<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1994
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ________________
Commission file number 1-10157
L.A. GEAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip code)
(310) 452-4327
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------
The number of shares outstanding of the registrant's Common Stock, no par
value, at July 11, 1994 was 22,936,433 shares.
THIS FORM 10-Q CONTAINS 37 PAGES.
THE EXHIBIT INDEX APPEARS ON PAGE 18.
<PAGE> 2
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 31, 1994
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------ --------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
May 31, 1994 and November 30, 1993 3
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the three months ended May 31, 1994 and May 31, 1993 4
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the six months ended May 31, 1994 and May 31, 1993 5
Consolidated Condensed Statements of Cash Flows for the
six months ended May 31, 1994 and May 31, 1993 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit Index 18
</TABLE>
2
<PAGE> 3
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, November 30,
1994 1993
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,361 $ 27,790
Accounts receivable, net 58,994 73,217
Inventories 87,459 109,797
Prepaid expenses and other current assets 8,811 8,960
-------- --------
Total current assets 203,625 219,764
Property and equipment and other assets, net 20,936 23,848
Goodwill, net 12,138 11,001
------- -------
$236,699 $254,613
======= =======
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 52,638 $ 54,079
Borrowings under international credit facilities 1,092 3,737
------- -------
Total current liabilities 53,730 57,816
7- 3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest 2,394 --
Mandatorily redeemable preferred stock:
7.5% Series A cumulative convertible preferred stock,
$100 stated value; 1,000,000 shares authorized, issued
and outstanding; redemption value of $100 per share 100,000 100,000
Shareholders' equity:
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at May 31,
1994 (22,934,623 shares issued and outstanding at
November 30, 1993) 128,093 128,076
Preferred stock, no stated value; 9,000,000 shares
authorized; no shares issued -- --
Cumulative currency translation adjustment 467 (836)
Accumulated deficit (97,985) (80,443)
-------- --------
Total shareholders' equity 30,575 46,797
-------- --------
$236,699 $254,613
======= =======
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended May 31,
------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Net sales $ 84,248 $ 84,572
Cost of sales 60,591 60,115
-------- --------
Gross profit 23,657 24,457
Selling, general and administrative expenses 34,822 37,125
Interest expense, net 885 491
-------- --------
Loss before income taxes and minority interest (12,050) (13,159)
Income taxes -- --
Minority interest (285) --
-------- --------
Net loss (11,765) (13,159)
Dividends on mandatorily
redeemable preferred stock (1,875) (1,875)
-------- --------
Loss applicable to common stock (13,640) (15,034)
Accumulated deficit, beginning of period (84,345) (53,867)
-------- --------
Accumulated deficit, end of period $(97,985) $(68,901)
======== ========
Loss per common share $ (0.59) $ (0.66)
======== ========
Weighted average common shares outstanding 22,936 22,921
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended May 31,
-------------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales $204,684 $160,899
Cost of sales 146,118 116,066
-------- --------
Gross profit 58,566 44,833
Selling, general and administrative expenses 70,840 69,103
Interest expense, net 1,974 451
-------- --------
Loss before income taxes and minority interest (14,248) (24,721)
Income taxes -- --
Minority interest (456) --
-------- --------
Net loss (13,792) (24,721)
Dividends on mandatorily
redeemable preferred stock (3,750) (3,917)
-------- --------
Loss applicable to common stock (17,542) (28,638)
Accumulated deficit, beginning of period (80,443) (40,263)
-------- --------
Accumulated deficit, end of period $(97,985) $(68,901)
======== ========
Loss per common share $ (0.76) $ (1.25)
======== ========
Weighted average common shares outstanding 22,936 22,911
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 6
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended May 31,
---------------------------
1994 1993
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 24,013 $(36,208)
-------- --------
Investing activities:
Capital expenditures (1,469) (2,405)
Acquisition of subsidiary, including
repayment of subsidiary's debt -- (11,445)
-------- --------
Net cash used in investing activities (1,469) (13,850)
-------- --------
Financing activities:
Proceeds from minority's investment in joint venture 4,850 --
Payment of dividends on mandatorily redeemable
preferred stock (3,750) (11,663)
Net borrowings under international credit facilities (2,706) --
Proceeds from the exercise of stock options 17 43
Net proceeds from issuance of convertible
subordinated debentures -- 47,800
-------- --------
Net cash provided by (used in) financing activities (1,589) 36,180
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (384) 103
-------- --------
Net increase (decrease) in cash and cash
equivalents, including collateralized cash 20,571 (13,775)
Cash and cash equivalents at beginning of the period,
including collateralized cash 27,790 83,982
-------- --------
Cash and cash equivalents at end of period,
including collateralized cash $ 48,361 $ 70,207
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 7
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, which consist only of
normal recurring adjustments necessary to present fairly the consolidated
financial position of L.A. Gear, Inc. and its subsidiaries (collectively
referred to as the "Company") at May 31, 1994, the results of operations for
the three months and six months ended May 31, 1994 and 1993, and the cash flows
for the six months ended May 31, 1994 and 1993. This interim financial
information and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1993. The
Company's results of operations and cash flows for interim periods are not
necessarily indicative of the results to be expected for any other interim
period or the full year.
Minority Interest
In December 1993 a joint venture was formed with Inchcape plc
("Inchcape") to engage in marketing, distribution and sales of L.A. Gear(R)
branded footwear, apparel and accessories in selected Far Eastern markets. The
Company contributed the rights to distribute L.A. Gear branded products for a
50% share in the joint venture. Profits and losses are allocated based on
specific terms of the joint venture agreement. The Company has a unilateral
purchase option to acquire a majority interest in the joint venture and,
accordingly, the Company has consolidated the accounts of the joint venture.
Minority interest represents Inchcape's interest in the equity of the joint
venture.
NOTE 2. BUSINESS ACQUISITION
Effective May 20, 1994 the Company acquired for $2.0 million certain
assets of the Company's exclusive distributor (and one of its affiliates) in
Mexico. The excess of the consideration paid over the estimated fair value of
net assets acquired in such transaction, amounting to $1.0 million, has been
recorded as goodwill. The purchase price for the acquisition was paid by
reducing the balance on outstanding amounts owed by the distributor to the
Company. The acquisition was accounted for under the purchase method and,
accordingly, the acquired assets have been recorded on a preliminary basis at
their estimated fair value at the effective date of the acquisition. The
preliminary allocation of the estimated fair value of such assets acquired is
subject to change based upon final determination of such fair value. If the
acquisition had taken place at December 1, 1993, the pro forma results of
operations for the six months ended May 31, 1994 would not be materially
different than the Company's historical amounts reported.
NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
----------------------------
1994 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST, NET $ 1,875 $ 276
======= ========
INCOME TAXES, NET $ 469 $(24,387)
======= ========
NONCASH INVESTING ACTIVITY:
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ 1,953 $ --
======= ========
</TABLE>
7
<PAGE> 8
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1994 1993
------- ------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $41,228 $54,434
INTERNATIONAL 17,237 16,854
------- -------
TOTAL TRADE RECEIVABLES 58,465 71,288
OTHER RECEIVABLES 6,924 7,846
------- -------
65,389 79,134
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (6,395) (5,917)
------- -------
$58,994 $73,217
======= =======
</TABLE>
NOTE 5. INCOME TAXES
In December 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which mandates the
liability method of accounting for income taxes. Under the new standard,
deferred tax liabilities are recognized for taxable temporary differences and
deferred tax assets are recognized for deductible temporary differences and tax
loss and credit carryforwards. A valuation allowance is established to reduce
deferred tax assets if some, or all, of such deferred tax assets are not likely
to be realized. The adoption of SFAS No. 109 did not have a material impact on
the Company's consolidated financial statements.
Deferred tax assets, net of valuation allowance, consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, 1993
-----------------
(IN THOUSANDS)
<S> <C>
LOSS CARRYFORWARDS $ 20,665
TAX CREDIT CARRYFORWARDS 3,226
RESERVES AND ACCRUED EXPENSES 10,896
OTHER 2,145
--------
GROSS DEFERRED TAX ASSETS 36,932
LESS VALUATION ALLOWANCE (36,932)
--------
$ --
========
</TABLE>
At May 31, 1994 deferred tax assets totaled approximately $42.5 million.
A valuation allowance has been established against the entire deferred tax
asset balance.
For the period ended May 31, 1994, the difference between the tax benefit
computed based on applying the U.S. statutory income tax rate to the loss from
continuing operations before income taxes and the recorded benefit was
primarily due to the nonrecognition of tax benefits for operating losses as
evaluated under the provisions of SFAS No. 109.
8
<PAGE> 9
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 31, 1994 NOVEMBER 30, 1993
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $30,210 $34,179
ACCRUED INVENTORY PURCHASES 19,321 16,900
ACCRUED UNUSUAL CHARGES 3,107 3,000
------- -------
$52,638 $54,079
======= =======
</TABLE>
Accounts payable include issued but uncleared checks of $0.8 million and
$2.5 million at May 31, 1994 and November 30, 1993, respectively.
NOTE 7. BANK BORROWINGS
On November 22, 1993, the Company obtained a three-year, $75.0 million
revolving line of credit with BankAmerica Business Credit, Inc. for loans and
letters of credit (the "Revolving Facility"). The Revolving Facility is
secured primarily by the Company's domestic assets and is subject to certain
financial covenants. On May 31, 1994, the Company entered into an amendment to
the Revolving Facility to provide the Company with greater financial
flexibility. Under the terms of the amendment, the Adjusted Tangible Net Worth
requirement (as defined in the amendment) was reduced to $169.5 million from
$175.0 million for the remainder of the Company's 1994 fiscal year and a
quarterly minimum earnings requirement, commencing in the Company's 1994 third
fiscal quarter, is applicable whenever the Adjusted Tangible Net Worth falls
below $175.0 million at the end of the third and fourth quarter of fiscal 1994.
During the quarter and six months ended May 31, 1994, the Company had average
borrowings of $0.1 million and $0.5 million, respectively, under the Revolving
Facility. There were no domestic borrowings at May 31, 1994. At May 31, 1994,
approximately $47.0 million of domestic letters of credit were outstanding.
The Company's foreign subsidiaries have the following credit facilities,
denominated in their respective local currency and converted to U.S. dollars at
the end-of-period exchange rates, which are secured by certain assets of the
respective subsidiary and guaranteed by the Company:
<TABLE>
<CAPTION>
AMOUNT OF FACILITY
--------------------------------------------- OUTSTANDING AT
(IN MILLIONS) SUBLIMITS MAY 31, 1994
-------------------------- -----------------------
TOTAL LETTERS LETTERS
COUNTRY AVAILABLE BORROWINGS OF CREDIT BORROWINGS OF CREDIT
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
GERMANY $7.6 $3.8 $3.8 $1.1 $1.5
NETHERLANDS $4.3 -- -- -- $0.5
</TABLE>
The weighted average interest rates, as defined in the respective credit
facility agreements and adjusted for current market conditions, for Germany
were 8.8% and 8.9% for the quarter and six months ended May 31, 1994,
respectively, and for the Netherlands were 7.2% and 7.4% for the quarter and
six months ended May 31, 1994, respectively. The Company continues to explore
the possibility of obtaining new secured revolving credit facilities for cash
borrowings and letters of credit for its other foreign subsidiaries.
NOTE 8. SUBSEQUENT EVENT
In June 1994, the Company entered into a settlement agreement in
connection with a trademark infringement action pursuant to which it received a
cash payment of $3.0 million. This settlement income will be recorded in the
Company's third quarter results of operations.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references to years are to fiscal years ending November 30, 1994 and
1993, as applicable.
NET SALES
In the second quarter of 1994, the Company's net sales decreased 0.5% to
$84.2 million as compared to $84.6 million in the second quarter of 1993. For
the six months ended May 31, 1994, the Company's net sales increased 27.2% to
$204.7 million as compared to $160.9 million in the year earlier period. The
first half increase in net sales was principally due to a 25.0% increase in the
number of pairs sold worldwide, which was primarily attributable to the
continued success of the children's lighted product line and sales of
approximately $19 million (1.2 million pairs) of selected excess inventory to
Wal-Mart Stores, Inc. ("Wal-Mart") during the first quarter. For the quarter
ended May 31, 1994, net domestic sales decreased 1.2% and for the six months
ended May 31, 1994, increased 35.8%, from the comparable prior year periods.
Net international sales, which accounted for approximately 32.0% and 27.0% of
the Company's total net sales for the quarter and six months ended May 31,
1994, respectively, increased by 1.4% and 8.7% from the comparable 1993
periods.
The following tables set forth certain information regarding the
Company's net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NET SALES
-------------------------- -------------------------------------------------
1994 1993
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> (C> <C> <C>
DOMESTIC FOOTWEAR
WOMEN'S $13,515 16% $19,851 23%
MEN'S 7,963 9 14,549 17
CHILDREN'S 35,004 42 22,884 27
OTHER 616 1 437 1
------- --- ------- ---
TOTAL DOMESTIC SALES 57,098 68 57,721 68
INTERNATIONAL FOOTWEAR AND OTHER 27,150 32 26,851 32
------- --- ------- ---
TOTAL NET SALES $84,248 100% $84,572 100%
======= === ======= ===
SIX MONTHS ENDED MAY 31, NET SALES
------------------------ -----------------------------------------------
1994 1993
------------------- ------------------
(DOLLARS IN THOUSANDS)
DOMESTIC FOOTWEAR
WOMEN'S $ 33,671 16% $ 39,993 25%
MEN'S 34,375 17 27,210 17
CHILDREN'S 79,866 39 41,272 25
OTHER 973 1 987 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 148,885 73 109,462 68
INTERNATIONAL FOOTWEAR AND OTHER 55,799 27 51,437 32
-------- --- -------- ---
TOTAL NET SALES $204,684 100% $160,899 100%
======== === ======== ===
</TABLE>
10
<PAGE> 11
The following tables set forth the percentage changes, by Women's, Men's
and Children's categories, in the number of pairs sold during the 1994 period
as compared to the same period of 1993:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
-------------------------- -----------------------
INCREASE/(DECREASE) BETWEEN 1994 AND 1993
---------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------------- ---------------- -----------
<S> <C> <C> <C>
WOMEN'S (24.9%) (16.1%) (22.0%)
MEN'S (16.1%) (4.1%) (10.9%)
CHILDREN'S 45.9% 89.8% 54.3%
TOTAL VOLUME INCREASE 7.4% 13.1% 9.1%
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
------------------------ -----------------------
INCREASE/(DECREASE) BETWEEN 1994 AND 1993
---------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------------- ---------------- -----------
<S> <C> <C> <C>
WOMEN'S (12.7%) (21.6%) (15.7%)
MEN'S 39.7% (3.5%) 21.2%
CHILDREN'S 79.1% 55.7% 73.2%
TOTAL VOLUME INCREASE 34.6% 5.4% 25.0%
</TABLE>
Sales of the Company's children's shoes increased during the three month
and six month periods ended May 31, 1994 from the prior year comparable period
primarily as a result of continuing customer demand for the Company's L.A.
LIGHTS(TM) and Light GEAR(TM) for children. The Company sold 1.8 million and
3.7 million pairs of children's lighted shoes during the second quarter and
first half of 1994, respectively, compared to 0.6 million and 1.3 million pairs
for the comparable prior year periods. Sales of the expanded line of
children's lighted shoes accounted for 60.7% of total children's net sales and
35.8% of total net sales for the first half of 1994. The number of pairs of
men's shoes sold increased for the six months ended May 31, 1994 primarily due
to sales of selected excess inventory.
GROSS MARGIN
The gross margin for the second quarter of 1994 decreased slightly to
28.1% from 28.9% and for the first six months of 1994 improved to 28.6% from
27.9% during the comparable periods in 1993. The Company's gross profit margin
on international sales increased to 28.3% from 26.0% for the second quarter and
to 30.9% from 22.7% for the first half of 1994 compared to the prior year
periods, primarily due to the inclusion of sales of the Company's foreign
subsidiaries acquired or formed during the 1993 second and third quarters. By
selling through these new subsidiaries, the Company realizes a wholesale margin
on the sale to the retailer that is greater than that on the sales to
independent distributors. The improvement in international margins was offset
by sales of selected styles of excess inventory at less than full margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
During the second quarter of 1994, the Company incurred a one-time charge
of $2.3 million for costs associated with the restructuring of the senior
management of the Company. Exclusive of the restructuring charge, total
selling, general and administrative expenses decreased 12.4% to $32.5 million
in the second quarter of 1994 from $37.1 million for the second quarter of 1993
and decreased slightly to $68.5 million in the first half of 1994 compared to
$69.1 million for the comparable prior year period. The decrease in the second
quarter of 1994 is primarily the result of lower media and advertising
expenses, and other cost control and containment efforts. Domestically, the
Company continued to pursue cost containment programs which helped lower
selling, general and administrative expenses by $6.7 million in the first half
of 1994, which excludes the $2.3 million restructuring charge. The savings in
the second quarter of 1994 were partially offset by the expenses of the
Company's foreign subsidiaries acquired or formed in the second and third
quarters of 1993. Media and advertising expenses will increase during the 1994
Back-To-School ("BTS") season from the second quarter of 1994 for the
multi-media launch of FLAK(TM), the Company's new high performance product
line.
11
<PAGE> 12
Selling, general and administrative expenses (exclusive of the
restructuring charge) as a percentage of net sales decreased to 38.6% in the
second quarter of 1994 from 43.9% in the comparable 1993 period, and decreased
to 33.5% for the first six months of 1994 from 42.9% in the comparable 1993
period. Changes in the Company's selling, general and administrative expenses
cannot be directly related to fluctuations in sales volumes as a substantial
portion of such expenses are (i) fixed in nature, such as compensation and
benefits for management and administrative personnel, rent, insurance,
depreciation and other overhead charges or (ii) incurred to benefit future
periods, such as media, trade show and advertising expenses.
INTEREST EXPENSE (INCOME), NET
Interest expense of $1.1 million and $2.3 million for the three months
and six months ended May 31, 1994, respectively, primarily related to (i)
interest costs on the $50 million, 7-3/4% convertible subordinated debentures
due 2002 (the "Debentures") issued in December 1992 and (ii) short-term
borrowings of the Company's wholly-owned foreign subsidiaries. During the
quarter and six months ended May 31, 1993 the Company incurred interest expense
of $1.1 million and $1.8 million, respectively, on the Debentures and
short-term borrowings of a wholly-owned subsidiary.
Interest income decreased to $0.2 million and $0.4 million during the
three months and six months ended May 31, 1994, respectively, compared to $0.6
million and $1.3 million in the comparable year earlier periods as a result of
decreased average daily cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information regarding the
Company's liquidity and capital resources:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1994 1993
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 48,361 $ 27,790
WORKING CAPITAL 149,895 161,948
OUTSTANDING LETTERS OF CREDIT 49,016 33,553
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK 100,000 100,000
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
--------------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $4,241 $2,730 $5,890 $1,365
WEIGHTED AVERAGE INTEREST RATES 8.6% 11.6% 8.6% 11.6%
</TABLE>
Cash and cash equivalent balances increased by $20.6 million from
November 30, 1993 to a balance of $48.4 million at May 31, 1994, primarily due
to better inventory management. Through sales of selected excess inventory
during the first half of 1994, the Company reduced inventory from $109.8
million (9.3 million pairs) at November 30, 1993 to $87.5 million (7.6 million
pairs) at May 31, 1994. Net accounts receivable at May 31, 1994 decreased
$14.2 million from November 30, 1993 primarily due to a 28.9% decrease in net
sales in the last two months of the 1994 second quarter compared to the last
two months of the 1993 fourth quarter.
12
<PAGE> 13
The Company's foreign subsidiaries have the following credit facilities,
denominated in their respective local currencies and converted to U.S. dollars
at the end-of-period exchange rates, which are secured by certain assets of the
respective subsidiary and guaranteed by the Company:
<TABLE>
<CAPTION>
AMOUNT OF FACILITY
--------------------------------------------- OUTSTANDING AT
(IN MILLIONS) SUBLIMITS MAY 31, 1994
-------------------------- -----------------------
TOTAL LETTERS CASH LETTERS
COUNTRY AVAILABLE BORROWINGS OF CREDIT BORROWINGS OF CREDIT
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
GERMANY $7.6 $3.8 $3.8 $1.1 $1.5
NETHERLANDS $4.3 -- -- -- $0.5
</TABLE>
The weighted average interest rate, as defined in the respective credit
facility agreements and adjusted for current market conditions, for Germany
were 8.8% and 8.9% for the quarter and six months ended May 31, 1994,
respectively, and the Netherlands were 7.2% and 7.4% for the quarter and six
months ended May 31, 1994, respectively. With respect to the Company's other
foreign subsidiaries, the Company continues to explore the possibility of
obtaining new secured revolving credit facilities for cash borrowings and
letters of credit.
On November 22, 1993, the Company obtained a three-year, $75.0 million
revolving line of credit with BankAmerica Business Credit, Inc. for loans and
letters of credit (the "Revolving Facility"). The Revolving Facility is
secured primarily by the Company's domestic assets and is subject to certain
financial covenants including a requirement that the Company maintain as of the
last day of any fiscal quarter Adjusted Tangible Net Worth (as defined in the
Revolving Facility) of at least $175.0 million, which for this purpose excludes
the Debentures from the Company's liabilities. On May 31, 1994, the Company
entered into an amendment to the Revolving Facility to provide the Company with
greater financial flexibility. Under the terms of the amendment, the Adjusted
Tangible Net Worth requirement was reduced to $169.5 million from $175.0
million for the remainder of the Company's 1994 fiscal year and a quarterly
minimum earnings requirement, commencing in the Company's 1994 third fiscal
quarter, is applicable whenever the Adjusted Tangible Net Worth falls below
$175.0 million at the end of the third and fourth quarter of fiscal 1994. This
earnings requirement specifies that the Company's Adjusted Net Earnings from
Operations (as defined in the amendment) must equal at least $5,047,000 in the
third quarter of fiscal 1994 and $1,069,000 in the fourth quarter of fiscal
1994. At May 31, 1994 the Company's Adjusted Tangible Net Worth was $172.1
million. There were no cash borrowings under the Revolving Facility at May 31,
1994.
The short-term and long-term liquidity of the Company principally is
contingent on the Company's future operating results and certain other factors.
The Company believes that its present funding sources are sufficient to sustain
the Company's anticipated short-term and long-term liquidity needs. These
needs are based on a number of factors including the size of the business and
related working capital needs, the extent of the international subsidiaries'
funding requirements and the level of domestic operating costs. In the event
that the Company's future operating results fall below management's
expectations, additional sources of working capital funding may be necessary
and difficult to obtain.
FUTURE OUTLOOK
In June 1994, the Company entered into a multi-year agreement to sell
L.A. Gear(R) branded footwear products to Wal-Mart. Pursuant to the agreement,
Wal-Mart will purchase a minimum of $80 million of L.A. Gear branded footwear
in each of the next three fiscal years, subject to reduction in the second and
third years if retail sales do not meet expected targets. Wal-Mart has also
agreed to purchase a minimum of $20 million of footwear during the remainder of
fiscal 1994, principally in the Company's fourth quarter. The agreement does
not provide for the sale of L.A. Tech(R), Flak(TM), Gravity Gear(TM) or any
L.A. Gear lighted footwear products to Wal-Mart. The Company also intends to
make available to mass market retailers, through its licensees, new product
lines of affordable apparel and accessories. The Company's efforts to expand
the market for its value-priced products are designed to help generate
significant sales volume without unduly affecting the Company's ability to
develop a stronger presence in traditional athletic footwear distribution
channels.
Demand from retailers for the Company's 1994 BTS products, which will
ship primarily in the third fiscal quarter, will have a significant impact on
the Company's financial performance during the balance of the year. Based on
historical shipping trends, the highest level of sales generally occurs in the
third quarter of the Company's fiscal year. Entering the BTS season, the
Company had a combined domestic and international order backlog of
approximately $175.4 million at May 31, 1994, $125.4 million of which is
primarily for new in-line products
13
<PAGE> 14
scheduled to ship during the June, July and August 1994 period. The May 31,
1994 backlog includes a minimum footwear purchase by Wal-Mart of $20 million
during the remainder of fiscal 1994, principally in the Company's fourth
quarter. Approximately 48 percent of the orders in the May 31, 1994 backlog
are for children's shoes, approximately 85 percent of which are for shoes
containing lighted technology. The combined domestic and international backlog
at May 31, 1993 was $160.7 million, $128.6 million of which represented orders
scheduled for shipment during the 1993 third fiscal quarter. Shipments and
sales for future periods depend on, among other things, the combination of
"futures" and "at once" orders. Accordingly, the comparison of backlog from
period to period may not be indicative of eventual actual shipments. A return
to profitability in the second half of 1994 is largely dependent upon "at once"
orders augmenting existing "futures" orders.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- Not applicable.
ITEM 2 - CHANGES IN SECURITIES
- Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on
April 19, 1994.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-Q.
(c) (i) PROPOSAL ONE: Election of Directors:
(a) Election of seven Directors by the holders of issued
and outstanding shares of Common Stock, voting as
a separate class:
<TABLE>
<CAPTION>
For Withheld
------------- -------------
<S> <C> <C>
Walter C. Bladstrom 17,326,576 504,089
Allan E. Dalshaug 17,340,746 489,919
Willie D. Davis 17,337,501 493,164
*Mark R. Goldston 17,359,806 470,859
Stephen A. Koffler 17,339,746 490,919
Ann E. Meyers 17,338,641 492,024
Clifford A. Miller 17,342,796 487,869
</TABLE>
*Mr. Goldston resigned as a director of the Company
effective June 14, 1994.
(b) Election of three Directors by the holders of issued
and outstanding shares of Series A Cumulative
Convertible Preferred Stock, voting as a separate
class:
<TABLE>
<CAPTION>
For Withheld
-------------- -------------
<S> <C> <C>
Stanley P. Gold 10,000,000 -0-
Robert G. Moskowitz 10,000,000 -0-
Vappalak A. Ravindran 10,000,000 -0-
</TABLE>
(c) (ii) PROPOSAL TWO: Ratification of the appointment of Price
Waterhouse as the Company's independent accountants for the
fiscal year ending November 30, 1994:
<TABLE>
<S> <C>
For: 27,465,279
Against: 239,877
Abstain: 125,509
</TABLE>
(d) - Not applicable.
15
<PAGE> 16
ITEM 5 - OTHER INFORMATION
- Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.1 Letter Agreement dated June 8, 1994 by and between
the Company and Wal-Mart Stores, Inc. Portions of
this agreement have been omitted and filed separately with
the Commission pursuant to a request for confidential
treatment.
10.2 Letter Agreement dated June 14, 1994 by and between
Mark R. Goldston and the Company.
(b) Reports on Form 8-K:
1) The Company filed a current report on Form 8-K on
June 2, 1994, under Item 5. - Other Information, with
respect to the First Amendment to Loan and Security
Agreement entered into between the Company and
BankAmerica Business Credit, Inc. which amends the
existing revolving line of credit facility.
2) The Company filed a current report on Form 8-K on
June 17, 1994, under Item 5. - Other Information, with
respect to the Company entering into a multi-year agreement
to sell L.A. Gear branded footwear products to Wal-Mart
Stores, Inc. The Company also announced that William L.
Benford had been elected as President and Chief Operating
Officer of the Company to succeed Mark R. Goldston, who
resigned as a director and officer of the Company to pursue
other business opportunities. Concurrently, other changes
were made in the Company's senior management.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 14, 1994 L.A. GEAR, INC.
By: /s/ W. Randall Boggan
-------------------------
W. Randall Boggan
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C> <C>
10.1 Letter Agreement dated June 8, 1994 by and between
the Company and Wal-Mart Stores, Inc. Portions of
this agreement have been omitted and filed separately
with the Commission pursuant to request for confidential
treatment. 19
10.2 Letter Agreement dated June 14, 1994 by and between
Mark R. Goldston and the Company. 25
</TABLE>
18
<PAGE> 1
EXHIBIT 10.1
WAL-MART STORES, INC.
702 SOUTHWEST 8TH STREET
BENTONVILLE, ARKANSAS 72716
L.A. Gear, Inc.
2850 Ocean Park Blvd.
Santa Monica, CA 90405
Attention: Robert H. Landes
Dear Mr. Landes:
Set forth below are the terms of our Agreement with respect to the
distribution by Wal-Mart Stores, Inc. ("Wal-Mart") of certain L.A. Gear, Inc.
("L.A. Gear") branded footwear products:
WAL-MART/L.A. GEAR BUSINESS RELATIONSHIP
A. Scope. This Agreement relates to L.A. Gear men's, women's and
children's lifestyle footwear products sold under the brand names "L.A. GEAR"
and "Catapult by L.A. Gear" (collectively, "Footwear"). This Agreement does not
relate to any Footwear products sold under the brand names "L.A. TECH," "FLAK,"
"Gravity Gear" or "L.A. Lights," or to any other L.A. Gear lighted footwear
products.
B. 1994 Footwear Purchases: Wal-Mart shall purchase from L.A.
Gear Footwear having a total wholesale price to Wal-Mart (after all discounts
and allowances) of $20 million, from the date of this Agreement through
November 30, 1994.
C. Annual Minimum Volume Commitments.
1. During each of the 1995, 1996 and 1997 fiscal years,
Wal-Mart shall purchase from L.A. Gear, for sale in Wal-Mart's stores located
in the United States, Footwear having a total wholesale price to Wal-Mart
(after all discounts and allowances) of not less than $80 million. References
to fiscal periods for this Agreement refer to fiscal periods based on L.A.
Gear's December 1 - November 30 fiscal year.
2. If the average weekly sell-through rate achieved by
Wal-Mart (as determined per data recorded in Wal-Mart's Retail Link system, the
"Average Weekly Rate") for the aggregate number of pairs of Footwear delivered
to Wal-Mart in any of fiscal years 1995, 1996 or 1997 does not equal or exceed
* based on in-store inventory, the annual minimum volume commitment for the
next succeeding fiscal year shall be as follows:
________________
* CONFIDENTIAL TREATMENT. MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
<PAGE> 2
<TABLE>
<CAPTION>
If the Average Weekly Rate is: The Minimum Volume Commitment shall be:
- ----------------------------- --------------------------------------
<S> <C>
* or more but less than * *
* or more but less than * *
less than * *
</TABLE>
The Average Weekly Rate is calculated as follows:
*
3. The Annual Minimum Volume Commitment is contingent
upon the following:
Wal-Mart and L.A. Gear shall cooperate and work with each other in developing
the styles, quality and costing of Footwear to be purchased by Wal-Mart
hereunder, and L.A. Gear shall deliver to Wal-Mart in a timely manner samples
of such styles of Footwear.
D. Purchase and Payment Terms:
1. Orders: All orders placed by Wal-Mart shall be in
writing, and, except as otherwise specified herein in the Agreement, shall be
governed by and subject to all of the terms and conditions set forth on
Wal-Mart's standard purchase order form, a copy of which is attached hereto as
Annex I.
2. Discount: Wal-Mart shall purchase Footwear at L.A.
Gear's wholesale prices, less a * discount.
3. Containers: Each order placed by Wal-Mart under this
Agreement shall be for shipment of full containers of Footwear.
4. Drive Fund: Wal-Mart shall be entitled to a credit
in the amount of * of the dollar amount of all shipments of domestic
Footwear for use solely in connection with point-of-sale displays, promotions,
activities and gifts with purchases, in each case relating solely to L.A. Gear
Footwear (the Drive Fund), which amount shall be credited as invoiced.
5. Defective Footwear: Wal-Mart shall report to L.A.
Gear defective Footwear delivered to Wal-Mart which exceeds 1% of the number of
pairs of any single style of Footwear delivered to Wal-Mart in any fiscal year.
At L.A. Gear's request, Wal-Mart
________________
* CONFIDENTIAL TREATMENT. MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
<PAGE> 3
shall provide such documentation and support as is reasonably necessary to
evidence such defects. In addition to the Drive Fund Wal-Mart shall be
entitled to a credit in the amount of 1% of the dollar amount of all net
shipments of domestic Footwear for use solely in connection with returns and
defective product (the "Return Credit"). This Return Credit of 1% will be
taken off invoice. In addition to the Return Credit, Wal-Mart may return to
L.A Gear for full credit any and all Footwear having major defects which
Wal-Mart and L.A. Gear agree render such Footwear unusable or unsellable by
Wal-Mart.
6. Payment Terms: L.A. Gear shall invoice Wal-Mart for
sales of Footwear on the date on which Wal-Mart takes possession of the
Footwear. All payments for sales hereunder shall be due * days from
possession date (invoice date) * .
E. Presentation:
1. *
2. Stores without concept shops will feature and sign
L.A. Gear Footwear products as best as possible to maximize sales.
F. Spokespeople: L.A. Gear will make its spokespeople, that are
mutually agreed upon by Wal-Mart and L.A. Gear, available to Wal-Mart for
advertising and promotional activities, at times and in places mutually agreed
upon by Wal-Mart and L.A. Gear, subject to the terms of then existing
agreements between such spokespeople and L.A. Gear and in accordance with L.A.
Gear's overall marketing strategy. Nothing contained herein shall be deemed to
require L.A. Gear to provide or to contract with any specific individual for
purposes of this Agreement.
G. Confidentiality: Each of L.A. Gear and Wal-Mart shall, and
shall cause its respective employees, officers, and directors, and shall use
its best efforts to cause its respective agents and representatives, to
maintain and hold in strict confidence, keep confidential and not disclose to
any person without the prior written consent of the other party hereunder, or
use in any manner except as specifically set forth in this Agreement, (i) the
terms of this Agreement, and (ii) the
________________
* CONFIDENTIAL TREATMENT. MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SEC PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
-3-
<PAGE> 4
information contained in any reports, certificates or notices delivered
hereunder; except if such party reasonably believes, after consultation with
its counsel, that such disclosure is required by the federal securities laws or
any other applicable law, rule, judgment, court order, or decree.
H. Assignment: Neither L.A. Gear or Wal-Mart shall assign its
rights or delegate its duties under this Agreement without the other's prior
written consent.
I. Hold Harmless. L.A. Gear shall protect, defend, hold harmless
and indemnify Wal-Mart from and against any and all claim, actions,
liabilities, losses, costs and expenses, even if such claims are groundless,
fraudulent or false, arising out of any actual or alleged infringement of any
patent, trademark or copyright by any merchandise sold to Wal-Mart hereunder,
or arising out of any actual or alleged death of or injury to any person,
damage to any property, or any other damage or loss, by whomsoever suffered,
resulting or claimed to result in whole or in part from any actual or alleged
defect in such merchandise, whether latent or patent, including actual or
alleged improper construction or design of said merchandise or the failure of
said merchandise to comply with Wal-Mart's specifications to L.A. Gear or with
any express or implied warranties of L.A. Gear or arising out of any actual or
alleged violation by L.A. Gear in connection with such merchandise, or its
manufacture, possession, use or sales, of any law, statute or ordinance of any
governmental administrative order, rule or regulation applicable thereto. The
duties and obligations of L.A. Gear created hereby shall not be affected or
limited in any way by Wal-Mart's extension of express or implied warranties to
its customers, except to the extent that any such warranties expressly extend
beyond the scope of L.A. Gear's warranties, express or implied, to Wal-Mart.
It is further agreed that all duties and obligations of L.A. Gear set forth in
this paragraph shall extend in full force and effect to pallets or other
transport or display devices provided by L.A. Gear. In the event of any claims
or actions to which this Section (I) relates, L.A. Gear shall have the sole
ability to defend or settle any claim or action with respect to the defense or
settlement of any such claim or action without L.A. Gear's prior written
consent. Further, in the event of any such claim or action, Wal-Mart shall at
L.A. Gear's request, return all or any part of any then-unsold merchandise to
which such claim or action relates and L.A. Gear shall refund the purchase
price of any such merchandise for which payment has been made by Wal-Mart.
Notwithstanding the foregoing, L.A. Gear shall have no liability under
this Section (I) with respect to
-4-
<PAGE> 5
any claim or action unless Wal-Mart shall deliver written notice of such claim
or action to L.A. Gear promptly upon Wal-Mart's receipt thereof.
If the foregoing correctly sets forth our Agreement, please so
indicate by signing both copies of this Agreement in the space below, and
returning one copy to Wal-Mart whereupon this shall constitute a binding
Agreement between both parties hereto with respect to the subject matter
herein.
WAL-MART STORES, INC.
By: /s/ Thomas M. Coughlin
------------------------------
Name: Thomas M. Coughlin
Title: Senior Vice President -
Specialty Division
Acknowledged and agreed as of this 8th day of June, 1994:
L.A. GEAR, INC.
By: /s/ Robert H. Landes
------------------------------
Name: Robert H. Landes
Title: Senior Vice President - Sales
-5-
<PAGE> 1
EXHIBIT 10.2
L.A. GEAR, INC.
2850 Ocean Park Boulevard
Santa Monica, CA 90405
June 14, 1994
Mr. Mark R. Goldston
2850 Ocean Park Boulevard
Santa Monica, CA 90405
Dear Mark,
In connection with your resignation as a director and officer of the
Company, this letter confirms our understanding regarding your retention as an
independent contractor, on a non-exclusive basis, to provide consulting and
advisory services to the Company through October 31, 1998, at the rate of
$750,000 per year. To evidence such change in status, and our agreement with
respect thereto, the terms of your October 19, 1993 Employment Agreement (the
"Employment Agreement") (a copy of which is attached hereto) will continue in
full force and effect except that:
1. All references in the Employment Agreement to "Employee" or
"Employment Term" and "Salary" shall hereafter be changed to
"Consultant" and "Consultancy Term"; and "Compensation", respectively;
2. Section 1 of the Employment Agreement shall be deleted in its
entirety. From and after the date hereof through the end of the
Consultancy Term, you shall serve as an independent contractor to the
Company providing consulting and advisory services, providing up to 25
hours per month of services, at such reasonable times and places as
requested by the Company;
3. The second, fifth, sixth and seventh paragraphs of Section 3
of the Employment Agreement are deleted in their entirety, provided
however, that you shall be entitled to participate in the EVA Bonus
Plan with respect to the Company's 1994 fiscal year on a pro rata
basis based on the number of months during fiscal 1994 that you served
as an officer of the Company; and
4. Clauses (iii), (iv), (v), and (vii) of Section 4(a), and
Sections 4(b), (c), (d) and (e), of the Employment Agreement are
deleted in their entirety.
<PAGE> 2
In addition, as an offset to any amounts to be paid to you as a
Consultant, you agree that any cash compensation (including any deferred
portion thereof) received or earned by you from any other employer, or from
personal services rendered by you to a third party as an independent contractor
during the period commencing on the date hereof and ending on October 31, 1998
shall reduce and mitigate the payments to be paid to you pursuant to the
Employment Agreement as modified hereby; except that no offset shall be made by
virtue of any cash sums received or earned arising out of (i) your personal
investment activities or (ii) your authorship of non-fiction books and/or
articles relating to general business and/or product marketing.
In addition, you hereby agree that all inventions, discoveries,
improvements, ideas, computer programs and related documentation, and other
works of authorship with respect to the Company or its business (hereinafter
each designated "Intellectual Property"), whether or not patentable,
copyrightable or subject to other forms of protection, made, created,
developed, written or conceived by you, either solely or jointly with others,
while engaged in providing consulting or advisory services to the Company shall
be the property of the Company. You agree that you will, without charge to the
Company but at the Company's expense, execute any assignments or other
documents and do anything else which in the Company's opinion is reasonably
necessary, to vest in the Company all right, title and interest in and to all
such Intellectual Property.
As a Consultant you will no longer have any authority to bind the
Company and you agree that you will not represent to any third party anything
to the contrary. During the period of your Consultancy, your Company Stock
Options will continue to vest and be exercisable subject to the restrictions
contained therein and the Company's Insider Trading Policy.
Should you desire to discuss other severance arrangements, we are
prepared to do so at your convenience.
If the foregoing accurately sets forth our understanding, kindly
execute and return to me a copy of this letter.
Very truly yours,
L.A. GEAR, INC.
By: /s/ Stanley M. Gold
--------------------
Stanley M. Gold
Acknowledged and Agreed
to this 14th day of June 1994
/s/ Mark R. Goldston
- --------------------
Mark R. Goldston
<PAGE> 3
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 19th day of October, 1993, by and
between L.A. GEAR, INC., a California corporation (the "Company"), and Mark R.
Goldston (the "Employee").
WHEREAS, the Company desires to retain the exclusive services of
Employee and Employee desires to be employed by the Company for the term of
this Agreement;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants contained herein, the parties hereto agree as follows:
1. Duties.
(a) The Employee shall serve as President and Chief
Operating Officer of the Company or such other position as may be agreed
between the Employee and the Company, and shall perform such duties, services
and responsibilities as are consistent with such positions, including the
general management and supervision of the business and personnel of the Company
and its subsidiaries. The Employee's duties, services and responsibilities
will be performed under the overall supervision of and consistent with the
policies of the Board of Directors of the Company (the "Board of Directors").
(b) During the Employment Term, the Employee shall
devote his full business time, attention and skill to the performance of such
duties, services and responsibilities, and will use his best efforts to promote
the interests of the Company. The Employee will not, without the prior written
approval of the Board of Directors, engage in any other business activity which
would interfere with the performance of his duties, services and
responsibilities hereunder or which is in violation of policies established
from time to time by the Company. The foregoing shall not be construed to
prohibit (i) the Employee's service as a member of the board of directors or as
an officer of any non-profit trade association or civic, educational or
charitable organization, or (ii) subject to the following proviso and the
provisions of Section 6(b), the Employee from making personal investments of a
passive nature; provided that such service or investments by the Employee do
not materially interfere with the performance by the Employee of his duties,
services and responsibilities hereunder.
(c) Notwithstanding the provisions of Section 1(b),
the Employee shall be permitted during the Employment Term to write non-fiction
books and/or articles relating to general business and/or product marketing,
and to engage in promotional activities (e.g., personal appearances,
interviews, etc.) with respect thereto; provided, that such writing and/or
promotional activities do not (i) materially interfere with the performance of
the Employee's duties, services and responsibilities hereunder, (ii) impair or
damage the reputation of the Company, any of its subsidiaries, or any of their
respective businesses, officers, directors, employees or affiliates, (iii)
constitute an unauthorized disclosure pursuant to Section 6(a) hereof, or (iv)
otherwise violate any provision of this Agreement.
<PAGE> 4
(d) During the Employment Term, the Employee shall
be based at the Company's principal executive offices (which are currently
located in the greater Los Angeles metropolitan area), except for reasonably
required travel in the performance of his duties, services and responsibilities
hereunder; provided, that during the Employment Term, the Employee shall not be
required to relocate to any place outside a 150-mile radius of any major U.S.
metropolitan area.
2. Term. The term of employment of the Employee hereunder
shall commence as of the date hereof and shall continue in full force and
effect until October 31, 1998, unless earlier terminated or extended as
provided herein (the "Employment Term"). The term of this Agreement shall be
coincident with the Employment Term.
3. Compensation. In consideration of the performance by
the Employee of the Employee's obligations during the Employment Term
(including any services as an officer, director, employee, member of any
committee of the Company or any of its subsidiaries, or otherwise), the Company
will during the Employment Term pay the Employee a salary (the "Salary") at an
annual rate of not less than $750,000.
It is anticipated that the Company will adopt for fiscal years
beginning after November 30, 1993 a management bonus plan based on excess
return on capital ("EVA Bonus Plan"). During the Term, Employee will be
eligible to participate in the EVA Bonus Plan adopted by the Company. To the
extent Emloyee was employed by the Company hereunder for not less than six
months during a fiscal year and Employee's employment is terminated during such
fiscal year, the Company, in its sole discretion, may pay the Employee a cash
bonus in an amount to be determined by the Board of Directors.
The Salary shall be payable in accordance with the normal
payroll practices of the Company then in effect. The Salary, and all bonuses
or other forms of compensation paid to the Employee hereunder, shall be subject
to all applicable taxes required to be withheld by the Company pursuant to
federal, state or local law. The Employee shall be solely responsible for
income taxes imposed on the Employee by reasons of any cash or non-cash
compensation and benefits provided hereunder.
In addition to the payment of Salary, (a) the Company hereby
grants to the Employee additional non-qualified stock options to purchase
250,000 shares of the Company's Common Stock, no par value per share ("Common
Stock"), at an exercise price equal to the average closing price of the Common
Stock on the New York Stock Exchange Composite Tape on the date hereof and upon
the terms and conditions set forth in the Nonqualified Stock Option Agreement
attached hereto as Exhibit A (the "New Option Agreement"), and (b) the Employee
shall be entitled to participate in any employee benefit plans then in effect
for similarly situated employees to the extent the Employee meets the
eligibility requirements for any such plan; provided, however, that nothing in
this paragraph shall require the Company to provide health or medical insurance
benefits to the Employee or any dependent of the Employee with respect to any
condition existing prior to the commencement of the Employee's employment by
the Company pursuant to the Prior Employment Agreement (as defined below),
except as covered
2
<PAGE> 5
by the Company's health and medical insurance plans sponsored for employees in
general. The options granted to Employee pursuant to the New Option Agreement
are in addition to, and not in lieu of, the option to purchase 400,000 shares
of Common Stock contained in the Nonqualified Stock Option Agreement, dated as
of October 7, 1991 (the "First Option Agreement"), between Employee and the
Company.
The Employee shall be entitled to three weeks vacation (in
addition to the usual national holidays) during each year during which the
Employee serves hereunder. Such vacation shall be taken at such time or times
as may be agreed between the Employee and the Company. Vacation not taken
during any year during the Employment Term will not be carried forward.
During the first 24 months of the Employment Term, the Company
will provide the Employee with up to $35,000 to be used as partial payment or
payment in full of the initiation fee of one private club of the Employee's
choosing. The Employee will provide appropriate accounting therefor, in
accordance with the usual practices of the Company.
If (i) the Employee is absent from work for 180 calendar days in
any twelve-month period by reason of illness or incapacity (whether physical or
otherwise) or (ii) the Company reasonably determines that the Employee is
unable to perform his duties, services and responsibilities hereunder by reason
of illness or incapacity (whether physical or otherwise) for a total of 180
calendar days in any twelve-month period during the Employment Term
("Disability"), the Company shall not be obligated to pay the Employee any
compensation (Salary or bonus) for any period in excess of such 180 days;
furthermore, any such payments shall be reduced by any amount the Employee is
entitled to receive as a result of such disability under any plan provided
through the Company or under state or federal law.
4. Termination.
(a) Except as otherwise provided in this Agreement,
the employment of Employee hereunder and the Employment Term shall terminate
upon the earliest to occur of the dates specified below:
(i) the close of business on the date of expiration
of the Employment Term;
(ii) the close of business on the date of the
Employee's death;
(iii) the close of business on the day on which the
Company shall have delivered to the Employee a written notice of the Company's
election to terminate his employment for "Cause" (as defined in Section 4(c)
hereof);
(iv) the close of business on the day on which the
Company shall have delivered to the Employee a written notice of the Company's
election to terminate his employment because of Disability;
3
<PAGE> 6
(v) the close of business on the day following the
date on which the Board of Directors shall have adopted a resolution
terminating the employment of the Employee hereunder and such termination is
not for death, Cause or Disability;
(vi) the close of business on an early termination
date mutually agreed to in writing by the Company and the Employee; or
(vii) the close of business on the date which is five
business days after the date on which the Employee delivers to the Company a
written notice of the Employee's election to terminate his employment hereunder
within six months following the occurrence of a "Change in Control" (as defined
in Section 4(d) hereof) (x) for "Good Reason" (as defined in Section 4(e)
hereof) or (y) for any other reason.
(b) Any purported termination by the Company or by
the Employee pursuant to Section 4(a) hereof shall be communicated by written
"Notice of Termination" to the other. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which indicates the
specific termination provision in this Agreement relied upon and which sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Employee's employment under the provision so
indicated. For purposes of this Agreement, no such purported termination
shall be effective without delivery of such Notice of Termination.
(c) For purposes of this Agreement, termination of
employment for "Cause" shall mean termination based on (i) the Employee's
material breach of this Agreement, (ii) conviction of the Employee for (x) any
crime constituting a felony in the jurisdiction in which committed, (y) any
crime involving moral turpitude (whether or not a felony), or (z) any other
criminal act against the Company involving dishonesty or willful misconduct
intended to injure the Company (whether or not a felony), (iii) substance
abuse by the Employee, (iv) the failure or refusal of the Employee to follow
the lawful and proper directives of the Board of Directors, or (v) willful
malfeasance or gross misconduct by the Employee which damages the Company.
(d) For purposes of this Agreement, the term "Change
in Control" shall mean and shall be deemed to have occurred at such time, prior
to December 31, 1994, as Trefoil Capital Investors, L.P., together with its
Affiliates (as defined in Rule 13b-2 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), shall no longer beneficially own (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, Common Stock or
securities convertible into or exchangeable for Common Stock representing at
least 12% of the then outstanding shares of Common Stock.
(e) For purposes of this Agreement, the term "Good
Reason" shall mean the occurrence of any of the following events or conditions
without the Employee's express written consent:
(i) the assignment to the Employee by the Company of
duties materially inconsistent with the Employee's position, duties,
responsibilities, and status with the Company
4
<PAGE> 7
immediately prior to a Change in Control, or a material change in the
Employee's reporting responsibilities, titles, or executive offices as in
effect immediately prior to a Change in Control, or any removal of the Employee
from, or any failure to reelect the Employee to, any of such positions, except
for Cause or Disability; or
(ii) any material breach by the Company of this
Agreement.
(f) In the event of termination of this Agreement,
for whatever reason, the Employee agrees to cooperate with the Company and to
be reasonably available to the Company with respect to continuing and/or future
matters arising out of the Employee's employment or any other relationship with
the Company, whether such matters are business-related, legal or otherwise.
The Company agrees to reimburse the Employee for the Employee's reasonable
travel expenses incurred in complying with the terms of this paragraph upon
delivery by the Employee to the Company of valid receipts for such expenses.
The provisions of this paragraph shall survive termination of this Agreement.
5. Termination Payments. If the Employee's employment
with the Company terminates for whatever reason, the Company will pay the
Employee any portion of the Salary accrued hereunder on or prior to the date of
termination but not paid. Subject to the last sentence of the following
paragraph, if the Employee's employment with the Company terminates pursuant to
Section 4(a)(v) or Section 4(a)(vii)(x) hereof, the Company will continue to
pay the Employee an amount equal to the Employee's Salary (at the salary rate
in effect on the date of termination of the Employee's employment hereunder)
for the remainder of the term of this Agreement.
Except as otherwise provided in the New Option Agreement or in
the Plan (as defined in the New Option Agreement), the foregoing payments upon
termination shall constitute the exclusive payments due the Employee upon
termination under this Agreement, but shall have no effect on any benefits
which may be due the Employee under any plan of the Company which provides
benefits after termination of employment. The Employee shall not be required
to mitigate the foregoing amounts payable upon termination of this Agreement by
seeking other employment or otherwise; provided, however, that the foregoing
payments shall be reduced or mitigated by virtue of any cash compensation
(including any deferred portion thereof) received or earned by the Employee
from any other employer, or from personal services rendered by the Employee to
a third party as an independent contractor, during the period commencing on the
date of termination of this Agreement and ending on the date on which the
Employment Term had been scheduled to expire; provided further, that the
foregoing payments shall not be reduced or mitigated by virtue of any cash sums
received or earned arising out of the Employee's personal investment
activities.
6. Employee Covenants.
(a) Unauthorized Disclosure. The Employee agrees
and understands that in the Employee's position with the Company, the Employee
will be exposed to and receive information relating to the confidential affairs
of the Company, including but not limited to technical information, business
and marketing plans, strategies, customer information, other
5
<PAGE> 8
information concerning the Company's products, promotions, development,
financing, expansion plans, business policies and practices, and other forms of
information considered by the Company to be confidential and in the nature of
trade secrets. Except to the extent that the proper performance of the
Employee's duties, services and responsibilities hereunder may require
disclosure, and except as such information (i) was known to the Employee prior
to his employment by the Company or (ii) was or becomes generally available to
the public other than as a result of a disclosure by the Employee in violation
of the provisions of this Section 6(a), the Employee agrees that during the
Employment Term and thereafter the Employee will keep such information
confidential and not disclose such information, either directly or indirectly,
to any third person or entity without the prior written consent of the Company.
This confidentiality covenant has no temporal, geographical or territorial
restriction. Upon termination of this Agreement, the Employee will promptly
supply to the Company all property, keys, notes, memoranda, writings, lists,
files, reports, customer lists, correspondence, tapes, disks, cards, surveys,
maps, logs, machines, technical data or any other tangible product or document
which has been produced by, received by or otherwise submitted to the Employee
during or prior to the Employment Term. Any material breach of the terms of
this paragraph shall be considered Cause.
(b) Non-competition. By and in consideration of
the Company's entering into this Agreement and the Salary and benefits to be
provided by the Company hereunder, and further in consideration of the
Employee's exposure to the proprietary information of the Company, the Employee
agrees that, subject to the provisions of the last sentence of Section 1(b),
the Employee will not, during the Employment Term, directly or indirectly own,
manage, operate, join, control, be employed by, or participate in the
ownership, management, operation or control of or be connected in any manner,
including but not limited to holding the positions of shareholder, director,
officer, consultant, independent contractor, employee, partner, or investor,
with any Competing Enterprise. For purposes of this paragraph, the term
"Competing Enterprise" shall mean any person, corporation, partnership or other
entity engaged in the design and marketing of athletic and casual footwear
and/or related apparel products and accessories. The prohibition of this
clause (b) shall not be deemed to prevent Employee from owning 2% or less of
any class of equity securities of an entity that has a class of equity
securities registered under Section 12 of the Securities Exchange Act of 1934,
as amended.
(c) Non-solicitation. During the Employment Term
and for a period of one year thereafter, the Employee shall not interfere with
the Company's relationship with, or endeavor to entice away from the Company,
any person who at any time during the Employment Term was an employee or
customer of the Company or otherwise had a material business relationship with
the Company.
(d) Remedies. The Employee agrees that any breach
of the terms of this Section 6 would result in irreparable injury and damage to
the Company for which the Company would have no adequate remedy at law; the
Employee therefore also agrees that in the event of said breach or any threat
of breach, the Company shall be entitled to an immediate injunction and
restraining order to prevent such breach and/or threatened breach and/or
continued breach by the Employee and/or any and all persons and/or entities
acting for and/or
6
<PAGE> 9
with the Employee, without having to prove damages, in addition to any other
remedies to which the Company may be entitled at law or in equity. The terms
of this paragraph shall not prevent the Company from pursuing any other
available remedies for any breach or threatened breach hereof, including but
not limited to the recovery of damages from the Employee.
The provisions of subsections (a), (c) and (d) of this Section 6
shall survive any termination of this Agreement and the Employment Term. The
existence of any claim or cause of action by the Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of the covenants and agreements of
this Section 6.
7. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, or (ii) if mailed, three (3)
business days after having been placed in the United States mail, registered or
certified, postage prepaid, addressed to the party to whom it is directed at
the address set forth below:
7
<PAGE> 10
If to the Company:
L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
Attention: Chairman of the Board
With a copy to:
L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
Attention: Legal Dept. - Office of General Counsel
If to the Employee:
Mark R. Goldston
c/o L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
With a copy to:
Louis L. Broudy, Esq.
Broudy & Jacobson
230 Park, Suite 2400
New York, New York 10169-0146
by registered or certified mail, postage prepaid, return receipt requested.
8. Binding Effect/Assignment. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
heirs, executors, personal representatives, estates, successors (including,
without limitation, by way of merger) and assigns. Notwithstanding the
provisions or the immediately preceding sentence, the Employee shall not assign
all or any portion of this Agreement without the prior written consent of the
Company.
9. Prior Employment Agreement. Upon the execution of this
Agreement by each of the Employee and The Company, except as provided below the
Employment Agreement, dated as of September 25, 1991 (the "Prior Employment
Agreement"), by and between the Company and the Employee, are hereby
terminated, effective as of the date hereof, and of no further force and
effect. Notwithstanding anything to the contrary in the foregoing, Section 6
of the Prior Employment Agreement shall remain in full force and effect and
shall survive the termination of the other provisions of the Prior Employment
Agreement pursuant to this Section 9.
8
<PAGE> 11
10. Entire Agreement. This Agreement, the New Option
Agreement and the First Option Agreement set forth the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, between them as to such subject matter.
This Agreement may not be amended, nor may any provision hereof be modified or
waived, except by an instrument in writing duly signed by the party to be
charged.
11. Severability. If any provision of this Agreement, or
any application thereof to any circumstances, is invalid, in whole or in part,
such provision or application shall to that extent be severable and shall not
affect other provisions or applications of this Agreement.
12. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California,
without reference to the principles of conflict of laws.
13. Modifications and Waivers. No provisions of this
Agreement may be modified, altered or amended except by an instrument in
writing executed by the parties hereto. No waiver by either party hereto of
any breach by the other party hereto of any provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions at the time or at any prior or subsequent time.
14. Headings. The headings contained herein are solely for
the purposes of reference, are not part of this Agreement and shall not in any
way affect the meaning or interpretation of this Agreement.
15. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
9
<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by authority of its Board of Directors, and the Employee has hereunto
set his hand, as of the day and year first above written.
L.A. GEAR, INC.
By: /s/ Stanley M. Gold
-------------------------------
Stanley M. Gold
Title: Chief Executive Officer
/s/ Mark R. Goldston
-------------------------------
Mark R. Goldston
(Employee)
10
