-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJWVSoxyigvVTq6YdoHVlfW8hLX5qY/X9VGg0zfgBSLs9EAyyRge6PYcc0lfS0uL ymw3b2xZaRHgiemvDPdS7g== 0000950109-96-003164.txt : 19960517 0000950109-96-003164.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950109-96-003164 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYKA INC CENTRAL INDEX KEY: 0000828750 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042958132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16611 FILM NUMBER: 96567055 BUSINESS ADDRESS: STREET 1: 555 S HENDERSON ROAD SUITE B STREET 2: RTE 3 INDUSTRIAL PARK CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6103372200 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ================================================================================ 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 MARCH 31, 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. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2958132 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 555 S. Henderson Road, Suite B, King of Prussia, PA 19406 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 610-337-2200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of May 3, 1996: Common Stock $.01 par value 46,615,326 - --------------------------- -------------------- (Title of each class) (Number of Shares) - -------------------------------------------------------------------------------- RYKA Inc. and Subsidiary Form 10-Q for the Three-Month Period Ended March 31, 1996 Table of Contents ================================================================================
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 1996 and March 31, 1995 4 Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1996 and March 31, 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 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults on Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index and Exhibits 18
-2- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS RYKA Inc. and Subsidiary Condensed Consolidated Balance Sheets - --------------------------------------------------------------------------------
March 31, December 31, 1996 1995 ------------- ------------ (Unaudited) ASSETS Current assets: Cash $ 185 $ 77,509 Accounts receivable, net of allowance for doubtful accounts of $73,800 in 1996 and $57,573 in 1995 1,497,335 533,490 Inventory 865,197 678,319 Prepaid expenses and other current assets 226,086 118,294 ---------- ---------- Total current assets 2,588,803 1,407,612 Property and equipment, at cost, net of accumulated depreciation 185,526 195,083 Deferred registration costs 40,000 -- Security deposits 535 500 ---------- ---------- Total assets $2,814,864 $1,603,195 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Note payable, bank $1,237,000 $ -- Accounts payable and accrued expenses 806,410 850,614 Due to affiliate 259,522 2,043 ---------- ---------- Total current liabilities 2,302,932 852,657 ---------- ---------- Subordinated note payable, affiliate 851,440 851,440 ---------- ---------- Commitments and contingencies Stockholders' 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; 46,615,326 and 46,135,326 shares issued and outstanding at March 31, 1996 and December 31, 1995, respectively 466,153 461,353 Additional paid-in capital 17,306,429 17,286,229 Accumulated deficit ( 18,112,090) ( 17,848,484) ------------ ------------ Total stockholders' deficiency ( 339,508) ( 100,902) ------------ ------------ Total liabilities and stockholders' deficiency $ 2,814,864 $ 1,603,195 ============ ============
Please refer to the notes to condensed consolidated financial statements. -3- RYKA Inc. and Subsidiary Condensed Consolidated Statements of Operations - --------------------------------------------------------------------------------
Three Months Ended March 31, 1996 1995 ------------------------------- (Unaudited) Net sales $ 2,014,333 $ 4,134,650 Other revenues -- 29,263 ----------- ----------- 2,014,333 4,163,913 ----------- ----------- Costs and expenses: Cost of goods sold 1,376,197 3,449,778 Inventory write-down to lower of cost or market -- 526,000 General and administrative expenses 227,579 608,938 Sales and marketing expenses 414,592 795,914 Research and development expenses 208,407 113,572 Special charges 22,772 -- ----------- ----------- 2,249,547 5,494,202 ----------- ----------- Operating loss ( 235,214) ( 1,330,289) ----------- ----------- Other (income) expense: Interest expense 28,754 227,779 Interest income ( 362) ( 1,200) Merger related costs -- 683,460 ----------- ----------- 28,392 910,039 ----------- ----------- Net loss ($ 263,606) ($ 2,240,328) ============== =========== Net loss per share ($ $.01) ($ .08) ============== =========== Weighted average common and common equivalent shares outstanding 46,615,326 26,474,326 ============== ===========
Please refer to the notes to condensed consolidated financial statements. -4- RYKA Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
Three Months Ended March 31, 1996 1995 --------------------------- (Unaudited) Cash flows from operating activities: Net loss ($ 263,606) ($2,240,328) Adjustments to reconcile net loss to cash (used in) operating activities: Depreciation and amortization 13,088 15,000 Provision for losses on accounts receivable 16,227 51,211 Capital contributed as services 25,000 -- Reserve for inventory writedown to lower of cost or market -- 526,000 Changes in operating assets and liabilities: Accounts receivable ( 980,072) ( 769,461) Inventory ( 186,878) 1,281,565 Prepaid expenses and other current assets ( 107,792) (30,569) Accounts payable and accrued expenses ( 44,204) 338,006 Due to affiliate 257,479 -- ---------- ---------- Net cash (used in) operating activities ( 1,270,758) ( 828,576) ---------- ---------- Cash flows from investing activities: Acquisitions of equipment ( 3,531) ( 17,506) Security deposits ( 35) -- ---------- ---------- Net cash (used in) investing activities ( 3,566) ( 17,506) ---------- ---------- Cash flows from financing activities: Proceeds from note payable, bank 1,237,000 -- Deferred registration costs ( 40,000) -- Principal payments under payable to lender, net -- ( 294,096) Advances from factor, net -- 878,778 ---------- ---------- Net cash provided by financing activities 1,197,000 584,682 ---------- ---------- Net decrease in cash ( 77,324) ( 261,400) Cash, beginning of period 77,509 296,226 ---------- ---------- Cash, end of period $ 185 $ 34,826 ========== ==========
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" 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 March 31, 1996 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant recurring losses since its inception and had an accumulated deficit at March 31, 1996 of $18,112,090. 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 March 31, 1996 will not be sufficient to meet management's objectives in 1996. Additionally, the Company was in violation of certain financial covenants required by the loan and security agreement with the Company's principal lender at March 31, 1996, although a waiver of these defaults was obtained from the lender through May 31, 1996. Defaults had existed at December 31, 1995 and previous waivers had been obtained. Based on the covenant violations covered by the waiver, it is unlikely that the violations will be cured by May 31, 1996. Accordingly, unless an additional waiver is obtained, 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 would be required as a prerequisite to such lender financing and 3) there is no assurance that the equity or subordinated debt funding will be obtained or that the new loan will be finalized. In connection with the foregoing, and the Company's requirements from time to time, management 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. 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 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 March 31, 1996, the Company owed $1,237,000 under this facility. Interest expense in connection with this facility was $5,614 for the three months ended March 31, 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 $1,475,000 by March 31, 1996, and, as described below, such infusion had not been made. At March 31, 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 May 31, 1996. 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, continues to make 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 March 31, 1996, letters of credit in the amount of $134,374 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 $149,886 relating to footwear sold to KPR yielding a profit of $31,621 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 three months ended March 31, 1996, estimated at $25,000, 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. -7- NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED A summary of all related party transactions with MR or its affiliates for the quarter ended March 31, 1996 are as follows:
Amount Financial Amount Included Nature of Statement Transaction Included in Due Amount Included in in Additional Transactions Classification Amount To Affiliate Accrued Expenses Paid-in Capital - ------------ ------------------- ----------- --------------- ------------------ --------------- Purchase of Inventory Inventory $1,340,198 $177,691 Sale of Merchandise Net Sales 149,886 Rent General and Administrative Expense 11,875 7,917 Interest on Subordinated Debt Interest Expense 19,606 $12,737 Interest on Letters of Credit Advances Interest Expense 1,779 1,779 Temporary Advances 107,097 73,914 Services Contributed General and to Capital Administration Expense and Additional Paid- in Capital 25,000 $25,000 ------- ------ ------ $259,522 $14,516 $25,000 ======= ====== ======
NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS Equity transaction - Investors: The Company offered for sale, through a private placement, 4,000,000 shares of Common Stock during the third quarter to 1995 and the results of the private placement were as follows:
Shares Placed Proceeds Received ------------- ----------------- July 31, 1995 3,020,000 $ 255,000 ========= ========== December 31, 1995 3,520,000 $ 880,000 ========= ========== March 31, 1996 4,000,000 $1,000,000 ========= ==========
As a condition of the 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 will be 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 private placement through March 31, 1996 related to the provisions requiring a $7,500 per month remittance. Since there is no financial statement impact at March 31, 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. -8- NOTE D - EQUITY TRANSACTION, STOCK OPTIONS AND WARRANTS - CONTINUED Equity transaction - Investors - continued: With respect to the warrants, pursuant to the specific private placement terms, through March 31, 1996, 40,000 warrants are to be issued to investors with an exercise price of $.25 and exercisable 10 years after the date of issue. From the date of closing on July 31, 1995 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 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 private placement was not completed by August 26, 1995, such bridge loan was to be converted to equity based on the same terms as the private placement, with the exception of the provisions causing a contingent reduction in stock proceeds, as described above. The conversion date was subsequently extended until March 31, 1996. 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. Stock Options: Pursuant to option grant letters, 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 quarter of 1996 is as follows:
Plan Year From Number of Which Stock Option Shares Option Shares Were Granted Granted Price - ------------------- --------- ------ 1987 13,000 $.49 1988 10,000 $.39 1992 10,000 $.39 1993 37,000 $.49 1995 285,000 $.20 Non Employee Directors 25,000 $.20 ------- 380,000 =======
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 will be issued pursuant to the "Partners Share Success" Equity Incentive Plan to be adopted by the Company. The purpose of the Program is to provide an ownership interest in the Company, through equity incentives, to retail sales personnel and store management 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 currently intends 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 approximately 4 shares of Company common stock for every 10 pairs of Company footwear sold by retail sales personnel under their supervision. The Company currently expects that the Program will remain in effect through the Spring of 2000. The Program will be available to retail sales personnel of customers of the Company who agree to participate in the Program and to purchase certain minimum quantities of Company's products. -9- NOTE E - REGISTRATION STATEMENT - EQUITY INCENTIVE PLAN - CONTINUED The Company anticipates that awards of common stock pursuant to the Program will 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 costs at March 31, 1996 are approximately $40,000 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. If the offering is not consummated, the deferred registration costs will be charged to expense. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS The 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 opinions. 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 $264,000 during the quarter ended March 31, 1996. In addition, the Company had an accumulated deficit of approximately $18,112,000 and a stockholders' deficiency of approximately $340,000 at March 31, 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. At March 31, 1996 capital funds have been reduced through operating losses to approximately $500,000. 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. As a result, the Company is unlikely to generate positive operating results in the near future. 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 March 31, 1996 will not be sufficient to meet management's objectives in 1996. Accordingly, the Company will be required 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. See "Liquidity and Capital Resources" and Notes A and B to the Company's Condensed Consolidated Financial Statements. -11- Results of Operations Three Months Ended March 31, 1996 as Compared to the Three Months Ended March - ----------------------------------------------------------------------------- 31, 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 MARCH 31, -------------------------------- 1996 1995 ---------------- ---------------- (Unaudited) (Unaudited) Net sales $ 2,014 100.0% $ 4,135 100.0% Other revenues -- 29 ------- ------- 2,014 4,164 -------- ------- Costs and expenses: Cost of goods sold (includes inventory writedown to lower of cost or market) 1,376 68.3% 3,976 96.2% General and administrative expenses 228 11.3% 609 14.7% Sales and marketing expenses 415 20.6% 796 19.3% Research and development expenses 208 10.3% 113 2.7% Special charges 23 1.1% -- -- ----------------- ------------------- 2,250 111.6% 5,494 132.9% ----------------- ------------------- Operating loss ( 236) ( 11.6%) ( 1,330) ( 32.9%) Other expense, net 28 1.4% 910 22.0% ----------------- ------------------- Net loss ($ 264) ( 13.0%) ($ 2,240) ( 54.9%) ================= ===================
Net sales decreased by $2,120,317 (51.3%) from $4,134,650 for the three months ended March 31, 1995 to $2,014,333 for the three months ended March 31, 1996. The decrease in net sales was due primarily to several factors as follows: . The Company purchased a limited quantity of spring merchandise for shipment in the first quarter of 1996. This merchandise was designed by L.A. Gear designers. Current management made a conscious decision to minimize the purchase for spring and commit additional resources towards developing a more performance based line with updated cosmetics to better meet the needs of the marketplace for the fall 1996 product line. . As a result of the failed merger with L.A. Gear and the resulting critical cash shortage during the first quarter of 1995, the Company was forced 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. . The athletic footwear industry continues to experience sluggishness and the volume of off-price product has continued at high levels. At the same time, the retail industry has just experienced poor results for the holiday season. . The women's athletic footwear category has become increasingly competitive with large vendors with considerably more resources than the Company increasing their focus in this segment of the market. Other revenues of $29,263 for the three months ended March 31, 1995 is comprised of royalty income resulting from international distributors purchasing the Company's products directly from its vendors. For the three months ended March 31, 1996 all income from international business was reported in the statement of operations as sales and cost of goods sold in as much as the Company directly sold any such merchandise to its international distributors. -12- Cost of goods sold decreased by $2,599,581 (65.4%) from $3,975,778 for the three months ended March 31, 1995 to $1,376,197 for the three months ended March 31, 1996. The overall gross profit expressed as a percentage of net sales increased from 3.8% for the quarter ended March 31, 1995 to 31.7% for the quarter ended March 31, 1996. During the quarter ended March 31, 1996 approximately seventy-five percent of sales represented spring sales at full margins. Cost of sales for the quarter ended March 31, 1995 includes a write-down of inventory to the lower of cost or market of $526,000. As discussed in net sales above, in the quarter ended March 31, 1995, as a result of the extreme financial pressures, the Company was required to sell substantial amounts of inventory at little or no profit to raise cash for operations. This adversely affected the gross profit for the quarter ended March 31, 1995. General and administrative expenses decreased by $381,359 (62.6%) from $608,938 for the quarter ended March 31, 1995 to $227,579 for the quarter ended March 31, 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: . The elimination of approximately $100,000 of credit and collection expenses incurred in the quarter ended March 31, 1995 of which approximately $50,000 related to costs associated with collection fees and commissions in connection with a previously existing factoring agreement with Heller Financial. The remaining amount represents approximately $50,000 in bad debt expense during the quarter ended March 31, 1995. . Additional legal, consulting and auditing costs aggregating to approximately $165,000 in the quarter ended March 31, 1995, were incurred in completing the December 31, 1994 financial statements and in filing the Annual Report and Form 10-K. . Other general and administrative expenses in the quarter ended March 31, 1995 included approximately $40,000 in legal fees incurred in connection with a failed attempt to raise capital from investors. . Reduction in administrative staffing levels amounting to approximately $40,000. Sales and marketing expenses decreased by $381,322 (47.9%) from $795,914 in the quarter ended March 31, 1995 to $414,592 in the quarter ended March 31, 1996. This decrease was due primarily to: . A decrease in sales representatives commission expense of approximately $102,000. The decrease in commissions is due to decreased sales and a decrease in the effective rate paid to outside sales representatives:
THREE MONTHS ENDED MARCH 31, ----------------------- 1996 1995 ---------- ---------- Commissions $ 55,485 $ 157,354 ========== ========== Sales $2,014,333 $4,134,650 ========== ========== Effective percentage 2.8% 3.8% ========== ==========
. Reduction in promotion expense of approximately $206,000 is due to a reduction in customers marketing allowances. . Decrease in salary and related expenses of $26,384 (21.1%) from $124,890 in the quarter ended March 31, 1995 to $98,506 for the quarter ended March 31, 1996. -13- Research and development expenses increased $94,835 (83.5%) from $113,572 in the quarter ended March 31, 1995 to $208,407 in the quarter ended March 31, 1996. The increase reflects a concerted effort by management to further develop and improve the Company's products. The increase is primarily due to: . An increase of approximately $72,000 in salaries and consulting fees. During the quarter ended March 31, 1996, at a cost of approximately $125,000, the Company engaged the services of two outside design group 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. Special charges consists of relocation and temporary living costs. Other expenses, net decreased $881,647 (96.9%) from $910,039 in the quarter ended March 31, 1995 to $28,392 in the quarter ended March 31, 1996. The decrease is primarily due to: . The write-off of approximately $683,000 in costs associated with the termination of the Agreement and Plan of Merger with L.A. Gear, Inc. in the first quarter of 1995. . Interest expense decreased by $199,025 (87.4%) from $227,779 for the three months ended March 31, 1995 to 28,754 for the quarter ended March 31, 1996. This decrease is a result of additional funds infused into the Company on July 31, 1995 as equity as well as reduced requirements for borrowings and substantially reduced interest rates on borrowing. In connection with this transaction with MR, the Company established a line of credit with a bank providing the Company with financing 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 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. 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% 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. -14- Liquidity and Capital Resources - Continued 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 March 31, 1996 the Company's working capital was approximately $286,000 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. 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 utilize its existing credit facility or establish a new facility that the Company will achieve profitability or a positive cash flow. As of March 31, 1996 and as stated previously, the Company was in default of certain financial covenants required by the loan agreement with its bank, although the Company's bank has waived such defaults in the past and most recently through May 31, 1996. As of December 31, 1995, no amounts were outstanding under the bank facility, although as of March 31, 1996, there was $1,237,000 outstanding under this facility. 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, obtain additional waivers of defaults past May 31, 1996 or cure such defaults, 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 is currently in the process of raising $2,000,000 in equity to satisfy this requirement. 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. -15- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS ON SENIOR SECURITIES At March 31, 1996, the Company was in default of certain provisions of the Loan and Security Agreement 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 difference between the actual amount and the required amount was approximately $1,475,000, at March 31, 1996. The principal lender has waived the aforementioned defaults and extended the time for credit insurance to be established to May 31, 1996. At March 31, 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 May 31, 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 10eee. Waiver letters. 11. Statement regarding computation of per share earnings. -16- 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: May 15, 1996 By: /s/ Michael G. Rubin ------------------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer Date: May 15, 1996 By: /s/ Steven A. Wolf -------------------------------- Steven A. Wolf Vice President of Finance & Chief Financial Officer -17- RYKA Inc. and Subsidiary EXHIBIT INDEX Exhibit No. Description Sequential Page No. - -------------------------------------------------------------------------------- 10eee. Waiver letters. 19 11 Statement regarding computation of per share earnings 23 -18- EX-10.EEE 2 WAIVER LETTERS [LETTERHEAD OF MIDLANTIC APPEARS HERE] May 7, 1996 Mr. Steven Wolf, CFO Ryka, Inc. 555 S. Henderson Road King of Prussia, Pa. 19406 RE: Loan and Security Agreement, dated as of July 31, 1995 (herein call the "Agreement") as entered into between RYKA, INC. ("Borrower"), a Delaware Corporation, and MIDLANTIC BANK N.A. ("Bank"), a National Banking Company. Dear Steven, In response to your recent advisement and request pursuant to the Agreement, please be advised that the Bank agrees to waive its rights to declare an event of default as a result of Borrower's violation of the following covenants, said waiver effective through May 31, 1996 for Section 6.01 (M)(2). SECTION 6.01 (M)(2) Borrower will at all times be in compliance with the following financial covenants: Leverage Ratio of not more than 1.50 to 1 as of the Closing and 1.75 to 1 as of December 31, 1995 and at all times thereafter. This waiver does not apply to any other terms, conditions or covenants. Furthermore the above waiver should not be construed as a waiver of said covenants for any other period beyond May 31, 1996. All Other Terms, Conditions And Covenants Remain In Full Force And Effect. Sincerely, /s/ Joseph G. Meterchick Joseph G. Meterchick Vice President -19- [LETTERHEAD OF MIDLANTIC APPEARS HERE] April 30, 1996 Mr. Steven Wolf, CFO Ryka, Inc. 555 S. Henderson Road King of Prussia, PA. 19406 RE: Loan and Security Agreement, dated as of July 31, 1995 (herein call the "Agreement") as entered into between RYKA, INC. ("Borrower"), a Delaware Corporation, and MIDLANTIC BANK N.A. ("Bank"), a National Banking Company. Dear Steven, In response to your recent advisement and request pursuant to the Agreement, please be advised that the Bank agrees to waive its rights to declare an event of default as a result of Borrower's violation of the following covenants, said waiver effective through May 31, 1996 for Section 3.04 (A), (B), and Section 3.03 (C), (D), and Section 6.01 (M) (1). SECTION 3.03 (C) Borrower shall have received the cash sum of not less than $2,000,000 as equity or subordinated indebtedness, which in the case of subordinated indebtedness shall be fully and unconditionally subordinated in all respects to Borrower's obligations to Bank. (D) Bank shall have received a Support Agreement from Rubin and MR. L.L.C. under which they unconditionally agree to provide or cause to be provided by them or by any other Person a cash infusion to Borrower after Closing under the terms and conditions set forth therein if Borrower's Tangible Net Worth is from time to time less than $2,000,000. No such funding may directly or indirectly be provided by Guarantor unless cash funds in a like amount are received for such purpose by Guarantor (as equity or subordinated debt, under agreements acceptable to Bank) from either of Rubin or MR. L.L.C. or any other Person(s) contemporaneously with such funding. SECTION 3.04 Post-Closing Conditions: ------------------------ (A) Borrower covenants and agrees that within thirty days following Closing, Borrower shall obtain credit insurance with respect to all or a substantial portion of its accounts receivable, a copy of the policy for which shall, within such period, be delivered to and approved by Bank. -20- (B) Within thirty days following Closing, Bank shall receive a current pro forma balance sheet for Borrower prepared as of the date of submission thereof which shall reflect a Tangible Net Worth, plus Subordinated Indebtedness for Borrower of not less than $2,000,000 prior to transaction costs associated with the acquisition by Rubin or his affiliate stock of Borrower and all transactions related thereto and evidence satisfactory to Bank that indebtedness of Borrower existing immediately prior to the Closing of at least $1,500,000 has been forgiven or waived. SECTION 6.01 (M)(1) Borrower will at all times be in compliance with the following financial covenants: Tangible Net Worth of not less than $1,500,000 as of the Closing and $2,000,000 as of thirty days following Closing and at all times thereafter; and This waiver does not apply to any other terms, conditions or covenants. Furthermore the above waiver should not be construed as a waiver of said covenants for any other period beyond May 31, 1996. All Other Terms, Conditions And Covenants Remain In Full Force And Effect. Sincerely, /s/ Joseph G. Meterchick Joseph G. Meterchick Vice President -21- [K.P.R. SPORTS INTERNATIONAL LOGO APPEARS HERE] May 6, 1996 Steve Wolf Chief Financial Officer 555 South Henderson Road King of Prussia, PA. 19406 Dear Steve: In connection with Loan and Securities Agreement dated as of July 31, 1995 between RYKA and KPR Sports International, Inc., we hereby waive through May 31, 1996 the default with the regard to the minimum tangible net worth and leverage ratio requirements. Sincerely /s/ Michael Rubin Michael Rubin President KPR Sports International K.P.R SPORTS INTERNATIONAL, INC. - -------------------------------------------------------------------------------- [OFFICE LOCATIONS APPEAR HERE] -22- EX-11 3 EARNINGS PER SHARE EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS RYKA INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 1995 --------------------------- PRIMARY: Weighted average number of shares outstanding 46,615,326 26,474,326 Net effect of dillutive stock options and warrants (based on the Treasury Stock Method using average market price) - - --------------------------- Total 46,615,326 26,474,326 --------------------------- Net loss ($ 263,606) ($ 2,240,328) --------------------------- Net loss per share ($ .01) ($ .08) --------------------------- FULLY DILUTED Weighted average number of shares outstanding N/A N/A Net effect of dilutive stock options and warrants (based on the Treasury Stock Method using the quarter-end market price, if greater than the average price) - - --------------------------- Total N/A N/A --------------------------- Net loss N/A N/A --------------------------- Net loss per share N/A N/A ---------------------------
-23- EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 MAR-31-1996 MAR-31-1995 185 77,509 0 0 1,571,135 591,063 73,800 57,573 865,197 678,319 226,086 118,294 375,875 372,344 190,349 177,261 2,814,864 1,603,195 2,302,932 852,655 0 0 0 0 0 0 466,153 461,353 (805,661) (562,255) 2,814,864 1,603,195 2,014,333 4,134,650 2,014,333 4,163,913 1,376,197 3,449,778 2,249,547 5,494,202 (362) 682,260 0 0 28,754 227,779 (263,606) (2,240,328) 0 0 (263,606) (2,240,328) 0 0 0 0 0 0 (263,606) (2,240,328) (.01) (.08) 0 0
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