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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-16611
RYKA INC.
(Exact name of Registrant as specified in its charter)
Delaware 5139 04-2958132
- ---------------------------- ------------------------- ------------------
(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation industrial classification identification no.)
or organization) code number)
555 S. HENDERSON ROAD
Suite B
King of Prussia, PA 19406
(610) 337-2200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (i) 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, and (ii) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant is $14,335,356(1). As of March 27, 1996, 46,615,326 shares of
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Proxy Statement to be filed in
connection with its 1996 Annual Meeting are incorporated by reference in Part
III of this Report. Certain exhibits from the Company's prior filings under the
Securities Exchange Act of 1934 and registration statements under the Securities
Act of 1933 are incorporated by reference as Exhibits in Part IV of this Report.
- ---------
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock, multiplied by the last reported
sale price for the Company's Common Stock on March 27, 1996. The information
provided shall in no way be construed as an admission that any officer,
director or 10% shareholder in the Company may or may not be deemed an
affiliate of the Company or that he/it is the beneficial owner of the shares
reported as being held by him/it, and any such inference is hereby
disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
INDEX
PAGE
PART I
ITEM 1: BUSINESS........................................................... 1
General Overview and Recent Developments........................... 1
Products........................................................... 2
Marketing and Sales................................................ 3
Advertising and Promotion.......................................... 4
Manufacturing and Distribution..................................... 5
Competition........................................................ 6
Patents, Trademarks and other Proprietary Rights................... 6
Employees.......................................................... 7
Governmental Regulation............................................ 7
ITEM 2: PROPERTIES......................................................... 8
ITEM 3: LEGAL PROCEEDINGS.................................................. 8
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 8
ITEM 4.1: EXECUTIVE OFFICERS................................................. 9
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................... 11
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA.............................. 12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 13
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 20
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 20
ITEM 11: EXECUTIVE COMPENSATION............................................ 20
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................... 20
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 20
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K....................................................... 21
PART I
ITEM 1: BUSINESS
General Overview and Recent Developments
RYKA Inc. ("RYKA" or the "Company") designs, develops and markets high
performance athletic footwear specifically for women. RYKA's product line
currently consists of four categories: Aerobic Fitness; Cross-Training; Walking
and Aqua Conditioning. The Company was organized in Delaware in 1986. The
Company commenced operations and introduced its first two styles of high
performance athletic footwear in 1987 and began shipping its first products in
1988.
In June 1995, the Company entered into a series of transactions that
significantly changed the capital structure of the Company and the manner in
which the Company operates its business. These transactions were a result of the
termination of the Company's proposed merger with L.A. Gear, Inc. ("L.A. Gear")
and the termination of the Company's production financing agreement with
Pro-Specs America Corporation ("Pro-Specs"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Transactions with MR Acquisitions. On July 31, 1995, the Company
consummated a financing arrangement with MR Acquisitions, L.L.C. ("MR
Acquisitions"), a company that is wholly-owned, indirectly by Michael Rubin,
the current Chairman and Chief Executive Officer of the Company, pursuant to
which MR Acquisitions provided or arranged to provide the Company with up to
$8,000,000 of new financing in the form of (i) an aggregate of $1,000,000 equity
and subordinated debt investment by MR Acquisitions and KPR Sports
International, Inc. ("KPR"), an affiliate of MR Acquisitions, (ii) a $2,000,000
letter of credit facility from KPR, (iii) a $4,000,000 revolving credit facility
with a bank, and (iv) a $1,000,000 equity investment through the private
placement with certain investors of Common Stock and a subordinated note which
will be converted into Common Stock.
Settlement with Creditors. In connection with the transactions with MR
Acquisitions, the Company negotiated settlement arrangements with secured and
unsecured creditors, resulting in the settlement of approximately $3,060,000 of
indebtedness and recognizing a gain of approximately $1,650,000. The Company
entered into an agreement with Pro-Specs, a secured lender who provided
inventory financing to the Company, pursuant to which $1,804,734 of secured
indebtedness was settled for $1,100,000 in cash and 500,000 shares of Common
Stock and Pro-Specs was released from its obligations to certain vendors under
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
addition, the Company entered into arrangements with other creditors, pursuant
to which the Company settled an aggregate of approximately $1,250,000 of
indebtedness for approximately $180,000 in cash and warrants to purchase 53,192
shares of Common Stock at $1.50 per share.
Relocation of the Company's Offices. In August 1995, the Company
terminated the lease for its principal facility in Norwood, Massachusetts and
moved its executive offices and warehouse to a facility in King of Prussia,
Pennsylvania, that it subleases from an affiliate of MR Acquisitions.
New Management Personnel. On July 31, 1995, Michael Rubin became
Chairman of the Board and Chief Executive Officer. Since that time, he has taken
an active role in the management of the Company. Michael Rubin does not receive
any compensation for his services. In addition, since August 1995, the Company
has hired Dennis DiDominicis as its President, Steven Wolf as the Vice President
of Finance and Chief Financial Officer, Lisa Dolezal as the Manager of Product
Marketing, Donna Jordan as the Manager of Marketing Services, and Maria Scutaro
as the Manager of Customer Service. All of these members of the new management
have substantial experience in the athletic footwear industry. See "Executive
Officers."
New Sales, Marketing and Manufacturing Arrangements. Since August 1995,
the Company has hired two independent design groups to create new designs for
the Company's footwear. In addition, the Company has entered into arrangements
for the sourcing and manufacture of the Company's footwear in the Far East. The
Company has also entered into arrangements with seven new independent sales
representative organizations covering 34 states for the sale of the Company's
footwear. See "Marketing and Sales" and "Manufacturing and Distribution".
RYKA maintains its principal executive offices and warehouse at 555 S.
Henderson Road, Suite B, King of Prussia, PA 19406 and its telephone number is
(610) 337-2200.
Products
The Company believes it is the only company to make performance
footwear exclusively for women. All of the Company's footwear are made on
women's lasts. As a result, the shoes are designed and manufactured taking into
account the anatomical features unique to women's feet.
RYKA's models incorporate in their construction RYKA's Nitrogen/ES(R)
System, which is designed to provide enhanced shock absorption, resiliency and
durability. The Nitrogen/ES(R) System in higher priced models consists of
visible and non-visible nitrogen spheres, grids and/or bridges which are placed
in the heel, the mid-sole and the forefoot of the shoe. In standard models, non-
visible nitrogen spheres are placed in the mid-sole only. The Company has
expanded the use of the Nitrogen/ES technology to include Nitrogen "V" web,
Nitrogen Centripod(TM), Nitrogen Bridge and Flex Weave applications, which
enhance the performance of the Company's footwear for particular athletic
activities. During 1994, the Company introduced what it believes to be the first
women's shoe designed specifically for the growing activity of aqua fitness, the
Acqueous(TM) 9H20.
The following table outlines the Company's percentage of net sales by
category for the years ended December 31, 1995, 1994 and 1993.
Category 1995 1994 1993
- -------------------------------------------- ---- ---- ----
Aerobic Fitness/Aqua Fitness ............... 50% 40% 65%
Walking .................................... 24% 32% 15%
Cross-Training ............................. 25% 27% 19%
Outdoor (1) ................................ 1% 1% 1%
- --------
(1) The Company has phased-out its sales of the Outdoor category.
Aerobic Fitness. The Company offers seven models of lightweight aerobic
footwear in various color options at suggested retail prices of $49.95 to
$69.95. Many models are available in both mid-cut and low-cut styles. Fashion
accents and other treatments have been added to the footwear to maintain a
contemporary look.
-2-
Cross Training. As a result of their multi-purpose uses, cross training
shoes represent a growing market. RYKA offers six cross training styles,
available in various colors and at suggested retail prices from $54.95 to
$74.95.
Walking. The Company offers walking shoes in two categories: fitness
walking and walk/run, with plans to expand into running and athletic walking in
Spring 1997. The suggested retail prices range from $49.95 to $69.95.
Outdoor. In 1995, the Company offered hiking shoes at a suggested
retail price of $64.95. The hiking shoes featured a nubuck/rugged mesh upper
Nitrogen/ES(R) System in the midsole and polar fleece lining from a premier
manufacturer in the United States. In the first quarter of 1996, the Company has
phased-out its sales of the Outdoor category.
Aqua Conditioning. The Company currently offers one model of aqua
conditioning footwear at a suggested retail price of $54.95.
In the second quarter of 1996, the Company will introduce a new
category called RYKA Body Training, encompassing the existing categories of
aerobics and cross-training. The category will be divided into RYKA Body
Training - Studio (aerobics) and RYKA Body Training - Gym (cross training) at
suggested retail prices of $54.95 to $69.95. In addition, the Company plans to
expand its line of aqua conditioning footwear in the second half of 1996.
Marketing and Sales
RYKA's marketing is targeted at physically active women who are
interested in a high-performance athletic shoe incorporating advanced
technology, high quality and fashion. RYKA believes that consumers in its market
prefer multi-purpose, comfort and proper fit and that its footwear addresses
these preferences.
RYKA currently sells its products to sporting goods stores, athletic
footwear specialty stores, catalog businesses and department stores, including
The Athlete's Foot, Foot Locker, Lady Foot Locker, Modell's, Oshman's,
J.C.Penney, Sportmart and Sports Authority. The Company also derives revenue
from inclusion of its products in catalogs such as Road Runner and Spiegel. Slow
moving and discontinued products are sold through selected distributors and
retailers.
The Company uses commissioned independent representative organizations
throughout the United States to promote and sell its products to retailers.
These representative organizations also handle products of other sporting goods
manufacturers, but they do not sell athletic shoes that compete with RYKA's
products. The Company has supported its international marketing efforts by
working directly with its independent foreign distributors in Italy, Japan,
Canada, South Africa and Israel in 1995 and by hiring an in-house sales and
customer service manager to serve as a liaison in 1996.
At March 31, 1996, the Company's backlog of orders was approximately
$840,000, as compared with approximately $1.1 million at March 31, 1995.
Approximately $150,000 of such orders for 1996 are scheduled for delivery
through May 1996. The balance of such orders are scheduled for delivery during
the third quarter of 1996. The Company has begun to solicit orders for products
to be delivered in the third quarter of 1996. The Company expects that most of
the backlog orders will be filled, although certain of such orders are
cancellable.
-3-
Three customers of the Company, J.C. Penney, Sport's Authority and
United Merchandising, each accounted for over 10% of the Company's revenues in
1995.
Advertising and Promotion
The competitive nature of the athletic footwear business makes
advertising and promotion critical to the creation of brand preference in
consumers. Accordingly, the Company has employed and will continue to employ
both conventional and innovative advertising and promotional techniques. First,
the Company intends to begin advertising in consumer publications which target
active women. Next, the Company has developed a variety of creative promotional
programs, such as an equity incentive program, the RYKA Training Body(TM) and an
interactive site on the Internet's World Wide Web. Lastly, the Company's focus
on products "exclusively for women" enables the Company to promote the
particular needs and concerns of women.
Because of RYKA's limited resources for advertising, it has
historically concentrated its efforts on relatively less costly, grass-roots
approaches designed to build brand awareness and demand at the retail level. In
the third quarter of 1996, however, the Company intends to begin advertising its
products in consumer publications which target RYKA's key consumer, the
physically active woman. Such publications include Shape, Fitness Magazine and
Women's Sports and Fitness.
To illustrate the Company's creative promotional programs, the Company
intends to file a registration statement with the Securities and Exchange
Commission in the near future for the offering of approximately 4.2 million
share of common stock. The shares will be issued pursuant to the "Partners Share
Success" Equity Incentive Plan to be adopted by the Company. The purpose of the
program is to provide an ownership interest in RYKA through equity incentives to
the retail sales personnel and the store management personnel of RYKA's
customers to educate consumers about RYKA's products and to increase the sale of
RYKA's products to consumers. Under the program, the Company currently intends
to grant retail sales personnel one share of RYKA common stock for each pair of
RYKA footwear sold and to grant store management personnel approximately four
shares of RYKA common stock for every ten pairs of RYKA footwear sold by retail
sales personnel under their supervision.
RYKA's network of aerobics and fitness instructors, marketed as the
RYKA Training Body(TM), is a network of over several thousand certified aerobics
and fitness instructors who are offered the opportunity to purchase RYKA
products at a discount. RYKA believes that many consumers rely on aerobics and
fitness instructors for advice and recommendations on purchasing appropriate
athletic footwear and apparel and that the network is therefore a cost-effective
way for RYKA to increase brand name awareness and stimulate sales. The program
also functions as a wear-testing forum, as RYKA requests that members submit to
RYKA evaluations of RYKA's products and marketing programs.
-4-
To complement the public relations initiatives, the Company has
launched an interactive site on the Internet's World Wide Web in early 1996. The
Company plans to use information that it obtains through its website to support
issues important to women.
RYKA believes that its focus on products "exclusively for women"
differentiates it from the numerous other footwear manufacturers in the
marketplace. Accordingly, RYKA has directed its advertising and promotion
efforts to cause both RYKA's athletic footwear products and the Company as a
whole to be identified in the market as suited to the particular needs and
concerns of women.
Sheri Poe has been a key participant in RYKA's promotional activities
because RYKA believes that having a woman as a founder and spokesperson inspires
other women to purchase its products. Ms. Poe visits key markets throughout the
United States to speak about various topics believed to be of interest to women,
including the challenges she faced in starting RYKA. Ms. Poe frequently lectures
at college campuses and women's business conferences and has been featured on
various television and radio talk shows.
Additionally, RYKA is supportive of organizations which focus on the
particular needs and concerns of women. For instance, the Company supports
LiveSafe, a non-profit organization which promotes personal safety training. The
Company's support will help provide tuition assistance to selected women in
high-risk areas.
The Company also is an active participant in fitness programs sponsored
by the Aerobics and Fitness Association of America and the International Dance
and Exercise Association. The Company actively solicits the placement of its
products in articles and photo features in consumer, trade and fitness
magazines. Editorials, product reviews and/or advertisements for RYKA's products
appeared in such periodicals as Fitness Magazine, IDEA Today, Women's Sports and
Fitness, Shape, Prevention, Fortune, News Journal and Footwear News.
RYKA retains the services of an outside agency with expertise in
footwear and premium brands to assist in the implementation of RYKA's public
relations programs.
Manufacturing and Distribution
As is common in the athletic footwear industry, the Company contracts
for the manufacture of its footwear products to its specifications through
independent overseas manufacturers in the Far East. The Company uses the
services of an independent buying agent, who acts under the direction of the
Company's consultant in the negotiation of favorable pricing, the purchase of
raw materials and selection of component part suppliers, inspection of goods
prior to shipment and shipment of finished products. The Company pays a
commission based on the cost of product purchased through the buying agent.
Management believes that sourcing of footwear products in this manner minimizes
the Company's investment in fixed assets, reduces costs and mitigates various
risks.
The Company has no contracts with manufacturers beyond the terms of
purchase orders issued. RYKA places purchase orders on a volume basis through
its agent and generally receives the product within 90 days of the start of
production. Under special circumstances, RYKA reduces the time required to
deliver the footwear from the factory through the use of air transportation.
-5-
The principal materials used in RYKA's footwear are leather, nylon,
rubber, ethyl vinyl acetate, polyurethane, cambrelle and hytrel. Most of these
materials are available in the countries where manufacturing takes place and
from a number of sources within the United States and abroad, although a loss of
supply could temporarily disrupt operations and increase the costs to
manufacture the Company's products.
The Company's supply arrangements are dollar denominated. Its importing
of footwear, however, could be adversely affected by fluctuations in currency
exchange rates, as well as the adoption of bilateral trade agreements between
the United States and countries in which the Company's suppliers are located,
work stoppages or the imposition of unilateral restrictions on trade, including
quotas or additional duties, by either the United States or any supplier
country.
RYKA has expanded its production alternatives and currently
manufactures substantially all of its product in China. If, however, the Company
is prevented from acquiring products from overseas manufacturers, the Company's
operations could be materially and adversely affected until alternative
suppliers are found. See "Governmental Regulation".
The Company imports its footwear from independent manufacturers in the
Far East, both to a public third-party warehousing facility in Gardena,
California with which the Company contracts on an as-needed basis, and to a
warehousing facility in King of Prussia, Pennsylvania which is subleased from an
affiliate of MR Acquisitions. From these warehousing facilities, the Company
distributes its footwear throughout the United States, usually by common
carrier. The Company believes that by utilizing such warehousing facilities, it
both reduces inbound transportation costs and the amount of time required to
import its products from the Far East.
Competition
The athletic footwear industry is highly competitive. RYKA's
competitors include specialized athletic shoe companies as well as companies
with diversified product lines. The Company believes that its unique niche,
combined with effective advertising and marketing, fashionable styling, high
quality and technological advances are the most important competitive factors.
However, due to substantial growth and interest in the women's segment of the
high performance athletic footwear market, there has been increased competition
from established companies which have developed advertising and promotional
programs directed to this segment of the market. Most of these competitors
including Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and
Saucony, have significantly greater financial and other resources and more
extensive marketing staffs than RYKA. There is considerable doubt that the
Company will be able to compete successfully with any of these companies or to
achieve any meaningful market share without significant additional resources.
Additionally, the Company may be unable to remain price competitive at the
retail level as competitors with larger volume production capabilities may
achieve better economies of scale and, therefore, better cost pricing for
products offering similar or more advanced technology.
Patents, Trademarks and Other Proprietary Rights
The Company was granted a patent in November 1990, which expires in
2007, covering certain uses of its Nitrogen/ES(R) System in athletic footwear.
There can be no assurance that the patent granted will be enforceable or will
provide RYKA with meaningful protection from competitors.
-6-
The Company applies its stylized RYKA trademark and the dual
parallelogram design trademark to all its footwear products. In addition, RYKA
applies the Nitrogen/ES(R) trademark on all of its products. RYKA has filed
trademark applications covering these and other marks in the United States and
in a number of foreign countries.
The Company believes that the aforementioned trademarks are valuable to
its ability to market footwear products and the loss of the right to use any of
these marks could have a material adverse effect on the Company's business. The
Company intends to defend these trademarks vigorously against infringements by
third parties, should any arise.
In a letter dated September 1, 1995, Hockerson-Halberstadt Inc.
("HHI"), owner of a United States Patent No. 4,322,895, issued April 6, 1982,
notified the Company that the Company's products allegedly infringe such patent.
The letter offered to negotiate a license for such patent. The Company has made
preliminary contacts with HHI. No suit has been filed in this matter. At this
early stage of negotiations, an evaluation of the likelihood of a favorable or
unfavorable outcome of this matter cannot be made, nor can any estimate as to
the amount or range of amount of potential loss, if any, be made. The Company
believes that the resolution of this matter will not have a material, adverse
effect on the Company, although there can be no assurances that it will not.
Employees
At December 31, 1995, the Company employed 12 persons on a full-time
basis. The Company is not a party to any collective bargaining agreements with
its employees.
Governmental Regulation
Substantially all of the Company's footwear products are manufactured
overseas and subject to U.S. customs duties. Under the fixed duty structure in
effect since July 1981, duties on the footwear products imported by the Company
to date approximate 10.0% of cost, plus administrative charges. If the Company
were to significantly increase the amount of synthetic raw material, as opposed
to leather, in its footwear, these duties would increase substantially.
The Company is unable to predict whether additional customs duties,
quotas or other restrictions may be imposed on the importation of its products
in the future. Any such action could result in increases in the cost of footwear
in general and, accordingly, might adversely affect the sales or profitability
of the Company and the imported footwear industry as a whole. The Company,
however, believes that the higher priced end of the footwear market, in which it
participates, would be better able to adjust its pricing in response to any such
increases.
From time to time, the United States enters into trade legislation with
other countries, including China, which may impact on the duty rates on footwear
imported into the Untied States and the Company's ability to access foreign
markets. Any such legislation that would substantially increase duty rates on
footwear imported into the United States or limit the Company's ability to
access foreign markets could adversely affect the Company's operations.
-7-
ITEM 2: PROPERTIES
The Company relocated to King of Prussia, Pennsylvania in August 1995
where it maintains its executive offices in a 5,000 square foot portion of a
70,000 square foot facility subleased from an affiliate of MR Acquisitions. In
addition, under this sublease, the Company has the right to use warehouse space
at this facility. Pursuant to the sublease, charges are approximately $4,000 per
month for use of these facilities and certain warehousing services, and the
remaining term of the sublease is one and one-half years. Any other costs
related to the use of the joint facility or for other services provided by MR
Acquisitions or its affiliates will be charged to the Company on an arm's-length
basis and will be subject to approval by a special committee of the Board of
Directors comprised of disinterested directors.
Additionally, the Company uses the services of a third-party public
warehousing facility in Gardena, California. See "Business: Manufacturing and
Distribution."
Management believes that the Company's subleased properties are
adequate for its present needs and that suitable additional or replacement space
will be available as required.
ITEM 3: LEGAL PROCEEDINGS
While the Company is periodically involved in litigation incidental to
its business, there are no material legal proceedings to which the Company or
its subsidiary is a party or to which any of their properties are subject. See
"Business: Patents, Trademarks and Other Proprietary Rights".
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 15, 1995, the Company held a Special Meeting in Lieu of Annual
Meeting of Stockholders at the offices of the Company. At the meeting,
stockholders voted on the following matters:
Proposal #1. To elect all three members of the Board of Directors of the
- ------------ Company
For Against Abstain
---------- ---------- ----------
Kenneth J. Adelberg 34,626,688 42,350 230,497
Sheri Poe 34,360,538 44,265 694,732
Michael G. Rubin 34,625,566 42,350 231,619
Proposal #2. To ratify the selection of Margolis & Company, P.C. as
- ------------ independent auditors of the Company for the year ended
December 31, 1995
For Against Abstain
---------- ---------- ----------
34,176,965 500,089 222,481
Proposal #3. To amend Article 4 of the Certificate of Incorporation of the
- ------------ Company to provide that the number of shares of Common Stock
which the Company has authority to issue be increased from
forty-five million to seventy million shares
For Against Abstain
---------- ---------- ----------
33,025,135 1,714,001 160,399
Proposal #4. To ratify and approve the adoption of the RYKA Inc. 1995 Stock
- ------------ Option Plan
For Against Abstain
---------- ---------- ----------
33,444,751 1,227,161 227,623
Proposal #5. To consider and approve the adoption of the RYKA Inc. 1995
- ------------ Non-Employee Director Stock Option Plan.
For Against Abstain
---------- ---------- ----------
33,177,738 1,416,260 305,537
-8-
ITEM 4.1: EXECUTIVE OFFICERS
The executive officers and directors of the Company are currently as
follows:
Name Age Position
- ---------------------------------- --- -------------------------------------------------
Michael G. Rubin (1).............. 23 Chief Executive Officer and Chairman of the Board
Dennis F. DiDominicis (1)......... 51 President
Steven A. Wolf.................... 37 Chief Financial Officer and Secretary
Sheri Poe (1)..................... 42 Founder, Spokesperson and Director
Kenneth J. Adelberg (2)........... 43 Director
- -------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
Michael G. Rubin has served as Chairman of the Board and Chief
Executive Officer of the Company since July 31, 1995. Since establishing KPR
Sports International, Inc., a privately-held footwear distribution company in
1991, Mr. Rubin has served as its President and Director. In 1994, Mr. Rubin
received the 1994 Entrepreneur of the Year Award for the Delaware Valley Region
which is sponsored by Inc. magazine and Ernst & Young. Mr. Rubin is the
President of several privately-held companies based in King of Prussia,
Pennsylvania and serves as the Manager of MR Acquisitions, L.L.C., a Delaware
limited liability company. Mr. Rubin attended Villanova University, Villanova,
Pennsylvania.
Dennis F. DiDominicis became the Company's President on September 25,
1995. Mr. DiDominicis has over 25 years of sales, marketing, product development
and sourcing experience. From November 1988 to September 1995, Mr. DiDominicis
worked for Asics Tiger Corporation, a Japanese footwear and apparel manufacturer
and distributor, as a Senior Director of its footwear division and then as a
Vice President of its North American sales and operations. Prior to Asics, Mr.
DiDominicis worked at American Sporting Goods Corporation, Laconia Shoe Company,
Hyde Athletic Industries, Colgate-Kendall Division, and Proctor and Gamble.
Steven A. Wolf is a certified public accountant who joined the Company
on August 1, 1995 as its Vice President of Finance and Chief Financial Officer.
From November 1990 to August 1995, Mr. Wolf was the Controller/Chief Financial
Officer of Ellessee USA, Inc., a $50 million footwear and sportswear company
which through September 1993 was a wholly-owned subsidiary of Reebok
International. Mr. Wolf received a B.S. degree in accounting in 1980 from the
State University of New York at Binghamton and is a member of the American
Institute of Certified Public Accountants and the New York State Society of
CPAs.
-9-
Sheri Poe is a co-founder of the Company and serves as spokesperson for
the Company. Ms. Poe served as Chairman of the Board from April 1988 until July
31, 1995 and as an Executive Officer of the Company since its inception until
July 31, 1995, serving as President and Treasurer from the Company's inception
in February 1987 until February 1991 and as President and Chief Executive
Officer since February 1991. Ms. Poe also served as Treasurer of the Company
from April 1995 until July 31, 1995. Ms. Poe is the founding director of The
R.O.S.E. Fund, Inc. (formerly The RYKA R.O.S.E. Foundation, Inc.), a non-profit
corporation formed in June 1992 and served as its President until August 1995.
From May 1986 to June 1987, Ms. Poe was the National Accounts Consultant for TMC
Group, a giftware manufacturer located in Derry, New Hampshire. At TMC, Ms. Poe
was responsible for national accounts of such companies as J.C. Penney, K Mart,
Wal-Mart and for sales to all major department stores including Bloomingdale's
and Macy's. From September 1982 to November 1985, she was National Sales Manager
for Matrix International Industries. Ms. Poe attended Southern Illinois
University.
Kenneth J. Adelberg has served as a Director of the Company since July
31, 1995. Since 1978, he has been President and Chief Executive Officer of HiFi
House Group of Companies, a privately-held company based in Broomall,
Pennsylvania, Mr. Adelberg is a Director and founding stockholder of US Wats,
Inc., a publicly-traded company specializing in business telecommunications
services, located in Bala Cynwyd, Pennsylvania, which was established in 1989.
Mr. Adelberg is a founding stockholder and Director of Republic Bank,
Philadelphia, Pennsylvania, a publicly-traded Bank which has been in operation
since 1989. Mr. Adelberg holds Bachelor of Science degrees in Biophysics and
Physiological Psychology from Pennsylvania State University and attended the MBA
program at Drexel University, Philadelphia, Pennsylvania.
-10-
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of December 31, 1995, the Common stock was held by approximately
2,351 holders of record. From March 28, 1988 until September 15, 1995, the
Common Stock was included for quotation on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") SmallCap Market under
the symbol RYKA. Subsequent to its delisting on the NASDAQ SmallCap Market, the
Common Stock has traded on the NASD Over-the-Counter Bulletin Board. The
following table sets forth the high and low sales prices per share of the Common
Stock of the Company as reported by NASDAQ for the period prior to September 16,
1995 and by the NASD thereafter. The prices shown do not include retail markups,
markdowns or commissions.
Sales Prices
-----------------------
High Low
------ ------
1995
First Quarter.................................... $ 0.78 $ 0.38
Second Quarter................................... $ 0.84 $ 0.13
Third Quarter
(July 1 - September 15) ..................... $ 0.69 $ 0.41
(September 16 - September 30) ............... $ 0.50 $ 0.25
Fourth Quarter................................... $ 0.49 $ 0.19
1994
First Quarter.................................... $ 0.88 $ 0.47
Second Quarter................................... $ 1.13 $ 0.50
Third Quarter.................................... $ 1.09 $ 0.75
Fourth Quarter................................... $ 1.06 $ 0.53
1993
First Quarter.................................... $ 2.00 $ 1.31
Second Quarter................................... $ 1.88 $ 0.91
Third Quarter.................................... $ 1.47 $ 0.94
Fourth Quarter................................... $ 1.00 $ 0.47
The Company has never declared or paid a cash dividend on its Common
Stock. The Company currently intends to retain any future earnings for funding
growth and, therefore, does not anticipate declaring or paying any cash
dividends on its Common Stock for the foreseeable future. In addition, the
Company's credit facility with its bank restricts the amount of dividends which
may be paid on the Common Stock.
-11-
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1995 are derived from the Consolidated Financial Statements of the Company,
which have been audited. This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------- -------------
Statement of Operations Data:
Net sales ............................. $ 7,538,354 $ 16,024,991 $ 14,300,282 $ 12,193,643 $ 7,977,925
Other revenues ........................ 75,904 228,508 50,000 0 0
------------ ------------ ------------ ------------ ------------
Total revenues .................... 7,614,258 16,253,499 14,350,282 12,193,643 7,977,925
Costs and expenses:
Cost of goods sold ................ 7,167,670(1) 11,399,760 11,199,119 8,867,375 5,231,346
Operating expenses ................ 4,608,319 4,566,236 5,887,070 3,110,821 2,840,270
------------ ------------ ------------ ------------ ------------
Operating income (loss) .............. (4,161,731) 287,503 (2,735,907) 215,447 (93,691)
Other expenses, net ................... 1,118,002(2) 798,918 692,584 512,260 405,821
------------ ------------ ------------ ------------ ------------
Net loss before extraordinary gain .... $ (5,279,733) $ (511,415) $ (3,428,491) $ (296,813) $ (499,512)
Extraordinary gain - forgiveness
of debt ........................... 1,650,256 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss .............................. $ (3,629,477) $ (511,415) $ (3,428,491) $ (296,813) $ (499,512)
============ ============ ============ ============ ============
Net loss per share:
Loss before extraordinary gain .... $ (0.15) $ (0.02) $ (0.15) $ (0.01) $ (0.03)
Extraordinary gain ................ 0.05 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss per share ................ $ (0.10) $ (0.02) $ (0.15) $ (0.01) $ (0.03)
============ ============ ============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding ................ 34,540,653 24,210,083 23,573,316 19,847,283 18,110,923
Number of common shares
outstanding ....................... 46,135,326 26,474,326 23,721,356 23,101,948 18,136,142
DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Total assets .......................... $ 1,603,195 $ 7,349,872 $ 6,430,812 $ 8,319,229 $ 4,498,021
Total long-term debt .................. $ 851,440 $ 0 $ 142,878 $ 410,673 $ 68,256
Net working capital ................... $ 554,955 $ 1,845,118 $ 1,201,820 $ 4,077,404 $ 743,587
Stockholders' equity (deficiency) ..... $ (100,902) $ 2,033,989 $ 1,310,114 $ 4,166,377 $ 834,902
- -------------
(1) Includes Inventory write-down to lower of cost or market of $586,000 in
1995.
(2) Includes costs of $783,289 related to the termination of the proposed
merger with L.A. Gear.
-12-
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's historical results of
operations and of its liquidity and capital resources should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
General Overview
The Company has not had a single profitable fiscal year since its
inception and had approximately $3.6 million in losses for 1995. In addition,
the Company had an accumulated deficit of $17,848,484 and a stockholders'
deficiency of approximately $100,902 at December 31, 1995.
During 1995, the Company was in default on several occasions under its
agreements with Pro-Specs to provide production financing. In May 1995,
Pro-Specs notified the Company of its intention to terminate financing
arrangements. During 1995, the Company reviewed several financing proposals, and
on July 31, 1995 the Company consummated the financing arrangement with MR
Acquisitions to enable the Company to continue in existence. Without this
financing arrangement, management believed there was substantial doubt that the
Company would be able to remain in business.
The financing arrangement with MR Acquisitions provided the Company
with cash proceeds from the sale of equity and subordinated debt and the ability
to obtain funds and letters of credit through new financing facilities. As part
of the financing, the Company negotiated substantial debt forgiveness with both
secured and unsecured creditors and established a new management team to operate
the restructured Company. Upon closing of the transaction with MR Acquisitions,
the Company had capital funds comprised of a net worth and subordinated debt in
excess of $1,500,000 as compared to an equity deficiency over $2,000,000 at June
30, 1995.
During the first half of 1995 and until the financing with MR
Acquisitions was consummated, staff reductions occurred on both a voluntary and
involuntary basis and temporary employees were required to handle daily
operations. Sales efforts were limited for a variety of reasons, including the
inability to obtain product from the Company's overseas production sources. Once
the financing with MR Acquisitions was consummated, new management began to
reposition the Company by, among other things, relocating the Company from
Norwood, Massachusetts to King of Prussia, Pennsylvania, terminating remaining
employees in the Massachusetts location, hiring and training new employees in
key management positions, including a new President and a new Chief Financial
Officer, filling of other necessary positions within the Company, and beginning
to develop new products and build or rebuild customer and supplier
relationships. While management believes that these activities will have a
long-term beneficial impact, they had a significant negative impact on the
Company's current sales and operations. As a result, the Company is unlikely to
generate positive operating results in the near future. To accomplish its goals,
to develop and acquire new merchandise, market and promote the Company's product
and expand the workforce in support of the Company's current plans, the Company
will have to incur substantial expenditures and incur continuing operating
losses during 1996. The Company's working capital at December 31, 1995 will not
be sufficient to meet management's objectives in 1996. Accordingly, the Company
will be required to obtain additional financing from its current lender or from
a new lender and/or raise additional funds through the sale of equity or debt.
See "Liquidity and Capital Resources" and Note A to the Company's Consolidated
Financial Statements.
-13-
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements of
Operations bear to net sales and the percentage change in those items from
period to period:
Period to Period Percentage
Percentage of Net Sales Increase (Decrease)
----------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1994 1993 1995 vs 1994 1994 vs 1993
-------- -------- -------- ---------------- ----------------
Net sales........................... 100.0% 100.0% 100.0% (53.0)% 12.1%
Other revenues...................... 1.0 1.4 0.3 (66.8) 357.0
------ ------ ------ -------- -------
Costs and expenses:
Cost of goods sold (1).......... 95.1% 71.1% 78.3% (37.1)% 1.8%
General and administrative
expenses (2)................ 27.4 10.8 15.9 19.0 (23.8)
Sales, marketing and
advertising expenses........ 23.9 16.3 22.7 (30.7) (19.8)
Research and development
expenses.................... 4.8 1.4 2.5 58.9 37.5
Special charges................. 5.0 -- -- N/M (3) --
------ ------ ----- -------- -------
Total costs and expenses............ 156.2% 99.6% 119.4% (26.2) (6.6)
------ ------ ------ -------- -------
Operating income (loss)............. (55.2)% 1.8% (19.1)% (1547.5)% 110.5%
Other expense, net.................. 14.8 5.0 4.8 39.9 15.4
------ ----- ---- -------- -------
Net loss before extraordinary gain.. (70.0) (3.2) (23.9) 932.4 85.1
Extraordinary item - forgiveness
of debt......................... 21.9 -- -- N/M (3) N/M (3)
------ ------ ------ -------- -------
Net income (loss)................... (48.1)% (3.2)% (23.9)% (609.7)% 85.1%
====== ===== ====== ======== =======
- -------------
(1) Includes Inventory write down in 1995 to lower of cost or market of
$568,000.
(2) Includes provision for losses on doubtful accounts.
(3) N/M means "not meaningful."
Year Ended December 31, 1995 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1994.
- -----
Net Sales. Net sales decreased by $8,486,637 (53.0%) from $16,024,991
for 1994 to $7,538,354 for 1995. The decrease in net sales was due to several
factors which continued to affect sales throughout the year as follows:
o Uncertainty as to the Company's future continued operations after the
termination of the proposed L.A. Gear merger.
o Many customers, including the Company's largest customer in 1994 did
not place their planned orders for the Fall or "back to school" product
due to a combination of customer apprehension 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 through the end of the year. Further, many
customers either canceled their orders that had been placed or were
given additional discounts and extended terms, both of which adversely
impacted net sales.
-14-
o During the first seven months of 1995, the Company sold product at
large discounts in order to generate cash to continue to fund the
Company's operations. As a result of the Company's financial condition
and Pro-Specs' termination of its production financing, the Company was
unable to obtain additional product from its suppliers in a timely
manner for the Fall season. Due to the delay of the delivery of the
Fall season product, the Company would not have been able to sell its
product at full margin. As a result, the Company negotiated reduction
in its purchase commitments for the originally scheduled production for
the Fall season.
o The athletic footwear industry is still experiencing sluggishness and
the volume of off-price product has continued at high levels.
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 provide additional discounts.
Costs of Goods Sold. Cost of goods sold decreased $4,232,090 (37.1%)
from $11,399,760 for 1994 to $7,167,670 for 1995 principally as a result in the
decrease in sales. The overall gross profit on net sales decreased by 24.0% from
28.9% in 1994 to 4.9% in 1995. This decrease reflected the inventory mark-down
of $586,000 in 1995 and the Company's need to liquidate inventory in the first
half of the year. The negative impact on gross profit of the first two quarters
heavily weighed down the overall gross profit for the year:
Quarter Ended
----------------------------------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
---------- --------- -------------- ------------- -------------
(in thousands)
Sales..................... $4,135 $1,484 $1,300 $ 619 $7,538
Cost of Sales............. 3,975 1,800 927 466 7,168
Gross Profit.............. 160 (316) 373 153 370
Gross Profit Percentage... 3.9% (21.3)% 28.7% 24.7% 4.9%
General and Administrative Expenses. General and administrative
expenses, including the provision for losses on doubtful accounts, increased by
$329,865 (19.0%) from $1,735,688 for 1994 to $2,065,553 for 1995. The increase
was 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) a decrease in factor commissions
due to the termination of the Company's relationship with its factor; (iv)
significant increase in bad debts from $130,000 in the year ended December 31,
1994 to $359,388 in the year ended December 31, 1995; and (v) an increase in
consulting fees in connection with the hiring of interim management until a
permanent management team was hired. As a percentage of sales, general and
administration expenses increased significantly as many expenses are relatively
fixed. Provisions for losses on doubtful accounts accounted for 4.7% of sales in
1995 compared with 0.8% of sales in 1994, and sales were extremely low as a
result of the restructuring.
-15-
Sales, Marketing and Advertising Expenses. Sales, marketing and
advertising expenses decreased by $800,591 (30.7%) from $2,604,277 for 1994 to
$1,803,686 for 1995. Sales and marketing expenses expressed as a percentage of
net sales increased from 16.3% to 23.9%. The dollar decrease is primarily due to
a reduction in sales commissions of approximately $426,800 (63.2%). This
decrease is proportionally greater than the decrease in net sales of 53.0%.
Commissions expressed as a percentage of net sales decreased from 4.2% to 3.3%.
This decrease of 0.9 percentage points is the 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, a reduction in staff salary and related expenses and a decrease in
expenses related to trade shows.
Research and Development Expenses. Research and development expenses
increased by $133,375 (58.9%) from $226,271 in 1994 to $359,646 in 1995. This
increase is attributed primarily to a reduction in sample costs and an increase
in payroll and consultant related costs. The consultants' charge was incurred
for designers hired to design and develop the Fall 1996 line. In addition, the
Company engaged the services of the former Vice President of Production on a
consulting basis.
Special Charges. Special charges were incurred in connection with the
bank financing as part of the transaction with MR Acquisitions and the related
closing of the Massachusetts facility and relocation of operations to King of
Prussia, Pennsylvania. These expenses, among other things, included transaction
costs, termination of a significant portion of personnel prior to the financing,
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. Other (income) expense, net, increased
$319,084 (39.9%) from $798,918 for 1994 to $1,118,002 for 1995. This increase
was due to merger related costs of $783,289 incurred in 1995 in connection with
the failed merger with L.A. Gear, a reduction in interest expense of $457,103
(56.8%) from $805,272 for 1994 to $348,169 for 1995, due to the termination and
settlement with Pro-Spec's and the capital infusion resulting from the
consummation of the financing with MR Acquisitions.
Extraordinary Item. The extraordinary item of approximately $1,650,256
related to gain on settlements with both secured and unsecured creditors in
connection with the financing with MR Acquisitions.
Year Ended December 31, 1994 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1993.
- -----
Net Sales. Net sales increased from $14,300,282 in 1993 to $16,024,991
in 1994, an overall increase of $1,724,709 (or 12.1%). This increase was due to:
(i) a realignment of some of the Company's independent sales representative
organizations throughout the country to improve service at the
point-of-purchase; (ii) a shift in promotional strategies from volume-oriented
wholesale price reductions to point-of-purchase advertising support and
cooperative marketing campaigns to strengthen sell-through results; (iii) the
Company's 1993 corporate image and public relations campaign; (iv) sales of
special orders and slow-moving inventory to a single buyer; and (v) increases in
the average selling prices of the Company's footwear.
-16-
Prior to 1994, RYKA managed international sales by taking title to the
footwear from the manufacturer, selling the product to distributors and
recognizing net sales and cost of goods sold expense when shipment occurred. In
1994, the Company changed its international sales arrangements so that its
international independent distributors primarily purchased footwear directly
from the Company's overseas manufacturers, and the Company received a royalty on
those purchases. Income from these direct purchases for 1994 was $228,508 and is
included in other revenues. In 1993, in response to credit losses on
international sales in the past, management instituted a policy of requiring
that its international distributors back significant purchases with irrevocable
letters of credit. Other revenues of $50,000 for the year ended December 31,
1993 related to a license fee for the transfer of rights to an international
territory.
In 1994, the Company began offering promotional items, including
point-of-sale materials, to its international distributors to help build brand
awareness throughout the world. During 1994, an in-house sales and marketing
manager worked directly with the international distributors to promote the RYKA
brand by assisting in their marketing and advertising campaigns.
Cost of Goods Sold. Cost of goods sold increased by $200,641 (1.8%) to
$11,399,760 in 1994 from $11,199,119 in 1993. Gross Profit increased to 28.9% in
1994 from 21.7% in 1993 primarily due to an increase in the average selling
price of the footwear. In addition, the Company was able to obtain lower pricing
on its footwear products by increasing the amount of production in China and
reducing the amount in South Korea. The higher margins were also a result of the
sale of a significant amount of slower moving products and special orders to a
single buyer during 1994. The higher margins may be difficult to maintain during
1995 due to competitive pressures and the need to sell inventory at lower
margins to meet the Company's cash requirements.
General and Administrative Expenses. General and administrative
expenses, including the provision for losses on doubtful accounts, decreased by
$541,700 (23.8%) to $1,735,688 in 1994 from $2,277,388 in 1993. The provision
for losses on doubtful accounts was $130,000 in 1994, compared to $631,835 in
1993, a decrease of $501,835. The 1993 provision for losses on doubtful accounts
included reserves in the full amount (approximately $373,000) of the Company's
potential exposure with respect to two customers. The net decrease in general
and administrative expenses also resulted from cost savings of approximately
$140,000 attributable to the Company's cost containment policies implemented
during 1994, which included a reduction in compensation and other overhead and
office expenses. These reductions were partially offset by approximately
$212,000 in costs incurred in the Company's unsuccessful attempts to secure a
new senior lender and to complete a private placement of equity with a domestic
investor and an increase in commissions to one of the Company's lenders of
approximately $130,000 resulting from its factoring arrangements having been in
place for the full twelve months of 1994, versus five months in 1993.
Sales, Marketing and Advertising Expenses. Sales, marketing and
advertising expenses decreased by $643,625 (19.8%) from $3,247,902 (22.7% of net
sales) in 1993 to $2,604,277 (16.3% of net sales) in 1994. This net reduction is
primarily due to a decrease of $824,491 in advertising expense offset by an
increase of $180,866 in sales and marketing expenses. The increase of $180,866
in sales and marketing expense is primarily due to an increase in payroll
expense for sales and marketing in 1994 attributable to the expansion of the
Customer Service and Distribution departments. Increased sales in 1994 also
contributed to higher commissions to domestic and international sales
representatives and higher freight costs.
-17-
Due to cash constraints, the Company reduced advertising expenses by
$824,491 (70.9%) from $1,162,825 in 1993 to $338,334 in 1994. Advertising costs
in 1993 included a charge of $429,062 representing the utilization of
advertising barter credits, a charge of $185,155 for advertising credits that
would not be utilized in future periods and an additional $109,000 for costs
associated with the "BE STRONG" corporate image campaign introduced in 1993. The
1994 marketing activities focused on less costly, grass roots approaches
designed to build awareness and demand at the retail level. Key promotional
activities included public relations engagements of Sheri Poe, RYKA's President
and Chief Executive Officer, and RYKA's network of aerobics and fitness
instructors, along with retail support through point-of-sale materials and
cooperative advertising. Advertising activities in 1993 centered on a national
print and corporate image program which was more costly to the Company.
Research and Development Expenses. Research and development expenses
decreased by $135,509 (or 37.5%) from $361,780 in 1993 to $226,271 in 1994. The
reduction was largely attributable to the inclusion in the 1993 research and
development expenses of a charge of $105,000 for sample shoe molds that will not
be utilized in the future. There was no corresponding charge in 1994. The
resignation during 1994 of a designer with the Company who was not replaced also
contributed to the reduction.
Other Expenses, Net. Other expenses, net increased by $106,334 (15.4%)
from $692,584 in 1993 to $798,918 in 1994. Interest expense during 1994 of
$805,272 primarily related to interest costs and financing fees on (i) the $1.5
million revolving credit facility with one of the Company's lenders, (ii) the
inventory financing agreements with the Company's Korean lender, and (iii) the
$300,000 bridge financing notes that were issued during 1994 to meet short-term
cash flow needs. The increase in interest expense included additional interest
and finance charges paid to the Korean lender to support a higher level of sales
activity and footwear purchases during 1994, twelve months versus five months of
interest paid to the Company's other lender and the high rate of interest on the
bridge financing.
Liquidity and Capital Resources
Through July 31, 1995, RYKA continued to experience a critical shortage
of cash. On July 31, 1995, the Company consummated a financing agreement with MR
Acquisitions, pursuant to which MR Acquisitions provided or arranged to provide
the Company with up to $8,000,000 of new financing in the form of (i) a
$1,000,000 equity and subordinated debt investment by MR Acquisitions and KPR,
an affiliate of MR Acquisitions, (ii) a $2,000,000 letter of credit facility
from KPR, (iii) a $4,000,000 revolving credit facility with a bank, and (iv) a
$1,000,000 equity investment through the private placement of Common Stock with
certain investors. Prior to consummating the Agreement with MR on July 31, 1995,
the Company had a nominal cash balance and a working capital deficiency of
approximately $2,300,000. Without this financing, management believed there was
substantial doubt that the Company would be able to remain in business.
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 annum).
-18-
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 December 31, 1995 the Company's working capital was
approximately $550,000 and will not be sufficient to meet management's
objectives in 1996. The Company does not anticipate making significant capital
expenditures during the foreseeable future. In addition, the Company plans the
sale of additional equity securities and/or the issuance of subordinated notes,
in order to generate sufficient capital resources to assure continuation of the
Company's operations. The Company must obtain these or similar additional
resources or consider modifications to its operating plans including reductions
in operating costs to enable it to continue operations. However, no assurance
can be given that the Company will be successful in raising additional capital
to support future operations. Further, there can be no assurance, assuming the
Company successfully raises additional funds and is able to utilize its existing
credit facility or establish a new facility that the Company will achieve
profitability or a positive cash flow.
As of December 31, 1995, the Company was in default of certain
financial covenants required by the loan agreement with its bank, although the
Company's bank has waived such defaults through March 31, 1996. As of December
31, 1995, no amounts were outstanding under the bank facility, although as of
March 14, 1996, there was $854,000 outstanding under this facility. In
order for the Company to fund its goals, the Company must either renegotiate the
terms of the financing facility provided by the Company's bank, obtain
additional waivers of defaults past March 31, 1996 or cure such defaults, or
arrange a new facility suitable to the Company's needs with a different lender.
The Company is currently in negotiations with a new lender to replace its
existing facility. In addition, the Company plans to raise additional funds to
support the Company's operations through the sale of additional equity
securities and/or the issuance of subordinated notes. The Company must obtain
these or similar additional resources or consider modifications to its operating
plans, including reductions in operating costs to enable it to continue
operations. However, no assurance can be given that the Company will be
successful in raising additional capital to support future operations. Further,
there can be no assurance, assuming the Company successfully raises additional
funds and is able to use its existing credit facility or establish a new
facility that the Company will achieve profitability or a positive cash flow.
-19-
Seasonality
The Company's business continues to be seasonal, with the first and
third quarter sales typically being the strongest, corresponding to the spring
and back-to-school seasons.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-23 and S-1 attached hereto.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Incorporated by reference from the Company's Current Report on Form 8-K
dated August 23, 1995 and amended on October 13, 1995.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's 1996 proxy statement to be
filed pursuant to General Instruction G(3) to the Form 10-K, except information
concerning certain Executive Officers of the Company which is set forth in Item
4.1 of this Report.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1996 proxy statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference from the Company's 1996 proxy statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1996 proxy statement to be
filed pursuant to General Instruction G(3) to the Form 10-K.
-20-
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements.
page
----
Report of Independent Accountants - Margolis & Company, P.C. F-2
Report of Independent Accountants - Coopers & Lybrand L.L.P. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-23
(a)(2) Schedules.
Schedule VIII - Valuation and Qualifying Accounts for the years ended
1995, 1994 and 1993. S-1
All other schedules not listed have been omitted since the required
information is included in the financial statements or the notes thereto, or is
not applicable or required.
(a)(3) Exhibits.
No. Description
1
2.1 Securities Purchase Agreement dated June 21, 1995 by and between the
Registrant and MR Acquisitions, Inc.
2
2.2 First Amendment to Securities Purchase Agreement by and between the
Registrant and MR Acquisitions, Inc. dated July 31, 1995.
3.1 The Company's Certificate of Incorporation, as amended.
3
3.2 The Company's Bylaws as amended.
3
4.1 Specimen of Common Stock Certificate.
2
10.1 Loan and Security Agreement by and between the Registrant and KPR
Sports International, Inc.
2
10.2 Promissory Note in the principal amount of $851,440 by and between
Registrant as maker and KPR Sports International, Inc. as payee.
-21-
2
10.3 Demand Promissory Note in the principal amount of $2,000,000.00 by and
between Registrant as borrower and KPR Sports International, Inc. as
lender.
2
10.4 Letter of Credit Financing Agreement by and between Registrant and
KPR Sports International, Inc.
2
10.5 Warrant to Purchase 5,100,000 shares of the Registrant's Common Stock
issued to MR Acquisitions, L.L.C.
2
10.6 Warrant to purchase 4,000,000 shares of the Registrant's Common Stock
issued to MR Acquisitions, L.L.C.
2
10.7 Registration rights Agreement by and between the Registrant and
MR Acquisitions, Inc.
2
+10.8 Employment Agreement dated July 31, 1995 by and between the Registrant
and Sheri Poe.
2
+10.9 Employment Agreement dated July 31, 1995 by and between the Registrant
and Steven Wolf.
4
+10.10 Employment Agreement dated September 25, 1995 by and between the
Registrant and Dennis F. DiDominicis.
2
10.11 Settlement Agreement by and between Registrant and Pro-Specs American
Corporation.
5
+10.12 1987 Stock Option Plan
6
+10.13 1988 Stock Option Plan
7
+10.14 1990 Stock Option Plan
8
+10.15 1992 Stock Option Plan
9
+10.16 1993 Stock Option Plan
2
+10.17 1995 Stock Option Plan.
10
+10.18 1995 Non-Employee Directors' Stock Option Plan.
11
10.19 Letter of Credit Financing Agreement with Exhibits dated as of May 1,
1991 by and between the Registrant and Pro-Specs America Corporation.
11
10.20 Loan and Security Agreement effective as of July 1, 1991 by and
between the Registrant and Pro-Specs America Corporation.
11
10.21 Demand Secured Promissory Note dated July 1, 1991 of the Registrant in
the principal amount of $1,000,000 in favor of Pro-Specs America
Corporation.
-22-
12
10.22 Revolving Credit Agreement dated as of March 30, 1992 by and between
the Company and Sheri Poe.
12
10.23 Security Agreement dated as of March 30, 1992 by and between the
Company and Sheri Poe-Brieske.
12
10.24 Subordination Agreement dated as of March 30, 1992 by and between
Sheri Poe and Pro-Specs America Corporation
13
10.25 Amendment dated as of November 15, 1991 to the Letter of Credit
Financing Agreement and Security Agreement dated as of July 1, 1991
between the Company and Pro-Specs America Corporation
13
10.26 Amendment dated as of July 1, 1992 to the Letter of Credit Financing
Agreement and Security Agreement dated as of July 1, 1991 between the
Company and Pro-Specs America Corporation.
14
10.27 Retail Collection Factoring Agreement as amended and related
documents.
15
10.28 Amendment dated November 23, 1993 to the Retail
Collection Factoring Agreement between the Company and Heller
Financial, Inc.
15
10.29 Promissory note dated December 31, 1993, in the amount of $125,000,
representing a loan from Sheri Poe.
15
10.30 Form of Amendment dated March 18, 1994 to the Retail Collection
Factoring Agreement between the Company and Heller Financial, Inc.
16
10.31 Amendments dated May 11, 1994 and June 28, 1994 to Retail Collection
Factoring Agreement.
17
10.32 Confidential Financing Summary dated September 13, 1994.
17
10.33 Form of Distribution Agreement utilized in the Financing.
18
10.34 Amendment dated as of November 22, 1994 to the Letter of Credit
Financing Agreement dated as of July 1, 1991 between the Company and
Pro-Specs America Corporation.
18
10.35 Amendment dated February 22, 1995 to the Retail Collection Factoring
Agreement between the Company and Heller Financial, Inc.
2
10.36 Termination of Lease Agreement, dated June 27, 1995, by and between
Bradford D. Whitten as landlord and Registrant as Tenant.
2
10.37 Promissory Note in the principal amount of $500,000 by and between
the Registrant and Michael Rubin.
2
10.38 Sublease Agreement dated July 31, 1995 by and between KPR Sports
International, Inc. as sublessor and Registrant as sublessee.
2
10.39 Loan and Security Agreement dated as of July 31, 1995 by and between
Registrant and borrower and Midlantic Bank as lender.
-23-
2
10.40 Revolving Credit Note in the principal amount of $4,000,000 by and
between the Registrant or maker and Midlantic Bank as payee.
2
10.41 Overview of Financing and Form of Subscription Agreement relating to
Private Placement.
4
10.42 Letter from Midlantic Bank, dated November 14, 1995.
4
10.43 Letter from KPR Sports International, Inc., dated November 14, 1995.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
- -------------
+ Management contract or compensatory plan or arrangement.
1
Incorporated by reference to Form 8-K dated June 21, 1995.
2
Incorporated by reference to Form 8-K dated July 31, 1995.
3
Incorporated by reference to the Company's Registration Statement
No. 33-33754.
4
Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine-month period ended September 30, 1995.
5
Incorporated by reference to the Company's Registration Statement
No. 33-19754-B.
6
Incorporated by reference to the Company's Registration Statement
No. 33-27501.
7
Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine-month period ended September 30, 1990.
8
Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
9
Incorporated by reference to the Company's Form S-8 Registration Statement
filed on January 3, 1994.
10
Incorportation by reference to the Company's Proxy Statement filed on
October 13, 1995 in connection with the 1995 Special Meeting in lieu of
Annual Meeting held on November 15, 1995.
11
Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1991.
12
Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1992.
13
Incorporated by reference to the Company's Post-Effective
Amendment No. 5 to Registration Statement 33-33754.
14
Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
15
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
16
Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994.
17
Incorporated by reference to the Company's Quarterly Report
on S-K dated September 27, 1994.
18
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
-24-
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated June 2, 1995
reporting the Letter of Intent with MR Acquisitions, Inc.
The Company filed a Current Report on Form 8-K dated June 21, 1995
reporting the execution of the Securities Purchase Agreement between the Company
and MR Acquisitions, Inc.
The Company filed a Current Report on Form 8-K dated July 31, 1995 on
August 8, 1995 reporting the completion of the transactions with MR Acquisitions
L.L.C. (assignee of MR Acquisitions, Inc.).
The Company filed a Current Report on Form 8-K dated August 23, 1995
on August 28, 1995 and amended on October 13, 1995 reporting the change in the
Company's independent auditors from Coopers & Lybrand L.L.P. to Margolis &
Company, P.C.
(c) Exhibits. See Exhibit Volume.
-25-
RYKA Inc. and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
PAGE
----
Report of Independent Accountants - Margolis & Company P.C. F - 2
Report of Independent Accountants - Coopers & Lybrand L.L.P. F - 3
Consolidated Balance Sheets at December 31, 1995 and 1994 F - 4
Consolidated Statements of Operations - Three Years Ended
December 31, 1995, 1994 and 1993 F - 5
Consolidated Statements of Stockholders' Equity (Deficiency) -
Three Years Ended December 31, 1995, 1994 and 1993 F - 6
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 1995, 1994 and 1993 F - 7
Notes to Consolidated Financial Statements F - 9
Financial Statement Schedule:
-----------------------------
Valuation and Qualifying Accounts S-1
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
RYKA Inc.
King of Prussia, Pennsylvania
We have audited the consolidated balance sheet of RYKA Inc. and subsidiary as of
December 31,1995 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the year then ended. We
have also audited the financial statement schedule listed in Item 14(a)(2) in
this Form 10-K for the year ended December 31, 1995. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RYKA
Inc. and its subsidiary at December 31, 1995, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
The accompanying financial statements for the year ended December 31, 1995 have
been prepared assuming that RYKA Inc. will continue as a going concern. As more
fully described in Note A, the Company has incurred significant operating losses
since its inception and has an accumulated deficit at December 31, 1995 of
$17,848,484. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's plans in regard to this
matter are described in Note A. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
MARGOLIS & COMPANY P.C.
Bala Cynwyd, Pennsylvania
January 19, 1996
F - 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Ryka Inc.:
We have audited the consolidated balance sheets of Ryka Inc. and its subsidiary
as of December 31, 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for the two years ended December 31, 1994.
We have audited the financial statement schedule listed in item 14(a)(2) in this
Form 10-K for the two years ended December 31, 1994. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ryka
Inc. and its subsidiary at December 31, 1994, and the consolidated results of
their operations and their cash flows for the two years ended December 31, 1994
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has incurred significant
recurring losses since its inception and has an accumulated deficit of
$14,219,007 at December 31, 1994. The Company was in default on payments under
its inventory financing agreements at various times during and subsequent to
the year ended December 31, 1994. The Lender has the right to terminate the
agreements with thirty days written notice beginning April 30, 1995. The
Company has not been successful in it efforts to arrange alternate financing
arrangements. Based upon present conditions, there can be no assurance that the
present financing arrangements will continue. The Company has entered into a
Merger Agreement requiring a majority approval by its stockholders, whereby the
Company would become a wholly owned subsidiary of the proposed acquirer. If the
Merger is not consummated on or before July 31, 1995 due to a failure to obtain
the required vote of the Company's stockholders or for failure to obtain an
opinion of patent and trademark counsel as to certain matters, the Company
becomes liable for the acquirer's transaction costs, as defined in the Merger
Agreement. As discussed in Note H, four separate class action suits have been
filed against the Company and its directors challenging the proposed merger. At
this time, the Company cannot predict the extent of additional losses, if any,
that may result from an adverse outcome in these complaints or the impact
thereof on the consolidated financial statements. The Company believes that
failure to consummate the Merger would have a material adverse effect on the
Company's financial position and future results of operations. Based upon
present conditions, there can be no assurance that the Merger will be
consummated or that the Merger Agreement will not be amended or terminated
before consummation of the Merger. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Boston, Massachusetts
March 15, 1995, except for
Note A as to which the date Coopers & Lybrand L.L.P.
is March 28, 1995
F - 3
RYKA Inc. and Subsidiary
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
December 31,
1995 1994
-------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 77,509 $ 296,226
Accounts receivable, net of allowance for doubtful
accounts of $57,573 in 1995 and $518,875 in 1994 533,490 2,933,994
Inventory 678,319 3,763,835
Prepaid expenses and other current assets 118,294 166,946
---------- -----------
Total current assets 1,407,612 7,161,001
Property, net of accumulated depreciation 195,083 173,118
Security deposits and other assets 500 15,753
---------- -----------
Total assets $1,603,195 $ 7,349,872
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 738,865 $ 419,866
Payable to factories - 390,113
Payable to lender - 2,783,464
Payable to factor - 1,286,237
Accrued expenses 111,749 436,203
Due to affiliate 2,043 -
----------- ------------
Total current liabilities 852,657 5,315,883
----------- ------------
Subordinated note payable, affiliate 851,440 -
----------- ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $0.01 par value, 1,000,000
shares authorized; none issued or outstanding - -
Common stock, $0.01 par value, 70,000,000
shares and 45,000,000 shares authorized at
December 31, 1995 and 1994, respectively; 46,135,326
and 26,474,326 shares issued and outstanding at
December 31, 1995 and 1994, respectively 461,353 264,743
Additional paid-in capital 17,286,229 15,988,253
Accumulated deficit (17,848,484) (14,219,007)
----------- -----------
Total stockholders' equity (deficiency) (100,902) 2,033,989
------------ -----------
Total liabilities and stockholders' equity $ 1,603,195 $ 7,349,872
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F - 4
RYKA Inc. and Subsidiary
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
---------------------------------------------------
Net sales $ 7,538,354 $16,024,991 $14,300,282
Other revenues 75,904 228,508 50,000
---------------------------------------------------
7,614,258 16,253,499 14,350,282
---------------------------------------------------
Costs and expenses:
Cost of goods sold 6,581,670 11,399,760 11,199,119
Inventory write-down to lower of
cost or market 586,000 - -
General and administrative
expenses 1,706,165 1,605,688 1,645,553
Provision for losses on doubtful accounts 359,388 130,000 631,835
Sales and marketing expenses 1,591,379 2,265,943 2,085,077
Advertising costs 212,307 338,334 1,162,825
Research and development expenses 359,646 226,271 361,780
Special charges 379,434 - -
---------------------------------------------------
Total costs and expenses 11,775,989 15,965,996 17,086,189
---------------------------------------------------
Operating income (loss) (4,161,731) 287,503 (2,735,907)
---------------------------------------------------
Other (income) expense:
Interest expense 348,169 805,272 699,231
Interest income (6,328) (6,354) (6,647)
Merger related costs 783,289 - -
Other (7,128) - -
---------------------------------------------------
Total other expenses, net 1,118,002 798,918 692,584
---------------------------------------------------
Net loss before extraordinary gain (5,279,733) (511,415) (3,428,491)
Extraordinary gain--forgiveness of debt 1,650,256 - -
---------------------------------------------------
Net loss ($ 3,629,477) ($ 511,415) ($ 3,428,491)
===================================================
Net loss per share:
Loss before extraordinary gain ($ 0.15) ($ 0.02) ($ 0.15)
Extraordinary gain 0.05
---------------------------------------------------
Net loss per share ($ 0.10) ($ 0.02) ($ 0.15)
===================================================
Weighted average common shares and
common equivalent shares outstanding 34,540,653 24,210,083 23,573,316
===================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F - 5
RYKA Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity (Deficiency)
- -------------------------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
----------------------------------------------------------------------------
Balance at December 31,
1992 23,101,948 $231,019 $14,214,459 ($10,279,101) $4,166,377
Issuance of stock for services 24,258 243 30,807 31,050
Exercise of stock options 105,150 1,051 26,127 27,178
Exercise of warrants 490,000 4,900 509,100 514,000
Net loss ( 3,428,491) ( 3,428,491)
----------------------------------------------------------------------------
Balance at December 31,
1993 23,721,356 237,213 14,780,493 ( 13,707,592) 1,310,114
Exercise of stock options 197,175 1,972 58,781 60,753
Issuance of stock, net of
offering costs 2,555,795 25,558 1,148,979 1,174,537
Net loss ( 511,415) ( 511,415)
----------------------------------------------------------------------------
Balance at December 31,
1994 26,474,326 264,743 15,988,253 ( 14,219,007) 2,033,989
Issuance of stock in connec-
tion with forgiveness of debt 500,000 5,000 120,000 125,000
Issuance of warrants in connec-
tion with forgiveness of debt 5,319 5,319
Issuance of stock and warrants,
net of offering costs 18,320,000 183,200 724,153 907,353
Issuance of stock for services
related to stock offering 40,000 400 9,600 10,000
Issuance of stock for settle-
ment of employment
contract 60,000 600 14,400 15,000
Issuance of warrants to lender
in connection with credit
facility 100,000 100,000
Exercise of stock options 41,000 410 9,838 10,248
Exercise of warrants 700,000 7,000 273,000 280,000
Contributed services 41,666 41,666
Net loss ( 3,629,477) ( 3,629,477)
----------------------------------------------------------------------------
Balance at December 31,
1995 46,135,326 $461,353 $17,286,229 ($17,848,484) ($ 100,902)
============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F - 6
RYKA Inc. and Subsidiary
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
-----------------------------------------------
Cash flows from operating activities:
Net loss ($3,629,477) ($ 511,415) ($3,428,491)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Extraordinary item - forgiveness of debt ( 1,650,256) - -
Depreciation and amortization 52,640 45,291 51,142
Provision for losses on accounts receivable 359,388 130,000 631,835
Advertising credits 614,217
Capital contributed as services 41,666 - -
Issuance of common stock and warrants
for services 115,000 - 31,050
Loss on disposition of equipment 504 - -
Changes in operating assets and liabilities:
Accounts receivable 2,041,116 ( 274,266) ( 462,934)
Inventory 3,085,516 ( 483,187) ( 20,031)
Prepaid advertising 109,243
Prepaid expenses and other current assets 48,652 ( 6,030) 79,595
Accounts payable and accrued expenses 1,070,386 ( 604,145) 1,208,148
Payable to factories ( 390,113) - -
Due to affiliate 2,043 - -
-----------------------------------------------
Net cash provided by (used for) operating
activities 1,147,065 ( 1,703,752) ( 1,186,226)
-------------------------------------------------
Cash flows from investing activities:
Acquisitions of equipment ( 90,109) ( 130,895) ( 53,290)
Proceeds from sale of equipment 15,000 - -
Security deposits and other assets 15,253 12,500 ( 6,768)
-------------------------------------------------
Net cash used for investing activities ( 59,856) ( 118,395) ( 60,058)
-------------------------------------------------
CONTINUED ON NEXT PAGE
F - 7
RYKA Inc. and Subsidiary
Consolidated Statements of Cash Flows - Continued
- ------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
-------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in payable to lender, net ($2,078,730) $ 155,971 ($ 472,507)
Increase (decrease) in payable to factor, net ( 1,286,237) 786,237 500,000
Proceeds from bridge financing - 300,000 -
Repayment of bridge financing - ( 300,000) -
Proceeds from notes payable to stockholder - - 125,000
Repayment of notes payable to stockholder - ( 125,000) ( 375,000)
Repayments of capital lease obligations - ( 17,878) ( 17,795)
Proceeds from exercise of stock options and
warrants 290,248 60,753 541,178
Proceeds from issuance of common stock, net of
issuance costs 917,353 1,174,537 -
Proceeds from subordinated note payable, affiliate 851,440 - -
-----------------------------------------------
Net cash provided by (used for) financing
activities ( 1,305,926) 2,034,620 300,876
-----------------------------------------------
Net increase (decrease) in cash and cash
equivalents ( 218,717) 212,473 ( 945,408)
Cash and cash equivalents, beginning of year 296,226 83,753 1,029,161
-----------------------------------------------
Cash and cash equivalents, end of year $ 77,509 $ 296,226 $ 83,753
==============================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 340,715 $ 303,092 $ 370,945
==============================================
Cash paid during the year for income taxes $ - $ - $ -
==============================================
Supplemental schedule of noncash investing and
financing activities:
Issuance of common stock in connection with
settlement with Pro-Specs $ 125,000 $ - $ -
==============================================
Issuance of warrants in partial settlement of
amounts due creditors $ 5,319 $ - $ -
==============================================
Issuance of common stock and warrants for
services $ 145,000 $ - $ -
==============================================
The accompanying notes are an integral part of these consolidated
financial statements.
F - 8
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
RYKA Inc. ("RYKA" or the "Company"), a Delaware corporation, designs,
develops and markets high- performance athletic footwear specifically for women
to retail outlets primarily located in North America and Europe. Operations
commenced in February, 1987.
The Company's financial statements for the year ended December 31, 1995 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 December 31, 1995 of $17,848,484. As
described in Note C, the Company was involved in several significant
transactions during 1995, which included the sale of securities, a change in key
management, the establishment of a new loan and security agreement with a bank,
the settlement of debts with secured and unsecured creditors and moving the
Company's principal offices. Without the occurrence of these transactions or
other strategic arrangements, there was substantial doubt that the Company would
be able to remain in business through the third quarter of 1995. Having
accomplished such transactions, management plans to develop and acquire new
merchandise, market and promote the Company's product and expand the workforce
in support of the Company's current plans. To accomplish these goals, the
Company will have to incur substantial expenditures and incur continuing
operating losses during 1996. The Company's working capital at December 31, 1995
will not be sufficient to meet management's objectives in 1996.
Additionally, the Company was in violation of certain financial covenants
required by the loan and security agreement with the Company's principal lender,
at December 31, 1995, although a waiver of default was obtained from the lender
through March 31, 1996 and subsequent through April 30, 1996. Based on the
covenant violations covered by the waiver, it is unlikely that the violations
will be cured by April 30, 1996. Accordingly, unless an additional waiver is
obtianed, the long-term availability of these funds is uncertain. The
expenditures, described above, were to be funded, in part, through the financing
facility provided by the Company's principal lender. Management is currently in
discussions with another lender to pursue other financing on terms acceptable to
the Company. Based on current discussions with another lender the Company
believes it possible for alternate financing to be obtained although 1) no
definitive agreement has been reached to date, 2) additional equity or
subordinated debt funding would be required as a prerequisite to such lender
financing and 3) there is no assurance that the equity or subordinated debt
funding will be obtained or that the new loan will be finalized. In connection
with the foregoing, and the Company's requirements from time to time, management
plans the sale of additional equity securities and/or the issuance of
subordinated notes, in order to generate sufficient capital resources to assure
continuation of the Company's operations. Management recognizes that the Company
must obtain these or similar additional resources or consider modifications to
its operating plans including reductions in operating costs to enable it to
continue operations. However, no assurance can be given that the Company will be
successful in raising additional capital to support future operations. Further,
there can be no assurance, assuming the Company successfully raises additional
funds and is able to utilize its existing credit facility or establish a new
facility that the Company will achieve profitability or a positive cash flow.
The financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the outcome of these
uncertainties.
NOTE B -SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of RYKA Inc. and its wholly owned subsidiary, RYKA GmbH, a German
corporation. During 1994 RYKA GmbH was involuntarily dissolved by the Munich
Trade Register. RYKA GmbH's sole business activity consisted of holding title to
the stylized RYKA and dual parallelogram trademarks, which are both key
trademarks of the Company, and licensing them back to the Company. During 1995,
the Company had legal proceedings in Germany and caused full ownership of such
trademarks to be transferred to the Company from RYKA GmbH. All intercompany
accounts and transactions have been eliminated in consolidation. The Company
currently operates without a subsidiary.
F - 9
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE B -SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash Equivalents: The Company considers highly liquid investments with
maturities at date of purchase of less than three months to be cash equivalents.
Inventory: Inventory, consisting of women's high-performance athletic footwear,
is valued at the lower of cost (determined by the first-in, first-out method) or
market.
Equipment: Equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the assets, generally five to seven years, using the
straight-line method. Included in these assets are leasehold improvements which
are amortized over the shorter of the useful life of the improvement or the
remaining term of the lease. Expenditures for maintenance and repairs are
expensed as incurred. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is reflected in results of operations.
Income Taxes: The Company follows the provision of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires recognition of deferred income taxes for all temporary differences
between the tax and financial reporting basis of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. SFAS 109
also requires a valuation allowance against net deferred assets if, based upon
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Revenue Recognition: Sales, net of discounts, are recognized upon the shipment
of footwear.
Other Revenues: Beginning in 1994, RYKA's independent foreign distributors
primarily purchased footwear directly from the Company's overseas manufacturers,
and the Company receives royalty on those purchases. Income from direct
purchases by foreign distributors is included in Other Revenues. In 1993, Other
Revenues consisted of a license fee for the transfer of rights to an
international territory.
Loss Per Share: Loss per share is based on the weighted average number of shares
of common stock and dilutive common stock equivalent shares outstanding during
each year. Stock options and warrants are included as common stock equivalents,
using the treasury stock method, in the computation of weighted average shares
outstanding when dilutive.
Reclassifications: Certain 1994 and 1993 balances have been reclassified to
conform with the 1995 financial statement presentation.
Use of Estimates: The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising Expense: The Company expenses the cost of advertising the first time
the advertising takes place. At December 31, 1995, $15,982 of advertising which
is to take place in 1996 was reported as an asset and included in prepaid
expenses. Advertising expense was $212,307 for 1995.
Stock Option Plans: The Company accounts for employee stock compensation plans
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Under such method, compensation is measured by the quoted market price of
the stock at the measurement date less the amount, if any, that the employee is
required to pay. The measurement date is the first date on which the number of
shares that an individual employee is entitled to receive and the option or
purchase price, if any, are known.
F - 10
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE B -SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Recently Issued Accounting Standards: In October 1995, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 permits companies
to choose between a "fair value based method of accounting" for employee stock
options or to continue to measure compensation cost for employee stock
compensation plans using the intrinsic value based method of accounting
prescribed by APB 25. The Company intends to continue to use the APB 25 method.
Entities electing to remain with this method, must make pro-forma disclosures of
net income (loss) and earnings (loss) per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied to all awards granted
in fiscal years beginning after December 15, 1994. The Company, as permitted
under SFAS 123, will make such disclosures for 1995 awards in its 1996 annual
financial statements.
NOTE C - 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"). 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 were delivered after approval by the
stockholders on November 15, 1995 of an amendment to the Certificate of
Incorporation increasing the number of authorized shares) and a seven year
warrant to purchase an additional 5,100,000 shares of Common Stock for
$.01 per share. Further, KPR Sports International, Inc, ("KPR"), an
affiliate of 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. The Affiliate has indicated that it does not intend
repayment to be made during 1996.
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 are maintained at a minimum of $2,000,000, as defined.
See Note C(2) below for information regarding waiver of default related to
these provisions.
F - 11
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
1. Transactions with MR - continued:
As part of the Transaction, the Company issued a seven year 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 December 31, 1995, the Company owed $ -0 - under this facility.
Interest expense incurred in connection with this facility was $6,907 for
the year ended December 31, 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 $900,000 by December 31, 1995, and, as
described below, such infusion was postponed.
At December 31, 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 December 31, 1995
the difference between the actual minimum tangible net worth amount and
the required amount was approximately $900,000.
The principal lender has waived the defaults, extended the time for the
credit insurance to be obtained, and postponed the Funding Requirement
and minimum tangible net worth requirements, through March 31, 1996, and
subsequently through April 30, 1996.
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.
F - 12
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
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
------------- -----------------
At closing 3,020,000 $255,000
========= ========
At December 31, 1995 3,520,000 $880,000
========= ========
As a condition of the private placement, in the event the Company is
unable to register such securities with the Securities and Exchange
Commission in a filing which is effective within 120 days of the Closing,
the Company will be required to remit to the investors $7,500 and warrants
to purchase 5,000 shares for each month such registration statement does
not become effective, up to a maximum reduction in stock proceeds of
$150,000 and additional issuance of 100,000 shares of Common Stock. The
registration was not accomplished within the 120 day period, however,
waivers have been received or are being requested from the participants in
the private placement through March 31, 1996 related to the provisions
requiring a $7,500 per month remittance and issuance of warrants. Further,
the financial statement impact at December 31, 1995 would be de minimus.
Accordingly, the entire amount of the proceeds has been recorded as equity
in the balance sheet.
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 December 31, 1995, a
total of $120,000 remained outstanding on such loan. As of December 31,
1995, a total of 480,000 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 March 31, 1996. 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 December 31, 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 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 America
Corporation, a lender described more fully in Note E(2), 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 were issued upon approval by the
shareholders on November 15, 1995 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.
F - 13
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
4. Settlement with secured and unsecured creditors - continued:
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.
o Other creditors:
In early July 1995, the Company was obligated to various unsecured
creditors in the aggregate amount of approximately $1,250,000. 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 $839,000 elected Option A. The
Company made payments to these creditors totaling approximately
$68,000 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 53,192 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 $31,500.
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.
F - 14
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE C - SECURITIES PURCHASE AGREEMENT WITH MR ACQUISITIONS, L.L.C. - CONTINUED
5. Other matters - continued:
o The Company's Credit and Collection Agreement with Heller Financial
Inc., its factor, described in Note E(1), was modified so that the
credit facility previously provided to the Company was terminated and
only collection services are currently being provided.
o At closing, the Company had 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 3,600,000 additional shares of common stock were
reserved for issuance of stock options and warrants unrelated to this
Transaction. The stockholders of the Company were requested to approve
and approved 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 issued and outstanding at December 31, 1995, but
which were pending release prior to stockholders' approval of the
amendment to the certificate of incorporation increasing the number of
authorized shares or otherwise included in the computation of loss per
share from the date of the Transaction, 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
Shares to Pro-Specs in connection with settlement of
secured indebtedness 500,000
Shares as termination of employment contract with former
employee 60,000
---------
4,600,000
Remaining shares to be issued pursuant to 4,000,000
shares private placement 480,000
---------
5,080,000
=========
For purposes of calculating the weighted average number of common and
common equivalent shares outstanding for the computation of loss per
share, such stockholder approval has been assumed as of the date of
the Transaction.
NOTE D - RELATED PARTY TRANSACTIONS
1. Affiliates of MR Acquisitions, L.L.C. (MR):
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 warehousing services commencing August 1, 1995 through July 31, 1997.
Rent expense related to this lease totaled $19,792 for the year ended
1995. 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. Rent expense
charged to operations in connection with this lease, as well as other
leases, was $58,792, $117,250 and $99,188 in the years ended December 31,
1995, 1994 and 1993, respectively.
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 remaining
outstanding at December 31, 1995, are included in the balance sheet under
current liabilities as due to affiliate.
F - 15
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
1. Affiliates of MR Acquisitions, L.L.C. (MR) - continued:
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 December 31, 1995, letters of credit in the amount of
$168,652 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 C, 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.
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 five months ended December 31, 1995, estimated at
$41,666, 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.
A summary of all related party transactions with MR or its affiliate, for
the period July 31, 1995 to December 31, 1995, are as follows:
Amount Amount
Financial Included Included in Amount Included
Nature of Statement Transaction in Due Subordinated Note in Additional
Transactions Classification Amount To Affiliate Payable Affiliate Paid-in Capital
------------ -------------- ----------- ------------ ----------------- ---------------
Purchase of
Inventory Inventory $256,892
Sale of Property
Equipment 15,000
Proceeds from Subordinated
Subordinated Note payable
Debt 851,440 $851,440
Sale of
Merchandise Net sales 85,254
Rent General and
Administrative
Expense 19,792
Interest on Interest
Subordinated Expense
Debt 34,555
Temporary
Advances 172,591 $2,043
Services con- General
tributed to and
Capital Administration
Expense
and
Additional
Paid-In
Capital 41,666 $41,666
-------- -------- -------
$2,043 $851,440 $ 41,666
======= ======== ========
F - 16
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
2. Other Matters:
Through mid 1995, the Company made available the services of certain
personnel and office space for The R.O.S.E. Fund Inc, formally The RYKA
R.O.S.E.(TM) Foundation (the "Foundation"), a non-profit organization
dedicated to helping end violence against women, which was founded in June
1992 by the then President and Chief Executive Officer of the Company. The
Company had also pledged to make contributions to the Foundation equal to
7% of its annual pretax profits, with minimum contributions of $10,000 per
quarter beginning January 1, 1993. For the years ended December 31, 1994
and 1993 the minimum contribution of $40,000 has been included in general
and administrative expenses. The Agreement has been terminated and
contributions for 1995 were de minimus.
On December 31, 1993 the Company issued an unsecured Promissory Note (the
"Note") for $125,000 to the then President and Chief Executive Officer of
the Company. The Note bore interest at the prime rate plus 3 1/2% per
annum, and was payable on the earlier of demand or July 1, 1994. As of May
12, 1994, the balance of the Note was repaid in full. In connection with
such loan, 100,000 options were issued to the then President and Chief
Executive Officer. The weighted average interest rate during the period
for 1993 and 1992 was 9.5% and 8.19% respectively.
On March 30, 1992 the Company entered into a Revolving Credit Agreement
(the "Agreement") with the then President and Chief Executive Officer of
the Company. Pursuant to the Agreement, the Company could borrow up to
$700,000 for working capital needs. Advances under this Agreement, as
amended, accrued interest at the prime rate plus 3 1/2% per annum, payable
on the earlier of demand or June 30, 1993, and were collateralized by a
subordinated security interest in all assets of the Company. During 1993,
the balance was repaid in full and the Agreement was terminated.
NOTE E - TERMINATED FINANCING AGREEMENTS
1. Accounts Receivable Credit and Collection Agreement:
Effective July 1, 1993 the Company entered into a one-year credit and
collection agreement (the "Factoring Agreement") with Heller Financial,
Inc. (the "Factor"). Under the Factoring Agreement, the Company sold the
majority of its domestic trade accounts receivable to the Factor, which
provides general credit and collection services and also provided credit
guarantees without recourse for certain preapproved customers, except in
cases where there were merchandise returns or merchandise disputes in the
normal course of business. The Factor also purchased nonapproved accounts
receivable on a with recourse basis. The Factor received a commission of
1.125% of purchased net receivables for the first $10 million of factored
volume, after which time the commission was lowered to 1%.
In November 1993 the Factoring Agreement was amended to establish a
revolving credit facility (the "Facility"), allowing for advances up to
the lesser of 50% of purchased net receivables or $500,000. In March 1994
the Factoring Agreement was further amended to increase the ceiling on
advances to the lesser of 50% of purchased net receivables or $1,000,000.
During May 1994, the Factoring Agreement was further amended to increase
the ceiling on advances to the lesser of 70% of purchased net receivables
or $1,500,000. Interest on advances was charged by the Factor at the prime
rate plus 2%. On February 28, 1995, RYKA further amended the Factoring
Agreement to increase the ceiling on advances to the lesser of 70% or
purchased net receivables or $2,250,000 through April 30, 1995, after
which the maximum reverted to $1,500,000. Advances under the Facility were
collateralized by a primary interest in the accounts receivable of the
Company and a secondary interest in all other assets.
Included in accounts receivable at December 31, 1995 and 1994 was $ -0-
and $2,054,000, of receivables due from Factor of which $ -0- and
$654,000, respectively, were receivables factored with recourse. The
Company has assigned to the Lender, described in Note E(2), seventy
percent of all collections or advances under the Factoring Agreement.
Upon closing of the Transaction with MR, described in Note C, the credit
Facility previously provided to the Company by the factor was terminated
and only collection services are currently being performed.
F - 17
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE E - TERMINATED FINANCING AGREEMENTS - CONTINUED
2. Inventory Financing Agreements:
During 1991 the Company entered into two financing agreements (the
"Pro-Specs Agreements") with Pro-Specs America Corporation ("Pro-Specs"),
a Korean trading company (the "Lender"). Under the amended terms of the
Pro-Specs Agreements the Company could establish, with the prior written
consent of the Lender, revolving letters of credit and banker's
acceptances to finance up to $4 million of footwear purchases. The line
was collateralized by a secondary interest in accounts receivable and a
primary interest in the inventory and other assets of the Company.
The Lender invoiced the Company for costs relating to financing charges,
insurance, letter of credit costs and commissions. These charges added
approximately 8% to the Company's manufactured cost of footwear.
The Company was in default at various times during 1995,1994 and 1993 on
its payments to the Lender, which required, among other things, that all
drawdowns under the $4 million facility be repaid in full each 120 days.
On November 22, 1994, the Company and the Lender amended the Pro-Specs
Agreements to provide that effective April 30, 1995, the Pro-Specs
Agreements may be terminated by either party upon 30 days written notice.
The Company was in default on its payments at various times during 1995
and on May 17, 1995 the Company received notice of termination of the
Pro-Specs Agreements with the Lender effective June 16, 1995.
Upon closing the Transaction with MR, all obligations under the Pro-Specs
Agreements were settled as described in Note C(4).
NOTE F - INCOME TAXES
For the years ended December 31, 1995, 1994 and 1993 the Company had no
provision for income taxes. The components of the net deferred tax assets at
December 31, 1995 and 1994, respectively, are as follows:
December 31,
1995 1994
----------- ------------
Deferred Assets:
Inventory $ 39,088 $ 90,567
Provision for doubtful accounts 23,029 193,514
Net operating loss carryforwards 7,042,668 5,349,399
Other 39,776 38,306
----------- -----------
Gross deferred tax asset 7,144,561 5,671,786
Valuation allowance ( 7,144,561) ( 5,671,786)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future income tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax
assets. As of December 31, 1995 the Company had available net operating
loss carryforwards of approximately $17,606,000 which expire in the years
beginning 2002 through 2010. The use of net operating loss carryforwards
may be subject to annual limitations based on ownership changes of the
Company's stock, as defined by Section 382 of the Internal Revenue Code of
1986.
NOTE G - PROPERTY
Major classes of property, at cost, are as follows:
December 31,
1995 1994
----------- -----------
Equipment $ 364,969 $ 460,182
Leasehold improvements 7,407 25,066
----------- -----------
372,376 485,248
Less accumulated depreciation and
amortization ( 177,293) ( 312,130)
----------- -----------
$ 195,083 $173,118
=========== ===========
F - 18
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE G - PROPERTY - CONTINUED
As described more fully in Note D(1) the Company relocated in August, 1995. As
a result of the relocation the Company abandoned leasehold improvements which
had an original cost of $25,066 and a net book value of $1,966, and terminated
leases for equipment under capital leases which had an original cost of $85,852
and a net book value of $1,683.
Fully depreciated equipment, furniture and fixtures previously subject to
capital leases retired during 1994 of $82,002 was removed from the accounts.
NOTE H - COMMITMENTS AND CONTINGENCIES
In February and March 1995, four purported class actions entitled R. David
Thinly v. RYKA Inc., et al. (February 8, 1995), Robert C. Macauley, IRA v. Poe,
et al. (February 4, 1995), Gordon Fyfe v. Poe et al. (February 14, 1995) and
James Sheeley v. RYKA Inc. et al. (March 13, 1995) were commenced in Delaware
Chancery Court by four alleged stockholders of RYKA against RYKA and the RYKA
Board of Directors relating to the proposed merger with L. A. Gear, Inc. which
was announced by L.A. Gear, Inc. and the Company on January 30, 1995. The
complaints in the Thinly and Sheeley actions also name L.A. Gear, Inc. and its
subsidiary, Brands Acquisition Corp., as defendants. The complaints in the
actions allege, among other things, that the RYKA Board breached its fiduciary
duties to its stockholders by failing to maximize stockholder value and obtain
the best transaction reasonably available for its stockholders in connection
with the anticipated transaction. The complaints in the Thinly and Sheeley
actions sought (i) injunctive relief against any action which might diminish, or
have the effect of diminishing, stockholder value, (ii) unspecified compensatory
damages and (iii) costs and disbursements, including reasonable attorneys' and
experts' fees. The complaints in the Macauley and Fyfe actions sought (i) a
preliminary and permanent injunction against the anticipated transaction, (ii)
an order for the RYKA Board to carry out its fiduciary duties to its
stockholders, (iii) an accounting of any profits that might be realized by the
RYKA Board through the anticipated transaction and (iv) costs and disbursements,
including reasonable attorneys' fees. All of these actions were consolidated
under the name In Re RYKA Shareholders Litigation, Consolidated Civil Action No.
14023. On May 17, 1995, the Court entered an Order and Stipulation of Dismissal
in this Action.
The Company is involved in various routine litigation, including litigation in
which the Company is a plaintiff, incident to its business. The Company believes
that the disposition of the routine litigation will not have a material adverse
effect on the financial position of the Company.
NOTE I - EQUITY
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock,
$.01 par value. The Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights. No preferred
stock has been issued as of December 31, 1995.
During September through November 1994, the Company raised a total of
$1,174,537, net of offering costs of $218,896, through the sale of 2,555,795
shares of Common Stock in an unregistered offering to overseas investors. In
connection with the unregistered overseas offering, in consideration for their
services the Company issued to the placement agent a three year non-redeemable
warrant to purchase 150,000 shares of Common Stock at an exercisable price of
$1.00 per share with piggy-back registration rights.
During 1995, the Company was party to several equity transactions as more fully
described in Note C.
NOTE J - STOCK OPTIONS
Pursuant to option grant letters, but not pursuant to any formal plan ("Non-Plan
Grants"), the Company has issued options to certain individuals to purchase
shares of the Company's Common Stock at prices which approximated fair market
value at the date of grant. The options vest at various times over periods
ranging up to four years and, if not exercised, expire up to ten years after the
date of grant.
F - 19
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- ------------------------------------------------------------------------------
NOTE J - STOCK OPTIONS - CONTINUED
The Company also has seven separate stock option plans (the "Plans"). Under the
terms of the 1987 Stock Option Plan, 1988 Stock Option Plan, 1990 Stock Option
Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1995 Stock Option Plan and
1995 Non-employee Directors Plan, the Company may grant qualified and
nonqualified options to purchase up to 626,421, 350,000, 750,000, 875,000,
900,000, 1,500,000 and 250,000 shares of Common Stock, respectively, to
employees, Directors and consultants of the Company. The options vest at various
times over periods ranging up to five years. All options have been granted at
not less than the fair market value of the Common Stock as of the date of grant.
The options, if not exercised, expire up to 10 years after the date of grant.
Number of Shares
----------------------------------------------------------------------------------------------
Non-
Non-Plan 1987 1988 1990 1992 1993 1995 employee Price of
Grants Plan Plan Plan Plan Plan Plan Directors Shares
----------------------------------------------------------------------------------------------
Outstanding at
December 31, 1992 93,321 288,746 152,152 441,000 863,667 $0.25-$1.31
Granted 20,000 532,000 $0.65
Exercised 3,500 2,550 99,000 100 $0.25-$1.25
Cancelled 39,500 6,616 3,500 157,000 $0.56-$1.31
---------------------------------------------------------------------------------------------
Outstanding at
December 31, 1993 93,321 265,746 142,986 338,500 706,567 532,000 $0.25-$1.31
Granted 250,000 67,000 120,000 675,000 350,000 $0.55-$1.06
Exercised 7,335 163,000 25,840 1,000 $0.25-$0.65
Cancelled 25,000 50,000 3,300 120,000 508,000 7,500 $0.56-$1.25
---------------------------------------------------------------------------------------------
Outstanding at
December 31, 1994 318,321 282,746 132,351 175,500 847,727 873,500 $0.25-$1.31
Granted 100,000 10,000 1,200,000 $0.25-$0.47
Exercised 20,000 2,500 18,500 $0.25
Cancelled 2,000 11,000 9,167 22,000 $0.25-$0.84
---------------------------------------------------------------------------------------------
Outstanding at
December 31, 1995 416,321 251,746 129,851 157,000 838,560 861,500 1,200,000 - $0.25-$1.31
======= ======= ======= ======= ======= ======= ========= ====== ===========
As of December 31, 1995, options to purchase 247,571 shares, related to Non-Plan
grants, have vested and are exercisable.
As of December 31, 1995, options to purchase 2,383,727 shares have vested and
are exercisable under the Plans. At December 31, 1995, the Company has reserved
4,479,657 shares of Common Stock for potential future issuance under the various
Plan and Non-Plan grants.
During 1994, of the stock options granted in 1992 and 1991, options to purchase
an aggregate of 371,000 and 114,250 shares, respectively, were repriced after
their initial issuance, to fair market value at the date of repricing.
F - 20
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE K - COMMON STOCK PURCHASE WARRANTS
In connection with its second public offering, the Company issued warrants that
entitle the underwriter to purchase up to 242,500 shares of Common Stock at
$2.23 per share. These warrants expired unexercised on June 6, 1994.
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 consisted 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. During 1993, 120,000 warrants and
120,000 Common Stock Purchase Warrants were exercised which resulted in cash
proceeds to the Company of $264,000 and issuance of 240,000 shares of Common
Stock. Prior to modification, these Unit Warrants originally were to expire on
July 16, 1995, but were extended. In advance of 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 totalling $280,000 as a result of the
full exercise of these warrants.
In connection with a $3 million line of credit which expired on September 9,
1990, the Company issued its prior lender warrants to purchase 250,000 shares of
Common Stock. During 1993 all of these warrants were exercised, resulting in
cash proceeds to the Company of $250,000 and the issuance of 250,000 shares of
Common Stock.
In connection with the provisions of an investment banking agreement in 1994,
the Company issued warrants that entitle the investment banking firm to purchase
50,000 shares of Common stock at a price of $.60 per share. At December 31,
1995, none of these warrants were exercised. If not exercised, these warrants
will expire on January 3, 2004.
In connection with an unregistered overseas offering of the Company's Common
Stock during 1994, the Company issued warrants to a placement agent to purchase
at total of 150,000 shares of Common Stock at an exercise price of $1.00 per
share. At December 31, 1995, none of these warrants were exercised. If not
exercised, these warrants will expire on September 13, 1997.
In connection with a bridge financing composed of two short term notes of
$150,000 each during July 1994, the Company issued warrants to purchase a total
of 30,000 shares of Common Stock, as adjusted to a total of 38,031 shares
based upon the terms of each of the warrants, at an exercise price of $0.8125
per share. If not exercised, 19,569 of these warrants will expire on July 14,
1999 and 18,462 will expire on July 25, 1999. These short term loans were
outstanding for approximately 60 and 90 days at the rate of 5% and 6% per thirty
day period, respectively, and were repaid in full as of December 31, 1994.
At December 31, 1995 the following common stock purchase warrants were
outstanding:
Number of Shares Average Exercise Price Expiration Date
---------------------------------------------------------------------------
Through December 31, 150,000 $1.00 September 13, 1997
1994: 19,569 $0.8125 July 14, 1999
18,462 $0.8125 July 25, 1999
50,000 $0.60 January 3, 2004
Related to the Transaction 5,100,000 $0.01 July 31, 2002
described in Note C which 4,000,000(a) $0.01 July 31, 2002
occurred in 1995: 500,000 $0.57 July 31, 2000
100,000 $0.42 July 31, 2000
53,192 $1.50 July 31, 2000
- -------------
(a) Contingent warrant of which 461,444 shares have vested per Note C(1).
F - 21
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE L - SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's sales and accounts receivable are primarily with national chain
stores. In 1995 one customer accounted for 20% of the Company's total revenue. A
second and third customer each accounted for 10% of total 1995 revenues. In
1994, one customer accounted for 25% of the Company's total revenues with no
corresponding revenues in 1993. Aggregate sales to five divisions of one major
customer accounted for approximately 16% of 1994 total revenues, and 34% of
total revenues in 1993. A third customer accounted for 10% of total 1994
revenues, with no corresponding sales in 1993. There were no other single
customers or group of customers under common control that accounted for at least
10% of total revenues in 1995, 1994 or 1993.
Accounts receivable for the three significant customers at December 31, 1995 was
approximately $323,000. Accounts receivables for the three significant customers
at December 31, 1994 was approximately $1,600,000, of which $676,000 was secured
by letter of credit and the remaining $924,000 was purchased by the Factor
without recourse.
NOTE M - SPECIAL CHARGES
In connection with the Transaction described in Note C, 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 $233,231
Temporary housing costs for relocated personnel 21,851
Recruitment and relocation costs related to new management
and personnel 76,318
Start-up and moving costs related to King of Prussia, PA
warehouse and office 48,034
--------
$379,434
========
NOTE N - 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 O - FINANCIAL INSTRUMENTS
The carying amounts and related fair values of the Company's financial
instruments as of December 31, are as follows:
Carying Fair
Amount Value
-------- -----
Cash and cash equivalents $ 77,509 $ 77,509
======== ========
Subordinated note
payable, affiliate $851,440 $851,440
======== ========
F - 22
RYKA Inc. and Subsidiary
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
NOTE P - SUBSEQUENT EVENT
During January 1996, the Board of Directors of the Company approved the filing
of a registration statement with the Securities and Exchange Commission for the
offering of approximately 4.2 million shares of Common Stock.
The shares will be issued pursuant to the "Partners Share Success" Equity
Incentive Plan to be adopted by RYKA. The purpose of the Program is to provide
an ownership interest in RYKA, through equity incentives, to retail sales
personnel and store management personnel of RYKA's customers to educate
consumers about RYKA's products and to increase the sale of RYKA's products to
consumers.
Under the Program, RYKA currently intends to grant retail sales personnel one
share of RYKA common stock for each pair of RYKA footwear sold and to grant
store management personnel approximately 4 shares of RYKA common stock for every
10 pairs of RYKA footwear sold by retail sales personnel under their
supervision. RYKA currently expects that the Program will remain in effect
through the Spring of 2000.
The Program will be available to retail sales personnel of customers of RYKA who
agree to participate in the Program and to purchase certain minimum quantities
of RYKA's products.
The Company anticipates that awards of common stock pursuant to the Program will
be accounted for as sales and marketing expense using the fair value of the
equity instrument issued or other consideration, as applicable.
F - 23
Schedule VIII - Valuation and Qualifying Accounts
RYKA Inc. and Subsidiary
- --------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B. Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------------------------------------
Additions
- --------------------------------------------------------------------------------------------------------------------------------
(2)
(1) Charged
Balances at Charged to to Other Balances
Beginning of Costs and Accounts Deductions at End of
Description Period Expenses - Describe - Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
1
Year Ended December 31, 1993: $446,034 $631,835 - ($412,264) $665,605
Allowance for doubtful accounts
1
Year Ended December 31, 1994: $665,605 $130,000 - ($276,730) $518,875
Allowance for doubtful accounts
1
Year Ended December 31, 1995: $518,875 $359,388 - ($820,690) $ 57,573
Allowance for doubtful accounts
- -------------
1
Accounts written off against the allowance
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf on March 29, 1996 by the undersigned thereunto duly
authorized.
RYKA INC.
By: /s/ Michael G. Rubin
-------------------------------------
Michael G. Rubin,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 1996.
SIGNATURE Capacity Date
- --------------------- ------------------------------------ -----------------
/s/ Michael G. Rubin
- ----------------------- Chairman and Chief Executive Officer March 29, 1996
Michael G. Rubin
/s/ Steven A. Wolf
- ----------------------- Chief Financial Officer March 29, 1996
Steven A. Wolf
/s/ Sheri Poe
- ----------------------- Director March 29, 1996
Sheri Poe
/s/ Kenneth J. Adelberg
- ----------------------- Director March 29, 1996
Kenneth J. Adelberg