Ryka Looks Like It's On Its Last Legs

As she left work on Apr. 27, Ryka Inc. Chief Executive Officer Sheri Poe was confident she had finally clinched a deal to sell her struggling maker of women's athletic shoes to larger rival L.A. Gear Inc. It hadn't been easy: A merger accord signed on Jan. 30 had fallen apart because of Ryka's deteriorating financial condition. But the two companies had hammered out a revised pact, and Poe hoped to announce the new plan as early as the following day. The two companies had even prepared a joint press release.

But moments after arriving home that evening, Poe got a call from L.A. Gear President William L. Benford. His brief, blunt message: The deal was off. Poe says Benford didn't really explain the sudden about-face. "I was shocked," she recalls. "It was bizarre."

BETRAYAL. Bizarre or not, the collapse of the merger has left Ryka struggling for its life. The Norwood (Mass.) company is in default on its main loan and faces a cash shortage and punishing losses. Poe says Ryka is in talks with several potential rescuers and hopes to secure a bridge loan. But time is short. Addressing speculation that Ryka only has enough cash to last two months, Poe says: "I don't know that we even have that long."

From the start, L.A. Gear wanted Ryka partly because it would add something entirely new to its line of hip, stylish sneakers. Ryka made its name as a pioneer in serious-minded "cause marketing." A rape survivor, founder Poe wove her personal trauma into a potent marketing message linking fitness and empowerment of women.

But the deal quickly began to sour. Committed to Poe's mission, many Ryka shareholders and employees felt betrayed when the company agreed to the $16.4 million L.A. Gear merger. They felt the price--just 62 cents a share--was inadequate. And the perk-laden employment agreement Poe cut (while leaving other managers to fend for themselves) made matters worse. Four shareholders filed class actions, while others started a grassroots campaign to kill the deal. In February, Ryka's chief financial officer, Roy S. Kelvin, quit in disgust.

Meanwhile, Ryka's finances began to deteriorate markedly. Since its founding in 1987, the company never has posted an annual profit and has been in a perpetual cash crunch. In 1994, it lost $511,000 on revenues of $16.3 million. Last August, when L.A. Gear approached it, Ryka was trying to secure new, long-term financing. The board opted for the merger instead.

But sales started to slip. Poe blames it partly on tough competition, partly on a dearth of new designs. But Ryka insiders also say that the merger caused some key customers to scale back orders, perhaps because many footwear retailers dislike discount-oriented L.A. Gear. Whatever the cause, Ryka announced on Apr. 6 that it expected a loss for the first two quarters, vs. a profit in last year's first half, and faced "a critical shortage of cash." Ryka was forced to go on bended knee to L.A. Gear for a loan.

After more negotiations, the two sides cobbled together a pact that called on L.A. Gear to pay far less for Ryka's stock--around 25 cents to 30 cents a share, estimates a source close to Ryka. Poe also agreed to cut back her employment package, and L.A. Gear was supposed to provide a $1.5 million credit line. Both boards had tentatively approved the deal by Apr. 21, insiders say.

"BAD MATCH." But L.A. Gear's Benford says he and Chairman and CEO Stanley P. Gold were growing increasingly edgy about Ryka's financial plight. The smaller company "was continuing to deteriorate as we went through the negotiations," he says. L.A. Gear was afraid that $1.5 million, which would be totally unsecured, might not be enough--and that the deal might be voted down by Ryka shareholders.

Benford denies any connection, but some outsiders believe L.A. Gear's own financial problems contributed to the deal's demise. On top of years of poor results, the company's first quarter, ended Feb. 28, was woeful: Inventories were up 25%, and the athletic-shoe outfit posted a loss of $12 million on revenues of $69 million. "At this point, L.A. Gear can't afford to overpay," notes Gary Jacobson, a Bankers Trust Securities Corp. analyst.

Lately, Ryka's share price has sunk to a meager 19 cents, giving it a market

capitalization of just $5 million. But not all is gloomy. "I'm really glad" the merger fell through, says Elizabeth Hermon, a psychotherapist in Cambridge, Mass., who, with her husband, owns 150,000 Ryka shares. "It was a bad match. I'd rather lose all my money than see Ryka run by L.A. Gear." Barring a miracle rescue, Hermon just may get her wish.

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