-----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, U++Oag+iPWZYixN8ED2pnh+kGCAP5COyzNQfhL/xsNeijDtbA8pVKo+H6beL219r fia5RRvPxJk6xDKvzJCrhg== 0001036050-97-000496.txt : 19970718 0001036050-97-000496.hdr.sgml : 19970718 ACCESSION NUMBER: 0001036050-97-000496 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970717 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYKA INC CENTRAL INDEX KEY: 0000828750 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042958132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16611 FILM NUMBER: 97642047 BUSINESS ADDRESS: STREET 1: 555 S HENDERSON ROAD SUITE B STREET 2: RTE 3 INDUSTRIAL PARK CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6103372200 10-Q 1 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 =============================================================================== FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934. For the period ended MARCH 31, 1997 -------------- 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 [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of July 17, 1997: Common Stock $.01 par value 59,135,326 - --------------------------- ------------------ (Title of each class) (Number of Shares) - -------------------------------------------------------------------------------- - 1 - RYKA Inc. and Subsidiary Form 10-Q for the Three-Month Period Ended March 31, 1997 Table of Contents ===============================================================================
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 1997 and March 31, 1996 4 Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1997 and March 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6 to 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 to 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults on Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit Index and Exhibits 15
- 2 - PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS RYKA Inc. and Subsidiary Condensed Consolidated Balance Sheets - --------------------------------------------------------------------------------
March 31, December 31, 1997 1996 ------------- ------------- (Unaudited) ASSETS Current assets: Cash $3,117 $37,469 Accounts receivable, net of allowance for doubtful accounts of $125,887 in 1997 and $65,941 in 1996 2,188,280 1,947,036 Inventory 2,822,989 2,644,017 Prepaid expenses and other current assets 221,086 149,306 Due from Affiliate 14,132 - Note receivable, officer 20,000 20,000 ------------- ------------- Total current assets 5,269,604 4,797,828 Property and equipment, at cost, net of accumulated depreciation 227,812 194,815 Security deposits 70,000 70,000 ------------- ------------- Total assets $5,567,416 $ 5,062,643 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable, bank $ 1,753,456 $ 1,592,453 Accounts payable and accrued expenses 1,582,707 1,001,577 Due to customer 413,290 413,290 Due to affiliate - 18,928 Subordinated note payable 851,440 851,440 ------------- ------------- Total current liabilities 4,600,893 3,877,688 Other liabilities 35,000 35,000 Commitments and contingencies Stockholders' equity: Preferred Stock, $0.01 par value, 1,000,000 shares authorized; none issued or outstanding - - Common Stock; $0.01 par value, 90,000,000 shares authorized; 56,635,326 shares issued and outstanding at March 31, 1997 and December 31, 1996 566,353 566,353 Additional paid-in capital 20,336,843 20,311,843 Accumulated deficit (19,971,673) (19,728,241) ------------- ------------- Total stockholders' equity 931,523 1,149,955 Total liabilities and stockholders' equity $ 5,567,416 $ 5,062,643 ============= =============
Please refer to the notes to condensed consolidated financial statements. - 3 - RYKA Inc. and Subsidiary Condensed Consolidated Statements of Operations - --------------------------------------------------------------------------------
Three Months Ended March 31, 1997 1996 ---------------------------------- (Unaudited) Net sales $2,584,098 $ 1,736,354 Costs and expenses: Cost of goods sold 1,709,795 1,170,440 General and administrative expenses 375,180 132,579 Sales and marketing expenses 504,684 403,873 Research and development expenses 142,062 208,407 Special charges - 22,772 ------------ ----------- 2,731,721 1,938,071 ------------ ----------- Operating loss ( 147,623) ( 201,717) ------------ ----------- Other (income) expense: Interest expense 53,732 28,754 Interest income ( 468) ( 362) Merger related costs 42,545 - ------------ ----------- 95,809 28,392 ------------ ----------- Net loss ($ 243,432) ($ 230,109) ============ =========== Net loss per share ($ - ) ($ .01) ============ =========== Weighted average common and common equivalent shares outstanding 59,635,326 46,615,326 ============ ===========
Please refer to the notes to condensed consolidated financial statements. - 4 - RYKA Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------
Three Months Ended March 31, 1997 1996 ------------------------------------ (Unaudited) Cash flows from operating activities: Net loss ($ 243,432) ($ 230,109) Adjustments to reconcile net loss to cash (used in) operating activities: Depreciation and amortization 16,573 13,088 Provision for losses on accounts receivable 59,946 16,227 Capital contributed as services 25,000 25,000 Changes in operating assets and liabilities: Accounts receivable ( 301,190) ( 752,093) Inventory ( 178,972) ( 392,635) Prepaid expenses and other current assets ( 71,780) ( 107,792) Accounts payable and accrued expenses 581,130 ( 99,923) Due to/from affiliate ( 33,060) 257,479 -------------- -------------- Net cash (used in) operating activities ( 145,785) ( 1,270,758) -------------- -------------- Cash flows from investing activities: Acquisitions of equipment ( 49,570) ( 3,531) Security deposits - ( 35) -------------- -------------- Net cash (used in) investing activities ( 49,570) ( 3,566) -------------- -------------- Cash flows from financing activities: Proceeds from note payable, bank 161,003 1,237,000 Repayment of bridge loan - 120,000 Proceeds from issuance of common stock - ( 120,000) Deferred registration costs - ( 40,000) -------------- -------------- Net cash provided by financing activities 161,003 1,197,000 -------------- -------------- Net decrease in cash ( 34,352) ( 77,324) Cash, beginning of period 37,469 77,509 -------------- -------------- Cash, end of period $ 3,117 $ 185 ============== ==============
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) or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of Management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the operating results of the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. This quarterly report should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Audited Consolidated Financial Statements as of December 31, 1996 as presented in the Company's Annual Report on Form 10-K. The Company's financial statements for the quarter ended March 31, 1997 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant recurring losses since its inception and had an accumulated deficit at March 31, 1997 of $19,971,673. During 1996, the Company incurred substantial expenditures in order to meet ongoing needs and fund its operating plans, which included the development and marketing of new products. The Company negotiated a credit facility with a lender which became effective August 15, 1996 (the "Credit Facility"). As a prerequisite to closing the new credit facility, the Company was required to raise $2,000,000 in equity. This requirement was satisfied with the sale of $2,500,000 of equity securities through a Private Placement which commenced in May 1996 and was completed in August 1996 (The "1996 Private Placement"). Subsequently, the Company was informed by this new lender that the Credit Facility was to be terminated on March 31, 1997, which was later extended to April 18, 1997. As of June 4, 1997, the lender agreed to extend the Credit Facility, as modified (see Note B) to November 30, 1997. If the Company is unable to obtain alternative financing , there is no assurance that the Company will be able to continue operations. Further, there is no assurance that the Company will be able to obtain alternative financing, or, if obtained, such financing will be on terms satisfactory for the Company. On September 26, 1996, the Company entered into an Agreement and Plan of Reorganization, as amended and restated (the "Reorganization Agreement") with KPR Sports International, Inc. ("KPR") and certain affiliated companies (collectively the "KPR Companies") and Michael G. Rubin, Chairman and Chief Executive Officer of RYKA and the sole stockholder of the KPR Companies, pursuant to which, subject to the approval by the stockholders of RYKA and the Company's lender, RYKA would become a holding company by transferring all of its assets and liabilities to a wholly owned subsidiary and would acquire the KPR Companies in exchange for 163,250,000 shares of RYKA. The Company believes that the proposed transaction will be completed by the end of 1997. There is no assurance that the reorganization will be consummated or the replacement financing obtained. In the event that the reorganization is not consummated, or further delayed, the Company may sell additional equity securities in order to generate sufficient capital resources to assure continuation of the operations of the Company. Further, upon completion of the reorganization, the Company may sell additional equity securities in order to further support future operations. Management recognizes that the Company may be required to obtain these or similar additional resources or consider modifications to its operating plans including reductions in operating costs to enable it to continue operations. However, no assurance can be given that the Company will be successful in raising sufficient additional capital, if required, to support future operations. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. - 6 - NOTE B - DEBT Effective as of August 15, 1996, the Company's Credit Facility consisted of a $4,500,000 asset based revolving credit facility. The facility makes funds available to the Company based upon a percentage of inventory and accounts receivable, as defined in the agreement. Interest on the amounts outstanding was paid monthly at the rate of prime plus one percent and was due on demand. As of March 31, 1997, the Company owed $1,753,456 under this facility. Interest expense in connection with this facility was $33,037 for the three months ended March 31, 1997. The Company's Credit Facility granted the bank a security interest in the Company's accounts receivable and inventory. In addition, under this agreement the Company is restricted from paying any dividends to its shareholders. Concurrently with RYKA, KPR closed a credit facility with the same lender. On November 8, 1996 the bank notified KPR that it was in default of certain financial covenants, specifically the debt to net worth ratio and required tangible net worth, and certain provisions relating to financial information. RYKA was in compliance with its financial covenants and is not in default of its loan with the lender. Given the dependence of RYKA on certain support provided by KPR, KPR's inability to obtain continued funding or additional funding for its operations could adversely impact the ability of RYKA to continue in business independent of KPR. On February 7, 1997, the Company entered into an agreement to modify the Credit Facility in anticipation of a complete refinancing of the Company's obligation. The terms of the modification called for an acceleration of the termination date to March 31, 1997, which was later extended to April 18, 1997. Coincident with the signing of this agreement, KPR entered into a Forbearance and Amendment Agreement (the "Forebearance Agreement") with the lender. The terms of this Forebearance Agreement place certain additional financial covenants on KPR, and accelerated the termination of KPR's Facility to March 31, 1997, which was later extended to April 18, 1997. The complete refinancing of the Company's obligation was not successfully completed by April 18, 1997. On June 4, 1997, the Company and KPR obtained an extension of their credit facilities to November 30, 1997 to allow the Company and KPR to continue to attempt to obtain new financing. The terms of the extension modified the Credit Facility by, among other things, increasing the interest rate to prime plus 3 1/2%. On June 27, 1997, the Company received a preliminary term sheet from a prospective lender to replace its current facility. The terms of this new facility require the company to raise an additional $5 million in capital. There is no assurance that the company will meet this condition to close this new facility. NOTE C - RELATED PARTY TRANSACTIONS The Company conducts its operations and warehouses inventory in a facility subleased from KPR. Terms of the sublease require rental payments of approximately $4,000 per month for use of these facilities and the warehousing through July 31, 1997. Rental payments charged to operations pursuant to the above lease were $11,875 for the three months ended March 31, 1996 and 1997, respectively. Any other cost related to the use of the joint facility or for other services provided by KPR or its affiliates will be charged to the Company on an arms length basis and will be subject to approval by a special disinterested committee of the Board of Directors. The Chairman and Chief Executive Officer of the Company devotes a portion of his time to the Company's operations and marketing and sales related activities for which he does not receive any compensation. The value of these services for the three months ended March 31, 1997, estimated at $25,000, was recorded as compensation expense and included as part of general and administrative expenses in the statement of operations and as a contribution to capital and included as additional paid-in capital in the balance sheet. KPR has advanced certain funds to the Company on a temporary basis in the ordinary course of business (ie. payroll related expenses, other general operating expenses), and the Company has advanced certain funds to KPR. Such amounts are included in the balance sheet as either a current asset - due from affiliate or a current liability - due to affiliate. In connection with the subordinated loan provided by KPR of $851,440 during 1995, the Company recorded interest expense of $19,606 and $19,420 for the three months ended March 31, 1996 and 1997, respectively. - 7 - NOTE D - EQUITY TRANSACTIONS, STOCK OPTIONS AND WARRANTS Equity transactions: The Company offered for sale, through a private placement, 4,000,000 shares of Common Stock during the third quarter of 1995 (the "1995 Private Placement"). As a condition of the 1995 Private Placement, and as a result of the Company's inability to register such stock with the Securities and Exchange Commission within 120 days of the closing (by November 28, 1995), the Company will be required to remit to the investors $5,000 and warrants to purchase 40,000 shares for each month such registration statement does not become effective. In connection with the above condition, the maximum reduction in stock proceeds cannot exceed $100,000 and the maximum additional issuance of stock purchase warrants cannot exceed 800,000 shares. The registration was not accomplished within the 120 day period; however, waivers of such payments and warrants have been received from certain of the participants in the 1995 Private Placement through March 31, 1997. The remaining participants were issued warrants. Accordingly, at March 31, 1997 and December 31, 1996, $35,000 of the proceeds of the 1995 Private Placement have been classified as other liabilities. With respect to said warrants, pursuant to the specific private placement terms, through March 31, 1997, 640,000 warrants are to be issued to investors with an exercise price of $.25 and exercisable 10 years after the date of issue. On April 21, 1997 the Company sold 2,500,000 shares of the Company's Common Stock for $750,000 to certain investors. The proceeds from this sale were used to repay $385,000 of the subordinated note payable to KPR and to enable the Company to open $810,000 in letter of credit agreements for the benefit of KPR. Contingent Stock Options and Warrants: The Board of Directors of RYKA on March 9, 1997 authorized the issuance of options to certain employees of KPR and RYKA and certain warrants to athletes sponsoring or endorsing the Apex brand for KPR, to purchase shares of the Company's Common Stock. The issuance of these options is contingent upon the consummation of the Acquisition by Ryka of the KPR Companies. The exercise price for these options will be the fair market value of the stock at the time of such acquisition . A summary of such contingent options is as follows:
Options Warrants ------------ ------------- KPR Employees 530,000 - RYKA Employees 930,000 - KPR Athletes N/A 3,200,000 ------------ ------------- 1,460,000 3,200,000 ============ =============
- 8 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Certain information contained in this form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). General Overview The Company has not had a single profitable fiscal year since its inception and incurred a loss of approximately $243,000 during the quarter ended March 31, 1997. In addition, the Company had an accumulated deficit of approximately $19,972,000 and stockholders' equity of approximately $932,000 at March 31, 1997. REORGANIZATION. On September 26, 1996, the Company entered into an Agreement and Plan of Reorganization, as amended and restated (the "Reorganization Agreement"), with KPR and certain affiliated companies (collectively, the "KPR Companies") and Michael G. Rubin, Chairman and Chief Executive Officer of RYKA and the sole stockholder of the KPR Companies, pursuant to which, subject to the approval by the stockholders of RYKA and the Company's lender, RYKA would become a holding company by transferring all of its assets and liabilities to a newly-formed, wholly-owned subsidiary and would acquire the KPR Companies in exchange for 163,250,000 shares of RYKA (the "Reorganization"). Although the Reorganization was originally scheduled to close by December 31, 1996, due to recent events discussed below, the completion of the Reorganization has been delayed. RYKA expects the Reorganization to become effective by the end of 1997. RECENT EVENTS. On August 15, 1996, the Company entered into a new credit facility with a bank. Concurrently with RYKA, KPR entered into a new credit facility with the same bank. On November 8, 1996, the bank notified KPR that KPR was in default of certain financial covenants. RYKA was in compliance with its financial covenants and was not in default of its loan with the bank. Since November 1996, RYKA and KPR have been in negotiations with the bank to extend their credit facilities. On June 4, 1997, RYKA entered into an amended agreement, and KPR entered into a forbearance agreement with their existing bank, that among other things, extended the credit facilities of RYKA and KPR to the earlier of November 30, 1997 or an occurrence of an event of default (as defined). Under its amended agreement, RYKA may borrow under its revolving credit facility up to the lesser of $4,500,000 or its borrowing base (as defined). Interest on its borrowings is payable at the bank's prime rate plus 3 1/2%. RYKA is also required to maintain certain receivables turnover ratios. RYKA's revolving credit facility is guaranteed by Michael Rubin and certain entities owned by Michael Rubin and is cross-defaulted with KPR's agreement with the bank. In addition to its negotiations with its existing bank, RYKA and KPR have been in discussions with certain other banks to obtain a new credit facility and with certain investors to obtain equity an/or subordinated debt. On April 21, 1997, RYKA entered into an agreement with certain investors to sell 2,500,000 shares of Common Stock for an aggregate purchase price of $750,000. The proceeds of this sale were used by the Company to repay $385,000 of the $851,000 subordinated loan from KPR. The remaining proceeds were used to open $810,000 letters of credit for the benefit of KPR. As a result of the issues arising in connection with the Company's credit facility with its existing bank, the completion of the Company's audited financial statements for the year ended December 31, 1996 was delayed, and the Company was unable to file timely its Annual Report on Form 10-K for the year ended December 31, 1996 or its Quarterly Report of Form 10-Q for the quarter ended March 31, 1997. - 9 - Results of Operations Three Months Ended March 31, 1997 as Compared to the Three Months Ended March 31, 1996 - -------------------------------------------------------------------------------- The following table sets forth, for the periods indicated, the relative percentage that certain items in the Company's Condensed Consolidated Statements of Operations bear to net sales:
THREE MONTHS ENDED MARCH 31, (In Thousands) ----------------------------------------------------- 1997 1996 ---------------------- ----------------------- (Unaudited) (Unaudited) Net sales $2,584 100.0% $1,736 100.0% Costs and expenses: Cost of goods sold 1,710 66.2% 1,170 67.4% General and administrative expenses 375 14.4% 133 7.6% Sales and marketing expenses 505 19.5% 404 23.3% Research and development expenses 142 5.5% 208 12.0% Special charges - .2% 23 1.3% ---------------------- ----------------------- 2,732 105.7% 1,938 111.6% ---------------------- ----------------------- Operating loss ( 148) ( 5.7%) ( 202) ( 11.6%) Other expense, net 95 3.7% 28 1.6% ---------------------- ----------------------- Net loss ($ 243) ( 9.4%) ( $ 230) ( 13.2%) ====================== =======================
Net sales increased by $847,744 (48.8%) from $1,736,354 for the three months ended March 31, 1996 to $2,584,098 for the three months ended March 31, 1997. This increase in sales was primarily due to (i) an improvement in design and development of RYKA's spring 1997 product line resulting from the hiring of an internal design and product development staff as opposed to relying on outsourcing these activities, (ii) the hiring of manufacturers representatives with extensive footwear industry experience to cover the entire United States, and (iii) the continuous expansion of relationships established during the 3rd and 4th Quarter of 1996 with major footwear retailers in the women's athletic footwear market. Cost of goods sold increased by $539,355 (46.1%) from $1,170,440 for the three months ended March 31, 1996 to $1,709,795 for the three months ended March 31, 1997. This increase was primarily attributable to the increase in sales as gross profit margins as a percentage of sales remained relatively flat increasing from 32.6% for the quarter ended March 31, 1996 to 33.8% for the quarter ended March 31, 1997. General and administrative expenses increased by $242,601 (183.0%) from $132,579 for the quarter ended March 31, 1996 to $375,180 for the quarter ended March 31, 1997. This increase was primarily due to (i) an increase in the accounts receivable reserve for doubtful accounts and additional bad debt writeoffs, totaling approximately $110,000, (ii) an increase in bank fees and professional fees of approximately $60,000 associated with negotiating and entering into the amended Credit Facility with the Company's primary lender and amending prior year quarterly financial statements and, (iii) increase in payroll costs of approximately $23,000 resulting from growth in back office expenses necessary to support the overall growth of the business. Sales and marketing expenses increased by $100,811 (25.0%) from $403,873 for the quarter ended March 31, 1996 to $504,684 for the quarter ended March 31, 1997. This increase was primarily attributable to (i) an increase of approximately $115,000 in direct selling expenses which were directly related to the 49% increase in sales volume (ie. commissions, promotion, advertising, trade shows) and (ii) an increase in costs of distribution and warehousing expenses of approximately $55,000 resulting from the higher sales volume and warehousing costs associated with inventory levels being significantly higher than the same period of the prior year. These increases were offset by (i) a decrease in public relations expense of approximately $23,000 resulting from termination of the companies public relations agency and (ii) a decrease in payroll related expenses of approximately $26,000. - 10 - Research and development expenses decreased $66,345 (31.8%) from $208,407 for the quarter ended March 31, 1997 to $142,062 for the quarter ended March 31, 1996. The decrease was a result of savings obtained by employee in-house designers during the first quarter of 1997 compared to engaging outside consultants on a project by project basis. Special charges consists of relocation and temporary living costs. Other expenses, net increased $67,417 (237.4%) from $28,392 in the quarter ended March 31, 1996 to $95,809 in the quarter ended March 31, 1997. The increase was primarily due to (i) an increase in merger related expenses in connection with the proposed acquisition by RYKA of the KPR Companies of approximately $42,000 in the first quarter of 1996. (ii) interest expense of $30,207 as a result of increased borrowing requirements during the first quarter of 1997 necessary to support higher accounts receivable and inventory levels over the same period of the prior year. Liquidity and Capital Resources As of March 31, 1997, the Company's working capital is $668,711. The level of working capital maintained during the 1st quarter ended March 31, 1997, relates primarily to the proceeds remaining from the 1996 Private Placement which totaled $2,500,000. On November 8, 1996 the Company's and KPR's bank notified KPR that KPR was in default of certain financial covenants, specifically the debt to net worth ratio and required tangible net worth, and certain provisions relating to financial information. RYKA was in compliance with its financial covenants and was not in default of its loan with the bank. On February 7, 1997, in conjunction with KPR entering into a forbearance agreement regarding its credit facility, the Company entered into an amendment to its credit facility that provided for, among other things, a termination date of April 18, 1997 (as amended) for the Company's credit facility, the same termination date as KPR's amended credit facility. As of June 4, 1997, the bank agreed to extend both the RYKA and KPR credit facilities to November 30, 1997 or an event of default (as defined). Under its amended agreement, RYKA may borrow under its revolving credit facility up to the lesser of $4,500,000 or its borrowing base (as defined). Interest on its borrowing is payable at the bank's prime rate plus 3 1/2%. RYKA is also required to maintain certain receivables turnover ratios. RYKA's credit facility is guaranteed by Michael Rubin and certain entities owned by Michael Rubin and is cross-defaulted with KPR's agreement with the bank. To date the company continues to produce negative cash flow from operating activities. The company used $1,270,758 in cash flow from operating activities for the three months ended March 31, 1996 as compared to $145,785 for the three months ended March 31, 1997. The Company and KPR are in discussions with lenders to obtain a new credit facility or facilities to replace their existing credit facilities upon the expiration of such facilities. During these discussions, certain lenders have indicated that any credit facility that they would provide to the Company and KPR would be conditional on, among other things, KPR raising additional equity and/or subordinated debt. The Company and KPR are seeking to raise an additional $3.0 - $5.0 million in equity and/or subordinated debt financing. The Company believes that it is in the best interests of the Company to resolve the credit facility and equity and/or subordinated debt needs of both the Company and KPR so that the Company can complete the proposed acquisition of the KPR Companies. On April 21, 1997, RYKA entered into an agreement with certain investors to sell 2,500,000 shares of Common Stock for an aggregate purchase price of $750,000. The proceeds of this sale were used by the Company to repay $385,000 of the $851,000 subordinated loan from KPR. The remaining proceeds from this sale were used by the Company to open $810,000 in letters of credit for the benefit of KPR. The Company is repaying a portion of the subordinated loan for KPR and is opening letters of credit on behalf of KPR in order to allow KPR to obtain sufficient financing for its operations until the proposed acquisition of the KPR Companies can be completed and a new credit facility for the combined companies can be negotiated. Effective April 1, 1997, the Company negotiated 60-day payment terms with two of its major suppliers for up to an aggregate of $1,500,000 in purchases at an annual interest rate of 12.0%. Previously, the Company was on a wire transfer on shipment basis with this supplier. - 11 - Liquidity and Capital Resources - continued The Company believes that the extension that the Company and KPR received from their current bank with respect to their existing credit facilities, together with the additional cash flow from the payment terms from its suppliers, will provide the Company with sufficient resources through November 30, 1997. During that period, the Company believes that it will be able to negotiate a new credit facility or facilities and/or raise additional equity and/or subordinated debt financing and complete the proposed Reorganization. If however, the Company is unable to obtain a new credit facility and/or additional equity and/or subordinated debt financing, there is no assurance that the Company will be able to continue operations. Further, there is no assurance that if the Company is able to obtain such financing, it will be on terms satisfactory for the Company. Moreover, given the dependence of the Company on certain support provided by KPR, including, but not limited to, financial support, administrative support, warehousing and office rental, KPR's ability to obtain continued financing or additional financing for its operations could significantly adversely impact the ability of the Company to continue in business independent of KPR. Even if the Company were able to obtain the financing discussed above or obtain alternative financing, RYKA may be required to raise additional equity and/or subordinated debt. However, no assurance can be given that RYKA will be successful in raising additional capital, if necessary. Further, there can be no assurance that RYKA will achieve profitability or a positive cash flow even with sufficient capital resources. - 12 - PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS ON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10eee. Waiver letters. 11. Statement regarding computation of per share earnings. - 13 - 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: July 17, 1997 By: /s/ Michael G. Rubin ----------------------------------- Michael G. Rubin Chairman of the Board & Chief Executive Officer Date: July 17, 1997 By: /s/ Steven A. Wolf ----------------------------------- Steven A. Wolf Vice President of Finance & Chief Financial Officer - 14 - RYKA Inc. and Subsidiary EXHIBIT INDEX
Exhibit No. Description Sequential Page No. - ------------------------------------------------------------------------------- 10eee. Waiver letters. 19 11 Statement regarding computation of per share earnings 23
- 15 - EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS RYKA INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997 1996 ----------------------------------- PRIMARY: Weighted average number of shares outstanding 56,635,326 46,615,326 Net effect of dilutive stock options and warrants (based on the Treasury Stock Method using average market price) - - ---------------------------------- Total 56,635,326 46,615,326 ================================== Net loss ($ 243,432) ($ 230,109) ================================== Net loss per share ($ - ) ($ .01) ================================== FULLY DILUTED: Weighted average number of shares outstanding N/A N/A Net effect of dilutive stock options and warrants (based on the Treasury Stock Method using the quarter-end market price, if greater than the average market price) - - ----------------------------------- Total N/A N/A ================================== Net loss N/A N/A ================================== Net loss per share N/A N/A ==================================
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