IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-Q IS BEING
FILED IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934.
For the period ended September 30, 1995
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or
/ / Transition Report Pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934.
For the transition period from to
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Commission File Number 0-16611
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RYKA INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2958132
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
555 S. Henderson Road, Suite B, King of Prussia, PA 19406
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(Address of principal executive offices) (Zip Code)
610-337-2200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of November 9, 1995:
Common Stock $.01 par value 41,535,326
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(Title of each class) (Number of Shares)
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RYKA Inc. and Subsidiary
Form 10-Q for the Three-Month Period Ended September 30, 1995
Table of Contents
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance
Sheets as of September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations for the
three-month and nine-month periods ended September 30, 1995
and September 30, 1994 4
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1995 and September 30, 1994 5
Notes to Condensed Consolidated Financial Statements 6 to 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 to 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults on Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index and Exhibits 23
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RYKA Inc. and Subsidiary
Condensed Consolidated Balance Sheets
- - -------------------------------------------------------------------------------
September 30, December 31,
1995 1994
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash $ 40,380 $ 296,226
Accounts receivable, net of allowance for doubtful
accounts of $213,186 in 1995 and $518,875 in 1994 1,029,221 2,933,994
Inventory 1,116,996 3,763,835
Prepaid expenses and other current assets 82,188 166,946
------------ ------------
Total current assets
2,268,785 7,161,001
Property and equipment, at cost, net of accumulated
depreciation 218,197 173,118
Security deposits and other assets -- 15,753
------------ ------------
Total assets $ 2,486,982 $ 7,349,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank $ 322,000 $ --
Accounts payable and accrued expenses 641,735 856,069
Payable to lender -- 2,783,464
Payable to factories 136,613 390,113
Payable to factor -- 1,286,237
Due to affiliate 25,640 --
------------ ------------
Total current liabilities 1,125,988 5,315,883
------------ ------------
Subordinated note payable, affiliate 851,440 --
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000
shares authorized; none issued or outstanding
Common Stock; $0.01 par value, 45,000,000 shares authorized; 41,535,326
and 26,474,326 shares issued and outstanding at September 30, 1995 and
December 31, 1994, respectively (pro-forma subject to stockholder
approval 70,000,000 shares authorized;
46,615,326 shares issued and outstanding - Notes B and G) 415,353 264,743
Additional paid-in capital 17,295,755 15,988,253
Accumulated deficit (17,201,554) (14,219,007)
------------ ------------
Total stockholders' equity 509,554 2,033,989
------------ ------------
Total liabilities and stockholders' equity $ 2,486,982 $ 7,349,872
============ ============
Please refer to the notes to condensed consolidated financial statements.
-3-
RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Operations
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Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------------- ----------------------------
(Unaudited) (Unaudited)
Net sales $ 1,299,603 $ 4,731,725 $ 6,917,866 $ 12,861,030
Other revenues 53,838 22,676 83,773 123,812
------------ ------------ ------------ ------------
1,353,441 4,754,401 7,001,639 12,984,842
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 927,108 3,489,955 6,116,792 9,062,721
Inventory write-down to lower
of cost or market -- -- 586,000 --
General and administrative
expenses 353,738 316,994 1,649,843 1,078,687
Sales and marketing expenses 235,238 687,801 1,629,385 1,940,387
Research and development expenses 38,582 68,737 288,018 144,492
Special charges 279,012 -- 279,012 --
------------ ------------ ------------ ------------
1,833,678 4,563,487 10,549,050 12,226,287
------------ ------------ ------------ ------------
Operating income (loss) ( 80,237) 190,914 ( 3,547,411) 758,555
------------ ------------ ------------ ------------
Other (income) expense:
Interest expense 17,488 243,598 319,213 645,299
Interest income ( 4,171) ( 1,141) ( 6,328) (3,762)
Gain on disposition of property
and equipment ( 10,782) -- ( 10,782) --
Merger related costs -- -- 783,289 --
------------ ------------ ------------ ------------
2,535 242,457 1,085,392 641,537
------------ ------------ ------------ ------------
Income (loss) before taxes ( 482,772) ( 51,543) ( 4,632,803) 117,018
Provision for income taxes -- 8,116 -- 21,316
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain ( 482,772) ( 59,659) ( 4,632,803) 95,702
Extraordinary gain:
Forgiveness of debt 1,650,256 -- 1,650,256 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,167,484 ($ 59,659) ($ 2,982,547) $ 95,702
============ ============ ============ ============
Net income (loss) per share:
Loss before extraordinary gain ($ .01) $ -- ($ .16) $ --
Extraordinary gain .04 -- .06 --
------------ ------------ ------------ ------------
Net income (loss) per share $ .03 $ -- ($ .10) $ --
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 43,375,492 23,940,406 30,830,241 24,371,375
============ ============ ============ ============
Please refer to the notes to condensed consolidated financial statements.
-4-
RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
1995 1994
------------------------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ($2,982,547) $ 95,702
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Extraordinary item - forgiveness of debt ( 1,650,256) --
Depreciation and amortization 36,572 39,149
Provision for allowance for doubtful accounts 367,030 100,000
Gain on disposition of property and equipment ( 10,782) --
Changes in operating assets and liabilities:
Accounts receivable 1,537,743 (1,300,345)
Inventory 2,646,839 280,254
Prepaid expenses and other current assets 84,758 ( 233,596)
Accounts payable and accrued expenses 856,188 ( 987,380)
Payable to factories ( 253,500) --
Due to affiliate 25,640 --
----------- -----------
Net cash provided by (used in) operating activities 657,685 (2,006,216)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ( 85,988) ( 71,614)
Proceeds from sale of equipment 15,120 --
Security deposits and other assets 15,753 12,500
----------- -----------
Net cash (used in) investing activities ( 55,115) ( 59,114)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in payable to lender, net ( 2,203,730) 967,699
Advances from (repayment to) factor, net ( 1,286,237) 998,384
Proceeds from note payable, bank 322,000 --
Proceeds from short-term note -- 300,000
Repayment of short-term note -- ( 300,000)
Proceeds from subordinated note payable 851,440 --
Repayment of notes payable to stockholder -- ( 125,000)
Repayment of capital lease obligations -- ( 14,858)
Proceeds from exercise of warrants and stock options 305,248 69,409
Proceeds from sale of Common Stock, net of issuance costs 1,152,863 361,336
----------- -----------
Net cash provided by (used in) financing activities ( 858,416) 2,256,970
----------- -----------
Net increase (decrease) in cash ( 255,846) 191,640
Cash, beginning of period 296,226 83,753
----------- -----------
Cash, end of period $ 40,380 $ 275,393
=========== ===========
Please refer to the notes to condensed consolidated financial statements.
-5-
RYKA Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RYKA Inc.
("RYKA,"(R) the "Company," or the "Registrant") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The accompanying financial information is unaudited; however, in the opinion of
Management, all adjustments (consisting solely of normal recurring accruals)
necessary for a fair presentation of the operating results of this period have
been included. The results of operations for the periods reported are not
necessarily indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Audited
Consolidated Financial Statements as of December 31, 1994 as presented in the
Company's Annual Report on Form 10-K.
Net income (loss) per share is based on the weighted average number of Common
Stock and dilutive Common Stock equivalents outstanding during the period.
Common stock equivalents comprise stock options and Common Stock warrants. Also
see Note G.
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C.
On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of
the Agreement and Plan of Merger (the "Merger Agreement") with L.A. Gear, Inc.
and Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On
April 27, 1995 L.A. Gear, Inc. notified the Company that it was terminating the
Merger Agreement. On May 17, 1995 the Company received notice of termination of
its financing agreement with Pro-Specs America Corporation ("Pro-Specs")
effective June 16, 1995. Pro Specs provided the principal source of financing
for the production activities of the Company. Subsequently the Company reviewed
several financing proposals from possible strategic partners or financing
sources and in June 1995, MR Acquisitions, Inc. and the Company entered into a
Securities Purchase Agreement (the "Agreement") to provide the Company with up
to $8,000,000 of new financing. The Agreement was subsequently assigned to MR
Acquisitions, L.L.C. ("MR"). Without this financing or other strategic
arrangement, Management believed there was substantial doubt that the Company
would be able to remain in business. The Agreement was consummated on July 31,
1995 (the "Closing") and the Company received cash proceeds from the sale of
stock and the ability to obtain funds through a new financing facility. In
addition, the Company negotiated substantial debt forgiveness with both secured
and unsecured creditors and established a new management team to operate the
restructured Company.
Following are the significant provisions of the Agreement and financing facility
(the "Transaction") between MR and the Company as set forth in the Agreement
dated June 21, 1995, as amended, the Loan Agreement and Security Agreement (the
"Loan Agreement") dated July 31, 1995 and the settlement of obligations due to
various creditors:
1. Transactions with MR:
MR purchased for consideration of $148,560 a total of 14,800,000 shares
of Common Stock of the Company (10,800,000 shares were delivered at
closing and the balance of 4,000,000 shares will be delivered upon
approval by the stockholders of an amendment to the Certificate of
Incorporation increasing the number of authorized shares) and a warrant
to purchase an additional 5,100,000 shares of Common Stock for $.01 per
share. Further, MR loaned $851,440 to the Company in the form of a
secured subordinated loan with interest at prime plus one percent and
with repayment terms coincident with the revolving credit facility with
the principal lender.
-6-
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
1. Transactions with MR - continued:
In connection with the bank loan described below, MR is responsible for
making future subordinated loans or capital infusions, or causing the same
to occur, in amounts substantially equal to any losses incurred by the
Company subsequent to the date of the Transaction such that by August 30,
1995 capital funds is maintained at a minimum of $2,000,000, as defined.
See Note B(2) below for information regarding waiver of default related to
these provisions.
As part of the Transaction, the Company issued a contingent stock purchase
warrant (the "Contingent Warrant"), to MR to purchase up to an additional
4,000,000 shares of Common Stock for an exercise price of $.01 per share,
of which 461,444 shares are vested. Pursuant to the warrant terms, if at
any time within one year from the date of issuance of the Contingent
Warrant, the Company issues a number of shares of Common Stock which
results in the Company having in excess of 50,000,000 shares of Common
Stock issued and outstanding, provided, that any such shares above such
50,000,000 were issued solely for the purpose of a) inducing a lender to
make a loan or loans to the Company, or b) in connection with an infusion
of capital to the Company, or c) a settlement of debts with the Company's
creditors, or (d) a combination thereof, then upon the occurrence of such
stock issuance, for every ten (10) additional shares of Common Stock which
are issued, four (4) of such shares shall vest under the Contingent Warrant
to MR, who upon exercise shall pay an additional one cent ($.01) per share
for the issuance of such additional shares.
MR, through its affiliate, KPR Sports International, Inc. has made
available, to the Company, a letter of credit facility in the amount of
$2,000,000. This facility may be utilized by the Company to, among other
things, enter into purchase transactions for the manufacture of inventory
with overseas vendors.
The Company reimbursed MR approximately $125,000 for its costs in
connection with the Transaction.
2. Transaction with principal lender:
In connection with the Transaction, the Company entered into a Loan and
Security Agreement with its principal lender to establish a $4,000,000
asset based revolving credit facility. The facility makes funds available
to the Company based on a percentage of inventory and accounts receivable,
as defined. Interest on the amounts outstanding will be paid monthly at the
rate of prime plus one percent and the facility is due on demand. As of
September 30, 1995, the Company owed $322,000 under this facility. Interest
expense incurred in connection with this facility was $1,805 for the
three-months ended September 30, 1995.
The Loan and Security Agreement requires the Company to observe certain
covenants and maintain certain minimum levels of tangible net worth and
leverage. Further, as described above, after August 30, 1995, there is a
requirement for additional subordinated loans or equity infusions in the
event that losses occur subsequent to the date of the Transaction which
would cause capital funds to decrease below $2,000,000, as defined. Such
$2,000,000 minimum required the infusion of additional equity or
subordinated loans of approximately $500,000 by August 30, 1995, and, as
described below, such infusion was postponed.
At September 30, 1995, the Company was in default of certain provisions of
the Loan and Security Agreement requiring certain credit and life insurance
to be obtained within prescribed timeframes, losses incurred by the Company
subsequent to the Transaction date to be funded by MR making subordinated
loans or capital infusions, or causing the same to occur (the "Funding
Requirement"), and the covenant requiring establishment and maintenance of
certain minimum tangible net worth. At September 30, 1995 and October 31,
1995, the difference between the actual minimum tangible net worth amount
and the required amount was approximately $450,000 and $600,000,
respectively.
The principal lender has waived the defaults, extended the time for the
insurance to be obtained through December 31, 1995, and postponed the
Funding Requirement and minimum tangible net worth requirements,
through January 30, 1996.
-7-
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
2. Transaction with principal lender - continued:
The principal lender received a fee of $20,000 upon closing the
Transaction, reimbursement of certain costs and expenses incurred in
connection with the Loan Agreement, and warrants to purchase up to 500,000
shares of the Company's Common Stock for an exercise price of $.57 per
share. The price was based upon the average trading price of the stock for
the five days before and after the Closing. The warrant may be exercised
for a period of up to five years after the Transaction date but may not be
exercised during the first twelve months. The value of the warrants was
$100,000.
3. Equity transaction - Investors:
In connection with the Transaction, the Company offered for sale, through a
private placement, 4,000,000 shares of Common Stock and the results of the
private placement were as follows:
Shares Placed Proceeds Received Shares Subscribed
------------- ----------------- -----------------
At Closing 3,020,000 $ 755,000 --
========= ========= =========
At September 30, 1995 3,520,000 $ 880,000 --
========= ========= =========
At November 3, 1995 3,520,000 $ 880,000 250,000
========= ========= =========
From the date of closing of the Transaction until completion of the private
placement, the Company's Chairman and Chief Executive Officer provided a
subordinated bridge loan to the Company. This loan is evidenced by a
promissory note bearing no interest and is due upon receipt by the Company
of the proceeds of the private placement. At September 30, 1995, a total of
$120,000 remained outstanding on such loan. As of November 3, 1995
additional shares were subscribed for or placed and a total of 230,000
shares have yet to be sold to investors. Originally, in the event the
private placement was not completed by August 26, 1995, such bridge loan
was to be converted to equity based on the same terms as the private
placement, with the exception of the provisions causing a contingent
reduction in stock proceeds as described above. The conversion date was
subsequently extended until December 31, 1995. Since the ultimate effect of
this transaction will be to increase the outstanding capital stock of the
Company through the sale of Common Stock to investors or conversion of the
bridge loan into Common Stock, the transaction has been given effect to in
these financial statements as if it had been completed. Included in
Additional Paid-In Capital at September 30, 1995 is $120,000 related to the
bridge loan for shares not sold. Further, such shares, although not
outstanding, have been considered as such in the computation of earnings
(loss) per share.
4. Settlement with secured and unsecured creditors:
As required by the Agreement, the Company negotiated the following
settlement arrangements with secured and unsecured creditors:
o Pro-Specs America Corporation:
The Company entered into a Settlement Agreement with Pro-Specs under
which $1,804,734 of secured indebtedness was settled by payment of
$1,100,000 in cash and the issuance of 500,000 shares of Common Stock.
These shares of Common Stock will be issued upon approval by the
shareholders of an amendment to the Certificate of Incorporation
increasing the number of authorized shares. These shares have been
valued at $.25 each or $125,000 in the aggregate. Pro-Specs was also
obligated to certain vendors pursuant to letters of credit opened on
behalf of the Company for the purchase of approximately $1,000,000 in
merchandise to be received in the future. In connection with the
settlement, as a result of separate negotiations with such vendors,
Pro-Specs was released from any obligations in connection with such
letters of credit.
In connection with the foregoing, the Company recognized a gain on
restructuring of this debt in the amount of $579,734 in the third
quarter of 1995.
-8-
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
4. Settlement with secured and unsecured creditors - continued:
o Other creditors:
In early July 1995, the Company was obligated to various unsecured
creditors in the aggregate amount of approximately $1,246,000. These
creditors were contacted and, generally, given the opportunity to elect
one of the following methods of settlement of the amounts due to them:
o Option A:
Payment in cash of $.08 during July 1995, or in certain cases at a
later date, in full and complete settlement of each dollar owed to
the creditor.
o Option B:
Payment in cash of $.03 during July 1995, or in certain cases at a
later date, for each dollar owed to such creditor and the issuance
of one warrant for the purchase of a share of Common Stock of the
Company for each $2 due such creditor. The warrants are
exercisable over a 5 year period at an exercise price of $1.50 per
share. The value of each warrant was $.10.
Creditors who were owed approximately $833,000 elected Option A. The
Company made payments to these creditors totaling approximately $71,000 and
recognized a gain of approximately $771,000 in the third quarter of 1995.
Creditors who were owed approximately $98,000 elected Option B. The Company
made payments to these creditors totaling approximately $3,000 and issued
44,903 warrants resulting in a gain recognized of approximately $91,000 in
the third quarter of 1995.
In addition, approximately $315,000 of claims were settled under other
negotiated arrangements requiring the payment of approximately $107,000 in
the aggregate resulting in a gain of approximately $208,000 in the third
quarter of 1995.
Currently the Company is negotiating with creditors who are owed
approximately $105,000.
The settlements with secured and unsecured creditors who were owed
approximately $3,050,000 resulted in a gain of approximately $1,650,000.
5. Other matters:
In connection with the Transaction, various other arrangements were
made including the following:
o The lease for the Company's principal operating facility was
terminated early with the payment of rent through August 15, 1995.
o Certain employment arrangements have been modified or new
arrangements have been entered into involving, among other
things, the granting of approximately 700,000 new options for the
purchase of the Company's Common Stock at a price equal to the
fair market value at the date of issuance.
o The Company incurred approximately $225,000 of professional fees
and other costs in connection with this Transaction. The amount
was paid in cash and by the issuance of 100,000 warrants valued at
$20,000. The warrants are exercisable over 5 years at a price of
$.42 per share.
o A key employment agreement was terminated involving the issuance of
60,000 shares of Common Stock, valued at $.25 per share.
o The Company's Credit and Collection Agreement with Heller Financial
Inc., its factor, was modified so that the credit facility
previously provided to the Company was terminated and only
collection services are currently being provided.
-9-
NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
5. Other matters - continued
o The Company presently has 45,000,000 shares of Common Stock
authorized for issuance. Prior to the Closing, approximately
26,500,000 shares of Common Stock were issued and outstanding and
approximately an additional 3,600,000 shares of Common Stock were
reserved for issuance of stock options and warrants unrelated to
this Transaction. The stockholders of the Company will be requested
to approve an increase in the number of authorized shares of Common
Stock to 70,000,000 at a special meeting on November 15, 1995 in
order to enable the Company to issue shares, options and warrants
as a result of the Transaction and to have shares available for
future financing and stock options.
A summary of shares to be issued and outstanding, pending
stockholders' approval of the amendment to the certificate of
incorporation increasing the number of authorized shares, is as
follows:
Shares purchased by MR in connection with Transaction 4,000,000
Shares for professional fees as reimbursement to MR for
Transaction costs 40,000
Remaining shares to be issued pursuant to 4,000,000
shares private placement 480,000
Shares to Pro-Specs in connection with settlement of secured indebtedness 500,000
Shares as termination of employment contract with former employee 60,000
------------
5,080,000
Shares issued and outstanding at September 30, 1995 41,535,326
------------
Shares issued and outstanding at September 30, 1995 on a pro-forma
basis, as if shareholders had Approved the Amendment to the
Certificate of Incorporation 46,615,326
============
NOTE C - RELATED PARTY TRANSACTIONS
The Company relocated to King of Prussia, Pennsylvania in August 1995 where
it conducts its operations and warehouses inventory in a facility subleased
from an affiliate of MR. Terms of the sublease require rental payments of
approximately $4,000 per month for use of these facilities and the
warehousing services commencing August 1, 1995 through July 31, 1997. Any
other cost related to the use of the joint facility or for other services
provided by MR or its affiliates will be charged to the Company on an arms
length basis and will be subject to approval by a special disinterested
committee of the Board of Directors.
KPR Sports International, Inc., an affiliate of MR and an entity owned by
the Chairman and Chief Executive Officer of the Company, has advanced
certain funds to the Company on a temporary basis. Such amounts are
included in the balance sheet under current liabilities as due to
affiliate.
MR through its affiliate, KPR, has made available to the Company, a letter
of credit facility in the amount of $2,000,000. This facility is used by
the Company to finance the purchase of manufactured inventory with overseas
vendors. At September 30, 1995, letters of credit in the amount of $207,000
were issued by KPR on behalf of the Company. Merchandise inventory received
under the terms of the facility is recorded in the financial statements
upon transfer of title to the Company which, generally, occurs upon payment
to KPR.
As stated in Note B, KPR loaned the Company $851,440 in the form of
subordinated debt.
Included in the statement of operations are sales of $85,254 relating to
footwear sold to KPR yielding a profit of $9,258 to the Company. These
goods were prior season's merchandise which was sold at negotiated terms on
an arms-length basis. KPR did not realize a profit on the ultimate sale of
this merchandise.
-10-
NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED
The Chairman and Chief Executive Officer of the Company devotes a portion
of his time to the Company's operations and marketing and sales related
activities for which he does not receive any compensation. The value of
these services for the two months ended September 30, 1995 was not
significant.
A summary of all related party transactions for the period July 31, 1995 to
September 30, 1995 are as follows:
Financial Amount Included in Amount Included in
Nature of Statement Transaction Due (To) From Affiliate Subordinated Note
Transactions Classification Amount at September 30, 1995 Payable, Affiliate
------------ -------------- ------------ ------------------------ --------------------
Purchase of
Inventory Inventory $132,660 ($83,605)
Sale of Fixed Assets Property and
Equipment 15,000 --
Proceeds from
Subordinated Debt Subordinated
Note Payable 851,440 -- $851,440
Sale of Merchandise Net Sales 85,254 85,254
Rent General and
Administrative
Expense 8,000 ( 8,000)
Interest on
Subordinated Debt Interest Expense 14,066 ( 14,066)
Temporary Advances 133,190 ( 5,223)
-------- --------
($25,640) $851,440
======== ========
NOTE D - CHARITABLE CONTRIBUTIONS
The Company has historically provided financial support to the R.O.S.E.
(Regaining One's Self-Esteem) Fund (formally The RYKA ROSE Foundation), an
independent not for profit foundation. The Company and the R.O.S.E. Fund are
currently discussing the terms of their future relationship which to date have
not been finalized. During the quarter ended September 30, 1995, contributions
in the amount of $2,000 were made.
NOTE E - OTHER
1. Exercise of Underwriters Warrants:
In connection with its third public offering in July 1990, the Company
issued 470,000 warrants (the "Unit Warrants"), each of which entitled the
underwriter to purchase up to one unit at a price of $1.20. Each Unit
Warrant consists of one share of Common Stock and one Common Stock
Purchase Warrant. Each Common Stock Purchase Warrant entitles the
Underwriter to purchase one share of Common Stock at an exercise price of
$1.00 per share. Prior to modification, these Unit Warrants originally
were to expire on July 16, 1995.
-11-
NOTE E - OTHER - CONTINUED
Prior to the modified expiration date of August 30, 1995, a total of
350,000 Unit Warrants remained outstanding and their terms had been
modified so that the purchase price of each Unit Warrant had been reduced
to $.45. Through further modification, the exercise price of each of the
Unit Warrants and Common Stock Purchase Warrants was reduced to $.40 and
during August, 1995 the Company received proceeds totaling $280,000 as a
result of the full exercise of these warrants.
2. NASDAQ Listing:
On July 19, 1995 the Company received an exception from the NASDAQ capital
and surplus listing requirement so that its Common Stock continued to be
listed on the NASDAQ Small Cap Market. The exception expired on September
15, 1995 and the Company was delisted from NASDAQ. Currently the Common
Stock of the Company is listed on the Over-the-Counter Bulletin Board.
NOTE F - SPECIAL CHARGES
In connection with the Transaction described in Note B, the related closing of
the Massachusetts facility, and relocation of operations to Pennsylvania, the
Company incurred the following special charges:
Professional fees and bank fees related to new credit facility, including
value of warrant to bank $205,492
Temporary housing costs for relocated personnel 17,575
Recruitment and relocation costs related to new management and personnel 41,320
Start-up and moving costs related to warehouse and office 14,625
--------
$279,012
========
NOTE G - PRO-FORMA AUTHORIZED CAPITAL, ISSUED AND OUTSTANDING COMMON STOCK AND
EARNINGS (LOSS) PER SHARE
As discussed in Note B (5), the stockholders of the Company will be requested to
approve an increase in the number of authorized shares of Common Stock to
70,000,000 at a special meeting on November 15, 1995. For purposes of
calculating the weighted average number of common and common equivalent shares
outstanding for the computation of earnings per share, such stockholder approval
has been assumed as of the date of the Transaction.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Overview
The Company has not had a single profitable fiscal year since its inception and
has incurred approximately $4,100,000 in losses during the first six months of
1995. In addition, RYKA had a stockholders' deficiency of approximately
$2,100,000 at June 30, 1995 and was experiencing a critical cash shortage.
During 1995 the Company was in default on several occasions under its agreements
with Pro-Specs America Corporation ("Pro-Specs") to provide production
financing. On May 17, 1995 Pro-Specs notified the Company of its intention to
terminate financing arrangements within 30 days. During 1995, the Company
reviewed several financing proposals and in June 1995 MR Acquisitions L.L.C.
("MR") and the Company entered into a Securities Purchase Agreement (the
"Agreement") to enable the Company to continue in existence. Without this
financing or other strategic arrangement Management believed there was
substantial doubt that the Company would be able to remain in business.
The Agreement was consummated on July 31, 1995 and provided the Company with
cash proceeds from the sale of stock and the ability to obtain funds through a
new financing facility. The Agreement also required substantial debt forgiveness
through negotiated arrangements with both secured and unsecured creditors and
established a new Management team to operate the restructured Company. At
closing, the Company had capital funds comprised of a net worth and subordinated
debt in excess of $1,500,000 as compared to an equity deficiency of $2,100,000
at June 30, 1995. The Agreement also called for certain officers and directors
to tender their resignation, thereby allowing a new management team to operate
the restructured Company.
During the first half of 1995 and until the Agreement with MR was consummated,
there was substantial doubt that the Company would be able to remain in
business. Staff reductions occurred on both a voluntary and involuntary basis
and temporary employees were required to handle daily operations. Further, sales
efforts were limited for a variety of reasons, including the inability to obtain
product from the Company's overseas production sources.
Once the Agreement with MR was consummated, new management directed its internal
efforts to carrying out a repositioning of the Company involving, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training of new employees in key management positions, including a
President and Vice President of Finance, filling of other necessary positions
within the Company, developing new product and the rebuilding of customer and
supplier relationships. These activities reflect a period of rebuilding in
certain areas of the Company's business and had a significant negative impact on
the Company's current sales and operations. Therefore, the Company is unlikely
to generate positive operating results in the near future.
Accordingly, sales and expense levels for the quarter ended September 30, 1995
and nine-months ended September 30, 1995 are not necessarily indicative of
results to be achieved in the future and the new management influences are not
fully reflected in the result of operations for the quarter ended September 30,
1995.
The approximate breakdown of operating expenses during the quarter is as
follows:
(In Thousands) Old Management New Management
One Month Ended Two Months Ended Three Months Ended
July 31, 1995 September 30, 1995 September 30, 1995
--------------- ------------------ ------------------
General and Administrative $143.9 $209.8 $353.7
Sales and Marketing 95.0 140.2 235.2
Research and Development 27.4 11.2 38.6
------ ------ ------
266.3 361.2 627.5
Special Charges -- 279.0 279.0
------ ------ ------
$266.3 $640.2 $906.5
====== ====== ======
By restructuring the expense base, obtaining working capital and a line of
credit at more favorable interest rates, the Company believes it is now better
positioned to compete in the athletic footwear market.
-13-
Results of Operations
Three Months Ended September 30, 1995 as Compared to the Three Months Ended
September 30,1994
The following table sets forth, for the periods indicated, a percentage analysis
of items included in the Condensed Consolidated Statements of Operations in
relation to Net Sales:
(In Thousands) THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
---------------------------- ----------------------------
Net sales $ 1,299.6 100.0% $4,731.7 100.0%
Other revenues 53.8 22.7
---------- --------
1,353.4 4,754.4
---------- --------
Costs and expenses:
Cost of goods sold 927.1 71.3% 3,490.0
73.7%
General and administrative expenses 353.7 27.2% 317.0 6.7%
Sales and marketing expenses 235.2 18.1% 687.8 14.5%
Research and development expenses 38.6 3.0% 68.7 1.5%
Special charges 279.0 21.5% -- --
----------------------------------------------------------------
1,833.6 141.1% 4,563.5 96.4%
----------------------------------------------------------------
Operating income (loss) ( 480.2) ( 36.9%) 190.9 4.0%
Other expense, net 2.6 .2% 242.5 5.1%
----------------------------------------------------------------
Income (loss) before taxes (482.8) ( 37.1%) ($ 51.6) (1.1%)
Provision for income taxes -- -- 8.1 0.2%
Income (loss) before extraordinary item ( 482.8) ( 37.1%) ( 59.7) (1.3%)
Extraordinary item - forgiveness of debt 1,650.3 127.0% -- --
----------------------------------------------------------------
Net income (loss) $ 1,167.5 89.9% ($ 59.7) (1.3%)
================================================================
Net sales decreased by $3,432,122 (72.5%) from $4,731,725 for the three months
ended September 30, 1994 to $1,299,603 for the three months ended September 30,
1995. The decrease in net sales of the Company's footwear was due to several
factors which continued to affect sales throughout the third quarter as follows:
o uncertainty as to the Company's future continued despite the likelihood
of and ultimately the consummation of additional financing and the
Agreement with MR;
o many customers delayed or stopped their planned orders for third quarter
fall or "back to school" product. This was due to a combination of customer
apprehension to place orders, and the fact that the fall goods,
traditionally shipped towards the end of June or the beginning of July were
not available for delivery to retailers until the middle of September. Thus,
many customers either canceled their orders or had to be incentified to keep
their orders which adversely impacted margins as additional discounts and
extended terms were granted;
o the Company had a low inventory level. Until September, when the Fall
season production arrived, the inventory consisted of a minimum quantity of
goods from the prior season. During the quarter ended September 30, 1995,
substantially all the prior season's goods were liquidated. In addition,
there was a limited quantity of Fall season goods available to sell in the
third quarter which were purchased as a result of extended negotiations with
factories in the Far East. Management, as part of the settlement of its debt
with the factories, agreed to take only a portion of the original production
of Fall season footwear. Management's decision was based upon a combination
of customers' apprehension and the delays in the factories' release of
product due to the settlement negotiations;
-14-
Three Months Ended September 30, 1995 as Compared to the Three Months Ended
September 30,1994 - continued
Net sales - continued
o the athletic footwear industry is still experiencing sluggishness and the
volume of off-price product has continued at high levels; and
o the women's athletic footwear category has become increasingly competitive
with larger vendors increasing their focus in this area thereby increasing
the need to sell inventory for less than normal prices.
Cost of goods sold decreased by $2,562,847 (73.4%) from $3,489,955 for the three
month ended September 30, 1994 to $927,108 for the three month ended September
30, 1995. The overall gross margin on net sales increased by 2.5% from 26.2% in
the third quarter of 1994 to 28.7% in the third quarter of 1995. The gross
margin reflect shipments of full price Fall merchandise.
General and administrative expenses increased by $36,744 (11.6%) from $316,994
for the third quarter of 1994 to $353,738 for the quarter ended September 30,
1995. The increase is primarily the result of (i) an increase in insurance
expense due primarily to directors and officers liability insurance for new
directors and coverage for former directors; (ii) travel expenses; (iii) legal
expenses (not related to the Transaction); and (iv) a decrease in factor
commissions due to the termination of the relationship with the factor. As a
percentage of sales, general and administration expenses increased significantly
as many expenses are relatively fixed in nature and sales were extremely low as
a result of the restructuring. The general and administrative expenses incurred
for the three months ended September 30, 1995 include one month of operations
under the prior management at higher expense levels. These expenses which were
incurred in July 1995, account for approximately $144,000 of the total general
and administrative expenses of $353,738 for the quarter.
Sales and marketing expenses decreased by $452,563 (65.8%) from $687,801 for the
quarter ended September 30, 1994 to $235,238 for the quarter ended September 30,
1995. Sales and marketing expenses expressed as a percentage of net sales
increased from 14.5% to 18.1%. The dollar decrease is primarily due to a
reduction in sales commissions of approximately $168,000 or 80%. This decrease
is proportionally greater than the decrease in net sales of 72.5%. Commissions
expressed as a percentage of net sales decreased from 4.3% to 2.8%. This
decrease of 1.5 percentage points is a result of reduced commission rates and a
greater proportion of house accounts sold by Company management at no
commission. Other reasons for the decrease include a reduction in promotional
expenses such as clothing giveaways and promotional allowances granted to
retailers, and a reduction in staff salary and related expenses.
Research and development expense decreased by $30,155 (43.9%) from $68,737 in
the quarter ended September 30, 1994 to $38,582 in the quarter ended September
30, 1995. This decrease is attributed primarily to a reduction in sample costs
and a reduction in payroll related costs.
Special charges were incurred in connection with the Transaction and the related
closing of the Massachusetts facility and relocation of operations to King of
Prussia, Pennsylvania. These expenses, among other things, included transactions
costs, termination of a significant portion of personnel existing prior to the
Transaction, temporary housing for certain relocated personnel, recruitment of
new management and personnel and costs associated with moving, start up of new
operations and winding down of prior operations.
Other (income) expense, net decreased $239,922 (99.0%) from $242,457 for the
quarter ended September 30, 1994 to $2,535 for the quarter ended September 30,
1995. This decrease is due to a reduction in interest expenses of $226,110
(92.8%) from $243,598 for the quarter ended September 30, 1994 to $17,488 for
the same period in 1995, due to the termination and settlement with Pro-Specs
and the capital infusion resulting from the consummation of the Agreement with
MR.
Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the Transaction.
THIS SPACE INTENTIONALLY LEFT BLANK
-15-
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994
The following table sets forth, for the periods indicated, a percentage analysis
of items included in the Condensed Consolidated Statements of Operations in
relation to Net sales:
(In Thousands) NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
------------------------------ ----------------------------
Net sales $ 6,917.9 100.0% $ 12,861.0 100.0%
Other revenues 83.7 123.8
----------- -----------
7,001.6 12,984.8
----------- -----------
Costs and expenses:
Cost of goods sold (includes
inventory write-down to lower
of cost or market) 6,702.8 96.9% 9,062.7 70.5%
General and administrative expenses 1,649.8 23.9% 1,078.7 8.4%
Sales and marketing expenses 1,629.4 23.5% 1,940.4 15.1%
Research and development expenses 288.0 4.2% 144.5 1.1%
Special charges 279.0 4.0% -- --
------------------------------------------------------------------
10,549.0 152.5% 12,226.3 95.1%
------------------------------------------------------------------
Operating income (loss) ( 3,547.4) ( 51.3%) 758.5 5.9%
Other (income) expense, net 1,085.4 15.7% 641.5 5.0%
------------------------------------------------------------------
Income (loss) before taxes ( 4,632.8) ( 67.0%) 117.0 0.9%
Provision for income taxes -- -- 21.3 0.2%
------------------------------------------------------------------
Net income (loss) before extraordinary item ( 4,632.8) ( 67.0%) 95.7 0.7%
------------------------------------------------------------------
Extraordinary item - forgiveness of debt 1,650.3 23.9% -- --
------------------------------------------------------------------
Net income (loss) ($ 2,982.5) ( 43.1%) $ 95.7 0.7%
==================================================================
Net sales decreased by $5,943,164 (46.2%) from $12,861,030 for the nine months
ended September 30, 1994 to $6,917,866 for the nine months ended September 30,
1995. The decrease was due to several factors as follows:
o as a result of the announced and subsequent failed merger with L.A. Gear,
many customers delayed or canceled planned orders pending the future ability
of the Company to operate and fulfill the orders. As a result, sales orders
were not placed or canceled;
o the orders for "futures" business (third quarter shipments) for which
orders would be taken in the first or second quarter did not occur;
o as a result of customer reaction, and a critical cash shortage through the
date of the Transaction, the Company determined that a significant amount of
inventory had to be sold at or below cost in order to raise needed cash from
limited available inventory for sale;
o Fall goods were not available to ship until mid-September, and prior to
that there was a limited amount of prior season inventory to ship;
o the athletic footwear industry is still experiencing sluggishness and the
volume of off-price product has continued at high levels; and
-16-
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994 - continued
Net sales - continued
o the women's athletic footwear category has become increasingly competitive
with larger vendors increasing their focus in this area thereby increasing
the need to sell inventory for less than normal prices.
Cost of goods sold decreased $2,359,929 (26.0%) from $9,062,721 for the nine
months ended September 30, 1994 to $6,702,792 for the nine months ended
September 30, 1995. The overall gross margin expressed as a percentage of net
sales decreased by 26.4 points, from 29.6% for the nine months ended September
30, 1994 to 3.1% for the comparable period in the current period. The decrease
in gross margin was primarily a result of the Company selling products at
reduced margins (primarily in the first and second quarters) in order to respond
to competitive market conditions and meet critical cash needs and a write down
of inventory to lower of cost or market (in the second quarter of 1995).
General and administrative expenses increased by $571,156 (52.9%) from
$1,078,687 for the nine months ended September 30, 1994 to $1,649,843 for the
same period in the current year. The increase consists primarily of an addition
to the Company's provision for bad debts, additional financial consulting and
accounting services incurred in completing the financial statements and in
filing the 10-K after the resignation of the Company's Chief Financial Officer
in February 1995 and an increase in costs for officers and directors liability
insurance for both current officers and prior officers.
Sales and marketing expenses decreased by $311,002 (16.0%) from $1,940,387 for
the nine months ended September 30, 1994 to $1,629,385 for the same period in
the current year. The decrease was due to (i) lower sales commissions resulting
from the reduced sales level as well as a reduction in the sales commission rate
on certain orders; (ii) an increase in the number of sales to house accounts
where no commission is paid; (iii) an increase in advertising and promotion
expenses; (iv) a decrease in salaries and benefits; and (v) a decrease in
international sales and marketing expenses.
Research and development expenses increased by $143,526 (99.3%) from $144,492
for the three quarters ended September 30, 1994 to $288,018 for the same period
in the current year. The entire increase is attributed to spending in the first
two quarters of 1995 as compared to the first two quarters of 1994. The increase
for the current nine month period compared to the previous year was primarily
due to the recruitment and hiring of a new Director of Design and design
consulting services.
-17-
Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended
September 30, 1994 - continued
Special charges were incurred in connection with the Transaction and the related
closing of the Massachusetts facility and relocation of operations to King of
Prussia, Pennsylvania. These expenses, among other things, included transactions
costs, termination of a significant portion of personnel existing prior to the
Transaction, temporary housing for certain relocated personnel, recruitment of
new management and personnel and costs associated with moving, start up of new
operations and winding down of prior operations.
Other (income) expense, net increased by $443,855 (69.2%) from $641,537 for the
nine months ended September 30, 1994 to $1,085,392 for the same period in the
current year. The increase is attributable to deal costs associated with the
Agreement and Plan of Merger with L.A. Gear, Inc. and a decrease in interest
expense of $326,086 (50.5%) from $645,299 for the three quarters ended September
30, 1994 to $319,213 for the same period in 1995.
Extraordinary item of approximately $1,650,000 related to gain on settlements
with both secured and unsecured creditors related to the Transaction.
THIS SPACE INTENTIONALLY LEFT BLANK
-18-
Liquidity and Capital Resources
Through July 31, 1995, RYKA continued to experience a critical shortage of cash.
During this period the Company reviewed several financing proposals and in June
1995, MR and the Company entered into a Securities Purchase Agreement (the
"Agreement") to provide the Company with up to $8,000,000 in new financing.
Prior to consummating the Agreement with MR on July 31, 1995, the Company had a
nominal cash balance and a working capital deficiency of approximately
$2,300,000. Without this financing or other strategic arrangement Management
believed there was substantial doubt that the Company would be able to remain in
business.
The Company was in default at various times during 1993 to 1995, under its
agreement with Pro-Specs America Corporation ("Pro-Specs"). Pro-Specs provided
the principal source of financing for the Company's production activities
through a $4,000,000 letter of credit and bankers acceptance line. On May 17,
1995 the Company received notice of termination of its agreement with Pro-Specs
effective June 16, 1995. Pro-Specs charged the Company substantial commissions
and other fees under its agreement in exchange for making financing available.
The effective annual interest rate including commissions paid was generally in
excess of 20%.
On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of
the Agreement and Plan of Merger ("Merger Agreement") with L.A. Gear, Inc. and
Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On April
27, 1995, L.A. Gear, Inc. terminated the Merger Agreement and its option to
purchase 677,500 shares of Common Stock and waived certain breakup fees. In an
effort to continue operations after the termination of the Merger Agreement, the
Company generated cash by liquidating inventory and accounts receivable and
using the proceeds to fund continuing operating losses and to reduce
liabilities, generally, to the Company's factor and to Pro-Specs.
As a result of consummating the Agreement with MR on July 31, 1995, the Company
received proceeds from the sale of Common Stock and warrants and proceeds from
subordinated notes payable, aggregating approximately $1,750,000 net of
transaction related costs. Additionally, secured and unsecured creditors forgave
certain debt resulting in a gain of approximately $1,650,000. The Company
established a new $4,000,000 asset based revolving credit facility with a bank
and established a $2,000,000 letter of credit facility with an affiliate of MR.
Both the bank facility and the letter of credit facility provide for rates which
are more competitive in today's lending environment. Interest on the bank loans
are at the prime rate plus 1% and letters of credit, prior to draw, are provided
at a rate of 1% of the sum of the face amount plus any underlying bank fees and
opening charges (approximately an additional 1 1/2% to 2% per anum).
The bank credit facility includes certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
capital funds (tangible stockholders' equity and subordinated notes payable) of
$2,000,000 by August 30, 1995. The bank credit facility also requires MR or its
affiliates, to make additional loans or otherwise cause capital funds of the
Company to be maintained at no less than $2,000,000. These provisions
effectively require the Company to raise capital through equity offerings,
proceeds from the exercise of stock options or warrants or through additional
subordinated borrowings or from MR or its affiliates, to finance any operating
losses.
The Agreement and financing resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000. At September 30, 1995 working capital was
approximately $1,100,000. Based on current plans, this available working
capital, along with the funding and support available from the asset-based
revolving credit facility and the letter of credit facility, are expected to
enable the Company to fund its anticipated needs in the near future. These
funding needs generally consist of supporting operating losses anticipated over
the next twelve months while the Company is carrying out its restructuring plan,
as well as supporting additional investments in inventory and accounts
receivable. The Company does not anticipate making significant capital
expenditures during the foreseeable future. In an effort to reduce costs and
increase efficiency, the Company is currently conducting its operations and
warehouse inventory in a facility subleased from an affiliate of MR.
-19-
Liquidity and Capital Resources - continued
At September 30, 1995, the Company was in default of certain provision of the
Loan and Security Agreement with its principal lender which have been waived
through December 31, 1995 and others through January 30, 1996. In addition, the
Company anticipates operating losses for the remainder of 1995 and for 1996. In
order to avoid a default under its Loan and Security Agreement with its
principal lender, the Company is required to increase its tangible net worth for
borrowings up to $4,000,000 to be available to the Company. The Company must
fulfill this requirement by January 30, 1996. Accordingly, in order to meet this
tangible net worth requirement, it may be necessary to seek additional equity or
debt financing in the near future. In such event, there can be no assurance that
such additional financings will be available when needed or, if available, will
be on terms satisfactory to the Company. Notwithstanding the foregoing and based
on current plans, the Company believes that existing liquid resources, funds
available under its existing revolving credit facility, resources provided under
its letter of credit facility and the requirement of MR or its affiliates to
provide funding will provide sufficient liquidity and enable the Company to meet
its operating and capital requirements and obligations through early 1996.
-20-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES
At September 30, 1995, the Company was in default of certain provision of
the Loan and Security Agreement regarding certain credit insurance and life
insurance to be established within prescribed timeframes, losses incurred by
the Company subsequent to the Transaction date to be funded by subordinated
loans or capital infusions by MR Acquisitions, L.L.C. ("MR"), or by MR
causing the same to occur (the "Funding Requirement"), and the covenant
requiring establishment and maintenance of certain minimum tangible net
worth. With regard to the minimum tangible net worth requirement, the
difference between the established amount and the required amount was
approximately $450,000 at September 30, 1995 and approximately $600,000 at
October 31, 1995. The principal lender has waived the aforementioned
defaults, extended the time for the insurance to be established to December
31, 1995, and postponed the Funding Requirement and minimum tangible net
worth requirements through January 30, 1996.
At September 30, 1995, the Company was in default of certain provisions of a
Loan and Security Agreement with KPR Sports International, Inc. relating to
a minimum tangible net worth requirement which is identical to the covenant
of the Company's principal lender. KPR Sports International, Inc. has waived
the aforementioned default through January 30, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10eeee. Key Employee Agreement dated September 25, 1995 with Dennis F.
DiDominicis
10ffff. Letter from MidLantic Bank date November 14, 1995
10gggg. Letter from KPR Sports International, Inc. dated November 20, 1995
11. Statement regarding computation of per share earnings.
(b) Reports on Form 8-K
(1) The Registrant filed a Form 8-K dated August 8, 1995 to report
the completion of the transactions with MR Acquisitions, L.L.C.
(assignee of MR Acquisitions, Inc.).
(2) The Registrant filed a Form 8-K dated August 23, 1995 to report
a change in independent auditors.
-21-
RYKA Inc. and Subsidiary
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RYKA INC.
Date: November 20, 1995 By: /s/ Michael G. Rubin
------------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
Date: November 20, 1995 By: /s/ Steven A. Wolf
------------------------------
Steven A. Wolf
Vice President of Finance &
Chief Financial Officer
-22-
RYKA Inc. and Subsidiary
Exhibit Index
Exhibit No. Description Sequential Page No.
- - -----------------------------------------------------------------------------------------------------
10eeee. Key Employee Agreement dated
September 25, 1995 with Dennis F. DiDominicis 24
10ffff. Letter from MidLantic Bank dated November 14, 1995 42
10gggg. Letter from KPR Sports International, Inc.
dated November 20, 1995 44
11 Statement regarding computation of
per share earnings 45
-23-