-----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, AZgknELXcDlEX9u6O5CkmTOOsZWn7L4LPUoAjMLmHJC7dZLxJUR2KcnaPm8K1Edn R0wUoSeAu5VS9TqkcOYP5Q== 0000950116-95-000522.txt : 19951130 0000950116-95-000522.hdr.sgml : 19951130 ACCESSION NUMBER: 0000950116-95-000522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951121 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYKA INC CENTRAL INDEX KEY: 0000828750 STANDARD INDUSTRIAL CLASSIFICATION: 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: 95595452 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 IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-Q IS BEING FILED IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION. =============================================================================== 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 September 30, 1995 ------------------ 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 November 9, 1995: Common Stock $.01 par value 41,535,326 - - --------------------------- ------------------ (Title of each class) (Number of Shares) - - ------------------------------------------------------------------------------- RYKA Inc. and Subsidiary Form 10-Q for the Three-Month Period Ended September 30, 1995 Table of Contents ===============================================================================
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994 3 Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 1995 and September 30, 1994 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1995 and September 30, 1994 5 Notes to Condensed Consolidated Financial Statements 6 to 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 to 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults on Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index and Exhibits 23
PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS RYKA Inc. and Subsidiary Condensed Consolidated Balance Sheets - - -------------------------------------------------------------------------------
September 30, December 31, 1995 1994 ------------- ------------- (Unaudited) ASSETS Current assets: Cash $ 40,380 $ 296,226 Accounts receivable, net of allowance for doubtful accounts of $213,186 in 1995 and $518,875 in 1994 1,029,221 2,933,994 Inventory 1,116,996 3,763,835 Prepaid expenses and other current assets 82,188 166,946 ------------ ------------ Total current assets 2,268,785 7,161,001 Property and equipment, at cost, net of accumulated depreciation 218,197 173,118 Security deposits and other assets -- 15,753 ------------ ------------ Total assets $ 2,486,982 $ 7,349,872 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable, bank $ 322,000 $ -- Accounts payable and accrued expenses 641,735 856,069 Payable to lender -- 2,783,464 Payable to factories 136,613 390,113 Payable to factor -- 1,286,237 Due to affiliate 25,640 -- ------------ ------------ Total current liabilities 1,125,988 5,315,883 ------------ ------------ Subordinated note payable, affiliate 851,440 -- Stockholders' equity: Preferred Stock, $0.01 par value, 1,000,000 shares authorized; none issued or outstanding Common Stock; $0.01 par value, 45,000,000 shares authorized; 41,535,326 and 26,474,326 shares issued and outstanding at September 30, 1995 and December 31, 1994, respectively (pro-forma subject to stockholder approval 70,000,000 shares authorized; 46,615,326 shares issued and outstanding - Notes B and G) 415,353 264,743 Additional paid-in capital 17,295,755 15,988,253 Accumulated deficit (17,201,554) (14,219,007) ------------ ------------ Total stockholders' equity 509,554 2,033,989 ------------ ------------ Total liabilities and stockholders' equity $ 2,486,982 $ 7,349,872 ============ ============
Please refer to the notes to condensed consolidated financial statements. -3- RYKA Inc. and Subsidiary Condensed Consolidated Statements of Operations - - -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 ---------------------------- ---------------------------- (Unaudited) (Unaudited) Net sales $ 1,299,603 $ 4,731,725 $ 6,917,866 $ 12,861,030 Other revenues 53,838 22,676 83,773 123,812 ------------ ------------ ------------ ------------ 1,353,441 4,754,401 7,001,639 12,984,842 ------------ ------------ ------------ ------------ Costs and expenses: Cost of goods sold 927,108 3,489,955 6,116,792 9,062,721 Inventory write-down to lower of cost or market -- -- 586,000 -- General and administrative expenses 353,738 316,994 1,649,843 1,078,687 Sales and marketing expenses 235,238 687,801 1,629,385 1,940,387 Research and development expenses 38,582 68,737 288,018 144,492 Special charges 279,012 -- 279,012 -- ------------ ------------ ------------ ------------ 1,833,678 4,563,487 10,549,050 12,226,287 ------------ ------------ ------------ ------------ Operating income (loss) ( 80,237) 190,914 ( 3,547,411) 758,555 ------------ ------------ ------------ ------------ Other (income) expense: Interest expense 17,488 243,598 319,213 645,299 Interest income ( 4,171) ( 1,141) ( 6,328) (3,762) Gain on disposition of property and equipment ( 10,782) -- ( 10,782) -- Merger related costs -- -- 783,289 -- ------------ ------------ ------------ ------------ 2,535 242,457 1,085,392 641,537 ------------ ------------ ------------ ------------ Income (loss) before taxes ( 482,772) ( 51,543) ( 4,632,803) 117,018 Provision for income taxes -- 8,116 -- 21,316 ------------ ------------ ------------ ------------ Income (loss) before extraordinary gain ( 482,772) ( 59,659) ( 4,632,803) 95,702 Extraordinary gain: Forgiveness of debt 1,650,256 -- 1,650,256 -- ------------ ------------ ------------ ------------ Net income (loss) $ 1,167,484 ($ 59,659) ($ 2,982,547) $ 95,702 ============ ============ ============ ============ Net income (loss) per share: Loss before extraordinary gain ($ .01) $ -- ($ .16) $ -- Extraordinary gain .04 -- .06 -- ------------ ------------ ------------ ------------ Net income (loss) per share $ .03 $ -- ($ .10) $ -- ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding 43,375,492 23,940,406 30,830,241 24,371,375 ============ ============ ============ ============
Please refer to the notes to condensed consolidated financial statements. -4- RYKA Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 1994 ------------------------------ (Unaudited) Cash flows from operating activities: Net income (loss) ($2,982,547) $ 95,702 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Extraordinary item - forgiveness of debt ( 1,650,256) -- Depreciation and amortization 36,572 39,149 Provision for allowance for doubtful accounts 367,030 100,000 Gain on disposition of property and equipment ( 10,782) -- Changes in operating assets and liabilities: Accounts receivable 1,537,743 (1,300,345) Inventory 2,646,839 280,254 Prepaid expenses and other current assets 84,758 ( 233,596) Accounts payable and accrued expenses 856,188 ( 987,380) Payable to factories ( 253,500) -- Due to affiliate 25,640 -- ----------- ----------- Net cash provided by (used in) operating activities 657,685 (2,006,216) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment ( 85,988) ( 71,614) Proceeds from sale of equipment 15,120 -- Security deposits and other assets 15,753 12,500 ----------- ----------- Net cash (used in) investing activities ( 55,115) ( 59,114) ----------- ----------- Cash flows from financing activities: Increase (decrease) in payable to lender, net ( 2,203,730) 967,699 Advances from (repayment to) factor, net ( 1,286,237) 998,384 Proceeds from note payable, bank 322,000 -- Proceeds from short-term note -- 300,000 Repayment of short-term note -- ( 300,000) Proceeds from subordinated note payable 851,440 -- Repayment of notes payable to stockholder -- ( 125,000) Repayment of capital lease obligations -- ( 14,858) Proceeds from exercise of warrants and stock options 305,248 69,409 Proceeds from sale of Common Stock, net of issuance costs 1,152,863 361,336 ----------- ----------- Net cash provided by (used in) financing activities ( 858,416) 2,256,970 ----------- ----------- Net increase (decrease) in cash ( 255,846) 191,640 Cash, beginning of period 296,226 83,753 ----------- ----------- Cash, end of period $ 40,380 $ 275,393 =========== ===========
Please refer to the notes to condensed consolidated financial statements. -5- RYKA Inc. and Subsidiary Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of RYKA Inc. ("RYKA,"(R) the "Company," or the "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of Management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the operating results of this period have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. This quarterly report should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Audited Consolidated Financial Statements as of December 31, 1994 as presented in the Company's Annual Report on Form 10-K. Net income (loss) per share is based on the weighted average number of Common Stock and dilutive Common Stock equivalents outstanding during the period. Common stock equivalents comprise stock options and Common Stock warrants. Also see Note G. NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of the Agreement and Plan of Merger (the "Merger Agreement") with L.A. Gear, Inc. and Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On April 27, 1995 L.A. Gear, Inc. notified the Company that it was terminating the Merger Agreement. On May 17, 1995 the Company received notice of termination of its financing agreement with Pro-Specs America Corporation ("Pro-Specs") effective June 16, 1995. Pro Specs provided the principal source of financing for the production activities of the Company. Subsequently the Company reviewed several financing proposals from possible strategic partners or financing sources and in June 1995, MR Acquisitions, Inc. and the Company entered into a Securities Purchase Agreement (the "Agreement") to provide the Company with up to $8,000,000 of new financing. The Agreement was subsequently assigned to MR Acquisitions, L.L.C. ("MR"). Without this financing or other strategic arrangement, Management believed there was substantial doubt that the Company would be able to remain in business. The Agreement was consummated on July 31, 1995 (the "Closing") and the Company received cash proceeds from the sale of stock and the ability to obtain funds through a new financing facility. In addition, the Company negotiated substantial debt forgiveness with both secured and unsecured creditors and established a new management team to operate the restructured Company. Following are the significant provisions of the Agreement and financing facility (the "Transaction") between MR and the Company as set forth in the Agreement dated June 21, 1995, as amended, the Loan Agreement and Security Agreement (the "Loan Agreement") dated July 31, 1995 and the settlement of obligations due to various creditors: 1. Transactions with MR: MR purchased for consideration of $148,560 a total of 14,800,000 shares of Common Stock of the Company (10,800,000 shares were delivered at closing and the balance of 4,000,000 shares will be delivered upon approval by the stockholders of an amendment to the Certificate of Incorporation increasing the number of authorized shares) and a warrant to purchase an additional 5,100,000 shares of Common Stock for $.01 per share. Further, MR loaned $851,440 to the Company in the form of a secured subordinated loan with interest at prime plus one percent and with repayment terms coincident with the revolving credit facility with the principal lender. -6- NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED 1. Transactions with MR - continued: In connection with the bank loan described below, MR is responsible for making future subordinated loans or capital infusions, or causing the same to occur, in amounts substantially equal to any losses incurred by the Company subsequent to the date of the Transaction such that by August 30, 1995 capital funds is maintained at a minimum of $2,000,000, as defined. See Note B(2) below for information regarding waiver of default related to these provisions. As part of the Transaction, the Company issued a contingent stock purchase warrant (the "Contingent Warrant"), to MR to purchase up to an additional 4,000,000 shares of Common Stock for an exercise price of $.01 per share, of which 461,444 shares are vested. Pursuant to the warrant terms, if at any time within one year from the date of issuance of the Contingent Warrant, the Company issues a number of shares of Common Stock which results in the Company having in excess of 50,000,000 shares of Common Stock issued and outstanding, provided, that any such shares above such 50,000,000 were issued solely for the purpose of a) inducing a lender to make a loan or loans to the Company, or b) in connection with an infusion of capital to the Company, or c) a settlement of debts with the Company's creditors, or (d) a combination thereof, then upon the occurrence of such stock issuance, for every ten (10) additional shares of Common Stock which are issued, four (4) of such shares shall vest under the Contingent Warrant to MR, who upon exercise shall pay an additional one cent ($.01) per share for the issuance of such additional shares. MR, through its affiliate, KPR Sports International, Inc. has made available, to the Company, a letter of credit facility in the amount of $2,000,000. This facility may be utilized by the Company to, among other things, enter into purchase transactions for the manufacture of inventory with overseas vendors. The Company reimbursed MR approximately $125,000 for its costs in connection with the Transaction. 2. Transaction with principal lender: In connection with the Transaction, the Company entered into a Loan and Security Agreement with its principal lender to establish a $4,000,000 asset based revolving credit facility. The facility makes funds available to the Company based on a percentage of inventory and accounts receivable, as defined. Interest on the amounts outstanding will be paid monthly at the rate of prime plus one percent and the facility is due on demand. As of September 30, 1995, the Company owed $322,000 under this facility. Interest expense incurred in connection with this facility was $1,805 for the three-months ended September 30, 1995. The Loan and Security Agreement requires the Company to observe certain covenants and maintain certain minimum levels of tangible net worth and leverage. Further, as described above, after August 30, 1995, there is a requirement for additional subordinated loans or equity infusions in the event that losses occur subsequent to the date of the Transaction which would cause capital funds to decrease below $2,000,000, as defined. Such $2,000,000 minimum required the infusion of additional equity or subordinated loans of approximately $500,000 by August 30, 1995, and, as described below, such infusion was postponed. At September 30, 1995, the Company was in default of certain provisions of the Loan and Security Agreement requiring certain credit and life insurance to be obtained within prescribed timeframes, losses incurred by the Company subsequent to the Transaction date to be funded by MR making subordinated loans or capital infusions, or causing the same to occur (the "Funding Requirement"), and the covenant requiring establishment and maintenance of certain minimum tangible net worth. At September 30, 1995 and October 31, 1995, the difference between the actual minimum tangible net worth amount and the required amount was approximately $450,000 and $600,000, respectively. The principal lender has waived the defaults, extended the time for the insurance to be obtained through December 31, 1995, and postponed the Funding Requirement and minimum tangible net worth requirements, through January 30, 1996. -7- NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED 2. Transaction with principal lender - continued: The principal lender received a fee of $20,000 upon closing the Transaction, reimbursement of certain costs and expenses incurred in connection with the Loan Agreement, and warrants to purchase up to 500,000 shares of the Company's Common Stock for an exercise price of $.57 per share. The price was based upon the average trading price of the stock for the five days before and after the Closing. The warrant may be exercised for a period of up to five years after the Transaction date but may not be exercised during the first twelve months. The value of the warrants was $100,000. 3. Equity transaction - Investors: In connection with the Transaction, the Company offered for sale, through a private placement, 4,000,000 shares of Common Stock and the results of the private placement were as follows:
Shares Placed Proceeds Received Shares Subscribed ------------- ----------------- ----------------- At Closing 3,020,000 $ 755,000 -- ========= ========= ========= At September 30, 1995 3,520,000 $ 880,000 -- ========= ========= ========= At November 3, 1995 3,520,000 $ 880,000 250,000 ========= ========= =========
From the date of closing of the Transaction until completion of the private placement, the Company's Chairman and Chief Executive Officer provided a subordinated bridge loan to the Company. This loan is evidenced by a promissory note bearing no interest and is due upon receipt by the Company of the proceeds of the private placement. At September 30, 1995, a total of $120,000 remained outstanding on such loan. As of November 3, 1995 additional shares were subscribed for or placed and a total of 230,000 shares have yet to be sold to investors. Originally, in the event the private placement was not completed by August 26, 1995, such bridge loan was to be converted to equity based on the same terms as the private placement, with the exception of the provisions causing a contingent reduction in stock proceeds as described above. The conversion date was subsequently extended until December 31, 1995. Since the ultimate effect of this transaction will be to increase the outstanding capital stock of the Company through the sale of Common Stock to investors or conversion of the bridge loan into Common Stock, the transaction has been given effect to in these financial statements as if it had been completed. Included in Additional Paid-In Capital at September 30, 1995 is $120,000 related to the bridge loan for shares not sold. Further, such shares, although not outstanding, have been considered as such in the computation of earnings (loss) per share. 4. Settlement with secured and unsecured creditors: As required by the Agreement, the Company negotiated the following settlement arrangements with secured and unsecured creditors: o Pro-Specs America Corporation: The Company entered into a Settlement Agreement with Pro-Specs under which $1,804,734 of secured indebtedness was settled by payment of $1,100,000 in cash and the issuance of 500,000 shares of Common Stock. These shares of Common Stock will be issued upon approval by the shareholders of an amendment to the Certificate of Incorporation increasing the number of authorized shares. These shares have been valued at $.25 each or $125,000 in the aggregate. Pro-Specs was also obligated to certain vendors pursuant to letters of credit opened on behalf of the Company for the purchase of approximately $1,000,000 in merchandise to be received in the future. In connection with the settlement, as a result of separate negotiations with such vendors, Pro-Specs was released from any obligations in connection with such letters of credit. In connection with the foregoing, the Company recognized a gain on restructuring of this debt in the amount of $579,734 in the third quarter of 1995. -8- NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED 4. Settlement with secured and unsecured creditors - continued: o Other creditors: In early July 1995, the Company was obligated to various unsecured creditors in the aggregate amount of approximately $1,246,000. These creditors were contacted and, generally, given the opportunity to elect one of the following methods of settlement of the amounts due to them: o Option A: Payment in cash of $.08 during July 1995, or in certain cases at a later date, in full and complete settlement of each dollar owed to the creditor. o Option B: Payment in cash of $.03 during July 1995, or in certain cases at a later date, for each dollar owed to such creditor and the issuance of one warrant for the purchase of a share of Common Stock of the Company for each $2 due such creditor. The warrants are exercisable over a 5 year period at an exercise price of $1.50 per share. The value of each warrant was $.10. Creditors who were owed approximately $833,000 elected Option A. The Company made payments to these creditors totaling approximately $71,000 and recognized a gain of approximately $771,000 in the third quarter of 1995. Creditors who were owed approximately $98,000 elected Option B. The Company made payments to these creditors totaling approximately $3,000 and issued 44,903 warrants resulting in a gain recognized of approximately $91,000 in the third quarter of 1995. In addition, approximately $315,000 of claims were settled under other negotiated arrangements requiring the payment of approximately $107,000 in the aggregate resulting in a gain of approximately $208,000 in the third quarter of 1995. Currently the Company is negotiating with creditors who are owed approximately $105,000. The settlements with secured and unsecured creditors who were owed approximately $3,050,000 resulted in a gain of approximately $1,650,000. 5. Other matters: In connection with the Transaction, various other arrangements were made including the following: o The lease for the Company's principal operating facility was terminated early with the payment of rent through August 15, 1995. o Certain employment arrangements have been modified or new arrangements have been entered into involving, among other things, the granting of approximately 700,000 new options for the purchase of the Company's Common Stock at a price equal to the fair market value at the date of issuance. o The Company incurred approximately $225,000 of professional fees and other costs in connection with this Transaction. The amount was paid in cash and by the issuance of 100,000 warrants valued at $20,000. The warrants are exercisable over 5 years at a price of $.42 per share. o A key employment agreement was terminated involving the issuance of 60,000 shares of Common Stock, valued at $.25 per share. o The Company's Credit and Collection Agreement with Heller Financial Inc., its factor, was modified so that the credit facility previously provided to the Company was terminated and only collection services are currently being provided. -9- NOTE B - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED 5. Other matters - continued o The Company presently has 45,000,000 shares of Common Stock authorized for issuance. Prior to the Closing, approximately 26,500,000 shares of Common Stock were issued and outstanding and approximately an additional 3,600,000 shares of Common Stock were reserved for issuance of stock options and warrants unrelated to this Transaction. The stockholders of the Company will be requested to approve an increase in the number of authorized shares of Common Stock to 70,000,000 at a special meeting on November 15, 1995 in order to enable the Company to issue shares, options and warrants as a result of the Transaction and to have shares available for future financing and stock options. A summary of shares to be issued and outstanding, pending stockholders' approval of the amendment to the certificate of incorporation increasing the number of authorized shares, is as follows: Shares purchased by MR in connection with Transaction 4,000,000 Shares for professional fees as reimbursement to MR for Transaction costs 40,000 Remaining shares to be issued pursuant to 4,000,000 shares private placement 480,000 Shares to Pro-Specs in connection with settlement of secured indebtedness 500,000 Shares as termination of employment contract with former employee 60,000 ------------ 5,080,000 Shares issued and outstanding at September 30, 1995 41,535,326 ------------ Shares issued and outstanding at September 30, 1995 on a pro-forma basis, as if shareholders had Approved the Amendment to the Certificate of Incorporation 46,615,326 ============
NOTE C - RELATED PARTY TRANSACTIONS The Company relocated to King of Prussia, Pennsylvania in August 1995 where it conducts its operations and warehouses inventory in a facility subleased from an affiliate of MR. Terms of the sublease require rental payments of approximately $4,000 per month for use of these facilities and the warehousing services commencing August 1, 1995 through July 31, 1997. Any other cost related to the use of the joint facility or for other services provided by MR or its affiliates will be charged to the Company on an arms length basis and will be subject to approval by a special disinterested committee of the Board of Directors. KPR Sports International, Inc., an affiliate of MR and an entity owned by the Chairman and Chief Executive Officer of the Company, has advanced certain funds to the Company on a temporary basis. Such amounts are included in the balance sheet under current liabilities as due to affiliate. MR through its affiliate, KPR, has made available to the Company, a letter of credit facility in the amount of $2,000,000. This facility is used by the Company to finance the purchase of manufactured inventory with overseas vendors. At September 30, 1995, letters of credit in the amount of $207,000 were issued by KPR on behalf of the Company. Merchandise inventory received under the terms of the facility is recorded in the financial statements upon transfer of title to the Company which, generally, occurs upon payment to KPR. As stated in Note B, KPR loaned the Company $851,440 in the form of subordinated debt. Included in the statement of operations are sales of $85,254 relating to footwear sold to KPR yielding a profit of $9,258 to the Company. These goods were prior season's merchandise which was sold at negotiated terms on an arms-length basis. KPR did not realize a profit on the ultimate sale of this merchandise. -10- NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED The Chairman and Chief Executive Officer of the Company devotes a portion of his time to the Company's operations and marketing and sales related activities for which he does not receive any compensation. The value of these services for the two months ended September 30, 1995 was not significant. A summary of all related party transactions for the period July 31, 1995 to September 30, 1995 are as follows:
Financial Amount Included in Amount Included in Nature of Statement Transaction Due (To) From Affiliate Subordinated Note Transactions Classification Amount at September 30, 1995 Payable, Affiliate ------------ -------------- ------------ ------------------------ -------------------- Purchase of Inventory Inventory $132,660 ($83,605) Sale of Fixed Assets Property and Equipment 15,000 -- Proceeds from Subordinated Debt Subordinated Note Payable 851,440 -- $851,440 Sale of Merchandise Net Sales 85,254 85,254 Rent General and Administrative Expense 8,000 ( 8,000) Interest on Subordinated Debt Interest Expense 14,066 ( 14,066) Temporary Advances 133,190 ( 5,223) -------- -------- ($25,640) $851,440 ======== ========
NOTE D - CHARITABLE CONTRIBUTIONS The Company has historically provided financial support to the R.O.S.E. (Regaining One's Self-Esteem) Fund (formally The RYKA ROSE Foundation), an independent not for profit foundation. The Company and the R.O.S.E. Fund are currently discussing the terms of their future relationship which to date have not been finalized. During the quarter ended September 30, 1995, contributions in the amount of $2,000 were made. NOTE E - OTHER 1. Exercise of Underwriters Warrants: In connection with its third public offering in July 1990, the Company issued 470,000 warrants (the "Unit Warrants"), each of which entitled the underwriter to purchase up to one unit at a price of $1.20. Each Unit Warrant consists of one share of Common Stock and one Common Stock Purchase Warrant. Each Common Stock Purchase Warrant entitles the Underwriter to purchase one share of Common Stock at an exercise price of $1.00 per share. Prior to modification, these Unit Warrants originally were to expire on July 16, 1995. -11- NOTE E - OTHER - CONTINUED Prior to the modified expiration date of August 30, 1995, a total of 350,000 Unit Warrants remained outstanding and their terms had been modified so that the purchase price of each Unit Warrant had been reduced to $.45. Through further modification, the exercise price of each of the Unit Warrants and Common Stock Purchase Warrants was reduced to $.40 and during August, 1995 the Company received proceeds totaling $280,000 as a result of the full exercise of these warrants. 2. NASDAQ Listing: On July 19, 1995 the Company received an exception from the NASDAQ capital and surplus listing requirement so that its Common Stock continued to be listed on the NASDAQ Small Cap Market. The exception expired on September 15, 1995 and the Company was delisted from NASDAQ. Currently the Common Stock of the Company is listed on the Over-the-Counter Bulletin Board. NOTE F - SPECIAL CHARGES In connection with the Transaction described in Note B, the related closing of the Massachusetts facility, and relocation of operations to Pennsylvania, the Company incurred the following special charges: Professional fees and bank fees related to new credit facility, including value of warrant to bank $205,492 Temporary housing costs for relocated personnel 17,575 Recruitment and relocation costs related to new management and personnel 41,320 Start-up and moving costs related to warehouse and office 14,625 -------- $279,012 ========
NOTE G - PRO-FORMA AUTHORIZED CAPITAL, ISSUED AND OUTSTANDING COMMON STOCK AND EARNINGS (LOSS) PER SHARE As discussed in Note B (5), the stockholders of the Company will be requested to approve an increase in the number of authorized shares of Common Stock to 70,000,000 at a special meeting on November 15, 1995. For purposes of calculating the weighted average number of common and common equivalent shares outstanding for the computation of earnings per share, such stockholder approval has been assumed as of the date of the Transaction. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Overview The Company has not had a single profitable fiscal year since its inception and has incurred approximately $4,100,000 in losses during the first six months of 1995. In addition, RYKA had a stockholders' deficiency of approximately $2,100,000 at June 30, 1995 and was experiencing a critical cash shortage. During 1995 the Company was in default on several occasions under its agreements with Pro-Specs America Corporation ("Pro-Specs") to provide production financing. On May 17, 1995 Pro-Specs notified the Company of its intention to terminate financing arrangements within 30 days. During 1995, the Company reviewed several financing proposals and in June 1995 MR Acquisitions L.L.C. ("MR") and the Company entered into a Securities Purchase Agreement (the "Agreement") to enable the Company to continue in existence. Without this financing or other strategic arrangement Management believed there was substantial doubt that the Company would be able to remain in business. The Agreement was consummated on July 31, 1995 and provided the Company with cash proceeds from the sale of stock and the ability to obtain funds through a new financing facility. The Agreement also required substantial debt forgiveness through negotiated arrangements with both secured and unsecured creditors and established a new Management team to operate the restructured Company. At closing, the Company had capital funds comprised of a net worth and subordinated debt in excess of $1,500,000 as compared to an equity deficiency of $2,100,000 at June 30, 1995. The Agreement also called for certain officers and directors to tender their resignation, thereby allowing a new management team to operate the restructured Company. During the first half of 1995 and until the Agreement with MR was consummated, there was substantial doubt that the Company would be able to remain in business. Staff reductions occurred on both a voluntary and involuntary basis and temporary employees were required to handle daily operations. Further, sales efforts were limited for a variety of reasons, including the inability to obtain product from the Company's overseas production sources. Once the Agreement with MR was consummated, new management directed its internal efforts to carrying out a repositioning of the Company involving, among other things, relocating the Company from Norwood, Massachusetts to King of Prussia, Pennsylvania, terminating remaining employees in the Massachusetts location, hiring and training of new employees in key management positions, including a President and Vice President of Finance, filling of other necessary positions within the Company, developing new product and the rebuilding of customer and supplier relationships. These activities reflect a period of rebuilding in certain areas of the Company's business and had a significant negative impact on the Company's current sales and operations. Therefore, the Company is unlikely to generate positive operating results in the near future. Accordingly, sales and expense levels for the quarter ended September 30, 1995 and nine-months ended September 30, 1995 are not necessarily indicative of results to be achieved in the future and the new management influences are not fully reflected in the result of operations for the quarter ended September 30, 1995. The approximate breakdown of operating expenses during the quarter is as follows:
(In Thousands) Old Management New Management One Month Ended Two Months Ended Three Months Ended July 31, 1995 September 30, 1995 September 30, 1995 --------------- ------------------ ------------------ General and Administrative $143.9 $209.8 $353.7 Sales and Marketing 95.0 140.2 235.2 Research and Development 27.4 11.2 38.6 ------ ------ ------ 266.3 361.2 627.5 Special Charges -- 279.0 279.0 ------ ------ ------ $266.3 $640.2 $906.5 ====== ====== ======
By restructuring the expense base, obtaining working capital and a line of credit at more favorable interest rates, the Company believes it is now better positioned to compete in the athletic footwear market. -13- Results of Operations Three Months Ended September 30, 1995 as Compared to the Three Months Ended September 30,1994 The following table sets forth, for the periods indicated, a percentage analysis of items included in the Condensed Consolidated Statements of Operations in relation to Net Sales:
(In Thousands) THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------- 1995 1994 (Unaudited) (Unaudited) ---------------------------- ---------------------------- Net sales $ 1,299.6 100.0% $4,731.7 100.0% Other revenues 53.8 22.7 ---------- -------- 1,353.4 4,754.4 ---------- -------- Costs and expenses: Cost of goods sold 927.1 71.3% 3,490.0 73.7% General and administrative expenses 353.7 27.2% 317.0 6.7% Sales and marketing expenses 235.2 18.1% 687.8 14.5% Research and development expenses 38.6 3.0% 68.7 1.5% Special charges 279.0 21.5% -- -- ---------------------------------------------------------------- 1,833.6 141.1% 4,563.5 96.4% ---------------------------------------------------------------- Operating income (loss) ( 480.2) ( 36.9%) 190.9 4.0% Other expense, net 2.6 .2% 242.5 5.1% ---------------------------------------------------------------- Income (loss) before taxes (482.8) ( 37.1%) ($ 51.6) (1.1%) Provision for income taxes -- -- 8.1 0.2% Income (loss) before extraordinary item ( 482.8) ( 37.1%) ( 59.7) (1.3%) Extraordinary item - forgiveness of debt 1,650.3 127.0% -- -- ---------------------------------------------------------------- Net income (loss) $ 1,167.5 89.9% ($ 59.7) (1.3%) ================================================================
Net sales decreased by $3,432,122 (72.5%) from $4,731,725 for the three months ended September 30, 1994 to $1,299,603 for the three months ended September 30, 1995. The decrease in net sales of the Company's footwear was due to several factors which continued to affect sales throughout the third quarter as follows: o uncertainty as to the Company's future continued despite the likelihood of and ultimately the consummation of additional financing and the Agreement with MR; o many customers delayed or stopped their planned orders for third quarter fall or "back to school" product. This was due to a combination of customer apprehension to place orders, and the fact that the fall goods, traditionally shipped towards the end of June or the beginning of July were not available for delivery to retailers until the middle of September. Thus, many customers either canceled their orders or had to be incentified to keep their orders which adversely impacted margins as additional discounts and extended terms were granted; o the Company had a low inventory level. Until September, when the Fall season production arrived, the inventory consisted of a minimum quantity of goods from the prior season. During the quarter ended September 30, 1995, substantially all the prior season's goods were liquidated. In addition, there was a limited quantity of Fall season goods available to sell in the third quarter which were purchased as a result of extended negotiations with factories in the Far East. Management, as part of the settlement of its debt with the factories, agreed to take only a portion of the original production of Fall season footwear. Management's decision was based upon a combination of customers' apprehension and the delays in the factories' release of product due to the settlement negotiations; -14- Three Months Ended September 30, 1995 as Compared to the Three Months Ended September 30,1994 - continued Net sales - continued o the athletic footwear industry is still experiencing sluggishness and the volume of off-price product has continued at high levels; and o the women's athletic footwear category has become increasingly competitive with larger vendors increasing their focus in this area thereby increasing the need to sell inventory for less than normal prices. Cost of goods sold decreased by $2,562,847 (73.4%) from $3,489,955 for the three month ended September 30, 1994 to $927,108 for the three month ended September 30, 1995. The overall gross margin on net sales increased by 2.5% from 26.2% in the third quarter of 1994 to 28.7% in the third quarter of 1995. The gross margin reflect shipments of full price Fall merchandise. General and administrative expenses increased by $36,744 (11.6%) from $316,994 for the third quarter of 1994 to $353,738 for the quarter ended September 30, 1995. The increase is primarily the result of (i) an increase in insurance expense due primarily to directors and officers liability insurance for new directors and coverage for former directors; (ii) travel expenses; (iii) legal expenses (not related to the Transaction); and (iv) a decrease in factor commissions due to the termination of the relationship with the factor. As a percentage of sales, general and administration expenses increased significantly as many expenses are relatively fixed in nature and sales were extremely low as a result of the restructuring. The general and administrative expenses incurred for the three months ended September 30, 1995 include one month of operations under the prior management at higher expense levels. These expenses which were incurred in July 1995, account for approximately $144,000 of the total general and administrative expenses of $353,738 for the quarter. Sales and marketing expenses decreased by $452,563 (65.8%) from $687,801 for the quarter ended September 30, 1994 to $235,238 for the quarter ended September 30, 1995. Sales and marketing expenses expressed as a percentage of net sales increased from 14.5% to 18.1%. The dollar decrease is primarily due to a reduction in sales commissions of approximately $168,000 or 80%. This decrease is proportionally greater than the decrease in net sales of 72.5%. Commissions expressed as a percentage of net sales decreased from 4.3% to 2.8%. This decrease of 1.5 percentage points is a result of reduced commission rates and a greater proportion of house accounts sold by Company management at no commission. Other reasons for the decrease include a reduction in promotional expenses such as clothing giveaways and promotional allowances granted to retailers, and a reduction in staff salary and related expenses. Research and development expense decreased by $30,155 (43.9%) from $68,737 in the quarter ended September 30, 1994 to $38,582 in the quarter ended September 30, 1995. This decrease is attributed primarily to a reduction in sample costs and a reduction in payroll related costs. Special charges were incurred in connection with the Transaction and the related closing of the Massachusetts facility and relocation of operations to King of Prussia, Pennsylvania. These expenses, among other things, included transactions costs, termination of a significant portion of personnel existing prior to the Transaction, temporary housing for certain relocated personnel, recruitment of new management and personnel and costs associated with moving, start up of new operations and winding down of prior operations. Other (income) expense, net decreased $239,922 (99.0%) from $242,457 for the quarter ended September 30, 1994 to $2,535 for the quarter ended September 30, 1995. This decrease is due to a reduction in interest expenses of $226,110 (92.8%) from $243,598 for the quarter ended September 30, 1994 to $17,488 for the same period in 1995, due to the termination and settlement with Pro-Specs and the capital infusion resulting from the consummation of the Agreement with MR. Extraordinary item of approximately $1,650,000 related to gain on settlements with both secured and unsecured creditors related to the Transaction. THIS SPACE INTENTIONALLY LEFT BLANK -15- Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended September 30, 1994 The following table sets forth, for the periods indicated, a percentage analysis of items included in the Condensed Consolidated Statements of Operations in relation to Net sales:
(In Thousands) NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------- 1995 1994 (Unaudited) (Unaudited) ------------------------------ ---------------------------- Net sales $ 6,917.9 100.0% $ 12,861.0 100.0% Other revenues 83.7 123.8 ----------- ----------- 7,001.6 12,984.8 ----------- ----------- Costs and expenses: Cost of goods sold (includes inventory write-down to lower of cost or market) 6,702.8 96.9% 9,062.7 70.5% General and administrative expenses 1,649.8 23.9% 1,078.7 8.4% Sales and marketing expenses 1,629.4 23.5% 1,940.4 15.1% Research and development expenses 288.0 4.2% 144.5 1.1% Special charges 279.0 4.0% -- -- ------------------------------------------------------------------ 10,549.0 152.5% 12,226.3 95.1% ------------------------------------------------------------------ Operating income (loss) ( 3,547.4) ( 51.3%) 758.5 5.9% Other (income) expense, net 1,085.4 15.7% 641.5 5.0% ------------------------------------------------------------------ Income (loss) before taxes ( 4,632.8) ( 67.0%) 117.0 0.9% Provision for income taxes -- -- 21.3 0.2% ------------------------------------------------------------------ Net income (loss) before extraordinary item ( 4,632.8) ( 67.0%) 95.7 0.7% ------------------------------------------------------------------ Extraordinary item - forgiveness of debt 1,650.3 23.9% -- -- ------------------------------------------------------------------ Net income (loss) ($ 2,982.5) ( 43.1%) $ 95.7 0.7% ==================================================================
Net sales decreased by $5,943,164 (46.2%) from $12,861,030 for the nine months ended September 30, 1994 to $6,917,866 for the nine months ended September 30, 1995. The decrease was due to several factors as follows: o as a result of the announced and subsequent failed merger with L.A. Gear, many customers delayed or canceled planned orders pending the future ability of the Company to operate and fulfill the orders. As a result, sales orders were not placed or canceled; o the orders for "futures" business (third quarter shipments) for which orders would be taken in the first or second quarter did not occur; o as a result of customer reaction, and a critical cash shortage through the date of the Transaction, the Company determined that a significant amount of inventory had to be sold at or below cost in order to raise needed cash from limited available inventory for sale; o Fall goods were not available to ship until mid-September, and prior to that there was a limited amount of prior season inventory to ship; o the athletic footwear industry is still experiencing sluggishness and the volume of off-price product has continued at high levels; and -16- Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended September 30, 1994 - continued Net sales - continued o the women's athletic footwear category has become increasingly competitive with larger vendors increasing their focus in this area thereby increasing the need to sell inventory for less than normal prices. Cost of goods sold decreased $2,359,929 (26.0%) from $9,062,721 for the nine months ended September 30, 1994 to $6,702,792 for the nine months ended September 30, 1995. The overall gross margin expressed as a percentage of net sales decreased by 26.4 points, from 29.6% for the nine months ended September 30, 1994 to 3.1% for the comparable period in the current period. The decrease in gross margin was primarily a result of the Company selling products at reduced margins (primarily in the first and second quarters) in order to respond to competitive market conditions and meet critical cash needs and a write down of inventory to lower of cost or market (in the second quarter of 1995). General and administrative expenses increased by $571,156 (52.9%) from $1,078,687 for the nine months ended September 30, 1994 to $1,649,843 for the same period in the current year. The increase consists primarily of an addition to the Company's provision for bad debts, additional financial consulting and accounting services incurred in completing the financial statements and in filing the 10-K after the resignation of the Company's Chief Financial Officer in February 1995 and an increase in costs for officers and directors liability insurance for both current officers and prior officers. Sales and marketing expenses decreased by $311,002 (16.0%) from $1,940,387 for the nine months ended September 30, 1994 to $1,629,385 for the same period in the current year. The decrease was due to (i) lower sales commissions resulting from the reduced sales level as well as a reduction in the sales commission rate on certain orders; (ii) an increase in the number of sales to house accounts where no commission is paid; (iii) an increase in advertising and promotion expenses; (iv) a decrease in salaries and benefits; and (v) a decrease in international sales and marketing expenses. Research and development expenses increased by $143,526 (99.3%) from $144,492 for the three quarters ended September 30, 1994 to $288,018 for the same period in the current year. The entire increase is attributed to spending in the first two quarters of 1995 as compared to the first two quarters of 1994. The increase for the current nine month period compared to the previous year was primarily due to the recruitment and hiring of a new Director of Design and design consulting services. -17- Nine Months Ended September 30, 1995 as Compared to the Nine Months Ended September 30, 1994 - continued Special charges were incurred in connection with the Transaction and the related closing of the Massachusetts facility and relocation of operations to King of Prussia, Pennsylvania. These expenses, among other things, included transactions costs, termination of a significant portion of personnel existing prior to the Transaction, temporary housing for certain relocated personnel, recruitment of new management and personnel and costs associated with moving, start up of new operations and winding down of prior operations. Other (income) expense, net increased by $443,855 (69.2%) from $641,537 for the nine months ended September 30, 1994 to $1,085,392 for the same period in the current year. The increase is attributable to deal costs associated with the Agreement and Plan of Merger with L.A. Gear, Inc. and a decrease in interest expense of $326,086 (50.5%) from $645,299 for the three quarters ended September 30, 1994 to $319,213 for the same period in 1995. Extraordinary item of approximately $1,650,000 related to gain on settlements with both secured and unsecured creditors related to the Transaction. THIS SPACE INTENTIONALLY LEFT BLANK -18- Liquidity and Capital Resources Through July 31, 1995, RYKA continued to experience a critical shortage of cash. During this period the Company reviewed several financing proposals and in June 1995, MR and the Company entered into a Securities Purchase Agreement (the "Agreement") to provide the Company with up to $8,000,000 in new financing. Prior to consummating the Agreement with MR on July 31, 1995, the Company had a nominal cash balance and a working capital deficiency of approximately $2,300,000. Without this financing or other strategic arrangement Management believed there was substantial doubt that the Company would be able to remain in business. The Company was in default at various times during 1993 to 1995, under its agreement with Pro-Specs America Corporation ("Pro-Specs"). Pro-Specs provided the principal source of financing for the Company's production activities through a $4,000,000 letter of credit and bankers acceptance line. On May 17, 1995 the Company received notice of termination of its agreement with Pro-Specs effective June 16, 1995. Pro-Specs charged the Company substantial commissions and other fees under its agreement in exchange for making financing available. The effective annual interest rate including commissions paid was generally in excess of 20%. On January 30, 1995, the Company and L.A. Gear, Inc. announced the execution of the Agreement and Plan of Merger ("Merger Agreement") with L.A. Gear, Inc. and Brands Acquisition Corp., a wholly-owned subsidiary of L.A. Gear, Inc. On April 27, 1995, L.A. Gear, Inc. terminated the Merger Agreement and its option to purchase 677,500 shares of Common Stock and waived certain breakup fees. In an effort to continue operations after the termination of the Merger Agreement, the Company generated cash by liquidating inventory and accounts receivable and using the proceeds to fund continuing operating losses and to reduce liabilities, generally, to the Company's factor and to Pro-Specs. As a result of consummating the Agreement with MR on July 31, 1995, the Company received proceeds from the sale of Common Stock and warrants and proceeds from subordinated notes payable, aggregating approximately $1,750,000 net of transaction related costs. Additionally, secured and unsecured creditors forgave certain debt resulting in a gain of approximately $1,650,000. The Company established a new $4,000,000 asset based revolving credit facility with a bank and established a $2,000,000 letter of credit facility with an affiliate of MR. Both the bank facility and the letter of credit facility provide for rates which are more competitive in today's lending environment. Interest on the bank loans are at the prime rate plus 1% and letters of credit, prior to draw, are provided at a rate of 1% of the sum of the face amount plus any underlying bank fees and opening charges (approximately an additional 1 1/2% to 2% per anum). The bank credit facility includes certain restrictive covenants which, among other things, require the Company to maintain certain financial ratios and capital funds (tangible stockholders' equity and subordinated notes payable) of $2,000,000 by August 30, 1995. The bank credit facility also requires MR or its affiliates, to make additional loans or otherwise cause capital funds of the Company to be maintained at no less than $2,000,000. These provisions effectively require the Company to raise capital through equity offerings, proceeds from the exercise of stock options or warrants or through additional subordinated borrowings or from MR or its affiliates, to finance any operating losses. The Agreement and financing resulted in an increase in working capital of approximately $3,600,000, so that the Company's working capital deficiency of approximately $2,300,000 was converted to positive working capital of approximately $1,300,000. At September 30, 1995 working capital was approximately $1,100,000. Based on current plans, this available working capital, along with the funding and support available from the asset-based revolving credit facility and the letter of credit facility, are expected to enable the Company to fund its anticipated needs in the near future. These funding needs generally consist of supporting operating losses anticipated over the next twelve months while the Company is carrying out its restructuring plan, as well as supporting additional investments in inventory and accounts receivable. The Company does not anticipate making significant capital expenditures during the foreseeable future. In an effort to reduce costs and increase efficiency, the Company is currently conducting its operations and warehouse inventory in a facility subleased from an affiliate of MR. -19- Liquidity and Capital Resources - continued At September 30, 1995, the Company was in default of certain provision of the Loan and Security Agreement with its principal lender which have been waived through December 31, 1995 and others through January 30, 1996. In addition, the Company anticipates operating losses for the remainder of 1995 and for 1996. In order to avoid a default under its Loan and Security Agreement with its principal lender, the Company is required to increase its tangible net worth for borrowings up to $4,000,000 to be available to the Company. The Company must fulfill this requirement by January 30, 1996. Accordingly, in order to meet this tangible net worth requirement, it may be necessary to seek additional equity or debt financing in the near future. In such event, there can be no assurance that such additional financings will be available when needed or, if available, will be on terms satisfactory to the Company. Notwithstanding the foregoing and based on current plans, the Company believes that existing liquid resources, funds available under its existing revolving credit facility, resources provided under its letter of credit facility and the requirement of MR or its affiliates to provide funding will provide sufficient liquidity and enable the Company to meet its operating and capital requirements and obligations through early 1996. -20- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS ON SENIOR SECURITIES At September 30, 1995, the Company was in default of certain provision of the Loan and Security Agreement regarding certain credit insurance and life insurance to be established within prescribed timeframes, losses incurred by the Company subsequent to the Transaction date to be funded by subordinated loans or capital infusions by MR Acquisitions, L.L.C. ("MR"), or by MR causing the same to occur (the "Funding Requirement"), and the covenant requiring establishment and maintenance of certain minimum tangible net worth. With regard to the minimum tangible net worth requirement, the difference between the established amount and the required amount was approximately $450,000 at September 30, 1995 and approximately $600,000 at October 31, 1995. The principal lender has waived the aforementioned defaults, extended the time for the insurance to be established to December 31, 1995, and postponed the Funding Requirement and minimum tangible net worth requirements through January 30, 1996. At September 30, 1995, the Company was in default of certain provisions of a Loan and Security Agreement with KPR Sports International, Inc. relating to a minimum tangible net worth requirement which is identical to the covenant of the Company's principal lender. KPR Sports International, Inc. has waived the aforementioned default through January 30, 1996. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10eeee. Key Employee Agreement dated September 25, 1995 with Dennis F. DiDominicis 10ffff. Letter from MidLantic Bank date November 14, 1995 10gggg. Letter from KPR Sports International, Inc. dated November 20, 1995 11. Statement regarding computation of per share earnings. (b) Reports on Form 8-K (1) The Registrant filed a Form 8-K dated August 8, 1995 to report the completion of the transactions with MR Acquisitions, L.L.C. (assignee of MR Acquisitions, Inc.). (2) The Registrant filed a Form 8-K dated August 23, 1995 to report a change in independent auditors. -21- RYKA Inc. and Subsidiary SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RYKA INC. Date: November 20, 1995 By: /s/ Michael G. Rubin ------------------------------ Michael G. Rubin Chairman of the Board & Chief Executive Officer Date: November 20, 1995 By: /s/ Steven A. Wolf ------------------------------ Steven A. Wolf Vice President of Finance & Chief Financial Officer -22- RYKA Inc. and Subsidiary Exhibit Index
Exhibit No. Description Sequential Page No. - - ----------------------------------------------------------------------------------------------------- 10eeee. Key Employee Agreement dated September 25, 1995 with Dennis F. DiDominicis 24 10ffff. Letter from MidLantic Bank dated November 14, 1995 42 10gggg. Letter from KPR Sports International, Inc. dated November 20, 1995 44 11 Statement regarding computation of per share earnings 45 -23-
EX-10 2 EXHIBIT 10EEEE KEY EMPLOYEE AGREEMENT To: Dennis F. DiDominicis 21932 Via Del Lago Trabuco Canyon, CA 92679 The undersigned, RYKA, INC., a Delaware corporation (the "Company"), with its principal place of business located at 555 S. Henderson Road, King of Prussia, Pennsylvania 19406, hereby agrees with you as follows: 1. Position and Responsibilities. 1.1 You shall serve as President of the Company, (or in such other executive capacity as shall be designated by the Board of Directors or Executive Committee of the Company and reasonably acceptable to you) and shall perform the duties customarily associated with such capacity from time to time. 1.2 You will, to the best of your ability, devote your full time and your best efforts to the performance of your duties hereunder and the business and affairs of the Company. After receipt of notice of termination of your employment hereunder, you shall continue to be available to the Company on a part-time basis at reasonable and customary hourly rates to assist in any necessary transition, provided that this will not unreasonably interfere with your obligations to any new employer. 1.3 You will duly and faithfully perform and observe any and all rules and regulations which the Company may now or shall hereafter reasonably establish governing your conduct as an executive employee and the conduct of its business. 2. Term of Employment. 2.1 The initial term of this Agreement shall be for the period of years set forth on Exhibit A annexed hereto commencing with the date hereof. Thereafter, this Agreement shall be automatically renewed for successive periods of one (1) year, unless you or the Company shall give the other party not less than four (4) months prior written notice of non-renewal. Your employment with the Company may be terminated as provided in Sections 2.2 or 2.3. 2.2 The Company shall have the right to terminate your employment at any time under this Agreement prior to the stated term in any of the following ways: (a) on thirty (30) days prior written notice to you upon your disability (disability shall be defined as your inability to perform duties under this Agreement for an aggregate of ninety (90) days out of any one hundred eighty (180) day period due to mental or physical disability); (b) immediately without prior notice to you by the Company for "Cause", as hereinafter defined, provided, however, that prior to any such termination for Cause; (c) immediately without prior notice to you, upon your death or in the event of the liquidation or reorganization of the Company under the federal Bankruptcy Code or any state insolvency or bankruptcy law; (d) at any time without Cause, provided the Company shall be obligated to pay to you upon notice of termination, as severance pay, a lump sum amount in cash equal to one-half of your current annual Base Salary less any amounts you may owe to the Company. 2.3 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i) the falseness or material inaccuracy of any of your warranties or representations herein; (ii) your willful failure or refusal to comply with explicit directives of the Board of Directors or Executive Committee or to render the services required herein; (iii) fraud or embezzlement involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds; (iv) your conviction of a criminal felony offense; (v) the willful breach or habitual neglect of your obligations under this Agreement or your duties as an employee of the Company; (vi) habitual use of drugs or alcohol. The existence of Cause for termination of your employment by the Company shall be subject, upon the written election by you or the Company, to binding arbitration as provided in Section 9 hereof. The cost of arbitration, exclusive of the cost of each party's legal representation (which, except as hereinafter otherwise provided, shall be borne by the party incurring the expense), shall be borne by the instigating party; provided, however, that the arbitrators' award may require either party to reimburse the other for the reasonable cost of legal representation in the arbitration proceedings. Further, any dispute, controversy, or claim arising out of, in connection with, or in relation to this definition of "Cause" shall be settled by arbitration as provided in Section 9 hereof. Any award or determination shall be final, binding, and 2 conclusive upon the parties, and a judgment rendered may be entered in any court having jurisdiction thereof. If your employment is terminated by the Company for any other reason, all obligations of the Company (except with respect to amounts and obligations accrued to you prior to the date of termination) shall cease. 3. Compensation. You shall receive the compensation and benefits set forth on Exhibit A attached hereto ("Compensation") for all services to be rendered by you hereunder and for your transfer of property rights, if any, pursuant to an agreement relating to proprietary information and inventions of even date herewith attached hereto as Exhibit C between you and the Company (the "Proprietary Information and Inventions Agreement"). 4. Other Activities During Employment. 4.1 Except for any outside employments and directorships currently held by you as listed on Exhibit B attached hereto, and except with the prior written consent of a disinterested majority of the Company's Board of Directors, you will not, during the term of this Agreement, undertake or engage in any other employment, occupation or business enterprise other than one in which you are an inactive investor. 4.2 You hereby agree that, except as disclosed on Exhibit B attached hereto, during your employment hereunder, you will not, directly or indirectly, engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a salesperson or otherwise), (viii) as a broker, or (ix) as a partner, co-venturer, stockholder, or other proprietor owning directly or indirectly more than five percent (5%) interest in any firm, corporation, partnership, trust, association, or other organization which is engaged in the planning, research, development, production, manufacture, marketing, sales, or distribution of athletic footwear, sportswear, related products, equipment, or services or any other line of business engaged in or under demonstrable development by the Company (such firm, corporation, partnership, trust, association, or other organization being hereinafter referred to as a "Prohibited Enterprise"). Except as may be shown on Exhibit B attached hereto, you hereby represent that you are not engaged in any of the foregoing capacities (i) through (ix) in any Prohibited Enterprise. 3 5. Former Employers. 5.1 You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior or current employment, consulting agreement or relationship whether oral or written. You represent and warrant that you do not possess confidential information arising out of any such employment, consulting agreement or relationship which, in your best judgment, would be utilized in connection with your employment by the Company in the absence of Section 5.2. 5.2 If, in spite of the second sentence of Section 5.1, you should find that confidential information belonging to any other person or entity might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any of your former employers; but during your employment by the Company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own all information which is common knowledge in the industry or otherwise legally in the public domain. 6. Proprietary Information and Inventions. You agree to execute, deliver and be bound by the provisions of the Proprietary Information and Inventions Agreement attached hereto as Exhibit C. 7. Post-Employment Activities. 7.1 For a period of one (1) year after the termination of your employment with the Company of this Agreement, absent the Board of Directors' prior written approval, you will not directly or indirectly engage in activities similar to those described in Section 4.2, nor render services similar or reasonably related to those which you shall have rendered hereunder to, any person or entity whether now existing or hereafter established which directly competes with (or proposes or plans to compete with) the Company ("Direct Competitor") in the women's athletic footwear in the sporting goods category except that you may be employed by an athletic shoe manufacturer, so long as you are not directly responsible for the women's athletic footwear line of business. Nor shall you entice, induce or encourage any of the Company's other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information and nor shall you entice, induce or encourage any of the Company's other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary 4 Information and Inventions Agreement or this Section 7. As used in this Agreement, the term "any line of business engaged in or under demonstrable development by the Company" shall be applied as at the date of termination of your employment, or, if later, as at the date of termination of any post-employment consultation. 7.2 For a period of two (2) years after the termination of your employment with the Company, the provisions of Section 4.2 shall be applicable to you and you shall comply therewith. 8. Remedies. Your obligations under the Proprietary Information and Inventions Agreement and the provisions of Sections 4.2, 7, 8, 9 and 11 of this Agreement (as modified by Section 14, if applicable) shall survive the expiration or termination of your employment (whether through your resignation or otherwise) with the Company. You acknowledge that a remedy at law for any breach or threatened breach by you of the provisions of the Proprietary Information and Inventions Agreement or Section 4 or 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to such injunctive relief in case of any such breach or threatened breach. 9. Arbitration. Any dispute concerning this Agreement including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless otherwise determined by such arbitration panel. 10. Assignment. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation and any assignee of all or substantially all of its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you, 5 except by operation of law or by a further written agreement by the parties hereto. 11. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any one or more of the provisions contained in this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 12. Notices. Any notice which the Company is required to or may desire to give you shall be given by registered or certified mail, return receipt requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time designate in writing. Any notice which you are required or may desire to give to the Company hereunder shall be given by registered or certified mail, return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing with a copy to David S. Mandel, Esquire, Astor Weiss Kaplan & Rosenblum, The Bellevue, Sixth Floor, 200 South Broad Street, Philadelphia, Pennsylvania 19102. 13. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any reach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 6 14. Complete Agreement; Amendments. The foregoing, including Exhibits A, B and C attached hereto, is the entire agreement of the parties with respect to the subject matter hereof, superseding any previous oral or written communications, representations, understandings, or agreements with the Company or any officer or representative thereof. This Agreement may be amended or modified or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 15. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. 16. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. If you are in agreement with the foregoing, please sign your name below and also at the bottom of the Proprietary Information and Inventions Agreement, whereupon both Agreements shall become binding in accordance with their terms. Please then return this Agreement to the Company. (You may retain for your records the accompanying counterpart of this Agreement enclosed herewith). Very truly yours, RYKA INC. By: Michael G. Rubin ------------------------------ Accepted and Agreed: Dennis R. DiDominicis - - ----------------------- Dennis F. DiDominicis 7 EXHIBIT "A" EMPLOYMENT TERM, COMPENSATION AND BENEFITS OF DENNIS F. DiDOMINICIS PRESIDENT 1. Term. The term of this Agreement to which this Exhibit "A" is annexed and incorporated shall be for five (5) years and ninety- eight (98) days, commencing September 25, 1995 and terminating December 31, 2000, unless renewed in accordance with Section 2.1 of the agreement or terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement. 2. Compensation. a. Base Salary. During the Term of this Agreement you shall receive an annual Base Salary of One Hundred Sixty- five Thousand ($165,000.00) Dollars; provided however, that commencing in calendar year 1997, you shall receive annual increases of five thousand (5,000.00) over your prior year's base salary. b. Bonus. Any bonus, if any, shall be determined by the Board of Directors in its sole and absolute discretion. No later than December 31, 1995, the Company and you shall agree upon a performance bonus plan which is acceptable to both parties. c. All Base Salary shall be payable twice monthly. 3. Vacation. You shall be paid for and be entitled to all legal and religious holidays, and such other vacation in accordance with Company policy. All vacation time shall be earned on a quarterly basis. You shall arrange for vacations in advance at such time or times as shall be mutually agreeable to you and the Company. You shall be entitled to carry forward into the subsequent year up to one (1) week of unused vacation time. You may not receive pay in lieu of vacation. A - 1 4. Insurance and Benefits. You shall be eligible for participation in any health or other group insurance plan which may be established by the Company or which the Company is required to maintain by law. You shall also be entitled to participate in any employee benefit program which the Company may establish for its key employees or for its employees generally, including, but in no way limited to, bonuses and stock purchase or option plans. The Company shall provide comprehensive health insurance for you and your dependents as provided to other similar executive employees of the Company at a cost to the Company not to exceed Five Thousand ($5,000.00) Dollars per year. 5. Expenses. The Company shall reimburse you promptly for all reasonable and ordinary business and out-of-pocket expenses incurred by you in connection with the Company's business and in the scope of your employment hereunder, as approved by the Company, including, without limitation, reasonable and necessary travel, lodging, entertainment and meals incurred by you during the term of this Agreement, provided the expenses are incurred in furtherance of the Company's business and at the request of the Company. You agree to keep and maintain records of the aforesaid expenses as may be requested by the Company and to account to the Company for the expenses prior to reimbursement. 6. Stock Options and Incentives. 6.1 Upon execution of this Agreement, you will be granted five (5) year options to purchase 250,000 shares of the Company's Common Stock at an exercise price per share equal to the fair market value of the underlying Common Stock on the date of the grant, of which 50,000 shares shall vest on each of the first, second, third, fourth and fifth yearly anniversaries of the date of your Employment Agreement. 6.2 In addition, upon execution of this Agreement, you will be granted five (5) year options to purchase a total of 250,000 shares of the Company's Common Stock at an exercise price per share equal to the fair market value of the underlying Common Stock on the date of the grant which shall vest fully as follows: (a) Commencing with the twelve (12) month period ending December 31, 1996 and continuing for each of the next four (4) twelve (12) month periods thereafter, options for 50,000 shares shall vest for each such twelve (12) month period based upon performance goals ("Goals") determined by the Company's Board of Directors no later than December 31, 1995. A - 2 6.3 In the event the Goals involve sales or net income, all determinations as to sales and net income shall be made by the Company's regularly retained certified public accountant whose determinations shall be final and binding upon all parties hereto. 6.4 Notwithstanding anything contained herein to the contrary, any stock options granted to you shall be subject to 1) prior Board approval as required; and 2) an amendment of the Company's certificate of incorporation to permit the authorization of such additional shares underlying the stock options. You acknowledge that, at the present time, the Company does not have the authorized number of shares necessary to support such stock options. 7. Relocation and Interim Housing Allowance The Company will reimburse you for the cost of moving from California to Pennsylvania including moving costs for you and your family, closing costs on the sale of your existing home and the acquisition of your new home. The total cost shall not exceed $45,000.00. In addition, the Company shall pay your interim housing costs through March 31, 1996, not to exceed one thousand five hundred (1,500.00) per month. 8. Automobile Allowance During the term of this Agreement, you shall receive a monthly automobile allowance of five hundred (500.00). A - 3 EXHIBIT B OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF DENNIS F. DiDOMINICIS NONE B - 1 EXHIBIT C - - ------------------------------------------------------------------------------- PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT - - ------------------------------------------------------------------------------- To: RYKA, Inc. 555 South Henderson Road King of Prussia, PA 19406 The undersigned, in consideration of and as a condition of my employment or continued employment by you and/or by companies which you own, control, or are affiliated with or their successors in business (collectively, the "Company"), hereby agrees as follows: 1. Confidentiality. I agree to keep confidential, except as the Company may otherwise consent in writing, and, except for the Company's benefit, not to disclose or make any use of at any time either during or subsequent to my employment, any Inventions (as hereinafter defined), trade secrets and confidential information, knowledge, data or other information of the Company relating to products, processes, know-how, techniques, methods, designs, formulas, test data, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Company or any of its affiliates, which I may produce, obtain, or otherwise acquire during the course of my employment, except as herein provided. I further agree not to deliver, reproduce or in any way allow any such trade secrets, confidential information, knowledge, data or other information, or any documentation relating thereto, to be delivered to or used by any third parties without specific direction or consent of a duly authorized representative of the Company. 2. Conflicting Employment; Return of Confidential Material. I agree that during my employment with the Company I will not engage in any other employment, occupation, consulting or other activity relating to the business in which the Company is now or may hereafter become engaged, or which would otherwise conflict with my obligations to the Company. In the event my employment with the Company terminates for any reason whatsoever, C - 1 I agree to promptly surrender and deliver to the Company all records, materials, equipment, drawings, computer disks, documents and data of which I may obtain or produce during the course of my employment, and I will not take with me any description containing or pertaining to any confidential information, knowledge or data of the Company which I may produce or obtain during the course of my employment. 3. Assignment of Inventions. 3.1 I hereby acknowledge and agree that the Company is the owner of all Inventions. In order to protect the Company's rights to such Inventions, by executing this Agreement I hereby irrevocably assign to the Company all my right, title and interest in and to all Inventions to the Company. 3.2 For purposes of this Agreement, "Inventions" shall mean all discoveries, processes, designs, methods, techniques, technologies, devices, or improvements in any of the foregoing or other ideas, whether or not patentable or copyrightable and whether or not reduced to practice, made or conceived by me (whether solely or jointly with others) during the period of my employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research and development of the Company, or result from or are suggested by any task assigned to me or any work performed by me for or on behalf of the Company. 3.3 Any discovery, process, design, method, technique, technology, device, or improvement in any of the foregoing or other ideas, whether or not patentable or copyrightable and whether or not reduced to practice, made or conceived by me (whether solely or jointly with others) which I develop entirely on my own time not using any of the Company's equipment, supplies, facilities, or trade secret information ("Personal Invention") is excluded from this Agreement provided such Personal Invention (i) does not relate to the actual or demonstrably anticipated business, research and development of the Company, and (ii) does not result, directly or indirectly, from any work performed by me for or on behalf of the Company. 4. Disclosure of Inventions. I agree that in connection with any Invention, I will promptly disclose such Invention to the Board of Directors or the Executive Committee of the Company in order to permit the Company to enforce its property rights to such Invention in accordance with this Agreement. My disclosure shall be received in confidence by the Company. C - 2 5. Patents and Copyrights; Execution of Documents. 5.1 Upon request, I agree to assist the Company or its nominee (at its expense) during and at any time subsequent to my employment in every reasonable way to obtain for its own benefit patents and copyrights for Inventions in any and all countries. Such patents and copyrights shall be and remain the sole and exclusive property of the Company or its nominee. I agree to perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title and interest in and to such patents and copyrights. 5.2 In connection with this Agreement, I agree to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all documents, including assignments of title, patent or copyright applications, assignments of such applications, assignments of patents or copyrights upon issuance, as the Company may determine necessary or desirable to protect the Company's or its nominee's interest in Inventions, and/or to use in obtaining patents or copyrights in any and all countries and to vest title thereto in the Company or its nominee to any of the foregoing. 6. Maintenance of Records. I agree to keep and maintain adequate and current written records of all Inventions made by me (in the form of notes, sketches, drawings and other records as may be specified by the Company), which records shall be available to and remain the sole property of the Company at all times. 7. Prior Inventions. It is understood that all Personal Inventions, if any, whether patented or unpatented, which I made prior to my employment by the Company, are excluded from this Agreement. To preclude any possible uncertainty, I have set forth on Schedule A attached hereto a complete list of all of my prior Personal Inventions, including numbers of all patents and patent applications and a brief description of all unpatented Personal Inventions which are not the property of a previous employer. I represent and covenant that the list is complete and that, if no items are on the list, I have no such prior Personal Inventions. I agree to notify the Company in writing before I make any disclosure or perform any work on behalf of the Company which appears to threaten or conflict with proprietary rights I claim in any Personal Invention. In the event of my failure to give such notice, I agree that I will make no claim against the Company with respect to any such Personal Invention. C - 3 8. Other Obligations. I acknowledge that the Company from time to time may have agreements with other persons, companies, entities, the U.S. Government or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. I agree to be bound by all such obligations and restrictions and to take all action necessary to discharge the Company's obligations. 9. Trade Secrets of Others. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep confidential proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. I agree not to enter into any agreement either written or oral in conflict herewith. 10. Modification. I agree that any subsequent change or changes in my employment duties, salary or compensation or, if applicable, in any Employment Agreement between the Company and me, shall not affect the validity or scope of this Agreement. 11. Arbitration. Any dispute concerning this Agreement including, but not limited to, its existence, validity, interpretation, performance or non-performance, arising before or after termination or expiration of this Agreement, shall be settled by a single arbitrator in Philadelphia, Pennsylvania, in accordance with the expedited procedures of the commercial rules then in effect of the American Arbitration Association. Judgment upon any award may be entered in the highest court, state or federal, having jurisdiction. The cost of such arbitration shall be borne equally between the parties thereto unless otherwise determined by such arbitration panel. 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives and successors. C - 4 13. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any provision of this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 14. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. 15. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties and supersedes any prior oral or written communications, representations, understandings or agreements concerning the subject matter hereof with the Company or any officer or representative thereof. This Agreement may be amended, modified, or certain provisions waived only by a written instrument signed by the parties hereto, upon authorization of the Company's Board of Directors. 16. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement, the intent of any provisions hereof, and shall not be deemed to constitute a part hereof nor to affect the meaning of this Agreement in any way. C - 5 17. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 18. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. 19. Notices. All notices, requests, demands and communications which are or may be required to be given hereunder shall be deemed given if and when sent by registered or certified mail, return receipt requested, postage prepaid, to the following addresses: If to the Company: RYKA, Inc. 555 South Henderson Road King of Prussia, PA 19406 Attention: President With a copy to: David S. Mandel, Esquire Astor Weiss Kaplan & Rosenblum The Bellevue, Sixth Floor 200 South Broad Street Philadelphia, PA 19102 If to Employee: Dennis F. DiDominicis 21932 Via Del Lago Trabuco Canyon, CA 92679 EMPLOYEE: Dennis F. DiDominicis -------------------------- DENNIS F. DiDOMINICIS Accepted and Agreed: RYKA, INC. By: Michael G. Rubin ---------------------- C - 6 SCHEDULE A LIST OF PRIOR INVENTIONS OF DENNIS F. DiDOMINICIS Title Date Identifying Number or - - ----- ---- Brief Description --------------------- NONE C - 7 EX-10 3 EXHIBIT 10FFFF Midlantic Bank, N.A. Asset Based Lending Department 1535 Locust Street MIDLANTIC LOGO Philadelphia, Pennsylvania 18102 215 772-2220 Tel. 215 772-2225 Fax November 14, 1995 Mr. Michael Rubin, COB 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 Michael, 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 December 31, 1995 for Section 3.04 (A), (C), Section 4.05, and Section 6.01 (A)(2) and through January 30, 1996 for Section 3.03 (C), (D), Section 3.04 (B) 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. (D) 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 of 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. (C) Within ninety days following Closing, Bank shall receive executed assignments of life insurance policies in accordance with Section 4.05 below. SECTION 4.05 Life Insurance. As further security for the prompt and full satisfaction of all obligations, Borrower will assign to Bank pursuant to a collateral assignment in form and substance acceptable to Bank policies of life insurance on the lives of Michael G. Rubin and Sheri Poe, each in an amount not less than $4,000,000, and issued by a life insurance company reasonably satisfactory to Bank, and shall pay all premiums on and otherwise maintain said policy in full force and effect. SECTION 6.01 (A)(2) Within forty-five (45) days after each calendar month end, a copy of Borrower's Monthly Financial Statement, certified by Borrower's chief financial officer, 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 $2,000,000 as of thirty days following Closing and at all times thereafter; and This waiver does not apply to any other terms, conditions or covenants. Furthermore the above waiver should not be construed as a waiver of said covenants for any other period beyond December 31, 1995 and January 30, 1996, respectively. All Other Terms, Conditions And Covenants Remain In Full Force And Effect. Sincerely, /s/ Michael R. Geissler - - --------------------------- Michael R. Geissler Vice President EX-10 4 EXHIBIT 10.GGGG November 20, 1995 Steve Wolf Chief Financial Officer 555 South Henderson Road King of Prussia, PA 19406 Dear Steve: In connection with Loan and Securities Agreement dated as of July 31, 1995 between RYKA and KPR Sports International, Inc., we hereby waive through January 30, 1996 the default with the regard to the minimum tangible net worth requirement. Sincerely, /s/ Dennis Rubisch - - ------------------------------ Dennis Rubisch CFO KPR Sports, International EX-11 5 EXHIBIT 11 Exhibit 11 - Computation of Per Share Earnings RYKA Inc. and Subsidiary
THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, 1995 1994 1995 1994 ----------------------------- ----------------------------- PRIMARY: Weighted average number of common shares outstanding 39,541,437 23,940,406 30,830,241 23,877,509 Net effect of dilutive stock options and warrants (based on the Treasury Stock Method using average market price) 3,834,055 -- -- 493,866 ------------ ------------ ----------- ----------- Total 43,375,492 23,940,406 30,830,241 24,371,375 ============ ============ =========== =========== Net income (loss): Income (loss) before extraordinary item ($ 482,772) ($ 59,659) ($4,632,803) $ 95,702 Extraordinary item 1,650,256 -- 1,650,256 -- ------------ ------------ ----------- ----------- Net income (loss) $ 1,167,484 ($ 59,659) ($2,982,547) $ 95,702 ============ ============ =========== =========== Net income (loss) per share: Income (loss) before extraordinary item ($.01) $0.00 ($.16) $0.00 Extraordinary item .04 0.00 .06 0.00 ----- ----- ----- ----- Net income (loss) per share $.03 $0.00 ($.10) 0.00 ===== ===== ===== ===== FULLY DILUTED: Weighted average number of common shares outstanding 39,541,437 23,940,406 30,830,241 23,877,509 Net effect of dilutive stock options and warrants (based on the Treasury Stock Method using the quarter- end market price, if greater than the average market price) 3,834,055 -- -- 525,882 ------------ ------------ ----------- ----------- Total 43,375,492 23,940,406 30,830,241 24,403,391 ============ ============ =========== =========== Net income (loss): Income (loss) before extraordinary item ($ 482,772) ($ 59,659) ($4,632,803) $ 95,702 Extraordinary item 1,650,256 -- 1,650,256 -- ------------ ------------ ----------- ----------- Net income (loss) $ 1,167,484 ($ 59,659) ($2,982,547) $ 95,702 ============ ============ =========== =========== Net income (loss): Income (loss) before extraordinary item ($.01) $0.00 ($.16) $0.00 Extraordinary item .04 0.00 .06 0.00 ----- ----- ----- ----- Net income (loss) per share $.03 $0.00 ($.10) $0.00 ===== ===== ===== =====
EX-27 6
5 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 40,380 0 1,029,221 213,186 1,116,996 2,486,982 530,868 312,671 2,486,982 1,125,988 0 415,353 0 0 509,554 2,486,982 6,917,866 7,001,639 6,116,792 10,549,050 1,085,392 0 319,213 (4,632,803) 0 (4,632,803) 0 1,650,256 0 (2,982,547) (.10) 0
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