<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, 1995
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)
CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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, 1995 was 22,936,433 shares.
<PAGE> 2
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at 3
May 31, 1995 and November 30, 1994
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the three months ended May 31, 1995 and May 31, 1994 4
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the six months ended May 31, 1995 and May 31, 1994 5
Consolidated Condensed Statements of Cash Flows for the
six months ended May 31, 1995 and May 31, 1994 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>
<PAGE> 3
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, November 30,
1995 1994
--------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,769 $ 49,710
Accounts receivable, net 67,381 77,284
Inventories 70,233 57,597
Prepaid expenses and other current assets 8,523 9,827
--------- ---------
Total current assets 169,906 194,418
Property and equipment and other assets, net 16,401 17,728
Goodwill, net 12,854 12,317
--------- ---------
$ 199,161 $ 224,463
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 41,865 $ 46,013
Borrowings under international credit facilities 893 557
--------- ---------
Total current liabilities 42,758 46,570
7-3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest 8,751 9,744
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' (deficit) equity:
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at May 31,
1995 and November 30, 1994 128,093 128,093
Preferred stock, no stated value; 9,000,000 shares
authorized; no shares issued -- --
Cumulative currency translation adjustment 1,041 194
Accumulated deficit (131,482) (110,138)
--------- ---------
Total shareholders' (deficit) equity (2,348) 18,149
--------- ---------
$ 199,161 $ 224,463
========= =========
</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,
--------------------------
1995 1994
--------- --------
<S> <C> <C>
Net sales $ 79,014 $ 84,248
Cost of sales 54,044 60,591
--------- --------
Gross profit 24,970 23,657
Selling, general and administrative expenses 32,644 35,124
Litigation settlement income (1,875) (302)
Interest expense, net 415 885
--------- --------
Loss before income taxes and minority interest (6,214) (12,050)
Income taxes -- --
Minority interest 303 285
--------- --------
Net loss (5,911) (11,765)
Dividends on mandatorily
redeemable preferred stock (1,916) (1,875)
--------- --------
Loss applicable to common stock (7,827) (13,640)
Accumulated deficit, beginning of period (123,655) (84,345)
--------- --------
Accumulated deficit, end of period $(131,482) $(97,985)
--------- --------
Loss per common share $ (0.34) $ (0.59)
--------- --------
Weighted average common shares outstanding 22,937 22,936
--------- --------
</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,
--------------------------
1995 1994
--------- ---------
<S> <C> <C>
Net sales $ 148,406 $ 204,684
Cost of sales 102,696 146,118
--------- ---------
Gross profit 45,710 58,566
Selling, general and administrative expenses 65,388 71,196
Litigation settlement income (1,875) (356)
Interest expense, net 742 1,974
--------- ---------
Loss before income taxes and minority interest (18,545) (14,248)
Income taxes -- --
Minority interest 992 456
--------- ---------
Net loss (17,553) (13,792)
Dividends on mandatorily
redeemable preferred stock (3,791) (3,750)
--------- ---------
Loss applicable to common stock (21,344) (17,542)
Accumulated deficit, beginning of period (110,138) (80,443)
--------- ---------
Accumulated deficit, end of period $(131,482) $ (97,985)
--------- ---------
Loss per common share $ (0.93) $ (0.76)
--------- ---------
Weighted average common shares outstanding 22,937 22,936
========= =========
</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,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Net cash (used in) provided by operating activities $(23,336) $ 24,013
-------- --------
Investing activities:
Capital expenditures (2,464) (1,469)
-------- --------
Financing activities:
Net borrowings (repayments) under international credit facilities 266 (2,706)
Proceeds from minority's investment in joint venture -- 4,850
Payment of dividends on mandatorily redeemable
preferred stock -- (3,750)
Proceeds from the exercise of stock options -- 17
-------- --------
Net cash provided by (used in) financing activities 266 (1,589)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents (407) (384)
-------- --------
Net (decrease) increase in cash and cash equivalents (25,941) 20,571
Cash and cash equivalents at beginning of period 49,710 27,790
-------- --------
Cash and cash equivalents at end of period $ 23,769 $ 48,361
-------- --------
</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, 1995, the results of operations for the
three months and six months ended May 31, 1995 and 1994 and the cash flows for
the six months ended May 31, 1995 and 1994. 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, 1994. 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.
NOTE 2. LITIGATION SETTLEMENT INCOME
In the second quarter of 1995, the Company recorded net litigation
settlement income of $1.9 million, $1.6 million of which was in connection with
the settlement of a patent infringement action.
NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
------------------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR:
INTEREST, NET $ 767 $1,875
------ ------
INCOME TAXES, NET $ 11 $ 469
------ ------
NONCASH INVESTING ACTIVITY:
DIVIDENDS ACCRUED ON MANDATORILY
REDEEMABLE PREFERRED STOCK $3,791 $ --
------ ------
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $1,953
------ ------
</TABLE>
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,
1995 1994
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $42,890 $55,531
INTERNATIONAL 27,989 24,552
------- -------
TOTAL TRADE RECEIVABLES 70,879 80,083
OTHER RECEIVABLES 3,947 3,676
------- -------
74,826 83,759
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (7,445) (6,475)
------- -------
$67,381 $77,284
======= =======
</TABLE>
7
<PAGE> 8
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. INCOME TAXES
At May 31, 1995 deferred tax assets totaled approximately $53.5 million. A
valuation allowance has been established against the entire deferred tax asset
balance.
For the period ended May 31, 1995, the difference between the tax benefit
computed based on applying the U.S. statutory income tax rate to the loss before
income taxes, minority interest 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.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1994
------- ------------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $26,072 $32,251
ACCRUED INVENTORY PURCHASES 15,669 11,327
ACCRUED NON-RECURRING CHARGES 124 2,435
------- -------
$41,865 $46,013
======= =======
</TABLE>
Accounts payable include issued but uncleared checks of $1.8 million and
$3.0 million at May 31, 1995 and November 30, 1994, respectively.
NOTE 7. BANK BORROWINGS
The Company has a three-year, $75 million revolving line of credit with
BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit which
is scheduled to expire in November 1996 (the "Revolving Facility"). The
Revolving Facility is secured primarily by the Company's domestic assets and is
subject to certain financial covenants. Under the terms of the Revolving
Facility (as amended to date), the Company was required to maintain as of May
31, 1995 Adjusted Tangible Net Worth (as defined in the Revolving Facility) of
at least $135.0 million, which for this purpose includes the $50 million, 7-3/4%
convertible subordinated debentures. At May 31, 1995, the Company's Adjusted
Tangible Net Worth was $135.8 million. The Company may incur cash borrowings up
to $10 million. There were no domestic cash borrowings under the Revolving
Facility at any time during the six months ended May 31, 1995 and as of that
date, approximately $40.9 million of letters of credit were outstanding.
In June 1995 the credit facility of the Company's German subsidiary,
denominated in local currency and converted to United States dollars at the end
of the period exchange rate, was reduced from approximately $8.8 million to $1.4
million. During the six months ended May 31, 1995 the maximum borrowing at any
time amounted to approximately $1.4 million and the balance outstanding at May
31, 1995 was approximately $0.9 million. The weighted average interest rates, as
defined in the agreement and adjusted for current market conditions, were 8.5%
for both the quarter and six months ended May 31, 1995. Also, in June 1995 the
credit facility of the Company's Netherlands subsidiary was canceled. There was
no outstanding balance at May 31, 1995 and the maximum borrowing at any time
during the six months ending May 31, 1995 amounted to $0.6 million. The Company
believes that it has the ability to meet the financing needs, if any, of both
the German and Netherlands subsidiaries for the foreseeable future.
8
<PAGE> 9
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
As long as shares of Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock") remain outstanding, the holders of such shares are
entitled to receive, when, as and if declared by the Board of Directors out of
assets of the Company legally available therefor, cumulative cash dividends at
an annual rate of 7.5% (if in arrears, compounded quarterly at a rate of 8.625%
per annum with respect to dividends in arrears, through the date of payment of
such arrearages), payable quarterly in arrears on the last business day of
February, May, August and November.
The Company determined it was in its best interest not to, and it did
not, pay the $1.875 million dividend on the Series A Preferred Stock due on each
of February 28, 1995 and May 31, 1995 to Trefoil Capital Investors, L.P.
("Trefoil"), the holder of all of the issued and outstanding shares of Series A
Preferred Stock. As of July 14, 1995, such dividend arrearage amounted to a
total of $3.831 million.
If an amount equal to three full quarterly dividends with respect to the
Series A Preferred Stock is at any time in arrears (provided certain conditions
are satisfied), the number of directors will be increased by four and the
holders of the Series A Preferred Stock will be entitled to elect the additional
four directors. Such additional directors will continue in office and the
holders of Series A Preferred Stock will continue to have such additional voting
rights until such time as all accrued and unpaid dividends on the Series A
Preferred Stock have been paid in full, at which time the terms of such
additional directors will expire.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Pursuant to a Sourcing Agreement, dated as of April 28, 1992 (the
"Sourcing Agreement"), an affiliate of Pentland Ventures, Ltd. ("Pentland") was
appointed as the sourcing representative of the Company with respect to certain
footwear manufacturers located in various countries in the Far East. In
consideration of its services under the Sourcing Agreement, the Pentland
affiliate receives a sourcing fee based on the aggregate U.S. dollar price of
products manufactured for the Company by manufacturers sourced by the Pentland
affiliate. Pursuant to a Supplemental to the Sourcing Agreement entered into in
March 1995, (i) the term of the Sourcing Agreement was extended from December
31, 1995 to December 31, 1997, (ii) the minimum annual sourcing fee was reduced
effective as of January 1, 1995, and (iii) the Company is permitted to use other
sourcing representatives with respect to footwear manufacturers located in the
Far East.
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, 1995 or 1994,
as applicable.
NET SALES
In the second quarter of 1995 the Company's net sales decreased 6.2% to
$79.0 million compared to $84.2 million in the second quarter of 1994. For the
six months ended May 31, 1995, the Company's net sales decreased 27.5% to $148.4
million compared to $204.7 million in the year earlier period. The sales decline
during the first half of 1995 is primarily due to a 24.1% drop in the number of
pairs sold worldwide. Domestic net sales in the second quarter and six months
ended May 31, 1995 decreased by 7.1% and 37.5% from the comparable 1994 periods,
respectively. Net international sales, which accounted for approximately 32.9%
and 37.3% of the Company's total net sales for the quarter and six months ended
May 31, 1995, respectively, decreased by 4.3% and 0.8% from the comparable 1994
periods.
The following tables set forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NET SALES
- -------------------------- ----------------------------------------
1995 1994
--------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 26,020 33% $ 35,004 42%
WOMEN'S 14,203 18 13,515 16
MEN'S 12,133 15 7,963 9
OTHER 676 1 616 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 53,032 67 57,098 68
INTERNATIONAL FOOTWEAR AND OTHER 25,982 33 27,150 32
-------- --- -------- ---
TOTAL NET SALES $ 79,014 100% $ 84,248 100%
======== === ======== ===
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, NET SALES
- ------------------------ ----------------------------------------
1995 1994
--------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 55,397 37% $ 79,866 39%
WOMEN'S 20,074 14 33,671 16
MEN'S 16,531 11 34,375 17
OTHER 1,027 1 973 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 93,029 63 148,885 73
INTERNATIONAL FOOTWEAR AND OTHER 55,377 37 55,799 27
-------- --- -------- ---
TOTAL NET SALES $148,406 100% $204,684 100%
======== === ======== ===
</TABLE>
The following tables set forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during the 1995 period
as compared to the same period of 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- -------------------------- -----------------------
INCREASE/(DECREASE) BETWEEN 1995 AND 1994
---------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- --------------- -------
<S> <C> <C> <C>
CHILDREN'S (18.7%) 44.5% (3.8%)
WOMEN'S 12.0% (39.3%) (6.1%)
MEN'S 26.1% (42.4%) (5.6%)
TOTAL VOLUME DECREASE (3.9%) (6.9%) (4.8%)
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- ------------------------ -----------------------
INCREASE/(DECREASE) BETWEEN 1995 AND 1994
---------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- --------------- -------
<S> <C> <C> <C>
CHILDREN'S (24.8%) 24.2% (13.6%)
WOMEN'S (34.8%) (27.6%) (32.5%)
MEN'S (43.0%) (27.2%) (37.6%)
TOTAL VOLUME DECREASE (31.0%) (6.0%) (24.1%)
</TABLE>
The year to date decrease in domestic net sales resulted principally from
(1) approximately $19.5 million in lower domestic sales of children's lighted
product, (2) sales of approximately $12.0 million of a newly introduced men's
lighted LEAP GEAR(TM) product line in the first quarter of 1994 without a
comparable introduction in the first quarter of 1995, (3) an overall drop in
the total number of pairs sold of the Company's children's, women's and men's
shoes and (4) a decrease of $1.72 in the average selling price per pair with
an associated decrease in the cost per pair.
Total sales of the Company's children's lighted shoes decreased by $7.7
million and $2.1 million to $65.5 million and $33.0 million during the first
half and second quarter of 1995, respectively, compared to the same periods in
1994. Domestic sales of children's lighted product decreased by $19.5 million
and $9.5 million in the six months and three months ended May 31, 1995,
respectively, compared to the same periods in 1994 due to heavy inventory
levels at retailers, lower priced lighted shoes offered by competitors and the
possible effect of adverse publicity regarding selected children's lighted
shoes manufactured prior to 1994 which utilized motion-activated switches
containing mercury. However, internationally there was strong demand for
children's lighted product, particularly in Europe and Asia, as sales
increased by $11.8 million and $7.4 million in the six months and three months
ended May 31, 1995, respectively, compared to the same periods in 1994.
GROSS MARGIN
The gross margins for the second quarter and first half of 1995 increased to
31.6% and 30.8% from 28.1% and 28.6% during the comparable periods in 1994. The
improvement resulted from an increase in international gross margins to 39.3%
and 34.1% in the second quarter and first half of 1995, respectively, from 28.3%
and 30.9% in the comparable 1994 periods primarily as a result of the increased
demand for children's lighted product. Domestically, gross margins for the
second quarter of 1995 decreased slightly to 27.8% from 28.0% and for the first
six months of 1995 improved to 28.9% from 27.8% during the comparable periods in
1994. Although the average domestic selling price decreased by $1.72 per pair
during the first six months of 1995 in comparison to the prior year period, the
average domestic unit cost dropped by $1.50 per pair. The Company realized
strong margins in 1995 on its children's lighted product and value priced shoes
and partially offset losses on any discontinued product against previously
established reserves.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Exclusive of a $2.3 million non-recurring charge incurred in May 1994, total
selling, general and administrative expenses decreased by $3.5 million or 5.1%
to $65.4 million in the first half of 1995 and decreased slightly in the second
quarter of 1995 compared to the respective prior year periods. Domestic selling,
general and administrative expenses declined by $7.3 million or 13.2% to $48.0
million in the first half of 1995 and by $2.5 million or 9.4% to $23.9 million
in the second quarter of 1995 from the comparable prior year periods. In the
first half of fiscal 1995 the reduction in domestic expenses was primarily due
to: (1) a reduction in product sourcing fees and distribution expenses
largely as a result of lower sales and (2) general cost containment efforts.
The reduction in domestic expenses for the second quarter is primarily due to
continued cost control and containment efforts.
The decreases in domestic operating expenses were partially offset by
increases in international operating expenses of $3.6 million and $2.1 million
for the six months and quarter ended May 31, 1995, respectively. These increases
were primarily due to expenses of the Far East joint venture, which was in the
start-up phase during the first half of fiscal 1994, expenses of the Company's
Mexico subsidiary which was not formed until the second quarter of fiscal 1994
and higher expenses of the European subsidiaries as a result of the increase in
the volume of their business.
Despite the overall decreases in selling, general and administrative
expenses, as a percentage of net sales, such expenses (exclusive of
non-recurring charges) increased to 41.3% in the second quarter of 1995 and
44.1% for the first half year of 1995 from 39.0% and 33.7% in the comparable
1994 periods.
11
<PAGE> 12
Changes in the Company's selling, general and administrative expenses cannot
be directly related to fluctuations in sales volume 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, advertisement and trade show expenses.
INTEREST EXPENSE (INCOME), NET
Interest expense of $1.0 million and $2.0 million for the three months and
six months ended May 31, 1995, respectively, and $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.
Interest income increased to $0.6 million and $1.3 million for the three
months and six months ended May 31, 1995, respectively, compared to $0.2 million
and $0.4 million in the comparable year earlier periods as a result of earning
higher interest rates on increased average 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,
1995 1994
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 23,769 $ 49,710
WORKING CAPITAL 127,148 147,848
OUTSTANDING LETTERS OF CREDIT 42,022 36,699
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,
------------------ -----------------
1995 1994 1995 1994
------ ------- ------ --------
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $ 232 $4,241 $ 402 $ 5,890
WEIGHTED AVERAGE INTEREST RATES 7.8% 8.6% 8.1% 8.6%
</TABLE>
Cash and cash equivalent balances decreased by $25.9 million from November
30, 1994 to a balance of $23.8 million at May 31, 1995 primarily due to a
seasonal increase in inventory levels and the funding of the fiscal 1995 first
half operating loss, partially offset by a reduction in accounts receivable from
the fiscal 1994 year end. During the first half of 1995, inventory increased
from $57.6 million (5.4 million pairs) at November 30, 1994 to $70.2 million
(6.8 million pairs) at May 31, 1995 due to the purchase of 1995 Back-to-School
products in anticipation of third quarter sales. Net accounts receivable at May
31, 1995 decreased by $9.9 million from November 30, 1994 primarily as a result
of reduced sales in the last two months of the 1995 second quarter compared to
the last two months of the 1994 fourth quarter.
The Company has a three-year, $75 million revolving line of credit with
BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit which
is scheduled to expire in November 1996 (the "Revolving Facility"). The
Revolving Facility is secured primarily by the Company's domestic assets and is
subject to certain financial covenants. Under the terms of the Revolving
Facility (as amended to date), the Company was required to maintain as of May
31, 1995 Adjusted Tangible Net Worth (as defined in the Revolving Facility) of
at least $135.0 million, which for this purpose includes the $50 million, 7-3/4%
convertible subordinated debentures. At May 31, 1995, the Company's Adjusted
Tangible Net Worth was $135.8 million. The Company may incur cash borrowings up
to $10 million. There were no domestic cash borrowings under the Revolving
Facility at any time during the six months ended May 31, 1995 and as of that
date, approximately $40.9 million of letters of credit were outstanding.
In June 1995 the credit facility of the Company's German subsidiary,
denominated in local currency and converted to United States dollars at the end
of the period exchange rate, was reduced from approximately $8.8 million to
$1.4 million. During the six months ended May 31, 1995 the maximum borrowing at
any time amounted to approximately $1.4 million and the balance outstanding at
May 31, 1995 was approximately $0.9
12
<PAGE> 13
million. The weighted average interest rates, as defined in the agreement and
adjusted for current market conditions, were 8.5% for both the quarter and six
months ended May 31, 1995. Also, in June 1995 the credit facility of the
Company's Netherlands subsidiary was canceled. There was no outstanding
balance at May 31, 1995 and the maximum borrowing at any time during the six
months ending May 31, 1995 amounted to $0.6 million. The Company believes that
it has the ability to meet the financing needs, if any, of both the German and
Netherlands subsidiaries for the foreseeable future.
The Company determined it was in its best interest not to, and it did
not, pay the $1.875 million dividend on the Series A Preferred Stock due on each
of February 28, 1995 and May 31, 1995 to Trefoil Capital Investors, L.P.
("Trefoil"), the holder of all of the issued and outstanding shares of Series A
Preferred Stock. As of July 14, 1995, such dividend arrearage amounted to a
total of $3.831 million.
The short-term and long-term liquidity of the Company is contingent
primarily 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, the extent to which the Company seeks to acquire or
license other footwear brands 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. The Company may also need additional financing for
future acquisitions which may be difficult to secure.
FUTURE OUTLOOK
The Company continues to follow the strategic direction to re-establish
the women's brand and capitalize on the strength of the children's business. A
national television and print campaign was launched in March 1995 directed
toward women. The Sales and Marketing departments have been realigned on an
interim basis subsequent to the departure of Robert Landes, Executive Vice
President-Sales and Marketing, from the Company in June, 1995.
The Company will try to increase sales velocity (1) through its
advertising and marketing campaigns, (2) delivering Back-To-School "future"
orders early to key customers to promote additional "at-once" orders and (3)
through promotional programs designed to stimulate sell-in and sell-through at
the retail level. In June 1995 the Company announced a multi-year sponsorship
agreement with Universal Studios Hollywood, Universal CityWalk and the
Universal Amphitheatre to reinforce the Company's association of the L.A. Gear
brand with the image and attitude of Los Angeles and the glamour of its
entertainment industry. In addition, the previously announced Street Hockey
line was recently delivered to retailers and the Company anticipates the launch
in the second half of 1995 of promotional programs featuring the popular Mighty
Morphin Power Rangers, which are designed to boost both sell-in and
sell-through of the Company's L.A. LIGHTS(R) children's shoes at the retail
level.
"At-once" orders from retailers for the Company's 1995 Back-To-School
products will be critical to the Company's financial performance during the
balance of the year. Management believes that increased competition at lower
price points and excess inventory at retailers may create increased pricing
pressure in the market place which could result in reductions in selling prices.
At June 30, 1995 the Company had a combined domestic and international
order backlog of $102.9 million, $68.0 million of which is primarily for new
in-line products scheduled to ship in the July and August period and $32.7
million of which is scheduled to ship in the Company's fourth quarter. The
combined backlog at June 30, 1994 was $155.1 million, $98.9 million of which
was scheduled to ship in the July and August 1994 period and $53.6 million
scheduled to ship in the fourth quarter of 1994. Approximately 35.2% of the
June 30, 1995 backlog was for children's lighted shoes compared to 42.6% at
June 30, 1994. 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.
13
<PAGE> 14
In June 1994, the Company entered into an agreement with Wal-Mart for
the anticipated purchase of a minimum of $80 million of L.A. Gear branded
footwear for each of the 1995, 1996 and 1997 fiscal years (subject to reduction
or elimination in 1996 and 1997 if sell-through does not meet designated
targets). The Company's agreement with Wal-Mart does not provide for the sale
of L.A. Gear lighted footwear products to Wal-Mart. Children's lights as a
percentage of the total June 30, 1995 backlog, excluding Wal-Mart orders, were
44.3%. The backlog at June 30, 1995 includes $21.1 million for Wal-Mart.
Wal-Mart has advised L.A. Gear that it does not intend to fulfill its
contractual commitment to purchase $80 million of footwear from the Company in
1995 and it is currently anticipated that Wal-Mart will purchase an aggregate
of approximately $45 million. The Company is evaluating its alternatives with
respect to Wal-Mart's failure to comply with such commitment, as well as the
amount of any contractual minimum purchase commitment for the remainder of the
agreement.
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
- As long as shares of Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock") remain outstanding, the holders of such
shares are entitled to receive, when, as and if declared by the Board of
Directors out of assets of the Company legally available therefor,
cumulative cash dividends at an annual rate of 7.5% (if in arrears,
compounded quarterly at a rate of 8.625% per annum with respect to
dividends in arrears, through the date of payment of such arrearages),
payable quarterly in arrears on the last business day of February, May,
August and November.
The Company determined it was in its best interest not to, and it did not,
pay the $1.875 million dividend on the Series A Preferred Stock due on
each of February 28, 1995 and May 31, 1995 to Trefoil Capital Investors,
L.P. ("Trefoil"), the holder of all of the issued and outstanding shares
of Series A Preferred Stock. As of July 14, 1995, such dividend arrearage
amounted to a total of $3.831 million.
If an amount equal to three full quarterly dividends with respect to the
Series A Preferred Stock is at any time in arrears (provided certain
conditions are satisfied), the number of directors will be increased by
four and the holders of the Series A Preferred Stock will be entitled to
elect the additional four directors. Such additional directors will
continue in office and the holders of Series A Preferred Stock will
continue to have such additional voting rights until such time as all
accrued and unpaid dividends on the Series A Preferred Stock have been
paid in full, at which time the terms of such additional directors will
expire.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on April
18, 1995.
(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>
William L. Benford 18,765,972 541,155
Walter C. Bladstrom 18,756,333 550,794
Allan E. Dalshaug 18,751,304 555,823
Willie D. Davis 18,756,896 550,231
Stephen A. Koffler 18,785,588 521,539
Ann E. Meyers 18,721,790 585,337
Clifford A. Miller 18,759,837 547,290
</TABLE>
(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>
15
<PAGE> 16
(c)(ii) PROPOSAL TWO: Ratification of the appointment of Price
Waterhouse LLP as the Company's independent accountants for the
fiscal year ending November 30, 1995:
<TABLE>
<S> <C>
For: 18,934,974
Against: 252,381
Abstain: 119,772
</TABLE>
(d) - Not applicable.
ITEM 5 - OTHER INFORMATION
- Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Supplemental, dated as of January 1, 1995, to Sourcing
Agreement, dated April 28, 1992, between the Company and LASCO
Sports Limited. Portions of this Supplemental and the underlying
agreement have been omitted and filed separately with the
Commission pursuant to request for confidential treatment.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1. The Company filed a current report on Form 8-K on March 3, 1995,
under Item 5. - Other Events, with respect to the Fourth
Amendment to Loan and Security Agreement dated as of November
22, 1993 between the Company and BankAmerica Business Credit
Inc., which amends the terms of the existing revolving line of
credit facility.
2. The Company filed a current report on Form 8-K on April 28,
1995, under Item 5. - Other Events, with respect to the
termination of the Merger Agreement, dated as of January 29,
1995, between the Company and Ryka Inc.
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, 1995 L.A. GEAR, INC.
By: /s/ William L. Benford
-----------------------
William L. Benford
President and
Chief Operating Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C>
10.1 Supplemental, dated as of January 1, 1995, to Sourcing
Agreement, dated April 28, 1992, between the Company and LASCO
Sports Limited. Portions of this Supplemental and the underlying
agreement have been omitted and filed separately with the
Commission pursuant to request for confidential treatment. 19
27.1 Financial Data Schedule 23
</TABLE>
18
<PAGE> 1
EXHIBIT 10.1
CONFIDENTIAL TREATMENT
AGREEMENT made as of January 1, 1995
BETWEEN
(1) L.A. GEAR, INC. ("Gear")
(2) ASCO GENERAL SUPPLIES (FAR EAST) LIMITED
(registered in The Bahamas, No. 1,511,818) ("ASCOBAH")
SUPPLEMENTAL to a Sourcing Agreement, dated as of April 28, 1992 between Gear
and Lasco Sports Limited ("Sourcing Agreement") (the benefits of and obligations
upon Lasco Sports Limited now being vested in ASCOBAH).
In consideration of the mutual agreements contained herein and other good and
valuable consideration, the parties hereto agree as follows:
1. The parenthetical reference to Schedule 2 contained in the first
sentence of Clause 1 Appointment shall be, and hereby is, deleted.
ASCOBAH agrees and acknowledges that it shall serve, on a non-exclusive
basis, as a sourcing representative in the Territory in respect of the
Products.
2. Clause 2. Sourcing Fee shall be amended and restated to read in its
entirety as follows:
(a) Gear and ASCOBAH confirm their agreement that for the calendar
year ending December 31, 1994 Gear has guaranteed to ASCOBAH a
total sourcing fee income of * . Gear has made a bullet
payment on account of such total sourcing fee income of * . On
January 31, 1995, Gear made a payment to ASCOBAH in the amount
of * (which amount represents the balance of said fee, namely,
* less any sourcing fee paid in excess of said
*).
(b) In respect of each year commencing January 1, 1995 the
sourcing fee ("Sourcing Fee") payable by Gear to ASCOBAH shall
be calculated at * of the aggregate FOB price in U.S. dollars
indicated on manufacturers' or suppliers' commercial invoices
for Products manufactured after January 1, 1995 and shipped
from the Territory (the "Throughput"); provided, however, that
with respect to Throughput in any calendar year in excess of *
, the Sourcing Fee for the remainder of that year shall be
calculated at * . There shall be in each calendar year
(commencing with calendar year 1995) guaranteed
________________
*Material omitted and filed separately with SEC pursuant to request for
confidential treatment.
<PAGE> 2
sourcing fee income of a minimum of * ("guaranteed
sourcing fee").
(c) If, at any time during a contract year, Throughput for such
contract year reaches * or above, Gear and ASCOBAH shall, in
good faith, discuss and endeavor to agree to (i) * and
(ii) any appropriate adjustment to the rate of Sourcing Fee
payable to ASCOBAH.
(d) (i) Gear and ASCOBAH acknowledge that ASCOBAH operates on
a fixed cost budget basis including a group overhead
charge.
*
(ii) The budgeted fixed costs of ASCOBAH, including group
overhead of * have been agreed at * for calendar
years 1995, 1996 and 1997.
*
(iii) The guaranteed sourcing fee shall be paid by Gear to
ASCOBAH in twelve equal installments, payment being
made by wire transfer to an account designated in
writing by ASCOBAH. For calendar 1995 the budgeted
credit to Gear as shown in (ii) above * may be set
against the guaranteed sourcing fee so that each
monthly payment shall be
*
If,
* a balancing payment in the proportion set forth
in (ii) above shall be made by Gear or ASCOBAH to
the other, as the case may be, within 30 days
*.
________________
*Material omitted and filed separately with SEC pursuant to
the request for confidential treatment.
<PAGE> 3
(iv) Prior to the commencement of 1996 and 1997
respectively, ASCOBAH shall submit to Gear its
budgeted fixed costs, including * in respect of group
overheads for each such year, which budgeted fixed
costs shall be as provided in the first sentence of
(d)(ii) above.
*
(e) On or prior to January 31, 1996, 1997, and 1998, Gear shall
pay to ASCOBAH, if necessary, an amount equal to the Sourcing
Fee for the previous year calculated in accordance with
subparagraphs (b) and (c) of this Clause 2 in excess of the
guaranteed sourcing fee calculated and paid in accordance with
subparagraph (d) of this Clause 2.
(f) Within thirty (30) days following the end of each calendar
month during the term of this Agreement, ASCOBAH shall deliver
to Gear a statement of Throughput for the immediately
preceding calendar month, such statement identifying the
manufacturers' or suppliers' invoices for such Throughput.
(g) Within thirty (30) days following the end of each calendar
month during the term of this Agreement, ASCOBAH shall deliver
to Gear a statement of the operating costs in respect of
ASCOBAH's activities for Gear during the immediately preceding
calendar month.
(h) Neither ASCOBAH nor any of its affiliates shall accept from
any person any remuneration for any services it provides
toward the acquisition of any Products purchased by Gear other
than the Sourcing Fee. Notwithstanding the foregoing, if
ASCOBAH or any of its affiliates receives remuneration in
connection with its services hereunder from any third party,
ASCOBAH shall promptly pay such amount to Gear. Except as
expressly set forth in the Agreement, ASCOBAH shall be
entitled to no compensation or reimbursement by Gear for its
services under this Agreement."
3. The first sentence of Clause 5. Termination shall be amended and
restated to read in its entirety as follows:
________________
*Material omitted and filed separately with SEC pursuant to request for
confidential treatment.
<PAGE> 4
"Except as specifically provided in this Agreement,
this Agreement shall remain in effect from the date
hereof until December 31, 1997 and shall continue in
force thereafter unless terminated by either party as
of the end of any calendar month upon at least six
months' prior written notice given not earlier than
March 30, 1997."
4. ASCOBAH and Gear each hereby acknowledge that is Gear's intention to
become more pro-active in the management and administration of
ASCOBAH's activities for Gear, provided, however, that unless
specifically set forth in writing as an amendment to the Sourcing
Agreement, the duties and obligations of ASCOBAH under the Sourcing
Agreement (as above amended) shall not be varied or deleted as a result
of such intention. The organizational chart for ASCOBAH and details of
appropriate cost authorization thresholds and operational controls in
respect of ASCOBAH's activities for Gear are attached hereto as
Schedule A. On or prior to October 1 of each calendar year during the
term of this Agreement, ASCOBAH shall deliver to Gear an statement of
the budgeted fixed costs for the following calendar year, which
budgeted fixed costs shall include an annual contribution of USD
150,000 to group corporate overhead.
5. The Sourcing Agreement as above amended is hereby confirmed.
IN WITNESS WHEREOF, Gear and ASCOBAH have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
L.A. GEAR, INC.
BY: /s/ W. L. Benford
-----------------
Name:
Title:
ASCO GENERAL SUPPLIES (FAR EAST) LIMITED
BY: /s/ Patrick Tang
-----------------
Name: Patrick Tang
Title: Executive Chairman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS, THE CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFECIT, AND CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAY-31-1995
<EXCHANGE-RATE> 1
<CASH> 23,769
<SECURITIES> 0
<RECEIVABLES> 74,826
<ALLOWANCES> 7,445
<INVENTORY> 70,233
<CURRENT-ASSETS> 169,906
<PP&E> 42,238
<DEPRECIATION> 31,168
<TOTAL-ASSETS> 199,161
<CURRENT-LIABILITIES> 42,758
<BONDS> 50,000
<COMMON> 128,093
100,000
0
<OTHER-SE> (130,441)
<TOTAL-LIABILITY-AND-EQUITY> 199,161
<SALES> 148,406
<TOTAL-REVENUES> 148,406
<CGS> 102,696
<TOTAL-COSTS> 102,696
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,924
<INTEREST-EXPENSE> 2,026
<INCOME-PRETAX> (18,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,553)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> 0
</TABLE>
