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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities and
Exchange Act of 1934.
For the period ended JUNE 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities and
Exchange Act of 1934.
For the transition period from ______________ to ______________________
Commission File Number 0-16611
RYKA INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2958132
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
555 S. Henderson Road, Suite B, King of Prussia, PA 19406
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(Address of principal executive offices) (Zip Code)
610-337-2200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of August 14, 1996:
Common Stock $.01 par value 55,615,326
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(Title of each class) (Number of Shares)
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RYKA Inc. and Subsidiary
Form 10-Q for the Three-Month Period Ended June 30, 1996
Table of Contents
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance
Sheets as of June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
three-month and six-month periods ended June 30, 1996
and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6 to 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 to 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults on Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index and Exhibits 20
2
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RYKA Inc. and Subsidiary
Condensed Consolidated Balance Sheets
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June 30, December 31,
1996 1995
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(Unaudited)
ASSETS
Current assets:
Cash $ 689 $ 77,509
Accounts receivable, net of allowance for doubtful
accounts of $69,921 in 1996 and $57,573 in 1995 1,560,205 533,490
Inventory 297,087 678,319
Prepaid expenses and other current assets 246,531 118,294
Note receivable, officer 20,000 --
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Total current assets 2,124,512 1,407,612
Property and equipment, at cost, net of accumulated
depreciation 180,743 195,083
Deferred registration costs 112,500 --
Other assets 17,202 500
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Total assets $ 2,434,957 $ 1,603,195
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Note payable, bank $ 250,000 $ --
Accounts payable and accrued expenses 767,421 850,614
Due to affiliate 311,961 2,043
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Total current liabilities 1,329,382 852,657
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Subordinated note payable, affiliate 851,440 851,440
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Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock, $0.01 par value, 1,000,000
shares authorized; none issued or outstanding -- --
Common Stock; $0.01 par value, 70,000,000
shares authorized; 50,775,326 and 46,135,326 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 507,753 461,353
Additional paid-in capital 18,329,829 17,286,229
Accumulated deficit (18,583,447) (17,848,484)
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Total stockholders' equity (deficiency) 254,135 (100,902)
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Total liabilities and stockholders' equity (deficiency) $ 2,434,957 $ 1,603,195
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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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
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(Unaudited) (Unaudited)
Net sales $ 1,557,981 $ 1,483,613 $ 3,572,314 $ 5,618,263
Other revenues -- 672 -- 29,935
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1,557,981 1,484,285 3,572,314 5,648,198
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Costs and expenses:
Cost of goods sold 1,194,614 1,739,908 2,570,811 5,189,684
Inventory write-down to lower of cost
or market -- 60,000 -- 586,000
General and administrative expenses 323,582 687,167 573,933 1,296,105
Sales and marketing expenses 253,645 598,233 668,237 1,394,147
Research and development expenses 205,435 135,863 413,842 249,436
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1,977,276 3,221,171 4,226,823 8,715,372
------------ ------------ ------------ ------------
Operating loss (419,295) (1,736,886) (654,509) (3,067,174)
----------- ------------ ------------ ------------
Other (income) expense:
Interest expense 53,779 73,946 82,533 301,725
Interest income (1,717) (958) (2,079) (2,157)
Merger related costs -- 99,828 -- 783,289
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52,062 172,816 80,454 1,082,857
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Net loss ($471,357) ($ 1,909,702) ($ 734,963) ($ 4,150,031)
============ ============ ============ ============
Net loss per share ($ .01) ($ .07) ($ .02) ($ .16)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 46,934,007 26,474,959 46,576,864 26,474,673
============ ============ ============ ============
Please refer to the notes to condensed consolidated financial statements.
4
RYKA Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
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Six Months Ended
June 30,
1996 1995
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(Unaudited)
Cash flows from operating activities:
Net loss ($734,963) ($4,150,031)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 25,362 24,376
Provision for losses on accounts receivable 12,348 367,030
Capital contributed as services 50,000 --
Reserve for inventory writedown to lower of cost or market -- 586,000
Changes in operating assets and liabilities:
Accounts receivable (1,039,063) 1,913,245
Inventory 381,232 2,879,745
Prepaid expenses and other current assets (128,237) 92,862
Accounts payable and accrued expenses (83,193) 734,969
Due to affiliate 309,918 --
Payable to factories -- (390,113)
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Net cash provided by (used in) operating activities (1,206,596) 2,058,083
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Cash flows from investing activities:
Acquisitions of equipment (11,022) (17,507)
Security deposits (35) 15,753
Note receivable, officer (20,000) --
Licensing fees (16,667) --
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Net cash (used in) investing activities (47,724) (1,754)
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Cash flows from financing activities:
Proceeds from note payable, bank 250,000 --
Deferred registration costs (112,500) --
Proceeds from issuance of common stock 1,040,000
Proceeds from exercise of warrants and stock options -- 7,123
Principal payments under payable to lender, net -- (978,730)
Payments to factor, net -- (1,254,035)
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Net cash provided by (used in) financing activities 1,177,500 (2,225,642)
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Net decrease in cash (76,820) (169,313)
Cash, beginning of period 77,509 296,226
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Cash, end of period $ 689 $ 126,913
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Please refer to the notes to condensed consolidated financial statements.
5
RYKA Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RYKA Inc.
("RYKA"(R) or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
The accompanying financial information is unaudited; however, in the opinion of
Management, all adjustments (consisting solely of normal recurring accruals)
necessary for a fair presentation of the operating results of the periods
reported have been included. The results of operations for the periods reported
are not necessarily indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Audited
Consolidated Financial Statements as of December 31, 1995 as presented in the
Company's Annual Report on Form 10-K.
The Company's financial statements for the quarter ended June 30, 1996 have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred significant recurring losses since its
inception and had an accumulated deficit at June 30, 1996 of $18,583,447. The
Company was involved in several significant transactions during 1995, which
included the sale of securities, a change in key management, the establishment
of a new loan and security agreement with a bank, the settlement of debts with
secured and unsecured creditors and moving the Company's principal offices.
Without the occurrence of these transactions or other strategic arrangements,
there was substantial doubt that the Company would have been able to remain in
business through the third quarter of 1995. Having accomplished such
transactions, management plans to develop and acquire new merchandise, market
and promote the Company's product and expand the workforce in support of the
Company's current plans. To accomplish these goals, the Company will have to
incur substantial expenditures and expects to incur continuing operating losses
during 1996. The Company's working capital at June 30, 1996 will not be
sufficient to meet management's objectives in 1996.
The Company was in violation of certain financial covenants required by the loan
and security agreement with the Company's principal lender at June 30, 1996, and
has entered into a forebearance agreement through October 15, 1996 which
requires, among other things, the immediate reduction of the present credit
facility with the bank from $4,000,000 to $2,500,000 and the further reduction,
in stages during September 1996, to $1,500,000 (See Note B). Accordingly, unless
a new arrangement is negotiated with the lender, the availability of these funds
is uncertain. The Company's goals were to be funded, in part, through the
financing facility provided by the Company's principal lender. Management is
currently in discussions with another lender to pursue other financing on terms
acceptable to the Company. Based on current discussions with another lender the
Company believes it possible for alternate financing to be obtained although 1)
no definitive agreement has been reached to date, 2) additional equity or
subordinated debt funding was required as a prerequisite to such lender
financing and $2,500,000 has been raised by the Company through August 14, 1996
as part of an equity Private Placement which commenced in May 1996 (the "1996
Private Placement"), and 3) although the equity requirement has been met, there
is no assurance that the new loan will be finalized. In connection with the
foregoing, and the Company's requirements from time to time, the Company may
sell additional equity securities in order to generate sufficient capital
resources to assure continuation of the Company's operations. Management
recognizes that the Company must obtain these or similar additional resources or
consider modifications to its operating plans including reductions in operating
costs to enable it to continue operations. However, no assurance can be given
that the Company will be successful in raising sufficient additional capital to
support future operations. Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to utilize its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.
The financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of these
uncertainties.
Net loss per share is based on the weighted average number of Common Stock and
dilutive Common Stock equivalents outstanding during the period. Common Stock
equivalents are comprised, when dilutive, of stock options and Common Stock
warrants.
6
NOTE B - DEBT
The Company has a $4,000,000 asset based revolving credit facility with its
principal lender. The facility makes funds available to the Company based upon a
percentage of inventory and accounts receivable, as defined in the agreement.
Interest on the amounts outstanding is paid monthly at the rate of prime plus
one percent and is due on demand. As of June 30, 1996, the Company owed $250,000
under this facility. Interest expense in connection with this facility was
$38,687 for the six-months ended June 30, 1996.
The loan and security agreement with the Company's principal lender requires the
Company to observe certain covenants and maintain certain minimum levels of
tangible net worth and leverage. Further, there is a requirement for additional
subordinated loans or equity infusions in the event that losses occur subsequent
to July 31, 1995 which would cause capital funds to decrease below $2,000,000,
as defined. Such $2,000,000 minimum required the infusion of additional equity
or subordinated loans of approximately $1,000,000 by June 30, 1996, and, as
described below, such infusion had not been made as of that date. Subsequently,
as a result of the 1996 Private Placement proceeds received between July 1, 1996
and August 14, 1996 an additional $1,460,000 of capital has been raised.
At June 30, 1996, the Company was in default of certain provisions of the loan
and security agreement requiring certain credit insurance to be obtained within
prescribed timeframes, losses incurred by the Company subsequent to July 31,
1995 to be funded by MR Acquisitions L.L.C. ("MR") making subordinated loans or
capital infusions, or causing the same to occur (the "Funding Requirement"), and
the covenants requiring establishment and maintenance of certain minimum
tangible net worth and leverage.
The principal lender has waived the defaults, extended the time for the credit
insurance to be obtained and postponed the Funding Requirement, minimum tangible
net worth and leverage requirements through July 15, 1996 and subsequently as a
result of continuing defaults entered into a forbearance agreement through
October 15, 1996 which requires, among other things, the immediate reduction of
the present credit facility with the bank from $4,000,000 to $2,500,000 and the
further reduction, in stages during September 1996, to $1,500,000, as well as an
increase in the interest rate from prime plus one percent to prime plus one and
one half percent.
NOTE C - RELATED PARTY TRANSACTIONS
The Company conducts its operations and warehouses inventory in a facility
subleased from an affiliate of MR. Terms of the sublease require rental payments
of approximately $4,000 per month for use of these facilities and the
warehousing through July 31, 1997. Any other cost related to the use of the
joint facility or for other services provided by MR or its affiliates will be
charged to the Company on an arms length basis and will be subject to approval
by a special disinterested committee of the Board of Directors.
KPR Sports International, Inc. ("KPR"), an affiliate of MR, has advanced certain
funds to the Company on a temporary basis. Such amounts are included in the
balance sheet under current liabilities as due to affiliate.
MR, through KPR, has made available to the Company a letter of credit facility
in the amount of $2,000,000. This facility is used by the Company to finance the
purchase of manufactured inventory with overseas vendors. At June 30, 1996,
letters of credit in the amount of $792,204 were issued by KPR on behalf of the
Company. Merchandise inventory received under the terms of the facility is
recorded in the financial statements upon transfer of title to the Company
which, generally, occurs upon payment to KPR.
Included in the statement of operations are sales of $151,299 relating to
footwear sold to KPR yielding a profit of $32,046 to the Company. These goods
were prior season's merchandise which was sold at negotiated terms on an
arms-length basis.
The Chairman and Chief Executive Officer of the Company devotes a portion of his
time to the Company's operations and marketing and sales related activities for
which he does not receive any compensation. The value of these services for the
six-months ended June 30, 1996, estimated at $50,000, was recorded as
compensation expense and included as part of general and administrative expenses
in the statement of operations and as a contribution to capital and included as
additional paid-in capital in the balance sheet.
In June, 1996, a $20,000 loan was made to an officer of the Company. The loan is
unsecured and is payable on demand. Interest is paid bi-monthly at the rate of
prime plus one quarter percent.
7
NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED
A summary of all related party transactions with MR or its affiliates for the
six months ended June 30, 1996 are as follows:
Amount
Financial Amount Included
Nature of Statement Transaction Included in Due in Additional
Transactions Classification Amount To Affiliate Paid-in Capital
- ------------ -------------- ------ ------------ ---------------
Purchase of
Inventory from
vendors through
letter of credit
arrangement with
affiliate Inventory $1,834,147 $297,144
Sale of Merchandise Net Sales 151,299
Rent General and
Administrative
Expense 23,750 3,958
Interest on
Subordinated Debt Interest Expense 39,242 6,473
Interest on
Letters of Credit
Advances Interest Expense 1,779
Temporary Advances 149,475 4,386
Services Contributed General and
to Capital Administrative
Expense and
Additional Paid-
in Capital 50,000 $50,000
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$311,961 $50,000
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NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS
Equity transaction - Investors:
The Company offered for sale, through a Private Placement (the "1995 Private
Placement"), 4,000,000 shares of Common Stock during the third quarter of 1995
which was finalized during the first quarter of 1996 and the results of the 1995
Private Placement were as follows:
Cumulative Cumulative
Through Shares Placed Proceeds Received
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July 31, 1995 3,020,000 $ 255,000
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December 31, 1995 3,520,000 $ 880,000
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March 31, 1996 4,000,000 $1,000,000
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As a condition of the 1995 Private Placement, in the event the Company is unable
to register such securities with the Securities and Exchange Commission in a
filing which is effective within 120 days of the actual Closing (by November 28,
1995), the Company is required to remit to the investors $7,500 and warrants to
purchase 5,000 shares for each month such registration statement does not become
effective, up to a maximum reduction in stock proceeds of $150,000 and
additional issuance of 100,000 shares of Common Stock. The registration was not
accomplished within the 120 day period, however, waivers have been received from
the participants in the 1995 Private Placement related to the provisions
requiring a $7,500 per month remittance. Since there is no financial statement
impact at June 30, 1996 and the subsequent impact, if any, would be de minimis,
the entire amount of the proceeds has been recorded as equity in the balance
sheet. With respect to the warrants, pursuant to the specific 1995 Private
Placement terms, through June 30, 1996, warrants are to be issued to investors
with an exercise price of $.25 which are exercisable for up to 10 years after
date of issue.
8
NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS - CONTINUED
Equity transaction - Investors - continued
From the date of closing on July 31, 1995 until completion of the 1995 Private
Placement, the Company's Chairman and Chief Executive Officer provided a
subordinated bridge loan to the Company. This loan is evidenced by a promissory
note bearing no interest and is due upon receipt by the Company of the proceeds
of the 1995 Private Placement. At December 31, 1995, a total of $120,000
remained outstanding on such loan. As of December 31, 1995, a total of 480,000
shares were yet to be sold to investors. At March 31, 1996, the remaining
480,000 shares had been sold and the bridge loan repaid with the proceeds.
Originally, in the event the 1995 Private Placement was not completed by August
26, 1995, such bridge loan was to be converted to equity based on the same terms
as the 1995 Private Placement, with the exception of the provisions causing a
contingent reduction in stock proceeds, as described above. The conversion date
was subsequently extended until March 31, 1996. Since the ultimate effect of
this transaction is to increase the outstanding capital stock of the Company
through the sale of common stock to investors or conversion of the bridge loan
into common stock, the transaction had been previously given effect to as if it
had been completed. During the quarter ended March 31, 1996 the portion of such
proceeds representing the par value of 480,000 shares amounting to $4,800 was
reclassified to common stock from additional paid-in capital.
In May, 1996 the Company, through a second Private Placement (the "1996 Private
Placement"), authorized the sale of 10,000,000 shares of the Company's Common
Stock during the second and third quarter of 1996. The result of the 1996
Private Placement is as follows:
Cumulative Cumulative
Shares Proceeds
Through Placed Received
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June 30, 1996 4,160,000 $1,040,000
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August 14, 1996 10,000,000 $2,500,000
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Stock Options:
The Company has issued options to certain employees to purchase shares of the
Company's Common Stock at prices which approximated fair market value at the
date of grant. The options vest at various times over periods ranging up to four
years and generally must be exercised within 10 years from the date of grant. A
summary of such options granted in the first six months of 1996 is as follows:
NUMBER OF SHARES
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For
Non-Plan 1987 1988 1990 1992 1993 1995 1996 Employee Price
Grants Plan Plan Plan Plan Plan Plan Plan Directors of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at
December 31,
1995 416,321 251,746 129,851 157,000 838,560 861,500 1,200,000 - - $.25 - $1.31
Granted during
six months ended
June 30, 1996 - 13,000 10,500 3,500 10,500 37,500 300,000 20,000 25,000 $.20 - $.47
Cancelled during
the six months ended
June 30, 1996 - - - - - - 50,000 - - $.47
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Outstanding at
June 30, 1996 416,321 264,746 140,351 160,500 849,060 899,000 1,450,000 20,000 25,000 -
=========================================================================================================
9
NOTE E - REGISTRATION STATEMENT - EQUITY INCENTIVE PLAN
During January 1996, the Board of Directors of the Company approved the filing
of a registration statement with the Securities and Exchange Commission for the
offering of approximately 4.2 million shares of Common Stock.
The shares were to be issued pursuant to the "Partners Share Success" Equity
Incentive Plan to be adopted by the Comany. The purpose of the Program was to
provide an ownership interest in the Company, through equity incentives, to
retail sales personnel and store managment personnel of the Company's customers,
to educate consumers about the Company's products and to increase the sale of
the Company's products to consumers.
Under the Program, the Company intended to grant retail sales personnel one
share of the Company Common Stock for each pair of Company footwear sold and to
grant store management personnel approximatley 4 shares of Company Common Stock
for every 10 pairs of Company footwear sold by retail sales personnel under
their supervision.
The Program would have been available to retail sales personnel of customers of
the Company who agreed to participate in the Program and to purchase certain
minimum quantities of the Company's products.
The Company anticipated that awards of Common Stock pursuant to the Program
would be accounted for as sales and marketing expense using the fair value of
the equity instrument issued or other consideration, as applicable.
Included in deferred registration cost at June 30, 1996 are $112,500 in
professional fees incurred in conjunction with the contemplated registration
statement. All costs will be charged to sales and marketing expense during the
term of the program.
As a result of the proposed merger transaction, as discussed in Note F, the
Company decided to postpone, and may ultimately terminate the offering in
connection the "Partners Share Success Program". If this offering is not
consummated, the deferred registration cost will be charged to expense.
NOTE F - SUBSEQUENT EVENTS
On July 8, 1996, the Company received a merger proposal from KPR Sports
International, Inc. and certain affiliated companies ("KPR") pursuant to which
KPR would be merged with RYKA. KPR and its affiliates are wholly-owned by the
Chairman and Chief Executive Officer of RYKA. The proposal would require RYKA to
issue approximately 140,000,000 shares of Common Stock to the shareholders of
KPR, in addition to any shares they currently hold or have rights to through
existing warrants. RYKA would be the surviving Company in the merger. The merger
proposal also provides that RYKA would effect a 1 for 20 reverse stock split.
The consummation of the contemplated merger agreement, including the
authorization of additional shares of RYKA's Common Stock and the reverse stock
split, is subject to approal by RYKA's Board of Directors and Shareholders.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
Certain information contained in this Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors, as and when applicable, are discussed in the
Company's filings with the Securities and Exchange Commission, including its
most recent Form 10-K, a copy of which may be obtained from the Company upon
request and without charge (except for the exhibits thereto).
General Overview
The Company has not had a single profitable fiscal year since its inception and
incurred a loss of approximately $735,000 during the first six months of 1996.
In addition, the Company had an accumulated deficit of approximately $18,583,000
at June 30, 1996.
Through July 31, 1995, the Company was in default on several occasions under its
agreements with Pro-Specs America Corporation ("Pro-Specs") to provide
production financing. In May 1995, Pro-Specs notified the Company of its
intention to terminate financing arrangements. During 1995, the Company reviewed
several financing proposals, and on July 31, 1995 the Company consummated the
financing arrangement with MR Acquisitions L.L.C. ("MR") to enable the Company
to continue in existence. Without this financing arrangement, management
believed there was substantial doubt that the Company would be able to remain in
business.
The financing arrangement (the "Agreement") with MR provided the Company with
cash proceeds from the sale of equity and subordinated debt and the ability to
obtain funds and letters of credit through new financing facilities. As part of
the financing, the Company negotiated substantial debt forgiveness with both
secured and unsecured creditors and established a new management team to operate
the restructured Company. Upon closing of the transaction with MR, the Company
had capital funds comprised of a net worth and subordinated debt in excess of
$1,500,000 as compared to an equity deficiency over $2,000,000 at June 30, 1995.
Such funds have diminished as a result of continuing operating losses and at
June 30, 1996, prior to giving effect to the $1,040,000 proceeds received
through June 30, 1996 from a $2,500,000 equity Private Placement which commenced
in May 1996 (the "1996 Private Placement"), would have been $65,575. Actual
capital funds at June 30, 1996, considering the $1,040,000 of proceeds from the
1996 Private Placement, were approximately $1,100,000.
During the first half of 1995 and until the financing with MR was consummated,
staff reductions occurred on both a voluntary and involuntary basis and
temporary employees were required to handle daily operations. Sales efforts were
limited for a variety of reasons, including the inability to obtain product from
the Company's overseas production sources. Once the financing with MR was
consummated, new management began to reposition the Company by, among other
things, relocating the Company from Norwood, Massachusetts to King of Prussia,
Pennsylvania, terminating remaining employees in the Massachusetts location,
hiring and training new employees in key management positions, including a new
President and a new Chief Financial Officer, filling of other necessary
positions within the Company, and beginning to develop new products and build or
rebuild customer and supplier relationships. While management believes that
these activities will have a long-term beneficial impact, they had significant
negative impact on the Company's sales and operations. To accomplish its goals,
to develop and acquire new merchandise, market and promote the Company's product
and expand the workforce in support of the Company's current plans, the Company
will have to incur substantial expenditures and expects to incur continuing
operating losses during 1996.
The Company's working capital at June 30, 1996 will not be sufficient to meet
management's objectives in 1996. Further, the Company has been in default of
certain provisions of it's new financing facilities and has entered into a
forbearance agreement through October 15, 1996 which requires among other
things, the immediate reduction of the present credit facility with the bank
from $4,000,000 to $2,500,000 and the further reduction, in stages during
September 1996, to $1,500,000. Accordingly, the Company will be required, in the
near future, to obtain additional financing from its current lender or from a
new lender and/or raise additional funds through the sale of equity or debt. To
this end, the Company, as described above, has received an additional
$2,500,000 in proceeds from the 1996 Private Placement through August 14, 1996
of which $1,040,000 was received by June 30, 1996. In addition, the Company has
continued its negotiations with a new lender and anticipates the closing of a
new credit facility during August 1996, although there can be no assurance that
such closing will occur. See "Liquidity and Capital Resources" and Notes A and B
to the Company's Condensed Consolidated Financial Statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
General Overview - continued
As described in Note F to the Company's condensed consolidated financial
statements, on July 8, 1996 the Company received a merger proposal from KPR
Sports International, Inc. and certain affiliated companies ("KPR") pursuant to
which KPR would be merged with RYKA. KPR is a related party which is wholly
owned by the Chairman and Chief Executive Officer of RYKA and KPR is
substantially larger than RYKA. If such merger were to occur it is believed that
operating benefits would occur, however, there is no assurance that the merger
will occur or the benefits materialize.
Results of Operations
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995
The following table sets forth, for the periods indicated, the relative
percentage that certain items in the Company's Condensed Consolidated Statements
of Operations bear to net sales:
(In Thousands) THREE MONTHS ENDED JUNE 30,
--------------------------------
1996 1995
------- --------
(Unaudited) (Unaudited)
Net sales $1,558 100.0% $1,483 100.0%
Other revenues - 1
------- ------
1,558 1,484
------- ------
Costs and expenses:
Cost of goods sold (includes inventory writedown to
lower of cost or market of $60,000 in 1995) 1,195 76.7% 1,800 121.3%
General and administrative expenses 323 20.7% 687 46.3%
Sales and marketing expenses 254 16.3% 598 40.3%
Research and development expenses 205 13.2% 136 9.2%
--------------------- ------------------
1,977 126.9% 3,221 217.1%
--------------------- ------------------
Operating loss ( 419) ( 26.9%) (1,737) (117.1%)
Other expense, net 52 3.3% 173 11.6%
--------------------- -------------------
Net loss ($ 471) ( 30.2%) ($1,910) (128.7%)
===================== =====================
Net sales increased by $74,368 (5.1%) from $1,483,613 for the three-months ended
June 30, 1995 to $1,557,981 for the three months ended June 30, 1996. The slight
increase in net sales was due primarily to several factors as follows:
o Management's decision to commit the Company's resources towards
developing a more performance based product line with updated cosmetics
to better meet the needs of the fall 1996 marketplace. In order to
focus on the fall 1996 season the Company minimized merchandise
purchases for the spring 1996 season. The Company purchased a limited
quantity of merchandise for the spring season which was designed by a
third party prior to the agreement with MR. Net sales for the three
months ended June 30, 1996 represented shipments of this merchandise
to customers and closeout orders for the spring 1996 season.
o The athletic footwear industry continues to experience sluggishness and
the volume of off-price product has continued at high levels.
12
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995 - Continued
o The women's athletic footwear category has been increasingly
competitive over the past several years with large vendors with
considerably more resources than the Company increasing their focus in
this segment of the market.
o As a result of a critical cash shortage during the second quarter of
1995; the Company was forced to continue to liquidate a large quantity
of inventory at low profit margins, or even below cost, in an effort to
raise cash to meet operating expenses, while the Company completed
negotiations for a new financing agreement with MR Acquisitions.
Cost of goods sold decreased by $605,294 (33.6%) from $1,739,908 for the three
months ended June 30, 1995 to $1,194,614 for the three months ended June 30,
1996. The overall gross profit expressed as a percentage of net sales increased
from (21.3%) for the quarter ended June 30, 1995 to 23.3% for the quarter ended
June 30, 1996.
The gross profit percentage of 23.3% for the quarter ended June 30, 1996 was a
result of "fill-in" and "close-out" orders of the 1996 spring line. The increase
in gross profit percentage for the three months ended June 30, 1996 as compared
to the three months ended June 30, 1995 was due primarily to the Company's
improved financial position. During the second quarter ended June 30, 1995 the
Company was under extreme financial pressures. As a result of these pressures
the Company was required to sell substantial amounts of inventory at significant
losses or no profit in order to raise cash for operations. This adversely
affected the gross profit for the quarter ended June 30, 1995.
General and administrative expenses decreased by $363,585 (52.9%) from $687,167
for the quarter ended June 30, 1995 to $323,582 for the quarter ended June 30,
1996. The decrease reflects a concerted effort to restructure the Company in an
cost efficient manner with reduced overhead expenses. This decrease was due
primarily to:
o The elimination of approximately $320,000 of credit and collection
expenses incurred in the quarter ended June 30, 1995 of which
approximately $13,000 related to costs associated with collection fees
and commissions with a previously existing factoring agreement and
approximately $288,000 related to bad debt expense.
o Additional legal, consulting and auditing costs aggregating
approximately $34,000 in the quarter ended June 30, 1995, were incurred
in completing the December 31, 1994 financial statements and in filing
the Annual Report and Form 10-K.
o Other general and administrative expenses in the quarter ended June 30,
1995 included approximately $32,000 in trademark and license fees
incurred in connection with the dissolution of RYKA GmbH in Germany.
Sales and marketing expenses decreased by $344,588 (57.6%) from $598,233 in the
quarter ended June 30, 1995 to $253,645 in the quarter ended June 30, 1996. This
decrease was due primarily to:
o Reduction in promotion expense of approximately $70,000 due to a
reduction of point of purchase and promotional materials supplied to
customers.
o Decrease in trade advertising of approximately $118,000 from $156,000
in the quarter ended June 30, 1995 to $38,000 in the quarter ended June
30, 1996. The Company has planned an extensive consumer ad campaign for
the third quarter in conjunction with the introduction of the 1996 fall
line.
o Decrease in salary and related expenses of approximately $37,000
(28.7%) from $129,000 in the quarter ended June 30, 1995 to $92,000 in
the quarter ended June 30, 1996.
o Decrease in trade show related expenses by $36,000 (88%) from
approximately $41,000 in the quarters ended June 30, 1995 to
approximately $5,000 for the quarter ended June 30, 1996, as a result
of the restructuring of the Company in 1995.
13
Three Months Ended June 30, 1996 as Compared to the Three Months Ended June 30,
1995 - Continued
Research and development expenses increased $69,572 (51.2%) from $135,863 in the
quarter ended June 30, 1995 to $205,435 in the quarter ended June 30, 1996. The
increase reflects a concerted effort by management to further develop and
improve the Company's products. The increase is primarily due to:
o An increase of approximately $51,000 in salaries and consulting fees.
During the quarter ended June 30, 1996, at a cost of approximately
$39,000, the Company engaged the services of two outside design groups to
design and develop the fall 1996 line. In addition, the former VP of
Sourcing and Production and one other person were retained on a consulting
basis to oversee the manufacturing process.
Other expenses, net decreased $120,754 (69.9%) from $172,816 in the quarter
ended June 30, 1995 to $52,062 in the quarter ended June 30, 1996. The decrease
is primarily due to:
o Costs of approximately $100,000 associated with the failed merger with
L.A. Gear, Inc. in the second quarter of 1995.
o A decrease in interest expense of approximately $20,000 (27.3%) from
approximately $74,000 for the three months ended June 30, 1995 to
approximately $54,000 for the quarter ended June 30, 1996. This reduction
in interest expense was due in part to the proceeds of the 1996 Private
Placement beginning in May 1996. As of June 30, 1996, the Company received
proceeds from this Private Placement of $1,040,000 which reduced the
Company's borrowing with the bank.
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995
The following table sets forth the periods indicated, a percentage analysis of
items included in the Condensed Consolidated Statement of Operations in relation
to net sales:
(In Thousands) SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------------ ------------
(Unaudited) (Unaudited)
Net sales $3,572 100.0% $5,618 100.0%
Other revenues - 30
------- -------
3,572 100.0% 5,648 100.0%
------- -------
Costs and expenses:
Cost of goods sold (includes inventory writedown to
lower of cost or market of $586,000 in 1995) 2,571 72.0% 5,776 102.8%
General and administrative expenses 574 16.1% 1,296 23.1%
Sales and marketing expenses 668 18.7% 1,394 24.8%
Research and development expenses 414 11.6% 249 4.4%
------------------- -----------------------
4,227 118.4% 8,715 155.1%
------------------- -----------------------
Operating (loss) ( 655) 18.3% ( 3,067) ( 54.6%)
Other expense, net 80 2.2% 1,083 19.4%
------------------- -----------------------
Net (loss) ($ 735) ( 20.6%) ($4,150) ( 73.9%)
=================== ========================
14
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30,
1995 - Continued
Net sales decreased by $2,045,949 (36.4%) from $5,618,263 for the six months
ended June 30, 1995 to $3,572,314 for the six months ended June 30, 1996. The
decrease in the net sales was due primarily to several factors as follows:
o As previously discussed, management's decision to commit the Company's
resources towards developing a more performance based product line with
updated cosmetics to better meet the needs of the fall 1996
marketplace. In order to focus on the fall 1996 season the Company
minimized merchandise purchases for the spring season which was
designed by a third party prior to the agreement with MR. Net sales for
the six months ended June 30, 1996 represented shipments of this
merchandise to customers and closeout orders for the spring 1996
season.
o The athletic footwear industry is experiencing sluggishness and the
volume of off price product in the market place has increased so that
inventory is being sold at lower margins.
o The women's athletic footwear category has become increasingly
competitive with larger vendors increasing their market focus in this
area, thereby increasing the need to sell inventory for less than
normal prices.
Cost of goods sold before inventory write-down to lower of cost or market in
1995 decreased by $2,618,873 (50.5%), from $5,189,684 for the six months ended
June 30, 1995 to $2,570,811 for the six months ended June 30, 1996. The overall
gross margin on net sales increased by 30.8 percentage points, from -2.8% in
the six months ended June 30, 1995 to (28.0%) for the comparable period in the
current year. The increase in gross profit percentage for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995, as previously
discussed, was due primarily to the Company's improved financial position.
During the six months ended June 30, 1995 the Company was under extreme
financial pressures. As a result of these pressures the Company was required to
sell substantial amounts of inventory at significant losses or no profit in
order to raise cash for operations. This adversely affected the gross profit for
the six months ended June 30, 1995.
General and administrative expenses decreased by $722,172 (55.7%) from
$1,296,105 for the six months ended June 30, 1995 to $573,933 for the six months
ended June 30, 1996. The decrease over the prior year was due primarily to:
o A decrease in the Company's provision for estimated bad debt expenses
of approximately $360,000.
o A decrease in office expense, bank fees and payroll of approximately
$60,000.
o Additional financial consulting and accounting services of
approximately $200,000, incurred in completing the financial statements
and in filing the quarterly report on 10-Q after the resignation of the
Company's Chief Financial Officer in February, 1995. Other general and
administrative expenses in the six months ended June 30, 1995 which
included approximately $40,000 in legal fees incurred in connection
with a failed attempt to raise capital from investors and approximately
$33,000 in trademark and licensing fees incurred in connection with the
dissolution of RYKA GmbH in Germany which formerly held the trademark
of RYKA.
Sales and marketing expenses decreased by $725,910 (52.1%) from $1,394,147 for
the six months ended June 30, 1995 to $668,237 for the six months ended June 30,
1996. The decrease over the prior year was primarily due to:
o Decrease in advertising of approximately $150,000 (73.1%) from
approximately $205,000 for the six months ended June 30, 1995 to
approximately $55,000 for the six months ended June 30, 1996. The
decrease is due to the Company's plan for an extensive consumer ad
campaign during the third quarter for the 1996 fall line.
15
Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30,
1995 - Continued
o Decrease in commissions paid to outside sales representatives of
$111,226 (54.2%) from $205,246 for the six months ended June 30, 1995
to $94,020 for the six months ended June 30, 1996:
Six Months Ended
June 30,
1996 1995
------------------------
Commissions $ 94,020 $205,246
==========================
Net sales $3,572,314 $5,618,263
==========================
Percentage 2.6% 3.7%
==========================
The decrease in commissions is the result of a decrease in sales and a
decrease in the effective commission rate. The decrease in the effective
commission rate reflects a lower commission rate structure and greater
proportion of in-house accounts.
o Decrease in promotion of approximately $273,000 (89.2%) from
approximately $306,000 for the six months ended June 30, 1995 to
approximately $33,000 for the six months ended June 30, 1996.
o Decrease in payroll and payroll related expenses of approximately
$63,000 for the six months ended June 30, 1996 compared with the same
period last year.
o Decrease in freight out of $33,000 for the six months ended June 30,
1996 compared with the same period last year.
Research and development expenses increased by $164,406 (65.9%) from $249,436
for the six months ended June 30, 1995 to $413,842 for the six months ended June
30, 1996.
The increase reflects a continuing concerted effort by management to further
develop and improve the Company's product line. The increase is due to an
increase of approximately $123,000 in salary and consulting fees. During the six
months ended June 30, 1996 the Company engaged the services of two outside
design groups to design and develop the fall 1996 and spring 1997 lines.
Other expenses net, decreased by $1,002,403 (92.6%) from $1,082,857 for the six
months ended June 30, 1995 to $80,454 for the six months ended June 30, 1996.
The decrease is primarily attributed to the write-off of costs associated with
the termination of the merger with L.A. Gear, Inc. of $783,289 and a decrease in
interest expense of $219,192 (72.6%) from $301,725 for the six months ended June
30, 1995 to $82,533 for the six months ended June 30, 1996. This decrease in
interest expense is a result of additional capital funds infused into the
Company on July 31, 1995, as well as in the second quarter of 1996 as a result
of proceeds received to date for the 1996 Private Placement. In connection with
the financing transaction with MR, the Company established a line of credit with
interest at prime plus one percent. Previously, the agreement with Pro-Specs
provided for inventory financing at effective interest rates in excess of 20%.
Liquidity and Capital Resources
Through July 31, 1995, RYKA continued to experience a critical shortage of cash.
On July 31, 1995, the Company consummated a financing agreement with MR,
pursuant to which MR provided or arranged to provide the Company with up to
$8,000,000 of new financing in the form of: (i) a $1,000,000 equity and
subordinated debt investment by MR and KPR, an affiliate of MR; (ii) a
$2,000,000 letter of credit facility from KPR, (iii) a $4,000,000 revolving
credit facility with a bank; and (iv) a $1,000,000 equity investment through the
1995 Private Placement of Common Stock with certain investors. Prior to
consummating the Agreement with MR on July 31, 1995, the Company had a nominal
cash balance and a working capital deficiency of approximately $2,300,000.
Without this financing, management believed there was a substantial doubt that
the Company would be able to remain in business.
16
Liquidity and Capital Resources - Continued
As a result of consumating the Agreement with MR on July 31, 1995, the Company
received proceeds from the sale of Common Stock and warrants and proceeds from
subordinated notes payable, aggregating approximately $1,750,000 net of
transaction related costs. Additionally, secured and unsecured creditors forgave
certain debt resulting in a gain of approximately $1,650,000. The Company
established a new $4,000,000 asset based revolving credit facility with a bank
and established a $2,000,000 letter of credit facility with an affiliate of MR.
Both the bank facility and the letter of credit facility provide for rates which
are more competitive in today's lending environment. Interest on the bank loans
are at the prime rate plus 1% and letters of credit, prior to draw, are provided
at a rate of 1/4% of the sum of the face amount plus any underlying bank fees
and opening charges (approximately an additional 1-1/2% to 2% per annum).
The bank credit facility includes certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
capital funds (tangible stockholders' equity and subordinated notes payable) of
$2,000,000 by August 30, 1995. The bank credit facility also requires MR or its
affiliates to make additional loans or otherwise cause capital funds of the
Company to be maintained at no less than $2,000,000. These provisions
effectively require the Company to raise capital through equity offerings,
proceeds from the exercise of stock options or warrants or through additional
subordinated borrowings or from MR or its affiliates, to finance any operating
losses.
The Agreement and financing resulted in an increase in working capital of
approximately $3,600,000, so that the Company's working capital deficiency of
approximately $2,300,000 was converted to positive working capital of
approximately $1,300,000 at July 31, 1995. At June 30, 1996 the Company's
working capital was approximately $800,000 and will not be sufficient to meet
management's objectives in 1996. The Company does not anticipate making
significant capital expenditures during the foreseeable future. In addition, the
Company plans the sale of additional equity securities and/or the issuance of
subordinated notes, in order to generate sufficient capital resources to assure
continuation of the Company's operations. To this end, the Company, as stated
previously, has received an additional $2,500,000 in proceeds from the 1996
Private Placement through August 14, 1996 of which $1,040,000 was received by
June 30, 1996.
As of June 30, 1996 and as stated previously, the Company was in default of
certain financial covenants required by the loan agreement with its bank and has
entered into a forbearance agreement through October 15, 1996 which requires,
among other things, the immediate reduction of the present credit facility with
the bank from $4,000,000 to $2,500,000 and the further reduction, in stages
during September 1996, to $1,500,000. Further, in connection with production of
the Company's Fall 1996 line, additional financing and letters of credit will be
required during the second and third quarters of 1996. In order for the Company
to fund its operating plans, the Company must either renegotiate the terms of
the financing facility provided by the Company's bank, or arrange a new facility
suitable to the Company's needs with a different lender. The Company has
negotiated a credit facility with a new lender to replace its existing facility,
which new facility requires the Company to raise an additional $2,000,000 in
equity as a condition to obtaining such facility. The Company has raised
$2,500,000 in equity to satisfy this requirement through August 14, 1996.
Although presently, a closing with the new lender is scheduled during August
1996, there can be no assurance that the closing will occur. In addition, the
Company may be required to raise additional funds to support the Company's
operations through the sale of additional equity securities and/or the issuance
of subordinated notes. The Company must obtain these or similar additional
resources or consider modifications to its operating plans, including reductions
in operating costs to enable it to continue operations. However, no assurance
can be given that the Company will be successful in raising additional capital
to support future operations. Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to use its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES
At June 30, 1996, the Company was in default of certain provisions
of the Loan and Security Agreement with its principal lender
regarding certain credit insurance to be established within
prescribed timeframe, funding requirements for the infusion of
subordinated loans or capital infusions by MR Acquisitions, L.L.C.
("MR"), or by MR causing the same to occur, and the covenant
requiring establishment and maintenance of certain tangible net
worth and leverage. The lender agreed to wait until July 15, 1996 to
demand payment and subsequently entered into an interim forebearance
agreement through July 31, 1996 which reduced the loan limit to
$1,500,000. Further, on July 31, 1996 the Company has entered into a
forebearance agreement through October 15, 1996 which requires,
among other things, the immediate reduction to the present credit
facility with the bank from $4,000,000 to $2,500,000 and the further
reduction, in stages during September 1996, to $1,500,000.
At June 30, 1996, the Company was in default of certain provisions
of the Loan and Security Agreement with KPR Sports International,
Inc. relating to a tangible net worth and leverage requirement which
is identical to the covenant of the Company's principal lender. KPR
Sports International, Inc. has waived the aforementioned default
through October 15, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Waiver letter dated August 15, 1996 between Ryka Inc. and KPR
Sports International.
10.2 Waiver letter dated June 29, 1996 between the Ryka Inc. and
Midlantic Bank.
10.3 Forebearance letter dated July 31, 1996 between Ryka Inc. and
Midlantic Bank.
10.4 Guaranty and Surety Agreement between Michael G. Rubin and
Midlantic Bank.
18
RYKA Inc. and Subsidiary
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RYKA INC.
Date: August 14, 1996 By: /s/ Michael G. Rubin
--------------------------
Michael G. Rubin
Chairman of the Board &
Chief Executive Officer
Date: August 14, 1996 By: /s/Steven A. Wolf
--------------------------
Steven A. Wolf
Vice President of Finance &
Chief Financial Officer
19
RYKA Inc. and Subsidiary
EXHIBIT INDEX
Exhibit No. Description Sequential Page No.
- -------------------------------------------------------------------------------
10 Waiver letter dated August 15, 1996
between RYKA Inc. and KPR Sports
International Inc. 21
Waiver letter dated June 29, 1996
between RYKA Inc. and Midlantic Bank.
Forebearance letter dated July 31,
1996 between RYKA Inc. and
Midlantic Bank.
Guaranty and Surety Agreement between
Michael G. Rubin and Midlantic Bank.
20