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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, 1996
[_] 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 industrial (I.R.S. employer
of incorporation 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 $13,236,998./(1)/ As of June 16, 1997, 59,135,326 shares of
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
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 June 16, 1997. 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
record keeping purposes of the Securities and Exchange Commission.
INDEX
Page
----
PART I................................ 1
ITEM 1: BUSINESS..................................................... 1
General Overview........................................... 1
Products................................................... 2
Marketing and Sales........................................ 3
Advertising and Promotion.................................. 3
Manufacturing and Distribution............................. 5
Competition................................................ 5
Patents, Trademarks and other Proprietary Rights........... 6
Employees.................................................. 6
Governmental Regulation.................................... 6
ITEM 2: PROPERTIES................................................... 7
ITEM 3: LEGAL PROCEEDINGS............................................ 7
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 7
ITEM 4.1: EXECUTIVE OFFICERS........................................... 7
PART II............................... 9
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.............................. 9
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA......................... 10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 11
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 17
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 17
PART III............................... 18
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 18
ITEM 11: EXECUTIVE COMPENSATION....................................... 18
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................... 18
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 18
PART IV................................ 19
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................. 19
PART I
ITEM 1: BUSINESS
GENERAL OVERVIEW
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. RYKA was organized in Delaware in 1986. RYKA commenced
operations and introduced its first two styles of high performance athletic
footwear in 1987 and began shipping its first products in 1988. 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.
In 1995 and 1996, RYKA entered into a series of transactions that
significantly changed the capital structure of RYKA and the manner in which RYKA
operates its business.
TRANSACTIONS WITH MR ACQUISITIONS. On July 31, 1995, RYKA consummated a
financing arrangement with MR Acquisitions, L.L.C. ("MR Acquisitions"), a
company that is indirectly wholly-owned by Michael Rubin, the current Chairman
and Chief Executive Officer of RYKA, pursuant to which MR Acquisitions provided
or arranged to provide RYKA with up to $8,000,000 of 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 was converted into Common Stock.
SETTLEMENT WITH CREDITORS. In connection with the transactions with MR
Acquisitions, RYKA 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. RYKA entered
into an agreement with a secured lender which had provided inventory financing
to RYKA, 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 the secured creditor
was released from its obligations to certain vendors under letters of credit
opened on behalf of RYKA for the purchase of approximately $1,000,000 in
merchandise to be received in the future. In addition, RYKA entered into
arrangements with other creditors, pursuant to which RYKA 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 RYKA'S OFFICES. In August 1995, RYKA 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 KPR.
NEW MANAGEMENT PERSONNEL. On July 31, 1995, Michael Rubin became Chairman
of the Board and Chief Executive Officer. Since that time, Mr. Rubin has taken
an active role in the management of RYKA. Mr. Rubin does not receive any
compensation for his services. In addition, since August 1995, RYKA has hired
additional management personnel, including Dennis DiDominicis, the Company's
current Executive Vice President, Steven Wolf, the Company's Current Vice
President of Finance and Chief Financial Officer and Dan Brown, the Company's
current Vice President of Product Marketing. Effective April 1, 1997, RYKA
hired Kate Bednarski as its President. All of these individuals have substantial
experience in the athletic footwear industry.
NEW SALES, MARKETING AND MANUFACTURING ARRANGEMENTS. Since August 1995,
RYKA has engaged independent design groups to create new designs for RYKA's
footwear. However, in February 1997, in-house
designers began to work full-time at RYKA headquarters in an effort to bring
most of the design function in-house. In addition, RYKA has entered into
arrangements for the sourcing and manufacture of RYKA's footwear in the Far
East. RYKA has also entered into arrangements with eleven independent sales
representative organizations covering 50 states for the sale of RYKA's footwear.
See "Business -- Marketing and Sales" and "Business -- Manufacturing and
Distribution".
REORGANIZATION. On September 26, 1996, the Company entered into an
Agreement and Plan of Reorganization, as amended and restated (the
"Reorganization Agreement"), with KPR and certain affiliated companies
(collectively, the "KPR Companies") and Michael G. Rubin, Chairman and Chief
Executive Officer of RYKA and the sole stockholder of the KPR Companies,
pursuant to which, subject to the approval by the stockholders of RYKA and the
Company's current lender, RYKA would become a holding company by transferring
all of its assets and liabilities to a newly-formed, wholly-owned subsidiary and
would acquire the KPR Companies in exchange for 163,250,000 shares of RYKA (the
"Reorganization"). Although the Reorganization was originally scheduled to close
by December 31, 1996, due to recent events, the completion of the Reorganization
has been delayed. See "Business - Recent Events." RYKA expects the
Reorganization to become effective by the end of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
RECENT EVENTS. On August 15, 1996, the Company entered into a new credit
facility with a bank. Concurrently with RYKA, KPR entered into a new credit
facility with the same bank. On November 8, 1996, the bank notified KPR that KPR
was in default of certain financial convenants. RYKA was in compliance with its
financial covenants and was not in default of its loan with the bank. Since
November 1996, RYKA and KPR have been in negotiations with the bank to
extend their credit facilities.
As of June 4, 1997, RYKA entered into an amended agreement, and KPR
entered into a forebearance agreement with its existing bank that, among other
things, extended the credit facilities of RYKA and KPR to the earlier of
November 30, 1997 or an occurrence of an event of default (as defined). Under
its amended agreement, RYKA may borrow under its revolving credit facility up to
the lesser of $4,500,000 or its borrowing base (as defined). Interest on its
borrowings is payable at the bank's prime rate plus 3 1/2%. RYKA is also
required to maintain certain receivables turnover ratios. RYKA's revolving
credit facility is guaranteed by Michael Rubin and MR Acquisitions and is cross-
defaulted with KPR's agreement with the bank. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations --Liquidity and
Capital Resources."
In addition to its negotiations with its existing bank, RYKA and KPR have
been in discussions with certain other banks to obtain a new credit facility and
with certain investors to obtain equity and/or subordinated debt. On April 21,
1997, RYKA entered into an agreement with certain investors to sell 2,500,000
shares of Common Stock for an aggregate purchase price of $750,000. The proceeds
of this sale were used by the Company to repay $325,000 of the $851,000
subordinated loan from KPR. The remaining proceeds were used to open $810,000 of
letters of credit for the benefit of KPR. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
As a result the issues arising in connection with the Company's credit
facility with its existing bank, the completion of the Company's audited
financial statements for the year ended December 31, 1996 was delayed, and the
Company was unable to file timely its Annual Report on Form 10-K for the year
ended December 31, 1996 or its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
PRODUCTS
RYKA believes it is the only company to make performance footwear
exclusively for women. All of RYKA'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 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. During 1994, RYKA introduced what it
believes to be the first women's shoe designed specifically for the growing
activity of aqua fitness, the Aqueous(TM) 9H20. The Company intends to introduce
a new line of shoes based on a new specific technology in Spring 1998.
The following table outlines RYKA's percentage of net sales by category for
the years ended December 31, 1996, 1995 and 1994.
CATEGORY 1996 1995 1994
--------------------------------------- ------ ------ ------
Aerobic Fitness/Aqua Fitness........... 25% 50% 40%
Walking................................ 36% 24% 32%
Cross-Training......................... 38% 25% 27%
Outdoor /(1)/.......................... 1% 1% 1%
_________________________
(1) RYKA has phased-out its sales of the Outdoor category.
FITNESS. RYKA offers several models of lightweight aerobic footwear in
various color options at suggested retail prices of $45.00 to $75.00. 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 four cross training styles,
available in various colors and at suggested retail prices from $45.00 to
$70.00.
WALKING. RYKA offers walking shoes in two categories: traditional
walking and athletic. The suggested retail prices range from $54.95 to $64.95.
AQUA CONDITIONING. RYKA currently offers two models of aqua conditioning
footwear at a suggested retail prices of $54.95 and $64.95.
RUNNING. In April 1997, RYKA has introduced at retail three models of
running footwear with a fourth model expected to be introduced in Fall 1997 for
Spring 1997. This category was the number one in pre-bookings among the RYKA
product line for Spring 1997. The suggested retail prices range from $54.95 for
an entry level runner to $74.95 for the 10k stability shoe.
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, Sportmart
and The Sports Authority. RYKA also sells its products in catalogs such as
Premier Sports and Road Runner and through telemarketer QVC. Slow moving and
discontinued products are sold through selected distributors and retailers.
RYKA 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. RYKA has supported its international marketing efforts by working
directly with its independent foreign distributors in Japan, South Africa and
Israel.
At June 13, 1997, the Company's backlog of orders was approximately
$6,300,000. Approximately $4,800,000 of such orders are scheduled for delivery
through the end of the third quarter of 1997 with the remainder scheduled for
delivery during the fourth quarter of 1997. The Company expects that most of the
backlog orders will be filled, although certain of such orders are cancelable.
Two customers of RYKA, Kinney Corporation (Lady FootLocker, Footquarters,
FootLocker Canada, Kinney Stores and Champs) and Marshalls each accounted for
over 10% of RYKA's revenues in 1996.
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, RYKA has employed and will continue to employ both conventional and
innovative advertising and promotional techniques. RYKA has begun to advertise
in consumer publications which target active women. RYKA has also developed a
variety of creative
-3-
promotional programs, such as a marketing program with Lady Foot Locker, the
RYKA Instructor and Trainer Alliance (RITA) and an interactive site on the
Internet's World Wide Web. RYKA's focus on products "exclusively for women"
enables RYKA 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, RYKA began 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.
In the second half of 1996, with commitments for 1997, RYKA has
participated in an integrated marketing program with Lady Foot Locker to
generate higher levels of awareness for RYKA's products and to promote Lady Foot
Locker as the foremost destination for RYKA's products. The marketing program
has involved significant national advertising and in-store displays of RYKA's
athletic footwear in approximately 500 Lady Foot Locker stores across the United
States.
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. In 1997, this program
will be housed under the RITA program mentioned above and be marketed more
aggressively.
To complement these public relations initiatives, RYKA launched an
interactive site on the Internet's World Wide Web in early 1996. RYKA plans to
provide information through its website about RYKA, as well as fitness and
safety tips.
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 RYKA as a whole to
be identified in the market as suited to the particular needs and concerns of
women.
Additionally, RYKA is supportive of organizations which focus on the
particular needs and concerns of women. For instance, RYKA supports LiveSafe, a
non-profit organization which promotes personal safety training. RYKA's support
will help provide tuition assistance to selected women in high-risk areas.
RYKA also is an active participant in fitness programs sponsored by the
Aerobics and Fitness Association of America and the International Dance and
Exercise Association and recently agreed to be the exclusive footwear for
AAA/ISMA. RYKA 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.
-4-
MANUFACTURING AND DISTRIBUTION
As is common in the athletic footwear industry, RYKA contracts for the
manufacture of its footwear products to its specifications through independent
overseas manufacturers in the Far East. RYKA uses the services of an
independent buying agent, who acts under the direction of RYKA's management 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. RYKA 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 RYKA's investment in fixed assets,
reduces costs and mitigates various risks.
RYKA 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 120 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.
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 RYKA's products.
RYKA's supply arrangements are U.S. 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 RYKA'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, RYKA is prevented from
acquiring products from overseas manufacturers, RYKA's operations could be
materially and adversely affected until alternative suppliers are found. See
"Business -- Governmental Regulation".
RYKA imports its footwear from independent manufacturers in the Far East,
both to public third-party warehousing facilities in Long Beach and Gardena,
California with which RYKA contracts on an as-needed basis, and to a warehousing
facility in King of Prussia, Pennsylvania which is subleased from KPR. From
these warehousing facilities, RYKA distributes its footwear throughout the
United States, usually by common carrier. RYKA 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. RYKA 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
-5-
RYKA. There is considerable doubt that RYKA will be able to compete successfully
with any of these companies or to achieve any meaningful market share without
significant additional resources. Additionally, RYKA 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
RYKA 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.
RYKA 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.
RYKA 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 RYKA's business. RYKA
intends to defend these trademarks vigorously against infringements by third
parties, should any arise.
EMPLOYEES
At December 31, 1996, RYKA employed 13 persons on a full-time basis. RYKA
is not a party to any collective bargaining agreements with its employees.
GOVERNMENTAL REGULATION
Substantially all of RYKA'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 RYKA to date approximate
10.0% of cost, plus administrative charges. If RYKA were to significantly
increase the amount of synthetic raw material, as opposed to leather, in its
footwear, these duties would increase substantially.
RYKA 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
RYKA and the imported footwear industry as a whole. RYKA, 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 RYKA's ability to access foreign markets.
Any such legislation that would substantially increase duty rates on footwear
imported into the United States or limit RYKA's ability to access foreign
markets could adversely affect RYKA's operations.
-6-
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 KPR. 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 KPR 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 two third-party public
warehousing facilities in 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.
-7-
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
-8-
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
As of December 31, 1996, the Common stock was held by approximately 2,320
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
-------- ---------
1996
First Quarter.................................. $0.85 $ 0.20
Second Quarter................................. $0.58 $ 0.27
Third Quarter.................................. $0.55 $ 0.30
Fourth Quarter................................. $0.56 $ 0.28
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
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 payment of dividends on the Company's
Common Stock.
During the past fiscal year, the Company has issued unregistered securities
to a limited number of persons, as described below. No underwriters or
underwriting discounts or commissions were involved. There was no public
offering in any such transaction, and the Company believes that each transaction
was exempt from registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), by reason of Section 4(2) thereof.
1. Between May and August 1996, the Company issued an aggregate of
10,000,000 shares of Common Stock to approximately 57 investors at a purchase
price of $0.25 per share for an aggregate purchase price of $2,500,000.
2. On April 21, 1997, the Company issued an aggregate of 2,500,000 shares
of Common Stock to Patrick Tang, Ura Tang and Erik Achten at a purchase price of
$0.30 per share for an aggregate purchase price of $750,000.
-9-
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1996 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,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ---------------- ---------------- ---------------- -----------------
STATEMENT OF OPERATIONS DATA:
Net sales............................... $10,194,675 $ 7,538,354 $16,024,991 $14,300,282 $12,193,643
Other revenues.......................... -- 75,904 228,508 50,000 0
--------------- ---------------- ---------------- ---------------- -----------------
Total revenues..................... 10,194,675 7,614,258 16,253,499 14,350,282 12,193,643
Costs and expenses:
Cost of goods sold................. 7,199,572 7,167,670/(1)/ 11,399,760 11,199,119 8,867,375
Operating expenses................. 4,591,682(3) 4,608,319 4,566,236 5,887,070 3,110,821
--------------- ---------------- ---------------- ---------------- -----------------
Operating income (loss)................. (1,596,579) (4,161,731) 287,503 (2,735,907) 215,447
Other expenses, net..................... 283,178 1,118,002/(2)/ 798,918 692,584 512,260
--------------- ---------------- ---------------- ---------------- -----------------
Net loss before extraordinary gain...... $(1,879,757) $ (5,279,733) $ (511,415) $(3,428,491) $ (296,813)
Extraordinary gain - forgiveness of debt -- 1,650,256 -- -- --
--------------- ---------------- ---------------- ---------------- -----------------
Net loss................................ $(1,879,757) $ (3,629,477) $ (511,415) $(3,428,491) $ (296,813)
=============== ================ ================ ================ =================
Net loss per share:
Loss before extraordinary gain..... $(.04) $(0.15) $(0.02) $(0.15) $(0.01)
Extraordinary gain................. -- 0.05 -- -- --
--------------- ---------------- ---------------- ---------------- -----------------
Net loss per share................. $(.04) $(0.10) $(0.02) $(0.15) $(0.01)
=============== ================ ================ ================ =================
Weighted average number of common
and common equivalent shares
outstanding............................ 51,368,619 34,540,653 24,210,083 23,573,316 19,847,283
Number of common shares outstanding..... 56,635,326 46,135,326 26,474,326 23,721,356 23,101,948
DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
.....................................
BALANCE SHEET DATA:
Total assets............................ $ 5,062,643 $ 1,603,195 $ 7,349,872 $ 6,430,812 $ 8,319,229
Total long-term debt.................... 0 851,440 0 142,878 410,673
Net working capital..................... 920,140 554,955 1,845,118 1,201,820 4,077,404
Stockholders' equity (deficiency)....... 1,149,955 (370,902) 2,033,989 1,310,114 4,166,377
_______________________
(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.
(3) Includes contingent warrant expense of $511,614.
-10-
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.
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-K contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
Company's financial condition, results of operations and liquidity and capital
resources and statements as to management's beliefs, expectations or options.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these
risks, uncertainties and other factors, as and when applicable, are discussed in
the Company's filings with the Securities and Exchange Commission. Factors that
could cause actual results to differ naturally include, but are not limited to,
those discussed herein under "Risk Factors".
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered by investors in evaluating the
Company and its business. The risk factors reflected below are not intended to
be an exhaustive list of all risks involved, but merely a representative listing
of those risks currently contemplated by the Company.
Operating Losses; Ability to Continue as Going Concern. RYKA commenced
operations in February 1987 and has incurred substantial losses in each year of
its operations. Net losses amounted to $1,879,757, $3,629,477 and $511,415 for
the years ended 1996, 1995 and 1994, respectively. At December 31, 1996, the
Company had an accumulated deficit of $19,728,241. The report of RYKA's
independent auditors with regard to the financial statements for each of the
fiscal years ended 1987 through 1996 stated that there is substantial doubt
about RYKA's ability to continue as a going concern. Management believes the
Company's ability to continue as going concern is dependent upon securing
adequate financing to fund operations until the Company achieves sustained
profitability. In order for RYKA to achieve sustained profitability, management
believes it must increase sales, improve gross profit margins and reduce
expenses as a percentage of total sales. There can be no assurance that RYKA
will be successful in achieving these goals.
Future Capital Needs. On June 4, 1997, the Company and its bank entered
into an amended forbearance agreement pursuant to which the bank agreed to
extend both the RYKA and KPR credit facilities to November 30, 1997. If the
Company is unable to obtain a new credit facility and/or additional equity
and/or subordinated debt financing, there is no assurance that the Company will
be able to continue operations. Further, there is no assurance that if the
Company is able to obtain such financing, it will be on terms satisfactory for
the Company. Moreover, given the dependence of the Company on certain support
provided by KPR, including, but no limited to, financial support, administrative
support, warehousing and office rental, KPR's ability to obtain continued
financing or additional financing for its operations could significantly
adversely impact the ability of the Company to continue in business independent
of KPR. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Risks Associated with the Reorganization. The consummation of the
Reorganization is subject to a number of conditions, including but not limited
to, declaration of the effectiveness of the 1997 proxy statement relating to the
Reorganization by the Commission, approval by the respective boards of directors
and stockholders of the Company and KPR, and certain required consents,
including the consent of the Company's current bank. Therefore, there can be no
assurance that the Reorganization will be consummated.
Competition. The athletic footwear industry in which RYKA markets and sells
its products 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,
especially Nike and Reebok, which have developed advertising and promotional
programs directed to this segment of the market. RYKA's competitors include
Adidas, Avia, Asics, Converse, K-Swiss, New Balance, Nike, Reebok and Saucony.
The Company's competitors have significantly greater financial and other
resources and more extensive marketing staffs than the Company. Accordingly,
there is no assurance that the Company will be able to compete successfully with
any of these companies or achieve any meaningful market share without
significant additional resources.
Substantially All Assets Pledged. In connection with its financing
arrangements with the Company's current bank, the Company has pledged
substantially all of its assets as security for the performance of its
obligations. In addition, the Company has also pledged substantially all of its
assets (after satisfying any obligations to its bank) to KPR in connection with
its secured subordinated debt and the letter of credit facility provided by KPR.
In the event that the Company were to default on the payment of any amounts owed
under the agreements, the Company's lenders would have the ability to satisfy
the Company's obligations to them by selling or causing the sale of some or all
assets of the Company.
Dependence Upon Key Personnel. The Company's ability to market its
products and to achieve profitability will depend, in large part, on its ability
to attract and retain qualified personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to attract
and retain such personnel. In particular, RYKA is dependent upon the services of
Michael G. Rubin, its Chairman and Chief Executive Officer. RYKA maintains key
person life insurance policies on Mr. Rubin with coverage in amount of
$4,000,000. The loss of Mr. Rubin could have a material adverse effect on the
Company.
Reliance on Foreign Manufacturers. As is customary in the footwear
industry, all of the footwear marketed by the Company is manufactured to its
specifications by independent factories in the Far East. The Company's importing
of footwear may be adversely affected by fluctuations in currency exchange
rates, 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. In addition, the
current political climate in the Far East is not always stable and may cause
delays in the Company's ability to deliver products to its customers in a timely
manner or, depending upon the severity of the situation, may limit or restrict
the Company's ability to have its products manufactured at all. Although the
Company does not believe that these factors have had a material impact on
operations to date, such factors could ultimately increase the Company's cost of
goods, resulting in higher product prices and lower gross profits unless
alternative manufacturing arrangements could be implemented.
Customer Preferences. The Company's current product lines are subject to
customer preferences and trends. There can be no assurance that the consumers
will remain loyal to its products or that the Company will be able to adapt
quickly to changing market trends.
No Dividends. The Company has paid no dividends to its stockholders since
its inception and does not plan to pay dividends in the foreseeable future. The
Company currently intends to retain any earnings to finance the growth of the
Company. In addition, the Company's credit facility with its bank restricts the
amount of dividends which may be paid on the Common Stock.
Limitation on Directors' Liabilities under Delaware Law. Pursuant to the
Company's Certificate of Incorporation and under Delaware law, directors of the
Company are not liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty, except for liability in connection with a breach
of duty of loyalty for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchasing illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
Securities Market Factors. There have been periods of extreme volatility
in the stock markets, which in many cases were unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stock.
During such periods, the price of the affected stock, including the Company's
Common Stock, has fluctuated substantially. General market price declines or
market volatility in the future could adversely affect the price of the
Company's Common Stock.
NASDAQ Delisting. The Company did not meet the listing standards for
inclusion on the NASDAQ Small Cap Market and was delisted on September 15, 1995.
The Company's Common Stock are currently listed on the OTC - Bulletin Board.
Possible Adverse Effect of Penny Stock Rules. As a result of the delisting
of the Company's Common Stock from the NASDAQ Small Cap Market, the Company's
Common Stock is subject to Rule 15g-9 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which imposes additional sales practice
requirements for broker-dealers which sell such securities to persons other than
established customers and accredited investors as defined in Regulation D under
the Securities Act. For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
rule may adversely affect the ability of broker-dealers to sell the Company's
Common Stock and may adversely affect the ability of persons acquiring
shares in this offering to sell any of the shares acquired in the secondary
market.
The Commission regulations define a "penny stock" as any equity security
not registered on a national securities exchange or for which quotation
information is not disseminated on NASDAQ and has a market price (as therein
defined) of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to a transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's Common Stock if such securities are included for quotation on NASDAQ
and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's Common Stock will qualify
for exemption from these restrictions. In any event, even if the Company's
Common Stock were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. The market liquidity for the
Company's Common Stock could be severely adversely affected by these rules.
GENERAL OVERVIEW
The Company has not had a single profitable fiscal year since its inception
and had approximately $1,880,000 in losses in 1996. In addition, the Company
had an accumulated deficit of approximately $19,728,241 and stockholders' equity
of approximately $1,149,955 as of December 31, 1996.
On July 31, 1995, the Company entered into a financing arrangement with MR
Acquisitions pursuant to which MR Acquisitions provided the Company with equity
and subordinated debt financing 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
stockholders' equity of approximately $580,000 as compared to stockholders'
deficiency of over $2,000,000 as of June 30, 1995. Since July 31, 1995,
operating losses have been incurred, which have diminished stockholders' equity
and an additional $2,500,000 of gross proceeds has been received from an equity
private placement which commenced in May 1996 and was concluded in August 1996
(the "1996 Private Placement"). As a result, stockholders' equity was
approximately $1,149,955 and subordinated debt remained at approximately
$851,440 as of December 31, 1996.
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. After 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 other necessary positions within the Company, and beginning
to develop new products and build or rebuild customer and supplier
relationships. While management believes that these activities will have a long-
term beneficial impact, they had significant negative impact on the Company's
sales and operations in 1995. 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.
-11-
As described in Note A to Notes to RYKA's Consolidated Financial
Statements, on September 26, 1996, the Company entered into an Agreement and
Plan of Reorganization (the "Reorganization Agreement") with KPR and certain
affiliated companies (collectively, "the KPR Companies"), all of which are
wholly owned by the Chairman and Chief Executive officer of RYKA. Pursuant to
the Reorganization Agreement, the KPR Companies would be merged with RYKA.
Although the Reorganization was originally scheduled to close by December 31,
1996, due to recent events, the completion of the Reorganization has been
delayed. See "Business - Recent Events." RYKA expects the Reorganization will be
completed by the end of 1997. If such merger were to occur, RYKA believes that
the combined companies would realize certain operating benefits. However, there
is no assurance that the merger will occur or that such benefits will
materialize.
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,
---------------------------------- ---------------------------
1996 1995 1994 1996 VS 1995 1995 VS 1994
---------- ---------- ---------- ------------ -------------
Net sales............................... 100.0% 100.0% 100.0% 35.2% (53.0)%
Other revenues.......................... -- 1.0 1.4 (100.0) (66.8)
---------- ---------- ---------- ------------ -------------
Costs and expenses:
Cost of goods sold /(1)/.............. 70.6% 95.1% 71.1% 0.4% (37.1)%
General and administrative
expenses /(2)/................... 12.2 27.4 10.8 (39.9) 19.0
Sales, marketing and advertising
expenses......................... 19.8 23.9 16.3 11.7 (30.7)
Research and development
expenses......................... 6.6 4.8 1.4 86.6 58.9
Contingent warrant compensation....... 5.0 --- --- N/M ---
Special charges....................... 1.5 5.0 -- (59.8) N/M /(3)/
---------- ---------- ---------- ------------ -------------
Total costs and expenses................ 115.7% 156.2% 99.6% 0.1% (26.2)%
---------- ---------- ---------- ------------ -------------
Operating income (loss)................. (15.7)% (55.2)% 1.8% 61.6% (1547.50)%
Other expense, net...................... 2.8 14.8 5.0 (74.7) 39.9
---------- ---------- ---------- ------------ -------------
Net loss before extraordinary gain...... (18.5) (70.0) (3.2) 64.4 932.40
Extraordinary item - forgiveness
of debt.............................. -- 21.9 -- (100.0) N/M /(3)/
---------- ---------- ---------- ------------ -------------
Net loss................................ (18.5)% (48.1)% (3.2)% 48.2% (609.70)%
========== ========== ========== ============ =============
____________________________________
(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, 1996 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1995.
- -----
Net Sales. Net sales increased by $2,656,321, or 35.2% , from $7,538,354
for 1995 to $10,194,675 for 1996. This increase in net sales was primarily due
to: (i) increased sales in the third quarter of 1996 as a
-12-
result of improvements in the design and development of RYKA's fall product
line; (ii) the hiring of manufacturers' representatives, experienced in the
athletic footwear industry, covering the entire United States and (iii) the
re-establishment of relationships with major retailers in the women's athletic
footwear market.
Cost of Goods Sold. During 1995, the Company took a charge of $586,000 to
record inventory at the lower of cost or market. Costs of goods sold before this
inventory write-down increased by $617,902, or 9.4%, from $6,581,670 for 1995 to
$7,199,572 for 1996. The overall gross profit margin, exclusive of this write-
down, expressed as a percentage of net sales increased by 17.2%, from 12.7% for
1995 to 29.4% for 1996. The increase in gross profit for 1996 was primarily due
to (i) the impact of an improved product line sold for Fall 1996 at greatly
improved gross margins; (ii) the more timely delivery schedule of product to
retailers in 1996, thus eliminating certain incentive discounts which were
required to be offered to customers in 1995 and (iii) the improvement of the
financial position of the Company in 1996. During the first seven months of
1995, RYKA was under extreme financial pressures. As a result, the Company was
required to sell substantial amounts of inventory at significant losses or no
profit in order to raise cash for operations. The negative impact on gross
profit for the first two quarters of 1995 adversely affected the overall gross
profit for the year.
General and Administrative Expenses. General and administrative expenses,
including the provision for losses on doubtful accounts, decreased by $823,893,
or 39.9%, from $2,065,553 for 1995 to $1,241,660 for 1996. This decrease was
due primarily to: (i) a decrease in 1996 in the Company's provision for
estimated bad debts of approximately $345,000; (ii) a decrease in factoring
commissions of approximately $65,000; (iii) a decrease in consulting fees
incurred in 1995 in connection with the hiring of interim management; (iv) a
decrease in legal expense of approximately $70,000; and (v) a decrease in other
general and administrative expenses for 1995 which included approximately
$40,000 in legal fees incurred in connection with a failed attempt to raise
capital from investors and approximately $33,000 in trademark and licensing fees
incurred in connection with the dissolution of RYKA GMBH in Germany which
formerly held the trademark of RYKA.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$210,985, or 11.7%, from $1,803,686 for 1995 to $2,014,671 for 1996. This
increase was due to (i) an increase in trade show expenses of approximately
$245,000 related to RYKA's attendance at the NSGA trade show in July 1996, a
show not attended by RYKA in 1995, as well as an increase in expenditures at the
Supershow in February 1996 compared to 1995; and (ii) an increase in
commissions of approximately $50,000 due to the increase in sales from 1995 to
1996, offset, in part, by a decrease in payroll and payroll related expenses of
approximately $40,000 and a decrease in international point of purchase
promotional items of $60,000. For 1996, sales commissions paid to sales
representatives was 2.9% of net sales compared to 3.3% of net sales for 1995.
The effective decrease in the commission rate was the result of lower commission
rates paid in connection with larger, key accounts.
Research and Development Expenses. Research and development expenses
increased by $311,376, or 86.6%, from $359,646 in 1995 to $671,022 in 1996.
This increase reflects a continuing effort by management to improve the
Company's product line. The increase is comprised of (i) an increase in
salaries and consulting fees of approximately $200,000; (ii) an increase in
travel and entertainment of approximately $75,000 related to expenses incurred
in connection with trips by production and development personnel to China to
develop and supervise production; and (iii) an increase in sample costs of
approximately $40,000.
Contingent Warrant Compensation. Contingent warrant compensation of
$511,614 relates to a non-cash charge for the vesting of 2,131,730 shares of
Common Stock issuable pursuant to a contingent stock purchase warrant
("Contingent Warrant") issued to MR Acquisitions. In July 1995, in connection
with the transactions with MR Acquisitions, the Company issued the Contingent
Warrant to purchase up to 4,000,000 shares of Common Stock at an exercise price
of $.01 per share. Pursuant to the terms of the Contingent Warrant, if at any
time within one year of its issuance, July 31, 1996, the Company issued a number
of shares of Common Stock which resulted 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 for the purpose of (i) inducing a
lender to make loans to the Company, (ii) in connection with an infusion of
capital to the Company, (iii) a settlement of debts with the Company's
creditors or (iv) a combination thereof, then upon the occurrence of such stock
issuance, four shares of Common Stock issuable pursuant to the Contingent
Warrant would vest for every ten additional shares issued. Under accounting
rules governing the issuance of warrants, the charge is equal to the difference
between the strike price of $0.01 and the fair market value at the time the
contingency is satisfied.
Special Charges. Special charges decreased by $226,719, or 59.8%, from
$379,434 incurred in 1995 to $152,715 in 1996. The special charges incurred in
1996 related to the "Partners Share Success" Equity
-13-
Incentive Plan. The purpose of this program was to provide an ownership interest
in the Company through the grant of equity incentives to retail sales personnel
and store management of the Company's customers. As a result of the proposed
Reorganization between RYKA and the KPR Companies, the Company decided to
terminate this plan prior to the issuance of any shares and write off $152,715
of administrative costs related to this program. In 1995, special charges were
incurred in connection with the bank financing portion of the transactions with
MR Acquisitions and the related closing of the Massachusetts facility and
relocation of operations to King of Prussia, Pennsylvania.
Other (Income) Expense, Net. Other (income) expense, net, decreased by
$834,824, or 74.7%, from $1,118,002 for 1995 to $283,178 for 1996. This decrease
was primarily attributable to a write-off of $783,289 associated with the
termination of the proposed merger with L.A. Gear, Inc. in 1995 and a decrease
in interest expense of $126,996, or 36.5%, from $348,169 for 1995 to $221,173
for 1996. The decrease in interest expense was a result of additional capital
funds raised by the Company in July 1995, as well as in the second quarter of
1996. In connection with the financing transaction with MR Acquisitions, the
Company established a line of credit with interest at the prime rate plus one
percent. This line of credit was subsequently refinanced with a new lender at
similar rates. The Company's previous financing arrangement provided for
inventory financing at effective interest rates in excess of 20%.
Year Ended December 31, 1995 as Compared to the Year Ended December 31,
-----------------------------------------------------------------------
1994.
- ----
Net Sales. Net sales decreased by $8,486,637, or 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 1995. First, the uncertainty
as to the Company's future continued operations after the termination of the
proposed L.A. Gear merger adversely affected net sales. Second, 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. Third, 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 the termination
of the Company's production financing arrangements, the Company was unable to
obtain additional product from its suppliers in a timely manner for the Fall
1995 season. Due to the delay of the delivery of the Fall 1995 season product,
the Company would not have been able to sell its product at full margin. As a
result, the Company negotiated reductions in its purchase commitments for the
originally scheduled production for the Fall 1995 season. Fourth, the athletic
footwear
-14-
industry was still experiencing sluggishness in 1995 and the volume of off-price
product continued at high levels. Fifth, the women's athletic footwear category
was becoming 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, or 37.1%,
from $11,399,760 for 1994 to $7,167,670 for 1995 principally as a result of 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 1995. The negative impact on gross profit of the first two
quarters of 1995 adversely affected the overall gross profit for the year. The
following table sets forth certain information relating to the Company's gross
profit (loss) for each quarter of 1995.
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,
or 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) an increase in travel expenses; (iii) a significant
increase in bad debts from $130,000 in 1994 to $359,388 in 1995; and (iv) an
increase in consulting fees in connection with the hiring of interim management
until a permanent management team was hired. These increases were offset, in
part, by a decrease in factor commissions due to the termination of the
Company's relationship with its factor. As a percentage of sales, general and
administrative expenses increased significantly as many expenses remained
relatively constant. Provisions for losses on doubtful accounts accounted for
4.7% of sales in 1995 compared with 0.8% of sales in 1994 due, in part, to the
fact that net sales in 1995 were extremely low as a result of the difficulties
that the Company experienced.
Sales and Marketing Expenses. Sales and marketing expenses decreased by
$800,591, or 30.7%, from $2,604,277 for 1994 to $1,803,686 for 1995. However,
sales and marketing expenses expressed as a percentage of net sales increased
from 16.3% for 1994 to 23.9% for 1995. The dollar decrease in sales and
marketing expenses was primarily due to a reduction in sales commissions of
approximately $426,800, or 63.2% from 1994 to 1995. The reduction in sales
commissions was proportionally greater than the decrease in net sales of 53.0%.
Sales commissions expressed as a percentage of net sales decreased from 4.2% for
1994 to 3.3% for 1995. The reduction in sales commissions was the result of
reduced commission rates and a greater proportion of house accounts sold by
Company management at no commission. The decrease in sales and marketing
expenses was also due to 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, or 58.9%, from $226,271 in 1994 to $359,646 in 1995.
This increase was attributable primarily to an increase in payroll and
consultant related costs offset, in part, by a reduction in sample costs. The
consultant-related costs
-15-
were incurred in connection with the hiring of designers 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 in 1995 were incurred in connection with
the bank financing portion of the transactions with MR Acquisitions and the
related closing of the Massachusetts facility and relocation of operations to
King of Prussia, Pennsylvania. These expenses 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, or 39.9%, from $798,918 for 1994 to $1,118,002 for 1995. This
increase was due to (i) merger related costs of $783,289 incurred in 1995 in
connection with the failed merger with L.A. Gear, (ii) a reduction in interest
expense of $457,103, or 56.8%, from $805,272 for 1994 to $348,169 for 1995, due
to the termination and settlement with the Company's previous financing source,
and (iii) the capital infusion resulting from the consummation of the financing
with MR Acquisitions.
Extraordinary Item. The extraordinary item of approximately $1,650,256 in
1995 related to gain on settlements with both secured and unsecured creditors in
connection with the financing with MR Acquisitions.
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 financing with MR Acquisitions,
the Company had a nominal cash balance and a working capital deficiency of
approximately $2,300,000.
As a result of consummating the financing with MR Acquisitions, the Company
received proceeds from the sale of Common Stock and warrants and subordinated
notes aggregating approximately $1,750,000 net of transaction related costs.
Additionally, secured and unsecured creditors forgave certain indebtedness
resulting in a gain of approximately $1,650,000. The financing with MR
Acquisitions resulted in an increase in working capital of approximately
$3,600,000, so that the Company's working capital deficiency of approximately
$2,300,000 was converted to positive working capital of approximately $1,300,000
at July 31, 1995. As of December 31, 1996, the Company's working capital was
approximately $920,140. The increase in working capital, in large part, relates
to the receipt of $2,500,000 in gross proceeds from the 1996 Private Placement
which occurred between May and August of 1996.
On August 15, 1996, the Company entered into a credit facility with a bank
which replaced the Company's prior credit facility. The new credit facility
initially had a term of one year and increased the amount that RYKA could borrow
to $4,500,000 based upon certain advance ratios with interest at prime plus
0.25%. Concurrently with RYKA, KPR closed a new credit facility with the same
bank.
On September 26, 1996, the Company entered into the Reorganization
Agreement with the KPR Companies and Michael Rubin, Chairman and Chief Executive
Officer of RYKA. The Company anticipates that the proposed Reorganization will
be completed by the end of 1997. In order for the Reorganization to become
effective, a majority vote of the stockholders of RYKA and consent by the
Company's bank, among other things, is required.
On November 8, 1996, the Company's and KPR's bank notified KPR that KPR was
in default of certain financial covenants, specifically the debt to net worth
ratio and required tangible net worth, and certain provisions relating to
financial information. RYKA was in compliance with its financial covenants and
was not in default of its loan with the bank.
On February 7, 1997, in conjunction with KPR entering into a forbearance
agreement regarding its credit facility, the Company entered into an amendment
to its credit facility that provided for, among other things, a termination date
of April 18, 1997 (as amended) for the Company's credit facility, the same
termination date as KPR's amended credit facility. As of June 4, 1997, the bank
agreed to extend both the RYKA and KPR credit facilities to November 30, 1997 or
an event of default (as defined). Under its amended agreement, RYKA may borrow
under its revolving credit facility up to the lesser of $4,500,000 or its
borrowing base (as defined). Interest on its borrowings is payable at the bank's
prime rate plus 3 1/2%. RYKA is also required to maintain certain receivables
turnover ratios. RYKA's credit facility is guaranteed by Michael Rubin and MR
Acquisitions and is cross-defaulted with KPR's agreement with the bank.
The Company and KPR are in discussions with lenders to obtain a
new credit facility or facilities to replace their existing credit facilities
upon the expiration of such facilities. During these discussions, certain
lenders have indicated that any credit facility that they would provide to the
Company and KPR would be conditional on, among other things, KPR raising
additional equity and/or subordinated debt. The Company and KPR are seeking to
raise an additional $3.0 - $4.0 million in equity and/or subordinated debt
financing. The Company believes that it is in the best interests of the Company
to resolve the credit facility and equity and/or subordinated debt needs of both
the Company and KPR so that the Company can complete the proposed Reorganization
with the KPR Companies.
On April 21, 1997, RYKA entered into an agreement with certain investors
to sell 2,500,000 shares of Common Stock for an aggregate purchase price of
$750,000. The proceeds of this sale were used by the Company to repay $385,000
of the $851,000 subordinated loan from KPR. The remaining proceeds from this
sale were used by the Company to open $810,000 in letters of credit for the
benefit of KPR. The Company is repaying a portion of the subordinated loan
for KPR and is opening letters of credit on behalf of KPR in order to allow KPR
to obtain sufficient financing for its operations until the proposed
Reorganization between RYKA and the KPR Companies can be completed and a new
credit facility for the combined companies can be negotiated.
Effective April 1, 1997, the Company negotiated 60-day payment terms with
two of its major suppliers for up to an aggregate of $1,500,000 in purchases at
an annual interest rate of 12.0%. Previously, the Company was on a wire
transfer on shipment basis with this supplier.
The Company believes that the extension that the Company and KPR received
from their current bank with respect to their existing credit facilities,
together with the additional cash flow from the payment terms from its
suppliers, will provide the Company with sufficient resources through November
30, 1997. During that period, the Company believes that it will be able to
negotiate a new credit facility or facilities and/or raise additional equity
and/or subordinated debt financing and complete the proposed Reorganization.
If, however, the Company is unable to obtain a new credit facility and/or
additional equity and/or subordinated debt financing, there is no assurance that
the Company will be able to continue operations. Further, there is no assurance
that if the Company is able to obtain such financing, it will be on terms
satisfactory for the Company. Moreover, given the dependence of the Company on
certain support provided by KPR, including, but not limited to, financial
support, administrative support, warehousing and office rental, KPR's ability to
obtain continued financing or additional financing for its operations could
significantly adversely impact the ability of the Company to continue in
business independent of KPR.
Even if the Company were able to obtain the financing discussed above or
obtain alternative financing, RYKA may be required to raise additional equity
and/or subordinated debt. However, no assurance can be given that RYKA will be
successful in raising additional capital, if necessary. Further, there can be
no assurance that RYKA will achieve profitability or a positive cash flow even
with sufficient capital resources.
-16-
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 7A: QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-28 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 November 26, 1996.
-17-
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information regarding the executive officers and
directors of the Company at December 31, 1996:
NAME AGE POSITION
- ------------------------------ ----- ------------------------------------
Michael G. Rubin.............. 24 Chief Executive Officer and
Chairman of the Board
Dennis F. DiDominicis......... 52 President
Steven A. Wolf................ 38 Chief Financial Officer and
Secretary
Kenneth J. Adelberg........... 44 Director
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 1995 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.
Currently, Mr. DiDominicis serves as the Company's Executive Vice President. 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.
Kenneth J. Adelberg has served as a Director of the Company since July 31,
1995. Since 1977, he has been President and Chief Executive Officer of HiFi
House Group of Companies, a privately-held company based in Broomall,
Pennsylvania. Mr. Adelberg was 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 First 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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by the Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with, except that
Messrs. Adelberg, DiDominicis and Wolf and Ms. Poe each failed to file a Form 5.
ITEM 11: EXECUTIVE COMPENSATION
Report of the Board of Directors
The Compensation Committee currently consists of Messrs. Rubin and
Adelberg. For 1996, the Board of Directors reviewed the compensation of
executive officers, made decisions regarding executive compensation and
administered the Company's employee stock option plans.
The Company's compensation policies for executive officers are to (i)
provide compensation packages, so as to attract, motivate and retain executives,
(ii) link a significant portion of compensation to financial results, so as to
reward successful performance, and (iii) provide long-term equity based
compensation, so as to further align the interests of executives with those of
the shareholders and further reward success and performance. The principal
components of the Company's executive compensation are base salary, incentive
compensation and stock options.
In determining compensation levels, the Company considers compensation
packages offered by similar sized companies within the athletic footwear
industry. Compensation levels for individual executive officers may be more or
less than those offered by such other companies, depending on a subjective
assessment of individual factors, such as the executive's position, skills,
achievements, tenure with the Company and historical compensation levels.
As of December 31, 1996, the Company had employment agreements with Dennis
F. DiDominicis, the Company's prior President and current Executive Vice
President, and Steven A. Wolf, the Company's current Chief Financial Officer.
Mr. DiDominicis' agreement, which was effective as of September 25, 1995, has an
initial term of five years, subject to automatic annual extensions. Mr. Wolf's
agreement, which was effective as of August 1, 1995, has an initial term of
three years, subject to automatic annual extensions. Pursuant to the agreements,
total compensation is divided into three primary components: base salary, bonus
and stock options. The award of bonuses and stock options serve as incentives
for superior performance and are based upon both the performance of the
executives and the Company. Compensation of the named executive officers for
fiscal 1996 was determined in accordance with the employment agreements as
described herein.
The Company does not have an employment agreement with Michael G. Rubin who
joined the Company on July 31, 1995 and who serves as the Company's Chief
Executive Officer and Chairman of the Board without compensation.
Under the stock option plans established by the Company, stock options are
periodically granted to employees at the discretion of the Board of Directors or
Compensation Committee. It is contemplated that executives of the Company will
be eligible to receive stock option grants subject to individual performance and
the performance of the Company as a whole.
During 1996, the Company's Chief Financial Officer granted a total of
150,000 options to purchase Common Stock at an exercise price of $0.20 per
share, and in connection with her termination, the Company's prior Spokesperson
was granted a total of 500,000 options to purchase Common Stock at an exercise
price of $0.42 per share.
Section 162(m) of the Internal Revenue Code generally denies deduction to
any publicly held company such as the Company for certain compensation exceeding
$1,000,000 paid to the chief executive officer and the four other highest paid
executive officers, excluding among other things certain performance-based
compensation. The Company has been advised that stock options granted before the
adoption of Section 162(m) are not subject to the limit on deductions and that
its general stock option grants will qualify for the performance based
exclusion. The Company has not yet recommended any change to the Company's
executive compensation policies and plans as a result of Section 162(m), but the
Compensation Committee will continue to evaluate the impact of recently
finalized tax regulations to ensure that the Company's executive compensation
plans most effectively serve the interests of the Company and its shareholders.
Michael G. Rubin
Kenneth J. Adelberg
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid to the Chief Executive Officer of RYKA, and to each of the three other most
highly compensated executive officers of RYKA, for services rendered in all
capacities to RYKA during 1996 (collectively, the "named executive officers").
Long Term
Annual Compensation
--------------------- --------------
Securities
Underlying
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options #
- ------------------------------------------- ----------- ----------- --------- --------------
C>
Michael G. Rubin/(1)/...................... 1996 -- -- --
Chief Executive Officer and 1995 -- -- --
Chairman of the Board
Dennis F. DiDominicis/(2)/................. 1996 $165,000 -- --
President 1995 $45,688 $1,500 500,000
Steven A. Wolf/(3)/........................ 1996 $101,563 -- 150,000
Chief Financial Officer 1995 $44,687 $1,500 200,000
Sheri Poe/(4)/............................. 1996 $ 83,333 -- 500,000
Founder, Spokesperson 1995 $120,833 $1,000 500,000
1994 $150,000 -- 370,000
- --------------------------------
(1) Mr. Rubin joined RYKA on July 31, 1995 and is serving as RYKA's Chief
Executive Officer and Chairman of the Board without compensation.
(2) Mr. DiDominicis joined RYKA on September 25, 1995 as its President.
Currently, Mr. DiDominicis serves as the Company's Executive Vice
President.
(3) Mr. Wolf joined RYKA on August 1, 1995.
(4) In August 1996, Ms. Poe resigned as an executive officer and director of
RYKA, although she continues to be consultant to RYKA.
Employment Agreements
Michael G. Rubin. RYKA does not currently have an employment agreement
with Michael G. Rubin who joined RYKA on July 31, 1995 and who serves as RYKA's
Chief Executive Officer and Chairman of the Board without compensation.
However, RYKA has entered into an employment agreement with Mr. Rubin which will
become effective as of the Reorganization Effective Date. See "THE PROPOSED
REORGANIZATION AND RELATED MATTERS -- Management After the Reorganization."
Dennis F. DiDominicis. On September 25, 1995, RYKA entered into an
employment agreement with Dennis F. DiDominicis, President of RYKA, for an
initial term of five years, subject to automatic annual extensions. Pursuant to
the terms of Mr. DiDominicis' employment agreement, Mr. DiDominicis is entitled
to receive (i) an annual base salary of $165,000 which will be increased $5,000
each year commencing in calendar year 1997, (ii) an annual bonus based on Mr.
DiDominicis' achievement of specified performance goals as determined by RYKA's
Board of Directors, and (iii) other benefits similar to those provided to RYKA's
other officers. Pursuant to the employment agreement, Mr. DiDominicis is also
entitled to receive a car allowance of $6,000 per year and has been granted a
five year option to purchase 500,000 shares of RYKA's Common Stock at an
exercise price per share equal to the fair market value of the underlying Common
Stock on the date of the grant, of which (i) 50,000 shares shall automatically
vest on each of the first, second, third, fourth, and fifth yearly anniversaries
of September 25, 1995, and (ii) 50,000 shares shall vest on each of the first,
second, third, fourth, and fifth yearly anniversaries of December 31, 1995 based
on the achievement by Mr. DiDominicis of performance goals to be established by
RYKA's Board of Directors. Subsequently, on [February 1997], the Company amended
Mr. DiDominicis' contract so that the 250,000 shares which were to vest pursuant
clause (ii) would vest at 50,000 shares per year on the first, second, third,
fourth, and fifth anniversaries of September 25, 1995.
Mr. DiDominicis' employment agreement may be terminated by RYKA with or
without cause which is defined to include, among other things, the willful
failure or refusal by Mr. DiDominicis to comply with explicit directions of the
Board of Directors or to render the services required by the employment
agreement, willful breach or habitual neglect in the performance of his duties,
conviction of a felony or fraud or embezzlement involving assets of RYKA. In the
event of termination without cause by RYKA, Mr. DiDominicis will be entitled to
receive a lump sum amount in cash equal to one-half of his then current annual
base salary less any amounts owed to RYKA. In the event of termination by RYKA
for any other reason, Mr DiDominicis will be entitled to receive any unpaid
salary and benefits through the date of termination. Under the employment
agreement, Mr. DiDominicis is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr.
DiDominicis is prohibited from soliciting employees of RYKA or engaging or
participating in any business which competes with RYKA while he is employed by
RYKA and for one year thereafter.
Steven A. Wolf. On August 1, 1995, RYKA entered into an employment
agreement with Steven A. Wolf, Vice President of Finance and Chief Financial
Officer of RYKA, for an initial term of three years, subject to automatic annual
extensions. Pursuant to the terms of Mr. Wolf's employment agreement, Mr. Wolf
is entitled to receive (i) an annual base salary of $107,500, subject to annual
adjustments determined by RYKA's Board of Directors, (ii) incentive compensation
up to 35% of his base salary based on sales and/or profit projections for RYKA
and based on his performance as determined by the Board of Directors, and (iii)
other benefits similar to those provided to RYKA's other officers. Pursuant to
the employment agreement, Mr. Wolf has been granted a five-year option to
purchase 200,000 shares of RYKA's Common Stock at an exercise price per share
equal to the fair market value of the underlying Common Stock on the date of the
grant, of which 50,000 shares shall vest on the date of grant and 50,000 shares
on each of the first, second, and third yearly anniversaries of August 1, 1995.
On January 2, 1997, Mr. Wolf was granted a ten-year option to purchase an
additional 150,000 shares of RYKA's Common Stock at an exercise price equal to
the fair market value of the underlying Common Stock on the date of the grant,
of which 50,000 shares shall vest on the date of grant and 50,000 shares on
each of the first and second yearly anniversaries of January 1, 1997.
Mr. Wolf's employment agreement may be terminated by RYKA with or without
cause which is defined identically to Mr. DiDominicis' employment agreement
described above. In the event of termination without cause by RYKA, Mr. Wolf
will be entitled to receive a lump sum amount in cash equal to five-twelfths of
his then current annual base salary less any amounts owed to RYKA and to have
any unvested stock options accelerate and become fully exercisable. In the
event of termination by RYKA for any other reason, Mr. Wolf will be entitled to
receive any unpaid salary and benefits through the date of termination. Under
the employment agreement, Mr. Wolf is prohibited from disclosing confidential
information during and after the term of the agreement. In addition, Mr. Wolf
is prohibited from soliciting employees of RYKA or engaging or participating in
the technical women's athletic footwear business while he is employed by RYKA
and for one year thereafter.
Option Grants
The following table sets forth certain information concerning options
granted during 1995 to the executive officers named in the Summary Compensation
Table. The following table also sets forth the potential realizable value over
the term of the options (the period from the grant date to the expiration date),
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These amounts do not represent RYKA's estimate of future stock price. Actual
realizable values, if any, of stock options will depend on the future
performance of the Common Stock.
OPTION GRANTS IN FISCAL 1996
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Appreciation For
Individual Grants Option Term (1)
-------------------------------------------------------------- --------------------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise
Options to Employees In Price Expiration
Name Guaranteed # Fiscal Year ($/share) Date 5% ($) 10% ($)
- ----------------------- -------------- ----------------- ---------- ------------ ----------- -----------
Michael G. Rubin....... -- -- -- -- -- --
Dennis F. DiDominicis.. -- -- -- -- -- --
Steven A. Wolf......... 150,000 14.35% $0.20 1/1/06 $18,870 $47,805
Sheri Poe.............. 500,000 47.85% $0.42 8/3/99 $33,100 $69,500
- ---------------------------------------
(1) Represents the difference between the market value of the Common Stock for
which the option may be exercised, assuming that the market value of the
Common Stock appreciates in value from the date of grant to the end of the
option term at annualized rates of 5% and 10%, respectively, and the
exercise price of the option.
Aggregated Option Exercises and Year-End Option Values
No options were exercised in 1996 by any of the executive officers named
in the Summary Compensation Table above. The following table sets forth, for
each of such executive officers, the number and value of options held at
December 31, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1996 December 31, 1996 (1)
----------------------------- ----------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- ------------- ----------- ------------- ----------- -------------
Michael G. Rubin.......... -- -- -- -- -- --
Dennis F. DiDominicis..... -- -- 100,000 400,000 -- --
Steven A. Wolf............ -- -- 150,000 200,000 2,500 5,000
Sheri Poe................. -- -- 1,520,000 -- -- --
- -----------------------
(1) Calculated by determining the difference between the deemed fair value of
the securities underlying the options on December 31, 1996 and the
exercise price.
Stock Option Plans
1996 Equity Incentive Plan. In March 1997, the Board of Directors adopted
and in July 1996 the Company's stockholders approved the Company's 1996 Equity
Incentive Plan (the "Incentive Plan"). The purposes of the Incentive Plan are to
attract and retain key employees and certain other persons who are in a position
to make significant contributions to the success of the Company, to reward these
employees and other persons for their contributions, to provide additional
incentive to these employees and other persons to continue making similar
contributions and to further align the interests of these employees and other
persons with those of the Company's stockholders. To achieve these purposes, the
Incentive Plan permits grants of incentive stock options ("ISOs"), options not
intended to qualify as incentive stock options ("Non-ISOs"), stock appreciation
rights ("SARs"), restricted and unrestricted stock awards, performance awards,
loans, and supplemental cash awards and combinations of the foregoing (all
referred to as "Awards").
The Incentive Plan permits Awards to be granted for a total of 2,000,000
shares of the Company's Common Stock. On September 24, 1996, the Board of
Directors approved an amendment to the Incentive Plan that increased the maximum
number of shares issuable under the Incentive Plan from 2,000,000 by 18,000,000
shares for a total of 20,000,000, subject to approval by the Company's
stockholders. Shares issuable under Awards that terminate unexercised, shares
issuable under Awards that are payable in stock or cash but are paid in cash and
shares issued but later forfeited will be available for future Awards under the
Incentive Plan.
All current and future employees of the Company, and other persons who, in
the opinion of the Board of Directors, are in a position to make significant
contributions to the success of the Company, such as consultants and
non-employee directors, are eligible to receive Awards under the Incentive Plan.
The Incentive Plan is administered by the Board of Directors, which
determines, among other things and subject to certain conditions, the persons
eligible to receive Awards, the persons who actually receive Awards,
the type of each Award, the number of shares of Common Stock subject to each
Award, the date of grant, exercise schedule, vesting schedule and other terms
and conditions of each Award, whether to accelerate the exercise or vesting
schedule or waive any other terms or conditions of each Award, whether to amend
or cancel an Award and the form of any instrument used under the Incentive Plan.
The Board of Directors has the right to adopt rules for the administration of
the Incentive Plan, settle all controversies regarding the Incentive Plan or any
Award, and construe and correct defects and omissions in the Incentive Plan or
any Award. The Incentive Plan may be amended, suspended or terminated by the
Board of Directors, subject to certain conditions, provided that stockholder
approval will be required whenever necessary for the Incentive Plan to continue
to satisfy the requirements of certain securities and tax laws, rules and
regulations.
Recipients of stock options under the Incentive Plan will have the right
to purchase shares of Common Stock at an exercise price, during a period of
time and on such other terms and conditions as are determined by the Board of
Directors. For ISOs, the recipient must be an employee, the exercise price must
be at least 100% (110% if issued to a 10% or greater stockholder of the Company)
of the fair market value of the Company's Common Stock on the date of grant and
the term cannot exceed ten years (five years if issued to a 10% or greater
stockholder of the Company) from date of grant. If permitted by the Board of
Directors and subject to certain conditions, and option exercise price may be
paid by delivery of shares of the Company's Common Stock that have been
outstanding, a promissory note, a broker's undertaking to promptly deliver the
necessary funds or by a combination of those methods. If permitted by the Board
of Directors, options (other than those granted in tandem with SARs) may be
settled by the Company, paying to the recipient, in cash or shares of Common
Stock (valued at the then fair market value of the Company's Common Stock), an
amount equal to such fair market value minus the exercise price of the option
shares.
SARs may be granted under the Incentive Plan either alone or in tandem
with stock options. Generally, recipients of SARs are entitled to receive upon
exercise, cash or shares of Common Stock (valued at the then fair market value
of the Company's Common Stock) equal to such fair market value on the date of
exercise minus such fair market value on the date of grant of the shares subject
to the SAR, although certain other measurements also may be used. A SAR granted
in tandem with a stock option is exercisable only if and to the extent that the
option is exercised.
The Incentive Plan provides for restricted and unrestricted stock
awards. Stock awards allow the recipient to acquire shares of the Company's
Common Stock for their par value or any higher price determined by the Board of
Directors. In the case of restricted stock awards, the shares acquired are
subject to a vesting schedule and other possible conditions determined by the
Board of Directors.
The Incentive Plan provides for performance awards entitling the
recipient to receive stock options, stock awards or other types of Awards
conditional upon achieving performance goals determined by the Board of
Directors. Performance goals may involve overall corporate performance,
operating group or business unit performance, personal performance or any other
category of performance determined by the Board of Directors. Financial
performance may be measured by revenue, operating income, net income, earnings
per share, Common Stock price, price-earnings multiple or other financial
factors determined by the Board of Directors.
Under the Incentive Plan, loans or supplemental cash awards may be
granted to recipients of Awards to help defray taxes due as a result of the
Awards. The terms and conditions of loans and supplemental cash awards,
including the interest rate, which may be zero, and whether any loan will be
forgiven, are determined by the Board of Directors.
Generally, upon termination of a recipient's employment or other
relationship with the Company, stock options and SARs remain exercisable for a
period of three months (one year if termination is due to death or disability)
to the extent that they were exercisable at the time of termination, except as
otherwise agreed between the employee and the Company, unvested shares under
outstanding restricted stock awards vest immediately except in the case of a
voluntary resignation or termination for cause (as defined in the Incentive
Plan). Stock options, SARs and other Awards that are not exercisable at the
time of termination automatically terminate, and payments or benefits under
deferred stock awards, performance awards and supplemental cash awards that are
not irrevocably due at the time of termination are forfeited.
In addition to the 1996 Equity Incentive Plan, which is discussed above,
the Company has adopted the following seven separate stock option plans (the
"Plans"): the 1987 Stock Option Plan, the 1988 Stock Option Plan, the 1990 Stock
Option Plan, the 1992 Stock Option Plan, the 1993 Stock Option Plan, the 1995
Stock Option Plan, and the 1995 Non-Employee Directors' Stock Option Plan. The
following terms and conditions are virtually identical for each of the Plans,
except for the 1995 Non-Employee Directors' Stock Option Plan which is
separately summarized below.
Pursuant to the Plans, options may be granted with respect to 626,420,
350,000, 750,000, 875,000, 900,000, 1,500,000 and 250,000 shares of Common
Stock, respectively.
Options under the Plans may be granted as incentive stock options intended
to qualify under Section 422 of the Code or as options not intended to so
qualify. In the case of both incentive stock options and non-qualified stock
options, the option price must be equal to at least 100% of the fair market
value of the Company's Common Stock on the date of grant. There is no limit on
the number of shares for which options may be granted to any single employee
under a Plan, except that incentive stock options first exercisable by a
recipient in any one year under a Plan may not exceed $100,000 in value
(determined at the time of grant). In addition, an incentive option granted to
any person who owns 10% or more of the shares of voting stock of RYKA must have
had an option price of not less than 110% of the fair market value of the shares
at the time of grant and the option must expire not more than five years after
its grant.
Payment of the option exercise price may be made in cash, shares of Common
Stock or a combination of cash and Common Stock. Except with respect to the 1995
Stock Option Plan, all officers, directors and key employees of RYKA or any
current or future parent or subsidiary of RYKA are eligible to receive options
under the Plans. Under the 1995 Stock Option Plan, non-employee members of the
Board of Directors of RYKA are not eligible to receive options. The Plans are
administered by the Board of Directors which selects the optionees, determines
the number of shares subject to each option and prescribes other terms and
conditions of each option.
1995 Directors' Plan. On September 19, 1995, the Board of Directors
adopted, and on November 15, 1995, the shareholders approved, the 1995
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to
the Directors' Plan, options may be granted with respect to an aggregate of
250,000 shares of Common Stock.
Options granted under the Directors' Plan are nonstatutory stock options
which do not qualify under Section 422 of the Code. Only non-employee directors
of RYKA or any subsidiary of RYKA ("Non-Employee Director") are eligible to
participate in the Directors' Plan. Mr. Adelberg qualified as a Non-Employee
Director.
While grants of stock options under the Directors' Plan are automatic and
non-discretionary, all questions of interpretation of the Directors' Plan are
determined by the Executive Committee of the Board of Directors. The Directors'
Plan provides that commencing January 1, 1996 and annually on January 1 of each
year thereafter, an option to purchase 25,000 shares of RYKA's Common Stock will
be granted to each Non-Employee Director. The option exercise price for each
option granted under the Directors' Plan is the fair market value on the date
the option is granted. All options granted under the Directors' Plan vest at the
rate of 25% per calendar quarter after the date of grant (or earlier in event of
the death or disability of the Non-Employee Director or sale of RYKA). Upon
departure from the Board of Directors by reason