the end of each calendar year, the personal statement of the Guarantor on the
Bank's form and, as soon as available, and in any event within 30 days after
filing, a copy of the federal tax return fro said year of the Guarantor;
(7) Promptly upon receipt thereof, copies of any reports submitted to the
Borrower by independent certified public accountants in connection with
examination of the financial statements of the Borrower made by such
accountants;
(8) Simultaneously with the delivery of the monthly and fiscal year end
financial statements referred to in Section 5.08(3) and (4), a certificate of
the chief financial officer of the Borrower (a) certifying that to the best of
his knowledge no Default or Event of Default has occurred and is continuing or,
if a Default or Event of Default has occurred and is continuing, a statement as
to the nature thereof and the action which is proposed to be taken with respect
thereto, and (b) with computations demonstrating compliance with the covenants
contained in Article VII;
(9) Simultaneously with the delivery of the annual financial statements
referred to in Section 5.08(4), a certificate of the independent public
accountants who audited such statements to the effect that, in making the
examination necessary for the audit of such
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statements, they obtained no knowledge of any condition or event which
constitutes a Default or Event of Default, or if such accountants shall
have obtained knowledge of any such condition or event, specifying in such
certificate each such condition or event of which they have knowledge and
the nature and status hereof;
(10) All reports regarding or relating to the Collateral as required
by the Security Agreement;
(11) Promptly after the commencement thereof, notice of all actions,
suits, and proceedings before any court or governmental department,
commission, board, bureau, agency, or instrumentality, domestic or foreign,
affecting the Borrower, which, if determined adversely to the Borrower,
could have material adverse effect on the financial condition, properties,
or operations of the Borrower;
(12) Immediately upon the occurrence of each Default or Event of
Default, a written notice setting forth the details of such Default or
Event of Default and the action which is proposed to be taken by the
Borrower with respect thereto;
(13) Immediately upon the creation or occurrence thereof, notice that
the Borrower has created a purchase money Lien permitted by Section
6.01(10) or has actual knowledge or has received notice of the existence or
filing of any other Lien against the Borrower or its property, whether or
not permitted by Section 6.01.
(14) As soon as possible and in any event within five (5) days after
the Borrower knows or has reason to know that any Reportable Event or
Prohibited Transaction has occurred with respect to any Plan or that the
PBGC or the Borrower has instituted or will institute proceedings under
Title IV of ERISA to terminate any Plan, the Borrower will deliver to the
Bank a certificate of the chief financial officer of the Borrower setting
forth details as to such Reportable Event or Prohibited Transaction or Plan
termination and the action the Borrower proposes to take with respect
thereto;
(15) Promptly after the sending or filing thereof, copies of all proxy
statements, financial statements, and reports which the Borrower sends to
its shareholders, and copies of all regular, periodic, and special reports,
and all registration statements which the Borrower files with the
Securities and Exchange Commission or any governmental authority which may
be substituted therefor, or with any national securities exchange; and
(16) Such other information respecting the condition or operations,
financial or otherwise, of the Borrower or any Subsidiary as the Bank may
from time to time reasonably request.
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SECTION 5.09. Lockbox. Maintain at all times a lockbox at a Bank location
into which all Account Debtors shall be instructed to remit all payments owing
to the Borrower for deposit into and processing through the Cash Collateral
Account.
SECTION 5.10. Principal Deposit Bank. Maintain at all times the Cash
Collateral Account at the Bank and maintain the Bank as its principal bank
of deposit.
SECTION 5.11. Further Assurances. Do such further acts and things and
execute and deliver to the Bank such additional assignments, agreements, powers
and instruments, as the Bank may reasonably require or reasonably deem advisable
to carry into effect the purposes of this Agreement or to better assure and
confirm unto the Bank its rights, powers and remedies hereunder.
ARTICLE VI
NEGATIVE COVENANTS
------------------
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will not (and will not permit any
Subsidiary it may create or acquire to):
SECTION 6.01. Liens. Create, incur, assume, or suffer to exist any Lien
upon or with respect to any of its properties, now owned or hereafter acquired,
except:
(1) Liens in favor of the Bank;
(2) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or, if due and payable, if they are being
contested in good faith by appropriate proceedings promptly initiated and
diligently conducted and for which appropriate reserves are maintained and
so long as no foreclosure, distraint, sale or other similar proceedings
shall have been commenced with respect thereto;
(3) Liens imposed by law, such as mechanics', materialmen's,
landlords' warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are
not past due for more than thirty (30) days or which are being contested in
good faith by appropriate proceedings promptly initiated and diligently
conducted and for which appropriate reserves have been established and so
long as no foreclosure, distraint, sale or other similar proceedings shall
have been commenced with respect thereto;
(4) Liens under workmen's compensation, unemployment insurance,
social security, or similar legislation;
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(5) Liens, deposits, or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), or public or statutory
obligations; surety, indemnity, performance, or other similar bonds; or
other similar obligations arising in the ordinary course of business;
(6) Liens existing on the date hereof and listed on Schedule 6.01
securing amounts not in excess of the amounts set forth on Schedule 6.01,
but not the extension of the Lien to other property, or the granting of the
Lien to secure the extension of the maturity, refunding, or modification of
such obligation, in whole or in part;
(7) Judgment and other similar Liens arising in connection with court
proceedings, provided the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings promptly initiated
and diligently conducted;
(8) Easements, rights-of-way, restrictions, and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use, and enjoyment by the Borrower or any Subsidiary of the
property or assets encumbered thereby in the normal course of its business
or materially impair the value of the property subject thereto;
(9) Purchase-money Liens on any property acquired or the assumption of
any Lien on property existing at the time of such acquisition, or a Lien
incurred in connection with any conditional sale or other title retention
agreement or a Capital Lease; provided that
(a) Any property subject to any of the foregoing is acquired by the
Borrower or any Subsidiary in the ordinary course of its
respective business and the Lien on any such property is created
contemporaneously with such acquisition;
(b) The obligation secured by any Lien so created, assumed, or
existing shall equal at least eighty percent (80%) and shall not
exceed one hundred percent (100%) of the lesser of cost or fair
market value as of the time of acquisition of the property
covered thereby to the Borrower or Subsidiary acquiring the
same;
(c) Each such Lien shall attach only to the property so acquired and
fixed improvements thereon; and
(d) The Debt secured by all such Liens shall not exceed Two Hundred
Fifty Thousand Dollars ($250,000) at any time outstanding in the
aggregate.
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SECTION 6.02. Debt, Create, incur, assume, or suffer to exist any Debt,
except:
(1) Debt of the Borrower to the Bank;
(2) Debt existing on the date hereof and disclosed in the Borrower's
financial statements referred to in Section 4.04 or otherwise disclosed to
the Bank on Schedule 4.14, but no renewals, extension, or refinancings
thereof;
(3) Subordinated Debt acceptable to the Bank;
(4) Accounts payable to trade creditors for goods or services and
current operating liabilities (other than for borrowed money), in each case
incurred in the ordinary course of business and paid within the specified
time, unless contested in good faith and by appropriate proceedings;
(5) Debt of the Borrower secured by purchase-money Liens permitted by
Section 6.01(9).
SECTION 6.03. Mergers, Etc. Merge or consolidate with, or sell, assign,
lease, or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person, or permit any Subsidiary to do so.
SECTION 6.04. Sale and Leaseback. Sell, transfer, or otherwise dispose any
real or personal property to any Person and thereafter directly or indirectly
lease back the same or similar property.
SECTION 6.05. Dividends. Declare or pay any dividends; or purchase, redeem,
retire, or otherwise acquire for value any of its capital stock now or hereafter
outstanding; or make any distribution of assets to its shareholders as such
whether in cash, assets, or obligations of the Borrower; or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption, or retirement of, any shares of its capital
stock; or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock, except that (1) the Borrower may
declare and deliver dividends and make distributions payable solely in common
stock of the Borrower and (2) the Borrower may purchase or otherwise acquire
shares of its capital stock by exchange for or out of the proceeds from a
substantially concurrent issue of new shares of its capital stock.
SECTION 6.06. Sale of Assets. Sell, lease, assign, transfer, or otherwise
dispose any of its now owned or hereafter acquired assets (including, without
limitation receivables and leasehold interests), except: (1) for inventory
disposed of in the ordinary course of business; and (2) the sale or other
disposition of assets no longer used or useful in the conduct of its business.
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<PAGE>
SECTION 6.07. Investments. Make any loan or advance to any Person, or
purchase or otherwise acquire any capital stock, assets, obligations, or other
securities of, make any capital contribution to, or otherwise invest in or
acquire any interest in any Person, except: (1) direct obligations of the United
States or any agency thereof with maturities of one year or less from the date
of acquisition; (2) commercial paper of a domestic issuer rates at least "A-1"
by Standard & Poor's Corporation or "P-1" by Moody's Investors Services, Inc.;
(3) certificates of deposit with maturities of one year or less from the date of
acquisition issued by any commercial bank having capital and surplus in excess
of One Hundred Million Dollars ($100,000,000); (4) stock, obligations, or
securities received in settlement of debts (created in the ordinary course of
business) owing to the Borrower; and (5) loans to employees up to Twenty-Five
Thousand Dollars ($25,000) in the aggregate.
SECTION 6.08. Guaranties, Etc. Assume, guarantee, endorse, or otherwise
be or become directly or contingently responsible or liable (including, but not
limited to, an agreement to purchase any obligation, stock, assets, goods, or
services, or to supply or advance any funds, assets, goods, or services, or to
maintain or cause such Person to maintain a minimum working capital or net
worth, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
SECTION 6.09. Transaction With Affiliate. Enter into any transaction,
including, without limitation, the purchase, sale, or exchange of property or
the rendering of any service, with any Affiliate except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would
obtain in a comparable arm's-length transaction with a Person not an
Affiliate.
SECTION 6.10. Hazardous Materials; Indemnification. Use, generate, treat,
store, dispose of or otherwise introduce any Hazardous Materials into or on any
real property owned or leased by the Borrower and will not cause, suffer allow
or permit anyone else to do so, except in an environmentally safe manner through
methods which have been approved by and meet all of the standards of the federal
Environmental Protection Agency and any other federal, state or local agency
with authority to enforce Environmental Laws. The Borrower hereby agrees to
indemnify, reimburse, defend and hold harmless the Bank and its directors,
officers, agents and employees ("Indemnified Parties") for, from and against all
demands, liabilities, damages, costs, claims, suits, actions, legal or
administrative proceedings, interest, losses, expenses and reasonable attorney's
fees (including any such fees and expenses incurred in enforcing this indemnity)
asserted against, imposed on or incurred by any of the Indemnified Parties,
directly or indirectly pursuant to or in connection with the application of any
Environmental Law to acts or omissions occurring at any time on or in connection
with any real estate owned or leased by the Borrower or any business conducted
thereon.
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ARTICLE VII
FINANCIAL COVENANTS
-------------------
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement:
SECTION 7.01 Minimum Working Capital. The Borrower will maintain as at the
end of each fiscal quarter of the Borrower Working Capital of not less than
$1,000,000; provided that Working Capital shall not less than $750,000 at June
30, 1996.
SECTION 7.O2. Minimum Tangible Net Worth. The Borrower will maintain as at
the end of each fiscal quarter of the Tangible Net Worth plus Subordinated Debt
of not less than $1,000,000 at June 30, 1996 and not less than $1,750,000 as at
September 30, 1996 and thereafter.
SECTION 7.03. Leverage Ratio. The Borrower will maintain as at the end of
each fiscal quarter of the Borrower a ratio of total liabilities to Tangible
Net Worth plus Subordinated Debt of not greater than (1) 5.1 to 1.00 from the
date hereof to and including June 30, 1996; and (2) 2.5 to 1.00 as at September
30, 1996 and December 31, 1996 and thereafter.
ARTICLE VIII
EVENTS OF DEFAULT
-----------------
SECTION 8.01. Events of Default. If any of the following events("Events of
Default") shall occur:
(1) The Borrower shall fail to make any payment or mandatory
prepayment under this Agreement or the Note, within one (1) day after the
date when due and payable;
(2) Any representation or warranty made or deemed made by the
Borrower or by the Guarantor in any Loan Document or which is contained in
any certificate, document, opinion, or financial or other statement
furnished at any time under or in connection with any Loan Documents shall
prove to have been incorrect in any material respect on or as of the date
made or deemed made;
(3) The Borrower or the Guarantor shall fail to perform or observe
any term, covenant, or agreement contained in any Loan Document (other than
the Note) to which it is a party on its part to be performed or observed,
provided that with respect to any such failure to perform a covenant or
agreement contained in Section 5.08(11) or (13) - (15), the Borrower or the
Guarantor, as the case may be, shall have fifteen (15) days to cure such
Default;
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(4) The Borrower or the Guarantor shall (a) fail to pay any
indebtedness for borrowed money (other than the Note) of the Borrower or
the Guarantor, as the case may be, or any interest or premium thereon, when
due (whether by scheduled maturity, required prepayment, acceleration,
demand, or otherwise), or (b) fail to perform or observe any term,
covenant, or condition on its part to be performed or observed under any
agreement or instrument relating to any such indebtedness, when required to
be performed or observed, if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration after the giving of
notice or passage of time, or both, of the maturity of such indebtedness,
unless such failure to perform or observe shall be waived by the holder of
such indebtedness; or any such indebtedness shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof;
(5) The Borrower or the Guarantor (a) shall generally not, or shall
be unable to, or shall admit in writing its inability to pay its debts as
such debts become due; or (b) shall make an assignment for the benefit of
creditors, petition or apply to any tribunal for the appointment of a
custodian, receiver, or trustee for it or a substantial part of its assets;
or (c) shall commence any proceeding under any bankruptcy, reorganization,
arrangements, readjustment of debt, dissolution, or liquidation law or
statute of any jurisdiction, whether now or hereafter in effect; (d) shall
have any such petition or application filed or any such proceeding
commenced against it in which an order for relief is entered or
adjudication or appointment is made and which remains undismissed for a
period of thirty (30) days or more; or (e) by any act or omission shall
indicate its consent to, approval of, or acquiescence in any such petition,
application, or proceeding, or order for relief, or the appointment of a
custodian, receiver, or trustee for all or any substantial part of its
properties; or (f) shall suffer any such custodianship, receivership, or
trusteeship to continue undischarged for a period of thirty (30) days or
more;
(6) One or more judgments, decrees, or orders for the payment of
money in excess of One Hundred Thousand Dollars ($100,000) in the aggregate
shall be rendered against the Borrower and such judgments, decrees, or
orders shall continue unsatisfied and in effect for a period of thirty (30)
consecutive days without being vacated, discharged, satisfied, or stayed or
bonded pending appeal;
(7) The Security Agreement or the Assignment of Life Insurance shall
at any time after its execution and delivery and for any reason: (a) cease
to create a valid and perfected first priority security interest in or
assignment of the property purported to be subject thereto, unless due
solely to acts or omissions on the part of the Bank in performing its
duties related thereto; or (b) cease to be in full force and effect or be
declared null and void, unless due solely to acts or omissions on the part
of the Bank in performing its duties related thereto; or (c) the validity
or enforceability thereof shall be contested by the Borrower, or the
Borrower shall deny it has any further liability or obligation thereunder,
or the Borrower shall fail to perform any of its obligations
24
<PAGE>
thereunder;
(8) The Guaranty shall, at any time after its execution and delivery
and for any reason, cease to be in full force and effect or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by the Guarantor, or the Guarantor shall deny it has any further
liability or obligation under or shall fail to perform its obligations
under the Guaranty;
(9) The Subordination Agreement shall at any time after its execution
and delivery and for any reason cease to be in full force and effect or
shall be declared null and void, or the validity or enforceability thereof
shall be contested by the Borrower or KPR, or the Borrower or KPR shall
deny it has any further liability or obligation under the Subordination
Agreement, or the Borrower or KPR shall fail to perform any of its
obligations under the Subordination Agreement;
(10) Any of the following events occur or exist with respect to the
Borrower or any ERISA Affiliate: (a) any Prohibited Transaction involving
any Plan; (b) any Reportable Event with respect to any Plan; (c) the filing
under Section 4041 of ERISA of a notice of intent to terminate any Plan or
the termination of any Plan; (d) any event or circumstance that might
constitute grounds entitling the PBGC to institute proceedings under
Section 4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan, or the institution by the PBGC of any such
proceedings; (e) complete or partial withdrawal under Section 4201 or 4204
of ERISA from a Multiemployer Plan or the reorganization, insolvency, or
termination of any Multiemployer Plan; and in each case above, such event
or condition, together with all other events or conditions, if any, could
in the opinion of the Bank subject the Borrower to any tax, penalty, or
other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or
any combination thereof) which in the reasonable determination of the Bank
may have a material adverse effect on the financial condition, properties
or operations of the Borrower;
(11) The Guarantor shall cease to maintain voting control, but in any
event ownership of at least 30% of the issued and outstanding voting
capital stock, of the Borrower, or the Borrower shall cease to be managed
by Michael G. Rubin or other senior management satisfactory to the Bank;
then, and in any such event, the Commitment shall terminate and the Note and all
interest thereon and all other amounts payable under this Agreement shall become
and be immediately due and payable upon declaration to such effect delivered by
the Bank to the Borrower; provided that upon the happening of a Default
specified in Section 8.01(5), the Commitment shall terminate and the Note and
all interest thereon and all other amounts payable under this Agreement shall be
immediately due and payable without declaration or other notice to the Borrower.
Thereupon, the Bank shall have the right to charge and accrue interest at the
default
25
<PAGE>
rate of interest provided for in this Agreement and shall have all of the rights
and remedies available to it under the Loan Documents and otherwise at law or in
equity. The Borrower expressly waives any presentment, demand, protest or
further notice of any kind.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.01. Amendments, Etc. No amendments, modification, termination,
or waiver of any provision of any Loan Document to which the Borrower is a
party, nor consent to any departure by the Borrower from any Loan Document to
which it is a party, shall in any event be effective unless the same shall be in
writing and signed by the Bank, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
SECTION 9.02 Notices, Etc. All notices and other communications provided
for under this Agreement and under the other Loan Documents to which the
Borrower is a party shall be in writing (including telegraphic and telex
transmission and facsimile transmissions if subject to pre-established
verification procedures) and mailed or transmitted or delivered,
if to the Borrower at RYKA Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attn: Steve Wolf
Fax# (610) 768-0753
with a copy to David S. Mandel, Esq.
Astor, Weiss, Kaplan & Rosenblum
The Bellevue, 6th Floor
Broad Street at Walnut
Philadelphia, PA 19102
Fax# (215) 790-0509
if to the Bank at CoreStates Bank, N.A.
if by mail: P.O. Box 7618
Philadelphia, PA 19101-7618
if delivered: 1339 Chestnut Street
Philadelphia, PA 19107
26
<PAGE>
in all cases: Attn: John P. Bradey, Vice President
F.C. 1-8-4-12
Fax# (215) 973-6680
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section 9.02. Except as otherwise provided in this Agreement all such
notices and communications shall be effective when deposited in the mails or
delivered to the telegraph company, or sent, answerback received, respectively,
addressed as aforesaid, except that notices to the Bank pursuant to the
provisions of Article II shall not be effective until received by the Bank.
SECTION 9.03. No Waiver; Remedies. No failure on the part of the Bank to
exercise, and no delay in exercising, any right, power, or remedy under any Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Documents preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies provided by
law.
SECTION 9.04. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights under any Loan Document to which the Borrower is a party without
the prior written consent of the Bank.
SECTION 9.05. Costs, Expenses, and Taxes. The Borrower agrees to pay (1)
on the date hereof a facility fee of $10,000; and (2) after the occurrence of an
Event of Default, all costs and expenses, if any, in connection with the
enforcement of any of the Loan Documents and the collection of the Loans,
including but not limited to the reasonable fees and out-of-pocket expenses of
counsel for the Bank and local counsel who may be retained by said counsel
incurred by the Bank in connection with the enforcement of the Loan Documents
and collection of the Loans and with respect to advising the Bank as to its
rights and responsibilities under any of the Loan Documents. In addition, the
Borrower shall pay any and all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing, and
recording of any of the Loan Documents and the other documents to be delivered
under any such Loan Documents, and agrees to save the Bank harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and fees.
SECTION 9.06. Right of Set Off. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Bank to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement or the Note or any other Loan
Document, irrespective of whether or not the
27
<PAGE>
Bank shall have made any demand under this Agreement or the Note or such other
Loan Document and although such obligations may be unmatured. The Bank agrees
promptly to notify the Borrower after any such setoff and application, provided
that the failure to give such notice shall not affect the validity of such
setoff and application. The rights of the Bank under this Section 9.06 are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) which the Bank may have.
SECTION 9.07. Governing Law. This Agreement and the Note shall be governed
by, and construed in accordance with, the laws of the Commonwealth of
Pennsylvania.
SECTION 9.08. Severability of Provisions. Any provision of any Loan
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Document or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 9.09. Survival of Agreement. All covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto shall survive the making by the Bank of the Loans and the
execution and delivery to the Bank of the Note and shall continue in full force
and effect so long as the Loan Documents or any amounts due thereunder or
hereunder are outstanding and unpaid.
SECTION 9.10. Headings. Article and Section headings in the Loan Documents
are included in such Loan Documents for the convenience of reference only and
shall not constitute a part of the application Loan Documents for any other
purpose.
SECTION 9.11. JURISDICTION AND VENUE. IN ANY JUDICIAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER, THE BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED IN MONTGOMERY OR PHILADELPHIA COUNTY IN THE COMMONWEALTH OF
PENNSYLVANIA AND AGREES NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO
THE LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY.
THE BORROWER AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY
EFFECTED UPON IT BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID,
TO THE BORROWER.
SECTION 9.12. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES TRIAL
BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING
OUT OF OR RELATED TO THIS AGREEMENT
28
<PAGE>
OR THE RELATIONSHIP ESTABLISHED HEREUNDER. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE BANK TO ENTER INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
RYKA INC.
By /s/ Steven Wolf VP CFO
---------------------------------
Steven Wolf VP CFO
---------------------------------
Print Name and Title
CORESTATES BANK, N.A.
By /s/ Ann B. Delaura VP
---------------------------------
Ann B. Delaura VP
---------------------------------
Print Name and Title
29
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$4,500,000 August 15, 1996
FOR VALUE RECEIVED, the undersigned, RYKA INC., a Delaware corporation (the
"Borrower"), DOES HEREBY PROMISE to pay to the order of CORESTATES BANK, N.A.
(the "Bank"), at its office at Broad and Chestnut Streets, Philadelphia,
Pennsylvania, in lawful money of the United States and in immediately available
funds, the principal amount of Four Million Five Hundred Thousand Dollars
($4,500,000) or the aggregate unpaid principal amount of all loans made to the
Borrower by the Bank (the "Loans") pursuant to the Revolving Credit Agreement
hereinafter referred to, whichever is less, on the Termination Date (as defined
in said Revolving Credit Agreement), and to pay interest (computed on the basis
of a year of 360 days) from the date of this Revolving Credit Note on the unpaid
principal amount of this Revolving Credit Note, in like money, at said office,
at rates per annum equal to one quarter percent (1/4%) above the rate as
announced from time to time by the Bank at its principal office in Philadelphia,
Pennsylvania as its prime lending rate ("Prime Rate") payable on the first day
of each month, commencing September 1, 1996 and at maturity. Any amount of
principal hereof which is not paid when due, whether at stated maturity, by
acceleration, or otherwise, and, to the extent permitted by law, any overdue
interest shall bear interest from the date when due until said principal amount
is paid in full, payable on demand, at a rate per annum equal at all times to
three percent (3%) above the rate which would otherwise be applicable. Any
change in the interest rate resulting from a change in the Prime Rate shall be
effective at the beginning of the day on which such change in the Prime Rate
becomes effective.
The Borrower hereby authorizes the Bank to keep computer stored records of
the amount and type of all Revolving Credit Loans made to the Borrower and all
renewals, conversions, and payment of principal amounts in respect of such
Revolving Credit Loans, which records shall, in the absence of error
demonstrated by the Borrower, be conclusive as to the outstanding principal
amount of all Revolving Credit Loans; provided, however, that the failure to
keep such records with respect to any Revolving Credit Loan or renewal,
conversion or payment shall not limit or otherwise affect the obligations of the
Borrower under the Revolving Credit Agreement or this Revolving Credit Note.
This Revolving Credit Note is the Note referred to in the Revolving Credit
Agreement dated as of August 15, 1996, between the Borrower and the Bank (said
Revolving Credit Agreement, as it may be hereafter amended, renewed or extended,
the "Revolving Credit Agreement"). The Revolving Credit Agreement, among other
things, contains provisions for acceleration of the maturity of this Revolving
Credit Note upon the happening of certain stated events and also for prepayments
on account of the principal of this Revolving Credit Note prior to the maturity
of the Revolving Credit Agreement. This Revolving Credit Note is secured by
<PAGE>
and pursuant to a Security Agreement and certain other collateral referred to in
the Revolving Credit Agreement, reference to which is hereby made for a
description of the collateral and the rights of the Borrower and the Bank with
respect to such collateral.
This Revolving Credit Note shall be governed by the laws of the
Commonwealth of Pennsylvania.
RYKA INC.
By _____________________________
_____________________________
Print Name and Title
2
<PAGE>
Disclosure Schedules
[To Be Provided by the Borrower]
Schedule 4.13. Contested Taxes. None
Schedule 4.14. Existing Debt not otherwise disclosed in the Borrowers'
Financial Statements. None
Schedule 6.01. Existing Permitted Liens
(list property subject to the Lien, name of lienholder,
current amount of Debt secured by the Lien)
<PAGE>
Schedule 6.01
Security Party KPR Sport International, Inc.
Description of Collateral: See Attached
Debt: $851,440
Subordinated to Bank
<PAGE>
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
Ryka, Inc.
555 S. Henderson Road
King of Prussia, PA 19406 1
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
1a
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
1b
- --------------------------------------------------------------------------------
Secured Party(ies) name(s) (last name first if individual) and address for
security interest information:
KPR Sports International, Inc.
555. S Henderson Road
King of Prussia, PA 19406
2
- --------------------------------------------------------------------------------
Assignee(s) of Secured Party name(s) (last name first if individual) and address
for security interest information:
2a
- --------------------------------------------------------------------------------
Special Types of Parties (check if applicable):
- ----
- ---- The terms "Debtor" and "Secured Party" mean "Lessee" and
"Lessor," respectively
- ----
- ---- The terms "Debtor" and "Secured Party" mean "Consignee"
and "Consignor" respectively
- ----
- ---- Debtor is a Transmitting Utility
3
- --------------------------------------------------------------------------------
SECURED PARTY SIGNATURE(S)
- --------------------------------------------------------------------------------
This statement is filed with only the Secured Party's signature to perfect a
security interest in collateral (check applicable box(es))--
a ---- acquired after a change of name, identity or corporate structure
---- of the Debtor
b ---- as to which the filing has lapsed.
c already subject to a security interest in another county in Pennsylvania--
----
---- when the collateral was moved to this county.
----
---- when the Debtor's residence or place of business
was moved to this county
d already subject to a Security interest in another jurisdiction--
----
---- when the collateral was moved to Pennsylvania.
----
---- when the Debtor's location was moved to Pennsylvania.
e ----
---- which is proceeds of the collateral described in block 9,
in which a security interest was previously perfected
(also describe proceeds in block 9, if purchased with cash
proceeds and not adequately described on the original
financing statement)
Secured Party Signature(s)
(required only if box(es) is checked above)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
Uniform Commercial Code ???? ?????
IMPORTANT Please read instructions on
reverse side page 4 before completing
- --------------------------------------------------------------------------------
Filing No. (stamped by filing officer): Date, Time, Filing Officer)
-------------------------------------------------------------------------------
This Financing Statement is presented for filing pursuant to the-Uniform
Commercial Code, and is to ??? with the (check applicable box):
---- Secretary of the Commonwealth
----
----
---- Prothonotary of Montgomery County.
------------------------------------
----
---- real estate records of ---------------------------- County.
- --------------------------------------------------------------------------------
Number of Additional Sheets (if any):
- --------------------------------------------------------------------------------
Optional Special Identification (Max. 10 characters):
- --------------------------------------------------------------------------------
COLLATERAL
- --------------------------------------------------------------------------------
Identify collateral by item and/or type:
See Collateral Description Attached
----
---- (check only if desired) Products of the collateral are also covered.
------------------------------------------------------------------------------
Identify related real estate, if applicable: The collateral is, or includes
(check appropriate box(es))
a. ---
--- crops growing or to be grown on --
b. ---
--- goods which are or are to become fixtures on --
c. ---
--- minerals or the like (including oil and gas) as extracted on --
d ---
--- accounts resulting from the sale of minerals or the like (including oil
and gas) at the wellhead minehead on --
the following real estate
Street Address:
Described at : Book __________ of (check one) --- ---
--- Deeds --- Mortgages, at
Page(s) ______ for _________________ County. Uniform Parcel Indentifier______
----
---- Described on Additional Sheet.
Name of record owner (required only if no Debtor has an interest of record):
- -------------------------------------------------------------------------------
DEBTOR SIGNATURE(S)
- --------------------------------------------------------------------------------
Debtor signature(s)
1
- --------------------------------------------------------------------------------
1a
- --------------------------------------------------------------------------------
1b
- --------------------------------------------------------------------------------
RETURN RECEIPT TO:
David S. Mandel, Esquire
ASTOR WEISS KAPLAN & ROSENBLUM
The Bellevue, 6th Floor
Broad Street at Walnut
Philadelphia, PA 19102
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT "A"
-----------
DESCRIPTION OF COLLATERAL
Debtor grants to Secured Party a lien and security interest in all existing and
future accounts, chattel paper, contracts, documents, equipment, fixtures,
general tangibles, instruments, inventory and all records pertaining to the
collateral and proceeds of the foregoing.
<PAGE>
EXHIBIT 10.24
SECURITY AGREEMENT BY AND BETWEEN
THE REGISTRANT AND CORESTATES BANK, N.A.
<PAGE>
SECURITY AGREEMENT
(ACCOUNTS, INVENTORY AND EQUIPMENT)
[LOGO OF CORESTATES APPEARS HERE]
THIS AGREEMENT is made this 15th day of August, 1996, between CoreStates Bank,
N.A.*
---- ------ --
a national banking association (the "Bank"), and Ryka Inc., a Delaware
-----------------------------------
corporation
- --------------------------------------------------------------------------------
(the "Debtor")
1. DEFINITIONS. As used herein and in any separate agreement between the Bank
and the Debtor in connection with this Agreement:
(a) "Account" means any right to payment for goods sold or leased or for
services rendered which is not evidenced by an Instrument or Chattel
Paper, whether or not it has been earned by performance including all
rights to payment under a charter or other contract involving the use
or hire of a vessel and all rights incident to such charter or
contract.
(b) "Qualified Account" means any Account meeting all the following
specifications; (i) it is lawfully owned by the Debtor and subject to
no lien, security interest or prior assignment, and the Debtor has the
right of assignment thereof and the power to grant a security interest
therein; (ii) it is a valid and enforceable Account, representing the
undisputed indebtedness of an Account Debtor to the Debtor; (iii) it
is not subject to any defense, set-off, counter-claim, credit,
allowance or adjustment; (iv) no substantial part of any goods, the
sale of which has given rise to the Account, has been returned,
rejected, lost or damage (v) if it arises from the sale of goods by
the Debtor, such sale was an absolute sale and not on consignment or
on approval or on a sale or return basis nor subject to any other
repurchase or return agreement, and such goods have been shipped to
the Account Debtor; (vi) if it arises from the performance of
services, such services have actually been performed; (vii) it arose
in the ordinary course of the Debtor's business; (viii) no notice of
the Bankruptcy, receivership, reorganization, insolvency, or financial
embarrassment of the Account Debtor has been received; (ix) the
Account Debtor is not a subsidiary or affiliate of the Debtor, does
not control the Debtor, and is not under the control of or under
common control with the Debtor; and (x) the Account meets such other
specifications and requirements which may from time to time be
established by the Bank.
(c) "Account Debtor" means the Person who is obligated on an Account or
General Intangible.
(d) "Chattel Paper" means a writing or writings which evidence both a
monetary obligation and a security interest in or a lease of specific
goods.
(e) "Collateral" means (i) all of the Debtor's Inventory now owned or
hereafter acquired; (ii) all of the Debtor's Documents of Title now
owned or hereafter acquired; (iii) all of the Debtor's Accounts now
existing or hereafter arising; (iv) all of the Debtor's Farm Products
now existing or hereafter arising; (v) all of the Debtor's General
Intangibles, Chattel Paper and Instruments now existing or hereafter
acquired or arising; (vi) all guarantees of the Debtor's existing and
future Accounts and General Intangibles and all other security held by
the Debtor for the payment or satisfaction thereof; (vii) the goods or
the services, the sale or lease or performance of which gave rise to
any Account or General Intangible of the Debtor, including any
returned goods; (viii) all of the Debtor's Equipment now owned or
hereafter acquired; (ix) any balance or share belonging to the Debtor
of any deposit, agency or other account with any bank and any other
amounts which may be owing from time to time by any bank to the
Debtor; (x) all property of any nature whatsoever of the Debtor now or
hereafter in the possession of or assigned or hypothecated to the Bank
for any purpose; and (xi) all Proceeds of all of the foregoing,
including all Proceeds of other Proceeds.
(f) "Debtor" means the Person who executes this Agreement as such. The
Debtor may be either a borrower from the Bank or a guarantor of the
indebtedness of another to the Bank, and in either case is the Person
obligated to pay the Liabilities secured hereby.
(g) "Document of Title" means a bill of lading, dock warrant, dock
receipt, warehouse receipt or order for the delivery of goods, and
also any other document which in the regular course of business or
financing is treated as adequately evidencing that the Person in
possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.
(h) "Farm Products" means crops or livestock or supplies used or produced
in farming operations or products of crops or livestock in their
unmanufactured states (such as ginned cotton, woolclip, maple syrup,
milk and eggs), if they are in the possession of a Debtor engaged in
raising, fattening, grazing or other farming operations.
(i) "Equipment" means tangible personal property held by the Debtor for
use primarily in business and includes equipment, machinery,
furniture, fixtures, dies, tools, and all accessories and parts now
or hereafter affixed thereto.
(j) "General Intangibles" means all personal property of every kind and
description of Debtor other than goods, Accounts, Chattel Paper,
Documents of Title, Instruments and money, and includes without
limitation choses in action, books, records, customer lists, tax,
insurance and other kinds of refunds, patents, trademarks, copyrights,
trade names, plans, licenses and other rights in personal property.
(k) "Instrument" means a negotiable instrument or a security or any other
writing which evidences a right to the payment of money and is not
itself a security agreement or lease and is of a type which is, in
ordinary course of business, transferred by delivery with any
necessary indorsement or assignment.
(l) "Inventory" means tangible personal property held by the Debtor for
sale or lease or to be furnished under contracts of service, tangible
personal property which the Debtor has so leased or furnished, and raw
materials, work in process and materials used, produced or consumed in
Debtor's business, and shall include personal property returned to the
Debtor by the purchaser following a sale thereof by the Debtor and
tangible personal property represented by Documents of Title. All
equipment, accessories and parts at any time attached or added to
items of Inventory or used in connection therewith shall be deemed to
be part of the Inventory.
(m) "Liabilities" means all existing and hereafter incurred or arising
indebtedness, obligations and liabilities of the Debtor to the Bank,
whether absolute or contingent, direct or indirect and out of whatever
transactions arising, and includes without limitation, all matured and
unmatured indebtedness, obligations and liabilities of the Debtor
under or in connection with existing and future loans.
________________________________________________________________________________
/*/CoreStates Bank N.A. also conducts business as Philadelphia National Bank as
CoreStates First Pennsylvania Bank and as CoreStates Hamilton Bank
** See Attachment, which by this refeence is incorporated herein.
<PAGE>
and advances evidenced by promissory notes or otherwise, letters of
credit, acceptances, all other extensions of credit, repurchase
agreements, security agreements, mortgages, overdrafts, foreign
exchange contracts and all other contracts for payment or
performance, indemnities, and all indebtedness, obligations and
liabilities under any guaranty or surety agreement, or as co-maker or
co-obligor with any person for any of the foregoing, including without
limitation all interest, expenses, costs (including collection costs)
and fees (including reasonable attorney's fees and prepayment fees)
incurred, arising or accruing (whether prior or subsequent to the
filing of any bankruptcy petition by or against any Debtor) under or
in connection with any of the foregoing, and further including all
such indebtedness, obligations and liabilities of the Debtor (i) to
others which the Bank may have obtained by assignment, participation,
subrogation, merger or otherwise, and (ii) to subsidiaries of the
Bank.
(n) "Person" means an individual, a corporation, a government or
governmental subdivision or agency or instrumentality, a business
trust, an estate, a trust, a partnership, a cooperative, an
association, two or more Persons having a joint or common interest, or
any other legal or commercial entity.
(o) "Proceeds" means whatever is received when Collateral is sold,
exchanged, collected or otherwise disposed of, including without
limitation insurance proceeds.
2. SECURITY INTEREST IN COLLATERAL. As Security for the payment of the
Liabilities the Debtor hereby assigns to the Bank and grants to the Bank a lien
upon and security interest in the Collateral. Without the written consent of the
Bank, the Debtor will not create, incur, assume or suffer to exist any other
liens or security interests in the Collateral.
3. COLLECTION OF ACCOUNTS. Any Proceeds of Accounts collected by the Debtor
shall be received and held by the Debtor in trust for the Bank. Unless otherwise
agreed by the Bank, the Debtor shall deliver to the Bank within one day of the
receipt thereof by the Debtor all Proceeds in the form of cash, checks, drafts,
notes and other remittances received in payment of or on account of any of the
Debtor's Accounts. Such Proceeds shall be deposited in a special non-interest
bearing bank account (the "Cash Collateral Account") maintained with the Bank
over which the Bank alone shall have power of withdrawal. All Proceeds other
than cash shall be deposited in precisely the form in which received, except for
the addition thereto of the endorsement of the Debtor when necessary to permit
collection of the items, which endorsement the Debtor agrees to make. The Debtor
will not commingle any such Proceeds with any of the Debtor's other funds or
property but will hold them separate and apart from any other funds or property
and upon an express trust for the Bank until deposit thereof is made in the Cash
Collateral Account. Periodically, at the Bank's discretion, the Bank will apply
all or any part of the collected Proceeds of Accounts on deposit in the Cash
Collateral Account to the payment in full or in part of such of the Liabilities
and in such order as the Bank may elect. The Bank shall have the right at any
time, acting if it so chooses in the Debtor's name, to collect the Debtor's
Accounts itself, to sell, assign, compromise, discharge or extend the time for
payment of any Account, to institute legal action for the collection of any
Account, and to do all acts and things necessary or incidental thereto. The
Debtor hereby ratifies all that the Bank shall do by virtue hereof. The Bank may
at any time, without notice to the Debtor, notify any Account Debtor that the
Account payable by such Account Debtor has been assigned to the Bank and is to
be paid directly to the Bank. At the Bank's request upon default the Debtor
shall so notify Account Debtors and shall indicate on all billings to Account
Debtors that payments thereon are to be made to the Bank. Without the written
consent of the Bank, the Debtor shall not compromise, discharge, extend the time
for payment of or otherwise grant any indulgence or allowance with respect to
any Account.
4. PROCESSING AND SALES OF INVENTORY. So long as the Debtor is not in default
hereunder, the Debtor shall have the right, xxxxx the regular course of its
business, to process and sell its Inventory.
5. OTHER AGREEMENTS OF DEBTOR.
(a) The Debtor shall keep complete and accurate books and records and make
all necessary entries therein to reflect the quantities costs, values
and location of its Inventory and Equipment, and the transactions and
facts giving rise to its Accounts and General Intangibles and all
payments, credits and adjustments applicable thereto. The Debtor shall
keep the Bank fully and accurately informed as to the location of all
such books and records pertaining to the Collateral and shall permit
the Bank's agents to have access to all such books and records and any
other records pertaining to the Debtor's business which the Bank may
request and, deemed necessary to the Bank, to remove them from the
Debtor's place of business or any other place where the same may be
found for the purpose of examining, auditing and copying the same. Any
of the Debtor's books and records so removed by the Bank's agents
shall be returned to the Debtor by the Bank as soon as the Bank shall
have completed its inspection, audit or copying thereof. The Bank
shall have the right to communicate with Account Debtors and Debtor's
accountant to the extent reasonably necessary to verify account
balances and any information provided by the Debtor. The Bank's right
to take possession of the Debtor's books and records pertaining to the
Collateral shall be enforceable at law by action of replevin or by any
other appropriate remedy at law or in equity, and the Debtor consents
to the entry of judicial orders or injunctions enforcing such right
without any notice to the Debtor or any opportunity to be heard.
(b) In the event that any lien, assessment or tax liability against the
Debtor shall arise, whether or not entitled to priority over the
security interest of the Bank created hereby, the Debtor shall give
prompt notice thereof in writing to the Bank. The Bank shall have the
right (but shall be under no obligation) to pay any tax or other
liability of the Debtor deemed by the Bank to affect xxxxx interest.
The Debtor shall repay to the Bank any sums which the Bank shall have
so paid, together with interest thereon at the rate payable by the
Debtor, at the time of payment by the Bank,with respect to the
Liabilities (or the highest such rate, if there be more than one), but
in no event less than six percent (6%) per annum and the Debtor's
liability to the Bank for such repayment with interest shall be
included in the Liabilities. In addition, the Bank shall be subrogated
to the extent of the payment made by it to xxxx rights of the
recipient of such payment against the assets of the Debtor. The Debtor
shall furnish to the Bank at such times as the Bank may require proof
satisfactory to the Bank of the making of payments or deposits
required by applicable law with respect to amounts withheld by the
Debtor from wages and salaries of employees and amounts contributed by
the Debtor on account xxxx federal and other income or wage taxes and
amounts due under the Federal Insurance Contribution Act. The Debtor
represents warrants and agrees that, in respect to all employee
pension or other benefit plans maintained by the Debtor or any of
xxxxx subsidiaries, the Debtor is in full compliance, and will
continue to comply fully, with the Employee Retirement Income Security
Act of 1974, as amended and all rules and regulations adopted
thereunder or pursuant thereto. The Debtor continuously represents and
warrants to the Bank that all Collateral consisting of goods has been
and will continue to be produced in compliance with xxxx requirements
of the Fair Labor Standards Act, including Sections 206 and 207
thereof, and will immediately notify Bank if Debtor has any reason to
believe otherwise.
** See Attachment
<PAGE>
(c) If any of the Debtor's Accounts or General Intangibles arises out of a
contract with the United States or any department, agency or
instrumentality thereof, the Debtor will immediately notify the Bank
thereof in writing and execute any instruments and take any steps required
by the Bank in order that the security interest of the Bank hereunder in
the Debtor's General Intangibles under such contract and in all Accounts
arising thereunder and in the Proceeds thereof shall be perfected under the
provisions of the Federal Assignment of Claims Act.
(d) If any of the Debtor's Accounts is or becomes evidenced by a promissory
note, a trade acceptance or any other instrument for the payment of money,
the Debtor will promptly deliver such instrument to the Bank appropriately
endorsed to the Bank's order Regardless of the form of such endorsement,
the Debtor hereby waives presentment, demand, notice of dishonor, protest
and notice of protest and all other notices with respect thereto.
(e) The Debtor will keep its Inventory** and Equipment insured against such
casualties and in such amounts as the Bank shall require. All insurance
policies shall be written for the benefit of the Debtor as the insured, and
shall name the Bank as loss payee, and such policies shall be delivered to
and held by the Bank. All such policies of insurance shall provide for at
least ten days' advance notice in writing to the Bank of any cancellation
thereof, and shall insure Bank notwithstanding the act or neglect to act of
Debtor. If the Debtor fails to pay the premiums on any such insurance, the
Bank shall have the right (but shall be under no obligation) to pay such
premiums for the Debtor's account. The Debtor shall repay to the Bank any
sums which the Bank shall have so paid, together with interest thereon at
the rate payable by the Debtor, at the time of payment by the Bank, with
respect to the Liabilities (or the highest such rate, if there be more than
one), but in no event less than six percent (6%) per annum and the Debtor's
liability to the Bank for such repayment with interest shall be included in
the Liabilities. The Debtor hereby assigns to the Bank any return or
unearned premium which may be due upon cancellation of any such policies
for any reason whatsoever and directs the insurers to pay to the Bank any
amounts so due. The Debtor's rights to receive payment of such return or
unearned premiums and the proceeds of any such insurance are included in
the Accounts and General Intangibles which are hereby subjected to a
security interest.
(f) The Debtor will maintain the Equipment in good condition and repair, and
will pay the cost of repairs to or maintenance of the same and will not
permit anything to be done that may impair the value of the Equipment.
(g) The Bank shall have the right to take possession of any Inventory and the
Debtor hereby assigns to the Bank its right of stoppage in transit with
respect to any Inventory. All costs of transportation, packing, storage and
insurance of any Inventory which the Bank may take into its possession
shall be promptly repaid to the Bank by the Debtor, together with interest
thereon at the rate payable by the Debtor, at the time of payment by the
Bank, with respect to the Liabilities (or the highest such rate, if there
be more than one), but in no event less than six percent (6%) per annum and
the Debtor's liability to the Bank for such repayment with interest shall
be included in the Liabilities. If any of the Debtor's Inventory is or
becomes represented by a Document of Title, the Bank may require that such
Document of Title be in such form as to permit the Bank or anyone to whom
the Bank may negotiate the same to obtain delivery of the Inventory
represented thereby, and that it be delivered into the possession of the
Bank.
(h) At such intervals as the Bank may require, the Debtor shall submit to the
Bank a schedule reflecting in form and detail satisfactory to the Bank the
quantities, cost and value of its Inventory** and Equipment, and the
amounts of all its outstanding Accounts and the amount of the Accounts
which are Qualified Accounts and the value of all of its General
Intangibles. The Bank may also require the Debtor to submit to the Bank
copies of the invoices pertaining to all or any of its Accounts and
evidence of shipment of the Inventory the sale or leasing of which have
given rise to such Accounts.
(i) The Debtor shall promptly notify the Bank of any event causing
deterioration, loss or depreciation in value of any substantial portion of
the Debtor's Inventory or Equipment and the amount of such loss or
depreciation. The Debtor shall permit the Bank agents to have access to its
Inventory and Equipment from time to time, as requested by the Bank, for
purposes of examination inspection, and appraisal thereof and verification
of the Debtor's records pertaining thereto. Upon default the Debtor shall
assemble the Inventory and Equipment and make them available to the Bank at
such place as may be designated by the Bank which is reasonably convenient
to both parties. Upon default the Debtor shall lease warehousing space in
the Debtor's own premises to the Bank for the purpose of taking any
Inventory into the custody of the Bank without removal thereof from such
premises and will erect such structures and post such signs as the Bank may
require in order to place such Inventory under the exclusive control of the
Bank.
(j) The Debtor will promptly notify the Bank (i) of any material adverse change
in the Debtor's financial condition or in the financial condition of any
Account Debtor or in the collectibility of any of its Accounts, (ii) of all
claims, rejections, returns and adjustments which may result in a reduction
of the liability of any Account Debtor on an Account, and (iii) of any
Qualified Account which shall cease for any reason to meet the
specifications fixed hereby for Qualified Accounts.
(k) The Debtor warrants that the Debtor's chief executive office and all of its
offices where it keeps its records concerning XXX Collateral, all locations
at which it keeps its Inventory and Equipment and all locations at which it
maintains a place of business XXX listed in Section XXX hereof. Debtor
further warrants that Debtor has no plans for the removal of the Collateral
to any location not set forth in Section XXX. The Debtor shall promptly
notify the Bank in writing of any change in the Debtor's name, chief
executive office or the location of the Debtor's records, of any change in
the location of the Collateral, of any change in the location of XXX place
of business and of the establishment of any new place of business.** If any
of the Collateral or any of the Debtor's record concerning the Collateral
are at any time to be located on premises leased by the Debtor or on
premises owned by the Debtor subject to a mortgage or other lien, the
Debtor shall obtain and deliver to the Bank, prior to the delivery of any
Collateral XXX records concerning the Collateral to said premises, an
agreement in form satisfactory to the Bank, waiving the landlord's XXX
mortgagee's or lienholder's rights to enforce any claim against the Debtor
for moneys due under the lease, mortgage or other XXX by levy or distraint
or other similar proceedings against the Collateral or the Debtor's records
concerning the Collateral XXX assuring the Bank's ability to have access to
the Collateral and the Debtor's records concerning the Collateral in order
to exercise XXX rights hereunder to take possession thereof.
(l) The Debtor shall pay to the Bank on demand, with interest at the rate
payable by the Debtor, at the time of payment by the Bank with respect to
the Liabilities (or the highest such rate, if there be more than one), but
in no event less than six percent (6%) per annum, any and all expenses
(including reasonable attorney's fees and legal expenses, filing fees,
searches, and termination costs which may have been incurred by the Bank
(i) to enforce payment of any Account or to enforce any General Intangibles
or XXX enforce any of the Liabilities, whether as against an Account
Debtor, the Debtor or any guarantor or surety of any Account XXX or of the
Debtor, or (ii) in the enforcement, prosecution or defense of any action
growing out of or connected with the subject matter of this Agreement, the
Liabilities, the Collateral or any of the Bank's rights therein or
therefor, or (iii) in connection with XXX custody, preservation, use,
operation, preparation for sale or sale of any Collateral; or (iv) in
connection with preparation XXX
** See Attachment
<PAGE>
completion of this Agreement and any and all related agreements and
consummation of the financing arrangments described herein and any
modification or extension hereof; or (v) with respect to the
enforcement, protection or preservation from time to time of the
Bank's rights under this Agreement or with respect to the Collateral.
The Debtor's liability to the Bank for such repayment with interest
shall be included in the Liabilities and is secured by the Collateral.
(m) The Debtor shall provide the bank with all financial statements or
other financial documents as the Bank may from time to time require.
The Debtor further covenants and agrees to execute from time to time
any and all agreements and documents (including financing statements)
which the Bank may request in order to perfect its lien on the
Collateral and otherwise carry out the provisions of this Agreement.
The Debtor further authorizes the Bank to file a carbon, photographic
or other reproduction of this Agreement or a financing statement
previously filed under this Agreement as a financing statement in any
jurisdiction. If certificates of title are issued or outstanding with
respect to any of the Collateral, the Debtor will cause the security
interest of the Bank to be properly noted thereon and will promptly
deliver such certificates to the Bank.
(n) Without the prior written consent of the Bank, the Debtor shall not
sell or otherwise dispose of its Equipment and, except in the ordinary
course of business, the Debtor shall not sell or dispose of its
inventory.
6. ENVIRONMENTAL MATTERS.
(a) As used in this Agreement the following terms shall have the following
meanings: (1) "Environmental Laws" means any and all applicable
federal, state and local environmental laws, rules and regulations
whether now existing or hereafter enacted together with all
amendments, modifications and supplements thereof: and (ii) "Hazardous
Materials" means any contaminants, hazardous substances, regulated
substances, or hazardous wastes which may be the subject of liability
pursuant to any Environmental Law.
(b) The Debtor represents and warrants that neither the property on which
its headquarters is located nor to the best of its knowledge any other
property owned or leased by the Debtor or any subsidiary of the Debtor
is in violation of any Environmental Laws, no Hazardous Materials are
present on said headquarters property or to the best of its knowledge
said other property and neither the Debtor nor any subsidiary of the
Debtor has been identified in any litigation, administrative
proceedings or investigation as a responsible party for any liability
under any Environmental Laws.
(c) The Debtor shall not use, generate, treat, store, dispose of or
otherwise introduce, or permit any subsidiary to use, generate, treat,
store, dispose of or otherwise introduce, any Hazardous Materials into
or on any property owned or leased by the Debtor, and will not, and
will not permit any subsidiary to, cause, suffer, allow or permit
anyone else to do so, except in an environmentally safe manner through
methods which have been approved by and meet all of the standards of
the federal Environmental Protection Agency and any other federal,
state or local agency with authority to enforce Environmental Laws.
The Debtor hereby agrees to indemnify, reimburse, defend and hold
harmless the Bank and its directors, officers, agents and employees
("Indemnified Parties" for, from and against all demands, liabilities,
damages, costs, claims, suits, actions, legal or administrative
proceedings, interest losses, expenses and reasonable attorney's fees
(including any such fees and expenses incurred in enforcing this
indemnity) asserted against, imposed on or incurred by any of the
Indemnified Parties, directly or indirectly pursuant to or in
connection with the application of any Environmental Law, to acts or
omissions occurring at any time on or in connection with any property
owned or leased by the Debtor or any subsidiary of the Debtor or any
business conducted thereon.
7. DEFAULT. The Debtor shall be in default hereunder upon the occurrence of
any of the following events.**
(a) The nonpayment when due of any amount payable on any of the
Liabilities by the Debtor or by any other person liable, either
absolutely or contingently, for payment, including endorsers,
guarantors and sureties (each such person is referred to as
"Obligor");
(b) If the Debtor or any Obligor has failed to observe or perform any
existing or future agreement of any nature whatsoever with the Bank
(other than those described in clause (a) above);
(c) If any representations, warranty, certificate, financial statement or
other information made or given by the Debtor or any Obligor to the
Bank is materially incorrect or misleading.
(d) If the Debtor or any Obligor shall become insolvent or make an
assignment for the benefit of creditors or if any petition shall be
filed by or against the Debtor or any Obligor under any bankruptcy or
insolvency law;
(e) The entry of any judgement against the Debtor or any Obligor which
remains unsatisfied for 15 days or the issuance of an attachment, tax
lien, levy or garnishment against any property of material value in
which the Debtor or any Obligor has an interest;
(f) If any attachment, levy, garnishment or similar legal process is
served upon the Bank as a result of any claim against the Debtor of
any Obligor or against any property of the Debtor or any Obligor;
(g) The dissolution, merger, consolidation or change in control (as
control is defined in Rule 12b-2 under the Securities Exchange Act of
1934) of any Debtor which is a corporation or partnership, or the sale
or transfer of any substantial portion of any Debtor assets, or if any
agreement for such dissolution, merger, or consolidation, change in
control, sale or transfer is entered into without the written consent
of Bank;
(h) The death of any Debtor or Obligor who is a natural person;
(i) If the Bank determines reasonably and in good faith that an event has
occurred or a condition exists which has had, or is likely to have, a
material adverse effect on financial condition or creditworthiness of
the Debtor or any Obligor;
(j) If the Debtor or any Obligor shall fail to remit promptly when due to
the appropriate government agency or authorized depository any amount
collected or withheld from any employee of the Debtor for payroll
taxes. Social Security payments or similar payroll deductions;
(k) If any Obligor shall attempt to terminate or disclaim such Obligor's
liability for the Liabilities;
(l) If the Bank shall reasonably and in good faith determine and notify
the Debtor that any collateral is insufficient as to quality or
quantity;
(m) If the Debtor shall to pay when due any material indebtedness for
borrowed money other than to the Bank; or
(n) If the Debtor shall fail be notified of the failure of the Debtor or
any Obligor to provide such financial and other information promptly
when reasonably requested by the Bank;
8. ACCELERATION AND ENFORCEMENT RIGHTS. Whenever the Debtor shall be in
default as aforesaid, (i) the Bank may declare the entire unpaid amount of
such of the Liabilities as are not then due and payable to become
immediately due and payable without notice to or demand on any obligor; and
(ii) the Bank may at its option exercise from time to time any or all
rights and remedies
<PAGE>
available to it under the Uniform Commercial Code or otherwise available to
it, including the right to collect, receipt for, settle, compromise,
adjust, sue for, foreclose or otherwise realize upon any of the Collateral
and to dispose of any of the Collateral at public or private sale(s) or
other proceedings, with or without advertisement, and the Debtor agrees
that the Bank or its nominee may become the purchaser at any such sale(s).
Bank shall have the unconditional right to retain and obtain the full
benefit of all Collateral until all Liabilities of the Debtor to the Bank
are paid satisfied in full. If any notification of intended disposition of
the Collateral is required by law, such notice shall be deemed reasonable
if mailed at least 7 days before such disposition addressed to the Debtor
at its Address shown herein. If any Note secured hereby is payable on
demand. Bank's right to require payment shall not be restricted or impaired
by the absence, non-occurrence or waiver of an Event of Default, and it is
understood that if such Note is payable on demand, the Bank may require
payment at any time.
9. APPLICATION OF COLLATERAL. The Proceeds of any Collateral received by the
Bank at any time before or after default, whether from sale of Collateral
or otherwise may be applied to the payment in full or in part of such of
the Liabilities and in such order as the Bank may elect. The Debtor, to the
extent that it has any right, title or interest in any of the Collateral
authorized Bank to proceed against the Collateral in any order that Bank
may determine and waives and releases any right to require the Bank to
collect any of the Liabilities from any source other than from the
Collateral under any theory of marshalling of assets, or otherwise, and
specifically authorizes the Bank to proceed against any of the Collateral
in which the Debtor has a right, title or interest with respect to any of
the Liabilities in any manner that the Bank may determine.
10. POWER OF ATTORNEY. The Debtor does hereby appoint any officer or agent of
the Bank as the Debtor's true and lawful attorney-in-fact, with power to
endorse the name of the Debtor upon any notes, checks, drafts, money
orders, or other instruments of payment or Collateral that may come into
possession of Bank: to sign and endorse the name of the Debtor upon any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against Account Debtors, assignments, verifications and
notices in connection with Accounts, and any instruments or documents
relating thereto or to the Debtor's rights therein; and to give written
notice to such office and officials of the United States Postal Service to
effect such change or changes of address so that all mail addressed to the
Debtor may be delivered directly to Bank (Bank will return all mail not
related to the Liabilities or the Collateral); granting unto Debtor's said
attorney full power to do any and all things necessary to be done with
respect to the above transactions as fully and effectually as Debtor might
or could do, and hereby ratifying all that said attorney shall lawfully do
or cause to be done by virtue hereof. This power of attorney shall be
irrevocable for the term of this Agreement and all transactions hereunder.
11. TERM. The term of this Agreement shall commence with the date hereof and
end on the date when, after receipt of written notice of the termination of
this Agreement from either party to the other, which notice may be given by
either party at any time, there shall be no Liabilities outstanding.
12. SUCCESSORS AND ASSIGNS. All provisions herein shall inure to, and become
binding upon, the heirs, executors, administrators, successors,
representatives, receivers, trustees and assigns of the parties, provided,
however, that this Agreement shall not be assignable by the Debtor without
the prior written approval of the Bank.
13. THE DEBTOR'S AUTHORITY AND CAPACITY, ETC. The Debtor represents and
warrants that the Bank is obtaining and shall maintain at all times a first
lien on all of the Collateral. If the Debtor is a corporation, the Debtor
further represents and warrants that it is duly organized, validly in
existence and in good standing in its state of incorporation and any other
state where the nature or extent of its business requires qualification,
that the execution and performance by the Debtor of this Agreement and any
related agreements is authorized by the Debtor's Board of Directors and
does not violate the Articles of Incorporation or By-Laws of the Debtor or
any other Agreement or contract by which the Debtor is bound. The Debtor
represents and warrants that this Agreement is the legal, valid and binding
obligation of the Debtor enforceable against the Debtor in accordance with
its terms.
14. CONSENT TO JURISDICTION AND VENUE, IN ANY LEGAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER, ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. EACH UNDERSIGNED PARTY
HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED IN MONTGOMERY OR PHILADELPHIA COUNTY IN THE
COMMONWEALTH OF PENNSYLVANIA AND AGREES NOT TO RAISE ANY OBJECTION TO SUCH
JURISDICTION OR TO THE LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH
PROCEEDING IN SUCH COUNTY. EACH UNDERSIGNED PARTY AGREES THAT SERVICE OF
PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED UPON IT BY MAILING A
COPY THEREFORE BY REGISTERED MAIL, POSTAGE PREPAID, TO EACH UNDERSIGNED
PARTY.
15. WAIVER OF JURY TRIAL, EACH UNDERSIGNED PARTY HEREBY WAIVES, AND THE BANK BY
ITS ACCEPTANCE HEREOF THEREBY WAIVES, TRIAL BY JURY IN ANY LEGAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,
CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO, ACCEPT OR RELY UPON THIS
AGREEMENT.
16. MISCELLANEOUS. The construction and interpretation of this Agreement and
all agreements shall be governed by the laws of the Commonwealth of
Pennsylvania. No modification hereof shall be binding or enforceable unless
in writing and signed by the party against whom enforcement is sought. If
any provision of this Agreement is determined to be unenforceable or
invalid, such determination shall not affect or impair the remaining
provisions of this Agreement. No rights are intended to be created
hereunder for the benefit of any third party beneficiary hereof. The
individual signatory(ies) on behalf of the Debtor represents that he (they)
is (are) authorized to execute this Agreement on behalf of the Debtor. This
Agreement supplements the Debtor's obligations under any promissory notes
or separate agreements with the Bank.
17. LOCATIONS OF DEBTOR. The Debtor represents and warrants that the following
addresses (together with any additional addresses which may be shown on any
attached schedule) correctly set forth all of the locations where the
Debtor maintains a place of business, its records or the Collateral.
** See Attachment
<PAGE>
CHIEF EXECUTIVE OFFICE: 555 South Henderson Road, King of Prussia, PA 19406
1221 East Dyer Road, Suite 215
Santa Ana, Orange County, CA 92705
Universal Warehouse Co.
JAM Industries, Inc. ULS Express
13605 Cimarron Ave. 2850 East Del Amo Blvd.
Gardena, Orange County, CA 90249 Long Beach, CA 90807-0547
18. NAME OF DEBTOR. The Debtor represents and warrants that the name of the
Debtor shown on this Agreement is the correct, full legal name of the Debtor and
that the Debtor has not at any time changed its name, identity or corporate
structure, been the surviving corporation in a merger, acquired any other
business, or engaged under an assumed name or trade name except as set forth
below.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
under seal and intending to be legally bound on the day and year first above
written.
CORESTATES BANK, N.A.
RYKA INC. By /s/ Ann B. Delaura
- ----------------------------------------- ---------------------------------
(Name of Corporate or Partnership Debtor) (Signature)
By /s/ Steven Wolf Ann B. Delaura VP
--------------------------------------- ---------------------------------
(Authorized Signature) (Print Name and Title)
/s/ Steven Wolf VP CFO Address 1345 Chestnut Street
- ----------------------------------------- ----------------------------
(Print Name and Title) (Number, Street)
Philadelphia, PA 19107
-----------------------------------
(City)
___________________________________(Seal)
(Signature of Individual Debtor)
_________________________________________
(Print Name of Individual Debtor)
_________________________________________
(Print Trade Style or Fictious Name if any)
<PAGE>
Attachment
to
Security Agreement (Accounts, Inventory and Equipment)
dated August 15, 1996 ("Security Agreement")
between Ryka Inc. and CoreStates Bank, N.A.
The terms of this Agreement shall modify and supplement the terms of the
Security Agreement and are hereby incorporated into and made a part of the
Security Agreement. To the extent that any term set forth in this Attachment is
inconsistent with the terms of the Security Agreement, the terms of this
Attachment shall govern.
The terms of the Security Agreement are modified as follows to conform the
terms of the Security Agreement with the terms of any credit, loan, letter of
credit or other similar agreement which now or at any time hereafter may be
entered into between the Debtor and the Bank relating to any Liabilities and any
promissory note now or hereafter delivered by the Debtor to the Bank
evidencing any Liabilities, including but not limited to the Revolving Credit
Agreement and related promissory note dated the date hereof between the Debtor
and the Bank, as any such agreement(s) and promissory note(s) may be amended,
renewed, increased or extended from time to time, (herein referred to
collectively as "Credit Agreement");
1. The second sentence of Paragraph 2 of the Security Agreement is hereby
modified to add the following to the end of that sentence, at the place marked
with two asterisks (**):
"except liens, if any, permitted by the terms of any Credit Agreement
("Permitted Liens')."
2. Paragraph 5(b) of the Security Agreement is hereby modified as
necessary to permit the Debtor to contest any lien, assessment or tax liability
against the Debtor to the extent such contest permitted by the terms of any
Credit Agreements.
3. Paragraph 5(e) of the Security Agreement is hereby modified to add the
following at the place marked with two asterisks (**):
, including but not limited to Inventory in transmit,
4. Paragraph 5(h) of the Security Agreement is hereby modified to add the
following at the place marked with two asterisks (**):
, including but not limited to reports of quantities, cost and value
of Inventory in warehouses, broken down by warehouse if requested,
5. Paragraph 5(k) of the Security Agreement is hereby modified to add the
following after the third sentence, at the place marked with two asterisk (**):
Without limiting the generality of the foregoing, the Debtor shall
confine, and cause its subsidiaries to confine, all shipment of
Inventory into locations and jurisdictions where the Bank has filed
and maintains in force UCC-1 financing
<PAGE>
statements and will not make any change or addition to the warehouses
utilized by the Debtor or its subsidiaries for delivery and storage of
Collateral without prior written notice to the Bank. Such notice, if
relating to a new warehouse or change in arrangements at an existing
warehouse, shall include evidence satisfactory to the Bank of the
rental of the warehouse space, including name, address (including
county) and square footage, Section 17 sets forth complete name and
address (including country) of every warehouse currently utilized by
the Debtor for the delivery and storage of Collateral.
6. Paragraphs 7(a) and (b) of the Security Agreement are hereby modified
to incorporate any required or any applicable grace or cure period for which
provision has been made with respect to nonpayment of any Liabilities or failure
to perform any other covenants or agreements in any Credit Agreements.
7. Paragraphs 7(d) through (n) of the Security Agreement are hereby
modified to incorporate any applicable terms contained in any Credit Agreements
relating to the subject matter thereof which limit, provide for any grace
periods or create expectations with respect to any of the defaults listed
therein.
8. Paragraph 13 of the Security Agreement is hereby amended to insert the
following at the end of the first sentence of said Paragraph, at the place
marked with two asterisks(**):
",except for Permitted Liens, if any."
9. Except as modified hereby, to the extent that the terms of the
Security Agreement contain provisions relating specifically to the Collateral
the subject matter of which is also dealt with more generally in any Credit
Agreements, the more specific terms of the Security Agreement and this
Attachment shall govern.
Executed the day and year set forth above.
RYKA INC.
By /s/ Steven Wolf
-------------------------------------
STEVEN WOLF VP CFO
-------------------------------------
Print Name and Title
CORESTATES BANK, N.A.
By /s/ Ann B. DeLaura
-------------------------------------
Ann B. DeLaura, Vice President
2
<PAGE>
EXHIBIT 10.25
MEMORANDUM OF SECURITY AGREEMENT BY AND BETWEEN
THE REGISTRANT AND CORESTATES BANK, N.A.
<PAGE>
MEMORANDUM OF SECURITY AGREEMENT
This Memorandum of Security Agreement, dated as of August 15, 1996, is made
by RYKA INC., a Delaware corporation with an address at 555 South Henderson
Road, King Of Prussia, Pennsylvania 19406 ("Grantor"), in favor of CORESTATES
BANK, N.A., a national banking association with an address at 1345 Chestnut
Street, Philadelphia, PA 19107 ("Grantee").
WHEREAS, Grantor is the owner of the trademark listed on Schedule "A"
attached hereto (, the "Mark"); and
WHEREAS, under a certain Security Agreement (Accounts, Inventory and
Equipment) dated the date hereof between Grantor and Grantee, Grantor has
granted to Grantee a security interest in certain of its assets (including the
Mark and the goodwill association therewith) to secure the payment and
performance of a certain liabilities and obligations owing by the Grantor to the
Grantee; and
WHEREAS, Grantor and Grantee by this instrument seek to confirm and make a
record of the grant of a security interest in the Mark and the goodwill
associated therewith;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Grantor does hereby acknowledge that
it has granted to Grantee a first security interest in, to and under (1) the
Mark and the goodwill associates therewith, and (2) the rights, interests, and
benefits of the foregoing, including without limitation any claim of the
foregoing, including without limitation any claim of the Grantor against any
third party for past, present and future infringement or dilution of the Mark,
or for injury to the goodwill associated with the Mark.
Grantor also acknowledges and confirms that the rights and remedies of
Grantee with respect to the security interests in the Mark granted hereby are
more fully set forth in the Security Agreement, the terms and provisions of
which are incorporated herein by reference.
IN WITNESS WHEREOF, Grantor has caused this Memorandum of Security
Agreement to be duly executed by its proper corporate officers thereunto duly
authorized as of the date first written above.
Attest: RYKA INC.
By [SIGNATURE ILLEGIBLE] By /s/ Steven Wolf
---------------------------------- ----------------------------
Title Steven Wolf VP CFO
----------------------------
Print Name and Title
Subscribed and sworn to before me this 15th day of August, 1996
---- -------
/s/ Patricia McCauley
- ---------------------
Notary Public
My Commission Expires:
[Seal]
<PAGE>
SCHEDULE A
TO
MEMORANDUM OF SECURITY AGREEMENT
dated as of August 15, 1996
by RYKA INC., a Delaware corporation ("Grantor"),
in favor of CORESTATES BANK, N.A.
THE MARK IS IDENTIFIED AS FOLOWS:
MARK: REGISTRATION #:
- ----- ---------------
Ryka #1,616,804
-2-
<PAGE>
EXHIBIT 10.26
LIMITED GUARANTY OF MICHAEL RUBIN
IN FAVOR OF CORESTATES BANK, N.A.
<PAGE>
[LOGO OF CORESTATES APPEARS HERE]
GUARANTY
This Guaranty is made and entered into by the undersigned, and by each of
them if more than one (the "Guarantor"), for the benefit of Corestates Bank,
N.A.*, a national banking association (the "Bank").
1. OBLIGOR. The "Obligor" means the following person or entity, and if more
than one, any or all of the following persons or entities:___________________
Ryka Inc.
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2. OBLIGATIONS. The "Obligations" means all existing and hereafter incurred or
arising indebtedness, obligations and liabilities of the Obligor to the Bank,
whether absolute or contingent, direct or indirect and out of whatever
transactions arising, and includes without limitation, all matured and unmatured
indebtedness, obligations and liabilities of the Obligor under or in connection
with existing and future loans and advances evidenced by promissory notes or
otherwise, letters of credit, acceptances, all other extensions of credit,
repurchase agreements, security agreements, mortgages, overdrafts, foreign
exchange contracts and all other contracts for payment or performance,
indemnities, and all indebtedness, obligations and liabilities under any
guaranty or surety agreements or as co-maker or co-obligor with any person for
any of the foregoing, including without limitation all interest, expenses, costs
(including collection costs) and fees (including reasonable attorney's fees and
prepayment fees) incurred, arising or accruing (whether prior or subsequent to
the filing of any bankruptcy petition by or against any Obligor) under or in
connection with any of the foregoing. If the term "Obligor" includes more than
one person or entity, the Obligations shall include all Obligations of any one
or more of such person or entities, whether such Obligations are individual,
joint, several or joint and several.
3. UNCONDITIONAL GUARANTY. In consideration of any existing Obligations and
any Obligations which may hereafter arise or be incurred, each Guarantor,
intending to be legally bound, absolutely and unconditionally (and jointly and
severally if more than one) guaranties to Bank the payment, performance and
satisfaction when due (whether by stated maturity, demand acceleration or
otherwise) of all Obligations. The obligations of the Guarantor hereunder shall
continue in full force and effect, irrespective of the validity, legality or
enforceability of any agreements, notes or documents pursuant to which any of
the Obligations arise, or the existence, value or condition of any collateral
for any of the Obligations, or of any other guaranty of the Obligations, or any
other circumstance which might otherwise constitute a legal or equitable
discharge of a surety or guarantor.
4. COST OF ENFORCEMENT. Each Guarantor agrees (jointly and severally if more
than one) to pay Bank all costs and expenses (including reasonable attorneys'
fees) at any time incurred by Bank in the enforcement of this Guaranty against
any Guarantor. See Rider, incorporated herein
5. PAYMENT BY GUARANTOR. Payment by each Guarantor is due upon demand by Bank
and is payable in immediately available funds in lawful money of the United
States of America.
6. CONTINUING GUARANTY. This Guaranty shall continue in full force and effect
with respect to each Guarantor and may not be revoked until all existing
Obligations and all Obligations hereafter incurred or arising have been paid,
performed and satisfied in full. Notwithstanding the foregoing any Guarantor
may, by written notice to Bank, terminate its liability hereunder with respect
to Obligations which are not Pre-Termination Obligations as hereinafter defined.
Such notice shall be ineffective unless sent via certified mail to: Special
Notices Section, Commercial Loan Services, F.C. 1-3-18-64, CoreStates Bank,
N.A., 1500 Market Street, Philadelphia, PA 19102
The burden of establishing (i) that Bank has received any termination notice
hereunder and (ii) the day on which such notice was received shall be on
Guarantor. In the event that Bank receives an effective termination notice from
Guarantor in accordance with the provisions of this paragraph, such termination
shall not affect Guarantor's liability (a) for Obligations incurred or arising
on or prior to the tenth day following receipt by Bank of such termination
notice, or any earlier day, on which Bank determines in good faith that the
appropriate Bank officers have actual knowledge of Bank's receipt of such notice
(the "Termination Effective Date"), (b) for Obligations which are renewals,
modifications, amendments, extensions, substitutions, replacements or rollovers
of; or which consist of accrued interest on, Obligations incurred or arising on
or prior to the Termination Effective Date, or (c) for Obligations incurred or
arising pursuant to a commitment existing on the Termination Effective Date
under which Bank was obligated to extend credit or make payments to Obligor or
for Obligor's account, all Obligations referred to in this sentence being
hereinafter collectively called "Pre-Termination Obligations". It is understood
that for purposes of this Guaranty and regardless of any conflicting agreement
between Bank and any Obligor all payments on and other reductions of the
Obligations subsequent to the Termination Effective Date (other than payments
made by Guarantor in respect of the Guaranty itself) shall, unless Bank elects
otherwise in writing, be applied first to Obligations other than Pre-Termination
Obligations, and then to Pre-Termination Obligations. It is further understood
that the provisions of the preceding sentence shall be applicable regardless of
the amount of any new Obligations incurred or arising subsequent to the
Termination Effective Date.
7. WAIVERS AND CONSENTS BY GUARANTOR. Each Guarantor unconditionally consents
to, and waives as a defense to liability hereunder, each of the following; (a)
any waiver, inaction, delay or lack of diligence by Bank in enforcing its rights
against any Obligor or in any property, or the unenforceability of any
such rights, including any failure to perfect, protect or preserve any lien or
security interest which may be intended directly or indirectly to secure any of
the Obligations, and the absence of notice thereof to any Guarantor, (b) the
absence of any notice of the incurrence or existence of any Obligation, (c) any
action, and the absence of notice thereof to any Guarantor, taken by Bank or any
Obligor with respect to any of the Obligations, including any release,
subordination or substitution of any collateral or release, termination,
compromise, modification or amendment of any instrument executed by or
applicable to any Obligor or of any claim, right or remedy against any Obligor
or any property, (d) any impairment of Guarantor's right to reimbursement by way
of subrogation, indemnification or contribution, (e) any other action taken or
omitted by Bank in good faith with respect to the Obligations, (f) the absence
or inadequacy of any formalities of every kind in connection with enforcement of
the Obligations, including presentment, demand, notice and protest, and (g) the
waiver of any rights of Bank under or any action taken or omitted by Bank with
respect to any other guaranty of the Obligations.
8. OTHER AGREEMENTS BY GUARANTOR. Each Guarantor agrees that there shall be
no requirement that Bank document its acceptance of this Guaranty, evidence its
reliance thereon, or that Bank take any action against any person or any
property prior to taking action against any Guarantor. Each Guarantor further
agrees that Bank's rights and remedies hereunder shall not be impaired or
subject to any stay, suspension or other delay as a result of Obligor's
insolvency or as a result of any proceeding applicable to Obligor or Obligor's
property under any bankruptcy or insolvency law. Each Guarantor also agrees
that payments and other reductions on the Obligations may be applied to such of
the Obligations and in such order as Bank may elect.
9. SUBROGATION AND SIMILAR RIGHTS. No Guarantor will exercise any rights with
respect to Bank or any Obligor related to or acquired in connection with or as a
result of its making of this Guaranty which it may acquire by way of
subrogation, indemnification or contribution, by reason of payment made by it
hereunder or otherwise, until after the date on which all of the Obligations
shall have been satisfied in full. Until such time, any such rights against the
Obligor shall be fully subordinate in lien and payment to any claim in
connection with the Obligations which Bank now or hereafter has against the
Obligor. If any amount shall be paid to any Guarantor on account of such
subrogation, indemnification or contribution at any time when all of the
Obligations and all other expenses guaranteed pursuant hereto shall not have
been paid in full, such amount shall be held in trust for the benefit of Bank,
shall be segregated from the other funds of Guarantor and shall forthwith be
paid over to Bank to be applied in whole or in part by Bank against the
Obligations, whether matured or unmatured, in such order as the Bank shall
determine in its sole discretion. If Guarantor shall make payment to the Bank of
all or any portion of the Obligations and all of the Obligations shall be paid
in full. Guarantor's right of subrogation shall be without recourse to and
without any implied warranties by Bank and shall remain fully subject and
subordinate to Bank's right to collect any other amounts which may thereafter
become due to the Bank by the Obligor in connection with the Obligations.
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* CoreStates Bank, N.A. also conducts business as Philadelphia National Bank, as
CoreStates First Pennsylvania Bank and as CoreStates Hamilton Bank
<PAGE>
10. REINSTATEMENT OF LIABILITY. If any claim is xxxxx upon the Bank for
repayment or recovery of any xxxxx or amounts received by Bank in payment or on
account of any Obligations and Bank repays all or part of said amount by reason
of (a) any judgment xxxxx order of any court or administrative body having
jurisdiction over the Bank or any of its property, or (b) any settlement or
compromise in good faith with any such claimant (including Obligor), then and in
such event, each Guarantor agrees that any such judgment, decree, order,
settlement or compromise shall be binding upon the Guarantor, notwithstanding
any termination hereof or the cancellation of any note or other instrument
evidencing any Obligation, and each Guarantor shall remain liable to the Bank
hereunder for the amount so repaid or recovered to the same extent as if such
amount had never originally been received by Bank.
11. SECURITY INTEREST. Each Guarantor hereby assigns to the Bank and grants to
the Bank a security interest in any balance or assets in any deposit or other
account of such Guarantor in or with the Bank whenever and so long as any of the
Obligations shall be outstanding and unpaid and agrees that the security
interest hereby granted shall be independent of the right of setoff.
12. FINANCIAL INFORMATION ON GUARANTOR. Each Guarantor hereby agrees to
provide the Bank with such information on the business affairs and financial
condition of such Guarantor as the Bank from time to time may reasonably request
and to notify the Bank of any change in the address of such Guarantor. In the
event that such Guarantor fails to comply with a request for information as
herein agreed, within ten (10) days after receipt of the request, such Guarantor
upon demand by the Bank agrees to purchase from the Bank without representation,
warranty or recourse the Obligations and to pay therefor the unpaid principal
amount of all such Obligations, including interest thereon to the date of
purchase.
13. EFFECT OF OTHER AGREEMENTS. The provisions of this Guaranty are cumulative
and concurrent with Bank's rights and remedies against Guarantor under any
existing or future agreement pertaining or evidencing any of the Obligations. No
such additional agreement shall be deemed a modification or waiver hereof unless
expressly so agreed by Bank in writing. If Bank holds any other guaranty or
surety agreement applicable to any of the Obligations, the liability of each
Guarantor hereunder shall be joint and several with each party obligated on such
other guaranty or surety agreement, unless otherwise agreed by Bank in writing.
14. CONFESSION OF JUDGMENT; WARRANT OF ATTORNEY--Each Guarantor irrevocably
authorizes and empowers any attorney or any clerk of court of record, upon the
occurrence of a default of an Event of Default under or in connection with any
of the Obligations, or at any time thereafter, to appear for and confess
judgment against such Guarantor for the full amount of such Guarantor's
liability under paragraph 3 hereof, with or without declaration, with costs of
suit and release of errors, without stay of execution and with an amount not to
exceed the greater of five percent (5%)of the principal amount of such judgment
or $5,000 added for collection fees. If a copy of this Guaranty, verified by
affidavit by or on behalf of Bank, shall have been filed in such action, it
shall not be necessary to file the original of this Guaranty. The authority
granted hereby shall not be exhausted by the initial exercise thereof and may be
exercised by Bank from time to time. There shall be excluded from the lien of
any judgment obtained solely pursuant to this paragraph all improved real estate
in any area identified by the Federal Emergency Management Agency as having
special flood hazards if the community in which such area is located is
participating in the National Flood Insurance Program. Any such exclusion shall
not affect any lien upon property not so excluded.
15. GUARANTOR'S ADDRESS. Guarantor warrants and represents that the address
set forth below is Guarantor's correct mailing address and agrees immediately to
notify Bank in the event of any change therein.
16. MISCELLANEOUS. (a) No amendment of any provision of this Guaranty shall be
effective unless it is in writing and signed by each Guarantor and Bank, and no
waiver of any provisions of this Guaranty, and no waiver or consent to any
departure by the Guarantor therefrom, shall be ineffective unless it is in
writing and signed by Bank, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given. (b)
Any provision of this Guaranty which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be effective to the extent of such
prohibition or unenforceability without invalidating the remaining portions
hereof or affecting the validity or enforceability of such provisions in any
other jurisdiction. (c) The obligations of each Guarantor hereunder shall not be
subject to any counterclaim, setoff, deduction or defense based upon any related
or unrelated claim which such Guarantor may now or hereafter have against Bank
or any Obligor, except payment of the Obligations, and shall not be affected by
any change in Obligor's legal status or ownership or by any change in corporate,
partnership or other organizational structure applicable to Obligor. (d) This
Guaranty shall (i) be binding on each Guarantor and its personal
representatives, estate, heirs, successors and assigns, and (ii) inure, together
with all rights and remedies of Bank hereunder, to the benefit of the Bank and
its successors, transferees and assigns. Notwithstanding the foregoing clause
(i), none of the rights or obligations of any Guarantor hereunder may be
assigned or otherwise transferred without the prior written consent of the Bank.
(e) This Guaranty shall be governed by and construed in accordance with the
internal laws, and not the law of conflicts, of the Commonwealth of
Pennsylvania.
17. CONSENT TO JURISDICTION AND VENUE IN ANY LEGAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS GUARANTY OR
THE RELATIONSHIP EVIDENCED HEREBY, EACH UNDERSIGNED PARTY HEREBY IRREVOCABLY
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
IN MONTGOMERY OR PHILADELPHIA COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA AND
AGREES NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE LAYING OR
MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. EACH UNDERSIGNED
PARTY AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED
UPON IT BY MAILING A COPY THEREOF, BY REGISTERED MAIL POSTAGE PREPAID, TO EACH
UNDERSIGNED PARTY.
18. WAIVER OF JURY TRIAL. EACH UNDERSIGNED PARTY HEREBY WAIVES, AND BANK BY
ITS ACCEPTANCE HEREOF THEREBY WAIVES, TRIAL BY JURY IN ANY LEGAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,
CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS GUARANTY OR
THE RELATIONSHIP EVIDENCED HEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
BANK TO ENTER INTO, ACCEPT OR RELY UPON THIS GUARANTY.
IN WITNESS WHEREOF, each Guarantor has executed this Guaranty as of the 15th day
of August, 1996.
________________________________________________________________________________
NAME OF CORPORATION OR PARTNERSHIP GUARANTOR
________________________________________________________________________________
ADDRESS
By:________________________________ By:_____________________________________
INDIVIDUALS OR PROPRIETORS SIGN BELOW
____________________ _______________________ /s/ Michael G. Rubin
-----------------------
WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
____________________ _______________________ -----------------------
WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
<PAGE>
RIDER TO GUARANTY
[LOGO OF CORESTATES APPEARS HERE]
Reference is made to that certain Guaranty dated August 15, 1996 (the
"Guaranty") executed by the undersigned ("Guarantor") in favor of CoreStates
Bank, N.A./*/, a national banking association (the "Bank"), the defined terms of
which are incorporated therein.
Guarantor and Bank agree as follows:
1. Guarantor's liability under paragraph 3 of the Guaranty shall be
limited to the smallest of the following amounts: (a) $2,000,000 (the "Limit
Amount"), (b) the aggregate amount of the Obligations, as said amount may
increase or decrease from time to time, or (c) subsequent to any termination of
Guarantor's liability in accordance with paragraph 6 of the Guaranty, the
aggregate outstanding balance of the Pre-Termination Obligations.
2. Whenever the aggregate amount of the Obligations exceeds the Limit
Amount, and regardless of the amount of any such excess, payments on and
reductions of the Obligations may be applied by Bank to that portion of the
Obligations which is in excess of the Limit Amount, so that the Limit Amount is
applicable to the Obligations on a "last-out" basis. Notwithstanding the
provisions of the preceding sentence, any payments made by Guarantor in respect
of the Guaranty itself shall directly reduce the unpaid amount of Guarantor's
liability under paragraph 3 of the Guaranty.
3. Except as expressly otherwise stated herein, all provisions of the
Guaranty shall continue in full force and effect and are hereby ratified and
confirmed.
IN WITNESS WHEREOF, and intending to be legally bound, Bank and Guarantor
have executed this Rider as of the 15th day of August, 1996.
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NAME OF CORPORATION OR PARTNERSHIP GUARANTOR
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ADDRESS
By: By:
------------------------------ ----------------------------------
INDIVIDUALS OR PROPRIETORS SIGN BELOW
/s/ Michael G. Rubin
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WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
MICHAEL G. RUBIN
- ---------------------- ----------------------- -------------------------
WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
- ---------------------- ----------------------- -------------------------
WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
- ---------------------- ----------------------- -------------------------
WITNESS ADDRESS OF GUARANTOR SIGNATURE OF GUARANTOR
CORESTATES BANK, N.A.
By:
------------------------------
------------------------------
(PRINT NAME AND TITLE)
________________________________________________________________________________
* CoreStates Bank, N.A., also conducts business as Philadelphia National Bank,
as CoreStates First Pennsylvania Bank and as CoreStates Hamilton Bank
<PAGE>
EXPLANATION AND WAIVER OF RIGHTS
REGARDING CONFESSION OF JUDGMENT
1. On the date hereof, Michael G. Rubin , a(an) individual
------------------------ ------------------
(the "Obligor") is signing and delivering to CoreStates Bank, N.A. (the "Bank")
a
[_] Promissory note in the principal sum of _______________________ Dollars
($__________);
[X] Guaranty of Obligations of Ryka Inc.
----------------------------------------------;
[_] Other ___________________________________________________________________
(as the same may be renewed, modified, amended, extended, restated or replaced,
whether one or more, the "Obligation"). The Obligor has been advised by the Bank
(and by the Obligor's legal counsel, if applicable) that the Obligation contains
a clause that provides that the Bank may confess judgment against the Obligor.
The Obligor has read the Obligation and clearly and specifically understands
that by signing the Obligation which contains such confession of judgment
clause:
(a) The Obligor is authorizing the Bank to enter a judgment against
the Obligor and in favor of the Bank, which will give the Bank a lien upon any
real estate which the Obligor may own in any county where the judgment is
entered;
(b) The Obligor is giving up an important right to any notice or
opportunity for a hearing before the entry of this judgment on the records of
the Court;
(c) The Obligor is agreeing that the Bank may enter this judgment and
understands that the Obligor will be unable to contest the validity of the
judgment, should the Bank enter it, unless the Obligor successfully challenges
entry of the judgment through a petition to open or strike the judgment, which
will require the Obligor to retain counsel at the Obligor's expense;
(d) The Obligor may be giving up an important right to any notice or
opportunity for a hearing before the Bank may request and use the power of the
state government to deprive the Obligor of its property pursuant to the judgment
by seizing or having the Sheriff or other official seize the Obligor's bank
accounts, inventory, equipment, furnishings, or any other personal property that
the Obligor may own, to satisfy the Obligation;
(e) The Obligor may be immediately deprived of the use of any
property that is seized by the Bank pursuant to the judgment without notice or a
hearing, and the procedural rules of Pennsylvania's court system do not
guarantee that the Obligor will receive a prompt hearing after the Obligor's
property is seized; and
(f) If the Obligation is the Bank's printed form of Master Demand
Note, Commercial Promissory Note or Security Agreement, or a Master Note
Agreement prepared by the Bank, the Obligor is agreeing that the Bank may enter
judgment whether or not there is a default under the Obligation.
2. The Obligor knows and understands that it is the confession of
judgment clause in the Obligation which gives the Bank the rights described in
subparagraphs (a) through (f) of paragraph 1 above.
<PAGE>
3. Fully and completely understanding the rights which are being given up
if the Obligor signs the Obligation containing the confession of judgment, the
Obligor nevertheless freely, knowingly and voluntarily waives said rights and
chooses to sign the Obligation.
4. The Obligor acknowledges that the proceeds of the Obligation are to be
used for business purposes.
5. If the Obligor is an individual, the Obligor certifies that his/her
annual income exceeds $10,000.00.
Dated this 15th day of August, 1996.
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THE OBLIGOR HAS READ THIS EXPLANATION AND WAIVER PRIOR TO SIGNING THE OBLIGATION
AND FULLY UNDERSTANDS ITS CONTENTS.
________________________________________
(Name of Corporation/Partnership
By________________________________ By____________________________________
__________________________________ ______________________________________
(Print Name and Title) (Print Name and Title)
INDIVIDUALS OR PROPRIETORS SIGN BELOW
__________________________________ /s/ Michael G. Rubin
--------------------------------------
(Witness Signature) (Signature of Individual Obligor)
Michael G. Rubin
__________________________________ ______________________________________
(Witness Signature) (Signature of Individual Obligor)
<PAGE>
EXHIBIT 10.27
LETTER AGREEMENT BY AND AMONG
THE REGISTRANT, CORESTATES BANK, N.A. AND MICHAEL RUBIN
<PAGE>
[LETTERHEAD OF CORESTATES]
[LOGO OF CORESTATES]
February 7, 1997
RYKA, Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Steve Wolf
RE: REVOLVING CREDIT AGREEMENT DATED AUGUST 15, 1996 BY AND AMONG
CORESTATES BANK, N.A. (THE BANK") AND RYKA INC. (THE "BORROWER")(AS
AMENDED FROM TIME TO TIME, THE "CREDIT AGREEMENT").
Dear Steve:
Pursuant to our recent discussions, I am writing to confirm that the
Borrower and the Bank have agreed to modify the Credit Agreement in accordance
with the terms set forth in this letter (the "Letter Agreement") and in
anticipation of a complete refinancing of the Borrower's obligations under the
Credit Agreement to occur on or before March 31, 1997 in accordance with the
terms of the refinancing commitment letter obtained by the Borrower as of the
date hereof (the "Commitment Letter"). All capitalized terms used in this
Letter Agreement without definition shall have the meanings given to such terms
in the Credit Agreement.
Terms of Amendment
------------------
1. The definition of "Accounts" as set forth on page 1 of the Credit
Agreement is hereby deleted in its entirety and a new definition of "Accounts"
is hereby added in its place as follows:
"Accounts" means any right to payment for goods sold or leased or for
services rendered which is not evidenced by an instrument or chattel
paper, whether or not it has been earned by performance.
2. The definition of "Account Debtor" as set forth on page 1 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Account Debtor" is hereby added in its place as follows:
"Account Debtor" means any Person who is obligated on any one or more
Accounts.
3. The definition of "Eligible Inventory" as set forth on page 2 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Eligible Inventory" is hereby added in its place as follows:
<PAGE>
RYKA INC.
February 7, 1997
Page 2
"Eligible Inventory" means Inventory owned by the Borrower: (i) which
is located in the United States or, if not located in the United
States, the purchase price for which is either secured by an
outstanding import letter of credit issued by the Bank pursuant to
this Agreement or paid as evidenced by the Borrower's initiation of
the transfer of immediately available funds and the corresponding
release of documents of title to the Borrower; (ii) which is readily
saleable in a bonafide arm's length transaction; (iii) which is titled
in the Borrower's name and not subject to any prior assignment or
lien, except the security interest of the Bank; (iv) which is not more
than nine (9) months or more from the purchase date; (v) which, if in
a warehouse, is located in a warehouse reported to the Bank as one
utilized by the Borrower as required by this Agreement and the
Security Agreement, and for which the Bank has received a landlord's
waiver and/or warehouseman's waiver satisfactory in form and substance
to the Bank (an "Approved Warehouse"); (vi) which is not "in transit"
except to the extent title to such in-transit inventory has passed to
the Borrower under documentation reasonably acceptable to the Bank and
either (a) such inventory is being shipped to an Approved Warehouse by
common carrier commissioned by the Borrower, or (b) such inventory is
received at an Approved Warehouse pending recording in the Borrower's
perpetual inventory system (as the case may be, "Approved In-Transit
Inventory"), and provided that the aggregate of all such Approved In-
Transit Inventory included as Eligible Inventory does not exceed a
book value of $1,000,000; and (vii) which meets such other
specifications and requirements that may from time to time be
established by the Bank.
4. The definition of "Qualified Account" as set forth on page 4 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Qualified Account" is hereby added as follows:
"Qualified Account" means any Account of the Borrower which meets the
following criteria: (i) it is lawfully owned by the Borrower arising
from a bona fide outright sale of goods by the Borrower, or for
services performed by the Borrower, under an enforceable contract
subject to no lien, security interest or prior assignment, and the
Borrower has the right of assignment thereof and the power to grant a
security interest therein; (ii) it is a valid and enforceable Account,
representing the undisputed indebtedness of an Account Debtor to the
Borrower and, if owing from a customer whose balances owing are
historically subject to credits, chargebacks, allowances, or other
adjustments, it has been reduced by a reserve for such historic
credits, allowances, or other adjustments in an
<PAGE>
RYKA INC.
February 7, 1997
Page 3
amount reasonably satisfactory to the Bank; (iii) it is not subject to
any defense, set-off, counter-claim, credit, chargeback, allowance or
adjustment; (iv) no substantial part of any goods, the sale of which
has given rise to the Account, has been returned, rejected, lost or
damaged; (v) if it arises from the sale of goods by the Borrower, such
sale was an absolute sale and not on consignment or on approval or on
a sale or return basis nor subject to any other repurchase or return
agreement, and such goods have been shipped to the Account Debtor;
(vi) if it arises from the performance of services, such services have
actually been performed; (vii) it arose in the ordinary course of the
Borrower's business; (viii) no notice of the Bankruptcy, receivership,
reorganization, insolvency, or financial embarrassment of the Account
Debtor has been received; (ix) the Account Debtor is not a subsidiary
or affiliate of the Borrower, does not control the Borrower, and is
not under the control of or under common control with the Borrower;
(x) it shall be aged less than 90 days from the date of invoice; and
(xi) it shall not be (a) a foreign receivable, unless supported by
credit insurance or a letter of credit or a bank guaranty acceptable
to the Bank, in which case it shall be a Qualified Account only up to
the amount covered by such insurance, letter of credit or bank
guaranty, (b) a "contra account" (defined as an Account off set by any
claim owing to the Account Debtor), provided, however, that the
ineligible amount for any contra account shall not exceed the amount
of the applicable claim or claims, (c) an Account owed by an Account
Debtor fifty percent (50%) or more of whose Accounts are not Qualified
Accounts, or (d) related to a "drop shipment" of inventory except to
the extent title has passed from the Borrower to its customer as
evidenced by documentation reasonably satisfactory to the Bank; and
(xii) the Account meets such other specifications and requirements
which may from time to time be established by the Bank.
5. The definition of "Termination Date" as set forth on page 5 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Termination Date" is hereby added as follows:
"Termination Date" means March 31, 1997.
6. The following new definitions are hereby added to section 1.01 of the
Credit Agreement in appropriate alphabetical order as follows:
<PAGE>
RYKA INC.
February 7, 1997
Page 4
"Inventory" means tangible personal property held for sale or lease or
to be furnished under contracts of service, and raw materials, work in
process and materials used, produced or consumed the ordinary course
of business, and shall include tangible personal property returned by
a purchaser following a sale thereof and tangible personal property
represented by documents of title. All equipment, accessories and
parts at any time attached or added to items of Inventory or used in
connection therewith shall be deemed to be part of the Inventory.
7. Line 10 of section 2.09 of the Credit Agreement is hereby amended by
deleting therefrom the number "$5,000,000" and adding in its place the number
"$3,000,000."
8. The following new provisions are hereby added to the end of section
5.08 of the Credit Agreement:
(17) within 15 days of the end of each calendar month: (i) a
written report of foreign Accounts reconciling each such Account to
applicable credit insurance coverage; and (ii) a written report of
pending credits not processed by the Borrower; and
(18) as and when received from its auditors, copies of all
management and other reports provided to the Borrower by such
auditors.
9. The following sentence is hereby added to the end of the section 5.07
of the Credit Agreement:
In addition to the foregoing, the Bank shall have the right at any
time and from time at the Borrower's expense to conduct extended scope
audits of the Accounts of the Borrower and any Subsidiary for the
purpose of determining compliance with the Borrower Base.
10. A new section 5.12 is hereby added to the Credit Agreement as follows:
5.12 Minimum Balance in Operating Account. From and at all
------------------------------------
times after February 7, 1997, the Borrower shall maintain a minimum
balance in its operating account with the Bank of not less than two
thousand dollars ($2,000).
11. The Borrower agrees that until such time as the Loans are repaid in
full from the proceeds of refinancing of the Loans, the Borrower will use its
best efforts to meet or otherwise comply with any and all conditions imposed
under the Commitment Letter. Upon and at any time following the Initial
Inventory Stepdown Date (as that term is defined in that certain
<PAGE>
RYKA INC.
February 7, 1997
Page 5
Forbearance and Amendment Agreement dated the date hereof by and among the Bank,
KPR Sports International, Inc., and various guarantors), the Borrower will
provide the Bank upon request with a borrowing base certificate prepared
according to the criteria set forth in the Commitment Letter in order to assist
the Bank in monitoring the Borrower's ability to meet any opening day
availability requirements set forth in the Commitment Letter. In the event that
any such borrowing base certificate does not demonstrate the appropriate opening
day availability required under the Commitment Letter, the Borrower will, at the
Bank's request, establish a borrowing reserve under the Revolving Credit
Facility up to a maximum of the amount that may be required for opening day
availability under the Commitment Letter.
12. The effectiveness of this Letter Agreement and the Bank's obligations
hereunder are conditioned upon the delivery by the Borrower of the following:
(a) This Letter Agreement duly executed by the Borrower and Michael
G. Rubin;
(b) Allonge to RYKA Note duly executed by the Borrower;
(c) A Certification of Corporate Authority executed by the Secretary
of the Borrower, dated as of the date of this Letter Agreement,
certifying the incumbency and signature of the officers of the
Borrower executing this Letter Agreement and all other documents
to be delivered by them pursuant hereto, together with evidence
of the incumbency of such Secretary;
(d) A Security Agreement Questionnaire to be completed by the
Borrower and in final form as attached hereto as Schedule 11(d);
(e) such Uniform Commercial Code Financing Statements and other
security documents as shall be presented by the Bank on or before
the closing date; and
(f) such other documents as may be required by the Bank to carry out
the provisions of this Letter Agreement.
13. The Borrower and the Guarantors, on behalf of themselves, and all
persons and entities claiming by, through, or under either of them, hereby
release, waive and forever discharge the Bank, and all of the Bank's officers,
directors, attorneys, agents, affiliates, and successors and assigns, of, from,
and with respect to any and all manner of action and actions, cause and causes
of actions, suits disputes, claims, counterclaims and/or liabilities,
<PAGE>
RYKA INC.
February 7, 1997
Page 6
cross claims, defenses, and any claims for avoidance or other remedies available
to a debtor, its estate or any trustee or representatives thereof, whether now
known or unknown, suspected or unsuspected, past or present, asserted or
unasserted, contingent or liquidated, whether or not well founded in fact or
law, whether in contract, in tort or otherwise, at law or in equity, which the
Borrower and/or the Guarantor had or now have, claim to have had, now claim to
have or hereafter can, shall or may claim to have against the Bank, for or by
reason of any cause, matter, or thing whatsoever arising from the beginning of
the world through the date hereof, including any claims based upon, relating to
or arising out of any and all transactions, relationships or dealings with or
loans made to the Borrower prior to the date hereof.
14. Any notice given pursuant to this Letter Agreement or pursuant to
any document comprising or relating to this Letter Agreement or any of the other
Loan Documents shall be in writing, including telecopies. Notice given by
telecopy or other electronic mail shall be deemed to have been given and
received when sent. Notice given by overnight mail courier shall bee deemed to
have been given and received one (1) day after the date delivered to such
overnight courier by the party sending such Notice. Notice by mail shall be
deemed to have been given and received three (3) days after the date deposited,
when sent by first class certified mail, postage prepaid, and addressed as
follows:
To the Borrower:
RYKA Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Steve Wolf
Telecopy: (610) 768-0753
With a copy to:
David S. Mandel, Esquire
Astor, Weiss, Kaplan, and Rosenblum
The Bellevue, 6th Floor
Broad Street at Walnut
Philadelphia, PA 19102
Telecopy: (215) 790-0509
<PAGE>
RYKA INC.
February 7, 1997
Page 7
To the Guarantor:
c/o RYKA Inc.
555 South Henderson Road
King of Prussia, PA 19406
Telecopy:(610) 768-0753
To the Bank:
CoreStates Bank, N.A.
Meetinghouse Business Center
2240 Butler Pike
Plymouth Meeting, PA 19462
Attention: John P. Brady, Vice President
Telecopier No.: (610)834-2069
With a copy to:
Duane, Morris & Heckscher
One Liberty Place, 41st Floor
Philadelphia, PA 19103
Attention: Peter S. Clark, Esquire
Telecopier Number: 215-979-1020
15. On or before the date hereof, the Borrower shall pay to the Bank the
amount of the Bank's costs incurred in connection with this Letter Agreement and
the other Loan Documents.
16. Except as expressly modified herein, the Credit Agreement remains in
full force and effect and the Borrower and the Guarantor hereby affirm and
reaffirm to the Bank their respective representations, warranties and covenants
as set forth in the Credit Agreement and the other Loan Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
RYKA INC.
February 7, 1997
Page 8
Please indicate the consent and agreement of the parties to the Loan
Documents to this Letter Agreement by having this Letter Agreement signed below
by an authorized officer of the Borrower and by Michael Rubin, as guarantor of
the Loan.
Sincerely,
CoreStates Bank, N.A.
By: /s/ John P. Brady
-------------------------
John P. Brady
Vice President
ACCEPTED AND AGREED TO
AS OF THIS 7 DAY OF
FEBRUARY 1997:
RYKA INC.
By: /s/ Michael G. Rubin
-----------------------
_______________________
_______________________
ACKNOWLEDGED AND AGREED TO
AS OF THIS __ DAY OF FEBRUARY 1997:
/s/ Michael G. Rubin
- ---------------------------------
Michael G. Rubin, as Guarantor
<PAGE>
EXHIBIT 10.28
SECOND FORBEARANCE AND AMENDMENT AGREEMENT
------------------------------------------
This Second Forbearance and Amendment Agreement (the "Forbearance
Agreement") is dated as of June 4, 1997 (the "Forbearance Closing Date") and is
made and entered into by and among CoreStates Bank, N.A. (the "Bank"), KPR
Sports International, Inc. (the "Borrower"), Michael G. Rubin ("Rubin"), and
KPR Sports International, Europe, BV, Delmar Ski, Inc., MR Acquisitions, LLC,
Apex Sports International, Inc., and MR Management, Inc. (collectively, the
"Corporate Guarantors," and, together with Rubin, the "Guarantors"). The
Borrower and the Corporate Guarantors are referred to collectively herein as the
"Corporate Obligors."
BACKGROUND
----------
A. The Bank and the Guarantors are parties to that certain Forbearance
and Amendment Agreement dated February 7, 1997 (as amended from time to time,
the "First Forbearance Agreement") pursuant to which the Bank agreed, among
other things, to forbear in the exercise of its remedies under the Loan
Documents through June 3, 1997 in order to allow the Corporate Obligors to
refinance or otherwise repay their obligations to the Bank.
B. As of the Forbearance Closing Date, the Borrower and the Guarantors
have been unable to refinance or otherwise repay their obligations and have
asked for an additional period through November 30, 1997 within which to pursue
their refinancing and repayment prospects.
C. Pursuant to various loan agreements and documents, the Bank has
extended a line of credit facility (the "Revolving Credit Facility") to the
Borrower. Such loan agreements and documents (the "Existing Loan Documents")
include, without limitation, the following:
1. The First Forbearance Agreement and related documents;
2. A Revolving Credit Agreement by and between the Bank and the
Borrower dated as of August 15, 1996 (the "Credit Agreement");
3. A Revolving Credit Note by the Borrower in favor of the Bank dated
August 15, 1996 (the "KPR Note");
4. Security Agreements executed by the Borrower and each of the
Corporate Guarantors dated August 15, 1996;
5. Guaranties (collectively, the "Corporate Guaranties") by each of
the Corporate Guarantors in favor of the Bank dated August 15,
1996;
<PAGE>
6. A Guaranty (the "Rubin Guaranty," and, together with the Corporate
Guaranties, the "Guaranties") by Rubin in favor of the Bank dated
August 15, 1996;
7. Various Memoranda of Security Agreements relating to trademarks
owned by each of the Corporate Obligors;
8. Various landlords' waivers and warehouseman's waivers executed by
the entities owning and/or controlling the warehouses utilized by
the Corporate Obligors in the conduct of their respective
businesses;
9. Various lockbox, cash collateral account, and cash management
agreements;
10. An Assignment of Life Insurance by Rubin;
11. An Assignment of Rights Under Credit Insurance by the Borrower;
12. A Subordination Agreement by the Borrower and Rubin in favor of
the Bank;
13. Various Uniform Commercial Code financing statements, corporate
authorization documents, and other loan and security documents
executed and delivered by any one or more of the Bank, the
Corporate Obligors and/or Rubin prior to the Forbearance Closing
Date.
As used herein, the term "Loan Documents" shall mean this Forbearance Agreement,
the other Additional Loan Documents (hereinafter defined), the Existing Loan
Documents, and all other documents now or hereafter entered into by and among
the Bank, the Borrower and/or the Guarantors to evidence the Revolving Credit
Facility and/or any of the other Obligations (hereafter defined). All
capitalized terms contained herein which are not otherwise defined shall have
the definitions set forth in the Credit Agreement.
D. As of the Forbearance Closing Date, the obligations under the Existing
Loan Documents have matured and certain Events of Default (collectively, the
"Existing Events of Default") have occurred and are continuing under the
Existing Loan Documents as a result of the following:
1. the Borrower and its Affiliates, on a combined basis, have
failed to maintain the Debt to Worth Ratios required by Section 7.02 (Debt to
Worth Ratio) of the Credit Agreement;
-2-
<PAGE>
2. the Borrower and its Affiliates, on a combined basis, have failed
to maintain the Tangible Net Worth levels required by Section 7.04 (Minimum
Increase to Tangible Net Worth) of the Credit Agreement;
3. the Borrower and its Affiliates provided the Bank with certain
financial information which was found to be incorrect in certain material
respects in violation of Section 4.04(3) (Financial Statements; Accuracy of
Information) of the Credit Agreement;
4. the amount outstanding under the Revolving Credit Facility has,
from time to time, exceeded the Borrowing Base (the amount of such excess, as it
may change from time to time after the date hereof, will be referred to as the
"Overadvance"); and
5. prior to April 7, 1997, the Borrower included in its Borrowing
Base certain Accounts that were not Qualified Accounts.
E. The Borrower and the Guarantors have requested that the Bank forbear
from taking action with respect to the Existing Events of Default for the period
from the Forbearance Closing Date through and including November 30, 1997, and
amend certain terms of the Existing Loan Documents, to enable the Borrower to
attempt to obtain replacement financing to repay the Obligations in full. The
Bank has agreed to these requests upon the terms and conditions hereinafter set
forth.
NOW THEREFORE, incorporating the Background herein, and for good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the Bank, the Borrower,
and the Guarantors agree as follows:
-3-
<PAGE>
ARTICLE I - ACKNOWLEDGMENTS
---------------------------
1.1 Acknowledgment of Existing Events of Default; Existing Loan
------------------------------------------------------------
Documents; Waiver of Defenses. The Borrower and the Guarantors acknowledge
- -----------------------------
that: (a) the Existing Events of Default enumerated in Section D of the
Background Section of this Forbearance Agreement currently exist; (b) the
Existing Events of Default are material in nature; and (c) the Existing Loan
Documents are valid and enforceable against the Borrower and the Guarantors in
every respect, and all of the terms and conditions thereof are binding upon the
Borrower and the Guarantors. The Borrower further acknowledges and agrees that,
as a result of the Existing Events of Default, the Bank is entitled immediately,
and without further notice or declaration to the Borrower or anyone else, to
accelerate the Obligations and to exercise its rights and remedies under the
Loan Documents or otherwise. To the extent that any of the Loan Documents
require notification by the Bank to the Borrower or the Guarantors of the
existence of a default and an opportunity for the Borrower or the Guarantor to
cure such a default, such notice and period for cure have been properly given by
the Bank or are hereby waived by the Borrower and the Guarantors. To the extent
that the Borrower or the Guarantors have any defenses, setoffs, claims, or
counterclaims to repayment of the Obligations or against the Bank, such
defenses, setoffs, claims, or counterclaims are hereby waived.
1.2 Acknowledgment of Current Outstanding Obligations. As of the date
--------------------------------------------------
hereof, the Borrower is indebted to the Bank in an aggregate amount equal to the
principal sum (including outstanding letters of credit) of
$_____________________ plus accrued but unpaid interest, plus the Bank's costs
and expenses associated with the Revolving Credit Facility, including, without
limitation, the Bank's audit fees and attorneys' fees incurred in the
negotiation and preparation of this Forbearance Agreement and the documents
related hereto (the foregoing amounts are hereafter collectively referred to as
the "Current Outstanding Obligations"), all without offset, counterclaims or
defenses of any kind. Nothing contained herein shall alter, amend, modify or
extinguish the Obligations of the Borrower and the Guarantors to repay the
Obligations, and this Forbearance Agreement does not constitute a novation of
any of the Loan Documents.
1.3 Acknowledgment of Guarantor Obligations. As of the Forbearance
----------------------------------------
Closing Date, the Guarantors are jointly, severally and unconditionally liable
with the Borrower to the Bank for the Obligations.
1.4 Acknowledgment of Liens and Priority. Except as disclosed to the Bank
------------------------------------
on schedule 1.4 hereof, pursuant to the Existing Loan Documents, the Bank holds
first priority, perfected security interests in and liens upon all of the
Borrower's assets and each of the Corporate Guarantor's assets, wherever
located, now owned or hereafter acquired, and as more specifically described in
the Existing Loan Documents. Such security interests and liens secure all of
the Obligations including, without limitation, all amounts owed by the Borrower
and the Guarantors to the Bank under the Existing Loan Documents. For purposes
of this Forbearance Agreement, the word "Obligations" shall mean any and all
obligations and liabilities of the Borrower to the Bank, of every kind and
description, direct and indirect, absolute and contingent,
-4-
<PAGE>
sole, joint, several, or joint and several, primary or secondary, due or to
become due, now existing or hereafter arising, regardless of how they arise or
by what agreement or instrument they may be evidenced or whether evidenced by
any agreement or instrument and includes obligations to perform acts and refrain
from taking actions as well as obligations to pay money, and also includes the
Current Outstanding Obligations.
1.5 Reaffirmation of Security Interests; Cross-Collateralization. All of
------------------------------------------------------------
the assets of the Borrower and each of the Guarantors pledged, assigned,
conveyed, mortgaged, hypothecated or transferred to the Bank pursuant to the
Loan Documents including, without limitation, all accounts receivable,
inventory, equipment, general intangibles, contracts, contract rights,
instruments, deposits, and documents of title (collectively, "the Collateral")
constitute collateral security for all of the Obligations. The Borrower and the
Guarantors hereby grant to the Bank and reaffirm their prior conveyance to the
Bank of a continuing security interest in and lien on the Collateral as well as
a security interest in and lien on any and all funds and/or monies of the
Borrower and/or the Guarantors contained in accounts located at the Bank or at
any of the Bank's subsidiaries or affiliates. The Borrower and the Guarantors
agree to execute and deliver to the Bank such additional documentation deemed
necessary or appropriate by the Bank, in its sole and absolute discretion, to
achieve the purpose of this Section of the Forbearance Agreement.
1.6 Reaffirmation of Guaranty. In consideration of the undertakings of
-------------------------
the Bank pursuant to this Forbearance Agreement, the Guarantors hereby reaffirm
their respective Guaranties and all of their respective obligations to the Bank
thereunder. The Guarantors further agree that any and all warrants to confess
judgment contained in their respective Guaranties are valid and fully-
enforceable against them. The Guarantors hereby consent to the execution and
delivery by the Borrower of this Forbearance Agreement and all other documents
and instruments to be executed in connection herewith. The Guarantors waive any
right they may have to contest the validity or enforceability of their
respective Guaranties by virtue of the Borrower's execution of this Forbearance
Agreement and the other documents entered into or delivered in connection
herewith.
1.7 Additional Acknowledgments. The Borrowers and the Guarantors
--------------------------
acknowledge and agree that as of and at all times after the Forbearance Closing
Date: (a) the Borrower will not be given credit on any of its accounts for
uncollected funds; (b) the Bank will not issue for the Borrower's account any
letter of credit expiring later than January 15, 1998; and (c) the Bank's
agreement to enter into this Forbearance Agreement and the Additional
Forbearance Documents does not constitute the consent of the Bank to any
proposed merger between the Borrower and RYKA, Inc. and the Bank expressly
reserves the right to review the terms of any proposed merger as and when
presented.
-5-
<PAGE>
ARTICLE II - AMENDMENTS TO CREDIT AGREEMENT
--------------------------------------------
2.1 The definition of "Termination Date" as set forth on page 8 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Termination Date" is hereby added in its place as follows:
"Termination Date" shall have the meaning given to that term in the
Second Forbearance Agreement.
2.2 The following new definition is hereby added to section 1.01 of the
Credit Agreement in appropriate alphabetical order as follows:
"Second Forbearance Agreement" shall mean that certain Second
Forbearance and Amendment Agreement dated as of June 4, 1997 by and
among the Borrower, the Guarantors, and the Bank, as amended,
supplemented, or modified from time to time.
2.3 Section 2.01 of the Credit Agreement is hereby deleted in its entirety
and a new Section 2.01 is added in its place as follows:
SECTION 2.01. Revolving Credit. The Bank agrees, on the terms
and conditions hereinafter set forth, to make loans (the "Loans")
to the Borrower from time to time during the period from the date
of the Second Forbearance Agreement up to and including the
Termination Date in an aggregate amount not to exceed at any time
the lesser of: (i) Fifteen Million Dollars ($15,000,000) plus the
Applicable Overline Allowance (hereafter defined), as such amount
may be reduced pursuant to Section 2.02., or (ii) the Borrowing
Base plus any Permitted Overadvance (hereafter defined) (as the
case may be, the "Commitment"). Within the limits of the
Commitment, the Borrower may borrow, prepay pursuant to section
2.07(2), and reborrow under this section 2.01. All Loans shall
be Prime Loans notwithstanding any reference to LIBOR Loans
contained in this Agreement. All Loans shall be made and
maintained at the Bank's Lending Office.
As used in this Agreement, the term "Permitted Overadvance" shall
mean the dollar amount in excess of the Borrowing Base
corresponding to the following specific time periods:
-6-
<PAGE>
PERIOD PERMITTED OVERADVANCE
------ ---------------------
June 1, 1997 through June 30, 1997 $4.4 million
July 1, 1997 through July 31, 1997 $5.2 million
August 1, 1997 through
August 31, 1997 $4.2 million
September 1, 1997 through
September 30, 1997 $2.0 million
October 1, 1997 through
October 31, 1997 $ 500,000
November 1, 1997 and
thereafter $0
As used in this Agreement the term "Applicable Overline
Allowance" shall mean for the month ending as of each date, the
dollar amount in excess of $15,000,000 corresponding to such
date:
Month Ending Applicable Overline Allowance
------------- -----------------------------
June 30, 1997 $2,900,000.00
July 31, 1997 $5,750,000.00
August 31, 1997 $4,600,000.00
September 30, 1997 $1,000,000.00
October 31, 1997
and at all times thereafter $ 0
2.4 Section 2.05 of the Credit Agreement is hereby deleted in its entirety
and a new Section 2.05 is added in its place as follows:
SECTION 2.05. Interest.
From June 1, 1997 through and including the Termination Date, the
Borrower shall pay interest to the Bank on the outstanding and
unpaid principal amount of the Loans made under this Agreement at
the following rates for each of the designated time periods:
-7-
<PAGE>
Time Period Applicable Rate
----------- ---------------
June 1, 1997 - June 30, 1997 Prime + 2 1/4%
July 1, 1997 - July 31, 1997 Prime + 3 1/4%
August 1, 1997 - August 31, 1997 Prime + 4 1/4%
September 1, 1997 - September 30, 1997 Prime + 5 1/4%
October 1, 1997 - October 31, 1997 Prime + 6 1/4%
November 1, 1997 - November 30, 1997
-- Date of Final Payment Prime + 7 1/4%
Notwithstanding the foregoing, at the election of the Bank, at
any time following the Termination Date and continuing thereafter
until the Loans are repaid in full, interest shall accrue at a
default rate equal to the otherwise applicable rate plus two
percentage points.
2.5 The first sentence of Section 2.10 of the Credit Agreement is hereby
amended by deleting therefrom the clause beginning "provided that in no event .
. ." and ending "Termination Date" and inserting in its place the following:
provided that in no event shall any such letter of credit be
written with a tenor of more than 120 days or to expire later
than the earlier to occur of: (i) 120 days from the date of
issuance; or (ii) January 15, 1998.
2.6 New sections 8.01(13) and 8.01(14) are hereby added to the Credit
Agreement as follows:
(13) Any one or more Events of Default occurs under the Second
Forbearance Agreement.
(14) Any one or more Events of Default occurs under that certain
Revolving Credit Agreement dated as of August 15, 1996 by and between the
Bank and RYKA Inc.
-8-
<PAGE>
ARTICLE III - ADDITIONAL COVENANTS OF BORROWER AND GUARANTOR
- ------------------------------------------------------------
The Borrower and the Guarantors, jointly and severally, covenant and
agree that from the date hereof and until the satisfaction of the Obligations,
unless the Bank shall otherwise consent in writing:
3.1 Execution of Other Documents. At the Bank's request, the Borrower
----------------------------
and/or the Guarantors, as the case may be, shall execute and deliver to the Bank
such other documents and instruments, including, without limitation, Uniform
Commercial Code financing statements, as the Bank, in its sole discretion, deems
necessary or convenient to carry out the terms of this Forbearance Agreement and
all other documents and instruments executed in connection herewith or otherwise
relating to this Forbearance Agreement.
3.2 Existing Covenants. Unless otherwise provided herein, the Borrower
------------------
and each of the Guarantors, as the case may be, shall comply with each of their
respective covenants set forth in the Loan Documents.
3.3 Reporting Requirements. The Borrower will provide the Bank with
----------------------
financial statements satisfactory to the Bank and consistent with past practice
within fifteen (15) days of each month-end. In addition to the existing
reporting requirements set forth in the Loan Documents, beginning on July 15,
1997 and continuing on the fifteenth day of each month thereafter, the Borrower
will provide the Bank with a Closeout Inventory Report in form and substance
satisfactory to the Bank reflecting purchase order dates for all closeout
inventory, number of units purchased, dollar value of such units, amounts sold
to customers, and units remaining as of the immediately preceding month-end.
3.4 Extended Scope Audits. In addition to the regular inspection and
---------------------
audit provisions set forth in the Loan Documents, the Bank shall have the right
at any time and from time at the Borrower's expense to conduct extended scope
audits of the Accounts of the Borrower and each of the Corporate Guarantors for
the purpose of determining compliance with the Borrowing Base.
3.5 Forbearance Financial Covenants. Without the Bank waiving any
--------------------------------
Existing Events of Default, so long as the Obligations remain unpaid or the Bank
shall have any Commitment under the Credit Agreement:
(a) Minimum Tangible Net Worth. The Borrower and its Affiliates shall
maintain Tangible Net Worth on a combined basis of not less than
$500,000 as at June 30, 1997 and at all times thereafter.
(b) Inventory Turnover Ratio. On an annualized basis as of each
designated month-end, the Borrower will maintain an Inventory Turnover
Ratio (defined as
-9-
<PAGE>
cost of goods sold divided by the average monthly
inventory value) equal to or greater than the following:
Inventory Turnover Ratio
------------------------
June 30, 1997 4.0
July 31, 1997 4.0
August 31, 1997 4.9
September 30, 1997 4.7
October 31, 1997 5.2
November 30, 1997 3.0
For purposes of calculating the Inventory Turnover Ratio, the average
monthly inventory value will be calculated as one half of the sum of
book inventory value as of the first day of the applicable month plus
the book inventory value as of the last day of the applicable month.
(c) Receivables Turnover Ratio. On an annualized basis as of each
designated month-end, the Borrower will maintain a Receivables
Turnover Ratio (defined as net sales over average monthly accounts
receivable) equal to or greater than the following:
Receivables Turnover Ratio (KPR)
---------------------------------
June 30, 1997 4.0
July 31, 1997 5.5
August 31, 1997 5.0
September 30, 1997 4.0
October 31, 1997 3.7
November 30, 1997 2.3
For purposes of calculating the Receivables Turnover Ratio, the
average monthly accounts receivable will be calculated as one half of
the sum of accounts receivable value as of the first day of the
applicable month plus the accounts receivable value as of the last day
of the applicable month.
(d) Maximum Closeout Inventory. The Borrower will reduce its closeout
inventory in increments such that the value of all such closeout
inventory will not exceed the following as of and at all times
following the designated date:
-10-
<PAGE>
Closeout Inventory
Value
-----------------------
June 30, 1997 $6,500,000
July 31, 1997 $5,500,000
August 31, 1997 $4,500,000
September 30, 1997 $4,000,000
(e) Closeout Inventory Resale. The Borrower will sell fifty
percent (50%) of all closeout inventory purchased after the Forbearance
Closing Date within thirty (30) days of such purchase.
3.6 Tang Group Transaction. The Borrower will provide the Bank with full
----------------------
disclosure related to the proposed Tang Group equity transaction and will
provide the Bank with the information necessary to review and consider providing
consent for the Tang transaction consistent with the Loan Documents. The Bank
agrees that it will use its best efforts to respond promptly to all requests for
approval of any proposal related to the Tang Group equity transaction.
3.7 Retention of Consultant. The Borrower will continuously employ Penn
-----------------------
Hudson or some other management consultant acceptable to the Bank in the Bank's
sole discretion for the purpose of assisting the Borrower in formulating and
implementing a business recovery plan.
3.8 Closeout Inventory Component of Borrowing Base. The Borrower
----------------------------------------------
acknowledges and agrees that the Bank may, in its sole discretion, reduce or
eliminate the closeout inventory component of the Borrowing Base as of or at any
time after August 15, 1997.
3.9 October - November Projections. On or before June 30, 1997, the
------------------------------
Borrower must provide to the Bank cash flow projections for the period beginning
October 1, 1997 through and including November 30, 1997, in form and substance
satisfactory to the Bank in its sole discretion.
3.10 Proceeds from Sale of KPR Europe. Any net proceeds (the "KPR Europe
--------------------------------
Proceeds") generated from the sale of KPR Sports International Europe, B.V., or
the sale of any assets of KPR Sports International Europe, B.V. other than in
the ordinary course of business, will be held in an interest bearing cash
collateral account with the Bank and applied as may be mutually agreed between
the Bank and the Borrower; provided however, that at any time after the
occurrence of an Event of Default, the Bank may set off and apply the KPR Europe
Proceeds to the Obligations in accordance with the Bank's remedies under the
Loan Documents.
3.11 Forbearance Fee. On the Forbearance Closing Date, as consideration
---------------
for the Bank's undertakings pursuant to this Forbearance Agreement, a non-
refundable fee (the
-11-
<PAGE>
"Forbearance Fee") of $125,000 shall accrue and be payable in two equal
installments of $62,500, payable on the Forbearance Closing Date and August 25,
1997, respectively.
3.12 Termination Date Fee. If the Borrower has not paid the Obligations in
--------------------
full on or prior to the Termination Date, an additional fee of $250,000 (the
"Termination Date Fee") will accrue and be immediately payable as of the
Termination Date. The accrual and/or payment of the Termination Date Fee shall
in no way be deemed evidence of a commitment on the part of the Bank to extend
the Revolving Credit Loans beyond the Termination Date.
3.13 Borrowing Base Certification. From and after the Forbearance Closing
-----------------------------
Date, until such time as the Bank in its sole discretion elects to restore a
daily Borrowing Base requirement, the Borrower will submit to the Bank on each
Friday a Borrowing Base Certificate in form and substance satisfactory to the
Bank and based upon which the Borrower may draw Advances within the Commitment
for the following week. To the extent that the Borrower's cash needs on any day
exceed the amount reflected as available on the Borrowing Base Certificate
submitted on the preceding Friday, the Borrower will submit an updated Borrowing
Base Certificate on such day certifying that the requested Advances for such day
are within the Commitment.
ARTICLE IV - FORBEARANCE BY THE BANK
------------------------------------
Subject to the terms and conditions of this Forbearance Agreement, and
without waiving the Existing Events of Default and the right to exercise rights
and remedies, the Bank agrees to forbear from enforcing its remedies under the
Loan Documents or applicable law as a result of the Existing Events of Default
until the earlier to occur of: (i) November 30, 1997; or (ii) the occurrence of
an Event of Default (other than the Existing Events of Default existing as of
the Forbearance Closing Date) under this Forbearance Agreement (such date, as
the case may be, to be referred to hereinafter as the "Termination Date").
ARTICLE V - CONDITIONS PRECEDENT
--------------------------------
The effectiveness of this Forbearance Agreement and the Bank's
obligations hereunder are conditioned upon the fulfillment by the Borrower
and/or the Guarantors, as the case may be, of all of the following conditions
precedent:
5.1 Documents to be Delivered to the Bank. The Borrower shall deliver or
-------------------------------------
cause to be delivered to the Bank, in form and substance satisfactory to the
Bank, the following (collectively, the "Additional Loan Documents"):
(a) This Forbearance Agreement duly executed by the Borrower and the
Guarantors;
-12-
<PAGE>
(b) An Amended and Restated Revolving Credit Note;
(c) The unlimited personal guaranty of Rubin;
(d) A Stock Pledge Agreement by Rubin;
(e) A Negative Pledge by Rubin in favor of the Bank (Henderson Road
Facility);
(f) Landlord's Consent and Waiver (Henderson Road Facility);
(g) Unlimited Guaranty of MR Acquisitions, LLC;
(h) Stock Pledge Agreement by MR Acquisitions, LLC;
(i) Acknowledgments of Confession of Judgment by the Borrower and each
Guarantor;
(j) Amendment Agreement duly executed by RYKA and all documents
referred to therein;
(k) A Certification of Corporate Authority executed by the Secretary
of the Corporate Obligors, dated as of the date of this
Forbearance Agreement, certifying the incumbency and signature of
the officers of the Corporate Obligors executing this Forbearance
Agreement and all other documents to be delivered by them
pursuant hereto, together with evidence of the incumbency of such
Secretary;
(l) such Uniform Commercial Code Financing Statements and other
security documents as shall be presented by the Bank on or before
the Forbearance Closing Date;
(m) the original note evidencing all subordinated indebtedness owed by
the Borrower to Rubin;
(n) each of the Closing Payments referenced on the Closing Agenda
issued in connection with this Forbearance Agreement; and
(o) such other documents as may be required by the Bank.
5.2 Payment of Bank's Legal Fees. On or before the Forbearance Closing
----------------------------
Date, the Borrower shall pay to the Bank the amount of the Bank's legal fees and
expenses incurred through the Forbearance Closing Date in connection with the
Existing Events of Default, the
-13-
<PAGE>
Loan Documents, this Forbearance Agreement, and all documents executed and
negotiations undertaken in connection with any of the foregoing; provided,
however, that the Bank will provide the Borrower with invoices related to such
legal fees and expenses following the Borrower's payment thereof. The Borrower
hereby consents to the debiting by the Bank of the Borrower's operating account
for the payment of such legal fees and expenses.
5.3 Payment of Bank's Costs. On or before the Forbearance Closing Date,
-----------------------
the Borrower shall pay to the Bank the amount of the Bank's costs incurred in
connection with this Forbearance Agreement and the other Loan Documents, if any,
including but not limited to, any audit fees due to Boston & Associates;
provided, however, that the Bank will provide the Borrower with invoices related
to such costs following the Borrower's payment thereof. The Borrower hereby
consents to the debiting by the Bank of the Borrower's operating account for the
payment of such costs.
5.4 First Installment of Forbearance Fee. On or before the Forbearance
------------------------------------
Closing Date, the Borrower will pay the first installment of the Forbearance
Fee. The Borrower hereby consents to the debiting by the Bank of the Borrower's
operating account for the payment of both installments of the Forbearance Fee.
ARTICLE VI - REPRESENTATIONS AND WARRANTIES
-------------------------------------------
To induce the Bank to enter into this Forbearance Agreement and as
partial consideration for the terms and conditions contained herein, the
Borrower and the Guarantors make the following representations and warranties to
the Bank, each and all of which shall survive the execution and delivery of this
Forbearance Agreement and all of the other documents executed in connection
herewith:
6.1 Organization and Location.
-------------------------
(a) The Corporate Obligors are corporations duly incorporated,
organized, validly existing and in good standing under the laws of their
respective states of incorporation, and are duly authorized to do business and
are duly qualified as foreign corporations in all jurisdictions wherein the
nature of their businesses or properties make such qualification necessary, and
have the corporate power to own their respective properties and to carry on
their respective businesses as now conducted;
(b) The Corporate Obligors have the requisite corporate power and
authority to deliver and perform this Forbearance Agreement and all of the
documents executed by them in connection herewith;
(c) Rubin is sui juris and has the authority to execute, deliver and
--- -----
perform this Forbearance Agreement and all of the documents executed by him in
connection herewith;
-14-
<PAGE>
(d) Every fictitious name, trade name, division or style under which
any of the Corporate Obligors conducts any business has been disclosed to the
Bank in writing together with the names of each and every jurisdiction in which
the same are utilized, and are included herein on Schedule 6.1(d) attached
---------------
hereto;
(e) Every joint venture, partnership, enterprise or stock ownership
involvement any of the Corporate Obligors has been disclosed to the Bank herein
on Schedule 6.1(e) attached hereto;
---------------
(f) Each affiliate and subsidiary of each of the Corporate Obligors is
named on Schedule 6.1(f) attached hereto; and
---------------
(g) The information contained on each of the Security Agreement
Questionnaires attached hereto as Schedule 6.1(g) is true, complete and
accurate as of the Forbearance Closing Date.
6.2 Authorization; Valid and Binding Agreement. All corporate action
------------------------------------------
required to be taken by the Corporate Obligors, and their respective officers,
directors and stockholders and all actions required to be taken by the
principals of the Corporate Obligors for the authorization, execution, delivery
and performance of this Forbearance Agreement and other documents contemplated
hereby have been taken. Each person executing this Forbearance Agreement on
behalf of any of the Corporate Obligors is an authorized officer of such
Corporate Obligor. This Forbearance Agreement is, and each of the documents
executed pursuant hereto will be, legal, valid, and binding obligations of the
party or parties thereto, enforceable against each such party in accordance with
their respective terms, subject only to bankruptcy, insolvency, reorganization,
moratorium and other laws or equitable principles affecting creditors' rights
generally.
6.3 Location of Assets of Borrower and the Guarantor. The locations of
------------------------------------------------
all of the Corporate Obligors' inventory, equipment, warehouses, sales offices,
main offices, and product distribution centers are listed on Schedule 6.3
------------
attached hereto. All of the real property of the Corporate Obligors is located
at the addresses set forth on Schedule 6.3 attached hereto.
------------
6.4 Compliance with Laws. Each of the Corporate Obligors is in compliance
--------------------
in all material respects with all laws, regulations and requirements applicable
to its business, and has not received, and has no knowledge of, any order or
notice of any governmental investigation or of any violations or claims of
violation of any law, regulation or any governmental requirement.
6.5 No Conflict; Government Approvals. The execution, delivery and
---------------------------------
performance by the Corporate Obligors of this Forbearance Agreement and the
other documents executed in connection herewith will not:
(a) conflict with, violate or result in the breach of any provisions
of any applicable law, rule, regulation or order; or
-15-
<PAGE>
(b) conflict with or result in the breach of any provision of their
respective Articles of Incorporation, operating agreements, charters, and/or by-
laws. No authorization, consent or approval of, or other action by, and no
notice of or filing with, any governmental authority or regulatory body is
required to be obtained or made by any of the Corporate Obligors for the due
execution, delivery and performance of this Forbearance Agreement.
6.6 Third Party Consents. The execution, delivery and performance by the
--------------------
Corporate Obligors and Rubin of this Forbearance Agreement and the documents
related hereto will not:
(a) require any consent or approval of any person or entity which has
not been obtained prior to, and which is not in full force and effect as of, the
date of this Forbearance Agreement;
(b) result in the breach of, default under, or cause the acceleration
of any obligation owed under any loan, credit agreement, note, security
agreement, lease indenture, mortgage, loan document or other agreement by which
any of them are bound or affected; or
(c) result in, or require the creation or imposition of, any lien or
encumbrance on any of their respective properties other than those liens or
security interests in favor of the Bank or the liens or security interests
disclosed to the Bank in the Loan Documents.
6.7 Financial Statements; Reporting.
-------------------------------
(a) Except as otherwise disclosed in writing to the Bank prior to the
Forbearance Closing Date, all balance sheets, reports, Borrowing Base
Certificates, budgets, reconciliations, accounts receivable reports, and other
financial information supplied to the Bank with respect to the Corporate
Obligors have been prepared in form acceptable to the Bank and, if applicable,
in conformity with GAAP, and present fairly the financial condition and results
of operations for the period covered thereby of the Corporate Obligors. Since
December 31, 1996, there has been no material adverse change in the financial
condition or results of operation except as disclosed to the Bank in writing
prior to the Forbearance Closing Date.
(b) Neither the Corporate Obligors nor Rubin know of any facts, other
than those already disclosed in writing to the Bank that materially adversely
affect or in so far as can be foreseen, will materially adversely affect their
ability to perform their respective obligations under this Forbearance Agreement
and other Loan Documents.
6.8 Litigation and Contingent Liabilities. Except as set forth on
-------------------------------------
Schedule 6.8 attached hereto, no action, suit, litigation, administrative or
- ------------
governmental proceeding is pending, or to the knowledge of any officer of any of
the Corporate Obligors, is threatened against any of the Corporate Obligors or
any of their respective properties in which the amount involved exceeds
$100,000.00 in the aggregate.
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<PAGE>
6.9 Exclusive and First Priority Perfected Lien. The Bank has, as of the
-------------------------------------------
date of this Forbearance Agreement, and shall continue to have, until all of the
Obligations are paid in full, first priority, valid perfected liens upon and
security interests in all of the Collateral to secure the payment and
performance of all of the Obligations.
6.10 No Untrue or Misleading Statements. Neither this Forbearance
----------------------------------
Agreement nor any other document executed in connection herewith contains any
untrue statement of a material fact or omits any material fact necessary in
order to make the statement made, in light of the circumstances under which it
was made, accurate.
6.11 No Events of Default. Other than the Existing Events of Default, no
--------------------
default(s) or Event(s) of Default has/have occurred as of the date hereof under
any of the Loan Documents.
6.12 Other Representations and Warranties. The Corporate Obligors and
------------------------------------
Rubin hereby reaffirm all of their representations and warranties to the Bank
contained in the Loan Documents, and warrant that such representations and
warranties are true and correct as of the date of this Forbearance Agreement.
ARTICLE VII - EVENTS OF DEFAULT
-------------------------------
The occurrence of any one or more of the following shall constitute an
Event of Default under this Forbearance Agreement:
7.1 Borrower's Failure to Pay. The Borrower fails to pay any amount of
-------------------------
principal, interest, fees or other sums within one (1) day after the date when
due under this Forbearance Agreement or any of the Loan Documents, or any other
Obligations, whether upon stated maturity, acceleration, or otherwise.
7.2 Breach of Covenants or Conditions. The Borrower or any Guarantor
---------------------------------
fails to perform or observe any covenant, term, agreement or condition in this
Forbearance Agreement or any of the other Loan Documents or is in violation of
or non-compliance with any provision of this Forbearance Agreement or any of the
Loan Documents after the expiration of any cure period, if any, set forth in the
Loan Documents with respect to such covenant, term, agreement or condition.
7.3 Defaults in Other Agreements. The Borrower or any Guarantor fails to
----------------------------
perform or observe any term, covenant, agreement or condition contained in, or
there shall occur any default under or as defined in, any other agreement
applicable to the Borrower or any Guarantor or by which the Borrower or any
Guarantor is bound which shall not be remedied within the period of time (if
any) within which such other agreement permits such default to be remedied,
unless such default is waived by the other party thereto or excused as a matter
of law.
-17-
<PAGE>
7.4 Agreements Invalid. The validity, binding nature of, or
------------------
enforceability of any material term or provision of any of the Loan Documents is
disputed by, on behalf of, or in the right or name of the Borrower or any
material term or provision of any such Loan Document is found or declared to be
invalid, avoidable, or non-enforceable by any court of competent jurisdiction.
7.5 False Warranties; Breach of Representations. Except as otherwise
-------------------------------------------
disclosed to the Bank in writing prior to the Forbearance Closing Date, any
warranty or representation made by the Borrower or any Guarantor in this
Forbearance Agreement or any other Loan Document or in any certificate or other
writing delivered under or pursuant to this Forbearance Agreement or any other
Loan Document, or in connection with any provision of this Forbearance Agreement
or related to the transactions contemplated hereby shall prove to have been
false or incorrect or breached in any material respect.
7.6 Judgments. A final non-appealable judgment or judgments is entered,
---------
or an order or orders of any judicial authority or governmental entity is issued
against the Borrower and/or any Guarantor (such judgment(s) and order(s)
hereinafter collectively referred to as "Judgment") (i) for payment of money,
which Judgment, in the aggregate, exceeds Fifty Thousand Dollars ($50,000)
outstanding at any one time; or (ii) for injunctive or declaratory relief which
would have a material adverse effect on the ability of the Borrower or any of
the other Corporate Obligors to conduct their respective businesses, and such
Judgment is not discharged or execution thereon or enforcement thereof stayed
pending appeal, within thirty days after entry or issuance thereof, or, in the
event of such a stay, such Judgment is not discharged within thirty days after
such stay expires.
7.7 Bankruptcy or Insolvency of the Borrower.
----------------------------------------
(a) Any Corporate Obligor or Rubin becomes insolvent, or generally
fails to pay, or is generally unable to pay, or admits in writing its inability
to pay, its debts as they become due or applies for, consents to, or acquiesces
in, the appointment of a trustee, receiver or other custodian or a substantial
part of its property, or makes a general assignment for the benefit of
creditors.
(b) Any Corporate Obligor or Rubin commences any bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any state or
federal bankruptcy or insolvency law, or any dissolution or liquidation
proceeding.
(c) Any bankruptcy, reorganization, debt arrangement, or other case or
proceeding under any state or federal bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, is involuntarily commenced against or in
respect of any Corporate Obligor or Rubin, or an order for relief is entered in
any such proceeding and such case or proceeding is not fully and finally
dismissed within thirty (30) days.
-18-
<PAGE>
(d) A trustee, receiver, or other custodian is appointed for any
Corporate Obligor or Rubin or a substantial part of any of their respective
assets.
7.8 Event of Default Under Other Loan Documents. Any Event of Default
-------------------------------------------
(other than the Existing Events of Default existing as of the Forbearance
Closing Date) occurs under any of the Loan Documents and is not cured within the
applicable grace period, if any.
7.9 Event of Default Under RYKA Loan Documents. Any Event of Default
------------------------------------------
occurs under that certain Revolving Credit Agreement dated August 15, 1996 by
and between the Bank and RYKA Inc.
ARTICLE VIII - REMEDIES
-----------------------
In addition to the rights and remedies set forth in the Credit Agreement,
the KPR Note and the other Loan Documents, the Bank shall also be entitled to
exercise the following remedies as indicated:
8.1 Loan Documents; Applicable Law. Upon and following the occurrence of
------------------------------
any one or more Events of Default, the Bank may, in its sole discretion, enforce
all of its remedies as set forth hereunder, under the Loan Documents, and/or
under applicable law, against the Borrower and/or any one or more of the
Guarantors. Without limiting the foregoing, upon the occurrence of an Event of
Default (and the expiration of any cure periods, if any, as provided under the
Loan Documents), at the option of the Bank, without notice to the Borrower or
the Guarantors, all Obligations shall automatically accelerate and immediately
become due and payable.
8.2 Right of Set-Off.
----------------
If any of the Obligations shall be due and payable or any one or more
Events of Default shall have occurred and any applicable cure periods have
expired, the Bank shall have the right, in addition to all other rights and
remedies available to it, without notice to the Borrower or the Guarantors, to
apply toward and set-off against and apply to the then unpaid balance of the
Obligations any items or funds held by the Bank or any affiliates of the Bank,
any and all deposits (whether general or special, time or demand, matured or
unmatured, fixed or contingent, liquidated or unliquidated) now or hereafter
maintained by the Borrower or any of the Guarantors with the Bank or with an
affiliate of the Bank, and any other indebtedness at any time held or owing by
the Bank or an affiliate of the Bank to or for the credit or the account of the
Borrower or the Guarantors. For such purpose the Bank shall have, and the
Borrower and the Guarantors hereby grant to the Bank, a first lien on all such
deposits. The Bank is hereby authorized to charge any such account or
indebtedness for any amounts due to the Bank. Such right of set-off shall exist
whether or not the Bank shall have made any demand under this Forbearance
Agreement, the KPR Note or any other Loan Document and whether or not the
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<PAGE>
KPR Note and the other Obligations are matured or unmatured. The Borrower and
the Guarantors hereby confirm the Bank's lien on such accounts and the Bank's
rights of set-off, and nothing in this Forbearance Agreement shall be deemed any
waiver or prohibition of such lien and rights of set-off.
8.3 Confession of Judgment.
----------------------
THE BORROWER AND EACH OF THE GUARANTORS HEREBY IRREVOCABLY AUTHORIZE
AND EMPOWER THE BANK, BY ITS ATTORNEY, UPON THE OCCURRENCE OF AN EVENT OF
DEFAULT OR AT ANY TIME THEREAFTER, TO APPEAR FOR THE BORROWER, THE GUARANTORS
AND/OR ANY ONE OR MORE OF THEM AND, WITHOUT DECLARATION OR STAY OF EXECUTION,
CONFESS AND ENTER JUDGMENT AGAINST THE BORROWER, THE GUARANTORS AND/OR ANY ONE
OR MORE OF THEM IN FAVOR OF THE BANK IN ANY JURISDICTION IN WHICH SUCH ENTITY OR
INDIVIDUAL OR ANY PROPERTY OF SUCH ENTITY OR INDIVIDUAL IS LOCATED. SUCH
JUDGMENT SHALL BE FOR ALL OBLIGATIONS TOGETHER WITH COSTS OF SUIT AND WITH
ACTUAL COLLECTION FEES (INCLUDING ATTORNEYS' FEES) WITH RELEASE OF ALL ERRORS
AND THE RIGHT TO ISSUE EXECUTION FORTHWITH. THE BORROWER AND THE GUARANTORS
HEREBY KNOWINGLY, WILLINGLY, AND INTENTIONALLY WAIVE AND RELEASE ALL RELIEF FROM
ANY AND ALL APPRAISEMENT, STAY, OR EXEMPTION LAW OF ANY STATE NOW IN FORCE OR
HEREINAFTER ENACTED. IF A COPY OF THIS FORBEARANCE AGREEMENT VERIFIED BY
AFFIDAVIT OF THE BANK OR A PERSON ON BEHALF OF THE BANK SHALL HAVE BEEN FILED IN
SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL FORBEARANCE
AGREEMENT AS A WARRANT OF ATTORNEY. THIS AUTHORITY AND POWER TO APPEAR FOR AND
CONFESS AND ENTER JUDGMENT AGAINST THE BORROWER, THE GUARANTORS, AND/OR ANY ONE
OR MORE OF THEM SHALL NOT BE EXHAUSTED BY THE SINGLE EXERCISE THEREOF AND SHALL
CONTINUE UNTIL THE OBLIGATIONS ARE FULLY PAID, PERFORMED, DISCHARGED AND
SATISFIED. THE BORROWER AND EACH GUARANTOR HEREBY WARRANT AND REPRESENT THAT
THEY HAVE REVIEWED THIS FORBEARANCE AGREEMENT WITH THEIR LEGAL COUNSEL,
INCLUDING, WITHOUT LIMITATION, THE PROVISIONS CONTAINED IN THIS CONFESSION OF
JUDGMENT SECTION. THE BORROWER AND THE GUARANTORS FURTHER ACKNOWLEDGE THAT THE
MEANING AND EFFECT OF THIS CONFESSION OF JUDGMENT HAS BEEN EXPLAINED TO THEM BY
THEIR LEGAL COUNSEL.
-20-
<PAGE>
ARTICLE IX - MISCELLANEOUS
--------------------------
9.1 Continuing Effect. Except as amended hereby, all of the Loan
-----------------
Documents shall remain in full force and effect and bind and inure to the
benefit of the parties thereto and are hereby ratified and confirmed.
9.2 Submission to Jurisdiction; Selection of Forum. The Borrower and the
----------------------------------------------
Guarantors submit to the jurisdiction of the courts of the Commonwealth of
Pennsylvania, and the United States District Court for the Eastern District of
Pennsylvania. The Borrower and the Guarantors further stipulate and acknowledge
that venue is proper in any court located in Pennsylvania and in the United
States District Court for the Eastern District of Pennsylvania and waive
personal service of process and agree that a summons and complaint commencing an
action or proceeding in any such court shall be properly served and shall confer
personal jurisdiction if served by registered or certified mail, return receipt
requested, in accordance with the notice provisions of this Forbearance
Agreement.
9.3 Judicial Proceedings. The Borrower and the Guarantors agree that any
--------------------
suit, action or proceeding, whether claim or counterclaim, brought or instituted
by the Borrower, the Guarantors, or any of their respective successors or
assigns, on or with respect to this Forbearance Agreement, or the dealings of
the parties with respect hereto, shall be tried only by a court and not by a
jury. THE BORROWER AND THE GUARANTORS HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR
PROCEEDING. Further, the Borrower and the Guarantors waive any right they 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. THE BORROWER AND THE GUARANTORS ACKNOWLEDGE AND
AGREE THAT THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS FORBEARANCE
AGREEMENT AND THAT THE BANK WOULD NOT ENTER INTO THIS FORBEARANCE AGREEMENT WITH
THE BORROWER AND THE GUARANTORS IF THE WAIVERS SET FORTH IN THIS SECTION WERE
NOT A PART OF THIS FORBEARANCE AGREEMENT.
9.4 Cooperation; Other Documents. At all times following the execution of
----------------------------
this Forbearance Agreement, the Borrower and the Guarantors shall execute and
deliver to the Bank, or shall cause to be executed and delivered to the Bank,
and shall do or cause to be done all such other acts and things as the Bank may
reasonably deem to be necessary or desirable to assure the Bank of the benefit
of this Forbearance Agreement and the documents comprising or relating to this
Forbearance Agreement.
9.5 Remedies Cumulative; No Waiver. The respective rights, powers and
------------------------------
remedies of the Bank in this Forbearance Agreement and in the other Loan
Documents are cumulative and not exclusive of any right, power or remedy
provided in the Loan Documents, by law or equity and no failure or delay on the
part of the Bank in the exercise of any right, power or remedy shall
-21-
<PAGE>
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or remedy preclude any other or further exercise thereof, or the
exercise of any other right, power or remedy.
9.6 Notices. Any notice given pursuant to this Forbearance Agreement or
-------
pursuant to any document comprising or relating to this Forbearance Agreement or
any of the other Loan Documents shall be in writing, including telecopies.
Notice given by telecopy or other electronic mail shall be deemed to have been
given and received when sent. Notice given by overnight mail courier shall be
deemed to have been given and received one (1) day after the date delivered to
such overnight courier by the party sending such Notice. Notice by mail shall
be deemed to have been given and received three (3) days after the date
deposited, when sent by first class certified mail, postage prepaid, and
addressed as follows:
To the Borrower:
KPR Sports International, Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Michael Rubin, President
Telecopy: (610) 768-0753
With a copy to:
David S. Mandel, Esquire
Astor, Weiss, Kaplan, and Rosenblum
The Bellevue, 6th Floor
Broad Street at Walnut
Philadelphia, PA 19102
Telecopy: (215) 790-0509
To the Guarantors:
c/o KPR Sports International, Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Michael G. Rubin, President
Telecopy: (610) 768-0753
To the Bank:
CoreStates Bank, N.A.
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<PAGE>
1339 Chestnut Street
Philadelphia, PA 19102
Attention: C.B. Cook, Vice President
Telecopier No.: (215) 786-7657
With a copy to:
Duane, Morris & Heckscher
One Liberty Place, 41st Floor
Philadelphia, PA 19103
Attention: Peter S. Clark, Esquire
James J. Holman, Esquire
Telecopier Number: 215-979-1020
A party may change his or its address by giving written notice of the changed
address to the other parties, as specified herein. This Section 9.6 shall amend
and restate in its entirety, effective as of the Forbearance Closing Date,
Section 9.02 of the Credit Agreement
9.7 Indemnification.
---------------
If, after receipt of any payment of all or any part of the
Obligations, the Bank is compelled to surrender such payment to any person or
entity for any reason (including, without limitation, a determination that such
payment is void or voidable as a preference or fraudulent conveyance, an
impermissible setoff, or a diversion of trust funds), then this Forbearance
Agreement and the other Loan Documents shall continue in the full force and
effect, and the Borrower and the Guarantors shall be jointly and severally
liable for, and shall indemnify, defend and hold harmless the Bank with respect
to the full amount so surrendered. The provisions of this section shall survive
the termination of this Forbearance Agreement and the other Loan Documents and
shall be and remain effective notwithstanding the payment of the Obligations,
the cancellation of the KPR Note, the release of any lien, security interest or
other encumbrance securing the Obligations or any other action which the Bank
may have taken in reliance upon its receipt of such payment. Any cancellation
of the KPR Note, release of any such encumbrance or other such action shall be
deemed to have been conditioned upon any payment of the Obligations having
become final and irrevocable.
9.8 Costs, Expenses and Attorneys' Fees. The Borrower and the Guarantors
-------------------------------------
agree to pay on demand by the Bank all reasonable out-of-pocket costs and
expenses incurred by the Bank, including, without limitation, all fees and out-
of-pocket expenses of counsel for the Bank in connection with: (i) the
negotiation, preparation and enforcement of this Forbearance Agreement and all
other documents and instruments executed in connection herewith or otherwise
relating to this Forbearance Agreement; (ii) the assertion by any person, entity
or organization, other than the Bank, of any claim or lien, encumbrance,
security interest, or other interest in any of the assets of the Borrower
including any attachment, garnishment, levy, notice
-23-
<PAGE>
of debtor's examination, notice of examination, judgment lien or execution lien,
regardless of when such fees or expenses are incurred; (iii) the enforcement or
exercise by the Bank of the Bank's rights or remedies with respect to the
collection of the Obligations or to preserve, protect or enforce the Bank's
interests in any bankruptcy, insolvency or reorganization case which may affect
the Borrower and/or the Guarantors and any litigation, dispute, case,
arbitration or action with respect to any attachment, garnishment, levy, notice
of debtor's examination, judgment lien or execution which may affect the
Borrower and/or the Guarantors; and (iv) any stamp or documentary tax or other
similar taxes and any filing, recording or lien search fees which may be payable
in connection with the execution, delivery or performance of this Forbearance
Agreement or the documents comprising or relating to this Forbearance Agreement.
All Obligations provided for in this Section 9.8 shall survive any termination
of this Forbearance Agreement.
9.9 Release. The Borrower and each of the Guarantors, on behalf of
-------
themselves, and all persons and entities claiming by, through, or under any one
or more of them, hereby release, waive and forever discharge the Bank, and all
of the Bank's officers, directors, attorneys, agents, affiliates, and successors
and assigns, of, from, and with respect to any and all manner of action and
actions, cause and causes of actions, suits, disputes, claims, counterclaims
and/or liabilities, cross claims, defenses, and any claims for avoidance or
other remedies available to a debtor, its estate or any trustee or
representatives thereof, whether now known or unknown, suspected or unsuspected,
past or present, asserted or unasserted, contingent or liquidated, whether or
not well founded in fact or law, whether in contract, in tort or otherwise, at
law or in equity, which the Borrower and/or the Guarantors had or now have,
claim to have had, now claim to have or hereafter can, shall or may claim to
have against the Bank, for or by reason of any cause, matter, or thing
whatsoever arising from the beginning of the world through the date hereof,
including any claims based upon, relating to or arising out of any and all
transactions, relationships or dealings with or loans made to the Borrower prior
to the Forbearance Closing Date.
9.10 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties of the Borrower and/or the Guarantors contained in this Forbearance
Agreement and in all other documents and instruments executed in connection
herewith or otherwise relating to this Forbearance Agreement shall survive the
execution of this Forbearance Agreement and are material and have been or will
be relied upon by the Bank, notwithstanding any investigation made by any
person, entity or organization on the Bank's behalf. No implied representations
or warranties are created or arise as a result of this Forbearance Agreement or
the documents comprising or relating to this Forbearance Agreement. For
purposes of the foregoing, all statements in any certificate or other writing
required by this Forbearance Agreement to be delivered to the Bank on or after
the execution of this Forbearance Agreement by or on behalf of the Borrower
and/or the Guarantors pursuant to and in accordance with this Forbearance
Agreement or any other document or instrument executed in connection herewith or
otherwise or relating to this Forbearance Agreement or in connection with the
transactions contemplated
-24-
<PAGE>
thereby shall be deemed to be representations and warranties contained in this
Forbearance Agreement.
9.11 Headings. The headings and underscoring of articles, sections and
--------
clauses have been included herein for convenience only and shall not be
considered in interpreting this Forbearance Agreement.
9.12 Governing Law. This Forbearance Agreement and all documents and
-------------
instruments executed in connection herewith or otherwise relating to this
Forbearance Agreement shall be construed in accordance with and governed by the
internal laws of the Commonwealth of Pennsylvania without reference to conflict
of laws principles.
9.13 Integration. This Forbearance Agreement and all documents and
-----------
instruments executed in connection herewith or otherwise relating to this
Forbearance Agreement, including, without limitation, the 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.
9.14 Amendment and Waiver. No amendment of this Forbearance Agreement, and
--------------------
no waiver, discharge or termination of any one or more of the provisions
thereof, shall be effective unless set forth in writing and signed by all of the
parties hereto.
9.15 Successors and Assigns. This Forbearance Agreement and the other Loan
----------------------
Documents: (i) shall be binding upon the Bank, the Borrower, and the Guarantors
and upon their respective heirs, nominees, successors and assigns, and (ii)
shall inure to the benefit of the Bank, the Borrower, and the Guarantors;
provided, however, that neither the Borrower nor any of the Guarantors may
assign any rights hereunder or any interest herein without obtaining the prior
written consent of the Bank, and any such assignment or attempted assignment
shall be void and of no effect with respect to the Bank.
9.16 Severability of Provisions. Any provision of this Forbearance
--------------------------
Agreement that is held to be inoperative, unenforceable, void or invalid in any
jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void
or invalid without affecting the remaining provisions in that jurisdiction or
the operation, enforceability or validity of that provision in any other
jurisdiction, and to this end the provisions of this Forbearance Agreement are
declared to be severable.
9.17 Conflicting Provisions. To the extent that any of the terms in this
----------------------
Forbearance Agreement contradict any of the terms contained in any of the Loan
Documents, the terms of this Forbearance Agreement shall control.
9.18 Joint and Several Liability. The obligations and liabilities of the
---------------------------
Borrower and the Guarantors hereunder are joint and several.
-25-
<PAGE>
9.19 Counterparts; Effectiveness. This Forbearance Agreement may be
---------------------------
executed in any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute one and the same Forbearance
Agreement. This Forbearance Agreement shall be deemed to have been executed and
delivered when the Bank has received counterparts hereof executed by all parties
listed on the signature pages hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-26-
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
have caused this Forbearance Agreement to be executed as of the date first above
written.
CORESTATES BANK, N.A.
By: /s/ Charles B. Cook
-----------------------------
Charles B. Cook
Vice President
ATTEST: KPR SPORTS INTERNATIONAL, INC.
/s/ illegible By: /s/ Michael G. Rubin
- -------------------------- ---------------------------
Secretary Michael G. Rubin
President
ATTEST: DELMAR SKI, INC.
/s/ illegible By: /s/ Michael G. Rubin
- -------------------------- ---------------------------
Secretary Michael G. Rubin
President
MR ACQUISITIONS, LLC
By: KPR Sports International, Inc.
Authorized Member
/s/ illegible By: /s/ Michael G. Rubin
- -------------------------- ---------------------------
Secretary Michael G. Rubin
President
ATTEST: APEX SPORTS INTERNATIONAL, INC.
/s/ illegible By: /s/ Michael G. Rubin
- -------------------------- ---------------------------
Secretary Michael G. Rubin
President
-27-
<PAGE>
ATTEST: MR MANAGEMENT, INC.
/s/ By: /s/ Michael G. Rubin
- -------------------------- ---------------------------
Secretary Michael G. Rubin
Title:________________________
ATTEST: KPR SPORTS INTERNATIONAL, EUROPE, BV
BY: KPR Sports International, Inc.
Managing Director
By: /s/ Michael G. Rubin
---------------------------
Secretary Michael G. Rubin
President
/s/ /s/ Michael G. Rubin
____________________________ _____________________________
Witness MICHAEL G. RUBIN
-28-
<PAGE>
Schedule 1.4
------------
No exceptions.
<PAGE>
SCHEDULE 6.1(d)
Fictitious name, trade name, division or style
- ----------------------------------------------
Apex
Yukon
<PAGE>
SCHEDULE 6.1(e)
Joint venture, partnership, enterprise or stock ownership involvement
- ---------------------------------------------------------------------
NONE
<PAGE>
SCHEDULE 6.1(f)
Affiliate and subsidiary of each Corporate Obligor
- --------------------------------------------------
NONE
<PAGE>
CORESTATES BANK, N.A. GENERAL SECURITY AGREEMENT
QUESTIONNAIRE
- --------------------------------------------------------------------------------
The undersigned ("Obligor") is entering into a Letter Agreement with Corestates
Bank, N.A. In connection with the Forbearance and Amendment Agreement, Obligor
is required to answer the following questions.
1. What is Obligor's exact corporate/partnership name as it appears in its
certificate of incorporation/partnership agreement (or, if not a
corporation or partnership, the Obligor's complete name)?
KPR Sports International, Inc.
2. Has Obligor ever changed its name? If so, state each other name Obligor has
had.
YES - Original Name - Nationwide Liquidators, Inc.
3. Does Obligor do business under any other name? If so, state each such name.
NO
<PAGE>
4. Does Obligor use or has Obligor used any trade names or trade styles? If
so, list each of them.
YUKON
APEX
5. Has Obligor changed its identity or corporate structure in any way within
the past four months? Changes in corporate structure would include
incorporation of a partnership or sole proprietorship, mergers,
consolidations and acquisitions. If any such change has taken place,
indicate the nature of such change and give the names each corporation or
other entity that was incorporated, merged or consolidated with or acquired
by Obligor in such transaction (including each name under which each such
corporation or entity has done business) and the address of each place of
business of each such corporation or entity immediately prior to such
incorporation, merger, consolidation or acquisition and within four months
prior to the date of this questionnaire.
NO
6. State the complete address (including the county) of Obligor's chief
executive office and, if different from its chief executive office, the
office where Obligor keeps its books and records relating to its accounts
or contract rights.
555 S. Henderson Road
King of Prussia, Pennsylvania
(Montgomery County)
<PAGE>
7. Has Obligor's chief executive office or office where Obligor keeps its
books and records relating to its accounts or contract rights been located
at any other address during the past four months? If so, specify each such
address (including the county)?
NO
8. State the complete address (including the county) of each other place of
business that Obligor presently has.
1. Jan de Rooystraat 49 2. 1221 E. Dyer Road
5171 DR Kaatsheuvel Suite 215
HOLLAND Santa Ana, CA 92705
9. State the complete address (including the county) of each place of business
that Obligor has had in the past four months, other than those listed in
the answers to questions 6, 7 and 8.
NONE
10. State the complete address (including the county) of each location where
Obligor keeps any inventory or equipment, other that the place of business
listed in the answers to question 6, 7 and 8.
APW
6400 Bristol Pike
Levittown, PA 19057
(Bucks County)
JAM Warehouse
425 W. Carob Street
Compton, CA 90220
Universal Warehouse
2850 East Del Amo Blvd.
Long Beach, CA 90810
<PAGE>
11. Has any of Obligor's inventory or equipment been located during the past
four months at any location other than the locations listed in the answers
to questions 6,7,8,9 and 10? If so, state the complete address (including
the county of each location.)
NO
12. Does any person or entity other than Obligor have possession of any
Obligors inventory or equipment? If so, state the name and address
(including the county) of each such person or entity.
NO
13. State the complete address including the county of each location leased by
the Obligor and state the name and complete address of the record owner of
each such location.
555 S. Henderson Road
King of Prussia, PA
Owner - Michael G. Rubin
(Montgomery County)
14. Does any person or entity other than Obligor have possession of any of
Obligors inventory or equipment? If so, state the name and address
(including the county) of each such person or entity.
NO
<PAGE>
15. Does Obligor purchase goods in which such goods might in the usual course
of the purchase transaction be located, even temporarily for purposes of
transshipment? If so, state the complete address (including the county) of
each such location.
Century Distribution Systems Ltd.
610 Asian House, 1 Hennessy Road
Wanchai, Hong Kong
16. Has Obligor acquired any of its inventory or equipment other than in the
ordinary course of business. If so, specify the nature of any such
acquisition.
NO
17. Does Obligor own or have an interest in any goods other than inventory or
equipment, such as crops, minerals or the like? If so, please describe such
goods and state the complete address (including the county) where such
goods are located.
NO
Obligor hereby certifies that its answers to the foregoing questions are
complete and correct and confirms that such answers constitute representations
and warranties under the Forbearance and Amendment Agreement.
KPR Sports International, Inc.
- ------------------------------
(type name of obligor)
By: /s/ Alan Schapire
--------------------------
Name: Alan Schapire
-------------------------
Title: Controller
------------------------
<PAGE>
CORESTATES BANK, N.A. GENERAL SECURITY AGREEMENT
QUESTIONNAIRE
- --------------------------------------------------------------------------------
The undersigned ("Obligor") is entering into a Forbearance and Amendment
Agreement with CoreStates Bank, N.A. In connection with the Forbearance and
Amendment Agreement, Obligor is required to answer the following questions.
1. What is Obligor's exact corporate/partnership name as it appears in its
certificate of incorporation/partnership agreement (or, if not a
corporation or partnership, the Obligor's complete name)?
Apex Sports International, Inc.
M.R. Management, Inc.
M.R. Acquisitions, LLC
Delmar Ski, Inc.
KPR Sports International, Europe, BV
2. Has Obligor ever changed its name? If so, state each other name Obligor has
had.
NO
3. Does Obligor do business under any other name? If so, state each such name.
NO
<PAGE>
4. Does Obligor use or has Obligor used any trade names or trade styles? If so,
list each of them.
Apex Sports International, Inc. - Apex
KPR Sports International, Europe, BV - Apex, Yukon
All Others - NO
5. Has Obligor changed its identity or corporate structure in any way within
the past four months? Changes in corporate structure would include
incorporation of a partnership or sole proprietorship, mergers,
consolidations and acquisitions. If any such change has taken place,
indicate the nature of such change and give the names each corporation or
other entity that was incorporated, merged or consolidated with or acquired
by Obligor in such transaction (including each name under which each such
corporation or entity has done business) and the address of each place of
business of each such corporation or entity immediately prior to such
incorporation, merger, consolidation or acquisition and within four months
prior to the date of this questionnaire.
NO
6. State the complete address (including the county) of Obligor's chief
executive office and, if different from its chief executive office, the
office where Obligor keeps its books and records relating to its accounts or
contract rights.
KPR Sports International, Europe, BV
Jan de Rooystraat 49
5171 Dr Kaatsheuvel
HOLLAND
All Others
555 S. Henderson Road
King of Prussia, PA 19406
(Montgomery County)
<PAGE>
7. Has Obligor's chief executive office or office where Obligor keeps its
books and records relating to its accounts or contract rights been located
at any other address during the past four months? If so, specify each such
address (including the county)?
NO
8. State the complete address (including the county) of each other place of
business that Obligor presently has.
N/A
9. State the complete address (including the county) of each place of business
that Obligor has had in the past four months, other than those listed in
the answers to questions 6, 7 and 8.
NONE
10. State the complete address (including the county) of each location where
Obligor keeps any inventory or equipment, other than the place of business
listed in the answers to questions 6,7 and 8.
N/A
<PAGE>
11. Has any of Obligor's inventory or equipment been located during the past
four months at any location other than the locations listed in the answers
to questions 6,7,8,9 and 10? If so, state the complete address (including
the county of each location.)
NO
12. Does any person or entity other than Obligor have possession of any of
Obligors inventory or equipment? If so, state the name and address
(including the county) of each such person or entity.
NO
13. State the complete address including the county of each location leased by
the Obligor and state the name and complete address of the record owner of
each such location.
KPR Sports International, Europe, BV
Jan de Rooystraat 49
5171 Dr Kaatsheuvel
HOLLAND
All Others - NONE
14. Does any person or entity other than Obligor have possession of any of
Obligors inventory or equipment? If so, state the name and address
(including the county) of each such person or entity.
NO
<PAGE>
15. Does Obligor purchase goods in which such goods might in the usual course
of the purchase transaction be located, even temporarily for purposes of
transshipment? If so, state the complete address (including the county) of
each such location.
NO
16. Has Obligor acquired any of its inventory or equipment other than in the
ordinary course of business. If so, specify the nature of any such
acquisition.
NO
17. Does Obligor own or have an interest in any goods other than inventory or
equipment, such as crops, minerals or the like? If so, please describe such
goods and state the complete address (including the county) where such
goods are located.
NO
Obligor hereby certifies that its answers to the foregoing questions are
complete and correct and confirms that such answers constitute representations
and warranties under the Forbearance and Amendment Agreement.
Apex Sports International, Inc. KPR Sports International, Europe, BV
M.R. Management, Inc. By: KPR Sports International, Inc.
Delmar Ski, Inc. -------------------------------
- --------------------------------- By: /s/ illegible
By: /s/ illegible -------------------------------
----------------------------- Name: Alan Schapire
Name: /s/ Alan Schapire -----------------------------
--------------------------- Title: Controller-U.S.
Title: Controller -----------------------------
---------------------------
M.R. Acquisitions, LLC
-----------------------------------
By: /s/ illegible
-------------------------------
Name: Alan Schapire
-----------------------------
Title: Controller
-----------------------------
<PAGE>
SCHEDULE 6.3
Location of Assets of Borrower and the Guarantor
- ------------------------------------------------
Main Office and Warehouse: 555 S. Henderson Rd., King of Prussia, PA
California Sales Office: 1221 E. Dyer Rd., Suite 215, Santa Ana, CA
European Sales Office & Warehouse: Jan de Rooystraat 49, 5171 DR, Kaatsheuvel,
Holland
Public Warehouses/Distribution Centers:
APW, 6400 Bristol Pike, Levittown, PA
JAM Warehouse, 425 W. Carob St., Compton, CA
Universal Warehouse, 2850 East Del Amo Blvd., Long Beach, CA
Asian Consolidator: Century Distribution Systems, Ltd.
610 Asian House, 1 Hennessy Rd.
Wanchai, Hong Kong
Real Property: None - All real property leased.
<PAGE>
SCHEDULE 6.8
Litigation and Contingent Liabilities
- -------------------------------------
NONE
<PAGE>
EXHIBIT 10.29
[CORESTATES BANK LETTERHEAD]
June 4, 1997
RYKA, Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Steve Wolf
RE: REVOLVING CREDIT AGREEMENT DATED AUGUST 15, 1996 BY AND AMONG CORESTATES
BANK, N.A. (THE BANK") AND RYKA INC. (THE "BORROWER")(AS AMENDED FROM TIME
TO TIME, THE "CREDIT AGREEMENT").
Dear Steve:
As you know, the Credit Agreement was due to mature by its terms as of
today. Pursuant to your request, I am writing to confirm that the Borrower and
the Bank have agreed to modify the Credit Agreement in accordance with the terms
set forth in this letter (the "Letter Agreement") to, among other things, extend
the Termination Date until the earlier to occur of (i) the occurrence of an
Event of Default under the Credit Agreement; or (ii) November 30, 1997. All
capitalized terms used in this Letter Agreement without definition shall have
the meanings given to such terms in the Credit Agreement.
Terms of Amendment
------------------
1. A new definition of "Guarantors" is hereby added to the Credit
Agreement as follows:
"Guarantors" shall mean, collectively, Michael G. Rubin and MR
Acquisitions, LLC.
2. The definition of "Termination Date" as set forth on page 5 of the
Credit Agreement is hereby deleted in its entirety and a new definition of
"Termination Date" is hereby added as follows:
"Termination Date" shall mean the earlier to occur of (i) at the
Bank's option, the occurrence of an Event of Default under this
Agreement; or (ii) November 30, 1997.
3. Section 2.01 of the Credit Agreement is hereby deleted in its entirety
and a new Section 2.01 is added in its place as follows:
SECTION 2.01. Revolving Credit. The Bank agrees on the terms and
conditions hereinafter set forth, to make loans (the "Loans") to the
Borrower from time to time during the period from June 4, 1997 up to
and including the Termination
<PAGE>
RYKA INC.
June 4, 1997
Page 2
Date in an aggregate amount not to exceed at any time the lesser of:
(i) the difference between Four Million Five Hundred Thousand Dollars
($4,500,000) and the proceeds of any equity raised by the Borrower for
working capital purposes from Patrick Tang on or after June 4, 1997;
or (ii) the Borrowing Base (as the case may be, the "Commitment").
Within the limits of the Commitment, the Borrower may borrow, prepay
pursuant to section 2.07(2), and reborrow under this section 2.01. All
Loans shall be Prime Loans notwithstanding any reference to LIBOR
Loans contained in this Agreement. All Loans shall be made and
maintained at the Bank's Lending Office.
4. Section 2.05 of the Credit Agreement is hereby deleted in its entirety
and a new Section 2.05 is added in its place as follows:
SECTION 2.05. Interest. From June 1, 1997 through and including the
Termination Date, the Borrower shall pay interest to the Bank on the
outstanding and unpaid principal amount of the Revolving Credit Loans
made under this Agreement at the Prime Rate plus three and one-half
percent (3-1/2%). Notwithstanding the foregoing, at the election of
the Bank, at any time following the Termination Date and continuing
thereafter until the Revolving Credit Loans are repaid in full,
interest shall accrue at a default rate equal to the otherwise
applicable rate plus two percentage points.
5. The following new section is hereby added at the end of Article 7 of
the Credit Agreement:
SECTION 7.05. Receivables Turnover Ratio. On an annualized basis as
of each designated month-end, the Borrower will maintain a Receivables
Turnover Ratio (defined as net sales over average monthly accounts
receivable) equal to or greater than the following:
Receivables Turnover
Ratio
-------------------------
June 30, 1997 7.7
July 31, 1997 4.7
August 31, 1997 3.0
September 30, 1997 4.9
October 31, 1997 2.2
November 30, 1997 1.3
For purposes of calculating the Receivables Turnover Ratio, the
average monthly accounts receivable will be calculated as one half of
the sum of accounts
<PAGE>
RYKA INC.
June 4, 1997
Page 3
receivable value as of the first day of the applicable month plus the
accounts receivable value as of the last day of the applicable month.
6. Two new sections 8.01(11) and 8.01(12) are hereby added to the Credit
Agreement as follows:
(11) The Borrower or the Individual Guarantor shall fail to observe
any covenant term or condition set forth in that certain letter
agreement dated June 4, 1997 by and among the Bank, the Borrower, the
Individual Guarantor, and MR Acquisitions, LLC.
(12) Any Event of Default occurs under that certain Second
Forbearance Agreement dated June 4, 1997 by and among the Bank, KPR
Sports International, Inc. and various other parties.
7. The effectiveness of this Letter Agreement and the Bank's obligations
hereunder are conditioned upon the delivery by the Borrower of the following:
(a) This Letter Agreement duly executed by the Borrower and Michael
G. Rubin.
(b) An Amended and Restated Revolving Credit Note duly executed by the
Borrower.
(c) A Certification of Corporate Authority executed by the Secretary
of the Borrower, dated as of the date of this Letter Agreement,
certifying the incumbency and signature of the officers of the
Borrower executing this Letter Agreement and all other documents
to be delivered by them pursuant hereto, together with evidence
of the incumbency of such Secretary.
(d) Unlimited Guaranty of MR Acquisitions, Inc. in favor of Lender
dated June 4, 1997.
(e) Stock Pledge Agreement dated June 4, 1997 by MR Acquisitions in
favor of Lender.
(f) Unlimited Personal Guaranty of Michael Rubin.
(g) Stock Pledge Agreement by Michael Rubin.
<PAGE>
RYKA INC.
June 4, 1997
Page 4
(h) Stock Powers by Michael Rubin.
(i) Stock Powers by MR Acquisitions, LLC.
(j) A Landlord's Waiver (Henderson Road Facility).
(k) Such Uniform Commercial Code Financing Statements and other
security documents as shall be presented by the Bank on or before
the closing date.
(l) Such other documents as may be required by the Bank to carry out
the provisions of this Letter Agreement.
8. On June 4, 1997, as consideration for the Bank's undertakings pursuant
to this Letter Agreement, a non-refundable fee (the "Forbearance Fee") of
$45,000 shall accrue and be payable by the Borrower in two equal installments of
$22,500, payable on June 4, 1997 and August 25, 1997, respectively.
9. The Borrower acknowledges and agrees that as of and at all times after
June 4, 1997: (a) the Borrower will not be given credit on any of its accounts
for uncollected funds; (b) the Bank will issue no letter of credit for the
Borrower's account expiring later than January 15, 1998; and (c) the Bank's
agreement to enter into this Letter Agreement does not constitute the consent of
the Bank to any proposed merger between the Borrower and KPR Sports
International, Inc., and the Bank expressly reserves the right to review the
terms of any proposed merger as and when presented.
10. The Borrower will provide the Bank with full disclosure related to the
proposed Tang Group equity transaction and will provide the Bank with the
information necessary to review and provide consent for the Tang transaction
consistent with the Loan Documents. The Borrower will apply all proceeds
received from the Tang Group equity transaction first, to its subordinated
-----
indebtedness obligations to KPR Sports International, Inc., and second, to its
------
working capital fund, provided, however, that to the extent proceeds are applied
to the Borrower's working capital fund, the Commitment will be reduced by a
dollar amount corresponding to the amount of such working capital funds.
11. The Borrower and the Guarantors, on behalf of themselves, and all
persons and entities claiming by, through, or under any of them, hereby
release, waive and forever discharge the Bank, and all of the Bank's officers,
directors, attorneys, agents, affiliates, and successors and assigns, of, from,
and with respect to any and all manner of action and actions, cause and causes
of actions, suits, disputes, claims, counterclaims and/or liabilities, cross
claims, defenses, and any claims for avoidance or other remedies available to a
debtor, its estate or any trustee or representatives thereof, whether now known
or unknown, suspected or unsuspected, past or
<PAGE>
RYKA INC.
June 4, 1997
Page 5
present, asserted or unasserted, contingent or liquidated, whether or not well
founded in fact or law, whether in contract, in tort or otherwise, at law or in
equity, which the Borrower and/or the Guarantors had or now have, claim to have
had, now claim to have or hereafter can, shall or may claim to have against the
Bank, for or by reason of any cause, matter, or thing whatsoever arising from
the beginning of the world through the date hereof, including any claims based
upon, relating to or arising out of any and all transactions, relationships or
dealings with or loans made to the Borrower prior to the date hereof.
12. Any notice given pursuant to this Letter Agreement or pursuant to
any document comprising or relating to this Letter Agreement or any of the other
Loan Documents shall be in writing, including telecopies. Notice given by
telecopy or other electronic mail shall be deemed to have been given and
received when sent. Notice given by overnight mail courier shall be deemed to
have been given and received one (1) day after the date delivered to such
overnight courier by the party sending such Notice. Notice by mail shall be
deemed to have been given and received three (3) days after the date deposited,
when sent by first class certified mail, postage prepaid, and addressed as
follows:
To the Borrower:
RYKA Inc.
555 South Henderson Road
King of Prussia, PA 19406
Attention: Steve Wolf
Telecopy: (610) 768-0753
With a copy to:
David S. Mandel, Esquire
Astor, Weiss, Kaplan, and Rosenblum
Broad Street at Walnut
Philadelphia, PA 19102
Telecopy: (215) 790-0509
To the Guarantor:
c/o RYKA Inc.
555 South Henderson Road
King of Prussia, PA 19406
Telecopy: (610) 768-0753
<PAGE>
RYKA INC.
June 4, 1997
Page 6
To the Bank:
CoreStates Bank, N.A.
1339 Chestnut Street
Widener Building
Philadelphia, PA 19102
Attn: C.B. Cook, Vice President
Telecopy: (215) 786-7657
With a copy to:
Duane, Morris & Heckscher LLP
One Liberty Place, 41st Floor
Philadelphia, PA 19103
Attention: Peter S. Clark, Esquire
Telecopier Number: 215-979-1020
13. On or before the date hereof, the Borrower shall pay to the Bank the
amount of the Bank's costs incurred in connection with this Letter Agreement and
the other Loan Documents.
14. Except as expressly modified herein, the Credit Agreement remains in
full force and effect and the Borrower and the Guarantor hereby affirm and
reaffirm to the Bank their respective representations, warranties and covenants
as set forth in the Credit Agreement and the other Loan Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
RYKA INC.
June 4, 1997
Page 7
Please indicate the consent and agreement of the parties to the Loan
Documents to this Letter Agreement by having this Letter Agreement signed below
by an authorized officer of the Borrower and by Michael Rubin, as guarantor of
the Loan.
Sincerely,
CoreStates Bank, N.A.
By: /s/ Charles B. Cook
--------------------
Charles B. Cook
Vice President
ACCEPTED AND AGREED TO
AS OF THIS 4TH DAY OF
JUNE 1997:
RYKA INC.
By: /s/ Michael G. Rubin
__________________________
Michael G. Rubin
Chief Operating Officer
ACKNOWLEDGED AND AGREED TO
AS OF THIS ____ DAY OF JUNE 1997:
/s/ Michael G. Rubin
- ------------------------------
Michael G. Rubin, as Guarantor
MR ACQUISITIONS, LLC, as guarantor
By: KPR Sports International, Inc.
Authorized Member
By: /s/ Michael Rubin
______________________________
Michael Rubin
President
<PAGE>
Exhibit 11.1 - Computation of per Share Loss
RYKA Inc. and Subsidiary
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY:
Weighted average number of
common shares outstanding 51,368,619 34,560,653 24,210,083
Net effect of dilutive stock
options and warrants (based
on the Treasury Stock Method
using average market price) - - -
----------- ----------- -----------
Total 51,368,619 34,560,653 24,210,083
=========== =========== ===========
Net (loss)
(Loss) before extraordinary item ($1,879,757) ($5,279,733) ($ 511,415)
Extraordinary item - 1,650,256 -
----------- ----------- -----------
Net (loss) ($1,879,757) ($3,629,477) ($ 511,415)
=========== =========== ===========
Net (loss) share:
(Loss) before extraordinary item ($ .04) ($ .15 ($ .02)
Extraordinary item ( .04) .05 -
----------- ----------- -----------
Net (loss) per share ($ .04) ($ .10) ($ .02)
=========== =========== ===========
FULLY DILUTED:
Weighted average number of
common shares outstanding 51,368,619 34,560,653 24,210,083
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) - - -
----------- ----------- -----------
Total 51,368,619 34,560,653 24,210,083
=========== =========== ===========
Net (loss):
(Loss) before extraordinary item ($1,863,757) ($5,279,733) ($ 511,415)
Extraordinary item - 1,650,256 -
----------- ----------- -----------
Net (loss): ($1,863,757) ($3,629,477) ($ 511,415)
=========== =========== ===========
Net (loss):
(Loss) before extraordinary item ($ .04) ($ .15) ($ .02)
Extraordinary item - .05 -
----------- ----------- -----------
Net (loss) per share ($ .04) ($ .10) ($ .02)
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23.1
SUBSIDIARIES OF THE COMPANY
The consolidated financial statements include the accounts of RYKA
Inc. and its wholly owned subsidiary, RYKA GmbH, a German corporation. During
1994 RYKA GmbH was involuntarily dissolved by the Munich Trade Register. RYKA
GmbH's sole business activity consisted of holding title to the stylized RYKA
and dual parallelogram trademarks, which are both key trademarks of the Company,
and licensing them back to the Company. During 1995, the Company had legal
proceedings in Germany and caused full ownership of such trademarks to be
transferred to the Company from RYKA GmbH. All intercompany accounts and
transactions have been eliminated in consolidation. The Company currently
operates without a subsidiary.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1995
<CASH> 37,469
<SECURITIES> 0
<RECEIVABLES> 1,947,036
<ALLOWANCES> 65,941
<INVENTORY> 2,644,017
<CURRENT-ASSETS> 4,797,828
<PP&E> 431,128
<DEPRECIATION> (236,313)
<TOTAL-ASSETS> 5,062,643
<CURRENT-LIABILITIES> 3,026,248
<BONDS> 851,440
0
0
<COMMON> 566,303
<OTHER-SE> 583,602
<TOTAL-LIABILITY-AND-EQUITY> 5,062,643
<SALES> 10,194,675
<TOTAL-REVENUES> 10,194,675
<CGS> 7,199,572
<TOTAL-COSTS> 11,791,254
<OTHER-EXPENSES> 283,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,173
<INCOME-PRETAX> (1,879,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,879,757)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
